Donald Trump meets Ronald Reagan: 1982 all over again?

President Donald J. Trump’s economic program, at least what we know of it, fits comfortably with free-market ideas but conflicts with Catholic social thought as embedded in a number of social encyclicals and the U.S. bishops’ 1986 letter on the economy, “Economic Justice for All.”  The bishops’ pastoral letter argues that concern for human dignity in social solidarity is at the core of Christian faith. Catholic social thought reflects a communitarian conception of society that prioritizes the common good. Because economic institutions and policies have a major impact on human dignity they raise not only technical but moral concerns as well. Therefore, the bishops argue, every perspective on economic life that is human, moral, and Christian must be shaped by three questions: What does the economy do for people? What does it do to people? And how do people participate in it? In addition, the bishops argue that in pursuing the common good special concern must be given to the economy’s impact on the poor and powerless because they are particularly vulnerable and needy.

Free-market thought, by contrast, is the child of an eighteenth-century liberalism that repudiates the very idea of a common good: society is merely a collection of individuals who enter into voluntary exchanges driven by self-interest. Individual liberty is the highest good, and, if individuals are left free to pursue their self-interest, the result will be the maximum material welfare. Advocates of this approach argue that the best way to deal with economic problems is to rely on the individual’s pursuit of self-interest in a private-property system, regulated by the forces of market competition; the government, in this view, should act as the neutral umpire of the rules of the economic game. In order to have an income each person has to provide something (a product, a service, or their labor) that others want and are willing and able to pay for, and through a process of voluntary exchange, overall production will be maximized while at the same time protecting individual freedom.

Stefano Zamagni has elaborated the differences between Catholic social thought and free-market approaches to the common good:

Freedom has three dimensions: autonomy, immunity and empowerment. Autonomy has to do with freedom of choice. Immunity has to do with the absence of coercion. It is, in brief, the negative freedom (that is to say the “freedom from”) cited by Isaiah Berlin. Empowerment, in the sense given to it by Amartya Sen, has to do with the capability to choose—that is to say to reach goals that are set, at least in part, by the person himself. One is not free if one is never (at least partially) able to fulfill one’s own life plan.

Free-market thought focuses on autonomy and immunity while neglecting empowerment. But the concept of the common good within Catholic social thought is the connective tissue that binds these three dimensions of freedom together: autonomy, immunity, and empowerment. The bishops’ three questions—what does the economy do for people, what does it do to people, and how do people participate in it—reflect these three dimensions of freedom.

The Trump administration has not embraced free-market policies on every issue, but the core tenets of free-market thought are central to his economic program: that markets work well; that government controls are seldom effective; and that investors, who are the driving force of the economy, must be given incentives such as lower taxes and fewer regulations to perform their magic. These are dubious assumptions, and putting them into practice is unlikely to “make America great again.” Catholics attentive to our tradition of social and political thought especially should be wary of such policies. Taking the examples of tax cuts and deregulation, both at the heart of Trump’s economic vision, will show why.


Trickle-down economics rests on the idea that policies that benefit the wealthy will ultimately help everybody, even the poor. The term was coined by Will Rogers, who observed of President Herbert Hoover’s 1928 tax cuts: “The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover... [didn’t] know that money trickled up.”

Catholics attentive to our tradition of social and political thought should be wary of Trump policies

The term is probably most associated now with former president Ronald Reagan. His defenders claim he was successful in rescuing the economy from stagflation by cutting taxes on the rich, setting off a boom. At the same time, government programs established during the previous forty-five years were attacked because they supposedly reduced any number of important “incentives.” Free up the economy and all would be well, the mantra went. Reduce welfare, lower minimum wages, and cut unemployment benefits so that the poor would have greater incentives to work; lower taxes and remove regulations on business so that the resulting higher profits would be an incentive for corporations and wealthy individuals to save and invest. Do all that, and productivity would increase and the GDP grow. Eventually, this largesse would trickle down so that even those at the bottom would be better off than before.

These promises proved to be more ideology than reality. The facts of Reagan’s trickle-down policies tell a different story. His administration conquered the inflation “half” of stagflation at the cost of what was then the deepest recession since the 1930s. The subsequent recovery after 1982 covered up a number of problems that continue to challenge policymakers: the record budget and trade deficits; an unprecedented increase in consumption expenditures and decline in savings; a tragic deferral of infrastructure maintenance; the deindustrialization of the U.S. economy and with it the growth of a two-tiered wage system; and expansion of a chronically poor “underclass” trapped inside the lowest-wage sectors of the economy or pushed outside the economy altogether, hungry and homeless.

