Reaganomics - Fritz the Cat

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Reaganomics is the name popularly given to the set of economic policies introduced by President Reagan during his term. Reagan and his political advisors began laying the ground work for this plan during his electoral campaign against President Carter. This plan included a military buildup, putting America back to work, curbing inflation, and tax reform. Let's take a brief look at each of these.

The military buildup.
For twenty years the U.S. had postponed up grading its convention military weapons so that it could develop a system of weapons suitable for use in non-conventional warfare that was becoming so popular in the so called third world. The cost of that effort (the Viet-Nam war) by 1967 had exceeded $25 billion a year. It would be out of the question to ask the U.S. taxpayers to pay for the development and production of a new bomber fleet, a new submarine fleet, a new set of ICBM missiles, and other weapons sufficient to ensure our domination of the developed world, and at the same time ask them to pay for the development and production of the thousands of tons of chemicals, bombs, bullets, and other weapons with we hoped to dominate the developing world.

Reagan used his election (by five per cent of the popular vote, with more than half the eligible voters staying home) to claim a mandate for the implementation of his program. By provoking an anti-communist hysteria unequaled since the days of Joseph O. McCarthy he was able to increase military spending at a pace unequaled since World War Two. Due to the cost of this military buildup, and in spite of a campaign promise to eliminate the national debt, Reagan has now added more to the national debt than all the other Presidents put together. As will be explained later, this buildup of the national debt was a necessary part of Reaganomics.

Unemployment under President Carter reached double digits nationally, twice that in the Northern industrial belt, and as high as 60% or more among some sub groups in limited areas, for instance black teenagers living in the inner city. This was not only a breeding ground for discontent, but the cost involved (welfare, unemployment insurance, etc.) constituted a terrific drag on the economy.

Reagan rejected the traditional "make work" policies associated with the fight against unemployment as inefficient and only a temporary cure. It would be much better, he felt, to let the market handle the problem. Theoretically, the market would handle the problem by allowing the price of labor to drop until it was more profitable for businessmen to have goods produced here in the U.S. than overseas. President Reagan wants to put us back to work, only at a pay rate substantially below the one we now command.

Unemployment under Reagan has remained essentially stable, at about 7% of the workforce. But that is only part of the story. Since 1980 the U.S. has lost a million manufacturing jobs that paid more than $25000 a year. Between 1979 and 1983 8 million new jobs were created, three-fifths of which paid less than $7000 a year.

Intimately connected with the problem of unemployment is the problem of inflation. Inflation occurs when there is more money to buy things than there are things to be bought. Thus there will never be inflation, no matter how much money increases in a system, as long as there is an equal increase in the amount of consumer goods to be bought.

When money is added to a system without a corresponding addition of consumer goods, inflation will result. The inflation of the Carter years was the delayed result of President Johnson's "guns and butter without a tax increase" policy during the Vietnam years. If we had paid for the war as we went along by increasing taxes, inflation would not have resulted because money would have been withdrawn from the system at the same rate consumer goods were displaced by military hardware. Johnson knew that a tax increase would make the war unpopular, and so chose to wait until it was over to pay for it.

Reagan did, of course, decrease inflation. He did this not by increasing the quantity of consumer goods in the system, but by decreasing the amount of money in the system. He did this by allowing heavy industry (with its high paying jobs) to deteriorate, and by attacking unions, farmers, and the middle class in general. More on this later.

Tax reform
The U.S. has traditionally maintained one of the world's most voluntary tax systems. We paid what we said we owed, only a small percentage of returns were checked, and penalties for cheating were generally mild. With the economic downturn of the early 70's this began to change.

People began working in the "underground" economy, where work was done for cash and income was not reported to the government. In the late 70's this was estimated to account for 10% of the total economy, and it has no doubt increased. Tax shelters were increasingly used to legitimately avoid taxes, and outright cheating became popular for those not wealthy enough to afford tax shelters. Radical groups sprang up advocating open refusal to pay taxes.

