All hail the end of the Reagan era! That’s the cry going up throughout liberaldom as the financial crisis and the impending Democratic electoral sweep threaten the Reaganite troika of deregulation, low taxes and free trade.
What’s at stake in the response to the financial turmoil and the deepening recession is more than Ronald Reagan’s legacy. It’s a bipartisan consensus in favor of a robustly open economy — welcoming competition at home and from abroad — that began to take hold in the 1970s in the Carter administration, found its ultimate champion in Reagan and got cemented into place under Bill Clinton.
In terms of our globalized economy, we’ve been living in the Reagan-Clinton years. As David Smick writes in his compelling new book on the financial system, The World Is Curved: “Globalization was not a Republican or Democratic phenomenon. Indeed, there was not much difference in economic policymaking between Democrat Bill Clinton and Republican Ronald Reagan.”
Conservative bogeyman Jimmy Carter deregulated the aviation and trucking industries. His Labor Department loosened rules restricting how pension funds could invest, freeing up a vast pool of new capital. In 1978, the Democratic Congress cut the capital-gains rate and established 401(k)s.
Reagan accelerated the trend toward deregulation, while cutting taxes, killing off inflation and promoting free trade. Leveraged buyouts honed the competiveness of American companies, and entrepreneurial creativity bubbled up from below. “By the mid-1980s,” Smick writes, “liberalized financial markets were feeding capital to the once-ignored small- and medium-sized ventures through a modernized, multilayered financial system.”
Clinton moderately raised taxes. Otherwise, he operated within the Reagan framework. He signed bills deregulating agriculture, telecommunications and financial services. A tireless advocate of globalization, he pushed through NAFTA and the establishment of the World Trade Organization. Later in the 1990s, he cut capital-gains taxes and the estate tax, earning the condemnation of his former Secretary of Labor Robert Reich for “the largest federal tax cut on higher income since Ronald Reagan.”
Clinton himself remarked sarcastically: “We’re the Eisenhower Republicans here, and we are fighting the Reagan Republicans. We stand for lower deficits and free trade and the bond market. Isn’t that great?” For the economy, the answer to his frustrated rhetorical question was undeniably “yes.”
In his book The Competition Solution, former Clinton economic official Paul London credits the prosperity of the 1990s to “more than two decades of bipartisan policymaking affecting specific industries, which ultimately made competition in these sectors far more intense.” Time and again, policymakers rejected the pleas of industry and unions for government protection from competition, thus stoking investment-driven productivity gains. This kind of special pleading had often carried the day in the 1960s and 1970s.
The deregulatory thrust of the Clinton years has frustrated opportunistic attempts to pin financial deregulation solely on Republicans. Clinton Treasury Secretary Robert Rubin advocated repeal of the Depression-era Glass-Steagall Act that separated commercial from investment banking and that critics (unpersuasively) blame for the current financial mess. Rubin also opposed regulating derivatives under the Commodity Futures Trading Commission, and a bill to bar their regulation sailed through Congress in December 2000 with bipartisan support.
Even Alan Greenspan has admitted this was too sweeping. We’ll have to update our financial regulations while avoiding a lurch into overkill, like the onerous Sarbanes-Oxley law passed after the accounting scandals of the tech bubble.
But the temptation to break fundamentally with the past 25 years will be strong. The government already has, in response to the economic turmoil, its tentacles in the banking, insurance and auto industries. Barack Obama is declaring deregulation a failure, proposing higher taxes on capital, promoting unionization and signaling a hostility to free trade. The danger is that we will blunt the economy’s entrepreneurial edge and lose out as a prized destination for global investment.
Declaring the demise of Reaganism will be emotionally satisfying for Democrats, but Reaganism only dies if Clintonism does too — along with a golden period of bipartisan economic policy.