The Reagan Counterrevolution

In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound.

In contrast, the country has now hitched its wagon to the views of Barack Obama. We don’t know much about what he truly believes about economics, but the little that we do know is not encouraging. Obama has repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution.

The President-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving. Like most of his generation, Obama believes that economic growth results from consumer spending, primarily from the middle class. Any policy that keeps the consumers headed to the mall will be promoted.

Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful. The effort to concentrate more power in Washington will be far more appealing to Congress then Reagan’s idea of restoring it to the people.

This sharp contrast in philosophy should not be taken lightly. Reagan looked to unleash the pent-up free market forces that had been smothered by a generation of Great Society reforms and uninterrupted Democratic control of Congress. Today, the public is looking for the Obama Administration to create the growth that the free market has apparently destroyed. The hope that our economy will grow as a result of government spending and micro-management is the most seminal shift in political philosophy since the New Deal.

Despite the absence of Reagan’s promised spending cuts, the economy generally did well during his presidency (The growth would have been more genuine if the cuts had been delivered). However, Obama’s policies will immediately make the current situation worse and the nation will suffer severely as a result. Rather than a sharp recession at the beginning of his term followed by a significant expansion, the recession that Obama inherits will be far worse when his first term ends.

What nearly all politicians, on both sides of the aisle, fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America’s borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression.

Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan of the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border.

However, if this shift proves temporary and Obama’s reign either ends in one term or if he can summon the intelligence and courage to reverse course once the situation deteriorates, then perhaps one day there will be light at the end of a very long tunnel.

While all of us can certainly hope for the best, prudence suggests that we had better prepare for the worst. Not only does that mean divesting our portfolios of U.S. dollar denominated investments but preparing for the possibility of emigration. With economic conditions at home becoming increasingly intolerable, the call of freer economies and greater prosperity abroad may be too tempting to resist.

Comments

[formerhawk]

Good post. We don't know what Obama will do because he doesn't vote on many issues. As you say the spend philosophy in Washington has never abated and is at the crux of our problems.

2008 Nov 09 08:20 AM

[User 294358]

So... still... the only important thing in all of this is your "portfolio"? And you'll still support anything that boosts your portfolio no matter what it does to the rest of the country? And you'll oppose anything that levels the playing field between Wall Street parasites who make their living sucking the life's blood of this country and producing nothing while the people who actually work for a living go without basic necessities in order not to adversely affect your "portfolio"?

Is there anything... anything at all... that might take precedence over a slight reduction in the amount of wealth in your "portfolio"? Are you truly so greedy... so selfish... that you would outsource the wealth of this country to one of those with "freer" economies (Communist China I presume) if any attempt were made to lower the gap between your "portfolio and my dinner table and reogn in the stupidity that brought us the current debacle in which you and your ilk remain bulletproof while we working stiffs take the hit for your stupidity and greed?

Excuse me again, but isn't outsourcing most of the decent jobs and much of the investment in this country something you've already been doing for a while now?

Of course I've gone on way too long but attitudes like yours, based on maintaining the Wall Street stranglehold on the wealth of this country was most likely the main reason Obama was elected in the first place. Just what the hell do you accomplish by threatening to take your little marbles and go somewhere else to play if he doesn't continue the exact same policies that brought us the biggest financial meltdown since 1929?

2008 Nov 09 08:27 AM

[ferguson]

When Reagan was president he could not distinguish between the history of real events and the history of movies he had played in. Peter Schiff is equally delusional, seeing salvation in the credit default swaps created by the unfettered free market and armageddon in responsible regulation. I applaud Peter Schiff's threat to emigrate. I am sure he can find some tax haven where he can live the good life unburdened by the challenges and responsibilities that Reagan and Bush et al have left behind.

2008 Nov 09 08:28 AM

[lefty37]

To help fix the economy, first get rid of All of those fuzzy, complicated, bundled, speculated, financial instruments which brought down the large fin. institutions. Then get rid of All of the market equities that are not backed by something of Real value. Ban every fund that does not invest in real assets. Forget , shorts, indexes, derivatives, etc. Any investment should be a part of something real. Throw out SPECULATORS!
Step two, Take LARGE steps to return living wage jobs back to the United States. When the general population makes a living, the economy prospers. Could go on, but will hush, for I know it's an exersize in futility.

2008 Nov 09 08:41 AM

[Buffett Jr]

You make no sense with this line.

"What nearly all politicians, on both sides of the aisle, fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection."

You say regulations were the problem yet recklessness were too in the same breath. If they had been better regulated the recklessness could not have happen. Look you made a great call with the housing collapse but don't get fooled by randomness. You can't be right every time and this article is proof of that.

