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One day during the 1984 reelection
campaign, a television correspondent, Andrea Mitchell
to be exact, shouted a question across the Rose Garden
to President Reagan: "What about Mondale's
charges?" Without missing a beat, the President
paused as he was returning to the Oval Office and
replied, "Tell him he should pay them."
Ronald Reagan brought a lightness
and benevolence to the serious business of the Oval
Office that few have been able to match. He had
inherited a dysfunctional economy and dealt with
global dangers, but his spirit never wavered.
Though such one-liners and anecdotes
were indeed humorous, many also communicate politics
or policy. A classic was candidate Reagan's memorable
quip during his 1980 campaign for the presidency:
"A recession is when your neighbor loses his job.
A depression is when you lose yours. And a recovery is
when Jimmy Carter loses his." I presume that
former President Carter was not amused, but as a
skilled politician himself, he could not but admire
the wit.
My favorite anecdote, as I remember
it, starts with Mikhail Gorbachev, accompanied by his
usual coterie of underlings, reviewing the Soviet
Union's military might parading by Lenin's tomb. The
phalanx of missiles, tanks, and troops was most
impressive as it passed the reviewing stand.
Next in line came a straggle of
disheveled civilians wholly out of step, a clearly
dissonant note in an otherwise well-orchestrated
performance. This sight evoked major distress from a
Gorbachev aide who pleaded forgiveness for allowing
such riffraff to mar the meticulous show of Soviet
military might.
"Do not be concerned,
comrade," counseled Gorbachev. "I am
responsible for them. They are our economists, and you
have no idea how much damage they can
do."
Underlying the humor is President
Reagan's long-held distrust of those economists who
promoted what he perceived as destructive government
intervention in the marketplace.
Throughout his professional life,
the President understood the self-correcting
tendencies of free markets and the fundamental
wealth-creating capacity of capitalism. He trusted
Adam Smith's invisible hand to stimulate creativity
and innovation and to produce outcomes that he
perceived as generally fair.
A great deal of what Reagan saw in
the America of the 1970s was not to his liking, and he
changed much of it when he became President. Yet for
all that he accomplished in those remarkable eight
years, one could argue that he had an even greater
effect after he left office, when a whole generation
of people who were proud to be identified as
Reaganites moved into positions to influence policy.
If he was ever discouraged, I
suspect it was because not even Ronald Reagan could
fully rein in excess government spending and
significantly pare the size of the bureaucracy. To be
sure, no American President, with constitutionally
limited powers, has been able to mold a nation as
complex as the United States to his set of values. But
Ronald Reagan surely stands in the first rank of
American Presidents measured by the breadth of their
legacy for good.
In his eight years in office,
President Reagan transformed the country's self-image.
Instead of believing they were a once great
power, Americans regained their self-confidence,
sensing that it was indeed "morning in
America." Although we have not yet wholly leveled
the playing field, Ronald Reagan believed that, more
than in any other country, every individual in the
United States is given an opportunity to succeed.
The revival of the American spirit,
which became evident in the 1980s, was the result not
of the President's cheery disposition but rather of
his implementation of important changes that continue
to manifest themselves in our society and economy.
Ronald Reagan started the sequence
of geopolitical initiatives that led Mr. Gorbachev to
figuratively tear down the Berlin Wall. President
Reagan's rhetorical demand, as he stood at the Wall in
1987, is the most vivid image I have of his
presidency.
He sensed a progressive economic rot
in the Soviet Union, despite official appraisals from
within the U.S. government of continuing Soviet
economic strength. He also did not believe, contrary
to much conventional wisdom, that per capita gross
domestic product in East Germany by the 1980s had
drawn close to that of West Germany. In fact, after
the dismantling of the Berlin Wall, the figure was
estimated to be less than half.
As a consequence, President Reagan
was convinced that the economy of the Soviet bloc
could not sustain the pace of its arms race with the
United States. A surprisingly large number of western
economists, including many in our government,
disagreed. They were largely relying on an array of
statistics from Soviet bloc central planning
authorities that, in the light of freedom, turned out
to be grossly exaggerated.
The President's Foreign Intelligence
Advisory Board in 1984 gave me the task of evaluating
economic data from the Soviet bloc and our
intelligence estimates of the economic strength of the
Soviet Union. The data's quality was poor, and their
implications were contradictory. The President cut
through the ambiguity with the simple premise that an
authoritarian and corrupt government cannot foster
economic vitality. He had it right, though it was
still years before his insight became evident to all.
* * * * *
President Reagan applied the same
straightforward approach to domestic economics,
setting in motion several initiatives that facilitated
an economic trend resulting in the exceptionally
flexible U.S. economy that we observe today. That
increased flexibility has allowed us to absorb and, at
least to date, fend off a series of economic shocks in
the last three years that in an earlier period, in my
judgment, would have been debilitating.
