Reagan and Andropov Jude Wanniski May 2, 1983

Executive Summary: President Reagan, who had been "stumbling in the right direction'' in his first two years, has been gaining ground rapidly on Wall Street's coattails and is beginning to be seen as a sure winner in '84. His charismatic speech to Congress projects a confident global leader whose foreign principles are framed not by anti-communism but by democratic principles. In this position of strength, a more docile Congress is likely to give him what he wants. By contrast, the Soviet's Yuri Andropov has been losing ground steadily to Reagan's lead of a solid, hard-line West. Thwarted abroad, he has to turn inward to effect liberal economic reforms. But the USSR will also be helped by a buoyant world economy as long as the West does not try to isolate it commercially.

Reagan and Andropov

Robert Bartley, editor of The Wall Street Journal, was asked to comment a few weeks ago on the performance of the Reagan Administration to date. "It's been stumbling in the right direction," he said. It seemed a perfect assessment, one the President himself would probably appreciate. There's been so much lurching around on economic, social and foreign policy at the White House that there have been times — especially last summer — when it looked as if Reagan would go from a stumble into a collapse, another one-term President. But if anything, in the last few months there's been less stumbling, with the Gipper picking up long yardage in a broken-field run. If he had more blocking from his chief of staff, it would be an open-field dash we'd be seeing.

None of this is readily apparent in a casual reading of the Establishment press, including the news pages of The Wall Street Journal. Yes, Reagan is benefiting a bit from the recovery, but look, he's got trouble with the budget and he's not making progress on arms control, etc. Maybe he won't run and if he does maybe he won't get credit for the economic expansion. Blah, blah.

The news that is not being openly discussed is that, for whatever reason, we finally have a President who is a winner. Both Republican and Democratic elites find this hard to admit without some embarrassment. But the electric, standing ovation he got from the Joint Session of Congress on April 27 before he spoke a single word was just such an acknowledgment. After five successive failed Presidents from both parties, both sides of the aisle could collectively cheer their national leader with bipartisan enthusiasm for his ability to win. It's as if a national drought has ended, and Democrats rejoice even though it was a Republican who made rain. This is charisma.

The fact is, Reagan cannot be separated from the raging bull market on Wall Street. Every surge of the Dow to a new record intimidates the President's opposition, including those in his own party who opposed his election and have been awaiting his failure as proof of their prescience. The markets are now predicting a robust, non-inflationary expansion and it will not take much more before the forecast is of boom. Reagan looks like a surefire winner in 1984 against Fritz Mondale, who is now so far ahead of the rest of the Democratic pack that there doesn't even seem to be a race for the nomination. To be a convincing candidate, a man has to be convinced that he is in fact superior to his competitors. The Harts, Cranstons and Glenns might have been able to assert themselves if 1984 still looked like it was going to be a Democratic year. But with Reagan on a roll that looks more formidable every day, all the campaigns are turning slack: What the heck, let Fritz have it.

There had been the vague hope that foreign and defense policy could still be Reagan's weakness, that he could be had in '84 because of voter fears of his anti-Soviet hardline, excessive military spending, involvement in Central America's turmoil, fears of a nuclear war, and general "disarray." It is, after all, the role of the Loyal Opposition to continually probe for weakness. And for a while, the President seemed vulnerable on all fronts. Last winter the public-opinion polls were turning up miserable results across the board for Reagan's foreign and defense posture. Democrats figured they had him on the run and so did the establishment Republicans, Percy, Dole, Domenici in the Senate; Baker, Darman, Duberstein in the White House. Reagan, they insisted, must compromise.

In actuality, it was the despair of these Reagan White House aides amidst winter's economic gloom that muffled Reagan's advocacy on foreign and defense policies and thereby generated by the public-opinion polls they viewed as proof that Reagan had to compromise. Jim Baker's greatest flaw as a political strategist — the reason he has been unable to win campaigns for himself or others — is that he accepts opinion polls as political reality. If the President's opponents make a case against his policies and Baker's pollster, Richard Wirthlin, takes a poll before the President has counted, the negative poll results will suggest to Baker that the President is on the wrong side of the issue. His hesitancy is reflected by the troops under his command, especially the White House communications people. The public at large hears a weak, uncertain note that the pollsters pick up as further evidence that Reagan has diminished public support.

