This paper contrasts the supply-side economic theory of Reaganomics to the Keynesian thought of the mid-twentieth century. Keeping in mind the many factors influencing the economy over the last century, this essay compares each theory’s impact on the American lower and middle classes.
After the collapse of capitalism’s Golden Age, 40th United States President Ronald Reagan unveiled an ambitious set of economic policies known as “Reaganomics.” Reagan considered his plan equivalent to a “Second American Revolution.” This paper analyzes the supply-side economic theory of Ronald Reagan, alongside the impact of his economic policies on the American lower and middle classes. Although these policies bare Reagan’s name, they are no longer unique to his presidency. The objective of extreme deregulation became ingrained into Republican doctrine, as reflected in the current policies of incumbent President Donald Trump. Therefore, we cannot study the impact of Reaganomics as a merely historical phenomenon, but rather an ongoing doctrine that continues to shape the present and future experience of the American working class. However, one must first realize the context in which Reaganomics arose to understand the significance of supply-side economics and the dilemmas it sought to address.
Throughout the twenty years following World War II, the American working class enjoyed “The Golden Age” of capitalism – defined by high employment and unprecedented expansion of the world economy. As the United States conducted overseas reconstruction programs, income per person in developing countries increased by 3.4%. In developed nations, GDP per head grew almost twice as fast as any previous period since 1820. Although many factors contributed to the Golden Age, the government was among the most significant. Economist John Maynard Keynes heavily influenced mainstream political thought since the Great Depression. He adhered to a demand-side economic theory which proclaimed high demand for product and services as the most efficient vehicle of economic growth. The collapse of the world economy in the 1930s reaffirmed the Keynesian stance that government spending is necessary to spur employment, demand, and, ultimately, growth. This philosophy inspired the government to take an increasingly active role in regulating the private sector, establishing welfare provisions, and maintaining its role as a major employer and producer throughout the mid-twentieth century. Progressive taxation and capital levies ensured the redistribution of wealth as the wealthiest Americans thrived in the newly robust economy. These policies resulted in unprecedented employment and wage protections for the working class. Keynesian political economics temporarily succeeded in spurring unprecedented growth after a period of unparalleled tragedy. However, the inevitable end to the Golden Age came to fruition in the incredible stagflation of the 1970s. By the election of 1980, the Golden Age had officially ended. Inflation hovered at 13%, the unemployment rate was at 7.7%, and productivity growth had steeply declined. The Bretton Woods system of the Golden Age had fallen.
The American electorate chose Ronald Reagan to reconstruct the economy in 1980 for his bold and ambitious supply-side economic proposals. In deep contrast to Keynesian thought, the supply-side theory maintains that economic growth is most effectively conducted by lowering taxes and decreasing regulation. Reagan believed that dismemberment of the federal government would result in a greater supply of goods at lower prices, which he saw as the true catalyst of high employment. In a set of policies known as “Reaganomics,” President Ronald Reagan sought to reduce the growth of government spending, federal income and capital gains taxes, and government regulation. This increase in aggregate supply intended to expand output and employment while lowering prices. Despite the previous decades of growth under Keynesian policies, supply-side economists believe that increased taxation reduces economic activity and discourages investment. Reagan also invoked the theory of trickle-down economics, which maintained that the wealthiest Americans would invest more in business and society at large if their taxes were diminished. This social investment, Reagan claimed, would outweigh the revenue lost from lowering taxes. Therefore, Reaganomics aimed to reduce taxes for all Americans, but especially the wealthiest. After decades of economic growth under demand-side economic thought, Reagan spent his presidency reversing Keynesian policies and diminishing the government’s influence in the economy – forever changing the American economy and Republican dogma.
In 1981, Congress enacted The Economic Recovery Tax Act – a landmark cut tax which reflected Reagan’s theory of trickle-down economics. The lowest tax bracket received cuts of 14 to 11 percent, while the top bracket enjoyed reductions of 70 to 50 percent. The top tax rate was further reduced from 50 to 38.5 percent in 1986. Reagan intended these cuts to spur investment and trickle down to the lower classes. However, data from the Pew Research Center consistently finds that this investment did not occur, and that Reaganomics accelerated long-term trends of unprecedented inequality. In 1970, the median middle American family’s share of aggregate wealth decreased from 32 percent to 17 percent from 1970 to 2018. Meanwhile the top-income tier came to compose 60 percent to 79 percent in the same period of time. In addition to growing inequality, Reagan’s tax policies also encouraged the trend of decreased personal savings for working-class families. Although personal savings as a percent of disposable income was remained steady at 11.4 percent throughout 1951-1981, it declined to 8.5 percent in 1988 and eventually 3.2% in 2005. Simultaneously, the increased income of the ultra-rich enabled banks to accommodate the increased demand for loans. As a result, household debt increased from 46% of GDP in 1965 to 49% in 1984, eventually reaching 98% in 2008. Outstanding debt rose from $55 billion in 1981 to $194 billion in 1988. Therefore, the distribution of tax cuts featured in The Economic Recovery Tax Act of 1981 resulted in an unprecedented concentration of wealth to the richest 5% of Americans, while the working class became excessively dependent on credit.
