Executive Summary: The following article, "Reagan's Second Term," was originally commissioned by The American Spectator monthly magazine. It will run in the Spectator's August 1984 issue and reprints will be available to the Republican convention delegates in Dallas. A typescript has already been circulating in the Reagan Administration among supporters of an activist Reagan platform and campaign.
Reagan's Second Term
President Reagan's landslide re-election this November will be followed by a second term that will secure his place in history as one of the greatest of Presidents. The achievements of his second term in fostering an era of peace and prosperity will also complete the transformation of the Republican Party into the party of economic growth and secure its dominance into the twenty-first century.
At least this is what could be, and the probabilities are good that it will be. The outlines of the second Reagan term can already be seen or surmised. And we can project many of the details by assessing what we know of the inclinations of the President and his party as we have seen them shaped in the first Administration.
There are a few important prerequisites. The most important still at issue is the requirement that Mr. Reagan actually seek a mandate for his vision of a second term. Many of his key political advisers are urging a campaign strategy that would have him be relatively vague about his plans. The voters would be asked to re-elect Mr. Reagan based on the success of his first term and to trust that he would perform similarly in his second.
This strategy is a perfectly good one for the President's re-election. But it would give him neither the mandate he needs for specific reforms nor the Republican victories in the Senate and House that are essential for a dynamic second term. It follows the 1956 pattern that brought President Eisenhower an easy re-election victory over Adlai Stevenson, but which saw a wave of liberal Democrats elected to an increasingly Democratic Congress.
Eisenhower had no agenda for his second term and ran an "l-Like-Ike, He-Got-Us-Out-of-Korea" campaign. This permitted Democratic congressional candidates to exploit voter worries that Eisenhower would pursue balance-the-budget austerity measures in his second term. Voters liked Ike, but they insured against his austerity inclinations by giving him a solidly Democratic Congress.
This year, Walter Mondale and the Democrats face the same kind of problem. Voters like Ron. Mr. Mondale's only real chance of defeating the President comes through his attempt to persuade the voters that a second Reagan term will be different than the first for fundamental reasons.
The Mondale pitch already being elaborated is this: Yes, there is an economic expansion that has made the President a popular figure, but it has been "bought" with massive deficit spending, $200 billion federal deficits as far as the eye can see. As soon as Mr. Reagan is re-elected, goes the argument, he will seek to pay these bills by raising taxes on the poor and middle-class and by slashing social spending, leaving military outlays relatively untouched. A recession in 1985 will result. Mr. Mondale attempts to revive the old New Deal coalition by arguing that he would have "the rich" pay these bills through income-tax surcharges and that military outlays would be pared. If the Republicans do not have a plausible counter to this pitch, Ron would likely still beat Fritz, but Democrats would likely take the Senate and hold their solid lead in the House. The second Reagan Administration would be contentious, indeterminate, moving sideways rather than forward.
Similarly on foreign policies, Mr. Mondale and the Democrats will assert, as they have been, that because the President will not be "accountable" in his second term, because he cannot go before the voters for a third term, he can indulge his hard-line, militaristic propensities. He may soon after election send troops into Central America (his "December surprise," Democrats suggest). And his rigid anti-Soviet posture will increase the danger of nuclear war and also expand the arms race.
In the absence of a coherent foreign-policy agenda for his second term, the President finds himself forced to respond to these kinds of attacks by simply altering his rhetoric. Instead of growling at the Kremlin, he coos. If the presidential campaign unfolds along this line, Mr. Reagan would of course be pushed further and further into making substantive concessions. It would not take much for the President to come to resemble Senators Baker and Percy, whose foreign-policy views are created for them by the Council on Foreign Relations and the Trilateral Commission, which is where Mr. Mondale finds out what he thinks.
From this standpoint, it's not realistic to even think of what the President's second term will bring unless we can assume he and the party will put forward the general game plan. We'd expect to see this in the Republican Platform that will be adopted at the August national convention in Dallas, and in the campaigns of the President and the congressional candidates. It's a must.
