Friday, May 06, 2011

Debunking Reagan Mythology - Forbes Magazine and Peter Ferrara edition

A friend's blog linked to this piece by Peter Ferrara in Forbes Magazine that is so full of omissions and mythology I have to think the editors at Forbes just say "What's the nuttiest right-wing thing we can think of to print today?" Other conservatives smarter than myself have pointed out that Forbes has gotten pretty nutty, and harmful to the conservative (or neoliberal, as many prefer) cause.

In short, Ferrara claims that Reagan delivered to us 25 of the greatest years in the history of the planet. He was a tax-cutting, de-regulating, inflation-fighting machine whose policies are "exactly the opposite" of President Obama's. Anyone can arrange "facts" to say what they want, like Ferrara does.

Reagan did inherit an economic mess, namely the problem of high inflation. But it was Jimmy Carter's Fed appointment- Paul Volcker, who Ferrara refuses to mention by name-- that did the inflation-fighting and induced the deepest recession since the Great Depression. Once that dragon was slain, the Fed was able to loosen its grip on the money supply, and the economy took off.

Perhaps the biggest contributor to the economic growth of the 1980s was the dramatic decrease in the price of oil. The inflation-adjusted price of oil fell from $99.11 in 1980 to $28.70 by 1986.

That's a huge supply-side boost that had nothing to do with monetary policy (and the inflation rate during this period was well above our current rate--another omission by Ferrara). It had more to do with the end of OPEC embargoes and the fact that Reagan cozied up to Saudi Arabia to break the cartel's hold. One can argue this point as a benefit of Reagan, but the fact that the Saudis use the money to build Wahabbist mosques that influenced Saudi terrorists to commit 9/11 and still indoctrinate jihadists in Afghanistan and Pakistan tend to suggest this was not a good long-run decision for America.

Ferrara seems bent on purporting the myth that Reagan was the Deregulator in Chief. Reagan did indeed deregulate, but the process of deregulation was initiated by Gerald Ford, and most of the heavy lifting was done (very ironically) by the Carter administration. Most of the deregulating was already done well before Reagan.

Ferrara trumpets the Reagan tax cuts without mentioning that Reagan actually signed tax increases into law in 7 of his 8 years in office. Why? Because of the yawning deficits caused by tax cuts that David Stockman and Art Laffer promised us would "pay for themselves" (the "magic asterisk"). I outsource to Brian Goldsmith of The Atlantic:

In 1982 alone, (Reagan) raised taxes twice, including the largest peacetime tax increase in American history. He raised payroll taxes, gas taxes, and corporate taxes. In fact, Reagan raised taxes every year he was president but the first and the last. He also raised spending by nearly a quarter in real terms -- more than double the increase under President Clinton. He added a new Cabinet department (Veterans' Affairs). In all, Reagan grew the federal civilian workforce by about 200,000... The national debt skyrocketed from $700 billion to nearly $3 trillion. And, as Michael Kinsley has written, "[the Democratic] Congress did not force Reagan to spend all this money. His total budget requests exceeded the amounts Congress appropriated."
I find it interesting that Ferrara omits that Reagan signed the payroll tax increase into law because of projected shortfalls in Social Security and Medicare. Ferrara now blasts Obama for wanting to do the same. (Do you get the drift, here?) Reagan tripled the federal deficit.
While Reagan's worshipers blame the deficits on a Democratic Congress, the data say otherwise.

The 1986 tax reform that Ferrara points to as a Reagan achievement was in no doubt initiated by Reagan's Treasury but much of the credit goes to Bill Bradley and other Democrats in Congress for writing the final legislation. This is pointed out in Alan Blinder's Hard Heads, Soft Hearts (my review).

Worse, Ferrara seems to think the 25 glorious years would have been uninterrupted in 1990 without those silly Bush tax hikes. Those were due to the yawning structural deficits the Reagan administration left.

Many Reaganites credit the dramatic U.S. GDP growth in the 1990s to Reaganomics. Alan Greenspan, a Reagan friend, credits it more to Bill Clinton and Congress raising taxes to balance the budget, causing long-term interest rates to fall and allowing the Fed to support a boom. I don't believe either, but to claim it was all somehow due to Reagan is a huge stretch. Let's credit China and India's growth to Reagan, too. It's just as plausible with the "facts" Ferrara uses.

