A New Economy, a Plague, a Fallenwall, and a Desert in Flames (1980-1991). Complete Idiot’s Guide to American History by Alan Axelrod.

A New Economy, a Plague, a Fallenwall, and a Desert in Flames (1980-1991). Complete Idiot’s Guide to American History by Alan Axelrod.

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In This Chapter

Rise and fall of Reaganomics.

The AIDS crisis.

Victory in the Cold War and the Persian Gulf.

Iran-Contra scandal.

 The presidency of James Monroe (1817-25) ushered in an “era of good feelings,” a time of perceived national well-being. Much the same happened during the two terms of Ronald Reagan, the most popular president since Ike Eisenhower. Where President Carter took a stern moral tone with the nation, admonishing his fellow Americans to conserve energy, save money, and generally do with a little less, President Reagan congratulated his countrymen on the fact of being Americans and assured them that all was well—or would be well, just as soon as he got “big government off our backs.”

For a time, business boomed during the Reagan years—though the boom was largely the result of large-scale mergers and acquisitions, the shifting back and forth of assets, rather than any great strides in production. True, too, the Reagan administration saw the beginning of the end of the Cold War and the disintegration of the Soviet Union, which the president called an “evil empire.” Yet, during the Reagan years, the national debt also rose from a staggering $1 trillion to a stupefying $4 trillion. And the period was convulsed by a terrible epidemic of a new, fatal, and costly disease, AIDS, which the administration met largely with indifference and denial.

Many things good and bad befell the Reagan years, yet, for the most part and for most people, only the good seemed to stick. The bad slid off Ronald Reagan with such ease that the press dubbed him the “Teflon president.”

Supply Side and Trickle Down. Following his inauguration, President Reagan lost no time in launching an economic program formulated by his conservative economic advisors. The program was quarterbacked by Office of Management and Budget (OMB) director David Stockman (b. 1946), whose ascetic appearance seemed to signal his ruthlessness as a slasher of taxes and domestic social welfare spending. The new administration marched under the banner of supply-side economics, a belief that the economy thrives by stimulating the production of goods and services (the supply side) because (according to advocates of the theory) supply creates demand. Make it, and people will buy it. Government’s proper role is to stimulate production by reducing taxes as well as reducing regulation of industry. Yet, even as taxes are reduced, supply-side economics also demands that the government operate on a balanced budget, since deficit spending encourages destructive inflation.

The Reagan revolution turned on three major policies: a reduction in government regulation of commerce and industry; aggressive budget cutting; aggressive tax cutting-not for middle-and lower-income individuals, but for the wealthy and for businesses. Reducing the tax burden on the rich was supposed to free up more money for investment, the benefits of which would ultimately “trickle down” to the less well off in the form of more and better jobs.

If trickle down was a hard concept for many to swallow, Reagan’s insistence that a reduction in tax rates would actually increase government revenues seemed downright bizarre to some. When Ronald Reagan and the man who would be his vice president, George Bush, were battling one another in the Republican primaries, Bush branded the notion voodoo economics—a phrase that would come back to haunt Bush in subsequent campaigns. But conservative economist Arthur Laffer (b. 1940) theorized that tax cuts would stimulate increased investment and savings, thereby ultimately increasing taxable income and generating more revenue. President Reagan made frequent reference to the “Laffer Curve,” which illustrated this process.

Plausible or not, a majority of the American people were prepared to take the leap with their new president. In 1981, a bold program was hurried through a sometimes bewildered Congress, including a major tax cut, a staggering $43 billion cut in the budget for domestic programs, and broad cutbacks in environmental and business regulation. The “Great Communicator” overcame all resistance. When catastrophe struck on March 30, 1981, in the form of would-be assassin John Hinckley, Jr., the 70-year-old president’s calm and heroic response to his having been shot in the chest drew even more support for his programs.

