The rich got richer

The Reagan economy was mediocre, and his economists' ideas were a muddle.

James K. Galbraith
June 8, 2004 9:05PM (UTC)

One cannot begrudge Ronald Reagan's personal admirers their moment of eulogy. And particularly not in view of the man's wise embrace of Mikhail Gorbachev late in his term, his gallant departure into Alzheimer's 10 years ago, and Nancy Reagan's noble advocacy since then of government support for stem-cell research. There were moments beyond politics when those of us who opposed Reagan the most could, and did, tip our hats to him.

But let's talk economics. It is not too early to contradict those who would elevate Reagan above Franklin Roosevelt, John F. Kennedy and Lyndon Johnson, or even Bill Clinton, on this score. Yes, Reagan did change the course of history. But his economic legacy was mainly destructive, and especially so for the world's poor and our own working class.


Among postwar administrations, who had the best record on economic growth? The answer is Kennedy-Johnson (49 percent over eight years), followed by Clinton (34 percent), followed by Reagan (32 percent). Among postwar two-term presidencies, Reagan beats out only Eisenhower (21 percent) and Nixon-Ford (24 percent). Call him the best of the Republicans, if you want.

The unemployment rate stood at 6.6 percent when Kennedy took office and at 3.4 percent when Johnson left it. The average over their eight years was 4.8 percent. When Clinton came in, unemployment was at 7.4 percent; it averaged 5.2 percent during his two terms and fell to 3.9 percent by the end. And for Reagan? Unemployment stood at 7.5 percent at his inauguration, and it averaged that same 7.5 percent during his entire eight years. The jobless rate was 5.4 percent when Reagan left office.

Inflation did come down -- from just over 10 percent in the oil crisis year of 1980 to just over 3 percent in 1983. But at whose expense? Here the correct contrast is with FDR, who controlled inflation while doubling output over four years in World War II. In the process, Roosevelt leveled the pay distribution and created the modern American middle class.


Reagan's disinflation came from unemployment over 10 percent, from his attack on unions, and from high interest rates, which drove up the dollar and cheapened imports. Those measures bankrupted much of the manufacturing belt. They damaged the middle class. And they created a vast trade imbalance and a rising external debt whose consequences haunt us still. Precisely what Roosevelt built, in other words, Reagan did much to destroy.

Mythmaking especially surrounds Reagan's economic ideas, where memory blurs reality into romance. In truth Reagan's economic team was a shotgun marriage between ideologues, monetarists and supply-siders who couldn't stand one another. There was even a good-humored (though conservative) Keynesian mixed in -- Murray Weidenbaum, the first chairman of Reagan's Council of Economic Advisors.

I remember Murray sidling over to me at a meeting of a deplorable group called the Gold Commission -- an official assembly of nut cases, to be blunt about it -- in the Cash Room of Donald Regan's Treasury Department, on the day in 1982 when the CEA's first "Economic Report of the President" for Reagan's presidency was published.


"Did you see Leonard Silk in today's Times?" Murray asked, referring to the New York Times' economics columnist. I hadn't. "Well Leonard says there's plonking in our report. Do you know what plonking is?" I didn't.

"Well, Leonard says there's plonking Type I: a little wild-eyed obfuscation. And he quoted something Bill Niskanen wrote." (Niskanen was the Council of Economic Advisors' supply-sider, more or less.)


"And then he said there was plonking Type II: the stupefaction of the blindingly clear. And he quoted something Jerry Jordan wrote." (Jordan was the CEA's monetarist; today he's one of the last survivors of that breed.)

Then Murray grinned. "And finally Leonard said there was something sensible in our report, and quoted something I wrote!"

Amusing Reagan's economists could be; coherent they were not.


Supply-side economics held that the rich would work harder if they were taxed less, while the poor would work harder if they were taxed more. Monetarism held that interest rates should go as high as necessary to kill inflation. This combination proved toxic in 1981-82 as the economy imploded. But the effects were even worse abroad. There, high interest rates stalled world development and triggered crises across Latin America and Africa and in much of Asia. Around the developing world, imports and living standards crumbled. So did fragile public education and health services -- just in time for the global AIDS epidemic.

