The Reagan Counterrevolution

by: Peter Schiff November 09, 2008    

Peter Schiff

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In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound.

In contrast, the country has now hitched its wagon to the views of Barack Obama. We don’t know much about what he truly believes about economics, but the little that we do know is not encouraging. Obama has repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution.

The President-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving. Like most of his generation, Obama believes that economic growth results from consumer spending, primarily from the middle class. Any policy that keeps the consumers headed to the mall will be promoted.

Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful. The effort to concentrate more power in Washington will be far more appealing to Congress then Reagan’s idea of restoring it to the people.

This sharp contrast in philosophy should not be taken lightly. Reagan looked to unleash the pent-up free market forces that had been smothered by a generation of Great Society reforms and uninterrupted Democratic control of Congress. Today, the public is looking for the Obama Administration to create the growth that the free market has apparently destroyed. The hope that our economy will grow as a result of government spending and micro-management is the most seminal shift in political philosophy since the New Deal.

Despite the absence of Reagan’s promised spending cuts, the economy generally did well during his presidency (The growth would have been more genuine if the cuts had been delivered). However, Obama’s policies will immediately make the current situation worse and the nation will suffer severely as a result. Rather than a sharp recession at the beginning of his term followed by a significant expansion, the recession that Obama inherits will be far worse when his first term ends.

What nearly all politicians, on both sides of the aisle, fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America’s borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression.

Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan of the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border.

However, if this shift proves temporary and Obama’s reign either ends in one term or if he can summon the intelligence and courage to reverse course once the situation deteriorates, then perhaps one day there will be light at the end of a very long tunnel.

While all of us can certainly hope for the best, prudence suggests that we had better prepare for the worst. Not only does that mean divesting our portfolios of U.S. dollar denominated investments but preparing for the possibility of emigration. With economic conditions at home becoming increasingly intolerable, the call of freer economies and greater prosperity abroad may be too tempting to resist.

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This article has 65 comments:

  •  
    Nov 09 08:20 AM
    Good post. We don't know what Obama will do because he doesn't vote on many issues. As you say the spend philosophy in Washington has never abated and is at the crux of our problems.
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  •  
    Nov 09 08:27 AM
    So... still... the only important thing in all of this is your "portfolio"? And you'll still support anything that boosts your portfolio no matter what it does to the rest of the country? And you'll oppose anything that levels the playing field between Wall Street parasites who make their living sucking the life's blood of this country and producing nothing while the people who actually work for a living go without basic necessities in order not to adversely affect your "portfolio"?

    Is there anything... anything at all... that might take precedence over a slight reduction in the amount of wealth in your "portfolio"? Are you truly so greedy... so selfish... that you would outsource the wealth of this country to one of those with "freer" economies (Communist China I presume) if any attempt were made to lower the gap between your "portfolio and my dinner table and reogn in the stupidity that brought us the current debacle in which you and your ilk remain bulletproof while we working stiffs take the hit for your stupidity and greed?

    Excuse me again, but isn't outsourcing most of the decent jobs and much of the investment in this country something you've already been doing for a while now?

    Of course I've gone on way too long but attitudes like yours, based on maintaining the Wall Street stranglehold on the wealth of this country was most likely the main reason Obama was elected in the first place. Just what the hell do you accomplish by threatening to take your little marbles and go somewhere else to play if he doesn't continue the exact same policies that brought us the biggest financial meltdown since 1929?
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  •  
    Nov 09 08:28 AM
    When Reagan was president he could not distinguish between the history of real events and the history of movies he had played in. Peter Schiff is equally delusional, seeing salvation in the credit default swaps created by the unfettered free market and armageddon in responsible regulation. I applaud Peter Schiff's threat to emigrate. I am sure he can find some tax haven where he can live the good life unburdened by the challenges and responsibilities that Reagan and Bush et al have left behind.
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  •  
    Nov 09 08:41 AM
    To help fix the economy, first get rid of All of those fuzzy, complicated, bundled, speculated, financial instruments which brought down the large fin. institutions. Then get rid of All of the market equities that are not backed by something of Real value. Ban every fund that does not invest in real assets. Forget , shorts, indexes, derivatives, etc. Any investment should be a part of something real. Throw out SPECULATORS!
    Step two, Take LARGE steps to return living wage jobs back to the United States. When the general population makes a living, the economy prospers. Could go on, but will hush, for I know it's an exersize in futility.
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  •  
    Nov 09 08:49 AM
    You make no sense with this line.

