Modern economy is different and more complex from primitive economy, says Michael Gilbert in his book “Reaganomics vs. the Modern Economy: The Conflict that divides America“. The defining characteristic of the modern economy is the ‘impossibility of true self-sufficiency.’ Today we cannot go out and supply ourselves with food, clothing and shelter. In order to survive, we need to buy our necessities with money from a store, to interact with the marketplace. This kind of economy does not bode well for the economic theory known as ‘Reaganomics’, a term used to describe the economic policies of President Ronald Reagan that promoted tax cuts, slashing of government spending and the deregulation of domestic markets.

The prevailing view is that the high oil prices stemming from OPEC’s cartel’s oil embargoes in the 1973 has caused the stagflation that inflicted so much damage to the US and world economy. But, Fed Chairman Arthur Burns argued in his book “The Anguish of Central Banking” in 1979 that the inflation appeared to be the result of a plethora of forces:

“the loose financing of the war in Vietnam, the devaluations of the dollar in 1971 and 1973, the worldwide economic boom of 1972-73, the crop failures and resulting surge in world food prices in 1974-75, and the extraordinary increases in oil prices and the sharp deceleration of productivity.”

Whatever the forces that caused the 1970s recession, the dominant view is that it was Reagan’s policies that ended it. Michael Gilbert does not agree with this view. The improvements in the American economy in the 1980s, he says, “has nothing to do with Reaganomics”. It was the market forces – a market correction that would take nearly ten years – that worked beautifully to end stagflation in the United States and the rest of the western world. In other words, Ronald Reagan was lucky and the misconception that somehow he turned the economy around has distorted US’s economic policy. Furthermore, it is responsible for the attack, shrink, shut down and underfund government.

Reaganomics continues to be a controversial issue. Ronald Reagan’s economic policy had 4 major objectives

To reduce government spending
To lower income tax
To reduce government regulation, and
To reduce inflation

In his first three years of his Presidency, Reagan chopped the top individual income tax rate from 50% to 28%, the bulk of which concentrated at the upper income levels. Reagan believed that tax relief for the rich would enable them to spend and invest more, stimulating the economy and therefore creating new jobs and more revenue for the federal government.

Reagan delivered on each of his four policy objectives, although not to the degree that was intended. The increased military spending, mainly due to his ambitious Strategic Defense Initiative (SDI) programme, dubbed “Star Wars”, plus the tax cuts, and the Congress’ refusal to make any deep cuts to the welfare state would cost the federal government trillions of dollars. Reagan’s failure to address the savings and loan problem led to an additional debt. At the end of his presidency the national debt had been tripled.

Reagan’s plans didn’t quite go as planned, but his policies helped to restore confidence in the American economy. Market and tax reforms, simplification of regulations, gave to the economy a new impetus that so badly needed. Simplification of regulations saved consumers billions of dollars. Furthermore, in the 1980s and the early half of the 1990s, a wave of political change swept over the world. Ronald Reagan, as Margaret Thatcher in the United Kingdom, followed this wave of change. Countries that embraced these changes were rewarded with improvements in the quality of life and unprecedented bursts of economic growth.

Michael Gilbert rightly argues that Ronald Reagan’s “government is the problem” strategy have been superficially used and often misapplied by the Republican Party. But he places great emphasis on the extremes of the debate “Government is the problem vs Government is good” to prove his point that government has an important role to play in modern economy.

Government is a vital institution. It isn’t perfect, but neither is the private sector. All markets fail to some degree. It is essential for government to take action when severe market failures are present. The better we make the government the better will perform its proper role in our modern economy.

It is true that all Presidents get too much blame or credit for the economic events that occur during their terms, and also that their preferred policies differ considerably from what people remember later as their philosophy. Reagan is no exception on either count, and this book spends considerable energy demonstrating those two things.

But the author goes much too far. There was a sea change in political thought that swept the world from the late 70s to the mid 90s, Ronald Reagan was just a part of it. Margaret Thatcher in the UK, of course, but also in Latin America and Asia, in the Nordic near-socialist states, in Israel, Turkey and South Africa, in Spain, in the Soviet Union and China; everywhere government goals were rolled back and market reforms introduced. Taxes were simplified and made fairer. Regulations were rationalized and reduced. Entrenched cronies were displaced.

