Ronald Reagan Did It!

America’s Middle Class in Crisis: How 40 Years of Failed Economics Has Created Today’s Threat to America’s Future and Democracy

Written by Jerry Elman, August 17, 2024

Over the past four decades, the American middle class has faced a steady decline, a phenomenon with far-reaching implications for the nation’s economic stability, social cohesion, and overall quality of life. This decline is not a natural evolution but the direct consequence of policy decisions, corporate practices, and financial systems that prioritize the wealth of the few over the well-being of the many. The erosion of the middle class threatens not just economic prosperity but the very fabric of American democracy.

How Reagan Started the Decline of the Middle Class

The origins of the middle-class decline can be traced back to the 1980s, during the presidency of Ronald Reagan. Reagan’s economic policies, collectively known as “Reaganomics,” marked a significant shift in American economic policy, with lasting effects that are still felt today. These policies were characterized by substantial tax cuts for the wealthy, deregulation of key industries, a focus on reducing government spending on social programs, and a broad embrace of supply-side economics, often referred to as “trickle-down” economics. While these policies were intended to stimulate economic growth, they had profound consequences for the middle class.

Reaganomics: The Foundation of Middle-Class Decline

Tax Cuts Favoring the Wealthy:
One of the cornerstones of Reaganomics was a significant reduction in the top marginal tax rate. When Reagan took office, the top tax rate was 70%, but by the time he left, it had been slashed to 28%. The theory was that by reducing taxes on the wealthy, they would invest more in the economy, leading to job creation and economic growth.

Reagan and the Supply Side Economic concept followers based their views on the Laffer Curve theory. This theory suggests that under certain optimal conditions, reducing tax rates can actually increase total tax revenue by stimulating economic activity. The idea is that lower taxes provide incentives for individuals and businesses to work, invest, and spend more, which could lead to overall economic growth and, ultimately, higher tax revenues even at lower tax rates.

The “optimal condition” chosen by Reagan and his economists focused tax cuts on the wealthiest individuals and corporations. The idea was that reducing taxes on the wealthy would lead to increased investment, economic growth, and job creation—a central tenet of supply-side economics. However, over the past forty-plus years, this approach has not led to the expected increased investment. The reality is that there is less investment in domestic business expansion than there was under the previous higher tax rates.

Prior to Reaganomics, tax breaks to the wealthy and corporations were directly tied to requirements for reinvesting in businesses in terms of adding jobs, capital investments, R&D, etc. Since the Reagan tax cuts were enacted, the tax cuts are directly applied as profit and paid out to the shareholders through dividends and stock buybacks rather than being used for business expansion or job creation.

This outcome has led many critics to refer to supply-side economics as “Corporate Welfare,” as the benefits disproportionately favor wealthy individuals and large corporations without benefiting the broader economy.

In most advanced economies, higher tax rates on wealthy individuals and corporations serve as a crucial source of government revenue. Tax incentives for businesses are typically contingent on meeting conditions such as job creation, reinvestment in capital, operations, or research and development (R&D). However, Reaganomics has been a significant contributor to the soaring U.S. budget deficit, even as its proponents continue to blame government spending. This argument falls apart when considering that deficits were much lower during periods of higher equivalent government spending before the implementation of Reaganomics.

Impact on the Middle Class:
While the tax cuts did not stimulate economic activity among the wealthy, they did succeed in creating substantial wealth for those at the top. These tax cuts contributed to a marked increase in income inequality, as the benefits were disproportionately skewed in favor of the wealthiest Americans. The most significant gains were concentrated among the top earners, while middle-class and lower-income Americans saw little to no benefit.

The reduction in federal revenue resulting from these tax cuts led to cuts in essential social programs that many middle- and lower-income families relied on, exacerbating their financial challenges. As a result, the middle class has been left to shoulder a higher relative tax burden, while the wealthiest individuals and corporations benefit from the tax cuts and pay a smaller share of their income in taxes. This shift has further strained the financial stability of the middle class, deepening economic disparities across the country.

