Reganomics

[ecoli]

According to Scott Sumner, Reganomics did produce the desired growth.

 

http://www.themoneyillusion.com/?p=5164&utm

 

 

1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

 

2. Over the next 28 years Britain would overtake Germany and France in GDP per capita

 

Seems to suggest that Chicagoan reforms of the 80s did indeed promote growth in Regan and Thatcher administrations.

 

I think, however, it depends on what metric you're using. Yes, GDP growth was up, but were the results destablized markets & income inequality? I've seen arguments both for and against, and I'm not sufficiently convinced either way.

 

However, Sumner's point is that neoliberal convictions that classical liberal policies would not produce growth were dead wrong. I'm glad when economists are willing to make predictions. Not so glad when they try to apply their model to any outcome... if you make a prediction and it doesn't come true, then there's a flaw in your model (or you need to make a more nuanced prediction).

[Skye]

The other thing is whether it was cannibalistic. If lowering taxes in some countries simply led to a shift in capital to those countries then I think the benefits are more dubious. The overall growth rate might not have improved, and the growth countries end up with government debt.

[ecoli]

True, Skye. I forgot to think of something else. Classical liberal policies, such as free trade and esp lower taxes doesn't mean as much if federal spending is still increasing. During Regan's time, it did. (especially defense related).

[bascule]

Seems to suggest that Chicagoan reforms of the 80s did indeed promote growth in Regan and Thatcher administrations.

 

Because Reagan was singlehandedly responsible for all growth that occurred after he took office, and the S&L scandal which plunged the US into a recession we would only get out of after Clinton took office didn't happen?

 

What? Perhaps we should talk about what great things George W. Bush did for our economy as well. Look at all that growth prior to the financial crisis. Awesome.

 

And what about the national debt? It exploded under Reagan. Cutting taxes on the super-rich and running our government in the red is a way to stimulate the economy, but after the (unsustainable) growth began, we've remained in that position.

 

I don't know how else to react to this. Myopic? Ignorant? Completely ridiculous?

[Pangloss]

Because Keynesian economics was so much better?

 

Come on, I think you can give the market guys a little more credit than that.

[iNow]

Well... The premise itself is rather questionable. Data strongly suggests that the uptick occurred pre-Reagan.

 

Here is more, with links within to 3 other posts addressing the same contention:

 

 

http://krugman.blogs.nytimes.com/2010/05/24/did-the-postwar-system-fail/

I’ve been posting about the contrast between the popular perception on the right that America had slow growth until Reagan came along, and the reality that we did fine pre-Reagan, in fact better; see

here

,

here

, and

here

.

 

 

[John Cuthber]

Much of the growth of the economy under Thatcher was due to North sea oil.

Under a different government more of that money might have been invested in infrastructure like education or healthcare and less of it used to fund the outbreak of Porche driving champagne swilling yuppies in the City of London.

[Pangloss]

Well... The premise itself is rather questionable. Data strongly suggests that the uptick occurred pre-Reagan.

 

Here is more, with links within to 3 other posts addressing the same contention:

 

 

http://krugman.blogs.nytimes.com/2010/05/24/did-the-postwar-system-fail/

I’ve been posting about the contrast between the popular perception on the right that America had slow growth until Reagan came along, and the reality that we did fine pre-Reagan, in fact better; see

here

,

here

, and

here

.

 

 

 

Now we're talkin. Nice post.

[ecoli]

I'd like to point out that the OP uses GDP as the metric while Krugman uses median family income. There's more than one way to skin a cat, but once the skin is off its difficult to tell if its the same cat.

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Much of the growth of the economy under Thatcher was due to North sea oil.

Under a different government more of that money might have been invested in infrastructure like education or healthcare and less of it used to fund the outbreak of Porche driving champagne swilling yuppies in the City of London.

 

Ok, but keep in mind we're talking about GDP growth and general economic performance. Not subjective notions of who deserves what money (etc).

 

It's hardly surprising that tax cuts would cause a GDP boost in this specific case... rich people are spending more money.

