Wednesday, September 1, 2010

Reaganomics and Keynesianism

Martin Feldman, head of Reagan's Council of Economic Advisors, has a great piece up at Project Syndicate on the savings rate, where he argues that an increasing savings rate could stall growth. He's essentially making a "paradox of thrift" point - which some will tell you was a kooky invention of the 1930s, but others will point out we've known about it for centuries.

The funny thing is - this is a Reagan economist sounding awfully demand-side and awfully Keynesian. Maybe this doesn't surprise you, but presumably it will at least surprise some of you. It shouldn't. Supply side economics was part flashy, Lafferesque, politically convenient theory, of course, but also part rational response to the supply constraints of the 1970s and 1980s. How an economist (well, a good economist) responds to a situation is going to depend on the circumstances at the time. The economy is a complex, dynamic system. Anyone that acts like the same policy is going to be appropriate in every case doesn't know what they're talking about. The 1970s and 1980s (and the early 1920s, for that matter!) were not characterized by weak demand. So a lot of economists that basically accepted Keynes (and yes, there are a lot of us) didn't sound like Keynes to untrained ears during this period. There's no need to talk about aggregate demand if aggregate demand isn't problematic!

It's also interesting to note as a historical matter that Reagan himself was a big fan of Franklin "Rendezvous with Destiny" Roosevelt. His father got a relief job with the New Deal. There was of course subsequent repudiation of the New Deal, but my understanding is Roosevelt remained his favorite president.

As Jefferson said in an 1816 letter on his (changed) views on encouraging manufacturing:

"We have time yet for consideration, before that question will press upon us; and the maxim to be applied will depend on the circumstances which shall then exist; for in so complicated a science as political economy, no one axiom can be laid down as wise and expedient for all times and circumstances, and for their contraries. Inattention to this is what has called for this explanation, which reflection would have rendered unnecessary with the candid, while nothing will do it with those who use the former opinion only as a stalking horse, to cover their disloyal propensities to keep us in eternal vassalage to a foreign and unfriendly people."


  1. I think that the Jefferson quote needs more context. Is he talking about policy? What precisely is he talking about? And what determines what axiom to use when? Anyway, the "single-minded" axiom of letting markets work themselves out isn't even a single axiom; it's an abstract, general description of countless differing actions and actors responding to different, evolving circumstances; we can't treat it as such a monolith. And I'm curious why you think that certain recessions weren't due to weak demand and others were. What determines this?

  2. It was in a letter where it remained vague - he could very well have been talking about bounties and tariffs, which the Republicans did change their views on by this time.

    And I'm curious why you think that certain recessions weren't due to weak demand and others were. What determines this?

    Our understanding of what triggered recessions: financial crises, interest rate hikes, supply shocks, wars, sovereign debt crises, inventory overhang, etc. - along with the behavior of prices and quantities - all provide insights into what is going on in any given downturn.

    Why would you think all recessions were due to weak demand? That seems like the stranger position.


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