• Part 1: Introduction
• Part 2: US Economy & Reagan
• Part 3: Fear & Loathing in the Kremlin?

By defeating communism, Ronald Reagan ended one of history's most violent centuries and opened the door to the possibility that for at least a few decades ahead war, though it can never be abolished, would be a smaller horror than in the past, and democracy might become available to more of the people who wanted it. In his foreign policy, at any rate, he turned out to be one of the two or three most effective American presidents of the 20th century.
The Economist, 10 June 2004, cover story

When the Lion had first begun singing, long ago when it was still quite dark, Uncle Andrew had realized that the noise was a song. And he had disliked the song very much. It made him think and feel things he did not want to think and feel. Then, when the sun rose and he saw that the singer was a lion ('only a lion,' as he said to himself) he tried his hardest to make himself believe that it wasn't singing and never had been singing— only roaring as any lion might in a zoo in our own world. 'Of course it can't really have been singing,' he thought, 'I must have imagined it. I've been letting my nerves get out of order. Who ever heard of a lion singing?' And the longer and more beautifully the Lion sang, the harder Uncle Andrew tried to make himself believe that he could hear nothing but roaring. Now the trouble about trying to make yourself stupider than you really are is that you very often succeed
CS Lewis, The Magician's Nephew (1955)

This is about an absurd allegation: that Reagan beat Communism. Lest I be accused of attacking a straw man, let me point readers to the cover of The Economist for 10 June 2004.

Nor should Reagan's admirers claim that without him the collapse of communism would never have happened. It would have collapsed anyway, in the end. A system which believes that a small group of self-selected possessors of the truth knows how to run everything is sooner or later going to run into the wall. But Reagan brought the wall closer. He got the American economy growing again (admittedly at a price), which made more Russians realise their own system's incompetence; he could therefore spend far more money on America's military power; and he put those new missiles into Europe. The result: maybe 20 years less of Marxist-Leninist ideological arrogance, and of the cold war's dangers.

1. It claims that Reagan caused the American economy to grow at an astonishing rate;
2. it claims that Reagan's arms build-up caused a panicked Soviet scramble to rebuild their arsenal (which was an inevitable response);
3. it claims that the Soviet response caused the collapse of their own economy;
4. it claims the booming American economy proved to the Soviets that Communism did not work;
5. it claims that missiles in Europe caused the Soviets to retreat, causing their empire to collapse...

First, Reagan's role in the period 1981-89 was reactive—reactive, not to liberals he was supposedly chasing out of the belfrey, but radical ideologues who demanded the wholesale, revolutionary liquidation of many government functions. As governor of California, Reagan might have been said to have learned the ropes of dealing with hard-line small-government conservatives; initially, for example, he insisted on a 10% cut in all departments that proved unworkable. In the White House, he responded to the small-government conservatives with speeches ("Government is the problem"), slashes in HUD, HHS, and so on. But farm subsidies survived intact, while defense spending soared. In the aggregate, government spending increased (chart).

At the same time as the Reagan Administration was increasing the size of expenditures (from 22.2% to 23.5% of GDP), revenues were falling as a share of GDP (from 19.6% to 17.4%). In part this was simply because, under a progressive tax code, tax revenues decline as a share of GDP during recession—which is, in itself, an excellent argument for a progressive tax code. Reagan's advisors made a number of excusable assumptions, such as the fact that inflation would perpetuate bracket creep (in which inflation moves tax payers to higher brackets) or that real interest rates would remain low. The fact that real interest rates soared in 1981, and that this would send the global economy into a tailspin, was a widespread error that caused OTA models to be skewed. The effects were, of course, to drastically increase the deficit—by 3.5% of GDP—and increase the cost of financing the debt.¹

The effects were predictable. Oil had reached a historic high—the single most powerful predictive variable of the world economy's performance. It plummeted in cost in the early 1980's (chart), but in '82 it was still within 15% of that high. Interest rates were at Latin American levels; the only bright spot was a gigantic deficit, whose fiscal effect was mitigated by the soaring interest rates and deficits of other OECD countries. This was the worst recession in the USA since WW2.

The recovery of 1983-84 was therefore spectacular. The price of oil plunged below $29 a barrel in the months before the '84 election; interest rates drifted downward gradually, and the gigantic deficits of the federal government began to make themselves felt. At the same time, the Garn-St. Germain Depository Act (1982) sharply increased the rate of credit creation. It would later spiral into the FSLIC/S&L implosion, as thrifts poured deposits into bad ventures, but the bottom line was that enterprise was now flooded with capital from abroad and from the household sector. As is usually the case, the immediate reaction to a very severe recession was a very steep recovery.

The Reagan Administration approved the Garn-St. Germain bill, which was later blamed for the meltdown of many thrifts in 1988-89. But it raised hundreds of billions in finance capital for the American real estate sector. We can give Reagan credit for this, but in that case, the Reagan Administration would then have to bear the responsibility for the shift of the American economy from a virtuous production economy to one in which investment flows principally into financial speculation and resource extraction. That's because the big winners in the American economy of the 1980's were the financial sector and national defense. Capital spending the USA was lackluster; our industrial base continued to shrink (as a share of GDP; 21% to 18%) through the 1980's, and with it, the underpinning of the American middle class. That's a heavy burden to lay on anybody's shoulders.

