Exclusive: For three decades, the United States has undertaken an extraordinary social experiment, incentivizing greed among the richest Americans by cutting their top tax rates in half or more. The results are now in from Ronald Reagan’s bold gamble and Robert Parry says they aren’t good.
By Robert Parry
So, it turns out that greed isn’t good after all – at least not for the vast majority of the American people. But this is a lesson that many U.S. opinion leaders still resist.
For the past three decades – since Ronald Reagan’s Republican landslide in 1980 – the United States has undertaken arguably the most destructive social experiment in American history, the incentivizing of greed among the rich by halving their top marginal tax rates.
The idea – once famously sketched out by right-wing economist Arthur Laffer on a napkin – was to slash the tax rates on the rich to spur a “supply side” bonanza of economic growth and higher tax revenues for the government.
Before becoming Reagan’s vice presidential running mate, George H.W. Bush labeled this tax strategy “voodoo economics,” and Reagan’s first budget director David Stockman warned that, without severe spending cuts, it could create a sea of red ink as far as the eye could see.
But the experiment was undertaken anyway, with Reagan persuading a large swath of the American electorate – especially alienated white men – that tax cuts heavily weighted to the rich were the way to go and that the most important priority was to get rid of federal regulations, or as Reagan phrased it, “government is the problem.”
Reagan’s sharply lower tax rates meant that the rich had a much stronger incentive to pad their salaries and grab whatever they could.
Instead of the richest Americans paying 70 percent or more of the highest tranche of their income to the Treasury as they did in the 1960s and 1970s (it was even higher, 90 percent, under President Dwight Eisenhower in the 1950s), the rich saw Reagan reduce their marginal tax rates to 28 percent by 1988.
The tax bite on some millionaires could be even lower if their earnings were categorized as “capital gains,” which were taxed at 15 percent. Over time, Republicans also eliminated the “estate tax” on large fortunes.
So, rather than discouraging excess wealth – as had occurred under presidencies from Dwight Eisenhower and John F. Kennedy to Richard Nixon and Jimmy Carter – Reagan essentially encouraged the rich to be greedy. Greed went from being a moral sin to a policy goal.
Gordon Gekko, the fictional corporate raider played by Michael Douglas in Oliver Stone’s “Wall Street,” summed up Reagan’s new paradigm: “Greed, for lack of a better word, is good.”
Consolidating an Orthodoxy
In the 1984 presidential campaign, Reagan and the Republicans turned their radical tax policies into a national orthodoxy when Democratic nominee Walter Mondale announced that he would raise taxes if elected and Reagan then mocked campaign hecklers with the smiling rejoinder, “I’ll let Mondale raise your taxes.”
When Mondale was crushed in Reagan’s 1984 landslide, it became clear that the American electorate had bought into this theory that lower taxes would be good for all.
Reagan’s Vice President George H.W. Bush followed the beloved “Gipper” in 1988 with a Reagan-like promise: “Read my lips: no new taxes.”
Though Bush eventually retreated somewhat from his pledge, lifting the top tax rate to 31 percent in 1991 as part of a deficit-reduction deal with Democrats, Reagan’s low-tax orthodoxy had settled in as a permanent feature of U.S. politics, despite the huge deficits that it created.
Even modest efforts to roll back Reagan’s folly have proved costly to politicians. Many congressional Democrats went down to defeat in 1994 after they supported President Bill Clinton’s boost in the top marginal rates from 31 percent to 39.6 percent.
After the Republican landslide of 1994, Clinton tacked to the right and accepted more Republican plans for “freeing up” the economy from government regulations.
With the support of Treasury Secretary Larry Summers and other neoliberal economic advisers, Clinton signed the Gramm-Leach-Bliley bill, removing Glass-Steagall restrictions that separated commercial and investment banks, a Depression-era rule that had stopped Wall Street from gambling with depositors’ savings.
That repeal opened the floodgates for Wall Street speculation as the United States shifted further and further from a country that made things into a country that made things up, often by using exotic financial products to shift money around while giving the bankers a fat cut.
After George W. Bush grabbed the White House in 2001, the Republicans scaled back the top marginal rate again, this time to 35 percent, quickly turning Clinton’s budget surpluses into a new round of deep deficits. On Wall Street, bubble followed bubble, finally blowing up with such force in September 2008 that the entire world’s economy was devastated.
So, the results of Reagan’s greed experiment are now in. Rather than “the shining city on a hill” and “morning in America” that Reagan had promised, many Americans are experiencing a nightmarish midnight, barely surviving in decaying cities, 14 million out of work and millions more out of their homes.
The Luxurious Rich
Under Reaganomics, the bounty for the rich from lower taxes was supposed to “trickle down” to the rest of the American population, creating a rising tide that would lift all boats. However, in reality, it floated only a handful of yachts – filled with beautiful people flaunting Tiffany jewelry, Prada crocodile handbags ($41,000 each) and Louboutin boots ($2,495 at Saks).
