If you, like me, grew up in the United States of America, you’ve probably heard a story of the late 1970s and early 1980s that goes something like this: “In the 70s, Carter’s liberal big-government policies resulted in runaway inflation. Reagan came in and defeated inflation, and produced an economic boom with deregulation and tax cuts. Reagan also embarked on a massive defense spending binge which, although it increased the deficit a lot, forced the USSR to bankrupt itself trying to keep up, and thus won the Cold War.”
That might sound like a straw man, but the narratives we tell each other about the past often consist of exactly such straw men. And debunking those narratives might feel like shooting at easy targets, but it’s helpful for taking a closer look at history.
Anyway, the above narrative is almost entirely wrong. Carter was a deregulator who didn’t increase deficits much, and appointed the Fed chair who beat inflation. Reagan didn’t do much deregulating, nor did he increase defense spending much as a share of GDP — and the USSR didn’t fall because of the arms race. Let’s go through these points one by one.
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