Reaganomics in Retreat

IT SEEMS THAT the world is beginning to come around to my point of view, that the credit crisis has been averted and the economy is not going to weaken enough to deserve to be called a "recession."

Several speeches this week by Federal Reserve officials have talked about the credit crisis very much in the past tense. The Fed finally came up with new liquidity facilities that were effective at easing the crisis — after nine months of flailing, doing everything wrong and nothing right. This after years of keeping interest rates too low, and triggering the cycle of speculation that led to the credit crisis in the first place. So now the Fed speechifiers can pontificate about the mistakes that bank lending officers and brokerage firm risk control experts made.

Even my longtime ideological nemesis Paul Krugman, the economist who writes a column for the New York Times in which, for years, he has forecasted every possible horrific outcome for the economy, admitted last week that "the worst of the financial crisis is over."

The Wall Street Journal ran a front-page story this week about how most professional economists have changed their gloomy minds. Just a month ago the consensus agreed that the economy is already in recession — now the consensus says it's not, and that we won't fall into recession from here.

I have to say, all this worries me. I am always much more confident of my views when I am out-of-consensus. When everyone starts to agree with me, I have to start looking for a new point of view.

But I don't think the credit crisis will erupt again. And I don't think the economy will fall into recession.

But as others are getting more confident, I'm getting more worried. In fact, I've told my institutional clients that I still expect a substantial recovery in stocks over the next several months. But I've also told them that looking out a little further, I think that it's time to prepare to get out.

What I'm worried about is politics. In economic matters, I am a conservative. I favor low taxes, no trade barriers, little regulation, sound money and a minimal role for government in the marketplace. For short, call it Reaganomics.

In today's politics that kind of economics is in retreat. When it came into ascendancy in the early 1980s, it was a revolutionary solution to deep structural problems in the economy. It's what lifted the American economy out of the rust bowl of the 1970s, and made the U.S. a technology leader coming into the new millennium.

In the 1970s the economic pie was shrinking. Now it's grown tremendously. So our psychology has changed quite a bit. Now we have the luxury of not worrying about how to make the pie grow, but instead to worry about how we distribute the pie.

So now there are calls to raise taxes on the rich (though it's low taxes on the rich that grew the pie in the first place). There are calls to stop global trade to protect jobs at home (though it's that trade that has collapsed the prices of most consumer goods). There are calls to nationalize health care, so that everyone can have an equal call on the miracles of modern medicine (though it's the mostly private approach to medicine that enabled those miracles in the first place). There are calls to heavily regulate financial services (though deregulation is what enabled almost every American, rich or poor, to carry a credit card, and so many to own their own homes for the first time).

Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.

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Posted 8:07 PM EST May 28, 2008

Posted by: hmarcano

Here"s my take on Reaganomics, the idea was that if you cut taxes and deregulate industry for the rich and well to do that some of the wealth would trical down to the masses, hense the term " trical down theory " , what no one counted on was "GREED". Mr. Luskin and others here think all we want is to tax the rich....what we really want is for everyone the pay their fair share, you talk about keeping government out of the business of doing business till they are ready to go belly up and then they want the government to step in and bail them out....(it all started with Crysler)and it has"nt stop. They want us all to shop at Wal-Mart so they can keep shopping at Tiffany"s.....we have the finest hospitals in the world, but can"t afford to use them.Our political and industrial leaders have let us all down.....My wife and I work our asses off, we save what we can....WE WILL NEVER SHOP AT WAL-MART.

Posted 10:05 AM EST May 22, 2008

Posted by: allynd

Don puts himself in the line of fire because his columns are often thinly veiled attempts to promote his political beliefs. Everyone likes lower taxes, but doubling the deficit in 8 years is simply obscene.

Posted 6:53 PM EST May 21, 2008

Posted by: bennieh

To vernhutter, keep bitching about guys like Don and how much they make (income), and how they don"t "make" anything. Don is rich because he has probably been working his ass off for the last few decades. He"s not just lucky. Most people in this country are just lazy, they work the regular 40 hours a week or less and wonder why they can"t get ahead. It takes more than that in today"s world, people in other parts of the world get this and the solution is to raise taxes on the the people that add the most to this country to pay for the lazy.

I"m not saying Dems get everything wrong or Rep. get evertyhing right, the problem is that our "public servants" have made a joke out of this country, not guys like Don.

Posted 6:52 PM EST May 21, 2008

Posted by: bennieh

Don,
I enjoyed the article and tend to agree with what you describe as driving economic growth and how it may be about to reverse with the bonehead policy thoughts of Obama and Clinton.

To some of the other posters, wake up already!. Allynd, looks like you post more in order to read your own silly thoughts. Keep bitching about the deficit. The reality is the deficit we have now, at the lofty level when you consider the stimulus package, represents 2.5% of US GDP, it has averaged 2.5% since 1970. I suppose it was those low taxes that made that deficit right? If you want someone to blame look at guys like Barry Obama and the Community Reinvestment Act to find out why so many have homes they can"t afford, I think these are things Don is hinting at. Tax the rich! Tax the rich! This is not the stuff of free trade and capitalism.

Posted 4:01 AM EST May 21, 2008

Posted by: allynd

Yes, let"s concern ourselves about the "gathering storm" on the horizon, so as to divert attention from the one that swept in 8 years back and is still overhead wreaking destruction! Bush 1, Bush 2 and Reagan ran up 7 TRILLION in debt and now it"s all the fault of whoever has to pay down the debt? How did you people ever get the reputation for fiscal responsibility?

Now we"ve got people posturing about future candidates on the basis of nothing more than campaign promises, which everyone knows are BS, but completely failing to acknowledge the current predicament they helped to create. I guess in the eighth year of this administration it is a little difficult to blame our economic woes on the previous party"s administration. So, it is time to blame an administration that has YET to take office. What a joke!