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The distinguishing characteristic of Ronald Reagan's run for the Presidency in 1980 was his pledge of a 30-percent across-the-board cut in marginal income-tax rates. It was the one idea that separated him from his Republican rivals for the presidential nomination. It was the idea that most distinguished him from President Carter. And when enacted and in place, the Reagan tax cut was the distinguishing feature of the expanding U.S. economy. Because the tax cut was a purely domestic move, its expansionary effects were felt only indirectly by the rest of the world economy. In the next four years, we can expect the rest of the world to emulate the Reagan "supply-side" tax cuts, and the United States will feel the secondary effects of the global expansion of productivity and production that will follow.
The key to it all, though, is the monetary reform that must be the distinguishing feature of the second administration. Because the dollar is the invoice currency for 70 percent of world trade, international monetary reform must begin in the U.S. Yet such reform will have immediate, beneficial effects on the world economy. Only monetary reform can solve the domestic deficit problem and the international debt crisis that besets the Third World and their industrial-nation creditors. Only monetary reform can bringdown dollar interest rates in a way that expands the U.S. and world economy. The only reform worth discussing is a gold-based reform, the kind the President came close to embracing in 1980.
The decision to permanently break the dollar's link to gold was made by President Nixon in 1973, with the heaviest shove coming from his Treasury Secretary George Shultz, on the advice of his friend Milton Friedman. Professor Friedman believed the Federal Reserve, if it followed his money-supply theories, could manage the dollar's value by ignoring the price signals that the gold market provides. The great inflation followed, with the quadrupling of the gold price in this "greenback" era preceding the quadrupling of the dollar price of oil in the fall of 1973.
President Reagan is well aware that no great nation has ever left a gold-based money system for managed greenbacks, "fiat money," as he puts it, and remained a great nation. Gold, universally recognized as the most monetary of all commodities, is the surest guide to incipient inflations and deflations. When it rises in price, it signals the onset of a general price rise. When it falls, the general price level deflates. The increased risk of either forces higher interest rates, which is what we have observed when gold's price signals have been ignored. In the last dozen years of fiat dollars, the Federal Reserve has taken the U.S. and world economy on a roller coaster ride of inflations and deflationary recessions.
By effecting a monetary reform that once again requires the Treasury and the Federal Reserve to stabilize the dollar value of gold at a price determined to be optimum balancing the interests of debtors and creditors President Reagan would lay the foundation for a worldwide non-inflationary economic boom. With the credit system rebuilt around a stable dollar, "gold-standard interest rates" would return, typically three to five percent.
This growth-oriented reform would dissolve the worldwide debt crisis. The U.S. national debt, approaching $1.7 trillion, would require $221 billion annually in debt service costs at current 13 percent interest rates; at 5 percent, debt service plummets to $85 billion. American farmers, savaged by two Fed deflations since 1980, would be able to refinance their staggering debt load, enabling farm subsidies to decline by at least $10 billion. The reduced cost of capital would shrink the costs of national defense by several times that amount.
The campaign appeal of a balanced budget through lower interest rates and economic growth rather than tax hikes and spending cuts is obvious. The appeal to families, especially young families, of low-interest home mortgages is also self-evident.
Such reform would bring profound relief to the dozens of Third World nations which, like U.S. farmers, have been crushed by the dollar deflations of recent years. They would not only be able to refinance their dollar debts, now well over $600 billion, at much lower interest rates and longer maturities. They would be able to sell their commodities to an expanding world market at stable, not falling prices.
For this reason, monetary reform must be initiated at the outset of the President's second term, not put off until 1986 as some Administration officials have recommended to the President. The same people who diverted Mr. Reagan from monetary reform in the 1980 campaign would devote 1985 to fiscal action, believing the newly re-elected President would have his best chance of slashing social spending and entitlement programs in the first year of his new term. These are precisely the fears that Walter Mondale is fanning among the voters, which would deal the President a more Democratic Congress that would stymie spending cuts and bring renewed pressures for higher taxes. At the same time, deferral of monetary reform would invite a wave of Third World debt repudiations in 1985 the only alternative to social strife leading President Reagan into a perpetual state of crisis management that would poison his second term.
There are sufficient numbers of senior Reagan aides who are aware of this specter to support his inclination to monetary reform this time around. This low interest-rate strategy would thus be the key to COP congressional victories that would make tax reform possible.
