Personally Prudent but Publicly Profligate: Reagan's Generation and Budget Deficits

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According to economic historian Robert Higgs (Crisis and Leviathan: Critical Episodes in the Growth of American Government, 1987), during the early part of the twentieth century, government spending at all levels (federal, state, and local) rarely exceeded 6 or 7 % of Gross National Product (GNP). Even after rising to 21% of GNP during WWI, the government's share of the economy returned to 8 % by the late 1920s. During the Great Depression, however, government's share of the economy rose to between 14 and 15 % and would never drop below that point again. Public sector economists have wrestled with an explanation for this seemingly permanent increase in this size and scope of government for some time.

Explanations include changes in the composition of the voting population (Husted and Kenny, "The Effect of the Expansion of the Voting Franchise on the Size of Government," Journal of Political Economy, 1997), political entrepreneurship (Holcombe, "Veterans Interests and the Transition to Government Growth: 1870 1915," Public Choice, 1999), crisis (Higgs, 1987), and Keynesian ideology (Buchanan and Wagner, Democracy in Deficit." The Political Legacy of Lord Keynes, 2000). It is this last argument we explore more in-depth in this note.

In their seminal work, Buchanan and Wagner argue that Keynesian economics eliminated the old-time fiscal religion that had existed prior to the Great Depression. The old time fiscal religion was represented by a correspondence between prudence in personal finance and public finance. Government was expected to run surpluses in good economic times, to prepare for unforeseen bad times. Deficits were only to be

In this note, we extend Buchanan and Wagner by showing how the Great Depression and Keynesian ideology changed the generation of Americans' coming-of-age during the Great Depression. We call this generation "Reagan's Generation" for two reasons. First, Ronald Reagan graduated as an economics and sociology major from Eureka College in 1932, fight in the midst of the Great Depression. Second, as President of the United States for two terms in the 1980s, Reagan presided over budget deficits that averaged over 4 % of GNP annually, leading the federal debt to increase from 33.3 % of GNP to 51.8 % (Yellen, "Symposium on the Budget Deficit," Journal of Economic Perspectives, 1989). How did a young man who studied economics during a period of great private austerity, where the President of the United States ran on a balanced budget platform, end up presiding over a period of chronic budget deficits? The answer to this question lies in how the Great Depression changed his generation's beliefs regarding public debt, because it is those beliefs that drove their political behavior. …