    "What nearly all politicians, on both sides of the aisle, fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection."

    You say regulations were the problem yet recklessness were too in the same breath. If they had been better regulated the recklessness could not have happen. Look you made a great call with the housing collapse but don't get fooled by randomness. You can't be right every time and this article is proof of that.
    Reply | Link to Comment
  •  
    Nov 09 08:50 AM
    your dogma/doctrine is showing sir. emigration to the cayman islands is your probable course of action.

    free markets are wonderful if you can find one that isn't rigged by the speculators/hedge finds. we haven't had a free market for many yrs. a market with responsible wise regulation is what is needed.

    reagan's policy was to give reckless irresponsible tax cuts to millionaires and delusionally promise that something would actually trickle down to other citizens.

    all that happened was the yachtbuilders grew rich while everyone else starved.

    reagan's policy was to militarily outspend the USSR in hopes they would be bankrupted sooner than us. our bankruptcy has now occurred.

    reagan was a failed movie actor in B movies who suddenly impersonated a president for 8 yrs. the performance deserves an academy award.
    > jack
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  •  
    Nov 09 08:59 AM
    What Reagan understood and most leftists don't understand is that our economy is not a zero-sum game. When someone loses (via higher taxes, e.g.) doesn't mean that someone else gains. That is not zero-sum, that is lose-lose. Increasing taxes on the rich more always hurts the poor more than it hurts the rich. And it is not "trickle down", it is "cascade down." Also, trying to find another country that is better than the U.S. economically is an exercise in futility. Look at the downward spiral of Europe; China? No, China will get old before it gets rich.
    Reply | Link to Comment
  •  
    Nov 09 09:02 AM
    User294358 response is why we are going backwards not forwards. France has elected a conservative to try to unwind the public unions - he can't because of the political force. Sweden unwound their nanny state with dramatic results - not going back anytime soon. Canada going back to conservative leadership.

    Why? Because socialism doesn't work. Having large public and private sector unions force contributions to one political party who then creates industry conditions to scare off competition including foreign. This will of course have disastrouos - look at Europe that all score significantly higher in education level. They have large unemployment and dismal GDP. They keep interest rates high because inflation will trigger more automatic union raises.

    Show me how you are going to produce a TV in this country with higher minimum, higher health costs from nationalizing, more litigation, higher environment regulation and costs, and much easier union organizers.

    Now we get to the envy part over disparities in wealth - this too has been played out in Europe and it works for politicians and impoverishes the citizen. Why would the portfolio (we have 7 trillion on the side) invest with these hurdles when other areas are significantly better. You can get mad all you want but it is futile - the investor- like everyone else doesn't go to work for free- nor should he be forced to keep his currency here.

    What socialist state citizens will not tell you - many barter or work under the table, this constituency votes in higher taxes, the rich citizens leave and come back from tax free havens and have ribbon cutting ceromonies with the same politician who is giving them tax breaks to open a new factory celebrating foreign investment (with all sorts of perks).

    Think about it - part of this current decline is a flight of capital. It it is very difficult to reverse investor confidence. Equal portfolios is failed religion - everyone talks it but why don't you read about how some of the most liberal polticians in the US amassed their fortunes and their current effective tax rate.

    Reply | Link to Comment
  •  
    Nov 09 09:23 AM
    Reagan was gorgeous, wasn't he. Somebody complained because I call myself the leading academic energy economist in the world, but the reason for my occupying this station is that I read and speak english, and I can add and subtract. Reagan's government borrowed more money than had been borrowed previously in the history of the Republic, to include two world wars, and in addition he thought that it would be better for Europe if they imported gas from Argentina rather than the Soviet Union. Incidentally, 'Europe' listened to him, and as a result the pipelines that were constructed from east to west were less than optimal size. In addition, although being stationed in Hollywood during WW2, he informed an audience somewhere that he had seen action in Germany.
    At the same time it cannot be denied that he was a decent man, and tried to do his best, but his best mainly helped the better off elements in the US.