 

Also, to the original point, neoliberal economists signed petitions claiming that GDP would not grow under Thatcher's administration. My point wasn't really one of politics, but that regardless of how the economic growth happened, some economists were wrong. This shows that their models were wrong (either over or underestimating the role of productivity shocks and government policy, for example).

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Because Reagan was singlehandedly responsible for all growth that occurred after he took office, and the S&L scandal which plunged the US into a recession we would only get out of after Clinton took office didn't happen?

Nobody is making that claim. please calm down!

 

What? Perhaps we should talk about what great things George W. Bush did for our economy as well. Look at all that growth prior to the financial crisis. Awesome.

We've exhausted that area. I'm interested in the '80s for this post.

 

 

And what about the national debt? It exploded under Reagan. Cutting taxes on the super-rich and running our government in the red is a way to stimulate the economy, but after the (unsustainable) growth began, we've remained in that position.

 

I made a similar point in my OP

 

I don't know how else to react to this. Myopic? Ignorant? Completely ridiculous?

If you're talking about my point, I think you're missing it: economists were wrong about the 80s. However GDP growth happened, it did happen. That means, at least some, economists were/are wrong about how the economy interacts with policy during this specific time period. Subsequent posts have brought up a new point: how well are indicators (such as GDP or median family income) actually indicating real economic performance over the country? How do you interpret the data that countries with classical liberal policies (according to the link) - such as the US, Britain, Chile, had higher GDP growth rates than countries that didn't emphasize these policies? Knowing what policies these countries would pursue, what would you have expected there GDP growth rates to be during this time?

 

 

 

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I've purposefully made this point intersect the point I made in a more meta-thread on the point I'm trying to get at: How can we be sure that economic or political models (personal or otherwise) fit the data we're looking at?

 

I'll use bascule as a convenient example here:

 

What do you anticipate as the result (measured in GDP or otherwise) of your model of classical liberal policies being bad for economic growth?

 

If you had said, when Regan became president, that his policies would harm GDP (as many did) then you would have been wrong.

 

Now that we have the benefit of hindsight, what do we do? (please read that other thread before thinking about this question)

 

Do we rationalize our model to fit the observed GDP data? (ex - GDP growth proves that Regan was an idiot by claiming GDP growth doesn't benefit the economy in this case)

 

Do we find a different model that includes other factors? (ex - Yes, GDP went up during Regan's time, but policy isn't everything and policy can fake growth)

 

Do we hold onto our model, but question the relevance or validity of the GDP data (ex - GDP data is false or irrelevant in measuring economic performance?)

 

What I'm interested in knowing is how do 5 people look at the same graph and not come to the same conclusion?

 

Obviously, people are starting with different priors and adjusting those priors in different ways, with respect to the evidence. Are people letting hindsight bias (or other biases) cloud rational consideration of evidence? Or are there irreconcilable, yet rational, differences in how people update their models based on the evidence.

 

For example: what economic data would you expect to observe in order for you to change your mind on your initial reaction to reading the OP?

Edited May 25, 2010 by ecoli
Consecutive posts merged.

[bascule]

Nobody is making that claim. please calm down!

 

Okay, can you please tell me what claims you are making about Reagan then? Because as far as I can tell this is nothing but a post hoc ergo propter hoc argument about how Reaganomics lead to a productive economy.

 

We've exhausted that area. I'm interested in the '80s for this post.

 

You are? I got a distinctly different impression from the OP:

 

According to Scott Sumner, Reganomics did produce the desired growth.

 

http://www.themoneyillusion.com/?p=5164&utm

 

1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

 

2. Over the next 28 years Britain would overtake Germany and France in GDP per capita

 

The very part of the guy's article you decided to quote talks specifically about the "next 28 years". So excuse me if I didn't get "just the '80s" from your OP.

 

That said, uhh, S&L scandal, and subsequent recession? The growth we saw under Reagan was not sustainable, and came at the cost of substantial national debt.

