Politics & Policy

Going to School On Reaganomics

The late president knew his stuff.

The late President Ronald Reagan understood economics better then his critics allege. Reagan studied economics at Eureka College in Illinois before his graduation in 1932. He was a well-read fusionist of economic thought, employing the best insights of market-based schools. This is apparent in his speeches, which include economic lessons about inflation, taxation, regulation, central planning, and strategy.

#ad#Inflation was wreaking havoc on U.S. manufacturers when Reagan took office in January 1981. The consumer price index recorded consecutive double-digit percent increases (1979 and 1980) for the first time since World War I. The Federal Reserve, under Paul Volcker (who was installed by Carter but unleashed under Reagan), followed a monetarist approach, restricting money-supply growth. Reagan said in February 1981, “A successful program to achieve stable and moderate growth patterns in the money supply will keep both inflation and interest rates down and restore vigor to our financial institutions and markets.”

The tight-money policy worked. Inflation fell almost immediately and was at a respectable 4.1 percent in Reagan’s last full year in office.

When it came to money matters, Reagan looked to Nobel laureate and economic advisor Milton Friedman. At a lunch in March 1982, Reagan joked, “We have a problem that’s been forty years in the making, and we have to find ways to solve it. And I didn’t want to ruin your appetites, so I waited till now to tell you this, but during the hour we’re together here eating and talking, the government has spent $83 million. And by the way, that includes the price of your lunch. [Laughter.] Milton Friedman is right. There really is no such thing as a free lunch.”

In addition to inflation (and inflated government), Americans were suffering under the burden of high tax rates in 1981. Less than one month into his first term Reagan unveiled his supply-side plan for economic recovery, based on tax cuts to provide an “incentive to increase productivity for both workers and industry:”

The tax cuts, legendary in their size and positive effect, set America on a long bull run. “Common sense,” he said in his farewell address in January 1989, “told us that when you put a big tax on something, the people will produce less of it.” His supply-side tone was unmistakable. Years earlier, in February 1986, he cited Adam Smith to defend this not-so-new-wave of economics: “[H]igher taxes won’t translate into higher revenue and lower deficit spending. This has been clear ever since the time of Adam Smith back in 1776. ‘High taxes,’ that great economist noted, ‘frequently afford a smaller revenue to government than what might be drawn from more moderate taxes.’”

The Reagan tax cuts led to 16.5 million new private sector jobs following the 1981-82 recession.

Reagan also spoke out against government regulation more than any 20th century president. Under Reagan the average number of pages added to the Federal Register declined versus other recent administrations (among them Ford, Carter, H.W. Bush, and Clinton). On the regulation front, he was fond of citing Ludwig von Mises, the Austrian economist and critic of Nazi and communist economic systems. In November 1988, Reagan said, “The philosopher Ludwig von Mises once wrote, in his words, ‘A nation is the more prosperous today the less it has tried to put obstacles in the way of the spirit of free enterprise and private initiative.’” Mises’s insight about nations, Reagan noted, “also goes for industries and sectors — the fewer the obstacles to private initiative, the better off they are.”

Reagan similarly resisted too much central planning. “Governments are notoriously bad at identifying ‘industries of the future,’” he told congressional leaders in January 1989, “and efforts to have the government formulate and implement industrial policy must be strongly resisted.”

Reagan and British Prime Minister Margaret Thatcher accepted the Austrian Nobel laureate Friedrich von Hayek’s Road To Serfdom critique of creeping socialism. But Reagan, again referring to Mises, emphasized that limited-government advocates must advance a positive program as a strategy.

In February 1987 he said, “Ludwig von Mises, that great economist, once noted, ‘People must fight for something they want to achieve, not simply reject an evil.’ Well, the conservative movement remains in the ascendancy because we have a bold, forward-looking agenda. No longer can it be said that conservatives are just anti-Communist … Modern conservatism is an active, not a reactive philosophy.”

Reagan’s positive agenda of low tax rates, high economic growth, and free enterprise worked its magic. Reagan told Eureka College students in February 1984 that free-enterprise advocates had captured the moral high ground against socialism because they had a plan for a freer and more prosperous society. In July 1987 he said the intellectual debate had in fact changed: “America astonished the world. Chicago school economics, supply-side economics, call it what you will — I noticed that it was even known as Reaganomics at one point until it started working [laughter] — all of it is fast becoming orthodoxy. It’s not just that Milton Friedman or Friedrich Von Hayek or George Stigler have won Nobel Prizes; other younger names, unheard of a few years ago, are now also celebrated.”

President Reagan, the Midwest optimist, ignored the critics and delivered his free-market message to the American people. Today’s leaders can still learn from his economic optimism, which was built on some very solid ground.

Greg Kaza is executive director of the Arkansas Policy Foundation, a non-profit economic research organization in Little Rock.

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