The Real Reagan/Carter Legacy

 September 8, 2012

There are a lot of myths in politics floating around that have gained so much traction that they are now often considered as fact. One that is extremely popular among conservatives is the idea that governments only get in the way of private enterprise. One of the most common examples used to support this theory is the Chilean economy under Pinochet. After he wrested power in a military coup d’etat in 1973, Pinochet fully embraced the Chicago School economic model of Milton Freidman that advocated privatization of almost all industries (defense excepted) and it was that decision that supposedly turned his third world economy into a powerhouse. This is the “go to” for conservatives when they talk about what would be good for the US.

There are a few reasons why this wouldn’t work here. First, Pinochet was a murderous tyrant. That’s generally a non-starter for the kind of person Americans want as their leader. However, it was because of this attribute that he was able to implement the philosophy unilaterally. His opposition literally disappeared, meaning he could implement the theory in its purest form. So that could not happen here (one would hope). Another reason is because it didn’t work as well in Chile as the advocates suggest. By several economic indicators the Chilean economy under him was no stronger than any other in South America and by some (like foreign debt owed) its strength was somewhat of a mirage. What is rarely cited is the fact that Chile’s copper industry was never privatized. It was so vital to the Chilean economy that Pinochet never risked letting anyone else run it. How vital? That single industry supplied 30% of the government’s revenue. To give some perspective to how huge a number that is, the total of all corporate taxes as a percentage of federal revenue in the US has hovered between 7% and 9% over the last decade. Even during the 1950s when taxes were at their highest levels of the century they averaged 28% of all federal revenues. And Chile’s government was getting that and more from one single entity. Regardless of how you interpret the economic indicators, that one fact neuters the Chicago School argument, at least when it comes to the “success” in Chile.

Another myth that has been floating around for almost as long is that Ronald Reagan was somehow a magical president. He is credited with saving a moribund American economy and single-handedly defeating the Soviet empire. Some of the sheen of his foreign policy glory has come off due to revelations in popular movies like “Charlie Wilson’s War” that let people in on the fact that there were a number of people who had a greater hand in those events. So now is as good a time as any to take a much more fact-based look at his real legacy.

I’ll start with the fall of the Soviet Union since that will play a part in the economic recovery. By the time he was inaugurated, the Soviet economy was rife with corruption. It was commonplace for regional administrators to lie about their quotas, and an economy that had grown at a healthy pace in the 1960s – in some years greater than that of the US - had slowed to a near standstill by the mid-1970s. Brezhnev’s second central plan (1970-1975) was increasingly heavy on defense spending (between 12%-15% of the USSR’s GDP) despite the fact they had no pressing need. Perhaps that’s why an incursion into Afghanistan seemed like a good opportunity to put it to use. The plan was also more focused on producing consumer goods like cars and watches – which at the time were flooding the market – rather than industrial capital goods. The problem was they had too much competition for customers, especially with emerging producers like China and Japan coming onto the scene. Those industries withered while the raw materials producers – the same people who evolved into the oligarchs who control their economy today – gained a stronger hold. Conservatives like to claim that Reagan’s defense spending, particularly SDI, forced the Soviets to increase their defense spending past critical levels, but the military spending apparatus was already in gear before Reagan took office and all available data points to their spending levels remaining fairly constant throughout the 1970s and 1980s. In fact, in 1989 Gorbachev revealed that the Soviet military budget was only $129 billion that year, half of what defense and intelligence analysts had projected, and that the Soviet military budget had been decreasing for several years. They were not spending outrageous sums to counter Reagan’s escalated defense spending; the blame for the economic collapse lay squarely with Brezhnev’s short-sighted plan, both in concept and execution.

