Asymmetrical Information

At the risk of arguing economics with an economist:

You mention the industry devoted to generating more loopholes, but leave out the industry devoted to finding them all - the accountants.

I think it's safe to say that the nation contains many who do not earn enough to be affected by any loopholes, as well as many who both earn enough to be affected by them and can afford a good accountant to find them all. But what about all those fokls in the middle? Why do we assume that the market for tax law information is efficient?

When the MTR was 70%, it's probably safe to say that many, many people who either did their own taxes, or hired sub-standard (read: the best they could afford) accountants paid more than they should have paid in taxes each year. By that stanadrd, cutting taxes is still a good thing for a lot of folks.

Oh, and as for ending the cold war: since when must one accomplish something entirely on one's own before deserving credit for it? Gorbachev brought down the Soviet Union & he says Reagan's the guy that should get the most credit.

Good enough for me.

Reagan arguably energized an entire generation of people who passively sat by during the 60s and 70s, as the left took center stage. His fervor eventually led to Newt G. and the Republican Congress of 94, and the intensely polarized society that we now have. Otherwise, we would still have the Humphrey/Mondale-type political leadership, a strong left pushing even harder for stronger socialization, without any counterbalance, and an apathetic majority just letting it all happen to them.

Have you ever discussed the cost of borrowing when Reagan took office? In light of government baseline budgeting, I wonder how that affected the deficit spending.

You are mostly right about Reagan's economic legacy; but his foreign policy legacy was very mixed. The USSR collapsed on his watch and he certainly helped it along with his 'evil empire' rhetoric that caused the media and sophisticated and nuanced Europeans to call him a 'dangerous cowboy'. But if you look at what he did and not what he said, he very clearly led budding Islamists to believe that the US is a weak horse. Nothing followed the murder of 241 Marines in Lebanon by Arab terrorists, unless you include the invasion of a West Indian country the size of Martha's Vineyard. He clearly rewarded Islamist hostage-taking on a grand scale by arming the Iranian mullahs. He aided and abetted OBL and the Taliban as they drove the Russians out of Afghanistan. Instead of blaming W or Clinton, the 9/11 commission ought to blame Reagan.

Jane, are smoking the crack rock again?

Oh, before everyone gets pissed off, I am just giving her a hard time.

Suggesting that Reagan goes down as one of the two best president's of the 20th century is ludicrous. I will agree that his optimism and faith in this country was much needed in the early 80's, and his unabashed commitment to fight the Soviets (in spending at least), was instrumental in ending the Cold War.

But Truman, Eisenhower, and Roosevelt 1 would get my vote above Reagan any day of the week. In fact, although Jimmy Carter was largely ineffetual as a president (except wrt the Middle East), I would submit him above Reagan for one reason: Iran-Contra. Reagan should have been impeached for that business if he knew about it (which I think we will find he did, as did GB 1). If he didn't know about it, then he was a doddering old fool. Course we don't get to find out for awhile b/c GB 2 sealed the records again.

Jane,

One more thing that you might want to add to Reagan’s legacy is that IIRC he was the first modern President to disavow wage and price controls as a “solution.”

I think if you'll look, you'll find all our favourite presidents did things we'd rather not think about; just off the top of my head, Roosevelt II lied to the country about having a secret message detailing an Axis plot against the US (made up out of whole cloth by FDR, IIRC), tried to stack the federal government so as to make it a cambric dictatorship, attempted to implement a basically fascist economic system in the US, allowed people he met at cocktail parties to run lunatic economic experiments on the country, arranged for people he felt couldn't be trusted to be involuntarily committed to St Elizabeth's mental hospital in Washington DC for the duration of World War II, got rid of his Communist fellow-travelling VP only when the publicity threatened to lose him the election, gave war materiel to Britain and Russia that he knew very well wasn't going to be given back or paid for under the fiction of "Lend-lease", ignored the holocaust despite overwhelming evidence of what was going on (including turning refugee Jews away from America and back to Europe), and deliberately took an aggressive stance against Japan in the pacific in order to provoke an attack that would offer him a pretense to enter World War II, which he'd been forced to promise he wouldn't do in the 1940 election. Truman was a party hack who made his name in basically fixed commission hearings against enemies of his political bosses in Kansas. Ike . . . well, frankly, I fall asleep whenever I think about Ike, but you get the idea.

