EconoMonitor

Ronald Reagan the Keynesian

I came across an article in the FT by Gideon Rachman which examined “How Reagan ruined conservatism.” It is an interesting piece which claims that traditional conservatives abhor populism and respect knowledge, while the Reagan Revolution ushered in a ‘new’ conservatism that appealed to those who love populism and disdain knowledge. All very interesting – but clearly an interpretation, an opinion of the political landscape in America.

But what I found most relevant to today was the economic implications buried in the article rather than the political ones which were front and center.  The last paragraph sums it up:

The real Reagan was, in fact, rather more pragmatic than the “Reagan myth” that sprang up after he left office. Real Reagan was willing to raise taxes in extremis, and became a firm believer in arms-reduction talks. Today’s American conservatives, who claim the mantle of Reagan, would regard these ideas as treachery and weakness. Reagan was ultimately a successful president. But he left behind a poisonous legacy for the conservative movement.

Here was Ronald Reagan, the man who wanted to starve the beast (government), raising taxes, ostensibly to cut the massive budget deficit he had created early in his tenure. That is certainly a pragmatic move. But, a friend had another angle on this that I agree with: While conservative in word, Reagan was Keynesian in deed.

My friend wrote:

He was a great Keynesian President.  His financial deregulation was a disaster (although not as bad as what followed), but on tax policy he was vastly superior to what followed.  A tax cut equivalent to 6% of GDP.  Pretty good impact.

Okay, he called it “supply side economics”, but that was a fancy word for using fiscal policy activism to restart economic activity.

Exactly.  If you recall, Ronald Reagan cut taxes massively during the double dip recession of 1980-82 in order to spur on the economy. This had the effect of increasing aggregate demand, so much so in fact that we had extreme financial excess by the mid-to-late 1980s, much of which was channelled into mergers and acquisition and junk bonds. A Keynesian President would see this as a sign of incipient inflation in an economy operating at near full employment. The Keynesian approach, therefore, would be to use fiscal policy as a control mechanism – raising taxes to choke off demand.

And that’s exactly what Reagan did.  So, was Ronald Reagan a libertarian who also appealed to populist anti-intellectuals and was pragmatic in economic decision-making and taxation? Or was he a closet Keynesian who presided over a large increase in government spending and used fiscal policy to steer the economy?


Originally published at Credit Writedowns and reproduced here with the author’s permission.

Comments are closed.

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

Economics Blog Aggregator

Our favorite economics blogs aggregated.