Friday, June 8, 2012

Was Reagan a Keynesian -- or a "Liquidationist"?

Paul Krugman apparently believes that he has struck the mother lode: He has declared that Ronald Reagan actually was more "Keynesian" than Barack Obama. Why? He writes:
O.K., by now many readers have probably figured out the trick here: Reagan, not Obama, was the big spender. While there was a brief burst of government spending early in the Obama administration — mainly for emergency aid programs like unemployment insurance and food stamps — that burst is long past. Indeed, at this point, government spending is falling fast, with real per capita spending falling over the past year at a rate not seen since the demobilization that followed the Korean War.
 He then goes on:
Why was government spending much stronger under Reagan than in the current slump? “Weaponized Keynesianism” — Reagan’s big military buildup — played some role. But the big difference was real per capita spending at the state and local level, which continued to rise under Reagan but has fallen significantly this time around. 

And this, in turn, reflects a changed political environment. For one thing, states and local governments used to benefit from revenue-sharing — automatic aid from the federal government, a program that Reagan eventually killed but only after the slump was past. More important, in the 1980s, anti-tax dogma hadn’t taken effect to the same extent it has today, so state and local governments were much more willing than they are now to cover temporary deficits with temporary tax increases, thereby avoiding sharp spending cuts.
Actually, there is a mother lode of confusion here, something that Krugman is good at creating with his sleight-of-hand use of statistics, not to mention a total refusal to examine the substance of the economic recovery that occurred after the recession of 1982. First, the notion that "revenue sharing" programs by the federal government actually helped lead the recovery is a True Krugman Howler. The actual amounts of money that was distributed in the form of block grants with minimal federal regulatory oversight (something that Krugman no doubt would claim was evil) was a pittance in terms of overall state budgets.

Second, and even more important, Krugman is claiming that temporary tax increases by state governments played an important role in bringing about economic recovery. In other words, money taken from private citizens and businesses and given to state employees and businesses contracting with the state somehow turned around a nasty recession.

Unless Krugman wants to appeal to the silly "balanced budget multiplier," I am not sure that his "logic" makes sense. (The "balanced budget multiplier" is based upon the belief that government will spend all of the money taken from households instead of just part of it, so a tax increase will bring about stronger economies. Obviously, this "logic" ultimately leads to the Mother of All Prosperity Schemes: a 100 percent tax.) To claim that robbing Peter to pay Paul would bring about economic recovery simply does not pass the laugh test.

Krugman grasps at more straws with his statement that "weaponized Keynesianism" also helped bring about economic recovery. It is true that Reagan did push through spending increases for the Pentagon, and no doubt that made military contractors and their employees better off, but if ramping up military spending truly were a pure benefit rather than a cost, then I guess the key to prosperity today would be for the USA to invade yet another hapless Third World country.

(As in his statement that tax increases in the states played a strong rule in bringing economic recovery, Krugman would be hard-put to complain about American military adventures abroad, since they do result in more government spending, and as every good Keynesian knows, more government spending means more general prosperity.)

There is something that Krugman does not address in this article, and that is the amount of liquidation and economic shifting that took place during the 1980s. Since Krugman and I were born in the same year, both of us remember some of the things that occurred during the recession of 1982 -- and the claims that were being made at the time.

A lot of farmers that had piled up debt (at the urging of federal agriculture officials) in anticipation of inflation and a permanent increase in crop prices found themselves watching their farms being sold at auction after crop prices fell in the wake of the Federal Reserve System's efforts (under Paul Volcker) to cut back money growth. I distinctly remember Dan Rather beginning one of his broadcasts at a farm auction, and Hollywood produced a spate of movies decrying the demise of debt-ridden farmers.

A large number of older iron and steel foundries were abandoned, giving rise to Billy Joel's hit song, "Allentown," and places like Pittsburgh, Pennsylvania, underwent fundamental economic changes as whole industrial sectors that were the basis of the economies in those places shut down. Likewise, a number of U.S. automobile plants shut down permanently (and the way was paved for automobile companies from other countries to build non-unionized plants in the USA, plants that have performed much better than their American counterparts).

