Aftershock: The Next Economy and America's Future (15 page)

In early 2010, a previously undistinguished Republican state senator named Scott Brown claimed Ted Kennedy’s former Senate seat in Massachusetts by driving an old pickup truck around the state and promising to vote against the health care bill then being considered in Congress. Brown attracted large numbers of independents and even a majority of voters from union households, who later explained to pollsters that they voted for him because they were upset by the bad economy, the Wall Street bailout, and the Democrats’ willingness to spend money.
Weeks after his victory, when asked by Fox News about a man who had just smashed his airplane into an IRS office in Austin, Texas, killing a federal employee and injuring others, Brown said, “I don’t know if it’s related [to my electoral victory] but I can just sense, not only in my election but since being here in Washington, people are frustrated.”

Talk radio and yell television emit escalating vitriol as they channel the “mad as hell” ire of many Americans. The ire has been directed at a variety of targets: immigrants, African Americans, the poor, foreigners, “East Coast elites,” “San Francisco elites,” “intellectuals,” Democratic politicians, Republican politicians, corporate leaders, Wall Street executives. The blogosphere has became a cauldron of insult and rage.

While the right has railed at big government and the left has fulminated against big business and Wall Street, there is a widening overlap.
“The wizards in Washington and on Wall Street have us figured out,” says Chuck Baldwin, as quoted in the Pocatello Tea Party’s online newsletter. “Along with their compatriots in the propaganda press corps, they know that no matter how loudly we scream, how much we protest, or how angry we become, the system is rigged to protect them.”
It was the bailout of Wall Street that really “got this ball rolling,” says Joseph Farah, publisher of WorldNetDaily, a Web site popular among Tea Party adherents. “That’s where the anger, where the frustration took root.” At the Utah state convention that unseated Robert Bennett, the mob repeatedly shouted, “TARP! TARP! TARP!”

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.

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 rich 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.