A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror (153 page)

When celebrating triumphs—whether over inflation, interest rates, unemployment, or communism—Reagan used “we” or “together.” When calling on fellow citizens for support, he expressed his points in clear examples and heartwarming stories. An example, he said, was always better than a sermon. No matter what he or government did, to Reagan it was always the people of the nation who made the country grow and prosper. Most important, he did not hesitate to speak what he thought was the truth, calling the Soviet Union the “evil empire,” a term that immediately struck a note with millions of
Star Wars
fans and conjuring up the image of a decrepit Soviet leader as the “emperor” bent on destroying the Galactic Republic (America). Once, preparing to make a statement about the Soviet Union, Reagan did not realize a microphone was left on, and he joked to a friend, “The bombing begins in five minutes.” Horrified reporters scurried about in panic, certain that this gunslinger-cowboy president was serious.

But Reagan relied on more than language to accomplish his goals. Criticized as a hands-off president, he in fact was a master delegator, using a troika of Edwin Meese, James Baker, and Donald Regan (who held various advisory positions, with Baker and Regan actually trading jobs in 1985) to supervise every important issue. That left Reagan free to do the strategic thinking and to galvanize public opinion. Indeed, Reagan flustered his opponents, who thought him intellectually weak, precisely because he did not micromanage and thus devoted himself to the truly important issues, often catching his adversaries completely unaware. His grasp of the details of government, clear in his autobiography,
An American Life
, shows that in one-on-one meetings over details of tax cuts, defense, and other issues, Reagan had mastered the important specifics. However, he also believed in getting the best people and letting them speak their mind, even when he had made up his. He repeatedly left hotly charged meetings, telling the participants, “I’ll let you know my decision,” rather than embarrass the losing side in front of the winners.

Tax Cuts Revive the Nation

To say that Reagan had a single most important issue would be difficult, for he saw rebuilding America’s economy and resisting Soviet communism as two sides to the same coin. Nevertheless, the key to the second came from success with the first: reviving the economy had to occur before the nation could commit to any major military expansion to resist the USSR. According to the traditional explanations, since the mid-1970s Reagan had steadily gravitated toward supply-side economics, touted by economists Arthur Laffer and Jude Wanniski. The supply-siders emphasized tax cuts to stimulate investment by making it more lucrative to build plants and start businesses instead of stimulating consumer demand, as Keynes and the Democrats had practiced for years. Cuts on the margin made a tremendous difference in purchasing and investing, the supply-siders argued, and the Laffer curve proved that tax cuts could actually increase revenues.
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Reagan’s vice president and opponent for the nomination, George H. W. Bush, had called supply-side cuts “voodoo economics,” but it was common sense, representing a revival of Mellon’s and Kennedy’s tax policies, both of which proved extremely successful. In Reagan’s hands, it became “Reaganomics.”

With the economy in such disrepair, Reagan easily persuaded Congress to back the concept, but he asked for an immediate 30 percent across-the-board cut (meaning that the wealthy would get tax relief too). Instead, Congress, afraid of appearing to favor the rich, strung the cut out for three years in 5, 10, and 10 percent increments through the Economic Recovery Act, passed in August 1981. In addition to lowering the top rates from 70 percent to 50 percent, and then still further, it lowered the all-important capital gains tax from 28 percent to 20 percent. Spreading out the cuts minimized the stimulus impact Reagan had sought. The economy recovered, slowly at first, then after the last segment of the cut was in place, rapidly. Lower capital gains rates caused investors to pump money into the economy as never before: their reported taxable income soared sevenfold and the amount of taxes paid by the investor classes rose fivefold.

But in the interim, from 1981 to 1982 the economy dipped even deeper into recession, with unemployment reaching 10 percent in 1982. Federal Reserve chairman Paul Volcker, with encouragement from Reagan, contributed to some of the downturn by restricting the money supply as a means to squeeze the skyrocketing inflation out of the system. Volcker succeeded: in one quarter, the inflation rate dipped to zero. It had dropped overall from 12 percent just a few years earlier to 4 percent. It was a monumental accomplishment, but largely missed by the media, which focused, instead, on unemployment in the “Reagan recession” as journalists dubbed it.
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Reagan knew in his soul the tax cuts would work, but as his diary revealed, the dark days of late 1981 and early 1982 brought nothing but bad news:

Christmas
[
1981
]
The recession has worsened, throwing our earlier figures off. Now my team is pushing for a tax increase to help hold down the deficits…. I intend to wait and see some results.

