The "Reagan" Economy

Here is an excellent posting by Paul Krugman on his NY Times blog that points out that the right wing "agenda" which has controlled the US since 1980 is a complete disaster that has been mythologized as an "improvement" over the golden years economy of post-WWII America. It is an incredible lie, but it is believed!

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. And what I’m getting as a common response — including from liberals — is something along the lines of, “That’s all very well, but by 1980 the postwar system was clearly failing, so what would you have done instead of Reaganomics?”

Which all goes to show just how thoroughly almost everyone has been indoctrinated by the current orthodoxy.

How do we know that the postwar system was failing? Yes, there were some bad years — largely due to oil shocks — and there was stagflation. But stagflation was not, as far as I know — and as far as standard textbook economics says — the result of high taxes and/or excessive regulation; it was a problem of monetary policy. It’s a testimony to the strength of supply-side propaganda that so many people think they know differently.

And how bad were those bad years, anyway? Well, let’s look at real median family income over two 8-year stretches, 1973 to 1981 and 2000 to 2008, in each case with income in the first year set to 100:


Funny, isn’t it? The Ford-Carter years look no worse — in fact, somewhat better — than the Bush years, especially if you look from business cycle peak to business cycle peak. And that was in the face of two very severe oil shocks. So a question for all the people who say that the economic troubles under Jimmy Carter discredited postwar economic policies: why don’t the troubles under Bush similarly discredit post-Reagan policies? Funny how that works.

Here’s what I think: inflation did have to be brought down — and Paul Volcker, not Reagan, did what was necessary. But the rest — slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage — wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on.

In the modern vision, the old US economy is seen as an absurd, unworkable thing. Where were the incentives to grow super-rich? How did you manage with all those well-paid, organized workers? But I’m old enough to remember that system, and it was no more unworkable than what we have now. Radical change happened because a powerful political movement wanted it, not out of economic necessity.

And there is more from another Krugman post:

That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history.

Given all that, what do we learn from the fact that since 1980 the United States has more or less maintained its relative GDP per capita, after substantial decline previously? Well, that’s not a simple story. Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

There’s also an issue of labor-leisure choices. In the 70s the long-run trend of taking productivity gains out partly in the form of shorter working hours came to an end in the US, while continuing elsewhere. What that’s about is the subject of dispute, but it’s important to understand that a large part of the GDP difference between the US and Europe reflects that choice. France, in particular, is a country with about the same level of technology and productivity as America, but with roughly 25 percent lower GDP per capita; this mainly reflects longer vacations and earlier retirement, which may or may not be bad things, but are not a straightforward case of inferior performance.

But back to the original point: where this all started was with the common assertion that the US economy was a failure until Reagan came along. This should be true, according to doctrine — so that’s what people believe happened, even though it didn’t.

Even with Obama in place, the idiocy of the Reagan years continues because Obama believes in "reaching out" to the fanatics who won't give an inch. The economy has collapsed and still most people think that the right wing agenda was "the good years". They don't even understand how the Republicans destroyed the country. These people are ready to hand the keys to the country back to the crazy Republicans.