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John Komlos1
Reaganomics: A Watershed Moment on the Road
to Trumpism
Abstract:
The socio-economic impact of Reaganomics and its long-run deleterious legacy is documented. The empirical
evidence indicates that the tax cuts of 1981 and 1986 failed to have an eect on economic growth. GDP did
snap back to its potential but did not accelerate beyond the rates achieved in prior or subsequent decades. The
supposed incentives of supply-side economics failed to materialize. People did not work more, they did not
save or invest more than they did before, and the benets trickled down like molasses and got stuck at the very
top of the income distribution. Reagan’s presidency was a watershed in US economic development in the sense
that it reversed many of the accomplishments of the New Deal and inaugurated an era in which low-skilled
men’s wages began a long period of decline. His true legacy is a dual economy that accompanied the hollowing
out of the middle class, a more business-friendly regulatory framework for Wall Street that ultimately led to
the nancial crisis, a stupendous increase in the national debt from 30% to 50% of GDP that put it on a path
such that by 2012 it exceeded 100%, anti-statism that contributed to the rise of Trumpism, a remarkable rise in
inequality that gave rise to an oligarchy, and the neglect of blue-collar workers who eventually became Hillary
Clinton’s“deplorables.”Reagan put the economy on a trajectory that ultimately, even if not inevitably, led to the
triumph of Trumpism and an economy of malaise [Johnston, David Cay, 2018. It’s Even Worse Than You Think:
What the Trump Administration Is Doing to America. New York: Simon & Schuster.].
Keywords: Reaganomics, Trumpism, Tax cuts, Supply-side economics, Trickle-down economics
JEL classification: B52, D69, H29, H69, N12, P16
DOI: 10.1515/ev-2018-0032
1 Introduction: From Reagan to Trump
Ronald Reagan’s victory in the Fall of 1980 was a watershed moment in US economic development, the kind that
occurs but once in a generation or two. A main reason for his election was that the economy was not in great
shape as ination hovered around an unprecedented 13%, unemployment rate was an uncomfortable 7.7%,
and productivity growth could best be described as mediocre (Modigliani 1988).1In addition, in November
the federal funds rate reached 16%.2Although real disposable personal income per capita was growing at
1.2% per annum for a number of years in spite of two oil shocks,3it came to a standstill by the presidential
campaign. Similarly, real GDP had been stagnant for at least two years by the time the citizens went to the
polls.4A stagnating GDP with unusually high ination became known as stagation, a witness to a topsy-
turvy economy.
No wonder that the electorate chose a new leader with a new vision that came to be known as Reaganomics.
This essay begins by reviewing its major tenets, the cornerstone of which was a major cut in taxes, especially
that of the superrich, which was supposed to incentivize investors suiciently to shift the economy into high
gear. It failed miserably to do so (Krugman 2008). However, it did bring the economy out of the recession of
1981–1982 as GNP snapped back to its potential. Instead of fostering inclusive economic growth, the tax cuts
brought about enormous budget decits and sudden and permanent increases in income inequality that ulti-
mately led to a dual economy in which the problems faced by the less educated were neglected by all subsequent
administrations. While its short-term impact was hardly exceptional, we argue below that the long-term conse-
quences of Reaganomics were far more consequential, because they set into motion powerful path-dependent
processes that practically locked the society into an inferior set of institutions, ideology, income distribution,
and educational system that had deleterious impact in the decades to come (Arthur 1989).
We focus on the very inception of this trajectory. The economic policies of the subsequent four administra-
tions as well as the concomitant forces of hyperglobalization, technological unemployment of the less skilled,
and the nancial crisis that impacted the economy along the way and amplied the socio-economic problems
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are discussed in more detail elsewhere (Komlos 2018). Suice it to say here that the real impact of these pro-
cesses did not begin suddenly in 1981 and therefore could not have caused the watershed documented here.
Their major impact on the economy started after Reaganomics. Path-dependency implied that, given the course
set by Reagan, it was far easier thereafter to continue to govern within the parameters of the worldview that
unfolded in 1981. That ideology made it easier for those global forces to contribute substantially to the rise in
inequality and wreak havoc among the excluded underclass. Under the circumstances, to reverse course per-
manently and stop coddling the superrich (Buett 2011) would have been a formidable undertaking that no
political party and certainly no politician was willing to hazard.
Thus, Reaganomics represented a fundamental break with New Deal activism, detaching itself from re-
sponsible scal policy. In numerous economic indicators the beginning of the Reagan administration was a
real turning point in the wrong direction. To be sure, as with any major realignments bordering on being revo-
lutionary, Reaganomics also had precursors. After all, which tiny creek or lake in Minnesota is the source of the
mighty Mississippi River is controversial and the French Revolution, too, drew inspiration from the philoso-
phers of the Enlightenment. Similarly, Reaganomics was not a bolt of lightning out of a blue sky. Well before
Reagan, the neoliberal movement was gathering momentum boosted by intellectuals such as the Nobel-Prize
winning Milton Friedman and Friedrich Hayek, as well as by conservative think tanks with the founding of
the Heritage Foundation (1973), Cato Institute (1974), and the Manhattan Institute (1977) which would become
inuential. These provided the intellectual support for Reaganomics and helped to legitimize its politics until it
became the dominant ideology of the land (Phillips-Fein 2009).5Reagan popularized these principles, advocat-
ing freedom and rugged individualism that t well into the ideals of American exceptionalism while translating
the philosophy into policy.6
It is not coincidental that similar political forces manifested themselves in the U.K. under Margaret Thatcher.
She, too, was inuenced substantially by the conservative wordly philosophers who advocated freedom, mini-
malist government, and the primacy of economic principles. Reagan, as well as Thatcher tranlated their laissez-
faire philosphy into successful political action (Smithin 1990). Another sign of the gathering steam of the ne-
oliberal ideology in the 1970s is that even the Carter administration began to detach itself from the New Deal
consensus. The pressure from neoliberals was too pervasive for it to hold the line (Palley 1998). So Carter ac-
ceded to more business-friendly laws governing airlines, trucking, and telecommunications.7In spite of the
eiciency gains obtained, these signaled a broad-based turn against government oversight in general which
under Reagan reached Wall Street.
Table 1: Underemployment Rate Among Disadvantaged Subpopulations in December 1989.
Percent
Labor force average 9.3
Hispanics 14.5
African American 17.5
Ages 16–24 17.4
Less than High School 18.3
High School Diploma 9.9
Less than High School African American 28.3
High School Diploma African American 18.0
Source: Economic Policy Institute, State of Working America Data Library “Underemployment.”Those with high school diploma are
those without any college.
That was risky, because nance is obviously the most fragile sector of the economy (Minsky 1986). So, laws
were passed that much later contributed to nancial instability. In 1982 the Garn-St. Germain Depository Insti-
tutions Act deregulated savings and loan institutions and allowed banks to write variable rate mortgages which
became a hazard in the nancial crisis. In 1984 Reagan allowed private banks to securitize mortgages which con-
tributed to the subprime mortgage crisis.8With that the stage was set for further similar Wall-Street-friendly
laws under Clinton that ultimately ended in the Meltdown of 2008 (Ackerman 1984; Komlos 2018).
Thus, the economic processes unleashed by Reaganomics, inequality, low taxes, budget and trade decits, as
well as anti-government ideology would have been extrememly diicult to reverse and consequently were not
reversed. They led to the accumulation of so much despair among the have-nots, the less educated, the evicted,
and the downwardly mobile who were excluded from its benets, that they nally reached for the pitchforks
to overthrow the establishment and put a strongman into the White House come what may. Thus, we conclude
that the triumph of Trumpism is Reagan’s ultimate legacy.
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2 The Policy Changes Under Reagan
As Reagan took oice, the ills of stagation were real, the proposed remedies bitter, and their potential for
success more than doubtful. In doctrinaire fashion Reagan blamed the government for the subpar economic
performance because: “…government regulation,…has increased production costs…. high taxes,…have re-
duced incentives to work and save…. [and] transfer payments for welfare and social security,…have reduced
employment of the poor and of older workers”(Rothschild 1982). The policy of economic freedom that Reagan
embraced meant foremost breaking the fetters of supposed overregulation and overtaxation using the untried
principles of supply-side economics, known also as trickle-down economics. The goal was to “redistribute in-
come to people with a high propensity to save –who happen to be rich people –and hope that their high spirits
or their thrift will in some manner inspire economic growth”(Rothschild 1982). In addition, Reagan sought
redistribution from welfare recipients to workers and investors: “It is not surprising that voters were receptive
to the message that taxes and government spending should be sharply reduced to redress the distribution of
income between wage earners and welfare recipients”(Feldstein 1993, 13).
