"Why did rich-world deficits start exploding around 1980?" - Noah Smith
Start with the last graph from last time:
|Graph #1: Federal Deficits (blue) with Inflation Removed (red) Base Year=1958|
Get rid of the blue line:
|Graph #2: Inflation-Adjusted Federal Deficits (Base Year 1958)|
Those peaks have the same values on Graph #1 of course, but they're easier to see on Graph #2. It's also easier to see what Noah called an "explosion" of deficits on this red line -- if you're looking for it.
Me, I'm not looking for it. I cannot imagine Maynard Keynes or Adam Smith seriously discussing an "explosion" of deficits. I learned what economics is, from them. I learned what economics is not, from Milton Friedman.
It is pretty obvious that the big jump on the graph occurs at the 1982 recession. And it looks to me like the second biggest jump occurs at the 1974-75 recession. Third, probably the 1991 recession. So I have to think that the big jumps in the deficit are recession-related, not 1980s-related.
Does it matter? Well, yeah. If the big jumps are recession-related it means they are Keynesian policy. If they are 1980s-related it means they are Supply-Side policy.
I think we can see supply-side policy on the graph, in the tapering off of deficit peaks. The strong upward trend established by the deficit increases of the 1970 recession, the 1974-75 recession, and the 1982 recession, the uptrend has broken by the time of the 1991 recession. That last peak is lower than the trend suggests it should be.
And after the 1991 recession, the deficits actually fall. Clearly, this is supply-side policy at work. Supply-side, or Reaganomics, or whatever you want to call it. Furthermore, the effects of this policy are delayed -- as we should expect. Policy is not instantaneous: Policy establishes trends.