Sunday, 25 March 2012

ECONOMICS / HISTORY: Reagan's Time-Bomb (K. Kęciek)

President Ronald Reagan cut taxes for the rich and benefits for the poor. He greatly reduced social spending, defeated trade unions and left Americans at the mercy of ruthless market forces. He sent single mothers into low-paid jobs, bringing about the feminisation of poverty. He left behind an enormous budget deficit. He revived a predatory brand of capitalism, free from effective control and focused entirely on profit and the commodification of everything.

George Brown Tindall and David E. Shi, authors of 'America: A Narrative History', pointed out that under the Reagan administration, the construction of affordable housing was stopped whilst at the same time slums were being demolished, thus leaving many homeless. Hospital care for the mentally ill was scrapped, resulting in countless beggars and tramps living in cardboard cities-- scenes more often associated with Calcutta than with the cities of a superpower. 'Reaganomics'-- the moniker used to describe the economic policies of the 40th US president-- were a time-bomb which in the end went off. The effects are to be seen in the current crisis of capitalism and world finance, whose final consequences are hard to predict.

 The former Hollywood actor Ronald Reagan, who was elected in 1980 with only 28% of the total vote, adhered to the theory of supply-side economics. This theory states that if taxes are lowered for entrepreneurs, they will invest more capital. As a result, new jobs are created and total tax revenues rise. "Our tax system would appear to have been created by some Communist with the aim of paralysing free entrepreneurship" said Reagan. According to advocates of supply-side economics, economic problems arise mainly due to excesive government interference in the market. They promised that any increase in the wealth of the richest in society would naturally 'trickle down' to those at the bottom of the pile. One of the main arguments in support of this theory was the Laffer curve (named after Arthur Laffer, an economist from the University of Southern California) which was supposed to show that at some point between 0% and 100% tax there is a point at which tax cuts spur on economic activity. Reaganomics, based on supply, was opposed to the doctrine of John Maynard Keynes, who believed that economic problems were to be tackled first and foremost with demand-side solutions.


The new doctrine was supposed to have been an effective cure for 'stagflation' ( inflation combined with economic stagnation ) which had been a problem during the previous decade. David Harvey, professor of Anthropology at City University of New York (CUNY) and author of 'A Brief History of Neo-Liberalism', sees things from a wider perspective. He notes that when growth stalled in the 1970s, interest rates fell below zero and low dividends and profits became the norm. The upper-classes around the world felt threatened. In the USA the share of wealth belonging to the richest 1%, which had remained stable for most of the century, suddenly shrank due to the falling value of shares, property and savings. They had to take action to save themselves from economic, and thus political, collapse. In the UK, thier tool was Margaret Thatcher. In the USA it was Reagan. It is hard to say how much the President understood about his role, as he did not enjoy a reputation as an intellectual titan. Before the elections, news weekly 'Time' pondered whether the 69 years old actor was "clever enough to be President....Accounts of his intelligence are at best mixed." When the victorious Reagan moved into the White House, the well-known New York commentator James Reston wrote that everyone like the President but that "only a very few suppose that he can comprehend the changes arising in the world."

In any case, the Reagan administration went to work with gusto. On 4th August 1981 the President signed the Economic Recovery Tax Act which reduced the maximum tax rate from 70% to 50% and lowered capital gains tax from 28% to 20%. In 1985 the highest tax rate was again reduced, from 50% to 28%-- the lowest level since the days of Calvin Coolidge (President 1923-1929) According to professor Harvey, this was a clear sign of intention to 'restore class power'. Chief of the Congress Budget Department, David Stockman, openly admitted that Reaganomics was a Trojan horse, intended to grant huge tax cuts to the wealthiest individuals and the largest corporations. According to the New York firm A. Gary Shilling, the changes in the tax system in 1982 alone gave the rich ( those with an income of over 47,500 dollars a year ) a profit in the region of 9.2 billion dollars, whilst taking almost 19 billion from the poorest, the working-classes and the middle-classes.

