Presently, America’s political system is in the middle of a cultural war. Many would say that it is economic class warfare - but I disagree. Democrats have for the last four elections been gaining a base of white, affluent, college-educated professionals. They know they may pay more taxes under the Democratic party-platform, but they believe and have a cultural kinship for the message. No longer does the party have to plot and scheme as to how to once again attract those working class whites who have been leaving the party for the last thirty years. The partisan-party warfare has translated into specific ideologies as how to govern. Let us take for example our current economic crisis. The stimulus plan was a demonstration in demand-side economics. Use government spending to create demand and jump-start the economy. It goes back to the New Deal (the Gospel of the Democratic party’s politics). The other side takes a hands off approach. Republicans champion a free market approach which believes that government should not interfere in the course of economic processes. Rather than using government spending, the government should relieve tax burdens and allow extra income and free enterprise to drive markets. Ronald Reagan and the Neo-Conservative movement of the 1980s is said to have been the origin of the new GOP’s platform. Lately, the platform and the party has come under scrutiny. George Bush cut taxes even in the midst of monumental government spending and greatly increased deficits. Free market policies have been blamed by a great deal of the public as to the cause of our current economic plight. A lack of government intervention in the real-estate industry has been seen as the major cause for this global recession. And in the face of all this, Republicans continue to clamor for tax cuts and tell us to look back to the legacy of Ronal Reagan as guidance. But what is that guidance and is there any mythology as to what truly happened during his presidency?
Before we even venture back to the 1980s we should take a short trip back to the mid 1990s. Around 1997, the United States had its first Democratic president since Jimmy Carter and its first elected two-term Democratic president since Franklin D. Roosevelt. Bill Clinton was presiding over one of the biggest approval rating and economic booms of the last Century (this was pre-Monica Lewinski). The New York Times had just published an Arthur Schlesinger Jr. survey of the presidents where Ronald Reagan got a below average score from many historians. So, with Clinton’s popularity and historians portraying Reagan in a less-than-favorable light, the media and PR blitz was turned up a notch to recapture the fervor of the neo-conservative revolution in the Reagan Legacy Project. In July 1997, the Heritage Foundation in their magazine Policy Review, slammed The Times article and ran a piece for their 20th anniversary issue: “Reagan Betrayed: Are Conservatives Fumbling His Legacy?” The article laid out that Reagan was responsible from everything to ending the Cold War to his tax cuts in 1981 being responsible for the 1997 economic boom. The right wing think-tank asserted that the only problem with the GOP was that its present leaders were too scared to follow Reagan’s legacy.It was a rally cry. Oklahoma Governor Frank Keating proclaimed that:
“Reagan's achievement can be compared to Lincoln's, because he faced immense challenges in an era characterized by deep and fundamental philosophical divisions among the people he set out to lead.”
Was his handling of the Cold War and stagflation as monumental as presiding over the abolition of slavery and a civil war? Conservatives wanted to create this type of aura. It was in October 1997 that Representative Bob Barr and Senator Paul Coverdell (both Republicans from Georgia) endorsed legislation to make Washington National Airport into Reagan National. From 1997 until his death in 2004, there have been drives to do everything from affixing his name on a public building in each of the country’s 3,066 counties to putting his face on the $10 bill. As Michael Kamburowski (former aide to Grover Norquist and C.O.O of the California Republican Party) stated to the Hartford Courant in December 1997: “The left has been far better at rewriting history. Conservatives just haven't paid that much attention to this kind of thing.”
So what happened back in 1981? Reagan rode into office as an ideologue who proclaimed the start of a conservative revolution. He promised to cut the size of government, scale back entitlements and cut taxes. His initial actions were to drastically cut taxes on marginal tax rates. Next, he created a massive military build-up and partly funded the increase by slashing $41.4 billion dollars from 83 different federal programs. His agenda for the rest of the year was to eliminate both the Departments of Energy and Education – which were campaign promises. Also, he and his Director of the Office of Management and Budget David Stockman, desired to greatly diminish social security and Medicaid (too which Stockman referred to as “closet socialism”).
