Why reaganomics reflects America's true character.

• Author: Gramm, Phil
• Position: American Thought

WHAT WAS THE U.S. economy like in the decade prior to the Reagan presidency? The 1970s, for a myriad of reasons, were not a happy time. They featured a combination of stagnation and inflation, which came to be called "stagflation." The inflation rate peaked at just over 13%, and prime interest rates rose as high as 21.5%. Although Pres. Jimmy Carter did not use the exact words, a malaise certainly had set in among Americans. Many wondered whether our nation's time had passed. A Time magazine headline read, "Is the Joyride Over?" Did we really need, as Carter told us, to learn to live on less?

Ronald Reagan did not believe the U.S. was in decline, but he did believe it had been suffering under wrongheaded economic policies. In response, he offered his own plan, a program for creating economic freedom that came to be known as Reaganomics. Of course, most of Reaganomics was nothing new. Mostly it was the revival of an older understanding that unlimited government eventually destroys freedom and that decisions regarding the allocation of scarce resources are best left to the private sector. Reagan explained these old ideas well, and in terms people could understand.

Yet, there was a novel element to Reaganomics and, looking back, it was a powerful element and new to the economic debate. It was the idea that tax rates affect a person's incentive to work, save, and invest. To put it simply: lower tax rates create more economic energy, which generates more economic activity, which produces a greater flow of revenue to the government. This idea, which came to be known as the Laffer Curve, was met with media and public skepticism. In in the end, though, it passed the critical test for any public policy--it worked.

To be sure, there were a couple of major impediments to the economic success of Reagan's program. First, the Federal Reserve Bank clamped down on the money supply in 1981 and 1982, in an effort to break the back of inflation, and subsequently the economy slipped into the steepest recession of the post-World War II period. Second, Soviet communism was on the march; the U.S. was in retreat around the world; and Pres. Reagan was determined to rebuild our national defense as part of a program of peace through strength. All of these factors worked strongly against Reagan in the battle to revive the American economy--nor was it a forgone conclusion that his program would get through Congress. We should not forget that it was a tough program. For...