As well as the tax system, radical action was taken in the form of cuts to social spending. Despite opposition from Democrats, there were drastic cuts in education, healthcare, home-building, help for the urban poor, food stamps and subsidies for school meals. The administration decreed that benefits for parents who stopped working to look after children would be withdrawn 4 months after leaving thier job, and that for every dollar they earned, one dollar would be taken from thier benefits. As a result, 400,000 people lost benefits and many of them also Medicaid health cover. After 2 years of the Reagan adminstration the number of people offically living below the poverty line had risen by 2.2 million.

The government deregulated everything, from airlines to telecommunications and finance. Deregulation served to open up new markets and opportunities for large corporations. In his 1984 book 'The New Politics of Inequality', Pullitzer Prize-winning academic and journalist Thomas B. Edsall wrote that the manouevring of the Reagan administration was focused on "removing federal regulations on areas such as industry, the environment, working conditions, healthcare and the relationship between seller and buyer." These goals were achieved by budget cuts and by "filling key roles in government institutions with individuals who had a dislike of regulation and close contacts with industrial interests." In 1983, 40% of laws passed in the 70s, which were seen by business as too pro-labour, were repealed  in less than 6 months.


In the summer of 1981 Reagan broke the long-running strike of the air-traffic controller's union PATCO. In August he dismissed 11, 345 controllers who had ignored the government's order to return to work. The controllers' duties were taken over by the military. PATCO was a symbol of the whole middle-class, not just the working-class trade union movement. Its defeat had dramatic consequences for hundreds of thousands of Americans.

The federal minimum wage, which in 1980 stood at the poverty treshold, fell over the next decade until it stood at 30% below the official poverty line. There was also a long-term fall in real wages. The fate of the air-traffic controllers was a clear signal that the trade unions were seen as enemies by the government. Tax breaks caused a migration of capital from the highly unionised north-eastern and mid-western states to the southern and western states where both unions and regulations were weak. The result was the deindustrialisation of the trade unions' heartlands, the so-called 'rust belt'. Corporations could dictate conditions under the threat of factory closures. With unemployment standing at 10% in the mid-80s, they did not have to fear strike action. Reagan's election victories in 1980 and 1984 seriously weakend the national trade union federation AFL-CIO, which had close links with the Democratic Party. Trade unions began to lose members. In 1979 24% of workers were union members-- 8 years later only 17% were.

Reagan also lauched an offensive against feminism. He opposed the Equal Rights Ammendment and the principle of equal pay for equal work. Cuts in social spending led to the feminisation of poverty. The Citizens' Commission on Civil Rights criticised the President for the fact that only 8% of his administration were women, with another 8% comprised of ethnic minorities. (Under his successor Jimmy Carter, the figures were 12 and 17% respectively.) In 1983 an irritated Reagan dismissed 3 members of the Commission, and tried to fire 2 more. Support for his government was for years lower amongst women than amongst men.

Reagan's policies met with sharp criticism from Western Europe. Hamburg weekly 'Der Spiegel' pointed out that social spending in the US represented 10% of GDP, 3 times less than in West Germany. It wrote, "When Ronald Reagan orders 4 pairs of thousand-dollar cowboy boots (whose price does not include the 14-carat gold monogrammed decorations) there is no talk of extravagance-- rather, he is helping the economy. Only bleeding-heart liberals would point out that in the same week that the President ordered his thousand-dollar boots, the Social Security Department announced new rules for those claiming benefits. The value of all their possessions, excluding TV and kitchen utensils, cannot exceed 1,000 dollars, otherwise they will lose their benefits."

Deregulation meant that the Reagan years were a boom time for high-risk investors and financial speculators. One famous example was the Vernon Savings and Loan bank-- a bank serving a small Texas town with a population of 12,000 which ended up with 6 private jets and which spent 2.5 million dollars on interior decorating.


