Smoke and Mirrors

14 June 2004



Reaganomics -- Neither a Revolution nor Wise

The burial of Ronald Reagan ought also to mark the end of the pernicious belief that there was such a beast as Reaganomics. Mr. Reagan's economic policy was not revolutionary. It was not particularly prudent. It was, in fact, the other half of Keynes.

Ronald Wilson Reagan came into office at a time of 19% interest rates and an economic weirdness called "stagflation" -- inflation in a flat economy, something that shouldn't really exist. However, if one recalls the massive increase in the price of oil during the 1970s and the fundamental role "Texas Tea" (or perhaps "Saudi Soda") plays in the global economy, these conditions were short-term extremes.

Fed Chairman Paul Volcker, who was more Alan Greenspan than Greenspan in those days, set the country on a course of wringing inflation out of the system through monetary policy. Mr. Reagan's contribution to the fight was to let Mr. Volcker do as he did -- since there was no way to stop him.

Instead, Mr. Reagan embarked on a classic Keynesian priming of the pumps -- he slashed taxes and increased defense spending. It was the equivalent of living off both paycheck and credit cards. Naturally, as Keynes taught, this sort of activity would boost economic growth. It also quadrupled the national debt that had taken 200 years (a Civil War and two World Wars) to create. To fund it, he merely sold debt to the rich (who else can afford T-bill?) to be repaid with taxes from the entire nation, a massive transfer of wealth that continues to this day.

A proper reading of Keynes will show that deficits are the cure for stagnant or shrinking economies (along with lower interest rates) while surpluses (and higher rates) keep a growing economy from growing too fast. The Reaganites slammed the Democrats as the "tax and spend" party, while they turned out to be the "borrow and spend" party. Mr. Bush is the leader of a Republican party that does not even pretend to be fiscally conservative.

Thanks to Ronald Reagan and his followers, the next badly needed surplus will be taken as a sign that taxes are too high. Any hope of fiscal balance appears to have passed on long before the 40th president.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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