The huge strain on the federal budget that resulted from the recession also forced Reagan to retreat. A budget deficit would have resulted from the 1981 tax cuts under any circumstances, but the shortfall ballooned when the economy nosedived within months of their passage. Congress had no taste for further compensatory spending cuts. In mid-1982, Reagan reluctantly agreed to tax code changes, including reduced incentives for capital investment, which restored about a third of the revenue lost as a result of the 1981 cuts. Even with these changes and further fiscal adjustments in his second term, for the remainder of the Reagan administration the deficit remained at two to three times its level during Carter’s last year in office.
Reagan decried the deficit, absolved himself of any responsibility (blaming Congress instead), and backed a constitutional amendment requiring a balanced budget. In practice, though, he accepted record-high peacetime deficits, which in some ways served his administration well. The deficit created ongoing pressure to cut spending and avoid new federal initiatives, furthering Reagan’s goal of shrinking government (or at least slowing its growth).
Some of the policies that created the deficit also provided a stimulus to the economy. When the Federal Reserve began to loosen the money supply in mid-1982, reduced taxes and massive defense spending, along with falling energy prices, sped an economic recovery that began in 1983 and continued through the end of the Reagan administration. But contrary to what the supply-siders predicted, the tax cuts did not boost the economy by increasing personal savings (which fell) or investment in plant and equipment (which even during the recovery remained below the rate of previous decades) but rather by boosting consumer spending, which along with military outlays acted as a vast Keynesian stimulus program.
High interest rates reshaped the economy as it emerged from recession. The large federal deficit put upward pressure on interest rates, which only slowly came down as the economy rebounded. The bank prime lending rate did not drop below 10 percent until mid-1985. The unusually large gap between the interest and inflation rates redistributed wealth toward those already wealthy. People with money to lend, either through bond purchases or ownership shares of banks and other lending institutions, made out spectacularly well at the expense of borrowers and taxpayers (who had to fund the interest on the federal debt). In 1982, interest constituted 14 percent of national personal income, an all-time high.
High interest rates attracted foreign investors, who helped finance the spending spree on armaments and consumer goods that fueled the recovery and subsequent economic expansion. In just a few years the United States went from being the world’s largest lender to being, for the first time since 1914, a debtor nation, and soon the world’s largest debtor. The influx of foreign money not only helped fund the national debt, it also provided investment funds for domestic enterprises and, by strengthening the dollar relative to other currencies, made imports cheaper. But the strong dollar hurt exports, which failed to grow even after economic activity picked up. U.S. manufacturers had increasing difficulty maintaining market share at home and abroad, resulting in a growing trade imbalance. By 1988, waste paper destined for recycling constituted the largest export from the West Coast.
The 1984 Election
The more moderate policies Reagan adopted as a result of the 1981–82 recession helped him in the 1984 election. The resignations of Anne Burford and James Watt kept environmental policy from being a major issue, to Reagan’s advantage. He also rebuilt his political strength through a rhetorical turn away from hard-line anticommunism, as he proposed greater cooperation with the Soviet Union and downplayed his support for anticommunist insurgencies, assuaging public fears that he might lead the country into confrontation or war. But most importantly, the economic recovery enabled Reagan to run again as a pro-growth optimist, claiming that he had restored national strength and values.
The Reagan campaign brilliantly put forth a vision of a restored nation in a series of sentimental television advertisements. The most noted proclaimed that it was “Morning Again in America.” Suffused with images of family, patriotism, and small-town life, the ads allowed voters to think that by selecting Reagan they were aligning themselves with an image of the country that made them feel good about themselves, even if in their own lives they chose very different directions from those portrayed in the commercials, abandoning the countryside and small towns for cities and suburbs, divorcing in large numbers, and indulging in—or at least yearning for—conspicuous consumption rather than the simple pleasures of bygone days. Reagan thrived on such contradictions, declaring himself against abortion but doing nothing to end it; calling for a constitutional amendment requiring balanced budgets while creating the largest peacetime deficits in history; and extolling family and community while promoting a deregulated free market that eroded both.
Reagan’s opponent, Minnesota senator Walter Mondale, had roots in New Deal–Great Society liberalism. His dull if competent campaign gained a certain excitement from his selection of New York congresswoman Geraldine Ferraro as his vice presidential running mate, the first major-party female nominee for president or vice president. But Mondale never found traction against the Reagan imagery. He tried to exploit the deficit by saying that if elected he would raise taxes to begin reducing it, as, he contended, Reagan also would have to do, taking another step in the Democratic move toward what had in the past been the conservative, Republican stress on balanced budgets and fiscal probity. But the public seemed to share little of the newfound Democratic concern over the growing national debt. Most voters saw little to cheer for in Mondale’s plan to raise taxes for more than half the population, in contrast to Reagan’s pledge to hold the line on taxation.
