Comments on the Kudlow Speech Defending Ronald Reagan

William Sharf

First of all, I would like to say that I am a Republican, I am a supporter of Reagan's economic policies, and I happen to be a big fan of the "Gipper". However, I think that Kudlow and many others make the mistake of attributing the collapse of the Soviet Union entirely to Reagan-era defense spending.

Basically, the Soviet Union fell because Gosplan didn't work -- it was simply impossible to centrally plan one of the world's largest economies. My economics teacher always used to tell a story about a foreign car factory opened in the Soviet Union during the days of Glasnost and Perestoika. Basically, the cars came out looking okay, but literally could not drive more than seven miles because the treads on their tires were never actually sealed, since that particular year Gosplan had only allocated about 1% of the total needed amount of tire sealant to the tire factory in the area. Whether or not this is actually true, it shows the fundamental problem with a Soviet-styled economy: a hundred people cannot take the place of supply and demand in a sizable economy without there being problems.

I think that Kudlow's statement that the Soviet Union fell because of Reagan-era defense spending is a dramatic over-simplification. Although an increased defense budget may have indeed catalyzed the fall of the Soviet Union, it was only one relatively minor dent in a totally demented system.

 

Kelso Bruce

There have been four major oil price increases since 1973. The first saw crude rise fourfold to over $12 per barrel from $3. In the second, following the Iranian revolution of 1979, oil prices briefly touched $82 per barrel before dropping back to the $35 level. Oil prices fell sharply during the mid-1980s but then rebounded to $46 per barrel during the Persian Gulf War of 1990-1991. If Kudlow wants to know why inflation fell in the 1980's, he needs to overlay his inflation charts with charts of per barrel oil prices.

And Mr. Kudlow should be reminded that under the Reagan economic program, the size of the federal government doubled, federal deficits doubled, and our national debt doubled, all under policies he supported and helped initiate.

The rest of the comments, particularly those reminding me of the leveraged buyouts, arbitragers, and pension raiders of the 80s, were on the mark.

 

Phillip Schuman

Lawrence Kudlow is knowledgeable enough to know that the spin he has put on the Reagan legacy in this address is far from true.

He asks, evidently assuming his audience will not know better, that if supply side economics' tax cutting were NOT responsible for boosting economic activity so greatly, just as the Laffer Curve predicted, that tax revenues came piling in at greatly increased totals to the government, even at the lowered rates, just how did nominal revenues 'almost double' (about 83% up in nominal terms) and actually increase about 30% in real terms, over Reagan's 8 years in office?

Since he thinks no one knows a better answer, by process of elimination (or lack of alternatives), it must have been the promises of supply side to raise revenues by cutting the tax rates, QED.

Kudlow's claim is patently dishonest, because as a former Reagan Treasury official, he surely knows better. For starters, the Reagan Treasury policy people projected a dead loss of $750 billion in tax revenue from his tax cuts, not any increase at all.

Maybe Kudlow is genuinely so ill informed or forgetful about Carter's policies that he honestly didn't know, or had forgotten, as your other respondents have remarked, that it was Carter who appointed Volcker, and Carter who deregulated transportation, deregulated natural gas, and put in place the deregulation of oil prices, to be done over a several year period (with Reagan's policy simply accelerating Carter's deregulation timetable). Maybe he never saw the Stockman Office of Management and Budget report that calculated that the deficit one year would have been fully $80 billion smaller under the Carter tax and budget policies prior to Reagan's passing his own. Maybe he wasn't familiar with the Carter term reduction of the top marginal rate for earned income to 50% (the higher 70% marginal rate applied no longer to salary or wage income, but only to so-called 'unearned' income like interest income, royalties income, patent earnings, etc.). It is more polite to suggest Kudlow was simply ignorant, rather than deliberately lying about these facts, and maybe that's even the case.

But Kudlow must know that Reagan signed very substantial tax HIKES in each of his last 7 years in office, after the size of the deficits (over $100 billion per year, as far out as the eye could see, in Stockman's memorable phrase) became apparent.

