Inflation: Reagan's Singular Economic Achievement

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We are deluged with Ronald Reagan celebrations and retrospectives, but most are misleading. They omit Reagan's singular domestic achievement and the wellspring of his popularity: the defeat of double-digit inflation. In 1979 and 1980, inflation averaged 13 percent; by 1984, it was 4 percent - and falling. Without subdued inflation, the economy would have remained a mess and Reagan might have lost his 1984 reelection bid. He certainly wouldn't have won his 58.5 percent to 40.4 percent landslide.

You will not find this in most of today's Reagan appraisals, which tell us more about the appraisers than about Reagan. In an 11-page cover package, Time magazine doesn't mention inflation but pronounces Reagan a "transformational" leader whose political style - not his policies - should be emulated by Barack Obama. In its 11 pages on Reagan, the conservative Weekly Standard also avoids inflation and argues that Reaganism endures as the rediscovery of the "principles of the founding."

Liberals want to appropriate Reagan's present popularity, even though they ridiculed him while he was president as a dangerous moron who was cruelly shredding the social safety net. Conservatives have made Reagan into a quasi-religious figure who must be uncritically worshipped.

How "transformational" was he? Less than you think. He clearly altered political rhetoric. It became respectable to question whether government could solve every social problem. It became common to praise "free enterprise" and traditional American values: freedom, individualism, hopefulness. More Americans became Republican. Reagan's policies helped end the Cold War. But on government's role, where Reagan's influence is considered greatest, it was actually modest.

He didn't reduce its size. In 1980, federal spending was 21.7 percent of the economy (gross domestic product); in 1988, it was 21.3 percent - essentially the same, though there was some shift toward defense. The safety net was not shredded, and entitlements (Social Security, Medicare) were not contained. If they had been, today's budget debates would be unnecessary.

What Reagan did was restore a sense of order and optimism, which had been ravaged by inflation. Terrified Americans didn't know how high it would go or whether their wages and savings would keep pace. Rising from 1 percent in 1960, inflation had frustrated every president since Lyndon Johnson and had defied successive voluntary and mandatory wage-price controls. Government (it was said) couldn't govern. The fears resembled the acute anxieties of the recent financial crisis.

"By the summer of 1979, no other issue could rival inflation as a pressure on the American mind, its mood and family planning for the future," wrote the preeminent political reporter Theodore H. White. The reason: Inflation affected everyone; it was a unique threat.

One reason Reagan receives so little credit for its collapse is that Paul Volcker's Federal Reserve did the hard labor. Through sky-high interest rates, Volcker engineered a savage recession. Housing and auto sales collapsed. Unemployment rose to 10.8 percent. Reagan's role was to provide the political support that allowed Volcker to maintain the squeeze long enough to purge inflationary psychology. Companies and workers had to learn that outsize price and wage increases would result in bankruptcy and unemployment. If the Fed had relaxed prematurely, inflation would almost certainly have revived and exceeded its previous peaks.

No other possible president at the time, Democrat or Republican, would have so steadfastly supported Volcker. Reagan faced enormous pressure from both Republicans and Democrats to push the Fed to relent. He was vilified in the press; his approval rating fell to 35 percent. Reagan and Volcker, though lacking a close personal relationship, did share a common conviction: America could not thrive with high inflation. "Unlike some of his predecessors," Volcker later remarked, "he had a strong visceral aversion to inflation."

Without Reagan, Volcker would have failed. But this story confounds the preferred narratives of both liberals and conservatives. The lesson liberals draw (and urge Obama to imitate) is that Reagan's political success reflected his optimistic presidential stagecraft. It wasn't policy, it was presentation. Wrong. Reagan earned his success the hard way - by backing policies that, though initially unpopular, served the nation's long-term interests. That's called leadership, a quality Obama has yet to demonstrate.

As for conservatives, they argue that Reagan's tax cuts explain the 1980s economic revival, when the more important cause was controlling the inflation that had bred four previous recessions (1969, 1973, 1980, 1981). Once inflation fell, so did interest rates, and the economy recovered rapidly. Imagine Reagan's reelection prospects if double-digit inflation had persisted. There would have been no "Morning Again in America." Despite cuts in tax rates, the overall tax burden dropped only from 19 percent of GDP in 1980 to 18.3 percent in 1989.

Little of this matters to the politicians and pundits who use Reagan for their own purposes. History be damned.


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