posted January 23, 2011
Paul Craig Roberts’ Indefensible Defense of Reaganomics

In a recent post on Counterpunch, Paul Craig Roberts offered a defense of Reaganomics and Supply Side economic theory, as a refutation of Robert Reich’s article, ‘Reaganomics Redux’. In the process Roberts conveniently ignored much of the overwhelming factual record on the costs and legacy of Reagan policies, and Reaganomics’ major contribution to growing income inequality in the U.S.—i.e. a trend set in motion by Reagan that has been accelerating ever since with devastating impact on the U.S. economy.

Let’s first look at some facts, provided by various government data and sources, which show the true face of Reaganomics. Subsequently, the curious convoluted logic of Roberts’ views, and of Supply Side economics in general, will be addressed.

Reaganomics was a peculiar mix of contradictory fiscal, monetary, trade and industrial policies. It produced the following economic results which Roberts has conveniently left out in his general praise for the Reagan period:

First, under Reagan the average hourly wage, adjusted for inflation ($1982) declined from $7.93 to $7.79 from 1980 to 1988. Real weekly earnings fell from $281.21 to $270.32. Moreover, this US Dept. of Labor data is extremely conservative with regard to the real wage decline for working and middle class Americans, since it defines and includes as ‘wage’ the salary equivalent of managers and even CEOs which bumps up the ‘average’.

Those same CEOs, investors, and other recipients of capital incomes (dividends, interest, rent, capital gains, etc.) in contrast did far better than the average working class wage earner. According to Internal Revenue Service data, the wealthiest 10% households in the U.S. increased their share of total US household income from 32% to 39% over Reagan’s eight years—two-thirds of which was accrued by the wealthiest 1% of the top 10% households.

The wealthiest 0.1% households did even better. After remaining between 1.7% to 2.0% share of income for more than twenty years, from 1960 to 1980, their income share tripled under Reagan from less than 2% in 1980 to more than 6% by 1988. In contrast to these very wealthiest, for the poorest working class households there were no adjustments to the minimum wage over the Reagan period, as Reagan made clear he would veto any such adjustment. Consequently, the minimum wage declined from $6.55 an hour to $4.80 an hour in real terms between 1980-89—or 27%. Not surprisingly, the poverty rate rose from 8.9% to 10.9% between 1980-86 largely as a result, and two paycheck families rose from 42% to 49% of all households between 1980-87 to accommodate stagnant working class earnings growth over the period.

For corporate profits, after a consistent 6.6% annual growth rate throughout the 1970s decade (only slightly lower than the 7.5% rate during the 1950s boom years) during the Reagan years profits grew annually in the 9%-10% range.

Roberts believes that Reagan’s massive tax cuts during his first term—initially proposed at $752 billion on a GDP base of around $4 trillion a year compared to Obama’s 2009 $787 on a GDP base of $13 plus trillion a year—had no impact on growing income inequality during the Reagan years. As he says, “Supply side economics (i.e. tax cuts) is not a conspiracy to enrich the rich.? Perhaps not a conspiracy, but an overt policy that irrefutably ‘enriched the rich’ nonetheless.

For example, the average federal tax rate (which includes individual, corporate, payroll and estate taxes) remained virtually unchanged for the bottom 95% of households over the entire decade of the 1980s. Only the wealthiest 5% witnessed their total federal tax rates reduced. The very wealthiest households’ federal tax rate declined from 59.3% to 35.4%. The total federal tax rate for U.S. population as a whole fell by less than 0.8% over the decade. In other words, the top 1% households effectively received virtually all the total federal tax rate deduction.

Yet wages, income and profits aren’t the total story or legacy of Reaganomics. It was also on Reagan’s watch that a massive shift to part time and temp work began, a condition that has continued ever since and has been eating away at the standard of living of tens of millions today, and in turn playing a major role in preventing a sustained economic recovery from the current recession. It was under Reagan’s first term alone that involuntary part time work force grew from 3.4 million to 6 million. Over half the jobs added from 1980 to 1983 were involuntary part time. That’s 2.7 of the 5.8 million jobs added in that period. Temp jobs also rose fourfold during the Reagan years, to more than 1.5 million. It should be noted these jobs paid only 60%-75% of wages of full time workers on average, and benefits of only 10%-20% on average.

