How Ronald Reagan Killed America

The June 14/20 issue of Bloomberg Business Week has a summary of why several prominent economists and analysts who have been bearish through the past few decades (in some cases) are still bearish now. At the end is one exception: James Grant, publisher of "Grant's Interest Rate Observer". The article states: "'We observed this in the recessions of 1991 and 2001, which were meek and mild, and so were the corresponding recoveries.' The deep recession of the early 1980s, on the other hand, led to a spectacular recovery. Based on that, Grant believes the rebound from this recession will be job-rich and strong, a position he has stuck to for nine months now."

My intent here is not to pick on Grant, but rather to use this as an opportunity to point out that a lot of economic analysis seems to want to treat the economy like the weather: a complex system that is hard to predict, but that does exhibit historical patterns because it's self directed. This may be true of weather, which has relatively few inputs. But economies are not self-contained forces of nature, but rather complex systems that are tightly coupled to many influences: demographics, technology, politics, and so forth.

So let's take the "spectacular recovery" that followed the recession of the early 1980s. Many people would like to credit Ronald Reagan with that recovery. The analysis quoted above would like to treat it evidence that the deeper the recession, the stronger the rebound. But what else happened in the mid-1980s?

One thing that happened was the personal computer revolution, which kicked off a wave of infrastructure-level capital investment and yielded tremendous operating benefits in almost every industry that continue today. Surely that had something to do with this recovery? And perhaps the subsequent emergence of the internet, another infrastructure-level transition that required, again, tremendous investment as everyone from corporations to grandmothers built web sites, had something to do with the recovery in the 1990s?

I don't think it's merely coincidence that these massive technology advances and infrastructure-level transitions happened at about the same time these recoveries did. So I have to ask, what infrastructure-level technology is on the cusp of maturity today that will lead to a wave of investment and operating benefits over the next ten years?

Frankly, I can't think of one. And without one, I don't think we're going to see a recovery like we did in the 1980s and 1990s.

Where should we be looking for such an opportunity? Well, the government cultivated the nascent semiconductor industry in the 1960s that led to the computing revolution of the 1980s and beyond. The government cultivated the internet in the late 1960s and early 1970s, and we started reaping the benefits twenty years later. So to find the maturing technology that will pull us out of the current recession, we should look to the 1980s.

One class of technologies that would fit the bill and was just getting off the ground at that time was renewable energy. At least, it was until Reagan killed government investment in renewable energy programs. Renewable energy is, like computing and the internet, and the national highway system, electrification, water, communications, and railroads before, an infrastructure-level technology that would require massive current investment and reap massive future rewards. Had Reagan not halted government investment in such technologies, we would probably now be on the verge of transitioning from fossil fuels to wind and solar. We might be burning our garbage for energy rather than burying it in landfills. We might not be intimately entangled in the Mideast and a target of terrorism. We might not have a uncontrollable oil well dumping untold amounts of crude into the Gulf of Mexico.

Instead, all of these are happening, and we have no long term strategy for solving these problems. For the foreseeable future, we'll be dependent on a finite and dwindling resource that pollutes our air and water, and that's largely controlled by entities who may not have our best interests at heart. As the world's biggest consumer of oil, we have the most to lose when it gets expensive and rare.

But perhaps more important than all of this is that, without another maturing infrastructure-level technology waiting in the wings to fuel the next wave of economic growth, we may not have a next wave for a long, long time. Without such a wave, there's nothing to stimulate growth except more borrowing. Without such a wave, there's no mechanism for organic job growth. And the one person most responsible for putting us in this position is Ronald Reagan. I predict that in thirty years or so, it will be widely recognized that he was the one who killed America.