Cheap Oil, New Coke, and Wilt Chamberlain — A Look at Reaganomics at 40

In August of 1981, in the throes of recession, the era of Neoliberalism was born. Originally they called it ETRA or the Economic Tax Recovery Act of 1981. It was signed into law by President Ronald Reagan, and it slashed every kind of tax imaginable. But, it didn’t do much about the ongoing recession and it appeared as if it might die in infancy. In 1982 an emergency operation was signed and it was given a middle name, TEFRA — 1982’s Tax Equity and Fiscal Responsibility Act, the main function of which was to roll back some of those tax cuts to avoid budget deficit in the still-ongoing recession. But, by August 1982, it started walking — stimulating economic growth in an economy that was experiencing a ten year crisis of stagnation and inflation. The stock market which had been on a downturn for over a decade, began an upward climb. In 1986, riding high on a soaring economy, they gave it a last name TRA — Tax Reform Act of 1986 which simplified the tax code, but more importantly cut top earner taxes nearly in half . We know this era by its nick-name “Reaganomics”, and it grew like a weed over the next few decades. Well, just look at it now.

Hmm. Looks a bit out of proportion. It’s not still growing like this is it?

Oh boy. Well, seems things have gotten out of hand. Just how did we get here?

The Road To Reaganomics

The Roaring 20s. The Great Depression. The New Deal. The War. The first half of the 20th century contained a number of important lessons — 1. Free markets collapse. 2. The effects of market collapse are felt broadly across the economic spectrum. 3. That it is possible to regulate for stable growth, and 4. It is possible to share the wealth of a well regulated economy.

The unrestrained “liberal” markets at the turn of the 20th century went boom, then bust. In the 30s, the FDR administration had the good sense to see that investment markets were a formidable force that might be harnessed for the greater good, if only they could be made reliable. The major economic reforms of the New Deal era The Banking Act of 1933 (AKA Glass-Steagall) and The Revenue Act of 1935 stabilized and harnessed investment markets respectively.

Armed with the 16th Amendment, which gave the federal government the right to tax income in 1906, the Revenue Acts of 1935 and 1936 set up a stunningly progressive tax structure (by today’s standards) with top tier income tax rates at 70%. Corporate Tax rates on undistributed profits rose above 40 percent from 12 percent. The Social Security Act and the FICA Tax levied to fund it created an economic safety net for the most vulnerable. When the War came the rich helped pay for it. When the post-war economy boomed, the effects of the boom were felt across a broader public. To a far greater extent than now, the wealth was shared.

The basic economic lessons of the Great Depression were largely heeded for the next 40 years. So what happened?

Around 1950, as the post-war economy boomed, corporate taxes which were set high during the New Deal nearly met their statutory rate — meaning the taxes actually collected as revenue were near to the rate itself. But, while the rate remained fairly high during the period of globalization following WWII until the 80s, the effective rate — the actual taxes collected from corporate profits, continued to decline. Much of this was due to the fact that corporations could claim profits from countries that were easy on taxes known as “tax havens”. A growing global economy made tax rules harder to enforce and the federal tax revenue bottom line was taking a hit.

At the same time, taxes on workers were growing. By the mid 60s new social programs, most importantly Medicare and Medicaid, were added to the already steadily-rising FICA payroll tax, which also funded Social Security and AFDC. Enacting these stalled programs was part of Lyndon Johnson’s “Great Society” plan — a suite of civil rights, environmental, housing, and other laws enacted in one whirlwind legislative session between 65 and 67. As corporate revenue dropped, payroll taxes shouldered more of the burden. Meanwhile, while LBJ was focusing on domestic hopes for the future, the global scene was steadily changing.

In the decades following WWII, the US energy market boomed. When it became cheaper to get oil from the Middle East, that’s just what we did. Instead of regulating to create a more sustainable and independent energy plan, the US guzzled up the cheap gas and petroleum products, cars got bigger and bigger, and a wave of baby boomers entered the energy economy. By 1973 when OPEC countries realized we were hopelessly hooked and that they could use oil wealth to pressure the West into not fucking with the ongoing Arab-Israeli Conflict, they tightened the vice.

Meanwhile the stabilization of currency values set collectively across most industrialized countries after WWII with the Bretton Woods Agreement, were about to be thrown to the wind. Under pressure — due in part to high deficits in domestic spending on Great Society programs, the immense costs of the Vietnam War, and inefficiency in taxing wealth to pay for it — the value of the US dollar was going to have to take a hit. Rather than accept this, the US pulled out of the agreement and decided to let its currency be decided on the open market, other nations followed suit, and it didn’t go well for the US.

