The Squandered Decade: Why My Kids Have a Right to Be Pissed Off
January 2, 1990
I never thought very much about the future until 1980, when my wife and I decided to end our carefree years — afternoon naps, spontaneous dinners on the town, long Sunday mornings in bed with newspapers and classical music — and have a baby. In fact, we had two — two highly energetic, testosterone-plagued boys. Now I can’t stop thinking about what kind of world they’ll inherit. It seems likely to be more peaceful than the Cold War we inherited, but also more polluted. As far as the economy goes, they have every right to be pissed off.
Yes, America produced 17 million new jobs. But in three ways, we squandered the future during the 1980s. First, we spent more than we earned. Second, the gap between the rich and the poor widened considerably. Third, we disinvested in our ability to produce new wealth. In effect, we squandered our future.
It all started when Ronald Reagan bought into “voodoo economics” (as George Bush so eloquently described the ruminations of supply-side economists) and expected that a huge tax cut in 1981 would bring more revenue into the treasury. His estimates were off, by about a trillion-and-a-half dollars.
Meanwhile, most Americans felt no richer than before, but spent as if they were. The so-called economic “recovery” or “expansion” that commenced in 1983 was the first in a half century in which the average wages of working Americans declined when compared to inflation. Yet credit-card and other consumer-installment purchases went up, from $300 billion total indebtedness in 1980 to more than $800 billion now.
Not to be outdone, corporate America went on its own spending spree — gobbling up shares of stock at an astounding price. Takeovers, leveraged buyouts, and other Wall Street innovations removed more than $800 billion of equity from corporate balance sheets and pushed up debt 130 per cent during the decade, to $1.9 trillion. As a result, about a third of the cash flow of corporate America is now dedicated to interest payments.
Where has all the money we borrowed come from? What we couldn’t borrow from ourselves we’ve borrowed from foreigners (increasingly, the Japanese), to whom we now owe about $600 billion. This comes to about $25 in monthly interest paid by every man, woman, and child in the United States. You may not be aware that you’re paying it, but you are — as a fraction of the cost of the products you buy and a portion of the taxes you pay.
We can expect to go on paying this, and more, as our foreign debts mount. Unless, of course, we choose to pay foreigners in different ways — say, rental payments on the places where we live or work, or a portion of the profits on the work we do. In fact, that’s precisely the choice being made when we sell foreigners our real estate and our companies. (Blaming foreigners for “buying up America” is like blaming the pawnbroker when he agrees to buy our family heirlooms.)
THERE ARE OTHER choices we could make, of course. We could simply spend less. But this isn’t a very attractive alternative for most Americans, whose family budgets are already stretched to the limit. It would be more palatable if the wealthy among us bore a higher share of the burden, but here we come up against the second legacy of the 1980s — the growing gap between rich and poor.
We now have the lowest tax rate on high incomes of any industrialized nation. If George Bush has his way and contrives a reduction in capital gains taxes, the effective rate will be even lower. And since so much of the Social Security Trust Fund is now being used for budget-deficit reduction, and because most poorer working Americans pay more in Social Security payroll taxes than they do in income taxes, we also have, in effect, among the highest tax rates on low incomes of any modern nation. Add to this all the local and state sales taxes necessary to finance social programs that the federal government has abandoned, and you come up with a tax system that’s extraordinarily regressive.
Thanks to Ronald Reagan, George Bush, and their friends, the 1980s were a wonderful time to be rich in America. The top fifth of income-earners increased their (inflation-adjusted) earnings by about 18 per cent. The average incomes of Wall Street investment bankers and financiers alone increased a full 21 per cent during the decade, the Octobers of 1987 and 1989 notwithstanding. The resulting conspicuous consumption is evident all around us. Luxury cars, which composed 4 per cent of the car market in 1980, now account for 8 per cent of new cars sold. Spending on pleasure boats and travel more than doubled in the 1980s.
Meanwhile, the 1980s were a lousy time to be poor in America. The bottom fifth of income-earners became about 10 per cent poorer during the decade. This was not only because of the regressive tendencies of the federal tax code and the cutbacks in AFDC, Medicaid, and other social programs. It was also because unskilled workers in the United States increasingly found themselves in competition for jobs with unskilled workers around the world who were willing to labor for a fraction of prevailing American wages.
