Ronald Reagan changed the economic conversation in America. But while his acolytes focus on Reagan's big tax cuts and small government rhetoric, we submit that the 40th President's economic legacy is far more nuanced and mixed. Reagan was a conservative partisan who worked with political opponents without exhibiting the rancor so prevalent today. In 1982 he teamed with Congress to pass the Tax Equity and Fiscal Responsibility Act that repealed some of the excesses of the big cuts in the 1981 Economic Recovery Tax Act. He negotiated with Democratic House Representative Dan Rostenkowski to pass the 1986 Tax Reform Act. He accepted Democrat Paul A. Volcker's tough monetary policy at the Federal Reserve, so necessary to defeating double-digit inflation. And he backed the recommendations of a bipartisan commission on Social Security, led by Alan Greenspan, that raised taxes.
Reagan took office at a time when America was economically unsure of itself -- mired in stagflation and cowering before a Japanese invasion in autos, electronics, finance, and real estate. By easing tax rates for individuals and corporations, he lowered the bar to risk-taking. Yet it was his unshakable confidence in the future that encouraged chief executives to take risks. Reagan's bonhomie changed the psychology in the markets: It was as important in reigniting growth as his tax cuts were.
So was Reagan's tax reform. While some point to the sharp cut in marginal rates -- from 70% to 28% -- as the reason for solid growth in the '80s, the 1986 bill that made the tax code simpler and fairer should receive at least as much credit. The reforms cut loopholes for old-line industries such as railroads, utilities, and real estate, freeing capital for the enormous task of restructuring Corporate America.
Indeed, it was by making markets more flexible that Reagan really helped to revive economic activity. The same month that Reagan signed his first tax cut -- August, 1981 -- he also fired members of the striking Professional Air Traffic Controllers Organization. The more flexible labor markets that followed fueled the wave of takeovers, mergers, and leveraged buyouts in the 1980s. There actually was less government deregulation under Reagan than under Presidents Carter and Clinton. The one exception, deregulating the Saving & Loan industry, led to a disastrous scandal and a $100 billion bailout.
Inevitably, the measure of Reagan's legacy of the '80s must be taken against what followed: the Clinton years of the '90s. Reagan became President when America was economically sclerotic. His tax changes, combined with a tight monetary policy, helped to make the country competitive again. The price paid, however, was a soaring budget deficit. Reagan and his supply-side advisers believed that big tax cuts would pay for themselves by generating higher tax revenues through greater economic growth. It never happened.
President Clinton took office in 1993, when those huge budget deficits weighed heavily on the markets and the economy. Clinton's turn away from liberal spending to balancing the budget (the "Rubinomics" policy of his Treasury Secretary, Robert E. Rubin) brought confidence back to the markets. When telecom and the Internet took off three years later, the economy ignited.
Yet despite different fiscal policies, the macroeconomic outcomes were remarkably similar. Under Reagan, lower taxes and a soaring budget deficit produced a growth rate of 3.4%. Under Bill Clinton, higher taxes and a budget surplus generated growth of 3.6%. Throughout both Presidencies, from 1982 to 2000, interest rates fell and the stock market roared. So much for ideology.
There were differences, of course. Under Clinton, unemployment was lower than under Reagan, poverty declined more, and wages rose faster for ordinary workers. But the essential truth remains: Strip away doctrinaire rhetoric, and here's the lesson of nearly two decades of economic activity: Decisive Presidential leadership that tackles the greatest threat of the day produces the policy mix best suited for growth. Sometimes that means lower taxes, sometimes higher. Sometimes it means less regulation, sometimes more.
In the end, perhaps the most important inheritance President Reagan has to offer is not his philosophy but his pragmatism, not his specific policies but his willingness to act decisively, not his partisanship but his ability to reach across political boundaries. The hagiography surrounding President Reagan today presents him as an ideologue with a cause. The truth, as usual, is much more complex.