Three decades of growing inequality and collapsing public morality have pitched America into crisis, imperiling its democracy. But there are precedents for a way out, says former Secretary of Labor Robert Reich.
In a recent post on your website, you said there was “moral rot” in America. And you say: “It’s located in the public behavior of people who control our economy and are turning our democracy into a financial slush pump.” Can you expand on this?
An economy depends fundamentally on public morality; some shared standards about what sorts of activities are impermissible because they so fundamentally violate trust that they threaten to undermine the social fabric. Without trust it has to depend upon such complex contracts and such weighty enforcement systems that it would crumble under its own weight. What we’ve seen over the last two decades in the United States is a steady decline in the willingness of people in leading positions in the private sector – on Wall Street and in large corporations especially – to maintain those minimum standards. The new rule has become making the highest profits possible regardless of the social consequences.
In the first three decades after World War II – partly because America went through that terrible war and also experienced before that the Great Depression – there was a sense in the business community and on Wall Street of some degree of social responsibility. It wasn’t talked about as social responsibility, because it was assumed to be a bedrock of how people with great economic power should behave. CEOs did not earn more than 40 times what the typical worker earned. Rarely were there mass layoffs by profitable firms. The marginal income tax on the highest income earners in the 1950s was 91 percent. Even the effective rate, after all deductions and tax credits, was still well above 50 percent. The game was not played in a cutthroat way. In fact, consumers, workers, the community, were all considered stakeholders of almost equal entitlement as shareholders.
Around about the late 1970s and early 1980s, all of this changed quite dramatically. The change began on Wall Street. Wall Street convinced the Reagan administration, and subsequent administrations and congresses, to deregulate and to undermine the set of regulations that were put in place after the crash of 1929 – particularly during the Roosevelt administration – to prevent a repeat of the excesses of the 1920s. As a result of that move towards deregulation, we saw a steady decline in standards – a kind of race to the bottom – on Wall Street and then in executive suites. In the 1980s we had junk bond scandals combined with insider trading. In the 1990s we had the beginnings of a speculative binge culminating in the dotcom bubble. Sad to say, under the Clinton administration the Glass-Steagall Act – that had been part of the banking act of 1933, separating investment banking from commercial banking – was repealed. In 2001 and 2002 we had Enron and the corporate looting scandals. Not only did this reveal the dark side of executive behavior among some of the most admired companies in America – Enron had been listed among the nation’s most respected companies before that time – but also the complicity of Wall Street. Wall Street traders were actively involved in the Enron travesty. And then, of course, we had all of the excesses leading up to the crash of 2008.
Where has the moral center of American capitalism disappeared? It’s ironic that at a time the Republican presidential candidates and state legislators are furiously focusing on private morality – what people do in their bedrooms, contraception, abortion, gay marriage – we have this far more significant crisis in morality. Wall Street is back to its same old tricks. Last week, Greg Smith, a vice-president of Goldman Sachs, accused the firm of putting profits before clients. What else is new? Almost every other Wall Street firm is doing precisely the same thing and they’ve been doing it for years.
Having identified the problem with American capitalism today, what’s the solution? You have said elsewhere that progressives need to save capitalism from its own excesses, but there has been a Democrat in the White House since 2009 and few signs of major reform. Who’s going to tackle this “moral rot”?
It hasn’t happened. The Dodd-Frank bill was an attempt to rein in Wall Street, but Wall Street lobbyists have almost eviscerated that act and have been mercilessly attacking the regulations issued. Pursuant Republicans have not even appropriated sufficient money to enforce the shards of the act that remain.
The Glass-Steagall Act has to be resurrected. There has to be a limit on the size of big banks. The current big banks have to be broken up using anti-trust laws, as we broke up the oil cartels in the early years of the 20th century. We’ve got to put limits on executive pay and have a much more progressive income tax so that people who are earning tens if not hundreds of millions of dollars a year are paying at a rate that they paid before 1981, which is at least 70 percent at the highest marginal level. We also need to get money out of politics.
But how are these changes going to come about while the very wealthy can so effectively control and manipulate the political process?
Well, exactly. That’s why we’ve got to have campaign finance reform that provides public financing in general elections and we need a constitutional amendment that reverses the grotesque decision of the Supreme Court at the start of 2010, in a case called Citizens United versus the Federal Election Commission. I could go on, but you get my drift.
