Political Economist

Political aspects of the Reaganomics

Given all of these economic consequences of the 1^st Reagan administration, it would be interesting to ask why so many ordinary Americans voted again for the 2^nd Reagan administration in 1984’s presidential election. Why did so many owners of farms and middle scale manufacturing industries vote for Reagan? Why did ordinary young Americans vote for the Reaganomics?

With respect to these questions, there might be following two answers: the first is related with Republican Party’s clever political strategy during the election period. From a political perspective, Reagan’s political strategies were more brilliant than those of Jimmy Carter and later Democratic Party’s presidential candidate, Walter Mondale.

Reagan promised relief from the anxieties of inflation without mentioning the costs of recession and unemployment. “Republican Party asked Americans to enlist in a great struggle to restore the nation’s economic health. But instead of demanding sacrifices and self-denial as Jimmy Carter had, Reagan demanded only that citizens accept a reduction in their taxes.”(369)

“Republicans held the symbolic high ground that the Democratic Party had once own in national politics – the party of growth and prosperity. On the contrary, Democratic presidential candidate proposed painful remedies – a major tax increase and substantial budget reductions to restore fiscal order.” (610)

From historical perspective, the historic positions of the two dominant political parties were reversed for the first time in political history during the 1984 election. “The Democratic Party felt trapped by its past government deficit policy, still tarnished by the inflationary anxieties experienced under Jimmy Carter.” Democratic leaders decided that they must convince the public of their newly developed sense of responsibility and so they campaigned for fiscal discipline.

In the meantime, the president’s party had effectively abandoned the old Republican orthodoxy that the Democrats started to attempt to mimic. From 1984 election, Republicans started to appeal their rhetorical loyalty to the idea of a balanced budget and fiscal order.

Of course, however, the conservative party had adopted the opposite in actual policy – an economy driven by increased federal spending (mainly for military subsidies) and increased debt (mainly from tax cuts), the most serious fiscal deficit policy ever attempted in peacetime. The old Republican complaint that deficit spending ultimately led to ruinous inflation was conveniently discarded in the presence of Republican federal deficits.

Secondly, Reagan fused nationalism into his presidential campaign. “It’s morning again in America,” “America is back,” “You ain’t seen nothing yet” are common slogans he used during the election campaign. “The spirit of nationalism, the warming glow of patriotic ferver swept the country.” And the news media amplified the illusions.

But from the benefits of hindsight, the Reagan administration’s economic policies were anything but nationalistic. Domestic industries – manufacturing, agriculture, oil and other minerals – were being decimated by the combined effects of Washington’s fiscal and monetary policy. “Ronald Reagan’s symbol of American revival, the strong dollar, was in reality assisting America’s foreign competitors, ceding a larger and larger share of world trade to other nations.”(643)

Nonetheless, what most ordinary citizens knew from their own lives appeared to match what the President told them. “The anxiety of price inflation was gone. Most important of all real disposable income per capita was rising throughout the campaign year at an extraordinary pace. In 1980, when Jimmy Carter was up for re-election, price inflation was above 13 percent and real disposable income was shrinking slightly due to brief recession.” Thus, when the President Reagan asked, ‘Are you better off than you were four years ago?,’ “the answer seemed self-evident for the majority of Americans.”(643)

Theoretical implication of the 1980s

From theoretical perspectives, economic policies adopted under the Reagan administration in 1980s can be characterized by free market fundamentalism along with monetarist anti-inflation policy. As we already mentioned, these economic strategies was based on the negation of the previously dominant liberal Keynesian economics.

However, unlike the forward-looking expectations of “supply side economics,” it was “demand side” which pulled and induced the investment. Even under the dire circumstances, it was not capitalist or entrepreneurs but ordinary households and consumers who spent their money leading entrepreneurs to expand their production facilities. In this sense, Keynesian notion of “effective demand” has remained effective even under the dominance of “supply side economics” in economic policy area.

Furthermore, Milton Friedman’s concept of inflation turned out to be wrong during the Reagan administration’s policy experiments. Friedman ascribed the cause of inflation to the excessive quantity of money supplied by the central bank. In other words, if the government pumped out too much money relative to the quantity of money necessary for the overall operation of economic activities in a given condition, he argued, this monetary policy would lead to inflationary pressures in the near future. According to him, inflation has been and will always be a “monetary phenomenon.”

