When Putin Got Into Reaganomics – The American Spectator

Unarguably, the war in Ukraine is the result of the machinations of Vladimir Putin, who has been the clear leader of Russia for nearly 23 years. Yet, as one who had a rather unique (for an American) association with Putin at the beginning of his presidency, I would argue that the Putin of today is behaving quite differently than the way he did at the start of his rule. There is a Putin I and a Putin II.

That said, I think the Russian leader’s zeitgeist has not fundamentally changed. Both Putin I and Putin II have been typical Russian leaders: fierce Russian patriots who, like virtually every predecessor dating back to at least Ivan the Terrible (1533–1584), have believed that Russia needs to expand its role on the European (if not the world) stage and overcome the derision that allegedly more civilized Europeans have showed toward it, thus gaining new respect and becoming a world power. As now–Israeli Prime Minister Benjamin Netanyahu concluded (based on a 2001 meeting with the Russian president), “Putin was smart and shrewd and totally committed to restoring Russia’s standing as a great power.” Indeed, I find it richly ironic that, before Napoleon and Hitler, arguably the last foreign government to seriously threaten Russia was that of Sweden. Russia’s defeat of Sweden in 1709 at the Battle of Poltava — in central Ukraine — more than any other event heralded Russia’s rise to great-power status. Might Ukraine be playing a role now in Russia losing that status?

When this century began on Jan. 1, 2000, Russia was in pretty bad shape. Literally the day before, Dec. 31, 1999, Vladimir Putin became the acting president of the Russian Federation, replacing Boris Yeltsin. Estimates of output change are notoriously unreliable for nations like Russia, which moved from a centrally planned to a more market-oriented regime, so some estimates of about a one-third decline in output in the first eight years after the demise of the old Soviet Union at the end of 1991 are probably exaggerated, but clearly the transition from communism had gone poorly under Yeltsin. A new breed of politically well-connected oligarchs in the 1990s seized control of previously state-owned assets, culminating in a horrendous financial crisis in 1998 in which Russia defaulted on its debt and was forced to devalue its currency, the ruble.

Yet times changed dramatically in the first two terms of Putin’s presidency, or Putin I, from early 2000 to 2008. The World Bank tells us that the country’s gross domestic product rose 74 percent, a compounded annual growth rate of 7.2 percent per year. Russia, no longer burdened by the inefficiencies of communism, belatedly began to show significant convergence with Western Europe and the U.S. as it increasingly embraced the advantages of free-market capitalism.

But the “Russian economic miracle” that seemed so promising in Putin’s early years has dramatically stalled. The era of Putin II probably formally started with Putin’s third term in office, which began in 2012. (From 2008 to 2012, Putin was constitutionally demoted to prime minister, although even in that period, he was the country’s most powerful leader.) Economic performance during Putin II looks altogether different. Looking at the last six pre–COVID pandemic years of 2014 to 2019, for example, the World Bank estimates that Russia’s gross domestic product rose an anemic 1 percent per year — far less than it did in booming neighbors and former Soviet satellites such as Poland (4.2 percent) or Estonia (3.7 percent), not to mention such Western rivals as the U.S. (2.5 percent), Germany (1.8 percent), or France (1.5 percent), or booming Asian nations like China and India.

Putin was formally elected president of Russia on March 26, 2000. A few days later, I received a phone call asking if I would like to join a small group of other economists in advising the Russian government on how to reform and revitalize its economy. I was an economic historian with a public policy orientation and interested in the process of economic change generally and specifically in Russia, which I had visited on multiple occasions dating back to 1970 and about whose economic history I taught students at Ohio University. A bit over two weeks later, I was in Moscow, joined by four others: a former president of the American Economic Association and prominent University of California Los Angeles and University of Chicago economist, Arnold “Al” Harberger; Florida State University economics professor James Gwartney; Jim Carter, a young staff person who had worked at the U.S. Congress Joint Economic Committee (JEC), and Peruvian economist and former finance minister, the late Carlos Boloña.

It was not unusual for Russian leaders to seek foreign advice. Peter the Great (1682–1725) had done so in his attempts to modernize Russia at the beginning of the 18th century. Similarly, Yeltsin’s government had invited the prominent Keynesian economist Jeffrey Sachs of Harvard (later Columbia) University and other international advisers from organizations such as the International Monetary Fund (IMF) and the World Bank to offer technical assistance.

But the delegation of economists first advising Putin on his ascension to power had a quite different perspective: They were all strong believers in the power and efficiency of markets, with strong conservative or libertarian political orientation. Why? Putin in early 2000 had selected as his top economic adviser a young economist (age 38), Andrei Illarionov, who admired such classical liberal economists as Friedrich Hayek, Milton Friedman, and Ludwig von Mises. He had also read the distinct supply-side writings done for the JEC by Jim Gwartney and by me that cast grave doubts on the alleged economic advantages of large activist governments. Our evidence, which was independently published, suggested that existing Western governments tended to far exceed the size that would maximize incomes. Big government financed by high levels of taxation tended to inhibit economic growth, a key message of the American supply-side revolution of the 1970s and 1980s. In time, however, Illarionov became disillusioned with Putin and ended up at the Cato Institute, a libertarian think tank in Washington, D.C. — probably the most remarkable career change of an economist that I have ever seen.

Our group garnered a good deal of press attention. A story in the leading business newspaper Kommersant by Constantine Levin had the headline “Putin Will Be Trained in Jesuit Methods of Managing the Economy.” In it, Al Harberger was called the “father of the Chicago boys,” and I was termed “the ideologue of Reaganomics.” Excerpts of one lecture I gave to university students showed up on Russian national TV.

Our little delegation of economic experts spent four days meeting key officials such as Russian Prime Minister Mikhail Kasyanov, IMF and World Bank officials, Russian central bank executives, and others. All of us independently gave lectures at prominent local universities and elsewhere. For me, a highlight was a lecture that I gave to a large number of apparatchiks and leaders of the Russian nomenklatura who were mandated by the Kremlin to attend my presentation. Drawing on Russian economic history, I asserted that Russia’s economy had advanced the most when Russia improved private-property rights and the rule of law, such as in the 1890s and early 1900s, and that economic decentralization, low taxes, and minimal regulation, which support a booming private economy, were the keys to Russia’s future prosperity. It was a gloriously ironic moment, as my lecture was delivered to a largely indifferent or hostile audience from what until recently had been the Communist Party headquarters.

The culmination of our weeklong Moscow visit came on April 21, when the five of us met for about an hour and a half with Putin, Illarionov, and an interpreter. Putin, who was clearly very smart, actually seemed to understand English far better than he let on. We had a lovely opulent Russian lunch, which came complete with four basic alcoholic food groups: vodka, white wine, Russian imitation champagne, and cognac, in addition to such Russian delicacies as beluga caviar. Each of us made different points. Harberger, for example, was particularly concerned about the exchange rate between the ruble and other currencies. Gwartney and I were more focused on the fact that, considering social insurance and other levies, the marginal income tax rate for some Russians far exceeded 80 percent, creating a massive underground economy. The American ambassador (James F. Collins) had already warned us before the Putin meeting that “no one in Russia is paying all those taxes.”