As author Barbara Ehrenreich wrote in last Sunday’s Washington Post, this era’s “‘hyper-luxury’ is represented by the 123-room Los Angeles mansion just purchased by 22-year-old British heiress Petra Ecclestone, which might be able to comfortably house 50 homeless families while leaving plenty of room for its owner should she care to remain on the premises.
“The term probably also applies to the new vogue of high-end children’s playhouses, one of which sells for $248,000. As one leading purveyor of such air-conditioned toys put it, ‘A special playhouse is not the sort of thing you can put off until the economy gets better.’” [Washington Post, Oct. 2, 2011]
Other beneficiaries of Reaganomics, the youthful and macho hedge fund managers, have turned Lower Manhattan and other favorite haunts into locations for Maserati dealerships, trendy restaurants, expensive bars, high-priced escort services and the finest cocaine.
Meanwhile, other Americans have to count their change before taking the family to a fast-food joint or before fitting the kids for school with discount clothes at Wal-Mart.
But many struggling Americans still vote Republican and cheer GOP candidates who call for even lower taxes on the rich. That’s due in part to the fact that during the Reagan era, the Right also built a powerful propaganda infrastructure to reinforce the message that low taxes on the rich somehow equated to both sound economics and American “liberty.”
Over time, this propaganda machinery churned out an altered American history in which the Founders supposedly despised a strong central government, even though they were the ones who replaced the weak Articles of Confederation with a dynamic federal structure under the Constitution in 1787. [See Consortiumnews.com’s “Tea Party Gets the Constitution Wrong.”]
The supremacy of the Union was reaffirmed in the Nullification battles of the 1830s and was finally settled in the Civil War in the 1860s. However, many of today’s ideological descendants of the defeated Confederacy discovered that knowledge of American history is now so weak that they could simply substitute a revised one – and that few voters would know better.
The “Reagan legacy” and this revisionist history of the Founder’s “originalist” intent have combined to ensure that Reagan’s failed tax experiment is far more enduring than it deserves to be. Much like Prohibition lingered on for years after its destructive impact – undermining respect for law and fueling organized crime – had become obvious.
Resistant to Reality
Reversing a disastrous experiment (once it has surrounded itself with entrenched interests) turns out to be very difficult. Reagan’s incentivized greed has proved especially impervious to facts, although the recent Wall Street protests indicate that reality may finally be seeping through.
A 2009 study by former International Monetary Fund chief economist Simon Johnson showed that in the years before Reagan’s deregulatory frenzy took effect, banks accounted for no more than 16 percent of domestic corporate profits. Yet by the middle of last decade, that number had risen to 41 percent – and with those bigger profits, Wall Street compensation soared.
However, the greed was not confined to Wall Street. Across the landscape of corporate America, compensation for chief executives and other top officials skyrocketed while pay for their employees stagnated.
Median CEO pay jumped from around $1 million in the 1970s and early 1980s to around $2 million by 1990 to around $5 million by the middle of last decade, according to data compiled by the Bureau of Labor Statistics.
It also didn’t seem to matter much that many CEOs were mediocre in their performance. As the Washington Post’s Peter Whoriskey wrote, corporate boards often applied a “Lake Wobegon Effect” that raised their CEO’s pay by pegging it to the overall rise in CEO pay.
For instance, Amgen CEO Kevin W. Sharer got a raise last March from $15 million annually to $21 million although shareholders in the biotech firm had lost 3 percent on their investment in 2010 and 7 percent over the past five years. [Washington Post, Oct. 4, 2011]
Yet, as bankers, CEOs and the occasional heiress feathered their luxurious nests, Reagan’s economic experiment had disastrous consequences for middle- and working-class Americans. Wages slumped, unions shrank, factories closed, jobs grew scarce and proud industrial cities endured rising poverty and worsening decay.
Though it should now be clear what Reagan wrought with his social experiment in incentivized greed, those lessons have not been accepted by many leading politicians and pundits. The prevailing “conventional wisdom” remains that taxes on the rich must stay low. Politicians approach this “third rail” of higher taxes very gingerly.
Even as President Obama called for a new jobs program, he recommended paying for it, in part, by raising taxes on some rich Americans so they don’t pay a lower tax rate than their secretaries. Yet, Republicans responded to even that modest proposal by accusing Obama of “class warfare.”
Missing a Great Opportunity
It is another bitter irony of history that Reagan’s ascension in 1980 coincided with a moment when the United States was on the cusp of what could have been a golden age. Federal investments in transportation, technology and science had brought the country into sight of a new horizon where a broad prosperity was possible for the entire population.
Through the tax structure of the 1950s, 1960s and 1970s, Americans had footed the bill for a wide range of advancements. However, some temporary economic reversals in the 1970s – from the Vietnam War’s inflationary hangover to oil shocks in the Middle East – created a national malaise that Reagan promised to cure with his cheery personality and tax policies.
So, instead of the country profiting from all those government investments – from the highway system under Eisenhower to microprocessors from Kennedy’s space program to the Pentagon’s early development of the Internet – the profits went almost entirely to big corporations and the rich who devised ways to take advantage of this taxpayer-financed progress.