Deregulation:
Reagan’s administration was marked by a push to deregulate industries, including finance, telecommunications, and transportation. The removal of regulations was intended to promote business growth and economic efficiency.

Impact on the Middle Class:
While deregulation did lead to short-term economic growth, it also set the stage for future financial instability. The weakening of regulations, particularly in the financial sector, contributed to the savings and loan crisis of the late 1980s and laid the groundwork for the 2008 financial crisis. For the middle class, deregulation meant reduced protections in the workplace, stagnating wages, and the erosion of labor unions’ power, which had been critical in securing better wages and benefits for workers.

Attacks on Labor Unions:
Reagan’s policies were also hostile to labor unions, which had traditionally been a stronghold for middle-class workers. His administration’s stance was epitomized by the 1981 PATCO strike, where Reagan fired over 11,000 air traffic controllers who were on strike for better working conditions.

Impact on the Middle Class:
This move sent a clear signal to other employers that union-busting tactics would not only be tolerated but supported by the government. The weakening of unions led to a decline in collective bargaining power, contributing to wage stagnation and the loss of benefits for many middle-class workers. As unions weakened, income inequality began to rise, as fewer workers had the leverage to negotiate for fair wages and working conditions.

Reduction in Government Spending on Social Programs:
Reaganomics also focused on reducing government spending, particularly on social programs like education, housing, and welfare. The rationale was to reduce the federal deficit and encourage self-reliance among Americans.

Impact on the Middle Class:
The cuts to social programs disproportionately affected the middle and lower classes, who relied on these services to help make ends meet. As funding for these programs was slashed, many Americans found it increasingly difficult to afford healthcare, education, and housing, leading to greater economic insecurity.

Supply-Side Economics and the Trickle-Down Theory:
Reaganomics was built on the premise that reducing taxes and regulations on the wealthy and businesses would lead to increased investment, job creation, and overall economic growth—a theory known as trickle-down economics.

Impact on the Middle Class:
In practice, the promised benefits of trickle-down economics largely failed to materialize for the middle class. While the wealthy saw substantial gains, these gains did not translate into broad-based economic prosperity. Instead, income inequality widened as the wealthiest Americans amassed more wealth, while middle-class incomes stagnated. The concentration of wealth at the top also reduced the overall consumer demand, as the middle class—who traditionally drove consumer spending—had less disposable income.

Offshoring and the Loss of Manufacturing Jobs:
Reagan’s push for free-market policies also laid the groundwork for the globalization and offshoring trends that accelerated in the 1990s and 2000s. Reagan’s policies favored corporate expansion and the pursuit of cheaper labor markets abroad.

Impact on the Middle Class:
The offshoring of manufacturing jobs hit the middle class particularly hard. Manufacturing had been a stronghold of middle-class employment, offering stable jobs with good wages and benefits. As companies moved production overseas to take advantage of lower labor costs, many American workers found themselves unemployed or forced into lower-paying service jobs, leading to a decline in their standard of living.

Corporate Stock Buybacks:
A stock buyback occurs when a corporation purchases its own shares from the marketplace, reducing the number of shares available and increasing the value of the remaining shares.

Historical Context:
Stock buybacks were largely restricted until 1982 when the SEC under Reagan adopted Rule 10b-18, leading to a dramatic increase in the practice.

Impact on the Middle Class:
The rise in stock buybacks marked a significant shift in corporate priorities. Instead of channeling profits into productive investments—such as raising wages, investing in innovation, expanding operations, or enhancing community engagement—many companies began using their profits to buy back their own stock. This practice artificially inflates stock prices, primarily benefiting shareholders and corporate executives whose compensation is often tied to stock performance.

As companies prioritized buybacks over investments in their workforce or long-term growth, job creation and wage increases were limited. The funds that could have been used to develop new products, improve services, or expand business operations are instead diverted to boost short-term stock prices. This shift has contributed to the widening income inequality, as the financial gains from stock buybacks are concentrated among the wealthiest individuals, particularly corporate insiders and large shareholders, rather than being distributed across the broader economy.