Most sad is Ferrara's choice to use Art Laffer's 2008 book to argue that the 25 glorious years created immense wealth. What happened to that wealth in 2008 and 2009? The wealth accumulated from the mid-1990s disappeared. Remember that Art Laffer back in 2006 was claiming that there would be no recession, that housing prices would never fall (see him at the 1:18 mark).

Reagan also granted blanket amnesty to 3 million illegal immigrants and his administration illegally funneled weapons to Iran, while at an earlier point also funneled weapons of mass destruction to Saddam Hussein to fight Iran. Not very helpful for the American long-run.

There are reasons that progressives I know think that conservatives are blatantly dishonest, and Reagan mythology is one of them. I know Peter Ferrara has to know all of the above about Reagan. Ferrara likely seethes that Reagan raised the payroll tax to pay for Social Security because Ferrara wants to destroy Social Security. The problem is, smart conservatives keep calling him out on his bad math.


JDTapp said...

A couple other bits I left out of my post:
1. Tax burdens are at their lowest since 1958, lower than the Reagan-era.
2. Obama signed off on extending the Bush tax cuts. But those tax cuts were passed as temporary cuts, it's the legislation signed by Bush that causes those rates to rise-- it's not an Obama invention.
3. The Bush tax cuts didn't create the rate of job growth that Ferrara says should have happened with the Reagan years as his datapoint. And 1991 was also an initially "jobless" recovery.

Ken said...

In a sense, every presidential policy can be associated with a myth. Structurally, the Reagan Myth, is no different than any proposed Roosevelt Myth, or any other (insert President's name here) Myth. Given the way our govt. functions, with a more or less independent legislative and judicial system, the sum total of government action in any administration is clearly not the singular work of a President. It is, however, advantageous for liberals to reference the Reagan Myth, if only to underscore their disagreements and, perhaps, to undermine his personal economic philosophy. So we might say there is a Reagan Myth Myth - pinning to Reagan the collective work of the whole government to him in an effort to use various failures of the whole to defame his core beliefs.

The central difference between Reagan and Obama is encapsulated in this claim: "Government is not the solution to our problems; government is the problem." He said it many times, many ways. Mr. Obama, on the other hand, views the govt. as the solution to vastly greater number of problems than did Reagan. Neither Reagan nor Hayek believed in full govt. withdrawal from economic and/or social problems.

Here is an article I found addressing many of your comments: -

Ken said...

I'll quote a few sections here.

"Few people know that Reagan had a major in economics, which he obtained at the Eureka College (Illinois) in 1932. The economic theory he was taught was untouched by Keynesian thinking and, as a consequence, very appropriate to the problems of the eighties. Reagan followed the advice [of Paul Craig Roberts, Robert Mundell, Norman Ture and Steve Entin and a journalist (Jude Wanniski)] and took action. The top marginal tax rate of 70% was lowered in two phases: to 50% with the “ERTA” (Economic Recovery Tax Act of October 1, 1981) and in a later phase to 28% (The Tax Act of 1986). These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%. One of the longest and strongest economic expansions since World War II had begun, with an average annual growth rate of 3.5%. But the first two years (1981 and 1982) were lost for Reagan. Fed chairman Paul Volcker fought inflation with a tight monetary policy and high interest rates. The Reagan administration urged Volcker to decrease monetary growth by a maximum of 50%, in order not to kill the tax cut program. But as the Federal Reserve is totally independent, Volcker cut money growth by 75% in 1981. The recession became even worse, and unemployment rose further. But after inflation had been defeated, money growth resumed and the Reagan expansion took shape."

I watched Barbara Walters interview Reagan in 1982. She scoffed at his economic plan while he explained it clearly. (She studied English and I find it interesting her TV network did not assign a more qualified journalist to interview him. He described his plan and measures he could take to address economic conditions at the time, though as noted above, he did not control the various appendages of the entire government.

Ken said...

I took my first economics course in 1985. My prof. was quite impressed with Reagan's efforts, having never "seen anything quite like it before." He spent several class periods comparing the President's policies with those of Keynes. I had just left home and my parents took on multiple jobs to deal with stagflation. Working more for less was the only thing they could do to offset the mounting economic losses.

Here's another quote from the article:

"It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years. But between 1981 and 1989 the budget deficit increased only slightly, from 2.6% to 2.9% of GDP. The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money). During the same years the Belgian budget deficit varied between 7% and 13% of GDP. The average budget deficit for the G-7 countries was only slightly lower than that of the US. ... The public debt of the US as a percentage of GDP, remained below that of the G-7 countries, i.e. below 32% of GDP. But Belgian public debt, the result of years of Keynesian policy, was higher than 100% of GDP and remains around 100% at this moment.

