The peasants are storming the Bastille. The AIG bonuses were a "let them eat cake" moment, and the Ancien Régime is trembling in its gated mansions. The American people are erupting in rage and the racket is so loud that Washington can't tune them out. You know politicians are hearing it from their constituencies when senators start hinting that disgraced businessmen may want to consider emulating their Japanese counterparts and commit suicide. Even Republicans, who normally react to any criticism of profit as if they had been given a lifetime subscription to Pravda, have been forced to climb aboard the Outrage Express: 85 GOP congressmen voted for the House bill imposing a 90 percent tax on bonuses paid by any company that receives federal bailout money.
In these parlous times, any entertainment is welcome. It provides a dollop of solace to watch the party of Crony Capitalism flailing as its Joe Six-Pack base turns on the Masters of the Universe whom they are supposed to emulate. The right's brain trust is yelling that the tax is a bill of attainder that will scare off "the investor class," but GOP politicians, facing pitchfork-waving mobs who want to string up that "investor class," have stopped following orders. The pearl of Alfred E. Neumann wisdom from the right, priceless in its political tone-deafness, is the repeated assertion that bonuses must be paid to retain "the best and brightest" executives. The best and brightest? Would that be the frauds and mountebanks who made gazillions of dollars on three-card-monte credit default swaps that destroyed the U.S. economy? For Americans who are warming themselves by burning their worthless 401Ks, like the starving artists at the beginning of Puccini's "La Boheme," the idea of rewarding these geniuses is like giving a raise to the navigator on the Titanic.
This long-overdue outburst of populist rage could mark a decisive shift in Americans' attitudes toward income inequality. It could also prove temporary, just another populist crest in a long cycle: Revulsion at economic injustice has historically been followed by variants of the "greed is good" credo. But it would be a mistake for Obama to dismiss the current outrage as ephemeral, or as the uninformed ranting of a mob.
As historian Michael Kazin has pointed out, "For better or worse, populism lives too deeply in America's fears and expectations to be trivialized or replaced." Populism does not always offer practical solutions. But it unerringly expresses deep national feelings -- and right now, Americans feel profoundly betrayed by the system. If Obama channels populist rage in the right way, he could use it to effect fundamental changes in our rigged version of capitalism, and begin to make America a fairer and more truly prosperous society.
Americans have always had complex and contradictory attitudes toward income inequality. The Gilded Age that followed Reconstruction, which created fabulous wealth for a few but left millions in poverty, forced Americans for the first time to grapple with income inequality on a vast scale. As a few tycoons amassed unheard-of wealth, Dickensian conditions prevailed elsewhere: Factory work was unsafe; child labor and 12-hour workdays were common. The response was the populist movement of the late 19th century, which blasted the monopolistic "concentrated capital" of banks and big businesses, whose cozy relationship to Washington gave them carte blanche to plunder. Small-town and rural Americans attacked unaccountable fat cats who, hand in hand with politicians, wielded "money power" to keep them down. The Populist Party was short-lived, but the movement pressured Washington into passing major reforms, including the eight-hour workday.
However, populism never broke out of its rural base. And powerful counter-narratives appeared to justify the extreme income inequality generated by capitalism. Social Darwinism, whose motto was "survival of the fittest," held that only the fittest survived. Society, like Tennyson's nature, was "red in tooth and claw," and those who failed to prosper were simply weak and unworthy. Social Darwinism's optimistic counterpart, the Horatio Alger myth, insisted that anybody, no matter how modest his or her origins, could succeed if they worked hard enough.
The capitalist ship righted itself. The Progressives of the early 20th century represented less of a threat to the established order than the Populists. As optimistic nationalists who believed in gradual reform, their position was epitomized by Teddy Roosevelt, who wrote, "Our objection to a given corporation must not be that it is big, but that it behaves badly." Post-World War I prosperity led to the rabidly pro-business culture of the 1920s. Bruce Barton's best-selling "The Man Nobody Knows" pictured Jesus Christ as a business executive. Calvin Coolidge demanded "stability" from the government, meaning that it should not interfere with business in any way. "Brains are wealth," Coolidge declaimed, "and wealth is the chief end of man." Income inequality widened again.
