The New Tax Deal: Reaganomics Redux

More than thirty years ago, Ronald Reagan came to Washington intent on reducing taxes on the wealthy and shrinking every aspect of government except defense.

The new tax deal embodies the essence of Reaganomics.

It will not stimulate the economy.

A disproportionate share of the $858 billion deal will go to people in the top 1 percent who spend only a fraction of what they earn and save the rest. Their savings are sent around the world to wherever they will earn the highest return.

The only practical effect of adding $858 billion to the deficit will be to put more pressure on Democrats to reduce non-defense spending of all sorts, including Social Security and Medicare, as well as education and infrastructure.

It is nothing short of Ronald Reagan’s (and David Stockman’s) notorious “starve the beast” strategy.

In 2012, an election year, when congressional Democrats have less power than they do now, the pressure to extend the Bush tax cuts further will be overwhelming.

Worse yet, the deal adds to the underlying structural problem that caused the Great Recession in the first place.

Since Ronald Reagan was president, median hourly wages have barely budged, and America’s vast working and middle classes have taken home a steadily smaller share of the nation’s income (adjusted for inflation). The typical male worker today is earning less than the typical male worker thirty years ago.

Yet the richest 1 percent of Americans is now taking home a larger percentage of the nation’s income than at any time since 1928. And we recall what happened in 1929.

Unless the vast majority of Americans has enough purchasing power to keep the economy going without going ever more deeply into debt, the economy will eventually go over a cliff.

That’s what happened. By the late 1990s the middle and working classes could keep spending — and thereby keep the economy moving — only by adding debt. This strategy ended when the housing bubble burst in 2007.

Without their spending, there can be no buoyant recovery.

Yes, the pending tax bill will give America’s middle and working classes slightly more cash next year. But only for one year. They won’t spend it. They’ll use it to help pay down their debts.

Will lower taxes on the rich spur them to create more jobs? Not a chance. Since 1980, Reagan’s supply-siders have said lower taxes on the rich will trickle down to everyone else. Nothing could be further from the truth.

Look at history.

During the almost three decade spanning 1951 to 1980, when the top rate was between 70 and 92 percent, the average annual growth in the American economy was 3.7 percent.

Between 1983 and the start of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.

Supply-siders are also fond of claiming that Ronald Reagan’s 1981 tax cuts caused the 1980s economic boom. There is no evidence to support this claim. In fact, that boom followed Regan’s 1982 tax increase. The 1990s boom likewise was not the result of a tax cut; most of it followed Bill Clinton’s 1993 tax increase.

Nor did George W. Bush’s tax cuts trickle down. Between 2002 and 2007 the median wage actually dropped. And Bush’s record of job creation was pathetic relative to Bill Clinton’s, when taxes were higher. Under Clinton, America added 22 million net new jobs. Under Bush, barely 8 million.

So why are Democrats voting for Reaganomics?

They say they have no choice — either vote for this or watch taxes rise on everyone starting January 1.

That Democrats have allowed themselves to get into this fix is a testament to either their timidity, obtuseness, or dependence on the campaign contributions of those at the top.

Robert Reich

Robert Reich’s Blog