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Blame the Fed for Reagan's Spending

A nice debate has started brewing about the records of Presidents Jimmy Carter versus Ronald Reagan on spending–thanks to US Sen. Rand Paul who again seems to be setting the terms of the debate.

Mother Jones has published a video of Rand taking issue of spending rising faster under Reagan that it did under Carter.

MSNBC has publicized the video through an interesting story here saying, in part:

It’s worth emphasizing, in case details like these make a difference, that Paul’s criticism of Reagan’s fiscal record happened to be accurate. The budget deficits were smaller under Carter than Reagan. Federal spending grew slower under Carter than Reagan, too.
But to put it mildly, Republicans don’t want to hear any of this, and they tend to be thoroughly unhappy when anyone compares Reagan unfavorably to Carter, even when the analysis is true.
before adding:
After Corn’s piece ran, Paul’s office issued a statement to Mother Jones, noting, “I have always been and continue to be a great supporter of Ronald Reagan’s tax cuts and the millions of jobs they created.”
Reason has now got into the act with a story here.  They basically confirm that Rand's facts are right before concluding, "The short version: Reagan spent like a drunken sailor and skipped out on the bill."
They even include a handy chart from Veronique de Rugy at Mercatus from here report here
Reason sums up Veronique de Rugy's (in full disclosure, she is part of the Board of the think tank that runs this blog) numbers:
As de Rugy does the math, Carter increased real spending 17 percent over the last budget of his predecessor, Gerald Ford. Over two terms, Reagan increased spending by 22 percent over Carter's final budget. On an annualized basis, then, Carter grew spending by 4.25 precent a year, while Reagan grew it by 2.75 percent. However, when expressed as a percentage of GDP, spending under Carter averaged 20.6 percent per year while Reagan averaged 21.6 percent. Spending typically really gears up in a second-term president's final years, so it's plausible to theorize that had Carter managed to stick around for eight years, he might have equaled or surpassed what the real-world Reagan managed.

For those still reading along, thanks, and you might be asking, what if anything does this have to do with free banking?  Well, I would like to posit that it is at least tangentially related in that from what I remember from the early days of the Reagan Administration, he cut a deal with Congress  on spending that would have had nominal growth but real cuts based on then projected inflation.  The blame then goes to Federal Reserve Chairman Volcker for slaying the inflation dragon much faster than anticipated so that the projected real spending cuts became real spending increases.

The St. Louis Fed published a paper by Keith W. Carlson in January/February 1989 entitled "Federal Budget Trends and the 1981 Reagan Economic Plan" (pdf) explaining that "prices were generally increasing at double digit rates."  The paper goes on to illuminate my point:

The 1981 administration forecast for inflation for the 1980—86 period was a 7.1 per-cent annual rate; the actual inflation rate during this period was 5.1 percent.

So, in conclusion, yes, Rand Paul is right to raise spending as an important economic issue and take sacred cows out for fair examination–but let's not forget that the Federal Reserve deserves its share of blame both for confusing economic planners as well as monetizing budget deficits.

  • Paul Marks

    "skipped out on the bill"?

    Actually tax revenue went up under Ronald Reagan – the tax cuts were successful.

    The problem was that government spending was not cut (in fact, as the article points out, it greatly increased).

    As for saying that Chairman "slayed the inflation dragon too quickly".

    Any sensible deal on government spending would have been in real terms.

    Mr Volker can not be blamed if the government spending deal was not done in real terms.

  • Paul Marks

    By the way "blame the Fed" for not producing as much inflation as some politicians want?

    That is a very strange position indeed.

  • Andrew_FL

    Actually, the reason this criticism is somewhat misplaced is that Presidents don't spend money, Congress spends money. The Congress at the time was controlled by the opposite party from Reagan. So it is wrong to give credit to or blame to the President and the President alone on issues of spending. Most of the responsibility falls on the Congress and when that Congress is controlled by the opposition party, the President is largely impotent to control the course of spending-regardless of the trajectory of it they desire.

    For example it is highly misleading to credit Bill Clinton for reigning in the Government that occurred after the Republicans regained control of Congress, especially given he fought hard against much of it. One could say much the same thing about the current President. Similarly the enormous jump in spending at the end of the Bush administration occurred when Democrats controlled Congress. Now, can one criticize Reagan or Bush for not fighting harder to control spending? absolutely. But it is not helpful to politics and policy in general to perpetuate the myth of the All Powerful Chief Executive who is responsible for everything, good or bad, that occurs on their watch, as if the other branches of the Federal Government were mere afterthoughts with no power. It makes them unaccountable for their actions to make historical myths like that.

  • Justin Merrill

    In addition to the inflation forecast error, the outlays under Reagan appeared larger because interest rates were so high (because of the Fed). If you subtract debt servicing, the budget looks much better.

  • George Selgin

    Sorry, Brad, but I can't go along with this.

    Were any individual to fail to reduce his expenditure below previously planned levels in response to unanticipated changes in his income, including changes connected to monetary tightening, he would be behaving irresponsibly. Every American citizen had to make just such adjustments in response to the Volcker tightening. The Reagan administration, on the other hand, didn't have to, because it could place the burden of its increased real expenditures and indebtedness on others. And that is indeed what it did. Those high interest rates that Justin Merrill refers to were, of course, partly a reflection of the government's borrowing–or are we to ignore this also in our zeal to tar the Fed black?

    It does not help the cause of Fed criticism to make the Fed a scapegoat for what was in fact Republican-party profligacy. By combating inflation in the early '80s, the Fed, for once, did something right. Reagan's government deserves credit for supporting that effort, but not for spending as if it couldn't believe that the effort had actually born fruit.

    Finally, I protest heartily against the quoting, without criticism, of passages in which "grew" is used as a transitive verb with reference to a thing.

  • It seems pretty odd to blame to Fed for reducing inflation more than expected, though in fact they did. I agree with George's comments.

  • vir_econ 1B

    I agree with both George and wcoats. I believe we cannot use the fed as an excuse when the inflation was reduced greatly. I believe that Reagan's spending resulted in these outcomes, however they may be a few other reasons why the inflation reduced more than expected; but Reagan has the majority of the blame.