GOODBYE, MIDDLE CLASS, Part 9: Trickle-Down, Voodoo, Reaganomics; Or B.S. by Any Other Name

Continued from Part 8: The Powell Memorandum; Or, Profits over People

“If it were true that lower taxes for the rich and more wealth for the wealthy led to job creation, today we would be drowning in jobs.” -- Nick Hanauer, TED Talk

In Who Stole the American Dream? Hedrick Smith explains that “laissez-faire philosophy of the past three decades promised that deregulation, lower taxes, and free trade would lift all boats. It argued that sharply reduced taxes for the rich would generate the capital for America’s economic growth. Its disciples asserted that the free market would spread the wealth. But this is not what happened. The middle class was left behind – the 150 million people whose family incomes range from nearly $30,000 to $100,000 a year – as well as 90 million more low-income Americans living in poverty or just above. Even the 60 million upper-middle-class Americans and the nation’s wealthiest 5 percent have been falling steadily further behind America’s financial elite, the super-rich 1%.” According to the U.S. Census Bureau, the pay of a typical male worker was lower in 2010 than in 1978, adjusted for inflation.

According to Thom Hartmann, the bogus idea was if society was rearranged so that the wealth of the rich grew suddenly, they’d use the money to build factories and hire more people, thus allowing their wealth to trickle down to the workers:

“This assertion of Regan’s was new – it had never before happened in the history of the world.”

Despite this, the public willingly endorsed it. Instead of create income, we created the greatest debt in the history of the world.

How did we solve this problem?

The government borrowed all the money in the fund from 1982 to today to help cover the voodoo economics budget deficit.

The OECD, the Organization for Economic Co-operation and Development, disproves the myth of “trickle-down economics,” claiming that it has not fostered economic growth as promised, but stymied economic growth significantly, and only made the rich richer.

Reaganomics is now widely recognized for increasing levels of inequality, stagnating wages, and hollowing out decent, middle-income jobs, as reported by the Center for American Progress.

A few statistics will put the damage of Reaganomics into proper perspective.

According to Hedrick Smith in Who Stole the American Dream?

  • From 1948 to 1973, the productivity of all nonfarm U.S. workers grew by 96.8% and the hourly compensation of the average worker rose by 93.7%. In short, middle-class workers got a solid share of the nation’s gains in productivity.

  • From 1973 to 2011, the productivity of the U.S. workforce rose 80.1%, but the wages of the average worker rose only 4.2%, and hourly compensation – wages plus benefits – rose only 10%. So while productivity rose almost 3% a year, hourly wages once adjusted for inflation were flat, the same in 2011 as in 1978.

In The Crash of 2016, Thom Hartmann explains that as a result of the Reagan tax cuts, Americans got feudalism instead of leisure. “That era from 1947-1979, where all classes of Americans saw their incomes grow together, ended. A new era where only the wealthy amongst us got rich off a booming economy commenced. According to census data, a typical hourly wage for an American worker increased a mere $1.23 over the past 36 years after counting for inflation. From 1979-2008, the middle 20% of Americans saw incomes grow only 11%. That’s compared to 111% growth in the 30 years prior. The poorest 20% of Americans meanwhile saw their incomes decrease by 7% between 1979 and 2008. In the 30 years prior, their incomes had grown by 118%. Meanwhile, the top 1% have seen their incomes increase by 275% since Reagan’s election, and it’s much higher for the top 0.1% and massively higher for the top 0.01%. Today, workers’ wages as a percentage of GDP are at an all-time low, yet corporate profits as a percentage of GDP are at an all-time high.

“Between 1962 and 1983, the average household net worth of [households whose wealth placed them in the bottom 40% of the country] had grown from $800 to $4,700,” explains Veteran reporter William Kleinknecht in The Man Who Sold the World. “But by the time Reagan was out of office in 1989, that group had a negative net worth of $4,100; that is, they were in debt for that amount…Between 1983 and 1989, the household worth of the middle 20% grew modestly, from $55,500 to $58,800, and then began declining, reaching $49,100 by 1995…The real winners in that economic growth were the wealthy. The top 1% of households saw its average net worth grow from $7.2 million to $9.1 million between 1983 and 1989, a 26.9% increase…The next 9% at the top of the ladder saw its worth grow from $814,200 to $897,900, more than a 10% increase…The top 1% had a net worth of $10.2 million in 1998 – a 42.2% increase from 1983 – and the next 9% had an average worth of $1 million, a 24.4% increase from 1983.”

Only the very rich saw a boom in the 1980s.

Hedrick Smith explains, “Despite economic ups and downs since 1975, corporate profits have trended upward while workers’ wages stagnated. In 2007, before the Great Recession, corporate profits garnered the largest share of national income since 1943, while the share of national income going to wages sank to its lowest level since 1929.” Gaping inequalities in wealth and income now characterize the U.S. economy. While the middle class stagnated, the top 0.01% jumped from an annual average income of $4 million in 1979 to $24.3 million in 2006 – a 600% gain per family.

