Aftershock

by Robert B. Reich

  Historian Richard Hofstadter once wrote a famous essay about the recurring strain of, as he put it, a “paranoid style in American politics”—an underlying readiness among average voters to see conspiracies among powerful elites supposedly plotting against them. The paranoia rises during periods of economic stress. It animated the pre–Civil War Know-Nothings and Anti-Masonic movements, the populist agitators of the late nineteenth century, the Ku Klux Klan, and the John Birch Society (whose founder, Robert Welch, accused Dwight Eisenhower of being “a dedicated, conscious agent of the Communist conspiracy”). Some of the current and pending backlash is rooted in a similar paranoia.

  Yet for all its bitterness, America’s backlash is still tame in comparison to uprisings elsewhere around the globe. During foreign meetings of the G-20 and other global institutions, demonstrators abroad have repeatedly blocked streets and disrupted proceedings. In October 2009, on the sixtieth anniversary of China’s communist revolution supposedly designed to create a “classless utopia,” that nation was gripped by a wave of anger against its new wealthy elite. A new phrase—“fen fu”—was coined, meaning “to hate the rich.”

  Economic resentments have not yet propelled anyone into the White House (unless you count Andrew Jackson’s 1828 victory, including his attack on the Second Bank of the United States and the “elite circle” of business leaders who, he charged, benefited from it at the expense of America’s farmers and laborers). At the end of the nineteenth century, America’s most famous economic populist was William Jennings Bryan, who won the Democratic nomination for president in 1896 demanding “free coinage of silver.” The nation’s adherence to the gold standard had caused the dollar to deflate, thereby crushing the nation’s farmers, laborers, and other debtors with high payments they hadn’t bargained for. A silver standard would have had the reverse effect, causing the dollar to inflate and shrinking their debts. Their enemies were eastern bankers who held most of that debt and naturally favored the gold standard. Bryan took on the bankers, “the few financial magnates who, in a back room, corner the money of the world.” In one of the most famously incendiary speeches in American history, he thundered to the assembled delegates, “We shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold!” The convention roared its approval, but Bryan lost the election to William McKinley nonetheless. (Perhaps not incidentally, McKinley’s campaign manager, Mark Hanna, had raised an unprecedented $3.5 million from big business and plowed most of it into advertising; historians credit Hanna with inventing the modern presidential campaign.)

  Before economic stresses and resentments have risen too far, America has traditionally opted for reform. Progressive state legislatures preempted Bryan’s prairie populism by enacting a welter of reforms on behalf of farmers and laborers. Theodore Roosevelt stole some of Bryan’s thunder by fighting the trusts. Years later, in the depths of the Great Depression, Father Charles Coughlin of Detroit, known as the “radio priest” for his weekly political broadcast, repeatedly chastised bankers and financiers—the “debt merchants” and “ventriloquists of Wall Street”—and he inveighed against the Fed, “a system owned by a group of your masters and not by the American people.” Coughlin demanded a radical inflation of the currency, which he insisted would redistribute wealth. About the same time, Senator Huey “the Kingfish” Long of Louisiana attacked “imperialistic banking control” and big corporations, and pushed for a tax on corporate assets that would guarantee everyone a minimal income and make “every man a king.” Here again, though, reformers preempted the populists. New Deal measures took much of the wind out of Coughlin’s and Long’s sails. When Coughlin and others joined in a third-party presidential challenge to FDR in 1936, they received around 2 percent of the vote.

  During the 1992 presidential election, when the nation was still mired in recession, maverick presidential candidate Ross Perot railed against government deficits, alleging that they hurt average working people. Although Perot’s third party never garnered enough votes to get near the Oval Office, five years later Bill Clinton signed the Balanced Budget Act, and soon thereafter balanced the budget. Pat Buchanan, the former Nixon speechwriter who coined the phrase “the silent majority,” ran in some Republican primaries on a platform calling for restrictions on immigration, multiculturalism, and gay rights. Buchanan garnered 3 million votes, hardly enough to displace George Bush. He tried again in 1996, charging that members of America’s establishment “hear the shouts of the peasants from over the hill.… All the peasants are coming with pitchforks.” It was a memorable phrase, but it didn’t get Buchanan any farther. By then, a strong economic recovery had becalmed Buchanan’s pitchforked peasants. In 2000, Ralph Nader ran for president as the Green Party candidate, assailing the power of “greedy” and “rapacious” corporations. He lost, of course, but some believe he got enough support to tip Florida, and therefore the electoral college and the presidency, to George W. Bush.

  To be sure, prolonged economic stress could open the door to demagogues who prey on public anxieties in order to gain power. A classic sociological study of thirty-five dictatorships found that when people feel economically threatened and unhinged from their normal habits, they look to authority figures who promise simple remedies proffering scapegoats. Adolf Hitler, coming to power only weeks before Roosevelt, gave voice to the phenomenon: “That is the mightiest mission of our Movement, namely, to give the searching and bewildered masses a new, firm belief, a belief which will not abandon them in these days of chaos, which they will swear and abide by, so that at least somewhere they will again find a place where their hearts can be at rest.”