Reagan's plan for tax reform was to close all tax loopholes and make sure that everyone, especially corporations, paid their fair share. He felt that people then would stop planning their financial transactions on the basis of its effect on their tax liability and start making decisions on a company's ability to make a profit. The very rich would plunge into business with renewed vigor once they were allowed to keep two thirds of their profits, instead of only one half as before. Corporations would quit shuffling their money around in order to avoid taxes and get on with business.

Reaganomics sounds good, but not everyone believes it will have its intended effect. Most of the loop-holes being closed were the ones which allowed the middle class to enjoy a high standard of living.  Corporate tax loop-holes are being withdrawn, only to be replaced with loop-holes in monopoly laws which will allow them to pass their increased tax load along to consumers in the form of higher prices.  The very rich are using their tax savings not to invest in new productive facilities, but to engage in mergers, corporate takeovers, overseas investment, and other fast money deals unlikely to decrease unemployment but likely to aggravate our balance of trade deficit and the national debt.

Before passing over to a critique of Reaganomics and an examination of the forces which caused it to appear at this particular time, it would be helpful to take a quick look at the long dominant economic policy it hopes to replace, Keynesianism.

John Maynard Keynes was an English economist active during the first part of the 20th century. The economic beliefs he struggled against were known as "laissez faire", which meant leave us (business) alone. The trouble with leaving business alone was that it tended to produce cyclical economic activity where over optimism passed into giddy euphoria which soon burst and left a terrible depression which could be overcome only very slowly.

Keynes felt that the economic cycle was a necessary and good part of the system. Without the "boom" phase where money was abundant, new ideas would have a much harder time being introduced, and without the "bust" period when money was very tight, poorly managed and inefficient firms could muddle their way along forever.

The "boom" preceding 1929 had, however, produced too many questionable business deals, and the "bust" which followed was taking way too long to resolve. The workers weren't taking their pay cuts with the good grace the theory predicted, and indeed were beginning to mouth radical slogans imported from Europe, which boded no good for the system as a whole.

Keynes felt, and eventually others agreed, that the system could be tempered by withdrawing some money from the system during its "boom" phase and injecting some money into it during its "bust" phase. That is, money would be taxed away from the rich when times were good, and given to the poor when times were hard. In addition, credit would be tightened when times were good, and loosened when times were hard.

So was born F.D. Roosevelt's New Deal. Hundreds of thousands of broke Americans went to work on public works and conservation, at bargain basement prices. The wages they spent translated into demand for consumer goods, stimulating business to a degree, but not enough to create a recovery. To do this it would have been necessary to pay the workers enough so that they had "discretionary" income enuogh to buy radios, cars, houses, and other consumer goods that would have put other people to work and created a "snowball" effect, where one person's purchases become another person's wages, and so on.

America's "movers and shakers", however, were not about to consent to a massive redistribution of income without benefits more tangible than improvements to the infrastructure. They wanted profits W.W. Two came along to twist F.D.R.'s "New Deal" into today's military-industrial complex.

The production of weapons became the regulator of America's business cycle. When the economy needed a stimulus the government could increase orders for military equipment. Building swords became the precondition for building plowshares.

War became the bottomless hole down which America's surplus production could be dumped. The American air effort in Europe during W.W. Two, which was only marginally successful in slowing Hitler's war machine, cost over $43 billion by wars end. More recently, by 1968 the U.S. was shipping 1.2 million tons of bombs a year to Viet-Nam. The allied forces used conventional munitions in Viet-Nam during 1968 at a rate of nearly $14 million a day. By the end of 1968 $4.8 billion worth of aircraft had been destroyed.

War, however, is not a particularly good economic stimulus. For one thing, it's too capital intensive. To be good Keynesian stimuli a program must be labor intensive, like the New Deal ditch diggers and brick layers. Since it takes a lot of money, machinery, and industrial plants (capital) to produce modern war material, a lot of money is returned to the rich (who own the capital) in the form of profit, and instead of being spent on consumer goods is reinvested in productive equipment, itself capital intensive.

