How Reagan Altered the Playing Field for the Middle Class
August 20, 2012 10:02 am
Once, the landscape was populated by private-sector types who answered a call to public service—a hybrid of liberal-minded republican men of the Nelson Rockefeller type. With the Ronald Reagan presidency, a new type of man emerged who equated “private” to mean the “shining city on the hill”, a seemingly autonomous creation detached from its creators. For Reagan, “public” denoted government, and government was to be dismantled at all costs. Of course, Reagan would herald this very narrow view of government anathema to that which sought to serve ordinary people.
The manner in which Reagan decoupled work rendered from the actual worker meant that his focus would increase the balance of preservation of material wealth at the top while decreasing personal welfare at the middle and bottom. By decoupling work from worker, it became much too easy to forget about the social contract that underwrites all workers to their work, and to undo the very fabric which motivates people to work toward a common interest.
No other president has played such a decisive role in shifting upward the distribution of wealth in our country over the shortest span of time. Reagan came into office as back-to-back generations had benefitted from “New Deal” policies. By the mid-term elections of 1978 leading into the 1980 general election, a typical family had more than doubled their incomes from that of 1947 (inflation adjusted), with incomes at the bottom, middle, and top fifth percentiles rising together in one fell swoop. During Ronald Reagan’s eight year presidency, the wealthiest one-fifth of American households saw their incomes increase by 14%. At the same time, the poorest one-fifth saw their incomes decline by 24%, with the middle three-fifths of American families’ income remaining essentially flat (with any increase being the result of wives going to work).
(Source: Analysis of U.S. Census Bureau data in Economic Policy Institute).
So, just how did redistribution work? Reagan cut income taxes, which are paid at a higher rate by the wealthy, while increasing payroll taxes, which are paid at a higher rate by the working poor and middle class. If this sounds like a familiar theme, it’s because it is. This allowed Reagan to shift the tax burden down the income scale. During the 1980s, the total effective federal taxation rate for the poorest one-fifth of American families actually increased by more than 16%. By contrast, the effective taxation rate for the wealthiest one-fifth of families fell by 5.5%.
For those who question the legacy the same (embarrassing) numbers paint a very different landscape. For instance, Dean Baker, a CEPR economist writes that the top 1% sucked in more than 42 percent of the gains of economic growth over the last thirty years. The top 10% now owns 70% of all American assets. This translates into the bottom 90% sharing in approximately 30% of the nation’s wealth. When breakthroughs in technology and increases in productivity are counted as positive by-products of top wealth, there is little excuse as to why the benefit should not have trickled down to the wider population.
One tenable argument is that the larger population has indeed “benefitted” since the public is now able to “purchase” these products (even if only via liberal credit lines). But mere consumption doesn’t increase core standards of living when debt-to-savings (or debt-to-real-wages) ratios align so negatively against the individual consumer. In fact, there is good reason to be suspect of any dubious claim that there continues to be a strong American middle-class purchasing power (even when we include the Walmartization that’s taken place across the country, easing inflationary pricing). A more sobering note is that when incomes are taken into account in the form of average hourly wages, the purchasing power (sans credit) has been depleted since 1982, with some later gains coming on the heels of a Clinton administration.
Source: Analysis of U.S. Census Bureau data in Economic Policy Institute, Congressional Budget Office
In the years before Reagan, notably the Nixon Administration, the American citizenry received the benefits of the Clean Water Act, federal wage-price controls, food-stamps for the needy, the Occupation Health & Safety Administration (OSHA), as well as a host of other job security measures. These government and regulatory programs that sought to stave off inflation and ensure a strong middle class were financed by two important top-down measures: 1) the removal of the gold-standard which saw a 10% drop in the value of the dollar in relation to our trade partners’ currency, which stimulated export growth, and 2) a 70% tax rate for those making over (in 1970 dollars) $200,000 a year, with long-term capital gains tax between 27%-36%. Nixon embraced a sort of Keynesian economics to a degree which sustained the middle class. Such tax measures today wouldn’t even make it to the floor of congress for rejection.
In socio-economic terms, recent top-down policy decisions have led to: 1) union-busting measures, 2) job-depletion and outsourcing, 3) unfettered globalization, all resulting in the systematic dismantling of the American middle class. When these above ingredients are stewed into the pot, along with an already hypnotic reverence for the “American myth” of extreme individualism and hyper-mistrust of collectivism, a dangerous brew is indeed reached. We must find our way back to a “Nixon middle” if we are ever to save our nation’s middle class.