Reaganomics and the American Renaissance | El Impacto Reagan | La Fundacion Centro de Estudios Americanos | Buenos Aires, Argentina | 11.01.06

This essay was written at the request of La Fundacion Centro de Estudios Americanos in Buenos Aires.  In translation it was published in November 2006 as a chapter in the Center’s El Impacto Reagan, the first originally Spanish-language book to examine Reagan Administration policies.  The Center asked that it open with a personal recollection of Mr. Reagan.

I first saw Ronald Reagan face to face at a Republican Governors Conference meeting in spring 1971.  The meeting was held in Williamsburg, Virginia, in a conference center near the colonial restoration.  New York Governor Nelson Rockefeller chaired the sessions.  His family had financed the rebuilding of Colonial Williamsburg, including the House of Burgesses where Founding Fathers George Washington, Thomas Jefferson and James Madison had served.  Reagan was in his second term as governor of California and had already made one, in retrospect tentative, run for the presidency.  That was in 1968, when Richard Nixon beat him for the party’s nomination and ultimately won the job.

Rockefeller and Reagan were the rock stars of the GOP governors.  Each was the leader of his wing of the party — Rockefeller of the big-government liberals, Reagan of the free-market conservatives.  Each was governor of one of the two largest states.  There was even talk of uniting them after the Nixon presidency on a dream team ticket that some thought would be unbeatable.  At that meeting I got a glimpse of why such a ticket was never to be and why, of the two party titans, Reagan was the one who would make history.

It came through a pair of small incidents, both entirely unnoticed except by me.  I should explain that I was taking a year out of college to represent the governor of the state in which I was in school, Indiana, in Washington.  It was a kind of internship, except that I was the sole official representative of the state government in the nation’s capital.  The next youngest person in such a job was more than a decade older than I and considerably more experienced.  My family’s interest in politics and government went no further than dinner table conversation, but I had impressed a professor at my school.  When he became the senior policy aide to the newly elected governor, one thing led to another and I found myself taking a leave from my studies.

What I am saying is that I may have been precocious in some ways, but I was still very young and at times acted it – as, for example, during a break at the conference.  My governor and Reagan were talking in the hall.  I was standing behind them.  A photographer was on the other side, snapping pictures.  He was moving back and forth, trying to get a shot that included the two governors but not me.  I in turn was rocking back and forth, trying to stay between them in every frame.  Reagan surely knew what I was up to.  The Hollywood actor in him always had an eye for cameras and settings.  But he let me play my game – a tiny act of generosity that I later learned was entirely characteristic of him.  When I returned to the state for a quick visit a week later, my girlfriend on campus showed me a clip that had run, apparently in all Indiana papers, a photo – my governor, Reagan and me.

The day after that picture was taken, I was sitting in the staff seats behind the principals’ table during a conference session.  Nelson Rockefeller sat immediately in front of me, to my left, and a photographer was crouched just beyond him, again snapping shots.  Great, I thought, let’s try to get photographed with the party’s other leader in waiting.  Again I rocked back and forth to stay framed.  But this time the leader in question didn’t play along.  Rockefeller started moving back and forth himself, remaining entirely between me and the camera, making sure he didn’t share the picture with anyone, particularly the boyish aide of a Midwestern colleague – a tiny act of pettiness as revealing as Reagan’s generous one.

One other item from that conference:  Rockefeller and Reagan dominated it, but in very different ways.  In each session, Reagan spoke of the programs and broad objectives of his administration.  Years later Alistair Cooke, the long-time BBC correspondent in America, wrote of Reagan that he had great clarity about financial matters.  That clarity was on full display at the conference as he expounded on a wide range of policy challenges and California’s approach to them under his leadership.  Rockefeller restricted himself to expressions of broad good feeling towards all his peers, an expansive bonhomie that was entertaining to watch and kept him in the spotlight at each session but lacked any hint of greater depth or broader purpose.