2008 Nov 09 08:49 AM

[john s. gordon]

your dogma/doctrine is showing sir. emigration to the cayman islands is your probable course of action.

free markets are wonderful if you can find one that isn't rigged by the speculators/hedge finds. we haven't had a free market for many yrs. a market with responsible wise regulation is what is needed.

reagan's policy was to give reckless irresponsible tax cuts to millionaires and delusionally promise that something would actually trickle down to other citizens.

all that happened was the yachtbuilders grew rich while everyone else starved.

reagan's policy was to militarily outspend the USSR in hopes they would be bankrupted sooner than us. our bankruptcy has now occurred.

reagan was a failed movie actor in B movies who suddenly impersonated a president for 8 yrs. the performance deserves an academy award.
> jack

2008 Nov 09 08:50 AM

[willynill]

What Reagan understood and most leftists don't understand is that our economy is not a zero-sum game. When someone loses (via higher taxes, e.g.) doesn't mean that someone else gains. That is not zero-sum, that is lose-lose. Increasing taxes on the rich more always hurts the poor more than it hurts the rich. And it is not "trickle down", it is "cascade down." Also, trying to find another country that is better than the U.S. economically is an exercise in futility. Look at the downward spiral of Europe; China? No, China will get old before it gets rich.

2008 Nov 09 08:59 AM

[[e-mail]]

User294358 response is why we are going backwards not forwards. France has elected a conservative to try to unwind the public unions - he can't because of the political force. Sweden unwound their nanny state with dramatic results - not going back anytime soon. Canada going back to conservative leadership.

Why? Because socialism doesn't work. Having large public and private sector unions force contributions to one political party who then creates industry conditions to scare off competition including foreign. This will of course have disastrouos - look at Europe that all score significantly higher in education level. They have large unemployment and dismal GDP. They keep interest rates high because inflation will trigger more automatic union raises.

Show me how you are going to produce a TV in this country with higher minimum, higher health costs from nationalizing, more litigation, higher environment regulation and costs, and much easier union organizers.

Now we get to the envy part over disparities in wealth - this too has been played out in Europe and it works for politicians and impoverishes the citizen. Why would the portfolio (we have 7 trillion on the side) invest with these hurdles when other areas are significantly better. You can get mad all you want but it is futile - the investor- like everyone else doesn't go to work for free- nor should he be forced to keep his currency here.

What socialist state citizens will not tell you - many barter or work under the table, this constituency votes in higher taxes, the rich citizens leave and come back from tax free havens and have ribbon cutting ceromonies with the same politician who is giving them tax breaks to open a new factory celebrating foreign investment (with all sorts of perks).

Think about it - part of this current decline is a flight of capital. It it is very difficult to reverse investor confidence. Equal portfolios is failed religion - everyone talks it but why don't you read about how some of the most liberal polticians in the US amassed their fortunes and their current effective tax rate.

2008 Nov 09 09:02 AM

[Ferdinand E. Banks]

Reagan was gorgeous, wasn't he. Somebody complained because I call myself the leading academic energy economist in the world, but the reason for my occupying this station is that I read and speak english, and I can add and subtract. Reagan's government borrowed more money than had been borrowed previously in the history of the Republic, to include two world wars, and in addition he thought that it would be better for Europe if they imported gas from Argentina rather than the Soviet Union. Incidentally, 'Europe' listened to him, and as a result the pipelines that were constructed from east to west were less than optimal size. In addition, although being stationed in Hollywood during WW2, he informed an audience somewhere that he had seen action in Germany.
At the same time it cannot be denied that he was a decent man, and tried to do his best, but his best mainly helped the better off elements in the US.

And finmah, I don't remember hearing about any socialism in Sweden except from my upper middle class students of international finance. Actually, the relation of socialism to Swedish social democracy is about the same as that be tween a rap standard and a Cole Porter evergreen.
In other words, no relation at all.

2008 Nov 09 09:23 AM

[montyman]

I'll keep saying this over and over again. If the worst-case scenario happens and the U.S. goes down the tubes, the rest of the world goes with it. There would be no good places to emigrate to in such a case.

2008 Nov 09 09:32 AM

[surgcare]

All you left wing "whinners" who supported Obama are about to find out just how bad Obama , Reid and Pelosi can destroy america .Those who think america is the greatest country are totally delusional . Why is it that the american auto makers can't survive in their own counry while foreign automakers like Honda ,Toyota etc are doing well . UNIONS Wall street didn't bankrupt the auto and steel industry and next the airlines , its the unions .

2008 Nov 09 09:34 AM

[russ]

The bias and Pollyanna view of Reagan undermines everything that follows in the post. The fact remains that the so-called free markets are often manipulated and abused for short term personal gain, whether it be by the John D. Rockefellers of yesterday or of today. Unfortunately, we need government to set a moral-operational standard to prevent excess and greed and when they do not, the result is a loss of confidence and market value, just as we have seen. Reagan was a bumbling ideologue confusing his movie lines with reality and eventually confusing everything. In the end, his mental deterioration was such that he was a functioning movie prop

2008 Nov 09 09:37 AM

[msoori]

You are complaining because you are not going to be allowed to steal from the poor in the future? Everything you speak of has already been done by the current administration over the past 8 years. Have you been asleep during all of this? And now you are looking at your broken crystal ball even before Obama goes into office. If this is not bigotry, what is?

