Statist Leadership Is in Decline

Recently by Gary North: The Case for Austerity

Three decades ago, political leadership was in a bull market. Today, it is in a bear market.

Sarkozy lost in France this month. Greece cannot form a government. Merkel’s party lost a major election over the weekend. Great Britain is ruled by a coalition government. Obama used his majority in both houses of Congress to ram through a $787 billion stimulus, which fizzled. Then his party lost the House in 2010. Support for him is tepid, at best.

Think back 30 years. In politics, there were three crucial figures: Ronald Reagan, Margaret Thatcher, and Deng Xiaoping. In religion, there was one: John Paul II.


Ronald Reagan rammed through his tax cuts in 1981. The Democrats in the House grudgingly went along. The public was behind Reagan. They knew it.

He had trounced Jimmy Carter. That was the first time an incumbent elected President had lost since 1932. (Ford had not been elected.)

In 1982, Reagan signed TEFRA into law. It raised taxes. Social Security’s bankruptcy came in 1983. Reagan accepted the decision of the Greenspan Commission on Social Security. He accepted a long-term tax hike.

In 1982, the economy was in the worst recession since World War II. The Dow Jones Industrial Average hit 777 on August 13, 1982. He signed TEFRA three weeks later. He refused to veto any spending bills. He did not shut down any federal department. The $200 billion annual deficits began in 1983, but even then, he was hailed as a great leader. He became the Teflon President. Nothing negative stuck. He defeated the hapless Walter Mondale in 1984 by a staggering 525 to 13 electoral votes.

He let James Baker III run the White House. Baker, then as now, was a Bush man. But Reagan’s rhetoric never failed to inspire his followers. He went out of office a popular President.

Reagan retained only three non-negotiable policies: (1) income tax cuts in the top brackets, (2) a build-up of the military, (3) anti-Communism. He stuck to his guns.

Almost as soon as he was sworn in, a minor union, PATCO, which ran air traffic control, went on strike. This was illegal by federal law. Reagan said he would fire anyone who did not go back to work on a specific day. Most PATCO members did not go back to work. All of them were fired. There were no plane crashes. The transition to new employees went smoothly.

That sent labor union leaders a message. It also sent the Soviet leaders a message. They were as old as Reagan was, but he seemed tougher, and the photos of Reagan as he rode his horse or put up fencing on his ranch indicated that he was mentally and physically far younger.

I recall a political cartoon at the time. It was a track race. Brezhnev was in his running shorts, using a walker. Reagan was racing past him, all teeth. That cartoon captured the actual condition of Soviet leadership. Brezhnev died in November 1982. His replacement was Andropov. He died in February 1984. His replacement was Chernenko. He died in March 1985.

Clinton was popular. Can you remember anything he did, other than Monica? He was in office for 8 years, and mostly we remember Hillary. He, too, was a Teflon President. Everything he did was Teflon. Nothing stuck to any of it.


Across the Atlantic in 1982 was Margaret Thatcher. She was the first female Prime Minister of Great Britain. She was elected in May 1979. Wikipedia summarizes how she won.

The Conservatives campaigned on economic issues, pledging to control inflation and to reduce the increasing power of the unions who supported the mass strikes. They also employed the advertising agency Saatchi & Saatchi. The Conservative campaign was focused on gaining support from traditional Labour voters who had never voted Conservative before, first-time voters and people who had voted Liberal in 1974. . . . She explicitly asked Labour voters for their support when she launched her campaign in Cardiff, claiming that Labour was now extreme.

This was exactly the strategy that Reagan adopted a year later. In the midst of raging price inflation and a recession, he got the votes of “blue collar Democrats” who correctly perceived that Carter and the Democrats were not deeply committed to their concerns.

She stuck to her guns.

Thatcher’s economic policy was influenced by monetarist thinking and economists such as Milton Friedman. Together with Chancellor of the Exchequer Geoffrey Howe, she lowered direct taxes on income and increased indirect taxes. She increased interest rates to slow the growth of the money supply and thereby lower inflation, introduced cash limits on public spending, and reduced expenditure on social services such as education and housing. Her cuts in higher education spending resulted in her being the first Oxford-educated post-war Prime Minister not to be awarded an honorary doctorate by the University of Oxford, after a 738 to 319 vote of the governing assembly and a student petition.

She did not raise interest rates. The free market did that. The Bank of England ceased inflating, following the lead of the Federal Reserve, under Paul Volcker, who reversed policy in August 1979. That was why price inflation slowed. That was also why the West went into a major recession. As Austrian economic theory teaches, when central banks inflate, there will be effects: rising prices and a bubble-filled boom. When they cease inflating, there will be popped bubbles and a recession.

Then, also like Reagan in 1982, she reversed on taxes.

Thatcher’s job approval rating fell to 23% by December 1980, lower than recorded for any previous Prime Minister. As the recession of the early 1980s deepened she increased taxes, despite concerns expressed in a statement signed by 364 leading economists issued towards the end of March 1981.

Why did she increase taxes? Because she refused to cut spending: also like Reagan. But the economy began to recover under the new monetary policy.

By 1982 the UK began to experience signs of economic recovery; inflation was down to 8.6% from a high of 18%, but unemployment was over 3 million for the first time since the 1930s. By 1983 overall economic growth was stronger and inflation and mortgage rates were at their lowest levels since 1970, although manufacturing output had dropped by 30% since 1978 and unemployment remained high, peaking at 3.3 million in 1984.

This paralleled the USA. By breaking price inflation, the two central banks caused a worldwide recession. But it reversed, as a result of lowered top marginal tax rates and more stable money.

