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The Reagan Economic Legacy

Author: Roger M. Kubarych
June 9, 2004
Council on Foreign Relations

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A journalist asked me to sum up Ronald Reagan’s economic legacy. Here is a summary of how I responded:

Reagan, throughout his political career and his presidency, promoted a powerful economic philosophy, but implemented it pragmatically (or inconsistently, depending on one’s point of view).

He spoke of free markets but erected strict trade barriers, including the notorious “voluntary export restraints”, really quotas, on Japanese cars.

He spoke of limited government, but greatly expanded government spending.

He cut taxes, indifferent to the budgetary consequences, but then raised a number of taxes to undo part of the damage later on.

He supported an independent Fed monetary policy designed to break the back of debilitating inflation, but did not see the need for helping out with a more disciplined fiscal policy. The result was higher interest rates and a deeper recession than might otherwise have been necessary.

One act was unequivocal: He broke the air traffic controllers strike, a major blow to union power. Symbolically, it laid the foundation for a more flexible US labor market, launching the US job creation machine that is the envy of every other industrial country even today.

One undeniable plus, with an ironic twist: the highly constructive role he played personally in the midst of the market turmoil set off by the stock market break of October 1987. He and his top advisor, Howard Baker, immediately recognized the case for action and pitched in to encourage the coordinated corporate decisions to buy back shares that helped bring the rout to an early end. So government was a major player in restoring stability to the private markets when they struggled to do so on their own.

Another undeniable plus: he understood the inherent weakness of the Soviet economic system far better than life-long scholars who repeatedly misjudged the situation.

But a lot of questionable developments were permitted or tolerated. In particular were the financial excesses associated with junk bonds, highly leveraged companies, a doomed commercial real estate binge, the savings and loan debacle, and the Millken felonies. Timely regulatory involvement that might have stopped or mitigated extremes of behavior was blocked. In the end US taxpayers had to pay hundreds of billions to clean up the mess.

Another negative was permitting huge volatility in foreign exchange rates, which injured scores of manufacturing companies, their workers, and their communities as the dollar soared in his first term, but then greatly worsened financial vulnerabilities when the dollar subsequently fell back sharply.

But details apart, Reagan was a passionate spokesman for American-style economic liberty, a firm advocate of the entrepreneur, and someone who did not view the word “profits” as a dirty word. He was an effective enemy of redistributive economic policies. For that he was and is detested by those who saw and see the redistribution of income as the primary goal of partisan politics. They will never forgive him for convincing the public that in America anybody can make it— and that those who make it ought to keep most of what they have earned. And he was convincing because he truly believed that.

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