America's Failing Economy and the Rise of Ronald Reagan

Eric R. Crouse

• Publisher: Palgrave Macmillan
• Year: 2018
• ISBN:
  9783319705453
• Topic: History
• Subtopic: North American History
• Index: History

This book examines one of the most important economic outcomes in American history—the breakdown of the Keynesian Revolution. Drawing on economic literature, the memoirs of economists and politicians, and the popular press, Eric Crouse examines how economic decline in the 1970s precipitated a political revolution. Keynesian thought flourished through the presidencies of Lyndon B. Johnson, Richard Nixon, and Gerald Ford, until stagflation devastated American workers and Jimmy Carter's economic policies faltered, setting the stage for the 1980 presidential campaign. Tracking years of shifting public opinion and colorful debate between free-market and Keynesian economists, this book illuminates a neglected era of American economic history and shows how Ronald Reagan harnessed a vision of small government and personal freedom that transformed the American political landscape.

© The Author(s) 2018

Eric R. CrouseAmerica's Failing Economy and the Rise of Ronald Reaganhttps://doi.org/10.1007/978-3-319-70545-3_1

Begin Abstract

1. Introduction

Eric R. Crouse¹

(1)

Tyndale University College, Toronto, ON, Canada

End Abstract

Three weeks before the presidential election of 1980 the polls had President Jimmy Carter and Republican challenger Ronald Reagan dead even in the popular vote poll. Political journalist Elizabeth Drew described the intense buildup for the upcoming televised election debate as “the world heavyweight championship and the Super Bowl combined.” Would one of the contenders make a major blunder? On debate night, Carter’s eyes were puffy and tired-looking whereas Reagan, 69, appeared “to be in robust health.” Success for Reagan hinged on his ability to convince American viewers that he was not an angry, “dangerous” conservative . Under the lights and in front of the cameras, his easygoing manner did the job as did his closing question to the American people concerning the state of the economy: “Are you better off than you were four years ago?”¹

Carter had genuine concern for those hurt by a floundering economy but were his economic policies the answer? The American people gave their verdict. On November 4, 1980, the United States witnessed the political defeat of Jimmy Carter and the policy defeat of Keynesianism. The Keynesian Revolution had continued uninterrupted for close to four decades in America, struck down when voters responded to the failure of their economic managers to deliver economic growth and price stability.

The election results questioned Keynesian economics that said active government intervention and management of the economy was essential for the economic well-being of society. In the final year of Carter’s administration, economists Robert L. Heilbroner , John Kenneth Gailbraith , and other Keynesians saw higher taxation, comprehensive regulation, and price controls as the correct method to solve America’s economic woes. Many had benefited from the economic stewardship of Democratic presidents Harry Truman , John F. Kennedy , and Lyndon B. Johnson , but the economic malaise of Jimmy Carter’s administration was another matter. It was a major reason for his political trouncing; he won only 6 states to Ronald Reagan’s 44. The weakening of Keynesianism allowed Reagan to reach the White House.

There is much literature on Carter’s failure to unite the Democratic Party , disentangle the Iranian hostage crisis (1979–1981), and win the votes of the Religious Right who were generally supportive of free-market thinking—a fact missed by scholars more interested in the social conservative opposition to Carter.² Although acknowledging that all these issues were important to Reagan winning the White House, this book focuses on the economic shortcomings of Carter’s policies that were decisive in presenting the former actor a window of opportunity.

Politicians, political pundits, journalists, and Main Street Americans all responded in various ways to the record of Keynesian macroeconomic management and the emergence of stagflation —that is, persistent high inflation and high unemployment.³ For this transformative era, there was a colorful cast of characters, some with economic expertise and many others without economic schooling. If few commentators were aware of the finer points of Keynesian economics, they all recognized “malaise.”