It must have been obvious at the outset even to Reagan’s advisors that they were trying to square the circle,
as the admissions of David Stockman (Director of the Oice of Management and Budget) imply: “none of us
really understands what’s going on with all these numbers”(Greider 1981). He continued cynically, “’The hard
part of the supply-side tax cut is dropping the top rate from 70 to 50 percent –the rest of it is a secondary
matter….’The original argument was that the top bracket was too high, and that’s having the most devastating
eect on the economy. Then, the general argument was that, in order to make this palatable as a political matter,
you had to bring down all the brackets. But, I mean, Kemp-Roth [tax bill] was always a Trojan horse to bring
down the top rate….’Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-
the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican
orthodoxy”(Greider 1981).
Yet, Reaganomics was supported by an enthusiastic array of conservative economists led by Milton Fried-
man. However, the vision was conceived more on faith than on solid evidence (Galbraith 1982). Stockman
conceded that the program was “premised on faith on a belief about how the world works”(Greider 1981). It
was all “a kind of convenient illusion –new rhetoric to cover old Republican doctrine”he admitted. The sub-
text was clear: to support “industrial workers, male, white, …[so that they can] get working again”and “to
kick the poor by eliminating social programs”(Rothschild 1981); this became known as “starving the beast”
political strategy. Robert Hall of Stanford University referred to the supposedly wasteful programs as “pour-
ing money down rat holes”(Hall 1981). The “rat holes”he had in mind included employment and training
programs, food stamps, school lunches and social services. However, military expenditures were not in the rat
holes. They remained sacred.
In short, Reagan advocated decreasing the taxes of the superrich which would provide incentives to increase
savings and investments and thereby create jobs and subsequently “trickle down”to the masses so they would
benet from it in due course.9Moreover, lower taxes meant an increase in take-home pay and that would
provide an incentive for people to work harder and for entrepreneurs to take more risks, thereby growing
the economy and boosting incomes further.
Arthur Laer was a leading proponent of the view that a tax reduction would increase government rev-
enue: “It is reasonable to conclude that each of the proposed 10 percent reductions in tax rates would, in terms
of overall tax revenues, be self-nancing in less than two years. Thereafter, each installment would provide a
positive contribution to overall tax receipts”(Laer 1981, 21). Laer was not only wrong, he was irresponsi-
bly wide o the mark and reputable economists, even conservative ones, found his theorizing unacceptable
(Galbraith 1982; Feldstein 1986; Mankiw and Weinzierl 2006; Fullerton 2008, 839). James Tobin, recipient of the
Nobel-Prize, estimated that the tax rate on wages would had to have been about 83% before a tax cut would
generate additional revenue, and modern estimates are of similar magnitude (Tobin 1981; Trabandt and Uh-
lig 2011).10 So it should not surprise us that instead of increasing, revenues fell so sharply that Reagan had to
reverse course and sign into law several “revenue enhancements” – newspeak for “tax increases”.
To be sure, Reaganomics also had plenty of sceptics from the start among progressives. “Military Keyne-
sianism –the large increase in military expenditure in the recession will hurt investments and innovation for
long-term growth and will leave some segments of the labor market stranded including young black women of
whom 41% were still unemployed at the end of 1981”(Rothschild 1982). Furthermore, people who were already
working full time would not likely increase their work hours. With the unemployment rate at 12% at the end
of 1982, it was hardly obvious that people could nd more work even if they wanted to. And additional invest-
ments would be unlikely, as new opportunities oering a decent return were hardly plentiful. And what if the
rich spent their additional income on conspicuous consumption buying foreign luxuries, traveling or investing
abroad? Then the benets would be trickling to other parts of the world. And what if they purchased foreign or
domestic government bonds instead of investing in physical capital? So, there were plenty of open questions if
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anyone cared to dig a bit deeper. The main point is that the road from tax cuts to economic growth in general
is hardly an obvious one. It depends on the context.
Nonetheless, in 1981 “Congress enacted the major tax bill that has become the centerpiece of supply-side
economics. The emphasis…was on changing marginal tax rates to strengthen incentives for work, saving, in-
vestment and risk taking”(Feldstein 1986, 26). The act included “a 25 percent across-the-board reduction in
personal tax rates…” Across-the-board tax cuts supposedly benet everyone, and Everyman on Main Street can
be impressed by slogans that their take-home pay will increase, regardless of the amount (Frank 2004; Stanley
2015; Cochrane 2017). That does sound fair on the surface, except it meant a reduction of top tax bracket from
70% to 50% and of the lowest one from 14% to 11%.11
So, the across-the-board tax cuts meant little for those at the bottom of the income pyramid: their gains
amounted to but a handful of dollars and meant, in addition, that their social services and access to education,
that is to say, their quality of life would diminish in due course (Table 2). While the increase in disposable
income of the typical tax unit in the $20–25,000 bracket was more substantial at $1600 (nearly a 10% increase),
worth $3500 in 2017 dollars, it meant absolutely nothing for its long-term prospects. The increase was used to
nance a little more consumption perhaps, but that failed to change the rate at which their subsequent income
would grow. On the contrary, their income declined relative to the wealthy and that meant that they would
have more diiculty keeping up with the lifestyle of the rich which made them take on excessive amounts of
debt. Moreover, the decline in their relative income meant a decline in their political power as well.
Table 2: Tax Savings in 1985 Compared to 1980.
Income Bracket Average Gross Income Tax rate Percent Percent of
1980 tax rate
Tax savings Dollars
Thousands of 1985 Dollars 1980 1985 Dierence 1985 2017
9–10 9 7 5.0 −2.1 −29.6 −187 −408
11–12 11 9 6.2 −2.5 −28.8 −278 −605
13–14 13 10 7.2 −2.7 −27.5 −356 −776
20–25 22 17 10.2 −7.2 −41.5 −1611 −3510
100–200 131 33 24.9 −7.7 −23.6 −10,068 −21,935
200–500 290 39 31.9 −7.3 −18.7 −21,276 −46,352
500–1000 670 43 36.0 −7.4 −17.0 −49,456 −107,747
>1 million 2316 47 39.2 −7.6 −16.2 −175,861 −383,137
Thousands of Dollars unless otherwise noted; CPI-U-RS is used for the nal column.
Source: https://www.irs.gov/statistics/soi-tax-stats-archive-1954-to-1999-individual-income-tax-return-reports.
Thus, the meaningful windfall accrued to those at the very top of the income distribution. For them it became
a truly watershed moment (Galbraith 2008). Millionaires, for example, with an average income of $2.5 million,
gained the respectable sum of $176,000 per annum (Table 2). Although in terms of percentages this did not
dier from that of the average taxpayer, the actual amounts were an order of magnitude greater, and that is
what counted. Because they were able to save much of it, their long-term prospects improved substantially.
Even more importantly, they used their windfall strategically to further their economic and political power
(Bartels 2016). Sure, they might speculate on the stock market or increase their conspicuous consumption but
the smart money invested much of the windfall into strengthening their political power by continuing to lobby
for deregulation and by nancing think tanks that hired economists to proliferate their ideology through the
media (Burch 1997).12 This was crucial in spreading the free-market ethos that advocated small government,
free trade, and deregulation until it became the dominant ideology of the land (Smith 2010).13 So, Everyman
on Main Street was no longer capable of discerning their own self-interest and came to support the interests of
the superrich.
Of course, the Laer curve did not work at all: nothing trickled down to the masses. The super-rich kept all
the benets to themselves. But the decits did rise astronomically. They were supposedly not going to be a prob-
lem because, as Defense Secretary Caspar Weinberger, asserted, “You aren’t really adding substantially to your
decit when you add defense spending because the spending is frequently, if not matched, at least approached
by the increased revenue that is generated by the defense expenditure”(Rothschild 1982). In contrast, transfer
payments were allegedly not so useful because they “generally go to non-durable consumer goods. These have
a lower investment component and a lower multiplier eect”(Rothschild 1982). So, reecting the philosophy of
the administration, Weinberger thought that decits for the military were acceptable but for welfare payments
they were not.
By abandoning their established policy of scal conservatism and balanced budgets, the Republican main-
stream became cheerleaders of Reaganomics. According to Feldstein the “remarkable reduction of personal
income tax rates…reduced the associated deadweight loss [by a substantial amount]”(Feldstein 1989, 108).
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In a self-congratulatory tone, he added that “the restructuring…is testimony to the power of economic ideas”
(Feldstein 1989, 108). He merely forgot that the tax models he was using failed to consider the productive uses
of taxes. When taxes are invested in public goods, such as infrastructure, education, health, or basic research
they increase eiciency, productivity, and GNP in subsequent periods. These were disregarded not only by
Feldstein but by all other supply-siders.
They also left out of consideration that the reduced revenues would lead to the burgeoning burden of the en-
demic budget decits, the hollowing out of the middle class, the neglect of public goods including investments
in infrastructure and education, the strengthening of the military-industrial complex, more nance-friendly
laws that would become harmful, the disregard of the needs of the lower classes that radicalized them and
turned them against the establishment, stagnating wages of low-skilled workers, the rise of inequality and the
“steady slide toward economic oligarchy”(Hacker and Pierson 2010; Prasad 2012; Temin 2017). These are the
real enduring harmful legacies of Reaganomics.
