{"id":140,"date":"2006-11-01T16:07:34","date_gmt":"2006-11-01T23:07:34","guid":{"rendered":"http:\/\/www.clarkjudge.org\/?p=140"},"modified":"2014-07-28T09:24:15","modified_gmt":"2014-07-28T16:24:15","slug":"reaganomics-and-the-american-renaissance-book-chapter-el-impacto-reagan","status":"publish","type":"post","link":"https:\/\/www.clarkjudge.org\/wordpress\/2006\/11\/01\/reaganomics-and-the-american-renaissance-book-chapter-el-impacto-reagan\/","title":{"rendered":"Reaganomics and the American Renaissance | El Impacto Reagan | La Fundacion Centro de Estudios Americanos | Buenos Aires, Argentina | 11.01.06"},"content":{"rendered":"

This essay was written at the request of La Fundacion Centro de Estudios Americanos in Buenos Aires. \u00a0In translation it was published in November 2006 as a chapter in the Center\u2019s El Impacto Reagan<\/span>, the first originally Spanish-language book to examine Reagan Administration policies. \u00a0The Center asked that it open with a personal recollection of Mr. Reagan.<\/em><\/p>\n

I first saw Ronald Reagan face to face at a Republican Governors Conference meeting in spring 1971.\u00a0 The meeting was held in Williamsburg, Virginia, in a conference center near the colonial restoration.\u00a0 New York Governor Nelson Rockefeller chaired the sessions.\u00a0 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.\u00a0 Reagan was in his second term as governor of California and had already made one, in retrospect tentative, run for the presidency.\u00a0 That was in 1968, when Richard Nixon beat him for the party\u2019s nomination and ultimately won the job.<\/p>\n

Rockefeller and Reagan were the rock stars of the GOP governors.\u00a0 Each was the leader of his wing of the party — Rockefeller of the big-government liberals, Reagan of the free-market conservatives.\u00a0 Each was governor of one of the two largest states.\u00a0 There was even talk of uniting them after the Nixon presidency on a dream team ticket that some thought would be unbeatable.\u00a0 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.<\/p>\n

It came through a pair of small incidents, both entirely unnoticed except by me.\u00a0 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.\u00a0 It was a kind of internship, except that I was the sole official representative of the state government in the nation\u2019s capital.\u00a0 The next youngest person in such a job was more than a decade older than I and considerably more experienced.\u00a0 My family\u2019s interest in politics and government went no further than dinner table conversation, but I had impressed a professor at my school.\u00a0 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.<\/p>\n

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 \u2013 as, for example, during a break at the conference.\u00a0 My governor and Reagan were talking in the hall.\u00a0 I was standing behind them.\u00a0 A photographer was on the other side, snapping pictures.\u00a0 He was moving back and forth, trying to get a shot that included the two governors but not me.\u00a0 I in turn was rocking back and forth, trying to stay between them in every frame.\u00a0 Reagan surely knew what I was up to.\u00a0 The Hollywood actor in him always had an eye for cameras and settings.\u00a0 But he let me play my game \u2013 a tiny act of generosity that I later learned was entirely characteristic of him.\u00a0 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 \u2013 my governor, Reagan and me.<\/p>\n

The day after that picture was taken, I was sitting in the staff seats behind the principals\u2019 table during a conference session.\u00a0 Nelson Rockefeller sat immediately in front of me, to my left, and a photographer was crouched just beyond him, again snapping shots.\u00a0 Great, I thought, let\u2019s try to get photographed with the party\u2019s other leader in waiting.\u00a0 Again I rocked back and forth to stay framed.\u00a0 But this time the leader in question didn\u2019t play along.\u00a0 Rockefeller started moving back and forth himself, remaining entirely between me and the camera, making sure he didn\u2019t share the picture with anyone, particularly the boyish aide of a Midwestern colleague \u2013 a tiny act of pettiness as revealing as Reagan\u2019s generous one.<\/p>\n

