Jim Baker (former chief of staff to President Reagan, former Secretary of the Treasury and former Secretary of State) gave the following speech at Princeton University on November 19, 2010 on the political challenges facing America. I recommend it to you highly. – William Isaac

By James A. Baker, III

Center for Economic Policy Studies

Princeton University

Thank you, Alan, for that generous introduction.

It’s really great to be back here at Princeton — at the “Best old place of all.”

Ladies and gentlemen, I don’t come here today as an expert on the esoterics of economics. In fact, I may be the only person to be Secretary of State who never took an economics course. But I do come with what I think is an appreciation of the way things work in Washington and the politics in that town, particularly when we have divided government.

And so, I would like to start by talking about the parallels and differences between President Barack Obama and another president — the one I worked for as White House chief of staff and secretary of the Treasury — Ronald Reagan. And I want to try and do so in as non-partisan a way as I can.

Two years ago, despite my support for my old friend John McCain, I was impressed by the former junior Senator from Illinois. (Of course, there wasn’t a Chris Matthews type of “thrill going up my leg.”) Nonetheless, I was struck by the similarities between Barack Obama and The Gipper.

Like Reagan, Obama is an eloquent speaker with a charismatic personality and a brand of quiet self-confidence that can appeal to worried Americans during difficult times. And like Reagan, he holds strong convictions about the enduring quality of our national spirit — though they might differ on the details of that spirit.

Similarly, both have represented new periods in American politics.

Reagan ushered in an era of American conservatism — one driven by the belief that government, although important, should be kept under control rather than be allowed to be in control.

During his eight years in office, Reagan restored America’s confidence in itself and its role in the world. He also instituted economic strategies that, over time, would prove wildly successful.

Obama’s election, likewise represented a new era. Upon his election, I told practically anyone who would listen to me that I was profoundly proud of my country for proving that we are capable of putting our past of troubled race relations firmly behind us. And I have been publicly supportive of many of his foreign policy positions.

Like Ronald Reagan, Barack Obama is committed to reducing the stockpile of nuclear weapons on our planet. Just yesterday, I met with the President and Vice President Biden and offered them my assistance to help gain support for the New START Treaty, which is a continuation of the START One treaty that I helped negotiate as Secretary of State.

Another important similarity and a very important one — both Ronald Reagan and Barack Obama were elected at pivotal times in American history.

Reagan faced an economy plagued by the so-called “misery index,” with both inflation and unemployment hovering above 10 percent. Newsweek said that President Reagan had inherited “the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago.” America’s national pride and global status had taken beatings in the aftermath of the Vietnam War and the hostage crisis in Iran

Two years ago, the United States faced similar problems. A tough recession at home, an international financial crisis, and two wars abroad were testing America’s fortitude and strength. Once again, our economic downturn was being likened to the Great Depression.

By the time of the first mid-term elections under both Reagan and Obama, Americans hadn’t fully accepted the remedies that each had prescribed.

By November 1982, unemployment was at 9.5 percent — too high for anxious voters. Reagan’s favorability rating had dropped to 42 percent. And the Democrats picked up 27 seats in a House they already dominated. (Republicans maintained their Senate majority at 53 to 47.)

That election was a tough blow for us in the White House. Two days later, the New York Times wrote in an editorial that the mid-term election was proof that “the need to clean up the wreckage of Reaganomics remains.”

Now, let’s fast forward to November 2010. Unemployment is at 9.6 percent. Obama’s favorability rating is in the mid-40’s — comparable to Reagan’s at the same point in their first terms. Republicans have retaken the House by a huge majority and made significant inroads in the Senate.

And once again, two days after a mid-term election, the New York Times has provided criticism of the Administration, this time in the form of an op-ed by retiring Democratic Senator Evan Bayh, who wrote: “The stereotype of Democrats as wild-eyed spenders and taxers has been resurrected.”

In short, there are strong parallels between the first two years of Ronald Reagan’s presidency and the first two years of Barack Obama’s. But I submit to you that unless our current president changes his approach and moves to the center, as President Clinton did, that’s where the similarities may end — and with it, perhaps his chances for winning a second term.

So what made Reagan ultimately successful? Books have been written to answer that question. But let me point to what I consider two major factors. The first was Reagan’s support for pro-growth economic policies. The second was his ability to work in a bi-partisan fashion.

Before the end of his first year in office, Reagan had worked closely with a Democratic Congress to pass the Economic Recovery Tax Act of 1981, which, among other things, dropped the top tax rate from 70% to 50%. Reagan focused on the economy with laser-like attention. Business responded.

