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Reagan Lives!

The legislation enacting Reaganomics may now be mostly gone, but the economic legacy of Ronald Reagan remains. Perhaps more important, the political attitudes that made many Americans so receptive to the Reagan program in the first place remain as well. One of the most significant lessons to be drawn from the exhausting 1990 battle over federal tax and spending policies is simply that so many Americans are no more willing today to make the sacrifices needed to rectify the nation’s fiscal imbalance—either to cut back middle-class entitlements or to eliminate jobs in defense industries, and certainly not to pay higher taxes—than they were when Ronald Reagan first assured them there was no need to do so.

The compromise five-year budget package finally approved by the Congress and signed by President Bush does mark a major change, both economically and politically. If they remain in place, the tax and spending measures that the new agreement includes will significantly shift the government’s fiscal trajectory. The political era in which tax rates were flexible only downward has now ended, and greater tax revenues will be a part of that difference. The commitment to a virtually unlimited military budget had actually ended during President Reagan’s second term (no thanks to Mr. Reagan himself), and the new five-year package holds defense spending in check even though outright reductions beyond the trivial remain elusive. The new plan also cuts Medicare subsidies, farm supports, the Post Office budget, and other elements of domestic spending. Even after allowing for the usual pathetically obvious unrealism of the economic assumptions used to translate specific policy actions into projections of overall revenue and expenditure totals, the combination of these three changes will staunch if not reverse the persistently widening imbalance that marked what was the Reagan fiscal policy and was becoming the Bush policy as well.

Even so, the Reagan legacy—the consequence of having sustained that imbalance for so long—is still very much with us. By now the objective realities created by an entire decade of over-borrowing and under-investing, including especially the shrinking supply of “good” jobs and the parallel failure of the average worker’s wage to keep up with inflation, are familiar enough. So too are the signs, increasingly frequent and ever harder to ignore, of the loss of American influence in international economic relations following a decade of borrowing from abroad and selling off national assets. This summer’s Persian Gulf invasion marked the first international crisis in decades in which the dollar fell instead of rallying. Since then Americans have watched the spectacle of our public officials, from Secretary of State Baker on down, going about the world, begging bowl in hand, soliciting contributions to finance what we can no longer afford on our own. Because no change in fiscal policy can suddenly wish into being the factories and machines that the nation failed to build during the last ten years, or magically erase the debts that it incurred, these aspects of the Reagan legacy will continue to shape our economic prospects for years to come, no matter how much we now raise taxes or cut government spending.

More fundamentally, when we consider the moral obligations that the members of any society either do or do not accept in their relationships with one another, both individually and in the aggregate, it seems still to be true that many Americans reject any notion of their own responsibility for the government’s chronic fiscal imbalance and its consequences, as well as any need that they should join in correcting it. Who, after all, thinks he pays too little in taxes? Who thinks his Social Security check is too big? Who thinks his parents pay too little for medical care? Whatever people may believe about the abstractions that so often dominate the public debate over our nation’s fiscal policies, the 1990 budget battle showed that many Americans even now remain unwilling to accept the basic truth of the matter. Despite all the self-reassuring accusations to the effect that “they” (Are they the poor? the ill? the elderly? defense contractors? farmers?) are bleeding “our” pocketbooks, our basic problem is that members of the average American family insist on government services—for themselves, for their parents, and for their children—that cost more than what they are willing to pay in taxes.

Economic Fundamentals: Opportunity or Danger?

Two important economic developments powerfully shaped the way most Americans viewed what the President and the Congress did. First, the dramatic increase in economic inequality among Americans in recent years inevitably brought into sharp focus the question of how to distribute whatever sacrifices the new fiscal measures would entail. Before the 1980s, a standard way to duck potentially fractious debates about whether the American system of mixed capitalism tended toward a more or less equal distribution of wealth and incomes was to complain that, because of the paucity of hard data about who owns what, no one could really say. That answer no longer suffices. Within the last ten years the difference between rich and poor has widened in ways that are easily visible despite the continuing absence of precise data.

Even within the limited sphere of wages earned by those who are working, the change has been startling. In 1979, college-educated workers earned 47 percent more on average than those with just high-school educations. Today the gap is 67 percent. Ten years ago the chief executive officers of the nation’s 300 largest companies made on average 29 times what the typical manufacturing worker made. Now the multiple is 93 to 1. The enormous changes in asset values in recent years—and hence the widening gap between families who already owned houses before the price explosion of the 1970s and those who now can’t afford to buy one, or between investors who participated in the 1982–1987 stock market boom and everyone who didn’t—only exaggerate the overall distortion.