My predecessor at the Federal
Reserve, Paul Volcker, embarked in the fall of 1979 on
an aggressive monetary tightening that attempted to
arrest a dangerously accumulating set of inflationary
forces. Presidential candidate Reagan also perceived
inflation as a danger, and, then as President,
afforded Volcker the political support that is so
essential to a central bank when its pursuit of
long-term stability risks some worsening in near-term
economic activity. That support began the process that
has led today to the virtual elimination of inflation
from the U.S. economy.
A second key support to today's
flexible markets has been the bipartisan deregulation
initiatives that began in the Ford and Carter years
and were extended by Ronald Reagan. In January 1981,
disregarding warnings that the action might renew
upward pressures on inflation, President Reagan
dismantled the remaining controls that had debilitated
our oil markets. By 1986, crude oil prices had reached
their lowest levels in real terms since 1973.
Deregulation in finance, trade, and transportation was
pressed forward.
But perhaps the most important, and
then highly controversial, domestic initiative was the
firing of the air traffic controllers in August 1981.
The President invoked the law that striking government
employees forfeit their jobs, an action that unsettled
those who cynically believed no President would ever
uphold that law. President Reagan prevailed, as you
know, but far more importantly his action gave weight
to the legal right of private employers, previously
not fully exercised, to use their own discretion to
both hire and discharge workers. There was great
consternation among those who feared that an increased
ability to lay off workers would raise the level of
unemployment and amplify the sense of job insecurity.
It turned out that with greater
freedom to fire, the risks of hiring declined. This
increased flexibility contributed to the ability of
the economy to operate with both low unemployment and
low inflation. Whether the average level of job
insecurity has risen is difficult to judge, but, if
so, some offset to that concern should come from a
diminished long-term average unemployment rate.
The notion that lowering barriers to
discharging workers reduces the long-term unemployment
rate has gained widespread acceptance even beyond our
shores. The European Council, meeting in Brussels last
month, urged member states to "maintain the
momentum of reform of national labor markets" by
among other things, "relaxing overly restrictive
elements that affect labor market dynamics." That
is not the way that Ronald Reagan would have put it,
but analytically it is moving in a Reagan direction.
In a recent speech, Chancellor Schröder, a Democratic
Socialist, made specific proposals to reduce the cost
of hiring and firing German workers. He proposed
making protection against dismissal "less
unwieldy."
* * * * *
Ronald Reagan was one of our most
successful Presidents in part because he fervently
believed in, and acted on, a small number of important
principles. To be sure, he knew how to compromise to
advance his legislative agenda. But in the process he
always kept sight of his essential principles.
Those principles included a
wholehearted embrace of capitalism and a rule of law.
He understood that no market system--no exchange of
goods and services--can function without a rule of law
rooted in individual rights, especially the right to
own property. Indeed, societies that do not sanction
and protect ownership rights are invariably rife with
bribery, corruption, and violence. Little wealth is
created in such an environment.
A society riven with violence cannot
organize a viable market economy. It obviously cannot
prosper if violence is unchecked, but it also cannot
prosper if the amount of violence that has to be
checked is large. The high risk and cost of
enforcement imposed on an economy subject to random
violence will raise the cost of capital and inhibit
productive economic growth.
The constancy of Reagan's policy
goals helped his administration construct legislative
and budgetary recommendations. Most veteran Reagan
staffers found that they could press their priorities
by demonstrating their consistency with one or more of
the President's goals. That approach resulted in a
greater coherence of policymaking.
Ironically, it also helped coalesce
the opposition to his policies because the President's
positions were a good deal less ambiguous than those
of most other politicians. Many disagreed with
elements of Ronald Reagan's philosophy of freedom and
markets, but few have had difficulty understanding
where he stood on the question of how to organize an
economy.
I will leave a fuller analysis of
that philosophy to historians and biographers.
Instead, let me focus this evening on one pillar of
free-market capitalism, the model that Reagan embraced
so enthusiastically. I refer to an old-fashioned human
virtue--trust.
* * * * *
Although a rule of law is necessary
to a vibrant and efficient market economy, it is not
sufficient. We rarely consider, for example, that a
law of contracts, an integral part of any rule of law,
operates because everyone assumes that only a very
small share of legally contracted transactions will
require adjudication. If it were otherwise, our courts
would be overwhelmed, and our economy severely
impaired.
Hence, an effective law of
contracts, as part of a rule of law, requires that the
vast majority of transactions be voluntary. That
outcome necessitates that the buyer of a good or
service trust the explicit or implicit warranty on the
offered product. The buyer needs assurance that, if an
agricultural equipment dealer certifies that a
harvester is in mint condition, he is being truthful
and his warranty is to be trusted. Similarly, the
dealer needs assurance that the buyer's check is good.