  Americans are not immune to this temptation, but we have not yet succumbed. Just before Franklin Roosevelt’s inauguration, as the nation fell into the depths of the Great Depression, some influential Americans thought the nation needed a dictator. The famed syndicated columnist Walter Lippmann advocated a “mild species of dictatorship” that would “help us over the roughest spots in the road ahead.” Some of Roosevelt’s closest advisors warned him that unless he assumed dictatorial power, the country would face revolution. The revolution never happened; nor did the dictatorship.

  This is not to argue that reform in America will inevitably preempt demagoguery or bitter “kill the cow” populism. So far our political system has shown a knack for stopping backlashes before they get too far out of hand. The question is whether reform will come this time, on a scale that’s needed. By the time Margaret Jones and her Independence Party (or whatever other form the backlash might take) take control, it will be too late.

  PART III

  The Bargain Restored

  1

  What Should Be Done: A New Deal for the Middle Class

  I could have grounded my argument in morality: It is simply unfair for a handful of Americans to take home such a large share of total income when so many others are struggling to make ends meet. Or I could have based it on traditional American values: Such a lopsided distribution is at odds with the nation’s history and its ideal of equal opportunity—especially when the deck seems stacked in favor of those at the top. I could have talked about how this degree of inequality undermines the nation’s moral authority and its standing in the world.

  I have chosen instead to base my argument on two tangible threats that such inequality poses to everyone—including even the wealthiest and most influential among us. One is economic: Unless America’s middle class receives a fair share, it cannot consume nearly what the nation is capable of producing, at least without going deeply into debt. And debt on this scale is unsustainable, as we have seen. The inevitable result is slower economic growth and an economy increasingly susceptible to great booms and terrible busts. The other threat is political: Widening inequality, coupled with a growing perception that big business and Wall Street are in cahoots with big government for the purpose of making the ric
h even richer, gives fodder to demagogues on the extreme right and the extreme left. They gain power by turning the public’s economic anxieties into resentments against particular people and groups. Isolationist and nativist, often racist, and willing to sacrifice overall prosperity for the sake of achieving their ends, such demagogues and the movements they inspire can cause great harm.

  As I’ve shown, the Great Recession has accelerated both troubling trends. With the bursting of the housing bubble, many middle-class homeowners who can no longer use their homes as piggy banks must face the reality of flat or declining wages. The downturn also has forced—or given a ready excuse for—firms to increase profits by shrinking their payrolls, laying off millions of workers and reducing the pay of millions more. It has simultaneously induced firms to ratchet up the pay of their “talent”—the executives and traders who drive the profits. At the same time, the Great Recession has starkly revealed the political power of big business and of Wall Street. Both have been able to enhance their profits by exacting money and other favors from government—even from one under the nominal control of the Democratic Party.

  Unless these trends are reversed, the financially stressed middle class will not have the purchasing power to keep the economy growing. This will hurt even those who are well-off. A political backlash could generate a similar result, or worse. Margaret Jones and her Independence Party are fictional, but the anger on which she bases her appeal is not.

  I cannot pretend that the following measures would remedy these problems altogether, but they represent important steps. They would help restore the basic bargain. As such, they would fill the gap in aggregate demand, and would preempt a politics of resentment. Some of these reforms would be costly, but I suggest ways to pay for them so they would not increase the national debt. To the contrary, they are likely to produce a budget surplus. And because they would generate stronger and more sustainable growth than the policies we now have, they would shrink the debt as a proportion of the national economy in years to come. The costs of inaction are far greater. An economy functioning well below its capacity is a terrible waste of all our resources, especially of our people; a society riven by resentment is potentially unstable.

  A reverse income tax. The most immediate way to reestablish shared prosperity is through a “reverse income tax” that supplements the wages of the middle class. Instead of money being withheld from their paychecks to pay taxes to the government, money would be added to their paychecks by the government.

  A similar idea was proposed by the prizewinning economist Milton Friedman, and we now provide this for low-income workers through the Earned Income Tax Credit. The EITC has not only helped reduce poverty but has also increased the incomes of families most likely to spend that additional money, and thereby create more jobs. In 2009, the EITC was the nation’s largest anti-poverty program. Over 24 million households received wage supplements. Given what’s happened to middle-class incomes, the EITC should be expanded and extended upward.

  Under my plan, full-time workers earning $20,000 or less (this and all subsequent outlays are in 2009 dollars) would receive a wage supplement of $15,000. This supplement would decline incrementally up the income scale, to $10,000 for full-time workers earning $30,000; to $5,000 for full-time workers earning $40,000; and then to zero for full-time workers earning $50,000.

  The tax rate for full-time workers with incomes between $50,000 and $90,000—whether the source of those incomes are wages, salaries, or capital gains—would be cut to 10 percent of earnings. The taxes for people with incomes of between $90,000 and $160,000 would be 20 percent, whatever the income source.

