Two Revolutions in Economic Policy: Growth-Oriented Macro Policy in the Kennedy and Reagan Administrations
Laurence H. Meyer, Joel L. Prakken, and Chris P. Varvares
The inspiration for this chapter is the interesting volume edited by James Tobin and Murray Weidenbaum, Two Revolutions in Economic Policy. Two Revolutions brings together the first Economic Report of the Council of Economic Advisors in the Kennedy and Reagan administrations, along with earlier papers written by the respective Council of Economic Advisors (CEA) staffs summarizing the economic policy initiatives of the new administrations and later analyses written for the volume evaluating the policies with the benefit of some historical perspective. It is apparent from Two Revolutions that the Kennedy and Reagan administrations shared an emphasis on growth-oriented macro policy, while advocating sharply different policies for promoting growth. The Kennedy CEA stressed the role of the mix of monetary and fiscal policies in promoting growth, while the Reagan CEA emphasized the role of supply-side tax incentives.
The theoretical analysis and empirical evidence in this chapter provide support for both administrations' views of the role of policy in promoting growth: both the policy mix and supply-side tax cuts are theoretically legitimate and empirically supported ways of enhancing intermediate-term economic growth. The puzzle that motivates this chapter, however, is the failure of fiscal policy in the Reagan administration as growth-oriented policy despite the promises of supply-side economics. The rate of growth of potential output during the Reagan years was about 2.5 percent per year, about the same as that recorded in the Carter years.
The failure of Reaganomics to promote growth can be understood as resulting in part from the perhaps unintended combination of a pro-growth supply- side tax policy with an anti-growth policy mix, and in part from the inconsistency with which supply-side tax policy was implemented during the Reagan