Reagan Faked New York City Out Of Its Shoes In The 1980s

In 1981, President Ronald Reagan ended all currently operational business plans in the United States. The epic cuts in marginal tax rates beginning in that year, and continuing through 1988, made all business strategies successful in 1980 unsuccessful by the end of the decade. In 1980, the top personal income tax rate was 70 percent; in 1988, it was 28 percent. In 1978, the top corporate tax rate was 48 percent; in 1987, it was 34 percent. Businesses that as of 1980 had risen to the top—the very Fortune 500—had done so by concocting strategies that yielded top take-home income to shareholders and executives given high tax rates. These strategies became irrelevant and inappropriate with the Reagan tax-rate cuts. New plans had to develop, assets had to be reorganized, and new business organizations appropriate to the low-tax era had to be launched. The huge Reagan tax cuts at the margin mandated a total revolution in business strategy in the 1980s.

Enter New York City. New plans had to be developed—a specialty of management consultants. Assets had to be reorganized—a specialty of investment bankers. New organizations had to be launched—the legal expertise belonging to corporate attorneys. Management consultants, investment bankers, and corporate lawyers—three icons of the 1980s economic scene. These people had degrees from business or law schools (when not the JD/MBA), wore power suits, and worked stupid hours in the wrenching but heady years of the 1980s, as the productive forces of the economy completely, on Reagan’s dramatic tax-rate cut actions, had to be rearranged and repurposed for the new conditions. These types became the swarm of white-collar workers who took over New York City in particular—though there were other major outposts, as television melodramas such as L.A. Law indicated.

Did New York ever think it was back in the 1980s. After a horrible 1970s, when the city was shedding upwards of 100,000 in population a year, crime was a regular fact of life, and the built environment deteriorated like it was the Sack of Rome, suddenly a new dawn spread all over. The hordes of white-collar workers pushed back the shufflers and vagrants of the 1970s, transformed them into job-gaining employees because of all the new economic activity. Gentrification put the “yuppies” up in rising-from-the-ashes neighborhoods all over Manhattan and soon Brooklyn, while occupation rates in the office towers (getting face lifts at last) soared. By the 1990s, as Seinfeld and Friends tipped off, enough fortunes had been made to sustain an idle next generation on the income.

The problem was that the whole thing was temporary. There were high tax rates before 1980 and then moderate to low ones afterward. And that was that. No further material change in top tax rates, just the holding of the Reagan averages (and the corporate rate cut way off in 2017). There was a one-shot task in the 1980s: reorganize businesses that had been appropriate in the 48/70 percent corporate/personal rate level to ones that were appropriate in the 35/28-39 (as under Clinton) percent level.

In 1980, businesses and executives had built whole conglomerates on deductions, because they were deductions against high tax rates. All that became far less valuable. A high performer preferred, beginning in the 1980s, cash compensation and cash profits (including stock gains), as opposed to, for example, posh Midtown lunches paid by the firm and deductible on its return. Scientists and engineers working in corporate research wanted cash instead of fancy labs, as they had acquiesced to before the 1980s. With the cash they could bolt and use their accumulated pile and make their own startup, and take income in that new endeavor at lower tax rates, as the legacy company lost its best employees and therefore became unprofitable and a candidate for asset-rearrangement.

But then it was done. If not by 1990, then by 2000, everyone understood that the old big-company, job-for-life, corporate labs model had lost all basis with the tax-rate cuts, and that a new entrepreneurial economy was here to stay. If New York had understood what was going on, while it was having salad days in the ’80s, it would have realized that Reagan’s tax-rate cuts had given temporary stimulus to management consultants, i-bankers, and corporate lawyers. Had it realized this, it would have perhaps summoned the wisdom itself to cut tax rates (as Gov. Hugh Carey started to), to attract the new businesses that would begin from scratch in the new low-to-moderate-tax-rate world. But New York never did that. The yuppie swell of the 1980s convinced the city that it was back, just as the Gen X goofs of the 1990s at the Central Perk convinced the city that income for idle youth would last forever. Mayor Bloomberg would even justify New York’s high tax rates with rationalizations about the city’s being a luxury good which one should pay for.

Reagan, by dramatically lowering tax rates, made the business plans of 1980 irrelevant and entrepreneurialism much more possible. New York ministered to the first development and thought that was the whole thing. It should have, with the state, substantially cut its own tax rates in the 1980s and 1990s, so that it could compete with the epic capital importers of the new era—Washington state, Florida, Texas, Tennessee—all zero-income-tax states. Even California, with its capped property tax and prohibition on local income taxes, very much got in on the entrepreneurial act as New York never really did. Today, combined state and local income tax rates at the top in New York City are 14 percent, tacked on to the federal rates. Buh-bye.

How empty the city appears, how strangely irrelevant to the new generation of entrepreneurial visionaries, its only real industry finance (which always is bloated in fiat-currency systems). The attitude that New York City still musters shows, unimpressively, that the city is stuck on trying to get by on the old 1980s fumes. “We sure did defeat the 1970s in the 1980s and my were we prosperous in the 1990s!” is the basic vibe. All true. But it stemmed from not realizing what Reagan was doing to the city. He gave the place a one-off in which yuppies would be in extreme demand for about ten or twenty years. Then it was up to the city organically to attract business and dreamers and startups, up against competition from locations, now flourishing, that said we do things like not tax incomes, especially at the tippy top, one single cent. A recent geographical projection suggested that Dallas may be the biggest city in the country in year 2100.

For a talk on the policy structure of these developments I gave at the Reagan library in August, click here.