The financial markets had been correctly forecasting the vigor of the recovery in the works, but oddly enough this public-opinion poll, conducted with hard dollars, was discounted by Baker et al. They allowed themselves to be persuaded by "experts" like Martin Feldstein, David Stockman, Peter Peterson, William Simon and the Business Roundtable that the projected structural deficits would abort the recovery and the bull market in financial assets would not translate into real economic activity.

It was not until early February, when the unemployment rate dropped to 10.4 percent from 10.8, that the chemistry of the White House turned in the President's favor. Instead of Baker, and almost everyone else in Washington, questioning Reagan's judgement, Baker could then feel better about his boss and a little sheepish about himself. At the same time, the President had to feel better about himself and the reliability of his own instincts. This positive psychology immediately spilled over into foreign policy, to which Reagan could now finally turn his attention.

In my mind, the first visible sign of Administration assertiveness on foreign policy, after several months of backpedaling, came on February 16 when Secretary of State George Shultz went before House Foreign Affairs Committee to discuss El Salvador policy. The committee liberals were then pressing their campaign to get the Administration to force the El Salvador government to "negotiate" with the rebels. Shultz, who for years has been fawned on by liberals and softies because of his willingness to compromise on principle — and who was counted upon to soften up Reagan, shocked them all by scornfully deriding the idea of permitting "the guerrillas to shoot their way into the government." It was only a matter of time before the Shultz fanclub in the press corps would decide, in unison, that maybe he wasn't the right man for the job.

•  On March 6, the West Germans gave an enormous boost to the President by voting up the Helmut Kohl government and turning thumbs down on the nuclear-freeze, unilateral disarmers.

•  On March 8, Reagan delivered his "focus of evil" speech, a breathtaking indictment of the ruling elite in the Kremlin, challenging both the morality and legitimacy of their oligarchic rule.

•  On March 22, he delivered his first of two speeches on arms control, offering a flexibility that disarmed his critics and forced the Russians to scramble with public-relations ploys to try to cover up their own rigidity.

•  On March 23, Reagan gave his "star wars" speech against the advice of his elite civilian advisers, trusting his own judgment and that of the Joint Chiefs that America's high technology can someday produce a heavenly antimissile defense.

•  On March 31, in Los Angeles, he gave his second arms-control speech, giving the Russians fits again.

•  On April 5, France kicked 47 Russian diplomats out of the country on espionage charges.

•  On Sunday morning, April 10, all of Washington was reading the front page of the Washington Post, "Moscow Faces Array of Hard-Line Leaders in West," in which we are told that for some unaccountable reason, all of the major Western nations suddenly have governments that agree with President Reagan's assessment of the Soviets.

•  On April 14, by a surprisingly large 57-42 Senate vote, Kenneth Adelman was confirmed as head of the Arms Control and Disarmament Administration. A major setback for the softliners.

•  On April 20, the Brazilians grounded a Libyan plane en route to Nicaragua with "medical supplies" that turned out to be arms meant for El Salvador's rebels.

•  On April 21, France announced a shift in its defense budget, giving priority to nuclear weapons at the expense of conventional weapons.

•  On April 26, Sweden recalled its envoy to Russia in protest of Soviet submarines in their waters.

On April 27 Reagan addressed the Joint Session of Congress, in what will prove to be one of the most important speeches of his Presidency. The stated purpose was to ask for aid to El Salvador. What the President came away with was bipartisan support for his foreign and defense policies in general. And he did it not by Nixonian appeals to America's greatness or fears of a Communist juggernaut. He did it by framing his policies with clear, unambiguous principles of democracy. As with the very best speech of his Presidency, last year's address to the British Parliament, Reagan made it clear that his foreign-policy standard emphasized political institutions, not economic systems. He's not supportive of El Salvador because it's pro-Washington, anti-Soviet, anti-socialist, but because it embraces basic democratic freedoms. He does not aim at the overthrow of the Nicaraguan government, but he cannot support its anti-democratic, oligarchic form. Only those in Congress who chose to ignore that message could resist its appeal; democracy is the key, the unifying theme. Even Speaker Tip O'Neill found himself applauding (and the next day wishing out loud that Reagan would not run for re-election because a second term would be too hard on a man of his years).

The only significant public setback for the President in recent months came in April when the Senate Budget Committee refused to approve his request for a 10.7 percent boost in defense spending. But beacuse the President refused to compromise with himself on this issue he will ultimately get everything he really wants out of Congress. If my analysis up to this point is correct, Congress has basically been pacified by the President. In seeing him as a winner, it no longer has the stomach to try to bring him down. So while it will still make a great fuss about percentages and dollars and cents, Congress will not deny him the help he wants in Central America nor the weapons systems that he wants in the defense budget. In the public-opinion polling that took place even prior to the April 27 speech before Congress, the President's campaign had brought solid advances for him in every category of foreign and defense policy. The April 27 speech can only have broadened public support for Reagan's approach.