Maybe I’m reading too much into it, but as I look back now, I see in the Ronald Reagan I encountered in Williamsburg, the focus, purpose and largeness of mind and character that were to help him win the presidency and succeed so spectacularly in it.  He needed all of these qualities and a considerable sense of humor to see the country through the challenges it faced when he assumed its highest office a decade later.

Ronald Reagan came to the presidency during the greatest U.S. economic crisis since the Great Depression of the 1930s and the most profound economic transformation since the industrialization of the late 19th and early 20th centuries. He left office with the United States well into the longest peacetime expansion on record – an expansion that, with only two mild and brief interruptions, continues to this day.  And the U.S. economy had moved from one dominated by large, often domestically focused, industrial enterprises to one in which small or rapidly growing companies driven by new technologies and an emerging global marketplace were the most dynamic factors. The combination of growth and transformation created, in essence, a new economy of unparalleled creative energy and strength.  As much as his security policies, Reagan’s economic policies made the United States what it is today: the world’s sole superpower.

The Policies

Under Reagan’s leadership, the U.S. government cut the top personal tax rate from 70 percent to 28 and accelerated depreciation of business assets, an effective tax reduction for all businesses calibrated to each firm’s investment in assets and growth.

Despite declarations after Reagan’s first two years from members of the Congressional opposition that each budget Reagan submitted was “dead on arrival”, Reagan brought the growth of domestic discretionary spending to a halt and oversaw a restructuring of Social Security that put the system in surplus for a quarter century to come.

The prior administration had overseen deregulation of two industries – airlines and trucking – but increased other regulations. The Reagan Administration reduced regulation broadly, across the economy.

The Reagan Administration ended the use of the antitrust laws to dictate the structure of industries; if they increased the efficiency of the overall economy to the benefit of consumers, both mergers and acquisitions were approved.

A decade and a half of inflationary monetary policy decisively ended.  In contrast to presidents since Lyndon Johnson, nearly all of whom had lobbied for bursts of inflationary growth in the money supply as a means of buying popular support, President Reagan gave complete political backing, first to Federal Reserve Board chairman Paul Volker, then to Reagan’s own appointee as chairman, Alan Greenspan, as they worked to flush inflation from the US economy.

Despite new opposition at home and rising resistance in Europe, the United States continued to lead the world towards increasingly open and free trade.

Put simply, Reagan reversed a nearly half century of rising government intervention in and control of the U.S. economy.  In every area of activity, the role of government was reduced, the role of markets increased.

The Results

During the decade and a half before Reagan took office, the American stock market had, in constant dollar (inflation adjusted) terms, declined.  With the phasing in of the Reagan tax cuts, it began the long and amazing climb that, despite a couple of brief setbacks, continues to this day.

After a period of instability in the ‘70s the real incomes of Americans turned upward.  A recent Census Bureau study has found that from the time Reagan took office to this day, the percentage of Americans with real income under $50,000 in 2004 dollars has declined, while the proportion with incomes exceeding $75,000 has nearly doubled to more than a quarter of American households.

A new age of entrepreneurship came into flower.  Even as many major corporations that traced their origins to the early industrial era changed ownership and downsized (becoming more efficient and better structured to compete in the increasingly integrated global economy), new companies and new industries began a long cycle of explosive growth.  Capital became vastly easier to access, both by small, start-up businesses in innovative fields and by challengers to the old, established giants.  The US high technology industry as we know it today is a product of the Reagan years, as is the pharmaceutical industry and a wide range of other entrepreneurial fields.

The long, destructive inflation ended.  When Reagan left office, the father of the monetarist school of economics, Milton Friedman, said that after quality improvements in goods and services were taken into account, inflation had ended in the U.S.  The gain was not temporary.  U.S. price stability continues to this day.

Despite talk of deficits as far as the eye could see, the elements were put into place that would enable the government to record a string of surpluses and dramatically pay down its debt in the last decade of the 20th Century.

