The Decline and Fall of the American Empire — Part II
Welcome back to my four-part series on the future of the American Republic. In the first installment, we looked at how financial decline has been an issue since the late 1970s. Today, we look at how the dismantling of economic conventions and regulations has led to a situation where the U.S. is comparable to a developing nation.
Reagan also spearheaded a trend of deregulation, where the conventions established after WWII (such as the Bretton Woods Agreement) were targeted and removed. These included Nixon-era price controls that were put in place to prevent inflation, like controls on oil and gas, cable television, long-distance phone service, interstate bus services, and ocean shipping.
In 1982, Reagan deregulated banking with the passage of the Garn-St Germain Depository Institutions Act of 1982, which removed restrictions on loan-to-value ratios for savings and loan banks. Reagan also cut the budget and reduced the regulatory staff at the Federal Home Loan Bank Board. As a result, banks began investing in risky real estate ventures.
All of this contributed to the 1987 stock market crash, which was the worst since 1929, and the “Savings and Loan Crisis” of 1989. The crisis ushered in the 1990 recession, from which the economy was slow to recover. This contributed to the ousting of George H.W. Bush to challenger Bill Clinton in the 1992 federal election.
From 1993 to 1999, President Clinton presided over a period of economic recovery and impressive growth. However, in 1997, a Republican-led Congress passed the Taxpayer Relief Act, which slashed capital gains taxes and led to much higher levels of speculative investment. This led to the IT Bubble, which effectively burst in 2000 and led to another economic downturn.
Things did not improve under George W. Bush, who passed some of the largest tax cuts in U.S. history upon assuming office, which naturally favored the wealthy. Like Reagan, he also combined these with high spending and deregulation, and the results were even worse. In 2007–08, after several years of slow economic recovery and sluggish job growth after 9/11, the U.S. experienced its worst crash and subsequent recession since the Great Depression.
According to the Financial Crisis Inquiry Commission’s report (2010), the collapse was attributable to four major causes:
- Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages;
- Dramatic breakdowns in corporate governance, including too many financial firms acting recklessly and taking on too much risk;
- An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
- Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels
All of these could be traced to administrations stretching back to Reagan and included both Republican and Democratic lawmakers. However, the lion’s share of responsibility fell squarely on the shoulders of the Republicans and Bush Jr. In particular, it was the way that sub-prime mortgages and the way the SEC in 2004 relaxed the net capital rule that caused the Real Estate Bubble and the massive accumulation of debts by investment banks — two major contributing factors.
The Obama administration inherited this mess, and after four years of job losses (8 million since 2007), he managed to turn the economy around and added 10 million jobs. Once again, those gains are being threatened by a Republican successor (Trump) who is once again pushing tax cuts and deregulation.
Another major shift by the 1980s was how Reagan threw out decades of bringing labor and industry under one roof — a tradition established with the New Deal. Reagan instead pushed the concept of “supply-side economics,” where industrialists, bankers and corporate CEOs were the ones who made economic policy and the government ensured that they got tax breaks and benefits as part of the package.
The Widening Gap
The results speak for themselves. Beginning the 1980s, household incomes of working- and middle-class families ceased keeping pace with GDP and became stagnant. Over the next few decades, the amount of wealth controlled by the top 10% of earners increased immensely, reaching over $70 trillion by 2007 (based on 2013 numbers).
To break those numbers down some, by 2007, 34.6% of the national wealth was concentrated in the hands of the top 1% of the population. Meanwhile, the next 4% controlled 27.3% of the wealth, while the next 5% controlled 11.2%. That’s a total of 73% of the wealth controlled by the top 10% of the population.
Meanwhile, the middle class had the following breakdown of societal wealth. While the upper-middle (20% of the U.S.) had control over 10.9% of the wealth, the rest of the middle-class (20% of the U.S.) controlled 4%. And then the bottom 40% of earners, what would be referred to as the working-class and the poor, controlled just 0.2% of the wealth.
However, those numbers become skewed even further when you consider that between 1982 and 1990, the number of billionaires went from 11 to 100. That trend has continued until today, with roughly 540 billionaires (0.000065% of the population) in the United States with a combined net worth of $2.399 trillion (2% of the wealth). Those numbers have only become worse as of 2014.
% of Population in Jail:
Another ugly development was how the 1980s and 90s saw a significant rise in violent crime as the country’s inner cities decayed and fell prey to drugs and gang violence. While crime had been steadily rising throughout the 60s and 70s, it experienced a sharp rise during the early 80s, then an even sharper rise again in the early 90s, coinciding with Reagan and George H.W. Bush’s presidencies.
The worst of it came in 1987 with the massive economic downturn that was part of the wider “Savings and Loans Crisis”. After a rapid recovery from the recessions of the early 1980s, the market experienced a sudden and massive drop. The crisis continued into the 1990s, and is generally attributed to the economic deregulation that took place under Reagan in the early 1980s.
Narcotics arrests also rose predictably, peaking in 2006 with 1.9 million people arrested in a single year. This trend has continued well into the millennium, with a greater and greater percentage of Americans being placed in prisons that were becoming increasingly overcrowded. Rates peaked around 2010, with roughly 950 people being incarcerated per 100,000 people in the U.S.
By the end 2016, it was estimated that about 2,298,300 people out of the total population of 324.2 million were currently behind bars — that works out to 0.7% of the population, which is the highest ranking in the world! The causes for this are varied, but generally have to do with the convergence of tougher economic conditions with tougher sentencing laws.
What is especially stark about this is that incarcerations continued to rise at a time when violent crime has been in free fall. In fact, between when it peaked in the early 1990s and early 2000s, homicides and violent crime in general decreased by almost half. Since then, the trend has fluctuated, but the general trend is downward, going from 463 reported crimes per 100,000 of the population to just under 400.