There also were fundamental changes in transportation, as the Interstate Commerce Commission regulatory schemes that created cartels in trucking and railroads were changed drastically and the ICC actually was phased out altogether. Entire new high-technology industries grew rapidly during this time, as changes in the rules governing telecommunications ultimately paved the way for the modern use of the Internet.

In other words, Reagan actually permitted huge portions of the economy to liquidate, a term that is anathema to Keynesians like Krugman. Despite the demands by members of Congress to adopt "industrial policies" that would prop up failing industries and create huge new subsidies for sectors favored by congressional Democrats, there actually was substantial free-market growth in the economy, and by the beginning of 1984, it was clear that the economy was in strong recovery mode.

Now, according to Krugman, what happened then actually was impossible. Yes, there was some growth in government, but certainly nothing like the massive spending that Keynesians claim would have been necessary for real economic recovery to have occurred. Furthermore, Keynesians would have us believe that the amount of liquidation that happened in 1982 and beyond would have dragged the U.S. economy into oblivion, but that clearly is not what happened.

People trained in statistical methods know that there always are clever ways to present numbers, and Krugman is playing that game. A number of people already have dealt with his numbers trickery and I won't join them. Instead, I wish to deal with Krugman on the basis of theory.

According to Paul Krugman, the economic recovery of 1983-84 could not have happened, given the liquidation that accompanied the recession, yet it did. Thus, he is forced to make up the fantasy story that "revenue sharing," "weaponized Keynesianism," and state tax increases really were the secret to prosperity. Oh, and the rate of inflation fell sharply during that time, something that Keynesians would argue is not possible during a recovery.

Unfortunately, a lot of people buy into this nonsense -- and it is nonsense -- and it gives Washington the excuse that taking more of our money and blowing it on "green energy" boondoggles and worse will hasten economic recovery. No, these schemes hold back whatever recovery we might get.

14 comments:

Tel said...

Regan's military spending had the surprising and useful side effect that it bankrupted the USSR and forced them to reconsider their central planning strategy (and a long and unsuccessful Soviet Afghan campaign also contributed to this). It's hard to say whether Regan planned this or fluked it.

After the fact Regan admitted that he would have liked to reduce government spending and that he didn't achieve what he set out to do.

Lord Keynes said...

"Second, and even more important, Krugman is claiming that temporary tax increases by state governments played an important role in bringing about economic recovery."

Only in that this avoided sharp budget cuts.

"there actually was substantial free-market growth in the economy, and by the beginning of 1984, it was clear that the economy was in strong recovery mode."

The recovery occurred in December 1982 after the turn to loose monetary policy and fiscal stimulus.

In particular, in October 1982, Volcker abandoned his quasi-monetarism and returned to a discretionary interest rate policy, through the Federal funds rate. The Federal funds rate was lowered significantly by the end of 1982.

Shouldn't this have caused just another Austrian business cycle?

The depth of your ignorance is such that you are unaware that even Rothbard regarded Reagan as a Keynesian:

http://www.lewrockwell.com/rothbard/rothbard55.html

"Yes, there was some growth in government, but certainly nothing like the massive spending that Keynesians claim would have been necessary for real economic recovery to have occurred. "

That is utter garbage.
Under Reagan, countercyclical fiscal policy was significantly increased by (1) Reagan’s discretionary spending on defence and (2) the 1981 tax cut.

"Keynesians would have us believe that the amount of liquidation that happened in 1982 and beyond would have dragged the U.S. economy into oblivion, but that clearly is not what happened"

A straw man. No Keynesian has ever asserted that "the amount of liquidation that happened in 1982 and beyond would have dragged the U.S. economy into oblivion".

" and the rate of inflation fell sharply during that time, something that Keynesians would argue is not possible during a recovery."

Wrong again. Maybe you're thinking of crude neoclassical synthesis Keynesianism.

But cost push inflation can fall even with economic expansion. The main cause of general price inflation 1979-1981 was the second oil shock: when the price of oil fell, so did general prices.

