Reagan’s first major policy move focused on securing substantive tax cuts, which he had long believed were the best form of economic policy. Tax cuts offered a way to bridge grassroots activists who saw tax cuts as a symbolic strike on the state and business organizations that were throwing their support behind the new GOP. Like anti-Communism, the administration saw taxes as a unifying issue that would attract the support of almost every faction in Reagan’s coalition and from parts of the Democratic Party as well. Practically speaking, the president was less concerned about the impact of federal deficits and more focused on “freeing” individuals and corporations alike from their tax burden. Relief from taxes, he argued, would enable them to pour that money into investments that would then stimulate overall economic growth. This “supply-side theory” of economics—derided by critics as the “trickle down theory”—rested on a premise that helping wealthier Americans would eventually bring benefits to those who stood lower on the income ladder. Its adherents, Reagan among them, rejected the conventional wisdom of Keynesian economists who had been arguing since the 1930s that tax cuts should be targeted to middle-class Americans who would immediately spend the money on consumer goods.
The challenge for Reagan was that there were still a decent number of prominent Republicans and conservative Democrats who ranked balancing the budget as the most important of all political objectives. Even Reagan’s own vice president, George H. W. Bush, had originally mocked the supply-side theory as a nonsensical form of “voodoo economics” when he was Reagan’s rival in the 1980 primaries. Fiscal conservatives like Bush warned that enacting sizable tax cuts, without making corresponding reductions in domestic spending, would instantly produce larger deficits and thus destabilize investment. Reagan pushed back, advancing the theory that short-term deficits were economically tolerable. He believed that the tax cuts would stimulate growth, that growth would increase overall income, and, in the end, that the government would actually take in more tax revenue than it had before.39
Reagan’s views on the centrality of tax cuts to economic growth had gained intellectual support through conservative economists who gave academic rationales for his political positions. According to key proponents of supply-side economics like the economist Norman Ture, the Keynesians, who had shaped economic policy since the New Deal, had erroneously focused on manipulating demand, which conservatives said would not cure the threat of inflation and unemployment. They pointed to the 1970s phenomenon of “stagflation”—that seemingly inexplicable rise of inflation in a stagnant economy—as the clearest evidence that the Keynesian policies had failed. Instead, conservative economists argued, the government needed to focus on the “supply side” of the economy by cutting business taxes, lowering the burden on wealthy Americans who could put their money in the market, and creating more incentives for research and investment, in addition to dismantling regulations.40
Conservatives had long believed in unfettered capitalism, but during the 1970s their traditional faith in free markets took a turn into fundamentalism. Within the universities, changes in the field of economics were part of a broader intellectual shift that was taking place in the world of ideas and scholarship. Increasingly, cutting-edge thinkers in different fields of study were giving less weight to the role of power structures, society, history, and institutions, and placing more emphasis on a world shaped by free-floating, rational individuals and free choice. In economics, a growing number of scholars were concluding that government efforts to sway consumer and business behavior by managing the economy through taxes and spending, the way that proponents of Keynesian economics had advocated since the 1930s, stifled productive decisions by market actors. The markets, they concluded, had to be left on their own.41
Public intellectuals helped to bridge the new research in economics departments with the world of politics. The University of Chicago economist Milton Friedman led the way with pioneering works like Capitalism and Freedom (1962), a best-selling book that characterized government policies as inefficient and ineffective and championed free-market alternatives instead. Friedman’s influence became increasingly felt during the coming years, not just within academic circles but in larger political and popular debates as well. When he was awarded the Nobel Prize for Economics in 1976, Friedman used the moment to lambast old orthodoxies, arguing that only the laws of supply and demand could provide economic equilibrium and that all forms of government interference in the economy—from campaigns for full employment to social welfare programs—invariably made matters worse. The marketplace would solve most problems, he insisted, if only the government would get out of the way.42
Friedman’s faith in free markets was shared by other enterprising economists such as Arthur Laffer, who proved instrumental in popularizing the new supply-side theory. While teaching at the University of Southern California, Laffer had played a prominent role in the 1978 campaign to pass Proposition 13. Upon entering the White House, Reagan appointed Laffer to his Economic Advisory Board, where he made the case for massive new tax cuts. The “Laffer Curve,” as he called it, showed the tradeoff between tax rates and tax revenues, with high tax rates creating a disincentive to earn. Keynesianism, Laffer argued, had failed. “If there was one clear economics lesson from the 1970s,” Laffer wrote, “it is that economics focusing on consumer demand, and which attempt to redistribute income, do not work.” 43 Laffer’s ideas had strong support in Congress from Republicans such as Jack Kemp and conservative media outlets like the editorial board of the Wall Street Journal.