Another problem with war as an economic stimulus is that when people come to see it for what it is they become extremely uncooperative. Given their choice, most people will take a depression any day.

I'm reminded of the Northwest American Indians who had inter-tribal contests to see who could burn the most blankets. Whoever lost was shamed. Who ever won gained status. The object of the game was just to keep the game going.  Making blankets just to burn looks silly when you look at it alone, but put it beside war and it looks positively brilliant. Maybe we should challenge the Russians to a blanket burning contest.

Another problem with war is that it is inflationary. It pumps a lot of money into the system without producing any consumer goods. The economy is so busy producing war material it can't fill demand as it normally would. So business can raise prices and still find buyers. Inflation decreases the value of all money, however, including that in banks and that out on loan.

Keynesian remedies have not only been misdirected into unsuitable channels, the nature of the economy has made them less effective. Keynes prescribed remedies for a competitive system, where if one company raises prices, business would go to a competitor who didn't. As the system becomes increasingly monopolized, Keynesian remedies become decreasingly effective. Anyone who thinks monopolies are not part of American business should reflect on the way car prices and interest rates follow the leader.

Reagan's opening move in his plan to make the U.S. great again was to increase the defense budget to levels not seen since W.W.2. This fulfilled three conditions vital to his plan. (1)It drew the military closer to his side. (2) It gave the rich a profitable place to invest their money. (3)It raised the interest rate.

(1) The need to cater to the wishes of the military brass may seem to be a problem more appropriate to a third rate dictatorship than to a super-power like the U.S. Ordinarily that would be true, but these are not ordinary times. The military has yet to recover its prestige from the Vietnam years. The weapons with which it must do its job are aged, and that is hard on the brass' sense of self-esteem. More importantly, the next ten years or so appear to be one of sever crisis, requiring the utmost in discipline from the armed forces. The idea of a military takeover in the U.S. may seem absurd, but remember that the day President Reagan was shot ex-Pentagon boss Alex Haig proclaimed himself in charge. It probably is not an overt takeover Reagan fears, but a subtle shifting of allegiance undetectable from the outside.

(2)The up-coming crisis that Reaganomics is preparing us for involves the near destruction of the middle class. The opening shot in this campaign was fired when Reagan fired the PATCO air traffic controllers. This was the first union broken, and the fact that it was the government that did it sent a signal to corporate America that it was open season on unions. Since then concession after concession has been given, wages have been reduced, and union membership has fallen off drastically.

One of the next steps will be to reduce the standard of living of all professional people, like doctors and lawyers. The groundwork for this was laid with the immense increase in the number of professionals in training in the university.

The final and most difficult part of the attack on the middle class involves the elimination of the small business people. They were already weakened by the loss of business due to the decreased purchasing power of the union people. A great many could be bankrupt simply by making it more profitable to invest money in places other than small business. The military fit into the picture perfectly.

The estimated cost of the completed Strategic Defense Initiative (Star Wars) program is one-two trillion dollars. That is a lot of money which could be spent elsewhere.  Moreover, because military spending is capital intensive, that is, it requires a much higher per cent of the money invested to be spent on machinery and the physical plant than do other sectors of business, jobs are actually lost when money is spent on the military rather than in other sectors of the economy. According to Employment Research Associates of Lansing, Michigan, 5000 jobs were lost for every one billion dollars spent on the recent military buildup.

(3)Reagan proposed, and the Congress agreed, that this massive military buildup should take place without a tax increase. The economic recovery that Reagan predicted would follow from his policies, and pay for the buildup without necessitating heavy borrowing, never took place. The U.S. went on a borrowing binge which drove the interest rate up to over 20%. Money that was invested in business with a rate of return less than this soon departed for the greener pastures of government securities, certificates of deposit, and the like, leaving many small business people unable to borrow the money they needed to stay in business.

The only way businesses could compete with the government for the money it needed to survive was to become increasingly efficient, and to return a higher rate of profit. Unfortunately, the only way most could do this was by cutting labor costs. By doing this they were cutting the purchasing power of the very people who bought their products. So by saving their individual skins in the short run they were cutting their collective throats in the long run.