Greed Is Good. A relatively small number of people made a lot of money as a result of Reaganomics. Most of the new wealth was generated not by the stimulated production that the supply-side theory promised, but by a frenzied crescendo of corporate acquisitions and mergers. The stock market buzzed and churned in a way that (for some) disturbingly recalled the late 1920s. Companies were bought and either merged for efficiency (with resulting loss of jobs) or broken up, their component parts and assets sold at a profit to stockholders (with resulting loss of jobs). Unemployment generated by the high-level financial manipulations of the 1980s was hard on the man and woman on the street, but the movement of masses of wealth benefitted those who could afford to invest in the right companies at the right time. The average American may have been raised to believe that businesses existed to make products and provide employment, but the manipulators of wealth insisted that companies existed exclusively to enrich investors, and if that meant destroying a company, breaking it up, so be it. In the words of Gordon Gecko, a fictional tycoon played by Michael Douglas in the popular movie “Wall Street” (1987), “Greed is good.”

Early confidence in Reaganomics faltered when the recession of the Nixon-Ford-Carter years deepened further, and public-opinion polls began to suggest that many people believed the tax cuts had benefited only the rich. Inflation did roll back, though interest rates remained high, as did unemployment. However, by 1983, acquisitions, mergers, and arbitrage had made the stock market a very active place, and prices began to rise sharply. This change, combined with relatively low inflation and (at last) rising production, as well as slowly decreasing unemployment, happily portended recovery.

What hopeful observers tended to ignore was the prodigiously growing national debt—under a president whose economic theory called for a balanced budget—and the flimsy sources of the profits being turned on Wall Street. Arbitrage is a high-risk business, which is made less risky if one has inside information, special knowledge of impending mergers, for example. The trouble is that such inside trading is illegal, and beginning in 1985, Wall Street was rocked by a series of massive insider trading scandals. Trader Dennis B. Levine pleaded guilty to making $12.6 million by trading on non-public information, and arbitrageur Ivan Boesky likewise admitted buying huge blocks of stock as a result of receiving inside information. Not all the money made on Wall Street was illegal, but much of it rested on very shaky ground.

To finance the buyout of companies, traders turned to junk bonds, high-risk investments (usually issued by a company without an established earnings history or burdened by poor credit) acquired cheaply and paying a high rate of interest. Such transactions, called leveraged buyouts (the takeover of a company financed by borrowed funds) were pioneered in the 1970s, by the Wall Street firm of Kohlberg Kravis Roberts and brought to a point of frenzy by Michael R. Milken. Often, junk bonds were purchased with very little hope that the issuing company would ever repay the loan, but in the short run, interest payments were so high that the underlying “junkiness” of the bond hardly seemed to matter.

Black Monday. The junk being bought and sold hit the fan on October 19, 1987, when the Dow Jones Industrial Average (key measure of stock market performance) plunged 508 points—almost double the fall in the 1929 crash that brought on the Great Depression. As Herbert Hoover had assured the American public that “prosperity was just around the comer,” President Reagan dismissed the crash as “some people grabbing profits.” Fortunately, the market gradually recovered—but the high-flying era of Reaganomics had careened to a gut-wrenching end.

“Gay Plaque” and a Blind Eye. While many Americans stared with envy, admiration, or disgust at the Wall Street roller coaster, they turned a blind eye to the growing legion of homeless people who haunted the nation’s large cities and even many of its smaller towns. Certainly, the Reagan administration, having drastically cut back federal welfare funding, did little enough for America’s poorest. The administration likewise turned away from a terrifying plague that developed initially among homosexual men but was soon also diagnosed in heterosexual men, in women, and in children.

Throughout the 1980s, grass-roots AIDS organizations—including, most notably, Gay Men’s Health Crisis (GMHC) and AIDS Coalition to Unleash Power (ACT UP)—mobilized. The organizations accused the government of failing to respond to an epidemic perceived to affect socially marginal groups—homosexuals and intravenous drug abusers (who contract the disease by sharing hypodermic needles tainted with infected blood). President Reagan failed. even to make public mention of the disease until April 1987, fully six years after health officials had determined that the epidemic was under way. Only through the efforts of AIDS activists was federal funding increased—from $5.6 million in 1982 to more than $2 billion a decade later.

