Witness to a Revolution?


Revolution, by Martin Anderson, New York: Harcourt, Brace, Jovanovich, 486 pages, $19.95

Reaganomics: An Insider's Account of the Policies and the People, by William A. Niskanen, New York and Oxford: Oxford University Press, 363 pages, $19.95

When asked to sign an academics' statement supporting Ronald Reagan during the presidential campaign of 1980, I refused. I did so on the basis of two pieces of evidence. The first was Reagan's mediocre record as governor of California. One of his worst acts, committed shortly after he took office, was to give California one of the country's most "progressive" (graduated) state income tax systems in an effort to erase a short-term budget deficit inherited from the senior Governor Brown. The second piece of evidence was his commitment during the 1980 campaign to cut government spending by attacking "waste, fraud, and abuse." Not that I favor waste, fraud, and abuse. Rather, my objection was that if Reagan interpreted those terms as narrowly as they are usually interpreted, he would not cut government spending programs that really should be eliminated—subsidies for farmers, for example. I never imagined during the 1980 campaign that Reagan would make a serious and sustained attempt to cut the size, let alone the growth, of the federal government.

I was wrong. In his first month in office, Reagan removed price controls on oil and disbanded the Council on Wage and Price Stability that had been running former President Carter's wage and price guidelines. He rescinded a number of "midnight" regulations that had been imposed during Carter's last days and proposed sharp budget cuts and even larger tax cuts. And that wasn't all. In his speeches to Congress and the nation, Reagan took the offensive, blaming government for the nation's economic problems.

That first month left me in shock. When I heard the president of the United States saying in his speeches some of the things I had said in mine, I felt mixed emotions. On the one hand, I felt gratified that finally a man who shared some of my most deeply held political and economic beliefs had the power to act on them. On the other hand, I felt threatened: Reagan was challenging my view of myself as a rebel, a view in which I had invested a lot of emotional capital.

That month, my political values struggled with my self-image. My political values won. I decided that I wanted to join Reagan's crusade to roll back the government. I went to Washington, where I worked first in the policy branch of the Labor Department under Hoover Institution economist John Cogan and later at the Council of Economic Advisers under Murray Weidenbaum and then under Martin Feldstein and Bill Niskanen.

By the time I got to Washington in late 1981, David Stockman had already helped torpedo the Reagan revolution by giving damaging interviews to then–Washington Post reporter William Greider. The 1981–82 recession had also begun. Both factors made further budget cuts even harder to attain. As a result, I missed the peak of Reagan's political power and was not in on many important attempts to tame the government.

The only one major old regulation I helped make less onerous was the one on fuel economy for new cars. Mostly, I helped to prevent new government programs. Sitting on the inside seeing Reagan and his advisors squander opportunities for cutting government and seeing Congress head Reagan off at almost every pass, I found it hard to think that I was part of a revolution.

Was there a Reagan revolution? Two recent books disagree on the issue. What makes the disagreement particularly interesting is that it is between two of the most libertarian of Reagan's high-level appointees, men who were and are political allies: Anderson, formerly Reagan's chief advisor on domestic policy, and Niskanen, a member of Reagan's Council of Economic Advisers and subsequent acting chairman. In Revolution, Anderson argues, as the title implies, that there was a genuine Reagan revolution. In Reaganomics: An Insider's Account of the Policies and the People, Niskanen says it ain't so.

If you look just at economic policies other than tax policy, you would have to say that Niskanen is right. Take government spending. According to Anderson's numbers, Reagan's goal was to bring spending to 18.6 percent of gross national product by 1985, down from an estimated 22.7 percent in 1981. Did he achieve it? The closest Anderson gets to answering is to describe the long economic expansion that we have had since 1982: "Reaganomics," he writes, "turned the economy into a money-making machine that allowed him to preside over the largest increases in social welfare spending of any country in history." In short, Reagan failed to cut domestic spending. By 1985, spending had increased to about 24 percent of GNP, over 5 percentage points above Reagan's goal. But you won't find that fact anywhere in Revolution.