Reagan's tax reform had features which made it probable that businesses which couldn't become more efficient would sell out. The tax reform raised the capital gains tax from 25% to 50%. This, coupled with the excess cash held by big business, caused record numbers of small and mid-sized firms to sell out in 1986.

The final and cruelest stroke is yet to come.  We saw earlier that military spending was inflationary, that is, it increases the quantity of money in the system without increasing the quantity of consumer goods. There are' two reasons the inflationary effect of Reagan's military buildup hasn't hit home yet; (1)the money used to pay for the buildup was borrowed and has yet to be repaid, and so is not yet in the system, (2)the wage cuts taken by union members and other wage workers will partially offset the money added by the buildup. Eventually the factors tending to inflation will hit home, and when they do you'll see inflation like you never thought possible in the U.S. Life savings will evaporate. Nest eggs will be shown to be illusions. People living on fixed incomes will be hard pressed to feed themselves, let alone maintain their standard of living.

The prime rate peaked in 1981 at 20.5%.  Ten year Treasury bonds also peaked during that year at nearly 14%. The government will prefer to pay these debts with inflated dollars. The labor movement will have regained enough strength by 1991 to regain some of the losses forced upon it by Reaganomics, just in time to take the blame for the inflation caused by Reagan's military buildup.

Why this attack on the middle class?
The middle class is the facade erected in front of the factory. It gives the lie to the old dictum that the rich get richer while the poor get poorer. It is a buffer between the rich and the poor. It serves as a role model for the poor who wish to better themselves. The middle class does some organizing for the rich. These jobs are not essential. Workers can learn to live without illusions, and organizing can be done cheaper by wage laborers. The middle class is a luxury the rich can no longer afford.

Another reason for the elimination of the small business person is because of the competition they offer big business. As you recall, business in a competitive environment can't raise prices to compensate for wage raises they have given. However, if big business can eliminate small business, and then organize monopolies among themselves, they can match any wage increase with a corresponding price increase, thus negating that drain on the rate of profit.  Protectionist measures will insure that foreign competition doesn't hinder American industrialist's ability to raise prices at will.

This monopolization of business is taking place now with Wall Street's merger mania, and Congress's increased relaxation of anti-trust laws. This relaxation is somehow supposed to allow American industry to compete better against "unfair" foreign competition, but in reality will make U.S. industry more competitive by reducing the U.S. worker's standard of living to one equal to that of a worker in the developing world.

Summary of Reaganomics
One of the middle class' functions is to organize the production\consumption process in the rich people's behalf. The U.S. middle class has shown itself to be incapable of that task by letting the rate of profit drop too low. The rich, who make the rules through their influence in Washington, have decided that the middle class must either make the workers accept a cut in their standard of living, or accept a cut in their own standard of living instead.

The military buildup simultaneously provided somewhere for the rich to invest their money, lured money away from small business, destroyed thousands of jobs, and set the stage for rampant inflation, which will infuriate the middle class and goad them into action. Those not covered by cost of living allowances will watch their earnings shrink, and listen to a chorus of government and business leaders blame unions.

The Reagan attack on organized labor, initiated with the firing of the striking air traffic Controllers, showed the middle classes a way out of their dilemma. It is not enough to extract concessions from workers when they are weak, during a recession. Their organizations must be destroyed so that they can't reclaim lost wages when an upturn in the business cycle increases production, thus decreasing the number of unemployed who are potential strike-breakers. Gaining concessions from workers during the "bust" phase of the business cycle is easy, preventing them from reclaiming them in the "boom" phase is not so simple.

Signs of the times
Doubtless few will be prepared to accept my indictment of our leaders on the circumstantial and possibly mistaken arguments presented here. That our President has led a charge into a depression will, however, find more acceptance than it would have a few short years ago.
One of the tests of a theory is that it not only be able to explain the past in an acceptable manner, but that it also be useful in predicting future events. The more precise the predictions, the more strength they give a theory. A prediction as vague as "continued hard times followed by a gradual business upturn" would prove nothing.

