Friday, June 8, 2012

Krugman on Reagan vs. Obama

I would say that great minds think alike, but I'm not arrogant enough to suggest that I'm anywhere near as intelligent as Paul Krugman. But anyways, I was looking at his blog/column today and I noticed that I may or may not have been just a hair faster than he was in getting my post out about the faulty comparison between the Reagan and Obama recessions. In any case, a few choice parts of today's column (ellipses added by me):
"I find it especially instructive to look at spending levels three years into each man’s administration — that is, in the first quarter of 1984 in Reagan’s case, and in the first quarter of 2012 in Mr. Obama’s — compared with four years earlier, which in each case more or less corresponds to the start of an economic crisis. Under one president, real per capita government spending at that point was 14.4 percent higher than four years previously; under the other, less than half as much, just 6.4 percent. . .
. . .So does the Reagan-era economic recovery demonstrate the superiority of Keynesian economics? Not exactly. For, as I said, the truth is that the slump of the 1980s — which was more or less deliberately caused by the Federal Reserve, as a way to bring down inflation — was very different from our current depression, which was brought on by private-sector excess: above all, the surge in household debt during the Bush years. The Reagan slump could be and was brought to a rapid end when the Fed decided to relent and cut interest rates, sparking a giant housing boom. That option isn’t available now because rates are already close to zero."
Hit the nail on the head, I think. Although the last sentence is technically arguable, if you think the Federal Reserve should adopt Nominal GDP targeting. But I digress. Like I said yesterday in my post, the Federal Reserve played a critical role in both the recession and the subsequent recovery--it wasn't all Reagan's policies of deregulation, tax-cutting, and budget-balancing. The latter of those three, of course, he didn't ever seem to do very well. But the point is, again, that comparing 1981 and 2008 is virtually meaningless--they're two entirely different ball games. 

There's this sort of mythological aspect to Ronald Reagan's legacy that I can't seem to wrap my head around, though. Sure, he was charismatic and popular, but Republicans seem to always invoke him when they talk about small government and balanced budgets, when his time in office yielded neither of those things.