None of this is possible without an upsurge in the public at large – a movement that may have already begun with the so-called Occupiers, but a movement that rescues our democracy and takes back our economy. You can’t do one without the other. The economy and our democracy are intertwined – the system’s called democratic capitalism. Much the same challenge exists in Europe and Japan and elsewhere around the world, where systems profess to combine capitalism and democracy. You see, when you have the extraordinary moves to inequality that we’ve seen over the past 30 years, there is simply no way that democracy can be maintained. Massive inequality is incompatible with robust democracy. Today, in the United States, the top 1% is taking home more than 20 percent of total income and owns at least 38 percent of total wealth. The richest 400 people in America have more wealth than the bottom 150 million Americans put together. As we’ve already seen in this Republican primary election, a handful of extraordinarily wealthy people can virtually control the election result – not entirely, but have a huge impact. That’s not a democracy. As the great American jurist and Supreme Court associate justice Louis Brandeis once said: “We can have huge wealth in the hands of a relatively few people or we can have a democracy. But we can’t have both.”
You’ve selected five books for us. Is there a single theme that ties them together?
Yes. All five books are about the structure of the economy and how that structure affects and is affected by the social life of a society. They are all economic books in one sense, but they are also political and sociological books in another. The field of economics didn’t exist until the great Alfred Marshall wrote his "Principles of Economics" in 1890. Before that, in the 19th century, it was called political economy – no one assumed you could separate politics from economics. Then before that in the 18th century it was called moral philosophy. Adam Smith called himself a moral philosopher. He took the greatest pride not in his "Wealth of Nations" but in his "Theory of Moral Sentiments," which is all about the ways in which people felt connected to one another in the same society. So the books – and I’m not suggesting these are necessarily the best books – that have been most influential to me in my formative years and in thinking about economics and social life have been these five.
In Herbert Croly’s book, "The Promise of American Life," we have a description of wealth in the hands of the few and U.S. politics swamped and corrupted by patronage. It sounds very familiar, but Croly is writing in the early 20th century. Tell us more.
It was written in 1909 and it had an electrifying effect on America and in the formation of modern American capitalism. Teddy Roosevelt used the book in formulating his so-called “New Nationalism” which he presented to the country shortly thereafter. Barack Obama used the occasion marking Teddy Roosevelt’s speech in Kansas in 1911 on New Nationalism – I believe it was the 100th anniversary of the speech – to give what I consider the best speech of his presidency just last December, setting forth a similar set of problems and a similar set of solutions.
Herbert Croly was the first to understand that modern capitalism required a government that was robustly democratic, but was large enough and strong enough to counterbalance the forces of large corporations. In a sense, he married the national vision of Alexander Hamilton to the commitment of Thomas Jefferson toward average people, rather than the wealthy and the privileged. That fusion of the two strands of American political thought was extremely important for the 20th century and I dare say that Croly’s influence and the influence of his thinking spread beyond the United States.
You touch on the debate between Hamilton and Jefferson, with Croly really siding with Hamilton and his belief in the need for a strong national government. But today in the United States there doesn’t seem much popular support for the idea of government being a positive force for change. In fact, government is seen as a threat to individual freedom even by people who might benefit from a more interventionist approach to the economy.
Yes, and some of these people seem to believe that a smaller government will give them more freedom. But they overlook the overwhelming power of big corporations and Wall Street. The only way they are going to have more freedom is if government, as Croly envisioned, counterbalances the enormous power of the large corporations and Wall Street. But in order to do so, government has to be more responsive to average people. This, of course, gets us back to the points I was making a moment ago. We have got to have a democracy that is not corrupted by great wealth and power. Otherwise the government simply becomes another vehicle for the wealthy to entrench their privileged position.
I suppose a proponent of reform could take some hope from Croly’s book. There are similarities between the U.S. today and with what was happening in the early 20th century. Back then there was a clear response to the failings of capitalism, and reforms such as anti-trust laws and labor protection legislation were instigated.
Yes. Modern American capitalism has been tested several times over the last century. At least twice, reformers have preserved capitalism by responding to its excesses. The first was during the progressive era, the first decade and a half of the 20th century before World War I. It was not just at the federal level but, perhaps even more strikingly, at the level of state government where you had the beginnings of the reforms that found their full flowering in the 1930s.
You mention anti-trust. Yes, anti-trust laws were designed to break up the big monopolies and oligopolies that essentially ran much of the American economy at the end of the 19th century. There were laws to improve the functioning of democracy, to get money out of politics, to reduce the power of the political bosses. The Federal Reserve Board was created in an attempt to provide some orderly and predictable means of maintaining economic policy and avoid the patterns of booms and busts that had marred the era of monopoly capitalism. Income tax was instituted. Labor protections, at the state level in particular, were introduced – a five-day working week, time-and-a-half for overtime, health and safety measures. The list was quite long.
