The latter half of the 1970s witnessed a profound pivot in American economic policy and ideological landscape, building upon the radical shifts initiated earlier in the decade, such as the “Nixon Shock” of 1971. This period was characterized by persistent economic challenges, notably “stagflation” — the vexing combination of rising inflation and unemployment that had been troubling the nation since 1973. This ongoing economic insecurity fueled widespread public dissatisfaction and a significant decline in optimism about the future of the country.
Against this backdrop, the underlying currents of wealth distribution in America began to shift dramatically. The “great leveling” of incomes that had occurred between the 1910s and 1970s, which saw a fall in the income share captured by the richest 1% and a rise for the bottom half, decisively “slipped away” after the 1970s, particularly in North America, the United Kingdom, and Australia. This reversal marked the onset of a new era of widening income gaps. Between 1977 and 1989, the pre-tax income of the wealthiest 1% surged by an astonishing 77%, while the poorest two-fifths of the population experienced no gains, and even a slight decline. Similarly, the after-tax income of the richest 1% saw an 87% increase in the decade ending in 1990. By 1977, the top 10% of the American population commanded an income thirty times greater than the bottom tenth, and the wealthiest 1% controlled 33% of the nation’s wealth.
This growing disparity was not an accidental byproduct of neutral economic forces but rather a direct consequence of deliberate policy choices and a fundamental shift in the allocation of power. A pivotal moment in this policy reorientation occurred in 1978, when the Democratic Party, despite being “fully in power,” initiated changes to the tax system that demonstrably made it less progressive. This marked a significant turning point in tax politics, with Democratic majorities supporting a shift that allowed “monied elites” to gain substantially. For instance, the Social Security tax, which is deducted from salary checks, became more regressive, meaning a higher percentage of income was taken from the poor and middle classes, while deductions ceased after salaries reached $42,000. By the early 1990s, a middle-income family earning $37,800 paid 7.65% of its income in Social Security taxes, while a family earning ten times as much paid only 1.46%. These higher payroll taxes, embarrassingly for the party typically seen as representing the working class, were put into motion under the administration of President Jimmy Carter. Carter also approved tax “reforms” that primarily benefited corporations, leading to a notable 44% surge in corporate profits in the last quarter of 1978 compared to the previous year. He signed an $18 billion tax reduction, with the majority of benefits flowing to affluent individuals and corporations. These changes stood in stark contrast to the post-World War II era, when top tax rates on income and inheritance were significantly higher, at times reaching 90% and 77% respectively. Furthermore, in 1975, Congress created the Earned Income Tax Credit, a program designed to subsidize the wages of the working poor, which was notably conceived by the conservative economist Milton Friedman, providing income supplements without the perceived stigma of “welfare”.
Accompanying these shifts in economic policy was the burgeoning influence of conservative intellectual movements and institutions. The groundwork for this ideological counter-revolution was laid earlier, with figures like Friedrich Hayek and Milton Friedman developing free-market critiques of Keynesian economics. In 1974, Charles Koch, alongside two other libertarian conservatives, established the Charles Koch Foundation, which would later be renamed the Cato Institute. These institutions were part of a broader network of “ultraconservative foundations and billionaires” that began actively shaping America’s political culture, creating a “counter-intelligentsia” to disseminate libertarian, anti-statist ideology. William Casey, a former Nixon appointee who would later become Ronald Reagan’s CIA director, founded the Manhattan Institute in 1977. These think tanks, often modeled after the Heritage Foundation (established in 1973), rapidly changed the landscape of policy advocacy, moving away from a “neutral technocratic regime” towards a “robust reactionary conservative regime”. Their aim was to provide policy proposals rooted in their ideological vision and actively influence the political agenda, promoting deregulation, lower taxes, and a reduced role for government intervention. This intellectual ferment of the 1970s, as the sources reveal, was “unrivaled since the 1930s”.
In the realm of monetary policy, the Federal Open Market Committee (FOMC) in the late 1970s faced significant challenges. Despite the experiences of 1972, the FOMC “regrettably” did not learn how to effectively improve monetary control, failing to implement procedural changes or develop techniques, such as methods for estimating the multiplier for reserve accounting. This suggests a struggle to effectively manage the money supply through precise theoretical models. While discussions within the FOMC included the analysis of real interest rates, their impact on the committee’s decisions was often “modest”. By late 1978 and early 1979, the administration itself, through figures like Charles Schultze and Michael Blumenthal, was publicly pressuring the Federal Reserve Chairman G. William Miller to “tighten up” policy, implying a perception of insufficient action or an ineffective approach to controlling inflation and monetary aggregates. The FOMC’s own records from 1978 acknowledged that M1 growth had consistently exceeded its longer-run target, and that “forceful” action was needed, but their failure to act forcefully was noted as the source of their problems. This period demonstrated the profound difficulties in steering the economy, especially as inflation continued to rise, reaching 13% by 1979, partly fueled by a second major oil price increase.
Thus, the second half of the 1970s was a period of significant transformation. The economic system, increasingly marked by the rise of “supercapitalism” where power shifted to consumers and investors at the expense of traditional democratic checks and balances, saw a dramatic concentration of wealth. This was facilitated by policy shifts, including less progressive taxation adopted even by the Democratic Party, and was buttressed by a burgeoning network of conservative think tanks actively promoting a free-market ideology. The Federal Reserve, grappling with persistent inflation, struggled to implement effective monetary control, indicating a period where the existing policy frameworks and their application proved insufficient for the evolving economic challenges.