Full recovery never occurred in many parts of the world. But no supply-side effects were ever observed here at home, and the poor still work harder than the rich.

Savings-and-loan deregulation was another Reagan initiative, spearheaded by a task force led by Vice President George H.W. Bush. What did we get from that? A wave of criminal takeovers, leading to failures that ultimately cost taxpayers over $150 billion and resulted in more than 1,000 felony convictions. Ed Gray, Reagan's appointee to the Federal Home Loan Bank Board, saw what was coming and tried to sound the alarm. But his superiors were deaf or did not care. Gray -- a forgotten hero -- was destroyed.


The New York Times headline at Reagan's death read that he "Fostered Cold War Might." But that too was largely transient. Where is the 600-ship Navy of then Navy Secretary John Lehman's dreams? We couldn't afford it. The MX missile, dubbed the "Peacekeeper"? We didn't need it. The Soviet Union was already decrepit, as its experience in Afghanistan was to prove. Star Wars, Reagan's missile defense system, did frighten the Russians -- they feared, correctly, that it fit into a strategy for "preventive" nuclear war. But Star Wars under Reagan was a costly illusion, a waste of talent and technology on an impossible dream, a diversion then as now from our true security needs.

Eventually, things did get better. Reagan's allies were beaten in the House midterm elections of 1982, and the Republicans and conservatives lost dominance there. Thereafter, Reagan became more pragmatic and economic performance improved.

Monetarism was completely abandoned. Large tax increases in 1982 and 1984 took back much of the 1981 tax cut, over supply-siders' objections. What survived kicked in, in 1983 and 1984, to produce a reasonable expansion. This happened on completely Keynesian principles, and it was better than nothing, even though the benefits were skewed to the rich.

There followed the miracle of the 1986 tax reform, whose core ideas the Treasury Department stole (under deepest cover) from former Sen. Bill Bradley, D-N.J. Defense spending peaked. And Reagan, his fingers burned, ceased attempting to wreck Social Security, which survived him and, so far, his successors.


But in the end Reagan's means to recovery largely exhausted the U.S. banking and financial system. The stock market collapse of October 1987 was one sign of the strain. The economy went back into recession in 1990, and banks lay dormant, rebuilding their balance sheets but not lending much to the public until 1994. It was for this reason, perhaps more than any other, that the presidency of Bush I did not survive. So I suppose we can thank Reagan, in part, for the rise of Clinton.

Apart from that, what did Reaganomics amount to?

In the summer and early fall of 1981, as the recession deepened, the late Rep. Henry Reuss, D-Wis., chairman of the Joint Economic Committee, would ask Republican colleagues when they would admit that the "Reagan economic recovery program" had finally taken effect? The Republicans, for understandable reasons, kept saying that it hadn't started yet. But finally they allowed that October 1, 1981, could be called the start date.

On that morning, I supplied Reuss with a poem, "The End of the World," by Archibald MacLeish. Reuss duly read it into the Congressional Record (to the great poet's delight, as we soon learned).


It is not an epitaph for Ronald Reagan the man, who deserves a respectful sendoff. But for his economists and their ideas, it will do.

Quite unexpectedly, as Vasserot
The armless ambidextrian was lighting
A match between his great and second toe,
And Ralph the lion was engaged in biting
The neck of Madame Sossman while the drum
Pointed, and Teeny was about to cough
In waltz-time swinging Jocko by the thumb--
Quite unexpectedly the top blew off:
And there, there overhead, there, there hung over
Those thousands of white faces, those dazed eyes,
There in the starless dark the poise, the hover,
There with vast wings across the cancelled skies,
There in the sudden blackness the black pall
Of nothing, nothing, nothing -- nothing at all.

James K. Galbraith

James K. Galbraith organized a conference on the “Crisis in the Eurozone” at the University of Texas at Austin on November 3-4. Papers and presentations can be found at, along with a video archive of the full meeting.

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