The Myth of Reaganomics

I have just watched the most appalling piece of historical revisionism I have seen in a long time, the first part of the PBS series, The Commanding Heights, first broadcast in 2002. This two hour film purports to show the history of 20th-century economics up through the Reagan administration. Never mind that the film presents this history as a simple contest between the "free market" and "socialism," or as a contest between J. M. Keynes (whom they seem to think was a socialist) and Friedrich Hayek; television, I suppose has to simplify. Nevertheless, you know something is afoot when, in discussing (in glowing terms) Reagan's economic policies, they do not mention the economic theory that was the driving force of the administration's policies and great debate of the day, the now thoroughly discredited supply-side economics.

The film presents Reaganomics as not only an unqualified success, but also as an unqualified victory for the "free market." One can, if one likes, call Reagan's policies a "success"; one cannot, if one is honest, call them "free market." And giving the right name to things is half the problem of understanding them. So what name should we properly give to Reaganomics? To answer that question, we will first have to evaluate what they accomplished, and evaluate it on their own terms, because the best way to evaluate anybody is by the goals they set for themselves; someone can argue about goals others set for them, but there is no disputing an evaluation in terms of one's own stated goals. Reagan stated four goals for his administration: 1) Reduce government spending; 2) Reduce taxes; 3) Balance the budget, and ; 4) Reduce government regulations. Let's look at the numbers to see how well he accomplished these goals. (Incidentally, I take the numbers not from some left-wing Reagan-haters, but from the purest of the Libertarian theorists, Murray Rothbard; you can find his 1986 evaluation of Reagan here.)

Government Spending

In 1980, the last year of Jimmy Carter's administration, the fed­eral government spent $591 billion. In 1986, the federal government spent $990 billion, an increase of 68%. Federal spending as percent of GNP in 1980 was 21.6%, and after six years of Reagan, 24.3%. A better comparison would be percentage of federal spending to net private product, that is, production of the private sector. That percentage was 31.1% in 1980, and a shocking 34.3% in 1986. So whether in absolute terms or in percentages, the Reagan administration has brought us a substantial increase in government spending.

Taxes

Despite the much touted tax cuts of 1981, taxes for the average person actually rose, and they rose every year thereafter. Of course, they weren't called "tax increases," they were called "fees" or "plugging loopholes; but the effect was the same. The facts are that federal tax receipts were $517 billion in the last Carter year of 1980. In 1986, revenues totaled $769 billion, an increase of 49%. Taxes fell from 18.9% of the GNP to 18.3%, or for a better gauge, taxes as percentage of net private product fell from 27.2% to 26.6%. While that is a slight decrease, it hardly matches the overheated rhetoric. What actually went down was not tax cuts, but tax shifting, from upper income taxpayers, to middle and lower-income taxpayers. This was accomplished through an $165B increase in Social Security taxes, monies which were spent as ordinary revenue. Taxes were increased again in 1986, to prevent a market meltdown.

Balanced Budgets

In the last year of Carter's administration, the budget deficit has $74 Billion. By 1984, the deficit was $200Billion and rising. In 1980, the debt of the United States was $712 Billion; when Reagan left office, it was over $2 trillion; when the elder Bush left office, it was $3 trillion. This kind of borrowing is also a tax increase, but an increase on future generations; we spend ourselves into prosperity by taking the money form our children; so much for "family values."

Government Regulation

The Reagan administration took credit for the deregulation of the airline and trucking industries, but in fact thses happened, or were begun, under the Carter Administration. All that extra money the Reagan Administration was spending went, in fact, to a larger and more intrusive government.

I have hewed pretty close to Rothbard's critique so as to avoid any charges of mere ideological bias, but in fact there are other grounds on which the "free market" bias of the Reagan administration can be cast into doubt, much less its deliterous social effects. Further, this critique, written in 1986, did not cover the end of his term and the presidency of the Bush I, where the situation only got worse. But if we cannot label Reaganomics as "free market," what should we call them? Clearly, this was not the ideas of Hayek at work, but those of Keynes. Further, it was not merely Keynesian, but hyper-Keynesian, with deficits that would have shocked Keynes himself, and without the moderating influeances of Keynes. In Keynes's theory, the government lowered taxes and borrowed in bad times to prop up demand, and raised taxes in good times to pay off the deficits. In Reagan's hyper-Keynesianism, the government borrowed all the time to sustain ever-higher levels of demand; the debts just keep piling up, and no matter how low corporate taxes are, they are never low enough.

Why Keynes?

Clearly the Reaganites used Hayek's rhetoric to achieve Keynesian policies, and Hayek himself--to his everlasting shame--connived in this deception. But why the deception in the first place? The answer lies in the fact that America is not, and has not been for over 100 years, a "free market" capitalist country, but a "corporate capitalist" economy, and corporate capitalists require government power to defend their position. The reason is that corporate capitalism is--and has always been--highly unstable. The accumulation of wealth and power in the hands of a relatively small oligarchy has always made economic equilibrium impossible, and it has always been necessary for the government to intervene to prop up demand and insure order. This is the one constant in capitalist history: as corporate power has grown, the size and expense of government has grown; there are no exceptions to this rule. The real historical battle has not been, as The Commanding Heights would have us believe, between "free-market" and "socialist" economies, but between left-wing and right-wing Keynesianism; the left-wing would give greater weight to social concerns, and the right to corporate concerns, but both rely on govmint power.

By the second half of the 20th century, every industrialized nation had adopted some form of Keynesian economics, and they did so whatever the ideological stripe of the regime in power. They did so because they had no choice. Or rather, they had a choice between government intervention and social chaos; their economies had been captured by large corporations, and only a similar growth in government power could insure corporate control on the one hand and some modicum of social peace on the other.

Keynes himself would have been appalled by all of this; he did not guess that the mechanisms he outlined for stabilizing an economy could, in a democracy, so easily be captured by corporate power. Had he been a better student of history, he would have realized that this was an inevitable outcome. Great fortunes need high fences to protect them, fences made of laws and regulations in fortune's favor; and these high fences need big governments to build and defend them.