How Ronald Reagan and Alan Greenspan Pulled off the Greatest Fraud Ever Perpetrated against the American People

David Leonhardt’s article,  “Yes, 47% of Households Owe No Taxes. Look Closer,” in Tuesday’s New York Times was excellent, but it just scratches the tip of the iceberg of how the rich have gained at the expense of the working class during the past three decades.  When Ronald Reagan became President in 1981, he abandoned the traditional economic policies, under which the United States had operated for the previous 40 years, and launched the nation in a dangerous new direction.  As Newsweek magazine put it in its March 2, 1981 issue, “Reagan thus gambled the future — his own, his party’s, and in some measure the nation’s—on a perilous and largely untested new course called supply-side economics.”

Essentially, Reagan switched the federal government from what he critically called, a “tax and spend” policy, to a “borrow and spend” policy, where the government continued its heavy spending, but used borrowed money instead of tax revenue to pay the bills.  The results were catastrophic.  Although it had taken the United States more than 200 years to accumulate the first $1 trillion of national debt, it took only five years under Reagan to add the second one trillion dollars to the debt.  By the end of the 12 years of the Reagan-Bush administrations, the national debt had quadrupled to $4 trillion!

Ronald Reagan and Alan Greenspan pulled off one of the greatest frauds ever perpetrated against the American people in the history of this great nation, and the underlying scam is still alive and well, more than a quarter century later.  It represents the very foundation upon which the economic malpractice that led the nation to the great economic collapse of 2008 was built.  Ronald Reagan was a cunning politician, but he didn’t know much about economics.  Alan Greenspan was an economist, who had no reluctance to work with a politician on a plan that would further the cause of the right-wing goals that both he and President Reagan shared. 

Both Reagan and Greenspan saw big government as an evil, and they saw big business as a virtue.  They both had despised the progressive policies of Roosevelt, Kennedy and Johnson, and they wanted to turn back the pages of time. They came up with the perfect strategy for the redistribution of income and wealth from the working class to the rich. Since we don’t know the nature of the private conversations that took place between Reagan and Greenspan, as well as between their aides, we cannot be sure whether the events that would follow over the next three decades were specifically planned by Reagan and Greenspan, or whether they were just the natural result of the actions the two men played such a big role in.  Either way, both Reagan and Greenspan are revered by most conservatives and hated by most liberals.

If Reagan had campaigned for the presidency by promising big tax cuts for the rich and pledging to make up for the lost revenue by imposing substantial tax increases on the working class, he would probably not have been elected.  But that is exactly what Reagan did, with the help of Alan Greenspan.  Consider the following sequence of events:   

1) President Reagan appointed Greenspan as chairman of the 1982 National Commission on Social Security Reform (aka The Greenspan Commission)

2) The Greenspan Commission recommended a major payroll tax hike to generate Social Security surpluses for the next 30 years, in order to build up a large reserve in the trust fund that could be drawn down during the years after Social Security began running deficits.

3) The 1983 Social Security amendments enacted hefty increases in the payroll tax in order to generate large future surpluses. 

4) As soon as the first surpluses began to role in, in 1985, the money was put into the general revenue fund and spent on other government programs. None of the surplus was saved or invested in anything.  The surplus Social Security revenue, that was paid by working Americans, was used to replace the lost revenue from Reagan’s big income tax cuts that went primarily to the rich.  

5) In 1987, President Reagan nominated Greenspan as the successor to Paul Volker as chairman of the Federal Reserve Board.  Greenspan continued as Fed Chairman until January 31, 2006.  (One can only speculate on whether the coveted Fed Chairmanship represented, at least in part, a payback for Greenspan’s role in initiating the Social Security surplus  revenue.)

6) In 1990, Senator Daniel Patrick Moynihan of New York,  a member of the Greenspan Commission, and one of the strongest advocates the the 1983 legislation, became outraged when he learned that first Reagan, and then President George H.W. Bush used the surplus Social Security revenue to pay for other government programs instead of saving and investing it for the baby boomers.  Moynihan locked horns with President Bush and proposed repealing the 1983 payroll tax hike.  Moynihan’s view was that if the government could not keep its hands out of the Social Security cookie jar, the cookie jar should be emptied, so there would be no surplus Social Security revenue for the government to loot. President Bush would have no part of repealing the payroll tax hike.  The “read-my-lips-no-new-taxes” president was not about to give up his huge slush fund.

The practice of using every dollar of the surplus Social Security revenue for general government spending continues to this day.  The 1983 payroll tax hike has generated approximately $2.5 trillion in surplus Social Security revenue which is supposed to be in the trust fund for use in paying for the retirement benefits of the baby boomers.  But the trust fund is empty!  It contains no real assets.  As a result, the government will soon be unable to pay full benefits without a tax increase.  Money can be spent or it can be saved.  But you can’t do both. Absolutely none of the $2.5 trillion was saved or invested in anything.  I have been laboring for more than a decade to expose the great Social Security scam.  For more information, please visit my website or contact me.

