This graph has circulated around the blogosphere and I think it says a lot. In a previous post I mentioned direct government consumption (not tax cuts) was most beneficial to the recovery. Maybe you are wondering why after an $800 billion dollar stimulus bill there has not been a robust recovery. The reason: A lot of that bill was in the form of tax cuts and not direct investment.
The graph, although a bit ‘wonkish’, shows the amount of government consumption through the first couple years of both the recession under President Reagan and the recession under President Obama. Government consumption means actual investments made by the government, so not tax cuts or safety net expenditures. We see at the beginning of each recession government consumption was similar. Then a year-and-a-half later Reagan continued government consumption while the President, up against a Republican Party with one goal of pre-mature debt reduction, was forced to cut government consumption. The result: “Morning in America” in the 1980s and now a slow recovery with unemployment above 8%. We see the validity of Keynesian economics at work here. Increased government consumption leads to economic growth in a recession. It worked for Reagan in the 1980’s and our slow but positive recovery is attributable to the government consumption done by President Obama; it was just not sustained long enough.
It is a shame the Republicans who praise Ronald Reagan do not follow in his footsteps. Ronald Reagan may be known for Reaganomics but by all accounts he is “in effect much more Keynesian than Obama.“