2.1 Policy Failures, Adverse Incentives and the Inevitable Rise of Oligarchy
The deep cuts in taxes failed to spur investments, savings, and work hours as the proponents of Reaganomics
claimed they would (Friedman 1988; Peterson 1988; Modigliani 1988; Leamer 2001, 16). Instead of increasing,
personal saving as a percentage of disposable income, declined. The evidence is unambigous: during the three
decades 1951–1981 personal saving was steady at 11.4% of disposable income. However, by 1985 it began to
decline: in 1988 it was already down to 8.5% and hit rock bottom at 3.2% in 2005.14 So the savings rate began its
long march toward zero during Reagan’s presidency and contemporaries recognized it: “The strategy did not
work…, Lower taxes led to a lower savings rate –not a higher savings rate”as the middle class scrambled to
keep up with the consumption norms set by the upper echelons of society (Thurow 1983). Without increased
savings, investments were not likely to budge.
And so they did not budge. To be sure, there was some pent-up demand for investments as the economy
recovered from the double-dip recession in 1982, but that was over by 1984. Real gross private investments in-
creased at a rate of 4.24% between 1950 and 1979 and by 4.26% between 1980 and 1988.15 This was unremarkable.
The decits soaked up too much of the savings for investments to rise meaningfully.16
Most revealing, xed investments even slowed from 6.5% to 4.2%.17 Moreover, that investments stagnated
completely thereafter for four whole years has been overlooked.18 Thus, the empirical evidence contradicts the
foundational tenets of supply-side theory. This was clear very early on: “The large government decits now
projected even for after the economy’s return to full employment will constitute a substantial impediment to
the U.S. economy’s net capital formation”(Friedman 1983, 93).
Savings failed to increase but, contrary to expectations, household debt did increase. In 1985, just as the
savings rate began to fall, debt began to rise and did so immediately. Household debt had been near 46% of
GDP ever since 1965; in 1984 it was still at 49%.19 Then it soared. By 1988 it rose 9 percentage points. By 2000 it
was 69%, an increase of 20 percentage points, and reached 98% in 2008. Credit card debt increased especially
fast. In 1981 total debt outstanding was around $55 billion; by the end of 1988 it stood at $194 billion, an increase
by an extraordinary factor of 3.5.20
The roots of this jump in indebtedness were the same as those of the decline in savings: the rise in inequal-
ity not understood by the Feldstein crowd. As the income of the middle class fell behind that of the rich and
superrich, the only way they could keep up with the rising consumption norms of the society was to decrease
savings and increase indebtedness. Simultaneously, the increased income of the superrich meant that the banks
had suicient funds to accommodate the increased demand for loans. Moreover, the transfer of income to the
top meant that aggregate demand would have been decreasing if it had not been buoyed up by rising debt. The
reason is that the rich save a higher fraction of their income than the middle- and lower classes and therefore
they also buy fewer goods per dollar of income. Growing inequality therefore creates a decline in aggregate
demand unless the gap can be shored up through credit, which was precisely what happened. So, consump-
tion of the middle class came to depend excessively on debt. Not only did trickle-down economics failed, in a
perverse development it drove the middle-class into becoming indebted.
Another supposition, that work eort would rise in response to the supposed incentives of lower taxes
was also contradicted by reality: the number of hours worked was 1,813 annually per capita in 1979 and the
same at the end of Reagan’s presidency (Leamer 2001, 11).21 This should not be surprising. Americans were
already living harried lives, working hundreds of hours more than their European counterparts (Linder 1970).
So, overworked Americans did not jump at the chance to spend even more time at the lathe, desk, or cash
register. It would be very diicult to squeeze more eort into their busy schedule.
The labor force participation rate of men also failed to move in the expected direction. Instead of increasing,
it was slightly down from 76.3% in 1981 and 75.4% in 1989.22 To be sure, women’s participation rate did con-
tinue to rise, but that had been increasing for decades amid the feminist movement and not because of any tax
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incentives. Even Feldstein, an ardent supporter of Reaganomics, had to admit nally that the incentives failed:
“Although we would expect some increase in work eort from the reduction in the highest marginal tax rates,
past evidence all points to relatively small changes.”Furthermore, there was “lack of evidence of an induced
increase in the number of people wanting to work…” (Feldstein 1986, 28).
In addition, unemployment remained stubbornly high despite the tax cuts. The oicial rate was 7.5% at the
outset of Reagan’s term and still the same at the end of his rst term due partly to the intervening recession and
the Fed’s high-interest-rate policy.23 In the meanwhile, the rate rose to 10.8% in November 1982, but Reagan
shrugged it o saying “Is it news, that some fellow out in South Succotash someplace who has just been laid o
should be interviewed nationwide?”24 (Weisman 1982). To be sure, eventually the oicial unemployment rate
did inch down to 5.4% but was still higher than during similar phases of prior business cycles (Leamer 2001, 10).
Furthermore, the true unemployment rate –also called underemployment (or U-6) –was much higher than the
oicial rate: 9.3% in December 1989, the rst date for which such data are available; among disadvantaged sub-
populations it was still higher. For instance, among African Americans without a high-school diploma the true
unemployment rate was 28% (Table 2).25 So, the unemployment record also ought not be judged in superlatives.
Yet another tenet of Reaganomics came up short: the windfall of the millionaires was supposed to trickle
down so that salaries of typical workers would increase (Table 2). Instead, wages of men without a college
education declined under the Reagan presidency (Figure 1). The average hourly wage of men without a high-
school diploma was $17.57 per hour in 1980 (in 2017 prices). The precipitous decline began in 1981; by 1984 it was
down by $1.35 to reach $16.12; by 1988 it was $15.73. Similarly, the annual median income of men working full
time was $53,200 in 1980 and $53,350 in 1988.26 Hence, the trickle-down eect of the tax cuts had the viscosity
of molasses as next-to-nothing reached the less educated.
Figure 1: Men’s Hourly Wages by Education, 1973–2017.
Source: Economic Policy Institute, State of Working America Data Library, “Wages by Education,”
https://www.epi.org/data/#?subject=wage-education&g=*.
Because of sluggish wages and the inferior bargaining position of labor, their share of income in GDP de-
clined from 63.1% in the latter half of the 1970s to 61.7% under Reagan27 (Figure 2). The reduction was perma-
nent: labor never regained its earlier gusto.28 The 1.4% drop in the share of GDP might not seem like much, but
it amounted to a loss of some $73 billion for the 80 million full-time workers or nearly $900 per worker which
equaled about two weeks’worth of wages for many that meant a loss of the gains obtained by the decrease in
the tax rate.29
Figure 2: Share of Labor Income in GDP.
Source: Federal Reserve Bank of St. Louis, Share of Labour Compensation in GDP at Current National Prices, LABSH-
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GDP growth also failed to accelerate. The boom Reagan and his advisors predicted remained wishful think-
ing: growth in the 1980s was on par with earlier and subsequent decades30 (Figure 3). Growth meant merely that
actual GDP caught up to potential GDP after the 1982 recession (Figure 4). The promised spectacular perfor-
mance was nowhere in sight (Krugman 2008).31 Hence, none of the economic variable responded as predicted
to the supposed incentives of the tax cuts.
Figure 3: Growth of Real Per Capita GDP, 1950–2018.
Source: Bureau of Economic Analysis, Table 7.1 Selected Per Capita Product and Income Series
https://www.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=3&isuri=1&1921=survey&1903=264.
Figure 4: Real GDP and Potential GDP, 2009 Prices.
Source: Federal Reserve Bank of St. Louis, Series GDPCA and GDPPOT.
The only variable to respond was the budget decit and it responded immediately. “Federal scal policy is
adrift without a rudder,”wrote Tobin in 1986. Although Reagan branded Carter’s $59.6 billion budget decit
“excessively high”and promised that it “will be reduced and in a few years, eliminated,”precisely the oppo-
site came to pass (Figure 5). Deep tax cuts coupled with slower-than-expected increases in GDP and revenues
brought about the biggest surge in the national debt since World War II even though the administration had
forecasted that by 1984 “the Federal budget should be in balance…[and] actually generate a surplus in 1985
and 1986, for the rst time since 1969”(White House 1981). Moreover, decreasing expenditures remained elu-
sive. Vested interests were able to prevent that. So, ‘starving the beast’was a failed strategy and using credit to
nance the decit was the easiest way out of the dilemma.
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Figure 5: Federal Budget Surplus or Decit.
Source: Federal Reserve Bank of St. Louis, Federal Budget Surplus or Decit, series FYFSD.
In 1981 the Congressional Budget Oice had projected that revenues would rise to $1.0 trillion by 1985. They
were o by not less than $266 billion or 29% since actual revenue was $734 billion (Timiraos and Shin 2017).
Consequently, by 1986 the decit reached $221 billion instead of the predicted $30 billion surplus (Figure 5).
