Ronald Reagan the Keynesian
I came across an article in the FT by Gideon Rachman which examined “How Reagan ruined conservatism.” It is an interesting piece which claims that traditional conservatives abhor populism and respect knowledge, while the Reagan Revolution ushered in a ‘new’ conservatism that appealed to those who love populism and disdain knowledge. All very interesting – but clearly an interpretation, an opinion of the political landscape in America.
But what I found most relevant to today was the economic implications buried in the article rather than the political ones which were front and center. The last paragraph sums it up:
The real Reagan was, in fact, rather more pragmatic than the “Reagan myth” that sprang up after he left office. Real Reagan was willing to raise taxes in extremis, and became a firm believer in arms-reduction talks. Today’s American conservatives, who claim the mantle of Reagan, would regard these ideas as treachery and weakness. Reagan was ultimately a successful president. But he left behind a poisonous legacy for the conservative movement.
Here was Ronald Reagan, the man who wanted to starve the beast (government), raising taxes, ostensibly to cut the massive budget deficit he had created early in his tenure. That is certainly a pragmatic move. But, a friend had another angle on this that I agree with: While conservative in word, Reagan was Keynesian in deed.
My friend wrote:
He was a great Keynesian President. His financial deregulation was a disaster (although not as bad as what followed), but on tax policy he was vastly superior to what followed. A tax cut equivalent to 6% of GDP. Pretty good impact.
Okay, he called it "supply side economics", but that was a fancy word for using fiscal policy activism to restart economic activity.
Exactly. If you recall, Ronald Reagan cut taxes massively during the double dip recession of 1980-82 in order to spur on the economy. This had the effect of increasing aggregate demand, so much so in fact that we had extreme financial excess by the mid-to-late 1980s, much of which was channelled into mergers and acquisition and junk bonds. A Keynesian President would see this as a sign of incipient inflation in an economy operating at near full employment. The Keynesian approach, therefore, would be to use fiscal policy as a control mechanism – raising taxes to choke off demand.
And that’s exactly what Reagan did. So, was Ronald Reagan a libertarian who also appealed to populist anti-intellectuals and was pragmatic in economic decision-making and taxation? Or was he a closet Keynesian who presided over a large increase in government spending and used fiscal policy to steer the economy?
You say “Reagan was willing to raise taxes in extremis, and became a firm believer in arms-reduction talks.” But you should choose whether you are talking about President Reagan’s personal beliefs or the actions taken by his administration. Yes, he had a feeling for strategic arms reduction that he tried to put into effect with Gorbachev at the Reykjavik Summit. But, if we are still talking about his personal beliefs, he was always opposed to raising taxes, notwithstanding the large deficits that this turned out to produce. If we switch from his personal beliefs to the actions taken by his administration, then it was the other way around. On the one hand, what he told Gorbachev was unconnected to what the arms experts and other advisors in his administration believed, and was ultimately as irrelevant to his administration’s policies after Reyjkavik as it had been before. On the other hand, Richard Darman and others in his administration did raise corporate and other taxes later in Reagan’s time in office — which was necessary in order to pay the interest on the debt that had been incurred by the large tax cuts and defense spending increases enacted when he took office in 1981 — but I think the evidence shows that the President was passive in this, and in fact often did not know about the details. Of course, if the point is that Reagan was pragmatic and flexible enough to let his staff determine the details in all policy areas, then I agree. George W. and Cheney might have done better if they had emulated Reagan in that respect.
But in the teeth of a severe recession, Reagan implemented massive tax cuts
and got the deficit as high as 6% of GDP, which helped revive aggregate
demand. By contrast, the virtuous Bill Clinton ran budget surpluses and
destroyed aggregate demand and incomes and forced greater reliance on private
debt. Add to that his insane financial deregulation policies (admittedly
also implemented by Reagan, although not to the same degree in finance), and
you have the makings for today’s disaster. And the same people responsible
for creating the mess are now back in power, with no sign that they have
learned anything from the episode (with the notable exception of Gary Gensler
at the CFTC).
In a message dated 3/5/2010 09:57:12 Mountain Standard Time,
writes:
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Gideon Rachman of the FT made the quote to which you refer, Jeff. You can see it indented in quotes.
I actually said “All very interesting – but clearly an interpretation, an opinion of the political landscape in America.” My focus was on the economic issues. And, yes, despite the rhetoric, Reagan does seem to have been pragmatic enough to allow an essentially Keynesian fiscal policy to guide his administration. That was the point of the post. And I agree, Bush and Cheney were inflexible in a way which undermined their policies.