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U.S. History: Income Distribution and Reaganomics

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By Edited Aug 6, 2016 0 0

Reaganomics Debate:

Inequality in Income Distribution, Government Policies and Corporate Restructuring

Mountains of paper have been written about the economic period of the 1980's, coined Reaganomics. Ronald Reagan's supporters credit him as being the great savior of the American economy; his critics' credit his policies for creating the destruction of labor and gambling away the future of the American economy through massive increases in the federal deficit. This article will discuss one particular facet of the Reaganomics debate; the issue of inequality in income distribution in America as a result of a turn-around in government policies combined with corporate restructuring.

Photograph of President Reagan leading a Cabinet Meeting, 11 September 1986

There is plenty of material to argue whether or not Reaganomics was an economic success or an economic blunder. And, of course, both sides of the argument will present evidence in support of their positions. Yet, no real credible argument has been made that the Reagan years did anything to improve the equality of income distribution. Both sides of the Reaganomic fence provide more than enough evidence in support of the argument that says: lower and middle class America lost significant ground during the 1980's. I must add at this point that the "U-turn" in America's economics actually began during the 1970's; Reagan only sped up and expanded the process significantly ("U-turn"- the term used by Bluestone and Harrison to describe the reversal of fortune of the labor forces and the shrinking middle class).

Since the mid-1960's through the 1990's, Americans have been getting poorer and poorer. The wage-gap between the America lower income group and the upper or rich America group has been ever increasing. Reminiscent of the 1920's and 1930's, the middle class, formerly the largest class of the post WWII through the Vietnam War era has also been ever decreasing in size. By the mid-1970's global competition was eating away at American business profits. U.S. businesses began discarding their standard practices and shifted capital into overtly speculative ventures. They increased offshore investments and began outsourcing for labor and manufacturing in search of the lowest labor and production costs.

Any discussion on Reaganomics should always contain a definition of Reaganomics so let’s get that out of the way from the start. Reaganomics, in effect, was a program to strengthen business and industry while weakening the power of organized labor, reduce federal spending on other than military programs, reduce taxes, and regulatory abatement. Reaganomics as described by most, if not all economists and historians was supply-side economics; however, this in itself doesn't really explain Reaganomics because of what actually happened. Often it's stated that the Reagan Administration was trying to reduce the double-digit inflation of 1980 and turn around the falling rate of production. Yet, the cost to the average American laborer during that era and continuing into the next administration was what gave Reaganomics its negative reputation.

Ronald Reagan's laissez-faire government policies, reminiscent of the 1920's, included legislative and legal actions that severely hampered organized labor. The "engineered recession" of 1980 and 1981-2, along with reductions in social welfare programs contributed to this "great U-turn" in the standard of living of most Americans, employed as well as unemployed, middle managers as well as blue collar workers (Harrison & Bluestone viii). As a result of these actions, profit margins rose steadily, yet average wages for families has decreased or at best has somewhat frozen in place.

The Government economic policies supporting deregulation and the concept of privatization of government services were actually taken initially between the years 1968-1978. The Reagan Administration simply continued this trend toward economic deregulation as initiated under Carter. To continue the weakening of the labor pool, the Reaganites engineered the recessions of 1980 and 1981-2 to under-cut labor organizations while contributing to the corporate bottom line (Harrison & Bluestone 14). Reagan policies were designed to provide some flexibility for businesses to contain production costs, increase profits by reducing labor costs, and reducing the costs involved in meeting government standards. The Government's induced deflation, deregulation, regressive tax reform, privatization, and "union bashing" have contributed to new corporate strategies and the inequality of income distribution in America (Harrison & Bluestone 16). The groundwork for Reaganomics policies was put in place well before his time.

Ronald Reagan televised address from the Oval Office, outlining plan for Tax Reduction Legislation

Part of the Reagan plan was a reduction in taxes. However, the benefactors of the tax reduction were not the majority of wage earners. According to data published in Krugman's book, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations, income data for the period reflects that the tax reductions during the 1980s actually cost the lower 60-percent income groups, while the top 40-percent income groups saw monetary increases (Krugman 24-5). The GINI Index numbers support this disparity. At the end of the Carter Era the GINI Index before taxes was (.403) and (.352) after taxes. By the late 1980s the before tax GINI Index was (.423) with the after taxes GINI as (.404). This shows that there was a higher distribution of income in the hands of fewer people (Krugman 25).

While Presidents Reagan and Bush froze the minimum wage level for a nine-year period, essentially cutting pay each year as inflation bit into lower wage earners, the salaries of executives skyrocketed during the 80's. Salaries and benefits of corporate CEOs as compared to the average factory workers were 30 times higher in1980 and reached 130-140 times higher in 1991 (Krugman 262). According to Krugman, these salaries did not come primarily from greater profits, but from a larger slice of the profits.

