To appreciate the magnitude of Reagan's achievement, it is important to recall just how bad the economic situation was in 1980. There was a recession that year, beginning in January and ending in July. As a consequence, real growth for the year was negative, with the national unemployment rate averaging more than 7 percent. Yet, inflation remained dangerously high.
By December 1980, the consumer price index was 12.4 percent higher than a year earlier. Inflationary expectations, combined with monetary tightening by the Federal Reserve, caused interest rates to hit the highest levels in U.S. history. The prime rate went above 20 percent at mid-year and was still above 15 percent when Reagan took the oath of office.
Reagan's predecessor, Jimmy Carter, was baffled by the combination of economic evils. Many economists believed that it would take the equivalent of another Great Depression to break the back of inflation and restore the nation's economic health, something no sane politician would ever contemplate. A common estimate was based on "Okun's Law," named for economist Arthur Okun, which says that to bring inflation down by one percentage point will cause the economy to contract by 10 percent. Thus eliminating a 12.4 inflation rate would either take a very, very long time or involve an unthinkable economic cost.
Nevertheless, by 1986 the U.S. inflation rate was down to just 1.1 percent and real gross domestic product was rising at a healthy pace. The unemployment rate and interest rates were still stubbornly high, but on a downward trend. Although the U.S. economy had suffered a sharp recession from July 1981 to November 1982, it was far less severe than most economists expected, given the drop in inflation.
It is to Reagan's credit that he never wavered from his commitment to end inflation, even during the darkest days of the recession in 1982, when his party was suffering huge losses at the polls resulting from the economic slowdown. He remained steadfast because he was certain of the outcome and because the stakes were so high. Reagan firmly believed that the Soviet Union's tottering economy was being kept afloat only by skyrocketing prices for its export commodities, such as oil and gold. Thus, stopping inflation was central not only to the health of the domestic economy, but to the defeat of Communism as well.
Of course, the Federal Reserve waged the main fight against inflation. But Reagan consistently supported its efforts and appointed new governors, including Alan Greenspan as chairman in 1987, who supported price stability. But Reagan also believed, rightly, that increasing the production of goods and services was another key to ending inflation. Toward this end, he pushed for lower tax rates to encourage work and investment, promoted free trade and deregulation to foster competition, and resisted political pressure for government intervention in areas such as corporate takeovers.
Critics of Reagan's policies continue to point to large budget deficits in the 1980s as the price of his success. These troubled him as well. But given the magnitude of Reagan's accomplishments in stopping inflation and bringing about the collapse of Communism, I don't think his failure in this area should be held against him.
As impressive as Reagan's tangible accomplishments in office were, his less tangible accomplishments were also significant. Together with Margaret Thatcher, he restored the idea that private individuals and businesses were the true sources of prosperity, not government. They gave legitimacy to free markets, open trade and sound money, in contrast to socialism, planning and price controls, which had dominated economic policy throughout the world for more than half a century. The renaissance of growth and freedom in Eastern Europe and the Third World owes much to Reagan's and Thatcher's discrediting of the socialist idea and their tireless defense of economic freedom.
It is sad that Reagan was not able to fully comprehend the magnitude of his own achievements in his last years, or even to enjoy the grudging respect of his enemies. I expect his stature will grow in future years as historians put Reagan's accomplishments into context. In the end, I believe they will conclude that he was among the world's greatest leaders, someone who changed the course of history for the better.