Comparing the Effectiveness of Keynesian Economics under FDR to Reaganomics under Reagan

The effectiveness of Keynesian economics under President Franklin D. Roosevelt (FDR) and supply-side economics (Reaganomics) under President Ronald Reagan is often debated. Traditionally, it is posited that Keynes favored loose fiscal and monetary policies with a large government role, while Reagan advocated for balanced budgets, low inflation, and small government. However, the situation is more complex than this simplified dichotomy. Keynes emphasized demand-side stimulus, whereas Reagan’s policies focused on supply-side reforms specifically through tax policies.

The Principles of Supply-Side Economics and Keynesian Economics

Supply-Side Economics posits that increasing the supply of goods and services, through supply-side policies, drives the economy. This approach focuses on adjusting taxes to stimulate production and investment. On the other hand, Keynesian Economics emphasizes how economic conditions can be influenced by the total amount of spending (aggregate demand) in the economy, thereby driving economic growth.

Keynesian Economic Theories and Reagan's Policies

According to Paul Krugman, in June 2012, Reagan’s policies were consistent with Keynesian stimulus theories, as exemplified by the significant increase in per-capita spending during his administration.

Reagan economics (Reaganomics) and Bidenomics diverged significantly from the economic policies that had dominated both parties for decades. Reaganomics rejected Keynesian liberalism, while Bidenomics repudiated the market-centric globalization that has defined economic policy in the United States for the past three decades.

Reagan’s Economic Policies and Their Impact

Reagan’s commitment to supply-side economics had both positive and negative impacts. According to King, Reagan’s economic policies disproportionately affected poor and marginalized communities, leading to increased unemployment, reduced social welfare funding, and widened income inequality. His policies can be critiqued for exacerbating economic disparities.

The Controversy Surrounding Reaganomics

There is also a significant critique of Reaganomics, often labeled as “Keynesianism.” For instance, Arthur Laffer, a prominent economist associated with Reaganomics, argued that Reagan’s economic policies were akin to Keynesianism, involving significant borrowing and stimulus measures rather than the orthodox supply-side approach.

Additionally, Jan King argued that while Reaganomics focused on supply-side policies, these policies had negative effects on the poor and marginalized communities. She highlighted that increased unemployment, reduced social welfare funding, and rising income inequality were direct consequences of Reagan’s economic policies.

Is Supply-Side Economics Truly Idiotic?

The principle of supply-side economics is that producing more goods enables them to be sold more efficiently at a lower price. However, this approach has limitations. If the demand for these goods is insufficient, leading to excess supply, the prices can decline below the marginal cost of production, potentially bankrupting producers. In contrast, Keynesian economics posits that demand drives production and prices, creating a sustainable equilibrium.

It should be noted that Reagan was not an economist, and his economic policies may not have been based on comprehensive economic theories. His approach, often labeled as “military Keynesianism,” focused on military spending and borrowing rather than purely supply-side measures.

Conclusion

While Reaganomics and Keynesian economics have different approaches to economic policy, both have had profound impacts on American society. Critics argue that Reagan’s supply-side policies, despite initial successes, had significant negative consequences, particularly for disadvantaged communities. Understanding the complexities of these economic theories and their application can provide valuable insights into past and potential future economic policies.