But the collapse of the financial markets in 1929, which took the country down with it into the Great Depression, spurred another revolt against unregulated capitalism. Prodded from the left by a revived Socialist Party, empowered labor unions and Louisiana populist Huey Long, FDR faced down conservative objections and created the great institutions of the New Deal: Social Security, bank regulation, the National Labor Relations Board, more control of the stock market and insured deposits. Then, as now, conservatives screamed that liberals were destroying the free market.
Once again, the system righted itself, buoyed by the long stretch of middle-class prosperity that started after World War II. To an extent unique among industrialized Western nations, Americans have always been wary of government itself and the idea it should play a role in ensuring income equality. Drawn to the ideal of the yeoman farmer who is beholden to no one, Americans have always preferred a society of risk: You may end up poor, but you could also end up rich. The fact that Americans, like lottery players, have a delusional sense of their chances of getting rich helps explain why they embrace roulette capitalism. A 2003 Gallup poll found that 31 percent of Americans believed they would become "rich" someday, including more than 20 percent of people who made under $30,000 a year.
This individualist ethos was the engine of tremendous creativity and helped make American-style capitalism the most potent economic force in human history. In turn, the wealth generated by American capitalism raised enough boats so that only a few radicals or malcontents dissented from the consensus. Any potential populist discontent at economic inequity was adroitly redirected by GOP operatives like Karl Rove into the culture wars, a process described by Thomas Frank in "What's the Matter With Kansas?," which argued Republicans have used God, guns and gays to keep heartland populists supporting GOP policies that actually hurt them. Meanwhile, conservatives have continued to proclaim Social Darwinist precepts. "In America," said right-wing jurist Robert Bork, "the 'rich' are overwhelmingly people -- entrepreneurs, small businessmen, corporate executives, doctors, lawyers, etc. -- who have gained their higher incomes through intelligence, imagination and hard work." (Bork might like to read Malcolm Gladwell's "Outliers," which argues success and wealth in America are the result of social currents and luck more than individual intelligence and hard work. It has been the top-selling new nonfiction book for most of this year.)
But if Americans have largely accepted such rationalizations for uncontrolled capitalism, they have always been troubled by doubts. They have been quiescently aware that Social Darwinism is a profoundly amoral (and, ironically, un-Christian) doctrine, and that the Horatio Alger myth is like a cheesy Hollywood movie with a happy ending: inspiring but not a portrait of reality. That slumbering awareness comes to life whenever the system breaks down. Which brings us to today. Americans are being forced to come to terms with the fact that our great wealth-generating system has become rotten to the core. Confronted with the terrifying reality that they may never again be as well off as they were before, middle-class Americans have had enough. The outrage over the AIG bonuses is just the tip of the iceberg. As Americans learn more about the rigged system that has been gamed by insiders for years, they are beginning to demand a fundamental change in that system. What would have seemed like wild-eyed radicalism just last year is coming to Main Street.
The current crisis has proved once and for all that unregulated capitalism will devour itself -- and take ordinary people down with it. Untrammeled capitalism is inherently monopolistic and anti-competitive, opaque and self-dealing. That's why we have anti-trust laws and transparency regulations, which have been increasingly ignored in the incestuous marriage of Big Business and Big Government. Enron and AIG, two of the biggest "success stories" of contemporary American capitalism until they came crashing down, are not aberrations -- they are the logical culmination of uncontrolled capitalism.
This isn't because there is anything inherently evil in capitalism or capitalists; it's simply that greed, the driving force of capitalism, is a force of nature, like water that seeks its own level. In uncontrolled capitalism, if there is profit to be made in gaming the system, and a player can game the system, he will game the system. The very forces that make capitalism work -- innovation, creativity, intelligence -- also lead it to enrich itself. Only government has the power to control capitalism. And when Big Business becomes essentially a branch of government, a development that has been happening for decades, there is no impediment to the self-dealing behavior that has now resulted in the worst economic meltdown since the Great Depression.
