Onscreen Reagonomics
The biopic Reagan opened on September 1, starring Dennis Quaid in the title role. Based on Paul Kengor’s 2006 book The Crusader, the film deals primarily with Ronald Reagan’s battles against communism, from the time of his executive involvement in the Screen Actors Guild through his White House years. But Reagan also contains a few sequences of interest to followers of the economic scene. Even though Reagan’s presidency ended more than three decades ago, the issues raised in the movie continue to be actively debated.
At one point in the action, Reagan rejects an aide’s idea of balancing the budget through revenue enhancements, i.e., new taxes. He describes a line of reasoning he encountered in his study of economics at Eureka College: Increasing the amount of cash in people’s hands increases their ability to spend. To satisfy the increased demand, companies have to hire more workers, who then in turn have more cash to spend and the cycle continues. Clearly, raising taxes would not be a way to get more money into people’s hands.
Few economic theorists would dispute that greater disposable income facilitates greater consumer spending. Many in the field, however, perceive undesirable consequences from leaving fiscal deficits unchecked. The film depicts Reagan himself saying, in a 1980 debate with Jimmy Carter, “We don’t have inflation because the people are living too well. We have inflation because the Government is living too well.”
To put that line in fuller context, in the actual presidential debate it followed a recap by Reagan of the causes of inflation that, in his estimation, Carter had cited: “[H]e has blamed the people for inflation, OPEC, he’s blamed the Federal Reserve System, he has blamed the lack of productivity of the American people, he has then accused the people of living too well and that we must share in scarcity, we must sacrifice and get used to doing with less.”
Even now, the impact of fiscal deficits on inflation is not a settled question. On the one hand, a 2005 study by Keith Still of the Federal Reserve Bank of Philadelphia found little evidence of a link in developed countries between deficit spending and inflation. The author concluded that the key to determining budget deficits’ effect on inflation is the extent to which monetary policy is used to help balance the government’s budget.
According to the Economic Policy Innovation Center, the extent of that particular dynamic was quite substantial early in this decade. That think tank wrote earlier this year:
The Federal government borrowed heavily to meet its spending needs in 2020 and 2021, and that borrowing was converted by the banking system into funds that fueled the rise in prices.
Central banks are typically depicted as the offender in this sort of claim, i.e., that monetization of government spending produces inflation. In the U.S., that would point the finger at the Fed—one party on Reagan’s list of culprits identified by Carter.
There are certainly economists who assign a major role to central banks, through their control of the money supply, in determining whether price levels hold steady or rise. Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.”
Economist Ariadna Vidal Martínez, though, wrote in 2015 that the relationship between inflation and the quantity of money “is strong and robust in the long term but, the relationship between both variables may weaken temporarily in the short term due to factors such as price rigidity and the velocity of money not being constant.”
The producers of Reagan clearly had intentions other than stimulating debate about economic theory. Even so, the film’s brief glimpses of the Gipper’s long ago views on the subject shed light on issues that warrant examination and discussion even now.
