Rejecting Reaganomics

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“The ‘science’ of economics today is not merely an institutionalized form of neo-feudal philosophy, nor is it merely an ideology of darkness that erects institutions to promote more darkness.  It has become a form of madness, a dream of human imagination we mistake for a pattern of the world.  It is a path not merely to serfdom, but to death.   We do have an alternative, though.  We can believe what we see with our own eyes.” – Barry C. Lynn [1]

This quotation from Barry Lynn, a business and financial expert who spent more than a decade studying changes in the organization and culture of American capitalism before releasing his new book last year, may seem melodramatic.  I assure you, it is not.  In fact, it correctly describes how our misconceptions and stereotyped images of the economy have been misleading most of us into a dangerous and false sense of security.

For Lynn, “the dream of human imagination we mistake for a pattern of the world” relates mainly to the underlying false assumption of “freedom” associated with a monopoly dominated capitalist economy.  That assumption is essential to our trust of Wall Street capitalists and willingness to cede economic control to them.

Lynn has impressively demonstrated how the American economy has morphed over the past 30 years into a tight bundle of financially oriented marketing monopolies that create dangerous production and supply systems to socialize their competitive and financial risks and shift those risks onto consumers.  He shows, in fact, how entire segments of the economy can become “too big to fail,” once again placing the ultimate risk on all of us in the economic bottom 99%.   This has transpired because of the discontinuance of anti-trust enforcement and reduced economic regulation that started with the “Reagan Revolution” in 1980.

We like to think we are living in an economy where outcomes are determined by a “free market.”  It’s easy to be misled into accepting such an idealistic “pattern of the world” when we are not aware of the intimate workings of the economy, and when the image we hold seems to be based on sound academic principles.

For example, the classical economics of Milton Friedman, the main architect of today’s conservative economics movement, is soundly based.  His explanation of classical economic theory, which results logically from its underlying assumptions, was of course correct.  His ideological argument for personal freedom is sensible.  And Friedman’s more controversial opposition to government welfare programs, in my opinion, is often based on sensible arguments.  For example, Friedman favored a “negative income tax” as opposed to inefficiently administered government welfare programs. [2]  That makes sense: Similarly, Robert Reich has sensibly proposed a negative tax as part of his proposed plan for recovery from the current crisis.

Friedman’s arguments about freedom and the proper role of government, however, presume the existence of a free and competitive economy, not a marketplace that as described by Lynn is in the destructive grip of tightly controlled, highly financialized monopolies.  Friedman, like Reagan and Goldwater, and before them John Maynard Keynes, rejected the goal of establishing “equality of outcome” [3] and championed individual freedom of opportunity, free of authoritarian control.  But like other classical conservatives, his views were presented in the context of opposition to communism.  In his major writings he neither considered nor addressed how this freedom could also be snuffed out by plutocracy or fascism.

Nor of course did Friedman ever endorse as a component of classical economic theory the fraudulent core Reaganomics argument that has brought the U.S. economy perilously close to disaster, the false notion that cutting rich people’s taxes will result in economic growth and prosperity for everyone. [4]  Lowering their taxes, the argument goes, will give rich people an incentive to increase investment in the economy, allowing prosperity to “trickle down” to everyone else.  The argument is inconsistent with economic theory, and it could be distilled only from the Friedman’s ideological faith in capitalism, not from his economics.

When Reaganomics was first floated about 40 years ago, people my age with training in Keynesian economics recognized that this “supply side” argument was simply wrong.  Economic growth results in response to increases in demand, or expected increases in demand, for goods and services.  Such increases in demand offer firms the prospect of profitable investment.  Because people with lower incomes spend earnings increases to a much higher degree than wealthy people, it is tax reductions for them that increase overall demand and stimulate the economy.  Reaganomics wrongly assumes that rich people, instead of wanting more money, have an incentive to give their wealth away.  But that makes no sense: If it were true, then presumably to not tax the rich at all would maximize prosperity.  In fact, for poorer people to subsidize the rich would be even more beneficial.

We’re actually doing that:  Despite enormous profits, big oil companies like Mobil/Exxon have enough influence to get billions of taxpayer dollars handed to them while paying minimal taxes on  their profits.  They have the political clout to make that happen.  [5]  But such taxpayer sacrifices have not maximized American prosperity over the last 30 years.  Instead, Reaganomics has brought the economy to a recession and the brink of a depression.  Meanwhile, the oil subsidies and corporate welfare have prevented us from marshaling those resources in more productive ways, like finding alternatives to oil, reducing our dependence on foreign oil, countering pollution, and ultimately saving the planet from global warming.

