Where Did the Reagan Tax Cut Go?

-- Bradford DeLong (delong@econ.berkeley.edu), May 04, 2000

Answers

Having had an opportunity to read your published comments about the supply-side revolution in today's New York Times, I find your ideological attacks against President Reagan's policies quite surprising.

The supply-side movement is premised on the idea that, beyond reconfiguring economics from a demand-oriented model, lower and flatter marginal tax rates influence economic growth. This idea remains anathema to numerous "scholars," many of whom persist in classifying economics as a science. Economics is a social science, with all the concomitant room for error from unexpected, irrational (paging Alan Greenspan) human behavior. That Paul Krugman and his fellow neo-Keynesians do not understand this amazes me. But arrogance is a trait more foggy than, and perhaps less intelligible than, simple economic science. Alas, I digress.

The central argument in your piece, from which opponents of supply-side economics have borrowed extensively, is that President Reagan's policies increased the deficit, which is undoubtedly true. What you fail to point out is that public debt is almost always irrelevant. Even Paul Krugman believes governments do not go bankrupt. Politicians are not usually as felicitous with numbers. Hence the temptation to conflate public and private debt. Simply stated, people can and do declare bankruptcy; governments rarely go Chapter 11. To my knowledge, the only way a government can go bankrupt is to lose a war and thereafter invalidate its currency (see the Confederate States of America).

More important is the importance of delineating between capital spending and current spending. The federal budget does not make this distinction, distinguishing between investments and current government outlays for things like Social Security and Medicare. Under this current system, how can one calculate the cost for Bill Clinton's "bridge to the twenty-first century"?

Finally, how do you explain the unprecedented economic growth during Reagan's presidency? Supply-side critics normally point a wavering finger to Paul Volker. But Volker's policies arguably worsened the 1982 recession, whereas Reagan's tax cuts began the economic rejuvenation we are still enjoying.

Like Paul Krugman (and other supply-side opponents) the temptation is strong to belittle Ronald Reagan as a lightweight, who was probably suffering from Alzheimer's Disease circa January 20, 1981. This is the fatal error most academics make: they personalize their criticisms, reducing arguments to ad hominem attacks between those with Ivy league degrees (Henry Kissinger notwithstanding) and the simpletons that support Reagan.

-- Lewis Fein (Lewisafein@aol.com), May 04, 2000.

You don't seem to have read my article. Ronald Reagan wanted to shrink the relative size of the government: to reduce federal taxes and spending as shares of GDP.

In spite of substantial legislative success in his first year, it hasn't worked out that way. But to point out that taxes are a higher share of GDP than before Reagan took office is not to make an ideological attack. When I make an ideological attack you will know it...

:-)

-- Bradford DeLong (jbdelong@home.com), May 04, 2000.

Both of the quotes-- deficits crowd out private investment and deficits cause high interest rates (more specifically there that lowering deficits cause lower interest rates) are pure Summers, but you are right that "pre-Keynesian" is the correct general label. Bob Eisner and Bill Vickrey spent their lifetimes trying to debunk these kind of standard mantras, that would be ridiculous if not for the fact that they influence policy. They are called "pre-Keynesian" because these generally depend on asssuming full employment. My students in Principles understand this. It is amazing that the same news summary will quote Clinton on paying down the national debt will allow lower interest rates and then report on the Fed will decide whether to raise or lower interest rates, without blinking. But why would Brad contribute to perpetuating such theoretically, empirically, historically, unsupportable views, when he surely knows better?

-- Mathew Forstater (forstate@levy.org), May 04, 2000.

Nah. In the context of the 1980s and 1990s, the Federal Reserve has its target for real GDP and unemployment that it will try to hit--so a bigger deficit means higher interest rates. It's not the pre-Keynesian childish babbling of a Say, but a certain (I think correct) view of how the Federal Reserve behaves...

-- Bradford DeLong (jbdelong@home.com), May 04, 2000.

Excellent piece. Elegant. Didactic. Lookforward to next month's. Good for you.

-- anonymous (anonymous@nowhere.org), May 04, 2000.

I understand perfectly what you meant because I noticed it with everyone who talks about Reagan, but arent there some solid facts to show that Reagan really hurt the US in the longer run than what he helped... I am not disagreeing that he brought more jobs, and the average american was getting payed better than what he used to during Carter's Presidency, what i am arguing is that when Reagan decided to initiate all these programs, including all these new jobs, the american budget was really unfit to support these people yet they didnt know it. Just because you create more jobs, lower taxes, and there is more money out there, that does not necessarily mean that money was generated by the economy,maybe some of it was, but for the most part all that money came from america's budget which in turn increased the deficit not to mention that Reagan also increased Military spending like a madman cause "USSR" needed to be defeated. I know this is a very long subject but sometimes, I dont think people think in the long run. Just as long as they have more money than last year, dont have to pay as much taxes, all what you'll hear out of them is "I'm living life, I dont care about anyone else" Clinton aint the best of presidents either. I am an American Citizen who has lived his whole life in America and no where else, can you believe that America spends more money on one Israeli individual liiving in Israel than on one American individual in the US. The US gives BILLIONS of dollars to a country half way around the world and doesnt have the thought to spend it on its own ppl. I mean what is life on earth coming to? People other than the minorities complain about poor minority conditions and when they run for presidency, they say they will solve the problem. The unnesecessary money given to other countries should be kept inside of America to take care of our own. Yeah, its nice to help other people but if you dont take care of your people first, sooner or later, you're bound for some big problem to come your way. Take care Mr. De Long and I hope to hear from you one last time.

Sincerely Musab

-- Musab Shaheed (shaheed81@worldnet.att.net), May 04, 2000.

Has everyone actually forgotten about Congress and their role in the deficit that is so conveniently pinned on Reagan. While it it true Reagan had to put his signature on those spending bills, the budgets passed which gave us that horrible deficit never were Reagan's budgets to begin with. Who can forget the Democratic leadership of Congress calling Reagan's budget proposals "DOA" - Dead on Arrival. Congress passed what they wanted and sent it to Reagan.

Sure Reagan got his spending increases he desired, increasing defense spending more than 50%, but the flip side is Congress increased social spending at almost the same rate. Both got what they wanted, and we got a deficit.

Reagan Taxes, yes, but don't leave the Congress out of this one.

-- Gary Storts (gstorts@aol.com), July 25, 2001.