Hits of the '80s

A second opinon about a much-maligned decade

Richard B. McKenzie from the August/September 1994 issue

(Page 2 of 3)

No, greed was not invented in the '80s. And while greed is probably underrated as an economic motivation--even by the decade's critics--there is literally no evidence, aside from a few anecdotes about Wall Street and savings-and-loan crooks, that greed was more unbounded in the '80s than in previous decades. In any case, greed obviously did not end with the advent of a new, anti-profit-motive administration in the '90s.

One of the new administration's strongest supporters, for instance, recently was able to pull in a reported $20 million for a single concert. Critics who have damned other entrepreneurs for their "princely incomes" now appear willing to excuse such a gargantuan paycheck, even though such a sum represents a rate of pay that equals or surpasses the so-called excesses of most '80s "paper entrepreneurs."

In fact, if charitable donations are a sign of selflessness, then the '80s were anything but greedy. Charitable contributions in inflation-adjusted terms rose at a substantially faster pace in the '80s than during the previous two-and-a-half decades. Philanthropy out-paced consumer debt, as well as purchases of goods and services that supposedly reflected the mood of the "me-ism" decade (e.g., jewelry, restaurant meals, and health clubs). Even corporate giving, as a percentage of corporate income, rebounded in the '80s to more than 3 percent of after-tax profits from less than 1.5 percent in the '70s.

Ah, but the rich got richer while everyone else got poorer." The data are decidedly mixed. Yes, many rich people became much richer, but it is also true that many lower- and middle-income Americans got richer. Besides, the overwhelming majority of rich people made their money the old-fashioned way: They earned it. As Microsoft Chairman Bill Gates did, they took sizable risks and provided Americans with superior products on more favorable terms.

"But the rich made out like bandits when it came to taxes at the same time Reagan slashed welfare programs to the bone." Again, not so. Top-income earners paid a higher percentage of federal taxes in 1990 than in 1980. Total real dollars spent on welfare programs for low-income families and children rose by close to 20 percent during the Reagan years--at the same time that the number of poor people in the country actually modestly fell by 300,000. And during the decade, a family of four at the poverty-income line saw its real federal tax liability slashed by a whopping 75 percent.

"Surely the 1980s were a decade of debt." Indeed, they were for the federal government. However, it is wrong to assume the rise in private debt was largely unwarranted. A major unnoticed reason for the explosion of debt in the expanding '80s was the collapse of Americans' debt-to-asset ratios in the unstable, inflationary '70s. Much of the assumption of private debt in the '80s also went into real productive assets such as computers and houses, which explains why Americans' consolidated net worth (not including their considerable human capital) rose by 14 percent, or $2 trillion, during the decade.

My friend the medical professor was incredulous, but she was willing to confess what I had suspected: "You know, Richard, I just don't want to believe that you are right."

An even more telling reaction came from a history professor (and an ardent critic of virtually everything Ronald Reagan ever did while in office). He indicated an interest in using What Went Right in the 1980s in a graduate course that would also include readings from critics of the decade. He asked where he could get a copy, because he wanted to read the book first, a reasonable wish. I was flattered until he admitted, "I don't want to assign it if it is a good book." There was an obvious element of teasing in his voice, but there was also an element of truth. He had bought all of the myths about the decade, and a "good book" would clearly make it tougher for him to insist that the only possible righteous way to economic prosperity is through the halls of Congress and the federal treasury.

My historian friend is convinced, as are most critics, that the S&L disaster that became painfully evident in the last half of the decade reveals the theoretical and practical bankruptcy of Reagan's free-market policies. After all, the argument goes, the S&L industry was "deregulated" in the early '80s. But the S&L deregulatory statute was actually proposed under Carter. More important, the S&L problems hardly reflect "free-market policies," under which people are fully accountable for the risks they take. On the contrary, the S&L debacle reflects a "national industrial policy"--or, more accurately, a national financial policy--gone awry.

The S&L travesty was an economic disaster in the making for 50 years. For starters, the industry could not diversify its portfolio--it had to focus its loans narrowly on housing--and this increased its risk of failure. While this is an obvious point of departure in discussing the S&L crisis, it nonetheless makes critics of the '80s, who want to believe the decade fully caused its own problems, squirm.

The thrift industry was already in deep financial difficulty in the early '80s, primarily because of the inflationary spiral of the '70s. To compete with other investment opportunities, S&Ls had to pay escalating interest rates on their deposits. But because they already had full portfolios of low-interest, long-term loans, they had no way of generating the money necessary to do so. The failing industry desperately needed a bailout, but Congress and the Carter administration did not want to infuse it directly with federal funds. Instead they decided to allow S&Ls to seek high-risk, high-return real-estate investments while fully covering the added risks by expanding the federal deposit-insurance system. Because of that back-door subsidy, unwarranted risk taking--and occasionally outright fraud--became a pastime for many S&L bankers.

Contrary to the critics' claims, the debacle proved the flaws in government bailouts and industrial (financial) management, not free-market policies. The S&L policy ploy is one that Ronald Reagan should have spurned with the same vehemence that he opposed the national industrial policy recommendations of Walter Mondale in the 1984 presidential election.

But while critics of the '80s delight in faulting Reagan for the S&L problems, they consistently seek to dismiss my reasoning, not with effective counter-arguments, but with a glib rejoinder: "twisted argument." Given the facts, they understandably want the weaknesses of the person, not the policy, to be the focus of disdain. After all, the allure of industrial management from Washington is at stake.

At times, though, the critics of the '80s seem to relent in their use of unwarranted claims. But they usually don't concede any real ground. Instead, they seek to shift the terms of the debate, as they did throughout the Reagan years. At the start of the '80s, the country was mired in a recession brought on by the severe anti-inflationary policy of the Federal Reserve (inaugurated in October 1979). The critics were then confident that the country had caught the "British disease." They anticipated a long-term malaise because nothing seemed to be working very well (the late '70s were indeed a period of practically no growth in worker productivity).

But once the '80s recovery began, the argument shifted to the problems of economic decay and "deindustrialization." When it became transparent in the mid-'80s that the economy was being transformed by a significantly more productive industrial base, the argument shifted once again, this time to concern over long-term decline relative to other countries. When it became evident that claim was groundless, the critics began to assert that the real problem was the "great U-turn" in worker wages caused by the unchecked greed of morally bankrupt capitalists.