by Henry Olsen
This broad principle placed a great deal of the federal budget beyond cutting. Social Security benefits and cost-of-living adjustments were protected from cuts, as were Medicare and the SSI program for the aged, blind, and disabled. Other social programs such as food stamps, disability insurance, and school breakfasts and lunches would only have their income levels for eligibility reduced so that “those without resources” could continue to receive benefits while those “who can afford to pay” did pay.
Reagan extended this principle of need to business too. Arguing that some subsidies were unnecessary because “the marketplace contains incentives enough to warrant continuing these activities without a government subsidy,” he proposed eliminating the Department of Energy’s synthetic fuels program and the Export-Import Bank.
The economic crisis did not force Reagan to go back on his lifetime commitment to the New Deal’s social protections, and it also did not force him to go back on his commitment to fight communism. He told Congress that “my duty as president” impelled him to propose increased defense spending to combat the Soviet threat. He knew this might lead to more deficit spending, but he said if that were necessary he would choose that every time.6
The next few months were very difficult for Reagan. The political battle of his life would have been hard enough, but soon he was literally in the battle of his life. Shot by John Hinckley as he was leaving the Washington Hilton on the afternoon of March 30, Reagan was rushed to the hospital, where it was found a bullet had punctured a lung and was lodged inches away from his heart. Skilled surgeons pulled Reagan through, and the inevitable public sympathy increased when word of his calm wit in the operating room made its way to the American people.7 By April he was back at work lobbying Congress for his economic program.
Reagan’s lobbying, which included more televised speeches to push Congress into action, worked. By the end of July both his spending and his tax cuts had become law. The latter were even more generous than he had asked for, as congressmen had insisted he include indexation of the tax brackets to end bracket creep in the final proposal.8 The so-called Reagan Revolution was on.
What that revolution entailed, however, differed depending on whom you asked. Liberals constantly argued that Reagan was tearing away the social protections initiated and inspired by the New Deal. This always infuriated Reagan. In his autobiography he complained that he “was never able to convince [House Speaker] Tip [O’Neill] that I didn’t want to deprive the truly needy of the assistance the rest of us owed them; I just wanted to make government programs more efficient and eliminate waste, so that we no longer spent $2 for every $1 of aid we delivered to people.”9 When Democrats charged that one of his budget proposals struck at the heart of Social Security, Reagan called for a bipartisan commission to firm up Social Security’s finances and ensure that recipients “continue to receive their full benefits.”10 “We can be compassionate about human needs,” he told Americans, “without being complacent about budget extravagance.”11
Disagreement over the scope of the revolution existed on the right too. This became painfully and publicly apparent in November when an article about OMB Director Stockman appeared in the magazine The Atlantic.
“The Education of David Stockman” rocked Washington.12 The article’s author, Washington Post editor William Greider, had held off-the-record discussions with Stockman for months with the understanding that nothing would be published until after the budget and tax bills were dealt with. Stockman had expressed his dismay to Greider over a host of issues in the White House, essentially airing some dirty laundry. He also admitted to fudging budget numbers and changing OMB computer models to hide how large the deficit would become if Reagan’s proposals were approved. It appeared to many that the Reagan administration had engaged in a big con and the American people had been the mark.
Reagan’s tax cuts had been the biggest con of all, if Stockman was to be believed. Stockman was an ardent believer in supply-side economics, a supposedly new theory about how markets worked and wealth was generated. Under supply-side theory, people responded heavily to marginal income tax rates. The higher they were, especially on the wealthiest people, the less they worked or the less inventive they were. The holy grail of supply-side theory, then, was to lower the top rate levied only on the richest taxpayers as much as possible.
Stockman cheerfully acknowledged this in his interviews, and went so far as to call Reagan’s entire tax cut bill a “Trojan horse to bring down the top rate.” This meant that “supply-side” wasn’t meant to improve incentives or lighten the load for anyone except the richest Americans. Any tax cuts for anyone other than the wealthiest Americans was simply political sugar to make the supply-side medicine go down.
