With the economy in such disrepair, Reagan easily persuaded Congress to back the concept, but he asked for an immediate 30 percent across-the-board cut (meaning that the wealthy would get tax relief too). Instead, Congress, afraid of appearing to favor the rich, strung the cut out for three years in 5, 10, and 10 percent increments through the Economic Recovery Act, passed in August 1981. In addition to lowering the top rates from 70 percent to 50 percent, and then still further, it lowered the all-important capital gains tax from 28 percent to 20 percent. Spreading out the cuts minimized the stimulus impact Reagan had sought. The economy recovered, slowly at first, then after the last segment of the cut was in place, rapidly. Lower capital gains rates caused investors to pump money into the economy as never before: their reported taxable income soared sevenfold and the amount of taxes paid by the investor classes rose fivefold.
But in the interim, from 1981 to 1982 the economy dipped even deeper into recession, with unemployment reaching 10 percent in 1982. Federal Reserve chairman Paul Volcker, with encouragement from Reagan, contributed to some of the downturn by restricting the money supply as a means to squeeze the skyrocketing inflation out of the system. Volcker succeeded: in one quarter, the inflation rate dipped to zero. It had dropped overall from 12 percent just a few years earlier to 4 percent. It was a monumental accomplishment, but largely missed by the media, which focused, instead, on unemployment in the “Reagan recession” as journalists dubbed it.60
Reagan knew in his soul the tax cuts would work, but as his diary revealed, the dark days of late 1981 and early 1982 brought nothing but bad news:
Christmas [1981] The recession has worsened, throwing our earlier figures off. Now my team is pushing for a tax increase to help hold down the deficits…. I intend to wait and see some results.
Jan. 11 [1982] Republican House leaders came down to the W. H. Except for Jack Kemp they are h--l bent on new taxes and cutting the defense budget. Looks like a heavy year ahead.
Jan. 20 First anniversary of inauguration. The day was a tough one. A budget meeting and pressure from everyone to give in to increases in excise taxes…I finally gave in but my heart wasn’t in it.
Feb. 22 Lunch on issues. I’m convinced of the need to address the people on our budget and the economy. The press has done a job on us and the polls show its effect. The people are confused about [the] economic program. They’ve been told it has failed and it’s just started.
April 26…at 10:15 addressed 2000 delegates of the U.S. Chamber of Commerce convention. What a shot in the arm. They interrupted me a dozen times or more…. The Dems are playing games—they want me to rescind the third year of the tax cuts—not in a million years!61
And so on. By November the nation had started to pull out of the recession, and within a year it was rocketing ahead at a pace never before seen.
Determined to slash government regulation, Reagan benefited greatly from momentum already begun under Carter, for which, surprisingly, Carter took little credit during the campaign. Beginning in the mid-1970s, consumer groups had joined conservatives in working to deregulate the airline industry. Economist Alfred Kahn, who had joined the government’s Civil Aeronautics Board in 1977, knew that a stranglehold on routes had kept airline prices high and the number of carriers low.62 The government first allowed airlines to discount nonpeak hours, then, gradually, to discount all fares. At the same time, new competitors entered the market, forcing prices down further, until, by the 1980s, air travel was virtually deregulated. Lower prices put people on airplanes at astounding rates: in 1977, passenger boardings stood at 225 million, but by 1992 they had nearly doubled to 432 million. At the same time (contrary to critics’ claims), eight of the ten major airlines had boosted their per-share earnings, all while lowering the number of fatalities per air mile traveled.63
In parcel delivery and overnight mail, United Parcel Service (UPS) and newcomer Federal Express also fought the postal service’s monopoly and drove down rates by using jet aircraft to deliver mail.64 Across the board, though, the percentage of share of freight regulated by the federal government plunged in the 1980s in both rail and truck transportation.65 Despite Reagan’s affinity for chopping government bureaus, he was able to eliminate only a few minor agencies during his term, a fact that reflected as much the previous success of deregulation of trucking and the air travel industry as it did his failures in cutting still more. He later referred to his inability to affect the scope of government as his greatest single failure in office. Ultimately, Reagan concluded that it was a task for another time and, perhaps, for another man or woman.
