Friday, July 18, 2014
On Brad on 2 intellectual Fathers of Reagan and Thatcher
I am going to do Brad Fair use and cut and past this post. (do click the link anyway to be fairer to him) THURSDAY HISTORY: INTELLECTUAL ORIGINS OF REAGAN-THATCHERNOMICS The policies that enabled the creation of our Second Gilded Age were born at the end of the 1970s out of a particular reading of the political economy of that moment. Were the ideologues and the intellectuals of the right correct back when they claimed in the late 1970s that the economic problems of the 1970s were the result of "too much government" or of "an excess of democracy"? I think not. But in order to evaluate the argument we need to remember what it was. So here are the particulars of the claims that the U.S. in the late 1970s suffered from too-large a government and too-strong a democracy set forth by Martin Feldstein9 and Samuel Huntington10, with 1-17 from Feldstein and 18-31 from Huntington: [ed note Feldstein quoted -- I'm not sure about context] 1"Real GNP growth slowed from an annual rate of 3.9% between 1947 and 1967 to only 2.9% between 1967 and 1979... productivity per man-hour in... private business... 3.2% during 1947-67 to less than 1.5% since 1967 and less than 1% since 1973..." 2"The average unemployment rate rose from 4.7%... to 5.85%..." 3"The average rate of... CPI inflation jumped from 2% to 6.7%... with an acceleration to an average of nearly 9% since 1973 and over 13% in 1979..." 4"Stock prices... rose sixfold between 1949 and 1969.... In the decade since... in constant dollars fell nearly 50%..." 5"A falling share of national income devoted to net investment and to research and development..." 6"Increasing pressures and risks in the financial sector..." 7"Low profitability and an aging stock of plant and equipment in many specific industries..." 8"A deteriorating performance of United States exports..." 9"Expansionary monetary and fiscal policies... in the hope of lowering the unemployment rate but without anticipating the higher inflation rate that would eventually follow..." 10"High tax rates on investment income were enacted and the social security retirement benefits were increased without considering the subsequent impact on investment and saving..." 11"Regulations were imposed to protect health and safety without evaluating the reduction in productivity that would result or the effect of an uncertain regulatory future on long-term R&D activities..." 12"Raising the amount and duration of unemployment benefits to the current high levels to avoid hardship among the unemployed would encourage layoffs and discourage reemployment..." 13"Medicare and Medicaid... lead[ing] to an explosion in health care costs..." 14"Welfare programs... weaken family structures..." 15"Federal aid through the tax laws and through special credit programs to encourage homeownership would have such adverse effects on the cities..." 16"The high rate of unemployment, the lack of investment demand, and the low rate of personal income tax constituted an environment in the 1930s in which the side effects of social security and unemployment compensation would be relatively innocuous. Today's tight labor market, capital scarcity, and high personal tax rates imply that these programs now impede employment and capital formation..." 17"Personal and business tax laws were designed for an economy with little or no inflation. The interaction of this tax structure with the current high inflation rates causes extremely high effective tax rates on capital income, a discouragement to saving, and a distortion of investment away from plant and equipment toward housing and consumer durables..." [Now Huntington quoted. I'm again not sure about context] 18 "The democratic surge of the 1960s raised again in dramatic fashion the issue of whether the pendulum had swung too far..." 19 "The vigor of democracy in the United States in the 1960s thus contributed to a democratic distemper... the expansion of governmental activity... and the reduction of governmental authority..." 20"Across the board, the tendency was for massive increases in government expenditures to provide cash and benefits for particular groups within society rather than in expenditures designed to serve national purposes vis-a-vis the external environment..." 21"During the 1950s and early 1960s... governmental expenditures normally exceeded... revenue... but... the gap.. was not large.... In the late 1960s... after the... Welfare Shift... the overall government deficit took on new proportions... obviously one major source of the inflation which plagued the United States..." 22"The beneficiaries of governmental largesse coupled with governmental employees constitute a substantial proportion of the public. Their interests clearly run counter to those groups in the public which receive relatively little in cash benefits from the government but must contribute taxes..." 23"In the family, the university, business, public and private associations, politics, the governmental bureaucracy, and the military services, people no longer felt the same compulsion to those whom they had previously considered superior to themselves... discipline eased and difference in status became blurred..." 24"The commandments of judges and the actions of legislatures were legitimate to the extent they promoted, as they often did, egalitarian and participatory goals. 'Civil disobedience', after all... implied the moral value of law-abiding behavior depended upon what was in the laws, not on the procedural due process by which they were enacted..." 25 "The major expansion of unionism in the public sector... add[ed] still further to governmental deficits and to the inflationary spiral..." 26 "The imposition of 'hard' decisions imposing costs on any major economic group is... particularly difficult in the United States..." 27 "Domestic problems... become intractable.... The public develops expectations which it is impossible for the government to meet..." 28"Politicians... [seek] achievement which may have an immediate payoff but which they and, more importantly, their country are likely to regret... giv[ing] to dictatorships (whether communist party states or oil sheikdoms)... a major advantage..." "An 'excess of democracy'.... The effective operation of a democratic political system usually requires some measure of apathy and non-involvement on the part of some individuals and groups..." 29 "Marginal social groups, as in the case of the blacks, are now becoming full participants in the political system.... Less marginality... needs to be replaced by more self-restraint..." 