Altogether, Reagan increased the national debt by an unheard of (in peacetime) $1776 billion.32 Total govern-
ment debt in January 1981 was $965 billion; by January 1989 it was $2740. In other words, Reagan practically
tripled the nation’s indebtedness; half of the increased debt went to the military.33 Thus, total public debt as a
percentage of GDP doubled from 30% to 60% by the middle of Bush Sr.’s term (Figure 6).
Figure 6: Federal Debt as Percent of GDP.
Federal Reserve Bank of St. Louis, Total Public Debt as Percent of Gross Domestic Product, series GFDEGDQ188S.
No other prognosis of the administration was so wide of its mark. This was a fundamental and ominous
break with the past at the expense of unborn generations: “The scal burden facing all future generations over
their lifetimes will be 17–24 percent larger than that facing newborns in 1989”(Auerbach, Gokhale, and Kotliko
1991). The ow of red ink became too diicult to reverse thereafter except briey under the Clinton adminis-
tration (Figure 5 and Figure 6). Prior to Reagan the decits were small and incurred mainly when economic
activity slowed. After 1981, however, decits became endemic in good times as well as in bad.34 The US po-
litical establishment became addicted, as it were, to spending more than collecting in revenue. Reagan steered
the economy on a path of accepting decits as the new normal and it would have needed strong leaders, such
as Franklin Roosevelt or Lyndon Johnson, to reverse it. Once the decit steamroller became endemic it could
be halted episodically and temporarily, but it was too diicult for policymakers to steer the economy onto a
dierent trajectory.
That is the logic of path dependence: societies can be locked into a suboptimal trajectory (Arthur 1989). The
road of least resistance was to shift the burden to subsequent generations who were unable to send lobbyists to
Washington. Obama was best situated to make a U-turn but wasted the opportunity aorded by the nancial
crisis and failed to begin taxing the superrich realistically. So endemic decits became the enduring legacy of
Reaganomics. Janet Yellen, future Chair of the Federal Reserve, observed at the time that “In the view of most of
the nation’s economists these developments are profoundly disturbing”as well they should have been (1989).
That recognition did not matter; Bush Jr. and then Trump continued to cut taxes. These were made much
easier by Reaganomics since it showed that the decits did not pose an immediate insurmountable problem.
International nancial markets were eager to buy U.S. I.O.U.s. So, even before the nancial crisis erupted in
2008, the US debt ratio reached 64%, climbing back to its previous peak of 1995. Consequently, the US treasury
was not well prepared for the nancial crisis and the Great Recession that followed during which expenditures
increased and revenues declined sharply catapulting the debt ratio to 100% by the 4th quarter of 2012.35 Then
came Trump’s tax cuts of 2017 which will likely have the same eect as that of Reagan (Bump 2017).
Even liberal Obama made permanent Bush’s tax cuts that would have expired in 2013, thereby adding some
$300 billion to the decits annually.36 This demonstrates that taxes are like a ratchet that allows movement in
only one direction: taxes can be lowered easily but going in the other direction requires a lot of strength. This is
another reason why path dependency was such a powerful force since Reagan. As a consequence, once endemic,
budget decits are extremely diicult to reverse. The US had decits in 34 out of the 38 years since Reagan’s
term began (Figure 5).
The endemic trade imbalance, a usual concomitant of government budget decits, also began under Reagan
(Figure 7) (Bernheim 1988). The high interest rates mandated by Federal Reserve Chairman Paul Volcker added
to the import surplus because they brought about an increased demand for dollars and thereby an appreciation
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of its value.37 The overvaluation of the dollar led to sharp declines in exports, contributing to the negative trade
balance. The cheap foreign goods ooding the US market broke the back of US heavy industry from which
many of them would never recover. Additionally, this wrought havoc in the international currency markets
inter alia leading to bankruptcies of Argentina, Brazil, Chile, and Mexico because their debt was denominated
in dollars that they now found burdensome to nance (Sinn 2018).
Figure 7: U.S. Trade Balance in Goods and Services.
U.S. Census, Bureau, “Foreign Trade, Historical Statistics,”https://www.census.gov/foreign-
trade/statistics/historical/index.html.
Insofar as the unions were strongest in the manufacturing industry, their decline also contributed to the
demise of union power and their voice in government. Without them the forces of globalization could penetrate
the US economy without eective resistance. While portrayed as a great stride forward, globalization instead
shuttered plants and exported jobs. This was supposed to have made Americans better o and they did make
many better o but the blue-collar folks had to fend for themselves, although they did not have many resources
to lean on. Many of them took their own life (Case and Deaton 2017). With the diminution of the countervailing
power of heavy industry and of their unions, it also became easier for the nancial industry to replace their
inuence in the halls of Congress.
The general view among contemporary progressive economists was that supply-side economics was a
“colossal theoretical failure of Reaganomics”(Ackerman 1982; Thurow 1983; Gandhi et al. 1987; Peterson 1988,
3; Wilber and Jameson 1990; Bartlett 2009). Even a conservative economist such as Feldstein, a strong supporter
of both the Reagan and Trump tax cuts, acknowledged as much: “The experience since 1981 has not been kind
to the claims of the new supply-side extremists that an across-the-board reduction in tax rates would spur
unprecedented growth, reduce ination painlessly, increase tax revenue, and stimulate a spectacular rise in
personal saving. Each of those predictions has proved to be wrong”(1986, 29).38
Reaganomics was not a failure in the sense that it brought economic growth to a standstill; GDP growth
remained within normal bounds.39 Moreover, ination was brought under control, even if at a substantial pain.
The economy also overcame the consequent recession of 1981–1982 in 16 months but as Krugman noted: “His
supply-side advisers didn’t promise a one-time growth spurt as the economy emerged from recession; they
promised, but failed to deliver, a sustained acceleration in economic growth”(2004). In other words, economic
performance in the short-run was bumpy but by no means out of the ordinary. The real pain surfaced slowly
in the decades to come.
2.2 Growing Productivity-Compensation Gap and Growing Inequality
As Piketty and Saez argue, across-the-board tax cuts invariably increase inequality. The evidence is consistent:
“a comprehensive empirical analysis shows that there is a systematic and strong negative correlation between
the evolution of top tax rates and the evolution of the pre-tax top percentile income share…In the United States,
top income shares are high when top tax rates are low (before the Great Depression and after the Reagan ad-
ministration) while top income shares are low when top tax rates are high (from the New Deal to the beginning
of the Reagan administration). Across countries, there is a tight correlation between the cut in top marginal tax
rates since the 1960s and the increase in the top percentile income share…” (Piketty and Saez 2014, S2).
The reason is straightforward: an across-the-board tax reduction brings an immense windfall to those at the
top of the income pyramid which they save and invest so that their income will grow substantially in subsequent
periods (Table 2). In contrast, the typical worker or employee saves little, if anything, so that the increase in
disposal income is inconsequential. It does not earn compound interest and therefore does not increase the
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growth rate of income. In wake of Reagan’s tax cuts millionaires received 100 times as much money as the
typical taxpayer (Table 2). Thus, Reaganomics reversed the decline in inequality unleashed by the New Deal
and policies during World War II (Margo and Goldin 1992; Lindert and Williamson 2016).
The rise in inequality in the wake of the tax bill was sudden, strong and enduring. First to move was the tip
of the iceberg, represented by the share of after-tax income of the top 0.1% or 80,000 of the roughly 80 million
households. The share was 1.8% in 1967 and stayed at or below that level until 1981 (Figure 8). Then the Reagan
tax cuts unleashed a trend that extended into the next century: by 1982 the top 0.1% of the income distribution
received 2.5%, and by 1983 2.7% of total (post-tax) income. Henceforth the oodgates were open and remained
open: by 1988 their share reached 5.4% and by 2000 7.3% (Piketty and Saez 2007, Figure 3).40 An increase from
1.8% in 1981 to 7.3% of national income by the year 2000 is a game changer of immense historic proportions.41
Figure 8: Post-Tax Income Share of the Top 0.1%.
Source:Piketty and Saez 2007 supplementary Table A2 http://piketty.pse.ens.fr/les/capital21c/en/xls/.
A breakdown of the top 10% into four groups indicates that most of the gains were registered among the
top 0.1% (Figure 9). Their share of total pre-tax income began to rise immediately, reaching 4.2% by 1982, a
level not seen since 1945. By the end of Reagan’s tenure, the top 0.1% doubled its share from 3.4% to 6.8%.
The part of the rest of the top 1%, (from the top 0.1 to the top 1%), also increased by 2.1 percentage points
but did so slower and started later.42 The 1%–5% group’s share increased by just 0.6%. However, the 5–10%
group’s share did not increase at all. In a similar vein, the Gini index summarizes the increase in inequality
under the Reagan administration. The index, already high in international comparison, began to climb steeply
immediately after the 1981 tax bill (Figure 10).43 Hence, it’s fair to say that the skewing of the income distribution
started immediately with Reagan’s tax cut and that hardly any of the benets trickled down beyond the top 1%
with the exception of the ideology coming from the top that justied their dominant position in society (Veblen
1899).
