Hoisted from the Archives: More Dilemmas of Teaching Political Economy Here at Berkeley
links for 2009-11-10

How Much of It Was Reagan's Fault?

Paul Krugman taunts the innumerate right some more:

Reagan mythbusting, productivity edition: Just to be clear: when I show that growth by every measure has been slower since 1980 than before, I’m not claiming that this shows that Reagan/finance caused the slowdown. The upper hand, in this case, is actually on the other foot: it’s the Reagan/finance enthusiasts who use the alleged fact of faster growth to make their case, so I’m just showing that it never happened. What’s funny — almost touching, really — is the way the enthusiasts respond to each refutation by claiming that there must be another number which justifies their triumphalism. Real GDP grew faster! No? OK, real GDP per capita grew faster! No? Well, productivity grew faster! Actually, no....

But there’s more to the story. Postwar productivity growth had three eras: a period of rapid growth from the late 40s to the early 70s, then a big slowdown that lasted until the mid 90s, then an acceleration that continues to this day.... [T]he Reaganauts... in addition to doing a disappearing act on the growth during the postwar generation... have retroactively attributed the post-95 productivity surge to Reagan. Because, you see, a surge that began midway through Bill Clinton’s administration was obviously caused by Reagan’s 1981 tax cut.Oh, and never mind the almost universal prediction on the right that the 1993 tax increase would lead to economic disaster.

Why did productivity stagnate for 20 years, then revive? The truth is that it probably had very little to do with anyone’s economic policies; the best guess is that businesses spent two decades figuring out what to do with information technology, then found the answer: big box stores! But that’s a subject for another post.

Run an extra 4% of GDP deficit and--if you push the social marginal product of investment up to 15% via taxes, labor rents, and spillovers--you can say that Reaganomics costs you 0.6% per year in economic growth, which over 15 years leaves you with a country 9% poorer than it would otherwise have been.

If you want to supercharge it, you can then say that the infotech revolution required that everybody have invested a certain amount in high-tech in order for Intel and company to learn-by-doing, and get bigger numbers.

And you can super-supercharge it by pointing to income and wealth inequality as well--where Reagan does leave a bunch of fingerprints--and take median wages rather than productivity as your principal outcome variable.

Take these together, and add the appropriate grains of salt, and I am happy saying that Reagan and George W. Bush cost the average worker somewhere between 5 and 10% of his or her wages as of 1994 or so. And that is pretty good...