Ronald Reagan 1981-1989

This is an entry in my Presidential Rankings series. To see the most up to date full rankings, and where each president ranks follow the link here: Presidential Rankings

Ronald Reagan became president during a period of economic chaos and when America’s stature was shrinking at home and abroad. Reagan led the country out of Jimmy Carter’s malaise and returned prosperity and American prestige. Reagan didn’t see the United States as just another nation among many, but as a Shining City on a Hill, a beacon of light, and a country to lead the world to defeat of the evils of communism. How did Reagan achieve this? He recognized American exceptionalism, and he was willing to call the Soviet Union what it was, an evil empire that enslaved its people in a system of poverty and despair.

Reagan first had to tackle the economic disaster left behind by the previous administration. The economy was in a shambles. During the 1980-1982 recession unemployment went above 10%, inflation above 14% and the prime lending rate went above 21%. Couple this with the energy crisis, and Reagan had a four headed economic beast that needed to be slayed.

The economic war was waged upon several fronts, but in recent years, it has come into vogue to give full credit for the economic recovery to Federal Reserve Chairman Paul Volcker. Historians, in turn, have created an economic myth where Jimmy Carter was the architect of the recovery by virtue of appointing Volcker, even though Carter worked against Volcker as president. In this myth Carter selflessly sacrificed the presidency, but in truth there was no gallant martyrdom by Jimmy Carter. When people were asked during Carter’s presidency about the biggest issue facing the country, the number one answer was “inflation and the cost of living”. If Carter didn’t at least address the issue and appear to be doing something about it, he would certainly lose his bid for reelection.

It is true that Volcker’s tight monetary policy was vital to curing inflation, but it wasn’t solely responsible. Volcker also had to work within the political realities of the day, and he has admitted as much. Reagan provided Volcker with cover and support which allowed Volcker to stay the course, and Reagan took the heat for it. In May of 1981, Reagan’s approval rating was 68%, by January of 1983, it was down to 35%. In 1980 Carter convinced Volcker to lower interest rates slightly and use other devices at his disposal to fight inflation. Volcker raised reserve requirements and restricted consumer credit, which, along with Carter’s economic programs, reduced consumer spending and plunged the economy into a recession without fixing inflation. Volcker, realizing his mistake, went back to his original remedy for inflation.

Volcker’s tight money policy combined with two of Reagan’s policies to bring inflation down. The first was Reagan’s policies towards oil. When Reagan became president there was an intricate system of price and allocation controls in the oil market which he removed in January of 1981. These controls had been amended hundreds of times to “fix” new issues that arose from the regulations themselves. This system of price controls was fruitless, because the world market sets oil prices, not the United States government. Carter combined these price controls with a “windfall profits tax” that was to take any additional profits earned from domestic oil producers above what oil prices were before the 1973 OPEC oil embargo. Reagan lowered this “windfall profits tax” in August of 1981 and later removed it altogether. The Windfall Profits Tax and price controls combined to reduced domestic oil production below what it would have otherwise been. The end result of the tax and regulations was increased dependency on foreign oil, gasoline shortages and higher consumer prices. Gas prices in 1976 were $0.59 per gallon, by 1980 they had gone to $1.19 a gallon, Reagan was able to get them down to $0.86 a gallon by 1986. If you adjust for inflation to 2022 dollars, the price of gasoline went from $4.25 in 1980 to $2.29 in 1986. Certainly cheaper energy prices served to undermined inflation.