30 "Democracy is more of a threat to itself in the United States than it is in either Europe or Japan where there still exist residual inheritances of traditional and aristocratic values..." My comment That is a long and interesting list. Somewhere the crime wave seems to have fallen between to stools (between 17 and 18). I think that, to be fair to both, especially Feldstein, you should number separately. Huntington's willingness to criticize democracy and praise deference to superiors is amazingly frank. I will use the word "Feldstein" to mean "Martin Feldstein as presented by Brad DeLong". OK Feldstein. On 1,2,4 and 6 subsequent evidence has been very unkind to Feldstein. Post Reagan revolution all did worse than pre. 6 (financial risks) was an amazing hostage to fortune on which he would have lost a fortune if he took his own arguments seriously. on 5 huh ?!? the ratio of nonresidential fixed capital investment to GDP was extraordinarily high in the 70s. (also it declined in the 80s) . what the hell is he talking about ? https://research.stlouisfed.org/fred2/graph/?graph_id=162563&category_id= 1-8 he is playing with timing. He is ascribing the 60s boom to the old policy regime even though it followed the policy shift. He is like the supply siders who decide that Reagan policy began in 1982. 9 this assertion is simply false. The increase in inflation was certainly anticipated by all prominent paleo Keynesians (who argued for tighter fiscal policy in the 60s). What actually happened is fiscal policy was loose (at least by pre Reagan standards) as no one likes taxing and Nixon demanded loose monetary policy to stave off the McGovern juggernaut. The second claim is a paraphrase of Arthur Burns who would tend to be more expert on the thought of Arthur Burns than Feldstein was. 10)I know of no evidence that taxing investment income reduces national savings. The data since 1979 have been very very unkind to Feldstein. 11) Feldstein assumes that health has nothing to do with productivity. The data suggest that good health precedes rapid growth (in a cross section of countries). Of course the "without considering" is simply a lie. I was alive in the early 70s and read some newspapers -- possible undesirable side effects of regulation were discussed at length (in the not so high brow Newsweek). 12) he has to deal with experience rating of UI when considering the effect on layoffs. Job search can be productive if it leads to better matches. it is easy to write down models in which UI causes a Pareto improvement. 13) Medicare, Medicaid & health care costs. This is very hard to reconcile with subsequent international comparisons. US has a larger fraction private and much higher spending than other developed countries. Private insurance plus out of pocket have grown very fast. Again subsequent data have not been kind to Feldstein. 14) there is little evidence that welfare programs weaken family structures. The structures kept changing the same way after welfare reform. Of course I must admit there is little evidence for the pro generous welfare position (say Moynihan) that it is important to provide welfare to unemployed couples too. Basically even in the 25 blue states which did this, the program was irrelevant as too few couples needed it. Now there has been a decline in teen pregnancy. That was clearly due to the clean air act (see 11 -- I am 100% serioius). 15) good point Marty -- note how actual elected Republicans don't agree. 16) again wtf is the labor market loose or tight ? In 2 vs 16 Feldstein has it both ways. On taxes, the top rate was higher in the 40s and 50s than in the 60s and 70s. As quoted, Feldstein is using high GDP growth in a period with UI, Social Security and high tax rates as proof that you can't have high growth with UI, social security and high tax rates. WTF ! Huh ! etc 17) good point again. However, I again note the very high level of investment in plant and equipment in the 1970s. Summing up. I think Feldstein wrote crazy things about investment in the 70s and growth with high taxes UI and social security. I think he knew better, but was exploiting the vague sense that everything was very right wing in the 50s. I think he counted on tricking people who were paying more attention to the 18-30 issues than to actual economic policy. He arbitarily picked the peak of a boom as the end of the good old days. This is cheating. However, he certainly was right that 70s economic performance was very disappointing. I didn't think that Reaganism was worth a try, but I can see how some people did. Subsequent poor economic performance refuted Feldstein's argument, but hey, that's social science. I think this is also true of health care spending. The USA had not pulled away from the pack yet. I think claims 8-17 (which are standard pro-market arguments) have weak empirical support (that includes 15 and 17 with which I agree). I'm pretty sure they are based on economics 101 and the assumption that elasticities are high. Trying to be quicker on 18-30 which I will ascribe to Mad Dog 18. His courage amazes me. Even George Will doesn't question Democracy so bluntly any more. 19. The word "distemper" is pejorative. Think of trying to tell a tea partier that a reduction in "government authority" is "distemper" I think they would lose their tempers. Again amazing frankness (I refer to mad dog who may or may not have anything to do with a Harvard prof.) 20. WTF !!! Does mad dog think Vietnam is internal to the USA. Some of the points clearly refer to the 60s and not the late 70s. Where was prof. Mad Dog at the time ? 21 subsequent events have not been kind to mad dog either. You have a problem yourself if you consider deficit phobia to be part of the intellectual origins of Reaganism. 22. mad dog has a problem. The big expansion in spending was mostly Medicare. Not cash, and benefiting all who live past 65. He seems to think that a high fraction of GDP was spent on means tested cash benefits. He is wrong. Increased public employment had a lot to do with teaching baby boomers how to read. I'm sure he doesn't oppose that. 24) does mad dog know what "procedural due process means" ? It sure doesn't mean depriving people of the vote then passing laws to keep them separate and unequal. Did mad dog know that congress is supposed to declare war and peace and that Johnson was sure the Tonkin gulf resolution did not grant him authority to escalate ? I mean how the hell does he dare place contempt for due process on the side of protesters when it characterized those against whom they protested ? 28-29 and 30 again amazing boldness. Also cluelessness. Had Mad Dog ever visited Europe ? I knew there was somewhere the Us authoritarians frank expression of envy of dictators. I think subsequent events have taught a bit about the advantages of dictatorships. The fact is that history shows that Democracy works horribly but less horribly than the alternatives.