Of course, it was not done perfectly, and it created problems as well as benefits, but it ended a global malaise that dated to the mid-60s. Places that embraced the changes were rewarded with the disappearance of problems that had seemed intractable, and unprecedented bursts of economic growth. Places that did not embrace them continued to stagnate in the misery of the early 70s. Trying to explain the entire thing with oil prices and one President in one country is absurd. On the other hand, Ronald Reagan was an important figure in that movement, denying that is equally absurd.

The author is on stronger ground when he argues that the anti-government lessons from Ronald Reagan's term have been misapplied since. Here again, however, he goes too far. He lists lots of things the government does, and insists we cannot live without them. But the government runs half the economy, the proper question is not whether it does some useful things, but does it do as much with its half of the resources as the private sector could? The government doesn't create anything, it shifts resources from one person or use to another.

While the author tries hard to generate controversy, there really isn't much here. Nearly everyone loves the government when it is honest, efficient and humble. We all love the firefighter who risks her life to save our child, the tireless public health researcher who forgoes millions of private sector dollars to keep us all healthy. We all hate the petty and not-so-petty tyrants, the lazy incompetents, the bloated cronies who make everyone's life miserable. And almost all of us admit both types exist. Similarly, nearly everyone loves the market when it delivers useful innovations, matchless efficiency and great customer service; and hate it when it delivers defective or dangerous products, destroys the environment or mistreats us as customers.

The reasonable position is not to waste energy fighting about whether government or private markets are better, but to try to make whichever one happens to be running something better. Nearly everyone cares more about whether something is well managed than who runs it. Some people are predisposed to favor government solutions, others have the opposite experience, but both agree that good government is better than bad private sector, and bad government is worse than good private sector.

When the book is discussing specific issues it's pretty reasonable in the main, although most readers will find points of agreement and disagreement. But too often it veers off to argue against some imagined anarchist opponent who thinks everything the government does is bad, and to list things like roads and schools as if they would all disappear tomorrow if we diminished any government powers.

Government is not the problem; Reaganomics is the problem

There’s a difference between a modern economy and a primitive economy, says Michael Gilbert. In a primitive economy, individuals can go off and live by themselves, live off the land, and make what they need without participating in a national marketplace. In a modern economy, pretty much no one can live without interacting with the marketplace. Healthcare, food clothing, cars, fuel, education – just about everything comes from third parties. So Reaganomics in invalid in theory. In practice, it has been a disaster everywhere it has been applied. It is no secret that despite his bleating about the federal budget out of control, Reagan tripled the national deficit in his eight years at the top. Kansas has turned itself into a basket case.

Gilbert spends the first 60 pages summarizing pre-Reagan history, pointing out times and ways government has given citizens a boost. From The New Deal to The Great Society and even the Nixon administration, government has stepped in to stop abusive practices, provide safety nets or create environments conducive to prosperity. Whole countries, like Japan, moved forward at record breaking rates by working along with government (“Japan, Inc.”) rather than constantly demanding the dismantlement of the structure. Gilbert describes five categories where government serves a critical purpose. Outside of these five, government can be wasteful and abusive. But the five of them are core essentials that Reaganomics ignores.

But then the book goes off the rails. There is just one chapter, about nine pages, where Gilbert analyzes the Reagan Administration. Topline summarily and critically. The term Voodoo Economics appears at least three times. Following that minimal look, the rest of the book deals with the Iraq war, inequality, taxation, public policy and Thomas Piketty. There are lots of numbers, but nothing about Reaganomics. There is no chapter on Kansas. There are no charts of before and after Reaganomics. It isn’t even mentioned in the conclusion. It’s as if Gilbert ran out of tools back at page 70 and took off on a Democratic Party rant. What started off as neutral, informed analysis ends in totally partisan whining. It becomes all about those evil Republicans.

It’s too bad, because the core point is exceptionally valid at this time: we need government to balance the inequities of market forces.

David Wineberg