What happened, of course, was that the US economy was not expanding virtuously, but consuming itself; financial resources required to maintain the manufacturing sector were instead released into the economy for consumption. Some conservatives would argue that's where it belongs. The US government heavily subsidizes consumption in many ways—through farm subsidies, road construction (which subsidizes the consumption of autos and petrol), tax breaks to homebuyers, and bureaux to protect consumers. While the rhetoric was about investment and incentives and virtuous behavior, the effects were a decisive shift towards a self-indulgent splurge economy. Again, this was not merely something Pres. Reagan inflicted on the nation; it was the product of a sea change in America's political landscape, a change that chose Reagan to represent it.

Outside the USA

For countries in the Free World outside our borders, the effects were mostly unattractive. The 1980's were to become the "Lost Decade" for Latin American countries, many of whom were mauled upon emerging from military rule. The same was true for African and Islamic nations. Of these regions, the vast majority of governments were historically friendly to Washington. In the nations of Western Europe, the recession of the early 1980's actually was marked by a permanent upward jump in unemployment (ILO). In the UK, for example, unemployment hovered at above 10% between 1981 and 1987; the Netherlands suffered a jump from 5.1% ('79) to 14.1% ('84); it was not until '88 that unemployment fell below 10%. Ireland's jobless reached 18% during an astonishingly brutal recession that lasted to the early 1990's. And so on. GDP growth for these countries remained tolerable, but the EU members were still assimilating productivity gains.

On the whole, it seems clear that Reagan's effect on the economic development of the non-Communist world, while small, was deleterious. It was small because the most decisive effect was the spike in interest rates, which was of course determined by the Federal Reserve. Towering like a colossus beside the big spike in the price of money was the big spike in the price of oil—a spike which seems to have created high unemployment and deficits in Europe, virtuous retooling in Japan, an excellent climate for China's embrace of capitalism, and calamity everywhere else. When oil prices rose, the USSR sucked up the billions and poured it into consumer goods, promotions of civil servants (with concomitant privileges) and wasteful projects. In Central Europe as well, coal deposits made heavy industry competitive. As prices headed south, many of those commitments could not be withdrawn except at high prices; the high price, as it turned out, was greater personal freedom. That was costly for the Soviet leadership.

The indebtedness of the USA was the major Reagan legacy; it did cement the Transatlantic alliance, moving Europe towards being a rentier state while the US industrial base withered.

NEXT: FEAR & LOATHING IN THE KREMLIN?

Soviet SS-20 Tactical Missile

Incidentally, the major development in strategic weapons of the period was the puzzling Soviet decision in 1977 to deploy SS-20 missiles in Central Europe; in response to this, NATO members had resolved to follow a carrot-and-stick approach described here. Development and placement of Pershing II missiles in Western Europe, while controversial, was also a decision made by the governments of the EU and the USA long before the November 1980 elections. Therefore, it is rational to argue that the Soviet leadership during the oil boom (Brezhnev, Ogarkov, Andropov) had a bigger impact on Western military spending than Reagan's administration did on the USSR's.

Malia goes on to explain that Gorbachev, who succeeded Chernenko as General Secretary, responded by being more reception to negotiation offers. That's certainly a worthy achievement, but the interesting thing is that the Soviets were not animated by American competition. The Pershing II missiles and possibly the MX were somewhat disturbing to military planners, but by all accounts, Soviet military planners did not regard a NATO invasion as plausible. Unlike the late 1960's and early 1970's, the USSR did not introduce new aircraft to counter a specific American threat. Even the Tupolev Tu-160 Blackjack, which closely resembles a B-1B, began development in 1977.

Part of the reason for the lackadaisical Soviet response was the underlying reality of nuclear war: by the 1970's, further conventional weapons systems were irrelevant to the Cold War. The NATO-Allied lead in blue-sea fleets was insuperable, cruise missiles rendered purchases of new capital ships a dubious proposition, and satellites made most fighter jets pointless. Air combat was an infrequent encounter between a minor powers, or ventures against Qadafy. In essence, much of the military encounters of the 70's and 80's were an effort on the part of several militaries to validate their huge budgets. Soviet expenditures on aircraft, ships, trucks and so on were driven by internal organizational matters; by 1985 or so, the Soviet economy was in such dire crisis that major new projects could not be undertaken.

Francis Fitzgerald buries what is left of the notion of a USSR spending itself to death struggling to keep up:

pp. 473-476: "No one in Washington foresaw the collapse of the Soviet system, but the conservatives were the very last to see that the system was vulnerable and that it was changing. In his memoir, published in 1990, Caspar Weinberger wrote that, 'In a world in which there are two superpowers, one of which has the governmental structure and military might of the Soviet Union, it is essential for our very survival that we retain the military strength we acquired in the 1980s....' And 'My feeling has always been that no general secretary of the Communist Party of the Soviet Union will be allowed to alter in any fundamental way the basically aggressive nature of Soviet behavior.'