The tax cuts started to have their effect. Production, employment, job creation, and entrepreneurship all surged, soon achieving near-record levels. And, true to the supply-side promise, government revenues soared, increasing by more than one third during Reagan’s eight years. Yet despite oceans of new money and Reagan’s constant foot on the brake, government continued to spend more than it took in, increasing outlays by nearly 40 percent in the same period. To restrain spending, Reagan cut a deal with Congress in which the Democrats agreed to hold spending down in return for closing tax loopholes (which really involved raising taxes again, but only in specific industries, such as yachts and pleasure boats). No sooner had Congress closed the deal than it passed new higher spending, generating sizable, but not record, deficits.
One of the most oft-repeated mantras of the 1980s—that Reagan’s military buildup accounted for the extra expenditures—was utterly false.66 Military budgets did grow, but barely. Defense spending never much exceeded $200 billion per year, whereas social spending under the Democrats consistently remained slightly higher. After Reagan left office, domestic nondefense spending was nearly double that of the Pentagon’s budget.67
None of this seemed to faze average Americans, who could see by their wallets that the economy was growing by leaps and bounds. At the end of eight years of Reaganomics, America’s revived industrial might had produced 14 million net new jobs. This was nothing short of stupendous, given that since 1970, all the European nations combined had not generated a single net new job!68
Most of these “gloomsters,” as one economist called them, were stuck in the manufacturing mind-set, but even manufacturing had not declined as they claimed. Production as a share of U.S. gross domestic product dipped in the 1970s, but rose throughout the 1980s, reaching 36.1 percent in 1989, the highest level in American history!69
Without question, however, America’s traditional heavy industry had been taking it on the chin since 1970, and job losses in steel, textiles, and automobile industries particularly underscored the trauma. Entire cities dried up when manufacturing moved out, leading to the coining of a new term, the Rust Belt. But other, high-tech cities blossomed, and not just with services, but with new manufacturing industries.
While the industrial policy critics, mostly from the Democratic side, complained about the loss of blue-collar manufacturing jobs, a whole new computer industry had grown up under their noses. American computer manufacturers in the 1980s snapped up 70 percent of the world’s software market and 80 percent of the world’s hard-drive business, all while a fellow named Bill Gates came to completely dominate the human-to-machine interface known as computer “language.” Nothing spoke to the lack of value in chip production more loudly than the plummeting prices of computer chips by the 1990s, when individual chips literally cost of a hundredth of a cent.
Silicon Valley replaced Detroit as the most important economic hub in the nation. Behind its laid-back style, Silicon Valley concealed a fiercely competitive collection of computer entrepreneurs whose synergy led to breakthrough after breakthrough. Eventually, the region would become so efficient and productive that in the late 1990s it had a severe recession. But at the beginning of the boom, Japan had nothing to match Silicon Valley.
By the end of the 1980s it took only half as much labor to purchase a gallon of milk as it had in 1950, the peak of heavy-industry America; and the cost in la
bor of a gallon of gasoline had fallen by two thirds. Some critics pointed to declining average wage growth as evidence that the U.S. economy, without heavy industry, would stagnate. In fact, wage growth was better when total compensation (such as medical benefits, retirement, and so on) was included, although the rate of increase had slowed some.
The result of the tax cuts, therefore, was not only revival of the economy but also restoration of confidence in American productivity and purpose. In addition, Reagan had mounted a strong counterattack on liberalism’s dependency mentality, cracking it with the assistance of “blue-dog” Democrats who supported his tax relief. If he had not entirely rolled back government, Reagan had at least destroyed liberal assumptions that only a steadily growing government sector could produce economic stability and prosperity.70 Yet tax cuts and the resurgence of the American economy only constituted part of Reagan’s success.