Both political parties are responsible for this corrupt system. But two Republican administrations deserve special mention. By claiming that "government is the problem" and encouraging extreme individualism, Ronald Reagan undercut Washington's moral authority and hence its ability to rein in buccaneer capitalism. George W. Bush practiced what Reagan (mostly) only preached: He simply abandoned regulation and abdicated to business. His tax cuts were responsible for the greatest transfer of wealth to a tiny fraction of a population in human history.
Just as in the Gilded Age, a corrupt government and predatory Big Business came together to loot the country. In 2005, the top 1 percent of Americans made almost 22 percent of the nation's reported income, and the top 10 percent made half of it. Things get even more outrageous when you compare the average compensation earned by big executives with that earned by everyone else. In 2007, the average S&P 500 CEO made 344 times what an average worker made. The top 50 investment fund managers made 19,000 times more than the average worker.
This is a profoundly unhealthy and unjustifiable situation in every way. For decades, despite their stagnating wages, middle-class Americans were able to ignore this pathological situation because their home values -- artificially propped up under Bush by Alan Greenspan's disastrously low interest rates -- kept going up. But as economist Nouriel Roubini has pointed out (free subscription required), those housing values were just as fraudulent as Bernie Madoff's Ponzi scheme. "The bursting of the housing bubble and of the equity bubble and hedge funds bubble and private equity bubble showed that most of the 'wealth' that supported the massive leverage and overspending of agents in the economy was a fake bubble-driven wealth; now that these bubbles have burst it is clear that the emperor had no clothes and that we are the naked emperor," Roubini wrote.
Americans are naked, and they're angry.
No one can predict where today's outrage will go. Like a prairie fire, populist anger is unpredictable. It is driven more by an inchoate sense of unfairness than by a coherent ideology. It can veer in weird and ugly directions: Father Coughlin's railing at elites was anti-Semitic. But every indication is that Americans' belief in trickle-down economics, the belief that extreme income inequality is an acceptable price to pay for "freedom," has been shattered and will never return. It turns out that "freedom" was only free for the insiders in a position to game the system. For the rest of us, "freedom" meant working paycheck to paycheck, making less and less money while government services kept shrinking.
Contrary to widespread belief, more Americans support active government intervention to reduce income inequality than oppose it. In polls carried out 17 times since 1978 by the National Opinion Research Center, 3 in 10 Americans say that government ought to act to reduce income inequality, while 2 in 10 say it should not. Fifty percent are in the middle. In a 2008 Gallup poll, 51 percent said government should impose heavy taxes on the rich, with 43 percent opposed. And the current crisis has certainly increased the number of those who support government action to reduce inequality.
The populist eruption presents Obama with a tricky challenge in the short term, and a unique opportunity in the long term. In the short term, he has to negotiate between populist rage at Wall Street and the fact that unless he fixes Wall Street, Main Street will go down with it. As my Salon colleague Andrew Leonard has pointed out, this puts him at least temporarily in a no-win situation: Treasury Secretary Timothy Geithner's plan to form a public-private team to buy up toxic bank assets, the Kryptonite killing our system, sent the market upward but drew bitter attacks from left-wing economists like Paul Krugman. And if Geithner's plan fails, populist rage at being forced to bail out the fat cats again could destroy Obama's presidency.
But if Obama is able to stabilize the economy, he can use that populist rage to rebuild our broken financial system from the ground up, restoring its transparency and changing its rules. His proposal to increase oversight of executive compensation, tying it more closely to performance, is a good start. It's akin to economic historian Brad DeLong's savvy call for Wall Street to embrace Silicon Valley's results-driven approach to compensation. In a more profound way, Obama could begin the long process of convincing Americans that a society in which 1 percent of the population has 22 percent of the wealth is a deeply unhealthy one. Without destroying the profit motive, he could push for higher marginal tax rates and tighter corporate governance. He could restore government's needed and much-maligned function as a force for economic justice -- not to punish the rich, but to build a stronger society on a broader base. Fairness is good for everyone.
Forest fires are destructive, but they are also regenerative. Nothing can undo the economic tragedy that has befallen millions of Americans. But if Obama is a wise steward, he can plant seeds in the ashes that will grow into taller and stronger trees than the ones that burned.