Saturday, February 4, 2012

A Reagan Conservative debunks the current GOP's economic proposals

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Given the iconic status of Ronald Reagan and "Reaganomics" that is serially invoked among the current crop of GOP candidates - particularly at the level of presidential aspirants - it's useful to listen to one guy who actually did help formulate Reagan's economic strategy three decades ago and who isn't impressed with the rubber-stamped "Reagan(!)" pretenders.

Bruce Bartlett - one of the few sane voices left in contemporary conservatism (or, perhaps more accurately, left in the wake of extremist right-wing radicalism that pays lip service to conservatism) - was a domestic policy advisor in the Reagan administration and adheres to conservative fiscal policy, which he doesn't interpret as simply "more tax cuts all of the time."

Here's Bartlett's explanation of why the current GOP agenda - tied to simplistic invocations of Ronald Reagan - doesn't make sense in 2012:
In their debates, ads and speeches, the candidates for the Republican presidential nomination are vying for the label of most Reagan-esque.

On taxes, “I take the Reagan approach,” former senator Rick Santorum said at a recent Florida debate.
On the economy, “under Ronald Reagan, we had . . . the right laws, the right regulators, the right leadership,” former House speaker Newt Gingrich said in a debate before his South Carolina primary victory.

Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today...
When comparing Reagan’s policies with Republican proposals today, several things stand out. Inflation is low now. We are not looking at “bracket creep” or sharply rising taxes, as we were in the late 1970s. The top income tax rate is 35 percent, half the rate Reagan inherited. And federal revenue is at a 60-year low of about 15 percent of GDP, compared with a post-World War II average of about 18.5 percent.

These differences are essential to understanding why Reagan’s policies worked when they did — and why they are not appropriate today.

All of the evidence tells us that the economy’s fundamental problem today is not on the supply side but the demand side. According to a recent study by Credit Suisse, two-thirds of the difference in growth at this point in the business cycle, compared with previous cycles, is due to slower consumer spending. 
And low inflation — as well as widespread unemployment, vast stocks of unsold houses, empty factories and other indicators — tells us that money is tight, not loose, as was the case in the late 1970s.

“Low interest rates are generally a sign that money has been tight,” economist Milton Friedman wrote in 1997. Yet, absurdly, Republicans continually berate the Federal Reserve for being too easy; some even insist, insanely, that the United States should return to the gold standard, even though it was a key cause of the Great Depression.

Because inflation and interest rates are low, Fed policy is constrained today in ways it was not in the early 1980s. Back then, the Fed could bring down the federal funds rate to a little less than the inflation rate and create negative real rates, thus stimulating borrowing, investment and consumption. It can’t do that now because it can’t reduce market interest rates below zero.

Economic conditions are entirely different today than they were in Reagan’s era, and different conditions demand different policies. Those who say otherwise are simply engaging in cookie-cutter economics — proposing whatever was popular and seemed to work once, without regard to changing circumstances.

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