The most electrifying candidate in the election was civil rights leader Jesse Jackson, whom Mondale defeated for the nomination. His sharp populist rhetoric and church-cadenced language of uplift helped mobilize the Democratic base, especially African American voters, who, along with Hispanics, Jews, and low-income voters, Mondale succeeded in carrying. Otherwise, Reagan swept the boards, winning 59 percent of the popular vote. His victory in every state except Minnesota (where he barely lost) and the District of Columbia gave him the largest electoral vote margin in history.
Perhaps Reagan’s strongest card was his self-assurance, his seeming resolve and willingness to take clear, bold action. His firing of the striking air traffic controllers brought him admiration, even among some voters who did not share antilabor views, for taking a strong stand and sticking with it. His graceful behavior after being shot (in the hospital waiting for surgery he quipped to his wife, “Sorry, honey, I forgot to duck”) cemented his image as calm and self-assured, even, literally, under fire. After the indecisiveness and ineffectiveness of Ford and Carter, Reagan’s very person seemed a refutation of the widespread perception of a country adrift, a declining empire that had lost the strength of will and boldness associated with its onetime glory. Like his conservative political soul mate, Margaret Thatcher, Reagan looked like he knew what he was doing (though in reality he was one of the least informed presidents the country ever had) and, more importantly, like he knew what he believed, which made him stand out against a tapestry of dull, poll-watching, equivocating leaders. In the end, voters, by a very large margin, liked the vision Reagan projected—expansive, upbeat, and cost-free—better than the Democratic message of problems, probity, and limits.
Revolution at Bay
Reagan’s huge victory did not translate into much in the way of policy initiatives. For one thing, the Republicans as a party did not do especially well in 1984, losing two seats in the Senate and gaining only fifteen in the House, leaving Reagan without strong congressional backing. For another, Reagan himself seemed to have little new that he wanted to accomplish, running a campaign almost devoid of programmatic proposals. Rather than further battling, he preferred to bask in the light of public accolade, an increasingly distant figure who rarely
had any unscripted contact with the press, the public, or even other politicians.
After the election, both Democrats and Republicans acknowledged the sheer fantasy of the early Reagan administration claims that taxes could be massively cut without creating a large deficit. In an effort to move toward a balanced budget, the 1985 Gramm-Rudman-Hollings Act established a system for automatic spending cuts if the deficit exceeded fixed targets. Both parties supported the bill. The spending caps reduced the budget shortfall but came nowhere near eliminating it.
In 1986, Congress, again on a bipartisan basis, addressed taxes but not with the aim of increasing revenue. Instead, it sought to revise and simplify the tax code, largely in accord with a soft version of supply-side economics. The Tax Reform Act reduced the top individual income tax rate to 28 percent, further institutionalizing the supply-side idea that cutting the tax rate for the rich would benefit the entire society. (Under the law, the tax rate for the income group just below the top actually exceeded what the wealthiest had to pay.) To make up for the lost revenue, the law closed many tax loopholes and reduced the value of various tax shelters. It also eliminated the deduction for interest on consumer loans (including credit cards but not mortgages), a modest step toward checking consumerism and the rise in personal debt. With some companies gaining from the law and others losing, the business community divided over it, part of a reversion to parochial concerns after the big victories of the late 1970s and early 1980s.
The Reagan administration recognized in 1985 that the strong dollar was causing such damage to exports and manufacturing industries that it could not be sustained. After maintaining a hands-off policy toward exchange rates, it began intervening in money markets and in September 1985 negotiated an agreement with the leading industrial powers to lower the value of the dollar. The new policy contributed to a revival of manufacturing. But the weakened dollar also had the effect of making American assets cheap buys for foreign investors, who gobbled up golf courses, trophy buildings, and corporations at a frantic pace. Direct foreign investment in the United States, which had been $83 billion when Reagan was first elected, reached $304 billion in 1988.
Any chance that Reagan might try to launch another transformative political effort during his second term ended when a series of scandals enveloped some of his key constituencies and his own administration, draining away what little remained of its vitality. Following the arrest of a young investment banker in the spring of 1986, investigators led by U.S. Attorney Rudolph Giuliani uncovered the extensive illegal use of insider information by leading Wall Street figures to make fortunes on mergers and acquisitions. Ultimately, prosecutors won convictions against fourteen people for mail fraud and security and tax law violations, including two of the most prominent figures in the market boom of the 1980s, arbitrageur Ivan Boesky, who bought insider information from leading brokerage houses with suitcases of cash, and Michael Milken, the junk bond salesman extraordinaire whose yearly income had exceeded the GNP of some nations. Rather than great democratic equalizers, the stock and bond markets turned out to be rigged games, in which cheating insiders reaped huge gains. Their malfeasance was facilitated by Reagan administration officials whose connections to Wall Street and ideological belief in the greater virtue of private enterprise than government led to lax regulation.