 

If you're talking about my point, I think you're missing it: economists were wrong about the 80s. However GDP growth happened, it did happen.

 

Yes, and we also saw GDP growth under FDR and Truman. Hooray for the New Deal! We also saw GDP growth under Bush, then... financial crisis.

 

Subsequent posts have brought up a new point: how well are indicators (such as GDP or median family income) actually indicating real economic performance over the country?

 

Growth according to broad metrics like GDP do not accurately reflect the risks that bring growth about. Someone can be "hot" on a craps table, with their total money increasing over time. That's not an indication that playing craps is generally a great way to make money.

[ecoli]

Okay, can you please tell me what claims you are making about Reagan then? Because as far as I can tell this is nothing but a post hoc ergo propter hoc argument about how Reaganomics lead to a productive economy.

Maybe it's based on a fallacy, but are you claiming that slower growth rates in non "reganomics" countries are not significantly due to reganomics-like policies (just to clarify).

 

 

You are? I got a distinctly different impression from the OP:

I meant I'm trying to get away from Bush bashing

 

 

That said, uhh, S&L scandal, and subsequent recession? The growth we saw under Reagan was not sustainable, and came at the cost of substantial national debt.

What if, however, we paired classical liberal policies without raising the national debt (keeping spending balanced) what would you expect to happen?

 

 

Yes, and we also saw GDP growth under FDR and Truman. Hooray for the New Deal! We also saw GDP growth under Bush, then... financial crisis.

This is a good example of what I'm talking about above. If I expect that GDP will grow in classical policies and fall during liberal policies, how would I interpret this data?

 

Growth according to broad metrics like GDP do not accurately reflect the risks that bring growth about. Someone can be "hot" on a craps table, with their total money increasing over time. That's not an indication that playing craps is generally a great way to make money.

 

Yet economists talk about metrics such as GDP all the time. People like Krugman would have probably supported signing a petition proclaiming GDP would fall under Thatcher. What would it take for someone like Krugman to revise their model (note: that doesn't mean siding with the enemy, but being consistent when they change their mind about something)

[bascule]

What if, however, we paired classical liberal policies without raising the national debt (keeping spending balanced) what would you expect to happen?

 

What I'd expect to see is the same thing we saw under Reagan, Bush Sr., Clinton, and Bush: a period of irrational exuberance/unsustainable growth followed by a recession/depression when things start getting out of hand

 

How many times do we have to keep trying the same failed experiment before we can declare it a failure and move on?

 

The type of deregulation pursued under the past four presidents put us on the road to economic ruin. A substantial portion of our present national debt was used to prop up our economy and keep it from collapsing entirely, money that Wall Street fraudsters and bandits used to line their pockets.

 

Our economy is desperately in need of more regulation. Large financial organizations like CitiGroup and Goldman Sachs should not be allowed to trade in derivatives like CDOs.

[Skye]

If I expect that GDP will grow in classical policies and fall during liberal policies, how would I interpret this data?

 

In my opinion, the problem with long term differences in growth is that the country with the higher growth ends up with a higher per capita GDP which tends to make them an inherently worse proposition for investing capital, since there are diminishing returns of production from capital investment on labour in classical economic theory. So if one country grows rapidly you would expect capital to flow to the other countries, leading to higher growth in those countries.

 

There are a number of limitations and exceptions. Generally this only works for similar countries (eg. developed), it relies on free movement of capital and technology, and there can be policy, population or resource differences between similar countries that lead to differences in GDP size. I think of it as though similar countries are tied to each other rubber bands, while they aren't bound rigidly together, and the growth rates tend to vary chaotically, they stay grouped together over long term. Also, countries that become comparable get slung forward at high growth rates. I'd say Japan was an example of this, and Singapore, Hong Kong and South Korea are more recent examples. It also seems these countries overshoot, eg. Japan in the early 90's and Singapore now. It'll be interesting to watch what happens to Singapore over the next few years.

[Double K]

Just to (hopefully) shed some humor on the topic.

