Ronald Reagan was every man's president. The Gipper believed that you had to energize the taxi driver, the waitress, and the factory worker to try to make things better. I recently spoke to a taxi driver from Russia about Reagan. “Without President Reagan,” he said, “I wouldn't be here.” Reagan was the blue collar worker's president.
Reagan’s confidence in people is what made him embrace Supply Side Economics from the start. All of us working on Reagan’s economic plan were talking about tax cuts, spending cuts, regulation cuts, and inflation cuts. The plan was very simple: set up incentives to encourage people to move their money from hard assets that don’t contribute to growth, like gold or antiques, to securities. The money that moves from those non-productive assets will fatten up the financial markets and make money available to grow businesses. In order to have economic growth, you have to make capital available to businesses. That’s exactly what happened during Reagan’s presidency and has continued to happen since then.
Back then were the days of Dr. Doom and Mr. Gloom, Wall Street pundits who were worried about deficits and interest rates. I believed then, and still do, that the deficit means nothing for interest rates. In 1981, I published an article in The Wall Street Journal called “Why Interest Rates Must Fall” that explained why.
The most important thing in determining interest rates is what assets people want to own. People will want to own securities if: 1) you don't tax them on their security income, and 2) you don't subsidize them for owning something else, like gold and other hard assets.
Reagan changed the entire incentive structure for owning assets. By lowering tax rates, he took away the incentive for people to hide their money in tax shelters. By lowering inflation, people could no longer get rich watching their house increase in value—lowering inflation took away the ability of people to earn money without working.
Lowering inflation was also a significant weapon in winning the Cold War. Russia made all of their money by selling commodities: gold, chromium, oil, and other hard assets. The Reagan economic plan bankrupted the Soviet Union, making them much more amenable to compromise. That was no accident.
On the home front, the Reagan plan forced people to change from being a real estate moguls to being Warren Buffet if they wanted to make money. When Reagan came in, tax shelters and inflation hedges were the investments of choice. Since then, people have moved 20% of their wealth out of hard assets into securities. With a total asset base of $130 trillion, that makes a $26 trillion tidal wave that moved out of hard assets and hit the financial markets. This made tremendous opportunities in the financial markets and in financial jobs. The size of that shift makes it a much more important story than anything about budgets and deficits.
There are still people worrying about current deficits driving interest rates up and triggering inflation. What still matters most is the size of the asset base, and compared to the total asset base of $130T, the deficit is not big enough to matter. |