“Mr. Gorbachev, Tear Down This Wall!”. If the Reagan administration did not engage AIDS vigorously, it did not hesitate to take on the Soviet Union, assuming an aggressive stance against what the president called “an evil empire.” Defense spending was dramatically stepped up, dwarfing domestic budget cuts in welfare and other programs.

The president also acted Aggressively to meet perceived military threats throughout the world, sending U.S. marines in the summer of 1982 to Lebanon as a peacekeeping force. On October 23, 1983, more than 200 of these troops were killed in their sleep when a truck laden with 25,000 pounds of TNT was driven into the marines’ Beirut headquarters building. Just two days after this disaster, the president ordered an invasion of the island nation of Grenada in the West Indies. Cuban troops had been sent to the tiny country (population 110,100) at the behest of its anti-American dictatorship, and the president was determined to protect the approximately 1,000 U.S. citizens there. The president also saw a successful liberation of the country as a kind of emotional compensation for the death of the marines in Beirut.

Ronald Reagan’s saber rattling was gratifying to some Americans and alarming to others, who were distressed by the stalemate of U.S.-Soviet arms-control talks as a fresh deployment of American nuclear missiles began in Europe during November 1983. Reagan protested to his critics that the build-up was needed to counter Soviet advances, yet the strategy produced no tangible positive diplomatic results.

Star Wars Arm Wrestle. During 1983, President Reagan announced the most spectacular, ambitious, elaborate, and expensive military project in world history. It was called the Strategic Defense Initiative (SDI), but the popular press dubbed the system “Star Wars,” after the popular George Lucas science-fiction movie of 1977. Using an orbiting weapons system, the idea was to create a shield against intercontinental ballistic missile attack by destroying incoming ICBMs before they began their descent. The weaponry was so far beyond even the foreseeable cutting edge as to be fanciful: X-ray and particle-beam devices (as yet theoretical) operated by supercomputers that had to be programmed by other computers. Critics pointed out that Star Wars was not only a violation of the 1972 ABM (antiballistic missile) treaty, but a temptation to thermonuclear war because it promised to make such a war survivable. Others suggested that the system could never be made to work, and still others protested that the staggering cost of the program—$100 to $200 billion—would permanently cripple the nation.

Yet Presidents Reagan and George Bush pursued Star Wars to the tune of $30 billion, even though. the program produced few demonstrable results. Finally, in 1993, anonymous SDI researchers revealed that at least one major space test had been “fixed” to yield successful results. Caspar Weinberger, who had served as President Reagan’s secretary of defense, initially denied these charges, but subsequently claimed that the test in question—and perhaps the entire Star Wars program—had been an elaborate decoy. The program (Weinberger said) had been designed solely to dupe the Soviet Union into spending a huge proportion of its resources on a Star Wars program of its own—a program that U.S. scientists already knew was unworkable.

The Wall Falls. Whether one views Star Wars—and the rest of the gargantuan Reagan defense budget—as a vast misjudgment, which quadrupled the national debt from one to four trillion dollars, or as a costly but brilliant strategy to win the Cold War, the fact is that the Cold War did end. The government of the Soviet Union was first liberalized and then fell apart, the nation’s economy in tatters and the people clamoring for democratic capitalist reforms. Even though Mikhail Gorbachev (b. 1931), general secretary of the Soviet Communist party (1985-91) and president of the U.S.S.R. (1988-91), introduced unheard of liberal reforms, President Reagan prodded him to go even further. In 1987, standing near the Berlin Wall, brick, stone, and razor-wire symbol of a half-century of communist oppression, the president made a stirring speech calling out to the Soviet leader: “Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall!” Two years later, Berliners began chipping away at the wall, tearing it down piece by piece, as a liberalized Soviet Union merely looked on.