The first tax hike came in 1982, when Sec. Transportation Drew Lewis convinced Reagan to raise the federal excise tax on gasoline by 12 cents a gallon, by telling him it wasn't really a tax at all, but a 'user fee.'

Also in 1982, then-Senate Finance Chairman Bob Dole authored a huge tax hike called 'The Deficit Reduction Act.' It substantially repealed the entirety of the ruinously profligate Reagan business tax breaks (grossly padded by Democrats as well, when Stockman said 'the hogs were really feeding at the trough'), including the accelerated depreciation schedules, the 'safe-harbor' leasing of tax credits, etc.

Later years saw Reagan raising the Social Security FICA tax rate by almost 50%, from 4.2% to 6.2%, but that wasn't the half of it. The increase in FICA tax was far greater than 50%. For, in addition to raising the rate by nearly 50%, the wage ceiling limiting how much earned income was subject to the FICA tax was raised tremendously. The maximum a high earner could end up paying in FICA tax actually went up to 500% of the maximum he could have paid under the previous rate and ceiling.

These two tax increases ranked at the time as the largest tax hikes in nominal (current dollar) terms in United States or world history. In real terms (using constant dollars) they remain larger than either the Bush $500 billion/5 year hike, or the similarly sized Clinton tax hike. And these two gigantic hikes in the Reagan years were accompanied in that 7 year stretch by at least one sizable tax hike per year, in the range of $30 to $50 billion each. Because payroll taxes were raised so much, and prior existing tax deductions like those for income averaging, and consumer interest on credit cards and car loans were taken away from the people, the average American was paying as high a percentage of their income in total federal taxation in 1986 as they were in 1980, before Reagan's tax cuts were enacted.

The St. Louis Federal Reserve branch, noted for its strong economic research activities, looked into the causes for the increase in federal revenue during the Reagan years. The tax hikes he passed each year from 1982 to 1988, together with the effects of inflation, accounted for **93%** of the increase in revenues, they found. Only **7%** of the increase could be traced back to 'dynamic' Laffer Curve effects of the tax breaks and their fostering of increased economic activity.

Nor did supply side policies result in the savings/investment boom its supporters said it would. Business investment rates fell 50% from what they were in the bad economic days of the '70s (from 3% of corporate revenues to 2% of revenues), and personal savings rates also plummeted. Consumer and business debt increased so dramatically that new bankruptcy records were set every year of even the Reagan recovery. The annual federal deficits soared so high that they exceeded the entirety of the plummeting private national savings available to finance them, requiring the sale of US national debt to foreign capital. Rather than some new surge of fixed capital investments in plant and equipment, US businesses instead shuttered, permanently closed and wrote off huge capital investments, in steel, automobiles, machine tools, and other major industries, permanently decreasing the workforce in those industries by millions of employees, devastating such rust belt industrial cities as Youngstown, OH, Pittsburgh, Cleveland, etc.

Under Reagan's fiscal and anti-union policies, US industrial workers went from the world's best paid in 1980, to 18th best paid in 1988. The average wage of a white high school graduate fell 30% in real terms during his term of office. Real wages averaged a nearly zero annual increase rate, coming in at very meager 0.2% per year for his 8 years. The net worth of the majority of Americans actually fell during the '80s. The numbers below the poverty line increased by millions, and the rate of poverty remained higher than Carter's worst year's figure until 1988, when it went below Carter's worst figure by barely 0.1%, before shooting up above Carter's figure immediately the next year.

Given that Kudlow so utterly misrepresents the '80s and '70s, it is no surprise that his analysis of the '90s economic boom as the result of Reagan's tax cuts of '81 is also utterly false. For, between the tax cuts of '81 and the boom years of the last half of the '90s were 7 years of Reagan himself raising taxes to counteract the revenue losses of his 1st year's cuts, Bush famously having to agree to a very large tax increase, and then, more famously still, Clinton having to do the same thing and about as much as Bush did.

In fact, to the contrary of supply side claims, '82 through '00 represent one historical example where a country appears to have TAXED itself into prosperity.

