- The Washington Times - Saturday, August 7, 2004

The history of 20th-century economic policymaking is marked by two watershed presidencies: those of Franklin Delano Roosevelt and Ronald Wilson Reagan. By “watershed,” we mean those presidencies changed forever the way we think about the role of the federal government.

President Roosevelt taught us free markets often contain imperfections that need to be addressed. His were primarily the “macro” concerns of high unemployment, deflation and income distribution. But he also felt regulation and government-orchestrated “cooperation” within industry was needed to a theretofore unprecedented extent.

President Reagan taught us that while free markets aren’t perfect, neither is government. In fact, government often presents serious and debilitating imperfections. As he often said, “Government isn’t the solution to our problems; government is the problem.” Like Roosevelt, Reagan saw these imperfections as having both macro and micro effects.

Both presidents faced historic economic crises. Roosevelt’s crisis was defined by unemployment lines and deflation; Reagan’s by gasoline lines and “stagflation.”

Both men were eternal optimists. President Roosevelt’s line, “We have nothing to fear but fear itself,” set the tone for his administration. President Reagan’s constant invocation of the “shining city on a hill,” and “ain’t seen nothing yet” mark his approach. Moreover, throughout their careers, both were willing to compromise — on outcomes, not principles — because of confidence they would prevail in the end. For example, in negotiating with Congress, President Reagan would often get much less than he asked for, but he would take half a loaf, thank Congress, and then plan to get the rest the next year.

President Roosevelt’s economic policies were primarily about redistribution. President Reagan’s were primarily about making the pie grow larger. In fairness, Roosevelt tried hard to get the economy growing again, but the state of economic learning — at least on the part of the most influential policymakers — was rather primitive, and we know in retrospect his policies had little positive effect on gross economic activity. President Reagan’s policies were geared to growth, and in these he was exceedingly successful.

How did Reagan make the pie grow larger? First, he recognized the importance of the “supply side” of government policies. Until Reagan, most attention had been on the “demand side” of government policies — how to regulate aggregate demand to maintain full employment without generating inflation.

First, said Reagan, get the basics right: respect legal institutions and maintain a stable medium of exchange. Second, cut waste, which is another way of saying: increase the real supply of goods and services. This means cutting waste in government. It also means eliminating ways in which government, through excessive regulation, forces people in the private sector to waste resources. Third, remove disincentives to produce — reduce tax rates and eliminate ways in which government needlessly “taxes” productive activity.

It is clear President Reagan succeeded. He launched the longest peacetime expansion in American economy. Inflation, interest, and unemployment rates all fell. Other relevant indices rose: employment, labor force participation rate and productivity.

It is interesting that national defense had a fateful impact on both men’s economic legacies. In Roosevelt’s case, most economists agree his “New Deal” policies failed to end the Great Depression. What did so, and saved Roosevelt’s economic legacy, was the stimulative effective of massive defense budgets and mobilization during World War II.

Bigger defense budgets had the opposite effect on Reagan’s economic legacy. In those days, the only way to get a recalcitrant Congress to agree on increased defense spending was to go along with more spending on domestic programs. Reagan thus had to choose between doing what he thought was necessary to defeat the Soviet Empire, on the one hand, and his lifelong commitment to smaller government and to balanced budgets on the other. Thank goodness he chose as he did, but he always said afterward he regretted not being able to do more to achieve these objectives.

Both men changed the economic policy debate for decades to come. For better or worse, Roosevelt dismissed laissez faire economics and replaced it with the Keynesian theory of demand management. Three decades later, President Nixon acknowledged “we’re all Keynesians now.” It took President Reagan to replace Keynes with the supply-side idea, still dominant, that cutting marginal tax rates and reducing other disincentives is the key to economic growth.

In the end, it was their ideas that mattered most. Roosevelt will always stand for the idea bigger government is needed to manage an unruly economy. Reagan’s legacy is that too much government can crush the entrepreneurial energies that make a growing economy possible in the first place.

Jeffrey A. Eisenach and James C. Miller III served in the Reagan administration at the Federal Trade Commission and at the Office of Management and Budget. They are now executive vice chairman and chairman, respectively, of the CapAnalysis Group, an affiliate of Howrey Simon Arnold & White.


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