The legacy of ‘Reaganomics’: most Americans are poorer today than in 1987

monopolyb“Reaganomics” — blind faith in supply-side “trickle down” down GOP economics which redistributed wealth upwards to the über-rich investor class on the promise that making the so-called “job creators” even wealthier would create economic expansion and prosperity that would “trickle down” to the middle and even lower economic classes — is a disproved and discredited lie. The American economy has been ravaged by the crippling consequences of this lie for 30 years now. It is the source of the greatest economic inequality in the United States since the end of the Gilded Age in 1929.

Matt O’Brien writes at the Washington Post’s Wonkblog today, The bottom 90 percent are poorer today than they were in 1987:

Once upon a time, the American economy worked for everybody, and even the middle class got richer. But this story has only been a fairy tale for almost 30 years now. The new, harsh reality is that the bottom 90 percent of households are poorer today than they were in 1987.

This is actually a much more dramatic statement than it sounds. While the Federal Reserve has already told us that the median households is worth less now than it was in 1989 — that’s the household right in the middle — it turns out that everybody but the richest 10 percent of Americans are worst off. That includes the poor, the entire middle class, and even what we would consider much of the upper class.

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You can see this troubling finding in the chart above, based on data from Emmanuel Saez and Gabriel Zucman’s new paper on U.S. wealth inequality, which itself is based on tax data. In this chart, I’ve taken each group’s inflation-adjusted net worth from 1945 and indexed that to 100, so we can compare how wealth has grown for people with lots or little of it. The answer, as you can see, is that the bottom 90 percent actually did very well during the first few decades of the postwar period — adding more wealth, in percentage terms, than those at the top.

But these days of shared prosperity have come to an end, gradually and then suddenly. It started in the 1980s when the top 1 percent awoke from their long postwar slumber, thanks to the combination of lower taxes, financial deregulation, and new technology. It wasn’t a total disaster for the bottom 90 percent. Even as most Americans saved much less, accumulating far less wealth, stock markets and housing prices continued to rise. Until they didn’t, coming crash down in 2007 and 2008.

The problem was that middle class doesn’t own that much in stocks, but went into debt to buy lots of housing. So the housing crash turned their biggest financial asset into an albatross, wiping out their equity but not their debt. And the housing recovery hasn’t done much to fix this, since it’s struggled to move beyond the “nascent” stage.

Stocks, meanwhile, collapsed during the crisis, but came back soon thereafter. The middle class, in other words, missed out on the big bull market in stocks, but not on the even bigger bear one in housing. That’s why the recovery has restored so little of the wealth that the recession destroyed. In fact, the bottom 90 percent have actually kept losing net worth the past few years, in large part, due to rising student loan debt.

It’s been a lost 25 years for the bottom 90 percent, but a lost 15 for the next 9 percent, too. That’s right: altogether, the bottom 99 percent are worth less today than they were in 1998.

But this isn’t a story about the top 1 percent running away from everybody else. It’s a story about the top 0.1 — scratch that, the top 0.01 percent — doing so. You can see that in the chart below, again based on data from Saez and Zucman, of each group’s share of US wealth. Indeed, since 1980, the top 0.01 percent’s piece of the wealth pie has increased by 8.6 percentage points, while the next 0.09 percent’s has done so by 5.4. The bottom 99 percent, meanwhile, have seen their wealth share fall an astonishing 18 percentage points.

Wealth-Shares-Since-1980

Here’s a bit of historical perspective: the top 1 percent now own over 41 percent of all the wealth in the country. That’s the most since 1939. Although it’s still well below the all-time high of 51 percent set in 1928.

There is an answer to this massive redistribution of wealth upwards to the über-rich investor class which has merely accumulated great wealth, rather than reinvest it in job creation and economic expansion: tax the über-rich investor class and redistribute the money they stole from the middle class over the past 30 years.

Think Progress reports, Everyone In America Would Be Better Off If We Soaked The Rich:

A 90 percent tax rate on the top 1 percent of American earners wouldn’t just significantly reduce income and wealth inequality and boost government tax revenues. It would also be the optimal level for Americans’ welfare, according to a new paper from economists Fabian Kindermann and Dirk Krueger.

They find that the top marginal tax rate that maximizes government revenues before being so high as to discourage the wealthiest from earning more is very high, or 95 percent on those who are among the top 1 percent of earners. They also find that a 90 percent tax rate on the richest 1 percent could significantly reduce the Gini index, a measure of income inequality, and wealth inequality would also steadily decline.

But these effects aren’t worth the policy change in and of themselves, they argue. In an email to ThinkProgress, Krueger wrote, “One could certainly reduce inequality in the economy to zero, by the government confiscating all income and wealth and redistributing it equally among all households… Of course people would stop working and saving and the outcome would be disastrous.” But the interesting finding in their paper is that the same tax rate that would maximize revenues and drive down inequality is nearly the same one that would make everyone better off, or what they call the optimal top marginal tax rate.

Everyone’s welfare is improved if a tax change allows the government to compensate them with enough wealth so that they are at the same level they were before the change, but the government still has money left over. “The more is left over, the better is the reform,” Krueger said. Everyone’s welfare improves or stays steady, including that of the 1 percent, under a 90 percent top tax rate. In fact, the welfare gains are “very substantial,” they note in the paper.

