Domain Query: On Reaganomics

pumpsix returns with a good question on the Reagan Revolution:
What do you think of Reaganomics? The idea, to me, seems so logical. More capital in the hands of those who can produce factories and jobs. However, I am constantly told that Reaganomics didn't work.
Glad you asked. As I made clear in a post a few days ago, I regard Reagan with immense respect and reverence. However, I do not agree with everything that Reagan did. His economic policies in particular were a truly odd mix of genius and stupidity. Here is what I think of them.

The basic premise of Reaganomics is that a free man should be free to produce according to his own desires, incentives, and resources. There is nothing inherently strange or new about this. It is the logical outcome of the Non-Aggression Principle and the Axiom of Human Action, and as such there is no disagreement whatsoever with the basic theories of Austrian Economics with regards to the need for lower taxes and less regulation.

The logical consequences of such a policy are very straightforward. As pumpsix notes, if you reduce the share of money that the government steals (and that is the correct word) from the people at gunpoint, the people will put it to whatever good uses they want. By reducing the constraints upon people to produce and create, you increase the productive capacity of the economy.

This is exactly what actually happened when Reagan's massive program of tax cuts and deregulation was implemented. The idea that Reaganomics somehow "didn't work" is not borne out at all by the economic figures of the time. Unemployment fell from over 10% to 5.4%. Reagan's economy added some 17 million jobs, and living standards rose at a rate not seen since the 1920s. Some of America's greatest modern companies, such as Apple, Microsoft, and Silicon Graphics (back in the day) came about directly as a result of entrepreneur-friendly policies that Reagan pushed through with massive bipartisan support- something that would simply not be possible in today's political climate. If you want a more comprehensive list of Reagan's achievements during this time, you can check out a documentary  called "I Want Your Money"; although it is overly reverential (read: kisses Reagan's ass), it does provide some excellent ammunition in the argument over whether or not Reagan's policies worked. A less partisan review can be found here.

It's important to remember the context in which Reagan implemented his four pillars of Reaganomics: interest rates were north of 15%, unemployment was over 10%, inflation was close to 18%, and America's economy was teetering on the brink of another long depression while the Soviet system of "command economics" was being held up by academics all over the country, and the world, as the model to follow. Lester Thurow, a professor of economics at MIT, went so far as to argue that command economics works by citing the "remarkable performance" of the Soviet economy. (I actually saw Thurow speak at a lecture in Singapore almost exactly 10 years ago; it says something about how full of s*** he was that I remember almost nothing he said and today regard his ideas as almost completely arrant nonsense.)

So on the theoretical side, at least, Reagan's ideas made very good sense. It is in the practical details of implementation where I strongly disagree with some of Reagan's policies. In this it is helpful to turn to one of the insiders of the Reagan Administration- David Stockman, once Director of the Office of Management of the Budget, who was so memorably "taken out to the woodshed" by Reagan for expressing open concern with the massive and growing deficit at the time. (It is telling how far this country has declined that the average deficit under Reagan was a "crazy" $238 billion, but Obarmy can run deficits in excess of $1 trillion every year and it's just considered business as usual.) Stockman pointed out that in fact Reagan's administration did not deregulate half as much as it should have, added massive tariffs and taxes on foreign producers of goods ranging from televisions to automobiles to agricultural produce, and that deregulation actually started under President Carter.

All of this is true. Reagan's time saw massive tariffs levied on sugar, for example, at the behest of Big Ag producers. The consequences of this on American diets, and of course on American physiques, have been severe. American sugar costs about one third again as much to make as Brazilian sugar- which is why, if you people really are dumb enough to think that sugar-based ethanol is a good fuel for your cars, you would be far better of simply importing it from Brazil instead of converting vast amounts of farmland into resource-intensive sugar plantations. It is also why high-fructose corn syrup, an abomination of a sweetener that in a rational world would be thoroughly discarded and abandoned, is so pervasive in the American diet; it's much cheaper to use that horrible stuff than to use good old-fashioned cane sugar.