Niskanen points out that Reagan made large cuts only in a few categories such as welfare support services and energy. How many spending programs did Reagan eliminate? Only one, but to Reagan's credit, a big one: the $5-billion revenue-sharing program for state and local governments. Reagan slowed the growth of new regulation but also slowed the deregulation movement that had gathered steam during Carter's term. How about Reagan's record on trade? Reagan, Niskanen states flatly, "imposed more new restraints on trade than any administration since Hoover."

Niskanen's conclusions are not totally negative. He credits Reagan for two major policy achievements. First, Federal Reserve Board Chairman Paul Volcker, backed by Reagan, reduced inflation by six percentage points—even more than Reagan had intended. In the process, they showed that inflation is easier to tame than many economists had thought. Niskanen claims that the true cost of cutting each percentage point of inflation turned out to be less than half the $100 billion (in 1980 dollars) in lost output predicted by President Carter's economists.

Second, Reagan dramatically reduced taxation of individual incomes. On tax policy, there was clearly a Reagan revolution. Reagan's biggest victory was his gutting of the "progressive" income tax: he reduced the top rate on individual income from 70 to 28 percent. Most of the industrialized countries around the world have been scrambling to follow the U.S. example: Canada's top federal rate, for example, is now only 29 percent; New Zealand's is 33 percent; Britain's, 40 percent. Certainly, Reagan has had a revolutionary impact on federal taxes that more than makes up for his earlier progressive-income-tax sins in California.

But the real revolution, argues Anderson, was in the realm of ideas. Anderson has that rare ability to look at the big picture—to keep his eyes on the prize. And the big picture, to Anderson, is the death of socialism worldwide and the corresponding shift in thinking toward "the new capitalism." Not that Anderson gives Reagan credit for this shift. He claims that Reagan, like Nixon and Goldwater before him, was created by, as much as a contributor to, the political movement toward the new capitalism.

Although I have trouble imagining Nixon as a closet believer in laissez-faire, Anderson is right about the dramatic shift toward procapitalist thinking. Take economics, for example. Only 18 years ago, I could read virtually everything written in journals and magazines by free-market economists. Now I can't keep up with 5 percent of what is written in English. And the foreign-language free-marketeers are at it too.

Revolution should not be read as a detailed analysis of economic policies. That is not what it is, nor what it claims to be. Instead, it is a kind of poetic political manifesto. Fellow REASON contributor Roy Childs has called the book "a libertarian counterpart to what liberal historians and commentators did to—or for—the administrations of Roosevelt and Kennedy." I second that. Revolution is about the values that motivated Reagan in his 25-year quest to tame the federal government. And Anderson writes with a power and a sweep that are rare for an economist.

In some ways, Revolution reminded me of Ayn Rand's novel The Fountainhead. This is perhaps not surprising, given Anderson's early association with Rand. Like Rand's novel, Revolution is about abstract ideas and the flesh-and-blood people who have those ideas. The most fascinating character in this large-stakes drama is Reagan himself.

As Anderson demonstrates with his tale of how Reagan made it to the White House, his biggest virtue is tenacity. Throughout the 1960s and 1970s, he stuck to the same message: the federal government spends too much on domestic programs and overregulates the economy, and our defenses are too weak. Ultimately, American citizens came around to his views. Then amazingly, after Reagan earned his way to Washington, he did not forsake the ideas he stood for but actually tried to implement them.

Reagan's biggest flaw is not, as is often believed, his failure to monitor subordinates. One human being can do only so much, and Reagan probably realized that he could not at the same time focus on his major goals, continue to be the Great Communicator, have any kind of private life, and still watch over his staff. The latter is what a chief of staff is supposed to do and what, according to Anderson, Jim Baker did well in the first term and Don Regan did badly in the second.

Reagan's biggest flaw was his susceptibility to making decisions based, not on logic, but on the personal appeal of those with access. This characteristic was best illustrated by Anderson's shocking story of why and how Reagan got Israel to quit bombing Lebanon. There was no careful weighing of the issues. Rather, Michael Deaver walked into Reagan's office one day, threatening to quit unless Reagan asked Israel's prime minister, Menachem Begin, to stop the bombing. Reagan called and made the request. Twenty minutes later Begin called back and told him that the bombing had stopped. Simple. This same willingness to give in to former CIA Director William Casey is what landed Reagan in the Iran-Contra soup.