The SDI claim is particularly laughable as scientists on both sides of the Atlantic felt it would be 20-30 years before a working prototype could be launched. To this day, the technology still has not been successfully developed. Even if it were, effective counter-measures could be deployed at one tenth the cost. In effect, Reagan was trying to bluff the same people who invented space travel - the first to conceptualize it, first to put unmanned and manned missions in space, etc. – that we had developed a revolutionary space weapon. The Soviets main concern about SDI was not as a defensive game-changer, but that it would instead be deployed as a platform from which to launch offensive missiles. At their historic meeting at Reykjavik, Reagan purportedly offered the technology to Gorbachev as part of a disarmament agreement, to which Gorbachev replied, “I do not take your idea of sharing SDI seriously. You don't want to share even petroleum equipment, automatic machine tools, or equipment for dairies, while sharing SDI would be a second American revolution—and revolutions do not occur all that often.”

Politically what brought the USSR down was a reluctance to use military force to quell insurrection. Previously, troops had been sent into East Germany in 1953, Georgia and Hungary in 1956 and Czechoslovakia in 1968 to subdue protests against Soviet policy. When Gorbachev and his Minister of Foreign Affairs Eduard Shevardnadze refused to use military force to quiet a series of demonstrations that began in Poland in 1989 and spread to East Germany, Czechoslovakia, Hungary, Bulgaria and Romania, the flood gates of revolutionary reform in the Eastern Bloc were opened.

Economically, the fall came from pressures that began in the South. In order to offset the added expense of the military conflict in Afghanistan, the Soviets increased the amount of oil they produced for sale. Partly in response to the Soviets occupying a Muslim nation and partly due to the Soviets encroaching on OPEC’s market share, Saudi Arabia glutted the oil market (from 8.1 million barrels a day in 1978 to a peak of 9.6 million barrels a day in 1980 and 1981) driving the price down and negating the Soviet play. That sped up the deterioration of the Soviet economy, and the increased availability of international oil caused oil prices in the US (deregulated under Carter by the way) to drop like a rock from $104 per barrel (inflation adjusted) in 1980 down to $28 per barrel by 1988. Imagine how the current US economy would react if gas prices dropped from nearly $4 per gallon down to $1 per gallon. That is essentially what happened under Reagan through no influence of his own. Ironically, had Reagan was really been the genius at fighting communism that he is lauded to be, he would have realized that continuing Carter’s cutback of US oil consumption would have driven the price of oil down even faster, thus speeding up the economic collapse of the Soviet Union. He could have led the green revolution and seen the Berlin Wall come down during his administration simultaneously.

And while oil prices don’t control the economy, they certainly have a huge impact. From the end of World War 2 until 1974 oil prices remained consistently between $20 - $25 per barrel (inflation adjusted). That was the largest sustained period of economic growth in American history. In 1974, when OPEC first decided to exert its influence on the world by choking off the flow of Mideast oil, the price shot up to $43. It went up to around $50 and remained there for the next five years. Remember when the combination of economic stagnation and inflation (cleverly called “stagflation” in the media) began? Would that have happened to be around 1979 when oil prices went up to $78? Did it get worse the following year when oil prices peaked at $104 per barrel? As noted, they went down precipitously under Reagan, but jumped back up to $40 a barrel in the middle of the first Bush’s administration. During the Clinton years, they dropped back down to $25-$30 range until his final year when they jumped to $36 a barrel. They dipped during GW Bush’s first two years but after his invasion of Iraq they began to rise steadily until 2008 when they peaked at $97 a barrel. When Obama was sworn in, prices were back down to $60 a barrel and have been increasing sharply ever since to where they are now, around $95 a barrel. Noticing a pattern? But I digress…

So what did Reagan do for the economy? Well, despite being the guy who talked up Milton Friedman’s ideas about how much healthier the economy would be with a smaller government, he actually increased the federal payroll by almost 250,000 non-military employees and increased government spending by 40%. Those developments sound oddly Keynesian. Unemployment increased from 7.1% to a high of 9.8% during his first term, but was down to 7.5% by the re-election, but still higher than when he entered office. It continued to drop as oil prices went down in his second term. As an aside, in January 2009 when Obama was sworn in the unemployment rate was 7.8%. By February of that year it rose to 8.3%, got as high as 10% by October, but in the two years since it has declined to 8.1% as of August this year. See any similarities? The biggest difference between Reagan and Obama is that Obama has accomplished the same thing without increasing the federal spending rate by double digits despite swimming against a tide of rising oil prices.

