How “The Regan Rule” Destroyed the Economy

by ursavoice

Jeffrey D. Klein
J.D. Candidate 2013, UCI Law

What is The Reagan Rule? Let me start with its predecessor, The Henry Ford Rule, to make the explanation simpler.

Most Americans are familiar with The Henry Ford Rule. As David Leonhardt explained in a 2006 New York Times article in 2006, on January 5, 1914, Henry Ford doubled the pay of many of his employees.1 The response Leonhardt reports to have occurred back then is interesting: Ford was called a Socialist. That aside, what actually occurred on that day was the beginning of what would be called Fordism, or The Henry Ford Rule. The basic idea, as we have heard for years, was that if you do not pay your employees enough so that they can buy your products, you will not have any customers. As Leonhardt states, “This turned into a pillar of 20th-century economic wisdom.”

Two-thirds of the economy is consumer spending. It makes sense that consumer earning dictates consumer spending. Thus, increased consumer earning would lead to increased consumer spending, which would bolster 2/3 of the economy.

That was a central premise on which the American economy operated on, until The Reagan Rule came and turned it on its head.

Though never officially stated, The Reagan Rule can be summed up as, essentially, the opposite of the Henry Ford Rule: “If I pay my employees well, they won’t be able to afford my products, and so I won’t have any customers.” It takes a second. Ford’s rule is pretty straightforward. You give people more money; they have more money to spend. How does Reaganism arrive at the conclusion that paying people more will make them less able to afford things?

It all comes down to one word: inflation. And it was one episode of history, the Carter days, that gave Reagan the power to overturn nearly a century of economic understanding in the name of staving off inflation, which rose to double-digits under Carter.

In the Reagan Rule scheme of things, paying employees well is a bad thing. Why? Because, he claimed, it would lead to inflation and that inflation would be so bad that people would be less able to afford things.

We have lived so long in the vacuum of uniform Reaganomic commentary that you may stop and say, “Ah, yes, that does make sense.” But take a step back and look at what the rule says plainly: “If I pay my employees more, they’ll be able to afford less.”

It is a nice trick; and in fact this rule, this way of thinking, has been used to justify policy after policy that has taken money out of the pocket of the American worker, and thus the American consumer. No policy was to be questioned if it cut workers’ pay, sent jobs overseas, or eliminated jobs altogether. The less companies had to pay employees, the better.

But here is where the philosophy, if adequately questioned, hits a speed bump. Why is it better if companies pay employees less? Well, according to The Reagan Rule, because it will lead to employees being paid more.

Excuse me?

The central premise of “trickle down” economics is that if you do what is good for corporate profits, it will increase jobs and pay. Problem is, what companies did to increase profits was cut pay, eliminate jobs, and send jobs overseas. So, to sum it up plainly, the Reagan Rule led to the premise that eliminating jobs and cutting pay will lead to an increase in jobs and better pay.

It does not take an “expert” to see a problem with this philosophy.

So when you hear talk now about “recovery,” understand there is none. Under the Reagan Rule there may be recovery: corporate profits just set an all-time record in the third quarter of last year. However, in reality, the jobs have not only not come back, they continue to go. And so, no recovery is possible; the collapse The Reagan Rule has been sewing for decades is still in progress.