Those Were the Days


What Went Right in the 1980s, by Richard B. McKenzie, San Francisco: Pacific Research Institute for Public Policy, 397 pages, $21.95

In the decades after the Great Depression, a progressive morality evolved based on two verbs: redistribute and regulate. The private economy was believed to produce the wrong results. For a period, Keynesians even claimed that the propensity of the rich to save more than the economy could invest would cause widespread and permanent unemployment, unless government undertook measures to maintain an adequate level of aggregate demand.

Ronald Reagan was the first president since Calvin Coolidge to speak for economic freedom, and his policies were an affront to the smug morality that had reigned for a half century. The more success Reagan's policies had, the more he was hated. That government was the solution had hardened into dogma, and here was Reagan saying government was the problem. The partisans of big government no longer controlled politics, but they still controlled the publishing houses and the media. They retaliated by painting the 1980s as dark as they could imagine.

For a decade a torrent of books poured forth. They all had the same message, whether written by third-rate journalists or Ivy League economics professors: The Reagan decade was one of decline, decay, destitution, and despair. Facts played no role in these accounts. All of the morally outraged authors knew before they picked up their pens that policies as evil as Reagan's could have only a disastrous outcome. Bill Clinton summed up this view of the 1980s when he declared: "Twelve years of neglect have left America's economy suffering from stagnant growth and declining incomes."

Unlike Robert Reich, Paul Krugman, Benjamin Friedman, Lester Thurow, Kevin Phillips, Robert Kuttner, George Lodge, Barry Bluestone, Philadelphia Inquirer reporters Barlett and Steele, and many others whose claims are put to the test in What Went Right in the 1980s, Richard B. McKenzie, a professor at the University of California, Irvine, thinks facts are important. He also thinks it is important to tell the truth. Consequently, he gives his reader a dispassionate romp through the systematic misrepresentation of the 1980s by those who cannot blame their mistakes on their lack of professional skills.

Everyone should have McKenzie's book. It is easy to read, and the facts are presented in an accessible way. The book is full of wonderful charts and tables. My favorite is on page 12, where the upward sweep of the Dow Jones Industrial Average is juxtaposed with the dismal predictions of the era. Clearly, the nabobs of doom had no impact on anyone doing anything real, such as the money managers entrusted with the population's pension funds and accumulated financial wealth. It is not clear that the misinformation about the 1980s even affected politics. Bush, a believer in government, was discarded for repudiating Reagan, not for defending him.

Influential or not, the "decade of greed" is a fabrication wrought by dishonest people. McKenzie shows that the United States did not deindustrialize during the 1980s. Productivity expanded at record rates, and domestic manufacturing output expanded by more than overall economic activity. Real incomes of rich and poor grew, and between 1984 and 1989, "the real per capita income of the lowest income group rose substantially faster than the per capita income of the highest income group." The tax burden was not shifted from rich to poor. The percentage of federal income taxes paid by the rich increased dramatically—proving the supply-side contention that better incentives would result in taxing the rich. McKenzie shows that every income group would be paying higher income taxes today if pre-Reagan tax laws were still in effect. Charitable giving took off, greatly outstripping predictions, despite the lower tax rates that reduced the value of the tax deduction. As for the claims that the 18 million new Reagan jobs were part-time "burger-flipping" jobs, McKenzie reports that "during the 1980s the part-time share of total jobs actually declined."

Even the growth in debt, which demoralized the Republicans and left them a dispirited bunch unable to defend their leader's accomplishments, turned out to be positive. McKenzie says that it was the expansion of private assets that made it possible for people to attain more credit with which to further expand their asset base.

He notes that the decade of the 1990s may be dynamic, "activated, in part, by the private debt accumulated during the 1980s." The good work in the 1980s makes McKenzie optimistic about economic prosperity in he 1990s. Clinton is well positioned to be the beneficiary of the strengths Reagan put into the economy.

As satisfying as McKenzie's book is, it has some puzzling shortcomings. One is that he doesn't acknowledge others who have exposed false and misleading claims about the 1980s. For example, there is not a single reference to any of my numerous high-profile defenses of the Reagan record or to Lawrence Lindsey's The Growth Experiment or to Martin Anderson's Revolution.

Another shortcoming is that McKenzie doesn't see the forest for the trees. He documents the growth in income, productivity, etc., but he neglects the greatest accomplishment of the era—the demise of stagflation and the shattering of the "Phillips curve" trade-off between employment and inflation. When Reagan was inaugurated, the conventional wisdom was that the price of sustained economic growth was a rising rate of inflation. Reaganomics was considered "voodoo economics" not because of its deficit projections, but because it forecast economic expansion and disinflation, which is precisely what it delivered. Foremost about what went right in the 1980s was the disinflationary economic expansion. If McKenzie had paid some attention to those of us who knew what we were doing, he would have included the big picture with the details.

Contributing Editor Paul Craig Roberts is chairman of the Institute for Political Economy and a Distinguished Fellow of the Cato Institute. He was assistant secretary of the treasury in 1981-82.