Especially against the background of this widening inequality, any call for sacrifice by large numbers of families would naturally have raised the issue of “fairness.” But concerns over inequality carry a different burden when, on average, incomes are rising from when incomes are stagnant or even falling. If most families were earning more today than they were a few years ago, the air would be full of talk about how a rising tide lifts most boats, albeit by uneven amounts, and unfortunately leaves a few behind. The reality, and hence the prevailing attitude, is far different. In 1990 not that many Americans are, in Ronald Reagan’s famous phrase, better off than they were, four (or even eight) years ago.

The second economic development of the 1980s that powerfully influenced the political environment within which the 1990 budget battle took place is simply that the average American family is losing ground, and knows it. The steep decline in earning power that began with the first OPEC oil shock and, after a respite in the late 1970s, extended through the Reagan-Volcker recession was bad enough. But at least the families who suffered through it could see some identifiable problems on which to lay the blame, including oil prices that went in two stages from $3 per barrel to $30, and then the need for a period of economic slack—in fact, the most severe business downturn since the depression of the 1930s—to halt spiraling inflation. By the mid-1980s, however, with oil prices falling and inflation under control, and the Reagan administration proclaiming a new era of economic expansion, people thought they had earned the right to incomes that would once again be rising.

They were wrong. In 1983, the first year of the new expansion of the economy, the average American worker in business earned $281 per week. That expansion will probably end soon, if it has not ended already, but even so it has fulfilled one part of the promise held out for it by becoming the longest running economic expansion in American peacetime experience. It has failed, however, to deliver the rising real wages that have accompanied previous expansions. Wage increases outdistanced inflation (barely) in only two years out of the next seven, and by mid-1990 the average worker was earning just $267 per week in 1983 dollars.

These two fundamental economic developments of the 1980s, widening inequality and a declining average income, are not independent of each other; nor is either unrelated to the fiscal policies that the nation has pursued. On average since 1980 the federal government’s borrowing has absorbed nearly three fourths of all net saving done by American families and businesses combined. As a result, the share of the nation’s income devoted to net investment in new plants and equipment has been lower than at any time since World War II. The absence of new factories and new machines has, in turn, not only restricted productivity growth and therefore wage growth in the nation’s basic industries but also sharply curtailed the supply of jobs that these industries have to offer.

Jobs in manufacturing still pay about one third more, on average, than jobs in other industries, just as they did in the late 1970s. The difference is that today there are fewer of them. In 1979 American manufacturing firms employed just over 21 million workers. By the time the 1981–1982 recession ended, 18.2 million were left. Today, after nearly eight years of recovery and expansion, there are just 19.1 million. This makes the 1980s the first decade since the Industrial Revolution in which the number of Americans working in manufacturing has fallen.

From one perspective, of course, the fact that two thirds of the manufacturing jobs lost in the 1981–1982 recession disappeared permanently meant “leaner and meaner” companies that could afford to pay higher executive salaries and still generate ample profit to stimulate sharply rising stock prices. But an entire decade of shrinking employment in the sector of the economy that has traditionally provided the nation’s largest source of high-wage jobs has also depressed living standards on average throughout the work force. And it has importantly contributed to widening inequality by taking away what used to be the greatest opportunity for most workers who could not afford college. After we allow for inflation, young high-school-educated males—the group most likely to compete for manufacturing jobs—now earn 18 percent less on average than in 1979.

The combination of widening inequality and a declining average wage may be understandable as the result of the economic policies America has followed during the last ten years, but that does not make the combination any the less potent as a political force. Indeed, most observers who have recognized these fundamental developments, and have inferred that they work to the advantage of one political party or the other (typically the Democrats), have probably underestimated the variety and the volatility of the likely public responses. Awareness that one’s own economic situation has deteriorated, envy toward those who have somehow gotten ahead, frustration over the nation’s increasing impotence in world affairs, and a general sense of discouragement that any of these trends will be reversed in the future—these all breed the kind of popular reaction that can be difficult for conventional politicians of either party to address. The result is a political climate in which departures from the norm in all directions, ranging from the promisingly innovative to the frighteningly ugly, may flourish.

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