Figure 9: Share of Top 10% in Total Income in Four Groups.
Source: (Piketty 2014, Table TS8.2) http://piketty.pse.ens.fr/les/capital21c/en/xls/.
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Figure 10: The Gini Index of Pre-Tax Income.
Source: Federal Reserve Bank of St. Louis, “Income Gini Ratio for All Households,”series GINIALLRH.
Figure 11 summarizes the changes in the share of total income in six groups and shows that in the 1970s
changes were hardly perceptible. The share of the top 5% did not change at all. However, thereafter only the rich
(80–85 percentile) and super-rich (top 5%) gained. All other groups lost share continuously. This was particu-
larly pronounced in the 1980s and 1990s for the super-rich whose share increased by almost 5% at the expense
of the middle class. The trend continued in the 21st century but at a muted rate. Note that until 1980 the share of
income of the superrich (top 5%) equaled that of the middle class (the 3rd quintile) but under Reagan a wedge
began to appear and by the beginning of Clinton’s tenure reached 5.9%. All other groups lost share, even the
upper-middle class, although the rich (80–95 percentile) were at least able to hold their own (Figure 11).
Figure 11: Trends in the Share of Income by Households, 1970–2016.
Source: Department of Commerce, U.S. Census Bureau, Table H-2. Share of Aggregate Income Received by Each Fifth
and Top 5 percent of Households. https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-
income-households.html accessed October 3, 2017.
Note: Poor, Lower-Middle, Middle, and Upper-Middle classes are the rst four quintiles. The top quintiles is not shown.
Instead it is further divided into the Rich and the Top 5%.
Tax returns indicate a similar pattern. The high-income tax returns became a greater share of all returns
in the 1980s44 (Figure 12). High-income is dened here as those above $200,000 in 1976 dollars; so these are
ination adjusted. That is equivalent to $880,000 in 2018 prices, which puts them in the top 1%. There is an
obvious kink in the trend line in 1982. Between 1981 and 1988 their share increased by a factor of 4. The trend in
the number of millionaires (in current prices) also has a kink in 1982 and again in 1986. The large jump was no
doubt due to the further reduction in the top tax bracket in 1986 from 50% to 38.5%. Some of the early increases
was due to the ination rate (because this group is not ination adjusted) but the big jump in the number
of millionaires between 1985 and 1987 from 17,300 to 62,000 tax returns could not have been due to ination
because the prices increased by only 5.6% between those 2 years. Yet, their share of total tax returns tripled in
these two years. This is indicative of the general pattern of income gains concentrating at the very top of the
income distribution.
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Figure 12: Percent of High Income Tax Returns.
Source: IRS Sta, 1994; and Individual Tax Returns for each year found at: https://www.irs.gov/statistics/soi-tax-stats-
archive-1954-to-1999-individual-income-tax-return-reports.
A similar kink in trend values appeared in the productivity-compensation gap. From a theoretical view-
point, rms should pay wages equal to the value of the marginal product of their workers. This implies that
real wages should keep pace with the productivity growth of the labor force. Yet, this basic theorem is blatantly
contradicted by US evidence, as the growth in compensation (wages, bonuses, and benets) fell very far behind
productivity growth after 1981 (Figure 13). Between 1947 and 1970 the growth in real wages equaled produc-
tivity growth exactly, just as theory predicted; both practically doubled in the intervening 23 years, growing at
an impressive compounded annual rate of 2.7% (Table 3).
Figure 13: The Productivity-Compensation Gap.
Note: Base year is 1947=100. The dotted lines are trend lines: exponential for productivity and straight line for wages.
Source: Susan Fleck, John Glaser, and Shawn Sprague, “The compensation-productivity gap: a visual essay,”Monthly
Labor Review, January 2011: 57–69. Data for 2012–2016 was kindly provided by Shawn Sprague of the Bureau of Labor
Statistics.
Table 3: Growth in Productivity and Real Compensation, U.S. 1947–2011.
Productivity growth % Wages growth % Ratio
annual
Dierence Annual (%)
Years Total Annual Total Annual
1) 1947–1970 23 85 2.7 83 2.7 0.98 −0.0
2) 1970–1982 12 19 1.4 14 1.1 0.74 −0.3
3) 1982–2016 34 94 2.0 40 1.0 0.43 −1.0
3a) 1982–1999 17 41 2.0 20 1.1 0.49 −0.9
3b) 1999–2016 17 37 1.9 16 0.9 0.44 −1.0
Total refers to the total percent increase during the period. Annual is the annual compounded growth rate. Ratio is the ratio of annual
growth rates. 2017 refers to the rst half of the year. Wages refers to total compensation.
Source: see Figure 13.
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Then in the 1970s a tiny wedge appeared, as wages grew 0.3% per annum slower than productivity (Table 3).
However, under Carter both variables still increased at the same pace, so the gap did not widen at all under his
watch (Figure 14). The real rst sign of a permanent structural break in the relationship between productivity
and wages appeared in 1982, as under Reagan the gap not only widened substantially but it continued to do so
relentlessly until the present day. After Reagan the growth in compensation was merely half of the growth in
productivity (Table 3).
Figure 14: Increases in the Productivity-Wage Gap.
Note: Base year is 1947=100. Percentage point increase in the index relative to the base year. For example at the beginning
of the Ford administration the size of the gap was 12.2 and at the end 18.3. Thus it increased by 2 percentage points per
annum.
Source: See Figure 13.
Thus, after 1982 the gap widened continuously, although each successive Democratic administration was
able to slow somewhat the increase in the size of the gap (Figure 14). This dovetails well with Bartel’s thesis
that Republican presidents increased inequality more than Democratic ones (2016). So, under Clinton the gap
increased at a slower rate than under Bush Sr. and similarly, under Obama it again increased but slower than it
did under Bush Jr. However, by the presidency of Bush Jr., the gap was growing at a rate of 6 percentage points
per annum. So by 2017 the gap had reached 150 percentage points. That is to say, labor compensation had
increased by 288% since 1947 but productivity had increased by 438%. So, productivity grew much faster than
wages; the dierence accrued to prots which increased exponentially. The power of the unions was dissipating,
and the government and courts were unsympathetic to labor, so they were left to fend for themselves (Bivens et
al. 2014; Farber et al. 2018). Without countervailing power, labor was at a distinct disadvantage. So, Reaganomics
failed to provide inclusive growth.
In addition to the tax cuts favoring the rich, another aspect of Reaganomics that contributed to the hollowing-
out of the middle class was his suppression of the strike of the Professional Air Traic Controllers Organization
(Stiglitz 2013, 81). The union ceased to exist, and 11,000 employees were red, signaling the end of the inuence
of big labor.45 Organized labor became so intimidated that the number of strikes involving at least 1000 workers
declined thereafter from 235 in 1979 to just 17 by 1999,46 and the share of the labor force in unions, still 26%
throughout the Carter presidency, fell precipitously by fully 1/3rd, to reach 17%, by the end of Reagan’s second
term (Figure 15).47 So union power was a thing of the past (Mishel 2012).
Figure 15: Union Membership.
Source: Economic Policy Institute, State of Working America Data Library, “Union Coverage,”
https://www.epi.org/data/#?subject=unioncov.
Unions had been the backbone of the middle class, especially that of the lower-middle class. They ensured
that a share of the prots went also to workers and not only to executives and shareholders. Collectively workers
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could threaten to strike, thereby exercising suicient countervailing power to obtain for themselves a little more
than a living wage –a share of the rents the corporation was earning. Without union support most workers
without a college education, especially those who had no special skills –were left on their own (Bivens et al.
2014). The upshot was devastating to this segment of the middle class. United, workers had some bargaining
power; divided they had none. The result was that workers‘pay lagged far behind their productivity growth
(Figure 13).
As worker’s power waned so did their ability to inuence Congress. Accordingly, federal minimum wage
shrank under Reagan from $9.03 (in 2016 prices) to $6.80, a 25% decline! The tax brackets were indexed to
ination (starting in 1985), but the minimum wage was not, and Reagan was proud of it: “the minimum wage
has caused more misery and unemployment than anything since the Great Depression,”he incorrectly claimed
(Kwak 2017, 7).
Another turning point came with corporate prots (Lazonick 2014). Reaganomics marked the onset of -
nancialization as well as the decline of manufacturing. Between 1963 and 1980 the share of corporate prots
originating in nance was 15% while that of manufacturing was 49%.48 Manufacturing was still the mainstay
of the economy but by the time Reagan left oice its downward trend was well underway (Figure 16 and Table
4). For nance, the turning point came in 1986 when their share jumped suddenly to 21%, surpassing recent
peaks and there was no turning back. Reagan began deregulating nance and that opened up opportunities
unavailable earlier. By 2000 the share of prots in the nancial sector reached 27% and then 33% by 2011, while
that of manufacturing sank to 17%. From 49% to 17% and from 15% to 33% was a turning point in the structural
make-up of the US economy. This posed a major challange, because while manufacturing shed jobs, the prof-
itable nance sector was unable to absorb the workers released. Consequently, their combined share of workers
declined from 22% to 13% of the labor force.