I followed the link initially because I thought you meant

 

Reggae-nomics.

 

I believe a discussion on that would be far more chilled out.

 

Peace.

 

[iNow]

I'd like to point out that the OP uses GDP as the metric while Krugman uses median family income. There's more than one way to skin a cat, but once the skin is off its difficult to tell if its the same cat.

 

<...>

 

Ok, but keep in mind we're talking about GDP growth and general economic performance.

 

<...>

 

If you're talking about my point, I think you're missing it: economists were wrong about the 80s. However GDP growth happened, it did happen.

 

<...>

 

If you had said, when Regan became president, that his policies would harm GDP (as many did) then you would have been wrong.

 

Okay, except the rate of GDP growth in the years preceding Reagan was roughly 70%, whereas the rate of GDP growth in the years after his taking office is closer to 50%. My argument holds by both measures. The data strongly suggests the uptick was pre-Reagan, and that economies were harmed under his policies.

 

 

 

 

EDIT: I screwed up my numbers. I knew something smelled off, so I went and checked. Here's from the wiki on Reaganomics:

 

Reagan's policies are recognized by some (but not all, for example economist James K. Galbraith makes a very different case in his 2009 book "How Conservatives Abandoned the Free Market and Why Liberals Should Too") as bringing about one of the longest peacetime expansions in U.S. history.[9] During Reagan's tenure, income tax rates of the top personal tax bracket dropped from 70% to 28% in 7 years,[10] while social security and medicare taxes increased.[11][12] Real Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and produced five straight quarters of growth averaging 8.5%. The GDP grew during Reagan's administration at an annual rate of 9.4% per year, the Real GDP (adjusted for inflation) increased 3.96% per year on average [13] higher than the post-World War II average of 3.6%.

 

A more thorough critique of the approach is available here:

http://en.wikipedia.org/wiki/Reaganomics#Criticism

Edited May 26, 2010 by iNow

[jryan]

 

 

 

Well, "median household income" would also reflect the surge of two income households and a drastic rise in household income parity during that same time period. The marginal rate tax cuts of the early 60s fueled the influx of new people into the workforce then, and it had the same effect under Reagan... except rather than being a massive influx of liberated work force it was buoying a rising number of newly unemployed.

 

As such, the effect of the tax cuts was magnified in the 50s and 60s, but more mundane in the 80s and 90s.... as there was no dramatic flood of new workforce in that time.

 

As an example: if you were to grant all illegal aliens amnesty, and cut the top marginal rates, the added cash and the sudden explosion of legal work force would likely cause a dramatic rise in media household income similar to what we saw in the 1950s and 60s, but it would eventually reach equilibrium as it did in the late 70s and early 80s, at which point tax cuts would seem to have a less dramatic effect on MHI but would help sustain normal growth in the employment base.

 

So that leaves me with two conclusions: Raising taxes will have an adverse effect on employment rates, and if any congressman wants to discuss amnesty for illegals they will have to also discuss cuts in marginal taxes so that employers can afford to hire them at a legal wage.

[iNow]

Interesting thoughts, but I'd prefer this thread not go down the immigration and amnesty rabbit hole.

[jryan]

Interesting thoughts, but I'd prefer this thread not go down the immigration and amnesty rabbit hole.

 

Well, that's true. I was just pondering a situation in which we would see the kind of huge influx of workers and wage equalization as we saw in the women's liberation or equal rights movements.

 

Putting that aside, I just don't find that Krugman's analysis was sufficient as it ignored the dramatic changes in the American work force in the 50s and 60s.

[iNow]

Well, that's true. I was just pondering a situation in which we would see the kind of huge influx of workers and wage equalization as we saw in the women's liberation or equal rights movements.

Understood. It's a fair point, just not what happened in the late 70s to early 80s time period.

 

 

Putting that aside, I just don't find that Krugman's analysis was sufficient as it ignored the dramatic changes in the American work force in the 50s and 60s.

