The Reagan Legacy and McCain’s Mendacity

Kevin Drum has turned his blog over to the very capable hands of Steve Benen for a couple of days. Steve caught another McCain lie that I missed in something called MCCAIN’S MENDACIOUS MEMORY. Steve’s main point was the McCain did vote against the Bush tax cuts, which we did note. The line I missed was as follows:

I was there with Jack Kemp and Phil Graham and Warren Rudman and all these other first that wanted to change a terrible economic situation in America with 10 percent unemployment and 20 percent interest rates.

First of all – the only interest rate to reach 20% was the artificial prime rate which was very noisy from 1980 to 1982. The 3-month Treasury bill rate was 15% when Reagan took office as of January 1981 and was still at 15.5% as of August 1981. But then we got a very deep recession that pushed unemployment to 10.8% by December 1982. But let’s take a look at the unemployment rate during Carter’s term of office and Reagan’s first term. During the first 2.5 years of the Carter Administration, the unemployment rate fell from 7.5% to 5.7%. During the summer of 1979, economists debated whether we were below full employment or beyond full employment. The Volcker FED decided that we needed some serious monetary restraint and we did have a recession towards the end of Carter’s term, which basically gave Reagan the 1980 recession. But from mid-1980 to mid-1981, we did have a short recovery as the FED backed off its tight monetary policies for a while.

What McCain and the other incredibly dishonest Reagan worshipers fail to tell their audiences is the reason for the second round of Volcker monetary restraint. The Fed viewed the 1981 tax cut (sine serious spending cuts) as excessive fiscal stimulus so it slammed on the monetary brakes big time. And yes, real interest rates shot up lowering both investment and net exports. The second and much larger spike in our graph should be viewed as the Reagan-Volcker recession even if dishonest hacks like John McCain want to pin this tail on President Carter. Then again – those 1984 “Morning in America” ads ran by a very dishonest Republican Party back then suggested that Reagan’s fiscal fiasco actually saved us from another Great Depression leading to a great employment situation even though the unemployment rate in late 1984 was about as high as the one Reagan inherited from Carter.