Ronald Reagan died on June 5, 2004. He died again tonight — or rather his legacy suffered a fatal blow when Barack Obama won the presidency and historians began to mark the Reagan era as running from 1980 to 2008.
The period will be remembered for two overarching ideas: A triumphal capitalism that featured low taxes, light regulation and limited government; and an emphasis on exporting democracy around the world as a way to generate prosperity and order.
Both ideas are in tatters; the second largely because of blunders in Iraq that wrecked U.S. credibility abroad, and the first because of Washington’s miserable failure, under its small-government ideology, to regulate the banking sector, leading to a worldwide financial panic and the onset of an economic slide that may rival the Great Depression.
President-elect Obama is left with a mess of incalculable size and shape. George W. Bush gets nearly all of the blame, although his policies rode on the back of Reaganism’s lingering influence.
Closest to an apology: Greenspan’s testimony
Apologies for all of this are hard to come by. Alan Greenspan’s tragicomic testimony before Congress on Oct. 23 came the closest so far. The former Reagan adviser and chairman of the Federal Reserve from 1987 to 2006, the man who once could shift hundreds of billions of dollars with a turn of phrase, said he was in a state of “shocked disbelief” that financial institutions had failed to responsibly regulate themselves. Asked if his ideology had driven lax regulation on risky mortgage lending, Greenspan admitted to “a flaw” in his judgment.
Well, yes. The problem wasn’t that Reagan’s economic ideas weren’t innovative or appealing or, in some cases, necessary. They were. The problem was that they were turned into a fundamentalist religion from which there could be no departure. Lower taxes, skimpy regulation and less government interference were the answers to every problem, no matter the situation or changing circumstance.
“Like all transformative movements, the Reagan Revolution lost its way because … it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state,” the political economist Francis Fukuyama wrote in a recent essay for Newsweek. As it turned out, tax cuts weren’t self-financing and financial markets weren’t self-regulating. Indeed, the peril of a deregulated financial sector was multiplied by the global inter-dependencies that came with it.
I’ve been thinking lately about Reagan’s first months as president. I was a young reporter in Washington in those days, assigned to cover Congress. And I was fascinated by Reagan’s talent at selling his new social and economic elixir, and by the eagerness of voters (and their elected officials) to swallow it. In re-reading my yellowing clips from the early 1980s, I was reminded of how unsettled the times were. The social upheavals of the 1960s still hung in the air, as did the tragedies of Vietnam and Watergate. Islamic extremism had just emerged in its modern form. The Cold War was still cold, oil supplies were uncertain, inflation was out of control and interest rates were sky high.
People wanted to believe the voodoo would work
Reagan’s notion that cutting taxes and regulations could so stimulate the economy that the budget would balance itself with enough money left over for lavish military programs, well, it sounded too good to be true. But people wanted to believe that the voodoo would work, wanted to believe they could pay less and get more.
“It’s time to try something different,” Reagan said, and after Congress enacted his tax cuts he declared a “new chapter in the American Revolution.” He sounded like a man “leading a sacred crusade,” I wrote in 1982, adding this quote from the president: “No army on earth can stop an idea whose time has come. … We have only begun to wean ourselves from the long misery of overtaxing, overspending and the great myth that our national nanny always knows best.”
But as Lou Cannon recalled in his political biography, “Reagan” (1982), the economy didn’t initially respond to the new president’s program. The stock market tumbled, a recession set in and the deficit climbed to record heights. Still, Reaganomics endured mainly on the power of belief. Reagan’s idea wasn’t based on “normal arithmetic,” Cannon explained, but on the president’s contagious optimism. Reaganomics was “less a program than a joyous secular theology.”
Indeed, the Reagan-Thatcher theology spread globally to ignite market economies and amazing middle-class growth in China, Russia, India and elsewhere. But it never fully succeeded in the mature U.S. economy. Only under Bill Clinton, the only Democrat to serve in the Reagan era, and only following on a timely tax increase from George H.W. Bush, did the domestic economy thrive, the deficit disappear, and the widening income disparities narrow a bit.