If trust in the word of counterparties is lost, any
exchange that takes place will need to be administered
by a court or some third party. It is a costly use of
real resources if one is required to engage in the
memorable admonition of one great statesman in a
different context, "Trust, but verify."
Trust in the promises and
performances of counterparties to a trade is thus an
essential pillar of free markets and, hence,
free-market capitalism. Because trust is so valued, it
is often capitalized and recorded explicitly as
"goodwill" on business balance sheets. Our
system works fundamentally on individual fair dealing.
We need only look around today's world to realize the
rarity and value of such an underpinning.
Trust has had an important role in
American economic development. In fact, through much
of the nineteenth century, laissez-faire reigned and caveat
emptor was the prevailing prescription for
guarding against the wide-open trading practices of
those years. A reputation for honest dealings was thus
a particularly valued asset. Even those inclined to be
less than scrupulous in their private dealings were
forced to adhere to a more ethical standard, or they
risked being driven out of business.
To be sure, the history of business
is strewn with Fisks, Goulds, and numerous others
treading on, or over, the edge of legality. But they
were a distinct minority. If it were otherwise, the
United States at the end of the nineteenth century
would never have been poised to displace Great Britain
as the world's leading economy.
Reputation was especially important
to early U.S. bankers. It is not by chance that in the
nineteenth century many bankers could effectively
issue uncollateralized currency. They worked hard to
develop and maintain a reputation that their word was
their bond. For these institutions to succeed and
prosper, people had to trust their promise of
redemption in specie. The notion that "wildcat
banking" was rampant before the Civil War was an
exaggeration. Certainly, crooks existed in banking, as
in every business. Some banks that issued currency
made redemption inconvenient, if not impossible. But
they were fly-by-night operators and rarely made it
beyond the first swindle.
In fact, most bankers competed
vigorously for reputation. Those bankers who had a
history of redeeming their bank notes in specie, at
par, were able to issue substantial quantities of
notes, effectively financing their balance sheets with
zero-interest debt. J.P. Morgan marshaled immense
power on Wall Street in large part because his
reputation for fulfilling his promises was exemplary.
But as the nineteenth century came
to a close, the view that the federal government
should eschew any role in altering free-market forces
started to change. The dishonest practices of some
less-scrupulous business people seriously eroded the
valuable reputations of the many more ethical business
people. The Granger laws of the 1870s began the
process of regulating the marketing practices of the
railroads. But they were not very effective and were
followed by the much broader Interstate Commerce Act
of 1887. The Federal Trade Commission Act of 1914
backed up the Sherman Antitrust Act of 1890 by
specifying illegal trading practices. Caveat
emptor was in retreat as federal enforcement of
appropriate business practice had the collateral
effect of diminishing the value of hard-earned private
reputation.
Over the past half century, the
American public has embraced the protections of the
Securities and Exchange Commission, the Federal
Deposit Insurance Corporation, and the myriad other
federal agencies that have largely substituted
government financial guarantees and implied
certifications of integrity for business reputation.
As a consequence, the market value of trust so
prominent in the nineteenth century seemed, by the
1990s, to have faded to a fraction of its earlier
level.
Perhaps we are better protected and,
accordingly, better off as a consequence. But
corporate scandals of recent years have affirmed the
view that the plethora of laws of the past century had
not eliminated the less-savory side of human nature. I
anticipate that recent legislation holding chief
executive officers more responsible for the integrity
of their companies will help.
But I am pleased to see a
re-emergence of market value placed on trust and
personal reputation governing business practice.
Moreover, after the revelations of corporate
malfeasance, the market punished the stock prices of
those corporations whose past behaviors cast doubt on
the reliability of their reputations. I hope and
anticipate that trust and integrity again will be
amply rewarded in the marketplace as they were in
earlier generations.
I cannot help but believe that
Ronald Reagan would consider that the right outcome.
* * * * *
Our forefathers bestowed upon us a
system of government and a culture of enterprise that
has propelled the United States to the greatest
prosperity the world has ever known. We elect
Presidents to protect and expand that bequest. Ronald
Reagan will go down in history as one President who
superbly fulfilled that obligation.
Contributing far more to that
success than most realize was Nancy Reagan. The
critical importance of her loving support of her
husband, especially in periods of great stress, was
evident to all of us who had the privilege of serving
the President. And besides, she added a certain
sparkle to the Reagan White House and to Washington
that few of us can forget. I particularly remember her
bravura surprise performance to a standing ovation at
the 1982 Gridiron Club dinner. I do not know how many
congressional votes she garnered for the
Administration from that performance, but she
certainly won mine.
The Reagan presidency was a
remarkable one for Americans. In the words of the
nation's fortieth President, "We meant to change
a nation, and instead, we changed the world." He
did indeed, and we are grateful.
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