In Twilight of the Elites: America after Meritocracy, The Nation editor Christopher Hayes states that the U.S. is now less mobile than nearly every other industrialized democracy on the globe.

Germany is 1.5 times more mobile.

Canada is 2.5 times more mobile.

Denmark is 3 times more mobile.

"Compared with other rich nations...U.S. intergenerational mobility is surpisingly low, in part because the gap between income groups is so much bigger," writes Jacob S. Hacker in Winner-Take-All Politics.

"The American Dream portrays the United States as a classless society where anyone can rise to the top regardless of family background. Yet there is more intergenerational mobility in Australia, Sweden, Norway, Finland, Germany, Spain, France, and Canada. In fact, of affluent countries studied, only Britain and Italy have lower intergenerational mobility than the U.S. does, and they are basically even with the U.S. The differences are often stark. In the U.S., more than half of the earnings advantage or disadvantage of fathers is passed on to sons. In Canada, only about a fifth or less is," explains Hacker.

In fact, former senior analyst on the House and Senate Budget Committees Mike Lofgren reports in The Party is Over that "in measures of economic equality, social mobility, and poverty prevention, the United States now ranks 27th out of 31 advanced industrial nations belonging to the Organization for Economic Cooperation and Development. Thank God we are still ahead of Turkey, Chile, and Mexico."

“Thanks in large part to Reagan’s policies, the two periods of economic expansion that followed his election did little for Americans in the middle and lower income brackets. While Reaganomics helped create huge fortunes for those at the top of the income ladder, it brought a reversal in the slow gains that the working class and the poor had made in the previous two decades,” writes William Kleinknecht in The Man Who Sold the World.

So where is all the wealth that was supposed to be reinvested in the economy?

New York Times columnist Paul Krugman, quoting a Northwestern University research study says that between 1972 and 2001:

Income at the 99th percentile (1%) rose 87%.

Income at the 99.9th percentile (0.1%) rose 181%.

Income at the 99.99th percentile (0.01%) rose 497%.

Meanwhile, the median household incomes declined.

In other words, the rich got richer, and the poor got poorer. About the only oft-repeated economic adage that holds true.

“Much of the safety net carefully woven over the previous five decades to help distressed communities was left in tatters by Reagan’s budget cuts: housing assistance, food stamps, and legal assistance for the poor were all cut to the bone. Reagan’s budgets decimated an array of programs that had existed to promote rural economic development. Rural development programs sponsored by the U.S. Department of Agriculture’s Farmers Home Administration were cut by 69% from 1981 to 1987, going from $1.67 billion to $490 million,” explains Kleinknecht.

“The wealthiest 100 people in the world have a combined net worth of $1.9 trillion, making them wealthier than the entire GDP of nations such as Italy, Mexico, Spain, Canada, Australia, and about 170 other nations,” reports Thom Hartmann in The Crash of 2016.

“This is the economy we got when Ronald Reagan and the royalists drastically slashed taxes on the super rich in the early 1980s, but just as we learned during the Gilded Age…it’s impossible to build a healthy stable economy on the backs of a few billionaires. That’s because billionaires are not job creators... If vast fortunes are being hoarded in the hands of very few people, who can’t possibly spend that much money in their lifetime, or their kids lifetime, or even their kids’ kids’ kids’ kids lifetime, then it’s essentially being wasted."

This is the point billionaire Nick Hanauer repeatedly makes. In his famous TED Talk on the subject, he explains why rich people are not job creators:

"There can never be enough superrich people to power a great economy," states Hanauer. "The annual earnings of people like me are hundreds if not thousands of times greater than those of the median Americans. But we don’t buy hundreds or thousands of times more stuff. If the 400 richest billionaires in America could generate just as much economic activity alone than the rest of us can, then maybe they’d be an argument for such vast wealth, but they can’t. The typical billionaire doesn’t buy thousands more pairs of pants or thousands more ties, or thousands more cars than the typical working class American."

Hanauer concludes, “I can’t buy enough of anything that the millions of unemployed and underemployed Americans can buy – any new clothes or cars or enjoy any meals out to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.”​

In other words, when high concentrations of wealth accumulate at the top, the economy suffers. The billions that sit in offshore accounts in the Caymans is not funneled back into the U.S. economy. If this money was put into the hands of the lower class, it would be used immediately at malls, grocery stores, and car dealerships.

When everyone has disposable income, the economy soars. When only the 1% has disposable income, money sits and accumulates, creating dynasties with unparalleled power and influence.

