On “Reaganolatry”

That´s a favorite of Paul Krugman. His latest says:

Just a further thought about Reaganolatry: consider the track of unemployment under two presidents. One is lauded as the ultimate economic hero and savior; the other reviled as an economic failure, who killed jobs by being nice to poor people and insulting job creators. The chart compares their records.

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OK, you can come up with reasons why president#2’s record isn’t as good as it looks. But is there really enough contrast there to justify the difference in perception? How much of what we’re looking at is the psychological impact of a V-shaped recession — things got really bad, so there was a sense of relief when they got better? How much is simply the result of decades of propaganda?

Anyway, I’m surprised that this chart isn’t more widely discussed.

So, let´s discuss it!

The first thing I do is to consider only the prime age population (25-54) to minimize demographic changes.

The unemployment chart is very similar. But when you look at what´s behind it, the labor force participation rate for prime age workers, you see that the unemployment rates in the two episodes are not comparable!

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In any case, what´s really behind the economy´s very different performance in the two episodes is not Reagan/Obama but the Volcker/Greenspan Fed and the Bernanke/Yellen Fed. The Fed controls the nominal economy, which irradiates effects on the real economy. The chart shows why there was a V recession in the first episode, giving out a “sense of relief” that is not felt in the second episode!

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