Tuesday, June 23, 2009

Where are the aliens when we need them?

One of the most amazing graphs I’ve seen in a long time is Emmanual Saez’ graph of the share of income going to the top ten percent of the American income distribution:

Recent levels of inequality exceed those preceding the Crash of 1929 and the Great Depression!  What is amazing, however, is how inequality dropped between 1939 and 1942 as the American people apparently banded together to fight a common enemy in World War II. 

It is ironic that Ronald Reagan should have invoked a common alien enemy to make all of humankind band together.  This suggests that the notion of the need for a common enemy is pretty deeply ingrained in Beltway-think.  The Project for a New American Century pined for a “Pearl Harbor of the 21st century” to motivate Americans.  “Section V of Rebuilding America's Defenses, entitled ‘Creating Tomorrow's Dominant Force’, includes the sentence:  ‘Further, the process of transformation, even if it brings revolutionary change, is likely to be a long one, absent some catastrophic and catalyzing event––like a new Pearl Harbor’ (51).[13]” (source).

If 9/11 was supposed to be the Pearl Harbor of the 21st century, it didn’t work.  We didn’t band together in any measurable way, except to have a financial crisis that booted the Republicans out of office.

So, with a nod to the Gipper and perhaps a flashback to Will Smith punching an alien in the face and saying, “Welcome to Earth!” in “Independence Day”… here’s Ronnie:

Let’s hope we find another way to band together than war.  Where are the aliens?

Seriously, let’s start by raising the marginal tax rates that Ronnie lowered, that started us down the primrose path toward fiscal excess to benefit the rich.  Shared sacrifice!  The government needs their money. 

For those of you who think the “supply side” tax cuts worked, here’s what actually happened:  Ronnie raised taxes more than he lowered them.  First he lowered them on the rich, then he raised them on the working folks:

One major tax cut, then lots of raises


Reagan in 1981 proposed — and Congress passed — a massive tax cut, the centerpiece of which was a 25 percent reduction in marginal tax rates.

The result was that taxes paid as a share of gross domestic product immediately began to decline from the post-World War II peak of 20.2 percent that they hit that year.

Reagan didn't cut entitlements either — a promise he'd made during his 1980 campaign. But that's not to say he didn't consider it. In 1982, Reagan went along with a plan by GOP Sen. Pete Domenici of New Mexico to slow the growth of spending on Social Security and cut $40-billion from the program. Reagan also called for a 10 percent reduction in total spending for Medicaid in his budget proposal that year.

In the end, both ideas came to naught, in the face of Democratic opposition in Congress.


In 1983, Reagan signed legislation aimed at preserving Social Security's solvency by raising payroll taxes and taxing Social Security benefits of upper-income Americans.

The plan certainly preserved Social Security but also demonstrated that Reagan was willing to impose tax increases, even if he didn't propose them and rarely accepted them with enthusiasm.

As former Reagan adviser Bruce Bartlett wrote in a 2003 article for National Review, Reagan signed two major tax increases in 1982 that took back much of the break he'd provided in his 1981 tax bill. After the Social Security tax increase of 1983, Reagan approved further tax increases — in one form or another — in 1984, 1985, 1986 and 1987.

None of them was particularly draconian and taxes as a share of GDP continued to decline until 1984, when they bottomed out at 18.4 percent but then rose back to 19.2 percent by 1989, when Reagan left office. The overall percentage then was still lower than during Reagan's first year in the White House.

Note the acceleration in public debt from 1980, except for later Clinton years.  Come on, Barack—raise marginal tax rates!  Bubba [Clinton] did it!  You can do it!  Raise marginal tax rates on earned incomes over a million dollars to 75 percent, and do away with the obscene “hedge fund exemption” that lets the richest Americans pay 15 percent tax rates on their earned income, less than their administrative assistants pay.



  1. I don't think there is the political will to raise taxes as you suggest. I see inflation as most likely. There is already a good justification for inflation (by reducing wage stickiness) to get people working for lower 'real' wages while not forcing them to accept a nominal pay cut. I think all unemployment is voluntary- the workers are just much poorer than they thought 2 years ago. The rich have laws protecting them and pushing income upward (Dean Baker lists many ways).. Krugman and Rogoff are pushing for at least 4% inflation which would also dissolve the debt (federal and private) pretty quiclky once the debt growth is stabilized, without even having net repayments. This wouldn't really hurt savers because the Fed would have to raise rates pretty sharply to stop the inflation and money growth and keep people in cash, like it did in the early 80s.
    Great blog

  2. Stevend -

    I'm not as hopeful that inflation will work out so well.


  3. "What is amazing, however, is how inequality dropped between 1939 and 1942 as the American people apparently banded together to fight a common enemy in World War II. "

    I'm not sure how you come to this conclusion. A better answer is that the USA became a self-contained economy, feeding off of largely domestic demand and manufacture. It is a great argument for high trade barriers to foreign goods.