The Real Effect of 'Reaganomics'

At the 100th anniversary of Ronald Reagan's birth, his most important legacy has gone largely overlooked. Reagan helped to put a caricature of politics at the centre of the national debate and it remains there to this day. In Reagan's caricature, the central divide between progressives and conservatives is that progressives trust the government to make key decisions on production and distribution, while conservatives trust the market.

This framing of the debate is advantageous for the right, since people, especially in the United States, tend to be suspicious of an overly powerful government. They also like the idea of leaving important decisions to the seemingly natural workings of the market. It is therefore understandable that the right likes to frame its agenda this way. But since the right has no greater commitment to the market than the left, it is incredible that progressives are so foolish as to accept this framing.

In reality, the right uses government all the time to advance its interest by setting rules that redistribute income upward. As long as progressives ignore the rules that are designed to redistribute income upward, they will be left fighting over crumbs. There is no way that government interventions will reverse a rigged market. For some reason, most of the people in the national political debate who consider themselves progressive do not seem to understand this fact.

To take the most obvious example: fighting inflation has come to be seen as the holy grail of central banks - a policy that it is supposed to be outside of the realm of normal political debate. On slightly more careful inspection, the inflation-fighting by the Fed and other central banks is actually a policy that is designed to ensure that the wages of ordinary workers do not grow too rapidly.

When central banks jack up interest rates to tame inflation, the CEOs at Goldman Sachs and JP Morgan won't be out on the street. The people who lose their jobs will be factory workers, store clerks and other less privileged workers. Raising unemployment among the group of less educated workers keeps their wages down. In other words, controlling inflation is about making sure that the wages of less educated workers don't rise relative to the wages of more educated workers. And the central banks have a licence to push as hard as they like in this direction.

Incredibly, the vast majority of progressives go along with this central bank squeeze. They accept the absurd notion that this upward redistribution by the central banks is simply apolitical monetary policy and agree not to criticise the central bank. As a practical matter, there is nothing that Congress could plausibly do in the way of downward redistribution that would offset the upward redistribution from the Fed's tightening.

This is not the only policy lever that progressives are happy to turn over to conservatives. The exchange rate has enormous impact on the relative wages of workers who have been subjected to international competition through trade policy. If the dollar is overvalued by 20-30% against other currencies, then this is giving a subsidy to foreign producers relative to domestic ones of this magnitude.

Doctors and lawyers are smart enough to know that this sort of competition will drive down their wages and incomes. This is why they maintain strong barriers that prevent them from being subject to international competition in the same way as autoworkers and textile workers. Unfortunately, the people who represent ordinary workers fail to understand this simple point. Therefore, exchange rate policy rarely features prominently in political debates, even though it is another huge cause of the upward redistribution of income that we have seen over the last three decades.

Similarly, patent and copyright policy lock off large areas of the economy in monopolies assigned to large corporations and wealthy individuals. The United States now spends more than 2% of GDP, $300bn a year, on prescription drugs that would likely cost less than one tenth this much if they were sold in a competitive market. The $270bn handed to the drug companies each year through governmen- provided patent monopolies is five times as much money as what was at stake with the Bush tax cuts for the rich. Yet, here as well, progressives largely ignore patent and copyright policy.

The battles that occupy progressives' energies are almost invariably trivial in their impact - relative to these three fulcrums of the economy. In effect, conservatives have managed to gain control of the most important levers of economic activity and left the crumbs for progressives to fight over in the political sphere.

It would be very hard to challenge the right's control over these levers, but the first step is simply to recognise them. Unfortunately, there is little appreciation among progressives of their importance. Instead, we get great histrionics over policies that really won't have very much impact, even if they might be wrongheaded.

It seems that progressives have taken a pledge to be the Washington generals of national politics. The policies that have led to the most massive upward redistribution of income in the history of the world go largely unchallenged, while we argue endlessly over the Reagan-Bush tax breaks to the rich.