The Rich, the Poor, and Reaganomics

When we come to measure the success of a presidency, it matters a great deal whether the administration in question made life better or worse for the poor. A culture whose values spring from Judaism, Christianity, and a compassionate humanism cannot be satisfied unless the poor are well cared for. Those who are better off can pretty much take care of themselves. But most (not all) of the poor are too young or too old, too ill or too disabled, to care for themselves. In this regard, the two accusations most consistently directed against the administration of Ronald Reagan are: (1) that it hurt the poor (and the middle class) and (2) that it increased the gap between the rich and the poor. Getting at the validity of these propositions requires careful and disinterested analysis.

Such analysis is not easily come by. In the religious communities, as elsewhere, almost nobody was entirely nonpartisan about Reagan and his policies. Yet it is perhaps not too old-fashioned to think that religious thinkers should be devoted to telling the truth. Moreover, what happens to the poor among us is a matter of great moral moment, and our reflections about alternative policies should be informed by careful attention to the facts. Admittedly, it is not easy to get at the truth, especially since most journalism, on which we depend for our sense of what is going on, is both intellectually weakest and most partisan in reporting economic questions. It is best, therefore, to go directly to primary sources, in this case the neutral annual report of the Census Bureau, Money, Income and Poverty Status in the United States, 1988 (Series P-60, No. 166).

This record shows, in sum, that the Reagan administration did far better for the poor than did the Carter administration. In particular, the economic achievements of black Americans reached all-time highs. Yet this is not the record most people have heard of through the media.

For eight long years the nation’s cultural elites did everything in their power to persuade the general public to think as ill of Ronald Reagan as they did. They predicted eight recessions to the one that actually occurred. They spoke with derision of “Reaganomics,” until the so-called “misery index” invoked by Jimmy Carter—which stood as Carter left office at a postwar high—was brought down far more authoritatively (and quickly) than anyone had expected. At that point, as Reagan wryly noted, the media stopped speaking of “Reaganomics.” And when the media began perceiving good economic news—about the growing millions of employed persons and the longest peacetime expansion in American history—their reporting of it typically came surrounded with as many fragments of bad news as they could find. The Reagan era by no means brought economic Utopia, but in between the malaise of the Carter era and the malaise of the Bush era, it achieved a great deal for the poor.

Three years of double-digit inflation under Jimmy Carter had wreaked havoc on the poor. Those bad years cumulatively depleted nearly 40 percent of the value of all incomes. During Carter’s single term, the poverty level for a nonfarm family of four soared from $5,815 to $8,414, and thus some 4.3 million persons (those on fixed incomes) were pulled down into poverty.

The basic facts of the Reagan years are now a matter of historical record. The Harvard economist Lawrence Lindsey expected to show that the growth achieved by Reaganomics decreased the taxes of the rich and hurt the poor, but found that the facts were exactly the reverse, as he reports in The Growth Experiment (1988). And later figures than his, the figures for 1988, can now be matched against the figures for 1980, Carter’s last year. One can measure exactly how much Ronald Reagan achieved for the poor and what an enormous increase in taxes he exacted from the rich, even while lowering tax rates across the board.

Reagan exempted virtually all the poor from federal income taxes, in part by almost doubling personal exemptions. Thus, a household earning less than $14,000 was by 1986 highly unlikely to be paying any federal income tax at all. (The effect of this was weakened by the steep increases in Social Security Taxes [FICA] mandated during the Carter years.) The Tax Reform Act of 1986 continued the reform process, expanding the Earned Income Tax Credit to the point where households with dependents in effect now pay no federal taxes up to nearly $10,000, and only a fraction of the combined employer/employee contribution to FICA up to nearly $20,000.

In 1976, Carter had attacked President Ford for a “misery index” much lower than his own policies were to cause by 1980. Carter ended up with interest rates at 19 percent, inflation at 13.5 percent, and unemployment at over 7 percent—a total of 40. By the end of his term, Reagan lowered this total to 17: interest rates 8 percent, unemployment 5.2 percent, inflation less than 4 percent. (In the narrow sense, the misery index counts only the inflation plus unemployment rates: a total of 20 for Carter, 9 for Reagan.)

