The Keynesian Under the Table: What Reagan's Supply-Side Defenders Keep Getting Wrong

       The Turk was the most incredible thing that most people in late-18^th century Europe had ever seen: an automaton who could play chess—and win. Between 1770 and 1820, Nobles and heads of state—from Napoleon to Benjamin Franklin  lined up to match wits with Wolfgang von Kempelen’s marvelous thinking machine. And the Turk almost always won, causing many to fear—more than 200 years before an IBM supercomputer vanquished human chess master Garry Kasparov—the obsolescence of the human mind.
       But it was all a trick. There was no machine, just an automaton sitting on top of a box that concealed a diminutive human chess master—a dwarf who had been trained to pull the levers and make it appear that the automaton was moving the pieces.
       Which, of course, brings us to Keynesian economics, or the theory of John Maynard Keynes that the best way for the government to handle a recession is to borrow money, spend lavishly, and stimulate the economy. The supposed failure of the Bush/Obama stimulus has lead to a frenzy of obituaries for Keynesianism, including this one by Forbes columnist and Reagan fanboy Peter Ferrara, who insists that, if we want to know what works during a recession, all we have to do is look at all the good stuff done by the Gipper, who "explicitly scrapped Keynesian economics for the more modern supply side economics, which holds that economic growth results from incentives meant to boost production."  

            And, as Ferrara reminds us in another article, Reagan’s accomplishments were certainly impressive: Slashing the top tax rate from 70 to 28%, deregulating anything that moved, cutting unemployment in half, and, in the process growing the economy by nearly a third and adding almost two trillion dollars to the Gross Domestic Product. “These economic policies,” Ferrara is quite sure, amounted to the most successful economic experiment in world history.”

       Does anybody else remember that there was a dwarf underneath the table? By “dwarf,” of course, I mean deficits, and the huge national debt, which reached proportionately massive levels under Reagan and has never gotten over it. The following chart, which I cobbled together from the historical data charts at the Office of Management and Budget, shows the rate of growth of both the economy AND the debt, and it makes a pretty good case that a non-trivial amount of GDP growth from year to year was, in effect, fueled by credit cards.

 

        And there is another dwarf under the table. Reagan increased military spending from an average of 4.8% under Carter to an average of 5.9%--creating, in the process, a huge Keynesian stimulus to the economy through spending in the defense sector—something that George W. Bush repeated during his eight years and that Mitt Romney is vowing to do (in the name of national security, of course) should he win in November. Whether you think that this is a good thing or a bad thing, it is most definitely a thing, and a thing that pumps a whole lot of government money into critical sectors of the economy.

       To his credit, Ronald Reagan did get unemployment and inflation under control, and he directed one of the most sustained recoveries in American history. But to suggest that he did this by ignoring Keynesian stimulus spending is silly. Large tax cuts were subsidized by large deficits, and the largest defense-spending increases in two generations pumped billions of dollars of borrowed money into the economy. That, really, is just about how Keynes said it should work.
       And, since tripling the size of the federal deficit is no longer a realistic option, let’s not fool ourselves into thinking that we can replicate Reagan’s recovery without a Keneysian dwarf underneath the supply-side table.