All Roads Lead Back to Reagan: The Pestilence of Preposterous Pay

In the time of the ascendancy of ancient Rome, it was said that “All roads lead to Rome,” since, politically, economically, socially, militarily, culturally, and artistically speaking, Rome was the centre of the Mediterranean world. Hence, it made sense that, at least in the case of paved roads, many of them did eventually lead to Rome, since at the time building roads was a costly, labour-intensive, and time-consuming activity.

Ever since the death of Ronald Reagan in 2004, there are many Americans who have come to regard him as one of their country’s greatest presidents. However, reports of Reagan’s greatness are greatly exaggerated, for the truth is that he, more than any other politician, is responsible for many of the ills that presently afflict their country, whether social, economic, or political. If one seeks to trace the origin of these ills, one will find that they often lead back to the policies that were initiated, implemented, confirmed, or intensified during the presidency of Ronald Reagan.

Prior to his political career, Reagan was a Hollywood actor. However, he never managed to achieve stardom in this profession, for he was eclipsed by more celebrated and successful actors of his time like Humphrey Bogart, Cary Grant, Gregory Peck, John Wayne, Jimmy Stewart, Gary Cooper, and Henry Fonda. In my opinion, had Reagan been able to achieve greater success as an actor, he would have been much less likely to pursue a career in politics later in his life, in part because he could have continued working as an actor, rather than being marginalized once he had passed his prime.

Because of the fact that, prior to embarking on his political career, Reagan did not spend much time educating himself about matters that a politician needs to know about, such as history, politics, economics, and human behaviour, he was ignorant about many important things. And the fact that he was an actor, and not a particularly important one, meant that he was used to working in a system where others told him what to say and how he should behave.[1] As a result, Reagan was ignorant enough to allow these and other harmful policies to be implemented in his name. In this regard, Reagan was a consummate actor, and being the President of the United States was by far his most important acting role. To paraphrase a statement that is attributed to Abraham Lincoln, Reagan the B-grade actor was able to fool enough people most of the time, including himself, since he was not aware of his prejudices and the distorting effects which these prejudices had on his beliefs and decisions. And the rest of the time, it didn’t really matter because, as his stature grew, most Americans were willing to overlook his mistakes, faults, and significant shortcomings.

An especially egregious example of his ignorance was the fact that Reagan actually believed the economic nonsense, called supply-side economics, that reducing income and corporate tax rates would lead to an increase in total government tax revenues. This laughably preposterous idea, proposed by an economist named Arthur Laffer, was based on the belief that these tax cuts would so greatly stimulate investment and spending that they would lead to a significant increase in overall income, which would consequently mean greater government revenues. The fact that there was not the slightest real-world evidence for this untested and highly dubious economic hypothesis did not deter the Reagan administration from basing their tax and economic policy on it. When these large tax cuts were implemented, far from increasing government revenue, they inevitably diminished it, which contributed significantly to increasing, during the course of the Reagan era, the federal government’s debt from slightly less than one trillion to almost three trillion dollars in only eight years.

One of the main consequences of lowering the top income tax rate was a gradual increase in the salaries that were paid to top corporate executives, an increase that has, in recent years, become a tsunami that threatens, with its corporate excess and hubris, to swamp the majority of people who are stuck on the ground, in terms of the wages and salaries they are paid. Although economists and others routinely argue that these high tax rates discourage incentive, innovation, and people from working harder, their primary effect was to discourage what I have called the pestilence of preposterous pay. If a person knew that, beyond a certain income level, most of the money one earned would be taxed by the government, then there was little incentive to demand a salary that was greatly in excess of this amount. In other words, these high marginal tax rates served as an effective cap on salaries, which in turn resulted in a more equitable distribution of incomes across the wage spectrum.[2] Not surprisingly, the reduction of these high marginal tax rates has unleashed people’s greed, with the inevitable result that, from top to bottom, people’s salaries and incomes have become more and more unequal.