It is also critical to note and remember that Reagan's policies came at a time when interest rates were being lowered by the Federal Reserve. I have a decidedly mixed opinion of Paul Volcker; his integrity is unimpeachable, but the Volcker Rule, which is in reality a whole morass of rules concerning what does and does not constitute proprietary trading, was his brainchild, and is in my opinion one of the dumbest set of ideas ever to come from any human intelligence. And I am not altogether convinced that he lowered interest rates at the "correct" speed. Of course, as far as I'm concerned, the Federal Reserve itself simply should not exist, so I'm a bit biased on this subject, but to me, the lowering of interest rates throughout the 1980s is as much responsible for the massive boom in investment and technology spending that the decade saw as anything that Reagan and his domestic advisers pushed through. And being the Austrian-influenced economic sceptic that I am, I tend to view such a drastic lowering of interest rates as the first and most obvious signs of a major bubble. This was definitely borne out during the 1990s, when the tech bubble began its reckless expansion.

My strongest criticism, by far, is of the fact that Reagan did almost nothing whatsoever to dismantle the thrice-damned welfare state. In his speech, "A Time for Choosing" (we know it today as simply "The Speech"), Reagan outlined a powerful, clear, and remarkably simple set of ideas for reforming Social Security:
Now—we're for a provision that destitution should not follow unemployment by reason of old age, and to that end we've accepted Social Security as a step toward meeting the problem.

But we're against those entrusted with this program when they practice deception regarding its fiscal shortcomings, when they charge that any criticism of the program means that we want to end payments to those people who depend on them for a livelihood. They've called it "insurance" to us in a hundred million pieces of literature. But then they appeared before the Supreme Court and they testified it was a welfare program. They only use the term "insurance" to sell it to the people. And they said Social Security dues are a tax for the general use of the government, and the government has used that tax. There is no fund, because Robert Byers, the actuarial head, appeared before a congressional committee and admitted that Social Security as of this moment is 298 billion dollars in the hole. But he said there should be no cause for worry because as long as they have the power to tax, they could always take away from the people whatever they needed to bail them out of trouble. And they're doing just that.

A young man, 21 years of age, working at an average salary—his Social Security contribution would, in the open market, buy him an insurance policy that would guarantee 220 dollars a month at age 65. The government promises 127. He could live it up until he's 31 and then take out a policy that would pay more than Social Security. Now are we so lacking in business sense that we can't put this program on a sound basis, so that people who do require those payments will find they can get them when they're due—that the cupboard isn't bare?

Barry Goldwater thinks we can.

At the same time, can't we introduce voluntary features that would permit a citizen who can do better on his own to be excused upon presentation of evidence that he had made provision for the non-earning years? Should we not allow a widow with children to work, and not lose the benefits supposedly paid for by her deceased husband? Shouldn't you and I be allowed to declare who our beneficiaries will be under this program, which we cannot do? I think we're for telling our senior citizens that no one in this country should be denied medical care because of a lack of funds. But I think we're against forcing all citizens, regardless of need, into a compulsory government program, especially when we have such examples, as was announced last week, when France admitted that their Medicare program is now bankrupt. They've come to the end of the road.
Yet when Reagan actually entered office, none of the basic features of Social Security were changed. None of the realities of Social Security changed. It was, and remains, a program of massive generational theft, a wealth transfer enforced at gunpoint via payroll taxes upon the young to support the old, the infirm, and the weak. My generation and I sure as hell didn't vote for this nonsense. (Being a foreigner, it's not like I had any choice in the matter.) Medicaid and Medicare are still present, even though Reagan spoke for years about the need to roll back the Great Society of LBJ. He even wrote in his diary about his critics who accused him of wanting to dismantle Social Security- he wrote that he wanted to do nothing of the sort, but he did want to undo the damage that President Johnson's cynical exercises in vote-buying did. And of course, he didn't.