Reaganomics has been destroying the economy.

What has been ignored, for far too long, is that because wealth doesn’t trickle down, it accumulates at the top.  Over the last 30 years, the lower taxes the Reagan Administration awarded the wealthiest Americans has transferred to them a huge share of the wealth of everyone else.  We show that the top 1% has gained at least $10 trillion from the bottom 99% over this period.  The effects of transferring that unimaginable amount of wealth to the hyper rich has been nothing less than staggering.    

The rationale for Reaganomics is so illogical it’s troublesome that the ruse still works at all.  But the wealthy few can’t sell their true, self-serving agenda, so the ruse is all they’ve got.  All across America, recession-racked states with radical right-wing governments are enacting legislation that provides tax cuts for corporations and the wealthy while slashing education budgets and local services, the very life blood of everyone in the bottom 99%.  In states like Ohio, such legislation is labeled a “jobs bill.”

After 30 years of applied Reaganomics, is this ignorance or just sick cynicism?  Last night Rachel Maddow commented that she thought people are probably starting to catch on to the Reaganomics hoax.  The financial overlords have amply revealed their intent to gather up for themselves what’s left of middle class wealth and prosperity.

Even so, that this is going on seems so stunningly bizarre, compared to what America used to be like, that just stating the truth seems to challenge one’s sense of sanity.  And that’s part of the problem we all have when we try to talk about what’s going on today.  We simply want to believe that even the very wealthiest people care about the future of America and its people, that we’re all in this together, and that the capitalism that drives them and their corporations is not that cold and heartless.  But we can, and we must, “believe what we see with our own eyes.”  The stunning lack of interest in the future of America and its people displayed by the radical right should be proof enough of why nothing has ever “trickled down.”

The disproof of Reaganomics has been piling up all along.  We can all be excused for overlooking the true gravity of our situation much before now, however:  It takes a while for information to accumulate and get published, we’ve been busy living our lives, and people who haven’t studied economics can be confused and intimidated by it, and avoid thinking about it.

Mostly, however, we’ve been kept in the dark all along, the truth obscured beneath a hazy layer of ideology, diversion, and self-congratulatory propaganda about American exceptionalism and the virtues of “free” market capitalism.

The good news is that economics is a science, the study of actual, real phenomena, not just “a form of madness, a dream of human imagination we mistake for a pattern of the world.”  Its honest and proper application provides the way out of this mess, if we hold on to science and reason.  Of course we must also hold on to democracy long enough to get control of our government back, which we can do.  But we can’t wait any longer.

JMH – 3/30/11, rev. 5/2/11


[1] Barry C. Lynn, “Cornered: The New Monopoly Capitalism and the Economics of Destruction,” John Wiley & Sons, 2010, p. 252.

[2] Milton and Rose Friedman, “Free to Choose, A Personal Statement,”  Harcourt, 1980, p. 120.

[3] Id. at 128.

[4] Interviewed by Jamie Johnson in his 2006 movie “The One Percent,” Friedman did however refer to progressive taxation as “socialism,” and asserted something close to the trickle down theory when he argued that unbridled capitalism would increase economic growth, a contention that had by then been proven false.

[5] Last year the Mobil/Exxon CEO publicly defended the subsidies by arguing that oil exploration is expensive.   Of course the corporation’s world-record profits belie the contention that tax subsidies are needed to make exploration possible.  It’s simply a lie, a ruinous extension of the Reaganomics “let us have more money” argument.

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10 Responses to Rejecting Reaganomics

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  3. anon4cec says:

    I have three problems with your article.

    1. Anyone can look back at history and see, despite your convoluted logic, that Reaganomics actually *does* work! It brought America out of the Great Depression (WWII only improved one economic indicator – unemployment), the recession of ’60-’61, and Pres. Carter’s “Stagflation” economy. Pres. Reagan’s tax cuts nearly doubled federal revenue and provided 96 consecutive months of economic growth. Tax increases don’t give that kind of results, and history shows that!

    2. The current state of federal taxation, even with the Reagan tax cuts, has the richest people paying a larger percentage of every dollar they earn. And if you move beyond percentages to actual dollar amounts, you’ll find from the IRS that the top 10% of taxpayers pay 50% of all taxes. How does paying the lion’s share of all taxes *and* having a higher per-dollar percentage than everyone else equate to being “fair” in your mind?

    3. You cite “world-record profits”, but you fail to mention world-record expenses / taxes / fees / etc. When you’re in such a large industry, numbers are bound to get big. A more fair analysis would have focused on percentages, in which case, an analysis of the oil industry would show a profit level of 8%, which would be low for any other industry. If you want “world-record profits”, look to Hollywood, where they spend $80M on a film, and get $160M on opening weekend … a 100% profit for just the first weekend!

