Economics Financial Crisis History Politics

The Reagan Revolution (cont.)

[digg-reddit-me]Some objections have been raised to my two posts on the Reagan Revolution earlier this week (here and here) that stem from a misunderstanding of what I was trying to say – a misunderstanding perhaps based on what I chose to emphasize when telling the story of the 1980s revolutions.

So let me re-tell the story briefly.

Ronald Reagan in 1980 was a man who met his moment. The nation was reacting to the excesses of the New Deal and Great Society liberalism and the 1960s revolutions – and they wanted a return to an older time. The country was in a reactionary mood, but still looking for optimism after the glum and depressing honesty of Jimmy Carter. Reagan blended the two in his own distinctive way. At the same time, the conservative movement that had been launched with Senator Barry Goldwater’s 1964 campaign was finally reaching maturity. The infrastructure of think tanks, foundations, magazines, and other organizations that the Scaife family and the Coors family and the Koch family and later the Walton family and others had started to build in 1964 was generating new and innovative right-leaning ideas. The neoliberal philosophy that Reagan was sympathetic to still only had a small number of adherents, but thanks to the conservative infrastructure it had reach and with marketing savvy was sold. At the same time, wealth was already becoming more heavily concentrated in the hands of fewer and fewer people, giving the rich benefactors of the conservative movement more power.

In this moment, Reagan became president – with liberalism tired and worn out, with a reaction against it’s excesses and the excesses of the revolutions of the 1960s reaching a boiling point, and a conservative movement heavily influenced at the top levels by neoliberalism finally maturing. Thus was launched the Reagan Revolution. 

This revolution wasn’t really about Reagan – but he was the figurehead at the top. A lot of the revolutionary changes had to do with society’s changing mores that allowed, “Greed is good” to became a positive mantra echoing the neoliberal Ayn Rand’s talk of the “virtue of selfishness.” Some of it had to do with the growing influence of the extremely wealthy. Some of it was a reaction against the silliness of the anti-materialism of the hippie generation. But like the 1960s revolutions, which were enabled though not created by the government, likewise for the 1980s revolutions. Reagan’s constant stimulus spending supercharged the economy; his trimming back the social safety net, his tax cuts for the wealthy, and his spending increases accelerated the concentration of wealth and power in the hands of fewer and fewer. His acquiescence to the informal Bretton Woods II arrangement created an economy that “favored finance over domestic manufacturing.” His trimming back of regulations also accelerated this trend. To some degree, these changes had positive effects – as the market was freer, as the economy grew, as corporations thrived, as the overall wealth of America grew. 

But they spelled trouble down the road. The stimulus spending and tax cutting, the informal Bretton Woods II agreement, and concentration of wealth created an unstable system. Internally, the society was imbalanced as extremes of wealth and power were accumulated by a small minority. This eventually undermined the very free market and democratic discourse that is essential to the American tradition. A course correction later might have saved the Reagan vision – and for a time it seemed as if Bill Clinton’s moderate presidency had, as middle class wages finally began to grow again – but Bush doubled down on Reaganism when he should have pared back, and we are left with this mess.

Is this collapse Reagan’s fault? I wouldn’t say so. But he set the initial course towards this iceberg, even if the iceberg was out of sight at the time he set the course. He – and the 1980s revolutions in finance, economics, and government that his administration supported and enabled – are the true authors of this economic collapse, even if they cannot be blamed for not forseeing it.

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The Reagan Revolution (cont.)

[digg-reddit-me]I’ve gotten a bit of feedback/blowback about having simplified what went on the in 1980s that led to the indisputable higher levels of income disparity, the concentration of wealth, the decimation of manufacturing, and the rise of finance. This wasn’t about Ronald Reagan and his neoliberal policies – it is claimed – but about basic economic forces. I tried to take that into account by pointing out that Reagan was only accelerating the trends that started in the 1970s – but let me go further now.

Another major factor that aided these trends was not entirely within Reagan’s control. As John Judis explained in The New Republic, in the 1980s:

…Japan was threatened by a cheaper dollar. To keep exports high, Japan intentionally held down the yen’s value by carefully controlling the disposition of the dollars it reaped from its trade surplus with the United States. Instead of using these to purchase goods or to invest in the Japanese economy or to exchange for yen, it began to recycle them back to the United States by purchasing companies, real estate, and, above all, Treasury debt…

With Japan’s purchases, the United States would not have to keep interest rates high in order to attract buyers to Treasury securities, and it wouldn’t have to raise taxes in order to reduce the deficit…[That] informal bargain…became the cornerstone of a new international economic arrangement…

Judis goes on to explain how this arrangement evolved through the 1990s:

Asian countries, led by China, adopted a version of Japan’s strategy for export-led growth… They maintained trade surpluses with the United States; and, instead of exchanging their dollars for their own currencies or investing them internally, they, like the Japanese, recycled them into T-bills and other dollar-denominated assets. This kept the value of their currencies low in relation to the dollar and perpetuated the trade surplus by which they acquired the dollars in the first place…

Until recently, there have been clear upsides to this bargain for the United States: the avoidance of tax increases, growing wealth at the top of the income ladder, and preservation of the dollar as the international currency…

[The current financial system] is sustained by specific national policies. The United States has acquiesced in large trade deficits – and their effect on the U.S. workforce – in exchange for foreign funding of our budget deficits. And Asia has accepted a lower standard of living in exchange for export-led growth and a lower risk of currency crises.

This financial arrangment was not created by Ronald Reagan – but he did acquiese to it – and spent America into a level of indebtedness it had not been in since World War II. This arrangment would not be consistent with a ideological neoliberalism that was discussed before – but this arrangment, most importantly, did benefit many of those who were vocal proponents of neoliberalism. 

The revolutions of the 1980s then, was not merely the result of a political movement within America – not anymore than the revolutions of the 1960s were. There were international factors that helped along both domestic movements. The combination of this special relationship with Japan – and later China and other Asian countries – with the neoliberal revolution of Ronald Reagan – led to a concentration of wealth and power within a small class of people rarely seen in a developed country. As Paul Krugman observed:

It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

Combined with the neoliberal principle, as described by Stanley Fish, that “Short-term transactions-for-profit [are better than] long-term planning designed to produce a more just and equitable society,” it becomes more clear how we ended up in this enormous financial mess. 

Take away the regulations; encourage short-term profits; reduce taxes; trim the social safety net; “starve the beast” by spending without taxing; and then supercharge the economy with constant stimulus spending (which is what “starve the beast” is) and easy debt from China and Japan. What you get from this is not only a revolution that undermines the American way of life in the mid-term – as wealth is concentrated and middle class and manufacturing jobs dry up – but an unsustainable economy that is going to collapse, and collapse hard. 

In other words, you get what we have now.

Today, we are reaping the effects of the generational bargain at the heart of the Reagan presidency.