Warren Buffett famously said you only learn who is swimming naked when the tide goes out. It is now low tide for America’s hyperprivatized economy, and the receding waves have revealed catastrophic failures of ideology, policy, and business practice. The COVID-19 crisis has produced immense harm but one salutary effect: It has destroyed a lot of the conventional wisdom concerning governments and markets.
The dominant and now discredited ideology known as neoliberalism held that markets work tolerably well most of the time and that market failure was rare. Market fundamentalism—a total faith in the ability of free market capitalism to solve problems—was disgraced by the stock market crash of 1929 and the U.S. government’s successful New Deal reforms during Franklin D. Roosevelt’s presidency. But since the 1970s, a new neoliberal orthodoxy has been embraced by many Democrats as well as Republicans—who deregulated countless industries despite the mounting evidence that their policies were inviting financial crisis, producing more corruption than efficiency, and generating extreme inequality.
The mispricing of toxic financial assets, enabled by deregulation, led to the financial collapse of 2008. Supply-side tax cuts didn’t increase public spending but instead exacerbated inequality. Deregulation of labor markets led to wage stagnation at the bottom while concentrating wealth at the top as hyperglobalization decimated the U.S. manufacturing sector. And the extreme commercialization of U.S. health care has created the Western world’s most expensive and least efficient system. The costs of these systemic market failures vastly outweighed the benefits.
Liberated markets did not improve economic efficiency or overall growth. But they did make a few people very rich and tens of millions poorer. This rampant inequality has undermined the economic security of the American middle class.
The coronavirus crisis, which cost the U.S. economy more than 25 million jobs in four months—disproportionately hurting minorities—has further vindicated the need for a massive government role and provided an opening for Democrats to bury a failed ideology once and for all.
In principle, widespread unhappiness with extreme inequality represents an opportunity to advance a bolder agenda than anything since Lyndon B. Johnson’s Great Society or even Roosevelt’s New Deal. But bringing about a more egalitarian economy will be much harder than it seems.
Most people are not agitated about inequality as an abstract principle; they are concerned about their own diminishing economic status. Calls to end inequality have also long been associated with poverty and race. To an anxious white middle class, the cause of greater equality has often had the ring of higher taxes on “us” or compensatory advantages to provide more for an undeserving “them.”
Reversing the inequality of recent decades would require more regulation, increased public spending, much higher taxes on the rich, and some public ownership. To win widespread support for a radically reformist agenda, a progressive president will need to be clear about the causes of today’s inequality and insecurity and propose remedies that could command broad popular and congressional support. To increase the chances of success, it helps to look back at the egalitarian economy that the United States once had and how it was lost.
During the three decades after World War II, the U.S. economy enjoyed a social contract that was a legacy of Roosevelt’s New Deal. The result was a remarkable degree of economic equality for a system that was still essentially capitalist. In the 25 years between 1948 and 1973, the economy not only grew at record peacetime rates of nearly 4 percent per year; it also became more equal, with the bottom quintile of earners gaining income at a faster rate than the top. The economist Claudia Goldin referred to this unusual era as the Great Compression.
The rules of the postwar economy imposed strict controls on financial markets, which prevented speculative crashes and restrained incomes at the top. Marginal tax rates exceeded 90 percent, and government policies empowered trade unions and provided labor regulation, which raised incomes at the bottom.
Various federal programs enabled the working and middle classes to accumulate household wealth through homeownership while free or very cheap higher education reached nearly half the population without burdening them with debt. The United States enhanced economic security with public social insurance alongside a private welfare state of company health and pension benefits. This reached blue-collar workers as well as professionals. In addition, the postwar economy was largely insulated from low-wage imports because trade was only about 5 percent of GDP as late as 1960, which meant that domestic purchasing power could support domestic jobs.
In the 1950s, under Dwight Eisenhower’s Republican presidency, this economic system was not viewed as radical; it was simply experienced as the new normal. But while the postwar order seemed to spring almost full-grown, its dismantling has been gradual and diffuse.
The reversal began in the 1970s, and when this regime of managed, egalitarian capitalism died, it did not jump—it was pushed. However, it’s tricky to sort out whose fingerprints were on the deed. Certainly, Republicans and libertarians were prime offenders, but Democratic presidents also bear some of the blame.
Indeed, deregulation did not begin under Ronald Reagan but under Jimmy Carter. It reached new depths under Bill Clinton, as coached by advisors Robert Rubin and Lawrence Summers. Each worked both on Wall Street and in top economic policy jobs under Clinton and in Summers’s case for both Clinton and Barack Obama. It was Obama’s administration in 2010—following a devastating financial crisis—that pursued austerity economics long before the economy was in full recovery. Hyperglobalization, which had devastating effects on industrial America, was one of the few things that presidents of both parties agreed on.