    • IFKaramazov says:

      Let’s just address these points one by one.

      1. No. Your randomly asserting that Reaganomics brought America out of all these economic crises is patently false. Reaganomics, or the pseudoscience of the all-powerful tax cut, does not in and of itself do anything of value. Massive government spending which was vastly increased during WWII and the creation of the modern welfare state was the basis for recovery. Intervention by the government stimulated job growth and pumped money back into the economy. No historian of repute disputes this. Further, the real secret of Reagan’s recovery lay in the massive downturn that preceded it. The economy was suffering from the lowest rate of employment since the time of the Great Depression and had already started a climb. The recession initiated by Volcker to break the spiraling inflation was taken out of the Keynesian playbook. Reagan’s recovery was cyclical, and the increase in unemployment was therefore not structural, nor a result of trickle-down economics.

      2. How is it fair? That’s easy. First, earned income is taxed at twice the rate as capital gains. About 20% of what the highest earners take in comes from actual work (which is taxed at the rate of labor). The rest is from finance. Capital gains, stocks, investments, etc. The top 10% owns about 75% of the wealth and make between 40-50% of all total yearly income in the United States. The figure you cite is percentage paid *of taxes collected.* This says nothing about how much or how little they still make in profit. Given how little the poor make and how little they own, even the minimal taxes placed on them hurt them to a disproportionately greater degree than they do the rich. As evidence, the rich have accrued to themselves a full 80% of all new income generated in the last 30 years. They continue to get richer, despite what you claim is their hefty, onerous tax burden. That is why we can say the situation isn’t fair – the facts back us up.

      3. This is just bad logic. If I give a friend a dollar for a pop on condition that he gives me my dollar back plus a dollar for my own pop later, am I really getting a better deal than the energy industrialists who own the means of energy production AND make $9 billion in profits? They may have to invest in the assets necessary to extract and refine energy, but poor them, they end up owning perpetual money-generating machines (which they keep for decades only at the cost of upkeep). 100% profit on a movie is not remotely comparable to 8% NET profit PLUS a gain in heavy machinery which will continue to produce profits for them. With a movie, much of the resources (intellectual, for instance) which are acquired for it are exhausted in production of it, except in the case of franchises, and most of those have a point of diminishing returns anyway. Like, say, the first sequel. I would go on to say that the exhaustion of intellectual resources during the production of the original film is obviously evident in most sequels, into which no intellectual resources were poured. So the sheer numbers ARE relevant, not just the percentages. If I am making the GDP of a moderate-sized nation at 1% profit plus accumulating huge assets in capital goods, there is no reasonable excuse for me to be doing even that well when over a billion people on earth are going hungry. There is no moral or rational justification. None at all.

  4. anon4cec says:

    Additionally, you harass and guilt the oil industry into accepting only an 8% profit margin, and then deny them access to areas where drilling would be easier, cheaper, and safer. They can’t drill in the Alaskan tundra, they can’t drill anywhere near the coast in the Gulf of Mexico, etc. They are required to drill so far off shore, in waters so deep, that if an accident occurs, it becomes a Herculean task to fix the issue. (Think “Deepwater Horizon”, where it took almost three months to stop the oil spillage.)

  5. anon4cec: It’s not the top 10% that is the problem. The top 10% contains most of what is left of the dwindling middle class. The very rich (within the top 1%) are the problem. And while they have a nominal “top” tax rate of 35%, their effective tax rate is less than 20%, as they are paying mainly the 15% capital gains tax rate. This is the tax rate for people in poverty. And huge corporations with record percentage profits often pay no taxes at all. We’ll get more information on “progressive” taxes and “fair” tax levels up soon.

  6. free ipad 2 says:

    Nice review! This is truly the type of article that should be shared around the web. Shame on the Google for not positioning this article higher!

  7. gatorjimbo says:

    Nice review, but I disagree with the whole principle. Why should any one group have to pay more taxes then another group? We shouldn’t be penalized for being successful in life. Fair taxes is just that: fair. Get rid of the current tax system completely and use a fair tax system and watch ANYONE that is in this nation pay their fair share. Anon4cec has a valuable point, too (above comment).

    • Thanks for this comment. One of my next few posts will deal with what’s “fair” in taxation. I’ll talk about a flat tax rate across the board, and progressivity and regressivity as well. Sorry I didn’t do that sooner, but stay tuned. It’s an area that should prompt a lively debate! – JMH

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