Greider noted that this meant the “new” supply-side doctrine was simply a new language to provide cover for the “hoary old” Republican doctrine that if one gave wealthy people and big businesses tax cuts, “the good effects ‘trickle down’ through the economy to reach everyone else.” Stockman agreed that supply-side was “really new clothes” for old-style trickle-down economics. “‘It’s kind of hard to sell trickle-down,’ he explained, ‘so the supply-side formula was the only way to get a tax policy that was really ‘trickle-down.’ Supply-side is ‘trickle down.’”
Stockman was only thirty-four at the time and had never been alive during FDR’s presidency. So he likely did not know that the president’s hero had directly attacked trickle-down economics in many speeches before and during his presidency.13
More important, Stockman was likely unaware that Reagan had been talking about tax reform for decades. Reagan was promoting the idea that all tax rates needed to come down for all people when Stockman was not even a teenager. Nor did Stockman seem to take note that Reagan as governor had increased the top rate for the wealthy and reduced taxes through rebates and property tax cuts for the working and middle classes. Stockman might have considered the president’s tax cuts a “Trojan horse for trickle-down,” but the president believed that everyone needed a lightened load and everyone’s incentives needed to be improved.
This is probably why Reagan always resisted the “supply-side” label. He was proud that as governor he had increased the level of tax-free income for a family from $2,000 to $8,000 a year.14 He thought that the best way to help the working poor was to reduce their taxes.15 He told a then-prominent conservative publisher, R. Emmet Tyrell, “I’m not sure I really understood simon-pure ‘supply-side’ or that I agreed with every facet.”16 When asked directly by another letter writer about “supply-side economics,” he said it was just common sense.17
The letter to Tyrell goes on to give Reagan’s full thoughts on what he was trying to do:
It’s always seemed to me that when government goes beyond a certain percentage of what it takes as its share of the people’s earning we have trouble. I guess a simple explanation of what I’ve been trying to do is peel government down to bare essentials—necessities, if you will, and then set tax revenues accordingly.
If we then find that we overdid on the tax cuts [then] adjust—but it will take a lot more evidence than I’ve seen to convince me adjustment is needed.18
No real supply-sider could have written that passage. Supply-side was and is concerned with the incentives faced by the most economically productive citizens as expressed by marginal income tax rates. Instead, Reagan was simply reaffirming fidelity to the ideas he had first talked about in 1958.19 Back then he said that economies that taxed more than a quarter of the national income faltered, that the people should set a rate of taxation they would accept and force government to spend no more than that, and that balanced budgets were essential to national health. Once again Reagan showed that when you supported him, as the supply-siders had done, he was not backing your agenda, you were backing his.
Reagan’s final word on supply-side came in his autobiography. He said that he had not adopted supply-side theory “as the basis for my economic recovery program.”
20 Instead, his experience with 94 percent marginal tax rates in Hollywood taught him that tax rates could suppress his desire to work. He went on:
The same principle that affected my thinking applied to people in all tax brackets. The more government takes in taxes, the less incentive people have to work. What coal-miner or assembly-line worker jumps at the offer of overtime when he knows Uncle Sam is going to take sixty percent or more of his extra pay?
And the principle applies as well to corporations and small businesses: When government confiscates half or more of their profits, the motivation to maximize profits goes down, and owners and managers make decisions disproportionately on a desire to avoid taxes.
Reagan was again showing he still believed what he had said decades earlier. He had indeed opposed high marginal tax rates even when he was a New Deal liberal, writing in 1951 in favor of a “human depreciation allowance” that would lower an individual’s tax burden similar to the manner in which an oil company would use a depletion allowance to reduce its tax burden.21 He had opposed tax rates above 50 percent as immoral in his mashed-potato-circuit speeches.22 He had argued for years in favor of a tax reform that would lower the marginal tax rates for everyone, the Herlong-Baker tax bill.23 So when supply-siders eagerly told each other in early 1980 that Reagan had “been successfully ‘converted’” to supply-side, they were ignoring the evidence.24 He was not coming over to them; they were coming over to him.
