The Anti-Economist: Misleading American History

By ignoring the historic role government played in enabling economic growth, the prevailing myths about how the U.S. became prosperous allow lawmakers, officials and lobbyists to craft policies that prevent the majority of Americans from taking their rightful share of the national wealth, Jeff Madrick writes in Harper’s Magazine.

“What myths would a good alternative economic history debunk?” Madrick asks.

“The first might be that America owed its rapid economic growth in the nineteenth century to the small size of its federal government.” Secondly, “misinterpretations and distortions” promoted by academics like the “respected conservative economics professor” and New York Times columnist Tyler Cowen have encouraged readers to misattribute the postwar boom to “plentiful natural resources … technological advances, and an increasingly educated population.”

Another is the view that “debilitating inflation [in] the 1970s was caused by … the Federal Reserve’s creating too much money through the imposition of very low interest rates.” And the last — and this one’s a doozy — is that Ronald Reagan’s tax cut and deregulation program in the early 1980s revitalized the economy.

As with many issues of public misunderstanding, the treatment involves a full reckoning of the available empirical evidence. As the liberal historian Howard Zinn wrote, the “chief problem in historical honesty isn’t outright lying” but the “omission or de-emphasis of important data.” Fortunately for us, Madrick — unlike many of his lauded and well-compensated peers — is a good student of Zinn’s.

First, Madrick tells us that growth in the country’s early history was helped by “the many regulatory and legal reforms that went into effect in those years … guaranteeing fair competition in business and the right of ordinary people to buy land.” With revenue collected from high taxes, the state financed investments in canals and railroads, developed free primary education, built sewers and water sanitation systems, and spurred the development of manufacturing. And the economic benefits of slave labor would not have been possible without able government enforcement.

Second, postwar “diplomatic machinations” and the persistent threat of American aggression kept oil prices artificially low during an era in which petroleum consumption tripled. Technological advances were spurred by deficit spending recommended to American presidents in previous decades by British economist John Maynard Keynes. Education, vital to the occupation and performance of complex jobs, was funded by government as well.

The late conservative Chicago economist Milton Friedman is largely responsible for the misleading notion that inflation in the 1970s was a result of the Federal Reserve’s decision to shrink interest rates. “Friedman’s view has since become conventional history,” Madrick writes. “But the belief is mostly wrong. More likely culprits … were two years’ worth of major crop failures, which led to soaring food prices, and the Arab nations’ oil-price hike, which quadrupled prices, from roughly $3 a barrel to $12 by 1974.” Moreover, “there is no empirical evidence to suggest that higher inflation rates would reduce economic growth.”

As for Reagan, the policies of the “Teflon president” (a nickname he earned for his ability to “do almost anything wrong and not get blamed for it”) “badly failed,” Madrick writes. “Under Reagan, income inequality began to rise rapidly after three decades of solid increases in earnings across all income levels. The top 10 percent of earners received 92 percent of all new income during this period, compared with 35 percent of the rise in income from 1960 to 1969.

“Furthermore, [w]ages grew far faster after Clinton’s tax hike than after the implementation of Reaganomics. And as for revitalizing productivity, output per hour of work — the key measure of the economy’s ability to produce income — rose far more slowly under Reagan than it did before or after.

“The assumption that technology, natural resources, and a more educated workforce are the only important sources of growth leads us to believe that Keynesian policies are not valuable,” Madrick notes. “The assumption that inflation has been caused by the Federal Reserve’s effort to keep unemployment down leads to policies that keep interest rates high, unemployment up, and wages low. Romanticizing the achievements of Ronald Reagan leads many to believe that tax cuts inevitably generate rapid economic growth.”

“Most damaging, however, are views of history … that fail to recognize the central place of government policy and intervention in economic growth. One tragic result of such views was the extreme financial deregulation and weak implementation of existing regulation that led directly to the financial crisis and the Great Recession. Another result is the weakness of current policies aimed at supporting the recovery — in particular, the failure to adopt a second fiscal stimulus back in 2009, and current austerity policies that will further diminish growth and perhaps even lead to a recession this year.”

— Posted by Alexander Reed Kelly.