The "Reagan earthquake" still reverberates through the world economy.
Nearly a quarter-century after the Reagan earthquake first rocked our economy, the aftershocks are still a very real and continuing phenomenon. Every tax cut, every regulatory stranglehold broken, every economic shackle unlocked, and every despot or totalitarian regime toppled increases freedom, creativity and entrepreneurship. And in the ultracompetitive world that has sprung from the ashes, "old line" hegemony and subjugation lose their strength.
As Ronald Reagan said in 1981, "We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success--only then can societies remain economically alive, dynamic, progressive and free. Trust the people."
A corollary to this credo is "trust the market," because people make markets. In the 1970s, the U.S. and most of the noncommunist world were headed toward a European-style welfare state. Huge swaths of the economy were regulated, government spending was out of control and income-tax rates topped out at a sky-high 70%.
Ronald Reagan stopped that process and turned the U.S. around. Many Western European societies kept moving down the socialist path and have now reached a point where any change in policy is nearly impossible because a majority of voters benefit in some way from government largesse.
President Clinton contributed to the Reagan revolution by declaring that the "era of big government is over." He signed into law welfare reform and Nafta, continuing the trend toward more personal responsibility, less government and more competition.
President Bush has taken this trend one step forward and would like to use government to create an "ownership society." The American Dream Down Payment Assistance Act, signed into law in December 2003, is helping first-time homebuyers with their down payments. This is shifting government spending toward supporting home ownership and away from perpetuating dependency on rent subsidies. A decade from now, this program will have helped to transform a whole new group of Americans into the "bottom up" market economy and away from the "top down" government economy.
Health Savings Accounts are another move in this direction, as is the push for personal Social Security accounts. Private property and ownership are keys to continuing the social and economic transformation that began many years ago.
In the past 24 years, the top marginal tax rate has been cut in half, while dividend and capital-gains tax rates have been reduced significantly. These lower tax rates have spurred massive new investment and attracted talent and brainpower from around the world. The U.S. has led the way in a global and technological revolution.
The result of these changes is a New World Order--one in which competition comes from everywhere. A growing number of people have "skin in the game" and a "personal stake" in public policy. This has created an American population, as we saw in the election, that values greater individual freedom and supports government actions that bolster economic growth and wealth creation, not wealth redistribution.
Obviously, this does not make everyone happy. In the late 1990s, George Soros made it clear that he thought deregulation had gone too far. At face value this is a comment on public policy. But it is also true that in an era of global deregulation, international financiers have a more difficult time profiting from personal relationships and intimate knowledge of government actions. Absolute returns tend to equalize among investors in a truly free market.
The same is true of just about every "old line" industry. The Internet, its irreverent blogs and cable TV are making information ubiquitous and stealing market share from major networks. Minority groups have also been lifted by the years of strong growth. The entrepreneurial society has created opportunity for all and increased wealth for many. Union membership is declining, while stock ownership is rising. Tensions between labor, management and shareholders must be worked out in the marketplace. Free-market capitalism works best when business owners and investors work toward the highest possible profits, not toward the latest fad in social responsibility.
There are clearly many who complain about the impact of these forces, and purport that the U.S. should return to its 1970s roots, following the lead of Europeans. In his book, "The European Dream," Jeremy Rifkin argues that "even the most self-reliant American can no longer go it alone in a world where a SARS epidemic, a computer virus, a terrorist attack, a stock-market scandal or global warming make everyone potentially vulnerable and reliant on each other."
He holds up the European Dream of "sustainable development, quality of life and the nurturing of community" as defenses against these threats. Mr. Rifkin echoes the well-known economist John Kenneth Galbraith, who in 1984, five years before its collapse, praised Russia for the "well-being of the people on the streets," adding that, "partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower."
Just as Galbraith's ideas were toppled by the aftershocks of the Reagan earthquake, the free market is undermining Mr. Rifkin's ideas. What Mr. Rifkin fails to realize is that an entrepreneurial society will not function if people do not work together. The facts speak for themselves. The EU has 455 million inhabitants and a GDP roughly equal to the U.S. After doing the math, this means that average per capita income in the EU is roughly 40% less than in America. With more wealth, the U.S. is in much better shape to defend itself against disease, terrorists or corporate shenanigans.
What cannot be defended is the status quo. The U.S. is living through an entrepreneurial renaissance of historic proportions. It started 24 years ago and the tectonic plates continue to shift. Part of this process will be an accelerated upheaval in the centers of power. The Europeans are trying to move in this direction with a push towards freer labor markets and lower taxes. Many will fight this process every step of the way. Others will "trust the people."Mr. Wesbury is chief economist at Griffin, Kubik, Stephens & Thompson Inc. This is part of an occasional series.