There are trade offs to such a policy change. About 10 percent fewer people would enter the labor force and consumption would decline in the long run by about 7 percent. But most of this would happen at the very top and not impact most Americans. Average consumption for people who don’t make it to the top 1 percent would actually be higher. Most of the labor force reduction is also among the richest. “Not knowing whether one would ever make it into the top 1% (not impossible, but very unlikely) households would be eager to accept a life that is somewhat better most of the time…and significantly worse in the rare case they climb to the top 1%,” Krueger noted.

The top 1 percent paid an average tax rate of 23.5 percent in 2011, below a peak of 27.6 in 2001. The rate had been dropping for many years, although what they’re paying now represents a slight increase. Either way, though, the rate is much lower than 90 percent.

While conservatives warn that higher tax rates on the wealthy will hurt so-called “job creators,” economists point out that higher taxes and economic growth can go hand-in-hand. After World War II, higher economic growth occurred alongside higher top tax rates, averaging 2.23 percent while the top rates were above 70 percent between 1950 and 1980 but just 1.68 percent when the rates were lower between 1980 and 2010. Job growth has been weakest when the top rate was lowest and stronger when it was higher.

Without any policy change, however, income and wealth inequality are set to keep growing.

Note: The highest rate for regular marginal income tax in the twentieth century was instated under Franklin D. Roosevelt toward the end of World War II at 94 percent. That rate declined to 92 percent under Harry Truman. In 1954, the 92 percent marginal rate decreased to 91 percent under Eisenhower. The marginal tax rate on the highest regular income bracket fell below 90 percent for the first time in 20 years in 1964 – the first year of Lyndon B. Johnson’s presidency. This decrease put the tax rate at 77 percent for income over $400,000. From Eisenhower to Obama: What the Wealthiest Americans Pay in Taxes.

The American middle class was built and thrived during the years that the top tax rate was over 90%.

9 responses to “The legacy of ‘Reaganomics’: most Americans are poorer today than in 1987

  1. I have been curious as to what impact the huge influx of illegal immigants has on our Nation. After the amnesty that Reagan granted, the numbers went up exponentially of people crossings our borders illegally to wait for the next amnesty. Their entry into our society HAS to have had an impact on statistic across board. They are unskilled, uneducated and can only contribute ate the very lowest levels of our economy. Thus you see drops in income, the ability to rise out of poverty, lowering of graduation rates, increases in gang activity, increasing violence, larger pockets of poverty in urban areas, etc.

    When I see article like this one, I think you blame the wrong source for the problem. You blame it all on Reaganomics and ignore and even larger social change that has taken place at the same time.

    • AZ BlueMeanie

      Wow. While you are a troll, I don’t believe that you have ever played the breathing while brown blame the immigrants for everything card. I gave you more credit than that. Clearly I gave you undeserved credit.

      • I don’t blame the illegal immigrants for everything. But you can’t deny that their numbers do not have an impact wherever they choose to settle. They enroll in schools, they use the health care system, they have children, etc., all of which has an effect in the area where they live. They also pay taxes and social security and rent. To pretend they don’t have an impact is foolish.

        • AZ BlueMeanie

          The point you were trying to make was a correlation between the Immigration Reform and Control Act of 1986 and the economic decline of the middle class. The decline of the middle class actually started in the 1970s – the article cited in the post above only tracked the data from 1987. There is no correlation, let alone any cause and effect as you apparently believe. Most poverty in America is actually white Americans living primarily in Red States, and most of them were born after 1986.

          • I was NOT trying to make any such correlation. My point is not that complicated. You are trying to dance around the fact that 11-15 million people (or 4-5% of our 2014 US population) DO HAVE an impact on our Country and any statistics you generate about it. I have not stated what kind of impact, nor does it matter for the point I am making. If you are going to put words in my mouth, please don’t allow your imagination to invent things you assume I am saying.

          • When you can find an economic theory which demonstrates that immigrants are the reason for the massive redistribution of wealth upwards from the poor and middle class to the one percent at the top over the last 30 years, which is what this post is about, then you may have something. Good luck with that. There is no such economic theory. Those who have wealth and power can manipulate politicians and the tax code to increase their wealth and power. This is not immigrants.

          • There is no economic theory involved with what I am saying. It is simple mathematics. If everything remained in stasis for the last thirty years, the addition of 4% to 5% to the poor and middle class changes the statistics. You remain blind to that simple fact. I don’t doubt that the wealthy have used their wealth to change things to thier advantage. It is called self interest and everyone acts in thier own self interest. That is just human nature.

            Now as far as I am concerned, this subject is closed. You can continue if you like, but your willful ignorance regarding what I am stating means that further argument is pointless from my perspective.

          • Sure there’s an impact on economies when there are a large number of immigrants, but that impact could well be a net positive. Just because things change doesn’t imply that it’s bad or good, positive or negative. It’s just different.

          • Which is what I was saying all along. The problem here is they always assume it has negative conotations as opposed to what I was saying which is has SOME impact, good or bad. That many people affect statistics. On this site they choose to ignore that because it doesn’t fit their narrative.