 

Michael and Priscilla Bloom

It's a big speech, and it'll take me more than one sitting to get through it. The first thing that jumped out at me was that Paul Volcker was a Carter appointee, but somebody else caught that first. (Which was as it should be, since it was glaringly obvious.)

The first thing I remember happening after trickle-down economics went into effect was that U.S. Steel used its tax break to buy up Marathon Oil, following which they changed their name to USX and got out of the steel business, eliminating thousands of (well paying, unionized) manufacturing jobs in the process. This scenario was to played out over and over again through the Reagan years and beyond, as mergers and acquisitions became way more profitable than actual production. I don't know where Kudlow came up with the notion that millions of jobs were created, since my recollection is that millions were lost-- good, long term, skilled jobs with benefits.

I remember also that the Reagan administration decided to quash an antitrust suit against IBM that had been in the works, if memory serves, for eight years (which means it wasn't just a liberal democratic idea of Jimmy Carter's, but has been initiated under Ford). I was then (and still am) a programmer, and virtually all of my professional experience has been on IBM mainframe systems. So I know something of how IBM works, and in my opinion, the suit was justified. The Reagan team's abandonment of the suit was yet another signal that prosecuting corporate malfeasance was, to say the least, not going to be a priority of this administration-- although in the long run it wasn't as horrible as Anne Burford Gorsuch collaborating with known polluters.

There was an event during Reagan's first term that I remember vaguely, but I can't find any record of it on the net. (Maybe you can.) The administration polled business leaders, asking what were the most burdensome federal regulations impeding their ability to conduct their business. No doubt they were hoping for pointers to inefficiencies and redundancies between, say, filings required by the SEC and the IRS that could be streamlined. But as I remember it, every one of the top ten requests from the business community involved laws that were supposed to protect workers and/or the environment. American business found it burdensome to have to inform their workers that the chemicals they handle are toxic. They found it intolerable that OSHA could come in and witness their industrial processes and rate them for safety, and so forth. Ultimately the regulatory agencies involved all had their budgets slashed, in the name of reining in Big Government. Strange how many more news reports of salmonella we see nowadays.

 

Contributor requests to remain anonymous

Hi there... I'm an amateur historian who has a huge interest in Russian and Soviet history... I have a bone of contention with the following statement:

"Today, as we meet, it is a different ball game. The Cold War is over, the
United States is supreme. American ideas, values, and economics dominate the
world scene. I believe firmly, with respect to the great success President
Clinton has had in this economy, that it was President Reagan that gave him
the ground he is standing on."

This sort of statement grants far too much credit for the collapse of the USSR to Reagan. It rests on the Republican premise that Reagan had forced the USSR to continue the crushing burden of maintaining military parity with the US, and it was those economic stresses which forced the collapse. However, I think that's a vast oversimplification of history and fails to take underlying factors into account. Americans are always quick to overestimate the ability of their country to "make things happen" in foreign nations.

The vast majority of historians who look at the collapse of Communism will say that the Soviet regime collapsed from the inside as a result of its numerous flaws. Indeed, the system carried within it the seeds of its own destruction, and these flaws had been present long before Reagan had entered politics.

The Soviet regime was, of course, a vicious system which held human life and the human spirit in contempt. Reagan was, rightly, vehemently and voiciferously opposed to it. However, the fact of the matter is, the USSR shows signs of going into decline well before Reagan was elected, and I go so far as to put-forward the hypothesis that the USSR would probably have collapsed regardless of who was in the White House in the 1980s. It is impossible to prove these sorts of scenarios, of course, but I've noticed that Reagan gets a lot of credit from Republicans for 'winning the Cold War' which we were well on our way towards winning anyway. Are we really to think that if Carter had won the 1980 election or if Walter Mondale had won the 1984 election, the USSR would have survived?

There is evidence that the Soviet Union was on its way to collapse as early as the 1960s and 70s. In the past twenty years, historians have found that the first major strikes and riots in the USSR appear to date-back to a 1959 incident in Temirtau where workers staged a large-scale protest that bordered on creating a full-scale revolt. A 1962 strike in Novocherkassk resulted in at least 70 people being killed. (It is also important to mention that the watershed event of the Solidarity movement in Poland, which had done so much to encourage Eastern Europe to free the USSR's grasp also predated Reagan's presidency.)