 

Erm... Not really, no. Be sure to open the links I posted (there were 4 specific to Krugman).

 

 

 

Also, from the wiki link in my post above:

 

 

The following Keynesian interpretation of Reaganomics is given by Paul Krugman:

 

The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.

 

 

In this view,

Reaganomics was not a refutation but rather a confirmation of Keynesian economics: the expansion was primarily a recovery from the 1982 recession, which was created by the textbook Keynesian monetary policy of Volcker, not the tax policy of Reagan.

At the start of the Reagan administration, inflation was high. The textbook Keynesian prescription for high inflation is high interest rates (contractionary monetary policy), designed to create a sustained period of high unemployment to break the price/wage spiral. Volcker did precisely this, creating the 1982 recession, then lowered interest rates once inflation was under control, resulting in economic growth and the unemployment rate coming down gradually.

 

Krugman argues that there is nothing unusual about the economy under Reagan – because unemployment was reducing from a high peak, it is entirely consistent with Keynesian economics for the economy to grow as employment increases while inflation remains low – the expansion was a

cyclical

recovery, but did not feature an increase in the

structural

rate of growth as its supply-side proponents argued.

 

 

 

I'm open to various arguments, but almost no matter how you slice it the data doesn't support the post-history revisionism being engaged in by some regarding our 40th president.

[jryan]

I don't see that the data during the Regan era points to a support for Keynesian Economics at all, because you simply can't take any presidency in a vacuum. Indeed, the stagflation that Regan inherited from Carter was the result of Keynesian economic policies of Carter.

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Oh, and as a matter of full disclosure, I am aware that Volker played a large role in pulling the country out of stagflation. But the recession that followed should be expected as inflation dropped from double digits to 3.2% in a year.

 

But what Krugman does here, as Krugman does everywhere, is ignore all data that doesn't support his claim. He ignores the existence of large tax cuts in the same time as Volker's clamp down on inflation simply to claim a false victory for Keynesian economics. Volker's work didn't happen in a vacuum either.

 

Krugman has always rubbed me the wrong way as his explanations have always been far too static. If X+Y=Z, he will argue that raising X raises Z... which makes some sense on casual review. But if X and Y have inverse correlation then you can't assume that raising X raises Z... but this reasoning is the underpinning of almost all of Krugman's arguments while he rarely bothers to look at the relationship between X and Y.

 

Here is one particular refutation of Krugman on that count.

[ecoli]

What I'd expect to see is the same thing we saw under Reagan, Bush Sr., Clinton, and Bush: a period of irrational exuberance/unsustainable growth followed by a recession/depression when things start getting out of hand

 

How many times do we have to keep trying the same failed experiment before we can declare it a failure and move on?

 

I don't see how you can be so confident about this, when n=4. Also consider that you're statement is pretty much exactly what a supporter of Austrian economics would say. It seems, at least to me, that both sides are having trouble coming up a testable hypothesis that can sufficiently exclude the ideas of the other side.

 

After all, it's not like we can set up controlled experiments to test different models.

 

Isn't it possible, afterall, that humans are so irrational that no amount of regulation (or lack thereof) can prevent business cycles (short of banning markets altogether)? Such a possibility wouldn't seem to be excluded, (at least as it seems to me) from the various current models.

 

One other point, if a business cycle fails to appear (a sustainable bubble is produced) under regan-like policies, would you concede that you are wrong? How do you know that economic growth is occuring because of, or in spite of, these policies? Such an observation would be difficult to separate from the hindsight bias. I worry about people who observe counterevidence and still insist that they're model is still correct... thousands of economists would fall under this umbrella.

 

The type of deregulation pursued under the past four presidents put us on the road to economic ruin. A substantial portion of our present national debt was used to prop up our economy and keep it from collapsing entirely, money that Wall Street fraudsters and bandits used to line their pockets

 

Our economy is desperately in need of more regulation. Large financial organizations like CitiGroup and Goldman Sachs should not be allowed to trade in derivatives like CDOs.

