From Malaise to Mastery in 25 Years
By Michael Barone
Twenty-five years ago, on July 15, 1979, a mere ten years after America put a man on the moon, President Jimmy Carter addressed the nation. Carter spoke to his television audience of “a fundamental threat to American democracy.” A threat, he said, that is “a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our Nation. The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America. Our people are losing...faith, not only in government itself, but in the ability as citizens to serve as the ultimate rulers and shapers of our democracy….What you see too often in Washington and elsewhere around the country is a system of government that seems incapable of action.”
Instantly known as the “malaise” speech, though the word appears nowhere in it, it was intended as a call to national action. It fizzled. Carter’s six specific proposals, for oil import quotas, alternative fuels research, and the like, went mostly un-enacted. But as a diagnosis of the national mood, it was not bad. Rereading the malaise speech reminds us of what America was like 25 years ago—and how different it is today.
“A system of government that seems incapable of action” was the consensus view 25 years ago. Underlying that consensus was the assumption that government was central to the workings of the economy and that government could only be led effectively by the President. Most commentators could not see how the economy of the late 1970s could be revived. In 1979, the American economy was in desperate trouble. The following year unemployment would be above 7 percent, inflation over 13 percent, and the gross domestic product down 0.5 percent. Keynesian economists could see no cure: You could only slash inflation by raising unemployment to intolerable levels, and you could only cut unemployment by allowing runaway inflation. Low-inflation economic growth was no longer possible. Productivity growth was low in the 1970s, well behind that of Japan and Germany, and any economic growth seemed to be limited as far as the eye could see. The specific proposals in Carter’s speech called for more privation: Limits on energy use and renunciation of oil imports meant a lower standard of living. The implication was that the American people should be grown up enough to accept that and live with it.
In other respects American life seemed to be deteriorating. Crime rates and welfare dependency tripled between 1965 and 1975, and continued to rise, though more slowly, after that. Divorce and cohabitation became common and acceptable in the 1970s. As pollster Daniel Yankelovich explained in his 1981 book New Rules, the values of the counterculture of the late ’60s had been adopted by the great mass of the American people. There would, presumably, be no going back to the America of the ’50s.
In 1979 America also seemed in retreat in the world as a whole. The Soviet Union, with its vast army and its huge arsenal of nuclear weapons and missiles, seemed to be gaining on the United States; arms control agreements, the central focus of Soviet policy in the Nixon, Ford, and Carter administrations, seemed unable to stop this. Soviet- and Cuban-sponsored guerrilla movements operated successfully in Nicaragua, El Salvador, Angola, and Mozambique. In December 1979, Soviet troops flooded into Afghanistan and installed a puppet government.
A month before, “students” had seized the U.S. Embassy in Tehran and, with the support of Ayatollah Khomeini and his mullah regime, held Americans as hostages—an act of war against the United States. In response, the Carter administration negotiated and sought permission to send Christmas presents to the hostages; across the country Americans tied yellow ribbons around trees, to show that they wanted the hostages to come home. Earlier in the decade, Richard Nixon had declared that the United States should not be “a pitiful, helpless giant.” By the end of the ’70s it looked like it was.
On the economic front, the success of Japanese and German cars and Japanese electronics in the U.S. market convinced many that American manufacturing was in terminal decline. Some drew the conclusion that those countries, with their large welfare states, were so well organized that the United States could not compete.
Projections of the future generally follow straight-line trajectories. Economic forecasters tend to assume that next year will look pretty much like this year; foreign policy and military analysts tend to assume that developments will continue in the same direction that they are already proceeding; social critics tend to assume that trends will continue at about the same rate they have. In 1979, the majority of Americans thought things were going badly and could only get worse. As Carter noted, Americans had seemed to lose their historic optimism.
Yet we know from history that lines on graphs don’t continue in the same direction forever. Sometimes they change direction. And that is what happened to the malaise-afflicted America of 1979 over the next 25 years. What turned things around? What forces were already operating in the America of 1979 that would produce decades of low-inflation economic growth, victory in the Cold War, and solutions to problems like crime and welfare dependency?
Part of the answer is Ronald Reagan. In 1979, Reagan was a 68-year-old former actor and California governor who was launching his third Presidential campaign. He had been defeated by Richard Nixon in the 1968 Republican National Convention and had lost to Gerald Ford in the 1976 Republican Presidential primaries. Now he was challenging his third President. By any standard rules, he was too old to run. Only three men had ever held the office of President at his age: William Henry Harrison, who died after a month in office; Harry Truman, who retired at 68; and Dwight Eisenhower, who reached 68 in the second year of his second term and retired at 70.
Candidate Reagan, moreover, espoused policies which all Democratic and most Re-publican elites considered unworkable and dangerously outside the mainstream. He called for lower taxes at a time when the federal government was running deficits and inflation was raging, and he called for a military buildup and a confrontational policy toward Soviet expansionism when the only safety seemed to lie in accommodation. None of the other serious candidates for President that year—Carter, Edward Kennedy, George H. W. Bush, Howard Baker, John Connally—stood for what Reagan did.
But as we now know, Reagan’s policies would work. At some cost, to be sure: His support of Federal Reserve Chairman Paul Volcker’s tight money policy raised unemployment to above 10 percent, and his defense buildup led to record budget deficits. But those turned out to be not as unbearable as the elites assumed. By the mid 1980s the nation was back to low-inflation economic growth, and by the late ’90s the budget deficits had vanished. And his foreign policy proved spectacularly successful. In 1989, the year he left office, the Berlin Wall came down and the Soviet empire in Eastern Europe vanished; in 1991 the Soviet Union ceased to exist.