These changes generated increasing income inequality, and labor’s share of personal income fell by three percentage points between 1980 and 1990, while the share of payments (profits, interest, rents) to owners of assets increased from 22.7 percent to 26.1 percent—a dramatic change in such a short period of time. In addition, inequalities within wage and salary incomes grew, as hourly wages stagnated or even declined while executive pay for managers dramatically increased. When changes in family income between 1977 and 1989 are looked at, the results are even more dramatic—the top 1 percent of families captured 44 to 70 percent of the total increase, depending on the definitions used, resulting in their share of total after-tax income jumping from 7 to 12 percent. In contrast, the bottom 40 percent of families actually lost income, both relatively and absolutely.

Changes in the employment structure of the economy created a situation where the poor became both more numerous and poorer, and where getting a job was no longer a way out of poverty—31.5 percent of all jobs in 1987 paid less than was necessary to support a family of four above the poverty line. The number of Americans living below the official poverty line increased from 26.1 million in 1979 to 32.5 million in 1987, moving from 11.7 percent to 13.5 percent of the population. The rate was not higher because most poor households have multiple wage earners. This was the basis for talk about the “new poor” and the “underclass.”

The 1992 election of Bill Clinton changed little. As the economy recovered from the Bush recession, unemployment and the budget deficit were reduced but most of the other problems remained. Clinton took some steps to reverse Reagan’s policies, such as increasing taxes on the wealthy in 1993. This resulted in better macroeconomic performance and somewhat greater responsiveness to the ethical dimension of economic policy. The 1996 reform of welfare laws may or may not have helped the poor. It removed many families from welfare and sent some to paying jobs, but it is not clear what the final result will be. Certainly there has been an increase in poverty among the very poorest families.

The George W. Bush administration pushed the economy further along the Reagan path. An examination of the data on the Bush administration’s performance regarding income distribution and poverty shows a deteriorating performance in these areas. Poverty rates rose from 11.3 percent in 2000 to 12.7 percent in 2004, or an increase from 31.6 million to 37 million living in poverty.

Over the past few decades, there has been a shift in the distribution of income, with a continual decline in the share of total income going to the lowest income groups and increases in the share going to the highest since 1970. For example, the functional distribution of income has shifted heavily in favor of profits and away from wages. Between 1980 and 2004, the share of income that was wages declined by close to 4 percent, though it rose in 2005. The share of profits increased by 5.6 percent, and proprietors’ income increased by 2 percent. During that same period, real wages in manufacturing decreased 1 percent, while the real income of the richest 1 percent increased 135 percent. These are large shifts. As the New York Times reported in August 2006, “wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording data in 1947, while corporate profits have climbed to their highest share since the 1960s.” In addition, median household income actually declined in the United States over the decade prior to 2016 and has been stagnant since the 1970s. Wages for men with a high-school education have fallen substantially over the same period.

Between their narrow technical training and their bias toward free markets, most economists failed to see the coming perfect storm of economic recession and financial crisis at the end of President Bush’s second term. In fact they paved the way for it by urging the deregulation of financial markets, under both Clinton and Bush. That enabled the creation of all manner of dubious new debt instruments, the wildly increased leverage of bank capital, and undetected Ponzi schemes. Add to this the extremely low interest rates set by the Federal Reserve and the “bubble” created in the housing industry, and the crash was inevitable.

The most astonishing admission of the failure of the free-market model came from former Federal Reserve Chairman Alan Greenspan in autumn 2008. He confessed that the Fed’s regime of monetary management had been based on a “flaw.” The “whole intellectual edifice” their reasoning was based on had “collapsed in the summer of last year,” he said.

The rising tide of wealth has conspicuously failed to lift all boats. Contrary to the cherished beliefs of most Americans, the United States has less social mobility than any other developed country. The Brookings Institution’s Ron Haskins and Isabel Sawhill show in their book Creating an Opportunity Society just how poorly the United States fares in this regard. For example, only 6 percent of those born into a family in the bottom fifth of the income distribution ever climb to the top fifth as adults, and a remarkable 42 percent of those born in the bottom fifth remain there as adults. That latter number shows that the United States has significantly less mobility than a host of countries in Europe, dreaded land of social democracy. In Denmark only 25 percent of those born in the bottom fifth of the income distribution never escape, with Sweden at 26 percent, Finland at 28 percent, Norway at 28 percent, and Britain at 30 percent.

Despite all this evidence, an idea as convenient to the rich and powerful as trickle-down economics is impossible to keep down for long—and it’s found advocates in the Trump White House. Trump’s proposals for cutting taxes on the wealthy are at the core of his economic policy, and central to the failed health-care reform bill was the elimination of heavy taxes the Affordable Care Act imposed on the well-off. The coming “tax reform” bill aims to reduce corporate tax rates and the top income tax rates [see our May 19 editorial, “The King of Debt”]. There is no reason to believe that the outcome of these massive tax cuts proposed by Trump and his allies will be any different this time than in the past. The rich will get richer and everyone else will lose or gain only a pittance.

