A New Economy, a Plague, a Fallenwall, and a Desert in Flames
(1980-1991)
In This Chapter
Rise and fall of Reaganomics
The AIDS crisis
Victory in the Cold War and the Persian Gulf
Iran-Contra scandal
The presidency of James Monroe (1817-25) ushered in an “era of good feelings,” a time of perceived national well-being. Much the same happened during the two terms of Ronald Reagan, the most popular president since Ike Eisenhower. Where President Carter took a stern moral tone with the nation, admonishing his fellow Americans to conserve energy, save money, and generally do with a little less, President Reagan congratulated his countrymen on the fact of being Americans and assured them that all was well—or would be well, just as soon as he got “big government off our backs.”
For a time, business boomed during the Reagan years—though the boom was largely the result of large-scale mergers and acquisitions, the shifting back and forth of assets, rather than any great strides in production. True, too, the Reagan administration saw the beginning of the end of the Cold War and the disintegration of the Soviet Union, which the president called an “evil empire.” Yet, during the Reagan years, the national debt also rose from a staggering $1 trillion to a stupefying $4 trillion. And the period was convulsed by a terrible epidemic of a new, fatal, and costly disease, AIDS, which the administration met largely with indifference and denial.
Many things good and bad befell the Reagan years, yet, for the most part and for most people, only the good seemed to stick. The bad slid off Ronald Reagan with such ease that the press dubbed him the “Teflon president.”
Supply Side and Trickle Down
Following his inauguration, President Reagan lost no time in launching an economic program formulated by his conservative economic advisors. The program was quarterbacked by Office of Management and Budget (OMB) director David Stockman (b. 1946), whose ascetic appearance seemed to signal his ruthlessness as a slasher of taxes and domestic social welfare spending. The new administration marched under the banner of supply-side economics, a belief that the economy thrives by stimulating the production of goods and services (the supply side) because (according to advocates of the theory) supply creates demand. Make it, and people will buy it. Government’s proper role is to stimulate production by reducing taxes as well as reducing regulation of industry. Yet, even as taxes are reduced, supply-side economics also demands that the government operate on a balanced budget, since deficit spending encourages destructive inflation.
The Reagan revolution turned on three major policies: a reduction in government regulation of commerce and industry; aggressive budget cutting; aggressive tax cutting-not for middle-and lower-income individuals, but for the wealthy and for businesses. Reducing the tax burden on the rich was supposed to free up more money for investment, the benefits of which would ultimately “trickle down” to the less well off in the form of more and better jobs.
If trickle down was a hard concept for many to swallow, Reagan’s insistence that a reduction in tax rates would actually increase government revenues seemed downright bizarre to some. When Ronald Reagan and the man who would be his vice president, George Bush, were battling one another in the Republican primaries, Bush branded the notion voodoo economics—a phrase that would come back to haunt Bush in subsequent campaigns. But conservative economist Arthur Laffer (b. 1940) theorized that tax cuts would stimulate increased investment and savings, thereby ultimately increasing taxable income and generating more revenue. President Reagan made frequent reference to the “Laffer Curve,” which illustrated this process.
Plausible or not, a majority of the American people were prepared to take the leap with their new president. In 1981, a bold program was hurried through a sometimes bewildered Congress, including a major tax cut, a staggering $43 billion cut in the budget for domestic programs, and broad cutbacks in environmental and business regulation. The “Great Communicator” overcame all resistance. When catastrophe struck on March 30, 1981, in the form of would-be assassin John Hinckley, Jr., the 70-year-old president’s calm and heroic response to his having been shot in the chest drew even more support for his programs.
Greed Is Good
A relatively small number of people made a lot of money as a result of Reaganomics. Most of the new wealth was generated not by the stimulated production that the supply-side theory promised, but by a frenzied crescendo of corporate acquisitions and mergers. The stock market buzzed and churned in a way that (for some) disturbingly recalled the late 1920s. Companies were bought and either merged for efficiency (with resulting loss of jobs) or broken up, their component parts and assets sold at a profit to stockholders (with resulting loss of jobs). Unemployment generated by the high-level financial manipulations of the 1980s was hard on the man and woman on the street, but the movement of masses of wealth benefitted those who could afford to invest in the right companies at the right time. The average American may have been raised to believe that businesses existed to make products and provide employment, but the manipulators of wealth insisted that companies existed exclusively to enrich investors, and if that meant destroying a company, breaking it up, so be it. In the words of Gordon Gecko, a fictional tycoon played by Michael Douglas in the popular movie “Wall Street” (1987), “Greed is good.”
Early confidence in Reaganomics faltered when the recession of the Nixon-Ford-Carter years deepened further, and public-opinion polls began to suggest that many people believed the tax cuts had benefited only the rich. Inflation did roll back, though interest rates remained high, as did unemployment. However, by 1983, acquisitions, mergers, and arbitrage had made the stock market a very active place, and prices began to rise sharply. This change, combined with relatively low inflation and (at last) rising production, as well as slowly decreasing unemployment, happily portended recovery.
What hopeful observers tended to ignore was the prodigiously growing national debt—under a president whose economic theory called for a balanced budget—and the flimsy sources of the profits being turned on Wall Street. Arbitrage is a high-risk business, which is made less risky if one has inside information, special knowledge of impending mergers, for example. The trouble is that such inside trading is illegal, and beginning in 1985, Wall Street was rocked by a series of massive insider trading scandals. Trader Dennis B. Levine pleaded guilty to making $12.6 million by trading on non-public information, and arbitrageur Ivan Boesky likewise admitted buying huge blocks of stock as a result of receiving inside information. Not all the money made on Wall Street was illegal, but much of it rested on very shaky ground.
To finance the buyout of companies, traders turned to junk bonds, high-risk investments (usually issued by a company without an established earnings history or burdened by poor credit) acquired cheaply and paying a high rate of interest. Such transactions, called leveraged buyouts (the takeover of a company financed by borrowed funds) were pioneered in the 1970s, by the Wall Street firm of Kohlberg Kravis Roberts and brought to a point of frenzy by Michael R. Milken. Often, junk bonds were purchased with very little hope that the issuing company would ever repay the loan, but in the short run, interest payments were so high that the underlying “junkiness” of the bond hardly seemed to matter.