The Administration is planning on a simplification of the tax code, some form of "flat tax" that preserves the major tax deductions that affect most households: interest on home mortgages, state and local taxes, charitable deductions. But as long as the deficit problem hangs over its head, the pressure on the Administration is to think not of fairness, simplicity and the incentive effects of lower marginal rates, but of increasing tax revenues. Mr. Mondale will continue to warn voters, as he has been, that the Treasury tax study that is due to report in December, after the election, will propose to lower marginal rates for the rich and increase taxes on the poor and middle class, through some form of national sales tax. The Administration has not denied such charges because those people in the Administration who advocate a fiscal solution to the deficit problem have promoted this idea as a live option.
If the President does not offer the voters a specific tax reform proposal during the campaign, he will be unable to refute the Mondale charges. Mr. Reagan can't simply hide behind a study. This would force uncertain voters to elect more Democrats to insure that a consumption tax will not be able to get through Congress. In 1982, the White House strategists believed they had defused the Social Security issue by arranging for a bipartisan commission to report after the congressional elections. This did not prevent Democrats from warning the voters that the commission might try to savage benefits.
At some point, then, whether in the platform or as an impromptu campaign decision, we can expect Mr. Reagan to refute the Mondale warnings by committing himself to the Kemp-Kasten flat-tax proposal or something like it. Kemp-Kasten, which would lower the top marginal income-tax rate to 25 percent and the top corporate rate to 30 percent, was not designed with the goal of higher revenues. It was designed to increase the efficiency of the economy, which, as a side effect, would expand the tax base, reduce tax evasion, and expand revenues in a growing economy. The plan would double the personal exemption for each taxpayer, spouse and dependent to $2,000 and increase the standard deduction, thereby removing 1.4 million of the lowest income taxpayers from the tax rolls. The White House is already moving toward endorsement of this provision, expecting the Democrats will do likewise. But the President will not be able to avoid offering a complete, growth-oriented tax strategy a la Kemp-Kasten without remaining on the defensive. Political necessity and his own inclinations will take him in that direction.
In the 1980 campaign, Mr. Reagan went to the South Bronx and committed himself to the idea of Enterprise Zones. The idea is to lower tax rates in those areas of the country like the South Bronx where unemployment is so high and opportunity so low that tax revenues are meager. The policy would be of great benefit to the Democratic constituents of these inner cities. But it is precisely for this reason that the bill has not been enacted; Democrats seem to believe they cannot permit the President and the COP to get credit for inner-city revitalization through free-market forces rather than government spending solutions. They would tend to lose constituents to the Republican Party as minorities developed vested interests in market solutions. Enterprise zones will again be part of the Reagan campaign. And they will become a feature of the second term. Again, though, it will take more Republicans in Congress to overcome the vested interests of the Democrats.
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The greatest shortcoming of President Reagan's first term has been in the area of foreign economic policy. This is only partly due to the fact that the dollar has fluctuated wildly with a deflationary bent in the absence of a monetary standard. Third World nations that had acquired dollar debts in the last, inflationary years of the Carter Administration found the dollar value of their productive assets the collateral for their loans nosediving with the dollar deflation. But at least we can say the Administration was oblivious to the fact that its support of monetarist policies at the Fed was the direct cause of this anguish in the world's poorest nations, especially in the dollar sphere in Latin America.
The Administration has no excuses, though, for blindly supporting the austerity policies of the International Monetary Fund. The IMF, after all, is dominated by the United States, both the government and American multinational banks. When Third World countries found themselves unable to pay their dollar debts in the U.S.-induced deflation, the IMF bounced around from one capital to another with dollars to loan on the condition that these nations tax their citizens more heavily, always in ways that led to capital flight. The IMF has acted not as a doctor to sick economies, but as a collection agent for U.S. banks.