The deficits in the USA remained huge, but supply-side economics got the credit. The policies were Keynesian to the core – huge deficits – but Keynesians got no credit for this, because Reagan and Thatcher were verbally anti-Keynesian. Reagan’s deficits ended the Republican Party’s rhetorical legacy of balanced budgets. That was Reagan’s supreme legacy to American political life. We now live under bipartisan Keynesian deficits. So does all of the West.

Still, the economy is sinking into recession. Keynesianism is not working.

In April 1982, the military of Argentina attacked the British-owned Falkland Islands, or Malvinas as the Argentinians called them. These islands were off the east coast of Argentina. They had no economic or strategic value. They were used for raising sheep. Thatcher went to war. In June, Argentina surrendered. The British lost 255 men. Argentina lost 649. The Argentinian government fell. Thatcher was overwhelmingly re-elected in 1983.

This six-week war had stretched the British Navy to its limits. This indicated that Great Britain’s military capability was a shell of its 1945 self. But flags flew and crowds cheered.

In 1984, the British coal miners struck in winter. Thatcher refused to capitulate. She broke the union. Like Reagan, she gave great speeches. She was a free market advocate, as was Reagan. She left a pro-market rhetorical legacy, as did Reagan. This legacy was far stronger than her actual policies were, also true of Reagan.

At the center of both economies were the respective central banks. Volcker, not Reagan, was the designer of the recovery. That was also true in Great Britain. The Bank of England held the real power. Thatcher and the British government did not.


In 1978, Deng Xiaoping announced a new policy for agriculture. Henceforth, farmers could grow what they wanted. They could sell their crops to other Chinese without government intervention.

The confirmation came to one village in a unique way. NPR revealed it early in 2012. The story has been widely known in China for years. The German press told the story in 2008. But NPR’s version is lively.

In 1978, the farmers in a small Chinese village called Xiaogang gathered in a mud hut to sign a secret contract. They thought it might get them executed. Instead, it wound up transforming China’s economy in ways that are still reverberating today. The contract was so risky – and such a big deal – because it was created at the height of communism in China. Everyone worked on the village’s collective farm; there was no personal property.

The farmers were fed up with communism. They agreed to assign plots to families. Everyone would grow the food for the family. It turned them into capitalists.

It was not pure free enterprise. Some of the output would still go to the government. Some went to the local collective. But families that exceeded their quotas got to keep it.

They might have been executed for this revolt. The contract said that if this happened, or if anyone went to prison, other families would take in the children until age 18.

They tried to keep the contract secret. They failed.

Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn. “We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.”

Ah, those inscrutable Chinese! They were secret capitalist roaders. They were governed by the cash nexus. Marx had warned against these people. They think only of themselves, not of the greater good. Then they work harder.

Nothing had changed, except the system of rewards. There were no new tools.

It was the same land, the same tools and the same people. Yet just by changing the economic rules – by saying, you get to keep some of what you grow – everything changed. At the end of the season, they had an enormous harvest: more, Yen Hongchang says, than in the previous five years combined. That huge harvest gave them away. Local officials figured out that the farmers had divided up the land, and word of what had happened in Xiaogang made its way up the Communist Party chain of command.

Pretty smart Communist bureaucrats! I mean, if all of a sudden output goes up by five to one, there can be only one rational explanation: creeping capitalism!

At one point, Yen Hongchang was hauled in to the local Communist Party office. The officials swore at him, treated him like he was on death row. But fortunately for Mr. Yen and the other farmers, at this moment in history, there were powerful people in the Communist Party who wanted to change China’s economy. Deng Xiaoping, the Chinese leader who would go on to create China’s modern economy, was just coming to power. So instead of executing the Xiaogang farmers, the Chinese leaders ultimately decided to hold them up as a model.

This was not an isolated incident. The same story was repeated all over China, which was why agricultural output rose in 1979. (For an academic paper that discusses this enormous increase, but does not mention Deng or the change in property rights, see this.) Wiki writes:

Economic reforms taking advantage of market principles began in 1978 and were carried out in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses. However, most industry remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained.


He became Pope in 1979, after 30 days of John Paul I’s brief term. He spoke several languages. He was a survivor. He had survived the Nazis. He had survived the Communists. He had been mentored by Cardinal Stefan Wyszynski, another master of pushing a hostile bureaucracy to its limits.

He came into office as an anti-Communist. His attempted assassination in 1981 by a man hired by Bulgarian Communists did not make him any more cordial. But he forgave the man in 1983, and even met with him. It changed the man’s entire attitude.

There have been competing views of his legacy, obviously. But there is no doubt that he was the most traveled Pope in history. The crowds that assembled to see him were enormous. The crowd in Manila in 1995 was estimated at 5 to 7 million.

In his waning days as Premier of the USSR, Gorbachev journeyed to the Vatican to meet with the Pope. In the midst of economic breakdown, Gorbachev needed to build ties with the West. He needed loans. He knew the importance of the Pope as a representative of the West. The Pope did not visit him.


There is no President, Prime Minister, or Premier to match the group of three in 1982. There is no religious leader, either. There is no one who commands much respect. There is no one who wields authority in terms of a vision of social renewal.

Given the state of public opinion today, it is best that there is no such leader. The voters are committed to irreconcilable goals, all over the world. They do not trust the state, yet they rely on the state for welfare payments. They perceive the corruption, yet they do not want to de-fund this corruption by spending cuts. They see that their liberties are being taken away by the state, yet they call for more action against undefined terrorists. They are, in a word, schizophrenic.