A Just and Generous Nation

by Harold Holzer

  Post-Reagan presidents—both Republicans and Democrats—have had less and less funds to perform essential government functions. Indeed, federal “government failure” is now built into the system. So long as the low-tax regime is maintained, the government will continue to have insufficient funds to perform its “legitimate government functions.” This runs counter to Lincoln’s ideas about the role of the federal government. Whereas Lincoln argued that the government should invest in infrastructure and support the poor, penniless beginners to rise, today supporters of the low-tax regime have redefined “legitimate government functions” to little more than military and homeland security activities.

  As it turns out, reducing the size of government is not a panacea for full employment or economic stability. In the period from 1890 through 1940, when federal outlays averaged only 5 percent of GNP, average annual unemployment was unhappily 8.7 percent per year. By contrast, in the post–World War II period from 1949 through 1981, when federal outlays averaged 18.2 percent of GDP, average annual unemployment was only 5.3 percent.

  The economic record for the most recent sixty-six years from 1949 through 2014 shows no support for the supply-side claim that reducing taxes on high-income individuals results in growth of GDP, business investment, or job creation (see Appendix). During the high-tax post-Roosevelt New Deal period from 1949 through 1981, when top marginal income tax rates averaged 79.7 percent and federal estate tax rates averaged 75.9 percent, the economy grew substantially—real GDP growth was above average at 3.7 percent, business investment growth was above average at 4.9 percent, and US employment growth was above average at 2.2 percent. During the low-tax Reagan and post-Reagan years from 1982 through 2014, when top marginal tax rates were reduced to an average of 38.1 percent and federal estate tax rates were reduced to an average of 51.8 percent, the economy was much weaker, with real GDP growth of only 2.7 percent, business investment growth of only 4.0 percent, and US employment growth of only 1.3 percent.

  Sources: US Department of Commerce, Bureau of Economic Analysis; US Department of Labor, Bureau of Labor Statistics (see Appendix).

  During the post–New Deal period, the United States changed from an economy benefiting all the people to an economy narrowly benefiting only the richest families. In the most recent period starting in 1982, the percent of income growth that went to the top 10 percent of earners in the United States increased to 80 percent and continued to increase to 116 percent in 2012.

  Source: Pavlina R. Tcherneva, based on data from Thomas Piketty and Emmanuel Saez and NBER.

  Not content with a low federal tax regime, conservative Republicans throughout the country also pushed successfully for state tax changes that would lower the level of taxation of the wealthiest Americans. They used “trickle-down” arguments supported by “supply-side” probusiness economic arguments to reduce state income, inheritance, and property taxes.

  Conservative Republicans succeeded in substantially reducing federal taxes on capital gains and creating special categories of capital gains that deferred taxes on the management fees charged by millionaire and billionaire venture-capital and hedge-fund investment managers, who were suddenly able to pay income taxes at lower rates than the prevailing rates on the earnings of all other American wage earners.

  To work toward their stated goal to balance government budgets, conservative Republicans increased sales and other consumption-related taxes, which have a greater percentage impact on the incomes of middle- and lower-income Americans than on the wealthiest Americans.

  A study by the Institute on Taxation and Economic Policy issued in January 2015 concluded that in 2015, the poorest fifth of Americans would pay an average of 10.9 percent of their income in taxes, the middle fifth will pay 9.1 percent, and the top 1 percent will average only 5.4 percent. The report concluded, “Virtually every state’s tax system is unfair. Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their needs in the long term.”

  The conservative success in undermining the tax and regulatory policies of the New Deal was followed in the Reagan and post-Reagan years by an unrestrained return of the banks and other financial business organizations to the high-risk policies of the decade that led to the Great Depression. Almost predictably, the conservative antigovernment, low-tax, antiregulation regime under George W. Bush brought on an economic decline and the Great Recession starting in 2007—the worst economic conditions seen in the United States since the Great Depression of 1929–1932.

  The most influential proponent of conservative free-market thinking during the Reagan and post-Reagan years was Alan Greenspan, chairman of the US Federal Reserve Board from 1987 until 2006. Greenspan, an acolyte of the libertarian thinker Ayn Rand, provided continued support for conservative economic thinking during the decades following Reagan’s administration, even under Democratic president Bill Clinton. It was only in 2008 that Greenspan admitted that he had put too much faith in the self-correcting power of free markets. He acknowledged that he had failed to anticipate the self-destructive power of the excessive risk taken by financial institutions. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief. . . . This modern risk management paradigm held sway for years. The whole intellectual edifice, however, collapsed in the summer of last year.”

  The recovery period from 2009 to 2015 under President Obama did not erase the problems of the Great Recession. The only segment of the population that gained substantially from the recovery was the wealthiest 1 percent, who received 95 percent of the total increase in GDP from 2009 to 2012. The other 99 percent saw their real incomes and purchasing power go down. For the 99 percent, the decline in living standards continued for more than five years after the onset of the Great Recession.

