The Reaganomics Strategy: A Legacy of Debt

I’ve laid this out before, but I wanted to give it its own post so I could refer to it — notably in my next post.

The Reaganomics Strategy is a brilliantly effective (and profoundly irresponsible) political strategy. It goes like this:

Borrow money from our children and from abroad, and use the money to buy votes here with the world’s oldest political pander: “I’ll cut your taxes.”

Just tell the people they don’t have to pay for the government they insist on receiving. Borrow to pay for it instead. It gets you elected, right? Deficits be damned.

When Cheney said “Reagan proved that deficits don’t matter,” he was making a political, not an economic statement. People (especially Republicans) love to self-righteously complain about deficits and debt, but they vote for the person who promises to cut their taxes.

Here’s the legacy of The Reaganomics Strategy:

After declining steadily for 35 years after WWII (from 120% to 35% of GDP) — with Republicans and Democrats alike responsibly paying off the debts of that war during a multi-decade economic boom — in 1981 debt started spiking, and has been doing so ever since (except under Clinton).

The Bush II spike in particular is simply stupefying, and we know the four sources of that spike: two wars, Medicare Part D, the economic bailout, and — of course — massive tax cuts.

Is it any wonder that Democrats complain of hypocrisy, when Republicans — supposed “fiscal conservatives,” vilifiers of Keynesian stimulus — have been engaged in a nonstop thirty-year binge of deficit spending and Keyensian stimulus gone wild — in both good times and bad? (Keynes advocated deficit spending during recessions, and building surpluses during expansions — straightforward stuff that both economists and everyday people see as being sensible, prudent, and the best path to growth and prosperity. Maybe Republicans don’t really believe in sensible, prudent policies that yield growth and prosperity.)

But even with that endless flood of government stimulus, Reaganomics-driven government- and regulation-slashing — supposedly such spurs to growth — have resulted in only tepid economic growth compared to the pre-Reagan era — and little to no growth in middle-class incomes. (Trickle-down is supposed to … trickle down, right? Eventually?)

We’ve done the experiment. It failed.

Now don’t get me wrong. I don’t blame all this on what Ronald Reagan did. He was a pretty good Keynesian compared to today’s lot — he raised taxes when times got good, to the tune of about half his bad-times tax cuts. I blame it on the ideology he promulgated.

Reagan loved to spout the Government Is Bad gospel — it was good rhetoric, good politics — but he didn’t actually live by it. He spent half his life in government. But his dee-sciples, they’re another story. With the wild-eyed (glassy-eyed?) zealotry of typical disciples, they’ve translated that rhetoric into a childishly simplistic and unabrogatable gospel that is a cartoonish caricature of Reagan’s relative pragmatism.

That’s the legacy that Obama is saddled with — thirty years of profound fiscal malfeasance. He’s set to flatten out the debt curve (once again, responsible Democrats cleaning up after Republican profligacy), but he won’t be delivering robust economic growth, much less a balanced budget, any time soon. That opportunity was squandered long ago.

Reagan was able to come off looking pretty good, because Volcker was able to turn on the monetary tap in ’83. The economy — including the unemployment rate — turned around within months.

Bernanke and Obama don’t have that luxury. The Republicans have had the tap wide open for thirty years.

So while Obama’s popularity ratings seem to be tracking Reagan’s almost perfectly right now, don’t expect that to continue. He’s in the unhappy position of dealing with a fiscal time bomb that was planted starting in 1981.