New! — you can now read this page translated into Belorussian, courtesy of Nadejda DobkinaWhy has the economy done so much better in 1993-2000 than it did in 1981-1989? What is it about the Clinton program, with its compromises, backing down, lack of focus, and shameless pandering to the dominant interest group of the moment that has been so much more beneficial than the Reagan program with its bold successes, clear sense of noble purpose, and strong popular mandate? I think the answer is quite simple: Clinton raised taxes in the upper brackets. In my opinion, that one factor is why the economy of today is delivering what Reagan promised.
Many staunch Republicans, of course, deny that there was anything wrong with the economy of the eighties. Others think that the benefits of today are simply the long term effects of Reagan's improvements, just as they thought the shortcomings of 1987 were just the long term effects of Jimmy Carter. (Reagan claimed this up to the very end of his time in office. In fact, most of the "stagflation" he inherited arose with Nixon.) Others give Congress the credit when Congress is republican, and the Presidency the credit when the Presidency is republican. But I think any clear look shows that the economic conditions of the eighties followed directly from Reagan's actions, and the conditions of the nineties follow directly from the actions of Clinton plus the actions of the Gingrich congress.
To review what Reagan did with the economy:
The sharp decrease in federal dollars going to low and moderate income people, plus the sudden halt in money supply growth, produced an immediate recession. This threw many people out of work, which in turn increased the budget deficit. The high unemployment and following underemployment, as people got jobs that paid less than their previous ones, pushed median wages down. People whose standard of living dropped, and may have assumed it was a temporary setback, increased their borrowing. Corporations whose business slumped also frequently turned to borrowing. The cut of taxes for those with capital left them with more capital, so there was a lot of money to lend out... but still, much of it ended up being loaned from overseas. So money was still in circulation, sort of, but now folks were paying a huge amount of interest to those with a lot of assets, increasing further the concentration of wealth into fewer hands, many of them outside the country. The federal budget deficit, not being ameliorated by inflation, had to be covered almost entirely by governmental borrowing, raising the flow of interest income to those with capital another large step further. The resulting concentration of yet more wealth in fewer hands decreased the amount of wealth in general productive circulation. (If you've ever been in a poker game where one person wins a lot and gets a big pile of chips, you know that the other players find themselves betting smaller, for lack of resources, and the total amount of economic action at the table decreases. This is true even if the winner loans out some of his winnings, unless the other players are completely imprudent.) With consumers less able to buy goods, capital didn't have as many places to go where it could be invested productively. So while investment in durable goods and physical plant was moderate, there was a massive explosion of speculative investing (which eventually led to a stock market crash) and a boom in corporate takeovers. The 1980s became a golden age for scams, swindles, and theft in the world of high finance, much as the time of the Robber Barons had been. All of that speculation produced feverish economic activity and made some people very rich, but did little to add new wealth to the system. It also concentrated the winnings still further as some losing gamblers dropped out. The involvement of so much of the overall wealth in these nonproductive games maintained and reinforced the lack of valuable economic activity at the worker and consumer level, keeping standards of living lowered for working people. Instead of invested capital being paid out as wages in order to produce something, it was just paid to another capitalist. The lack of regulation of sleazebags like the people who skimmed hundreds of billions in the Savings and Loan debacle, often with the connivance of state legislatures, also contributed. As the effects of Reagan-style policies spread outside the USA, poverty in the third world increased, with some countries' economies going from unfortunate to desperate.
The end result was the economy that we had from about 1984, when the initial recession tapered off, through the Bush years: one which was bustling and booming with tremendous activity, but nevertheless left about half of the population worse off than they had been in the stagnant seventies (and the eighties, it should be noted, produced fewer new jobs than the seventies did). It was rather like the economy of the 1920s, and a feeling of dread started to hang over those who noticed the similarity. (Reagan was a great admirer of Calvin Coolidge.) Many families regained their previous standard of living, but only at the cost of having to hold down two jobs where before they had managed with one, or of working harder and longer hours. (The average work week for those with full time jobs lengthened significantly over 40 hours during the eighties.) And by the end, more than ten percent of our federal taxes were being spent on interest payments to the holders of the national debt. Poverty and homelessness had been elevated for so long that, though the worst extremes were behind us, people had practically forgotten how much less of both there had once been. Earnings in upper brackets continued to prosper while wages at the lower end continued to be held down. With so many people in want, crime stayed high despite endless increases in law enforcement and lengthening of prison terms. A new wave of demonization of immigrants and minorities erupted as people looked for scapegoats.
Thank God that Bush didn't succeed in passing even more capital gains tax cuts.