  The yearly cost to the federal government of these wage supplements would be $633 billion. The cost of the tax cuts for middle-income families would be billions more. But these lost revenues would be replaced by the following two initiatives: a carbon tax, and higher taxes on the top 5 percent of incomes.

  A carbon tax. We should tax fossil fuels (coal, oil, and gas), based on how many tons of carbon dioxide such fuels contain. The tax would be collected at the mine or port of entry for each fossil fuel, and would gradually rise over time in order to push energy companies and users to spew less carbon into the atmosphere. (A yearly auction for the “right” to pollute under a certain maximum cap that tightened year by year would theoretically have the same effect and generate about the same amount of money—but only if permits were not handed out to politically powerful polluters free of charge or exchanged for imaginary and unverifiable “offsets” that a company might claim by, say, planting trees in Brazil.)

  If initially set at $35 per metric ton of carbon dioxide or its equivalent, such a tax would raise over $210 billion in its first year alone. By the time it reached $115 per ton, it would yield about $600 billion per year. The public wouldn’t pay this tax directly, but indirectly as the prices of goods rose in proportion to how much carbon was used in their production. For example, a tax of $115 per ton would add about $1 to the price of a gallon of gasoline and 6¢ per kilowatt-hour to the price of electricity.

  If the revenues from the carbon tax went into wage supplements, middle- and lower-income Americans would still come out far ahead. A carbon tax would have two additional advantages. First, it would push energy companies and businesses to invest in new ways to reduce greenhouse gases, and in lower-carbon fuels and products; it could thereby lead to the development of cheaper and more efficient sources of energy. Second, by stimulating such investments, the carbon tax would also boost aggregate demand.

  Higher marginal tax rates on the wealthy. In a nation facing a widening chasm between the very rich and everyone else, it is not unreasonable to expect those at the top to pay a higher tax on their incomes, from whatever source (wages, salaries, or capital gains). I propose that people in the top 1 percent, with incomes of more than $410,000, pay a marginal tax of 55 percent; those in the top 2 percent, earning over $260,000, pay a marginal tax of 50 percent; and those earning over $160,000, roughly the top 5 percent, pay 40 percent. These taxes, when added to the modest amounts contributed by taxpayers who earn between $50,000 and $160,000 under my plan, would raise $600 billion more than our current tax system per year. Added to the $210 billion generated by the carbon tax just in its first year, the total new revenues would be $810 billion initially and would increase as carbon tax revenues increased. These would more than pay for the income supplements and tax cuts I propose. I would use the surplus for additional initiatives listed in the following pages that require funding, and for reducing the federal deficit.

  Under my proposal, income from capital gains would be treated no differently from income derived from wages and salaries. Someone with a total income of between $50,000 and $90,000 would pay 10 percent, even if a majority of that income is from capital gains. That is substantially less than the 15 percent tax rate on capital gains today. By the same token, someone with a total income of several million dollars would pay a marginal tax of 55 percent on all income, regardless of how much of it came from capital gains. (The four hundred highest-income taxpayers in 2007, each with an average income of over $300 million, paid only 17 percent of their total incomes in taxes that year, because most of their incomes were treated as capital gains. This makes a mockery of the ideal of a progressive tax system.)

  Furthermore, these tax rates are not out of line with most of our history over the last century, during which time the nation’s productivity and overall economy grew quickly. As noted, from 1936 to 1980, the top marginal tax rate was 70 percent or more. Since 1987, the official top rate has remained below 40 percent, and the effective rate, after all deductions and credits, between 20 percent and 25 percent. Yet higher taxes on top earners have not correlated with slower growth, the claims of so-called supply-side economists to the contrary notwithstanding. During the almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 92 percent, average annual growth in the American economy was 3.7 percent. Between 1983 and the start
of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.

  So-called supply-siders are fond of claiming that Ronald Reagan’s 1981 tax cuts caused the 1980s economic boom. There is no evidence to support their claim. In fact, that boom followed Reagan’s 1982 tax increase. The 1990s boom likewise was not the result of a tax cut; most of it followed Bill Clinton’s 1993 tax increase.

  My proposal is not a Robin Hood–like redistribution. The wage supplements and tax reductions I’m proposing for the middle class would enable them to spend more, and their spending would help move the economy to full capacity and sustained growth. Consequently, companies would enjoy higher profits, and the stock market would rise. Although the rich would pay higher taxes and thereby receive a somewhat smaller share of the economy’s overall gains, those overall gains would be much larger than they would be otherwise. Hence, richer Americans are very likely to come out ahead compared to where they were before—as they did during the Great Prosperity, when they paid substantially higher taxes but enjoyed the fruits of faster growth.

  A reemployment system rather than an unemployment system. The old unemployment insurance system was designed to tide people over until they got their jobs back at the end of a downturn. Nowadays, most job losers never get their jobs back, and the ranks of the long-term unemployed are extraordinarily high. People who are unemployed for long periods have difficulty getting back into the job market, and they drain family assets. High levels of long-term unemployed strain our social safety nets. What’s needed is a reemployment system that speeds and smoothes the way for those who become unemployed to find new jobs.