Redistribution of Wealth Part 1

As a somewhat reluctant follower of the talk radio I have noticed this phrase getting a lot more usage in the last couple of years. It is usually tied to some sort of diabolical socialist plot to take money out of the working man’s pocket and give it to a lazy, shiftless group of people who do not work. Supposedly, there is a vast group of people in this country standing around with their hands out waiting on the Democratic Party to send them a check. I suppose this can be traced all the way back to Reagan’s fanciful “welfare queen” that he created from whole cloth as a sort of symbol of encroaching ruin for the country. Even though the people that Reagan spun parables about did not actually exist, they were a caricature that he was able to make stick. Reagan, like all demagogic types, understood that people didn’t want to hear about real problems that might be associated with their own actions. People understood there was a problem. They could see it all around them in unemployment, high interest rates, and a stagnant general economy and Reagan simply gave them a straw man to blame it on. Big government was robbing them to pay people who didn’t want to work. Reagan suggested that cutting taxes would allow people to reinvest their own money in the economy rather than give it to the government who would inevitably waste it. Reaganomics was an idea born of the idea that the American public is basically ignorant of economics in general. Since it was such a successful propaganda tool for Reagan it has since come to be the mantra of the right wing conservatives everywhere in one form or the other. Maybe we should take time to look at how it actually worked out now that we have about 30 years of experience with this philosophy.

The basic philosophy of Reaganomics is that a rising tide floats all boats. In other words, the investment dollars of the rich go directly into creating jobs instead of going to the federal government in the form of taxes. This is underlined with the oft repeated “proofs” that the government will just waste your money anyway; usually with the insinuation that this waste will be in the form of giveaways to people who are basically too lazy to work. Reagan made an art form out of this description and repeated it so often and so persuasively that people began to believe it. It is now accepted fact in almost all right wing conservative movements; the basic core that most of their system is built around. In Reaganomics the cutting of taxes for the rich allows them to invest in the economy and create jobs. As more jobs are created everyone benefits; hence the rising tide analogy. It sounds like basic common sense which is exactly why it is so widely believed.

When Reagan ran for President in 1980 against Jimmy Carter there could hardly have been a wider divergence in their relative beliefs about the American system. Carter was suggesting that Americans should tighten their belts, cut down their thermostats, and be responsible for helping the country pull itself out of the recession that we were all in together. Reagan suggested that the recession and most of our other problems were the direct result of big government. In other words, it wasn’t our fault so why should we suffer for it? He needed a scapegoat of course and he found it in the “welfare queens” who were draining all of our hard earned tax money out of the economy. Everyone could see there was a problem with such systems wherein several generations of families were living off the government dole but Reagan took it to new heights. It was a fitting symbol of the disaster that was the government according to Ronald Reagan. His solution was to cut government spending while at the same time cutting taxes to increase investment.

Reagan won the election and immediately set about implementing his program. The interesting thing about Reagan was that he was a pragmatist first, a conservative second. In other words, he had no problem saying one thing and doing another, it had been his mode of operations for as long as he had been in politics. He did initially cut taxes but raised them numerous times afterwards. The first tax cuts were not very successful at stimulating the economy as unemployment went up after they were enacted. What did stimulate the economy was a massive increase in federal spending through the military and the industrial complex that Eisenhower has warned the country about as he left office. In other words, Reagan’s “miraculous” economic recovery was simply a matter of pouring federal money into defense programs; money that we didn’t have to spend. The national debt when Reagan took office was a little less than 2 trillion dollars. It had been at roughly this same rate since 1945 when adjusted for inflation. By the time Reagan left office in 1988 it was a little over 4 trillion. Reagan more than doubled the national debt in 8 years when it had remained virtually the same for the previous 35 years. The massive buildup for World War II cost a little over a trillion dollars to our national debt yet Reagan and his economic plan cost 2 trillion and we were not fighting a war. Reagan coined the phrase that “government is not the solution; government is the problem” during his run for governor of California in the last sixties. He sold Americans on the idea that he would cut the government but he actually more than doubled the cost of government in just 8 years.

Unfortunately, Reagan proved to politicians everywhere that the truth doesn’t matter; what really matters is how you spin it and what you make people believe. He started a massive upward spiral in government spending that hasn’t stopped yet. In the ensuing 17 years after he left office the federal deficit grew to an astonishing 9 trillion dollars as politicians spent like drunken sailors while espousing the same principals. The key to getting elected it seems is to guarantee the economy is booming and politicians from Bush Sr. to Bush Jr. learned this lesson well. There was a brief downturn in federal spending under Clinton but it was quickly curtailed when the economy started to droop again. Vice President Cheney in a moment of rare clarity pointed out that “Reagan proved that deficits don’t matter” when questioned about it during Bush Junior‘s last term in office. It is a little ironic that the man who was elected on the promise of reducing government actually started a trend in government spending that led directly to a five-fold increase in government deficits over the next 25 years and led directly to the economic collapse the we are experiencing today but I will go into that in a later post. For the moment I would like to concentrate on what the other result of Reaganomics wound up being; the drastic redistribution of wealth in this country from the middle class to the very wealthiest amongst Americans.