In Thomas Geoghegan's book, Which Side Are You On? Trying To Be For Labor When It's Flat on Its Back, two pieces of legislation are discussed as the beginning of the end for organized labor began with the 1935 Wagner Act and the National Labor relations Board (NLRB). The same act that affirmed the right to organize but gave the NLRB the job of certifying whether or not a union was to be considered "officially" recognized. Additionally, in 1947 and the passing of Taft-Hartley, labor could no longer organize on the scale of unions of the 1930's. This act also weakened union power by outlawing mass picketing, secondary strikes on neutral employers, and sit-downs. As Geoghegan puts it, the Taft-Hartley led to union busting.

Geoghegan, a former labor attorney, tells of his experiences dealing with organized labor, how and why it has lost its ability to fight. His experience through the late 1960's and 1970's describes the labor movement as having become political driven organizations characterized by the same characteristics (greed, power, control, and inequality) of those they despised - Big Business. Union bureaucracy began to rival that of the federal and state court systems (Geoghegan 86-7).

Geoghegan believes that part of the weakening of unions also has to do with a lack of sympathy by the average family. During the 1970's the average family income was $24,000, while the average steelworker was making $40,000. Therefore, it's not too surprising to see the average American family would not be to upset if union organizations were losing ground. The existence of the Pension Benefit Guarantee Corporation (PBGC) also quieted union members by insuring the benefits of workers displaced when companies went bankrupt or their pension plans go bust.

If labor had not been weakened enough by the high unemployment levels in the late 1970's, Reagan's firming of the PATCO members sent a clear message to not only the unions, but also to the courts as to his lack of support for organized labor. During the 1980's, the U.S. lost one out of three heavy industrial jobs.

Jimmy Carter

Deregulation under Carter and Reagan opened the industries of steel, automotive, carpenters, and trucking to what Geoghegan called gypsies - small owner operators (Geoghegan 139). "The old Teamster order collapsed and thousands of firms closed (Geoghegan 139)." During the late 1970's and into the 1980's, the Teamster membership fell from 2.2 million to 1.6 million. Yet, organized labor was not the only one to feel the reduction of government support. Also on the hit list for Reaganomics, was the reduction of social programs.

Social deregulation, as described by Harrison and Bluestone, was a true innovation of the Reagan Administration. The result of this program was a softening of safety and environmental regulations to ease the burden on industry. Fulltime manning was drastically reduced in watchdog agencies tasked to monitor the various industries. The program included freezing the minimum wage and shifting against federal protection of workers’ rights and unions. The results of these policies directly impacted the redistribution of income in favor of the higher income group (Harrison & Bluestone 162).

Reagan was not the only one conducting a reduction program. With the weakening of organized labor by deregulation, businesses began experimenting with organizational changes to include work, labor, management relations, and flexible arrangements with employees, subcontractors, otherwise known as corporate restructuring.

To better compete in a global economy, US industries adopted a program of "restructuring". As Harrison and Bluestone state it, "Globalization of production was no longer supplementing domestic manufacturing but replacing it (Harrison & Bluestone 28)." Restructuring involved creating multinational corporations with its headquarters and support functions in the major capitalist countries. The reduced costs resulting from relocating no-skill jobs, low-skill jobs, assembly, and manufacturing operations to low wage areas, validated the practice of outsourcing. In some cases businesses just simply got out of the production end and found alternate "ways of making paper profits" or found other ways to reduce labor costs.

Creative wage reduction programs such as the two-tier pay system and conversion of a percentage of full-time employees to contingency labor employees (part-time and temporary employees) or a combination of methods became (and are still) the normal practice. These methods provided a way of reducing full-time labor wage costs, which included a reduction in employee benefits cost. The two-tier wage system allowed reduced wages for employees during the new worker's first few weeks or months of the normal probation period. New employees would only receive 75 to 80-percent of the normal wage during a probation period (the probation period usually equated to the business's employee turnover period). Since employee turnover is highest during the first few months of employment, businesses could save at least 20 to 25-percent of the wages they would have paid to an employee during that same period.

Contingency labor pools were (and still are) not organized under a union. They provided (and still do) flexibility to tailor their work force needs to the production needs. Contingency labor included part-time and temporary employees. Benefit packages for these contingency employees were either non-existent or at least small enough to still keep labor costs low. A further major benefit of these creative pay systems was that they provided a way to avoid unions or at least keep the impact of union actions at a minimum. Keeping labor costs from rising is not the only reason that U.S. firms have gone abroad to set up assembly or service operations. Some firms have done so to improve their chance of selling to foreign markets or to take advantage of foreign government incentives (taxes) (Harrison & Bluestone 31).

But what is the cost of these outsourcing? The result of reductions in domestic production and outsourcing was a reduction in U.S. production employment. Employment in the manufacturing area fell seven-percent between 1968 and 1979, continuing to fall twelve-percent more through the 1980's and 1990's (Slater 143). Employment in mining actually rose until 1981 only to fall nearly in half during the 1980's through the 1990's (Slater 129).