But Reagan does not deserve sole credit for reversing the negative trends that seemed inexorable in 1979. Presidents, contrary to elite analysis in 1979, are not the only ones who shape the nation. The example of Franklin Roosevelt, who seemed to reverse the downward economic spiral of the Depression and to win World War II single-handedly was misleading. Individual economic actors and masses of soldiers and civilian workers played critical parts in the successes of the 1930s and 1940s. And even in 1979 America had hidden strengths which would become apparent as the years went on.
One of those strengths was a law already on the books, the tax bill passed by the Democratic Congress and signed by Jimmy Carter in 1978. It cut capital gains taxes to 25 percent—at a time when the top rate on investment income was 70 percent—and included section 401(k), allowing employers to set up tax-deferred investment accounts for employees. The capital gains cut, according to standard scoring practices, was supposed to cost the government revenue and to have no effect on the behavior of individuals. Of course the opposite was true. The capital gains cut stimulated investment and innovation, and brought the government far more revenue than expected. And section 401(k), with the help of favorable regulations issued by the Reagan IRS, meant that the number of people covered by such defined contribution pension plans rose from 19 million in 1980 to 50 million in 1998. It helped to create a mass investor class, which amounted to a majority of voters by 2000.
Another law expanding the economy was the deregulation of airlines initiated by the Ford administration and passed under Carter (with significant support from Senator Edward Kennedy). This provided the template for the deregulation of transportation and communications, which squeezed huge costs out of the economy in the 1980s and 1990s.
Individual Americans also changed the private sector vastly. In 1979 few Americans had heard of Sam Walton, Fred Smith, or Bill Gates. But the companies they founded—Wal-Mart, Federal Express, Microsoft—produced innovations that made the American economy immensely more efficient and productive. None of these companies, by the way, got its start from government aid or through the stock market; they were financed instead by personal savings and family money. Absent these people, America would be substantially less efficient and productive today.
Indeed, in 1979 financial markets were thin and stock prices were below 1965 levels. But in the 1980s, new techniques were developed—hostile takeovers, leveraged buyouts, junk bond financing—which elicited far better performance from corporate management and provided far more capital for innovation. Many journalists portrayed creative financiers as heartless predators, but in fact they created huge amounts of value which contrast vividly with the unproductivity of the complacent corporate managers of the ’70s. The private sector was also stimulated to better performance by competition from foreign firms (notably the Japanese car makers) after it became clear that trade barriers could not protect them from competition.
In the America of 1979 were also gestating the ideas that would propel public policy changes that vastly improved life, especially in the inner cities. Charles Murray was developing the critique of the welfare system that he presented in Losing Ground in 1984, and George Kelling and James Q. Wilson were already working on the critique of police practices presented in their article “Broken Windows” in 1982. These ideas helped to develop the welfare reforms pioneered by Wisconsin’s Governor Tommy Thompson in 1987 and the crime fighting measures introduced by New York’s Mayor Rudolph Giuliani in 1993. Those policies, widely imitated across the country, resulted in the reduction by more than half of welfare dependency and crime in the 1990s—a happy result that no one had predicted in 1990, much less in 1979. In 1979, military officers and intellectuals were also developing the ideas that vastly improved military performance in the 1990s.
Almost no one in 1979 predicted the momentous changes of the 1990s. (Notable exceptions: Both Ronald Reagan and Daniel Patrick Moynihan predicted the collapse of the Soviet Union.) Why did so few people foresee that the straight lines would change direction? Why did no one foresee that the fog of malaise would be lifted from the land?
As one who remembers the year 1979 vividly, let me tentatively advance an answer. It starts with this: The elites of 1979 believed that government and the private sector could only work the way they had over the preceding 35 years. To put it another way, they thought this was forever Franklin Roosevelt’s America. In this view, government must and should be periodically expanded to help people in need, and government action is necessary to produce prosperity. This was Big Unit America—Big Government, working with and settling disputes between Big Business and Big Labor, could produce low-inflation economic growth forever.
But in the 1970s, Big Government failed, spectacularly, to do this, while Big Business remained stodgy and non-innovative, and Big Labor was shrinking toward irrelevance.
The Big Units had helped America recover from the Depression, win World War II, and produce an unexpected postwar prosperity. But by 1979 they were visibly failing. The elites of the time were reduced to plaintive pleas to Americans to accept their lot: We live in an era of limits, people should be satisfied with high-inflation stagnation, our institutions can only be improved by Constitutional change, which everyone knows is impossible. As the Communist playwright Bertolt Brecht said after East Germans rioted against the Communist regime: “The government should invent a new people.”
Instead, the people—with a big boost from the Gipper—invented a new America.
History, it turns out, does not, and should not, always move left. Lower taxes and reduced government regulation could liberate people to create a new, far more productive economy. Technological innovation could come more rapidly from the private sector than from government grants. Government may have produced the atomic bomb during World War II, but by the 1990s the Pentagon was developing precision weapons by taking old bombs and attaching GPS devices purchased at Radio Shack.
Innovative public policies which improve people’s lives are usually not generated at the center but the periphery, not by federal government and university elites, but by local governors and mayors picking up ideas generated by free-market and conservative think tanks.
The elites who were bemoaning malaise in 1979 did not understand that America had these resources. They overvalued central direction and undervalued decentralized innovation. They did not realize that Big Unit America was no longer working and that Tocquevillian America—decentralized, democratic, religious, and profit-seeking—could produce even better results than Big Unit America at its best. Government in 1979 may have been, as Jimmy Carter said, incapable of action. But Americans were capable of action, and acted.
Michael Barone, a senior writer for U.S. News & World Report, is co-author of The Almanac of American Politics. His most recent book is Hard America, Soft America.