On three occasions, when tougher labor laws to counteract union-bashing were just a few votes short of passage in the Senate, neither Carter nor Clinton nor Obama lifted a finger to put the legislation over the top. They were not sure they wanted a stronger labor movement pushing them from the left. The presidential wing of the Democratic Party was increasingly allied with Wall Street plutocrats, who liked the new economic order just fine. As a consequence, many voters unhappy with the results of a grossly unequal economy have not been sure whom to blame or whom to trust—and they are not entirely wrong. And at least partly as a result, voters were ready for an outlandish outsider like Donald Trump.
Extreme economic inequality has produced an undertow of concentrated political power that defends the status quo. These forces tend to undermine Democratic presidents’ progressive impulses. Obama had everything going for him as an agent of Rooseveltian change. He was an outsider, and history even delivered a financial collapse on the Republicans’ watch just before his 2008 victory.
But Obama flinched and appointed as his top economic team the same Wall Street advisors whose policies had produced the collapse. Obama’s would-be successor, Hillary Clinton, sought to navigate these shoals by steering left on cultural issues and center-right on economic ones. That left some working-class voters to conclude that she cared more about bathroom laws than their economic pain.
Even if the 2020 Democratic nominee changes course, there is the further challenge of Congress. Joe Biden seems to be moving left. But in order to actually enact New Deal-scale policies, he’d need Roosevelt-
scale majorities in Congress. Assuming a remotely fair election, the Democrats may well win majority control of both the House and Senate. Yet a working progressive majority will be a stretch.
House Speaker Nancy Pelosi is hobbled by dozens of centrist Democrats in the House (some voting on their districts’ behalf; others voting on their donors’), and in the Senate the best-case scenario for Democrats is a small majority that includes some on the center-right. And if a Rooseveltian Biden failed to deliver impressive gains by the 2022 midterm elections, he could kiss a precarious majority goodbye.
What would it take to replicate the equality and security of the postwar era under very different circumstances? First, the United States would need more progressive taxation, both to contain great concentrations of wealth and to finance the social investment needed to give children from middle-class families a shot at the good life. As recently as 1982, the top marginal rate on individual incomes was 70 percent; today, it’s only 37 percent. Corporate profits once paid a tax of 50 percent; they now pay just 21 percent, and the effective rate is lower thanks to extensive loopholes.
Until 2003, dividends were taxed at the full individual tax rate; taxes on interest, dividends, and capital gains have all been slashed. Sen. Elizabeth Warren has proposed a wealth tax that would exempt everyone with wealth of under $50 million. But so concentrated is today’s wealth that her tax would still bring in an estimated $3.7 trillion over 10 years. Just repealing the Trump tax cuts of 2018 would yield another $2 trillion.
While some remedies require taxing and spending, many are regulatory. If Congress had the votes and Biden had the nerve, he could enact laws restoring Wall Street to the role of the economy’s servant rather than its master. Warren, once again, has written the playbook in two pieces of legislation, the Accountable Capitalism Act of 2018 and the Stop Wall Street Looting Act of 2019.
As Warren suggests, the U.S. government would need to restore the separation between investment banking and commercial banking; close the loopholes in tax and regulatory law that allow private equity companies to function as predators on the real economy; return derivatives to the footnote that they were before the 1980s; make banking simple and transparent enough to regulate, complemented by some public banks; and require large corporations to get federal charters limiting their destructive behavior and put workers on their boards.
These reforms would destroy Wall Street’s toxic business model—but Wall Street would not exactly roll over. Despite Biden’s repositioning, his default setting is to turn to the economic advisors with close Wall Street ties from the Clinton-Obama era who spearheaded financial deregulation, such as Summers and former Obama chief of staff Rahm Emanuel. Biden is also reliant on donors from Wall Street; his roots in Delaware—with its lax incorporation laws—have long made him indulgent of the financial industry.
Even if wealth can be constrained at the top, there is still the challenge of raising earnings at the bottom. In addition to reviving the Wagner Act—to allow workers to organize or join unions—the U.S. government would have to confront the gig economy.
Many companies have redefined payroll jobs as contract work. Some of this is a violation of the Fair Labor Standards Act—illegally disguising regular workers as freelancers in order to deny them rights and benefits—but some of it represents new hybrids such as Uber and Lyft. To improve the pay and security of gig workers, the government would need to give them the same regulatory protections as payroll workers and enact a much higher minimum wage covering all workers.
A Democratic administration serious about tackling inequality would also need to reverse the dismantling of antitrust laws. Monopolies frustrate competition and lead to concentrated wealth and political influence. Several of America’s richest people, such as Amazon’s Jeff Bezos, made their fortunes in tech platforms that are virtual monopolies. Efforts to restore antitrust laws will mean confronting a Silicon Valley elite that has become a key source of funding for the Democratic Party.
To restore the U.S. government’s capacity to regulate capitalism and reclaim domestic manufacturing, trade policy will also require reform. The original Bretton Woods scheme of 1944 allowed national governments plenty of policy independence. It permitted capital controls and the right of nations to condition imports on labor standards. Trade policy in the 1950s and 1960s was mainly about reciprocal reductions in tariffs, not about an absolute shift to global free markets. But by the 1990s, business groups branded many normal forms of public regulation and investment as illegal infringements on free trade. Democratic presidents, increasingly allied with Wall Street, were even more ferocious advocates of this approach than Republicans.