All this was very good for the poor—not only the drop in inflation (which under Carter had driven so many people into poverty), but also the rise in employment and income. For example, the number of blacks employed when Carter left office was 9 million; during Reagan’s eight years, this number shot up to 11.4 million. A higher proportion of black adults was then employed than at any time in history.

Partly for this reason, the total income received by the 27 million American blacks, which in 1980 was $191 billion (in constant 1988 dollars), soared in 1988 to $25

9 billion. This sum is larger than the GNP of nearly all of black Africa and, indeed, of all but ten nations in the world.

By 1988, half of all married-couple black families had an income above $30,424, the highest median income ever achieved by black families. The number of black families earning more than $50,000 (in constant 1988 dollars) jumped from 392,000 to 936,000 during Reagan’s eight years.

All this good news for blacks has to be matched, however, against a continuing serious problem caused by cumulative personal choices. The number of single parent families among blacks, which had been rising with great rapidity since the 1960s, grew more slowly, but still significantly, from 1.9 million in 1980 to 2.2 million in 1988. More than half of all black children were by then the financial and psychological burden of one parent. Most of these single parents were female and the vast majority were not in the work force. Such families, therefore, were hardly able to benefit by economic growth, since they were disconnected from employment.

Indeed, the rapid growth in the number of female-headed households during the past thirty years dramatically altered the shape of poverty (not only in the U.S., but in virtually every welfare-state economy). Fifty years ago, a high proportion of the poor lived in married-couple families, so that higher employment levels and decent wages—economic growth—could eliminate most poverty. In that context, President John F. Kennedy could credibly say that “a rising tide lifts all boats.” The new shape of poverty has falsified this belief. Female heads of household who are neither employed nor in the work force—and who perhaps, with young children to care for, shouldn’t be expected to be—no longer rise with rising tides. They depend almost entirely on welfare. Such families, especially in urban areas and when the women are quite young, may also live in considerable isolation from the rest of society except for their children, their boy friends, and the television set. Such poverty is not easy to cure by government programs. Indeed, expanding government programs, if they do not cause this phenomenon, are at least coincident with its growth.

Because of the success of Reaganomics in generating an unprecedented number of months of uninterrupted economic growth, the media began to turn attention away from the absolute condition of the poor and towards a second issue: inequality. The Census Bureau divides the 92 million U.S. households into five equal segments (“quintiles”), ranked by annual reported income, and the media began to stress the fact that the proportion of income earned by the bottom 20 percent declined during Reagan’s two terms. Most journalists overlooked the more important reality that the total income of the bottom quintile (in constant dollars) rose substantially between 1980 and 1988, by nearly 15 percent.

Since noncash income from welfare benefits isn’t even counted in Census Bureau figures, the income of the bottom quintile cannot be raised by higher welfare benefits, except those in cash. And if all welfare were given in cash, the cost of bringing every single person above the poverty line would be a mere $35

billion, one-third of the present total federal expenditure for means-tested programs. Three times more money is now allotted in benefits than in cash.

The 18 million householders in the bottom 20 percent no longer have the same characteristics as those who were in the same quintile sixty years ago. In 1930, most householders in the bottom quintile presided over married-couple families. In 1988 more than half (52 percent) were single persons. One-third of all such householders in 1988 were widows and one-third were single mothers with small children. So it is not surprising that nearly two-thirds of the householders in the bottom quintile did not work at all, and that only 12 percent worked full-time for at least 48 weeks. After all, some 40 percent were older than sixty-five. Thus, most of these householders were either living in retirement or else were unemployed single females with small children. In 1988, only one-fifth of the whole quintile lived as married-couple families (often with grown children).