The other way that Reagan beat inflation was through tax cuts, which were phased in from October 1981 through 1983 under the Economic Recovery Tax Act of 1981. By cutting taxes, Reagan encouraged people to invest in productive endeavors. Before the tax cuts, investors were speculating against inflation. Getting the economy going again was the key. Volcker even had to reverse policy and add money back into the system to keep up with the booming economy. Tax cuts work in two ways to spur economic growth. First, they give consumers more money to spend and investors more money to invest. The second way is that they allow investors to keep a greater percentage of the reward when their investments work out. In 1980 the top tax rate was 70%, meaning that investors would only keep 30% of additional profits before they started paying state, local, sales and excise taxes. Today the top tax rate is 37%. meaning investors get to keep 63% of additional profits. It’s easy to see which tax rate will induce a greater amount of investment. To give an idea of how well the tax cuts worked, in 1980 the workforce participation rate was 63.8% and unemployment was 6.5%, meaning that there were 57.8 jobs for every 100 Americans. By 1988 the workforce participation rate had increased to 66.4% and the unemployment rate went down to 4.6%, meaning that there were 63.4 jobs per 100 Americans, an increase of 5.5 jobs for every 100 Americans. Had the workforce participation rate stayed the same, unemployment would have been below 1%. Reagan followed up the 1981 tax cuts with the Tax Reform Act of 1986, which simplified the tax code and removed six million poor Americans off of the tax rolls.

Reagan has been derided for the increase in federal debt during his term, but due to circumstances beyond his control, there wasn’t much that he could have done about the debt. There were several reasons for the debt increases:

• Reagan was the first President to serve eight full years since Dwight Eisenhower, which gave him more time to pile on debt than his five predecessors.
• Inflation was especially bad between Eisenhower and Reagan. What a dollar would buy in 1960 would cost $3.07 in 1981.
• Reagan served after the passage of The Congressional Budget and Impoundment Control Act of 1974. This act was passed in the wake of Watergate and forces Presidents to spend all appropriated money. Before this act, Presidents going back to Thomas Jefferson, had impounded government funds to control spending.
• Reagan served after the passage of Lyndon Johnson’s “Great Society” programs, which had the effect of constantly increasing in cost, but before welfare reform under Bill Clinton in the 1990s.
• Reagan increased military spending to defeat the Soviet Union which allowed subsequent Presidents to lower spending after the cold war.
• Reagan had higher spending forced on him by Congress than what he had wanted.

The real, inflation adjusted, average rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan, which was a slower rate of growth in inflation adjusted spending than any of his five predecessors. Reagan was also the only president since World War II that lowered spending as a percentage of GDP without the benefit of demobilizing from a major war, or in Bill Clinton’s case, the Cold War.

Some people try to blame the tax cuts for “lost revenue”, but this is dubious at best, as tax receipts went up after the tax cuts. This comes from the false premise that the economy will grow at the same rate regardless of government policies and programs. Even though people kept a larger share of their income, taxes as a share of GDP were basically the same. Total federal revenues averaged 17.7% of GDP from 1981–88, versus the 1974–80 average of 17.6% of GDP. Not only do lower taxes increase tax revenue through encouraging economic activity, but higher tax rates make tax evasion, both legal and illegal, more profitable. By removing prohibitively high taxes, tax avoidance is no longer incentivized.

Reagan’s handling of the Air Traffic Controllers (PATCO) strike has been wrongly blamed for causing the decline of Union labor. The decline of unionized labor started long before Reagan became president, which was already significantly eroded at the time of the PATCO strike. The percentage of workers in unions in 1954 was 34.8%, by 1981 it had declined to 21%. Unions have been on the decline in the United States for various reasons, but the chief one is the decline of the American manufacturing sector, which typically uses unionized labor. Reagan told his negotiators to offer a pay raise to the PATCO workers even before the strike occurred, the first time a president made such an offer to a federal union. PATCO went on strike anyways, which was illegal under federal law. Reagan warned the workers that he would fire them if they did not return to work, as they had no right to strike against the public safety. When most refused to return, Reagan was forced to fire 11,345 strikers. Reagan had to keep his word, or it would have showed everyone across the globe that he would back down in tough situations.