    And finmah, I don't remember hearing about any socialism in Sweden except from my upper middle class students of international finance. Actually, the relation of socialism to Swedish social democracy is about the same as that be tween a rap standard and a Cole Porter evergreen.
    In other words, no relation at all.
    Reply | Link to Comment
  •  
    Nov 09 09:32 AM
    I'll keep saying this over and over again. If the worst-case scenario happens and the U.S. goes down the tubes, the rest of the world goes with it. There would be no good places to emigrate to in such a case.
    Reply | Link to Comment
  •  
    Nov 09 09:34 AM
    All you left wing "whinners" who supported Obama are about to find out just how bad Obama , Reid and Pelosi can destroy america .Those who think america is the greatest country are totally delusional . Why is it that the american auto makers can't survive in their own counry while foreign automakers like Honda ,Toyota etc are doing well . UNIONS Wall street didn't bankrupt the auto and steel industry and next the airlines , its the unions .
    Reply | Link to Comment
  •  
    Nov 09 09:37 AM
    The bias and Pollyanna view of Reagan undermines everything that follows in the post. The fact remains that the so-called free markets are often manipulated and abused for short term personal gain, whether it be by the John D. Rockefellers of yesterday or of today. Unfortunately, we need government to set a moral-operational standard to prevent excess and greed and when they do not, the result is a loss of confidence and market value, just as we have seen. Reagan was a bumbling ideologue confusing his movie lines with reality and eventually confusing everything. In the end, his mental deterioration was such that he was a functioning movie prop
    Reply | Link to Comment
  •  
    Nov 09 09:56 AM
    You are complaining because you are not going to be allowed to steal from the poor in the future? Everything you speak of has already been done by the current administration over the past 8 years. Have you been asleep during all of this? And now you are looking at your broken crystal ball even before Obama goes into office. If this is not bigotry, what is?
    Reply | Link to Comment
  •  
    Nov 09 10:08 AM
    nothing works when you have scammers & scoundrels in charge of finances.this greedy author makes no mention of the fact that reagan did not have to deal with phony AAA rated paper,lying ceos,selfserving boards.humans have to be regulated & cant investigate themselves.its sad but true.this fast moving world cant wait for 436 people to agree on anything.big business moves quickly(enron,worldcom... & putting the crooks in jail does not return the value of lifetime work to the fleeced sheeples who allow this to happen.
    Reply | Link to Comment
  •  
    Nov 09 10:09 AM
    Peter, I have read your book and have been reading your articles and watching your comments on tv. What you say makes sense most of the times, but then suddenly, you say something that is either too simplistic or just doesn't make sense. Buffett Jr has pointed out one above.

    Can you write a focused and concise analysis of why we're in such a historic financial turmoil and what exactly was the role of regulation in this turmoil. I think that effort will make your case more believable. The general statements like regulation is bad is not strong enough evidence. As economists we should be able to back up with empirical data.

    I would argue that the lack of regulation is exactly why the bankers' greed got out of control and now we're all paying for it. The gov has to step into the situation after all, because the final tab of that greed is running into trillions (yes, with a T), and no private enterprise has that kind of money; besides when you start selling those junk CDO and CDS vehicles to foreign enterprises, the gov will be forced to step into resolving any conflicts. So, how do you propose the private enterprise to be able to self-regulate. I think the current situation already self-evident of what self-regulation can cause.
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  •  
    Nov 09 10:15 AM
    Let us look at the record: economic growth restored, inflation contained, stock market at record levels, huge increase in jobs, all while winning the cold war for freedom-loving people of the world. Pretty good record in spite of not getting the entire growth agenda enacted into law. This legacy of Ronald Reagan has been eroded by two decades of creeping increases in state control of the activities of our daily lives. The number of pages added to the Federal Register each year is a pretty good measure of the level of regulatory interference in the economy and it is now at an all-time high. After a sharp decline in the Reagan years, it has climbed steadily through both the Clinton and the Bush years. It is not just the Federal intrusion - state power has steadily increased too. The myth of the Bush deregulation is just that - a lie told repeatedly by too many politicians and media pundits.

    And now we have a new President who clearly promises an acceleration in regulation at rate not seen since Richard Nixon. If you care to check the numbers, just click here: www.mercatus.org/uploa...