I don't know what I think about Iran Contra; it occurred during a period when I suspected anyone to the right of Chairman Mao of grand conspiracy theories, and I haven't studied the matter since then. But I doubt it will eclipse the legacy of being the guy who took on the Evil Empire.

That said, who knows? Maybe we'll barely remember him in fifty years.

Good points, all.

Jimmy Carter was largely ineffectual as a president

Largely ineffectual?? Good God. Carter would be my candidate for the worst President of the twentieth century, just easing out Richard Nixon, who without his major blot would have rated surprisingly highly, IMO (much like Clinton in this respect). BTW, I voted for Carter, I'm ashamed to say. Fortunately, wiser heads prevailed.

I would compare Iran-contra with FDR's violations of the Neutrality Act, wherein he clearly committed acts of war by openly aiding a belligerent nation (the US Navy protection of convoys partway to Britain). In both cases, a President bending the rules to achieve an end in the interests of the country, but not at the time supported by the public. Sometimes a leader has to lead, rather than govern by focus group.

Reagan's knocking the air traffic controllers' union on the head was a huge contribution, and changed the course of American labor relations to ensure that they did not proceed down the rocky path followed by Europe, as they seemed about to do. Recall that the controllers saw fit to violate the no-strike clause in their existing agreement, thereby undercutting the whole point of negotiating a contract. When Reagan fired every man-jack of them, and labor saw his popularity skyrocket, they knew that European-style union activism was not going to fly in this country. Not then, not now, not ever. American Arthur Scargills out there need not apply.

Further, Reagan also knocked the USSR on the head. Liberals now like to denigrate his contribution by saying the USSR collapsed "on his watch," but that unfairly implies that it would have happened regardless of who was in office. Can you seriously imagine the Soviet Union collapsing on Carter's watch? Reagan brought not only American economic power (increased defense spending, which damaged our economy, but destroyed theirs, a trade I'd make anytime) but also moral authority to bear on the USSR (by openly characterizing them as an "Evil Empire," which of course they were), and the Soviets could not withstand that external pressure, nor the internal pressure it encouraged. As I have learned from several Polish expats who were there then, Poland is our friend to this day because of Reagan's support for them then, and they took enormous heart from it.

Overall, however, his biggest contribution may have been the restoration of American confidence, which made all else possible. Those not of age at the time will find it hard to understand just how shockingly demoralized the country was in 1979. The Soviet Union had brazenly invaded Afghanistan (Carter's response: keep our athletes home from Olympics - that showed 'em), a low-rent Third World country used our embassy for target practice and held our personnel hostage, the economy was in the dumper, with inflation rampant, the President mumbling about staying in the Rose Garden until the hostages were released...it was sad. And it all turned around within weeks of Reagan taking office.

A massive contribution. And don't let anyone tell you different.

Jane,
You attack Truman for his background before the presidency.

Your points are well noted on Roosevelt, though lend-lease was perfectly legal. His packing of the supreme court, internment of japanese americans, and other actions against civil liberties during WWII were awful and not to be repeated (despite such calls by the right now - don't flame me for that one - listen to Rush/Ann Coulter/Sean Hannity for a little while and they are ready to lock up most of the country, unless you are on oxycontin).

I used to have a somewhat similar view of Nixon as Occam's Beard, but having read enough about him and his administration, I just can't rate him much above a paranoid thug (W's administration exhibits a similar penchant for secrecy and disregard for the law). Carter was lousy, but far as I could tell he did not knowingly break the law and then lie to the American people about it (as Nixon did and Reagan likely did). If that is what you mean by leadership, then by all means, lionize him. Perhaps you are a big Ken Lay, Dennis Kozlowski, Michael Milken, Jeff Skilling fan.