I will be the first to admit that part of this is because in practical terms, it simply wasn't possible. Reagan faced a Democrat-controlled legislature for most of his time in the Oval Office, and Speaker Tip O'Neill had no intention whatsoever of letting Reagan get away with dismantling what Democrats see as their "signature achievements" of the last century. (Quite why a political party seeks to celebrate such a blatant violation of basic human liberty as an "achievement" is rather beyond me.) Reagan was nothing if not a practical politician, even though he was guided by a powerful and unyielding set of core convictions; he knew that if he wanted to implement his basic strategies for destroying Communism, he needed to get the legislature onside. So he sacrificed some components of his ideas in order to advance others. I believe that in some cases, he chose poorly.

None of these criticisms change the basic facts of the decade. Reagan's economic policies took a nation with a moribund economy back to its rightful place as the leader of the free world. What is truly fascinating about Reagan is that he was almost completely immune to public opinion- or anyone's opinion, for that matter- about what he was doing. He was massively unpopular among the "elite" of the Beltway for his "simplistic" and "silly" proposals, but in reality his ideas embraced simple, basic truths about human nature and the human condition and applied them to the wider world.

For taking the fight directly to the enemy, for restoring America's pride and glory (however briefly), for giving hope to millions of slaves within the Soviet nations, for carrying out God's work in fighting tyranny and evil all over the globe, and for his unyielding tenacity and determination in fighting the good fight, Ronald Wilson Reagan will always have my deepest respect and admiration. As the KGB's own dossier on Reagan said of him as far back as 1968, "Reagan is... a firm and unbending politician for whom words and deeds are one and the same"; in many ways, his enemies in the Evil Empire understood him better than any of his domestic critics, and better even than most of his friends. My criticisms of Reagan are of very specific things that he did or did not do during his time in office, but I will always remember Reagan as the "Last of the Romans", a happy warrior who fought his war with faith and love, who like Cincinnatus so many centuries before him, answered the call of God and country and then returned quietly and contentedly to his ranch and family.


  1. Thanks for answering another question of mine.

    I didn't realise America had it so bad before Ronald Reagan was elected as president.

    Demand side economics relies just as much on "intuition" as supply side economics, but with the added problem of not being all that reliable.

    1. No problem.

      Actually demand-side economics is based on a series of logical, empirical, and mathematical fallacies that are so glaring that it amazes me that people actually believe anything Keynesians have to say. You'll see this very quickly if you read two books by a chap named Henry Hazlitt- Economics in One Lesson and The Failure of the New Economics. Both are great reads and both address the issue of the false dichotomy between supply-side and demand-side economics; one cannot be a consumer without also being a producer, by definition. I'll address this and a couple of other issues on economics in a future post.

  2. I have read Economics in One Lesson and thought it was rather good. I have yet to read the other book by Hazlitt, but it is on my Amazon "to buy list". The problem I have with Keynesians (and I guess Modern Monetary Theorists) is that they view money as the answer to all our problems; as if someone how having more money makes more things happen.

    1. If you liked Economics in One Lesson, I think you're really going to enjoy The Failure of the New Economics. What Hazlitt does in that book is basically go through the Keynesian bible, The General Theory of Wages, Employment, and Interest almost literally paragraph by paragraph, and performs the most thorough demolition job of the entire edifice that you will ever see. If you have ever wanted conclusive and irrefutable ammunition to use in arguments against mid-witted Keynesian and neo-Keynesian supporters of government spending and monetary "pump-priming", you will never find a better book than this one. It is extremely readable- I remember being unable to put it down- and very memorable indeed. The digression on mathematical economics about two-thirds of the way through is, in my opinion, the best bit of the book.

      Also check out The Forgotten Man by Amity Shlaes. That was another book that I literally couldn't put down when I started reading it. It is a street-level account of the Great Depression, the policies that led to it, and the policies that prolonged it. I think you'll really enjoy it.

      Have a go at those and let me know what you think.


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