If you are still in doubt, give a homeless man $100 and watch it go immediately back into the economy. Give the Koch Brothers $100 and watch it accumulate offshore.

Put simply: trickle-down economics does not lift all boats. Wealth can only trickle-up.

“Governor Mario Cuomo of New York related the problem in memorable fashion as keynote speaker at the 1984 Democratic National Convention: ‘President Reagan told us from the beginning that he believed in a kind of Social Darwinism, survival of the fittest…[that] we should settle for taking care of the strong, and hope that economic ambition and charity will do the rest. Make the rich richer, and what falls from the table will be enough for the middle class.’…In 2009, the 1% paid 5.2% of their income in state and local taxes, while the poorest 20% paid 10.9%. States penalized the poor with impunity,” writes Nancy Isenberg in White Trash: The 400 Year Untold History of Class in America.

So why exactly did we come to embrace Reaganomics – a self-serving ideology by our economic elite? Why as a country did we change course from one of prosperity for the Middle Class?

Kleinknecht reports in The Man Who Sold the World that the popular explanation for the change of policy resulted from the ills of the 1970s: “the decline of manufacturing and the twin evils of high unemployment and galloping inflation, the result of excessive regulation of business, out-of-control public spending, and a tax system that was choking our entrepreneurial spirit.” If you think this sounds conveniently pro-business, it is. It’s what conservatives have been peddling for 30+ years. MIT assembled a panel of experts in economics, technology, business management, political science, and other disciplines to mount an exhaustive study. Here’s what they discovered: “excessive taxes and regulation and high labor costs were not responsible for the loss of America’s productive supremacy. Rather it was the myopia of the U.S. industry, the refusal to sacrifice short-term profits in the interest of long-term investment in plant and equipment. The commission also faulted American business for not responding to the needs of customers and being much slower than their Japanese and European competitors in bringing new products to the market…The commission found that most of the American firms had lost their competitive position because of poor decisions by executives, not because of macroeconomic factors like taxes and regulation…the Reagan administration’s encouragement of mergers and rampant speculation was feeding into exactly what was wrong with U.S. industry…its tendency to favor short-term horizons.”

The core tenets of Chicago School of economics – privatization, deregulation, and cuts to government services – have laid the foundation for our current economic breakdown.

Naomi Klein in The Shock Doctrine asserts: the “free market” [did] not create a perfectly harmonious economy but turned the already wealthy into the superrich and the organized working class into the disposable poor. These patterns of stratification have been repeated everywhere that the Chicago School ideology has triumphed…In China, despite its stunning economic growth, the gap between the incomes of city dwellers and the 800 million rural poor has doubled over the past 20 years. In Argentina, where in 1970 the richest 10% of the population earned 12 times as much as the poorest, the rich were by 2002 earning 43 times as much. Chile’s ‘political success’ has truly been globalized. In December 2006, a month after Milton Friedman died, a UN study found that ‘the richest 2% of adults in the world own more than half of global household wealth… For the [Friedmanite] executives, the counter-revolution that began in the basement of the Social Sciences building in the 1950s has indeed been a success, but the cost of that victory has been the widespread loss of faith in the core free-market promise – that increased wealth will be shared.”

We assume that during an economic growth, the diffusion of prosperity and privilege will flow naturally, but it typically privileges the few while accentuating the relative disadvantage of the many. Explains historian Tony Judt in Ill Fares the Land, "We are often blind to this: an overall increasae in aggregate wealth camouflages distributive disparities. This problem is familiar from the development of backward societies - economic growth benefits everyone but disproportionately serves a tiny minority psoitioned to exploit it. Contemporary China or India illustrate the point. But that the United States, a fully developed economy, should have a 'Gini coeffecient' (the conventional measure of the gap separating rich and poor) almost identical to that of China is remarkable."

Even Bruce Bartlett, former domestic policy advisor to Ronald Reagan and one of the originators of Reaganomics, now debunks this conservative economic theory. In The New American Economy: The Failure of Reaganomics and a New Way Forward, Bartlett outlines a historically-based case for sizable tax increases to help counter the effects of his party’s now failed economic plan.

“Rich people do not create jobs, nor do businesses large or small," explains entrepreneur Nick Hanauer. "Jobs are a consequence of a circle-of-life feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense an ordinary consumer is more of a job creator than a capitalist. We’ve had it backwards for the last 30 years… The true job creators are Middle Class consumers. Taxing the rich to make investments [in order] to make the middle class grow and thrive is the single shrewdest thing we can do for the Middle Class, the poor, and the rich.” (You can listen to his entire TED Talk HERE.)

If the economic, academic, and journalistic consensus is that Reaganomics – and by default Reagan himself – was bad for the nation, then why do we have such admiration, nostalgia, and positive associations with Reagan the politician?

We’ll see next in Part 10: Tear Down this Myth