  The change in the benefits of the American capitalist economy in favor of the wealthiest citizens was recognized by prominent Republicans, Carly Fiorina, former CEO of Hewlett-Packard, and John Huntsman Jr., former Republican governor of Utah, and prominent Democrats, Laura Tyson, former chair of President Clinton’s Council of Economic Advisers, and Larry Summers, former chairman of President Obama’s National Economic Council. All four were members of the Henry Jackson Initiative for Inclusive Capitalism led by Dominic Barton, global managing director of McKinsey & Company, and Lady Lynn Forester de Rothschild, CEO of E. L. Rothschild. Their analysis, based on data compiled by the US Congressional Budget Office, was published on October 15, 2012:

  In the U.S., between 1979 and 2007, according to an analysis from the Congressional Budget Office, the real after-tax household income of the top one percent grew 275 percent, and that of the next 19 percent grew 65 percent. The 60 percent in the middle grew just under 40 percent. The after-­tax income of the lowest 20 percent grew only 18 percent over this period. In the period 2005–2007, leading up to the financial crisis, the top 20 percent of U.S. income earners made more than the entire 80 percent of wage-earners below them. In 2007 alone, the top 10 percent earned 49.7 percent of total U.S. income, the greatest earning disparity since the 1930s.

  The details are even more disturbing. In 2007, 23.5 percent of all American income flowed to the top one percent of earners. Staggeringly, the top 0.1 percent earned 12.2 percent of all income in the United States in 2007, up from an average of 3.5 percent in the 1960s. Sadly, the trend worsened after the Great Recession. From 2009 to 2010, the top one percent of incomes grew by 11.6 percent while the bottom 99 percent grew by only 0.2 percent, meaning that in the first year of the recovery 93 percent of income gains were captured by the top one percent of income earners.

  Capitalism was not always like this. From 1943 to 1983, wealth was much more evenly spread. Between 1970 and 1979, CEOs earned approximately 40 times more than the average American worker. Today the average CEO earns 380 times more. The 1950s through the 1980s was
the golden age of the American Dream: we all believed that America was a level playing field and if we worked hard and played by the rules, there was no limit to the success we could enjoy in a country of endless possibilities.

  The Russell Sage Foundation focused on the same problem in its report on the economy issued in 2014. The New York Times summarized the Russell Sage report on July 26, 2014. “It’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too. The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline. . . . When only a few people are winning and more than half the population is losing, surely something is amiss.”

  This was not the capitalist society envisioned by Adam Smith, the father of modern procapitalist economic theory. Smith understood that market participants should not be guided solely by individual self-interests. He argued that the market works to everyone’s advantage when and only when its participants are guided by a generally accepted “moral sympathy” that predisposes all members of society to do well by others, as well as by their individual self-interest.

  Public confidence in the state of the nation and its institutions in the years since the onset of the Great Recession has not been encouraging. In March 2010 the Harris national public opinion poll found that fewer than 10 percent of Americans had “a great deal of confidence” in either “Wall Street” or “Congress,” while fewer than 30 percent were highly confident about law firms, the press, organized labor, major companies, television news, the public schools, organized religion, the White House, the courts, and the justice system. The “confidence gap” was grounded in the public feeling that the leaders of virtually all American institutions were using artificial, technical, or self-serving rationales for their decisions. A majority of Americans came to believe the leaders of American institutions were no longer being guided by what ordinary citizens viewed as moral and honorable behavior. More and more Americans saw their leaders as believing that anything that was “legal” was “morally legitimate.” This new cynicism was reinforced by an increasing awareness that Wall Street firms were being allowed to settle cases of illegal financial practices by paying substantial fines to the Securities and Exchange Commission without admitting that the actions of their leaders were illegal. Rather than feeling a positive connection between themselves and the institutions of their society, most Americans came to feel disappointed, distrustful, and disengaged.

  Cartoon by Steve Sack—one of many uncannily similar images that appeared at the time of the Obama inauguration—all imagining the Lincoln of the Lincoln Memorial coming to life to welcome the first African American president in January 2009.

  BY PERMISSION OF STEVE SACK AND CREATORS SYNDICATE, INC.

  But public concerns did not inspire leaders to embrace the economic philosophy that had inspired Abraham Lincoln and Franklin Roosevelt. The Reagan rhetoric remains the dominant language of American politics. Republican politicians are unified in their support of low taxes, little regulation of business, and little, if any, government investment spending to support employment and economic growth. Their control over one branch of the national government after the midterm elections in 2012 gave Republicans the power to block positive initiatives to use the power of the federal government to rebuild America’s middle-class society. Their power increased after the election of 2014, when Republicans captured control of both houses of Congress. Democrats in Congress were divided. Some went along with the low-tax regime imposed by the Republicans. Others campaigned for programs consistent with Lincoln’s and Roosevelt’s belief in positive government programs to provide opportunity for lower-income people to improve their economic situation.