Some were massively enriched; the rest were held back
Overall, the major accomplishment of three decades of Reaganomics was to accumulate massive debt and to further enrich the wealthy and the entrepreneurally talented while holding back everyone else. Reaganomics had no answer to the loss of good jobs to foreign competition and technological change. It trapped the middle class on a treadmill of more work for less reward.
Between 1979 and 2005, the incomes of households in the bottom fifth of the population rose only 6 percent in real terms, while the incomes of those in the middle three-fifths rose by 17 to 21 percent, according to the nonpartisan Congressional Budget Office.
But incomes in the upper fifth soared by 69 percent, and in the top 1 percent by a whopping 176 percent. Indeed, the aggregate share of national after-tax income held by the top 1 percent doubled from 7.5 to 14 percent during the three decades of Reagan’s influence. Not since the 1920s had so much of the nation’s income been held by such a narrow slice of its people. The trickle-down never trickled.
These trends had been apparent for more than a decade, but only recently, in the aftermath of the Wall Street meltdown, did the disparate fruits of Reaganomics begin to trouble the broad electorate. “Suddenly we live in a profoundly different time,” Walter Mondale told me last Friday when we bumped into each other at our neighborhood supermarket.
Mondale, who ran against Reagan in 1984, recalled his failure a quarter-century ago to persuade middle-class voters that the incumbent president was wrong. “They weren’t buying it,” he said.
Shortcomings are clearer than in 1984
But now, finally, the shortcomings are clearer, Mondale said, ticking off five examples: A realization that the market can’t solve every problem; that tax breaks for the rich haven’t trickled down; that government’s effectiveness has been greatly damaged (see Hurricane Katrina); that social fears and religion have been used cynically to divide the American people; and that democracy cannot be exported by force and torture or without the help of allies.
Had Reagan succeeded in shifting Social Security to the private equity markets, as he had hoped to do, the current economic turmoil would have been far greater, Mondale said.
Massive debt is another Reagan legacy. Reagan thought he could cut taxes while greatly expanding military spending. What he didn’t understand was that to avoid debt he’d have to slash middle-class programs like Social Security and Medicare, and those were politically untouchable. “The traditional view was correct,” Fukuyama wrote in his essay. “If you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit.”
Since then, the debt problem has multiplied many times. In the wake of the financial meltdown, the enormous cost of the various bailouts must be added to the cost of Bush’s wars and tax cuts, along with the debt yet owed to solving global warming and keeping Social Security and Medicare afloat as the baby boom retires. Add it all up and, according to Michael Mandelbaum’s new book, “Democracy’s Good Name,” you get a wealth transfer comparable to that of the Bolshevik Revolution — except that this time the transfer is from the poor to the rich, but, more than that, from the future to the present. We’ve taken out a gargantuan loan against our children and grandchildren to keep ourselves going.
As the disciples of Margaret Thatcher and Ronald Reagan moved last month to nationalize banks in Britain and the United States, President Nicolas Sarkozy of France was quick to declare: “Self-regulation is finished, laissez-faire is finished.”
Government as the enemy hasn’t gone away
Perhaps, but that doesn’t mean that Americans have fallen suddenly in love with government. Reagan’s drumbeat of government as the great enemy, government as the great evil, has not gone entirely away. “Her faith in politicians was somewhere close to zero,” George Packer wrote about a working-class white woman in his insightful piece in the Oct. 13 New Yorker.
Packer alleged that neither race nor social issues were the main concern for Obama, but rather a feeling among white working-class voters that Democrats had abandoned them on economic issues. Since Reagan, the populist, low-tax, anti-government rhetoric of conservative candidates appealed more to their world view.
But this time, there was something different in the air. “When will the class war ever drown out the culture war, if not in 2008?” Packer wondered. “The question that Ronald Reagan asked voters to such devastating effect in 1980, when the white working class began turning away from Democrats — ‘Are you better off than you were four years ago?’ — should, in theory, produce an equal and opposite effect this year.”
The answer to the question is collectively obvious: The nation is worse off. Reaganism has run its course. Ours is a country of checks and balances. When one experiment crashes, another takes its place.
Steve Berg covered politics in the Star Tribune Washington Bureau from 1981 to 1994. Later he was national correspondent and an editorial writer for the paper. He writes the Cityscape column for MinnPost.