SELF-INFLICTED DAMAGE

By the 1980s, not only were the United States and the United Kingdom experiencing lower growth than they were accustomed to, but they also felt continental Europe and Japan catching up.

For both Margaret Thatcher in the UK and Ronald Reagan in the US, what was to blame for the slump in the late-1970s was clear (though we now know they really had no idea). The countries had drifted too far to the left—unions were too strong, the minimum wage was too high, taxes were too onerous, regulation was too overbearing. Restoring growth required treating business owners better through lower tax rates, deregulation, and deunionization, and getting the rest of the country to be less reliant on the government. As mentioned earlier, the idea that tax rates need to be low to avoid disaster is of recent vintage. In the United States, the top marginal tax rate was above 90 percent from 1951 to 1963. It declined afterward, but remained high. Under Presidents Reagan and George H. W. Bush, top tax rates came down from 70 percent to less than 30 percent. Bill Clinton pushed them back up, but only to 40 percent. Since then they have bounced up and down, as the US presidency passes between Democrats and Republicans, but they have never gone much higher than 40 percent. Lower taxes were accompanied, first under Reagan and then even more strongly under Clinton, by “welfare reform” (in other words, gutting welfare), which was justified both on grounds of principle (the poor must be more responsible and therefore welfare must become workfare) and out of budgetary compulsion (resulting from diminished tax collection). Unions were brought to heel, both by changing the laws and by directly using state power against them (Reagan, famously, called out the army to break an air traffic controllers’ strike).

In the UK, something similar happened. The highest tax rate went from 83 percent in 1978 to 60 percent in 1979 and then to 40 percent, and has remained close to that ever since. The very (too?) powerful unions of the postwar era were taken down with a firm hand—the miner’s strike of 1984 was a defining moment of Margaret Thatcher’s rule—and have never recovered. Deregulation became the norm, though the integration with regulation-friendly Europe limited how far it could go. The one difference between the UK and the US is that there was never a major attempt to cut welfare (Mrs. Thatcher apparently wanted to, but her cabinet colleagues dissuaded her). Public spending did fall from 45 percent of GDP to 34 percent during the Thatcher years, but it then partially recovered under subsequent governments.²⁷

The reason why such radical changes were possible probably had a lot to do with the anxiety that came with slowing growth. Despite the fact that there is no evidence massive tax cuts for the rich promote economic growth (we are still waiting for the promised turnaround in growth in both the US and the UK), at the time the evidence was much less clear. Since growth had stopped in 1973, the natural reaction was to turn to the critics of the Keynesian macroeconomic policies of the 1960s and 1970s, such as the (right-leaning) Chicago school of economics professors and Nobel Prize–winners Milton Friedman and Robert Lucas.

Reaganomics, as the dominant economics of this period came to be called, was quite open about the fact that the benefits of growth would come at the cost of some inequality. The idea was that the rich would benefit first but the poor would eventually benefit. This is the famous trickle-down theory, never better described than by Harvard professor John Kenneth Galbraith, who claimed this was what used to be called the “horse and sparrow” theory in the 1890s: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”²⁸

Indeed, the 1980s ushered a dramatic change in the social contract in the US and the UK. Whatever economic growth happened since 1980 has been, for all intents and purposes, siphoned off by the rich. Was Reaganomics or its UK version responsible for it?