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Reaganomics Revisited

Beyond the Glow of Nostalgia


I regularly read and appreciate the writings of Paul Craig Roberts on CounterPunch. Indeed, after reading his article "The True State of the Union," which Roberts wrote soon after President Bush’s January 31 State of the Union speech, I sent a note out to all faculty and graduate students in my department with a link to the article, suggesting that they give it a serious look.

After I sent this note out, one of my faculty colleagues wrote me back, asking whether this was the same Paul Craig Roberts who was a leading exponent of Reaganomics and high official in the Reagan Treasury in the 1980s, and if so, my colleague asked, "what happened to this guy? He now sounds like Alex Cockburn." I responded that it was indeed the same person, but, having never had any contact whatsoever with Roberts, I had no idea what, if anything, had happened to him since his days as a team member during the Reagan revolution. But Roberts himself answered my colleague’s question only a few days later, with his February 6 CounterPunch article, "Who Will Save America? My ‘Epiphany’."

This article includes interesting observations both on splits among the Reaganite versus the neoconservative branches of Republicanism, as well as on Roberts’ own political history. But it also gives an unqualified, if brief, endorsement of the achievements of Reaganomics. I am always in favor of "letting a hundred flowers bloom" in political debates. However, I never thought this particular hardy right-wing perennial would emerge in CounterPunch. A response seems in order.

Roberts, to begin with, is apparently convinced that Reaganomics ended the era of high inflation in the U.S., and that this fall in inflation led to rising living standards for U.S. workers. As he wrote, "No doubt, the rich benefited," from the fall in marginal tax rates, but "ordinary people were no longer faced simultaneously with rising inflation and lost jobs. Employment expanded for the remainder of the century without having to pay for it with high and rising rates of inflation."

Other than acknowledging that the rich benefited from the large tax cuts under Reagan, this summary statement of the achievements of Reaganomics is wrong or seriously misleading on several fronts.

At the simplest factual level, it is not accurate that Reagan’s tax policies were responsible for bringing inflation down, from an average rate of 8.2 per cent under Nixon, Ford and Carter, to 4.6 per cent under Reagan. The main force here was the stringent monetary policies imposed by then Federal Reserve Chair Paul Volcker. Volcker was appointed not by Reagan but by Jimmy Carter in 1979. Carter appointed Volcker because Wall Street made it clear to Carter that he had no choice. Almost immediately on taking office, Volcker returned the favor to Carter by imposing the most severe global recession since the 1930s, which then doomed Carter’s chances for re-election in 1980.

Volcker did indeed break the back of persistent and rising inflation brought on primarily by the four-fold oil price increases in 1973-4 and again in 1979. But he achieved this at a very high cost, by no means in the costless manner suggested by Roberts. In Latin America, the 1980s were known as the "lost decade," because of the debt crisis that followed from the 1980-82 Volcker-induced recession. As for U.S. workers about whose condition Roberts refers explicitly, real wagesi.e — . the buying power of your dollars of wages — peaked in 1973, the period of high inflation. Average real wages fell sharply throughout the Reagan presidency. The average figure for those eight years, at $15.72 per hour (in 2005 dollars), was 7.6 per cent below the average hourly wage under Carter of $16.95, and 9.6 below the Nixon/Ford peak of $17.39.

Along these lines, we should also acknowledge that despite Roberts’ claim that stagflation — the combination of high unemployment and high inflation — "destroyed Jimmy Carter’s presidency," in fact the U.S. economy’s performance under Carter, considered by strictly conventional measures other than inflation, was at least as strong if not stronger than the eight years under Reagan. Average GDP growth was nearly identical, averaging 3.3 under Carter and 3.4 under Reagan. But unemployment was substantially higher under Reagan, at 7.5 per cent relative to the Carter average of 6.5 per cent. This is not to suggest that the U.S. economy was robust under Carter, but simply to offer a bit of entirely commonplace evidence regarding types of claims made by Roberts and others. Remember that Carter was supposed to have brought the era of "malaise" while Reaganomics brought a new "morning in America."