More here:

http://socialdemocracy21stcentury.blogspot.com/2011/02/reaganomics-analysis.html

http://socialdemocracy21stcentury.blogspot.com/2011/09/reaganomics-as-keynesianism.html

C. Van Carter said...

Krugman now says Reagan was a Keynsian, he used to say Reagan's economic policies failed:

http://www.nytimes.com/2008/01/21/opinion/21krugman.html

For [Reaganomics] did fail. The Reagan economy was a one-hit wonder. Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, there was little sustained economic improvement for most Americans...

When the inevitable recession arrived, people felt betrayed...Some good things did eventually happen to the U.S. economy — but not on Reagan’s watch.

Dan said...

Krugman, as a scholar, is an excellent debate-team enthusiast: the personality that is intrigued by nothing more than the challenge of arguing both sides of any proposition.

Given: Reagan was a failure. Blame supply-side economics and Austrians.

Given: Reagan was a success. Credit Keynes and high taxes.

This, I think, more than any ideology or party identification, is what drives him. He is a character worthy of Sinclair Lewis; a Babbit of the left, loving nothing more than the sound of his own voice in his head bending words -- for the sake of bending them. All that's missing is the "Look what I wrote, Mommy!" at the end of every essay.

Mike M said...

When progressive statists have to graft themselves to the image of Reagan, you know its almost over for them

Marco2006 said...

Krugman's Nobel Prize is worth about as Obama's Nobel Peace Prize.

Both need to go

Calgacus said...

Yes, Lord K, this is an incredible rewriting of history by Professor Anderson, unrecognizable to anyone who was alive and observant at the time. Thought it was an accepted fact that Reagan, though he pretended to be a budget-balancer, was actually a drunken-sailor spender, and the recovery was due to his drunken-sailor spending. Because it happens to be the truth.

Although it was the worst kind of spending. Welfare-for-the-rich death-toys, used for murdering people in the 3rd world, to maintain the pretense of necessity. Remember Star Wars? And of course he made and continued major structural changes to the US economy, all negative, destroying necessary programs like "revenue sharing". Mostly stupid and destructive changes extolled here as causing the recovery from the 82 recession, which was entirely a "Keynesian" government-spending recovery.

HiddenBait said...

"if ramping up military spending truly were a pure benefit rather than a cost, then I guess the key to prosperity today would be for the USA to invade yet another hapless Third World country."

That's not the point; the point is to stimulate aggregate demand by buying goods/services. This flows money towards businesses, who spend it. That money then goes to other businesses, who spend it, and so on.

This grows investment, as more people spend more, and consumption, for the same reason. So the economy kicks back up to life.

Mike M said...

HiddenBait

Ummmm You're kidding right???

Hiram J Goldstein II said...

And so what, HiddenBait? That simply results in more and more resources being consumed to produce less and less of what people need. This results in rising prices and wasted material, not prosperity.

Anonymous said...

Perhaps Obama is like Reagan than we think, or at least adheres to his philosophy. Ronald Reagan said "the government that governs least, governs best". Since his inauguration, Barack Obama has spend most of his time fundraising, on the golf course or on vacation. Even when he is in the White House, he spends most of his time watching football or basketball. No modern president has spent less time governing than Barack Obama!

Anonymous said...

I lived during this time as well and I remember pay 18.8% interest on the first car I bought. It is amazing how you totally disregard his main argument that the 2 recessions are completely different. 1980's basically caused buy inflationary controls on monetary policy and the this last one caused buy to much debt in the private sector similar to the great depression.

Bob Roddis said...

The fact is that the Fed induced a liquidation in 1980 which helped propel the later expansion. But the world still does not work the way LK or the Keynesians say.

And LK still does not understand the basic Austrian concept of economic calculation.

http://bobroddis.blogspot.com/2012/06/lord-keynes-again-demonstrates.html

ALima said...

This only works if the items produced are actually useful. Stockpiling weapons during a period of relative peace is not very productive. If they get used then that is definitely destructive.