Alan Greenspan receiving the Presidential Medal of Freedom in 2005; after the 2008 crash, he acknowledged the failure of the free-market model

All this is incompatible with Catholic social thought. Pope Francis strongly criticized trickle-down economics in his apostolic exhortation, Evangelii gaudium:

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting.


The second element of free-market thought to consider is deregulation, the idea that government regulations usually hinder the efficiency of markets. The boundaries between the private and public sectors have always been fluid, but the general tendency since the late nineteenth century has been for the state’s role to expand in order to correct for the limitations and failures of market outcomes. Beginning in the late 1970s and early ’80s, with the rise of Margaret Thatcher in Great Britain and Reagan in the United States, there has been a concerted global attempt to reverse this process.

Trump has made it clear he wants to dismantle many government regulations that he believes create disincentives for investors. Deregulation got top billing in his “100 day action plan” issued last November. On the Monday of his second week in office, Trump signed an executive order requiring every federal agency to cut two existing regulations for every new regulation they implement. He stressed that small businesses had been hampered by regulations and now they would be able to expand and create new jobs, despite the paucity of evidence suggesting that regulations really hamper small businesses. In early February he met with executives of some of the largest corporations in the United States and promised to cut regulations by 75 percent.

Contrary to our cherished beliefs, the United States has less social mobility than any other developed country

Another executive order from Trump proposes to eliminate or sharply cut back the Dodd-Frank legislation regulating the financial sector. It directs agencies and policymakers to study ways to eliminate virtually any regulation that curbs banks’ ability to lend or that supposedly undermines brokers’ role in advising and selling shares for clients. That order further directs agencies to review “all existing laws, treaties, regulations, guidance, reporting and record keeping requirements” that might hinder U.S. firms from becoming more competitive. The results of all this could be disastrous. Even former Secretary of the Treasury Lawrence Summers attacked these policies, saying such sweeping deregulation was setting the stage for the next financial crisis. “The deregulation in some areas like finance is hugely dangerous,” he said in an interview on the Fox News Channel. “Who wants to go back to the era of predatory lending? Who wants to go back to the era of vastly over-leveraged banks?”

In remarks, memoranda, and a number of other executive orders, Trump has gone after specific regulations that he believes reduce economic growth and the creation of new jobs, including the “Waters of the U.S. Rule” designed to protect rivers and wetlands and the Environmental Protection Agency’s “Clean Power Plan,” which limits carbon pollution from power plants. The president and congressional Republicans have suggested rolling back other key regulations governing the FDA’s drug-approval system; their promises to repeal the ACA, which so far have been stymied, are also driven by a desire to deregulate the health-care industry. Already the Republican-led Congress has passed a law rolling back Obama-era internet-privacy rules. Trump appointments for key cabinet posts, including Scott Pruitt for the Environmental Protection Agency and former congressman Tom Price for Health and Human Services, further signal the Trump administration plans for aggressive deregulation.

Those with a rage for deregulation argue that the results of a perfectly competitive market cannot be improved upon. In reality, these conditions seldom exist and we know government can and must step in to correct for what economists call “market failures.” Market failures include: monopolies and other departures from perfect competition that result in high prices; externalities, such as pollution, in which people and firms affect others adversely without paying for the harm they cause; and the problem of imperfect information (about such things as whether a medicine actually works).

At its most basic, the case for government regulation focuses on correcting these market failures by breaking up monopolies, imposing fines for pollution, supplying public goods, and by certifying that medicines work. In fact, markets require these regulations to function efficiently.

Sensible proponents of the mixed economy have never argued that deregulation should be opposed in all cases. As circumstances change, government involvement in some areas of the economy becomes more desirable, in others less so. But the idea that change should always be in the direction of less regulation needs to be subjected to careful scrutiny, not simply trusted as an a priori dictate of ideology. So far, we’ve gotten too much of the latter from the Trump administration.

We need to shift from the view that efficiency is the primary goal of our economic policies to one that sees equity as equally important. Proponents of “free markets” who have pushed policies based on claims of their supposed efficiency have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality. We know who that empowers, and it’s not the poor, workers, or even those struggling to stay in the middle class. To cite Pope Francis again:

While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

It seems clear Trump and his GOP allies will not pursue and defend the common good “with vigilance.” For now, that falls to the rest of us.

Charles Wilber is emeritus professor of economics at the University of Notre Dame. He is the author of Economics and Ethics: An Introduction and Catholic Spending and Acting Justly.

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Published in the May 19, 2017 issue: View Contents
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