This decline in real wages, beginning in the late 1970s and accelerating sharply in the 1980s under Reagan, is also a crucial link in understanding why inflation did not rise up as unemployment fell in the 1990s, contrary to expectations of virtually every single economics textbook. The standard theory held that when unemployment gets too low, workers gain in bargaining strength. They then push up wages, and businesses pass along these additional costs in the prices they charge consumers. This means rising inflation. But beginning in the 1990s under Clinton, unemployment fell, to as low as 4.0 per cent in 2000, but inflation stayed low. What happened?

Former Federal Reserve Chair Alan Greenspan’s own answer to this question (as reported by Bob Woodward in Maestro, his book-length hagiography of Greenspan) was that U.S. workers had become increasingly "traumatized" in the 1990s, and as such did not feel sufficiently secure to attempt to bargain up wages even at low unemployment. Greenspan openly acknowledged this "traumatized worker" explanation for the dampening of inflationary pressures in his regular semi-annual testimony to Congress in July 1997. Saluting the economy’s performance that year as "extraordinary’" and "exceptional," he remarked that a major factor contributing to its outstanding achievement was "a heightened sense of job insecurity and, as a consequence, subdued wages."

Now Greenspan never went further publicly than simply to celebrate this "heightened sense of job insecurity" among U.S. workers, to provide an analysis as to why this might have happened. But the answer is not too difficult to discern. Mr. Roberts himself has offered important observations on this matter, in his frequent discussions in CounterPunch on the outsourcing of U.S. jobs. However, such attacks on the employment security of U.S. workers hardly begins with the neoconservatives under Bush. Indeed, if one would have to pick the single most important turning point over the past 30 years in the treatment of U.S. workers, I would choose Ronald Reagan’s decision to summarily fire more than 11,000 air traffic controllers who, as members of PATCO, the air traffic controllers’ union, went on strike eight months into Reagan’s presidency, in August 1982. This early attack by Reagan was followed by eight years of relentless hostility to the organized working class.

But Reagan did not attack the organized working class only. More broadly, Reaganomics entailed a dramatic new framework for fiscal policy, the area in which Mr. Roberts was likely to have primarily involved as a Treasury official. Reagan’s fiscal program was fundamentally about tax cuts for the rich, a massive expansion in military spending, sharp reductions in social expenditures, and an acceptance-or better still, an embrace-of large-scale federal government fiscal deficits on these terms. All of this should have a familiar ring to those who have followed the course of economic policy under George W. Bush.

No doubt Mr. Roberts recalls President Reagan’s frequently recounted stories about "welfare queens" driving to pick up government checks in their Cadillacs. It was through repeating stories like this that Reagan was able to build support for an assault on even the minimal welfare state programs that had been operating prior to his taking office. It is no surprise that the individual poverty rate rose from 11.9 per cent under Carter to 14.1 per cent under Reagan.

But there was an even more fundamental lesson from the Reagan fiscal policy that was learned well by the George W. Bush team. It is that large-scale fiscal deficits create persistent pressure for a permanent contraction in social spending by the federal government. The Nobel Laureate in Economics and right-wing economics guru Milton Friedman could not have been more blunt on this point, explaining in a 2003 Wall Street Journal article that deficits serve as "an effective ­ I would go so far as to say the only effective ­ restraint on the government propensities of the executive branch and the legislature." Remember the Reaganites, as with the Bush group, apparently experienced few qualms about throwing more money to the military while cutting taxes for the already overprivileged.

The Reagan economic program, in short, was the first major step in constructing the U.S. economy that Mr. Roberts now properly and persuasively denounces on CounterPunch: an economy in which conditions for the average working person have fallen sharply over a generation while the rich feast ever more bounteously on the spoils of political victory that began decisively with Reagan.

ROBERT POLLIN is professor of economic and founding co-director of the Political Economy Research Institute at the University of Massachuesetts-Amherst. His groundbreaking book, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity, has just be released in paperback by Verso with a new afterward. He can be reached at:

A recent interview with Pollin can be read at the PERI site.