McGhee’s and Leonhardt’s accounts might appear to be in tension, echoing the “race versus class” debate that followed Trump’s victory in 2016. In fact, they’re complementary. As the economist Thomas Piketty has shown, since the’60s, left-leaning parties in most Western countries, not just the U.S., have become dominated by college-educated voters and lost working-class support. But nowhere in Europe was the backlash quite as immediate and intense as it was in the U.S. A major difference, of course, is the country’s unique racial history.
The 1972 election might have fractured the Democratic coalition, but that still doesn’t explain the rise of free-market conservatism. The new Republican majority did not arrive with a radical economic agenda. Nixon combined social conservatism with a version of New Deal economics. His administration increased funding for Social Security and food stamps, raised the capital-gains tax, and created the Environmental Protection Agency. Meanwhile, laissez-faire economics remained unpopular. Polls from the ’70s found that most Republicans believed that taxes and benefits should remain at present levels, and anti-tax ballot initiatives failed in several states by wide margins. Even Reagan largely avoided talking about tax cuts during his failed 1976 presidential campaign. The story of America’s economic pivot still has a missing piece.
According to the economic historian Gary Gerstle’s 2022 book, The Rise and Fall of the Neoliberal Order, that piece is the severe economic crisis of the mid-’70s. The 1973 Arab oil embargo sent inflation spiraling out of control. Not long afterward, the economy plunged into recession. Median family income was significantly lower in 1979 than it had been at the beginning of the decade, adjusting for inflation. “These changing economic circumstances, coming on the heels of the divisions over race and Vietnam, broke apart the New Deal order,” Gerstle writes. (Leonhardt also discusses the economic shocks of the ’70s, but they play a less central role in his analysis.)
Free-market ideas had been circulating among a small cadre of academics and business leaders for decades—most notably the University of Chicago economist Milton Friedman. The ’70s crisis provided a perfect opening to translate them into public policy, and Reagan was the perfect messenger. “Government is not the solution to our problem,” he declared in his 1981 inaugural address. “Government is the problem.”