When Reagan entered office, most people saw the Soviet Union as undefeatable, which led to the policy of détente. This was a policy of peaceful coexistence and conciliation of communist countries. Reagan saw the Soviet Union as an evil empire that needed to be defeated and he wasn’t afraid to say so. Reagan saw the underlying weaknesses in the Communist system and was willing to exploit them. Reagan put pressure on the corrupt Soviet system at every turn. He raised military spending, forcing the Soviets to try to keep up. He invested in new technologies, especially the Strategic Defense Initiative, which the Soviets tried vainly to duplicate. He helped countries fighting against Soviet aggression across the globe. Even Reagan’s work to drop oil prices put pressure on the Soviet Union, as their economy depended on petroleum exports. The pressure on the Soviet Union eventually led to the promotion of a reformer, Mikhail Gorbachev, as General Secretary of the Politburo. In Gorbachev, Reagan found someone that he could work with. Reagan negotiated the Intermediate Range Nuclear Treaty with Gorbachev, which eliminated all land based Ballistic and cruise missiles under 5500 KM (3400 miles) range. This was the first time a treaty eliminated nuclear weapons and it removed an entire class of weapons. 

Reagan’s Pressure caused the Soviet Union to first loosen its grip on the satellite states in Eastern Europe and later the eventual collapse of the Soviet system altogether. Some detractors try to say that the Soviet system was corrupt and doomed to failure. Whereas Communism and socialism is by its very essence corrupt, several other communist countries still survive today, including North Korea, Cuba, Vietnam and Venezuela. Others try to give all the credit to Gorbachev, even though Gorbachev himself credits Reagan. Gorbachev just recognized that the system was collapsing, and he tried to save what he could, Reagan caused the collapse. It is not true that the Soviet Union was teetering on the brink of collapse when Reagan took office. From instituting martial law in Poland, the Soviet invasion of Afghanistan, the Sandinista revolution in Nicaragua to communist rule in Mozambique, Angola, South Vietnam and Cambodia, the Soviets had built up a string of victories leading up to Reagan’s election. After visiting Moscow in 1982, Harvard professor Arthur Schlesinger Jr stated, “Those in the US who think the Soviet Union is on the verge of economic and social collapse, ready with one small push to go over the brink, are … only kidding themselves.”

In 1983 the Organization of Eastern Caribbean States appealed to the United States about the situation in Grenada. The island government had been overthrown by a communist regime in 1979. The new regime was getting aid from Cuba and the Soviet Union to build the Point Salines International Airport, which could accommodate the largest Soviet aircraft. The small country already had the Pearls Airport, which was more than enough to serve the nation’s needs. It was obvious that the Soviets were building a military base. On October 25th of 1983, the invasion commenced to rescue American citizens, other foreign nationals and to restore Democracy to Grenada. The invasion took eight days and was met by nearly 800 Cuban soldiers and the Communist People’s Revolutionary Army which was armed with Soviet weapons. The invasion was a smashing success and proved that the United States didn’t need to fear “another Vietnam” if America was fighting to defeat rather than outlast its opponents. Even though most of the troops in Grenada were from Cuba and Grenada itself, The Soviet Union, North Korea, Libya, East Germany and Bulgaria also provided soldiers. The idea that there was no communist threat in Grenada is a false one.

Reagan is oftentimes unfairly blamed for the AIDS epidemic as if he created it. The first cases of Aids were thought to be rare forms of pneumonia and cancer. When AIDs started showing up in children in 1983, they thought that it could be passed via casual contact, which we now know was wrong. It wasn’t until 1984 that they discovered the true cause of AIDS, before that nobody really knew what was going on, and there was quite a bit of fear and misunderstanding related to the disease. People look back thirty plus years later and Monday morning quarterback and say that Reagan could have reacted differently. Reagan did come out in a 1985 press conference asking for a massive government research program for AIDs like Richard Nixon did for cancer in the 1970s. Reagan stated: “It’s been one of the top priorities with us, and over the last 4 years, and including what we have in the budget for ’86, it will amount to over a half a billion dollars that we have provided for research on AIDS in addition to what I’m sure other medical groups are doing. Yes, there’s no question about the seriousness of this and the need to find an answer.” Annual AIDS related funding was $44 million in 1983, but it increased to $1.6 billion in 1988.