Reaganomics also encouraged the erosion of labor unions, protective entities that ensured bargaining power to the working class throughout the early and mid-twentieth century. Organized labor covered over a quarter of the American workforce before the presidency of Ronald Reagan and had ensured that employers did not take advantage of workers throughout the Golden Age. Reagan held a critical perspective of organized labor, as most notoriously displayed in the autumn of 1981. Citing safety concerns, The Professional Air Traffic Controllers Organization called for a reduced workweek, substantial pay increase, and better retirement package for all air-traffic controllers. After unsuccessful negotiations, roughly 13,000 union members went on strike. Reagan, believing in the illegality of public employees’ right to protest, fired, and banned each of the workers who continued to demonstrate. The Federal Labor Relations Authority then de-certified the union and allowed a new coalition to represent workers. The action of the Reagan administration sent shock waves across the working class, signaling the end of organized labor’s authority and legitimacy. The percentage of workers covered by a collective bargaining agreement dropped from 25.7 percent in 1980 to 19 percent in 1988. The number currently stands at 11.6 percent in 2019. As workers lost their bargaining power in the workplace, they also lost influence in government. Reagan’s commitment to deregulation of the financial sector further provided employers the opportunity to exploit a vulnerable workforce. By the conclusion of the Reagan presidency, the minimum wage fell by 25 percent, unions had lost any remaining influence they carried into the 1980s, and government regulation of employers had substantially reduced – officially severing all bargaining power of the working class.
The finances of the federal government changed drastically throughout the presidency of Ronald Reagan, primarily against the interests of the working class. Reagan added $1.86 trillion to the national debt, a 186 percent increase from the $998 billion deficit at the end of Carter’s administration, and the greatest increase of any president since FDR. Debt occurs under Keynesian economic governing because of the cost of social spending. However, the Reagan administration prioritized defense spending over education and healthcare. The debt under the Reagan administration occurred as a result of decreased taxes on the wealthiest Americans, which dramatically reduced the government’s tax revenue. The national debt remained between 30 to 35 percent of gross domestic product from 1969 to 1981, the year which Reagan assumed office. That number reached 49 percent by 1988 and 106 percent by 2019. This usage of the government not only burdened the working class, but it further perpetuated a lasting ideology that the government is unable to help solve the problems of the working class. Conservatives use the national debt as justification that we cannot afford more social spending while refusing to re-transition the tax burden from the middle-class to the wealthiest Americans. Instead, they proclaim these issues as inherent to government. As a result, Americans no longer expected the government to provide the social services they once did, instead placing these responsibilities on the private sector. The Keynesian economic governing of the Golden Age cannot be achieved again if Americans believe the government is always the problem, as perpetuated by Reagan and reflected in the current American president.
The tax policies of President Donald Trump reflect the supply-side dogma established by the Reagan administration in 1981. Trump’s tax plan, titled “A New Foundation for American Greatness,” cost the federal government $1.5 billion in 2018. The bill slashed the corporate tax rate from 35 to 21 percent, enabling corporations to avoid roughly $200 billion in federal income taxes and increasing after-tax corporate profits by at least 20 percent. This policy reflects Reagan’s theory of supply-side economics, and precisely his trickle-down approach by providing exceptional cuts to those who can afford it the most. However, these cuts simply lead to an increased national debt if not paired with substantial spending reductions. Although Trump’s tax plans slash social spending, the 2018 budget raised defense spending by $52 billion and immigration law enforcement by over $3 billion. These spending priorities are detrimental to a working-class who would be greater impacted by increased investment in education or healthcare. A New Foundation for American Greatness also includes numerous cuts to government regulations on businesses, jeopardizing workers’ rights at a time of unprecedentedly low collective bargaining coverage. Decades after the Economic Recovery Tax Act of 1981, the American working class continues to lose power, as inequality and the national debt increase.
The analysis of short and long term economic trends reveals that Reaganomics exchanged high inflation and unemployment for extreme inequality and government deficit – a detrimental bargain for the American working class. The passage of the Economic Recovery Tax Act of 1981 established the economic policy of the Reagan administration, one based in supply-side and trickle-down theory. The landmark tax plan slashed taxes, especially for the wealthiest Americans. The bill established Reagan’s economic philosophy that continued to be displayed in other regards, such as his handling of The Professional Air Traffic Controllers Organization strike the same year. The detrimental impact of these policies on the working class is evident through the declining union membership and minimum wage, alongside the rapidly expanding inequality throughout and beyond Reagan’s presidency. The erosion of unions and deregulation of government deprived working-class Americans of the entities that protected them throughout the Golden Age of capitalism, as reflected in the trends explored throughout this paper. The lasting influence of Reaganomics is also evident in the modern Republican dogma, particularly in the tax plan presented by Donald Trump. Therefore, we must access the impacts of Reaganomics as an ongoing study that continues to shape the experience of the American working class. Furthermore, we must contrast the economic governing of Reagan to the social spending policy of Keynes. Most importantly, we must realize the impacts of each on the working class to ensure the survival of the American dream.
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