Henderson’s account, which came to light in some newly released diplomatic papers that The Daily Beast spotted, is interesting in a number of respects. For one thing, it suggests that Reagan had somewhere picked up on a homophobic critique of Keynes that had been circulating in conservative circles for decades. According to Robert Skidelsky, the author of a monumental biography of Keynes, it dates back at least to Keynes’s death, in 1946, when Joseph Schumpeter, the Austrian economist, who moved to Harvard, wrote in an obituary, “He was childless and his philosophy of life was essentially a short-run philosophy.”
To some conservatives, seemingly including Schumpeter, Keynes’s sexuality imbued him with a certain myopia that invalidated many of his policy prescriptions. As every student of economics knows, one of Keynes’s most famous quotes is, “In the long run we are all dead.” One of his theoretical contributions was to point out that the long run “steady state” beloved by classical economists doesn’t really exist: the long run is a succession of short runs. If this and other Keynesian arguments could be dismissed as the irresponsible musings of a gay aesthete who didn’t have any heirs, then, to some conservatives, that would be all for the better.
In a 2003 article, Skidelsky pointed out how the first volume of his biography, which came out in 1983 and included an extensive discussion of Keynes’s private life, “gave critics of Keynesian economics their chance.” William Rees-Mogg, a former editor of the Times of London, argued that “Keynes’ rejection of moral rules led him to reject the gold standard, which provided an automatic control of monetary inflation,” Skidelsky recounted. Such ugly and reductionist ideas lived on. Just last year, at an investment conference in California, Niall Ferguson, the British historian, who is now another Harvard man, resurrected the notion that Keynes, because he was gay and childless, took a short-term view of things, adding, “It is the economic ideals of Keynes that have gotten us into the problems of today.” (Ferguson subsequently apologized for his “stupid and tactless” remarks, saying that he had made them off the cuff.)
All of that happened well after Henderson encountered Reagan and composed his dismissive missive, of course. But it just goes to show how certain misguided tropes tend to stick around, especially if they can be used to make a political argument. And it shows something else, too: Reagan didn’t understand his own economic program, which was a lot more “Keynesian,” in the modern American sense of the word, than is commonly realized.
On being elected in November, 1980, Reagan inherited an economy that was gingerly emerging from a slump: taking the year as a whole, the economy contracted by 0.2 per cent. Like any good Keynesian, the new President’s response was to promise a substantial stimulus package. This was duly delivered in the form of a substantial military buildup and broad tax cuts, the latter constituting the central feature of the Economic Recovery Tax Act of 1981.
Of course, Reagan and his backers portrayed the tax cuts not as a traditional Keynesian remedy but as part of a supply-side revolution. Many of them, doubtless, believed this description. But the economically literate members of the Administration, such as Murray Weidenbaum and David Stockman, were well aware that the most immediate impact of the tax cuts would be to boost the level of demand in the economy and to raise the budget deficit. To be sure, some Keynesians would argue that boosting government spending is a more effective way of raising demand than cutting taxes, but that is nitpicking. From John F. Kennedy to Barack Obama, Democratic Keynesian Presidents have also used tax cuts to revive the economy.
In the Reagan Administration, some true believers were convinced that the rise in the budget deficit would be short-lived: lower tax rates would stimulate so much growth that tax revenues would eventually rise well above their pre-tax-cut levels: this was the “Laffer curve” theory. The realists, such as Stockman, hoped that the deficits would force Congress to cut spending: this was the “starve the beast” theory.
Unfortunately, for the Reaganites, neither theory panned out. To begin with, they hadn’t reckoned with Paul Volcker, the imperious chairman of the Fed, whose crusade to eliminate inflation involved raising interest rates to twenty per cent. This monetary shock overwhelmed Reagan’s fiscal stimulus and plunged the economy into another recession, which began in July, 1981, and lasted until the end of 1982. As the budget deficit soared, the orthodox (and anti-Keynesian) move would have been to embrace austerity policies and slash spending. But Reagan’s heart wasn’t in it. Under pressure from Republicans in Congress who were worried about the midterms, he agreed, in 1982, to let over-all spending (not just spending on the military) rise considerably.
This trimming enraged some of his conservative supporters. A few of the early enthusiasts of Reaganomics, including Weidenbaum, left the Administration. Others, such as Stockman, stayed on to fight a losing fight. Government outlays continued to rise. In 1979, the year before Reagan was elected, over-all government spending came to 19.6 per cent of G.D.P. In 1989, the year after Reagan left office, spending was 20.5 per cent of G.D.P.
Eventually, as the Fed reduced interest rates, the stimulus worked, and G.D.P. growth picked up sharply. Deficits continued to be a problem, however—one that was left for Reagan’s successors, George H.W. Bush and Bill Clinton, to deal with. In strict terms, Reagan’s neglect of the deficit wasn’t Keynesian. Keynes himself believed in letting the deficit rise in a recession and paying down debts in the good times. In America, though, Keynesianism has always been associated with stimulus programs, big government, and deprioritizing the deficit. In all of these ways, Reagan was a Keynesian. But a word to the wise: don’t waste your time trying to tell that to anybody in the Republican Party.
Original Article
Source: newyorker.com/
Author: JOHN CASSIDY
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