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The World Knows That Reaganomics Was Right


Economic Viewpoint

THE WORLD KNOWS THAT REAGANOMICS WAS RIGHT

Was there a Reagan Revolution, and if so, what was it? What is its legacy? There was a Reagan Revolution in the same sense that there had been a previous Keynesian Revolution. Fundamental changes occurred in the attitudes of policymakers toward the impact of government on the economy.

In the 1940s and 1950s, Keynesians debunked the invisible hand of classical economist Adam Smith. They saw macroeconomic policy and government regulation as enhancing economic performance. For them an active, interventionist government was essential to economic stability and full employment.

But by the time of Reagan's election, the Keynesian policy of maintaining high demand while neglecting the supply side of the economy had resulted in stagflation and trade-offs between employment and inflation. The only way out of this dilemma, Keynesians said, was more interventionism--an incomes policy that would control salaries, wages, and prices.

Policymakers found this unconvincing. Supply-side economists, a new breed on the scene, argued that Keynesian policy had pumped up demand while strangling incentives to supply, causing prices to rise relative to real output. The problem was not in the economy itself but in the policy. The remedy was to improve the incentives to produce. This would release the economy from stagflation and permit employment to rise while inflation fell.

During the 1980s, the economy enjoyed its longest peacetime expansion: 18 million new jobs were created, and inflation fell. The Phillips curve--the notion that inflation rises with employment--vanished, to the consternation and embarrassment of the economic Establishment, which had come to regard it as an iron law.

CONVERGING SYSTEMS. Ronald Reagan symbolized this revolution. Government, he said, is the problem, not the solution. Reagan's emphasis on this simple truth crystallized the opposition of intellectuals who still cling to the conviction that government should rectify inequities in economic and social life. However, they pay little heed to the inequities created by government and the vast failures of its policies. It is extraordinary that any intellectuals still believe that government policy, which is dominated by special interests that live off the taxpayers, serves some communitarian public interest. For the committed, faith in government has replaced religious conviction.

Prior to Reagan, people all over the world were accustomed to the view that capitalism and free markets were evolving into a semisocialist mixed economy, just as excesses of central planning were being reined in and replaced with market socialism. Competing economic systems were believed to be converging.

Reagan astonished the world by reaffirming capitalism. He slashed income tax rates and made individuals once again the majority shareholders in their own labor. Soviet academicians have told me that it was this, more than the military buildup or "Star Wars", that shook the confidence of the Communist Party. If capitalism were mired not in failure but only in a wrongheaded policy, there could be no competitive chance for the Soviet Union, whose planned economy had clearly failed.

Listen to Mikhail Gorbachev, the last Soviet leader, speaking in April, 1990: "If we do not get out of the system we're in--excuse my rough talk--then everything living in our society will die." No anticommunist ever pronounced as damning an indictment of the Soviet economy. Gorbachev's economic adviser, Stanislav Shatalin, added that without massive economic change, "we will find ourselves in a common grave."

"GRAVE PROBLEM." Liberated by Gorbachev, Soviet economists saw the world anew. By the end, most agreed with Boris Pinsker and Larisa Piyesheva when they wrote: "Many centuries of human experience show that freedom of the individual is not only the highest social value but also the most profitable way of organizing the life of society."

Reagan's legacy is very much alive: in the transformation of Russia, Eastern Europe, Latin America, and Communist China into capitalist-market societies; in the privatizations in Britain, France, and Italy; and in the antisocialist revolution in Sweden. Peruvian President Alberto Fujimori told the Board of Governors of the Inter-American Development Bank in April, 1991, that his country's "grave problem" is "the elephantine state--that enormous and disproportionate governmental apparatus that hinders development." And Mexican President Carlos Salinas de Gortari summed up the outcome of Mexican socialism in one sentence: "The state took all the properties, leaving the public with all the needs."

Ian Wachtmeister, leader of Sweden's New Democracy Party, recently observed that the U.S. continues to march toward Big Government, while all other countries have turned away from it. Even Bill Clinton, as Presidential candidate, had to pretend to be a New Democrat, which is a Democrat leavened with Reaganism. Only later did the electorate learn that Clinton's vision of America came from the left-wing songs he sang in the 1960s. An atavistic statism reigns in the U.S., but Reaganism rules abroad.PAUL CRAIG ROBERTS


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