It's true that inflation was beaten... but what we ended up with was an economy in which some inflation would have been an improvement! It would have done little to harm working people, whose wages would have moved up with prices, it would have stimulated employment, and it would have provided major relief to debtors, and particularly to the national debt. There would have been costs for some, but the costs we were already suffering were at least as bad. The people it would have hurt, and who therefore tried to convince us all that the stopping of inflation as a more important goal than employment or prosperity for the majority, were anyone who had loaned out funds at a fixed interest rate -- in short, the holders of capital. Having had their way in so much and gained so much additional power as a result, they called the shots on the economy... and what they wanted was low inflation, low taxes in upper brackets, and ever smaller spending on public infrastructure and public services, since they got far less value for their tax dollars from these things than the rest of us do. And Greenspan took their interests as the interests of the nation, even telling us that we had to watch out for anything that might cause wages to rise! So while we go to our lower paying jobs, we drive over potholed streets with cracked sewers under them, there's crime on our street and it takes half an hour for the understaffed police force to respond, and our kids go to schools with crowded classrooms and second-rate teachers, with little in the way of sports or music or arts or opportunities for gifted minds unless local parents raise the money themselves... and sometimes, textbooks that teach that evolution and creationism are equally valid theories.
Then came Clinton. And the one thing he did that most offended the Republicans was pass what Bob Dole liked to call "the largest tax increase in our nation's history", pushing upper bracket rates part of the way back to pre-Reagan levels. Compromising with Republicans in congress, he worked out budget cuts that were broad and balanced, instead of trying to gut particular sectors that he was ideologically opposed to. The result was a more successful effort to cut spending than Reagan's was, even though its goals were more modest. So the federal deficit shrank, and eventually reversed. He restored some of the governmental functions that Reagan had decimated on ideological grounds. This helped with some small relief to the unfortunate. The higher taxes on the top brackets restored some of the capital that was concentrated in big piles to general circulation, where it could do more good. (Even conservative economists don't argue that concentration of wealth, as such, is beneficial. Everyone recognizes that circulation through earning and spending does the most to generate prosperity and more wealth.) Employment rose, standards of living inched upward (though still to lower levels than we once enjoyed), and companies producing real goods became more profitable. This attracted more capital to where it could be used as wages instead of just used to buy assets from another investor. Gradually, more of the overall wealth found its way into broad circulation.
The process was slow to develop, with positive feedback building up in very gradual increments, but each improvement boosted the other. Unproductive speculation is no longer the dominant activity in investing. Jobs were no longer hard to find, in most areas, for people with any skills. Despite the continuing influence of Greenspan, wages are finally starting to improve in some areas. The real size of the economy has expanded, shrinking the national debt as a proportion and making its cost more affordable. Other debt has moved back toward normal levels. The result is a boost in prosperity that extends through the full depth of the economy, instead of just across the top. By the time Clinton caved in to the Republican version of welfare reform, conditions were decent enough to minimize its impact. Crime, as a result, dropped. And the ironic part is... the wealthy, who generally opposed this change, are doing just fine! If they'd only known it, they had nothing to fear from this kind of policy! In fact, though the extremes of easy money are not as extreme, the well-to-do have also benefitted, simply because they can live in a more pleasant environment and be more fully a part of the normal population instead of needing to barricade themselves so much from the squalor around them, and also because they can put their money to work in ways that earn steady income instead of making risky gambles.
In short, everybody is better off. Rich or poor, educated white male or disenfranchised minority, working stiff or technocrat or million-share stockholder or schizophrenic street bum, all classes and sectors of society are better off than they were in the eighties. As the sense of desperation felt by many voters lessens, we are freed to deal with issues that were ignored and deferred in the eighties, like taking better care of the environment and public health. In international relations, we are (at least sometimes) replacing peace through threats with peace through peace. This is why, for all you Republicans who are baffled by this, folks hardly care if Clinton can't keep his zipper zipped.
The following tables
illustrate the point. They list changes in the incomes, in inflation-adjusted
dollars, of each quintile of the population -- the poorest 20% of households,
the second poorest 20%, the middle 20%, the second richest 20%, and the
richest 20%. Now during the late seventies, these figures went down
-- people's incomes, after inflation, dropped. Reagan did do better
than that. In the end, these are the results he got:
|quintile||total change||change per year|
|Poorest 20%||+7.6% (+5.4%)||+0.9% (+0.7%)|
|Second 20%||+11.3% (+9.1%)||+1.3% (+1.1%)|
|Third 20%||+12.0% (+9.8%)||+1.4% (+1.2%)|
|Fourth 20%||+13.8% (+11.5%)||+1.6% (+1.4%)|
|Richest 20%||+27.0% (+24.4%)||+3.0% (+2.8%)|
[For 2000, the census bureau changed their computation of the rate of inflation and I had to redo all the numbers in these older tables, instead of just changing the most recent one to include year 2000 figures. The small figures in green are the numbers I originally got from the older census bureau tables.]