Images of Wall Street big shots being taken off to jail tainted the ideological and moral claims of boosters of unregulated capitalism, but a more severe blow came in October 1987, when the Dow Jones Industrial Average fell 23 percent in a single day, the steepest drop in its history (including during the Great Depression). The loss of money by millions of people trying to get in on the magic of unearned financial gains led to a widespread sense of betrayal, evident in movies like Oliver Stone’s Wall Street, with its hero-villain loosely based on Boesky; novels like Tom Wolfe’s Bonfire of the Vanities, with its unflattering look at a bond trader; and a wave of business books documenting the mercenary culture of 1980s finance. The Reagan administration suffered from its association with the cult of the market and money, though it would only take another upswing for Wall Street and free-market ideology to regain their cultural and political footing in the post-Reagan era.
Lax Reagan administration regulation contributed to another financial debacle, the savings and loan scandal, the full cost of which became evident only after the president left office. The removal of limits on how federally regulated savings and loan associations could invest their money prompted a turn to speculative investments in shopping malls, office buildings, condominiums, ski resorts, casinos, and other endeavors with big potential gains but also big risks. Federal regulators failed to closely monitor the banks, which in many cases morphed from sleepy local institutions to big regional operations, even though federal deposit insurance made Washington liable for a large part of any losses they might incur. Some bankers engaged in unethical behavior or outright thievery, using their institutions to provide favorable loans to themselves and their associates and finance high living. A slowdown in the real estate market, especially in Texas and the Southwest where the savings and loan expansion had been greatest, led to a wave of bank failures during Reagan’s second term. In 1989, Congress finally acted to clean up the industry and deal with insolvent banks, at a cost to the government of well over $100 billion, making it the most expensive bank crisis to date.
Scandals in the spiritual world also took some shine off Reaganism. In the spring of 1987, television evangelist Jim Bakker admitted to having had an affair with a church volunteer, whom he paid to keep silent. Jimmy Swaggart, another high-profile television preacher, confessed to having had a sexual relationship with a prostitute. Jerry Falwell, the most visible ministerial link between conservative churches and conservative politics, tried to rescue Bakker’s operation but soon gave up on it and his own Moral Majority organization. As the televangelist scandals revealed the hypocrisy that sometimes lay behind the public professions of piety that had become common in the Reagan era, the open association of evangelical church leaders with conservative politics turned into a mixed blessing.
The most serious blow to the Reagan administration came from its own doings, its secret, illegal, semiprivatized effort to pursue foreign policy operations banned by Congress and beyond the pale of public acceptability. In late 1986, news began to filter out about a series of interrelated clandestine government operations, including the supply of arms to the antigovernment Contra forces in Nicaragua in violation of an explicit congressional ban; the sale of arms to Iran in exchange for the release of hostages; and the use of profits from the arms trading to fund the Nicaragua operation. Though Reagan personally managed to avoid legal consequences for the violations of law and the Constitution he and his aides engaged in, his popularity dropped sharply, as he lost the high degree of public trust that had been one of his greatest political assets.
The Iran-Contra affair reflected the Reagan administration’s loose administrative style that sometimes verged on chaos, poor oversight of spending and operations, porous boundaries between public and private interests, and lax ethical standards. During Reagan’s second term and after he left office, several top administration officials, some with close personal ties to the president, were charged with criminal activities, including fraud, larceny, illegal lobbying, and perjury. Secretary of Labor Raymond Donovan became the first sitting cabinet officer ever to be indicted, on charges related to his work in the construction industry, though he ultimately won acquittal. The most extensive corruption took place in HUD, an agency whose very mission Reagan and his allies largely rejected. Young, politically connected officials, often with no housing expertise, steered massive amounts of federal money to developers who paid high fees to prominent Republicans (including James Watt and former Nixon attorney general John Mitchell) to serve as their consultants and lobbyists, furthering political interests and private wealth at the expense of public housing.
How Reaga
n Changed America
The Reagan revolution failed to achieve many of its goals. Most basic structures and policies of the federal government did not fundamentally change during the years Reagan occupied the White House. While the public was enamored of the president, it never supported many of his specific plans. But Reagan did lead a revolution in the assumptions and values of the nation, especially concerning the role of government and political economy.
Coming into office, Reagan promised to balance the budget by 1984. Instead, he ran up deficits of over $100 billion in every one of his budgets, raising the national debt from $914 billion in 1980 to $2.7 trillion in 1989. As a percentage of the GNP, Reagan’s deficits exceeded the average of the New Deal deficits during the Great Depression.
American Empire Page 54