The Romney Economic Plan's Misreading of History

[salvorhardin]

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.

...

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.

Full post: http://hnn.us/blogs/romney-economic-plans-misreading-history-0

[The_Casual_Observer]

1. There was a gigantic unholy increase in defense spending during reagan

the recession that followed in 1992 due to defense cutbacks was also gigantic.