The Times

Few would have predicted these dazzling developments in 1981. The day Reagan took office inflation in the U.S. reached 13 percent; interest rates, 21.5 percent – numbers the country had not seen since its Civil War of more than a century earlier.  In the 1960s and 70s it had become an article of faith among most economists that unemployment and inflation see-sawed against each other.  If inflation went up, the thinking went, unemployment would go down, and visa versa.  But by 1981, both unemployment and inflation were high, a phenomenon dubbed “stagflation”, that is, stagnation combined with inflation.

A mood of desperation had spread through the once smug community of U.S. economists.  From confident predictions of a few years earlier that modern theory had conquered the business cycle, a near panic had set in.  A prominent policy journal – The Public Interest – even devoted an entire issue to what it called “The Crisis of Economic Theory.”  This neo-conservative flagship invited scholars ranging from monetarists to Marxists to contribute explanations of the predicament and prescriptions for escaping it.  Reading the submissions it became evident, the neo-Keynesian consensus of the prior decade had vanished.  No one knew what to do.

Looking back, it seems clear now that the source of America’s late 70s economic malaise was simple: the post-World War II period was over.  Policies that had provided the foundation for the U.S. boom of the late 40s and the 50s and the reemergence of Europe and Japan – policies that had emerged as Franklin Roosevelt’s administration struggled with the Great Depression and the Second World War and that included expansive monetary policies, wide-reaching economic regulation and redistributionist fiscal policies anchored in high tax rates — could no longer be sustained.

The shock of the world wars had left most regions outside North America in desperate need of investment capital and markets to absorb their goods – capital and markets that only a vibrant U.S. could provide.  Taken together, U.S. post World War II policies sharply favored consumption over investment.  They combined to absorb global goods while pushing out capital, restoring global and, in particular, European and Japanese liquidity.  And for that reason, a reason largely unappreciated among policy makers, by and large, they worked for the U.S. economy, too.  Real incomes rose; real personal wealth, broadly shared, increased.

But by the early 60s, Europe and Japan had recovered.  Other regions had not yet adopted the policies that would have allowed them to ingest and digest excess American liquidity – policies such as secure, easily established and readily transferable rights of property, impartial rule of law, deference to free markets.  So within the U.S. the expansive monetary policy, made disastrously more expansive during the Vietnam War, turned corrosively inflationary.  In 1972, President Richard Nixon reacted to the speculative currency crisis that the export of now unneeded dollars had triggered and cut the U.S. currency free from gold.  Within two years, the oil exporting countries, attempting to protect their real incomes in the dollar-denominated oil trade, imposed steep spikes in crude oil prices, signaling the start of the nearly decade-long inflation crisis of the 1970s, the only peacetime inflation crisis in U.S. history.

Meanwhile, even after the Kennedy tax cut of the early 1960s, both personal and corporate tax rates remained near historic highs. Though relics of the Great Depression and even more of World War II finance, high rates had not stopped real family incomes from rising and the economy from growing in the peculiar economic environment of the post-war 1950s. The American economy so dominated the global economy in that time that, unlike any other period of the nation’s history before or since, sustained growth required little more than that large American companies get larger. The global market and the adaptability it demands — now so much a factor in U.S. thinking – was scarcely a consideration. The U.S. domestic market was highly stable and expanding back into itself after the contraction of the 1930s and the arrested development of the wartime years.  Overseas, big American companies commanded the financial strength to buy their way into almost any country. Meanwhile, manufacturing technology was little more than a straight-line development of 19th and early 20th century techniques and processes that favored large units.

In this almost ideal environment for relying on big corporations to fuel growth, high tax rates produced less economic drag than they would have in other periods.  By and large, big companies have much lower capital costs and much greater access to capital than smaller ones.  Personal and corporate income taxes drive up the cash flows needed to produce acceptable levels of return.  When taxes rates are high, then, it is the smaller and younger companies and the start-ups that, with their higher costs of capital, find themselves priced out of the financial markets.  Following the oil shocks of the early 70s, the reliance on established enterprises was no longer sufficient.  Entrepreneurship became an increasingly critical driver of national economic growth and high taxes became an increasing burden on the economy.