Others helped spread the word. The Journal’s Jude Wanniski was so taken with supply-side theory that he secured a year-long position as the first-ever research journalist at the American Enterprise Institute to write an entire book about it. The result, The Way The World Works (1978), popularized supply-side economics for a general audience. Promoting the book, Wanniski argued that tax cuts would solve a host of problems, helping America win the Cold War abroad and even fight the problems of drug abuse and divorce at home. “Instead of a society smothered, crushed by disincentives, with all its tensions, there would be light, air and hope,” he promised in one op-ed. “We will once again feel confident about ourselves as a nation.” The sudden surge of support for supply-side economics astounded even its most ardent fans. “In the short period of five years,” marveled Paul Craig Roberts, an associate editor for the Journal who joined Reagan’s Treasury Department, “supply-side economics has progressed from ‘voodoo economics’ to presidential policy—a remarkable success story.” 44
Tax cuts were also attractive to Reagan because they offered a way to create pressure for reducing the size of government in an era when directly attacking government spending was difficult. Budget Director David Stockman, who led the drive for tax cuts in 1981, understood that, contrary to the claims of supply siders that tax cuts would eventually lead to greater government revenues, the enactment of rate cuts would actually diminish the amount of tax revenue that Congress had available to fund domestic programs. As deficits inevitably rose, legislators would find themselves under pressure to cut domestic spending rather than take the unpopular step of raising taxes to the pre-cut rates. Stockman called this the “starve the beast” strategy. “The beast is big government,” he explained in a 1981 interview. “You starve it by cutting taxes and reducing revenues, so the programs must be cut back.” 45
In February 1981, Reagan proposed a sweeping package of tax cuts to a joint session of Congress. In addition to over $40 billion in cuts to domestic spending and a sharp increase in the defense budget, the president called for 30 percent across-the-board tax rate cuts over the coming three years. “Marching in lockstep with the whole program of reductions in spending is the equally important program of reduced tax rates. Both are essential if we’re to have economic recovery,” Reagan said. “It’s time to create new jobs, to build and rebuild industry, and to give the American people room to do what they do best. And that can only be done with a tax program which
provides incentive to increase productivity for both workers and industry.” 46
Initially, the proposal received a lukewarm response. Americans had found Reagan’s antigovernment campaign rhetoric appealing in theory, but they were much less enthusiastic when the cuts to specific programs were outlined. While ordinary Americans would be most affected by the broad rollback in government programs, the majority of tax relief would be directed to the wealthiest. Members of Congress soon heard from constituents about the types of hardships the reductions would cause in their daily life, a concern that was soon reflected in the opinion polls. In mid-March 1981, Gallup revealed that only 59 percent approved of Reagan’s performance so far (compared to Carter’s 75 percent approval at a similar point in his presidency), while his disapproval rating was 24 percent (nearly double the norm for presidents in the “honeymoon” period).47 The president’s agenda seemed to be stalled in the first hundred days.
An assassination attempt saved Reagan’s political standing. On March 30, 1981, John Hinckley Jr. shot the president outside a Washington hotel, apparently seeking to impress the actress Jodie Foster by re-creating a scene from her 1976 movie Taxi Driver. Of the six bullets fired, one bounced off the president’s car and into his body; another struck James Brady, Reagan’s press secretary, in the head, causing permanent brain damage. Caught on camera, the shooting was replayed endlessly in the media. One New York Times reporter recounted: “Within minutes, Americans were witnessing for the second time in a generation television pictures of a chief executive being struck by gunfire during what appeared to be a routine public appearance. For the second time in less than 20 years, too, they watched as the nation’s leaders scrambled to meet one of the sternest tests of the democratic system.” 48
Reagan not only survived the assassination attempt, but found that his political standing had been considerably strengthened as a result of the ordeal. His lighthearted response to the shooting helped change public perceptions of him and his programs. Reportedly, he had joked with his surgeons: “Please tell me you’re Republicans.” After he was released from the hospital, his popularity rose, with his approval ratings increasing by seven points. The president immediately turned his attention back to the tax cut, daring Democrats to take him on. His opponents in Congress were suddenly reluctant to strike out at a president who had almost been struck down. “Because of the attempted assassination,” Democratic Speaker of the House Tip O’Neill acknowledged, “the President has become a hero. We can’t argue with a man as popular as he is.” 49
The administration conducted an aggressive campaign to sell the tax bill, especially as it became clear that proposed spending cuts would never come to pass. Combined with his own proposals to increase the military budget significantly, the president understood he was pushing a bill that would vastly expand the deficit. He blitzed the airwaves, promising Americans that the tax cuts would have a dramatic impact on economic conditions. Although tax reduction would provide the greatest benefits to wealthier Americans, Reagan depicted the legislation as a populist measure that would help average wage earners recover from the devastation of the 1970s. The president urged voters to write their representatives in Congress to let them know how much they wanted a cut. Meanwhile, allied conservative organizations ranging from business lobbies to religious groups likewise pressured legislators to act. Republican leaders in Congress, who were not always comfortable with the far Right in their party, were brought into line with an aggressive whip operation. “Our fundamental position must not change,” House Minority Leader Robert Michel told them. “We must continue to strive for multi-year, across the board tax rate reductions this year. We must not accept anything less. We can compromise, but we must not capitulate.” 50
House Democrats, realizing that many conservative members in their caucus would cross the aisle, abandoned any effort to kill the bill. Instead, they pursued additional tax breaks to benefit middle- and working-class Americans. The result was what some called a “Christmas Tree,” with members of both parties adding ornaments to the final package. Despite Democrats’ provisions, the tax cuts remained highly regressive overall, giving the largest benefits to those in the upper income brackets. On August 13, 1981, Reagan signed the measure, then known as the Economic Recovery Tax Act. It cut deeply into the revenue capacity of the federal government and created a fiscal straightjacket for policy makers who would have to confront ballooning deficits.