By 1984, the Misery Index had been cut in half from the level when Reagan took office — with unemployment down from 9.5 percent to 7.5 percent between 1982 and 1984. The President won an unprecedented landslide election — 49 states and a second term.

Reagan’s pro-growth policies resulted in 96 months of unbroken economic growth starting in 1983, the creation of 18 million new jobs during that same period, and the eradication of inflation and high interest rates.

And although Ronald Reagan’s poll numbers sagged from time to time, much like they did in 1982, support for his policy prescriptions did not. Why not? Because they were successful.

It remains to be seen, of course, whether Obama’s policies will ever engender support the way that Reagan’s did. First returns don’t look so good.

For two weeks now, the pundits and talking heads have been telling us that the mid-term election was a referendum on President Obama.

Voters are worried about a mounting debt bomb that threatens to cripple our nation. And they are frustrated by the massive expansion of the Federal government. We face a gross debt to GDP ratio at or above 100 percent for the next three years and an increased government role in the healthcare industry, the automobile industry, the student loan industry, and the financial services industry. These expansions of government’s role, combined with the stimulus and the poor economy, mean that in the first 22 months of his presidency Obama has increased the country’s gross debt to GDP ratio more than Reagan did in eight years.

His policies may have helped our country avoid an economic catastrophe, and the President deserves credit for that. But there is little evidence that these policies will soon kick start the private sector, which is the engine for growth in the American economy.

Less than five months after this administration took office, the White House asked a few of us to prioritize the strategic challenges facing the country. I said that although the President faced other challenges — including nuclear proliferation, establishing an environmentally-sensitive energy policy and addressing regional conflicts like Iraq, Afghanistan and Iran — his top priority was clear.

“Historically,” I wrote, “the strength of our economy has been the basis for the strength of our country. So I believe that promoting economic growth is today the most important strategic challenge confronting your presidency.”

Instead of focusing with laser-like intensity upon the economy, the administration, as I mentioned, sought and achieved one of the most aggressive expansions of government since the Johnson administration. In addition, it proposed, but did not achieve, massive costs on energy and all that would entail for the economy. And most regrettably, along the way, they trashed as greedy profiteers the business sector — the same business sector that ultimately must lead us out of this morass.

Meanwhile, the Federal Reserve’s quantitative easing is lowering the value of the dollar to the dismay of major exporting countries who question our consistency after accusing China of currency manipulation. Although the Fed’s goal is to reduce long-term interest rates so as to stimulate growth, and I fully understand Chairman Bernanke’s reasoning for doing this, it is acting unilaterally without the type of international cooperation that Reagan insisted upon and that led to the 1985 Plaza Accord.

Many argue that it is because of the actions being taken with respect to our economy that America’s business sector is not responding as it should, can, and eventually will respond. Instead, business is taking a cautious approach — by sitting on their money rather than investing it — amid concern about the growth of government and a pervasive uncertainty in our politics and our economy. These same observers argue that consumer demand is now weak because Americans fear that the debt crisis will eventually pinch their pocketbooks through higher taxes, higher inflation, or a weaker dollar — or all three.

In short, uncertainty is eroding confidence on Main Street as well as Wall Street.

Some of these current problems stem from the Administration’s early decision to sub-contract out the formulation of much of its domestic policy to the Democratic leadership in the House and Senate.

This approach was in stark contrast to Reagan. The path to bi-partisanship is to do what Reagan did — send your own proposal up to Capitol Hill and give the other party a buy-in in the formulation of the final product. That way, Senators and Congressman can go home and show their constituents what changes they got to help the folks at home.

So where do we go from here?

President Obama may be right. It could be time for a “Slurpee Summit” with John Boehner. (Although, given my preference for a “real” drink, I might prefer Boehner’s idea of a “Merlot Meeting” a little better.) Either, of course, would be a good start — if it would get the two sides talking with one another rather than at one another.

But it will take more than that.

All of our leaders need a large dose of political pragmatism, focusing on results rather than ideology.

Here, they could take another lead from Ronald Reagan, who held convictions as strong as anyone I have ever known. But he also realized that presidents are only successful when they get things done. And so, he was willing to compromise.

But compromise is hard to come by these days. Witness the Bipartisan Commission on Fiscal Responsibility and Reform that Erskine Bowles and Alan Simpson are chairing to resolve our national debt problems. Earlier this month, Bowles and Simpson released a chairmen’s proposal with recommendations to reduce spending and raise revenues. It has been trashed by both the right and the left, and I am not sure that the commission can reach a consensus for a final set of recommendations.