Croly was not entirely responsible obviously, but his book came at a time when there was great optimism about the capacity of our democratic process to control the excesses of capitalism and to make capitalism work for the people. The second era [of reform] was obviously the 1930s when, after the Great Crash of 1929, [President] Franklin D Roosevelt enacted everything from the minimum wage to social security, unemployment insurance, the 40-hour working week nationally and also the requirement that employers bargain with unions in good faith, thereby laying the foundations for very strong labor unions in the United States.
Much of what the progressives accomplished, and what the New Deal accomplished 25 years later, had to do with changing both the economic and social structure of the country – widening the circle of prosperity, enabling far greater numbers of Americans to participate in the economy and to gain advantages as the economy grew, and at the same time strengthen democracy. We are now at another crisis. The Great Recession was symptomatic, but as I said before, it’s been building for 30 years and when you look at the allocation of income or wealth or the decline of our democracy under the weight of money, you see many of the same things that reformers in the early part of the 20th century, such as Herbert Croly, saw.
Let’s move on to your second book now, J.K. Galbraith’s "The New Industrial State."
Galbraith is best known for his book "The Affluent Society," which predates "The New Industrial State." But in many ways "The New Industrial State" is more interesting because here again we have an economist who reaches beyond the narrow scope of economics and sees economics and social life in a broader frame.
Galbraith was looking at what had happened to the large corporation. By the 1960s, he saw it had succeeded, that Croly’s promise of American life had been achieved in many respects. "The New Industrial State" was more of an explanation than a call to arms. It was an explanation for how it was that the giant corporation managed to create an adequate market for its extraordinary productivity and why, as Galbraith called it, the “technostructure”, the people who were involved in planning the next innovations in goods and services, was really the centre of power in the large mid-20th century corporations. If anything, Galbraith’s book was a warning about that technostructure. The United States, and by inference all nations practising democratic capitalism, had to be careful to make sure that we understood what the technostructure was doing and why it was doing it and how it was trying to influence all of us. Galbraith understood 20th century consumerism probably better than anyone. Just as Thorstein Veblen understood where consumerism was going at the end of the 19th century, Galbraith really saw the future with regards to consumerism in the last decades of the 20th century.
You mention the “technostructure” that Galbraith talks about in this book. He said that the technostructure’s primary aim was to avoid risk and to maintain and expand the big corporation rather than maximise profits. That may have been true then, but it doesn’t seem to be the case now. Wall Street is definitely not risk averse or shy of maximising profits, is it?
Exactly. Galbraith in some senses explained and even celebrated a system of corporate power that was soon to shift to Wall Street. He also celebrated, in a different but related book "American Capitalism," what he called “countervailing power”, a system in the United States – but by inference elsewhere where you have democratic capitalism – where unionized workers, small businesses and others would accumulate enough power to countervail against the giant corporations that were beginning to take over the American economy. In both books, in "American Capitalism" and subsequently "The New Industrial State," indeed in the "Affluent Society" as well, Galbraith is an optimist. He’s as much an optimist as Herbert Croly. Galbraith sees the victory of a system of democratic capitalism by contrast to the alternatives in the world at that time – communism, fascism, dictatorship and mass poverty. He saw in the delicate balance that the American system had created an answer to the world’s problems. But at the same time he was concerned about the technostructure. He wanted to make sure that it was accountable and responsible.
Your third book is the second volume in a trilogy entitled "Civilization and Capitalism, 15th-18th Century." Tell us why you chose this book.
As you said, Braudel’s book is the second in this series. "Civilization and Capitalism" is a monumental undertaking. In these three volumes, Braudel did what no one else had attempted before and he did it more successfully than anyone I know of, that is to try to understand the beginning of capitalism – particularly the kind of capitalism that has now become dominant in the world, the capitalism that started in Europe between the 15th and 18th centuries. What I like about the second volume, "The Wheels of Commerce," is that he understood that the banking and the trading systems that evolved in Europe between the 15th and 18th centuries were run, dominated, and designed by a different group entirely from the actual people who developed the goods and services that would be traded within this emerging system – the merchants, the craftsmen, the farmers. They were all part of capitalism, but the actual organisation of capitalism was through this ever more complex banking and trading system and the evolution of credit. Braudel recognises that credit is the key. He understands that between the 15th and 18th centuries, the invention of banking and of a system of credit and fundamentally a system of trust among a people who understood that they had every selfish reason to trust one another, was the essence and the genius of the development of capitalism.
Another thing I love about the book is the detail – the abundance of data, the charts, the information about social and political life interwoven in the development of capitalism and also the extraordinary illustrations. You get it all. You see the relationships.
Braudel argues, does he not, that capitalists are at heart monopolists and not advocates of free and competitive markets and that the state had to ensure that the market system worked correctly.