I

One only had to look at the post-World War II years to the mid-1960s to find evidence of a vibrant American economy and a sense of optimism at what government could achieve. With noble intentions, politicians devised policies to improve the lives of the poor and the middle class. But something changed during the 1970s—a change that Carter completely missed. Several weeks after his defeat by Reagan, he wrote in his diary that Republicans exaggerated the problems of the economy. As he saw it, “with the exception of interest rates, everything is going surprisingly well.”⁴ An economic history of the rise and decline of Keynesian ideas explains much about competing visions on the role of the government and the major shift in economic thinking that few envisaged.⁵

The high mark of Keynesianism was during the 1960s. On the issues of inequality and poverty, many had faith in the government—more so than at any other time in history—to find solutions. Before President Lyndon Johnson’s “Great Society ” programs began to tarnish, there was much confidence in government intervention. Progressive Americans viewed centralized economic planning as the reason for the Soviet Union’s transformation from a primitive peasant nation. Basically, a handful of experts could “substitute their judgment for the billions and trillions of decisions that go on in a free market.” Keynesianism was not socialism , but both shared the idea of using central planning to “correct” the free-market system.⁶

American intellectuals found European economic ideas appealing. As a better way to protect the public from difficult economic times, Western European countries and elsewhere viewed “government knowledge” superior to “market knowledge.” Careful not to completely stifle the market, Western governments sought to modernize and “propel economic growth” while delivering “equity, opportunity, and a decent way of life.” Most citizens approved. In 1945, British voters, not wanting a return to the economic hardships of the 1930s, replaced Winston Churchill , their victorious war leader, with social worker Clement Attlee , head of the Labour Party that promised an expansive welfare state.⁷

In the United States, high-ranking officials in government saw that policy drove the budget rather than the budget driving policy; thus, it was more important to get government policies through than make them effective.⁸ This was especially true for the 1960s. Government was to intervene in the economy, and it was not only Democratic leaders who acted. Republican President Richard Nixon saw that voluntary price and wage targets were ineffectual, and he believed that the American economy was stronger when government interference was minimal. Yet, to the dissatisfaction of conservatives, he went ahead with wage and price controls in 1971, causing economic problems for the rest of the decade. He also allowed economic regulation to thrive in other sectors. With both Democratic and Republican presidents, America had its own special “brand of regulatory capitalism.”⁹

Pursuing the 1976 Democratic nomination for president in a strong field of competitive candidates, former governor of Georgia (1971–1975) Carter, mastered the technicalities of the political process and won the nomination. On the campaign trail against President Gerald Ford , who narrowly defeated Reagan for the Republican nomination in August, Carter promised integrity and openness. The memory of the traumatic Watergate crisis was still fresh for many and Ford’s economic record was not great. With his victory over Ford in November, the former naval engineer and self-identified “planner” appeared to have the skills to fix America’s most pressing economic problems.

On the issue of economics, Carter did not start on a good footing. As president-elect, he decided it was a good idea to congratulate by phone the American Nobel laureates of 1976, including economist Milton Friedman (1912–2006)—the most influential free-market scholar in America. Friedman’s scholarship and mentorship at the University of Chicago, and a Newsweek column on economic matters over the years, put him in a special category; he was a scholarly economist able and willing to present insightful analysis in layman’s terms for people outside of the field of economics. When Carter told his secretary to call Friedman in December 1976, however, she contacted the wrong Milton Friedman and got the speechwriter with the identical name who had served President Ford. After the mistaken identity episode, Carter finally talked with the correct Friedman ; it was their only direct contact ever.¹⁰

Having faith in Keynesian management of the economy , President Carter and his economic advisors saw no benefit in consulting the free-market Nobel laureate who saw government intervention as more of a problem than a solution. In the summer of 1979, when the White House invited many commentators to Camp David to discuss the malaise with Carter , there were no notable economists with new ideas, and certainly no one with ideas like Friedman’s.

Friedman was a formidable critic of Keynesianism and its central idea that free-market economies were inherently unstable, requiring continuous active government intervention. His monetary theory tore down the mainstream consensus that economies required government management to succeed. His grasp of economic theory and history alongside his evidence-based arguments for free-market policies were obvious to anyone paying attention to his Newsweek column that began in 1966. With decades of research and university teaching under his belt, the mild-mannered , five-foot Friedman wrote with authority when he targeted the economic shortcomings of Carter’s administration. He was a dynamic ball of energy who m...