In this respect, heavy economic regulations worked the same way as heavy taxes.  Often, big companies could afford to carry them.  Smaller companies could not or could not as easily.  As large and established but less nimble firms stagnated and faltered in the unstable 1970s, the economy began by default to rely more on new and rising units, making the burden of New Deal era economic regulation less and less tolerable.  Then, too, in the rising turmoil of the period, even larger companies were finding they needed a freedom to test and innovate that economic regulation in many cases all but ruled out and high taxes made increasingly difficult to finance.

Origins: Reagan’s Conversion

Ronald Reagan had been an enthusiastic supporter of Franklin Roosevelt and the New Deal. As a Hollywood celebrity and member, then president, of the Screen Actors Guild, one of the movie industry’s most effective unions, he had endorsed the candidacies of Roosevelt and Harry Truman, campaigning with Truman in 1948. He was a man of the old order, and one of the first U.S. public figures to see that that order’s time had passed.

By the end of the Truman years, Reagan was becoming disillusioned with the Democratic Party and the activist government it espoused.  After he entered public life, he spoke often of how he had seen the way high taxes stifled his industry. He noted that the astronomical marginal tax rates of the post-war years drove stars like himself (who in turn drove box office receipts) to stop working part way through each year. Why work when the government took 91 percent of what you made, 91 percent being the highest marginal tax rate in the 1950s?  He said that the people truly hurt by these excessive rates were not the well-paid top actors but less prominent performers, crew and the thousands of middle-income studio workers who were paid less and ended up working less as a result.

Reagan’s disillusionment with over-reaching government grew out of other experiences, too.  During the Second World War, Reagan’s bad eyesight had prompted the Army (even though he had enlisted in the reserves well before the war) to keep him at home, assigned to making training films.  In those years, the government effectively assumed control of the movie industry, and Reagan saw first hand what its management produced.  Years later he wrote of the decline in production quality that came once the studios were no longer privately run.  He said it took years following the war for the industry to recover from the slippage of standards that government direction had brought about.  He had no time after that for those who advocated government ownership and control of the means of production.  Government control of production meant, he saw, that less was produced and what was produced was not as good.  As president, he summed up these conclusions with a joke.  What would happen, he asked, if the government took over the Sahara?  His answer: Soon sand would be in short supply.

Movie industry experience also provided Reagan with lessons in dysfunctional regulation. After the war, in part because of the challenge of television, the movie industry suffered a crisis. Americans were watching TV on nights when in the previous decade they would have gone to the movies.  The industry went through years of downsizing and restructuring before it adjusted to the new world.  Yet it was in this very period of faltering that the government chose to bring an antitrust suit against the studios, ultimately severing their link to movie houses. Through exercise of its regulatory authority, it introduced new risks and costs at a time when the industry was most vulnerable.

Meanwhile, Reagan had himself made the jump from movies to television, becoming one of the top television actors and program hosts of the day.  This career move led to a larger relationship with the sponsor of his show, General Electric (GE).  Reagan was already emerging as a popular speaker on the after-dinner circuit.  For GE, he agreed to speak at the company’s factories and facilities, a job that would take him to hundreds of plants and communities around the United States.  His theme was American liberty and how to preserve it.  In the next few years, as he wrote and rewrote his own speeches and, later, radio scripts, he refined his thinking about government, political freedom, economic opportunity and economic freedom.

In 1960, Reagan headed Democrats for Nixon.  In 1964, by then a Republican, he delivered a nationally televised speech in support of Barry Goldwater, that year’s Republican presidential candidate.  Using a variation of his GE texts, he argued for lifting the burden of government from the economy as well as for a clear-eyed understanding of the Soviet threat.   Together with stopping communism and defeating the Soviet Union, restoring economic freedom in the U.S. remained his central theme and purpose through the rest of his public life.

