With Trickle-Down Economics, Who Really Wins?
As irony would have it, Ronald Reagan’s “trickle-down” economic policies have lubricated the slippery slope toward the destruction of a middle class in America. Through engaging in what is now a rather definitive neoliberal ploy to limit the extent of the state and, specifically, its involvement in the “organic” flow of trade — in simple terms — the rich have gotten richer, and the poor have gotten poorer. Done under the guise of supposed positive externalities to be granted to the majority by the owners of the means of production, perhaps unsurprisingly, the effective upward redistribution of economic power via a reduction in tax burden to those already in possession of such power has had no equalizing effect.
With no intent of minimizing the critical nature of economic equity that persists at all times, policy responses formulated during times of recession and depression — namely, those enacted in light of the Great Depression and the recession of the early 1980s — have shown to be especially resolute and vigorous. In such a particular context, limited intrusions by the state into the nominally free market for the purposes of economic stimulation on behalf of the consumer, known typically as the Keynesian approach, stand to be largely efficient not only in combating the source of an economic downturn but influencing enduring economic policy afterward.
Reagan’s “trickle-down,” “Reaganomics” approach to the recession of the early 1980s comprises perhaps the single largest motivator toward the widening of the wealth gap in the modern United States. The readoption of previously successful Keynesian principles, once employed by Roosevelt and Nixon and now by Obama and Biden, are lights shining in the dark for a change in the process of equitably addressing recessions, depressions, and the externalities that remain afterward.
The Rise of Reagan
In 1970, a method for empirically determining the level of success or failure of economic policies called the “economic discomfort index” was developed by economist Arthur Okun. Simply the sum of the rates of unemployment and inflation, this mechanism caught on in popularity with political prospects in campaign messaging under a similar name, the “misery index.” Used by presidential candidate Jimmy Carter in his campaign against incumbent Gerald Ford, where in 1976 he referred to a misery index value of 12.8, a strange turn of irony led to a noteworthy peak of 22 on the misery index late in his administration. In his 1980 campaign against Carter, Ronald Reagan won a landslide victory off of a campaign largely focused on addressing increasingly dismal economic conditions — principally a consequence of anti-inflationary monetary policy taken on at the Federal Reserve.
Critically, in his 1981 Program for Economic Recovery, Reagan outlined policies that would curtail four distinct trends: the growth of government spending, income and capital gains taxes, regulations on businesses, and the expansion of the money supply. This particular approach is known under multiple terms — Reaganomics, supply-side economics, trickle-down economics, free-market economics — that refer principally to the same concept. Definitionally, the claims of this approach are rather straightforward. Trickle-down theory purports that economic prosperity is driven by increased production. Hence the notion that regulation and taxation are intervening factors that disrupt the generation of valuable production, trickle-down theory holds that the absence of these factors will lead to economic prosperity via authorizing the provision of unfettered supply in the market. The “trickling down” arises from the presumption that those in control of the means of production will provide positive externalities for the general public through enabling the creation of jobs and the providing of higher wages.
In determining what level of success Reagan’s policies achieved relative to what was envisioned, many seem to only refer explicitly and literally to the aforementioned four pledges made and not to the practical end intended. Robert D. Plotnick, professor at the University of Washington, conducted a study through the early nineties that sought to hold President Reagan accountable to his pledges through an empirical analysis. Reflecting some of the most significant issues facing the citizenry at the time, this analysis examines data ranging in date from the postwar 1940s to the conclusion of the Reagan Administration in 1989 covering the topics of the Standard of Living, Income Inequality, and Poverty.
Considering that a legitimate, fleshed-out measurement of standard of living is difficult to concretely define conceptually, material standard of living in the form of real median income was utilized instead. Beginning in 1950, this metric’s value grew steadily until 1973, where it experienced a sharp dip due to the oil crisis that year, but recovered by 1979. After the beginning of the recession of the 1980s, values dropped sharply, as expected, but rebounded in a small form and reached 1973 levels by 1987. Despite this, average annual growth in the Reagan era was represented by only a 0.7% increase while the prior 30 years experienced average annual growth of 2.1%.
More dramatic were figures describing income inequality, calculated as the ratio of income received by the top 20% to the bottom 20%. This metric remained mostly stagnant from the beginning of the data in 1947 to the early 1960s. From this point, there was a modest decrease until the later 1960s and subsequently a modest increase until 1980. Through the Reagan years, income inequality witnessed an increase not seen since 1920. Quantitatively, the value increased 18 percent between 1980 and 1989. From 1985 onward, values were higher than at any other point in the data.
Lastly, though not most dramatically, were figures displaying levels of poverty. As noted by Dr. Plotnick, poverty is officially defined not uniformly but variably based on the factors of household size, the age of the head of household, and the number of children under 18 in tandem with annual household income. Beginning in 1959, where (in the realm of this data) a maximum level of 22.4% of Americans were impoverished, conditions improved steadily until 1980, where levels of poverty began and continued until 1983 to shoot up in response to the economic downturn during that period. From that point on, levels gradually decreased once again to just under the 1980 conditions.