Millions of workers earned less, enabling record corporate profits compared to the 1970s which were paid out in dividends, interest, capital gains, etc., now conveniently reduced significantly by the Reagan ‘supply side’ tax reductions for corporations and the top tax brackets.

Roberts takes Reich to task for not addressing “the devastating impact on American incomes and employment? due to offshoring in manufacturing and professional services. Fair enough. Agreed. Offshoring has been accelerating during Clinton and George W. Bush years. But Roberts’ fails to note that 3.7 million manufacturing jobs were lost during Reagan’s first term, and many due to offshoring.

Many also were due to Reagan trade policies designed to keep the value of the U.S. dollar artificially high, which rose by 50% in his first term and resulted in a surge of imports that destroyed millions of such jobs in the U.S. A massive, and since Reagan, chronic and growing trade deficit has been the legacy of Reaganomics too. The U.S. Commerce Dept. estimates that for every $1 billion in annual trade deficit 15,000 jobs are lost in the U.S.

Much of the offshoring of jobs in the 1980s was a consequence in part of Reagan’s investment tax cut and equipment depreciation incentives. Roberts makes the point several times that investment tax cuts—that is the same as the ‘supply side’ tax cuts that he considers an economic panacea for all ills—was created under John F. Kennedy. True, in part. But the big difference was that JFK’s investment tax credit required proof of job creation in the U.S. before it could be claimed by corporations. Reagan’s version decoupled the credit from actual U.S. job creation. With a little creative accounting, corporations got the tax credit even by investing offshore. In effect, American workers and taxpayers began to subsidize the export of their jobs and have been doing so now for decades. Oh, and let’s not forget, Free Trade began under Reagan as well. It was he who proposed the first Free Trade treaty, with Canada, in 1988.

And while we’re at it, let’s not forget what happened to Pensions under Reagan. Reagan shoved through rules that gave birth to 401k privatized pensions. And it was under Reagan that new rules also allowed companies to skim off the surplus in traditional defined benefit pensions. Reagan ruled that pensions no longer represented workers’ deferred wages, but were now the property of the company to do with it what it wanted Exxon helped pay for its Valdez oil spill with $1.6 billion of its employees’ pension surplus. Good year tire skimmed off $400 million. United Airlines $287 million it never put back, hastening the eventual bankruptcy of the plan. Not least, in 1983 Reagan approved rule ’83-52’ which allowed a corporation to terminate its pension plan entirely and distribute it however it pleased. This gave rise at the time to corporate ‘raiders’ taking over companies just to get at their cash rich pension plans—made famous in Oliver Stone’s award winning film ‘Wall Street’ at the time. Over Reagan’s term defined benefit pension plans were replaced by 401k plans at an accelerating rate, beginning a process continuing to this day. Tens of thousands of defined plans were terminated, replaced by companies with cheaper cost, and no liability, 410k plans, the latter of which rose from zero in 1981 to several hundred billions covering tens of millions of workers by the end of Reagan’s term.

Then there was the first attempt to privatize Social Security, which was also launched under Reagan. Unable to pull it off, instead Reagan’s Social Security Commission at the time, led by later-to-be Federal Reserve chairman, Alan Greenspan, opted for a massive increase in the payroll tax for social security and indexing of its base. The Reagan plan produced thereafter record annual surpluses in the social security trust fund, which has been promptly ‘borrowed’ and spent every year by Congress to help offset budget deficits to the tune of hundreds of billions every year. Oh yes, that chronic budget deficit thing is also a Reagan legacy. Annual budget deficits doubled, from less than $80 billion in 1981 to more than $200 billion annual by mid-decade.

But Roberts is wrong that trillion dollar military spending budgets were financed by cutting Social Security and Medicare. Until recently, the surplus of more than $2 trillion in the social security trust fund, (which Congress has borrowed annually and replaced with an IOU), has carried the U.S. budget deficit. The surplus has been used to reduce the US budget deficit from an even greater amount than it has been. But now that that annual surplus is gone due to the current recession, the real offensive to cut Social Security to finance the continuing war budgets of the U.S. will begin. The first salvo opening that attack is Obama’s recently proposed 2% payroll tax cut to begin in 2011.