From the crash of 1929 through the 1970s, CEO compensation had stagnated. Workers’ pay rose much faster than that of top executives. The most obvious reason for this stagnation was the tax code. Top marginal tax rates were punishingly high, topping 90 percent in the 1950s and early 1960s. Beyond a certain level there was no point in getting paid more. Top executives wanted perks like country club memberships and pensions and job security, not pay hikes of which they would see only 10 percent.

The Reagan tax cuts of 1981 changed all that. The 1986 tax reform, which brought the top rate down to 28 percent, changed it even more. CEO pay began to rise sharply, so sharply that it began to attract criticism in the media and from politicians.[3]

The biggest beneficiaries, as he [McIntyre] has documented over many years, are America’s biggest corporations. In the early 1980s, after the Reagan administration’s tax-cutting binge, half of the 250 largest, most profitable companies paid no federal income tax at all over three years, despite $250 billion in aggregate profit. GE was again a leader in the field, earning $6.5 billion in profit and collecting a $283 million tax refund from the government. Many of the scandalous loopholes were reduced or closed by the 1986 tax reform legislation, but the government gained no revenue because the political trade-off required a steep reduction in the top personal income tax rates paid by the wealthy, including corporate executives. Through the 1990s, corporate loopholes steadily crept back into the tax code, so that by 2000 McIntyre found that forty-one corporations were again paying less than zero—and earning tax rebates of $3.2 billion on $25.8 billion in profits.[4]

Increasing a company’s profits by decreasing the amount of taxes it pays is clearly not due to greater innovation, efficiency, or new product development. Rather, it is due to the ability to manipulate the political system in order to benefit the company’s executives and its shareholders, since these are the primary beneficiaries of this sometimes considerable corporate windfall.

In addition, this large increase in corporate executives’ compensation has greatly increased the incidence of predatory investment, which perversely tends to take from the poor and middle-class and give to the rich. Many rich people today have far more money than they know what to do with, and so, like the supposedly rational human beings that the blind economists say they are, they proceed to try and make even more money with their money, which monetary gains they also don’t know what to do with, except perhaps zealously to protect it from the government, like the wealth-obsessed human dragons that they have become.

To the common economic argument that high marginal tax rates discourage people from working harder and taking risks, I reply that you foolish economists have completely misunderstood the true causes of people’s behaviours and motivations: people’s behaviours, abilities, and motivations are actually determined by the models of behaviour they have grown up observing and admiring, and not necessarily by how much money they are paid to do something. To give a common example, most mothers and fathers are extremely conscientious in their care and concern for, and their willingness to sacrifice both their time and money in the raising of, their children. And yet, most parents are not paid any money for the tens of thousands of hours which they devote to this work over the course of many years. Moreover, those who are paid to look after children do not necessarily do a better job than parents do towards their own children.[5] Clearly, at least in this important social example, money is most certainly not the reason why parents do the best they can in raising and caring for their children.

More important than absolute salaries are relative salaries, in the sense that a person will feel disgruntled if one is paid less than another person whom one believes is on a par with, or inferior to, oneself, whether in ability, intelligence, experience, or some other trait. This tendency, which is due to our very strong innate desire to imitate and conform to those who are in our realm of influence, exists both in a particular industry and across different industries. The truly remarkable thing about this tendency is that there is no practical limit to how much people feel they deserve to be paid. If others in one’s position, occupation, or field are paid x, then one will feel that one too deserves to be paid x. But if, over the course of several years or decades, the remuneration for that position increases to 10x, then to 100x, and even, in some exceptional cases, to 1000x or 10,000x, then one’s expectations will quickly adjust so that one also feels that one deserves to be paid these astronomically large – and in many cases, wholly unjustified – sums of money. And when one has become a money addict, as many supposedly rational human beings have become in today’s world, it is very easy to find reasons to justify the obscene amounts of money one is paid or is able to acquire.