Mr. Reagan has understood and championed supply-side tax policies for the U.S. But what about his State Department and Treasury, who know full well the oppressive, counter-productive tax rates borne by the people of the Third World? At the outset of the Reagan Administration there had been great hopes that it would push the IMF to induce growth-oriented tax and currency policies in exchange for their loans, so the loans could be paid back out of growth. The exact opposite has been followed, with State and Treasury bureaucrats enthusiastically supporting the IMF "medicine" of higher taxes and currency devaluations. The results have been dire. We will not hear anything about this in the fall campaign, however. The practices of the IMF are those shaped by the Council on Foreign Relations and Trilateral Commission, policies designed by U.S. banking interests. The Democratic establishment and the Republican establishment are fully supportive, and policies thus do not change from one Administration to the next. Because he was not an establishment figure, Ronald Reagan should have pressed for new policies. But the establishment quickly co-opted him in this area and it's not even certain he knows what hit him.
In the same way, the President blundered early in Central America by endorsing the socialist reforms the Carter Administration had fostered in El Salvador; confiscatory land-reforms, the nationalizing of banking and trade, and redistributionist tax policies. This was the same formula that was forced on South Vietnam in the early Kennedy years, policies that destroyed the South Vietnamese economy and made a U.S. military solution impossible.
The President has been ardent in pressing for democratic institutions in the Third World, breaking with establishment policies that have long assumed poor countries are not ready for democracy. But here too the establishment outflanked him in El Salvador. When Salvadorans in 1982 voted against the socialist plan by voting in the party that had opposed it, the Reagan State Department was persuaded to withhold U.S. support of that government. The CIA subsequently used taxpayer funds to finance the socialist party. The President's docility in this area has been the gravest blot in his first term.
In a second term, things can only be better. This will almost certainly require Cabinet or at least subcabinet changes, people with the interest, knowledge and energy to alter these profoundly important foreign economic policies. The President also has to focus his attention here instead of simply accepting counsel. If there is international monetary reform pursued in 1985 he will have time for such use of his resources; otherwise, he and his team will be occupied by crisis management.
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Much of the President's resources in his first term have gone to national defense-and strategic diplomacy with our allies vis a vis the Soviet Union. By the summer of 1982 he was headed toward failure as the Federal Reserve deflation pushed the U.S. economy into deep recession. A President cannot lead the free world if he cannot preside over a healthy domestic economy, and in the depths of the recession Mr. Reagan's foreign policy was said to be in disarray. The bull market that began in August of 1982, with the Fed's ending of its two-year deflation, foreshadowed the economic boom that restored confidence at home and abroad in Mr. Reagan's leadership. In this environment, the West Germans elected a government that backed the NATO decision to deploy Pershing missiles in Europe. At the same time, the Soviet Union sank into deeper economic depression as leadership changed hands through death again and again. As a further setback to Soviet strategic interests, China's economy began to blossom as it marched down the capitalist road, a development the President observed firsthand as he cemented relations with Peking.
In his second term, he will conform the delicate problem of dealing with a bitter, demoralized Kremlin, ideologically and economically bankrupt yet dangerously armed. The President almost single-handedly has put the U.S. on a path toward development of a space-based anti-missile defense, the so-called "Star Wars" program (which Walter Mondale derides as a "magic curtain"). The Soviets are alarmed at this shift in U.S. strategic policy away from Mutually Assured Destruction toward Mutually Assured Defense. And Mr. Reagan's pollsters are finding the idea enormously popular with the electorate. All this does mean that Mr. Reagan will have to find ways to let the Soviets get out of the corner they have been backed into and draw them into the expanding world economy. Former President Nixon advocates a trade avenue. A unilateral U.S. decision to grant the Soviets most-favored-nation trade status will probably be considered. Any such step would of course have to be seen as an act of strength on the part of the U.S., which means a U.S. economy in continued expansion. The Soviets are viewed as being hopelessly intractable, but it was not long ago that the Chinese were viewed as being even more hopeless.
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"Councils of war breed timidity and defeatism" Douglas MacArthur was fond of saying, meaning that a committee of advisors tend to look for reasons not to do something that involves breaking with conventional wisdom. There are incrementalists everywhere around the President, urging him to move by inches if at all. The President is not an incrementalist but a revolutionary, which is why he carefully listens to the counsel of his incrementalist advisors. When the arguments are not persuasive, he feels confident in advancing the revolution. In his second term as governor of California he moved far more boldly than he did in his first, feeling surer of himself, his scope and his instincts. With a few major exceptions, he has been masterful in his first term in leading the Reagan Revolution. There's no reason to think he will be anything but superb in his second.
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