Reagan’s basic premise was that by reducing taxes on the wealthy they would invest that money in the economy which would lead to more jobs; thus the infamous “trickle down” theory that one still hears bandied about by those with no understanding of economics. By cutting taxes on the very rich Reagan did two things; he increased the deficit by cutting the amount of money the government took in and he increased the wealth of the wealthiest Americans drastically. You might ask yourself how this happened but it was really a very simple two pronged approach. First, cutting taxes on the wealthy was not simply a matter of cutting income tax it included Estate taxes, and all manner of taxes on accumulated wealth. All the tax cuts since the 1980’s have favored the wealthiest American’s and corporations. Second, the massive federal spending into military and defense corporations wound up stimulating the stock market into frenzy and as I will show a little later, it is overwhelmingly the richest Americans who own stocks and bonds.

Let’s start with income taxes on the richest Americans. Reaganomics says that dropping these taxes increases economic activity. The truth is that in a period from 1940 to 1970 during which the United States saw the greatest increase in economic power ever seen on this planet the income tax rate on the top earners in the United States stayed steady at 70%. During a period of unprecedented growth and economic prosperity that has not been equaled before or since, a period that saw massive growth of infrastructure, schools, electrical grids, highway systems, and nearly every other indices of governmental performance the income tax rate for the highest earners was always above 70%. This was also a period during which dividends from stocks and bonds were taxed at the same rate as all other income, unlike today when it is not taxed in many cases, yet we saw continuous and massive economic growth. In the period since Reagan taxes on the highest income brackets have fell to less than 30% and there are numerous loopholes that allow dividends to be ignored in this accounting. Most estimates of the actual income tax rate that winds up being paid into the system by the wealthiest Americans are now around 17%. Warren Buffet pointed this out in an interview with Tom Brokaw in 2007 when he admitted that he paid tax on only some $97,000 of his 66 million dollar income. Buffet contrasted this with the average member of his staff how paid some 39% of their total income on combined taxes that same year. If Reagan was right we should be in the midst of the greatest economic boom in history. Unfortunately, what we are actually seeing is a wasting away of the infrastructure that was built in this country from 1940- 1970. Electrical grids, schools, roads, and almost every system that the government supports are in a state of collapse these days. The only government sponsored activity that seems to be doing well is the military industrial complex but I guess a 6 trillion dollar increase in the deficit would be nearly impossible to blow without having something to show for it.

Obviously, the cuts in taxes should be stimulating the economy and increasing productivity if Reagan was right. This should have “trickled down” to all of us by now but it seems there is a flaw in the plan. The rich are definitely getting richer but for some reason it doesn’t seem to be trickling down. Between 1947 and 1973 both worker productivity and worker median income doubled. From 1980 to 2005 worker productivity increased some 70% while worker median income increased 19%. This seems impossible until one finds that during this same period from 1980 to 2005 the top 1% of wealthiest Americans increased their percentage of the total income produced in this country from 8.2% to 17.4%. Favorable tax rates on both income and wealth and the massive fluctuations in the stock markets are the simplest explanations. The top 1% of wealthiest Americans owned some 23% of the total wealth in this country in 1979. Today they own around 43% of the total wealth in the country. This isn’t the whole story unfortunately. Not only have income taxes for the very rich dropped but estate taxes and capital gains taxes have fallen drastically as well. As a matter of fact the federal tax burden has shifted dramatically since 1980 with the percentage of tax revenues actually being collected shifting dramatically towards payroll taxes. Since 1980 the payroll tax burden has risen 25% as a share of total tax income. During this same period the percentage of tax revenue generated by capital gains tax on investments has fallen 31% and the percentage of tax revenue generated by estate taxes has fallen 46%. There has been a massive redistribution of wealth in the last 30 years but it isn’t going from tax payers to the indigent; it is going from taxpayers to the wealthiest Americans. Instead of “trickle down” economics what we actually have is “sucking up” economics. It is as if there is a giant vacuum at the top pulling everything that way.

The truth of the matter is that Reagan as president was the same thing he had been before; an unemployed actor who worked as a shill for corporate America. According to studies by the World Institute for Development Economics Research what we have actually seen in the last 30 years is a massive concentration of wealth and earning power in large corporations. Over 40% of the GNP of the United States comes from 500 largest conglomerates in the country. According to studies recently released by this group these companies control over two thirds of total American business sources, employ two thirds of the industrial workers in this country, account for 60% of total sales and collect over 70% of total profits. In 1955 corporate tax income paid some 33% of the total taxes taken in by the Federal Government. In 2007 this number had decreased to 14%. In other words, entities that gobble up 70% of the total profits made in this country pay in 14% of the taxes. No wonder corporate America deifies Ronald Reagan. One can hardly imagine a more favorable climate for corporate growth than such a system yet we are still on the verge of economic collapse in this country.