Reagan dealt with foreign terrorists and usurpers quickly and decisively. Warned of a possible Cuban takeover of the little Caribbean nation of Grenada in 1983, he ordered in troops to thwart Castro’s invasion. When a terrorist bombing in 1986 of a West German disco frequented by American GIs was linked to the radical Islamic state Libya and its unpredictable dictator Muammar al Qaddafi, Reagan authorized the bombing of the terrorist camps. American aircraft also struck Qaddafi’s home, but the colonel was not home when the bombs fell. Nevertheless, he got the message, and Libya dropped off the international terrorist radar screen for the remainder of the decade. World terrorism fell sharply alongside the declining power of the Soviet Union, to the point where the number of reported incidents by 1987 was about half that of 1970.71
Only in one foreign policy situation—removal of the communist government in Nicaragua—was Reagan unable to make the progress he had hoped for. The communist regime in Nicaragua under Daniel Ortega, funded and equipped by Castro, not only gave the Soviets a foothold on the Central American mainland, but it also provided a staging area for terrorist activities against neighbors, such as El Salvador and Honduras. Reagan was committed to evicting Ortega’s regime by supporting the pro-American rebels in his country, the contras. Congressional Democrats had continually thwarted any assistance to the contras, raising fears again and again of another Vietnam. Despite Reagan’s concerns that Nicaragua could become a second Cuba, the Democrats turned back several aid packages. Frustration over this festering problem mounted within the administration.
Reagan also made a serious error by inserting peacekeeping troops in Lebanon. This was an expensive mistake, which he quickly repented. In 1983 he had dispatched American marines to Beirut to separate warring militias there. A suicide bomber drove a truck full of explosives through sentry checkpoints and blew up the marine barracks at the Beirut airport, killing 241 marines and wounding more than 100. Lebanon caused the president to rethink the key requirements for any future U.S. action. Military forces, he determined, should be committed only under the following conditions: (1) if the cause is “vital to our national interest,” (2) if the commitment is made with “clear intent and support needed to win the conflict,” (3) if there is “reasonable assurance” that the cause “will have the support of the American people and Congress,” and (4) as a last resort, when no other choices remain.72 Between 1988 and 2002, three U.S. presidents committed American forces (only two sent ground troops) to three major engagements—the Gulf War, the Bosnia/Kosovo conflict, and the war on terror in Afghanistan. In two of the three, Reagan’s conditions were met, and both engagements proved militarily successful, receiving full backing of the public and Congress. However, in the third (Bosnia/Kosovo), where only U.S. air units were involved, the record was mixed: there was no vital interest, other options were not exhausted, and the public was far from united.
Later, in his dealings with the USSR, Reagan added yet one more strategic objective, known as the Reagan doctrine. Rather than contain the Soviet Union, the United States should actively attempt to roll it back. Freedom, he observed, “is not the sole prerogative of a lucky few, but the inalienable and universal right of all human beings….” He predicted that “Marxism-Leninism would be tossed on the ash heap of history like all other forms of tyranny that preceded it.”73
Microprocessors and Missiles
It was at that point that the new computer/information sector converged with Reagan’s steadfast goal of defeating Soviet communism to produce one of the most amazing wonder weapons of all time. Perhaps the most amazing thing about it—the weapon was a space-based defense shield called Star Wars—was that it was not built and still has not been deployed (although parts of the technology are in use). Understanding the phenomenal impact of the computer on national security in the cold war, however, requires a cursory review of America’s computer industry.
The rise of computers dates from Charles Babbage’s nineteenth-century punch cards to the ENIAC computer of World War II. A key breakthrough occurred in 1952, when Texas Instruments researchers discovered that silicon, which could sustain temperatures of 1,200 degrees Celsius, was the perfect sealant for a transistor. In 1971 another company, Intel, managed to put an entire computer on a single chip called a microprocessor.
Virtually every other machine in human history had gotten more powerful by getting larger. This fact was epitomized by the internal combustion engines in use in Detroit’s “muscle cars” at the very time the personal computer (PC) was invented. Obversely, computers promised to become more powerful the smaller they got, and to work faster the hotter they became. Chips, whose central element was silicon (available from ordinary sand), thus portended to offer a limitless resource, overthrowing the tyranny of physical materiality to a great extent. Finally, computers reinforced the pattern in American history that the most significant technological breakthroughs never come from leaders in the field but from total unknowns—many of them completely outside the field of their great success.