But that reckoning still lay ahead. The new president’s tax cut was heralded in the national press as nothing less than “triumphant.” Reagan had not simply delivered on a signature promise made to the conservative base; he had also provided a sense of bipartisanship by bringing in large numbers of Democrats. Most important, he had shown that Washington might actually work after all.51
CHAPTER 6
Fighting Right
CONSERVATIVE CELEBRATIONS OVER REAGAN’S INITIAL successes did not last long.
While it represented a significant triumph for the Republican Party, the 1981 tax cut also proved to be a powerful warning for the opposition. Democrats realized that the president’s legislative victory would give the GOP momentum for further policy gains, while the practical impact of the reduction in federal funding would leave other domestic programs in a weaker position across the board. As Reagan entered his second year, the opposition recovered its footing. Refusing to believe there had been a “Reagan Revolution” at all, Democrats argued that the 1980 election did not represent a permanent shift in political power and resolved to take Washington back.
Frustrated on domestic affairs, the new president made greater headway in foreign policies in his first term. Ramping up military spending and encouraging a more confrontational attitude across the globe, the Reagan administration sought to dispel any lingering enthusiasm for détente and to restore American military might and patriotic confidence. In its drive to renew American confidence, however, the new administration also sparked widespread fears—at home and abroad—that the renewed Cold War conflict of the 1980s might well lead to a nuclear holocaust. Reagan’s fights with his enemies, foreign and domestic, came to a dramatic head in the election campaign of 1984.
Democratic Resurgence
Whatever his powers of persuasion, Reagan alone could not remake the political landscape. The new movements of the late 1970s had created a powerful base for conservatism, but liberalism remained a force in national politics. For all its fracturing in the 1970s, the New Deal state still dominated. Policies that had seemed radical when they were introduced decades earlier—from labor protections to welfare state measures—had come to be not only widely accepted but deeply entrenched as well. Institutional defenses had grown up around these policies and programs over the decades and, more important, voters had come to rely upon them and resist calls for their removal. One election would not change that.
Liberalism’s staying power became clear as early as 1981, during the showdown over Social Security. One of the most popular domestic programs of the New Deal, Social Security provided retired workers a monthly pension financed through a payroll tax on current workers. Conservatives had long resented the program, but had found it impossible to end. In 1964, Republican presidential candidate Barry Goldwater talked on the campaign trail about the possibility of privatizing Social Security, only to find voters recoiling from him as a result.1 As a key supporter of Goldwater’s, Reagan understood the political risks of challenging Social Security, but still hoped to tackle it. In 1976, in his primary race against President Ford, Reagan suggested that Americans who had sufficient money for retirement should be able to opt out of the program.2 Now, as president, he was optimistic that the political climate had shifted enough to make change possible. In May 1981, the administration proposed lowering Social Security benefits for some early retirees, claiming that the program was in danger of failing. “The crisis is inescapable,” argued Secretary of Health and Human Services Richard Schweiker. “It is here. It is now. It is serious.
And it must be faced.” 3
While the White House focused on the nation’s finances, millions of retirees who depended on Social Security worried about their own. For three-fifths of the beneficiaries in 1981, Social Security accounted for 50 percent or more of their total income. Gregory Kaplan, a former painter from Brooklyn who had retired to West Palm Beach, Florida, argued that each Social Security check was essential. “I never expected to live this long,” he told a reporter. “I really didn’t figure on living on just my Social Security.” But now he was. For others, the current benefits didn’t go far enough. Gladys Curtis, an 81-year-old retiree in the District of Columbia, noted that her $229 monthly check was already insufficient to cover the rent for her small apartment. She worried about it being reduced further.4
When the president circulated his proposal to reduce early retirement benefits, Speaker Tip O’Neill made it clear the Democrats would resist the move. This was, he recognized, the first step in a much bigger plan to eliminate the nation’s premier social insurance program. An ardent New Deal and Great Society Democrat, O’Neill had little sympathy for the new conservatism. “I will be fighting this every inch of the way,” he promised. Though he was in his late 70s at the time, O’Neill answered the Social Security proposal with uncharacteristic energy. He had long avoided the media, routinely turning down invitations to the networks’ Sunday morning shows so he could relax at his home in Cape Cod. But now the Speaker took to the airwaves, showing how congressional leaders could use television to push back against the bully pulpit of the presidency.5 The Boston politician used dramatic rhetoric, warning voters that Reagan sought to destroy the entire Social Security program and leave elderly Americans without the support that they expected and, indeed, deserved. “It is a rotten thing to do,” he said. “[It was] nothing but a sneak attack on Social Security.” 6
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