Read Restless Giant: The United States From Watergate to Bush v. Gore Online
Authors: James T. Patterson
Tags: #20th Century, #Oxford History of the United States, #American History, #History, #Retail
Relieved to have in hand bipartisan recommendations, Congress quickly accepted them, and Reagan signed them into law. As it turned out, the changes did not take care of the longer-range structural problems of Social Security—notably the predictable crunch that would hit the program in the 2000s, when millions of baby boomers would retire (and, living longer than people had done in the past, would collect benefits for many more years than earlier retirees had). Still, the reforms addressed Social Security’s shorter-term financing difficulties.
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For the next twenty-five or so years, the viability of the program was assured.
Social Security payroll taxes, which were regressive, landed with special impact on low-income people. Along with the cuts in marginal tax rates for the wealthy that the Reagan administration had secured, they contributed to already rising economic inequality in the United States. As earlier, millions of Americans (33.1 million in 1985, 31.5 million in 1989) continued to live in households below the poverty line. Millions more, including hosts of low-wage workers, teetered on the brink of poverty.
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But by accepting bipartisan changes in Social Security, Reagan had avoided political catastrophe, and he made no further efforts to trim the largest entitlement programs, Social Security and Medicare. These continued to grow in later years.
Means-tested programs like SSI, Medicaid, the Earned Income Tax Credit, food stamps, and Aid to Families with Dependent Children (AFDC) also expanded incrementally after 1982, offering needy recipients slightly larger benefits in real dollars in 1990 than they had received in 1980.
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Reagan and his conservative advisers succeeded in slowing, but by no means arresting, the rising tide of federal expenditure for entitlements and other social purposes.
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Concerning the impact of the income tax cuts of 1981, economists and others continued to disagree many years later. Foes of the president were correct to point out that neither he nor his advisers always knew what they were doing. Chief among these advisers was David Stockman, whom Reagan made director of the Office of Management and Budget (OMB). Stockman, only thirty-five in 1981, had been a member of the left-of-center Students for a Democratic Society (SDS) while an undergraduate at Michigan State in the late 1960s. In 1977, he had entered the House as a Republican congressman from Michigan. Energetic and hard-driving, Stockman had moved well to the right politically since his student days. In 1981, he was a zealous supply-sider determined to cut government spending. At that time he impressed Reagan and others in the White House as a genius concerning numbers and economic forecasts.
But Stockman and his team at OMB failed to achieve many of their fiscal goals. Federal spending overall—much of it owing to hikes for defense—peaked at 23.5 percent of GDP in 1983, dipping slowly thereafter to 21.2 percent in 1989. This latter percentage was still a point or so higher than those of the late 1970s—and higher by two points than those in the late 1990s, when federal spending in constant dollars at last came close to leveling off, and when deficits briefly disappeared.
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Federal civilian employment, which had fallen slightly in the 1970s, rose during Reagan’s tenure from 2.9 million to 3.1 million.
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Reagan, like other presidents in the post-1960s era, discovered that interest groups and constituents had the power to preserve and to enlarge the size of government.
The president and his advisers were also off base in believing that tax cuts, by stimulating the economy, would hike tax revenues that would thereby prevent deficits. These were gross miscalculations. Though tax revenues did increase in the 1980s, they fell far short of covering the jump in federal outlays, and gross federal debt as a percentage of the GDP skyrocketed from 33 in 1981 to a post-1960 high of 53 percent in 1989.
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Stockman himself confessed in late 1981, “None of us really understands what’s going on with all these numbers.”
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Reagan, bending to foes who assailed the rising deficits, soon disappointed supply-siders. In 1982 (and later) he agreed to increases in excise, corporate, and income taxes. These increases, added to the hikes in Social Security taxes that he accepted in 1983, ensured that the overall tax burden in America did not fall during his administration. Though a major tax law enacted 1986 further lowered marginal income tax rates (to 28 percent for those in the top bracket), it also closed a number of loopholes that had deprived the government of revenue. For all these reasons, income from federal taxes remained steady at around 19 percent of GNP during the 1980s.
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Nor did supply-side practices seem to contribute to two of Reagan’s major economic goals: great expansion of funds pouring into productive investment, and more rapid economic growth. Many investors took advantage of high interest rates to buy government bonds. Others, paying less in taxes, indulged in speculative endeavors, such as unproductive buyouts and “junk bonds.” Thanks in part to still sluggish growth in productivity, increases in real per capita money income were modest during Reagan’s presidency, averaging around 2 percent per year—below the rate of growth during the Good Old Days following World War II, and roughly the same as had occurred during the 1970s.
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In fact, the overall economic picture in the mid-1980s, though improved, was uneven. While many of the wealthy prospered as never before, the real wages of full-time male production workers continued to stagnate.
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As in the 1970s, job-seekers frequently complained that the fastest-growing occupations were in low-paying parts of the service sector: waiters and waitresses, nurses, janitors, cashiers, and truck drivers.
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Though the Sunbelt continued to grow impressively, other regions, notably the Rust Belt, still floundered. Grain farmers, who faced increases in world production that lowered prices for their goods, also suffered. The number of farm foreclosures increased. Facing considerable competition from abroad, the United States in the mid-1980s went from being one of the world’s largest creditor nations to the world’s largest debtor.
