Johns Hopkins professor Francis Fukuyama writing in the 13 October 2008 issue of Newsweek, The Fall of America, Inc., offers one analysis and explanation for what has happened to America’s economy. His basic idea is that Reaganomics have run their course. Reaganism favored deregulation of the economy, less government and lowering taxes as the basis for all good things. Fukuyama suggests all good things come to an end. Reaganism which started with such promise worked in its early years, but as it became guided by ideologues it lost the ability to adapt to the changing conditions of the world, and in the end it bankrupted the very economic explosion it had created by collapsing in on itself.
Fukuyama worries that the greatest damage though is not the economic loss which is severe, but the loss of American prestige in the eyes of the world. The nations of the world are watching how following American “cowboy capitalism” has led to worldwide financial disaster. America created a world economic system that was not sustainable, and now the world will have to suffer for this. He points out that Russia, China, Venezuela and other nations are eager to step into the void created by the collapse of Reagan ideology. The Reagan mantra that government is the problem has led to the government having to do the largest financial bailout in history to deal with a mess partially created by the failure of the government to regulate. And to the surprise of the Reaganomic cheerleaders, deficit does matter – an ever expanding deficit is no more sustainable for the government than it is for families. Fukuyama doesn’t spare the Democrats either for he blames them for failing to come up with candidates or a plan to address the problem which was becoming increasing obvious to many.
He also says that America’s other great idea and export – democracy – got hijacked by the current administration’s war on terrorism, and today when America says they are promoting “democracy” the world hears this as American hegemony. As the world sees it the Bush administration used “democracy” as “a code word for military intervention and regime change.”
Personally in the next Obama-McCain debate, I would like to see NEWSWEEKS’ Fukuyama and Fareed Zakaria formulate the tough questions for the candidates to answer. I would like to see some foreign policy questions that center on world economics, not just commander in chief issues. The president of the U.S. still claims to be the leader of the free world, and that is an aspect of the presidency that seems to get ignored as foreign policy questions get shrouded in military overtones. Even Defense Secretary Robert Gates has criticized “the creeping militarization” of U.S. foreign policy. The president has to see and approach the world not simply as the Commander in Chief of the American Army, but also as the leader of the free world. When American foreign policy focuses exclusively on its military (the one part of American foreign policy that seems to have no financial limits), is it any wonder that other nations – even our allies – feel threatened by US?
If Fukuyama is correct, the next president is going to have a lot of work in improving the image of the U.S. to the world, and this is not going to be accomplished by increased militarization, but by better foreign policy.
Fraternized 
Father,
I would submit that it was not “Reaganism” (which your definition does just fine with) that failed in our current crisis, but just the opposite; overt meddling in markets for political gain by the Left led to truly stupid loans being made. In 1998, Andrew Cuomo, then head of HUD, I think, advanced the Community Reinvestment Act as a form of Affirmative Action to increase minority home ownership. (He actually said that, and I’m scrambling to find the link.) The market does not care about your color when money is at stake, because all money is green. The market does care when it is exploited and distorted for non-market purposes.
With apologies to Mr. Tolkien, one should not meddle in the affairs of markets, for they are subtle and quick to anger. And angered they are, punishing those who went with a program which was purely political, and ignored the realities of the market’s rules. I note with some satisfaction that Wells Fargo is not so encumbered with bad debt portfolios, having foregone the siren song of quick profits. (I enjoyed its stock performance today, while listening over the last couple of years to my fellow shareholders screaming about “lost opportunity”) Good management and common sense still matter.
Money is good. It is what allows us to give alms, to do good works, to clothe the naked and feed the poor. And there is little doubt that Americans do more of that than the rest of the world, combined. Perhaps that is because of how much we have, or it is because of who we are, or a combination of the two, but it is not debatable. That wealth came about because of a set of rules, the market, with which we should not trifle.
We’re in this mess because of the trifling, and it is the most disgusting type of trifling: for power. I will disagree with the wise man who said that money is the root of all evil. After all, who would take a $450,000 a year job that has the demands of the Presidency when that same skill-set could garner 4.5 million in the marketplace? It’s not money; it’s power that corrupts.
Respectfully,
Christopher
Chris,
Thanks for your post. Not being schooled in economics or finanaces, I struggle to make sense of the mess. Fukuyama offers his explanation for how things went wrong, and I cannot prove or disprove his claims, but only react to what he said.
Regarding money being the root of all evil – that is a misquote. It was St. Paul who said, “The love of money is the root of all evil” (1 Tim 6:10). He would have agreed with you that money in and of itself is simply a resource which can be used for great good or great evil. If you want you can go to http://www.biblegateway.com/quicksearch/?quicksearch=love+of+money&qs_version=47 to see the biblical connection between love of money and problems. Money may not corrupt, but the love of money surely does, which is why greed is among the deadly sins. But apparently it is also possible to have money and not be greedy – the problem is not the money, it is the person’s attitude toward it. And that seems to me to be at the heart of the current financial crisis.
“Quick” profit does seem to be a culprit in this, that certainly is a good corrective to some other comments I made about how “profit” became a euphemism for greed.