Origins: Intellectual Influences

Reagan was a voluminous reader, attentive listener and voracious consumer of political and policy journals. He once told Fredrich Hayek, the free market winner of the Nobel Prize in economics, that he had read only the first few chapters of Hayek’s seminal, The Constitution of Liberty.  But, Hayek noted, Reagan’s action and policies were those of one who had read all of that work closely and absorbed it completely.

In contrast to London School of Economics (LSE) socialists (Hayek had taught at LSE in the 1940s) who had strongly influenced the thinking of U.S. policy makers of the 1960s and 70s, Hayek saw government-directed economic planning as inescapably ignorant and dysfunctional.  The reason, he argued, was information. Economies generated too much information too rapidly for any one set of individuals to absorb and act upon, however schooled and attentive they might be. Only markets could process such stupendous volumes of information and generate, through prices, accurate signals for economic actors.  So a government of overpowering size and scope would inevitably make a society less wealthy and more impoverished.  By default, it would serve itself, not the people.  As Hayek noted, Reagan made this thinking part of his political argument and his governing code, communicating Hayek’s complex concepts through rhetorical shorthand and folksy stories.

Reagan read George Gilder’s path breaking supply-side treatise Wealth and Poverty before it became widely circulated.  It was, actually, Reagan’s promotion of it that vaulted the book onto the bestseller lists.  Together with economists Arthur Laffer and later Nobel laureate Robert Mundell and former Wall Street Journal editorial writer and author of the path breaking The Way the World Works Jude Wanniski, Gilder was an early proponent of lowering marginal tax rates and supply-side economics.

Despite the successful rate-lowering Kennedy tax cuts of the 1960s, economic policy makers had long been focused on average tax rates and on the impact of taxes and spending on consumption.  Kennedy’s economic advisors were Keynesians and argued, in retrospect incorrectly, that their rate cuts had compensated for a consumption deficit in the U.S. economy.  That was why, they said, the economy had grown so smartly after the Kennedy cuts’ enactment.

Supply-siders like Laffer, Mundell, Wanniski and Gilder emphasized, not consumption, but investment and production as key economic drivers.  High marginal rates discouraged both, they argued.  Their focus was more on personal tax rates and the capital gains tax than corporate taxes, reflecting that, unlike the neo-Keynesians and others such as Harvard’s John Kenneth Galbraith, their concept of economic growth placed less emphasis on the long-established giant corporation and more on the entrepreneur and the rising company.

When the neo-Keynesians looked at the U.S. economy, all they seemed to see was General Motors, its labor union (the United Auto Workers) and big units like them.  When the supply-siders surveyed the same scene, they noted the then recent research by the Massachusetts Institute of Technology’s David Birch that vastly more new jobs and new productive activity were coming from companies of 15 or fewer employees, companies like the then tiny and unnoticed Microsoft that were highly creative and through their creativity nurtured the capacity for rapid growth.

Such companies depended on the personal cash flows of their founders and initial investors for start-up and early growth capital and on the ability of those investors to receive the rewards when the risks they took worked out.  Growth was a matter of motivation as well as ability.  For an economy to grow, the supply-siders said, people had to have incentives to work, save and invest — incentives that markets naturally generated and that high marginal tax rates took away.  Despite folklore to the contrary, the Reagan years saw tax increases as well as tax cuts, but in keeping with supply-side thinking, Reagan consistently lowered marginal personal tax rates and, with one or two lapses, tax rates on investment – and with brilliant effect.  The long cycle of economic growth that continues to this day can be dated to the phasing in of the 1981 tax cuts.

But surely no economic thinker had a greater influence on Reagan than the man he referred to as “my friend, Milton Friedman.”  Friedman’s monumental A Monetary History of the United States (written with Anna Schwartz) had established the role of money supply above all other factors in sparking or cooling inflation.  For that achievement, Friedman had won the Nobel Prize in economics.  But other works such as Capitalism and Freedom had made a cogent, even definitive case for turning away from socialism toward markets, including in fields, such as education, that had been assumed to be natural functions of government.  Friedman taught that freedom of choice produced a vastly more prosperous and better-served society than government fiat.  Socialism, he showed, produced stagnation and decay.  Capitalism produced broadly shared prosperity and opportunity.