Some of the new rich, who piggybacked onto government-funded projects like the Internet, claimed they were the worthy ones who deserved their sudden wealth. Republicans continue to warn that it is wrong to punish society’s “winners,” even though many online moguls might be delivering pizzas today if it weren’t for the taxpayer money used to create the Internet.
Meanwhile, average Americans lost out in two ways: first, the higher productivity from the technological breakthroughs eliminated many middle-class jobs, from factory work to accounting, and second, the adoption of “free trade” policies shipped many jobs overseas to lower-wage countries.
Those two developments alone ensured super-profits to multinational corporations and their wealthy owners. However, instead of a large chunk of that money going to pay back the nation for the crucial investments and for the global security that made the “free trade” possible, the money mostly went to buy expansive mansions and expensive baubles.
If the pre-Reagan higher marginal tax rates had stayed in place, the extra money could have been reinvested in the country’s infrastructure and recycled into additional scientific research, creating millions of new jobs to replace those lost to both technology and globalization.
That lost opportunity represented not only a personal tragedy for the millions of Americans who then frantically sought to maintain their living standards by working more hours and borrowing against their homes, but it marked a historic tragedy for the entire planet because there was a chance for people everywhere to enjoy the fruits of this new technology.
Instead, the ill-timed arrival of Ronald Reagan on the world stage changed that history. But that is not the narrative that most Americans hear. Instead, Ronald Reagan has been transformed into a national icon with recent U.S. polls rating him the greatest president ever.
Until recently, the loudest “populist” voices in America have come from angry right-wing talk show hosts and Tea Party protesters who hail Reagan and advocate more tax cuts for the rich and more reductions in the role of the federal government.
Many working- and middle-class white men have allowed their anger over their declining status to be redirected away from the rich and toward minorities, women and the “guv-mint.” These members of the Reagan cult remain convinced that the “guv-mint” is a threat to their “liberty” and that their “freedom” depends on giving nearly unlimited power to the rich and the corporations.
Some of these “populist” right-wingers wear their racial/ethnic/religious bigotry on their sleeves, treating the African-American in the White House as the ultimate symbol of their “oppression” and vowing to “take our country back.”
This mix of fear and prejudice helps explain the stubborn appeal of the ugly falsehood about Barack Obama being born in Kenya and thus not being a “naturally born” American.
But finally a counter-movement to this right-wing orthodoxy has begun to take shape, spearheaded by young Americans who see their future much dimmer than that of their parents. Though their “99 Percent” movement may lack specific policy remedies, it does recognize the harm caused by the concentration of national wealth in the top one percent.
Instead of the Tea Party approach of taking the side of (and organizational money from) billionaires like the Koch brothers, the “99 Percent” movement takes aim at the greedy Wall Street banks and America’s super-rich. These protesters at least have identified the real culprits.
Official Washington, which has served as a reliable handmaiden for the wealthy over the past several decades, is nonplussed by these anti-capitalist sentiments being expressed in this new movement as it occupies a park near Wall Street and spreads to other cities.
Washington’s think tanks and other policy centers remain dominated by Reagan’s “free-market” devotees, but those sentiments also pervade the major U.S. news media, especially mainstream outlets like the Washington Post and the New York Times. A key reason is that many well-paid media stars have profited handsomely from the current political/economic climate.
Offering ersatz “reform,” the likes of best-selling author (and Times columnist) Thomas Friedman have begun calling for a third party of “radical centrism” that would support some modest increases in tax revenues while continuing “free-trade” policies and taking the “courageous” stand of slashing “entitlement” programs, like Social Security and Medicare.
It should be recalled that during the run-up to George W. Bush’s invasion of Iraq, Friedman enthusiastically supported the illegal war and deemed himself a “Tony Blair Democrat,” thinking that associating himself with the glib but unprincipled British prime minister was a good thing.
There will be many media talking heads who will urge Americans to get behind the supposedly brave Friedman and his “centrist” third party. However, if serious change is to come to the United States – and the world – more is needed than Friedman’s chic centrism.
For now, the new protest movement of the “99 Percent” may wish to stay focused on its anti-capitalist critique. That’s all well and good. However, if the American economy is to be revived, concrete proposals will eventually be needed.
A good place to start might be to relearn the lessons of earlier generations – from the economic progressivism of Theodore and Franklin Roosevelt through the government pragmatism of Dwight Eisenhower and John F. Kennedy to the early environmental initiatives of Richard Nixon, Gerald Ford and Jimmy Carter.
A key starting point for this national rebirth might be to restore the pre-Reagan marginal tax rates on the rich, with the extra revenue reinvested to create jobs and to rebuild America. Senate Democrats have made a modest move in that direction by proposing a five-percentage-point surcharge on people earning $1 million or more to pay for Obama’s job program.
In other words, the time may finally be ripe for the country to bring Reagan’s failed experiment to an end and to start dis-incentivizing greed.
[For more on related topics, see Consortiumnews.com’s “How Greed Destroys America” or Robert Parry’s Lost History, Secrecy & Privilege and Neck Deep, now available in a three-book set for the discount price of only $29. For details, click here.]
Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com. His two previous books, Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras, Cocaine, the Press & ‘Project Truth’ are also available there.