Reagan did show strong and correct leadership in facing off the Soviet Union. And he sure whipped Granada. I think his rhetoric and his emphasis on defense spending did bring about a closer end to the Cold War. But I also think his support of Saddam Hussein (who gassed his own people under Reagan's no-so-astute eye), Contras, and right wing governments throughout the world has resulted in serious problems for us now. Could he have foreseen such issues then? No. But his legacy must carry those burdens as well.

Scott,

Nixon was paranoid, and arguably a thug, but I was thinking in particular of his opening relations with China. That was a staggering initiative on his part that rocked the world (confessing my age here) as much as if Bush had the bin Ladens (Mr. and the four Mrs.) over for a White House dinner. People were stunned.

He also established the EPA, but clearly his interests and skills lay primarily in foreign relations, at which he was unsurpassed.

I think he got a black eye for doing in Watergate what I strongly suspect others have done before and perhaps since. That doesn't excuse it, but places it in some context. I think that accepting campaign contributions from China, for example, is a much more serious matter.

Also, part of his paranoia, which drove the Watergate break-in, had a basis in reality. The left in general and the press in particular was out to get him. Part of their rancor was earned (from, e.g., his first campaign for Congress); some was visceral distaste. They moved the earth to get him, and ultimately did. If the media had applied 10% as much effort to Clinton they'd have nailed him to the wall for any number of issues (not just Monica Lewinsky). (I'm not saying they should have - I'm glad they didn't. But they could have. In Nixon's case, they chose to do so.)

Support for Saddam Hussein was a matter of Realpolitik. The Iranians were running amok at that point (their inclination toward terrorism was apparent early on), and the Iraqis were no day at the beach, so the reasoning went to let them fight each other. As Kissinger famously said, "The pity is that they can't both lose." Reagan put his thumb on the scale to keep the Iraqis in the fight until both sides were exhausted. Not the nicest thing in the world, but Realpolitik never is, and it was vastly preferable to having either or both of them actively direct their hostilities towards us. I can't call it a bad decision, anymore than I could say that of FDR's decision to make common cause with Stalin. The reasoning is the same.

As for supporting right-wing governments, the question has to be asked what the alternatives were. Supporting a military dictatorship over a wannabe liberal democracy would clearly be wrong. But supporting one over a totalitarian communist dictatorship would not clearly be wrong, in my view. Of the two, I'd hold my nose and plump for the right-wing dictatorship because it would lack the ideology that would give it longevity, and therefore would be a self-limiting disease. Pinochets come and go relatively quickly; only ideology can lead to a multigenerational dictatorship.

I completely agree with your economic analysis. Tax simplification was Reagans best achievement. Though most people don't seem to have noticed that this was effectively a tax increase (i.e. revenues as a percent of GDP increased).

As for Reagan winning the Cold war, this is also true, but you have the reasons exactly wrong. Reagans first term belligerence towards the Soviet Union was actually counterproductive. It had the effect of strengthening the internal support for hard liners, and weakening reformers. It was Reagans 2nd term reversal of stance that is his contribution to the end of the cold war. (That, and his good luck that Khernenko died so soon after taking office, leaving room for a reformer - Gorbachev - to ascend to the top spot). To Reagan's eternal credit, When Gorbachev came to power, he reversed himself entirely and made room for reform and friendlier relations.

So, sure, Reagan helped to end the cold war, but not by threating the Soviets or building weapons. He did it by agreeing to arms reductions and friendlier relations. He won only when he stopped acting like Reagan and started acting like Carter.

> Richard Nixon, who without his major blot

You hate wage and price controls as much as the rest of us, eh?

I think everyone credits Reagan with giving the country some needed optimism, and I'll certainly back the marginal tax rate change. He certainly wasn't in a league with FDR, but that's really a matter of history making the man rather than anything else (TR, IIRC, used to bitch that he wouldn't have anything like the Civil War during his term by which he could make his name).

