If the 1980s expansion had been a classic, demand-driven Keynesian recovery, nominal demand should have grown rapidly in the 1980s. However, as Figure 9 shows, over the course of the 1980s the rate of nominal demand growth fell.
"Nominal demand". Whatever they mean by nominal demand, figure 9 shows the annual growth in GDP. So GDP equals "nominal demand" - why not just say GDP? The Cato piece seems to be intent in claiming that it wasn't a demand stimulative effect but a "supply-side" effect. Maybe this is due to some allegiance to Say's law - Supply creating it's own demand or something like that.
Personally I view "Lafferism" as a form of "Keynesianism". Both prescribe tax and spending policies to stimulate the economy. Whether the stimulative effect is due to the effect on demand or supply seems to be an academic question to me.
The Keynesian explanation of the economic recovery in the 1980s is also fundamentally inconsistent with the sharp fall in inflation throughout that decade. If the recovery had been driven by a hike in the demand for goods and services rather than by a supply-side effect of greater output, inflation would have risen rather than fallen.
Well, if one pretends that nothing else was shaping the economy during this time. But the Fed remained very dedicated to preventing inflation throughout the 1980's and beyond. Despite this, inflation did increase in the 1986 - 1990 period according to figure 5 in the Cato piece.
Finally, if budget deficits are highly stimulative, the post-Reagan period of 1990-95 should have produced strong economic growth. The budget deficits of that period were very nearly of the same magnitude as the deficits of 1982-89 (4.2 percent of GDP versus 3.9 percent of GDP); in the 1980s, however, we had rapid growth and in the 1990s we have had anemic growth.
I note that figure 9 in the Cato piece measures economic growth as nominal change in GDP. Figure 9 shows 1981 with an 11% rate of nominal GDP growth. I don't remember 1981 as a gangbuster economic year. But inflation was still pretty high then, I think. I think what they are doing is using nominal growth instead of real growth in order to overstate the economic growth in the early part of the decade. Naturally as inflation fell over the decade, nominal changes would get smaller. |