Although communist hardliners staged a revolt against Gorbachev in 1991, progressive junior army officers refused to follow KGB (Soviet secret police) directives, and the attempted coup failed. Gorbachev then disbanded the Communist party and stepped down as leader of the Soviet Union. Boris Yeltsin (b. 1931), radical reformist president of the Russian Republic, assumed leadership not of the Union of Soviet Socialist Republics—which ceased to exist—but of a loose commonwealth of former Soviet states.

Ollie, Iran, and the Contras. The debate still rages over whether the policies of Ronald Reagan won the Cold War or whether the Soviet Union, shackled to a financially, intellectually, and morally bankrupt system of government, simply lost the half-century contest. Another episode of unorthodox world diplomacy continues to provoke controversy as well.

In November 1986, President Ronald Reagan confirmed reports that the U.S. had secretly sold arms to its implacable enemy, Iran. The president at first denied, however, that the purpose of the sale was to obtain the release of U.S. hostages held by terrorists in perpetually war-torn Lebanon, but he later admitted an arms-for-hostages swap. Then the plot thickened—shockingly—when Attorney General Edwin Meese learned that a portion of the arms profits had been diverted to finance so-called Contra rebels fighting against the leftist Sandinista government of Nicaragua. As part of the ongoing U.S. policy of containing communism, the Reagan administration supported right-wing rebellion in Nicaragua, but Congress specifically prohibited aid to the Contras. The secret diversion of the secret arms profits was blatantly unconstitutional and illegal.

A lengthy investigation gradually revealed that, in 1985, a cabal of Israelis had approached National Security Advisor Robert MacFarlane with a scheme in which Iran would use its influence to free the U.S. hostages held in Lebanon in exchange for arms. Secretary of State George Schultz and Secretary of Defense Caspar Weinberger objected to the plan, but (MacFarlane testified) President Reagan agreed to it. In a bizarre twist, U.S. Marine lieutenant colonel Oliver (Ollie) North then modified the scheme in order to funnel profits from the arms sales to the Contras.

As was the case with Watergate during the 1970s, investigation and testimony implicated officials on successively lofty rungs of the White House ladder—through national security advisors John Poindexter and MacFarlane, through CIA director William J. Casey (who died in May 1987), and through Defense secretary Caspar Weinberger. Few people believed that President Reagan had been ignorant of the scheme, but even if he had been the unwitting dupe of zealots in his administration, the implications were bad enough, painting a picture of a passive chief executive blindly delegating authority to his staff.

In the end, Ollie North was convicted on three of 12 criminal counts against him, but the convictions were subsequently set aside on appeal; Poindexter was convicted on five counts of deceiving Congress, but his convictions were also set aside; CIA administrator Clair E. George was indicted for perjury, but his trial ended in mistrial; and Caspar Weinberger was indicted on five counts of lying to Congress. All of those charged were ultimately pardoned by President Reagan’s successor, George Bush. Although the 1994 report of special prosecutor Lawrence E. Walsh scathingly criticized both Reagan and Bush, neither was charged with criminal wrongdoing.

Desert Shield and Desert Storm. President Reagan’s second term, marred by the Iran-Contra affair, a bumbling performance at the 1986 summit with Mikhail Gorbachev, and the 1987 stock market crash, nevertheless saw the “Teflon president” emerge personally unscathed. Vice President George Bush sailed to easy victory in the presidential race of 1988. Where the “Great Communicator” Reagan had been charismatic, however, Bush was perceived as testy, and, with the economy faltering (the principal issue was high unemployment), his popularity rapidly slipped in the polls. Bush seemed doomed to a one-term presidency.

Then, on August 2, 1990, Iraqi president Saddam Hussein, a dictator whose florid mustache recalled Josef Stalin and whose ruthless actions summoned to mind Adolf Hitler, ordered an invasion of the small, oil-rich Arab state of Kuwait. It was the beginning of a tense and dramatic crisis, but it was also President Bush’s finest hour. His administration brilliantly used the United Nations to sanction action against Iraq, and with masterful diplomacy, the president assembled an unprecedented coalition of 31 nations to oppose the invasion. Particularly delicate was acquiring the support of the Arab countries while keeping Israel, which was even subject to attack by Iraqi SCUD missiles, out of the fray. As to the U.S. commitment, it was the largest since Vietnam: more than a half million troops, 1,800 aircraft, and some 100 ships.

