PART I The Modern Economy and Resistance to Government
Chapter 1 The Modern Economy
The Primitive Economy. The Economy of the Founding Fathers. The Frontier Spirit—an Impediment to Good Policy? Market Inadequacies and Market Defects. The Role of Nonprofit Organizations. The Five Categories of Government Economic Functions.
Chapter 2 The Public Sector Imperative
Government: The Ultimate Service Provider. When Can the Market Handle It? Federal Spending: Paying the Bills. Natural Antigovernment Bias. E = M + G.
Chapter 3 The New Deal and the Rise of Democrats
A Call for Intervention: The 1927 Flood. The Bubble Bursts: October 1929. No Market Solution. Roosevelt’s New Deal. Emerging Republican Frustrations. John F. Kennedy and the Civil Rights Movement.
Chapter 4 Resistance to Government and the Republican Schism
Forming the Federal Government. The Whiskey Rebellion. The Federal Land Use Controversy. States’ Rights and Nullification. States’ Wrongs and Segregation. Barry Goldwater Unites the Right-Wing. Lyndon Johnson’s Great Society. Igniting the Republican Schism.
Chapter 5 Confusion, Opportunity, and Ronald Reagan
Foreshadowing Lyndon Johnson’s Vietnam War. Nixon’s Fall. Stagflation. Grasping at Economic Straws. Reagan to the Rescue.
PART II Reaganomics as Economic Policy
Chapter 6 Morning in America
A Long-Term Correction. Exploration and Production. Geology and the American Market Response. Japan Thrives; America Lags. The Battle for Market Share. The End of Stagflation.
Chapter 7 Reaganomics
The Savings and Loan Crisis. Leveraged Buyouts. Tax Cuts. Star Wars, Increased Defense Spending, and Budget Deficits.
Chapter 8 Better Lucky than Good: 1981–2000
Reagan and Gorbachev. Skeptics and Loyal Soldiers. Number Forty-One. Breaking Bad: The Republicans in Opposition.
Chapter 9 Fool Me Twice: The Second Reagan Revolution: 2001–2008
Bush vs. Bush. Inadequate Financial Regulation. The Great Recession. The Aftermath. Cautionary Tales.
PART III Reaganomics as Political Strategy
Chapter 10 From Jokes and Distractions to Government Shutdowns and War
Apologetics. Hysterics. Fear of Big Bird. The Big Noise. Devolution. “Making” War. Suspicious Minds. Peak Oil. Rand Paul Doesn’t Buy It. Beware What You Wish For.
Chapter 11 Dissension and Chaos
The 99 Percent. Parties to Change. Disgruntled Republicans. Chaos.
Chapter 12 Reagan’s Legacy
Reagan vs. the Modern Republican Party. Making Lemons Out of Lemonade. A Realistic View of Reagan’s Presidency.
Part IV Market Inadequacies: Pressure Points in a Modern Economy
Chapter 13 Employment
The Nonemployed. The Labor Force. Inadequate Employment. Rent-Seeking
Managers. Public Policy Implications.
Chapter 14 Employment-Minimizing Transactions
Dynamic Products and Static Assets. The Financial Sector. Government, Taxes, and Employment. Economic Optimization. Public Sector Transactions.
Chapter 15 Income and Wealth Distribution
Nonconsumption. Piketty’s Work: Shining a Light on Maldistribution. Slicing the American Pie. Remedies to Wealth Maldistribution. Failure to Thrive.
Chapter 16 Public Policy
Economic History. Failed Theories. Equilibrium in a Modern Economy. Public Sector Necessities.
Future Economic Research
About the Author
Ronald Reagan inspired optimism from the moment he gave his first inaugural address on January 20, 1981. Reagan famously declared that “government is not the solution; government is the problem.” With the enemy identified, the plan of attack was obvious. Reagan advocated less government, lower taxes, and fewer business regulations as the remedy for America’s problems. This policy, later dubbed Reaganomics, was widely heralded as a call to action against the federal government in Washington.