I'm curious about this, though: "One can theorise that [deficits] should [affect interest rates], and indeed the theories make a great deal of sense. It's just that you can't find any actual good data to support them in the Real World. This is one of the major sources of my scepticism about Rubinomics." Does this skepticism mean you are retracting your prior statements (in your argument with dsquared about the validity of sociology) about the "hardness" of the laws of supply and demand ? Because it sounds like you don't really believe they apply as often as one might think.

As for supporting right-wing governments, the question has to be asked what the alternatives were. Supporting a military dictatorship over a wannabe liberal democracy would clearly be wrong. But supporting one over a totalitarian communist dictatorship would not clearly be wrong, in my view. Of the two, I'd hold my nose and plump for the right-wing dictatorship because it would lack the ideology that would give it longevity, and therefore would be a self-limiting disease. Pinochets come and go relatively quickly; only ideology can lead to a multigenerational dictatorship.

Good point compare the following:

Taiwan versus the PRC
South Korea versus North Korea
Pinochet’s Chile versus Cuba (which backed Allende)

In each case the United States initially supported a right-wing strongman as the "lesser evil" and the nation was able to become a more liberal republic. In contrast, the thugs (or their descendents) supported by the Marxists are still in power and their people are still enslaved.

No, Tim, I'm not arguing about the direction of the change; I'm simply saying that the magnitude of the change seems to be, as far as anyone has been able to demonstrate, too small to be analytical distinguishable from statistical noise. Unless new, better evidence comes to light, this pretty thoroughly demolishes the Rubinomics fairy tale. (As does the Clinton administration's rather tepid committment to balanced budgets until after the economy balanced it for them; it was Clinton, after all, who shot down the balanced budget amendment. But that's another argument.)

One doesn't have to believe that the laws of supply and demand have been repealed to think that the bond market is considerably more complicated than a simple macroeconomic model in which all investment assets are perfectly substitutable and thus an increase in the amount of one must produce a 1-for-1 decrease in the capital available for the others.

Jane, Clinton did not "shoot down" the balanced budget amendment. The president plays no role in the Constitutional Amendment process set forth in Article V. While he opposed it, it died simply because there was not enough suppport in Congress, being defeated in one instance when a Republican Senator, Mark Hatfield, refused to be rolled by the GOP leadership and voted no.

As far as the wastefulness of high MRTs, does anyone remember leveraged lease equipment tax shelters and the companies that used to create and sell them? With a very few exceptions, all those companies came crashing down after the passage of the '86 TRA.

Jane -

When 'Ma Bell' was the only phone game in town, those 'extortionate long distance rates' were used to subsidize local phone services, so that large-scale users of long distance (mostly big business) made near-universal phone service affordable for almost everyone, so that telephone use spread much faster than would have happened otherwise.

The benefit to the long-distance rate payers was that they then got a phone system that could reach almost anyone.

I heard big complaints just after the breakup that some local users could no longer afford service, since local service then had to pay its own way. Big business sure didn't complain, but the 'universal network' was now in place, and people they wanted to talk to were going to keep their phones.

Plus, the cost of the technology went down, and new technologies came out. It was probably time for the breakup, but as regulated monopolies go, U.S. phone service seems like it worked pretty well in its day.

How about decontrolling the price of oil and natural gas? I was too young to remember the gas line of 73-74, but I do remember the odd-even rationing of 79-80. Can you imagine the lines we would have today if the price of gasoline was controlled today?

Jane, I don't understand why *all* interest, not just mortgage interest, shouldn't be deductible. If I have to claim interest earned as income, why should I not be able to deduct interest paid? It sounds like heads government wins, tails I lose.

Congratulations on giving Volcker the credit he deserves. Too many Reagan idolaters simply ignore his efforts.

Perhaps you might also give some credit for tax simplification to its strong supporter Bill Bradley, who was in fact ahead of Reagan on the issue. Remember that the initial tax reform bills of the mid-eighties were the Bradley-Gephardt bills. True, Reagan and Donald Regan, his Treasury secretary, came to be supporters of simplification, and I don't really know how to divide the credit for what finally passed.

