Reagan Changed the World

President Ronald Reagan`s stature
will grow as his achievements come to be more widely
recognized.

Few Americans realize that
President Reagan`s economic policy won the cold war by

rejuvenating capitalism.
Members of the Soviet
Academy of Sciences, with whom I spoke in Moscow during
the Soviet Union`s final months, agreed that it was
President Reagan`s confidence in capitalism, not his
defense buildup, that caused Soviet leaders to lose
their confidence.

Unlike many “Soviet experts”
in the West, the Soviets themselves were aware of the

failures of their economic system.
Although their
failing economy seemed impervious to reforms, the
Soviets took comfort in American stagflation and the
various diseases that afflicted the British and European
economies.

The Soviets heard from Western
economists about worsening

“Phillips curve”
tradeoffs between employment
and inflation and the inability of Western economies to
grow without inflation. The Soviets saw the West`s
economic difficulties as an offset to their own and had
no reason to panic and give up the struggle.

Ronald Reagan took away the
Soviets` comfort factor when he said that the
“Phillips curve”
and falling US productivity were
the results of the wrong policy mix, not inherent
features of a market economy. The U.S. economy, in other
words, could be easily fixed, but the Soviet economy
could not.

Reagan then proved his point by

slashing tax rates
from 70 percent to 28 percent and
presiding over a record economic expansion while
inflation fell.

Margaret Thatcher
achieved a similar renewal of the

British economy
, and the French followed by
privatizing their socialized economy.

The Soviets saw that the jig was
up. Released from suffocating economic policies, Western
economies moved ahead rapidly, while the Soviet economy
ground to a halt and declined.

Reagan revitalized the U.S.
economy. He abandoned the Keynesian policy mix of
monetary expansion to stimulate demand and high tax
rates to restrain inflation–which was obviously not
being restrained by Keynesian demand management. Reagan
got the

supply-side message
that high tax rates were
restraining real output while money growth pumped up
demand, thus causing inflation.

Reagan did as the supply-side
economists recommended. He reversed the policy mix.
Monetary policy was used to control inflation, and tax
rate reductions stimulated real output.

Reagan`s policy was a success. But
at the time it was misunderstood. Accustomed to thinking
of tax cuts as a demand-side measure to stimulate
consumer spending, the entire economics profession,
along with the Federal Reserve, the Republican Senate,
and most of Reagan`s own government, predicted
accelerating inflation.

Supply-side voices were drowned
out. Even Alan Greenspan predicted that inflation would
explode. He told Fed

Chairman Paul Volcker
at a July, 1981, meeting of
the Fed with its economic consultants (at which

I was present
as the administration`s
representative) that monetary policy was a “weak
sister”
and could “do nothing other than a weak
rear-guard action”
against Reagan`s
“inflationary”
tax cut.

The opposition to Reagan`s program
caused many of his political appointees to abandon his
agenda. They feared that support for Reaganomics would
make them unpopular with the establishment and damage
their future careers. Consequently, they added their
voices to those decrying Reagan`s economic policy.

The supply-side enclave at Treasury

fought Reagan`s government for Reagan,
but in the
end Reagan chose to govern by appealing directly to the
people over the heads of both his own government and of
Congress. Instead of firing disloyal aides, he simply
ignored them.

This practice allowed Reagan to be
successful without spokesmen for his policy. But it was
a leadership style that allowed opponents to control the
explanation of his policy. To this day the erroneous
belief persists that Reagan won the cold war with a
military buildup but damaged the economy with deficits.

The greatest myth of all about
Reaganomics is that the administration made a

“Laffer-curve”
forecast that the tax rate
reductions would pay for themselves. Reagan`s budget
deficits are regarded as proof that supply-side
economics failed.

As official government documents
show, the administration made a static revenue forecast
that the tax cuts would lose $718 billion in tax
revenues over the forecast period. The budget deficits
resulted because inflation fell even faster than the
administration predicted, wiping out $2.4 trillion in
nominal GNP during 1982-86, a dramatic reduction in the
tax base. This unanticipated disinflation also built
into the budget higher levels of real spending than the
administration had intended.

The predicted inflation never
materialized from the “Reagan deficits” because
the deficits themselves were the direct consequence of
the collapse of inflation. Treasury supply-siders
predicted the disinflationary expansion. But their
prediction was ignored, because it conflicted with the
Keynesian interpretation of fiscal policy and the
economic establishment`s belief in the “Phillips
curve.”

Reagan changed the world, because
he did not believe capitalism was a spent force. He
liberated our economy and chased away the “malaise
that had paralyzed the Carter administration and given
hope to Soviet leaders.

Dr.
Roberts drafted the original Kemp-Roth tax rate
reduction bill and served as Assistant Secretary of the
Treasury for Economic Policy during 1981-82. In August
1981 President Reagan wrote to him: “As I signed the
tax legislation, I could not help but think of the great
role that you played in achieving this victory for the
American people.”
In 1987 Dr Roberts was recognized
by the government of France as “the artisan of a renewal
in economic science and policy, after half a century of
state interventionism” and inducted into the Legion of
Honor. Dr. Roberts is the author of


The Supply-Side Revolution
and


Meltdown: Inside The Soviet Economy
.

COPYRIGHT CREATORS
SYNDICATE, INC.

Paul
Craig Roberts was Associate Editor of the WSJ editorial
page, 1978-80, and columnist for “Political Economy.”
During 1981-82 he was Assistant Secretary of the
Treasury for Economic Policy. He is the author of



Supply-Side Revolution: An Insider`s Account of
Policymaking in Washington
.