August 15, 2006
The Economic Interests of the Rich Posted by John Steele Gordon at 09:10 AM EST In “Class Acts and U.S. Politics,” posted yesterday, Fred Smoler wrote, “One way to describe Reagan’s political gift is to note his ability to simultaneously advance the economic interests of the rich while speaking for the moral passions of the working poor.”
Far be it from me to disagree with the idea that one of Ronald Reagan’s greatest political gifts was his ability to give voice to “the moral passions of the working poor.” He connected with the average joe in a way that has made him one of the giants of American history. But the idea that he “advanced the economic interests of the rich” is, at best, a Democratic talking point and an unusually silly one. For necessarily implicit in it is the idea that “Reaganomics” therefore retarded the economic interests of the non-rich. The “working poor,” in other words, loved him despite his having made them poorer by his policies.
In turn, that can only be true if it is also true—and this is a core, though carefully unstated, liberal belief—that the average joe is too stupid to know what’s good for him. He needs to be guided by a liberal elite so that they can protect him from the likes of smooth talkers such as Ronald Reagan. Since I’m a small-D democrat, which fewer and fewer liberals are, I think that’s rubbish. Living creatures have been evolving, and therefore getting better at determining and more capable of pursuing their self-interests, for four billion years. The average joe doesn’t need someone with a summer house in Nantucket to help him do it.
The rich, by definition, are a small minority of the whole body politic, and, in what is incontestably a democracy, pursuing their interests contrary to the interests of the great mass of the people would be political suicide. Either Reaganomics has helped the great majority or it would have died a painful political death. People would have treated it with the same enthusiasm they would show for, say, a tax credit on cars costing over $100,000.
So how can the idea that “Reaganomics”—principally big cuts in marginal income tax rates and monetary restraint to control inflation—is harmful to the poor be so enduring? There are several reasons.
One is that it is certainly bad for the interests of the liberal elite. If everyone gets better off, they won’t have any sheep to be the shepherds of. And the last major power center dominated by the liberal elite is the mainstream media, which never tires of repeating the idea.
But mostly, I think, it is that Reaganomics is very, very good for the rich in both the short and the long term, while its principal benefit to the non-rich is in the long term only. Liberals pretend there is no long term. It is mathematically inescapable that cuts in marginal income tax rates are going to benefit immediately those with large incomes more than those with smaller ones, let alone those with incomes too low to be taxed. If that were all there was to it, then Reaganomics would indeed be merely “tax cuts for the rich.”
But of course that is not all there is to it. Cuts in marginal rates promote economic growth, and that benefits everyone. In the long term it benefits everyone in spectacular fashion. Since this is a history blog, let’s look at the history. Last Saturday, it happens, was the twenty-fifth anniversary of Reagan’s signing of the Economic Recovery Tax Act, which, along with monetary tightening by the Fed, began the great experiment in Reaganomics. The act cut income tax rates 25 percent across the board, indexed rates to inflation, and cut corporate income tax rates in half. What followed has been the most prosperous quarter century in the history of the Republic. GDP has more than doubled in real terms and the standard of living, at nearly all economic levels, has done likewise.
More, the Dow Jones Industrial Average has gone from around 800 to over 11,000. (To have that great an increase in the next 25 years, the Dow will have to reach 150,000 by 2031.) Housing values, thanks partly to greatly lowered interests rates, have risen by a factor of 10 in many areas of the country. In the 1930s—about when Rip Van Liberal philosophically nodded off to sleep—that would have been great for the rich only, because most people rented and had no substantial financial assets. Today, over half of all families have investments in stocks, bonds, and mutual funds. Many more are the beneficiaries of pension funds that are invested in them. Almost 70 percent of families now own their own homes.
One test of a good idea, of course, is, Has it spread? The answer is yes. According to last Saturday’s Wall Street Journal (available online to paid subscribers only), the average top personal income-tax rate in the developed world in 1980 was 67 percent. Today it’s 43 percent. The average corporate rate was 48 percent and is now 29 percent. France’s top rate in 1980 was 60 percent; it’s now 48 percent. Japan has gone from 75 percent to 50 percent, Canada from 60 to 39, Britain from 83 to 40. Even Sweden, the poster-child for the welfare state, has cut its top rate from 87 percent to 54 percent.
As Reaganomics has spread, so has prosperity. The world is a far richer place today than it was in 1980. And not just for the rich. Everyone seems to understand that, except for the liberal elite, who also can’t understand why no one listens to them anymore.
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