So molded both by personal experience and by extensive reading and discussion with major economic thinkers of the day, Reagan entered the presidency with a clearer sense of his economic course than any president in U.S. history and a firmer will to carry his vision through.

What About The Deficit?

In the nearly two decades since Reagan left office, the president’s critics have built their case against him around the large budget deficits the government ran during his term.  The deficits negate all his other economic achievements, they’ve charged.  Reliance on markets didn’t produce the Reagan expansion.  Stupendous government borrowing did, so they say.

A lot has been at stake in this debate.  Virtually all of these critics have had an ideological commitment to high taxes and extensive government spending as vehicles for — in New Deal fashion — redistributing incomes.  They have rejected economic growth as capable of being properly shared or even possible at all without strict government intervention and direction.  So they have rejected as impossible that the Reagan tax cuts sparked the recovery and expansion of his term. This dismissal has allowed them to deny that the vast increases in tax collections during the 1980s had anything to do with Reagan’s tax policies.  Meanwhile, they have rarely had anything to say about cutting government spending, which in general they have opposed, except for spending on national defense.  Debate over the Reagan deficits, then, has been a surrogate for a larger debate on the ends and role of government.

Yet for those who aren’t so ideologically driven, from a quarter century’s perspective, Reagan’s deficits look less like a failure to balance the budget and more like a delayed success.  How so?

Start with a few words about context.  Concern about national deficits is another way of expressing concern about national debt.  As a proportion of gross domestic product (GDP), the all-time peak of U.S. government debt was recorded at the end of the Second World War, a cataclysm that consumed by many times a higher proportion of America’s wealth than any other foreign war.  Only a mortal threat such as that posed by Nazism and fascism could have justified such an economic exertion.

From the end of the war to the mid 1970s, federal government debt as a percentage of GDP declined.  The U.S. ran budget deficits in that period, but did not expand the national debt as quickly as growth expanded the national economy.  The time of declining ratios of indebtedness to GDP ended with the Watergate scandals.

Watergate, of course, had nothing to do with economics or government finances, but it had a profound impact on both.  As much as it was a petty scandal involving errant aides in which an injudicious chief executive allowed his presidency to become entangled and destroyed, Watergate also represented a struggle over legislative versus presidential power and, through that struggle, over the expansiveness of federal government spending.

Even as he was fighting the Watergate investigation, Richard Nixon was attempting to expand the presidency’s ability to restrain Congressional spending. He had asserted, more sweepingly than any president before him, the prerogative not to spend Congressionally appropriated funds.  In response, a Congress then lopsidedly in the hands of the opposition party had enacted a mandate that all appropriated funds be spent.  At the same time, it had established a Congressional budget process that was designed to favor expansive spending over restraint.

These reforms worked just as intended. Once the presidency’s role in the budget process had been constricted, federal debt as a proportion of GDP began to grow.  Presidents of both parties had put a brake on the natural impulse of members of Congress to deliver government largess to every constituency that might conceivably influence their reelections.  With the brief exception of the period of runaway inflation in the late 1970s (when much nominal growth in GDP was the illusory product of inflation), the growth of federal debt as a proportion of the economy continued unabated for nearly two decades.  It was not until 1998, following the Republican take-over of Congress three years earlier, that budget surpluses materialized and debt to GDP went into a sudden nosedive — a decline that continued through 2001.  After 2001, large budget deficits returned as the need for heightened military spending in the wake of the September 11th attacks combined with a decline in the commitment of the aging GOP House and Senate majorities to domestic spending restraint.

Viewed in this way, the deficits and the federal debt they produced were the products of institutional changes that altered the balance of strength between the president and Congress and between the American political parties in Congress.  These factors came together before Reagan entered the White House, endured untouched for nearly a decade following his presidency and were only temporarily reversed when passing ideological solidarity swept away careerist impulses immediately after the Republicans captured both houses of Congress for the first time in four decades in 1994.