Within five years of the microprocessor’s invention, Steve Jobs and Steve Wozniak, two California college dropouts, founded the personal computer industry with Apple Computers, Inc., in the Jobs family garage. Selling each Apple for $666, Jobs and Wozniak gained reputations as geniuses, and their company joined the Fortune 500 in less time than any company in history.74 Apple was quickly eclipsed by other computer companies, but Jobs and Wozniak had “taken a technology of government and big business…and humanized it, putting power in the hands of the people in the most immediate sense of the term.”75 Starting from a time of essentially no computers in homes, the U.S. computer “population” had swelled to one computer for every 2.6 people by 1990. This amounted to the most rapid proliferation of a product in human history: the PC took only sixteen years to reach one fourth of all Americans compared to radio’s twenty-two years, electricity’s forty-six years, and television’s twenty-six years.76
Computer technology alone did not ensure the success of the PC, however. An equally important breakthrough came from a Seattle-born Harvard dropout named Bill Gates, who, along with partner Paul Allen, cracked the language problem of programming computers, introducing BASIC in 1975, and founded Microsoft. Gates eventually refined and popularized the DOS system, used by virtually all computers by the 1990s. Solving the language problem was the equivalent of putting all of the trains of the 1850s on the same gauge rails. Gates reached his apex with the introduction of Windows, which used a point-and-click “mouse” controller to give the computer commands. In the process, he became the richest American in history, with a personal wealth exceeding that of Carnegie or Rockefeller in dollar equivalents.77 Jobs, Gates, and the “boys of Silicon Valley” had not only transformed the information industry, but had touched off a revolution as profound as the industrial revolution, redefining every activity in terms of measurement, improvement, or facilitation through the application of computers. More important, as they did so, the prices of computers (especially microprocessors) plummeted, making them almost literally dirt cheap.78 All that remained was to find a way for compu
ters to “talk” to each other or, to stay with the railroad metaphor, to hook all the train tracks together.
In 1969, under a Pentagon contract, four universities connected their computers, and three years later e-mail was developed. By 1980, some online news and discussion groups had appeared. Although the World Wide Web was not formally inaugurated until 1991, and the early Internet was still complex and highly limited to select users, it was nevertheless hurtling full speed toward the business and civilian sectors. Government was involved in the original Pentagon hookups, but true intercomputer communication did not occur until the free market found ways to exploit its commercial potential.
This promise was seen in the burst of patent activity. (The total number of patents in the United States actually fell until the Reagan tax cuts.) High-temperature superconductors appeared early in the decade, which set in motion a torrent of patents—just under 150,000 by 1998, or triple what the number had been in 1980. This was the most rapid patent expansion in American history, eclipsing the period 1945–75, which had seen the introduction of the transistor, the polio vaccine, and the microprocessor.79
Computer technologies played a critical role in ending the cold war but only when they were placed in the policy “hands” of a leader who had the insight to use them to the fullest advantage. That leader was Ronald Reagan. In his first press conference, the president announced his opposition to the SALT II treaty, which the Senate had not passed in the wake of the Soviet invasion of Afghanistan. Announcing his intention to rectify the imbalance in forces between the United States and the USSR, Reagan signaled to the communist leadership that he would never allow the Soviet Union to attain military superiority. It was a message that terrified the entrenched Soviet leadership. In one of Yuri Andropov’s final decrees before stepping down from his fifteen-year term as chairman of the KGB, he stated that the most pressing objective of all Soviet spies, whatever their rank or specialty, was to ensure that Reagan was not reelected.80 Soviet resistance only convinced Reagan all the more. In short order, Reagan had authorized the construction of one hundred B-1 bombers, continued funding of the controversial B-2 Stealth bomber, commissioned a speedy review of the MX missile to determine the most survivable deployment disposition, and ordered the armed forces to deploy cruise missiles (some of them with nuclear warheads) on all available platforms. At the same time that he ditched SALT II, Reagan offered genuine reductions under the new Strategic Arms Reduction Talks (START), but movement from the Soviet side occurred only after the Reagan buildup. Moreover, the powerful Trident submarines went on station concurrent with Reagan’s inauguration, and so, in a heartbeat of time, the window of vulnerability slammed shut.81
A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror Page 124