I do know that support for simplification was widespread, in both parties.

Oil deregulation that was started under Nixon was passed by Carter and accelerated by Reagan. But to say that the deregulation of oil is what caused the price collapse that started in ‘81 is absurd. The US hit a high water mark for production in 71 (when industry imposed quotas that had been in place since the 30’s were lifted). Nothing happening in domestic production has had any effect on oil prices since.

Between 1972 and 1981 the price of oil rose 283% while the reduction in demand in the transportation sector decreased a whopping 8.2%. The price collapse was because of OPEC infighting not UD deregulation. And the beneficial effects of regulation are often discounted. After the price collapse people didn’t rip out the insulation in their homes and didn’t reengineer their engines to be less efficient.
Oil deregulation that was started under Nixon was passed by Carter and accelerated by Reagan. But to say that the deregulation of oil is what caused the price collapse that started in ‘81 is absurd. The US hit a high water mark for production in 71 (when industry imposed quotas that had been in place since the 30’s were lifted). Nothing happening in domestic production has had any effect on oil prices since.

Between 1972 and 1981 the price of oil rose 283% while the reduction in demand in the transportation sector decreased a whopping 8.2%. The price collapse was because of OPEC infighting not UD deregulation. And the beneficial effects of regulation are often discounted. After the price collapse people didn’t rip out the insulation in their homes and didn’t reengineer their engines to be less efficient.

"(Then again, they might not. As far as I can tell, there's no evidence that budget deficits have a significant effect on interest rates. One can theorise that it should, and indeed the theories make a great deal of sense. It's just that you can't find any actual good data to support them in the Real World. This is one of the major sources of my scepticism about Rubinomics.)"

What do you think would happen to interest rates if the US government started running budget deficits of, oh, 15% of GDP?

Maybe there's a non-linear aspect to it, like inflation, but there's clearly a relationship.

And praising Reagan for the loophole closing during his term, which he didn't come up with or push for, is rather strange.

"All in all, I think it likely that he'll be remembered alongside Roosevelt as one of the two greatest president's in the twentieth century."

I don't have much of an opinion on Reagan, but Roosevelt? Easily one of the WORST two presidents!

I'll vote for any candidate who proposes that the 1987 tax code simply be re-adopted, word for word, and left in place for at least 20 years, barring a Congressional Declaration of war.

As to other aspects of Reagan's time in office, go over to Virginia Postrel's website and review what titanic intellects such as John Kenneth Galbraith, Lester Thurow (anybody hear from ol' Les lately?), and Arthur Schlesinger were saying about the Soviet system around 1980, while the amiable dunce Reagan was plainly saying that the Soviet system was doomed to fail. Reagan's accomplishments were attitudinal as much as anything; attitudinal leadership is among a President's most important tasks, given the structurally weak nature of the office.

bones:

Reagans first term belligerence towards the Soviet Union was actually counterproductive. It had the effect of strengthening the internal support for hard liners, and weakening reformers.

My understanding of the theory was that Reagan's belligerence induced the Soviets to try and keep up with us militarily, which proceeded to destroy their economy. Given that thesis, I don't see the relevance of your point.

Did Reagan actually say words to the effect that the Soviet Union was doomed to fail? His rhetoric seemed to state the contrary. To him, it was an "Evil Empire" hellbent on world domination. Reagan and his admin. routinely told us of the strength of the Soviet Union and therefore, the need for us to be strong too. The only person that I can recall saying that the Soviet Union was doomed to fail (actually, I don't recall this, but I have read it after the fact) was Daniel Patrick Moynihan in a famous essay in Newsweek circa 1979, in which he called the Soviet Union a "sick" and "troubled" society and declared that the defining event of the next decade could well be the unraveling of the U.S.S.R.. Although he was off by about three years or so, I think Moynihan was closer to the mark than Reagan was. One can agree with Reagan's "evil Empire" characterization, but is it true that he really saw the failure of the Soviet Union as inevitable?

