Reagan and His Flawed Presidency:
by Dr. Richard Paul
We have studied what Hayek’s economic solutions are about. We have studied in some detail who Milton Friedman and Friedrich Hayek are. We have also seen the differences in approach to economics in a primarily capitalist Nations. We know the difference between microeconomics, and Macroeconomics. Now is the time to study why trying to apply microeconomics to a Capitalist Society is harmful to the economy as a whole. To do this we must, with all earnestness, show why Reagan’s presidency were both flawed, and great for the economy at the time. All of the previous entries have been an attempt at reading up to this short blog. We will move quickly, and hopefully concisely enough for you to follow along. If you have any questions about a topic, or if you need further explanation with the contents, don’t be afraid to study what is being written. We need, with all our heart, to understand a few things first. Its incumbent upon me, the author, to present you with detailed facts and accounts to the best of my ability. It’s also incumbent upon me, being the author, to present clear and concise meaning to this article. I hope you find this as revealing as I.
To begin, we should first understand that Reagan was not a conservative. He wasn’t wanting to move the economy back to a better time, nor was he wanting to decrease the government. What Reagan wanted to do was be the lead man in the world, since his acting career was not that great. Reagan understood one thing about the economy, before taking office. That one thing was that stagflation was in full swing and something needed to change. He was a well read man, with very fervent ideas that went counter to the “common wisdom” of US Economic Policies. He had read many books about alternative theories written on micro and macro economics. His thoughts were consistent with the theories that if government got out of regulations then you could allow the economy to be the driving force of all policies, domestic and otherwise, without regard for social values. He was coached on what to say about many social issues (Peggy Noonan on Morning Joe, Nov 2010).
After becoming the President in 1980, Reagan set his mind to affect change in the stagnant economy. He appointed an Economic Advisor named Milton Friedman because he had read Friedman’s essay on why Government is the problem, and even used some of the quotes during his campaign. Reagan was considered to be an extremist, and rightfully so. His ideas about Government control were extraordinarily skewered towards not understanding the effectiveness of regulations. His were the thoughts that many microeconomics had regarding government at the time. It was, however you may want to believe otherwise, the right ideas for the right time, at least in the short-term.
At the time Reagan took office, many main street economists were stuck on the never-changing ideology of Classical Keynesian Economics. Keynesian Economics couldn’t explain why stagflation occurred, and couldn’t explain how to get out of stagflation periods. Austrian Economics, even though it was meant to be a microeconomics theory, had a perfect and simple idea of starting the movement out of stagflation. This was the right idea for the time.
However, once stagflation started moving again, Reagan and the Austrian School of Economics failed to see that regulations meant for microeconomics could cause long-term damage if not ended. This isn’t their fault because the Neo-Keynesian Theory wasn’t around for a backup plan. It was still in developing format trying to explain why the microeconomics plan of Austrian Economics worked. Many Keynesian’s were baffled by the sudden changes (that type of change they thought would take years to fully implement for change to start to take effect). Some people even credited Carter for getting stagflation moving, and not the Austrian’s. In 1965, President Johnson started increasing deficit spending to fund the Vietnam war. This fiscal policy (as predicted by Keynesian theory) increased inflation and reduced unemployment. Then the two oil crises happened in the 1970′s which created the stagflation. Please also note the similarities to the Iraq and Afghanistan wars fundings when considering Vietnam. All three increased spending while keeping some of the costs off the books. For example, Vietnam kept most of the clandestine initiatives off the public books just as both Iraq and Afghanistan do at this time. Oftentimes, and the reason I grouped wars and oil together, when inflation occurs, the Oil Markets increase to match the suspected inflation. This is called self-prophecy, which maintains that if oil companies increase the costs, so to will inflation increase to match. This recessionary cycle is different from what later became known as stagflation in that the Federal Reserve is artificially keeping inflation low. More on that later.
So, why should Carter get credit for saving the US from stagflation? Simple, he nominated Volcker as the Fed Chairman. He intentionally allowed a recession and tightened money because of stagflation. Companies had become reliant upon free money. They set prices based on it. They set wages based on that same free money. Volcker said that it was time the US took its medicine it had created. I agree that many people were hurt from his seemingly harsh decisions, but they were absolutely necessary.
Most people who know little to nothing about economics say that Reagan himself turned the corner towards a more positively active economy. While some of his policies did change the way the US viewed economy as a whole, they had only little positive effects on the economy in the long-term. The reason that it had some positive effects is because, according to Neo-Keynesian thinking, deregulation were the only temporary measures to get the economy moving in either direction. Accordingly, those same economists have repeatedly said that repealing those deregulation should have taken effect in 1983 when the economy started moving so as to secure the economy. By not securing the economy, it allowed forms of monopolization.
While we can debate the results of Austrian Economics as it pertains to Financial Globalization, what we must not do is argued as to the negative effects it has led to. The next blog will be on the move from National Based Financial Means Testing towards the more dangerous tract of Globalization. This is a direct result of Reaganomics. It can be best understood as moving from a car travelling at 55 MPH to a space vehicle moving at the speed of thought.