    So, Peter, you are correct in your prognosis. The end of prosperity is near.
    Reply | Link to Comment
  •  
    Nov 09 10:19 AM
    since the reagan era, we've had our lunch eaten by countries (think Korea, China, Singapore) that combine capitalism with the use of government as a 'super venture capitalist'. As wall street and traditional vc's have become increasingly afflicted by attention deficit syndrome, the reaganian doctrine is out of sync with the times and needs a refresh. you need government to provide a base level of stable investment (e.g. on alternate energy) so that capitalism can work
    Reply | Link to Comment
  •  
    Nov 09 10:22 AM
    You have to be a bumbling idealogue to think that government can set a moral-operational standard.

    Just take Social Security, the idea that the burden of one generation's retirement should weigh on the shoulders of another generation.

    Blind faith in the efficacy of government is no less ideological than blind faith in the free market.

    And what happens to a blind man when he negotiates dangerous terrain? Bodily harm.


    On Nov 09 09:37 AM russ wrote:

    > The bias and Pollyanna view of Reagan undermines everything that
    > follows in the post. The fact remains that the so-called free markets
    > are often manipulated and abused for short term personal gain, whether
    > it be by the John D. Rockefellers of yesterday or of today. Unfortunately,
    > we need government to set a moral-operational standard to prevent
    > excess and greed and when they do not, the result is a loss of confidence
    > and market value, just as we have seen. Reagan was a bumbling ideologue
    > confusing his movie lines with reality and eventually confusing everything.
    > In the end, his mental deterioration was such that he was a functioning
    > movie prop
    Reply | Link to Comment
  •  
    Nov 09 10:46 AM
    the polarized views expressed above are so typical of the bankrupt state of debate at this at point in an economic crisis. Go back to the UK in the 60's 70's for a historical perspective . Capital and talent is fungible and will not stick around to babysit the idle or unskilled. Sorry it's human nature . You can dream otherwise, but either let the market remunerate "talent" or settle for living in a second rate country in relative equality with your neighbors.........bye!
    Reply | Link to Comment
  •  
    Nov 09 10:47 AM
    Obama is far too late to destroy America, as the job has already been done so thoroughly by the neo-cons.
    I suggest you emigrate, but leave behind the money you have looted from the system in your association with the gangster capitalism that has been the current practise for many years.
    BTW, I speak as someone who has been a conservative all my life.
    Capitalism though bears only a passing resemblance to the pillaging which has occurred, with vast sums taken by fraud whilst real wages stagnated.
    Reply | Link to Comment
  •  
    Nov 09 11:02 AM
    The core of what Schiff says is right on.

    We need an economy that is powered by real savings and real production. We manufacture nothing in the U.S.A. Yet every stimulus packaged discussed is making the U.S. consumer go to the shopping mall and spend money buying foreign products. Tell me this -- all those manufacturing jobs we lost we replaced with what? Engineers and technicians who made $50 an hour now make $15 an hour in the service industry flipping burgers? It is one thing for a politician to stand on a pedestal and speak mightily about free trade and not erecting trade barriers but it is entirely another thing if there is no backstop program to help/assist those displaced to move into alternate jobs where they make the same amount of money. Tell me this -- we have destroyed nearly 100% of the manufacturing jobs in this country and replaced them with nothing! Now outsourcing has taken hold and is destroying all our technical jobs and replacing them again with -- NOTHING! We need to fix the real two problems that we have no savings and we manufacture and produce nothing in this country. Otherwise all we are doing is putting a bandaid on the wounds until the day comes when they are ripped apart by foreign investors who hold trillions of dollars of our debt and we will then have to shape up and become a mighty economy again or go down the tubes and become subservient to China and India and let them use us like we used them. How about China and India opening up call centers here because we have now become the low cost low wage poor country and the income level and spending power of their populations have gone up? How about when other economies of the world will do to us what we have done to them the last few decades as the situation completely reverses and we would work for them instead of them working for us? That day is coming my friends and nothing short of a radical realization of our follies and immediate corrective actions will fix it!
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  •  
    Nov 09 11:22 AM
    Schiff's annalysis amazes me. If Reagan succeeded in releasing pent up economic forces the Bush administration removed the dam by removing the regulations which assure financial transparancey. The flood of greed has destoried the economy. Now the people Obama brings all have a history of financial success in dealing with financial crisis. Schiff's annaysis is short on reality.
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  •  
    Nov 09 11:31 AM
    The borrow and spend policy started under Reagan. If even the world's greatest CEO ran a company like Reagan and the Bushes ran the USA, it would be bankrupt in a short time...oh, woops it is!
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  •  
    Nov 09 11:33 AM
    You can write moronic characterizations of the ecomomy on websites--the first amendment is broad--but how do you get on Fox network, where right wing plutocrats think you are a Nut?
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  •  
    Nov 09 11:40 AM
    Reagan's Philosophy? Grecian Formula + Cue Cards. If you don't know that you've kind of missed out on what's happened over the last 28 years. Never mind In the US there will always be an opportunity to start over. That's what Regan did isn't it? Sports caster, movie star,union leader, McCarthy-ite snitch, GE mouthpiece, and so on. Nostalgia for fantasy isn't a substitute for policy.
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  •  
    Nov 09 11:50 AM
    This view point has not got a leg to stand on. There no evidence that good example of Laissez faire economics as ever fared well.

