Presidents, profits, productivity, & poverty: a great divide between the pre- & post-Reagan U.S. economy?

Journal of Sociology and Social Welfare, Sept, 2004 by Richard K. Caputo

This paper examined profits, productivity, and poverty in the United States from 1961 through 2002. Results indicated that the "great divide" thesis regarding the U.S. economy before and after the Reagan administration depends on which measure of the economy is the focus of attention. In addition, on some measures where before and after differences were detected, the nature of those differences was paradoxical. Corporate profits as a share of national income, for example, were highest in Democratic rather than Republican administrations and despite the increased income inequality of the post-Reagan years, individual and family poverty rates remained relatively constant after edging upward from the 1970s but still below 1960s highs. Further, findings provide some evidence corroborating neoclassic economic theory in regard to incentives and productivity and they present a challenge to activists who equate poverty as a natural or an inevitable byproduct of the more market-driven fiscal and monetary policies of the 1980s and 1990s.

Key words: economy, profits, production, poverty, Reagan administration, presidents

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This paper examined profits, productivity, and poverty in the United States from 1961, with the onset of the Kennedy administration, through 2002, the first two years of the GW Bush administration. It focused on these and other macroeconomic measures by presidential terms to determine the nature and extent of economic life in the U.S. about twenty years before and after the Reagan administration. The paper was guided in part by classical economic theory, which predicts that greater levels of productivity would be accompanied by increased corporate profits and income inequality, but also decreased poverty, and in part by contemporary fiscal policy informed by neoclassical economic theory, which predicts that readjusting tax incentives would promote greater levels of productivity (Fullerton, 1994; Smith, 1994/1776; Stiglitz, 2003). It tests the thesis that the Reagan administration can be viewed as a "great divide" in the sense that this and subsequent administrations relied more explicitly and ideologically on market mechanisms and increased productivity rather than on government programs per se to address social problems, with poverty reduction viewed as a natural byproduct of a dynamic economy (Anderson, 1988; Economic Report of the President, 1994; Feldstein, 1994a; Gilbert, 2002; Gilbert & Gilbert, 1989; Madrick, 2003).

In 1965, President Johnson declared a war on poverty. Several presidential policy advisors during the Johnson administration such as James Tobin and Robert Lampman proclaimed the prospects of eliminating poverty by 1980 (Iceland, 2003). During the 1970s, however, the U.S. experienced relatively double-digit inflation and nearly double-digit unemployment rates. Concern about poverty as a national problem, however, receded, especially after failures by Congress to pass President Nixon's Family Assistance Plan in 1969 and again in 1972. By the 1980s, President Reagan had declared that poverty won the war launched by President Johnson, that in effect government efforts failed and may have even exacerbated the problem. The Reagan administration stressed deregulation of market related activities and devolution of federal responsibilities of domestic policies and programs either to lower levels of government or to the private sector. States began experimenting with ways to promote greater labor force participation among welfare recipients. The Family Support Act of 1988 encouraged the further expansion of efforts linking poverty reduction with welfare recipients' labor force participation.

The economic expansion of the economy that the Reagan administration enjoyed after the 1981 recession was interrupted during the GH Bush Administration. The recession of 1990-91 paved the way in part for the advent of the Clinton administration. With a focus on deficit reduction, deregulation, and capital gains tax cuts, the Clinton administration enjoyed another expansion of the economy. Overall, the economic and social policies of the Clinton administration primarily relied on market mechanisms and looked to a growing economy to affect poverty rates, exemplified in part by its expansion of the Earned Income Tax Credit in 1993 to boost the work-effort and income levels of low-income workers (Center on Budget and Policy Priorities, 1998; Economic Report of the President, 1994). The Personal Responsibility and Work Opportunities Act of 1996, which created the Temporary Assistance for Needy Families (TANF) program and ended the entitlement nature of the Federal-State Aid to Families with Dependent Children (AFDC) program, explicitly aimed at, among other things, welfare reduction more so than at poverty reduction.

The Reagan administration can be viewed as a "great divide," relying more explicitly and ideologically on market mechanisms and increased productivity rather than on government programs per se to address social problems, with poverty reduction viewed as a natural byproduct of a dynamic economy (Anderson, 1988; Economic Report of the President, 1994; Feldstein, 1994a; Judis, 1988; Madrick, 2003; Stein, 1984). The "great divide" also meant a shift in emphasis from pre-Reagan fiscal policy to post-Reagan monetary policy as the main mechanism by which the Federal Government intervened in the economy. This study sought to test the "great divide" thesis, that is, to determine how the ideological shift regarding the proper role of government in the economy and society that had accompanied the Reagan administration and gained ascendancy thereafter affected poverty / inequality between 1961 and 2002. In doing so, it assessed the extent to which there were significant differences in a variety of macroeconomic indicators and Federal capacity by presidential terms. The study provided an empirical basis for assessing the merits of the ideological underpinnings of presidential economic rhetoric and policies, with a particular focus on the relationship between prosperity and poverty / inequality in the U.S. Study results were intended to enable policymakers and others interested in the amelioration of poverty to get a better sense of how strongly the economic welfare of the nation coincided with poverty / inequality and what if any relationship existed between corporate profits and poverty / inequality.