Reagan appointment of Dr C Everett Koop as surgeon General was key to solving the AIDS crisis. Koop addressed the public on AIDS stating: “This is a battle against the disease, not our fellow Americans“. Koop was a key figure that persuaded members of Congress to set aside their hostilities towards gay people, and to focus on the threat that AIDS posed. In the 1960s the FDA had adopted rules that stated that drugs could only be approved if there was “substantial evidence” of its effectiveness in “adequate and well-controlled” clinical trials. The issue with such trials is that they would have taken so long that they would have been a death sentence for many AIDS patients. Reagan’s FDA wrote new rules that allowed significant parts of the old rules to be relaxed or not vigorously enforced. The new regulatory loopholes allowed doctors to start treating patients with drugs before they even entered the FDA licensing process and before they entered the testing process beyond short-term safety issues. These new rules gave AIDS patients access to medicines far faster than what would have previously been allowed. The National Academy of Sciences noted these changes allowed the extraordinarily fast development of drugs that ended up in the cocktails now used to control HIV. They stated that these changes also had a “revolutionary effect on modern drug design.” I really don’t see how any of the other possible presidents of the time would have responded any better than Reagan did to the AIDS epidemic.

The Iran-Contra Affair started when Israel approached the U.S. about selling its American built arms to Iran and then replenishing them with new weapons from the United States. Israel ensured that the arms were going to moderate groups within Iran, and it made little sense that Israel would sell arms directly to the Islamic extremist. It was hoped that these moderate groups would take over when the elderly Ayatollah Khomeini died. Israel’s real motivation was to keep the Iran-Iraq war raging to weaken both sides. Colonel Oliver North, without Reagan’s knowledge, started diverting profits received from Israel on the sales to aid the Contras fighting against the Communist Nicaraguan government. The Boland Amendment, which was of questionable constitutionality, had barred the CIA from aiding the Contras. Was the law broken though? Actually, it wasn’t. The United States congress cannot dictate how other countries, in this case Israel, spend their own money. Reagan had encouraged private donations or contributions from other countries for support of the Contras, but Congress cannot prohibit government officials from lobbying third parties. Reagan has been assailed for having too lax of a leadership style which allowed Iran-Contra to take place, but no president can watch every member of the executive branch all the time. A House and Senate select committee concluded that mistakes in judgement were made, but nothing more, and that there was no constitutional crisis. Too much has been made out of Iran Contra, it should be but a small footnote in history. 

Recently allegations have come from Texas Democrat Ben Barnes that former Texas Governor John Connally had went to the Middle East in July of 1980 to pass a clandestine message to Iran to hold the hostages until after the 1980 election. Connally passed the message, according to Barnes, to secure a place in Reagan’s administration as Secretary of State or Secretary of Defense, even though Connally never visited with any Iranians and Connally never served in the Reagan administration. The proof Barnes presents is that Connally later met with William Casey in September to report back on his trip. Why would Casey wait until weeks, even months later to meet with Connally if he were tasked with such an important mission? If Connally were successful, why wasn’t he given his reward? Barnes doesn’t explain any of this, he doesn’t even state that he actually saw Connally pass any type of message to any Middle Eastern leaders, he just stated “I’ll go to my grave believing that it was the purpose of the trip“. In fact, Barnes cannot produce any evidence to back his claims as all the central figures have long since died, he does not a single document backing his claim and his account of events cannot be corroborated by anyone. Barnes is also eighty-five years old, and older people are more prone to having false memories of events that never happened. It should be noted that both houses of Congress have previously held inquiries and debunked the “October surprise” conspiracy theory, concluding that no credible evidence exists. Why didn’t Barnes come forward when these investigations were going on? There are simply too many questions for Mr. Barnes’s statements to be considered factual, especially since he cannot produce any evidence to prove his account.

Reagan returned prosperity and hope to the American people, after the long malaise of the 1970s, it was Morning in America once again. Reagan defeated the Soviet Union without firing a single shot. He instinctively knew that the Soviet Union could be defeated if one took advantage of its internal weaknesses, and he did just that, forcing the failure of the Soviet empire. For ending a dark era in world history, Reagan was truly a great president.