I worked for the Dept. of Defense from 1984-1989, spending money on military equipment and services. I estimate I participated in spending about 1/2 billion dollars in that time frame.

Ken said...

The article explains defense spending in this manner - not at all as an ( inherently inconsistent) intent to stimulate the economy:

"Defense spending is a typical Keynesian demand-side policy and is certainly not a supply-side approach. Supply-side economics has nothing to do with expenses, but with the creation of incentives to produce, to take risk, to work, to invest and to save. Reagan saw the increase of defense expenditures as a necessary evil, to safeguard the security of the US in the long term. Without this defense buildup (which was the main cause of the increase in public spending) government outlays would have been considerably lower, and the success of Reaganomics would have been even more pronounced. Indeed, supply-side economics has taught us that an increase in government spending does not boost economic growth. On the contrary, recent studies have clearly shown that there is an inverse relation between economic growth and the level of public spending. This means that the increase of the defense expenditures during the Reagan era has lowered economic growth. Money invested in defense was lost for more productive investments in the private sector. Anyway, we must keep in mind that the Reagan budget deficit was not caused by the tax cuts, but by the increase in spending (mainly for defense), and paradoxically by an increase in social outlays, i.e. 2.9% per year during the first four years of the Reagan Presidency. That is an indication that Reagan was not an anti-social president.

Ferrara may have his reasons for presenting a version of the Reagan myth. However, there should be no dispute that Obama and Reagan differ on the extent to which demand stimulated by government spending is expected to impact economic conditions.

In a perfect world I suppose one could expect perfect economic policy. Multiple players, economic and national enemies - not to mention the political variety - serve to cloud the intentions and actions taken. I think the govt. in place today is dramatically different than the ideals of the Reagan administration, which is why I find the comparison worthy to further highlight characteristics of the liberal state.

JDTapp said...

A couple of thoughts. The article says that "These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%." without a shred of statistical evidence to back this up. A lot of things were going on. The Reagan tax cuts didn't make the price of oil fall from $99 to $28.70, but that was a huge supply-side stimulus. Explain how exactly the tax cuts caused inflation to fall (and 4.3% inflation would get Bernanke strung up today). To me, that shreds most of the credibility of the article-- pure snake oil. A lot of economic literature has attempted to show that Volcker's re-instilling confidence in central bank credibility, along with the rest of the world's central banks also adopting an anti-inflation attitude, did more for world economic growth than anything else.

And let's not forget, as Reagan's OMB director David Stockman later regretted and wrote books about, the tax cuts were sold as paying for themselves-- which they didn't.

If Reagan's tax cuts were supply-side stimulus, do we make the same claim about JFK's? No, it's usually viewed as Keynesian demand-side stimulus, which is what JFK told us it as. But then GW Bush's tax cuts were also portrayed as Reagan-style supply-side stimulus. What's the difference?

And if tax cuts are what matters, since we now have the lowest effective tax rates since 1958, lower than the Reagan era, shouldn't our economy be humming along according to your (and the author's) logic? I believe we also saw some great growth in the 1950s when the top marginal rate was 90%, and Eisenhower refused to cut it because he was worried about creating a budget deficit. It's the problem of operating from one datapoint-- as Reaganomics True Believers do.

The author can argue that without the Reagan defense build-up we would have seen "even greater growth," but again-- what's he basing that on? Nothing.

Reagan once campaigned against Social Security and Medicare as leading us down the slippery slope of Socialism. But when he got into office, he did things to shore up the safety net-- like raising the payroll tax. As Reagan biographer David Brinkley has pointed out-- FDR was one of Reagan's heroes. Reagan didn't want to eliminate government so much as he wanted to make it more effective. Yes, Reagan eliminated some waste, but he did things modern conservatives would consider anathema -- amnesty, negotiating with Gorbechev, nuclear non-proliferation, and raising payroll taxes rather than privatizing Social Security.

I'm not saying we don't need low marginal tax rates, and that we shouldn't be skeptical about what government can do (I believe Obama actually has said several times "there is only so much a government can do..."), but the Forbes author was directly contrasting economic performance in two very different situations, which is extremely disingenuous.

(I also highly question the author you linked to's comments about Reagan economists preferred amount of money growth. If he could provide a source, I might believe it).