There is something vaguely charming about the old-fashioned idea of a truly progressive income tax, which would put a major damper on the spending of wealthier Americans — particularly now that total spending has to be restrained. In 1936, in the depths of the Depression, Franklin Delano Roosevelt proposed an income tax that would have claimed most of the incomes of the richest Americans above a certain amount. In fact, FDR said that no American should earn more than $25,000 (the equivalent of $200,000 today). If there was ever a time to revive the quaint idea of a progressive tax, it’s now.
The other alternative is for us to become far more productive — productive enough to live in the manner to which we have become accustomed, while at the same time improve the lives of the least fortunate among us, and accomplish both without going into debt to foreigners. How do we do this? By investing in our future.
THIS BRINGS US to the third economic legacy of the 1980s. During the decade we disinvested in our future. American investment in new business plants and equipment fell to a smaller share of national income than in any previous sustained period since World War II. Of equal if not more importance was the failure to invest in roads, bridges, airports, harbors, research, and education.
Consider infrastructure. Productivity rises by about one-third of 1 per cent for every per cent increase in the net stock of public capital, relative to the level of private-sector input of capital and labor. In the 1960s, when American productivity was surging forward, we directed almost 4 per cent of America’s gross national product to building and maintaining transportation and disposal systems. But in the 1980s, we invested less than 3 per cent. New construction alone dropped to 1.3 per cent of GNP. Meanwhile, publicly supported nonmilitary research and development dropped from about .8 per cent of GNP in the 1970s to .4 per cent in the 1980s.
What about education? The conventional belief is that we’ve spent much more, and George Bush calls himself the “education president.” But here too, disinvestment has been the rule. In the 1960s and 1970s, total spending per student in primary and secondary schools grew at a brisk 4.7 per cent a year (adjusted for inflation), which was more than a full point above the rate of increase in GNP and even higher than the rate of increase in business investment in plant and equipment. But this decade, per-pupil dollars grew at a rate of just 2.7 per cent in real terms, behind the rate of private capital investment. Today the average American teacher receives a salary that, when adjusted for inflation, is just about what he or she got in 1971. And because public schools are now financed primarily from local property taxes, these average figures hide some huge inequities. Schools in poor rural towns and inner cities get the crumbs. Meanwhile, the federal government has cut way back on guaranteed student loans for college — even though college costs have surged by 26 per cent in the 1980s, and family incomes haven’t.
Public help for job training is also way down — dropping during the 1980s by more than half, from $13.2 billion to $5.6 billion. And fewer than 20 per cent of the poor kids eligible for taking part in Head Start — a preschool program highly correlated with later successes in school and jobs — are getting into the program. “We just can’t afford it,” says Mr. Bush.
Clearly, we need to rebuild our capacities to be productive in the future. Going into debt in order to invest in our future is far less troubling than going into debt in order to consume. In the 19th century, America was much more indebted to foreigners as a per cent of GNP (in those days, to Britain rather than to Japan), but we invested what we borrowed — in canals, railways, schools, and factories. These investments made us so much more productive that we found it easy to repay the debt.
The Cold War, in case you hadn’t noticed, is going into deep thaw. In coming months there will be much discussion of what to do with the “peace dividend” — the savings to be gained (estimated up to $150 billion a year) from cancelling huge weapons systems and closing military bases. Some will argue for reducing the federal budget deficit. But the foregoing argument would suggest a different tack. The peace dividend should be invested in our economic future, so we can recreate a prosperous and a just society.
Historians will look back on the 1980s with wonder: How was it that America managed to produce and invest so little, and consume so much? How did we let our priorities get so out of line, and the gap between rich and poor grow so wide? Historians will come up with many theories, including the buoyant thoughtlessness of the man we chose to lead the nation through most of these years and the good-natured silliness of his second-in-command. But presidents can’t be blamed for everything. And it won’t only be historians who do the asking. You and I will have to take some of the rap, and we’ll have to answer to our kids. My two boys will demand explanations.
The economic legacy of the 1980s — debt, inequality, and disinvestment — isn’t irreversible, but reversing it will take some work. Hence, your task and mine. ■
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