Throughout the 70s, the growth seen since WWII stagnated. Manufacturing, which had created much of the post-war wealth, was now happening elsewhere. The new Republican Party, born out of opposition to the civil rights reforms, cut its teeth by blaming the problems of the 70s on bloated government programs. With high taxes, high inflation, high unemployment, little recourse to taxing wealth, and a second and more extreme petroleum embargo and recession in 79, voters lost faith in the Great Society and elected leaders that favored market deregulation, tax easing, cuts to social programs, and more aggressive foreign policy. The new winds of global capitalism evaded the Great Society’s sails, and the big government approach of FDR and LBJ was billed as the problem. A new era of economic liberalism emerged as the solution.

To be fair, the Reagan Administration made good on it’s promise. They used legislation to steer the economy toward growth, and cut taxes in the meantime, and it sort of worked, at least by the indicators they valued: GDP, the stock market, and unemployment. Deregulation and tax easing coaxed domestic money out of hiding and attracted foreign capital. Starting in the summer of 1982 the stock market turned around, and by the end of the decade it was reaching record highs — a trend that would continue through the 1990s.

But Reaganomics was its own re-Deal — access to global capital made at the expense of broad social welfare. And, increasingly, the wealth was shared unevenly. High-income tax rates on speculation and investment that had been set by the Revenue Act of 1935 around 70% and had remained that way until the early 80s when ERTA dropped them to 50% and then in 1986 the TRA (Tax Reform Act of 1986) brought them under 30%. There’s little doubt that it got the money moving again — only it kept it moving in one direction.

If Reaganomics was simply an adaptation to an already changing global free market, the real legacy of Reaganomics may have been embracing global markets for growth in the same way the New Deal harnessed domestic markets — a new approach to deal with an economic inevitability. But, while the New Deal promised to share the wealth directly through social programs, Reaganomics promised an indirect “trickle-down” while a lake of wealth was accumulating at the top.

While Republican control of the White House lasted from 1980 until 1992, Democratic partisan control had had little effect on federal economic policy. Historically, while major Democratic party economic values were created out of the New Deal, that too was rapidly changing.

The New Coke Approach

In 1985, after losing much of its market to Pepsi, Coke changed its formula to be more like its slightly sweeter rival, and dubbed the new product “New Coke”. New Coke was a failure, and the backlash was swift. Coca-Cola received a deluge of angry mail and phone calls from devoted Coke drinkers. Recognizing the mistake, Coke re-introduced the old Coca-Cola recipe as Coca-Cola Classic, and it has been a successful soft-drink ever since. Meanwhile, an eerily similar story was happening in the Democratic Party.

As the new economy was gaining momentum in 1985 and Reagan had just won a second term by landslide victory, the Democratic Leadership Council (DLC) was born. The main function of the DLC was to strategize on how to win power back from the Republican Party and strategists suggested the way to do this was to adopt the fiscal approach of Reaganomics while remaining the socially liberal alternative. They styled themselves “New Democrats” and among their leadership was a young Bill Clinton and Al Gore. In 1992, after 12 years of Republican control in the White House, Democrats won back the white-middle-class and parts of the South, and the strategy worked.

New Coke died destroying choice, but its death propelled Coca-Cola Classic. In the Cola-wars of the 80s, the illusion of choice was key. The New Dems took note. While the Clinton Administration represented socially progressive ideals that had become a Democratic Party mainstay since FDR and LBJ, economically, they represented a market-led continuum of Reaganomics. While Reagan tax-cuts created the environment for wealth inequality of today, the failure of Clinton and other New Democrats to pursue greater re-taxation codified neoliberalism as the only approach to modern economic welfare. Going forward, Democratic and Republican politics differentiated themselves on social and religious positions and foreign policy tactics instead of economic policy.

Crucially, the same neoliberal economic ideas held primacy on both sides of the aisle. Those ideas are: the continual growth of free markets must be allowed to continue unimpeded. And, the state must keep its pre-globalism New Deal era approach of sponsoring growth during recession to avoid catastrophe. The state was to look after the market, even if the market was now barely beholden to the state. To the degree that economic debate continued, through the Clinton, Bush, and Obama years, the only major concerns heard by either party were how to best implement Neoliberalism, even when its now-second-biggest bust cycle eventually emerged 30 years in.