Yet, as soon as the Soviet Union collapsed, conservative pundits began to advance the argument that the Reagan administration had played a major role in its downfall. Among others, George Will and Irving Kristol argued that SDI, Reagan's military buildup and the ideological crusade against Communism had delivered the knockout punch to a system that had been on the ropes since the early 1980s. A parade of former Reagan administration officials, including Weinberger and Richard Perle, came forward to assert that Reagan had known all the time that the Soviet Union was on its last legs and had aggressively foreclosed Soviet military options while pushing the Soviet economy to the breaking point. According to conservatives, the combination of military and ideological pressures gave the Soviet Union little choice but to abandon expansionism abroad and repression at home, and SDI was the key to this winning strategy. The Star Wars initiative had put the Soviets on notice that the next arms race would be waged in areas where the US had a decisive technological advantage.

This argument contrasted sharply with previous conservative complaints about Reagan's embrace of Gorbachev, and it did not persuade scholars of the Soviet Union. Yet, since it is the inveterate propensity of Americans—or at least of American pundits—to relate the falls of sparrows in distant lands to some fault or virtue of American policy, it went against the grain to deny the argument entirely and to propose that the enormous military buildup of the Reagan years had no role at all in the demise of the Soviet Union.

Thus a vague and unexamined version of the movement conservative thesis entered the public discourse: SDI and the US military buildup forced the Soviets to spend more than they could afford on their defenses and/or convinced them of the inherent weaknesses of their system. But the evidence for this proposition is wanting.

From 1983 to 1987 the Strategic Defense Initiative alarmed Soviet leaders because it threatened to reverse what they saw as the trend toward strategic stability and stable costs. Nonetheless, they did not respond to it by creating their own SDI program. That is, they continued their existing research programs on lasers and other advanced technologies, plus their existing design-work on space weaponry, but they did not mount an effort to test or develop SDI-type weapons. In addition they studied counter-measures to space-based weaponry, but since the SDIO never designed a plausible system, they had nothing specific to study, and their military spending was not affected. Between 1985 and 1987 Gorbachev spent a great deal of effort trying to convince the Reagan administration to restrain the program, presumably because he thought his own military-industrial complex would eventually force him to adopt a program of some sort to counter SDI, but by the end of 1987 the Soviet leadership no longer regarded SDI as a threat.

Then, too, the Soviets did not respond to the Reagan administration's military buildup.

As CIA analysts discovered in 1983, Soviet military spending had leveled off in 1975 to a growth rate of 1.3 percent [per year], with spending for weapons procurements virtually flat. It remained that way for a decade. According to later CIA estimates, Soviet military spending rose in 1985 as a result of decisions taken earlier, and grew at a rate of 4.3 percent per year through 1987. Spending for procurement of offensive strategic weapons, however, increased by only 1.4 percent a year in that period. In 1988 Gorbachev began a round of budget cuts, bringing the defense budget back down to its 1980 level. In other words, while the US military budget was growing at an average of 8 percent per year, the Soviets did not attempt to keep up, and their military spending did not rise even as might have been expected given the war they were fighting in Afghanistan.

During Reagan's first term, some in the Kremlin were concerned that the US might possibly be gaining a first-strike capability and might actually launch a nuclear war. This was, of course, the mirror image of the fears expressed in Washington in the mid-seventies. Nonetheless, though the strategic arsenals on both sides grew like Topsy in the 1980s, the strategic balance remained extremely stable. Without any spending increases, the Soviets continued to turn out and deploy strategic warheads at about the same rate the US did. When the START I treaty was signed in 1991, the US had deployed 12,646 strategic warheads, the Soviet Union 11,212—the numbers so large as to be almost meaningless in terms of deterrence.

At the beginning of Reagan's first term, some conservative enthusiasts in the administration might have believed that the US could spend the Soviets under the table in an all-out strategic arms race. But the Joint Chiefs of Staff never thought this, nor did the CIA, for the simple reason that Soviet spending on strategic weapons was a very small fraction of the overall Soviet military budget. According to one MIT expert, Soviet spending for the procurement, operations, and maintenance of its strategic offensive forces amounted to only 8 percent of its entire defense budget. In other words, had Gorbachev achieved the 50 percent reductions he was seeking at Reykjavik, he would not have made savings of any significance in terms of the Soviet economy.

What happened during the 1980s was that the Soviet economy continued to deteriorate as it had during the 1970s. The economic decline, of course, resulted from the failures of the system created by Lenin and Stalin—not from any effort on the part of the Reagan administration. Without Gorbachev, however, the Soviet Union might have survived for many more years, for the system, thought to be on the decline, was nowhere near collapse. It was Gorbachev's efforts to reverse the decline and to modernize his country that knocked the props out from under the system. The revolution was in essence a series of decisions made by one man, and it came as a surprise precisely because it did not follow from a systemic breakdown.
[Special thanks to Brad DeLong—JRM]