Some would argue that the changes in the tax rate under Reagan is what spurred the economy on, but since he raised taxes a half dozen times in his two terms along with his famous tax rate cuts, about the only thing that can definitively be proved is that those on the upper end of the income spectrum were the primary beneficiaries of the tax changes. His spending tripled public debt and he was the only president to not raise the minimum wage since it was established in 1938. He did cut Social Security by $2.3 billion, but he did so at the expense of high school seniors (among others) who were depending on those benefits earned by their deceased, disabled or retired parents to pay for college. In the spring of 1982 they had a choice - leave high school and be enrolled full-time in college by April 1 in order to keep their benefits, do both full-time high school and college workloads at the same time, or finish high school and forfeit all Social Security benefits. As a further cost cutting measure, the Social Security Administration did not notify the 150,000 students who would be affected, citing it would be very expensive to send out individual notices. Reagan is also credited with getting runaway inflation under control but the author of that solution was none other than Carter-appointed Fed Chairman Paul Volcker. All Reagan had to do was listen to the man. Interestingly enough, Reagan fired Volcker because he didn’t feel he was de-regulating enough. In his place, he appointed Alan Greenspan, who turned out to be one of the major enablers of the financial meltdown of 2008. Oh, and the guy who first promoted the notion that government spending deficits have little consequence? Yeah, Ronald Reagan.

Back to foreign policy for a second, the Reykyavik summit of 1986 marked the first time Reagan officially addressed the growing nuclear arsenals. When he came into office, his rhetoric suggested a man who believed nuclear war was winnable. It wasn’t until 1983 that he began to realize that was not the case. So what changed his mind? Was it the September 26, 1983 close call when Soviet radar falsely detected a nuclear launch and nearly launched an all-out counterattack that caused him to change his mind, or the numerous published policy papers that stated nuclear war, even limited in scope, would be catastrophic? No, it was two Hollywood movies, the made-for-TV “The Day After” which aired in November 1983, and “Wargames”, which was released in June of that year. It was Reagan’s viewing of those two movies that changed his mind. Who needs policy wonks and experts when you can watch a movie or two, eh?

Reagan further added to his legacy of intellectual absentia with his handling of the Iran-Contra affair in which neither he nor anyone involved could recall anyone talking about or acting on diverting millions of dollars from arms sales to Iran, and from CIA-supported cocaine sales to help support the Contras fight a war with the governing communist regime in Nicaragua, a fight that would later be rendered moot by a free election. It was those “lapses” that enabled the legitimacy of political golems like Dan Quayle, George W Bush and even Sarah Palin to be considered viable candidates. Fifty years ago, the mere suggestion that those gaffe-masters could be in the White House or even close to it would have been met with derisive laughter. But not after the old Gipper.

He sold chemical and biological weapons to Saddam Hussein, the most insane tyrant in the Middle East… and that’s saying something. How do we know? Among other places it was reported in one of the most respected defense journals in the world, Jane’s Defense Weekly. Hussein also made no secret about having them when he used them against Iranian troops during the Iran-Iraq war and again against the Kurds to quell an uprising. It wasn’t a question whether Saddam Hussein had chemical and biological weapons when the US forces invaded Iraq in 2003; the only question was whether he had any left and whether he had developed the means necessary to make more.

