My old friend Arthur Laffer, once a chief economic advisor to Ronald Reagan, tells the story of Reagan’s first Cabinet meeting as president. The new Cabinet members, ready for their marching orders, had assembled in the West Wing of the White House. Reagan, the seasoned actor, waited for silence in the Cabinet Room. He then stood and said, “Gentlemen and ladies, I hate inflation, I hate taxes, and I hate Communism. Do something about it.” He proceeded to walk out of the room.
This was not a president who sweated the details. He had a few very big ideas and he pursued them with the relentless and steely resolve of a greyhound chasing a mechanical rabbit.
Those who understate the accomplishments of Reagan — political scientists rate him an average president, which says far more about political scientists than it does about Reagan — seem to have no remembrance of how far our economy had stumbled in the 1970s. During that bleak chapter of American history, our nation seemed hopelessly mired in a death-spiral of economic decline and despair: Inflation hit 13 percent and mortgage interest rates 20 percent; gasoline lines and OPEC embargoes signaled our hostage status to oil-producing nations; the “misery index” (inflation plus unemployment) hit a 40-year high of 20 percent; and communists seemed to be outperforming the capitalists.
Reagan was truly blessed by the incompetence of his predecessors. The cumulative policies of LBJ, Nixon, Ford, and Carter had atrophied America’s economic muscle. Their legacy was big bureaucratic government expansionism, easy money, soaring expenditures on Great Society income-redistribution programs, a regulatory regime with tentacles that invaded every industry, and most insidious of all, confiscatory state-federal tax rates that in some cases exceeded 80 percent. What was needed in January 1981 was the right president with the right vision. That, thank God, is what we got.
Reagan knew that freedom and free markets would put things right. Of course, his supply-side experiment was anything but warmly embraced by the intelligentsia in government, academia, and the media. One recurring lesson of history is that trailblazing intellectual and political leaders who dare to capsize the conventional wisdom of the day are typically dismissed as dangerous, delusional, and dimwitted. To say the earth is round when everyone knows it is flat is a daring enterprise. But that is just what Reagan did in the 1980s. He created a new economics, one based on how the world really works, and he overthrew the unworkable Keynesian ideas that were bankrupting the nation.
And what exactly were those ideas so scorned by the Left and ridiculed as “Reaganomics”? The Reagan prescription consisted of tax-rate cuts, free trade, a light hand of regulation, tight money to make the dollar once again as good as gold, and unconditional victory in the Cold War.
The jewel of the Reagan economic package was the famous Kemp-Roth 30 percent income-tax cut. Conservative intellectuals — among them Laffer, Robert Bartley, Jude Wanniski, and Jack Kemp — had made the case for supply-side policies; Reagan was the only leader of significance who listened and understood. When the economy hit rock bottom in the summer of 1982, Reagan’s adversaries joyously proclaimed Reaganomics a scam. Even many of Reagan’s most trusted advisors wanted a reversal of direction. But it was Reagan who insisted that we “stay the course.”
Thankfully we did — Reagan’s policies spawned the greatest economic and wealth expansion in the history of the western world.
In 1982 the Dow Jones industrial average hit a low of 800. After the final pieces of the Reagan tax cuts were installed, the market rocketed upward for 18 consecutive years. From 800, the Dow rose to 10,000 — creating between $15 trillion and $20 trillion in new wealth and industries. The Dow would have to climb to 100,000 by 2020 to match this Herculean performance. By clearing away the wealth destroyers of high tax rates and high inflation, U.S. companies became far more productive, profitable, and valuable.
The economy also created 15 million new jobs under Reagan and grew in real terms by 40 percent. Some have likened this to adding a new California to the U.S. economy.
By the end of the 1980s, in what was a fitting tribute to the Reagan program, almost all industrialized nations had sharply lowered tax rates to regain a competitive position lost to the U.S. in the decade. Reagan would note that “Imitation is the sincerest form of flattery.” In this way, Reaganomics saved not just the U.S. economy from worldwide depression, but the entire global economy as well.
The Reagan way was spurned throughout the 1980s as “voodoo economics” (one of George Bush Sr.’s few memorable comments.) Many college textbooks to this day even argue that Reagan’s economic policies were flawed because they created record budget deficits. But the textbooks don’t mention that as the national debt rose by $2 trillion, national wealth rose by $8 trillion. They also don’t mention that the Laffer curve worked: Lower tax rates did generate more tax revenues at the federal, state, and local levels. Federal tax collections rose from $500 billion in 1980 to $1 trillion in 1990.
Ronald Reagan is dead, but the power of his ideas will no doubt continue to shape generations of future leaders worldwide. Throughout American history our heroes have come from the unlikeliest of places. How ironic that the man to most influence economics in the 20th century was a graduate of tiny Eureka College. Our haughty intellectual class, tucked away in their ivory towers, could learn much from the economic lessons of Ronald Reagan. They probably never will. But it’s enough that Reagan convinced the rest of us of the rightness of his ideas — that free men and free enterprise should be the guiding forces in a prosperous and just society.
–Stephen Moore is president of the Club for Growth and an economist at the Cato Institute.