“I’m from the Government and I’m here to help.”
In his inaugural address in January 1981, Ronald Reagan spoke of the current economy burdened by “the longest and one of the worst sustained inflations in our national history.” He cited “a tax system which penalizes successful achievement,” and decades of deficit spending that threaten “tremendous social, cultural, political, and economic upheavals.” Declaring that “Government is not the solution to our problem, government is the problem,” Reagan announced his intention “to curb the size and influence of the Federal establishment.”
The 40 years following Reagan’s inauguration set in motion a period of government action, and inaction, that brought rising inequality, tax policy that favored wealthy households, underfunded education, school re-segregation, deteriorating infrastructure, minimally enforced antitrust regulations, deregulated financial institutions, and runaway costs for healthcare and higher education.
Increasing Income Inequality
From 1980 to 2021 Gross Domestic Product (GDP) doubled, adjusted for inflation. U.S. tax revenue as a percent of GDP is one of the lowest among countries of the Organization for Economic Cooperation and Development (OECD). Not surprisingly, U.S. spending on social benefits at 19% of GDP is well below that of France’s 31%, representative of European countries. Income taxes on higher income households have fallen drastically. In the 1970s the top rate was 70%. The Economic Recovery Tax Act of 1981 reduced the highest rate to 50%. The current top rate is 40.8%.
In 1980 the federal hourly minimum wage was $3.10. It has been raised ten times since then; six of those raises did not keep pace with the rate of inflation. The current $7.25 per hour federal minimum wage was set in 2009. If raises had kept pace with inflation since 1980, the current minimum wage would be $10.47. For a three-person family with a single wage earner, that income would be below the poverty level.
Income inequality in the U.S. has increased since 1980, as measured by the GINI Index, an internationally recognized metric. Of 20 democracies of five million population or more, the U.S. ranks twentieth in inequality. The trend supports an analysis in a study comparing hourly compensation to productivity. The study found the two increasing in lockstep until 1973. From 1973 to 2013 productivity increased 74.4%, while hourly compensation increased 9.2%.
Underfunding Government Services
U.S. student performance is at or below the average among the 37 OECD countries in mathematics, reading and science. Socio-economically disadvantaged U.S. students underperformed advantaged students in all three categories. Public schools remain largely segregated, with lifelong consequences for students of color.
The U.S. is the largest OECD member that does not have universal health care. Over the last decade health care spending across OECD countries averaged 8.7% of GDP; in the U.S. spending increased from 16.3% to 17.0% of GDP.
In 2017 the American Society of Civil Engineers (ASCE) projected total infrastructure needs over the following 10 years would require investment of over $4.5 trillion. Overall, the ASCE gives the country’s cumulative infrastructure a grade of C-. Infrastructure investment supports growth in GDP and employment.
This list of challenges bears notable resemblances to the policy agenda of President Joe Biden. The American Rescue Plan bolsters relief efforts against the dampening economic effects of COVID-19, as well as addressing adverse effects of the pandemic and recession on families, businesses and governments. Biden’s forthcoming package addresses infrastructure, education, family benefits and health care expansion.
In an August 12, 1986 news conference President Reagan quipped: “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” Forty years after Reagan’s inauguration, President Biden is proposing to make those words a reality. His challenge is to do so while generating economic growth sufficient to repay the debt that will be incurred.