THE REAGAN-BUSH-CLINTON-BUSH YEARS: INEQUALITY AT PRE-DEPRESSION LEVELS

GEORGE IRVIN, POST-AUTISTIC ECONOMICS REVIEW - Max Hastings, a former editor of the Daily Telegraph, is not known for holding strongly socialist views, but the extent of inequality in today's Britain has led him to write: "Today's filthy rich are wealthier, healthier and more secure than ever. . . It seems remarkable that any high roller these days resorts to fraud to enrich himself. It is possible to bank such huge sums legally that criminality seems redundant."

There is now a voluminous literature on growing inequality in Britain and the USA, not to mention an avalanche of newspaper articles on City bonuses and fat-cat salaries. For many years the conventional wisdom was that as countries grow richer, inequality at first rises but ultimately tends to fall when countries become 'fully industrialised', a hypothesis first advanced by Simon Kuznets in the 1950s. Over the past 30 years, however, inequality appears to have risen for the OECD countries taken together. This result is most strongly influenced by what has happened in the Anglo-Saxon world; notably, Britain and the United States where income and asset inequality today has returned to levels last seen in the 1930s. Squaring this trend with conventional economic theory has required telling a story about the growing premium placed on highly educated labor (including top entrepreneurial talent) in the 'new economy' pioneered in the Anglo-Saxon world while bemoaning the lack of dynamism of 'old Europe'. An alternative story takes a closer look at the changing political and economic landscape of the period.

The rollback of the 'welfare state' - particularly in the UK, but also of its weaker US cousin set up under Roosevelt's New Deal - is the main legacy of the Reagan-Thatcher years, underwritten by subsequent governments in both countries and whose international expression is the Washington Consensus. The neo-liberal revolution of the 1980s had two critical implications for developmental alternatives to the pure free-market model; first, it was accompanied by the demise of the ‘socialist' (USSR-style) centrally-planned economy option; secondly, in Europe it helped prompt the re-emergence of unfettered free-market capitalism as an alternative to the dominant post-war social democratic consensus.

Underlying the Reagan-Thatcher political project were structural changes in both the USA and the UK; notably, the decline of industrial capital and the trade unions, the rise of the international financial sector and the growing importance of the two-tier service economy; ie, low-wage and low-skill (eg, MacDonald's, Wal-Mart etc.) and high-tech (eg, Microsoft, Goldman Sachs etc.). The much-hyped 'new economy' has helped to fragment labor markets, change the structure of remuneration, weaken job security and the relative bargaining power of capital and labor and spread neo-liberal ideology. Growing inequality fed back into the political consolidation of neo-liberalism in a variety of ways ranging from the shift towards individual and corporate donations in the funding of political parties, the concentration of media power in the hands of fewer owners and the reduction and commoditization of politics into sound-bites and spin. In short, the modern Anglo-Saxon model has challenged the European 'welfare state' version of the market economy under which a relatively strong, democratically-financed state mediates conflicts between capital and labor and guarantees political and social cohesion and high levels of public provision. . .

In the United States during the 1980s, airlines, trucking, banking and some utilities would be deregulated while industrial concentration---as reflected in growing corporate mergers---would grow explosively in the 1990s. As top corporations became more concentrated, CEO pay grew disproportionately, aided by favorable tax legislation. Reagan's Economic Recovery Act of 1981 greatly reduced top rate of personal tax while extending corporate tax write-offs and easing depreciation rules; further tax reductions followed in 1986. Income inequality grew strongly under Reagan and Bush I, a trend the Clinton years did little to reverse. Indeed, the 1997 'Taxpayer Relief Act' produced another bonanza for the wealthy: it is estimated for every $1 in tax savings going to the bottom 80%, the top 1% of income earners saved over $1000 in tax. While swathes of unionized skilled workers lost their jobs as traditional industries disappeared, the remuneration of top CEOs grew. As the president of the New York Federal Reserve Bank, William J McDonough, noted in a speech to mark the first anniversary of 9/11, in 1980 America's top executives on average earned about 40 times as much as the average worker; by 2000 the ratio was 400:1, a jump impossible to explain by corporate performance.

The distribution of income in the US today is the least egalitarian of any of the major industrialized countries. This was not always true. The policies introduced under Roosevelt's New Deal in the 1930s improved the lot of the poor, the Second World War brought full employment and the post-war period saw further strides in reducing the extreme inequalities that characterized US capitalism in the early 20th century. However, over the past three decades the distribution of household income in the US has become as unequal as it was before the Great Depression. In broad-brush terms, this shift is explained by the fact that the rich---the very top percentiles of the household income distribution--- have become very much richer than before. By contrast, income has stagnated for the vast majority of Americans while the bottom twenty percent (the lowest quintile) is actually worse off than in 1970.