One other item from that conference:\u00a0 Rockefeller and Reagan dominated it, but in very different ways.\u00a0 In each session, Reagan spoke of the programs and broad objectives of his administration.\u00a0 Years later Alistair Cooke, the long-time BBC correspondent in America, wrote of Reagan that he had great clarity about financial matters.\u00a0 That clarity was on full display at the conference as he expounded on a wide range of policy challenges and California\u2019s approach to them under his leadership.\u00a0 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.<\/p>\n

Maybe I\u2019m 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.\u00a0 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.<\/p>\n

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<\/sup> and early 20th<\/sup> centuries. He left office with the United States well into the longest peacetime expansion on record \u2013 an expansion that, with only two mild and brief interruptions, continues to this day.\u00a0 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.\u00a0 As much as his security policies, Reagan\u2019s economic policies made the United States what it is today: the world\u2019s sole superpower.<\/p>\n

The Policies<\/span><\/strong><\/p>\n

Under Reagan\u2019s 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\u2019s investment in assets and growth.<\/p>\n

Despite declarations after Reagan\u2019s first two years from members of the Congressional opposition that each budget Reagan submitted was \u201cdead on arrival\u201d, 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.<\/p>\n

The prior administration had overseen deregulation of two industries \u2013 airlines and trucking \u2013 but increased other regulations. The Reagan Administration reduced regulation broadly, across the economy.<\/p>\n

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.<\/p>\n

A decade and a half of inflationary monetary policy decisively ended.\u00a0 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\u2019s own appointee as chairman, Alan Greenspan, as they worked to flush inflation from the US economy.<\/p>\n

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

Put simply, Reagan reversed a nearly half century of rising government intervention in and control of the U.S. economy.\u00a0 In every area of activity, the role of government was reduced, the role of markets increased.<\/p>\n

The Results<\/span><\/strong><\/p>\n

During the decade and a half before Reagan took office, the American stock market had, in constant dollar (inflation adjusted) terms, declined.\u00a0 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.<\/p>\n

After a period of instability in the \u201870s the real incomes of Americans turned upward.\u00a0 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.<\/p>\n

A new age of entrepreneurship came into flower.\u00a0 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.\u00a0 Capital became vastly easier to access, both by small, start-up businesses in innovative fields and by challengers to the old, established giants.\u00a0 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.<\/p>\n

The long, destructive inflation ended.\u00a0 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.\u00a0 The gain was not temporary.\u00a0 U.S. price stability continues to this day.<\/p>\n

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<\/sup> Century.<\/p>\n

The Times<\/span><\/strong><\/p>\n

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 \u2013 numbers the country had not seen since its Civil War of more than a century earlier.\u00a0 In the 1960s and 70s it had become an article of faith among most economists that unemployment and inflation see-sawed against each other.\u00a0 If inflation went up, the thinking went, unemployment would go down, and visa versa.\u00a0 But by 1981, both unemployment and inflation were high, a phenomenon dubbed \u201cstagflation\u201d, that is, stagnation combined with inflation.<\/p>\n

A mood of desperation had spread through the once smug community of U.S. economists.\u00a0 From confident predictions of a few years earlier that modern theory had conquered the business cycle, a near panic had set in.\u00a0 A prominent policy journal \u2013 The Public Interest<\/span> \u2013 even devoted an entire issue to what it called \u201cThe Crisis of Economic Theory.\u201d\u00a0 This neo-conservative flagship invited scholars ranging from monetarists to Marxists to contribute explanations of the predicament and prescriptions for escaping it.\u00a0 Reading the submissions it became evident, the neo-Keynesian consensus of the prior decade had vanished.\u00a0 No one knew what to do.<\/p>\n

Looking back, it seems clear now that the source of America\u2019s late 70s economic malaise was simple: the post-World War II period was over.\u00a0 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 \u2013 policies that had emerged as Franklin Roosevelt\u2019s 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.<\/p>\n

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 \u2013 capital and markets that only a vibrant U.S. could provide.\u00a0 Taken together, U.S. post World War II policies sharply favored consumption over investment.\u00a0 They combined to absorb global goods while pushing out capital, restoring global and, in particular, European and Japanese liquidity.\u00a0 And for that reason, a reason largely unappreciated among policy makers, by and large, they worked for the U.S. economy, too.\u00a0 Real incomes rose; real personal wealth, broadly shared, increased.<\/p>\n

