Krugman on Obama on Reagan, fisked

Barack Obama mentions Ronald Reagan, and Paul Krugman has a fit. He proceeds to revise Reagan’s legacy, because Clinton failed to change the narrative and Republicans are trying to rewrite history. Seriously.

Here’s the column, by celebrated New York Times columnist, former Enron adviser, and economist extraordinaire, Paul Krugman.

Debunking the Reagan Myth
By PAUL KRUGMAN
January 21, 2008

I thought, “Well, that was a quick read”, and was just about to retire for a power nap, when someone asked me for comment. So I thought, “Well, that’ll make a nice fisking.”

And it turned out to be very much worth fisking. Writes Krugman:

Historical narratives matter. That’s why conservatives are still writing books denouncing F.D.R. and the New Deal; they understand that the way Americans perceive bygone eras, even eras from the seemingly distant past, affects politics today.

It’s not the perception that matters, it’s the economic policies and principles that matter. Whether the New Deal was or was not sound economic policy matters very much, because it is on such historical lessons that many base their decisions of today.

And it’s also why the furor over Barack Obama’s praise for Ronald Reagan is not, as some think, overblown. The fact is that how we talk about the Reagan era still matters immensely for American politics.

Indeed. Maybe that’s because the Reagan era still matters immensely for Americans (not to mention the rest of the world).

Bill Clinton knew that in 1991, when he began his presidential campaign. “The Reagan-Bush years,” he declared, “have exalted private gain over public obligation, special interests over the common good, wealth and fame over work and family. The 1980s ushered in a Gilded Age of greed and selfishness, of irresponsibility and excess, and of neglect.”

And low taxes, the defeat of inflation, low oil prices, and the defeat of the Soviet Union. A Gilded Age indeed.

Contrast that with Mr. Obama’s recent statement, in an interview with a Nevada newspaper, that Reagan offered a “sense of dynamism and entrepreneurship that had been missing.”

Even Democrats understand this, though I wouldn’t expect Keynesians like Krugman to share that understanding.

Maybe Mr. Obama was, as his supporters insist, simply praising Reagan’s political skills. (I think he was trying to curry favor with a conservative editorial board, which did in fact endorse him.) But where in his remarks was the clear declaration that Reaganomics failed?

He omitted it, because he thought lying wouldn’t be consistent with his message of “change”.

For it did fail.

Really? Trust the intrepid journalist at the New York Times to break this news to the world 25 years later.

The Reagan economy was a one-hit wonder.

That’s fairly accurate, actually, if you limit your view to the USA. Keynesian economics (or worse) was triumphant throughout most of the 20th century. Of course, plenty non-American examples exist of Reaganomics in action, and all have the same result: low inflation, low interest rates, rising production, and rising prosperity.

Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before - and the poverty rate had actually risen.

That may well be true, if he’s measuring by nominal income, which he is. He’s dishonest that way (as befits a partisan columnist and former Enron adviser, perhaps).

Krugman conveniently forgets that real income is affected largely by two factors: inflation and taxation. He forgets to note that marginal tax rates were slashed by two thirds, from 70% (IIRC) to 28%. Now I know numbers are dry and boring, even to an economist like Krugman, but I’d have thought they’re worth a mention if, in fact, they represent one of the two major reasons why Reagan’s economic policy yanked America out of the severe recession of the 1970s and early 1980s and into a boom.

He also forgets to point out that inflation peaked at 13.5% in 1980. By 1983, it was 3.2%. This was admittedly not entirely Reagan’s doing. Paul Volcker is to be thanked for this, and to be fair to (the otherwise justly maligned) president Jimmy Carter, Volcker was neither appointed nor briefed to conquer stagflation by Reagan. But he did, and Reagan permitted him to do so, despite the massive short-term economic pain this involved. For taking the political heat over the resulting rising unemployment, Reagan deserves at least some credit.

So, by the mid-1980s, we have a two-thirds drop in taxes, and a three-quarter drop in inflation. That’s what I call “sustained economic improvement”.

But permit me to support that with actual numbers. Real median income is an accepted proxy for the income of “most Americans”. It remained constant in the eight years pre-Reagan, and increased by some $4 000 (11%) during Reagan’s term. It fell again by $1 500 in 1989-1995. So arguing that there was little sustainted economic improvement for most Americans under Reagan is patently false, unless you think real income growth of over 10% is “barely higher” than the stagnation pre-Reagan and the decline post-Reagan. In short, Krugman is flat-out lying here.