Reaganomics has dominated public policy discussions in the United States since 1981, largely because of Ronald Reagan’s personal popularity and the huge improvements in the economy during his administration. When Reagan, a Republican, took office after Democratic president Jimmy Carter, the American economy was wallowing in inflation, low output, and high unemployment—a phenomenon called “stagflation.” By the end of Reagan’s eight years in office, the economy had improved dramatically. Inflation and unemployment were lower and output was higher. There was, however, one rather ominous sign: the national debt had nearly tripled.
By the time he left office, Reagan’s policies had apparently saved the country. The handsome former movie star and California governor became the most influential figure in America since Franklin D. Roosevelt. Indeed, Reaganomics seemed calculated to undermine FDR’s New Deal, Lyndon Johnson’s Great Society, and all the “big government” programs that had been associated with Democrats since the 1930s.
But the improvements in the American economy in the 1980s had nothing to do with Reaganomics. High oil prices stemming from the OPEC cartel’s oil embargoes had caused the stagflation that inflicted so much damage on the US economy. In time, a dramatic increase in non-OPEC oil production would break the cartel’s hold on petroleum prices. Market forces, not Reaganomics, worked beautifully to end stagflation. But the market correction would take nearly ten years. That was plenty of time for confusion and Reagan’s personal popularity to overwhelm any rational assessment of Reaganomics.
This same confusion would also mask the real cause of the savings and loan crisis in the 1980s, as well as the leveraged buyouts, greenmail, and insider trading on Wall Street that led to turmoil in the corporate world. Tax cuts and increased defense spending during the Reagan administration brought the biggest peacetime budget deficits in US history. Once the world’s biggest creditor nation, the United States became the world’s largest debtor nation. For all its political appeal, Reaganomics seemed to do actual harm.
In order to make a proper assessment of Reaganomics, we need to understand our modern economy: the complex, interconnected system of jobs, markets, and government services that we rely on for our very survival. We seek some defining quality of a modern economy, some timeless characteristic that separates it from the economic world inhabited by our primitive ancestors. Technology is an important feature of our economy, but it changes every day. The defining characteristic we seek is the impossibility of true self-sufficiency. We are dependent on the system around us, and that system includes government.
Unlike Americans in the eighteenth-century world of the founding fathers, people in a modern economy have no recourse to go out into the wilderness, build a log cabin, and supply themselves with food, clothing, and other necessities of life. For practical purposes, nobody produces any necessities for themselves; if possible, they buy them from a store, typically with money they earn from a job. But this presents an immediate problem: people can’t get to their job, or to the marketplace, without infrastructure. Moreover, people must have enough education to function in a modern economy, even if they can’t afford a private school. Their security requires more than just a gun to protect their home; national defense and police protection are important. The solution to these and many other problems makes government an important part of the economy.
This does not bode well for the economic theory known as Reaganomics. Any arbitrary attack on government threatens to undermine the system that everyone—old and young, rich and poor, conservative and liberal—depends on for their very survival. Yet opposition to government seems to come naturally to Americans. We will explore this opposition further in chapter 4.
We will also explore frustrations and divisions within the Republican Party, which can be traced to the party’s loss of power in the Great Depression. The GOP was the dominant force in national politics until FDR came along. Beginning in the 1930s, the Democrats offered policies that most Americans found appealing, policies closer to the requirements of a modern economy than anything Republicans had to offer. The Republicans had to wait until 1980 for Ronald Reagan to revive the Grand Old Party.
The misconception that somehow Reagan turned the economy around in the 1980s has so distorted domestic policy that for many Americans, it is axiomatic that the path to prosperity and increased freedom is to attack, shrink, shut down, ridicule, and underfund government. But the proper economic function of government in a modern economy is to provide necessities like public infrastructure and national defense, necessities that cannot be adequately obtained from the private sector marketplace. The need for these necessities doesn’t go away just because confusion and Ronald Reagan’s continuing popularity can be leveraged to get votes.
This book systematically presents the definition and characteristics of our modern economy, and the impact of public policies on our everyday lives. We are concerned with needs; i.e., goods and services that people cannot do without. Needs cost money, whether they are obtained while shopping in the marketplace or by paying taxes for public services. So we are interested in where money goes, whether for personal consumption, savings and investment, or taxation.