The following is a line from Andri Amalrik's "Will the Soviet Union Survive Until 1984?" (Written in 1969). It would hint that the USSR had reached an impasse in its existance and a general paralysis.

"Obviously we have already reached that dead-end where the notion of power is linked neither to a doctrine, nor to the personality of a leader, nor to a tradition, but only to power as such...
Naturally the only aim of such a regime, at least in domestic affairs, must be self-preservation... The regime neither wants to restore Stalinism nor to persecute the represenatives of the intelligentsia, nor to give fraternal aid to those who do not ask for it. It wants only that everything remains as before: that the authorities are recognized, that the intelligentsia shuts up and that the system not be shaken by any dangerous or unexpected reforms. The regime does not attack, it defends itself. Its motto is: don't touch us and we won't touch you."

Russians refer to the time of Brezhnev as the "era of stagnation". The USSR was beset by increasing bureaucratization of the economy: the number of industrial ministries increased from 45 in 1965 to more than 70 in 1985. Soviet GNP and worker productivity declined throughout the pre-Reagan period... although the exact numbers are in dispute, the trend is not.

In the words of the historian Martin Malia in "The Soviet Tragedy": "The deeper cause of "stagnation" was to be found in the basic structures of the Soviet system itself, and not a result of the external pressures of Reagan's military buildup:

"...none of the Soviet Union's external problems- from Solidarity to Afghanistan- would be capable of shaking the system unless there were first a crisis at home. And there were numerous latent elements of crisis in the Soviet Union at the start of the 1980's- from the stagnation of the economy to the sclerosis of the Party to geopolitical overextension. Yet none of these elements could emerge into the open or congeal into general crisis with a precipitating shock. And this shock could originate only at the top, for the structure of the system was such that all initiative had to come from on high...
Because the system was so centralized, there would be no way out of this predicament until the (Brezhnevite) gerontocrats had physically passed from the scene. This circumstance resulted in a three-yer interregnum during which, one by one, they were interred beside the Kremlin wall. And this macabre process was the final element of crisis that produced the utimate in Reform Communism, Gorbachev's perestroika."

A researcher by the name of Murray Feshbach (author of Ecocide in the USSR and Ecological Disaster: Cleaning-up the Hidden Legacy of the Soviet Regime) notes that in the mid-1970s, there are signs that the Soviet Union would start to experience a severe demographic decline. This would be the result of increased infant mortailty rates brought-on by overall poor health-care and environmental degradation coupled with the decimation of the peasantry under Stalin, and the reduction in family size brought-about by the chronic Soviet housing shortage. By the 1970s, this brought-about a shrinking of the country's labor force accordingly. Indeed, in the last years of the Brezhnev regime, the life expectancy of males fell from 68 to 64 years while the rate of infant mortality increased from 3 to 7 percent. Reagan could NOT have caused that.

Mikhail Gorbachev once summarized the troubles within the USSR as "buereaucratic paralysis, economic stgnation and moral decay." These are things that an American president could not possibly have put in motion, and reflect problems that had been long preexisting previous to Gorbachev's tenure.

The Soviet collapse had multiple causes stemming from deep-set structural problems /within/ the system.. I feel that Reagan deserves only incidental mention for the collapse of the USSR, simply by virtue of his being in the right place at the right time- as an outside factor during the tail-end of what had been a long process. I mentioned this to a hopeful Republican candidate who had once run for a seat in the House of Representatives. He responded somewhat glibly: "That may be true, but Reagan was the straw that broke the camel's back."

To me, that unprovable statement of his is very weak indeed- how can you credit one man with such an important, complex historical event?

 

Mark Cordell, Teesside, UK

As a UK citizen I would take issue with the comments made about Tony Blair, British PM, being influenced by Reagan or being a clone of Reagan. Blair only came to power because the well liked left-wing traditionalist leader of the Labour Party, John Smith, died suddenly well before the 1997 election.