Jan. 11
[
1982
]
Republican House leaders came down to the W. H. Except for Jack Kemp they are h--l bent on new taxes and cutting the defense budget. Looks like a heavy year ahead.

Jan. 20
First anniversary of inauguration. The day was a tough one. A budget meeting and pressure from everyone to give in to increases in excise taxes…I finally gave in but my heart wasn’t in it.

Feb. 22
Lunch on issues. I’m convinced of the need to address the people on our budget and the economy. The press has done a job on us and the polls show its effect. The people are confused about [the] economic program. They’ve been told it has failed and it’s just started.

April 26
…at 10:15 addressed 2000 delegates of the U.S. Chamber of Commerce convention. What a shot in the arm. They interrupted me a dozen times or more…. The Dems are playing games—they want me to rescind the third year of the tax cuts—not in a million years!
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And so on. By November the nation had started to pull out of the recession, and within a year it was rocketing ahead at a pace never before seen.

Determined to slash government regulation, Reagan benefited greatly from momentum already begun under Carter, for which, surprisingly, Carter took little credit during the campaign. Beginning in the mid-1970s, consumer groups had joined conservatives in working to deregulate the airline industry. Economist Alfred Kahn, who had joined the government’s Civil Aeronautics Board in 1977, knew that a stranglehold on routes had kept airline prices high and the number of carriers low.
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The government first allowed airlines to discount nonpeak hours, then, gradually, to discount all fares. At the same time, new competitors entered the market, forcing prices down further, until, by the 1980s, air travel was virtually deregulated. Lower prices put people on airplanes at astounding rates: in 1977, passenger boardings stood at 225 million, but by 1992 they had nearly doubled to 432 million. At the same time (contrary to critics’ claims), eight of the ten major airlines had boosted their per-share earnings, all while lowering the number of fatalities per air mile traveled.
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In parcel delivery and overnight mail, United Parcel Service (UPS) and newcomer Federal Express also fought the postal service’s monopoly and drove down rates by using jet aircraft to deliver mail.
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Across the board, though, the percentage of share of freight regulated by the federal government plunged in the 1980s in both rail and truck transportation.
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Despite Reagan’s affinity for chopping government bureaus, he was able to eliminate only a few minor agencies during his term, a fact that reflected as much the previous success of deregulation of trucking and the air travel industry as it did his failures in cutting still more. He later referred to his inability to affect the scope of government as his greatest single failure in office. Ultimately, Reagan concluded that it was a task for another time and, perhaps, for another man or woman.

The tax cuts started to have their effect. Production, employment, job creation, and entrepreneurship all surged, soon achieving near-record levels. And, true to the supply-side promise, government revenues soared, increasing by more than one third during Reagan’s eight years. Yet despite oceans of new money and Reagan’s constant foot on the brake, government continued to spend more than it took in, increasing outlays by nearly 40 percent in the same period. To restrain spending, Reagan cut a deal with Congress in which the Democrats agreed to hold spending down in return for closing tax loopholes (which really involved raising taxes again, but only in specific industries, such as yachts and pleasure boats). No sooner had Congress closed the deal than it passed new higher spending, generating sizable, but not record, deficits.