Nonetheless, nearly one-third of those in the bottom quintile were above the poverty line. The cutoff point defining the bottom fifth was 115,102 in 1988, well above the poverty line (|12,385) for a family of four. Over half of the householders at the bottom were living alone, and for such persons the poverty line was much lower. Indeed, it was possible for one person (or couple) to have an income nearly twice as high as the poverty line and still be in the bottom 20 percent.

In sum, the bottom fifth did better in 1988 than it had in 1980. And so did every other quintile. In fact, practically all brackets of Americans moved up the income ladder between 1980 and 1988.

In one of its measurements, the Census Bureau divides households by fixed (real) dollar amounts into nine brackets. According to this method, the percentage of American households reporting an income of 115,000 or less dropped between 1980 and 1988 from 28.8 to 27.3 percent. The percentage of households reporting in the next two brackets, between $15,000 and $49,999, decreased by more: from 55 percent to just under 52 percent. These figures indicate that households at the lower end were moving upwards. And indeed, the percentage of those earning from 150,000 to 174,999 jumped from 11.3 to 13.4, while the percentage of those in the next bracket, $75,000 to $99,999, also jumped (from 2.9 to 4.2) and the percentage of those earning more than $100,000 actually doubled, from 1.6 to 3.2. In sum, from 1980 to 1988, lower brackets were shrinking, upper ones expanding; Americans were moving up. Indeed, if you want a pocketbook reason for President Reagan’s popularity, recall that the number of American households reporting an income of $50,000 or more (in constant 1988 dollars) grew by 6.3 million between 1980 and 1988, and the percentage of working-age Americans holding jobs (63.4 in July 1988) reached an all-time high.

Since these achievements cannot be erased from the neutral Census Bureau reports, those who despised Reagan and what he stood for had two choices: either grudgingly to admit that he did far better than they had predicted, or to change the terms of measurement. As a result, critics stopped insisting that the poor fared worse under Reagan than under Carter. They began stressing instead the growing “gap” between the top quintile and the bottom quintile. Even here, if they were honest, they were obliged to notice as causes of the phenomenon profound social changes far beyond the reach of government.

For one thing, the Reagan tax cuts had little to do with the “gap”; the Census Bureau figures defining quintiles of income are pre-tax. More importantly, the demographic profiles of householders in the top and bottom quintiles have diverged increasingly in recent decades. Thus, only 22 percent of the householders in the bottom quintile are married, compared to 82 percent in the top quintile. At the bottom, 52 percent are single-person households, at the top only 5 percent. Put differently, at the bottom, 52 percent are living alone; at the top, 83 percent have at least two persons under one roof, and two-thirds have three or more. At the bottom, 40 percent are 65 or older, at the top 8 percent. At the bottom, only 12 percent worked full time, year round; at the top, 93 percent. Moreover, at the bottom, nearly two-thirds of households have no one working at all, whereas 83 percent of the households at the top have two to four persons bringing in income. Given these divergent characteristics (all of which affect income) is it any wonder that the top quintile has considerably more income than the bottom quintile? It could hardly be otherwise.

Then there is the factor of education. Two-thirds of the householders in the top quintile have some college education and nearly one-half have four years or more. By contrast, in that portion of the bottom quintile that falls below the poverty line, only 9 percent had completed high school and only 4 percent had as much as a year or more of college. In the top quintile, most spouses are also working full-time (this means, in most cases, at least two high incomes), but in the bottom quintile very few households have even one person working full-time. So long as the nation is committed to higher education for both sexes and to employment outside the home for both (if they so choose) high-income householders whose spouses are as educationally advantaged as themselves are bound to put ever more distance between themselves and the bottom quintile. The much-lamented “gap” is thus an inevitable product of the nation’s commitment to both higher education and employment for both sexes.