Braudel illustrates that point beautifully. Again and again, capitalism reached points where, if the state did not intervene in such ways as to induce more competitiveness, it would collapse under its own weight. In other words, what Braudel saw was this continuing evolutionary balance between the state and capitalism, in which the state needed to support capitalism but at the same time needed to guard against its excesses. Braudel in this sense is part of the same tradition as Herbert Croly and Galbraith.
Your fourth book is Tocqueville’s study of American society written in the 1830s. Why is "Democracy in America" still so important?
Tocqueville probably understood America better than anyone else at the time or since. He was not only a brilliant sociologist, but he also saw the connections between American society and the budding American capitalism of the 1830s. For example, Tocqueville, as he wandered up and down the east coast of the United States, saw something that puzzled him a great deal at first. He saw Americans who were among the wealthiest in their communities investing in public schools and improving highways and being community leaders. He asked himself: “Why did they do this?” In Europe it was all about honour, duty and patriotism and noblesse oblige. But he could not find these motivations in the economic leaders of these various American communities. There may have been some motivation of honor, duty and patriotism, but that was not what primarily motivated them. They were motivated, Tocqueville discovered, by what he called “self-interest, rightly understood”. Today we call it “enlightened self-interest”. They understood that if the people around them were more productive they themselves would do better. They understood that by investing in their communities – in the education of the children and in the transportation system and even in public parks – everyone would do better. To use a phrase that Tocqueville didn’t use but we’ve come to use – “a rising tide lifts all boats”. This was a remarkable insight. It was undoubtedly true in the United States for a long time.
The question is: Whatever happened to enlightened self-interest? Today’s rich would be far better off owning a smaller share of the American pie, but having a pie that grew much faster overall. Today they have a large share of a pie that’s hardly growing at all. They would also benefit from a society that, instead of being one overwhelmed by anger and cynicism as it is now, was a society in which people had a great deal of hope about the future and expectation that their children could live better than they do. Too many of today’s wealthy – including the captains of industry, CEOs of global corporations headquartered in the United States and people in high positions on Wall Street – don’t give a damn about their communities, about the nation, about the average working person either here or elsewhere around the world. All they are looking at is their own bottom lines. And as a result the tide is rising, but at a very slow rate. This is the most anaemic economic recovery on record. And part of the reason is that so much income and wealth is now at the top, that the vast middle class in the United States does not have enough purchasing power to keep the economy going. People are also scared and angry. They are worried about losing their jobs, their houses, their health care, of falling backwards. Most Americans today, according to polls, believe their children will live worse than they live. That’s not the society Tocqueville saw.
Tocqueville also made a clear connection between equality and a healthy democracy.
Exactly. Tocqueville saw that. And remember this is the 1830s in the United States, this is long before anyone had really connected the dots and seen the danger of inequality to a robust democracy. Women didn’t even have the vote in the 1830s; certainly African Americans didn’t have the vote. You had a relatively small number of white men who were full participants in the incipient democracy of the 1830s, and yet Tocqueville saw one of the threats to the future of American democracy was widening inequality.
Your final book, "The Theory of the Leisure Class," which was published in 1899, is regarded as one of the first critiques of consumerism. Please tell us more.
It was a critique of consumerism, but it was particularly a critique of consumerism by the very wealthy. Veblen coined the phrase “conspicuous consumption”. Less well remembered is his phrase “conspicuous leisure”. Veblen saw the importance of social status as a motivator in capitalism. He was the first to understand that one of the reasons that people desperately wanted to become rich was not simply to consume but to consume in such a way that they established themselves as being superior to others. To put it another way, consumption was not solely or even primarily about fulfilling particular individual needs or ambitions, in a social context it was about establishing one’s social position relative to others.
Veblen has quite a misanthropic worldview, don’t you think? He saw capitalism as a form of primitive barbarism dating back to prehistoric times.
Veblen was very much an anthropologist as well as an economist. He looked back on tribal society and saw much the same thing as he saw in the Gilded Age of the last decades of the 19th century in the United States. He saw people in early tribal society establishing their social dominance through displaying power by what they had accumulated and their ability to essentially do nothing while everyone else worked. To some extent it’s a misanthropic view, but it’s also a satirical view. Veblen was a great humorist. In fact, he wrote with his tongue firmly in his cheek, pointing out the foibles of the Gilded Age. I like Veblen as a stylist. I also like the fact that he combines anthropology and sociology with economic observation. He views the accumulation of wealth as a social act, rather than as a mere personal, familial objective. Veblen writing in 1899 was, of course, a precursor to the reforms that Herbert Croly and others had called for in the early years of the 20th century. And yet America today bears a striking resemblance to the Gilded Age of the late 19th century. Read Veblen today and you can almost see contemporary America.