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For these reasons, the soundness of supply-side ideas remained hotly debated. Then and later, opponents complained that tax cuts aggravated economic inequality, which (thanks also to America’s comparatively porous social safety net) became sharper than anywhere else in the industrialized world. They also argued that there is no necessary connection between tax cuts and economic progress: The runaway deficits of the 1980s, these critics said, had made investors skittish and limited economic growth.
Supply-siders nonetheless kept the faith. Rejecting the argument that they had been fiscally irresponsible, they stressed that big federal deficits had come into existence in the 1970s, not in the 1980s, and that Carter, not Reagan, had initiated large hikes in military spending. Rising economic inequality, they pointed out, stemmed primarily from structural trends in the labor markets, notably expanding gaps in wages between skilled and unskilled workers. They added that relatively high earnings reaped by two-income families and by well-educated, technologically savvy people in an onrushing Information Age further accentuated inequality. These were indeed among the major reasons why income inequality increased not only in the 1980s, when tax rates on the wealthy went down, but also in the 1990s, when they inched up. Similar, though gentler, increases in inequality occurred for comparable structural reasons in other industrialized nations.
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Reagan’s defenders further maintained that though the cuts of 1981 were especially generous to the very wealthy, people at all income levels were doing better in the 1980s. This was in fact the case: Though the wealthy advanced most rapidly, the real disposable income of every stratum of the population rose during the decade.
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For this and other reasons—Americans tend to envy the rich, not to castigate them—class resentments did not flourish in the 1980s. Most young Americans, managing better after 1983 than they had in the 1970s, were acquiring more education than their elders had and were using it to advance in life. Advantages of birth and of religion, key determinants of social mobility in the past, seemed to be becoming a little less important.
So it was that a majority of those Americans who had struggled in low-income categories when they were young were managing by the mid- and late 1980s to rise to higher stations in life. Millions of Americans, moving into white-collar jobs, purchasing houses, and buying all manner of household goods, said that they were optimistic about their own personal lives in the 1980s—even as they grumbled loudly about trends in society at large and predicted all manner of disasters for
other
people. They did not seem to be abandoning the American Dream, which had been nourished by the great natural abundance of the United States, the political ideals of the Revolutionary era, and the faith, dreams, and entrepreneurial drive of millions of immigrants and their descendants.
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It is even plausible to argue that the overall effect of Reagan’s fiscal policies—including the tax law of 1986, which succeeded for a time in narrowing loopholes—promoted slightly greater popular faith in the capacity of the IRS and of government in general.
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From Reagan’s anti-state perspective, this was surely an ironic development. It is also evident that the reductions in tax rates had long-range consequences. Thereafter, politicians shrank from bringing back the high marginal tax rates of the early post–World War II era. These had been as steep as 70 percent in 1981. As of 2004, the highest marginal rate stood at 35 percent.
Some of Reagan’s defenders also claimed that the tax cuts of 1981 helped to sustain consumption during the recession of 1981–82, thereby quickening recovery. Reagan did not have such Keynesian effects in mind, but some experts continued to maintain that government deficits, though driving up interest rates and expenditures for debt retirement, may offer good medicine when an economy needs a shot in the arm.
These debates aside, there was no doubting that the American economy brightened after 1982, and that real growth, though modest, continued for the rest of Reagan’s tenure. As the economy improved, an ever greater variety of consumer goods—many of these, including cars, better made than in the past—came within the buying power of the American people. By the early 1990s, Americans owned nearly a billion credit cards, which they used with an abandon that ratcheted up personal debt. As in previous decades, families, though smaller in average size than in the past, bought and lived in bigger, more comfortable houses, which they were filling with VCRs, personal computers, telephone answering machines, cable TV, and remote controls—electronic items that had not existed in 1970.
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It was by no means obvious that all these developments promoted deep personal satisfactions: The more there was to buy, the harder the choices. The more people consumed, the more they seemed to want. This gap—between the comforts that people enjoyed and their still higher expectations about the Good Life—continued to be a source of popular restlessness in late-twentieth-century America. How fulfilling was self-gratification that depended heavily on the acquisition of consumer goods? Sensing that something was missing, many Americans, while doing better, still seemed to feel worse.
By contrast to the darker days of apparently runaway inflation and “malaise” under Carter, however, the economy of the mid- and late 1980s was obviously ushering in a more glittering material world for a great many people.
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Reagan basked happily in this glow, attributing it not only to his fiscal policies but also to deregulatory moves that he said had unleashed market forces spurring entrepreneurial activity and productive investment. His supporters pointed out that the number of jobs grew by some 200,000 a month—or by more than 18 million overall—between 1981 and 1989.
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The Dow Jones industrial average jumped from 950.88 at the time of his first inaugural to 2,239 eight years later. More than any other development of Reagan’s time in the White House, the turnaround in the economy accounted for the popularity that he was to regain when unhappy memories of the recession of 1981–82 finally dissipated.
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, Reagan had enjoyed poking fun at hippies and radicals, especially those who aroused furious controversy at the Berkeley campus of the University of California. Political battles involving abortion and welfare had also engaged him. Then and later, though, the domestic concerns that most excited him involved taxes and spending. Many other issues—urban affairs, labor relations, race, women’s rights, the environment—scarcely interested him at all. It is hardly surprising, therefore, that liberal foes of his administration, perceiving him as an agent of the rich, have given him low marks in these areas of policy.
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