A good start towards defusing the ticking debt bomb would be if the commission could build support for reasonable solutions to our entitlement monsters — Social Security and Medicare. On Social Security, I am optimistic because we did just that in 1983. On Medicare, I am pessimistic because it is a bigger and much more complex problem. But even if the commission recommends solutions to the problems of Social Security and Medicare — and those solutions are legislated, which I think is very unlikely — more needs to be done.

Meanwhile, the commission chairmen appear to recognize that raising taxes will have a detrimental effect on the economy if they are not accompanied by spending cuts — real cuts and not just a reduction in the growth of spending, which is Washington’s usual response during periods of austerity. History has proven that any time taxes are raised in the absence of spending restraint, Congress will spend that money and more. The last time federal spending actually fell was 1965, when it dipped by one-quarter of 1 percent. Since then, through both Democratic and Republican control, our spending has risen just as surely as the sun rises each day in the east.

There is absolutely no political will on the part of either party to cut spending. President George W. Bush vetoed only a very small number of spending bills. In fact, Bush vetoed fewer bills than any president since Warren Harding and none in his first term.

I think the new Republican-controlled House under John Boehner is unlikely to employ the same approach as the House did in 1995 under Speaker Newt Gingrich. That year, Gingrich helped bring government to a halt after Republicans gained control of the House during the mid-term election of Bill Clinton’s first term as president. Of course, it cost Gingrich his job.

There are areas affecting our economy where President Obama and the GOP leadership can take a few pages from Reagan’s playbook. One area of potential cooperation is reforming our tax code as we did in 1986. We did that with Democratic votes. Another is working to extend the market for U.S. goods and services through free trade agreements, a top priority of the Reagan Administration. In this regard, it has been encouraging to see Obama recently seek an improved trading relationship with India and begin to move on a free-trade pact with South Korea, although it is disappointing that he waited so long to pivot on the South Korea trade pact because it may be hard to strike a new bargain.

Budget reform, of course, will require cooperation from Republicans who now have a bigger decision-making role and should not be merely critics. They must recognize that their recent victories were not necessarily a validation of the GOP and its ideas. Rather, they were an invalidation of Obama and his ideas.

In effect, Republicans are on probation. Voters rejected them just two years ago. And unless they are perceived as a party that is willing to try to create solutions, they risk another rejection two years from now.

And so, it is time for Republicans to act responsibly. Of course, they only control one House of Congress and to do what needs to be done for our economy and our country will require compromise from the White House and Democrats in the Senate as well.

Having said all this, it would be naïve to think that there won’t continue to be major differences between the White House and House Republicans during the next two years. And I hate to say it, but as one who has served in three Administrations that dealt with many of the types of economic issues we face today, I think the likely outcome for the next two years in Washington will be uncertainty and gridlock.

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To conclude, Ladies and Gentlemen, let me say that despite my pessimism about the short term, I am far from a “declinist” who believes that America’s best days are in the rear view mirror.

I reject gloomy predictions about our national eclipse and am absolutely convinced that our country’s future is a bright one. We remain the world’s economic, military, and diplomatic leader, and I believe we will for decades to come. Despite our current economic woes — and they are huge — American economic output still represents almost a quarter of global GDP. No other power — established or emerging — can match us in the military arena. Moreover, we still continue to exert immense diplomatic influence around the world.

Still, the dark clouds of concern are very real. Although the United States may be the most powerful state in history, unless we get our economic house in order, it is quite possible that we could sink into a malaise that lasts a decade or longer.

As I have mentioned, there are strong parallels between the United States of 1982 and the United States of 2010. At both times, the critics warned that the period of American greatness was nearing an end.

During Reagan’s presidency, we were told that Japan Inc. would overtake us. Today, we are told that China is poised to do so.

But Japan did not overtake us. By the time Reagan made his state of the union address after winning re-election in 1984, he noted with pride that the country had experienced 25 straight months of economic growth, the strongest in 34 years. There was a 3-year inflation average of 3.9 percent, the lowest in 17 years. And the country had created 7.3 million new jobs in 2 years, with more of our citizens working at that time than ever before.

That growth remained continuous up until the recent downturn except for slowdowns in the second half of 1990 and first half of 1991, and in 2002.

And so today, I remain confident that we can get back on track in the mid- to long-term.

But we will do that only if our leaders learn how to work together.

And then, then only if they adopt pro-growth policies that get our magnificent economic machine again running on all cylinders.

Thank you.