(Poverty rate and how it’s measured is a complicated subject, which I don’t want to get into in detail here. Suffice to say that it is a relative measure, and it would have risen for two reasons: the poverty line is linked to median income, so when it rises, all else being equal, the povery rate rises too, and since Carter’s instruction to Volcker was to conquer stagflation regardless of the impact on unemployment, and Reagan conceded his independence as Fed chairman to do so, unemployment rose for a while. That said, Reagan’s record on job creation was substantially better than both pre- and post-Reagan, and by the time he left office, it was two percentage points lower than when he entered office.)

When the inevitable recession arrived, people felt betrayed — a sense of betrayal that Mr. Clinton was able to ride into the White House.

Would that be the betrayal most often illustrated by the quotation, “Read my lips, no new taxes”? Ah, yes. The reason Bush Snr. got thrown out of the White House. Witness: higher taxes, recession. Link.

Krugman falls for the fallacy that two consecutive Republican administrations imply a continuation of policy, and that the “Reagan Years” were actually 12 years long. They were not. They ended in 1990, when Bush Snr. repudiated his “no new taxes” pledge.

Besides, Clinton, a Keynesian by instinct, was set to make things a lot worse, if not for a fellow named Newt Gingrich who stymied him two years into his eight-year term by ending the Democrats’ 40-year lock on Congress and promising a return to low taxes and fiscal responsibility (which ultimately, is Congress’s responsibility, not that of the president).

Given that reality, what was Mr. Obama talking about? Some good things did eventually happen to the U.S. economy — but not on Reagan’s watch.

Reagan used the only major policy instrument over which a president has partial control to affect the economy: taxes. I contend that Reagan cut taxes and Volcker brought inflation under control “on Reagan’s watch”. Unless you’d care to define “Reagan’s watch” as different from 1981 to 1988.

For example, I’m not sure what “dynamism” means, but if it means productivity growth, there wasn’t any resurgence in the Reagan years. Eventually productivity did take off - but even the Bush administration’s own Council of Economic Advisers dates the beginning of that takeoff to 1995.

Which didn’t start until Bill Clinton had watched productivity growth decline to lows (0.3%) not seen since Herbert Hoover. By contrast, Reagan-era productivity growth was 1.5%. And unless Al Gore really did invent the internet, I’ll take Krugman’s claim that Clinton is to be credited with the post-1995 resurgence of productivity growth with a pinch of salt, if you don’t mind.

Similarly, if a sense of entrepreneurship means having confidence in the talents of American business leaders, that didn’t happen in the 1980s, when all the business books seemed to have samurai warriors on their covers. Like productivity, American business prestige didn’t stage a comeback until the mid-1990s, when the U.S. began to reassert its technological and economic leadership.

He’s merely playing word-games with perceptions here, not making a point. Busines leaders and entrepreneurs aren’t the same thing, for a start, and the perception of business leaders as ruthless raiders is largely mistaken. Even if not, however, the fact is that the long-term economic expansion in the US (and the world) began with the two major achievements of Reagan’s term: low taxes and low inflation. And Reagan can take direct credit for at least one of them

(An important aside, to clarify something: it’s remarkable how often monetary policy (or stock market performance) is blamed on a sitting president. The executive controls fiscal policy, and even then, only with the assent of Congress. Fiscal policy involves taxes and government spending, over which the president’s treasury exercises control, subject to the assent of Congress. A president is not at all in charge of monetary policy, whether in terms of money supply or interest rates. These are the domain of the independent central bank (the Fed). A president doesn’t set interest rates. He cannot fight inflation. He cannot prevent stock market booms or stock market crashes, other than by the limited means of changing government spending or taxation levels. All he can do in terms of monetary policy (as Reagan in particular did despite grave misgivings over the unemployment consequences of the Fed’s measures to defeat stagflation) is permit the Fed to continue as an independent central bank without any government interference.)

I understand why conservatives want to rewrite history and pretend that these good things happened while a Republican was in office — or claim, implausibly, that the 1981 Reagan tax cut somehow deserves credit for positive economic developments that didn’t happen until 14 or more years had passed. (Does Richard Nixon get credit for “Morning in America”?)

Geez, and he calls himself an economist. Inflation was conquered under Reagan, and stayed conquered. Taxes were slashed under Reagan, and (relative to the size of his cuts) stayed slashed. Therefore, Reagan set the stage for the next 25 years of economic expansion.

And no, Nixon doesn’t get credit for a Reagan campaign commercial. Carter gets credit for making that one possible.

As for “rewriting history”, I’m using an analysis from 1996 — the middle of the Clinton years — for most of the numbers I’m quoting in this reply¹. (Hence the fact that some comparisons end in 1995.)

But why would a self-proclaimed progressive say anything that lends credibility to this rewriting of history — particularly right now, when Reaganomics has just failed all over again?