Another unsettling Reagan moment occurred in 1983 when he sent the armed forces to Lebanon to restore order in the always turbulent Middle East. Instead of imposing order, their barracks was destroyed by a suicide bomber and 241 Marines lost their lives. Less than 48 hours later he invaded Grenada, a move that was criticized worldwide, including by staunch US allies Great Britain and Canada. A cynic might suggest the invasion was merely a diversion to the disaster in Lebanon. After all, the coup that had overturned the government in the former British territory had occurred almost two weeks before. And although the invasion was considered a resounding success by the American public – and why not with an invasion force of more than 7,000 well-trained American soldiers facing 1,500 poorly trained Grenadians and 700 Cubans - it was later revealed that many of the American fatalities occurred due to the fact that the soldiers were forced to use tourist maps that had no topography and all the critical locations had been marked by hand. The support fire was directed by similar maps but due to minor differences in the hand-drawn coordinates, they ending up firing on American positions. For all the increased spending on defense, particularly weapons systems, did anyone in the Reagan administration consider that logistics might also be important? Three months later, Reagan quietly withdrew the Marines from Lebanon. Osama bin Laden later cited that withdrawal as a sign of American weakness.

It’s interesting that Jimmy Carter is blamed for a lot of America’s problems during that period, that he was the one who made the country weaker. But it was Carter who began the funding/arming of the Mujahedeen resistance in Afghanistan that eventually forced a stalemate with Soviet forces, a policy expanded by a Democratic Congress, not Reagan. It was also Carter who realized that dependence on foreign oil was a national security issue, and in 1980 alone he reduced our dependence on it by 23%. That policy was reversed under Reagan. Thirty years, three wars and one horrific terrorist attack later, we finally seem to be coming to the same conclusion Carter did. In 2010, CATO analyst Ivan Eland published a book called Recarving Rushmore and in it he ranked the presidents by how libertarian (read: working toward a smaller government) their administrations were. He ranked Jimmy Carter #8, right behind George Washington, largely on the strength of his de-regulating key strategic industries (airline, phone, trucking, railroad). Reagan, by the way, was ranked #34, two spots below noted liberal, government-growing Lyndon Johnson. However, among the domestic government programs Carter did initiate was the Superfund, which has been responsible for cleaning up 347 toxic waste sites nationwide largely at the expense of the original polluters. As far as defense spending, he directed the creation of DEVGRU (aka Seal Team Six) after the military's failure to rescue the Tehran hostages. Carter green-lighted AWACS (a system that has been a critical part of coordinating our armed forces for the last three decades) and the cruise missile program, but cancelled the B-1 bomber, in large part because it was stupid: it carried half the payload of the B-52, its operational range was 1,000 miles less and could not drop its bombs at supersonic speeds, its primary reputed advantage to the B-52. Essentially it had no tactical advantage over a plane 30 years its senior. By the way, Reagan re-started the program at a cost of $283 million per plane. He built 100 of them. Carter started the B-2 stealth project, poured funding into the F-117 stealth fighter and gave the go ahead for the first Trident missile submarines. So, in summation, he was responsible for reduced dependency on unstable foreign powers to supply our energy needs, a smaller federal government that made us safer, and a more effective way to deal with the real threats of the 21st century. Personally, my favorite Carter development was the elimination of some of the holdover regulations from Prohibition that outlawed home brewing. If you enjoy brewing your own beer or that from a particular micro-brewery, you can thank Jimmy Carter. So did he really make us weaker? Or just smarter? One thing that is indisputable is that he clearly improved our choice of beverages.

Reagan, on the other hand, got us more deeply involved in the political maelstrom that is the Middle East and increased our dependency on foreign oil. It turns out that Reagan’s foreign policy was the genesis behind many of the major international problems we have today. He also gave a bully pulpit to a whole generation of economists who think that deficits don’t matter and who think Chile is a shining example to the world about how wonderful Friedman/Chicago school deregulation/privatization economics are. That philosophy provided the framework for subsequent meltdown/bailouts of the Savings and Loan industry in the 1990s, and the 2008 meltdown which will cost American taxpayers trillions of dollars in bailouts and lost jobs/wages. Despite his marble-chiseled reputation, the reality is that Reagan was nothing more than a birthday party clown. The children at the party were amazed and entertained by him, and will remember his act in the most euphoric terms possible. But the adults in the room will understand that he was just making balloon animals for the kids and that two days after the party, those party favors became a choking hazard. There’s an old saying that children should be seen and not heard. Maybe it’s time for the children to be quiet and do their homework.

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