Eamonn, go review the evil empire speech, and what he viewed as the likely denoument of the Soviet system.

"He helped bring down the Soviet Union. Oh, I agree with liberals that he didn't do it singlehandedly"

Just about--his only allies being Maggie, the Pope, and the King of Saudi Arabia.

Virtually every political figure of the time disagreed with Reagan's stance toward the Soviet Union. Nixon, Ford, Kissinger, Carter [who even conspired with Soviet leadership during the 1980 election campaign to have himself elected since they obviously feared Reagan (No, I'm not making that up, it's in the Soviet archives] all thought Reagan was crazy to do what he did.

I'd rate his major accomplishments as:

I. The dispatch of the USSR to the dustbin of history--which he predicted in at least two speeches.

II. Supporting Paul Volcker in his efforts to wring inflation out of the economy--something Volcker himself praised Reagan for in his memoir.

III. Changing the political consensus toward more reliance on markets and less on government--his inauguration day directive ending controls on gasoline (and thus gas lines) was the perfect coup de grace for Jimmy--"crisis of the spirit"--Carter.

IV. Lowering marginal tax rates and eliminating the tax shelter industry (even though it eliminated my job at the time).

Eamon:

Reagan said Communism would wind up on the "ash-heap of history".

What do you think "ash-heap of history" means, if it's not a prediction that Communism would collapse?

Those who want to give Paul Volcker all the credit for bringing down inflation and none to Ronald Reagan do not understand the realtionship between the White House and the Fed. Although the Fed is an independent institution, historically presidents have exercised a great deal of influence over it. Look at the way William Mc. Martin backed down in 1966 when when Lyndon Johnson demanded that he not raise rates, thereby setting inflation in motion.

Volcker's relationship with Carter was a rocky one and he wasn't really able to run monetary policy the way he wanted to until after the election. Reagan constantly supported him and appointed administration officials like Jerry Jordan at the CEA and Beryl Sprinkel at Treasury who were hard-core monetarists. Reagan reappointed Volcker in 1983 against the advice of some of his political advisers, and also appointed hard-money men to the Fed board.

In the dark days of 1981 and 1982, there was a lot of pressure for Volcker to ease monetary policy. Had Reagan pressured him to do so, he probably would have backed off on tight money. Therefore, one can conclude that Reagan was as much responsible for the Fed's successful fight against inflation as Paul Volcker.

Jane:

"Unless new, better evidence comes to light, this pretty thoroughly demolishes the Rubinomics fairy tale." Don't overstate your case. Absence of proof, yada yada. Also, can you point out a couple of the better of these studies, if the names are at hand - the only references I could find were across national lines and across or referenced the Volcker period (which could be a real outlier - I don't know)? Capital is about as fungible as it gets - I'll trust the theory on this one for now.

Bruce,

Certainly Reagan deserves credit for not pressuring Volcker, but I think you overstate the case. It was Carter, after all, who appointed Volcker, knowing full well what he was going to do. And it was a lot easier for Reagan to let Volcker run, with the election three years off, than for Carter, who was barely more than a year away from his campign when he made the appointment.

In any case, to say that Reagan was "as much responsible" is a stretch.

Indeed that's true, Tim; absence of evidence is not evidence of absence. Nonetheless, given that there is no evidence for the proposition that budget deficits have a large effect on interest rates, why would I act on that theory?

Jane:

I guess I wonder what we do if we're left with is a collection of data that cannot be meaningfully organized by rule - noise. Particularly b/c I'm not clear about the nature of the evidence or its strength. Unless the evidence is strong, I'm inclined to go with the Most Reasonable Theory Available (MRTA). It's not the most comfortable position to be in, I admit, but we make sense of the world as we can. At the moment, the MRTA is increased deficits mean increased interest rates.

On the other hand, trying to find out a bit about the evidence led me to some stuff by Paul Davidson, which led to some commentary by dsquared, which led back to Paul Davidson and some other stuff about Post-Keynesian economics, and now I just want to cry. So take the above for what its worth, which is not very much.

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