Following the Great Recession of 2008, which at the time had the broadest economic impact of any recession since the Great Depression, the Obama Administration responded with the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which addressed many of the mortgage lending policies that led to the recession. Yet again, there was little in the way of re-taxing high incomes or excessive wealth. That is to say, while the US public participated in bailing out many financial institutions to stabilize the economy, there has been little reward for doing so other than avoiding further economic catastrophe.

Unlike the New Deal Era, Democratic leadership in the 21st Century has pursued stabilizing but not harnessing the system. In 2013, the highest income tier was taxed at 37%. In real terms however, the taxation of the richest Americans income still falls under 30% after adjusting for deductions. Absurdly, the top tier tax level is for incomes around $500,000 or greater, an absurd oversight of the level of income generated by the very top earners which, now earn in the billions.

Q: So why not harness the vast fortunes built under Neoliberalism?

A: The winners of Reaganomics found something to do with all that extra money.

Nixon’s PAC-Men

Cries of corruption reached a boiling point after the election of Theodore Roosevelt, who sailed to victory on corporate contributions during his 1904 campaign. But, admitting the problem, he signed the Tillman Act into law in 1907, which prohibited campaign contributions but lacked a means of enforcement. Over time, new laws were enacted to strengthen Tillman’s regulations and create greater transparency in political campaign funding. The process moved slowly but bent toward regulation into the 1970s. The Watergate scandal reignited interest in anti-corruption and the Federal Elections Commission was established in 1974 to provide further oversight. But the shake-up empowered lobbyists who went to fight regulation in the courts.

In 1976, a Supreme Court bursting with new Nixon appointees decided there was a qualitative difference between contributing and spending. While contributing was seen as encouraging quid pro quo corruption, spending on behalf of a campaign or ideology was not. This was the beginning of “soft-money” campaigning.

Unions, corporations, and individuals that were otherwise banned from or limited in contributing created coalitions on behalf of candidates, parties, and political positions. These new coalitions were known as Political Action Committees, or PACs. Throughout the 80s and 90s the number of PACs exploded. The amount of money they funnel into the political process increases every election cycle.

But just who is most interested in having influence and where do they find their dollar better spent?

The finance sector, where the winners of Reaganomics made their fortunes in the 80s and 90s, spends a lot of money to maintain them. Notably, more to Republican candidates who, since Reagan, tend to favor deregulation and tax easing for, you guessed it, the finance sector.

But how can you measure the actual effect that this money has on the political process? Does spending money on issues actually work? To test the theory Cambridge researchers looked at 1,779 instances of policy change between 1981 and 2002 that met specific criteria of having survey information on who was pro/con for the policy change, having information on their economic standing, and their pro/con position being categorical. What they found was that pro/con preference from citizens of average economic standing had little correlation to actual policy change. And that the preferences of economically elite citizens and interest groups had strong correlation to actual policy change.

By the data, what the rich want actually happens in American democracy. While this data only looks at 40ish years since Reagan, it makes it clear that there is a strong correlation within this time frame. Paying for political power works.

But, while it’s clear that the rich hold political sway through direct or indirect campaign finance, it has been the work of the Supreme Court and not Congress to create this particular deregulated situation. In fact, since the 70s, regulations of political contributions have continued to be enacted by Congress only to be considered unconstitutional on First Amendment grounds by the Supreme Court in a kind of one-step-forward-two-steps-back dance. Wins for regulation in the 70s were undone by the Court’s allowance of soft money. Direct aim at soft money in the Bipartisan Campaign Reform Act of 2002 eventually led to the Citizens United vs FEC decision that removed the cap on soft money completely.

As such, efforts to regulate corruption have to a large degree failed. First Amendment interpretations of campaign finance hold that spending money is free speech and that corporations have the same right to free speech as citizens. They just have the means to buy a bigger voice.

So on the one hand there is quid pro quo — donations buy favor when a legislator votes on policy. (Many of the highest donors donate equally to opposing parties and even opposing candidates in a single race — a clear indicator of quid pro quo that goes unchallenged by campaign finance law.) But, the other role, and the more important role since soft money, is to convince voters to actually adopt an ideology and to motivate them to vote for preferred candidates or parties. Short of paying voters to vote one way or another, how is this accomplished? Americans are smart and well informed citizens who certainly can’t be tricked into voting against their best interests, right?

Neoliberalism isn’t just a few changes to the tax code — it’s a sea change in the way Americans think about what’s possible to achieve through collective action. So pervasive is it that many Americans now see economic growth as the only indicator of economic well being. As such, any ideas about a “Great Society” that put the needs of people before growth of the economy are a threat that must be neutralized, and those who have benefited most from the situation have the means (political contribution, media engagement) of doing so. The thought barely registers now that there was even a pact between the horse and cart of market and citizenry to begin with — That the rich were allowed to have their fun as long as it was good for the entirety of the system — that collectively we might control the economy rather than having the economy control us.