Figure 16: Share of Corporate Prots in Finance and Manufacturing.
Economic Report of the President (Washington, D.C. 2012), Table B.91 “Corporate prots by industry, 1963–2011,”
https://www.gpo.gov/fdsys/browse/collection.action?collectionCode=ERP&browsePath=2012&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=63.
Table 4: Prots and Employment in Manufacturing and Finance.
Year Total Labor Force Employment
Millions of workers Percent of total Prots percent of total
MFG Finance MFG Finance Sum MFG Finance Sum
1981 108.4 18.6 5.2 17.2 4.8 22.0 52.1 8.4 60.5
2000 142.6 17.3 7.7 12.1 5.4 17.5 24.9 27.4 52.3
2011 153.3 11.7 7.7 7.6 5.0 12.7 17.0 32.8 49.8
Source: See Figure 12 and Bureau of Labor Statistics, Establishment data. Historical Employment. Table B-1. Employees on nonfarm
Payrolls by major industry sector.
More recently, this was reinforced by the super low interest rates of the Federal Reserve after the 2001 re-
cession and then again during the Financial Crisis which was coasting on the zero lower bound (nominal) for
seven years (2008–2015).49 Loose monetary policy was an implicit subsidy for the banks. Between 1999 and
2003 prots almost doubled, reaching $300 billion per annum in 2003.50 Then after the nancial crisis it quickly
rebounded exceeding previous highs by the summer of 2009. In Iceland the bankers were put in jail while in the
US they were paid millions in subsidies. In 2018 nance’s prots accounted for 27% of all corporate prots. The
interest rate policy of the Fed also meant that the burgeoning public debt was easier to sustain than it would have
been with interest rates in the customary 5% range.51 In other words, the low-interest-rate policy meant that
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the groups associated with nance were “privileged”considered unjust in democratically conceived political
traditions thereby exacerbating income inequality and further contributing to social polarization (McKinnon
and Schnabl 2012; Duarte and Schnabl 2017).
3 Conclusion: From Reagan to Trump in One Generation
This essay is an analytic narrative using social science concepts that are not quantiable and therefore not sub-
ject to statistical analysis52 (Bates et al. 1998). We argue that (a) Reaganomics was a watershed moment in the
economic development of the US (Friedman 1990); its legacy has a long reach; (b) it initiated powerful path-
dependent processes that could be slowed occasionally but would have been extremely diicult to reverse
permanently and consequently was not reversed; (c) its across-the-board tax cuts were deceptive as it skewed
the distribution of income substantially, thereby increasing the political power of the top 1% suiciently to tip
the scale of the political balance toward a plutocracy; (d) the 1% used enough of their windfall to further their
interests which included advocating for laissez-faire economic policies including deregulation, hyperglobal-
ization, nancialization, and the IT revolution which successfully anchored and advanced their social, political
and economic position and strengthened their dominant anti-government ideology;53 (e) the rise in inequality
increased the frustration of the have-nots, those who did not have adequate education or skills, because they
were experiencing downward social mobility as well as a considerable decline in their relative incomes; (f) the
frustration accumulated thereby leading to social disintegration that manifested itself in the rise of many anti-
social phenomena including mass murders and other acts of desperation including suicides, alcoholism, and
the epidemic of opioid use and overdose (Brooks 2018; Case and Deaton 2017); (g) desperate people are easier
to manipulate by demagogues and are thus more likely to support an unqualied politician who promises to
throw them a lifeline to lower their level of frustration. That is the crux of the argument how Reaganomics
contributed to the rise of Trumpism.
However, in order not to be misunderstood, we should emphasize that the argument is emphatically not
that Reaganomics caused Trumpism. It was neither a necessary nor a suicient cause. Rather, the argument is
that Reagan initiated a path-dependent process, which gathered momentum along the way, could have been
reversed, especially during the nancial crisis when the opposing forces were at their weakest, but the oppor-
tunity was wasted and therefore the path nally ended up in the triumph of Trumpism (Turchin 2016; Kuttner
2018). In other words, Trumpism was not foreordained but came at the end of a trajectory with numerous twists,
turns, and missed opportunities in between.
Politically it was much easier for subsequent administrations to continue to accumulate debt, to disparage
government, to decrease taxes, and to rely on the market to distribute income and wealth. The growing num-
ber of millionaires also gained the nancial resources to ensure that their dominant position was maintained
economically, politically, as well as ideologically. So, the country and its economywere practically locked onto
the path dened by Reaganomics with seven major deleterious legacies.
The rst was the sudden increase in inequality which generated to a dual economy (Temin 2017). Nobel
Prize winning economist Joseph Stiglitz, in a section of his book titled “When did we go astray?”, noted that the
“election of President Ronald Reagan represented a turning point in the United States. Among the precipitating
events were the beginning of ...the reduction in the progressivity of the tax system... the policy of lowering taxes
at the top.... Then the taxes on forms of income received disproportionately by the rich (capital gains, more than
half of which are earned by the top 0.1 percent) were lowered further, under Clinton to 20 percent in 1997 and
then under Bush to 15 percent”(Stiglitz 2013, xxxi).
The rise in inequality led to the “hollowing out”of the middle class (Kwak 2017; Palley 1998). Stiglitz
also noted that “President Ronald Reagan began hollowing out the middle class and skewing the benets of
growth to those at the top…” (Stiglitz 2016). That this would be the consequence of Reaganomics was clear to
contemporeries from the outset. The Harvard economist Benjamin Friedman noted that “the average American
family is losing ground, and knows it”(1990). Another observer wrote, “The erosion of middle-class living
standards is well documented, and Reagan’s tax reform, which brings relief to the very rich, will make it harder
than ever for working-class and lower-middle-class taxpayers to make ends meet”(Lasch 1988). And so it did.
The result was a decline in the savings rate and an increase in the burden of credit (Dettling et al. 2017). In other
words, while the typical citizen was misled, there were some contemporaries who saw through the thinly-veiled
arguments and the real political objectives: “to redistribute income and well-being toward the rich and away
from the poor; to redistribute health and education and security toward much the same people who would
already have enjoyed them before the second World War…” (Rothschild 1982).
Moreover, the rise in business-friendly regulation was at the expense of workers and consumers (Faux 2012;
Komlos 2016a). Stiglitz pointed out that “the beginning of the deregulation of the nancial sector…led to the
excessive nancialization of the economy…. The path of deregulation upon which Reagan set the country was
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unfortunately, followed by his successors.”(2013, xxxi).54 Thus, the lax oversight continued unabated and cul-
minated in the nancial crisis of 2008 and the subsequent Great Recession which, in turn, hurt and radicalized
millions55 (Komlos 2014).
Reaganomics also legitimized decit nancing until it became endemic. So, Friedman was right to be con-
cerned early that the decits would become “a permanent feature of the economy’s ongoing development”
(1983, 80). It was no longer a taboo to tranfer the burden onto future generations. It became the new normal
which led to the accumulation of debt in excess of 100% of GDP by 2012, not seen since World War II. It would
not have been bad if the decits had been accumulated because of investments in improving education, repair-
ing infrastructure, expanding basic research, or fostering renewable energy so that they would have provided
nancial returns over time. Instead, they were used mainly for the military and for lifting current living stan-
dards by increasing consumption. Thus, the decits did not improve the long-term prospects of the US economy
(Sornett and Cauwels 2014).
To be sure, the increase in the national debt as a percentage of GDP was not linear (Figure 5 and Figure 6).
However, once the superrich became accustomed to low taxes they became irreversible: “America has thrown
itself a party and billed the tab to the future. The costs,…will include a lower standard of living….”(Friedman
1988). Admittedly, Reagan himself did try to backtrack a bit and Bush Sr. did raise taxes in 1991 but that aected
only the rate at which the decit was increasing. It still kept on growing relentlessly relative to GDP until 1995.
Then Clinton did manage to reverse the trend temporarily but, at 55%, the debt ratio still exceeded the level
when Reagan left oice. However, his successor, Bush Jr., followed in Reagan’s footsteps. This was easier to do
because the taboo had been dispelled by Reagan, and the Republican Party abandoned its orthodoxy of scal
conservatism that not only continued under Bush Jr. but became one of the pillars of Trump’s economic policy.
Trump adopted Reagan’s supply-side rhetoric, adding $1.5 trillion to the debt supported again by
economists such as Feldstein (2017) and Barro (2017) of Harvard University, some of whom had supported
the Reagan tax cuts as well.56 The same political party, the same arguments, and the same economists support-
ing it. That was the continuity between the Reagan and the Trump tax cuts (Sinn 2018). To be sure, the road
from Reagan’s indulging the superrich to Trump’s tax bill was not a direct one. There were short lulls along the
road. However, the spirit is the same, the arguments are the same, and the consequences will be the same as
well (Krugman 2018). Burdened by such debt, which generation will muster the courage to put an end to this
process of debt accumulation? It would have to accept a lower standard of living and start paying higher taxes.