Moreover, the emphasis on buybacks over long-term investments has left companies more vulnerable to economic downturns. Without robust investments in innovation, capital assets, or workforce development, companies are less prepared to navigate economic challenges. This lack of resilience can lead to layoffs, reduced benefits, and other cost-cutting measures that disproportionately impact the middle class, further exacerbating their economic insecurity.

Exploding the Federal Deficit:
Despite the emphasis on reducing government spending, Reaganomics led to a significant increase in the national debt. Reagan’s combination of massive tax cuts, particularly for the wealthy, and a substantial increase in defense spending resulted in the federal deficit more than tripling during his administration.

Impact on the Middle Class:

Reagan inherited a national debt of approximately $900 billion when he took office in 1981. By the end of his presidency in 1989, the national debt had indeed ballooned to around $2.7 trillion. This significant increase in the national debt was a direct result of the combination of massive tax cuts, particularly for the wealthy, and substantial increases in defense spending.

Borrowing money became a central aspect of fiscal policy under Reagan, with deficit spending used to finance tax cuts rather than investments in long-term economic growth or infrastructure. This approach marked a shift from previous fiscal policies, where borrowing was typically reserved for investments expected to yield future economic benefits.

The long-term consequence of this exploding debt was that future administrations were left with less fiscal flexibility, as a growing portion of the federal budget had to be allocated to servicing debt interest. This put additional pressure on social programs, as budget constraints became tighter, creating a justification for further cuts that disproportionately affected the middle and lower classes.

The growing national debt also laid the groundwork for the austerity measures that would be proposed in subsequent years, further eroding the economic security of the middle class. These measures often targeted social safety nets and public investments that many middle- and lower-income Americans depended on, exacerbating economic inequality and contributing to the continued decline of the middle class.

Impact on Media and Free Press:
Reagan’s deregulation policies extended to the media industry, fundamentally altering the landscape of American media. In 1987, the Reagan administration abolished the Fairness Doctrine, which had required broadcasters to present contrasting viewpoints on controversial issues of public importance. This decision paved the way for the rise of partisan media outlets and the consolidation of media ownership.

Impact on the Middle Class:
The dismantling of the Fairness Doctrine and the subsequent concentration of media ownership in the hands of a few large corporations have significantly impacted the quality and diversity of news available to the public. As a result, media outlets have increasingly prioritized sensationalism and profit over balanced reporting, contributing to a more polarized and less informed electorate. This media environment has made it more challenging for the middle class to access accurate and unbiased information, which is crucial for informed civic participation. Furthermore, the concentration of media ownership has reduced the diversity of voices and perspectives, limiting the ability of the middle class to have their concerns and issues adequately represented in public discourse.

The Cumulative Impact of Reagan’s Policies on the Middle Class

Reagan’s policies set the stage for the long-term decline of the American middle class. By prioritizing the interests of the wealthy and corporations over those of the broader population, Reaganomics created a legacy of income inequality, weakened labor protections, reduced social services, a ballooning federal deficit, and a more polarized media landscape. These trends were compounded by subsequent administrations, leading to the erosion of the middle class that continues today.

The Impact of Subsequent Administrations on the Middle Class: Clinton, Bush, Obama, Trump, and Biden

The decline of the middle class continued under subsequent administrations, each of which contributed to the problem in different ways:

Clinton Policies

North American Free Trade Agreement (NAFTA):
Signed into law by President Bill Clinton in 1993, NAFTA was intended to increase trade between the U.S., Canada, and Mexico. While it succeeded in boosting trade, it also accelerated the offshoring of manufacturing jobs as companies moved operations to Mexico to take advantage of lower labor costs. This shift contributed to significant job losses in the U.S. manufacturing sector, particularly in the Midwest and Rust Belt regions, areas that were strongholds of middle-class employment.

Welfare Reform:
The Personal Responsibility and Work Opportunity Reconciliation Act (1996) aimed to reduce dependency on government assistance by promoting work.