  In his campaign for election as president in 2008, Barack Obama largely ignored partisan economic issues. When he announced his run for the presidency, he said, “In the shadow of the Old State Capitol, where Lincoln once called on a divided house to stand together, where common hopes and common dreams still live, I stand before you today to announce my candidacy for President of the United States.” But he did not focus in any particular way on the progressive tradition of government for the people established by Lincoln and Roosevelt. Rather, he presented himself as a postpartisan candidate. He was able to win the presidential election by running against the unpopular war policies of President George W. Bush and promising in particular to end the war in Iraq. He presented himself as a new kind of president who would govern above the fray in a new postpartisan tradition focused primarily on intelligent and efficient government.

  But three years of extremely partisan politics in Washington led President Obama to a new focus in his campaign for reelection in 2012. Pointing to his major accomplishment in extending government-­sponsored medical care to all US citizens, he also put himself clearly in the Lincoln tradition of government for the people when he self-­consciously chose to open his campaign for reelection at Osawatomie, Kansas, on December 11, 2011.

  Osawatomie was the site of John Brown’s raid in 1856, which many have described as the first battle of the Civil War. It was also the site chosen by Theodore Roosevelt to launch his Progressive Party campaign to regain the presidency in 1910. At Osawatomie Theodore Roosevelt had embraced the legacy of Abraham Lincoln. He said he relied on the wisdom of Abraham Lincoln to guide the nation in addressing the issues of the twentieth century, stressing that Lincoln was the father of the idea that property rights were secondary to the rights of the common welfare. He cited Lincoln as the original advocate of government support not for those who profit, but instead for those who produce.

  Barack Obama chose Osawatomie to pursue the same theme in 2011:

  My grandparents believed in an America where hard work paid off, and responsibility was rewarded, and anyone could make it if they tried. . . . And these values gave rise to the largest middle class and the strongest economy that the world has ever known. . . . Today . . . for most Americans, the basic bargain that made this country great has eroded. . . . Fewer and fewer of the folks who contributed to the success of our economy actually benefitted from that success. Those at the very top grew wealthier. . . . But everybody else struggled with costs that were growing and paychecks that weren’t. . . . This is the defining issue of our time. . . . There is a certain crowd in Washington who . . . have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything.” . . . We simply cannot return to this brand of “you’re on your own” economics if we’re serious about rebuilding the middle class in this country.

  Obama cited Lincoln in a direct and unqualified way a few months later in a speech on June 14, 2012: “I do share the belief of . . . Abraham Lincoln—that through government, we should do together what we cannot do as well for ourselves. . . . That’s how we built this country—together. We constructed railroads and highways. . . . We haven’t done these things as Democrats or Republicans. We’ve done them as Americans. . . . In the last century, this consensus—this shared vision—led to the strongest economic growth and the largest middle class that the world has ever known.”

  President Obama campaigned for reelection against the Republican trickle-down economic theory with a positive commitment to direct government action to rebuild the modern American middle-class society. For the first time in more than a decade, Lincoln’s emphasis on supporting a middle-class society was stated clearly and played a direct role in Obama’s success in the election.

  In his Second Inaugural Address, on January 21, 2013, President Obama quoted from Lincoln’s famous fragment on government: “The legitimate object of government is to do for a community of people whatever they need to have done, but can not do at all, or can not so well do, for themselves—in their separate, and individual capacities.”

  The reelected President Obama no longer felt the need to nod to his Republican opponents by accepting their claim to Lincoln’s heritage. A year earlier in his Sta
te of the Union address, Obama had misquoted Lincoln when he said: “I believe what Republican Abraham Lincoln believed: That Government should do for people only what they cannot do better by themselves, and no more.” Adding “only . . . and no more” to Lincoln’s commitment to government action “for the people” was at the time a tacit acceptance by Obama of Ronald Reagan’s claim to Lincoln’s philosophy. A year later, it was clear to Obama that the long rhetorical shadow of Reagan that had influenced Democratic as well as Republican presidents for thirty years was no longer compelling. This was a new day. The added words only and no more no longer had a place in Obama’s now correct quotation of Lincoln’s vision.

  President Barack Obama shows a delegation of elderly African American Washingtonians a signed printed copy of the Emancipation Proclamation that went on loan to the Oval Office on January 8, 2010. The autographed printing—originally created in 1864 for sale at a Philadelphia war-charity fair—has since been moved to the Lincoln Bedroom, the room that once served as Lincoln’s office and where he signed the original proclamation on January 1, 1863.