Wednesday, June 16, 2010

The Keynes/Reagan Shift

Recently I showed Emmanuel Saez's graph (above) and pointed out the policy change that occurred right around 1978. I called it a policy change from Keynesian economics to Reaganomics. The change actually started before Reagan became president, but people generally associate the changes with his name.

For the record, the change also occurred 30-odd years after the death of Keynes. So the use of both names is something of a metaphor. But names are the least important aspect of this; it's the change itself that is significant.

Here's a short list of changes from Paul Krugman for what it's worth:

  • slashing taxes on the rich
  • breaking the unions
  • letting inflation erode the minimum wage

Here's an excerpt from The Agonist that chops up history the same way I do:

MMT is a macroeconomic theory which tries to explain the operation, structure, and behavior of national economies (as all macroeconomic theories do). This puts it in the same league as Keynesianism and Monetarism.... Roughly speaking, US economic policy from the New Deal until the early 1980s was mostly Keynesian, while policy from the early 1980s until today has been roughly Monetarist.

I like this guy. He's looking at the same policy-shift I am, and his dates and time-spans are close to mine. The Agonist calls it a shift from Keynes to Monetarism, I call it Keynes/Reagan. There's a lot more to what's been happening for the last 30 years than just Monetarism, in my view. But we're in the same ballpark. The labels are of little importance, and the dates are close.

Finally, here is a little more evidence, another graph that shows a change that occurred around that time:

Chart 1 here is from a PDF titled The Inflation Question, a "Market Insights" report from J.P.Morgan Asset Management.

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