Historian Argues Ronald Reagan’s 1981 Tax Cut Led To Trumpism

 

Originally published on Forbes.com.

Is it possible that the Economic Recovery Tax Act of 1981, followed by the Tax Reform Act of 1986, the legacy of Ronald Reagan is where it all went wrong?  That is the case that John Komlos makes in his paper recently released onto SSRN –   Reaganomics: A Historical Watershed. It wasn’t morning again.

It was the beginning of a dystopian nightmare from which we still have not awakened.

It Wasn’t The Stupid Economy

Professor Komlos is an economic historian with PhDs in history and economics from the University of Chicago.  He worked with Nobel laureate Robert Fogel, which impresses the hell out of me, so I have to take him seriously, even though I love ERTA and TRA 1986.  Those acts are why public accounting was good to me, despite the fact that I dress poorly, can’t stand golf and have a below-average knowledge of sports.

The gist of the article is that the decreases in marginal tax rates did not boost the economy.  Rather the benefits of tax cuts went disproportionately to the top tier.  This has led to despair among the working classes (i.e. Hillary Clinton’s deplorables) and the election of President Trump, which Professor Komlos thinks was not such a good thing.  But what about her e-mails?

Inequality

Of course, it is a longer story than that. A lot of the focus is on rising inequality, which began to increase a bit in the seventies from historic lows, but then:

The real shock came three years later when the trend was unleashed that extended into the next century: in 1981 the top 0.1% of the income distribution received 1.8% of total income, by 1982 2.5%, and by 1983 2.7%. So by 1983 the share of income of these 80,000 households doubled compared to 1977. Henceforth the floodgates were open and remained open: by 1988 their share reached 5.4% and by 2000 7.3%  From 1.3% to 7.3% of national income is a game changer of immense historic proportions. (References omitted)

And Goodbye To The Unions

It wasn’t just the tax cuts.  There was also breaking PATCO, the air traffic controllers union which marked the beginning of a long term decline in union membership.

Unions had been the backbone of the middle class, especially the lower-middle class. They ensured that a share of the profits went also to workers and not only to executives and shareholders. Collectively workers could threaten to strike, thereby exercising sufficient countervailing power to obtain for themselves a little more than a living wage—a share of the rents the corporation was earning. Without such countervailing power most workers without a college education, especially those who had no special skills—were left on their own . The upshot was devastating to this segment of the middle class.  (References omitted)

The Seven Deadly Consequences

Professor Komlos traces the effects to the present day like this.

We argue that a) Reaganomics did not come to an end in 1989  its legacy continues to the present day; b) it initiated a path-dependent process which would have been difficult to reverse; c) the skewed distribution of income increased the political power of the top 1%; d) they used this power to further their interests which included advocating for laissez-faire economic policies including globalization, financialization, and the IT revolution; e) the rise in inequality increased the frustration of the less skilled and less educated because they were experiencing downward social mobility; f) hence, relative incomes mattered in generating frustration; g) desperate people are easier to manipulate and will do desperate things including voting for an unqualified presidential candidate who promises to end their misery; this is linked to the phenomena of deaths of despair documented by Case and Deaton (2017). (References omitted)

His most depressing observation is that we may be stuck in a downward spiral.

The growing number of millionaires also had the financial resources at their disposal to make sure that their dominant position was maintained economically, politically, as well as ideologically. So, the country and its economy was practically locked into the path defined by Reaganomics with seven major negative legacies.

Those seven legacies are inequality, “hollowing out” of the middle class, business-friendly regulation at the expense of workers and consumers, deficit financing becoming endemic, disparaging the government,  oligarchy which is transform country into a plutocracy and neglect of blue-collar workers.

So how did that elect Donald Trump?

Hopelessness is a mighty political force and therefore it should not be so surprising that after the failed promises and benign neglect of three Republican and two Democratic administrations spanning a third of a century, the have-nots came to believe that only a strongman will change the course of the ship of state. The uneducated, those who experienced the alienation of downward social and economic mobility, or the disappointment of wage stagnation for a generation while others were living the lifestyle of the rich and famous, those who were clobbered subsequently by the tsunami of hyperglobalization, and those who were evicted from their homes while the Lords of Finance were being pampered, were ripe to revolt and turn against the establishment elites. Trump was able to harvest the anger of those who reached for the American Dream and found a nightmare instead.(References omitted)

I’m Skeptical

Although I think Professor Komlos makes a strong case and I have strong reasons for respecting his intellect, his analysis does not resonate that strongly with me.

President Trump may be giving a last hurrah to a form of patriotism that is fading with my generation.  That is something that I sensed when I attended one of his rallies in Worcester.  Among people I know the two reasons for voting for Trump were abortion and “What about her emails?”, neither of which is addressed by Professor Komlos.  I have a theory on that based on my brief experience of Professor Komlos’s milieu.

Things Scholars Might Not Get

As I noted I am very impressed by Professor Komlos’s credentials particularly his association with Robert Fogel.  As it happens I had hoped to be associated with Fogel and went pretty far down the path.  I majored in history at the College of the Holy Cross, which is not too shabby.  And I am better at math than most liberal arts graduates, which is saying practically nothing and even most CPAs, which is not saying much.

So when I heard Professor Fogel speak about the new field of cliometrics (Clio was the Greek muse of history.  I know you knew that, but you have to consider the other readers), I was very excited.  He wrote something about a program he was getting going at the University of Chicago.  When I got to the University of Chicago in 1975, I learned that the program was a trial balloon that popped when he left for Harvard.

It could have been worse.  I got to take a course on the antebellum South in which I could listen to John Hope Franklin mocking Fogel’s observations on how enslaved people were treated.  Other than that, things did not go well for me.