Americans are enjoying an era of peace and prosperity not seen since the 1950s. Perhaps this golden age will prove to be short-lived, but while it lasts, we would do well to ask: How did it come about?
President Clinton and the Republican Congress are both trying to take credit for the robust health of the economy. But, E.J., you have to admit that these guys are just surfing a wave that none of them created.
Today's politicians tout the historic significance of the recent budget deal. They tell us it will balance the budget for the first time in decades. Ironically, without the budget compromise, the budget would balance itself even faster.
When we consider the ingredients of the current boom--the taming of inflation, the revival of economic growth, the restructuring of the economy, the reduction of the deficit, the opening up of world markets, the peaceful climate generated by the end of the Cold War--we see that in virtually every case, the turning point came in the 1980s.
Yes, it's true. Ronald Reagan is the man most responsible for America's economic restoration. Few are willing to credit his achievement because most people--and especially intellectuals--accept the facile stereotype of Reagan as an intellectual lightweight who napped on the job and was too detached from the daily operations of government to have a lasting impact.
Like most stereotypes, this one contains an element of truth. But it misses the broader point, which is that Reagan made the critical choices that led to America's victory in the Cold War and the restoration of the economy after a long period of stagflation and indefinable malaise.
Reagan initiated a massive military buildup to counter the Soviet threat, and secured sharp across-the-board tax cuts to stimulate economic growth. (The top tax rate plummeted from 70 percent to 28 percent between 1981 and 1986.) Reagan also supported the restrictive monetary policies of Federal Reserve Chairman Paul Volcker as a necessary strategy to curb the double-digit inflation of the Carter era.
These measures extracted a heavy price. Volcker's tight money policies ended double-digit inflation, the scourge of the 1970s, but at the price of plunging the U.S. economy into a deep recession in 1982. The poverty rate climbed from 12 percent to 15 percent. Unemployment rose from 7 percent to 11 percent. The New York Times dubbed his policies "Reaganomics" and observed that "the stench of failure hangs over Ronald Reagan's White House."
Reagan's critics demanded public-works projects to put Americans back to work. They also called for restrictions on cheap imports to save domestic jobs. Invoking the success of the Japanese, many economists advocated industrial policy-- an elaborate scheme to invest taxpayer money in the "sunrise" industries of the future and to protect jobs in "sunset" industries that were no longer competitive in the world economy.
Reagan refused to support these short-term solutions. He allowed the economy to go through a painful period of downsizing and restructuring. In the depths of the 1982 recession, Reagan urged Americans to "stay the course" in the confidence that things would get better.
Eventually, they did. In 1983, the economy turned around and went into a 15-year boom, interrupted only by the mild Bush recession of 1990-1991. Nearly 20 million new jobs were created between 1983 and 1989, with another 10 million since then. With typical panache, Reagan remarked that "the best sign that our economic program is working is that they don't call it Reaganomics anymore."
Reagan's major failure was his inability to arrest the growth of government spending. This, combined with his tax cuts and defense increases, produced the $1.5-trillion deficit of the 1980s. Reagan's critics warned that he was leading the country on an expensive spending spree that would bankrupt future generations. But the deficits of the Reagan years corresponded almost exactly with the amount invested by the Reagan administration in fighting the Cold War.
America won that war. So if future generations must assume the financial burden of the deficits of the 1980s, they also inherit a world in which the threat of nuclear war is vastly reduced. Moreover, the end of the Cold War has meant the opening up of world markets to American companies, contributing to an unprecedented surge in the Dow Jones average from around 800 in 1982 to around 7,500 today.
Reagan's final vindication has come lately in the disappearance of the deficit as a serious concern. The current deficit is around $20 billion, and economists tell us that the budget will soon balance itself, rendering absurd the predictions of many of Reagan's critics (and his own budget director, David Stockman) of "$200 billion deficits as far as the eye can see."
Two factors are responsible for reducing the deficit. The first is the continued vitality of the Reagan boom--a bonanza for the U.S. Treasury. The second is America's huge defense savings as a consequence of winning the Cold War. In real terms, America today is spending around $100 billion less each year on defense than at the height of the Cold War era. Consequently, even the deficit reductions of the 1990s must be largely credited to Reagan's legacy.
Future generations will remember Reagan as a great president. E.J., I know how hard it is for liberals to admit that Reagan was right, because it means that all this time you guys were sadly wrong. But ideological prejudices aside, isn't it only fair that we, who are benefiting enormously from the Reagan legacy, should do the man the honor of acknowledging his achievement during his lifetime?