Greed is hardwired into human DNA, and the reintroduction of laissez-faire capitalism sixty years after the Roaring Twenties gave it free rein. Reaganomics also gave free rein to historically unprecedented big government tax and spending policies. The late conservative Murray N. Rothbard of the Austrian School of Economics once explained that Reaganomics is a blend of three inconsistent schools of economic thought: policies drawn from big government conservatives like President Reagan, from monetarists, and from supply-siders.1 While the second and third schools quickly proved theoretically deficient, the outcome of these three threads has been decades of big government spending, large tax cuts, and credit expansion unparalleled in US economic history.
But Reaganomics is more than just the economic elements highlighted by Rothbard. It also consists of political elements like deregulation and cultural elements, with the self-centered focus of Ayn Rand supplanting the community spirit of the golden age. Those elements gave the American business community both the means and the incentive to capture Washington regulators and pursue payday windfalls. The outcome has sidetracked America’s evolution to family capitalism; the national goal became the prosperity of business rather than families. Shareholder capitalism replaced stakeholder capitalism.
This transformation was never presented for voter approval—for the very good reason that it would have been rejected. Few voters would have countenanced an end to the golden age and even fewer would have endorsed the adoption of the author Ayn Rand as the Reagan era’s philosophical touchstone. Indeed, many voted for Ronald Reagan precisely because he promised to restore family prosperity, not derail it.
This section examines the elements of Reaganomics, beginning with its hallmark feature: deregulation. This resulted in dramatically reduced public oversight of corporations and regulatory capture, causing Washington to support the emergence of shareholder capitalism and ignore the impact of globalization on families. The most familiar consequences have been wage stagnation and widening income disparities. But as we will see, shareholder capitalism didn’t work even on its own terms. Weakly governed firms came to be run for the interests of managers rather than shareholders. Short-termism and weak productivity emerged as executives became inattentive to the long-run success of corporations, minimizing shareholder value.
The most potent threat to shareholder capitalism is more public oversight. To reduce that risk, the business community has aggressively argued that government Is invariably dangerous, and engineered government gridlock to thwart reregulation. With the gains from growth mostly flowing to the 1 percent, another threat was higher taxes. Thus, the business community’s solution to every problem is lower taxes—especially on the richest Americans. Spending cuts proved difficult and the combination produced large government deficits.
The first element of Reaganomics we examine unfolds in the next chapter, the regulatory capture of Washington.