Tuesday, May 10, 2011

More Reagan myth debunking

In the comments on my previous post, Ken linked to an article containing even more unsubstantiated claims and mythology of Reaganomics-- that Reagan's tax cuts singlehandedly lowered inflation, boosted productivity, and gave us 25 glorious years. The problem is that the data disagrees.

1. You can't decrease inflation by increasing the deficit, which Reagan did. Inflation in the long-run is determined almost completely by the growth rate of the money supply. The author sort of acknowledges this, but not exactly.

2. Via Paul Krugman, who did a series debunking Reagan myths a couple years ago:
Growth in per capita real GDP from 1950 to 1980: 2.2 percent per year.
Growth in per capita real GDP from 1980 to 2007: 2.0 percent per year.

Growth in median real family income from 1950 to 1980: 2.3 percent per year.
Growth in median real family income from 1980 to 2007: 0.7 percent per year.

Growth in labor productivity from 1950 to 1980: 2.3% per year.
Growth in labor productivity from from 1980 to 2007: 2.0% per year.
The greatest growth in productivity in America took place after WWII, at a time when the top marginal tax rate was in the range of 70-90%. (Kennedy cut it after Eisenhower would not, ironic!). There was a pickup in labor productivity in the mid-1990s. But this, of course, was after Clinton raised taxes which, following the Reagonomics authors' logic, should never happen. I'll let Krugman snark on this point.

The overall point that Ken wants to highlight is that Obama and Reagan have differing views of government. I agree. But conservatives/neoliberals who want to highlight this shouldn't peddle mythology that Reagan proved that cutting marginal tax rates automatically boosts productivity. They deceitfully neglect to point out high rates of economic growth during times of higher marginal tax rates. My point about Ferrara's Forbes Magazine piece was that he also neglects to mention the number of times Reagan increased taxes, including the payroll tax, and the ways he boosted the overall level of government spending and size of the federal work force.

Tyler Cowen would argue a la The Great Stagnation that the 1950s & 1960s saw the productivity gains because America was still picking the "low-hanging" fruit-- integrating its work force both racially and in gender, increasing human capital (GI Bill and the like), and experiencing the positive externalities of some of the "big" discoveries-- like the computer. But, that fruit was mostly picked by the 1970s-- it wasn't Reagan's fault that productivity was still pretty stagnant after his policies. But it's to his followers' discredit that they believe the myth that it somehow grew at a record pace.

1 comment:

JDTapp said...

I should add that Milton Friedman, sort of my rabbi, is on record as saying he has "no doubt" that the alignment of incentives and the deregulation of the 70's and 80's unleashed the creative potential of the American economy. Reagan has some hand in this, he continued the deregulation of some industries started under Ford and continued under Carter. But Friedman also said "to spend is to tax," and hated the Reagan deficits.

Ironically, I think Krugman's blog comments that I linked to are more Hayekian in nature than the conservatives' articles. There's a lot that contributes to GDP and productivity growth that we should be humble about understanding. The Reagan-worshippers seem to suffer from the Fatal Conceit themselves in misusing one data point to come up with one main policy prescription--lower marginal tax rates.