To the commonly advanced argument that these high corporate salaries have improved the efficiency, management, and operations of large corporations, I reply that corporations were generally better run before the Pestilential Era of Preposterous Pay. It is a very grave mistake to allow a company’s stock price, which is a fickle, volatile, and, moreover, a completely delusional measure of a company’s “value,” to determine how it is operated on a day-to-day basis. This is because the stock market is based on the fraudulent model of collective pricing; and secondly, apart from primary sales of stock shares, absolutely none of the money that is paid for shares in all subsequent sales of a company’s stock actually goes to the company. Hence, these stock market transactions do not qualify as investment in the economist’s sense of “investment,” since they do not help the company to grow in any way, except perhaps by pressuring its executives constantly to increase or maintain – in some cases by fraudulent means – their company’s quarterly or yearly profits, since, in many cases, the executives will personally benefit from these profits.

In the past, profitable corporations used a significant part of their profits to fund research, investment, and expansion. But that has changed as a result of several key changes that were made during the Reagan era, which included allowing corporations to buy back their own shares.

Back in the 1960s and ’70s, companies invested about 40 percent of each additional earned or borrowed dollar into the real economy. All that changed in the Reagan era. “Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa,” says William Lazonick, a University of Massachusetts Lowell professor who has done extensive research on [stock] buybacks. The legislative change that allowed this destructive shift happened in 1982, which was a crucial year for all kinds of market deregulation. The Supreme Court struck down a key antitakeover law in Illinois—and, by implication, similar laws in all other states. The Justice Department relaxed limits on concentration within industries, making it possible for large, more monopoly-oriented firms to emerge.[6]

Meanwhile, the stage was set for the buyback boom in 1981, when a vice chairman of the stock brokerage firm E. F. Hutton, John Shad, was appointed to head the SEC. He was among the first Wall Street executives to back Reagan for president and had led his fundraising campaign in New York. Not since Joseph P. Kennedy became chair of the SEC in 1934 had a Wall Street type headed the agency. Shad’s tenure brought another crucial shift: regulations allowing firms to buy back their own shares, something that had previously been considered market manipulation, were dramatically loosened. On November 10, 1982, the SEC sanctioned massive open-market repurchases, up to 25 percent of a company’s previous four weeks’ average daily trading volume, despite complaints from long-serving SEC commissioner John Evans that this measure essentially legalized market manipulation. Market volatility rose following the rule change. No matter. Shad knew that buybacks would raise share prices, and he felt that would be good for shareholders—and what was good for them was good for America. The real-world turn toward the University of Chicago model of corporate governance, in which companies were run explicitly to “maximize shareholder value,” had begun.[7]

In the case of regulations, the extremely harmful recent trend of deregulation, based on the nonsensical belief that industries should be left to regulate themselves, was first put into practice during the Reagan Era. One might as well declare that the police should no longer enforce the other laws of society, since, based on this same argument, criminals and all other malefactors should also be allowed – and can be trusted by the general public – to regulate themselves. In order to curtail the government’s ability to regulate industries, many government departments, boards, and commissions have had their staff and budgets slashed so they are effectively prevented from regulating, in any meaningful way, the industries they are supposed to regulate.

In the case of corporate mergers and takeovers, the refusal on the part of the Reagan administration to enforce anti-trust laws has led to the consolidation of market share in many industries, so that many industries have been transformed into oligopolies, with a handful of large corporations controlling fifty percent or more of the market.

In 1970 the top four meatpacking firms slaughtered only 21 percent of the nation’s cattle. A decade later, the Reagan administration allowed these firms to merge and combine without fear of antitrust enforcement. The Justice Department and the P&SA’s successor, the Grain Inspection, Packers and Stockyards Administration (GIPSA), stood aside as the large meatpackers gained control of one local cattle market after another. Today the top four meatpacking firms — ConAgra, IBP, Excel, and National Beef — slaughter about 84 percent of the nation’s cattle. Market concentration in the beef industry is now at the highest level since record-keeping began in the early twentieth century.