While it is true that Blair is more right-wing than any other Labour leader this is because:
a) Of the bizarre popularity of Margaret Thatcher, who Blair has copied, and
b) That the Labour party failed to be elected in the previous two elections under the leftist Neil Kinnock and had to change to hope to be elected at all.

Reagan was not a factor. The UK is inherently conservative anyway, and responds well to conservative ideas.

Unfortunately.

 

James Swint

OK, I am done with Kudlow speech of July 1997. It is dated and pre-dates impeachment. The guy is in love with Reagan but he is prety sharp. He mentions an economist named Schumpeter as being a Reagan man but admits he doesn't know if they ever met. In my opinion Schumpeter was right on the money but his advice is being ignored today by Greenspan. The credit Kudlow gives to Reagan should go to Jimmy Carter. Kudlow says Reagan deregulated transportation when trucking and railroads were deregulated by Carter. Kudlow mis-spells Volcker and says Reagan hired him when it was actually Jimmy Carter that hired Volcker. Reagan did appoint Greenspan but Greenspan is doing the opposite of what Kudlow said he would do. Kudlow said Schumpeter talked to Greenspan so Greenspan would cut interest rates. The fact is Greenspan has been raising interest rates and this goes against the Schumpeter model. Expect economic trouble within twelve months.

This guy gives much credit to Reagan that should go to Jimmy Carter. Jimmy Carter had an eight year plan for America when he needed two four year plans. Reagan benenfited from that eight year plan.

After I printed it out and read it, I appreciated it more. Kudlow is OK with his understanding of economics. He is just giving a lot of credit to the wrong guy.

Larry Stephens

I whole heartedly agree that tax cuts are responsible for spurring economic growth and that Reagan's administration did much to advance this idea. Label it with any derogatory term you want "Voodoo Economics", "Trickle Down Economics" - it works. For the simple reason that if the vast populace of the country is allowed the freedom to do with that money what they wish, the possibilities for success and prosperity are much greater, by simple virtue of the fact that there are more possibilities. However, when the government takes your money and applies it to 'planned" economic initiatives, like Social Security your prosperity lives or dies with the success of the single government alternative.

When the government lets you keep your money, you can now take that money and invest in the stock market, or you can go with real estate if the conditions are good in your area, or if you're risk averse, put it in a CD. The point is the choice is up to you and because you have more choices, your chances of success are much greater than they would be with a single option government alternative. Sure some people will have more money than others, but everyone will have the freedom and opportunity to invest this money wherever the biggest payoff lies for them.

Economic freedom is tightly bound to political freedom. Freedom to invest as you wish is also freedom of association, whether that investment is your money or your labor. Why do you think so many ardent anti-communists jumped on the bandwagon for free trade with China? Many of them know that economic freedom sows the seeds of democracy. To explain this away as the result of simply successful lobbying by Nike is far too cynical I think.

Am I saying it is impossible for a handful of government technocrats to come up with a profitable solution? No, just that it is highly unlikely based on the lesson's of the Soviet Union, North Korea, and Cuba. Why is it unlikely? Because there will always be more smart people outside of government than in it and the citizenry is not insulated from itself. If this sounds like a defense of the "Invisible Hand" theory, it is that too.

Ok, so we get to spend our money the way we want, how does this help the poor and destitute? What about social justice? Again I would argue that by leaving the money in the hands of the millions of individuals that make up this country, we will come up with far more solutions for these problems than a few government bureaucrats ever could. Besides any socialist doctrine, regardless of it's ideals, always ends up in less freedom and fewer choices. Equality is acheived through coercion, rather than innovation. For a much more eloquent explanation of this viewpoint, read F.A. Hayek's "The Road to Serfdom".

I would like to add that I, in no way, am an advocate of laisezze faire economics. Government, when it remembers it's primary role of ensuring equality of opportunity rather than outcome, is vital to economic success. Its role in protecting property rights is equally important. In order for economic freedom to exist, personal freedom must exist. Not freedom from want, but freedom from coercion, be it economic or otherwise.

 

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