Supply-siders should have had another clue that Reagan did not share their ideology: his regular statements that the average person was the driver of the American economy. Supply-side theory holds that the entrepreneur is the person who drives the American economy. It is this person who builds new businesses, creates new modes of production, and invests capital most successfully who creates the wealth and jobs that then flow or trickle down to the rest of us. But Reagan always said the opposite. In his model, it was the average person whose savings provided the investment capital that allowed American business to invest. Put them to work, give them more money, and wealth would flow up to the businessman who would then cycle it back down. Presidential biographer Lou Cannon quotes Reagan as saying “America’s natural economic strength” was its people: “My attitude had always been—let the people flourish.”25 Reagan held a conservative version of the theory FDR had announced in 1932, that “if we make the average of mankind comfortable and secure, their prosperity will rise upward, just as yeast rises up, through the ranks.”26
Reagan mentioned the word “entrepreneur” only once in all of his major campaign and presidential speeches on the economy between November 1979 and the passage of the tax cut bill in July 1981. That was in his first inaugural, quoted at length above. The entrepreneur was simply one of many American heroes, listed after the shopkeeper, the housemaker, and the factory worker. The supply-siders were following Hoover and Goldwater in emphasizing the importance of the uncommon individual to American life. Reagan, as always, followed FDR and spoke lovingly of the common person.
This love for the real lives of everyday people also informed Reagan’s trade policies. Reagan was an ardent free trader and believed people should be able to trade as freely between countries as they could within a country. He kicked off his 1980 campaign by proposing a free trade area encompassing Canada, Mexico, and the United States, an idea that Bill Clinton brought to fruition thirteen years later with the signing of the NAFTA accord. He also started talks for free trade with the Caribbean nations and with Central America, ideas that led to CAFTA and the Caribbean Basin Initiative. No one could accuse Reagan of being a protectionist devoted to a Fortress America view of the world.
His free-trade views did not, however, prevent him from taking firm action to protect American workers and companies from what he viewed as unfair trade practices. Nor did they prevent him from acknowledging political sentiment that was urging protection to help American workers. What Reagan did on trade is important proof that he always acted on principles, but was never an ideologue.
Japanese auto imports were the first trade issue Reagan had to deal with. American car manufacturers had held over 90 percent of the US auto market in the early 1970s, but the massive increase in gasoline prices after the Arab oil embargoes of 1974 and 1979 had made fuel-efficient smaller Japanese cars attractive to American consumers. Chrysler, the smallest of Detroit’s “Big Three” manufacturers, had been bailed out by the federal government in 1979, and auto companies and autoworker unions were pressing Congress to stop the flood of Japanese imports as Reagan took office.
An ideological free trader would have resisted these pressures to the last. Not Reagan. Reagan recognized that “the genuine suffering of American workers and their families made this issue intensely charged politically.”27 Reagan adopted an idea suggested by Vice President Bush, that he ask the Japanese to voluntarily restrict the number of vehicles they exported to the United States. He later did that in a meeting with the Japanese trade minister.28 The Japanese adopted the suggestion later that year, reducing the pressure on American automakers.
Reduce, but not end. By 1982, Japanese auto companies had begun setting up “transplant” auto factories that assembled cars in the United States. This enabled them to get around the “voluntary” export limits, since the cars themselves were not exported. As more and more Japanese companies set up these plants, American auto manufacturers again came under pressure as consumers increasingly preferred cheaper, better cars designed in Japan but made in America. In effect, Reagan’s move had created incentives for Japanese companies to share their wealth with American workers, defusing at least somewhat the pressures for protectionism. Reagan’s nonideological engagement with the issue gave American consumers what they wanted while minimizing the downside to American autoworkers.