Even with a more robust trade policy, the United States will never have the manufacturing jobs it once had, thanks to automation. Most jobs will be in the service economy, which is notorious for low wages. The National Domestic Workers Alliance, and its project Caring Across America, has proposed a grand bargain to create a new category of social insurance. All workers who cared for the old, the young, or the sick—such as nurse aides and home care and child care workers—would be paid a living wage, and families could get the high-quality child care, nursing care, and home care they needed at affordable costs. This would help reduce inequality by bolstering the living standards of America’s working poor, as well as by giving the middle class the package of benefits that the rich are able to purchase. But it would require annual public outlays in the hundreds of billions.
Health care represents another obstacle to a more egalitarian economy. It’s clear that the most efficient and fair insurance system would be universal and organized by government. Standing in the way are several powerful industries and a seemingly insurmountable structural challenge—moving from a system partly underwritten by employers to one that is tax-financed, without astronomical tax increases on the one hand and windfall gains to employers on the other. But there’s a real opportunity here.
One strategy, proposed by Yale University’s Jacob Hacker, the author of the original so-called public option proposal, would require all employers to provide good insurance for their workers and create incentives for companies to meet the requirement by buying in to Medicare. (The Medicare system is now just for people age 65 or older and those with disabilities; Hacker’s approach would extend it to nearly everyone but without requiring a general tax increase since most costs would be paid by employers.) Biden has embraced a much more modest reform, of lowering the Medicare eligibility age to 60 and other piecemeal reforms, but not fundamental change for the entire system, which is what Americans need.
The shifts since 1980 have widened inequality in another subtle respect. Young people from affluent families are cushioned by what might be called the parental welfare state. As costs of housing and education have risen and social supports have fallen, wealthy parents can give their offspring a huge head start not available to others—providing everything from early childhood enrichment programs to university fees to down payments on a house. The Harvard University economist Raj Chetty and his colleagues have demonstrated the dramatic increase in intergenerational inequality: At some elite universities, there are more students from families in the top 1 percent than from the bottom 60 percent.
A 30-year-old today without rich parents faces a bleak economic landscape when it comes to income, wealth, job opportunities, and debt. My generation of Americans born during or shortly after World War II enjoyed cheap homeownership, debt-free higher education, the likelihood of finding a payroll job with an employer that provided health and pension benefits, and affordable access to decent public schools (on one income); for today’s young adults, this package has been destroyed.
Indeed, people my age have enjoyed windfall gains from housing inflation; the cost of those gains has been prohibitively expensive housing for our children and grandchildren. Young adults are less likely to have long-term payroll jobs and more likely to have precarious gigs; they are less likely to have good, employer-provided pensions or health coverage and more likely to have university loan debt. The rate of homeownership among young families has declined, in large part because it’s harder to get a mortgage if one is burdened with student loan repayments.
Some of this can be remedied with policy. The U.S. government could forgive a lot of student debt and restore the model of free public higher education that the country enjoyed from the land-grant colleges of the 19th century through the 1980s, when state legislatures hellbent on cutting taxes began withdrawing public funding for higher education and replacing it with tuition and fees.
Affordable housing will be even harder to produce because much of the housing boom of the 1950s was the result not just of policies but of cheap farmland converted to suburbia. Cheap land is gone. Replicating the conditions of the 1950s would require a massive government investment in affordable housing on a larger scale than the United States has ever seen. This would entail using the government’s power to assemble and then subsidize land costs to produce both modestly priced homes for purchase and socially owned rental housing. The current bipartisan policy of incentivizing private developers to build affordable homes and apartments has been a costly failure.
As a result of these shifts, most younger Americans correctly believe that they will never live as well as their parents. The abrogation of the postwar U.S. social contract, therefore, should not just be understood as rising inequality. It’s also a story of increasing economic precariousness, diminished life horizons, and greater hardening of intergenerational class lines. Many young people simply see themselves as having been born in an unlucky generation—not as victims of deliberate policy shift.
It will take uncommon political skill, resolve, and luck to connect these several dots and rally a broad coalition for what will be seen as drastic change—against bipartisan economic royalists who have never been more powerful. The needed package of policies would deliver a more productive, secure, and egalitarian America, just as it did during the postwar boom, but the political path is steep.
The coronavirus pandemic has revealed not just grotesque inequalities of race but has also underscored the vulnerabilities of the middle class and produced a broad movement for constructive change. The essential role of government is evident, as are the predations of unfettered capitalism and extreme globalization. Yet the United States’ founders created a system of checks and balances that allowed for sweeping transformation only on rare occasions that combined large congressional majorities and a president capable of mobilizing broad public support for drastic reforms. The current president has abused his office for his own imagined glory. Should Biden win, Americans will soon learn if Trump’s successor will seize the moment and use the power of the office for the public good.
This article appears in the Summer 2020 print issue.