Reagan’s Legacy Needs No Slogan : He Understood Private Enterprise, and That’s What Worked

I have never liked the term Reaganomics. It symbolizes what’s wrong with our economic debates. Sloganeering substitutes for clear thinking.

Reaganomics was a catchword of President Reagan’s friends and foes alike to mean whatever they pleased. For both, it signified something new--either wonderful or terrifying. This was always hype. Reagan had no new theory. His economic success rested on an old truth: Private enterprise works. As he leaves office, it’s important to get this straight.

Reagan understood (as many economists do not) that private enterprise is the economy’s central engine of growth. The quest for bigger markets and profits spurs expansion, innovation, efficiency. This being so, Reagan strove to create a climate in which private enterprise could flourish. Ending double-digit inflation was essential because it subverted growth; people and businesses couldn’t plan for the future. Quite naturally, Reagan supported the Federal Reserve Board’s tough anti-inflation policies that led to the deep 1981-82 recession.

Part of the public’s mystification with Reagan--and the envy of his critics--stems from a sense that he didn’t earn his success. It was too effortless. After high inflation was broken, he seemed almost a casual observer to the ensuing six-year recovery with its 16 million new jobs. Precisely. What’s misunderstood is that Reagan chose not to meddle. His comparatively passive style represented a decisive reversal of the approach of the previous 20 years.

For almost two decades every President from John F. Kennedy to Jimmy Carter actively pursued “full employment.” There was a feeling that the economy wouldn’t work properly unless the government “managed” economic growth. The result was a series of overly expansionary policies (featuring low interest rates) that ultimately created double-digit inflation. Reagan rejected this eager activism. His orientation was completely different. Activism assumed that private business needed stimulating. Reagan assumed that business would grow if obstacles, mainly inflation, were removed.

He demonstrated that less is more. It’s not that the government’s main economic tools--changes in interest rates, taxes or government spending--are irrelevant. They can help prevent great depressions (of the 1929-39 variety) or runaway inflation. But trying to use these tools to avert every recession or squeeze a little extra growth from the economy is excessively ambitious. The economy can’t be manipulated so exactly. Two decades of activist policies did more harm than good.

Sadly, this message may be obscured by Reagan’s major failure: the budget deficits. They’ve been so huge that they’re often seen as the essence of Reagan’s policies, as if nothing else mattered. Yes, the federal debt (the total of all past deficits) has nearly tripled since 1980 to more than $2.6 trillion. Some of Reagan’s prosperity was borrowed from the future. People were a little better off, temporarily, because the country went into debt.

But Reagan’s critics are wrong when they argue that this failure discredits his entire performance. It’s not true, for example, that the budget deficits created the strong Reagan recovery. The budget deficits contributed mostly to big trade deficits. As a nation, Americans were overspending. Most of the extra demand was satisfied by imports; they covered the gap between our production and our purchases. Nor will the budget deficits inevitably cause a future economic crisis. Predictions of catastrophe have repeatedly proved to be overblown.

If Reagan’s critics exaggerate, so do his supporters. They’re already bragging that the country’s recovery vindicates “supply-side economics.” Reagan did cut the top personal tax rate from 70% to 33%, as the supply-side approach urged. Although this move was sensible, it didn’t unleash a burst of economic growth. During the current recovery, the growth rate of the economy has been about equal to the average of previous postwar recoveries. One reason the economic recovery has lasted so long is that it came after the worst recession since World War II. With unemployment nearly 11% in 1982, there was ample room for expansion. The truth is that most economists (both conservatives and liberals) oversell their policy proposals. It’s a path to power and fame. The constant repetition of extravagant promises over 25 years has confused the public. Hearing that proper policies would lead to a stronger economy, many Americans came to believe that government actually creates economic growth. This was always nonsense. The proof is history: The economy grew for more than 150 years before there was any central economic management.

Reagan punctured the mystique of the experts.He listened to economists’ views when it suited him. Otherwise he ignored them and trusted his own instincts. This is an important reason, of course, why many economists think ill of Reagan. He didn’t flatter their self-importance. Reagan’s strengths and weaknesses as an economic manager came from a single source: his conviction (as his one-time adviser William Niskanen has written) that government is the cause of, not the solution to, most problems.

This made Reagan effective in fighting inflation and ineffective in dealing with the budget deficits. He simply couldn’t concede the permanence of Big Government or face the basic deadlock: Americans’ desire for government services exceeds their willingness to pay. (Reagan’s tax “cuts” merely prevented taxes from rising higher. Federal taxes are now about 19% of the gross national product--about the same as in the Carter years.) Finally, Reagan’s prosperity didn’t reduce long-term poverty. Criticizing him for this is easy, but no one really has a solution for the underclass.

So forget Reaganomics. Reagan’s years are best understood without slogans. Mostly he taught us about economic growth. Government doesn’t create it. Private enterprise still has plentyof vitality. Government policies permit, distort or discourage growth. Especially discouraging are high levels of inflation. It will be a pity if these basic lessons aren’t learned.