An Economic Legend

SYNOPSIS:

In the movie "The Man Who Shot Liberty Valance," a reporter defends prettifying history: "This is the West, sir. When the legend becomes fact, print the legend." That principle has informed many of this week's Reagan retrospectives. But let's not be bullied into accepting the right-wing legend about Reaganomics.

Here's a sample version of the legend: according to a recent article in The Washington Times, Ronald Reagan "crushed inflation along with left-wing Keynesian economics and launched the longest economic expansion in U.S. history." Actually, the 1982-90 economic expansion ranks third, after 1991-2001 and 1961-69 but even that comparison overstates the degree of real economic success.

The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.

The depressed economy in 1982 also explains "Morning in America," the economic boom of 1983 and 1984. You see, rapid growth is normal when an economy is bouncing back from a deep slump. (Last year, Argentina's economy grew more than 8 percent.)

And the economic expansion under President Reagan did not validate his economic doctrine. His supply-side advisers didn't promise a one-time growth spurt as the economy emerged from recession; they promised, but failed to deliver, a sustained acceleration in economic growth.

Inflation did come down sharply on Mr. Reagan's watch: it was running at 12 percent when he took office, but was only 4.5 percent when he left. But this victory came at a heavy price. For much of the Reagan era, the economy suffered from very high unemployment. Despite the rapid growth of 1983 and 1984, over the whole of the Reagan administration the unemployment rate averaged a very uncomfortable 7.5 percent.

In other words, it all played out just as "left-wing Keynesian economics" predicted.

In the late 1970's most economists believed that eliminating the high inflation then prevailing in the United States would require inflicting a lot of pain: the economy would have to go through an extended period of high unemployment and depressed output. Once the inflation had been wrung out of the system, the unemployment rate could go back down. And that's exactly what happened. In fact, it's instructive to put a graph showing the actual track of unemployment and inflation during the 1980's next to a figure from a 1978-vintage textbook showing a hypothetical disinflation scenario; the two look almost identical.

Ronald Reagan didn't decide to inflict that pain. The architect of America's great disinflation was Paul Volcker, the Fed chairman. In fact, Mr. Volcker began the process in 1979, when he adopted the tight monetary policy that caused that record unemployment rate. He was also mainly responsible for the recovery that followed: it was his decision to loosen up on the money supply in the summer of 1982 that set the stage for the rebound a few months later.

There was, in short, nothing magical about the Reagan economy. The United States did, eventually, experience an economic miracle but not until Bill Clinton's second term. Only then did the economy achieve a combination of rapid growth, low unemployment and quiescent inflation that confounded the conventional economic wisdom. (I'm aware, by the way, that this plain statement of fact will generate an avalanche of angry mail. Irrational Clinton hatred remains a powerful force in American life.)

It's a measure of how desperate the faithful are to believe in the Reagan legend that one often reads conservative commentators claiming that the Clinton-era miracle was the result of Mr. Reagan's policies, and indeed vindicated them. Think about it: Mr. Reagan passed his big tax cut right at the beginning of his presidency, and mainly raised taxes thereafter. So we're supposed to believe that a tax cut passed in 1981 was somehow responsible for an economic miracle that didn't materialize until around 1997. Apply the same timing to the good things that happened on Mr. Reagan's watch, and you'll discover that Lyndon Johnson deserves the credit for "Morning in America."

So here's my plea: let's honor Mr. Reagan for his real achievements, not dishonor him and mislead the nation with false claims about his economic record.

Originally published in The New York Times, 6.11.04