Que? The present economic problems are a direct consequence of interest rates, over which a political economist like Krugman should know the president has little, if any, control. And the shallowness and shortness of the post-crash recession, along with the sharp rise in employment numbers, were both largely (though I don’t claim exclusively) attributable to the Bush tax cuts.

Even the Democrats are talking about “tax rebates” as economic stimulus now. (Though I hope Bush doesn’t pander to them, and enacts more permanent tax cuts instead, since history has proved them to be both more effective and more durable in stimulating economic growth than redistributive rebates.)

Reaganomics, insofar as Bush followed it, has worked perfectly fine, thank you very much. Monetary policy and how stock markets and lending institutions respond to it, now that’s a different matter, which I’d have thought an economist like Krugman might be bothered to explain.

Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich and promises that the benefits would trickle down to the middle class. Like Reagan, he also began his term with an economic slump, then claimed that the recovery from that slump proved the success of his policies.

Any politician will take credit for an economic recovery, or the shallowness of a slump, whether or not they deserve it. In both Reagan and Bush’s case, they deserve credit inasmuch as they used the fiscal policy tools available to them. And have the facts ever stopped commentators like Krugman from giving presidents the blame for economic weakness inasmuch as they didn’t use monetary policy tools not available to them?

Another aside, on “tax cuts for the rich”. For Reagan’s cuts, the richest 1% paid 18% of all tax in 1981, but 25% in 1990. The richest 5% paid 35% in 1981, but 44% in 1990. The poorest 50% paid 7% of all tax in 1981, and 6% in 1990. A similar analysis of the Bush tax cuts shows similar results: everybody benefits from cuts in marginal income tax rates, and indirectly, everyone benefits from cuts in corporate tax rates.

Where does this “tax cuts for the rich” myth come from? And what does it benefit an economist, of all people, to perpetuate it? Is he talking politics, not economics, perhaps?

And like Reaganomics — but more quickly — Bushonomics has ended in grief. The public mood today is as grim as it was in 1992. Wages are lagging behind inflation. Employment growth in the Bush years has been pathetic compared with job creation in the Clinton era. Even if we don’t have a formal recession — and the odds now are that we will — the optimism of the 1990s has evaporated.

That wasn’t “optimism”, Mr Economist, that was speculative hysteria. You don’t benchmark an economy by comparing it to its most manic (but inevitably temporary) excesses. As for employment growth, Bush began and will end his term with employment near the “full employment” level of 4%, despite a substantial rise in unemployment resulting from the recession early in his presidency. It’s hard to create new jobs when you’ve just overseen an economy that recovered sufficiently to regain near-full employment.

This is, in short, a time when progressives ought to be driving home the idea that the right’s ideas don’t work, and never have.

Not only is this intellectually dishonest, since if they were right, it’d be important enough that they ought to be driving home that idea all the time, but it is patent nonsense, if you consider the economic numbers. It’s too much to expect a retired economist to bother with those, I guess.

It’s not just a matter of what happens in the next election. Mr. Clinton won his elections, but — as Mr. Obama correctly pointed out — he didn’t change America’s trajectory the way Reagan did. Why?

Uhm, I’ll take a stab at that one. Because Reagan knew his Economics 101, and Clinton didn’t?

Well, I’d say that the great failure of the Clinton administration — more important even than its failure to achieve health care reform, though the two failures were closely related — was the fact that it didn’t change the narrative, a fact demonstrated by the way Republicans are still claiming to be the next Ronald Reagan.

Now who’s advocating “rewriting history”? Be consistent, Mr Krugman, please. Let me get this straight: conservatives are trying to “rewrite history”, because Clinton failed to “change the narrative”? Okay then. Or rather, whatever, dude.

Now progressives have been granted a second chance to argue that Reaganism is fundamentally wrong: once again, the vast majority of Americans think that the country is on the wrong track. But they won’t be able to make that argument if their political leaders, whatever they meant to convey, seem to be saying that Reagan had it right.

And once again, “progressives” are being regressive by advocating Keynesian economics in which demand-side stimulus consists of government spending funded by taxation and debauchment of the currency. Despite all the data that shows this to be a false economy, despite all the data that shows supply-side stimulus by reducing taxation creates real and lasting economic growth, despite the fact that even on the left politicians are now beginning to acknowledge what no honest economist can deny, Krugman remains wedded to his vision of welfare-state nirvana.

An honest economist would consider changing the narrative.

Update: Added the excerpt/summary as the introduction to the post.

1. A comparison of key economic indicators before, during and after Reagan’s presidency, plus plenty of other useful calculations and charts, can be found in this 1996 report by the Cato Institute. [↩]