The Romney Economic Plan's Misreading of History

Ronald Reagan holding a staff meeting on his first day in office. Credit: Wikipedia

Last week, the Romney campaign responded to criticisms of its tax and economic proposals by issuing a new white paper, "The Romney Program for Economic Recovery, Growth and Jobs." Authored by Greg Mankiw of Harvard, Glenn Hubbard of Columbia, John Taylor of Stanford, and Kevin Hassett of the American Enterprise Institute, this makes three claims in trashing the Obama administration's record on recovery and virtually promising a re-run of morning-again-in-America if the GOP candidate is elected president in 2012.  First, recovery from the Great Recession has been terribly slow even by post-financial crisis downturn standards; second, the Obama administration made a grievous error in relying on spending stimulus to renew the economy; and third, the tax cuts, spending cuts and deregulatory initiatives proposed by Romney will usher in a period of rapid growth to revitalize employment and generate a bountiful harvest of budget revenues.

The paper contains an appendix referencing the work of independent economic analysts that apparently supports the claims of the Romney campaign. Nevertheless, a goodly number of those cited -- including Michael Bordo of Rutgers, Amir Sufi of Chicago, and Alan Auerbach of Berkeley -- have disputed the interpretation the paper offers of their scholarship. [For a full review, see Ezra Klein's recent article in the Washington Post.]

Matching the Romney paper's questionable economic analysis is its dubious reading of economic history. Much is made of the robust bounce-back from the deep recessions of 1974-75 and 1981-82 to support its contention that today's economy in the present phase of recovery should be creating 200,000-300,000 new jobs a month. "History shows," it avows, "that a recovery rooted in policies contained in the Romney plan will create about 12 million jobs in the first term of a Romney presidency." (p. 5) The report also paints a rosy scenario of the Reagan administration's effectiveness in not only overcoming the 1981-82 recession but also resolving the structural problems of the 1970s economy: "By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, policymakers sought to make it profitable to invest in America again."

Perhaps a historical reality check would help at this juncture. While it is true that domestic discretionary spending fell by some 1.6 percent GDP over the course of the Reagan presidency, defense spending increases canceled out some 1.2 percent GDP of this. The three-year 1981 tax cuts were the largest in history but were followed by tax increases, especially the closure of business tax loopholes, in 1982, 1984 and 1986. Deregulation was far from perfect in its effect -- as the onset of the Savings and Loans crisis testified. Finally, it did become profitable to invest in America again, especially for foreigners. The need to finance the Reagan deficits necessitated the continuation of high real interest rates (the actual rate minus the rate of inflation) to attract foreign purchasers of U.S. Treasury Securities, with a consequence that America had metamorphosed from being the world's largest creditor in 1980 to its largest debtor by 1985.

It is worth reaffirming that the greatest economic achievement of the 1980s -- the conquest of inflation -- was the work of the Federal Reserve and not, at least directly, the Reagan administration. But this success was a costly one for many Americans. The 1981-82 recession, the deepest in the second half of the twentieth century, was a policy-induced recession precipitated by Federal Reserve money-stock restraint (instead of its usual interest-rate manipulation) to throttle the runaway inflation of 1979-80. The resultant recession devastated the old industrial heartland, parts of which would never fully recover. Far from being a boom time, the Reagan presidency did not see unemployment fall to its 1980 level until 1986, in part because the high post-recession interest rates, required for public-debt-servicing purposes, pumped up the dollar's value and helped to suck in cheap imports that underwrote a consumer boom. 

Recovery was certainly speedy after the 1981-82 downturn came to an end. But this was largely the result of the Fed's abandonment of the monetarist experiment that had caused the recession in mid-1982. Though interest rates continued thereafter to be high in comparison to the postwar norm, they were still appreciably lower than the unprecedented peaks associated with the money-stock restraint of 1981-82. Fiscal policy also helped in promoting economic growth, but mainly in terms of the aggregate demand generated by the huge budget deficits of the first half of the 1980s, something which tends to get overlooked by contemporary conservatives.

All this is not to deny that the 1980s were a critical period in America's modern economic development. In essence, however, the most important economic change of this decade was not the morning-in-America renewal dear to the present-day right but the rise of finance as the key sector of the U.S. economy, a precondition for which was the conquest of inflation. Real income remained stagnant for most American families in this apparently glittering economic era. The big-time economic winners of the period were those who derived their wealth from the FIRE sector (finance, insurance and real estate). And what, one might ask, were the ultimate consequences of that?

Each partisan camp makes questionable claims about the past in every presidential election, but present-day Republicans should not be allowed to get away with rewriting the 1980s in support of their economic proposals for the second decade of the twenty-first century.