This was the beginning of the revolution – “and it was being televised”. This might have been the problem. In 1982, the tax cuts caused deficits to balloon and the recession deepened. Realizing that they had over-stepped their means in 1981,in 1982 they also rolled-backed about a third of the cuts from the previous year. He also in 1982 attempted to make draconian cuts to a social security program near insolvency. The outcome was vehement opposition from the Senate and was probably the catalyst for the GOP losing 26 seats in the 1982 mid-term elections. The following year, Reagan made a total about-face on his campaign promises of limiting entitlements. He agreed to a $165 billion bail-out of social security. Maybe this was Reagan the politician and leader of his party seeing the reactions of an electorate and politicians rather than the ideologue delivering a proclamation of a brand new conservative way. The bailout dramatically increased pay-roll taxes for both employees and employers. It also created a new class of social security recipients in new federal workers. What was truly non-conservative about the bailout is that it began to tax social security benefits and only for those who were upper-income recipients. He closed the year by raising a gasoline tax and repeated the action the following year by raising it again – this time $50 billion over the next three years.
Finally, there was the Tax Reform Act of 1986. Most conservatives will tell you that legislation was a high point of supply-side economics where it lowered individual income tax. What they will not tell you is that it caused one of the largest corporate income tax increases in history. Joshua Green wrote in the Washington Monthly:
“Reagan raised corporate taxes by $120 billion over five years and closed corporate tax loopholes worth about $300 billion over that same period. In addition to broadening the tax base, the plan increased standard deductions and personal exemptions to the point that no family with an income below the poverty line would have to pay federal income tax”
Another aspect of the Act, which was out of character for Conservatives, was the expansion of the earned income tax credit or EITC. As originally adopted in 1975, it was passed into law as a wage subsidy for the working poor. The earned income credit was intended to offset the Social Security taxes of low-income workers with children and to provide those taxpayers with an increased incentive to work. The bill has been considered over the last 20 years as one of the most important anti-poverty measures of the last twenty-five years.
I am not making the case that Ronald Reagan was not Conservative or that he was actually moderate. However, the neo-conservative caucus does leave a lot out of this legacy (such as he made the Department of Veteran Affairs a cabinet-level department and increased the number of government employees by 61,000 by the time he left office). I believe in the end you saw a politician who came in on a specific platform and realized that he had to, at times, play “partisan ball”. The American people sometimes just like “New Deal” policies and come to grow accustomed to them. They may even “like” them and their benefits. The mythology of Reagan is just a piece of the conservative puzzle.
Along with the Ronald Reagan story, there is the 1981 tax cuts that created an economic boom that many conservatives say created a wave of prosperity until the end of the 20th century. This is the basis of their present platform. We have prefaced this policy with the fact that Reagan did offset a great deal of his initial cuts with tax hikes in following years. However, 1983 saw a recovery form the recession that lagged throughout the stagflation of the 1970s and the beginning of the 80’s. Here are four things that conservatives do not talk about when discussing 1983.
The first point to acknowledge is that business cycles have peaks and troughs. Conservatives tried to take credit for the 1983 rebound and state that the boom of the mid to late 1990s was a result of Reagonomics. It is as faulty as when Democrats state that the boom under Clinton was due to the 42nd president. Ever since we have become an industrialized nation in the mid 19th century, the economy has been susceptible to large swings. In 1983, there was 7.5% growth but any economist will tell you that the biggest period of growth is the initial period of the rebound. Just to conclude this point, I think we have to listen to David Stockman (Ronald Reagan's first Director of the Office of Management and Budget and the main architect behind Reagonomics). He wrote in his book The Triumph of Politics:
“There was nothing new, revolutionary, or sustainable about [the growth of 1983-89]. The cycle of boom and bust had been going on and bust had been going on for decades and ...its oscillations had reached the high end of the charts. That was all.”
The second characteristic of the time was the price of oil. The price of oil exploded in 1970s. Since the end of World War II, whenever the price of oil has risen by 60% or more a recession has soon to follow. This makes sense due to oil’s uses as an ingredient to make a great range of products and it's necessity in the transportation of products and services. Between 1978 and 1981, the price of a barrel of crude oil more than doubled from $40/barrel to $86. The spike was caused by supply shock There was revolution and war in Iran and Iraq with caused a reduced oil supply. This increase came on top of a quadrupling of the price per barrel caused by the 1973 Arab oil embargo. As the supply stabilized, from 1981 to 1983 the price per barrel declined nearly a third. By 1986, the OPEC oil cartel had totally collapsed and prices bottomed out to $20/barrel - which caused the cost of business to drastically decline.
The third factor present during that time started in the Ford and Carter administrations. The way to do business was changing. Small and mid-size companies were allowed to play in the financial arena due to the deregulation of monopolies. Legislation in the 1970s allowed for the possibility of pension and mutual funds. In 1975, fixed commissions were abolished on the New York Stock Exchange. This made it standard for the NYSE to allow for quantity discounts on the ordering of large trades and created the ability of mutual funds and pensions to invest in small public equities. By 1979, the Department of Labor lifted conservative investment regulations for pensions, insurance products and retirement plans to invest in more risk tolerant investments. This was the beginning of the “private equity market” with its venture capital and leveraged buyouts.
The era brought a decrease in the industries where incumbents were strongly protected from any new competitors. Trucking, natural gas, telephone, airline and railroads were all regulated monopolies that established almost impenetrable barriers to enter. With the deregulation of monopolies came the ability for optimal competition – as long as someone was willing to give you a loan in order that you could compete with the heavyweights.
And on that note, the biggest reason, in my opinion, for the economic transformation in 1983 was the monetary policy of the Federal Reserve. Before Reagan entered office in 1981, Paul Volcker the Chairman of the Federal Reserve Board, substantially reduced the growth of the money supply. Interest rates hit levels only seen by the Great Depression. The Federal Funds Rate, in a five year period, went from 6% to 19% by 1981. Volcker felt he had no other means by which to curb inflation. The previous decade saw inflationary rates between 5 – 10%. Volcker stated:
“...the economy could have better prospects only if it regained the now lost condition of “price stability,” in which ordinary people do not feel that they have to take into expectations of price increases into account in making their investment plans or running their lives”
Inflation had been curbed, but it caused an economic slowdown. Due to enormous rates, banks crunched lending. These high rates caused businesses not to borrow. They were also a direct cause of residential investment falling by 40%. I could not comprehend signing a 3 year fixed mortgage at 19%. By 1982, housing starts dropped by half in a four year period.
In the middle of 1982, inflation was down but unemployment had reached double digits. Volcker believed it was now time to lower rates. By the end of the year, the rate had dropped to 9% (and would reach 6% near the end of 1986). During 1983, residential investment rose nearly 50%. Inflation settled in around 3%. This does not even account for activity in other types of lending.
Finally, I would like to comment on the government income stream. If you ever tried to balance your household budget there is one thing you immediately come to realize: if you spend more money than you bring in you will be privy to problems. Reagonomics professed that the lessened burden of taxes would create an economic productivity which would make tax cuts “self-funding.” It is true that tax revenues per person increased in the 1980s. However, due to population growth and inflation, this is a common phenomena. If you are adjusting for these two factors, tax revenues per person increased far less than they did in the preceding and proceeding decades. The Congressional Budget Office states that the years immediately following the tax cuts that tax revenues fell in proportion to the rise in Gross Domestic Product. By 1990, the first Bush administration's Treasury Department observed that the 1981 tax cuts were costing their current government $164billion per year in lost revenues. There were corporate streams of tax revenues that did rise: payroll taxes and corporate taxes. However remember these taxes were raised by the the Social Security Reform Act of 1993 and the Tax Reform Act of 1986.
I am not making these revelations to use as ammunition for some attack against Conservatives or their platform. Liberals are just as guilty of glorifying Franklin Deleanor Roosevelt and his New Deal policies and how he courageously brought us through the second world war. (A topic for another a paper would be how actually successful was his initial hundred days). Yet, the Democratic party is the big tent party with a large ideological and geographic dynamic – liberals versus blue dogs and etc…. They cover such a broad spectrum where liberals, moderates and conservatives can discuss issues and produce their agenda without any dissent from the GOP. It is at this juncture where our political system faces a crisis. The Republican platform is based upon an idea and a figure, that when you look at the economic numbers of the 1980s and Ronald Reagan’s record, is not a cure all. Supply-side, Reagonomics, or Trickle-down economics – or whatever other name you want to give it – has not proven its worth historically. Ronald Reagan’s conservative declaration has been narrowed to such a small percentage of (not only just Americans) but to Republicans that it runs the risk of being irrelevant. The backlash against the party has been brought to the attention of the American people by it’s continual perception of obstructionism and a lack of ideas - except to repeatedly believe that all government needs to do is cut taxes.
I am a registered independent voter. I decided not to align myself with either party because I think both parties need to fight for my vote. You can see that in previous elections us moderates and independents have become the focal point of campaigning – we determine who wins. We decide what ideas best suit us but that only occurs when we have a variety of ideas from which we may choose. This is the way it should be since moderates and independents make up the majority of the country. I beg the Republicans, for the continued existence of a two party system, please come up with some new ideas.
Notes
1. Will Bunch, “How Republicans created the myth of Ronald Reagan”, Salon.com, Feb. 02, 2009, http://www.salon.com/books/excerpt/2009/02/02/ronald_reagan/print.html
2. Will Bunch, “How Republicans created the myth of Ronald Reagan”, Salon.com, Feb. 02, 2009, http://www.salon.com/books/excerpt/2009/02/02/ronald_reagan/print.html
3. Joshua Green, “Reagan’s Liberal Legacy”, Washingtonmonthly.com, January/February 2003, http://www.washingtonmonthly.com/features/2003/0301.green.html
4. Joshua Green, “Reagan’s Liberal Legacy”, Washingtonmonthly.com, January/February 2003, http://www.washingtonmonthly.com/features/2003/0301.green.html
5. Joshua Green, “Reagan’s Liberal Legacy”, Washingtonmonthly.com, January/February 2003, http://www.washingtonmonthly.com/features/2003/0301.green.html
6. David A,. Stockman, “The Triumph of Politics: Why the Reagan Revolution Failed” (New York: Harpercollins, 1986), 377
7. Bernard Sherman, “Reaganomics: Why Ronald Reagan’s 1981 Tax Cut Did Not Cause the 1983 Recovery or Boost Tax Revenues”, bsherman.org, May 2006, http://www.bsherman.org/rushmore.html
8. Bernard Sherman, “Reaganomics: Why Ronald Reagan’s 1981 Tax Cut Did Not Cause the 1983 Recovery or Boost Tax Revenues”, bsherman.org, May 2006, http://www.bsherman.org/rushmore.html
9. Bernard Sherman, “Reaganomics: Why Ronald Reagan’s 1981 Tax Cut Did Not Cause the 1983 Recovery or Boost Tax Revenues”, bsherman.org, May 2006, http://www.bsherman.org/rushmore.html
10. Bernard Sherman, “Reaganomics: Why Ronald Reagan’s 1981 Tax Cut Did Not Cause the 1983 Recovery or Boost Tax Revenues”, bsherman.org, May 2006, http://www.bsherman.org/rushmore.html
Monday, May 18, 2009
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