But the deficits were also a product of specific policies of taxing and spending.  It is worth a moment to look closely at how Reagan’s tax policies actually affected the deficit.

Personal and corporate income taxes generate the bulk of the U.S. government’s revenues. When the U.S. economy turns down and incomes decline, so do federal receipts. This happened in 1981.  The price of the restrictive monetary policies that ended the runaway inflation of the 1970s was a recession that began in mid-1981 and continued, according to the National Bureau of Economic Research, until late-1982, when the tax cuts were sufficiently phased in to take effect.

More than any other action, the phasing in of the 1981 investment-encouraging tax cuts sparked the recovery, a recovery in which investment played a larger role than it had in any recovery in decades. Once underway, the upturn was rapid and robust. Real growth of GDP was 3.6 percent in 1983 and 6.8 percent – a peacetime record for modern history – in 1984. With that renewed growth, federal collections recovered and continued to rise strongly though the rest of Reagan’s term. By 1988, the last full year of his presidency, they were approaching twice what they had been in 1980, the last full year of his predecessor’s presidency.

Spending, however, climbed faster. Looking at the government’s books, it is hard to escape the conclusion that failure to exert sufficient restraint over spending rather than insufficient revenue was the reason for the large deficits. Why was spending not better controlled?

The U.S. government does not have one budget so much as three: 1. Social Security, Medicare and other pension and health plans; 2. domestic so-called discretionary spending, the size of which, unlike entitlements, Congress votes on each year; and 3. defense spending, also determined by annual Congressional appropriations.

Social Security and Medicare have their own revenue systems. As noted, after bipartisan reforms of Reagan’s first term, they ran surpluses and were not contributors to the fiscal shortfalls. Defense and domestic discretionary spending are funded through income and other general taxes.

Reagan focused on controlling domestic discretionary spending.  By historical standards, he succeeded.  He halted growth in this category of spending, the only president in modern times to do so.  He did it despite facing a Congress that always had at least one house in control of the opposition party and the weakened position of the presidency in the budget process.  This success was a tribute to his formidable command of the informal powers of the presidency and his skills as a negotiator.

At the same time, he increased spending on national defense.  It is now widely understood by all but his most extreme critics that he was using the build-up of the U.S. defense establishment as a chess piece in his ultimately successful strategy to bankrupt and bring down the Soviet Union.  This spending – like the World War II spending of four decades before – was the price of confronting and disposing of a mortal threat to the U.S. and, indeed, civilization.

And it was the collapse of the Soviet Union that opened the way for the surpluses of the 1990s.  Those surpluses were the products of two factors, both originating in the Reagan years.  With the expansion that Reagan’s 1981 tax cuts ignited and that stable prices, reduced regulation and freer trade kept going, U.S. government revenues continued to grow.  Cuts to the capital gains tax rate enacted in the mid-1990s gave the economy and revenue growth an additional boost.  Meanwhile, with the Cold War over, the Clinton Administration sharply lowered national security expenditures, reductions that would have been impossible had the Soviet Union still existed.  So in the second half of the 1990s, lower defense spending combined with rising revenues to produce a string of surpluses.  Between the impact of economic growth and the retirement of bonds, during the last years of the 20th century publicly held U.S. government debt fell to the lowest level as a proportion of GDP since the Reagan military build up.

In other words, the surpluses of the Clinton years represented the last installment of the Reagan program and were the delayed product of Ronald Reagan’s policies.  It is easy to imagine them materializing had someone other than Bill Clinton been president in that time.  It is impossible to imagine them materializing had Ronald Reagan not been president the decade before.