This is not to say that all the weapons systems will be built and Reagan will preside over $1.6 trillion in defense outlays in a second term. The importance of Reagan's success in being seen as a charismatic winner who will breeze to re-election is not that this puts the MX missile in his back pocket, but that it demonstrates to the Soviet Union that it's Reagan's for the asking. At the moment, there's no need for Moscow to count upon Reagan being hamstrung by the Congress, public opinion and American allies. In away, Reagan's projected strength reflects the nation's projected strength and increases chances of serious arms-control talks with the Soviets.

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Leonid Brezhnev died just in time. Another few months and he would have had to sit in his Kremlin office hearing of daily records being set on Wall Street, Western economies coming back to life with hard-line anti-Soviets in charge of their governments, the People's Republic of China burying Marxism-Leninism a little more every day, Eastern Europeans wallowing in debt and no-growth and the Pope running up and down with Ronald Reagan inciting democracy. Brezhnev can sleep peacefully on 18 years worth of bureaucratic laurels. It's Yuri Andropov who now has to greet each day with a grimace, wondering what new set of impossible problems he will have to solve before breakfast. The general secretary of the Communist Party's Central Committee enjoyed three solid months on top of the world, from his selection November 12 until sometime between February 4, when the U.S. unemployment rate dropped, and the March 6 German elections.

What has caught Andropov by surprise is the outbreak of recovery in the West amidst the presence of western leaders like Reagan and Pope John Paul who are exalting democratic freedoms in challenging the very legitimacy of the Soviet power elite. There's no question that Marxism-Leninism has become a mass religion without any believers. Soviet missiles protect not an ideological system but a solidified caste system that would be liquidated by even a breath of democracy.

Andropov's job is to preside over the decline of the Marxist-Leninist imperium in a seemly way, one that does not too rapidly offend those of his Politburo supporters who believe such a revolution would cause them and their younger proteges to lose out. Only power is at stake. The Chinese managed this after Mao's death, with Deng Xiao Peng adroitly managing the transition. Now, it's up to Andropov, whose work cannot be sidetracked by economic and military weakness in the West, which would only tempt him and the Politburo into foreign adventures and diversions.

In 1977, I wrote the following in the first editon of The Way the World Works:

In China, the passing of Mao Tse-tung has given that vast electorate of 900 million an opportunity to "vote" in new leadership, through internal consensus-shaping. The result has been a relatively rapid drift in the direction of classical economic forms. Peking has openly embraced the idea of using individual incentives as a means of expanding production, going so far as to twist a Marxist slogan into one more appropriate to Adam Smith: Instead of Marx's idea of communism, "From each according to his abilities, to each according to his needs," Peking proposes, "From each according to his abilities, to each according to his work/' If China can find a way to unlock the nation's intellectual capital through incentive systems, for industry as it has for agriculture, rapid growth can follow. Unity with Taiwan is historically inevitable, as is unification of North and South Korea. But it is now not outlandish to consider the possibility that the completed results will mean a China and Korea that more closely resemble Taiwan and South Korea than Marxist models, which has been the conventional assumption by both liberal and conservative intellectuals in the West.

It would be harder for the Soviet Union to make the transition, I wrote, because Russia went through the global depression of the 1930s as a communist system and China did not. Stalin left a generation of leaders who viewed dissent as ideological rather than economic in origin, but Mao left a more pacific cadre with a less distorted view of the nature of dissent, a cadre willing to rewrite Marx into Adam Smith under economic pressure from the masses.

As far as Russia is concerned, I suggested in 1977:

Conflict is more likely to come as a result of uneven advance. If all members of a family unit save one are developing, the one left behind will cause trouble, drain the resources of those who have been advancing, and create tensions and strife that will block the advance of the unit as a whole. If the West, China and the Third World manage a major economic advance in the 1980s as the result of simultaneous moves down the Laffer Curve, but the Soviet Union is unable to break through the crusts of ideological dogma that would enable it to advance as well, one would expect an increase in the potential for conflict. A happier outcome would be general global advance, with the fresh economic and political impulses in Eastern Europe spreading into the heartland of Russia.