Indeed, comparisons with Vietnam were plentiful, made principally by Americans who objected to trading “blood for oil” and who feared that the nation would become mired in another hopeless conflict. The fact was that Middle East oil had become essential to the Western economy, But the issues also went far beyond this commodity. President Bush was one of the last of the generation of U.S. leaders who had fought in World War Il. He well knew what can happen when an international bully like Saddam Hussein, in command of the fifth largest army in the world, is allowed to operate unchecked.

In early August 1990, King Fahd of Saudi Arabia invited American troops into his country to protect the kingdom against possible Iraqi aggression. Called Operation Desert Shield, this was a massive, orderly buildup of U.S. forces. In January 1991, the U.S. Congress voted to support military operations against Iraq in accordance with a U.N. Security Council resolution, which set a deadline of January 15, 199 1, for the withdrawal of Iraqi forces from Kuwait. When Saddam Hussein failed to heed the deadline, Operation Desert Shield became Operation Desert Storm, a massively coordinated lightning campaign against Iraq from the air, the sea, and on land. After continuous air attack beginning January 17, the ground war was launched at 8:00 p.m. on February 23 and lasted exactly 100 hours before Iraqi resistance collapsed and Kuwait was liberated.

New World Order. Bush, who consistently earned high marks from the American public for his conduct of foreign relations, now enjoyed overwhelming popular approval in the wake of the successful outcome of the Persian Gulf War. But Bush did not bask alone in the war’s afterglow. Military success in the Gulf seemed to exorcise the demons of failure born in the Vietnam War, and with the liberalization and ultimate collapse of the Soviet Union, Americans felt that their nation was in the vanguard of what President Bush called a “new world order.” Not only had the long ideological struggle between communism and democracy ended in a victory for democracy, but a bully from the Third World, Saddam Hussein, had been defeated—and he was defeated with the cooperation of many nations and to the applause of most of the world.

The Least You Need to Know

President Reagan started a conservative revolution in America, introducing supplyside economics and undoing much of the welfare state that had begun with FDR.

              The Reagan-Bush years saw victory in the 50-year Cold War (as well as victory in the brief but dangerous Persian Gulf War) but at the cost of quadrupling an already       staggering national debt and sidelining such domestic issues as welfare and the AIDS crisis.

Main Event. President Reagan had been in office only two months when he exited the Washington Hilton Hotel on March 30, 1981, after delivering a speech. Six shots rang out, fired from a .22-caliber revolver loaded with explosive “Devastator” bullets. Secret Service agent Timothy J. McCarthy and Washington police officer James Delahanty were hit, as was White House press secretary James S. Brady, who suffered a severe head wound.

The president was bundled into his limousine, where it was discovered that he, too, had been wounded in the chest. Fortunately, the bullet, lodged in his lung, had failed to explode and was removed in an emergency surgical operation. “I hope you’re all Republicans,” the president quipped to his surgeons.

The shooter, 25-year-old John Warnock Hinckley, Jr., was the drifter son of a wealthy Denver oil engineer. Hinckley was obsessed with screen actress Jodie Foster, who had made a sensation as a teenage prostitute in “Taxi Driver,” a 1976 film dealing in part with political assassination. Hinckley apparently decided to kill the president to impress Foster.

A jury found Hinckley not guilty by reason of insanity, and fie was confined to a psychiatric hospital. All of his victims recovered, except for Brady, who was left partially paralyzed. Brady became a passionate advocate of federal regulation of handguns—a policy President Reagan had himself opposed.

Real Life. The words put into Gordon Gecko’s mouth were paraphrased from a real-life Wall Street manipulator, Ivan Boesky, who told the graduating class of the School of Business Administration at the University of California, Berkeley, on May 18, 1986: “Greed is all right, by the way … I think greed is healthy. You can be greedy and still feel good about yourself.”