From 1973 to 1986 average wages have dropped in buying power by nearly 14-percent (Harrison & Bluestone 113).In 1986, the average annual income of the poorest 20-percent of all families was $8,033. This was more than $1,740 less than they would have received based on 1968 income levels (Harrison & Bluestone 131). The richest 20-percent received $5,600 more per year in 1986, than they would have based on 1968 monetary values (Harrison & Bluestone 131). As a result, the traditional one-income household was no longer sufficient to keep up with the family economic needs. More family members entered the work force in order to increase or sustain real income purchasing power. This included family members taking on extra jobs or moonlighting in order to make ends meet. Double income families were not a uniqueness of the lowest income earners, middle-class America also lost, or at least sustained, buying power during the 1980's. Harrison and Bluestone define what is usually considered the middle-class income earners, as those making $20,000 to $50,000 annually. This group shrank from 53-percent in 1973 to 47.9-percent in 1984. Either there exists a significant polarization of income distribution around the middle-class or the middle-class is now what used to be the lower-end of the upper-class income.

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The counter argument against these income disparity issues is attributed by some as simply a matter of normal business cycles. One argument presented to explain this problem is that the "low wage explosion is mostly a statistical illusion, reflecting the impact of inflation and recession on workers' earnings (Geoghegan 124)." Another proposal is to attribute the problem to a large influx of baby boomers into the work force. However, after accounting for the business cycle, for productivity, and for the shrinkage of manufacturing jobs, the growing proportion of baby boomers in the work force contributes nothing to an explanation of low wages. The inequality of income is not limited to only a specific age group (Harrison & Bluestone 125).

Of course there are many supporters of Reaganomics that will produce statistics showing how the GNP was sustained during the 1980's; there is really no mystery here. A major part of Reagan's policy was to enhance the military complex in order to stay ahead of the perceived communist threat. During this period the government went on a spending spree financed by the deficit. DOD spending doubled $134 billion in 1980 to $282 billion in 1987 (Harrison & Bluestone 149). Strangely enough, this period seems to be the era of debt for both the government and the American income earners. This living on debt and buying time was sufficient to fuel a short-term recovery (Harrison & Bluestone 147). But most of all, during the Reagan year's people went into debt.

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The total amount borrowed by consumers nearly doubled between 1981 and 1986, from $394 Billion to $739 Billion. Families expanded their use of "plastic money" even faster. Revolving installment credit grew from $55 billion in 1980 to more than $128 billion in 1986 (Harrison & Bluestone 149). Families filing chapter 13 of the Bankruptcy Code grew from an average of less than 39,000 per year (1975-1980) to almost 95,000 a year (1981-1984) (Harrison & Bluestone 152).In effect, most Americans during the Reagan Years went into debt. It became a joke to say, "We are spending money to help the economy." Consumer borrowing doubled between 1981 and 1986, from $394 Billion to $739 Billion. Credit card use grew from $55 billion in 1980 to more than $128 billion in 1986 (Harrison & Bluestone 149).Families filing chapter 13 of the Bankruptcy Code grew from an average of less than 39,000 per year (1975-1980) to almost 95,000 a year (1981-1984) (Harrison & Bluestone 152).

From 1969 - 1980 (prior to Reaganomics) wage cuts and freezes were "practically non-existent" (Harrison & Bluestone 39). After 1980, the purchasing power of lower-class wage earners through middle-class wage earners degraded throughout the period. Who paid for the improvements in American business during the 1980's? The lower 60% of American workers paid for these improvements through the reductions in the real purchasing power of their income.

Final Word

This article focused on one particular facet of the Reaganomics debate; the issue of inequality in income distribution in America as a result of a turn-around in government policies combined with corporate restructuring. Harrison and Bluestone call the Reagan Administration "the single greatest gift to the business community" (Harrison & Bluestone 102).  Reaganomic policies, though we can't forget some initial deregulation efforts instituted during the Carter years, reversed what had been accomplished prior to the 1970's (Harrison & Bluestone 79). Many of the nation's economic critics saw the policies of Reaganomics as short-term answers to a long-term problem by borrowing against the nation's future.

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Bibliography

  1. Thomas Geoghegan Which Side Are You On? Trying To Be For Labor When It's Flat on Its Back. . New York: Farrar, Straus & Giroux , 1991 .
  2. Bennett Harrison and Barry Bluestone The Great U-Turn: Corporate Restructuring and the Polarizing of America. New York: Basic Books, Inc., 1991.
  3. Paul Krugman Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: WW. Norton & Company , 1994.
  4. Courtenay M. Slater Business Statistics of the United States, 1997 Edition. Lanham: Bernan Press , 1997 .

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