Published for www.johnbtaylorsblog.blogspot.com, May 26, 2012
Today the Wall Street Journal dedicated more than three-fourths of a page to publishing large excerpts from a 1980 memo to president-elect Ronald Reagan from George Shultz and other economists who had advised Reagan in the presidential campaign. In my view, that memo represents a watershed in the history of economics with great relevance today, and that is why I focused on it in my new book First Principles, where I explain why the economy prospers when policy adheres to the basic principles of economic freedom, but falters when policy deviates from those principles, as it is doing now. That original fifteen page 1980 memo was an important reason why policy veered back to the principles of economic freedom the 1980s and the 1990s. Here is how I describe the memo in First Principles:
Less than two weeks [after the 1980 election], on November 16, 1980, many of the economists who had worked together in the campaign wrote an extraordinary memo to Reagan entitled ‘Economic Strategy for the Reagan Administration.’ It began with a call for action: “Sharp change in present economic policy is an absolute necessity. The problems . . . an almost endless litany of economic ills, large and small, are severe. But they are not intractable. Having been produced by government policy, they can be redressed by a change in policy.”
The memo then outlined a set of reforms for tax policy, regulatory policy, the budget, and monetary policy. There were no temporary tax rebates, short-term public works projects, or other so-called stimulus packages. Rather there were sentences like “The need for a long-term point of view is essential to allow for the time, the coherence and the predictability so necessary for success.”
I believe it is instructive to compare this 1980 memo to President-elect Reagan with a similarly-timed fifty-seven page 2008 memo to President-elect Obama. The 2008 memo from Larry Summers was recently posted by Ryan Lizza on the New Yorker web page generating much political and economic debate. Both were written in times of great economic difficulties, but the contrast between the overall approaches to economic policy is striking. Most important, unlike the 1980 memo to Reagan, the 2008 memo focused mainly on short-term interventions and so-called stimulus packages. The recent debate in the press has been over whether the short-term stimulus package should have been larger. In contrast the 1980 memo did not even mention such short term stimulus packages, but rather focused on more permanent long-term strategies and policy predictability.