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  Rep. Jesse Jackson Jr. has raised the ghastly specter of Reaganomics.

 "If we cut taxes for the wealthy, while maintaining massive military spending in support of two wars, then the new Republican Congress will be empowered to cut social programs in order to reduce the deficit," Rep. Jesse Jackson Jr., a longtime friend and sometimes critic of the president, said in a statement. "So it will be a choice between cutting programs for the poor, children, the unemployed, the uninsured and veterans or allowing deficits to pile up. That was President Reagan's strategy: A 'starve the beast' plan of lowered taxes and increased military spending that would force Congress to make deep cuts in program for the most vulnerable."

 What exactly was Reaganomics? And is that a bad thing?
  Many people think that Reagan was one of our greatest presidents, and Reaganomics was his defining legacy.

 This is a good place to stop and examine exactly what Reaganomics was and what it means. Most importantly, let's look at the raw numbers so no one can confuse us with spin.

#1: Reaganomics Claim: Taxes were lowered for everyone
Accuracy?: Not True

Total Effective Tax Rates for All Families (Federal Income and Payroll Taxes)
Image Hosted by
From the Congressional Budget Office; Congressional Study: Tax Progressivity and Income Distribution. March 26, 1990. CIS#H782-11

 While Reagan did indeed cut progressive income taxes (the wealthy more than anyone else), he turned around a doubled regressive payroll taxes (at the recommendation of the Greenspan Commission). Thus the tax burden was shifted from the rentier class to the working class.
  To put it another way:

Effective Family Federal Tax Rate (Income and FICA)

Year  medianTop 1%

 Until 1981 the top income bracket was taxed at 70%. In 1985 it was 50%. By 1988 it was at 28%.
  The shifting of taxes from income to payroll (without significant overall spending cuts) meant that the federal government would increasingly borrow from social security surpluses that the working class depend on in order to afford the massive tax cuts for the wealthy. The implied understanding was that the wealthy would one day have to pay the money back.
  Now the wealthy have decided that that is not going to happen.

#2: Reaganomics Claim: Everyone got more wealthy in the 1980's
Accuracy?: Not True

 My memories of the 1980's include my family house being foreclosed on, and my living on the street for a while after leaving home. So maybe those memories color my perception of the Reagan decade. That's what raw numbers are for.

Average weekly earnings of nonsupervisory workers, total private industry, 1982 dollars

1980  $274
1985  271
1990  259

Average hourly earnings, total private industry (1982 dollars)

1980  $7.78

Both charts above from:U.S. Bureau of Labor Statistics, Bulletin 2445, and Employment and Earnings, monthly, June and March issues

 People forget that the 1980's was a time of high unemployment. The unemployment rate in 1980 was 7.2%. It rose to 10% in 1983, and didn't make it back down to 7.2% until 1985. Unemployment didn't drop below 1979 levels (5.9%) until 1988, nearly at the end of Reagan's term.
  The reason for this is because job growth under Reagan was terrible.

Job Growth Per Year Under Most Recent Presidents

Johnson  3.8%

Based on data from the Bureau of Labor Statistics, Current Employment Statistics Survey.
 Of course even Reagan's performance looks good compared to Bush The Younger, but that's not saying much.

 The stagnation of wages for the working class fell hard on the poorest and most vulnerable.

Percent of children below the poverty level

1980  19.5%

source: U.S. Bureau of the Census, Current Population Reports, P60-185.

Meanwhile, the compensation for corporate executives skyrocketed. They went from 30 times the average factory workers salary to 130 times (Kevin Phillips, Boiling Point (New York: HarperPerennial, 1993), p. 251.)
  These huge increases in salary didn't come from greater corporate profits. They came from a greater share of corporate profits (source: Internal Revenue Service).

Executive Compensation as a Share of Corporate Profits

1953  22%

What we saw in the 1980's was a concentration of income and wealth, a trend that continues today.
Image Hosted by
source:Congressional Budget Office tax simulation model, cited in U.S. House Ways and Means Committee, 1992 Green Book, p. 1521.

 While the wealthy grew more wealthy they also gave less and less to charity.
Image Hosted by
source: Internal Revenue Service data of Adjusted Gross Incomes for itemized reductions. Cited by Business Week, "Look Who's Being Tightfisted," November 5, 1990, p. 29.

Reagan was the first president since Hoover not to raise the minimum wage while in office.

#3: Reaganomics Claim: The tax cuts paid for themselves
Accuracy? Not True

Tax Collections (billions)

Year   Constant (1987 Dollars)Debt as % of GDP

source: U.S. Office of Management and Budget, Historical Tables, annual.

Note how tax revenue dropped for several years and didn't make it back to pre-tax cut levels until his second term.
 The Republican theory is that the economic growth from the tax cuts would pay for them. But the average annual tax revenue growth under Reagan was only 2.4%. Compare that to revenue growth under the hated Carter of 3.0%.

 Republicans like to blame the enormous deficits on Congressional spending. The reality was that total federal government spending as a percentage of GDP dropped from 22.9% in 1981 to 22.1% in 1989 (despite the hike in defense spending). Meanwhile, tax revenue went from 20.2% of GDP in 1981 to 19.2% in 1989.
source: U.S. Office of Management and Budget, Budget of the United States Government, annual
 One of the central premises of supply-side economics is that the tax cuts would spur savings, which would cause investment, which would spur growth. In fact the savings rate dropped in the 1980's - from 7.9% in 1980 to 4.2% in 1990.
 The fact is that there was no growth in direct private investment at all during the 1980's.
source: Paul Krugman, Peddling Prosperity, (New York: W.W. Norton & Company, 1994)

 Considering the dramatic drop in corporate taxes, if corporations didn't invest in the country, what did they use the money for? Mergers.

"Since Fiscal Year 1980, there has been a drop of more than 40 percent in the work years allocated to antitrust enforcement. In the same period, merger filings skyrocketed to more than 320 percent of their Fiscal Year 1980 level."
 - Federal Trade Commissioner Andrew Strenio, 1988

 The emerging monopolies and oligopolies were able to squeeze out the labor unions, raise prices, ship jobs overseas, cut services and wages.

 That's what Reaganomics was really about.

Originally posted to gjohnsit on Tue Dec 14, 2010 at 04:02 PM PST.

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