It is unlikely. Instead, they will most likely choose the easy road and continue to pass on this burden to future
generations until it is too late. That is why Reagan’s legacy of debt accumulation has catastrophic implications.
The fth legacy is the disparaging of government which fostered and legitimized the dominant ideology
“that government has no real capability to solve any of our major problems. It is a theme that the administra-
tion and its conservative supporters have been relentlessly drumming into the public consciousness”(Peterson
1988). There was not an iota of recognition that the new economy desperately needed government support to
prepare its citizens for this new age by expanding educational opportunities, by investing in infrastructure and
curtailing global warming. Instead, the rhetoric of distrust of government tended to turn the society upon it-
self, thereby permanently fraying the fabric of the social contract. This philosophy of anti-statism endured until
Trump capitalized upon it. “Government is the problem”became more extreme with the “deep state”being
the problem and “Drain the swamp!”became the new slogan but the spirit and implications were the same.57
Sixth, the tax windfall gave rise to an oligarchy which (aided by the courts) meant the eventual the trans-
formation of the political system into a plutocracy (Bartels 2016; Formisano 2015; Gilens and Page 2014; Hacker
and Pierson 2016; Levitsky and Ziblatt 2018; Mann and Ornstein 2012; Page and Gilens 2017; Schlozman, Verba,
and Brady 2012). The windfall of millions of dollars strengthened immensely the vested interests that Olson
had warned us about and put them in a position to overpower the society, its economy, and its politics (1982,
42). Stockman conceded as much cynically: “‘weak clients’suered for their weakness….‘unorganized groups
can’t play in this game’” (Greider 1981). So, the corporate world together with the superrich formed distribu-
tional coalitions to manage the free-enterprise system to their advantage and lobbied for their cause thereby
gaining additional power (Komlos 2016b).
The seventh adverse legacy is Reagan‘s neglect of the needs of the blue-collar workers (the Reagan
democrats) whose support brought him to the White House in the rst place. They were the less-educated
low-skilled segment of the lower-middle class who were vulnerable to the decline of economic vitality in the
Rust Belt. Until then the unions provided some countervailing power and the government provided them some
relief and protection too. “Each year during President Carter’s term in oice about 4 million economically disad-
vantaged persons received training and job opportunities under the Comprehensive Employment and Training
Act alone”(Marshall 1981). But Reagan cut funding for training programs drastically from $22 billion to $8 bil-
lion (Bartels 2016, 52). And those who were hurt had few alternatives. Hence, they dropped out of the labor
force by the millions and collected disability payments (Charles, Hurst, and Notowidigdo Forthcoming). Even
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the federal minimum wage, which had buoyed up their income, declined precipitously and failed to recover.
In 2018 it is at the level of 1975.58
Reaganomics was followed by the one-two punch of hyperglobalization and skill-biased technical change
that accompanied the IT revolution with the consequent devaluation of a high school diploma, adding to labor’s
frustration. Unskilled labor was unable to nd employment in the expanding sectors. For example, the number
of employees in computer-related occupations rose from 450,000 in 1970 to 4.6 million in 2014 but 22% of them
had at least a master’s degree (Beckhusen 2016). The increased demand was met by recruiting foreigners: a
quarter of the 4.6 million employed in IT were born outside of the US.
It is necessary to note that neither hyperglobalization nor the IT revolution appeared suddenly in 1981.
They unfolded slowly over time and their main impact came later. NAFTA came into being in 1994, the World
Trade Organization in 1995, and China did not join the WTO until the year 2000. Hence, the share of imports
stood at 9.5% of GNP between 1981 and 1986 only in 1987 did it climb slightly to 10.4% and stayed at that level
until 1993.59 Thereafter the real increase began: by the year 2000 it was 14.3% and by 2008 it peaked at 17.2% a
multiple of what it was under Reagan’s rst term. Similarly, the IT revolution was in its infancy in the 1980s.
For instance, merely 15% of US households had a computer in 1989.60 Hence, the fact that wages, and so many
other variables discussed above, turned suddenly in the negative direction in and around 1981, can only be
ascribed to the sudden change in economic policy at the outset of the Reagan era.
To be sure one could well argue counterfactually that globalization and technological change would have
been disruptive in any event, without Reaganomics. Surely these forces were on the horizon but arguably the
rate of transformation of the US economy could have been at a more measured pace. It was not necessary
for globalization to become hyperglobalization and technological underemployment did not have to create
despair among the undereducated. Optimal policy could have ensured that they would be nearer to being
Pareto optimal, i.e. that the losers were compensated at least to some extent by the gainers even if they were not
made whole. Hence, the rate and way these transformative processes took place was endogenously determined
by the socio-economic forces and political power imbalances unleashed by Reaganomics.
We are well aware that post hoc is not propter hoc, but it would be rather surprising if the abrupt changes in
trend represented by the kinks in innumerable variables immediately following Reagan’s tax cuts would be a
mere coincidence. Admittedly this essay does not answer the important question how much did one or another
of these socio-economic forces contribute to the ultimate accumulated frustration. However, that is another
question from the one posed in this essay.
While the deleterious legacies of Reaganomics were obvious to contemporaries, that its long-run path-
dependent impact would be irreversible was less so. Benjamin Friedman came close when he noted that, “the
Reagan legacy –the consequence of having sustained that imbalance for so long –is still very much with us.
By now the objective realities created by an entire decade of over-borrowing and under-investing, including
especially the shrinking supply of ‘good’jobs and the parallel failure of the average worker’s wage to keep up
with ination, are familiar enough”(1990). Janet Yellen, future chair of the Federal Reserve, had similar premo-
nitions: “the tab for throwing a decit-nanced party may not come due for decades”(2016). Well, it took two
decades for the Reagan deregulations to culminate in the nancial crisis and three for the triumph of Trumpism
(Komlos 2018). So, her prognosis was of the right order of magnitude.
Thus, from a long-run perspective Reaganomics was more than a failure noted by many contemporaries; it
is close to being catastrophic because it unleashed tectonic forces that frayed the social fabric, the body politic,
and the structural health of the economy. These forces had such a long reach that we can discover in them the
roots of the current socio-economic malaise and the political dysfunction associated with the rise of Trump,
himself an oligarch surrounded by oligarchs and generals.
Like hunger, hopelessness is a mighty political force, and therefore, it should not be surprising that after the
failed promises and irresponsible neglect of three Republican and two Democratic administrations spanning a
third of a century, the have-nots came to believe that only a strongman could change the course of the ship of
state. The uneducated, those who experienced the alienation of downward social and economic mobility, or the
disappointment of wage stagnation for a generation while others were living the lifestyle of the rich and famous,
those clobbered subsequently by the tsunami of hyperglobalization, and those evicted from their homes while
the Lords of Finance were being pampered, were ripe to revolt and turn against the elites (McKinnon and
Schnabl 2012; Goldstone 2016; Turchin 2016). No wonder that they were frustrated enough to revolt against
the establishment and take their chances with a self-proclaimed genius with extravagant promises, however
implausible. Trump was able to harvest the anger of those who reached for the American Dream and found a
nightmare instead (Smith 2012; Gilbert 2016). The path to that frustration began in 1981 with a Reaganomics
that unleashed the “darkest spirits of capitalists”(Rothschild 1982).
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Acknowledgement
Helpful comments on an earlier version are appreciated from Frank Ackerman, Charles L. Allen, Harry Berg-
steiner, George Bittlingmayer, George H. Blackford, Fred Block, Jenny Bourne, Peter Coclanis, James G. Devine,
John Donohue, Richard Easterlin, Wolfram Elsner, George Georgescu, Jack Goldstone, Raghbendra Jha, Michael
Joe, David Cay Johnston, Thomas Palley, Radmilo Pesic, Milenko Popovic, Terrence Quinn, Alex Rosenberg,
Claudio Shikida, Robert Skidelsky, John N. Smithin, Antoon Spithoven. All remaining possible ambiguities,
oversights, or errors are that of the author alone.
Notes
1 Federal Reserve Bank of St. Louis, Consumer Price Index: Total All Items for the United States, series CPALTT01USA659N.
2 Federal Reserve Bank of St. Louis, Eective Federal Funds Rate, series FEDFUNDS.
3 From $20,000 in 1973 to $21,700 in 1980 in 2012 dollars. Federal Reserve Bank of St. Louis, Real Disposable Personal Income: Per Capita,
series A229RX0Q048SBEA.
4 Federal Reserve Bank of St. Louis, Real gross domestic product per capita, series A939RX0Q048SBEA.
5 There were other non-economic developments that made many voters susceptible to Reagan’s message including the reaction to the
Supreme Court’s decisions Brown vs. the Board of Education and Roe v. Wade coupled with the Civil Rights movement which lost the
South to the Democratic Party and by the 1970s energized the right wing of the Republican Party, as well as the evangelicals (Hacker and
Pierson 2010; Mayer 2016; MacLean 2017).