Word for the Day. During the Reagan years, the Wall Street word for the day was arbitrage–the art of buying securities, commodities, or currencies in one market and immediately (sometimes simultaneously) selling them in another market to profit from price differences. Arbitrageurs like Ivan Boesky acted on takeover bids and impending mergers, buying blocks of the target company’s stock at a low price, with the hope of selling them at a much higher price when the merger occurred. If the merger failed to occur, losses could be devastating.

Real Life. Michael R. Milken (b. 1946) was a star executive at the prestigious Wall Street trading firm of Drexel Burnham Lambert, Inc. He engineered a number of high-stakes, high-profile corporate takeovers through the use of high-yield junk bonds, making many of his clients and himself enormously wealthy in the process. However, it was subsequently discovered that much of Milken’s trading was based on illegal inside information, and in 1989, a grand jury handed down a 98-count indictment against him for violating federal securities and racketeering laws. When Milken pleaded guilty to securities fraud and related charges in 1990, the government dropped the insider trading and racketeering charges, which carried greater penalties. His 10-year sentence was later reduced to three, and Milken returned to the world of finance upon his release. His spectacular rise and equally dramatic fall mirrored the course of the economy and cast a harsh light on the era’s questionable business ethics.

Stats. On “Black Monday,” October 19, 1987, $870 billion in equity simply evaporated as the market dropped from a Dow of 2,246.73 to 1,738.41 points.

Word for the Day. AIDSAcquired immune Deficiency Syndrome–is caused by infection with the Human Immunodeficiency Virus (HIV), which attacks immune system cells, ultimately producing severe suppression of the body’s ability to resist other infections.

The disease is transmitted sexually, through the blood (for example, through transfusion with infected whole blood plasma), and during birth, from infected mother to their children.

Stats. Since the first AIDS cases were formally reported in 1981, approximately a half-million AIDS cases and mote than a quarter-million AIDS-Mated deaths have been reported in the United States. It is believed that another million Americans, have been infected with HIV through the mid-1990s but have not developed clinical AIDS symptoms.

Voice from the Past

“So in your discussions of the nuclear freeze proposals, I urge you to beware the temptation of pride—temptation blithely to declare yourselves above it all and label both sides equally at fault, to ignore the facts of history and the aggressive impulses of an evil empire, to simply call the arms race a giant misunderstanding and thereby remove yourself from the struggle between right and wrong, good and evil.”

Ronald Reagan, statement made on March 8, 1983

Word for the Day. Americans learned two important Russian words during the 1980s. Perestroika (literally, restructuring) was how Gorbachev described his program of liberal political and economic reforms. Glasnost (openness) described how the traditionally secretive and closed USSR would now approach its own people and the rest of the world.

Stats. Combined U.S. and coalition forces in the Gulf War amounted to 530,000 troops as opposed to 545,000 Iraqis. U.S. and coalition losses were 149 238 wounded, 81 missing and 13 taken, prisoner (they were subsequently released). Iraqi losses have been estimated in excess of 80,000 men, with overwhelming loss of materiel.

Real Life. The only thing Americans cherish more than their cynicism is their heroes, and the Persian Gulf War produced one in General H. Norman Schwarzkopf, overall commander of operations Desert Shield and Desert Storm. Born in Trenton, New Jersey, on August 22, 1934, Schwarzkopf graduated from West Point in 1956. He served with distinction in numerous staff strategic and personnel management assignments, as well as in field command in Vietnam and in the 1983 invasion of Grenada.


During the Persian Gulf War, Schwarzkopf commanded a combined U.S.-coalition force of 530,000 troops opposed to 545,000 Iraqis and achieved overwhelming victory. Frequently appearing on television press conferences during the conflict, he impressed the American public with his forthrightness, military skill, and softspoken humanity. “Any soldier worth his salt,” Schwarzkopf declared, “should be antiwar. And still there are things worth fighting for.” Much honored, he retired after the war.


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