I have assumed that inflation is a key part of Reaganomics. It is the whip with which the rich will force the middle class to "put up or shut up", that is, destroy the organized working class or be destroyed themselves. That the rich know when the inflation will begin, and at hat approximate rate it will increase is a fair deduction from the assumption that they planned it in the first place.

Now, inflation can either hurt you or help you, depending on whether you owe people money or people owe you money. Since inflation decreases the value of all money, those who owe money are helped, and those who are owed money are hurt.  Thus, the very rich, who are in the know, would want to be holding a minimal amount of paper representing money owed to them, such as all bonds, certificates of deposit, etc. They would want to have their money in fixed assets such as stocks, land titles, or productive equipment. They would want to buy these things with borrowed money, if possible.

As an indication of this, consider the change in the U.S.'s role in world finances since Reaganomics took over.  In 1982 the U.S. was the world's largest creditor nation. Other nations owed us $141 billion more than we owed them. In 1985 we became a debtor nation for the first time since 1914.  We are now the world's largest debtor nation and we greedily try to borrow more foreign funds. On the other hand, the U.S. lenders are becoming increasingly interested in trading third world debt for third world property.

Keeping these things in mind, let’s look at one possible scenario for the future. One of the most difficult stockpiles of money to turn into fixed assets, both because of its immense size and its public status, will be the national debt. Keep in mind that only those with accurate information will get their money out at the optimum time. Someone must be left holding the bag of inflated dollars, these dollars must be redeemed, and someone must take a loss on them before inflation can be eradicated.

Reaganomics is now at work selling the government's land, oil and timber leases, businesses, strategic metals, and anything else it has of value, for dollars that are soon to be worth many many times less than they now are. So as you see more and more articles in the newspaper about this or that government property being sold to the highest bidder, keep in mind that the highest bidder probably is counting on inflation to make his purchase very worthwhile, and, indeed, that a small group of men have probably been conspiring amongst themselves to see what the high bid, and who the high bidder would be.

You have probably heard how obsolete U.S. productive equipment is, how Japanese steel mills produce better steel cheaper because they incorporate technical innovations discovered since ours were built. Automated factories of all sorts overseas now produce with much less manpower, increased efficiency, and a per unit cost which we can't match.

When will the U.S. retool its factories so we can once again be the most efficient, modern producers in the world? One thing for sure, if the rich decide that that would be a good plan (and nothing says they will decide that for sure) they will want to borrow the money and spend it while it still holds its value, and pay it back after inflation has devalued a great bit of it.

Since the rich (who are in the know) won't be lending out any of their money at that time, those wishing to retool will have to get it somewhere else. The most likely source is pension funds. With the mob controlling the unions, the government indifferent at best to the worker's welfare, and the whole project wrapped in Old Glory, it should be a piece of cake to sell it to the union rank and file.

As the merger-mania comes to completion, look for the government to gradually relax anti-trust laws. They will do this as gradually as conditions allow them, and will attempt to disguise them as rationalizations of industry, ways to compete with "unfair" foreign competition, or onerous obligations accepted by industry out of their concern for the general welfare.

A current (3-22-87) example of this can be seen in the airline industry, possibly so central an arena because of its largely middle class clients. The government has decided that the best way to decrease the long wait between commercial aircraft's loading time and take-off time at several of the nation's busier air terminals is to relax anti-trust laws.

One last sign of the times to keep your eyes open for; the increased power of the executive branch of government, and., the decreased power of the legislative branch. In order for the very rich to obtain maximum benefit from the coming crisis, it is important that government be able to respond very quickly to developments, keep some news absolutely secret, and do everything without much public debate. If the crisis creates enough hostility among the poor so that the rich feel their power to be threatened, the increased power of the executive branch may come about through a semi-legal seizure of power which, while claiming to be revolutionary, will not disturb existing property or status relationships.

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