Ronald Reagan’s death this past week marked the passing of an individual who will undoubtedly be remembered as one of the giant figures of the past century. He casts a large shadow, which continues to be seen today. He was born well before John Kennedy, at a time when Babe Ruth was the star pitcher at St. Mary’s School for Boys. He was a teenager when the Great Depression began and is in many ways a bridge across American generations.
I did not know him well, although I did work with him closely on a couple of occasions. He also gave me my first presidential citation, for which I am very grateful. He was certainly a gracious and likable individual, but it is more appropriate for those who knew him best to speak on those matters. I will confine myself to his economic legacy which, like other facets of his life, was large (but mixed).
On the positive side, it is necessary to turn our memory banks back to a most unpleasant time—just before he took office in 1981. I remember it well, as I was in the midst of completing the first iteration of the Texas Econometric Model. The prime rate of interest had spiked above 20% on two occasions, inflation was at 13%, and we were teetering on the edge of recession. There was a general feeling of despair (which was not helped by nightly reports on the plight of a group of American hostages held in Iran for more than a year). Ronald Reagan was able to effectively communicate a sense of calm and hope which, given the importance of expectations in driving economic behavior, was quite beneficial.
The next few years were painful, as the inflationary spiral was broken at the expense of very high unemployment. This change was primarily the handiwork of the Federal Reserve under Paul Volcker’s leadership, but it would have been difficult to achieve in the absence of tacit approval from the White House.
Another cornerstone of the Reagan Presidency was a move toward economic deregulation. The benefits of this trend, which continues to move forward, are enormous and undeniable. Along the way, however, some serious and unnecessary disruptions were meted out. In the financial sector, for example, the transition to an open market (coupled with the first round of Reagan tax policy) led to massive overbuilding, the failure of thousands of financial institutions, and a gargantuan federal bailout. Much of this debacle could have been avoided with more careful and coordinated policy. (It must be recognized that the fine details of legislation tend to be within the purview of Congress).
In a similar vein, his push for free trade and open markets was definitely needed, and the world continues to benefit from his impetus. His foreign policy on other fronts, however, had some negative consequences. The demise of the Soviet Union may well be his greatest legacy, and it was a momentous achievement by any standard. His strategy, however, involved destroying the export base of the area (primarily oil and gold). In the process, he also devastated the US petroleum sector, causing great hardships for Texas and diminishing our prospects for ever achieving energy efficiency and less dependence on volatile Middle Eastern suppliers. (There were, of course, other factors involved.) While the US economy enjoyed a substantial boom in the mid to late 1980s, Texas, Louisiana, Oklahoma, and Colorado were plundered.
The Reagan tax policy was always something of an anomaly. He preached “supply side” economics, but his major impact was through “demand side” tax cuts. The details of his two major tax initiatives first helped to create the real estate bubble and then made the recovery more difficult. His bold “Star Wars” spending plan, coupled with tax reductions, brought spiraling budget deficits. At the same time, his domestic policy exacerbated the plight of some less fortunate individuals in ways that continue to defy remedy. There is no question, however, that his policy did stimulate spending in the economy and support much needed innovations.
Like virtually every President, Ronald Reagan’s economic legacy is mixed. Like virtually everything about Ronald Reagan, it is also large. We are at one of those times when it is appropriate to offer an overall perspective, but we shouldn’t dwell on it. It is best to mourn the passing and celebrate the life of one of the most important and endearing figures of the 20th Century. His lingering shadow is giant indeed.