However, apart from the question related with adequate quantity of money (how can we know and to what extent is the overall quantity of money necessary in a given condition?), his explanation missed the significant role of the velocity of money. If the velocity of money changes due to various reasons, his argument that the Fed should focus on the overall quantity of money, instead of trying to regulate real interest rates, would lead us in the wrong direction.

In sum, Reagan’s 1981 tax bill failed not only to increase the average saving rates in the United States, but also to induce the investment on productive capital. The Fed’s tight monetarist money policy not only depressed manufacturing sectors but also decimated future growth potentials of the US economy.

Concluding remarks

It seems necessary for me to conclude this review essay by introducing the merits of this book. The first virtue that I would like to mention is its style and structure. It is written and organized in plain English. Even those readers with basic level of English proficiency would not find any serious difficulties in understanding the main contents of the author’s arguments. Even though it seemed to be somewhat thick compared to ordinary paperbacks at first glance (717 pages for main contents and total 798 pages including reference, appendix and index), the way of writing was easy to follow and even exciting. It took a week for me to finish reading the book.

Second, the book is well organized. The book consists of four major parts, each of which mainly deals with the Fed’s institutional characteristics (“Part one: secrets of the temple”), its history and traditional roles (“Part two: the money question”), the Fed’s monetary policies in 1980s and their repercussions (“Part three: the liquidation”) and finally evaluations of the Fed’s economic policies in socio-political perspectives (“Part four: the restoration of capital”). Every chapter is closely connected with each other.

Third, this book is based on wide range of references, data analysis and intensive interviews. As you can see, the author spent for about 5 years to gather basic data and references. He also conducted in-dept interviews with former Fed chairman and many government officials in order to represent policy debates and economic climates around the Fed and the White House at the time. The author’s honest and meticulous descriptions of the affairs offer enough information about the Fed and US contemporary economic history.

Fourth, this book contains wide range of knowledge about the US history, philosophy and sociology not to mention economics. It deals with not only domestic consequences of the Fed’s policy in the 1980s but also shows how those policies have affected on world economy. In this sense, I was tempted to conclude that the subtitle of the book should be changed into “How the Federal Reserve Runs the World Economy.”

In sum, this book will be a very helpful guide for those who want to understand the history of US economic affairs – how does it develop and where will it go. Instead of doing laborious work for myself, I would like to finish this essay by citing the following precise praises for the potential readers: “startling and revelatory as well as probing and incisive. It is not only a major journalistic achievement but a major public service, for it is an immensely valuable addition to our understanding of the hidden forces that shape our lives.” – Robert A. Caro; “I expect this book to shake up Washington and probably Wall Street too. Bill Greider’s reporting goes right to the bone and marrow of American politics – how the government really decides the largest economic questions and whose influence really counts. This book may also be the public’s best chance to understand an enormously complex subject – money – because Greider’s narrative makes it lucid and even exciting.” – David A. Stockman; “a fascinating account of Paul Volcker’s extraordinary management of the Federal Reserve Board, and through the Fed, the American economy. I don’t know of any book that has made so ambitious and effort and succeeded so brilliantly.” – Robert L. Heilbroner; “a masterly look at the Federal Reserve System, William Greider drops the other shoes and argues that much of what passes for economic policy is really about politics. This is a book that should be read and talked about from one end of the country to the other.” – Senator Edward M. Kennedy.

* Reference for this review

Friedman, M. 1963. A Monetary History of the United States, 1860-1960, Chicago: University of Chicago

Krugman, P. 1990. The Age of Diminished Expectations – U.S Economic Policy in the 1990s, Cambridge: The MIT Press

------------. 1994. Peddling Prosperity – Economic Sense and Nonsense in the Age of Diminished Expectations, New York: Norton & Company

* Further reading list about the history and roles of the Fed and the US economy

Greider, W. 1992. Who Will Tell the People – The Betrayal of American Democracy, New York: Simon & Schuster (focuses on the implications of the Fed for the American democracy)

Woodward, B. 2001. Maestro – Greenspan’s Fed and the American Boom, New York: Simon & Schuster (deals with the roles of the Fed in the 1990s focusing on Alan Greenspan’s leadership and personality)

Rothbard, M. 2002. A History of Money and Banking in the United States – The Colonial Era to World War Ⅱ, Alabama: Ludwig von Mises Institutes (deals with the history of the US central bank system from the perspective of Austrian school of economics)

Stiglitz, J. 2003. The Roaring Nineties – A New History of the World’s Most Prosperous Decade, New York: WW. Norton & Company (deals with the US economic affairs in 1990s under the Clinton administration based on his personal experiences as an economic advisor for the President)