2008 Nov 09 09:56 AM

[notsosmart]

nothing works when you have scammers & scoundrels in charge of finances.this greedy author makes no mention of the fact that reagan did not have to deal with phony AAA rated paper,lying ceos,selfserving boards.humans have to be regulated & cant investigate themselves.its sad but true.this fast moving world cant wait for 436 people to agree on anything.big business moves quickly(enron,worldcom... & putting the crooks in jail does not return the value of lifetime work to the fleeced sheeples who allow this to happen.

2008 Nov 09 10:08 AM

[User 86999]

Peter, I have read your book and have been reading your articles and watching your comments on tv. What you say makes sense most of the times, but then suddenly, you say something that is either too simplistic or just doesn't make sense. Buffett Jr has pointed out one above.

Can you write a focused and concise analysis of why we're in such a historic financial turmoil and what exactly was the role of regulation in this turmoil. I think that effort will make your case more believable. The general statements like regulation is bad is not strong enough evidence. As economists we should be able to back up with empirical data.

I would argue that the lack of regulation is exactly why the bankers' greed got out of control and now we're all paying for it. The gov has to step into the situation after all, because the final tab of that greed is running into trillions (yes, with a T), and no private enterprise has that kind of money; besides when you start selling those junk CDO and CDS vehicles to foreign enterprises, the gov will be forced to step into resolving any conflicts. So, how do you propose the private enterprise to be able to self-regulate. I think the current situation already self-evident of what self-regulation can cause.

2008 Nov 09 10:09 AM

[GerryB43]

Let us look at the record: economic growth restored, inflation contained, stock market at record levels, huge increase in jobs, all while winning the cold war for freedom-loving people of the world. Pretty good record in spite of not getting the entire growth agenda enacted into law. This legacy of Ronald Reagan has been eroded by two decades of creeping increases in state control of the activities of our daily lives. The number of pages added to the Federal Register each year is a pretty good measure of the level of regulatory interference in the economy and it is now at an all-time high. After a sharp decline in the Reagan years, it has climbed steadily through both the Clinton and the Bush years. It is not just the Federal intrusion - state power has steadily increased too. The myth of the Bush deregulation is just that - a lie told repeatedly by too many politicians and media pundits.

And now we have a new President who clearly promises an acceleration in regulation at rate not seen since Richard Nixon. If you care to check the numbers, just click here: www.mercatus.org/uploa...

So, Peter, you are correct in your prognosis. The end of prosperity is near.

2008 Nov 09 10:15 AM

[vv]

since the reagan era, we've had our lunch eaten by countries (think Korea, China, Singapore) that combine capitalism with the use of government as a 'super venture capitalist'. As wall street and traditional vc's have become increasingly afflicted by attention deficit syndrome, the reaganian doctrine is out of sync with the times and needs a refresh. you need government to provide a base level of stable investment (e.g. on alternate energy) so that capitalism can work

2008 Nov 09 10:19 AM

[Haigh]

You have to be a bumbling idealogue to think that government can set a moral-operational standard.

Just take Social Security, the idea that the burden of one generation's retirement should weigh on the shoulders of another generation.

Blind faith in the efficacy of government is no less ideological than blind faith in the free market.

And what happens to a blind man when he negotiates dangerous terrain? Bodily harm.


On Nov 09 09:37 AM russ wrote:

> The bias and Pollyanna view of Reagan undermines everything that
> follows in the post. The fact remains that the so-called free markets
> are often manipulated and abused for short term personal gain, whether
> it be by the John D. Rockefellers of yesterday or of today. Unfortunately,
> we need government to set a moral-operational standard to prevent
> excess and greed and when they do not, the result is a loss of confidence
> and market value, just as we have seen. Reagan was a bumbling ideologue
> confusing his movie lines with reality and eventually confusing everything.
> In the end, his mental deterioration was such that he was a functioning
> movie prop

2008 Nov 09 10:22 AM

[Greame H]

the polarized views expressed above are so typical of the bankrupt state of debate at this at point in an economic crisis. Go back to the UK in the 60's 70's for a historical perspective . Capital and talent is fungible and will not stick around to babysit the idle or unskilled. Sorry it's human nature . You can dream otherwise, but either let the market remunerate "talent" or settle for living in a second rate country in relative equality with your neighbors.........bye!

2008 Nov 09 10:46 AM

[David Martin]

Obama is far too late to destroy America, as the job has already been done so thoroughly by the neo-cons.
I suggest you emigrate, but leave behind the money you have looted from the system in your association with the gangster capitalism that has been the current practise for many years.
BTW, I speak as someone who has been a conservative all my life.
Capitalism though bears only a passing resemblance to the pillaging which has occurred, with vast sums taken by fraud whilst real wages stagnated.

2008 Nov 09 10:47 AM