Another character, less important but still fascinating, is young David Stockman. Anderson rightly calls Stockman's book, The Triumph of Politics, "a self-righteous work with the tone of a screeching bluejay." Stockman simply did not understand that you can't always get what you want. If pessimistic Stockman were to write a description of baseball great Ted Williams, says Anderson, it would read as follows: "Even at the height of his career, Williams manages to get base hits only 40 percent of the time and strikes out repeatedly."

Anderson's book is probably most valuable as an inspiration for those who want to enter the political arena and continue hacking away at government. But it says little about the lessons learned from some of Reagan's failed attempts. Niskanen's Reaganomics is much better on this. One of Reagan's biggest blunders, according to Niskanen, was on Social Security.

In 1981, Social Security was ripe for reform. The old age, survivors, and disability (OASDI) program was projected to run out of money within a few years despite large tax increases passed in 1977. The main problem—short- and long-term—was that benefits were tied to the consumer price index, which overstated inflation. Congress was already concerned about the problem. According to Niskanen, Democratic representative Jake Pickle (Tex.) and Republican senator William Armstrong (Colo.) would probably have come up with a good bill to solve the short-run problem and even make Social Security sounder in the long-run.

But budget director David Stockman was impatient. He wanted immediate budget reductions and cared little about the long run. As he stated in one of the most revealing, and unheralded, quotes in his infamous interview with Greider, "I'm just not going to spend a lot of political capital solving some other guy's problem in 2010." As Niskanen points out, Stockman, allied with Anderson, got his way, and the administration proposed cutting early retirement benefits from 80 percent to 55 percent of full benefits effective in January 1982. The result: the Senate straight-armed Reagan, approving a resolution critical of his proposal by a vote of 92 to 0. Reagan quickly withdrew the proposal, and the Democrats had a hot issue that helped them in the crucial 1982 elections.

Moreover, Social Security did not get fixed. The main long-term problem—the indexing formula—was unchanged, and higher taxes were the main solution to the short-term problem.

This episode, a pivotal one given that Social Security accounts for over 20 percent of government spending, carries an important lesson: be patient. If you want to have a long-term impact, work for long-term goals.

Surprisingly, neither book mentions what could be one of Reagan's most durable and important legacies: his appointment of judges. For good or ill, judges have enormous power to decide what the law is and whether it is constitutional. Because Reagan has appointed three Supreme Court judges and hundreds of district and appeals court judges, all of whom can serve for life, the impact of his judges will be felt into the next century.

I am not qualified to say whether the net impact be good or bad, but on economic policy it will most likely be good. Some of Reagan's Supreme Court judges—especially fire-breathing Antonin Scalia—have been instrumental in two landmark decisions that limit the power of local governments to regulate people's use of their own property—Nollan v. California Coastal Commission and First English Church v. Los Angeles County. Richard Epstein, in his book Takings, argues that the judges should go further and overturn other regulations that amount to a regulatory taking of private property by the government. If they do so, it will be in no small part because of Reagan's appointees.

Reagan definitely hastened the movement of the United States away from statism. At the same time, he squandered important opportunities for further moves. So it is too soon to tell whether there there was a Reagan revolution. How lasting his impact is will depend on a number of factors. The most immediate is how the new administration handles economic policy. But more important than the policies of the new administration is whether Americans in general believe that government is a dangerous master. Even more important is whether the hundreds of believers in limited government whom Reagan appointed, along with the thousands of others who believe in limited government but are not in government, will continue to fight the beast. As Anderson writes: "Little in politics happens by chance,…virtually everything is carefully done, carefully plotted, sometimes years in advance."

Contributing Editor David R. Henderson, a former staff economist for President Reagan's Council of Economic Advisers, teaches at the Naval Postgraduate School in Monterey and is a regular contributor to Fortune.