Paul Krugman attempts to rewrite economic history in his column today:
The point, then, is that we’d be in much better shape if we were following Reagan-style Keynesianism. Reagan may have preached small government, but in practice he presided over a lot of spending growth — and right now that’s exactly what America needs.
1. As far as spending goes, real total outlays grew by 9.6% during Reagan’s first term, from 1981 -1984. As a share of GDP, spending went from 21.7% in 1980 to a high of 23.5% in 1983 and back down to to 22.25 in 1984.
During Obama’s first term (using OMB numbers for 2012), real total outlays will be up 18.8%. As a share of GDP, spending was 20.8% in 2008, hit a high of 25.2% in 2009, and will fall to 24.3% in 2012.
So spending will be far higher in Obama’s first term than in Reagan’s first term. I think Keynesian spending has gotten a pretty good shot from Team Obama.
2. Wasn’t there something else that happened during the Reagan years besides the spending? What was it? Oh, right, massive tax cuts!
Let me cite a great and even-handed analysis of the Reagan tax cuts by AEI adjunct scholar Larry Lindsey from his book The Growth Experiment:
So who was right about the effect of tax changes on the economy, the Keynesians or the supply-siders? … The Keynesians were right in claiming that such a substantial reduction in [tax] rates would powerfully boost demand, a point the supply-siders never denied but perhaps underestimated. The demand-side revenue feedback and the combined behaviorial feedbacks (supply-side and pecuniary [how taxpayers alter their financial situation]) turned out to be roughly equal.
On the other hand, the revenue results vindicate the supply-siders most important claim: The tax cut produced quite large changes in taxpayer behavior. That claim, strongly confirmed by the results, ran directly contrary to Keynesian theory and most Keynesian predictions. The combined supply side and pecuniary effect recoupled well over one-third of ERTA’s direct cost, a very powerful response.
3. Oh, and I just know there’s something else Krugman is forgetting. Oh, right, massive deregulation! From 1973-1980, the pages of the Federal Register—a handy measure of U.S. regulation—grew by 200%. From 1981-1988, they fell by 39%.
What really powered the Long Boom from 1983-2007—as well as accelerating the economy out of the Long Recession from 1980-1982—was a turn toward pro-market policies of lower marginal tax rates and deregulation.