It was against this kind of thinking that I welcomed Andropov's elevation and the submergence of his bureaucratic competitor, Chernenko. Andropov has the earmarks of a Deng Xiao Peng, able to bring economic reforms to the Soviet Union in a way that will force a gradual democratization, as we now observe in China. The reforms have been delayed perhaps because Andropov, like the Democrats, believed what he was reading in the Washington Post and the other establishment journals here: Reagan's in disarray, the recovery will abort over high deficits, the bull market is a flash in the pan, there's no public support for Reagan's anti-Soviet hardline or for increased defense spending, and he's a one-term President. If his KGB sources are any good at all, they should confess to him that the last place to get reliable information on what's going to happen is the Washington press corps, which reports over its shoulder.

What is going to happen? As long as Reagan and the West are sensitive to Andropov's problem (but without any sign of weakness), he will push liberalization along supply-side lines. How do I know when the national press tells us we know very little, after all, about Andropov? Because he tells us all about it. In the third issue of the Kommunist Journal, reported by Tass on February 23, Andropov writes of 'The Teaching of Karl Marx and Some Questions of Building Socialism in the USSR." Some excerpts:

...it was at the price of great efforts and even mistakes that all the significance of Marx's views concerning distribution was appreciated. He pointed out persistently that in the first phase of communism every working man gets back from society, after all deductions, as much as he himself gives it, in short, strictly according to the amount and quality of his work, which agrees with the basic principle of socialism: "From each according to his ability, to each according to his work." An impeccable democrat and humanist, Mark was strongly against equalisation and categorically rejected demagogic or naive talk, which was not infrequent in his time too, about socialism as "general equality" in distribution and consumption.

Indeed, relations of distribution directly and immediately affect the interests of all and everyone. The character of distribution is essentially one of the major indicators of the degree of social equality possible under socialism. Any attempts to exceed by will this possible degree, to lunge ahead — to communist forms of distribution — without assessing accurately the contribution made by everyone with his work to creating material and spiritual boons may, and do, give rise to undesirable things...

We have a long-established system of material and moral stimulation of work. It served and continues to serve us quite well in the struggle for socialism and communism. But today, this system, just as the forms of its practical application, evidently needs to be further improved. What is important, is not only that good work should be well rewarded and get public recognition that is due to it. It is also necessary that the practice of material and moral incentives, combined with an efficient organisation of labour, should maintain and cultivate in the minds of people an awareness of the usefulness of their efforts and of their products. It is necessary that the system of material and moral incentives should eventually strengthen in workers a feeling of involvement in the affairs and plans of their collectives, and of the entire people. This feeling mobilises and disciplines people better than any persuasion and exhortations.

It's all there. Now all Andropov has to do is get sufficient power into the hands of people who know how to crack through the egalitarian barnacles with the much vaunted Hungarian-type reforms. There's no time to waste. The stock markets around the world are pointing in the direction of a global expansion and technological advances of a dizzying pace. The Eastern bloc and especially the Soviet Union would be left in the dust, unable to steal technology fast enough to remain an industrial nation.

While Andropov contemplates his growing pile of daily problems, though, he will soon realize that the booming financial markets in the West are predicting better economic times for the USSR too. The Soviet Union, after all, is integrated into the world economy, and in the last decades it suffered waves of dollar inflations and deflations with everyone else. At the Williamsburg economic summit May 28-30, the Soviet Union will be very much on the minds of the seven Western heads of state, and Andropov will be thinking of them.

In his interview with Der Spiegel, the West German magazine, on April 24, Andropov's harried tone reflected the sense of his country's growing isolation. Most of the extensive interview turned on arms control issues, Andropov clearly upset that his campaign against deployment of Pershing II missiles in Western Europe this autumn is lost. At the very end, though, he was asked: "It is known that the foreign indebtedness of some of the socialist countries has now assumed very dangerous proportions. What way out is possible here in order to avoid a deepening of the crisis? The fact is that we in Europe all depend on one another."

Andropov replied: "Since we are speaking about sovereign states, I can only say that looking for ways out of the problems that arise is a sovereign matter for each particular country. If we are speaking about what the Federal Republic of Germany could do for its part, then I can only offer this piece of advice: Carry on trade and develop economic relations, and do not engage in 'sanctions'."

On that point, I'd emphatically agree. In fact, Reagan has things going so well for him now that he could easily afford to soften his trade stance with Moscow while maintaining military and diplomatic pressures. Somehow he has to strike the right balance in feeding the forces of reform we can see exist in the Soviet Union on Andropov's sleeve. For the first time in quite a while, it feels particularly nice to be an American.

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