Reagan had focused on solving the nation’s economic challenges throughout most of the year. But following the passage of the tax and spending bills, the country’s military challenges took center stage. The Soviet Union had not been sitting idly by as Reagan had wrangled with Congress.
Communist forces were on the march everywhere. The USSR’s Central American satellite, Nicaragua, was pumping arms into a Marxist rebel group in El Salvador. Libya’s dictator, Moammar Qadaffi, a mercurial figure who purchased weapons from the Soviets, tried to push the United States out of the Central Mediterranean by claiming ownership of the Gulf of Sidra, a body of water clearly in international jurisdiction. Poland, the largest Communist country in Eastern Europe, had been in turmoil since a visit by the first Polish pope, John Paul II, in 1979 had unleashed anti-Communist sentiment. In May 1981, the Pope was shot by a Turk who many believed acted in league with the Soviet KGB and Bulgarian intelligence. Finally, in September, the Egyptian president, Anwar Sadat, a man who had broken with the Soviets to move Egypt into an alliance with the United States, was assassinated.
Reagan met these challenges with his characteristic resolve. When the Libyan air force scrambled to intercept American naval planes training in the Gulf of Sidra, Reagan ordered the US Navy to shoot down any Libyan planes that tried to prevent the maneuvers. They did and they were. Reagan marshaled quiet support for anti-Communist Poles and kept America’s European allies in line as they struggled to aid their cause without provoking the Soviet Union. Reagan sent supplies and training to El Salvadoran troops in their fight against the Marxist rebels. And he began a wide-ranging global effort to combat Soviet influence wherever it existed, an effort that over his presidency would include support for anti-Communist guerrillas fighting in Afghanistan, Angola, Mozambique, and Nicaragua.
By 1981 many Democrats viewed these acts as warlike and unusual, but in fact Reagan was simply updating the same tactics that Democrat Harry Truman had employed to fight communism in the late 1940s and early 1950s. Truman had given aid to Greeks fighting Communist guerrillas in that country’s civil war and created the primary Western military alliance of the Cold War era, NATO. When Soviet troops blockaded West Berlin, a portion of t
he old German capital not under control of the Soviets, Truman ordered American planes to airlift supplies over Communist-controlled airspace. And when Communist North Korea invaded non-Communist South Korea in 1950, Truman organized the United Nations to come to the defense of free Korea. When Reagan was a New Dealer, Republican conservatives were isolationists and New Dealers were globally active. Reagan simply brought his old resolve into his new party and got to work.
Reagan had said for decades that Communists intended to conquer the world, and nothing he saw from the White House convinced him they had changed their stripes. Since the USSR’s leader, Leonid Brezhnev, still claimed to desire a Communist world, Reagan felt obliged to fight back any way he knew how. Still, he sought to ease tensions without conceding American interests, and so he sent a handwritten letter to Brezhnev to see if there might be common ground in finding genuine peace.29
While Brezhnev brushed off Reagan’s letter with a brusque reply, one paragraph Reagan wrote stands out as indicative of his deepest beliefs:
The peoples of the world, despite differences in racial and ethnic origin, have very much in common. They want the dignity of having some control over their individual destiny. They want to work at the craft or trade of their own choosing and to be fairly rewarded. They want to raise their families in peace without harming anyone or suffering harm themselves. Government exists for their convenience, not the other way around. If they are incapable, as some would have us believe, of self-government, then where among them do we find people who are capable of governing others?30
What’s striking here is the absence of a few words many might consider crucial to such a plea: liberty, freedom, free markets, and democracy. Instead, Reagan mentions dignity, choice, fair reward, and security. It’s not that the first concepts are absent from his plea, but rather they are the means toward the more important ends. Freedom begets dignity; liberty begets choice, markets begets fair reward; and peace begets security. The ends, not the means, are what Reagan holds most dear.