The Reagan administration oversaw a huge increase in defence spending, leading to a large deficit. Apologists for this policy claim that it was responsible for victory in the Cold War. This claim is only partially true. The Soviet system collapsed because it was tired, bankrupt, full of conditions and with no fight left in it. Reagan's arms policy might have sped up the inevitable, but nothing more.

The budget deficit quickly grew. The administration insisted that high defence spending was necessary and that the only way to reduce the deficit was through cuts in social spending. During Reagan's 2 terms in office the federal deficit grew from 908 billion to 2.6 trillion dollars. Defenders of Reaganomics point out that it led to great advances  in technology and 19 million new jobs. Critics reply that average unemployment under Reagan was relatively high, at 7.5%. They also point to the mass of poverty-stricken and marginalised people which appeared under Reagan's administration. In the summer of 1988 the 'New York Times' estimated that over 45% of those over 16 in New York City belonged to the so-called 'underclass'-- people living below the poverty line and long-term unemployed, either due to lack of qualifications or other problems such as drug addiction.

 Prosperity somehow failed to 'trickle down' to the lowest levels of society. According to official figures, in the priod 1977-1987 the real income after tax of the poorest 10% fell by 10.5%, while that of the richest 10% rose by 24.4% and that of the wealthiest 1% grew by 74.2%! The dominance of the rich and powerful was preserved. Since the USA adopted neoliberal economimc policies the share of the wealth of the top 1% has from 8 to 15%. The ricjest 0.1% accounted for 2% of all wealth in 1978 and 6% in 1999. The ratio between the pay of CEOs and the average worker was 30:1 in 1970 and almost 500:1 in 2000.

The Reagan era paved the way for a predatory, unregulated form of capitalism focused entirely on profit. It created an ideal environment for greedy bankers and reckless speculators. The explosion of Reagan's timebomb was always a question of when, not if. The first warning sign was 'Black Monday' on 19th October 1987 when the Dow Jones Index fell by 22.6% with the loss of 560 billion dollars. Despite this, the fundamental principles of neoliberalism were embraced by both George Bush in the USA and Tony Blair ion the UK. Not until the financial crisis of 2008 did mainstream opinion become aware of the dangers posed by this system.

In the USA the gap between the richest 1% and the both the endangered middle-class and the poor is still widening. Politicians concern themselves mainly with the interests of business and finance. A protest movement, claiming to represent the 99%, has appeared and is speaking out against economic injustice.

Author: Krzysztof Kęciek  Taken from 'Przegłąd' magazine nr.11 (637) 18/03/12

The original Polish article can be read here.


Anonymous said...

Very interesting article, Czarny!

I think it is worth noting that the Laffer curve has been demonstrated to exist, but all the evidence points to the apex being at a much higher rate of taxation than we currently have: the only nations which are in danger of pushing themselves onto the derivative < 0 side of the Laffer curve are nations like Denmark and Norway.

But the most insidious part of Reaganomics was that, in the name of a.) 'starving the beast' and b.) outspending the Soviets on nuclear weapons, it in fact freed government spending from any connexion with the generation of actual wealth. Instead of starving the beast, they took off the reins which made it work for the public good, exposed it to toxic waste and transformed it into a ravenous mutant.

And then, of course, there was also the disastrous effect on unionised labour, an effect exacerbated by Clinton-era 'free trade' policies.

Good to see these articles; look forward to reading more!


Czarny Kot said...

Hello Matthew, thanks for your comment.

For Stateside readers this article is probably just a list of things they already knew but it is a good summary for those like me who know what Reagan did in general, but without knowing the exact how, when etc.

Of course, Reagan's reputation here in Poland is almost entirely based on his status, deserved or otherwise, as the conqueror of the Soviet Union. Some people admire him both for his domestic and foreign policies but many of those who idolise him for his Cold War statesmanship would take to the streets if similar domestic policies were introduced here.

I'm glad you like the translations. You might find the next one interesting..

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