Reaganomics all over again


By Gwynne Dyer

HAS anybody else noticed that there is a plot afoot to turn economics into an exact science? Since we are all part of the experiment, I think we should be told.



ONT face=”Verdana, Arial, Helvetica, sans-serif”>Economics is about the behaviour of human beings, so it has the same drawback as other social ‘sciences’; you are not allowed to confirm your hypothesis by running repeated experiments on live human beings.


Somehow, though, an undercover team of experimental economists has managed to trick the Bush administration into re-running the great Reagan adventure in “voodoo economics” of the 1980s. They can’t tell us which theory they are testing for fear of influencing the results, but it looks like it’s about the relationship between the size of budget deficits and the severity of the subsequent recession.


Ronald Reagan set a peacetime record for budget deficits in 1984, the year that he was seeking a second term: 6,2% of Gross Domestic Product (GDP). He justified it by grossly inflating the threat from the decrepit Soviet Union, which was actually teetering on the brink of collapse (the intelligence agencies were as eager to please the administration then as now), and pumping up the defence budget to fight the ‘evil empire’.


The short-term result of this extra spending, no doubt by purest coincidence, was to make the US economy grow by 7% in 1984, guaranteeing Reagan’s sweeping re-election victory.


The longer-term effect, of course, was to force up interest rates as government borrowing competed with private borrowers for credit, and to kill the boom in a particularly savage way: the recession at the end of the 80s was the grimmest since the 50s. Small wonder that the father of the current president, a real conservative (as opposed to a neo-conservative), dubbed the Reagan budgets “voodoo economics” when he was seeking the Republican nomination in 1988. It didn’t save President George HW Bush from the recession that followed, however, and the voters punished him by electing Bill Clinton in 1992.


So along came President George W Bush in 2001, and in only three years he has turned the 2% surplus he inherited from Clinton into a deficit that is now nearing 5% of GDP. Since the defence budget is already stuffed to bursting, he did most of it by pushing through unfunded tax cuts targeted on his core supporters.


At one point, according to the recent tell-all book written by Ron Suskind in collaboration with former Treasury Secretary Paul O’Neill, Bush appears to have had doubts about the beneficiaries if not the scale of his largesse, asking “Haven’t we already given money to rich people? Shouldn’t we be giving money to the middle?” But his political adviser Karl Rove told him to “Stick to principle” and he meekly obeyed.


The massive deficit -US$520 billion this year, and the final bill for Iraq could drive it still higher – is already producing the desired short-term economic boom. If it starts to create jobs as well as profits by the middle of the year, then only a drastic deterioration in the security situation in Iraq could stop Bush from winning in November. But that’s not what interests the economists-in-disguise who tricked him into this repeat of the Reagan experiment. They just want to see how bad the subsequent recession will be.


Recessions are bound to occur from time to time, but they vary widely in severity. Many people expected a particularly bad one after the exceptionally long nine-year Clinton boom, mainly due to a superstitious belief that the universe will always get even, but in fact the recession we have just come through was one of the mildest on record. So you can see the cutting-edge economic theorists getting together and coming up with a brilliant new theory: budget surpluses are followed by gentle recessions; huge deficits lead to brutal recessions.


But if you want your discipline to be recognised as a proper science, then you have to reproduce the results under properly controlled experimental conditions. How could we ever get another administration to repeat Reagan’s folly? It’s not just Americans who would suffer. The whole world would face a long, bitter recession in a few years if America went down that road again. Have we the right to do that to people in the name of science?


* Gwynne Dyer is a London-based independent journalist.