But by the early 60s, Europe and Japan had recovered.\u00a0 Other regions had not yet adopted the policies that would have allowed them to ingest and digest excess American liquidity \u2013 policies such as secure, easily established and readily transferable rights of property, impartial rule of law, deference to free markets.\u00a0 So within the U.S. the expansive monetary policy, made disastrously more expansive during the Vietnam War, turned corrosively inflationary.\u00a0 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.\u00a0 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.<\/p>\n

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\u2019s 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 \u2013 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.\u00a0 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<\/sup> and early 20th<\/sup> century techniques and processes that favored large units.<\/p>\n

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.\u00a0 By and large, big companies have much lower capital costs and much greater access to capital than smaller ones.\u00a0 Personal and corporate income taxes drive up the cash flows needed to produce acceptable levels of return.\u00a0 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.\u00a0 Following the oil shocks of the early 70s, the reliance on established enterprises was no longer sufficient.\u00a0 Entrepreneurship became an increasingly critical driver of national economic growth and high taxes became an increasing burden on the economy.<\/p>\n

In this respect, heavy economic regulations worked the same way as heavy taxes.\u00a0 Often, big companies could afford to carry them.\u00a0 Smaller companies could not or could not as easily.\u00a0 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.\u00a0 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.<\/p>\n

Origins: Reagan\u2019s Conversion<\/span><\/strong><\/p>\n

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\u2019s 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\u2019s time had passed.<\/p>\n

By the end of the Truman years, Reagan was becoming disillusioned with the Democratic Party and the activist government it espoused.\u00a0 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?\u00a0 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.<\/p>\n

Reagan\u2019s disillusionment with over-reaching government grew out of other experiences, too.\u00a0 During the Second World War, Reagan\u2019s 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.\u00a0 In those years, the government effectively assumed control of the movie industry, and Reagan saw first hand what its management produced.\u00a0 Years later he wrote of the decline in production quality that came once the studios were no longer privately run.\u00a0 He said it took years following the war for the industry to recover from the slippage of standards that government direction had brought about.\u00a0 He had no time after that for those who advocated government ownership and control of the means of production.\u00a0 Government control of production meant, he saw, that less was produced and what was produced was not as good.\u00a0 As president, he summed up these conclusions with a joke.\u00a0 What would happen, he asked, if the government took over the Sahara?\u00a0 His answer: Soon sand would be in short supply.<\/p>\n

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.\u00a0 The industry went through years of downsizing and restructuring before it adjusted to the new world.\u00a0 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.<\/p>\n

Meanwhile, Reagan had himself made the jump from movies to television, becoming one of the top television actors and program hosts of the day.\u00a0 This career move led to a larger relationship with the sponsor of his show, General Electric (GE).\u00a0 Reagan was already emerging as a popular speaker on the after-dinner circuit.\u00a0 For GE, he agreed to speak at the company\u2019s factories and facilities, a job that would take him to hundreds of plants and communities around the United States.\u00a0 His theme was American liberty and how to preserve it.\u00a0 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.<\/p>\n

In 1960, Reagan headed Democrats for Nixon.\u00a0 In 1964, by then a Republican, he delivered a nationally televised speech in support of Barry Goldwater, that year\u2019s Republican presidential candidate.\u00a0 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.\u00a0\u00a0 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.<\/p>\n

Origins: Intellectual Influences<\/span><\/strong><\/p>\n

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\u2019s seminal, The Constitution of Liberty<\/span>.\u00a0 But, Hayek noted, Reagan\u2019s action and policies were those of one who had read all of that work closely and absorbed it completely.<\/p>\n

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.\u00a0 The reason, he argued, was information.\u00a0Economies 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.\u00a0 So a government of overpowering size and scope would inevitably make a society less wealthy and more impoverished.\u00a0 By default, it would serve itself, not the people.\u00a0 As Hayek noted, Reagan made this thinking part of his political argument and his governing code, communicating Hayek\u2019s complex concepts through rhetorical shorthand and folksy stories.<\/p>\n

