Since the fall of 2008 we have been living in a different world than the one we inhabited in the quarter century that preceded that anxious autumn. During that 25-year period, Americans experienced steady (and sometimes explosive) economic growth, infrequently interrupted by recessionary speed bumps. For two and a half decades, economic insecurity of the kind we have felt so keenly of late, was virtually unknown to Americans below a certain age. There are lessons we can learn from that period that will stand us in good stead today as we operate on the edge of crisis.
Ronald Reagan gave birth to a long boom when he successfully repudiated the Keynesian economics and punitive marginal taxation that had come to characterize the American approach to running the economy. By doing so, he restored prosperity to a nation mired in the twin crises of unemployment and inflation and wondering whether the presidency was simply too big for one man. His formula of stimulating the economy through tax cuts rather than government distribution of centrally confiscated dollars fueled increases in American productivity and thus provided the nation with a basis for real wealth generation.
There is an important lesson to be learned from Reagan’s boom. Practitioners of public policy should be required to memorize it: Beware the tyranny of the obvious.
When Reagan took office, he brought with him a message Jack Kemp had been proclaiming ahead of time like some John the Baptist of the beltway. The message was counterintuitive, but incredibly powerful. What was it? You can cut taxes, and if they have been too high, you will actually gain revenue. The “obvious” answer is that Reagan was wrong. Higher taxes mean greater revenue, don’t they? In fact, it is still an article of faith among many leftists that Reagan’s tax cuts led to spiraling deficits and a mounting national debt. In this case, however, the faith is misplaced. An empirical examination shows that Reagan’s massive tax cuts led to real (inflation-adjusted) gains in federal revenue. Lower rates mean more incentive to earn and less incentive to cheat. At the same time, the sea change in tax policy put the fundamentals in place for long-term economic growth. In short, what seemed obvious (cutting taxes would lead to disaster for a government already sorely pressed financially) was clearly incorrect. Reagan derailed the express that heads for the place where all empires end: high taxes and empty coffers.
Welfare reform was one of the stated goals of the Reagan presidency, but it was an agenda item he failed to complete. However, when Congress changed hands in 1994 its new Republican leadership and the campaign promises of “New Democrat” Bill Clinton cohered to bring about comprehensive change in entitlements for working-age adults. Welfare reform inspired many jeremiads before its implementation, as defenders of War on Poverty program predicted social meltdown and death in the streets. Those prophesies now appear to have proceeded from gazing at a cracked crystal ball. Late 1990s welfare reform, which proved to be one of the most successful policy initiatives in American history, literally cut welfare rolls in half and helped fuel the first federal surpluses in decades. This outcome, too, was a strike against the tyranny of the obvious, which said that those who are on welfare aren’t working because it is impossible for them to find jobs. Nobody chooses welfare, champions of the obvious proclaimed. And they were wrong.
Add to our aphorism about the tyranny of the obvious another wise saying: Wishing does not make it so. Combining the tyranny of the obvious with wishing-makes-it-so public policy leads to outright disaster. The welfare policies, which so desperately cried out for reform in the late 1990s, themselves proceeded from a naïve view of human nature. If people are poor, provide them with an income. No time limit on benefits will be necessary. Having the bare necessities of life guaranteed, the poor will be able to ascend from poverty under the guidance of social bureaucrats. The advocates of these plans had no inkling that these good-hearted strategies would lead to enduring cycles of poverty and family disintegration that threatened to consume entire generations. Wishing for good outcomes resulted in disaster. It was only when a more tough-minded view took hold – the idea that it is reasonable to expect productivity and initiative out of healthy, working age persons – that many managed to escape mere subsistence.
The reason for this reflection circles back to the beginning. We are living in anxious times. The desire for a good leader to take the situation in hand and bring about victory is palpable. Indeed, the president now appears to have been almost prescient in choosing his campaign themes of "Hope and Change." Governments tend to grow the most during times of war and times of economic crisis. The ground they gain is rarely, if ever, given back to the citizens. That is what made Reagan and Thatcher so special in their joint tenures. They pushed back against “what everyone knew” and drove forward on the basis of a realism inspired by deeper insights about people and societies.
If we succumb now to public policies based on a combination of the tyranny of the obvious and wishing-makes-it-so, then the consequences will be with us for much longer than the present crisis. It took many decades to reverse the disastrously punitive tax policy embraced by an America buffeted by depression and two world wars. And while the ship was eventually turned on welfare for working age adults, much human potential was wasted in the lukewarm water of entitlement prior to reform. Resort to the state is always the obvious answer, always what we wish would make our problems go away. But while the promise is illusory, the pain will be real.