Recently I compared Obama’s stimulus to the austerity approach favored by Republicans, which Europe has pursued with meager success. But maybe that wasn’t fair. Republicans never call their policies “European.” Instead, they invoke Ronald Reagan and his 1983 economic recovery. For instance, here’s the Vice Chair of the House Republican Conference:
President Reagan took a very different approach. He took an approach that was focused on pro-growth, on free-market solutions… an approach that in the third year of his term resulted in the economy booming by then.
And from the ever-reliable Fox News Network:
Reagan used the tax code to incent people to invest in our economy. And by doing so, he re-created the manufacturing sector. That created high paying jobs, and yes it made some people very rich, but here’s a newsflash for you, it’s the rich people that employ the rest of us.
Ah, yes, supply-side economics. Funny thing, though: In 1984 I entered Stanford’s Ph.D. program in economics (I opted not to finish, but that’s a different story). Stanford’s econ department was no bastion of liberal orthodoxy — the on-campus Hoover Institution provided too much funding for that — but even so, no one saw Reagan’s recovery as a victory for supply-side economics. Instead, it seemed pretty Keynesian, as in J.M. Keynes, the bad, bad homosexual whose economic theory is behind Obama’s stimulus.
So are Republicans rewriting history, or has time given us new insight? Luckily, we collect economic data every quarter, so this is easy to check. If the Republicans are correct, and “job creators” drove the Reagan recovery, then we’d expect to look back and see a jump in investment leading to an increase in real GDP. Is that what happened?
No. Real GDP shows its first sustained jump in Q1 of 1983. Investment goes up in Q2. Investment seems to responding to improved economic conditions, not causing them. This appears to be true not just for the recovery, but for the 1981 recession as well.
So much for investment. What about personal consumption? Democrats recently worked to extend unemployment benefits and cut the payroll tax, all in the hope of getting more money in the hands of consumers. The idea is that people will buy more stuff, depleting inventories, and encouraging businesses to expand production. So how did consumption figure into the Reagan recovery?
Consumption jumps a bit and begins a slow climb in Q1 of 1982. Real GDP increases slightly one quarter later and then stays roughly flat. However…
In Q4 of 1982, consumption leaps more dramatically, and guess what? One quarter later, the economy begins its long, steady recovery — even though investment is still falling.
Of course, the basic idea behind Keynesian economics (and the stimulus) is that the government can jump start us out of a recession with a little more spending. So let’s add federal spending to the picture.
Eh. I see a connection, but it’s a bit weak. We see a small increase in federal spending in the quarter before the small 1982 Q1 jump in consumption. But the connection seems to get stronger starting with 1982 Q3, where bigger increases in federal spending are followed one quarter later by the bigger jump in personal consumption, followed by the recovery itself.
I showed these numbers to a conservative friend of mine. He gave me a strange answer. Thinking of Reagan’s military buildup, he replied (and this is a quote): “…perhaps we could say an increase in military spending juices a recovery, but not so with domestic initiatives.”
That struck me as partisan desperation, as if Republican orthodoxy were drowning in a lake of data, clinging to whatever it could find — in this case, the idea that Republican-favored spending is good, but spending that Democrats like is bad, bad, very bad.
Still I figured, What the heck, and I took out total federal spending and tossed in federal nondefense spending. And whoa!
- 1982Q1: Consumption increases modestly, and the economy stops shrinking so dramatically.
- 1982Q3: Federal nondefense spending begins to climb significantly.
- 1982Q4: Personal consumption doesn’t merely increase — it accelerates.
- 1983Q1: The economy comes out of recession.
- 1983Q2: Investment spending finally begins to increase.
It’s easy to spin a story out of this:
A small increase in government spending eases the recession a bit, but later a bigger increase in federal nondefense spending leads to a bigger jump in consumption, which pulls us out of the recession and finally gets the “job creators” off their butts to increase investment.
And that, my friends, would mean Reagan experienced a standard, textbook, “liberal,” Keynesian recovery. The type that today’s Reagan-worshipping, Tea-Partying Republicans so staunchly oppose.
But be careful. Don’t fall into the post hoc ergo propter hoc fallacy: The fact that one thing happened before another thing does not mean it caused that thing.
Fortunately, we’re not trying to go that far, so we can fall back on a sounder and simpler principle: The cause should happen before the effect. So the next time a Republican invokes the Reagan recovery, you can reply:
Reagan didn’t save the economy through supply-side policies. The job creators didn’t get moving until after the economy was getting better. No, Reagan’s recovery started with an increase in personal consumption, not investment — and the best way to boost personal consumption is to focus on the middle class and the poor, not the rich.