Reagan read George Gilder\u2019s path breaking supply-side treatise Wealth and Poverty<\/span> before it became widely circulated.\u00a0 It was, actually, Reagan\u2019s promotion of it that vaulted the book onto the bestseller lists.\u00a0 Together with economists Arthur Laffer and later Nobel laureate Robert Mundell and former Wall Street Journal<\/span> editorial writer and author of the path breaking The Way the World Works<\/span> Jude Wanniski, Gilder was an early proponent of lowering marginal tax rates and supply-side economics.<\/p>\n

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.\u00a0 Kennedy\u2019s economic advisors were Keynesians and argued, in retrospect incorrectly, that their rate cuts had compensated for a consumption deficit in the U.S. economy.\u00a0 That was why, they said, the economy had grown so smartly after the Kennedy cuts\u2019 enactment.<\/p>\n

Supply-siders like Laffer, Mundell, Wanniski and Gilder emphasized, not consumption, but investment and production as key economic drivers.\u00a0 High marginal rates discouraged both, they argued.\u00a0 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\u2019s 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.<\/p>\n

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.\u00a0 When the supply-siders surveyed the same scene, they noted the then recent research by the Massachusetts Institute of Technology\u2019s 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.<\/p>\n

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.\u00a0 Growth was a matter of motivation as well as ability.\u00a0 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.\u00a0 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 \u2013 and with brilliant effect.\u00a0 The long cycle of economic growth that continues to this day can be dated to the phasing in of the 1981 tax cuts.<\/p>\n

But surely no economic thinker had a greater influence on Reagan than the man he referred to as \u201cmy friend, Milton Friedman.\u201d\u00a0 Friedman\u2019s monumental A Monetary History of the United States<\/span> (written with Anna Schwartz) had established the role of money supply above all other factors in sparking or cooling inflation.\u00a0 For that achievement, Friedman had won the Nobel Prize in economics.\u00a0 But other works such as Capitalism and Freedom<\/span> 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.\u00a0 Friedman taught that freedom of choice produced a vastly more prosperous and better-served society than government fiat.\u00a0 Socialism, he showed, produced stagnation and decay.\u00a0 Capitalism produced broadly shared prosperity and opportunity.<\/p>\n

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.<\/p>\n

What About The Deficit?<\/span><\/strong><\/p>\n

In the nearly two decades since Reagan left office, the president\u2019s critics have built their case against him around the large budget deficits the government ran during his term.\u00a0 The deficits negate all his other economic achievements, they\u2019ve charged.\u00a0 Reliance on markets didn\u2019t produce the Reagan expansion.\u00a0 Stupendous government borrowing did, so they say.<\/p>\n

A lot has been at stake in this debate.\u00a0 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.\u00a0 They have rejected economic growth as capable of being properly shared or even possible at all without strict government intervention and direction.\u00a0 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\u2019s tax policies.\u00a0 Meanwhile, they have rarely had anything to say about cutting government spending, which in general they have opposed, except for spending on national defense.\u00a0 Debate over the Reagan deficits, then, has been a surrogate for a larger debate on the ends and role of government.<\/p>\n

Yet for those who aren\u2019t so ideologically driven, from a quarter century\u2019s perspective, Reagan\u2019s deficits look less like a failure to balance the budget and more like a delayed success.\u00a0 How so?<\/p>\n

Start with a few words about context.\u00a0 Concern about national deficits is another way of expressing concern about national debt.\u00a0 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\u2019s wealth than any other foreign war.\u00a0 Only a mortal threat such as that posed by Nazism and fascism could have justified such an economic exertion.<\/p>\n

From the end of the war to the mid 1970s, federal government debt as a percentage of GDP declined.\u00a0 The U.S. ran budget deficits in that period, but did not expand the national debt as quickly as growth expanded the national economy.\u00a0 The time of declining ratios of indebtedness to GDP ended with the Watergate scandals.<\/p>\n

Watergate, of course, had nothing to do with economics or government finances, but it had a profound impact on both.\u00a0 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.<\/p>\n