The New Nation

In the 1980s, it became the fashion among American academics to predict the long-term decline of American power.  Among the reasons commonly given was that the nation’s global security commitments were too much for any economy to sustain. This intellectual fad’s demise can be dated to the moment that one of its principal proponents, Yale historian and strategist Paul Kennedy, noticed in the mid-90s that the U.S. economy had been growing faster than its defense spending.  The economic growth that Ronald Reagan started had created something unique in history – a country that saw its international commitments increasing even as the relative cost of those commitments declined.

But it created much more than that.  The 1980s saw the start-up and growth of a number of new companies and industries, particularly in high technology and the medical sciences.  The tools produced by high technology had, in turn, transformed almost every sector of the economy.  For example, steel mills that once employed thousands could be operated by a handful of men equipped with the right computers and software.  Even as manufacturing output expanded, manufacturing employment stagnated, a repeat of the nation’s experience during the productivity revolution in agriculture of the century between 1850 and 1950.  Meanwhile, the new technology opened the way for creation of a new knowledge-based economy.  From computer programming to product design to on-line journalism, this new, technology-driven economy created vast numbers of new jobs, often in new occupational categories.

The result was a profound transformation. Consider that in 1979, General Motors was, as it had been for decades, the largest industrial company in the world.  By 1989 a company that produced only software code – Microsoft – was on its way to overtaking GM as a global economic force.

Or consider that in 1976 there were no high technology start-ups in the United States, not one – and not surprising, considering that venture capital investments had shrunk to only $10 million in 1975.  By the end of Reagan’s second term, venture capital was running at $4 billion annually.

The single critical fact of this transformation was not that companies and industries declined.  Given changes in the global economy, certain fadings were all but unavoidable.  The critical and surprising fact was that so many new firms rose and that, despite the downsizing in the old sectors of the economy, the nation saw from 1983 to the end of Reagan’s term and to a lesser extent in the years following, some of the highest annual job growth numbers on record.


Nevertheless, many still dismiss Reagan’s policies as misguided, if only because, they say, his policies favored elites, in particular the wealthy.  Reagan’s defenders counter that Reagan was a populist, finding his support in non-elites.  The truth is that Reagan was neither elitist nor populist.

Reagan saw the United States and its economy and society not as a geological formation, with some people always in the top layers and others always in the bottom.  Instead, in his view, it was constantly churning, with virtually everyone rising and falling at some time, but, if the people had sufficient freedom, more rising as years went on.   In this, he was right.

An ongoing University of Michigan study has followed family income histories for the last several decades.  It found that that in the United States persistent status in the top or bottom income strata is extremely rare.  Consistent placement in the bottom fifth of incomes is confined to less than two percent of the population.   Instead, those in that category in one year are almost certain to have moved up to the middle fifth within a decade.  A large proportion will move into the top 20 percent.

Once asked if he favored the rich, Reagan replied that he favored the opportunity for everyone to become rich.  He saw his policies as helping all to move up.  In this, too, he was also right.

As that Census Bureau study cited earlier found, during the Reagan years and after, the proportion of Americans with higher real incomes grew.  The proportion with lower real incomes fell.

And so Reagan stood not for one group or another but for the nation as a whole and, beyond the nation, for the dignity of all humanity.  America was strongest and happiest, he believed, when its people were freest.  It was in economic and political freedom that men and women made their mark, found outlets for their creative vision and energy and, in pursuing their ambitions and building a better future for themselves and their families, made the nation stronger and freedom throughout the world more secure.

Reagan transcended the myopia of those who saw only rich and poor and winners and losers.  He once remarked that he found it strange to refer to free people as the “masses.” Free people weren’t an undifferentiated whole but many separate individuals, each with special dreams, abilities and worth.

All economic policies of all governments carry within them a vision of humanity.  Reagan’s vision was as broad and deep as the country itself.  It embraced the aspirations of all the American people, seeing in freedom hope and opportunity for all.   In freedom, he believed, all were winners – both economically and spiritually.

After a quarter century it is clear that here, too, he was right.

This entry was posted in Economic Policy: General, Ronald Reagan and the Reagan Administration and tagged . Bookmark the permalink. Both comments and trackbacks are currently closed.