Impact on the Middle Class:
While welfare reform reduced welfare rolls, it also left many low-income and borderline middle-class families with fewer resources during economic downturns, exacerbating poverty and economic insecurity. The reforms made it more difficult for struggling families to access the safety nets that could prevent them from slipping further into poverty.

Bush Policies

2001 and 2003 Tax Cuts:
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced income tax rates, capital gains taxes, and estate taxes.

Impact on the Middle Class:
While these tax cuts provided some relief to middle-income earners, the primary beneficiaries were the wealthy. This contributed to increasing income inequality and reduced federal revenue, which in turn put pressure on social programs that benefit the middle class. Additionally, the tax cuts contributed significantly to the national debt, which has implications for future government spending and economic stability.

Obama Policies

Affordable Care Act (ACA):
One of President Barack Obama’s signature achievements, the ACA expanded access to healthcare by creating insurance marketplaces, expanding Medicaid, and providing subsidies to low- and middle-income individuals. The ACA also prohibited insurance companies from denying coverage due to pre-existing conditions.

Impact on the Middle Class:
This legislation provided millions of Americans with access to affordable healthcare, reducing medical debt and financial insecurity for many middle-class families. However, the ACA faced significant political opposition and legal challenges, limiting its impact in some states.

Dodd-Frank Wall Street Reform and Consumer Protection Act:
Enacted in response to the 2008 financial crisis, Dodd-Frank aimed to increase regulation of the financial industry and protect consumers from predatory lending practices.

Impact on the Middle Class:
The legislation sought to prevent another financial crisis and protect the middle class from the devastating effects of such events. While its effectiveness has been debated, Dodd-Frank helped stabilize the financial system and provided important protections for middle-class consumers.

Trump Policies

Tax Cuts and Jobs Act of 2017 (TCJA):
The TCJA significantly reduced the corporate tax rate from 35% to 21% and lowered individual income tax rates across the board. It also doubled the standard deduction and limited state and local tax (SALT) deductions.

Impact on the Middle Class:
While the tax cuts provided some relief to middle-income earners, the benefits were disproportionately skewed toward the wealthy and corporations. The reduction in corporate taxes contributed to stock buybacks and increased shareholder wealth, while the limitation on SALT (state and local taxes) deductions particularly affected middle- and upper-middle-class taxpayers in high-tax states. The long-term impact on federal revenue is expected to increase the national debt, which could lead to cuts in social programs that benefit the middle class.

Biden Policies

Since the Reagan presidency, President Joe Biden has done the most to undo the harm caused by Reaganomics. His administration has implemented several policies aimed at reversing the long-term trends that have eroded the middle class.

American Rescue Plan:
Passed in March 2021, the American Rescue Plan provided direct financial relief to millions of Americans, including expanded unemployment benefits, direct stimulus payments, and child tax credits.

Impact on the Middle Class:
These measures were designed to support families during the COVID-19 pandemic, helping to reduce poverty and stabilize the economy. The expanded Child Tax Credit, in particular, lifted millions of children out of poverty and provided significant financial relief to middle-class families.

Infrastructure Investment and Jobs Act:
Signed into law in November 2021, this act allocates $1.2 trillion to rebuild America’s infrastructure, including roads, bridges, public transit, and broadband access.

Impact on the Middle Class:
The investment is expected to create millions of jobs, many of which will be well-paying, unionized positions. The focus on infrastructure not only creates jobs but also modernizes the economy, making it more competitive globally and benefiting middle-class workers and their communities.

Tax Policies:
Biden has proposed increasing taxes on corporations and the wealthiest Americans to help fund his social programs and reduce the deficit. These measures include raising the corporate tax rate and increasing taxes on capital gains for the wealthiest individuals.

Impact on the Middle Class:
By ensuring that the wealthiest Americans pay their fair share, Biden’s tax policies aim to reduce income inequality and provide more resources for programs that benefit the middle class, such as healthcare, education, and infrastructure.

