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Saturday, April 1, 1995

What Went Right in the 1980s

McKenzie Illuminates the "Decade of Greed"

If one were to turn to the mainstream media or the current administration in Washington, D.C., as historical guides to the 1980s, one would come to see the decade as a period of great economic decline for the United States. With the decade cast in such a dim light, one also might expect a book entitled What Went Right in the 1980s to be a rather slim volume.

In contrast, Richard McKenzie illuminates the so-called “decade of greed.” McKenzie provides a detailed look at the fiscal and economic developments of 1980s, chapter by chapter supplanting the political hyperbole so closely associated with the decade with sound economic analysis. Thanks to his efforts, the reader gains a clearer and more sober view of the 1980s. As the author asserts, “The 1980s were not the best of times; the decade could have been better. But, neither were they the worst of times. On balance, the decade was a pretty good one.”

McKenzie provides much evidence to back up his declaration. The most substantial is that “growth in U.S. output during the 1980s was the equivalent of adding the entire economy of Germany (East and West) or two-thirds of the Japanese economy to the U.S. economy.” Based on this fact alone, one would be justified in declaring that the economy of the 1980s was more than just pretty good.

The author addresses a host of issues that have been hotly debated, including the trade deficit. Critics argue that a growing trade deficit reflects a waning ability to compete on the world economic stage. McKenzie deftly counters such misguided notions with two key points:

First, one reason for the rise in the U.S. trade deficit in the 1980s is the faster pace of economic growth in the United States compared to that of most other countries around the world. With a more rapid rate of growth, producers need more resources, many of which must be drawn from abroad in the form of imports. Second, the balance on the capital account necessarily mirrors the balance on the trade account (with adjustments for other elements in the overall balance of payments). This means that exports are not the only U.S. products that foreigners want. As was evident in the growing balance of the capital account surplus in the 1980s, foreigners also wanted capital goods that could be put to work in this country.

McKenzie concludes. “In other words, the trade deficits could have (and did to an extent) reflected the fact that American exporters of goods were simply out-competed, not by foreign producers but by domestic producers of investment opportunities in the United States.”

Another favorite criticism of the decade was a worrisome increase in private debt. However, individuals levying such concerns fail to view both sides of the equation. As McKenzie notes: “Debt, which is merely a claim on assets, is no burden at all when it is used to acquire assets that are at least equal in value to the collateral assets.” He goes on to observe that, in fact, private assets rose more rapidly in real terms during the 1980s than did private debt, hence “yielding an increase in total private net worth.”

McKenzie even manages to find a bright side to mounting government debt during the 1980s. Interestingly, he notes that “deficits may be ‘bad’ in themselves, but that does not mean that they were the worst thing to do under the political and economic circumstances of the 1980s.” Though some may disagree with McKenzie’s assessment of government debt, I believe his arguments hold merit, and at the very least, provide the basis for spirited debate.

McKenzie attacks other misconceptions regarding the 1980s. For example, during the so-called “decade of greed,” the annual rate of growth in total real charitable giving was almost 55 percent higher than in the previous two-and-one-half decades. As for some individuals benefiting during the 1980s at the expense of others, McKenzie’s income and expenditure analyses reveal that “the rich, poor, and middle classes got richer in real dollars and that their gains showed up in the amount of goods and services they bought.”

What Went Right in the 1980s acts as a substantive counterweight to the mounting attacks on the economic record of the 1980s. McKenzie proves to be a good writer and innovative economic thinker. In his concluding chapter, he takes a peek at the 1990s, and offers this simple, yet sage advice: President Clinton “should look to the tax theory of his mentor, John Kennedy, who proposed to lower tax rates for the same reason Ronald Reagan did: High tax rates represent a drag on the economy.”

  • Richard McKenzie, an economics professor and the Walter B. Gerken Professor of Enterprise and Society, has authored 30 books and is a nationally recognized authority on the Microsoft anti-trust case. His research focuses on economic policy issues. He is currently writing a book on In Search of a Defense of Rational Behavior in Economics.