Roberts’ ‘supply side’ Reagan tax cuts were supposed to generate sufficient revenue to offset the tax loss from the cuts and cover the more than doubling war spending in the 1980s. But they didn’t. Reagan monetary policy accompanying the supply side tax cuts caused a deep recession in 1981-82 that created an even greater tax revenue decline. Short term interest rates rocketed to 18% and long term rates to 13% in Reagan’s first term. The auto and housing industries virtually shut down as a result. This provoked a crisis in Savings and Loan companies and regional-community banks, dependent on residential and commercial real estate. Many started to fail circa 1983. Reagan’s answer was to deregulate the S&L industry by passing the Garn-St. Germain Act that allowed the S&Ls to go and try to offset their housing losses by speculating with the big boys in the corporate junk bond market. But when junk bonds blew up in 1987, so did another round of S&Ls—all of which eventually costed the taxpayer about $300 billion in bailouts—and even greater budget deficits.

Thus financial deregulation, and housing implosion, was another Reagan original legacy—and a dress rehearsal to the even greater similar housing collapse in 2007. So it’s simply not true, as Roberts argues, that George W. Bush and Clinton “would deregulate the financial sector?. They merely continued and accelerated the trend already set in motion by Reagan.

Despite all this factual evidence, Roberts nonetheless argues that “The (Reagan) policy worked?. That it brought down inflation that was the result of bad Keynesian demand side policies. Yes, inflation came down. But that inflation was largely the result not of demand side policies but of external supply side shocks—specifically the oil price shock of 1979-1980 and consequent inflationary expectations. Reagan therefore made the American consumer and worker (demand side) pay for what was essentially a supply side problem (oil shock). He preferred to take it out on the American worker and consumer, not to confront the oil sheiks and other OPEC players that were the (supply side) source of the inflation. The Reagan solution applied (demand side) was not the problem. The problem was supply. And that’s the opposite of Roberts’ claim that Reagan’s supply side policy solved a demand side problem. But that kind of reversal of causal relationships and logic is typical of supply side ideology and arguments.

The economy witnessed the return of the Phillips curve (an inverse relationship between unemployment and inflation) following the Reagan policies. But it did so not because of the success of Reagan’s supply side tax policy, but because the external supply side problem of oil price shocks abated. Those supply shocks temporarily obscured the Phillips curve trade off, which reappeared once the oil shock’s impact diminished.

Roberts’ logical legerdemain gets even more interesting. Roberts maintains that Wall Street was actually opposed to Reagan’s major reduction in the top marginal tax rates for the personal income tax. Oh yeah. Sure. Big bankers who earn most of their income from bonuses didn’t want Reagan’s tax rate deduction! Does anyone really believe that today?

So far as Roberts’ claim that it was Reagan’s military buildup that brought the Soviets “to the negotiating table to end the cold war?, once again one can only ask what’s the cause and what’s the effect here? The Soviet economy was clearly in decline well before Reagan or his military buildup. Its eventual crackup, and that of the system itself, has probably more to do with sclerotic Soviet leadership at the time, than American leadership.

Concerning the latter, Roberts concludes that “the Reagan administration had no intention of establishing American hegemony over the world?. A more accurate rewording would be the phrase “The Reagan administration had every intention of ensuring the continuation? of American hegemony. Just ask the Japanese, whose arms were twisted (and economy broken) with the Reagan ‘Plaza Accord’ agreement of 1985 between the U.S. and Japan over currency exchange rates. As result of the ‘Accord’, the Japanese were forced to agree to raise the value of their currency in relation to the dollar so U.S. exports could gain back what ‘Japan Inc’ had won over the preceding decade. Japan thereafter began a slide that culminated in the eventual beginning of the collapse of its economy in 1990.

Today history is attempting to repeat itself, with Washington trying once again to ‘arm twist’ with China over matters of currency exchange rates. But China is not Japan, an economic vassal of the U.S. And American hegemony is in the early stages of its decline. The past should never be viewed through ‘rose colored’ policy glasses. And that includes Reagan all the more so, given the recent surge in ‘Reagan worship’ among conservatives with no new, workable policy proposals of their own to confront the current economic crisis.

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