Healthcare Expansion:
The Biden administration has expanded access to healthcare by increasing subsidies for those purchasing insurance through the ACA marketplaces.

Impact on the Middle Class:
This has made health insurance more affordable for millions of Americans, particularly those in the middle class, reducing healthcare costs and helping middle-class families avoid medical debt.

The Decline of the Middle Class: A Catalyst for Crime, Corruption, and Civil Disorder

As the middle class continues to erode, the broader societal implications become increasingly dire. The decline of the middle class is not just an economic issue; it is a catalyst for a range of social problems, including rising crime rates, increased corruption, and growing civil disorder.

Rising Crime Rates:
When middle-class families struggle to make ends meet, the economic strain can push individuals toward criminal activities as a means of survival. The loss of stable, well-paying jobs leads to higher unemployment and underemployment, which are closely linked to higher crime rates. Communities that were once safe and prosperous can become hotspots for theft, drug-related crimes, and other illegal activities as economic opportunities diminish.

Increased Corruption:
As economic inequality widens, the gap between the wealthy and the rest of the population fosters a sense of disenfranchisement. This environment can breed corruption, as those in power exploit their positions for personal gain, knowing that the disenfranchised majority lacks the resources to hold them accountable. Corruption further erodes trust in institutions, making it harder for society to address the root causes of economic inequality and social instability.

Growing Civil Disorder:
The erosion of the middle class contributes to growing civil unrest, as people become increasingly frustrated with a system that seems rigged against them. This frustration can manifest in protests, strikes, and even violent uprisings. The lack of economic opportunities, combined with a sense of injustice, can drive people to take drastic measures to be heard. Civil disorder not only disrupts communities but also undermines the stability of democratic institutions.

The Current Political Context: The Middle Class at the Heart of Democracy

The current presidential campaign is being defined as a choice between saving or destroying democracy. However, what is often left out of this conversation is how America arrived at this critical juncture. The decline of the middle class over the past 40-plus years has played a significant role in weakening the foundations of democracy. A strong and successful middle class is the best defense in preserving freedom and democratic governance.

As the middle class has eroded, so too has the broad-based economic prosperity that supports a healthy democracy. The growing concentration of wealth and power in the hands of a few has created a system where the voices of ordinary citizens are increasingly drowned out by the influence of money in politics. This has led to policies that favor the wealthy and powerful, further exacerbating income inequality and eroding trust in democratic institutions.

Conclusion: The Cumulative Impact on the Middle Class

The policies and decisions made by the Reagan, Clinton, Bush, Obama, Trump, and Biden administrations have collectively shaped the current state of the American middle class. Beginning with Reaganomics in the 1980s, which emphasized tax cuts for the wealthy and deregulation, the middle class began to face growing economic pressures. These policies set the stage for increasing income inequality, weakened labor protections, and the offshoring of jobs—trends that have persisted and, in many cases, intensified under subsequent administrations.

Reagan’s legacy of deregulation and tax cuts for the wealthy, while initially stimulating economic growth, also laid the groundwork for the erosion of the middle class. This erosion was further accelerated by trade agreements like NAFTA under Clinton, the tax cuts under Bush that disproportionately benefited the wealthy, and the financial instability addressed by Obama’s Dodd-Frank reforms.

Under Trump, the Tax Cuts and Jobs Act provided significant benefits to corporations and the wealthy, continuing the trend of prioritizing short-term profits over long-term economic stability for the middle class. However, it is under President Biden that we see the most significant efforts to reverse these trends. Since the Reagan presidency, Biden has done the most to undo the harm caused by Reaganomics through initiatives focused on infrastructure investment, healthcare expansion, and tax reform aimed at reducing inequality and strengthening the middle class.

The cumulative effect of these policies has been the steady erosion of the middle class, with far-reaching implications for the nation’s economic stability, social cohesion, and democratic institutions. Addressing these challenges requires continued efforts to implement policies that prioritize the needs of the middle class, ensure economic fairness, and restore trust in the political system.