Mr. Reagan Your Keynesianism is Showing

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.


3 thoughts on “Mr. Reagan Your Keynesianism is Showing

  1. Interesting that your Reagan graph starts in 1982 after he already cut the top tax rate from 70% to 50%. He then cut them again in 1987 to 38.5% then to 28% in 1988. You can try to label him as a Keynesian but he cut the top tax rate from 70% to 28% during his 2 terms. So his priorities were tax cuts.

    His spending was on defense due to the cold war which was a national security issue. That spending was alot more “shovel ready” then anything Obama has proposed. So Reagan created alot more jobs. Investment on defense is appropriate since that is the major lrole of the government – to protect us.

    So cutting the top tax rate by more then half and investing in defense lead to economic growth during the 1980’s. That is the direct oppsite of the Keynesian’s who would increase taxes to invest in make-work social engineering projects that don’t create jobs.

    • The fact is Reagan increased government consumption during the recession, and that is Keynes 101. Keynes didn’t care what the money was spent on be it infrastructure or national defense the end result is all the same. This post has nothing to do with tax rates. I understand he lowered them, but that isn’t counter to Keynes. Keynes advocated raising taxes during boom times, not in a recession.

      You can make the argument that the tax cuts boosted the economy but I don’t see how that holds up to other evidence. Currently we have lower taxes than the early 80s and less government investment. So if it was the low taxes that caused the economic growth how come we don’t see similar growth now? The fact is government consumption and not tax cuts boosts economic growth in a recession.

  2. Pingback: Construction is the Achilles’ Heel of this Recovery « Ajones1021's Blog

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