Sunday, 6 February 2011

Reaganomics Review.

 Voodoo Economics.

On January 20th 1981, following the disappointment of Carter's administration, the Reaganites were rushed to power on a platform that attacked "big government" as the source of America's problems. It was an easy answer to grievances of ordinary Americans going back to the early 70s. As President, Ronald Reagan implemented an economic policy that would go on to be known as "Reaganomics" which could be said to consist of four pillars: reduction in government spending, reduction in the income rates and capital gains tax, reduce government regulation of the economy and control the money supply to reduce inflation. "Reaganomics" was presented as a return to the glory days of free-market capitalism before the Great Depression and the New Deal reforms. Supposedly, President Reagan was working in accordance with the economic principles of Milton Friedman and Friedrich Hayek.

The economic policies of the Reagan administration are often described in ecstatic terms, as if such policies were the edicts of a free-market papacy, but what should be noted is that capitalism in its laissez-faire variant does not exist in the US. The Reaganites did not act to bring back the mythical halcyon days of the free-market and were a radically statist administration. For instance under Reagan protectionist measures doubled and at one point were three times higher than most other industrial countries. During these years state-expenditure increased significantly - breaking post-war records - in response to calls for "re-industrialisation" and the means to accomplish this was mostly Pentagon spending. By increasing the defence budget and cutting taxes the Reaganites effectively increased subsidies to the markets, specifically to lower the costs of firms - socialising costs and privatising profits.

A pillar of "Reaganomics" was the trickle-down theory which stipulated that cuts to the top rate of income tax and corporation tax, the state can encourage investment and expansion by entrepreneurs which leads to greater job creation and keep unemployment low. In fact, the opposite happened and the cuts lead to higher unemployment, lower wages and greater inequality. The wealth was hoarded as productivity has increased by around 45% while wages for working-people stagnated. The amount of debt per household doubled from 1982 to 2008 as workers substituted the cuts to their wages with credit cards, loans and mortgages - which later led to the $8 trillion housing bubble that caused the financial crisis of 2008. The number of illegal firings increased by a factor of six, as the state failed to enforce the laws that protected workers and unions from abuse. As a result, there are on average 65,000 deaths due to work-related injuries and illnesses in the US today.
At the same time, corporate profits surged from the early 80s to the late 90s and by 2007 the ratio of financial assets to GDP had doubled. By 2000 the richest 1% of Americans owned 40% of stock, while the bottom 80% owned less than 10%, this is indicative of the massive increase in the gap between the rich and the poor which resulted from "Reaganomics". There is a correlation between inequality and social deprivation, in more unequal societies there is typically greater signs of social deprivation such as illiteracy, obesity, teenage pregnancies, violent crime, drug addiction, alcoholism, mental illness and depression. During the Reagan years, there was an increase in mental illness and depression among workers which later led to the anti-depressant boom of the 1990s. The rate of incarceration has increased and today over 2 million Americans are in the prison system, mostly for drug-related offences whilst drugs became stronger and cheaper than ever before.

Starve the Beast.

The richest 1% of the American population, who were paying an income tax rate of 70% had that rate chopped down to 50% and then to 28% under the Reagan administration. The Democrats were complicit in these massive tax-cuts and the increase of tax-breaks for the ultra-rich. Between 1978 and 1990 the government lost $840 billion in tax revenue whilst 1% of Americans accumulated $1 trillion. When Reagan first entered the White House the national debt was at around $700 billion, by the time he left the debt had exceeded $3 trillion. The US had become the world's leading debtor, as opposed to the world's leading creditor as it had been prior to the Reagan years. The massive tax-cuts for the wealthy enacted by Reagan to necessitate cuts in public spending at a later date, a strategy known as "starving the beast", left the state borrowing to make up for the losses in the meantime. Incidentally the projected interest burden of the debt is equal, as a proportion of GDP, to the interest of the debt incurred by Obama's "fiscal irresponsibility".

The debt was a result of "Reaganomics" specifically the "too big to fail" bailout of Continental Illinois, the doubling of protectionist barriers, the deregulation of industry which led to mass-redundancies for short-term profits and the massive increase in military spending - which is a way of discretely pouring money into high-tech industry and enriching the likes of Bill Gates. It is likely that the collapse of tax revenue, which the Reaganites were responsible for, contributed greatly to the budget deficit as the economy descended into recession. This later led to the first Bush administration to raise taxes in a pragmatic move to secure the recovery, but as a result George HW Bush lost the election to Bill Clinton - who immediately followed up the tax-rises with massive spending cuts. Of course, the savage cuts furthered the ongoing decline of the  New Deal reforms, while spending in areas such as defence increased because only social programmes that are beneficial to the poor should be slashed.

One result of the enormous deficit accrued by "starving the beast" under Reagan were the pragmatic actions undertaken by Bush I and Clinton, namely the tax hikes that helped elect Clinton and the spending cuts that followed under him. The economic policies of Bush I, Clinton and Bush II sustained and furthered the changes made by Reagan, which all together amounted to the financialisation of the economy. In short the impact of budget deficits on politics has been to stifle radical change in favour of the kind of "pragmatism" we saw under Clinton, massive public spending cuts to shrink the deficit. The same is being seen under Obama, the enormous deficit accumulated by the second Bush administration functions to constrain any progressive tendencies left in the Democratic Party. Now that Obama has renewed the Bush tax-cuts which could cost $4 trillion and no doubt continue to "starve the beast" thereby justifying even greater cuts under whoever wins in 2012. 

The impact of "Reaganomics" is a shift to neoliberalism and supply-side economics, which are inclusive of all forms of driving economic growth by pumping money into 'Big Business' but don't see the need to fund welfare provisions or public education. All the theory behind this is reliant on the assumption that markets are innately efficient and will always clear without government intervention. A consummate nonsense, as supply and demand are in nearly constant flux which means that there is always disequilibrium - e.g. unemployment. Nonetheless, you'll find this ideological sewer running beneath theories of "trickle-down" and "starve the beast" in which tax-cuts pay for themselves and cash runs downhill for some reason. This sophistry meant that conservatives no longer had to worry about cutting spending before cutting taxes, it provided an intellectual gloss to slashing taxes for the highest earners whilst cutting spending on welfare.


Edward Cain said...

This is an excellent post, Josh. Unfortunately my knowledge of Reagan and macroeconomics is insufficient to give you a proper reply, but I'm interested in a few items in the second paragraph. How are 'protectionist measures' defined? Would be good to have a link to the figures for ther purposes too... And did state expenditure rise as a percentage of GDP or are you referring to another measure, e.g. just a simple total measure?

J.T. White said...

Protectionism typically refers to policies which insulate the domestic economy from foreign competition, under this umbrella concept could fall: tariffs, quotas, economic sanctions, embargoes, subsidies and administrative barriers etc.

As "Reaganomics" was essentially a form of supply-side economics there was a notable use of subsidies and tax-cuts for this end. The level of subsidies to American agribusiness and industry has long been a way of outdoing the foreign competition and has led to "dumping" in the past.

Alas, I don't have a specific link at hand right now and I was referring to the ratio of expenditure to tax revenue (if I recall accurately). Though here is a relevant diagram: In terms of GDP the interest on the debt accumulated under Reagan is near identical to Obama.

Thanks for reading,