John Rawls, Robert Nozick and The Wilt Chamberlain Defense

If the modern American economy has produced vast economic inequality, philosopher Robert Nozick holds that this is the natural order of things. In his 1974 book Anarchy, State, and Utopia, he outlines what he conceives as the only economic justice compatible with liberty and he invokes basketball legend Wilt Chamberlain to make his case. If given an “original position” in which there are a million people and we all have an equal distribution (essentially the same amount of money) and we all decide to give Wilt Chamberlain a quarter to watch him play basketball (because he is talented), Wilt ends up with $250,000 and we all end up less one quarter. And, who can say that this is not just, and furthermore how would it be just to take anything away from Wilt to redistribute it to those less well off?

Nozick holds that the only workable system of economic justice is based on his “Entitlement Theory” in which one should only look at how things come to be owned, how those ownerships are transferred, and if they were unjustly acquired in the first place. Specifically:

1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding.
2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.
3. No one is entitled to a holding except by (repeated) applications of 1 and 2.

What it amounts to is that principals of ownership should apply at every level of economics. According to Entitlement Theory, tax is theft.

Nozick created this fanciful basketball metaphor and indeed the Entitlement Theory itself in criticism of John Rawls theory of “Justice as Fairness” as outlined in his 1971 book A Theory of Justice.

Toward creating economic justice, Rawls says we should employ a “Veil of Ignorance”. The veil of ignorance is a veil by which we (as makers of justice) represent people that are on the other side of the veil (the receivers of economic justice), with the knowledge that we are both makers and receivers. In this state, we will gear an idea of justice that will give the greatest possible benefit to the least well off, because, crucially, we don’t know if that person will be us. The veil keeps us from knowing, in an attempt to keep us fair. Rawls’ theory assumes there will be natural inequalities in the system, but provides that these inequalities can be tolerated if they produce the greatest amount of good for the system as a whole, and specifically for the least well-off. In opposition to Nozick’s theory, Rawls holds that a system of governance and not simply ownership should apply to economic justice.

I bring up Rawls and Nozick because their ideas precede the era of Reaganomics, and perhaps you haven’t heard of them and thus approach their theories without a great degree of inherent bias. While it is tempting to accept Entitlement Theory as justice for Wilt, the more important question to ask is this : which of these theories cultivates justice? If we are to believe that economic justice can come out of Entitlement Theory alone, then we must ignore the vast wealth inequality and corruption it has created and the societal unfairness it has perpetuated. If justice is truly blind, then doesn’t the path to it look something like Rawl’s veil? What good is the idea of an “original position” if the playing field is already drastically uneven? What fairness is there when some of us can basically touch the rim without even jumping (I’m looking at you Wilt.)

New Deal economics held sway for roughly 40 years, and Neoliberalism for another 40. As we’ve seen in the past, economic sea change only happens when things get bad. If Neoliberalism brought back economic liberalism in the age of globalism, after the 2020 COVID-19 Recession, officially the worst since the Great Depression, can there be a NeoDeal?

A NeoDeal

The crux of a NeoDeal, like the crux of the New Deal, is the federal government’s responsibility to tax the wealth created by neoliberalism-and-beyond effectively, and to redistribute it as broader financial equality. At time of writing, the Biden Administration is attempting to levy corporate taxes not seen since ERTA (1981) by both raising the effective rate and attempting to work with partner nations to regulate tax havens. If it works, the 2022 Federal Budget Resolution, which has just passed the Senate and House, will pave the way for the Biden Admin to collect more taxes as a percentage of GDP than has been collected since the early 70s. Subsequently, The benefactors of the proposed 2022 budget look a great deal like Great Society programs.

High-earning income tax rates (as opposed to corporate rates) are set to rise slightly but nothing like New Deal levels. Is it too early to hope we can keep moving progressively toward economic justice? Are these the same old New Dems, or might they be something else — NeoDems perhaps?— and their budget structure the first new economic platform for Democrats since the 70s. Will the neoliberal milieu just subsume whatever progress they make anyway?

Reaganomics took hold over disruptions of globalism, corruptions of the process of law making, and racializing of the debate over social programs, and it endures by an existential numbness toward collective economic agency. It may have been conceived by the Reagan Admin, but it has grown into something bigger than they could have imagined, and now not just fairness but human progress and maybe human existence has taken a passenger seat. Forty years in, its time we put it back in its place.