Socialist governments traditionally do make a financial mess. They always run out of other people’s money.

While reading a Yahoo interview with Mr. Stiglitz in which he describes three steps to solve income inequality, I was struck with the thought that he remembers the 1980s much differently than I do. Here is a quote from the interview.

In his new book, “The Great Divide: Unequal Societies and What We Can Do About Them,” Stiglitz traces the modern divide of inequality back to the Reagan era. Though inequality was a huge problem at the turn of the last century and in the lead up to the Great Depression, Stiglitz says the income divide in the U.S. was reduced after World War II and that the country “grew at its fastest pace” and “grew together.” He says the turning point was the Reagan Administration and its rolling out of supply-side economics, deregulation, and lower tax rates. The goal of these policies was to spur economic growth overall and make everyone wealthier. Stiglitz says it caused a divide instead.

To refresh my memory about the Reagan years I went back and listened to the American Heritage podcast, “The Reagan Revolution”, by Professor Moore of Hillsdale College. I think there is a much stronger argument that the income divide was reduced after World War II because we won and they lost. There was very little foreign competition for our businesses until the mid 1960s. When the competiton heated up in the 1970s we were constantly reminded that the Japanese and Germans were making products that were not only better but cheaper and the cost for our social experiments with defined benefits and free health insurance were a burden our companies could no longer afford. I remember the early 1980s as a time filled with fear and despair. People in both the United States and Britain were concerned that the socialistic policies and practices of the past had failed to live up to their promise and were now viewed as the primary obstacle to improving competitiveness, employment, and wage growth. Desperate times call for desperate measures and the first idea to die was the idea of the paternalistic company in the United States and the state-owned company in Britain. The second idea to die was the cavalier attitude toward the importance foreign competition. The business sector needed to restructure with an emphasis on efficiency. It was a “we win, they lose” situation and America and Britain did remarkably well under pressure. The auto and steel industries in both countries started the long process of re-inventing their businesses for the new environment.  Reganomics reversed the stagnant productivity during the Carter years with solid productivity gains. The Reagan Revolution is fondly remembered as the tide that lifted all ships and President Reagan was easily re-elected. Probably more amazing was the transformation of the British economy under Prime Minister Thatcher as it emphasized deregulation (particularly of the financial sector), flexible labor markets, the privatization of state-owned companies, and reducing the power and influence of trade unions. It was arguably the more difficult political task but the reforms has allowed Britain to be in a competitive position this century that is more like Germany than Italy.

When I look at the 2015 economic landscape I keep wondering whether we have become too financially efficient and complacent to innovate and grow sales. Our GDP growth is limping along primarily on gains in health care spending so is anyone surprised that wage growth has been stagnant? We need to get back to making things bigger, better, faster, or cheaper to get customers to keep coming back and arguably small and mid-size companies is the optimum organization structure to achieve it. The interesting part of this solution is that we probably fix both our middle class wage growth, income inequality, and GDP growth issues. The economic solution for today is the similar to the solution advocated by Reagan and Thatcher in the 1980s.  What did the TARP bailout do besides protect bank executive paychecks? It sure looks like once again we are seeing that cronyism is the primary beneficiary of government fiddling. The most important question has always been how do you grow the economy after a liquidity crisis so how did quantitative easing become our best policy option for growth? We need to get smaller, agile, and more competitive if we want to compete in a world economy where it is likely that our the most feared world competitor is based next door in Indiana, Kentucky, or some other state with a similar attitude. It is time to unleash the animal spirits of entrepreneurs.