6 Reaganomics had these two intertwined aspects to it: intellectual backing and political action. Trumpism diers from this in that it does
not have such intellectual roots and is more of an ad-hoc approach to economic populism with an authoritarian political bent.
7 The average tax rate of the top 0.1% of income earners was also decreased from 59.8% to 56.0% in 1978. However, the tax-rate reduction
aected only the top 0.5%; the tax rates of the other half of the top 1% actually increased (Piketty and Saez 2007, Table 1).
8 Volatility also increased in the nancial sector culminating in the crash of 1987 (Chen 2010).
9 Dubbed the horse-and-swallow theory: “If you feed the horse enough oats, some will pass through to the road for the sparrows”(Gal-
braith 1982).
10 The consumption tax Laer curve does not have a peak at all, implying that the tax can be increased without decreasing revenue. The
83% bears an uncanny similarity to modern estimates which suggest that the income tax rate could be as high as 70% without having a
negative eect on either revenues or output. (Trabandt and Uhlig 2011, 314).
11 In 1986 the top tax rate was reduced again from 50% to 38.5% increasing inequality further.
12 They also invested heavily in academia (Ravitch 2017).
13 For the damage done by the war on government see Hacker and Pierson (2016).
14 Federal Reserve Bank of St. Louis, Personal saving as a percentage of disposable personal income, series A072RC1A156NBEA.
15 Federal Reserve Bank of St. Louis, Real Gros Private Domestic Investment, series GPDICA.
16 Besides the decits, another reason why investments were not accelerating was the excess industrial capacity. Capacity utilization was
generally falling and peaked at 86.7% under Carter but under Reagan the peak was slightly lower at 85.2%. Federal Reserve Bank of St.
Louis, Capacity Utilization: Total Industry, Series TCU.
17 Federal Reserve Bank of St. Louis, Real Gros Private Fixed Investment Nonresidentail, Equipment, series Y033RX1A020NBEA.
18 Federal Reserve Bank of St. Louis, Real Gross Private Domestic Investment, Series GPDC1.
19 Federal Reserve Bank of St. Louis, Total Credit to Households and Non-Proft-Insttitutions Serving Households, Series QUASHAM770A.
20 Board of governors of the Federal Reserve System, “G. 19, Consumer Credit Outstanding: Revolving,”
https://www.federalreserve.gov/releases/g19/HIST/cc_hist_r_levels.html.
21 Federal Reserve Bank of St. Louis, Average Annual Hours Worked by Person Engaged for United States, Series AVHWPEUSA065NRUG.
22 Federal Reserve Bank of St. Louis, Civilian Labor Force Participation Rate: Men, series LNU01300001.
23 That did not keep him from airing “Its Morning in America Again,”advertisement during his reelection campaign that was silent on
the unemployment rate; https://www.youtube.com/watch?v=EU-IBF8nwSY.
24 Federal Reserve Bank of St. Louis, Civilian Unemployment Rate, series UNRATE.
25 Underemployed include discouraged workers, those who would like to work but have not searched within the last month, and part-time
workers who would like to work full time.
26 In 2016 dollars. U.S. Census, Historical Income Table P36. Full-Time, Year-Round Workers by Median Income and Sex. Weekly earn-
ings show the same pattern. Federal Reserve Bank of St. Louis. “Employed full time: Median usual weekly real earnings.”U.S. Depart-
ment of Labor, Bureau of Labor Statistics, Weekly and Hourly Data from the Current Population Survey, Series ID LEU0252881900,
http://www.data.bls.gov/cgi-bin/surveymost?le. The dierence between the two data sets is that for weekly wages the worker does not
have to be employed the whole year to be included in the sample.
27 These data end in 2014. However, another index (which leaves farming and government out of consideration) has remained unchanged
between 2014 and 2018. U.S. Bureau of Labor Statistics, Nonfarm Business Sector: Labor Share [PRS85006173], retrieved from FRED, Federal
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PRS85006173, November 3, 2018.
28 This labor’s share includes the increasing income of executives, because it is also considered labor income, even though most of it is
rent coming out of prots. So, the actual worker’s share must have declined by even more than the 1.4% implied.
29 Dividing the average annual income of men and women of $24,000 by 52 yields $460 of income per week.
30 White House Report on the Program for Economic Recovery, February 18, 1981. http://www.presidency.ucsb.edu/ws/index.php?pid=43427;
Federal Reserve Bank of St. Louis, Real Gross National Product, series GNPCA; and Real Gross National Product Per Capita, series
A791RX0Q048SBEA.
31 During the expansionary phase of the business cycle real GDP grew at 4.2% per annum whereas under Ford/Carter it grew at 4.4%
(Leamer 2001, 6).
32 Federal Reserve Bank of St. Louis, Total Public Debt, series GFDEBTN and “Federal Surplus or Decit,”series FYFSD. Congres-
sional Budget Oice, Supplements to The Budget and Economic Outlook: 2014 to 2017,”Historical Budget Data, February 2014;
https://www.cbo.gov/about/products/budget-economic-data.
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33 Military expenditures increased during Reagan’s administration by $805 billion. Congressional Budget Oice, Supplements to The
Budget and Economic Outlook: 2014 to 2017,”Historical Budget Data, February 2014; https://www.cbo.gov/about/products/budget-
economic-data.
34 “What is extraordinary about the U.S. government decits projected for 1984–1988, therefore is not just that they will be large but,
more importantly, that they will represent a fundamental imbalance between the government’s revenues and its expenditures…. [They]
are increasingly decits at full employment.”(Friedman 1983, 80).
35 Federal Reserve Bank of St. Louis, series, GFDEGDQ188S.
36 American Taxpayer Relief Act of 2012.
37 The value of the dollar increased from 1.8 Deutsche Mark in 1980 to 3.3 DMark in 1985. Federal Reserve Bank of St.Louis, series EXGEUS.
38 He forgot that he was a ferventadvocate of those policies himself while Chair of the Council of Economic Advisers and that he continued
to support the similar Trump tax cuts (Feldstein 2017).
39 Alternative policies that envisioned rescuing the Rust Belt through a Reconstruction Finance Corporation was oated but was given
short shrift (Rohatyn 1981).
40 The data are at: https://eml.berkeley.edu/∼saez/.
41 Moreover, the top 0.01% of income recipients have the exact same trend but the rest of the top 1%, i.e. those between the 99th and 99.9
percentiles began to climb three years later.
42 Although the share of top decile in national income uctuated somewhat between 1943 and 1981, it remained essentially unchanged at
around 34.5%. Then it began to climb steeply and persistently to reach 40.6% by 1988 and 48% by 2010.
43 It is not a coincidence that Ivan Boesky proclaimed that “Greed is good”in 1986 (Dickerson 1993). One of the episodes of a CNN
miniseries on the “Eighties”aired in 2016, was titled “Greed is Good.”Hence, Reaganomics also aected the culture and arguably increased
the degree of greed leading to the large increase in CEO salaries.
44 The number of earners above 200 K is greater with expended concept of income such as plus tax exclusions. IRS, “Individual Income
Tax Returns,”1982, 103; https://www.irs.gov/statistics/soi-tax-stats-archive-1954-to-1999-individual-income-tax-return-reports.
45 “The PATCO strike signaled a profound decline in organized labor’s power in the late twentieth-century United States”(McCartin 2007,
1126).
46 Ibid.
47 Bureau of Labor Statistics, “Table 2. Union ailiation of employed wage and salary workers,”
https://www.bls.gov/webapps/legacy/cpslutab1.htm accessed September 17, 2017.
48 Without considering prots originating in the Federal Reserve Banks and prots from overseas. The latter are not stratied by industry.
49 Federal Reserve Bank of St. Louis, series FEDFUNDS.
50 Federal Reserve Bank of St. Louis, series A587RC1Q027SBEA.
51 The average rate 1954–2007 is 5.75%. Federal Reserve Bank of St. Louis, series FEDFUNDS.
52 For an excellent Quantitative analysis of the political right in Sweden See (Bó et al. 2018).
53 For the various strategies the CEOs employed in this regard see (Lazonick 2014).
54 Quotation is from the 2013 paperback edition.
55 The “expansionary monetary policies contributed to the political destabilization”(Duarte and Schnabl 2017).
56 And 137 other economists. CNBC, 2017. “An open letter to Congress signed by 137 economists supporting GOP Tax reform bill.”
November 29.
57 “Make America Great Again”was also used extensively by Reagan in 1980. The only dierence was that Reagan inserted the word
“Let’s”in front of the slogan. Wikipedia Contributors, “Make American Great Again.”
58 Federal Reserve Bank of St. Louis, series FEDMINNFRWG and series CPALTT01USA661S.
59 Federal Reserve Bank of St. Louis, series IMPGSA and series GNPA.
60 Statista, “Percentage of households with a computer at home in the United States from 1984 to 2010.”
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