    Markets without some level of law and order, transparency and oversight is like a farm without a fence. It simply does not work.

    And, the author gravely under estimates Barack Obama, who under the hood represents a new generation of pragmatist with the idealistic gloss needed to gain the support of the American public.

    That said, I do agree that re-regulation of the markets could easily run amuck, if it is tooled by old school democrats. The as guilty as republicans of lacking any form of vision.

    Regan was the right man for his time, Barack is the right man for out times.
    Reply | Link to Comment
  •  
    Nov 09 11:58 AM
    Capitalism, unregulated, always ends up with the greedy hustlers pushing the economy of a country into disaster. It has always been
    that way and we find ourselves, the citizens of America, getting
    punked once again.
    There is a thing called moderation. There is another thing called balance. For the past forty years America has become more and more unbalanced economically. A smaller and smaller percentage of people have managed to get a greater and greater percentage of the world's wealth. Those in power have relentlessly pushed for this, or, have not cautioned enough against it until we are where we find ourselves today: FUBAR.
    When people with power, official or unofficial, don't act with wisdom and foresight a cataclysm eventually results. How close are we to such a thing right now? I don't pretend to know, but the "chicken little" posturing
    of Peter Schiff really put me off.
    If Obama moves towards "socialism" it may well not be such a bad thing. Some delivery of relief to working stiffs and the unemployed would be every bit as helpful to the economy as the "socialism" for the rich that came down in 2001 and just last month for Goldman Sachs and Wachovia Bank.
    Am I a "leftist"? Left of who? Rush? Alan Greenspan? Larry Kudloooow?
    Peter Schiff can move to Bumfuk, Egypt for all I care. Neocon gangster capitalism has proven, definitively, just how bad it sucks, but I'm going to remain an American and I feel one heck of a lot better supporting Barack Obama than I ever could the posturing faux cowboy who hasn't left D.C. yet.
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  •  
    Nov 09 12:07 PM
    the reagan/ W bush policy is to throw out all the citizen protections of the FDR program of 1933-45 and restore the harding/coolidge/hoove... policy of business without regulation.

    it is always a source of amusement & consternation that the people who control the republican party insist on running morons for national office. i suppose it is because morons are easier to control than people with a live brain function.
    > jack
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  •  
    Nov 09 12:07 PM
    The sad truth is that in an unregulated free market economy there will be greedy capitalists who, for financial gain, will take unfair advantage of the rest of the population. However, in an highly regulated central government dominated economy there will be over-reaching politicians and bureaucrats who, for the sake of power, will take unfair advantage of the rest of the population. There will always be an "elite" minority prospering at the expense of the majority. So it has always been and so it will always be. Human nature is not even close to perfect.
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  •  
    Nov 09 12:47 PM
    Regan robbed the Equity Americans over several generations had built up in program like Highway, bridges, Social Security, Medicare and so many others.

    He stole the excess funds from those programs to fund tax cuts for millionaires, to fund weapons systems and still left $ 3 Trillion Dollars in debt.

    It pains me to think of my grandfathers and my fathers, both who died never collecting Social Security, money going to fusn tax cuts for Millionaires just like the excess from Social Security unber Bush is used to off set his tax cuts for Millionaires.

    Even Buffet said he did not need or want these tax cuts. The tax cuts were the main reason for the Budget Deficts. Read Ben Stiens Yale Economic Review
    www.yaleeconomicreview...
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