The Economic Legacy of the Reagan Years: Euphoria or Chaos?

Euphoria? Chaos? Is there nothing in between? Quite aptly, the message of these 30-odd editors, authors, co-authors, and commentators can be summarized: there is something in between. Only two approach "euphoria": Thomas Gale Moore (formerly of President Reagan's Council of Economic Advisers, now at the Hoover Institution) on domestic issues only, and Roger Kormendi (University of Michigan), who prefers the term "Unfolding Opportunities" to "Unwarranted Optimism." None of the assessments come close to "chaos." (The essays were presumably written in 1989-90, before the "Bush" recession.) Some of the papers imply that one or another aspect of "Reaganomics" was "full of sound and fury, signifying nothing" - or if "something," little more than statistically-random bobbles and wobbles. This review will attempt to raise the question of why this may be the case.

The volume's 15 chapters and accompanying commentaries deal with 3 1/2 important aspects of the Reagan record. The three are fiscal policy, monetary policy, and international-economic policy. The half is the microeconomic problem of deregulation, which omits any "financial institutions" chapter covering savings and loans, banks, insurance companies, etc. A more important omission, from the Reagan-bashing viewpoint, is the topic of income distribution and redistribution - the so-called "fairness" issue.

As hinted above, several chapters left this reviewer wondering why the Reagan years appear to have accomplished so little in either euphoric or chaotic directions. This would have been a minor problem, or no problem at all, in the Dark Ages before our expectations had turned rational; many of these essays do not in fact progress beyond those days. Three examples of policy "false alarms": tax reform meant to some Reagan advisers primarily a lowering of high individual and corporate income tax rates, but to others primarily generous investment credits, more favorable treatment of capital gains, and so on, with gains on one front bartered for inaction and-or losses on another and with the President's own preferences seldom clear or consistent; on the monetary side, Reagan was in a similar position as between monetarists and supply-siders among his advisers; in international economics, Reagan's practice fluctuated between something like free trade and something like "fair trade," somehow interpreted; however, none of these writers accept extreme judgments of administration trade policy as "a strategic retreat" or as "the most protectionist since Herbert Hoover." And on none of these fields, lest we forget, did Reagan get from Congress whatever policies he wanted - after a "honeymoon" in early 1981.

But leaving in the background such easy "policy-paralysis" explanations of the minimal results of Reaganism, we have had for nearly a generation a rational-expectations critique, to the effect that the ordinary equations of our ordinary macro-models are policy-sensitive and that policy changes exercise no systematic effects on the underlying (real) economy. In which case, however single-minded and unopposed the Reagan administration - or any other administration - may be, its effects are limited to price-level changes plus random error terms. Both euphoria and chaos are then ruled out under the institutions of American capitalism; "perestroika" is presumably something else again. The rational-expectations hypotheses, largely ignored in most essays of the volume under review, are faced most clearly in the discussion of exchange rates. Here Craig Hakkio (Federal Reserve Bank of Kansas City) finds real rates not neutral with respect to changes in nominal rates; this is a disconfirmation of one expected consequence of rational-expectations theory in its simplest form (without explicit treatment of information costs).

Our editors are economists at Oakland University in metropolitan Detroit, and a somewhat disproportionate number of contributors are affiliated with various universities in Michigan. The dominant methodological approach is quantitative, the construction and application of econometric models, although the essays of Part III (deregulation and free markets) are historical, institutional, and ideological. The bibliography is a large one, with what this reviewer thinks may be a significant omission: Revolution (1988) by Martin Anderson, Reagan's principal adviser on domestic economic issues in 1981-82.

There is real need for more collections at this level, appropriately intermediate between Econometrica and Business Week and open to a variety of views. But this particular collection misses, I believe, by excessive compression and bob-tailing, making individual pieces somewhat shorter and less readily comprehensible than they might have been in a volume of this kind.