A Solution
In direct contrast to the approach taken by Reagan and supply-side economists, British economist John Maynard Keynes developed in the 1930s an approach to addressing periods of recession and depression that was subsequently referred to as Keynesianism. This approach purports that the state should increase demand through government spending to boost economic growth. Government spending in this respect can come through a multitude of forms. Most commonly, though, it comes in the form of job creation. This sort of intervention has multiple examples in the United States, even in the time since the formulation of Keynes’s theories.
Perhaps obviously, the single greatest engagement in Keynesian theory by a politician in the United States, though not quite first in time to meet Keynes’s work, was conducted by President Franklin Delano Roosevelt in the midst of the Great Depression and known as the ‘New Deal.’ In essence, this program sought to end the depression via the creation of federal government agencies that would in themselves create jobs but also develop construction projects and enact policy to stabilize prices. Besides the development of agencies, President Roosevelt developed social programs like Social Security and enacted a minimum wage at the federal level.
Though perhaps not as impactfully, subsequent politicians made strides to implement Keynesian policies both in and out of periods of economic downturn. Presidents Nixon, Johnson, and far more recently Obama and Biden have all taken part in passing policy in one form or another to provide economic stimulus through federal government investment. Considering more topical and recent examples, the passages of President Obama’s American Recovery and Reinvestment Act of 2009 and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 were directly in line, though not to the same extent, to many Keynesian engagements preceding them.
To determine both how effective engaging in a Keynesian response would have been to the recession of the early 1980s, and how effective and flexible it can be to similar crises that may transpire in the future, one must study where the supply-side response went wrong. In execution of supply-side theory, the state must either reduce its level of spending or withstand an increase in the deficit; during the Reagan Administration, however, both of these were done. Despite a 4.1% cut to social programs intended to increase drive for poor individuals to work, tax cuts intended to increase productivity and savings rates, and heavy deregulation intended to save billions each year, the labor force remained nearly constant, productivity grew by 0.8% less than in previous postwar periods, savings rates decreased by 1.2%, and by 1984 the deficit had risen to $195 billion, the largest in history. Quite simply, in nearly all sectors in which government intervention was reduced, results underperformed both expectations by policymakers and historical rates of change.
How, then, was there ever eventually a recovery? Curiously, it was tangibly as a consequence of very Keynesian-appearing government maneuvers. Data for the full employment deficit showed that the government’s fiscal policy was actually expansionary — that is, Keynesian — toward the end of 1982 and all through 1983. An increase in military spending, despite a decrease in nondefense spending, acted implicitly as a stimulus through the creation of jobs and awarding of contracts. Lower interest rates, which fell in 1982 and 1983, led to an increase in spending on housing by 65.9%. As a consequence of these rates, consumers diminished their saving practices, leading to a 4.5% increase in spending. Considering all of this, it is evident that there need be no presumption of what would have happened during this recession if Keynesian policies were in place — they were.
Counters to Keynesianism
The most common modern objections to Keynesianism and its policy offshoots concern topics not necessarily pertinent to the discussion of Reaganomics or the recession of the early 1980s, but among supply-side circles they are legitimate hindrances to the reimplementation of such policies.
One of the central objections stems from the belief that an unrestrained, “free” market is naturally more stable and self-resolving than accounted for by Keynes in his theorizing. Simply resolved by data, historical figures say otherwise, as the fullest employment and fastest growth rate were enjoyed during a time (1950–1975) when Keynesian economic theory directed fiscal policy. Another of the objections suggests that investment by the state “crowds out” investment by the private sector, which is true uniquely if it is done during times of complete economic normalcy. In all less favorable conditions, as during recessions and depressions, the capacity exists for the state to account for holes in the private sector’s ability to saturate the market.
Going Forward
Reagan’s “trickle-down,” “Reaganomics” approach to the recession of the early 1980s comprises perhaps the single largest motivator toward the widening of the wealth gap in the modern United States. The readoption of previously successful Keynesian principles, once employed by Roosevelt and Nixon and now by Obama and Biden, are lights shining in the dark for a change in phase in the process of equitably addressing recessions, depressions, and the externalities that remain afterward.
Though most of the aforementioned policies enacted during the time of Reaganomics were intended to combat both the roots and the consequences of the recession, they were also not intended to be temporary. Despite the Keynesian angles that the federal government took toward the end of the recession that enabled an escape from it, supply-side policy enacted earlier on that led to worsening conditions in income equality during that period did not disappear through the future — and income inequality has only worsened since. As evidenced directly by the 2008 financial crisis and the lingering recession brought on by the COVID-19 pandemic, economic downturns will remain a recurring issue — and the consequences of the response that the state chooses to address such conditions will linger on.