Recent economic history reveals the conflicts between the demands of a modern economy and the dictates of the economic theory known as Reaganomics. Though Reagan’s most prominent critic, Republican George H. W. Bush (president from 1989–1993), straightened out some of the problems with Reaganomics, there was still enough faith in the theory to produce a second spate of Reaganomics in the George W. Bush administration (2001–2009). The results were all too predictable.
In this book, we learn how political frustrations and denial of economic reality led to the Great Recession, a huge national debt, partisan bickering, a dysfunctional Congress, and political statements that often border on sedition. None of this would have happened without the confusion that surrounded Reaganomics. Ironically, from all indications, Ronald Reagan would have been offended by the exploitation of his personal popularity to undermine the routine functions of the American government that are so essential to our modern economy.
We want to understand how the decades-long attack on government has created an economic system that works extremely well for the few, but doesn’t adequately meet the needs of the many. Chapters 1 and 2 define the characteristics of a modern economy and provide context for all that follows. The history (chapters 3–5) that led to Reagan’s election precedes an in-depth discussion of Reaganomics, first as an economic policy (chapters 6–9), and then as a political strategy (chapters 10–12). The history of Reaganomics provides empirical evidence that the proper structure of public policy in a modern economy is precisely the opposite of Reagan’s policies.
In part IV, we combine what we know about the requirements of the modern economy with our experiences with Reaganomics. This allows us to construct public policy that produces optimum levels of employment, consumption, and investment. Put simply, our goal in this book is to define the proper relationship between markets and government in a modern economy.
From Chapter 1:
The Five Categories of Government Economic Functions
In a representative democracy like the United States, people can use government to overcome structural problems in the private sector marketplace. Indeed, the proper economic function of government is to provide necessities that are not adequately available from the markets. This naturally gives rise to five categories of government economic functions, each named for the specific market inadequacy that makes it necessary:
- Category I Total Market Irrelevancy
These are needs provided by government for which there is no market solution for anyone. National defense, public safety, disaster relief, homeland security, the criminal and civil justice systems, monetary policy, public infrastructure, public health, the Coast Guard, and Medicare are obvious examples. So is the use of fiscal policy to stimulate an economy in a steep economic downturn. Assistance for the severely mentally ill often requires resources like police and a special court system that are outside the usual private sector health-care system.
- Category II Internal Market Defects
Government regulates certain market behaviors that unfortunate past experiences tell us will cause harm. Regulations address our concerns about product safety (especially in food, medicines, and transportation), unsafe working conditions, environmental pollution, and misrepresentations of financial products. Minimum wage legislation is critically important to workers who might otherwise be subjected to life-threatening levels of compensation determined solely by supply and demand in the labor markets. Unfortunately, federally mandated minimum wages have never been sufficient to prevent inadequate employment.
- Category III Predominant Market Insufficiency
These are necessary services provided by government that most people are unable to provide for themselves. Examples include Social Security, universal public education (grades K–12), and financing higher education and vocational training. To be sure, many people have pensions or savings for retirement. Some people can afford to send their children to private schools. But in general, inadequate employment and occasional unemployment make it impossible for most of the population to pay directly for their children’s education or to reliably save enough for retirement. Providing medical services and disability payments for injured veterans is also a Category III function, along with social services that protect the elderly and people with serious mental or physical problems.
- Category IV Acute Market Insufficiency
This describes government services that satisfy needs that are so acute as to be potentially life threatening. Category IV functions provide some people help with problems that most of the population are capable of solving for themselves. Examples include food stamps, unemployment compensation, welfare, Medicaid, insurance subsidies through the Affordable Care Act, public housing, and protective services for children. People who need Category IV services may have problems that are not caused by markets; but these are proper functions of government because markets offer inadequate solutions.
- Category V General Market Insufficiency
These are important government services that supplement available private sector offerings that the public deems to be inadequate. One example is basic research. This is defined to be long-term investigations in technical fields that are not likely to pay off anytime soon. Past experience has shown that such government-funded research in medicine, technology, and energy can provide big future economic benefits to the nation. Certain NASA programs fall into this category (others may be valuable for national defense, which would make them Category I government functions).
National Public Broadcasting is another example of a Category V government function. There are huge numbers of commercial radio and television channels, but the American people still see value in providing media outlets not controlled by commercial interests. Public recreation areas, America’s system of national parks, and the US Postal Service are also Category V functions.