Now, an average real growth of around 1.4% a year (or 1.2% a year, depending which figures you believe), as most people experienced, is not so terribly bad -- it roughly keeps up with the general historical pace of overall economic growth -- but it sure isn't anything to talk up as a great grand boom of prosperity. The reason why you hear it talked up that way is because of that richest twenty percent, which gained far more increase in income than the rest of us did. The gain in income for the top five percent was even steeper -- a whopping 44% over eight years. And they are the ones who own and run the media in which we hear pundits explaining our economy to us.
Another factor which should not be forgotten is that although family income made some moderate gains during these years, individual income did not. Average family incomes went up largely because more families felt they needed to have two earners.
In the Bush years,
progress sputtered badly and most of the gains of Reagan's second term,
which helped make up for the recession in his first, were lost again:
|quintile||total change||change per year|
|Poorest 20%||-7.9% (-9.4%)||-2.0% (-2.4%)|
|Second 20%||-6.5% (-8.0%)||-1.7% (-2.1%)|
|Third 20%||-5.7% (-7.2%)||-1.5% (-1.9%)|
|Fourth 20%||-3.1% (-4.7%)||-0.8% (-1.2%)|
|Richest 20%||+3.3% (+1.6%)||+0.8% (+0.4%)|
But, of course, there
were no losses in the circles where Bush made his friends -- the top five
percent still gained 2.3% per year, despite eighty-plus percent
of the populace losing ground. Now look at Clinton's numbers through
2000 -- the latest figures available from the census bureau:
|quintile||total change||change per year|
|Poorest 20%||+16.9% (+15.3%)||+2.3% (+2.1%)|
|Second 20%||+15.4% (+13.9%)||+2.1% (+1.9%)|
|Third 20%||+15.2% (+13.7%)||+2.0% (+1.8%)|
|Fourth 20%||+15.0% (+13.5%)||+2.0% (+1.8%)|
|Richest 20%||+18.9% (+17.4%)||+2.5% (+2.3%)|
[This time the green figures are estimates for how the 2000 numbers would have looked according to the old inflation rules, calculated as: new 2000/1993 × old 1999/1993 ÷ new 1999/1993.]
The numbers speak for themselves. The policies of Reagan and Bush helped the well-to-do get richer only at the cost of sacrificing improvement for those of below average income, and produced little overall gain for the whole twelve year period, except for a few. But Clinton's policies, which helped working people do better, did not create a corresponding penalty on the wealthy -- every part of society benefitted greatly. The "trickle down" theory does not work. The "trickle up" theory does work.
Here's another census bureau statistic: from 1981 to 1993, the median household income increased only 5.9%, a rate of only 0.5% per year, after adjusting for inflation. (The median is the level of income that exactly half of all households are above and half are below.) Yet at the same time, the mean household income -- what you would get if you had an equal share of the total income of all households -- increased 17.6%, or 1.4% per year. John F. Kennedy once remarked of economic growth that "a rising tide lifts all boats", but in this case, a tide that rose 17.6 feet managed to lift the typical boat only 5.9 feet. Two thirds of the rise benefitted only a minority, not the broad population. How do the figures from Clinton's term compare? From 1993 to 2000, the mean household income rose 17.1%, or 2.3% per year, and the median household income went up 14.7%, or 2.0% per year. In this case, the tide really did lift all boats... not to mention that the entire tide went up faster.
(If you're wondering, the figures for 1977 to 1981 are: median 0.3% per year and mean 0.5% per year... and for 1969 to 1977 the figures are a miniscule 0.1% per year for median and 0.6% per year for mean.)
We're still a long way from where we might have been. Median wages for individuals are still lagging relative to the overall economy, and have only recently started to turn upwards (as measured in real dollars) after decades of decline. Single income families still can't afford to buy a house in many populous areas, as they once could. Wealth is still quite stratified, and political influence is still overly concentrated in few hands. Gains for minorities are still under hostile pressure. Public spending on big ticket infrastructure and social services is still treated like poison by policymakers, even as urban areas choke on traffic and no private sector solution seems to be available. Education is still undersupported in many states, at a time when prosperity has lead to shortages of workers with high skill levels. Monopolization is a worrying trend in various business sectors. But every one of these conditions is an improvement over the corresponding situation in the eighties. And it happened because capital came out of isolation and reentered general circulation.
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