Reagan Economic Policy Is an Enduring Influence
There have been countless commentaries on the life and contributions of Ronald Reagan in the last week, but few that truly captured the legacy of Reaganomics.
The former president’s death stirred up the old debate about tax cuts and federal deficits. But no matter which side you come down on, the Reagan bequest is far more than that. He did nothing short of transform the economy. His fundamental idea was that we could leave it to the marketplace to take care of things. Quite simply, “he made it an investment economy,” says Tom Campbell, a former Republican congressman from San Jose and now dean of UC Berkeley’s Haas School of Business. And that gave rise to the era of entrepreneurship and innovation we live in today.
Before Reagan, the policies of Franklin D. Roosevelt’s New Deal, which strove for full employment with government help, guided all presidents, Republican and Democrat alike, for 50 years. Reagan’s policies, based on his belief that the best jobs are created in an economy spurred by investment and highly adaptable to change, have ruled for almost a quarter-century, influencing the Clinton administration as well as the two Bush regimes.
Reagan reduced social spending in his first year, although he expanded defense spending. He brought in an environment of lower taxes, pulling the marginal rate down from 70% to 50% initially and ultimately, with the tax reform package of 1986, to 28%.
The package also eliminated tax shelters in real estate, cattle breeding and such; the combination reduced the incentive to shield income from taxes and put the emphasis instead on earning as much as one could and investing to earn returns. (Reagan knew about tax shelters because he was an actor, earning rushes of money whenever he made a film and, in his words, “being pushed into the top bracket and having to quit work” for a while. He resented both the taxes and having to use shelters to avoid them, so he made reform a priority when he got to the White House.)
After 1986, there was an explosion of financing of new ventures and companies in which some employees looked to the stock market rather than the paymaster’s office for rising incomes. Tax rates essentially are at the same levels today, and it is inconceivable that any government would take them back to 70%.
Reagan didn’t start the deregulation of industry -- his predecessor Jimmy Carter did that. But Reagan’s Office of Management and Budget put intense emphasis on removing regulations if they couldn’t pass the test of cost-benefit analysis.
When Reagan entered office in 1981, many U.S. companies were being battered by foreign competition; the word “rustbelt” was coming into the language. “We revised the merger guidelines to reflect the broader competition facing most firms, “ recalls William Niskanen, an economic advisor to Reagan. That opened the way for U.S. industries to restructure, consolidate and adapt to the global economy.
There were costs. Reagan famously broke a public employee union, the Air Traffic Controllers Organization, demonstrating to the business world that unions were fair game in the shift to an investment-led economy. In that kind of economy, those with money to invest prosper more than those without -- and during Reagan’s years and since, the median incomes of the highest 20% of wage earners have almost tripled while those of the lowest 20% have only doubled.
Views of the social consequences of those patterns differ. Robert Pollin, an economist at the University of Massachusetts and a leading advocate of living wage laws, says that the Reagan presidency “marked a historical turning point in economic policy.” To Pollin that was a turn for the worse, to a “version of capitalism that is significantly more aggressive in promoting the interests of big business and the rich and more willing to attack the interests of working people and the poor.” That is one view.
Listen to another, from social philosopher and economist James Q. Wilson, professor emeritus of the Anderson School of Management at UCLA: Reagan “believed in freedom and that meant entrepreneurial freedom. Expanding freedom imposes costs,” says Wilson. “When entrepreneurial freedom grew, we all benefited at the cost of wider income gaps.”
That freedom came at another price, what some recall as an out-of-control culture of greed. Without a doubt, the Reagan era was marked by corporate raiding and leveraged buyouts, savings and loan crises and the kind of financial legerdemain that sent many market players to prison. One of them was Michael Milken, the “junk-bond king” who pleaded guilty in 1990 to securities fraud. But when he looks back, he sees what Reagan inspired as mostly for the good. “Reagan’s belief in freedom of the individual,” Milken says, “opened up access to capital for individuals and entrepreneurs in the baby boom generation.”
What did it all add up to? Or, to paraphrase a line Reagan used in the 1980 campaign: Are you better off today than two decades ago?
The answer has to be a resounding yes. The reforms of the Reagan era reawakened industrial productivity, which still is growing at a healthy 5% a year. The ability of the U.S. economy to adapt has been in stark contrast to continental Europe, where economic growth is chronically slow and unemployment rates of 10% and 11% prevail. Significantly, leading European countries, including Germany, are trying now to lower their effective tax rates, which remain at levels above 60%.
In this country, it’s an open question as to whether Reagan’s trust-the-market policies will endure for another quarter-century. Problems are looming -- partly because of the widened income gaps. Financing medical care is a growing challenge, as 43 million Americans lack health insurance and the retiring baby boom generation threatens to bankrupt Medicare. Perhaps a new model of private-public finance will need to be devised.
Undoubtedly, the flexible U.S. economy will adapt. Reagan, who made it flexible, would approve of that.
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James Flanigan can be reached at jim.flanigan @latimes.com. For previous columns go to latimes.com /flanigan.