Even as he was fighting the Watergate investigation, Richard Nixon was attempting to expand the presidency\u2019s ability to restrain Congressional spending. He had asserted, more sweepingly than any president before him, the prerogative not to spend Congressionally appropriated funds.\u00a0 In response, a Congress then lopsidedly in the hands of the opposition party had enacted a mandate that all appropriated funds be spent.\u00a0 At the same time, it had established a Congressional budget process that was designed to favor expansive spending over restraint.<\/p>\n

These reforms worked just as intended. Once the presidency\u2019s role in the budget process had been constricted, federal debt as a proportion of GDP began to grow.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 After 2001, large budget deficits returned as the need for heightened military spending in the wake of the September 11th<\/sup> attacks combined with a decline in the commitment of the aging GOP House and Senate majorities to domestic spending restraint.<\/p>\n

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.\u00a0 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.<\/p>\n

But the deficits were also a product of specific policies of taxing and spending.\u00a0 It is worth a moment to look closely at how Reagan\u2019s tax policies actually affected the deficit.<\/p>\n

Personal and corporate income taxes generate the bulk of the U.S. government\u2019s revenues. When the U.S. economy turns down and incomes decline, so do federal receipts. This happened in 1981.\u00a0 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.<\/p>\n

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 \u2013 a peacetime record for modern history \u2013 in 1984. With that renewed growth, federal collections recovered and continued to rise strongly though the rest of Reagan\u2019s 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\u2019s presidency.<\/p>\n

Spending, however, climbed faster. Looking at the government\u2019s 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?<\/p>\n

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.<\/p>\n

Social Security and Medicare have their own revenue systems. As noted, after bipartisan reforms of Reagan\u2019s 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.<\/p>\n

Reagan focused on controlling domestic discretionary spending.\u00a0 By historical standards, he succeeded.\u00a0 He halted growth in this category of spending, the only president in modern times to do so. \u00a0He 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.\u00a0 This success was a tribute to his formidable command of the informal powers of the presidency and his skills as a negotiator.<\/p>\n

At the same time, he increased spending on national defense.\u00a0 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.\u00a0 This spending \u2013 like the World War II spending of four decades before \u2013 was the price of confronting and disposing of a mortal threat to the U.S. and, indeed, civilization.<\/p>\n

And it was the collapse of the Soviet Union that opened the way for the surpluses of the 1990s.\u00a0 Those surpluses were the products of two factors, both originating in the Reagan years.\u00a0 With the expansion that Reagan\u2019s 1981 tax cuts ignited and that stable prices, reduced regulation and freer trade kept going, U.S. government revenues continued to grow.\u00a0 Cuts to the capital gains tax rate enacted in the mid-1990s gave the economy and revenue growth an additional boost.\u00a0 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.\u00a0 So in the second half of the 1990s, lower defense spending combined with rising revenues to produce a string of surpluses.\u00a0 Between the impact of economic growth and the retirement of bonds, during the last years of the 20th<\/sup> century publicly held U.S. government debt fell to the lowest level as a proportion of GDP since the Reagan military build up.<\/p>\n

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\u2019s policies.\u00a0 It is easy to imagine them materializing had someone other than Bill Clinton been president in that time.\u00a0 It is impossible to imagine them materializing had Ronald Reagan not been president the decade before.<\/p>\n

The New Nation<\/span><\/strong><\/p>\n

In the 1980s, it became the fashion among American academics to predict the long-term decline of American power.\u00a0 Among the reasons commonly given was that the nation\u2019s global security commitments were too much for any economy to sustain. This intellectual fad\u2019s 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.\u00a0 The economic growth that Ronald Reagan started had created something unique in history \u2013 a country that saw its international commitments increasing even as the relative cost of those commitments declined.<\/p>\n