It is also sometimes alleged that the Reagan administration “cut” welfare benefits for the poor. The President claimed strenuously that he was cutting only the “rate of growth” of such expenditures. What is the truth? According to the Statistical Abstract: 1990, the actual expenditures in 1980 and 1987 (latest available) look like this:

U.S. Expenditures for Means-Tested Welfare Programs
(Current Dollars, in millions)

| | 1980

| 1987

| | Public Aid | $48,666 | $69,233 | | Medicaid | 14,550 | 27,613 | | Food Stamps | 9,083 | 12,362 | | Education | 13,452 | 16,054 | | Housing | 6,608 | 11,110 | |Other Social Welfare | 8,786 | 8,504 |

These numbers are given in current dollars for each year, in order to reflect the political realities of the time. If they were corrected for inflation during the eight Reagan years, most would still show greater cumulative real spending for welfare. It is true that some programs, such as “other social welfare” (including child nutrition, child welfare, ACTION, etc.) did decline.

Much has also been written—falsely—about the tax cuts by which Reagan supposedly favored the rich. It is true that Reagan championed tax cuts, much to the dismay of the policy elite, both Democratic and establishment Republican. (I have always thought of establishment Republicans as representing the GOP School of Dentistry—they don’t seem to think a policy is good for you unless it hurts. If Democrats are “tax and spend,” establishment Republicans are “tax and reduce the deficit.”) Given cuts in tax rates, Reagan promised economic growth and a higher tax intake from the rich. He said tax cuts would provide incentives that would stimulate economic activity, producing higher tax revenues. He was right. Late in 1990, the Swedish Parliament openly recognized this by lowering the top Swedish tax rate from 72 percent to 51 percent, and the Swedish minister for tax policy declared: “What was achieved in tax reform in the U.S. played a big part in our Swedish debate.”

In reporting on the Reagan tax cuts, however, most US. journalists failed to observe the simple distinction between tax rates and tax revenues. Reagan did cut tax rates, not solely for the rich but across the board. But he also extracted a great deal more revenue from the rich than anyone ever had, both absolutely and as a proportion of all taxes paid.

For example, in 1988, an income of just over $50,000 placed a household in the top 20 percent of taxpayers, and an income of almost $86,000 qualified a household for the top 5 percent. By these standards, many full professors, if their spouses also work, qualify as rich. In fact, so do most journalists and other activists who regularly attack the rich without recognizing in this a self-accusation. In any case, the top 5 percent of all taxpayers paid 35 percent of all federal income taxes in 1981, but 46 percent in 1988. By contrast, the share of federal income taxes paid by the rest of the top half of taxpayers (from 50-95 percent) declined from 57 percent to 49 percent. And the share paid by the entire bottom 50 percent of the taxpayers fell from 7.4 percent to 5.7 percent. In other words, Reagan shifted the tax burden significantly from the poor and the middle class to the rich. It bears repeating: He soaked the rich.

In comparing these facts to the more commonly heard accounts of the Reagan era, it may help to note that those who deride Reagan usually rely on two tricks. The most important of these is to report figures starting from 1979, instead of 1981. In this way, they bring into the picture the last two extremely damaging Carter years, with their withering inflation. They thus lay on Reagan blame for the devastation Carter wrought. The other trick is the usual one of not allowing conservatives to play on the same level playing field as liberals; when they lose on an issue, they change the subject and never admit defeat.

There is much in the Reagan years for a fair-minded observer both to celebrate and to fault. One should raise serious questions about the federal deficit, the deregulation of the Savings and Loans, and the restructuring of industry through buyouts and takeovers. On these issues, one should hear out both the prosecution and the defense and form a judgment. But on the issue whether the poor benefited more under Reagan or under Carter, and whether the rich paid a larger share of federal income taxes under Reagan or Carter, a fair-minded judgment is also called for, and this one is clearly in Reagan’s favor.

The American people may come to appreciate Reagan’s achievement even more than they did in the elections of 1984 and 1988, now that the establishment Republican leaders—George Bush, Richard Darman, and Nicholas Brady—have abandoned Reagan’s policies of growth through incentives. For all its faults, the dynamism of the Reagan era looks pretty good framed between two periods of malaise. Alas, the poor suffer most from the current administration’s turning away from that dynamism.

Michael Novak is the George Frederick Jewett Scholar in Religion and Public Policy at the American Enterprise Institute.