 

I think part of the problem could be that of terminology. Under certain circumstances, selective deregulation could be thought of as regulation (newspeak?) Example, Relaxing rules so that Washington help out their Goldman Sachs buddies is sure as hell not a free market idea.

 

So we can see the same events you see a market failure and I see a government failure - even though it was essentially the same failure.

[bascule]

So we can see the same events you see a market failure and I see a government failure - even though it was essentially the same failure.

 

I see it as a government failure to regulate. I'm guessing you see the government failure here in a different light.

 

Large conglomerate financial companies like Goldman Sachs and CitiGroup should NOT be allowed to trade in CDOs

[iNow]

I don't see how you can be so confident about this, when n=4.

 

N only = 4 if you define your population by administrations. If you drill-down to more detail and define your population sample as something more representative of the programs pushed through and managed under those administrations... you know... a realistically representative sample... N suddenly explodes into the thousands.

[rigney]

I probably belong on the lowest rung on the ladder in trying to explain economics. But can any of you formalize: Minimum Wage, Ergonomics and Welfare and put them into perspective? Everyone from the head of state to the dish washer needs a job, "big, small or in between". But our Welfare system is creating a hole large enough so that eventually, no one will be able to climb out. The day is shortly to come when six Phds in Physioligy, a couple in Astrophysics or Cosmology and perhaps one or two in medicine will be digging this ditch. The dude supervising the job will likely be a legitamate "Ditch Digger". Welfare and minimum wage is a bane on civilization. If I am wearing the big hat, I can placate the less fortunate at the expense of the middle group. But, let not any of us make waves, "anyone"!!

Edited June 5, 2010 by rigney

[iNow]

I probably belong on the lowest rung on the ladder in trying to explain economics. But can any of you formalize: Minimum Wage, Ergonomics and Welfare and put them into perspective?

I need you to first explain how the science of the design of equipment, especially so as to reduce operator fatigue, discomfort and injury is even vaguely relevant here.

 

 

 

But our Welfare system is creating a hole large enough so that eventually, no one will be able to climb out.

Can you elaborate on this point? From my perspective, it doesn't make much sense. Let me explain.

 

When someone loses their job, the benefits provided by the government allow them the ability to find new work, and to still feed their families without having to resort to illegal activities to do so. It allows them to stay current and not fall behind on their bills, so the creditors also do better economically due to the assistance from the government. In short, they continue to be better contributors to society due to a little help from the rest of us to help them get through the bad times.

 

The same holds true for the elderly. They are no longer able to work, but still have bills to pay and food requirements. The "welfare system" about which you lament actually ensures that they are not just dying and rotting out in the streets alone and sick. It helps those around them, and respects their contributions to society during their former years. It helps their family, and allows them to continue contributing their own monies into the larger economy thus helping the markets in which they consume. Without help from our social safety nets, that money would instead have to be devoted to all of the expenses for their elder family members, and the larger economy (now no longer receiving that money) would suffer as a result. They also pay taxes on that money, so it goes back into the system and is there to help the rest of us, and to repair and build roads, and to educate our young, and to help us when we ourselves get too old to work and care for ourselves.

 

In short, the welfare system you despise does more good than harm. Further, it is hardly what is preventing people from working, which you and others like you seem to imply. It is what helps people to survive and crawl out of those holes. It is a way to help people who have fallen on hard times to again find their way and become contributing members of society. As should be painfully obvious after the economic crisis of 2009, the thing preventing people from working is the lack of jobs, not the availability of a social safety net. Sure, some incredibly tiny fraction of a percentage of a minority might game the system, but the system as a whole does far more good for people and the overall economy than harm.

 

What you describe as a "bane on civilization" is an enlightened way to alleviate suffering and to ensure a minimum basic level of care and social support is available to all citizens regardless of their background or wealth. The black and white good/bad absolutist description you've put forth is not only inaccurate, but painfully disconnected from the people who manage to survive and care for their children and ultimately find new work due to these programs.

Edited June 5, 2010 by iNow