But it created much more than that.\u00a0 The 1980s saw the start-up and growth of a number of new companies and industries, particularly in high technology and the medical sciences.\u00a0 The tools produced by high technology had, in turn, transformed almost every sector of the economy.\u00a0 For example, steel mills that once employed thousands could be operated by a handful of men equipped with the right computers and software.\u00a0 Even as manufacturing output expanded, manufacturing employment stagnated, a repeat of the nation\u2019s experience during the productivity revolution in agriculture of the century between 1850 and 1950.\u00a0 Meanwhile, the new technology opened the way for creation of a new knowledge-based economy.\u00a0 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.<\/p>\n

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.\u00a0 By 1989 a company that produced only software code \u2013 Microsoft \u2013 was on its way to overtaking GM as a global economic force.<\/p>\n

Or consider that in 1976 there were no high technology start-ups in the United States, not one \u2013 and not surprising, considering that venture capital investments had shrunk to only $10 million in 1975.\u00a0 By the end of Reagan\u2019s second term, venture capital was running at $4 billion annually.<\/p>\n

The single critical fact of this transformation was not that companies and industries declined.\u00a0 Given changes in the global economy, certain fadings were all but unavoidable.\u00a0 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\u2019s term and to a lesser extent in the years following, some of the highest annual job growth numbers on record.<\/p>\n

Perspective<\/span><\/strong><\/p>\n

Nevertheless, many still dismiss Reagan\u2019s policies as misguided, if only because, they say, his policies favored elites, in particular the wealthy.\u00a0 Reagan\u2019s defenders counter that Reagan was a populist, finding his support in non-elites.\u00a0 The truth is that Reagan was neither elitist nor populist.<\/p>\n

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.\u00a0 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.\u00a0\u00a0 In this, he was right.<\/p>\n

An ongoing University of Michigan study has followed family income histories for the last several decades.\u00a0 It found that that in the United States persistent status in the top or bottom income strata is extremely rare.\u00a0 Consistent placement in the bottom fifth of incomes is confined to less than two percent of the population.\u00a0\u00a0 Instead, those in that category in one year are almost certain to have moved up to the middle fifth within a decade.\u00a0 A large proportion will move into the top 20 percent.<\/p>\n

Once asked if he favored the rich, Reagan replied that he favored the opportunity for everyone to become rich.\u00a0 He saw his policies as helping all to move up.\u00a0 In this, too, he was also right.<\/p>\n

As that Census Bureau study cited earlier found, during the Reagan years and after, the proportion of Americans with higher real incomes grew.\u00a0 The proportion with lower real incomes fell.<\/p>\n

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.\u00a0 America was strongest and happiest, he believed, when its people were freest.\u00a0 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.<\/p>\n

Reagan transcended the myopia of those who saw only rich and poor and winners and losers.\u00a0 He once remarked that he found it strange to refer to free people as the \u201cmasses.\u201d Free people weren\u2019t an undifferentiated whole but many separate individuals, each with special dreams, abilities and worth.<\/p>\n

All economic policies of all governments carry within them a vision of humanity.\u00a0 Reagan\u2019s vision was as broad and deep as the country itself.\u00a0 It embraced the aspirations of all the American people, seeing in freedom hope and opportunity for all.\u00a0\u00a0 In freedom, he believed, all were winners \u2013 both economically and spiritually.<\/p>\n

After a quarter century it is clear that here, too, he was right.<\/p>\n","protected":false},"excerpt":{"rendered":"

This essay was written at the request of La Fundacion Centro de Estudios Americanos in Buenos Aires. \u00a0In translation it was published in November 2006 as a chapter in the Center\u2019s El Impacto Reagan, the first originally Spanish-language book to examine Reagan Administration policies. \u00a0The Center asked that it open with a personal recollection of […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[5,181],"tags":[32],"class_list":["post-140","post","type-post","status-publish","format-standard","hentry","category-economic-policy-general","category-ronald-reagan-and-administration","tag-el-impacto-reagan"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/posts\/140","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/comments?post=140"}],"version-history":[{"count":8,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/posts\/140\/revisions"}],"predecessor-version":[{"id":825,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/posts\/140\/revisions\/825"}],"wp:attachment":[{"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/media?parent=140"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/categories?post=140"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.clarkjudge.org\/wordpress\/wp-json\/wp\/v2\/tags?post=140"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}