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. His latest book is Raiding the Trust Fund: Using Social Security Money to Fund Tax Cuts for the Rich. Read other articles by Allen, or visit Allen's website.

5 comments on this article so far ...

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  1. bozh said on April 14th, 2010 at 10:07am #

    Still, this is only symptom or really quite legal act by US. So, appears to me of the system. So, what’s wrong-right with the system of which governing the country by laws is integral part? Apparently nothing; even to allen smyth.
    So, why bother complaining ab an a legal act? Beats me! Why not change the system that allows this? tnx

  2. Mike 2 said on April 15th, 2010 at 4:40am #

    I think politics is, has and always will be the problem and it seems to have creeped in to Dr. Smiths article.
    The American people through decades of political rhetoric have come to believe all the lies that have been told by politicians and duly reinforced by a compliant media.
    Reagan proposed cutting benefits to fix social security. On 5/12/81 HHS Secretary Richard Schweiker sent Congress the Administrations plan to rely on benefit cuts. You know what happened next – the Democrats pounced with the elderly lobbies not far behind. Reagan gave up and not unlike todays President, formed the commission mostly for political cover and to take the heat off. And remember Congress passes the law, the President does not get a vote.
    The reserve fund build up for the boomers is also a myth. That is if we can believe the Congressionsl Research Service:

    “In fact, it has become conventional wisdom that Congress deliberately intended to built up large balances in the trust funds, not just for the near term, but to help finance the benefits of the post World War II baby boomers and later retirees.”…”To the contrary, a review of the record of congressional proceedings would suggest that the goal was
    not to create surpluses, but to assure that the system would not be threatened by insolvency again in the event adverse conditions arose.” ( CRS Report for Congress – Social Security Financing Reform: Lessons From the 1983 Amendments – 97-741 EPW )

    Or if we choose to believe Robert J Meyers:

    Q: As we look at it today, some people rationalize the financing basis by saying that it’s a way of partially having the baby boomers pay for their own retirement in advance. You’re telling me now this was not the rationale. Nobody made that argument or adopted that rationale?

    Myers: That’s correct. The statement you made is widely quoted, it is widely used, but it just isn’t true. It didn’t happen that way, it was mostly happenstance that the Commission adopted this approach to financing Social Security.
    ( )

    Senator Daniel Patrick Moynihan may have become outraged but he was on the commission. He never realized that all cash surpluses have to be invested in debt – since Social Security began? I find that hard to believe, but he was right to recommend cutting the FICA tax, which of course went nowhere in CONGRESS.

    If this new commission comes up with a plan to “extend the life” of the trust fund, as happened with the new health care bill, it’s just kicking the can down the road again. Let’s let them use the “trust fund” and run it down to zero. How? cut spending elsewhere.

  3. perris said on April 15th, 2010 at 10:56am #

    this is a great article alan, you missed one of the most important things greenspan did to destroy the economy

    he went to war on what he termed “wage inflation”

    every time you see the prime go up that means there is upward pressure on wages and he is trying to keep businesses from having money to offer higher wage

    when you see wages go down it’s because wage pressure is either stagnant or negative

    of course there are other factors that make the prime go up or down but wage pressure is the big reason you see it happening

    when greenspan said “the economy is heating up” what he meant is “people are asking for and getting a raise”

    important stuff and one of the main reasons the middle classes wages have been stagnant

  4. siamdave said on April 16th, 2010 at 12:00am #

    – the US was not alone – this scam was taking place in most if not all western faux-democracies. For the Canadian perspective – which has cost Cdn taxpayers some two trillion dollars over the last 30+ years in “debt service” whilst government after government claims ‘no money!!’ and slashes the social programs Cdns worked generations to establish – What Happened? . And thus it will continue until people catch on to this scam, this fraud, and put a lot of people in jail. ABout the same time I find my way out from behind the looking glass, I expect. We’re all in cloud cuckooland now. Dorothy. The wizard is dead and the black witch rules.

  5. AaronG said on April 16th, 2010 at 4:39am #

    “Both Reagan and Greenspan saw big government as an evil, and they saw big business as a virtue. They both had despised the progressive policies of Roosevelt, Kennedy and Johnson”

    Republicans BAD……..Democrats GOOD.

    “When Ronald Reagan became President in 1981, he abandoned the traditional economic policies, under which the United States had operated for the previous 40 years”

    The ‘traditional’ economic policy of ‘capitalism’ (are economists allowed to utter that word in public, or is ‘traditional’ a better oxymoron?) was rampant before 1981 and was going about its destructive business. This article paints a picture of the pre-1981 world being the ‘glory days’.