One of the most oft-repeated mantras of the 1980s—that Reagan’s military buildup accounted for the extra expenditures—was utterly false.
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Military budgets did grow, but barely. Defense spending never much exceeded $200 billion per year, whereas social spending under the Democrats consistently remained slightly higher. After Reagan left office, domestic nondefense spending was nearly double that of the Pentagon’s budget.
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None of this seemed to faze average Americans, who could see by their wallets that the economy was growing by leaps and bounds. At the end of eight years of Reaganomics, America’s revived industrial might had produced 14 million net new jobs. This was nothing short of stupendous, given that since 1970, all the European nations combined had
not generated a single net new job!
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Most of these “gloomsters,” as one economist called them, were stuck in the manufacturing mind-set, but even manufacturing had not declined as they claimed. Production as a share of U.S. gross domestic product dipped in the 1970s, but rose throughout the 1980s, reaching 36.1 percent in 1989, the highest level in American history!
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Without question, however, America’s traditional heavy industry had been taking it on the chin since 1970, and job losses in steel, textiles, and automobile industries particularly underscored the trauma. Entire cities dried up when manufacturing moved out, leading to the coining of a new term, the Rust Belt. But other, high-tech cities blossomed, and not just with services, but with new manufacturing industries.

While the industrial policy critics, mostly from the Democratic side, complained about the loss of blue-collar manufacturing jobs, a whole new computer industry had grown up under their noses. American computer manufacturers in the 1980s snapped up 70 percent of the world’s software market and 80 percent of the world’s hard-drive business, all while a fellow named Bill Gates came to completely dominate the human-to-machine interface known as computer “language.” Nothing spoke to the lack of value in chip production more loudly than the plummeting prices of computer chips by the 1990s, when individual chips literally cost of a hundredth of a cent.

Silicon Valley replaced Detroit as the most important economic hub in the nation. Behind its laid-back style, Silicon Valley concealed a fiercely competitive collection of computer entrepreneurs whose synergy led to breakthrough after breakthrough. Eventually, the region would become so efficient and productive that in the late 1990s it had a severe recession. But at the beginning of the boom, Japan had nothing to match Silicon Valley.

By the end of the 1980s it took only half as much labor to purchase a gallon of milk as it had in 1950, the peak of heavy-industry America; and the cost in labor of a gallon of gasoline had fallen by two thirds. Some critics pointed to declining average wage growth as evidence that the U.S. economy, without heavy industry, would stagnate. In fact, wage growth was better when total compensation (such as medical benefits, retirement, and so on) was included, although the rate of increase had slowed some.

The result of the tax cuts, therefore, was not only revival of the economy but also restoration of confidence in American productivity and purpose. In addition, Reagan had mounted a strong counterattack on liberalism’s dependency mentality, cracking it with the assistance of “blue-dog” Democrats who supported his tax relief. If he had not entirely rolled back government, Reagan had at least destroyed liberal assumptions that only a steadily growing government sector could produce economic stability and prosperity.
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Yet tax cuts and the resurgence of the American economy only constituted part of Reagan’s success.

Reagan dealt with foreign terrorists and usurpers quickly and decisively. Warned of a possible Cuban takeover of the little Caribbean nation of Grenada in 1983, he ordered in troops to thwart Castro’s invasion. When a terrorist bombing in 1986 of a West German disco frequented by American GIs was linked to the radical Islamic state Libya and its unpredictable dictator Muammar al Qaddafi, Reagan authorized the bombing of the terrorist camps. American aircraft also struck Qaddafi’s home, but the colonel was not home when the bombs fell. Nevertheless, he got the message, and Libya dropped off the international terrorist radar screen for the remainder of the decade. World terrorism fell sharply alongside the declining power of the Soviet Union, to the point where the number of reported incidents by 1987 was about half that of 1970.
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Only in one foreign policy situation—removal of the communist government in Nicaragua—was Reagan unable to make the progress he had hoped for. The communist regime in Nicaragua under Daniel Ortega, funded and equipped by Castro, not only gave the Soviets a foothold on the Central American mainland, but it also provided a staging area for terrorist activities against neighbors, such as El Salvador and Honduras. Reagan was committed to evicting Ortega’s regime by supporting the pro-American rebels in his country, the contras. Congressional Democrats had continually thwarted any assistance to the contras, raising fears again and again of another Vietnam. Despite Reagan’s concerns that Nicaragua could become a second Cuba, the Democrats turned back several aid packages. Frustration over this festering problem mounted within the administration.