Re: Re: Greider on debt reduction

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

> The New York Times, June 19, 1985, Wednesday, Late City Final Edition
>
> Economic Scene;
> Is Reagan A Keynesian?

yes, in practice (though not in theory).


> By Leonard Silk
>
> WAS the economic recovery of 1983-84 the result of the Reagan
> Administration's supply-side policies or of the Keynesian stimulus
> resulting from big budget deficits?
>
> Wallace C. Peterson and Paul S. Estenson of the University of Nebraska
> contend that, despite its supply-side rhetoric, the substantive economic
> policies of the Reagan Administration became Keynesian following the deep
> recession of 1981-82, which threatened Mr. Reagan with outright failure on
> the economic front.

this is currently a very common view. But the Federal Reserve's retreat
from slash-and-burn attacks on inflation (in response to complaints from
the banks about illiquidity and the negative impact on Mexico) also helped
the US recover.

> Writing in the summer issue of the Journal of Post-Keynesian Economics, the
> Nebraska economists maintain that ''substantative Reaganomics,'' by cutting
> taxes and sharply increasing Government spending, ''took advantage of a
> simple but empirically valid principle, namely, that Government deficits
> stimulate economic activity.'' Tax cuts and climbing military outlays, they
> say, led first to increased consumption and then to an investment surge.
> They insist it was not an investment-led recovery, as the supply-siders
> maintain.

Of course, government deficits can stimulate private investment, by raising
capacity utilization rates and thus profit rates. (This a version of the
"accelerator effect.")

BTW, I'd think that I'd died and gone to heaven if the NY TIMES quoted the
_Journal of Post-Keynesian Economics_ in 2000. It's too far outside the
politically-correct vision of the NYT. (Post Keynesians, BTW, can be very
conservative. Some are lefties, though.)

> In the first quarter of the 1983 recovery, they calculate, nonresidential
> fixed investment actually retarded the recovery of the gross national
> product by 6.38 percent. While this was a less severe restraint on growth
> than during the average recovery, they deny that a negative effect of
> investment can be described as an investment-led recovery; consumption and
> housing expenditures, aided by declining interest rates, provided the lead
> and business investment followed.
>
> The major factor in the recovery, they argue, was fiscal stimulus, as
> measured by the so-called high-employment budget deficit. That concept is
> used by economists as a measure of what the budget deficit would be if the
> economy were operating at a standardized level of output and employment or
> unemployment. As now used by the Commerce Department, the standardized
> level of unemployment is set at 6 percent of the labor force. A bigger
> high-employment deficit implies greater fiscal stimulus; a lower deficit or
> surplus implies less stimulus or greater restraint.
>
> In the first quarter of 1981, the high-employment budget deficit was $21.2
> billion. It varied in succeeding quarters but was still only $26.3 billion
> in the second quarter of 1982. Then, as the Reagan tax cuts took effect, it
> soared to $106.1 billion by the fourth quarter of 1982. Mr. Peterson and
> Mr. Estenson find that the behavior of the high-employment deficit during
> the recovery ''provides evidence which strongly favors a Keynesian
> interpretation of the rebound from recession.''
>
> Despite the recovery, however, the high-employment deficit has continued to
> climb. It reached $155.7 billion in the last quarter of 1984. This, the
> authors note, should not have happened if the Laffer curve had worked and
> lower tax rates had increased national income and tax revenues enough to
> shrink the deficit.

right.

> The high-employment deficit hit a postwar peak annual rate of $156.6
> billion in the first quarter of 1985. The Bureau of Economic Analysis of
> the Commerce Department, using the Administration's budget projections,
> estimates that the high-employment deficit will decline to $133.6 billion
> in the fourth quarter of this year and to $129.9 billion -the last quarter
> for which it has published an estimate - in the third quarter of 1986. Does
> this imply a drag on the economy or simply a moderate reduction in the
> degree of fiscal stimulus?
>
> The answer appears to be the latter, with high-employment budget deficits
> above $100 billion still in prospect for the next three years even if the
> Administration and Congress get the budget cuts they are seeking, and if
> the changes in the tax laws now being debated do not result in further tax
> cuts.
>
> Does the persistence of high-employment deficits insure against another
> recession? That seems unlikely. The deficits threaten to keep interest
> rates and the dollar high, and to aggravate the huge trade deficit, which
> is playing havoc with American agriculture, mining and manufacturing.

Of course, the Fed has a lot of impact on interest rates (even though it
can't fine-tune the economy).

> Mr. Peterson and Mr. Estenson find that, as a result of the chronically big
> deficits, the American economy is in ''new and uncharted territory.'' They
> say the legacy of the Administration's policies ''has not only been a
> recovery from a devastating recession but a deficit which has reached
> unprecedented levels under high-employment conditions.'' They find it
> impossible to see how any future administration of whatever political
> persuasion could use tax cuts or major spending increases as a way of
> coping with a new recession. Here they find what they call ''the supreme
> irony: unintended Keynesian consequences have shut the door on future
> Keynesian actions.''

there's also been a major shift in the economy toward globalization under a
floating exchange-rate regime, which weakens fiscal policy and strengthens
monetary policy. Further, the economics profession shifted dramatically to
the right during the 1970s, away from Keynesian economics, as seen by the
common (false) assumption that efforts to increase saving without working
to increase real investment at the same time is a good thing for the
economy (i.e., does not encourage recession).

> And this is why the main actor in the bid to keep the economy from sliding
> into recession is likely to be the Federal Reserve and its monetary policy.

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine