“Reaganomics” and the Decline of the American Middle Class.

 Key Terms
Stagflation- rising unemployment and inflation Largely prevalent throughout the 70s
Gdp- The market value of all the goods and services produced in a country in a given period of time.
Recession- A slowdown of economic activity in a given country.
Inflation/deflation-A rise of prices of goods in a country over a period of time. Generally measured by the consumer price index. Inflation was a big problem in the 70s. Deflation is the opposite of inflation
Deregulation-The reduction of government control on how business is done. This ideology was widely introduced by the Reagan administration and is still a large portion of modern conservatism.
Free market economy- All markets within the economy are not regulated by anyone other than the players in that specific market. This system advocates against government intervention and believes that the market will work its own problems out. Price is largely determined by supply and demand. Reminiscent of Laissez-faire economics.
Concentration of wealth-  The amount of wealth owned by the top portions of the American society. Since the 1980s the wealth at the top has become more and more concentrated.
Supply side economics- The belief that economic growth is achieved by reducing taxes for those who produce the goods. Theoretically, the greater supply of goods lowers prices and eventually benefits the consumer.
Laffer Curve- The relationship between government revenue from taxation and their rates, the representation is used by the promoters of supply side economics. The system argues that if taxes are too high the wealthy cease to have motivation to innovate and make more money
Trickle down economics- An alternative way to refer to supply-side economics
Keynesian economics- essentially the opposite of Supply-side economics.
“Reaganomics”- An economic plan that was reminiscent to supply side economics but focused on reducing growth of government spending, reduce income tax and capital gains tax, reduce government regulation, control the money supply to reduce inflation.
Causes

In the late seventies, during the Carter administration, the American economy was suffering from a period of stagflation, and many other issues that were a result of policies in previous administrations. The American public had grown tired of international issues such as the Vietnam war and the Arab Oil embargo, which were proving detrimental to American society. American voters were ready for a shift in economic policies and were ready for a change. The previously liberal base that had dominated the political scene since World War 2 was soon to receive a staunch challenge in the form of Ronald Reagan. In the election of 1980, Reagan made constant appeals to the common man, and often spoke of his small town roots from Dixon, California. Reagan promised a profound shift in economic policy with his inception of Reaganomics. According to him, these wholesale changes would prove beneficial to the American middle class. Relying on his acting abilities, Reagan successfully sold these ideals to the American public and convinced them that “Reaganomics” was the correct route. At the polls, Reagan won by a landslide 489-49 electoral votes and entered the presidency riding a wave of popularity and widespread optimism. Through his victory, America entered a new era of Conservatism that would last for over 20 years.

Once elected into the presidency, Reagan began the implementation of his policies. Chiefly being his economic system, sensibly named “Reaganomics”. Through this system Reagan advocated a number of ideals that he sincerely believed would reduce the rising inflation and unemployment rates in the 1970s. Reagan’s system was largely structured on what can now be referred to as modern-conservative ideals. These stemmed from the beliefs of preceding economists. “Reaganomics” was simply a combined iteration of free market policy schemes. Milton Friedman and many other prominent economists at the time had already begun their avocation of such policies. These included the firm belief that “Supply creates its own demand” and that economic growth is only possible if the Supplier can create more products for the consumer. This is supposedly beneficial for the consumer, as in theory it stimulates competition which helps those purchasing the products. This shift in thought became prevalent towards the late 1970s and marked a significant shift from Keynesian economics which was essentially the opposite of Supply side economics.

The culmination of the multitude of free-market ideas presented itself through “Reaganomics” which was the premise for Reagan’s presidential campaign. This ideal, devised by Reagan himself, included four major beliefs, which were supplemented by other beliefs. Reaganomics advocated the reduction of government spending, the reduction of income taxes, the reduction of regulation, and the reduction of inflation. Already noticeable is the term reduce, which was a prime portion of Reagan’s overall scheme. The belief was that with this reduction, more economic freedom would be achieved. Government was seen as the source of the problem and its reduction comprised a large part of Reagan’s beliefs.

Reagan strongly believed in the reduction of government spending. He thought that government was the problem, and thus set out to greatly limited it. According to Reagan, “Governments tend not to solve problems, only to rearrange them”. He also voiced his disapproval of a big government through another quote. “Government’s view on the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” These were all ideals Reagan was staunchly opposed to, and so his first aim as president was to constrain and limit the government, and especially its spending.

Income taxes were a major issue according to Reagan and one of his prime aims were to adjust them. Reagan did not believe in heavy taxation and followed the theory of the Laffer curve. He especially believed in lower taxation for the upper realms of society. Reagan thought that reducing taxes for those at the top would make it easier for them to produce cheap goods, which would stimulate competition and ultimately, help the consumer. In his system, Reagan would raise taxes for the middle class and reduce them for the top 5 and 1 percent of American society. He believed this lure of low taxes would motivate suppliers to make more money.

Unbridled capitalism was one of Reagan's major goals. He believed that the free-market economy, and lazzies-faire policies helped nurture economic freedom. He believed that the economies problems work themselves out.

Reagan also tried to reduce inflation by reducing the money supply.
The only area where Reagan believed in an increase was in Military spending, which he thought could serve to protect the American public.

During his presidency, Reagan was largely influential due to the shift in American politics. In one of Reagan’s speeches in 1977, Reagan even revels in this shift. He says of conservatives, “we are part of the great majority of Americans.” Thus, many of his proposals were passed by congress. This aided Reagan and made him one of the most influential presidents in America’s history. During his administration, Reagan successfully busted unions and even busted a 1981 union by firing the striking workers. Reagan also passed various bills that were in line with “Reaganomics” and its overlying theories. One of which was the tax recovery act of 1981, which reduced the top income tax bracket from 70 to 50 percent. Reagan also passed both the Tax reform act of 1986 which reduced the top income bracked to 28 percent and increased the bottom tax bracket from 11 to 15 percent. These among others were the actions Reagan took in accordance with “Reaganomics”

Effects
The effects of “Reaganomics” have been subject to rigorous debate. Its effects are revered by those from the right wing and opposed vehemently by left-wingers. “Reaganomics”, according to the President himself, was supposed to increase investment and economic growth, balance the budget, and improve the living standards of all Americans. However, in retrospect, it is evident that these goals were not all met.

The immediate effects of Reaganomics are quite controversial. Reagan entered the election with the promise that his economic system would aid the hard-working common man. He made constant references to his humble roots from Dixon, California. Thus the American public sincerely believed he would fight for them. However, they were in for a rude surprise.

After WW2, America had been experiencing a period of sustained economic growth and perhaps more importantly, an economy free of recessions. However, as soon as Reagan enforced his policies, the US slipped into the recession of 1982, and later on the stock market crash of 1987.  Unemployment in the US was at 5.6% in 1979 but reached a high of 10% in 1985. Farmers also soon realized their demise as 400,000 American farm families lost their land between 1985 and 1989. This signaled the shift in American Farming to the large agribusinesses they are today. As American farmers were losing their land, agricultural giants such as Cargill increased their profits by 66 percent in 1986. These examples only serve to display the bigger American economic picture. Throughout the Reagan administration, the influence of Unions was waning, and American workers increasingly found their economic well being in jeopardy. Corporate taxes were also cut, from 48% to 34%. Already thriving corporations were aided even further, and this led to the rise in profits for America’s largest business institutions. Ronald Reagan, through his advocation for entrepreneurship, led to the rise of greed in America.

Even more startling was the Tax equity and fiscal responsibility act of 1982, which in essence repealed many aspects of the economic tax recovery act of 1981. Reagan realized that the first bill he passed was highly unrealistic, and thus INCREASED taxes in order to reduce the widening deficits. This bill, recognized that the tax cuts in 1981 led to a decreased revenue stream. Reagan, in order to stimulate the American economy, did exactly what “Reaganomics” advocated against.

Interestingly enough, Reagan also strayed from his financial doctrine in the area of Federal spending. From 1981 to 1989, federal spending only fell by .8% of gdp.

As is already evident, the common man did not benefit whatsoever from these wholesale changes. While the top income bracket was slashed from 70% to 28% for the wealthy, the middle class actually experienced an increase in taxes. When the consumers do not have the money to buy products, this spells a bad omen for any economy. As a result of this, poverty rose every year from 1981 to 1992. Instead of realizing that this was a problem, Reagan opted to increasing the lowest tax bracket in 1986, from 11 to 15%. This increase was unnecessary, as no real revenue can be procured from those who are already low on money.

Also detrimental were the widening deficits and the rise in debt during the Reagan administration. During his administration, American debt rose from 900 billion to 3 trillion. Debt was 32% of our gdp under Carter, but rose to 66% at the end of the Reagan administration. In two years the Federal Deficit rose from 80 billion to 200 billion. These problems were a direct result of the increase in Military spending instituted by Reagan himself, and his refusal to raise taxes to supplement those needs. Reagan forgot a powerful rule, that you must make more than you spend.

The long-term effects of Reagan’s legacy are in fact more profound than their short term ones. While Reagan is largely credited with engineering the largest peacetime economic expansion in United States history,  the real economic picture is not so rosy. While it is true, the United States GDP has been steadily rising since the 1980s. However, the share of the middle class has actually lessened throughout this period while the top 20, 5 and 1 percent having seen the largest growth. Inflation adjusted median family income has also remained stagnant since 1980 as a result of Reagan’s policies. Also, from 1970 to 2000, the share of income received by the middle 60% of American families declined from 54 to 47%. The top 20 and especially 5% were the main benefactors of this shift. 80% of income gains since 1980 went to the top 1%. Corporations also experienced an increasing portion of the US GDP over this same period of time. By 2008, the top 1% of Americans owned 23% of the wealth. The last time the wealth was so concentrated was in 1929, and most Americans remember what happened then. Reagan’s legacy emphasized that “greed is good” and coupled with the increasing deregulation of American businesses, it becomes evident why the rich are prepared to do anything for more money. Micheal Moore once stated in Capitalism: A love story that when Reagan was elected “American corporations had gotten exactly what they wanted.” Gone were the days of an equal distribution of wealth. And with this, the plight of the American middle class ensued. These damaging measures instituted by Reagan and followed by his predecessors ultimately led to the biggest bubble of all bubbles. That is, the American consumers simply did not have enough money to buy what was being produced. If America learns one thing from the 2 biggest economic meltdowns in its history, it is that the middle class must be sustained for a healthy economy.

Thesis
Reagan’s pragmatic approach to American Economics inadvertently led to the downfall of the American middle class, the corporitization of America, and eventually the financial crash of 2008.