I will say that I consider myself a fiscal conservative, but apparently of some old or dying breed. I have never understood how government deficit spending could be good for the country in the long term, yet that seems to be a cornerstone of Reaganomics. I never bought the idea that we can borrow ourselves out of debt and into prosperity. I also do not believe a country can tax itself into prosperity. But in Reaganomics the alternative to “tax and spend” seems to be “borrow and spend”. Both the Reagan and current Bush administrations created huge government/national debts. Personally I do not find this to be fiscal conservatism, but reckless irresponsibility. I find it disorienting that it was not Republicans but Clinton who balanced the budget and created a surplus while the current adminstration spends us into the hugest debt ever while arguing for tax cuts. I think this situation is untenable and don’t think it will rectify itself by the U.S. continuing to borrow money. The insatiable borrowing of money now seems to be part of that “quick profit” motiff – do anything to make yourself prosper now. It is this same shortsidedness which seems to have infected and killed much of US industry. Everyone, investors especially, want quick profits and seem unconcerned about sustainability.
Final point – Fukuyama did think that much of Reagan style deregulation was good for the economy. He wrote though that Wall Street is not like other industries, and when deregulation is applied everywhere without thought for how different parts of the economy really are different and need different levels of regulation that leads to the serious trouble we are now in.
Again thanks for your thoughtful comment, and your point about quick profit as vs. good management and common sense.
Thanks for your thoughtful reply. I am schooled in economics and finance, and I too am struggling to make sense of what’s going on. I’m a bit taken aback by the thought of a $700B bailout of 29 year old kids who drive Maseratis and eat $750.00 plates of sushi.
The economics of deficit spending are fairly simple. If you borrowed $100.00 when you were a 20 year old college student in 1985, and pay back say $250.00 this year with interest, a couple of things have happened in the meantime: your income has gone up considerably (GDP growth), and inflation has slowly eaten up the purchasing power of that $100.00, so that you are now actually paying back less than you borrowed in terms of nominal purchasing power. The government can do that because of the favorable interest rates it pays on the debt it issues.
The problem that you point out is that we borrowed $100.00 every day we were in college, spent it with abandon on a lot of gourmet pizza and beer (unnecessary items), and now we’re all grown up and out of work. While the Reagan years did run up huge deficits, it was primarily in order to bankrupt the Soviet Union and was considered worth the cost. If I’m not mistaken, a lot of study was conducted on the huge deficits we ran up during WWII and how those were handled when the Reagan defense build up was being planned. Bush I and II, however, presided over a giant beer and pizza party. Like you, I find it hard to get my head around the surpluses of the Clinton years, except that the takeover of the House by Republicans in 1994, where all spending bills originate, was a huge factor. Later of course, they turned into drunken sailors.
As for the current mess, a pox on both their houses. (I didn’t mean to sound as if I don’t also blame Republicans. I certainly do.) In my business we deal with a lot of real estate liens and very often get paid from sale closings. The mortgage brokers and appraisers that were involved in some of these deals should be in prison playing poker for cigarettes instead of running free. My brother, an attorney who defended many, many people in foreclosures on illegal and slimy loan deals, was beside himself with how bad these loans were. We saw this coming 5 years ago, but even to us the extent of it is astounding, and the solution is unknown.
Sadly, it’s just another example of the political classes letting down their employees with corruption and a failure of oversight. We’re going to pay a high price this time.
Respectfully,
Christopher Engel
Bless, Father.
Greetings Mr. Engel,
There is one fundamental problem with Reaganomics, as I see it. First, the whole idea was trickle-down, was it not? If we add profit to the highest “owners” of capital, then it would “trickle-down” to the lowest parts.
Trouble is, the wealthy horded the benefit, or spent it frivolously (as we have seen). Although American worker productivity is up substantially over the past two decades, they have not seen the benefit in terms of increased real wages.
I suspect (but don’t know) that Reagan truly believed that an “honest” businessman would share the wealth with the workers. Problem is, it never happened.
Sincerely,
Marty Watt
Rev. Deacon Marty:
First, and far more importantly, congratulations on your ordination. It was a privilege to attend. God grant you many years!
It is important, in my mind, to recall the context of the early 80s. Interest rates had reached about 21%. At that price, money was plain unaffordable, and practically no capital investment was being made. This led of course to unemployment somewhere north of 10%, and general stagnation. Carter’s solution was simple: print more dough, so while the country was miserable, we at least had inflation to keep us warm. Not a pleasant time.
The Reagan-Volcker plan was different. Volcker reduced the money supply, bringing down interest rates and inflation, while Reagan pushed through a plan which dropped top marginal tax rates from 70-28%. This put a lot more money in the hands of the investor class (of the time. We’re all investors now.) Capital started to flow, unemployment came down, inflation was in check, and the boom began. In that respect, it “trickled down”. One is hard pressed to say that the people leaving unemployment for one of the new jobs created didn’t see a wage increase. (The term trickle-down was actually a pejorative used by opponents to belittle the plan.) Also, government revenues boomed, due to the increased activity. The argument over whether that was a good thing, i.e., the growth of government, is another matter.
So in that aspect, I respectfully disagree with you about what happened in the medium term of the “Reaganomics” era.
But we are well past that medium term, and you are absolutely correct about the current wage stagnation. Productivity gains lead to output gains, which lead to higher profits. I suspect, (and this is pure conjecture), that we are “topping out” on those productivity gains and, in an era of global competition, firms are running into the Marginal Cost-Marginal Revenue conundrum. Still, we should have seen some movement in wage rates. Then again, as this entire post is about out of control greed, your explanation is far simpler, and Occam’s Razor leads me to agree with you. The Roaring 90s changed business ethics in a way with which few are pleased, as we all became shareholders and demanded more and more and more from our companies. For that, a great many of us are guilty.
Again, congratulations. See you at Church.
Respectfully,
Christopher Engel
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