Today’s unprecedented degree of meatpacking concentration has helped depress the prices that independent ranchers get for their cattle. Over the last twenty years, the rancher’s share of every retail dollar spent on beef has fallen from 63 cents to 46 cents.[8]

Towards the end of the Reagan administration, the appointment of the Randophilean disciple Alan Greenspan as the Chairman of the U.S. Federal Reserve, a position that he held for more than eighteen years, ensured that these foolish changes in government policy would be perpetuated beyond the end of Reagan’s presidency. In other words, the work that was begun by the closet Randophile Ronald Reagan was continued – and zealously protected with blind ideological fervour – by Rand’s most devoted disciple, Alan Greenspan.

If Americans want to liberate themselves from the pernicious ideological straitjacket in which many of them presently find themselves entrapped, a straitjacket that is, in some ways, just as limiting, coercive, and harmful as the ideological straitjacket of communism, then they must begin by recognizing and seeking to correct the grave harms and foolish policies that were initiated by the administration of Ronald Reagan. But so long as they continue to revere Reagan as a great leader, these necessary changes will not occur, and the degradation of their society and economy will continue unabated, possibly to end in collapse, just as the Soviet Union collapsed after many decades due to the falsehood of its underlying ideology.

[1] In making this declaration, I am most certainly not saying that Reagan did not have strong political, social, or economic convictions. However, his understanding of many of the issues that confronted him was quite shallow, and it was far from adequate given the great power and responsibilities which he actively sought and was able to achieve during his political career. In many ways, Reagan the politician viewed the world in the oversimplified, stark black-and-white, good-guys-versus-bad-guys perspective that prevailed in Hollywood during his acting career. In many instances, this led him to ignore or completely overlook important problems and facets of certain issues. An example of this simplistic worldview was his conviction that all people on welfare are lazy, good-for-nothing, social parasites and cheats.

[2] In the case of salaried positions like corporate executives, company managers, professional team athletes, and others, they are required to spend as much time performing their occupation regardless of how much they are paid, since if they fail to do so, then they will be replaced by others who are willing to work harder than them. Hence, in their case, we can see that the economic argument that higher salaries will motivate these workers to strive harder, be more industrious, work longer hours, take more chances, and so forth is not necessarily true. In addition, there exist non-monetary incentives and motivations, such as the desire to be the best in one’s field or position, the desire to win a championship, and the desire to win awards or be recognized by one’s peers, that can be just as important as how much money one is paid. For instance, in the fields of science, most renowned scientists do not receive the extravagant salaries that individuals in some other professions receive, and yet this does not lessen their motivation to work hard and strive to be the best they can in their field, such as by making new discoveries.

In the case of professions like medicine and law, where individuals can increase their remuneration by working more hours, the decrease in the top marginal tax rates has had the effect of spurring some in these fields to work extremely long hours. When, for example, a doctor or lawyer works more than seventy, eighty, or ninety hours a week, and this becomes a common practice, then clearly this means there will be less work for others in the same field. In the past, when doctors, lawyers, and other professionals worked reasonable hours, such as forty or fifty hours per week, the work in these fields, and hence, the amounts that were earned by their practitioners, was more equitably distributed.

[3] The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox, chapter 15. HarperCollins e-books, 2009.

[4] The Soul of Capitalism: Opening Paths to a Moral Economy by William Greider, p. 280. Simon & Schuster, New York, 2003.

[5] A foolish economist, based on the false belief that people do things primarily for money, would propose that, in the case of bad parents, the best way to modify their behaviour towards their children is by paying them to be better parents. However, my belief is that these parents need to be re-educated, and the best way to do this is by allowing them to observe good models of parenting behaviour.

[6] Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar, chapter 4. Crown Business, New York, 2016.

[7] Ibid, chapter 4.

[8] Fast Food Nation: The Dark Side of the All-American Meal by Eric Schlosser, pp. 137-138. Perennial, HarperCollins, New York, 2002.