"Bloodiest thing the world has seen": David Cay Johnston on inequality's looming disaster

Pulitzer Prize winner David Cay Johnston tells Salon how America's economic story could end -- and it isn't pretty

Published May 22, 2014 12:30PM (EDT)

David Cay Johnston    (The New Press/Cheryl Amati Martin)
David Cay Johnston (The New Press/Cheryl Amati Martin)

Long before anyone knew the name Thomas Piketty, Pulitzer Prize-winning journalist David Cay Johnston was plumbing the hidden depths of the American tax code, revealing the myriad ways it privileges the interests of corporations and the wealthy ahead of those of the 99 percent. Indeed, while it may sometimes feel as if economic inequality is the new trend, Johnston's career reminds us that the great gulf that separates the rich from the rest in the contemporary United States didn't happen overnight, but over a course of decades.

Despite coming out during the same year as "Capital in the Twenty-First Century," and "The Divide," Johnston's newest release, "Divided: The Perils of Our Growing Inequality," is a different kind of inequality book. Rather than a sweeping overview of centuries of economic history, or an on-the-ground examination of how our justice system ignores the powerful while brutalizing the rest, Johnston's book is a collection of essays, speeches and excerpts — a kind of inequality reader. Featuring insights from philosophers, economists, journalists, researchers and even politicians, "Divided" reminds us how inequality is one of those rare problems that truly matters to all of us, no matter what our interests or chosen field.

Earlier this week, Salon reached Johnston via telephone to discuss "Divided," whether American democracy can survive such great economic disparities, and how returning to a more equal society is literally a matter of life and death. Our conversation follows, and has been slightly edited for clarity and length. In addition, Johnston followed up with further thoughts via email.

What inspired you to create this book?

I had done a trilogy on hidden aspects of the American economy, “Perfectly Legal,” which was about how the rich benefit from taxes, “Free Lunch,” about all the subsidies people didn’t know about that go to rich people and corporations, and “The Fine Print,” which was about restraint of trade and monopolies. And in speaking for the last 10 years around the country, one of the things I learned is that people didn’t understand that this isn’t just a function of numbers and whatnot; they didn’t understand there’s a whole structure that affects families, health, healthcare — which are different things — incarceration, opportunity, exposure to environmental hazards, wage theft and so, there was really a need here to give people a broad understanding of, well, "How did this come about, this incredible inequality that we didn’t have in this country until recent years?"

[After the interview, Johnston emailed to add: "My trilogy on the American economy explained many of the little-known, and often deceptive, laws, regulations and official practices. But inequality involves much more than what I had written about in the trilogy. I wanted to provide people with a broad understanding of the issues, ranging from limited opportunity and obstacles to achieving a modicum of prosperity, to the remarkably cruel and thoughtless policies of the Reagan era."]

In your introductory essay, you make a point of arguing that inequality is not natural, that it's something we created and, by extensions, we can undo. But what would you say to those who, say, have read their Piketty and are thinking this kind of inequality is endemic to capitalism?

Well, Piketty — whose work I relied on for years and who substantiates a lot of things that I’ve written with his research — argues that the concentration of wealth will just continue and continue and continue. As Herbert Stein, Richard Nixon’s chief economic adviser, famously said, a trend will only continue as long as it can. We will either, through peaceful, rational means, go back to a system that does not take from the many to give to the few in all these subtle ways, or we will end up like 18th century France. And if we end up in that awful condition, it will be the bloodiest thing the world has even seen. So I think it’s really important to get a handle on this inequality. After all, since the end of the Great Recession, one-third of all income increases in this country went to just 16,000 households, 95 percent of it went to the top 1 percent, and the bottom 90 percent's incomes fell, and they fell by 15 percent. So we need to recognize that there is a very, very serious problem here that has to get addressed. But it won’t just go on forever because if you follow that to its logical absurdity, one person ends up with 90 percent of the wealth in the world. And that’s not going to happen.

[In the aforementioned email, Johnston also followed up on this point, writing: "While I certainly am worried that we could end up in a violent revolution somewhere in the future, sparked by extreme inequality,  I’m [an] indictable optimist and believe that [if] the American people have access to explanations and information they will, over the long run, make smart choices."]

So when you say it will be very bloody, I know you're speaking of a wild hypothetical to some degree, but do you really think we're on track for violent social upheaval?

Oh, yes. I’ve written about people on the far right and the far left since the '60s. Back in the '60s, I was in the homes of people who built bombs, both left and right. And we live in a country now where we have members of Congress who have either questioned, or ignored questions about, killing the president of the United States. We are seeing all these laws passed allowing people to carry guns openly. We are coming apart as a society, and inequality is right at the core of that. When the 90 percent are getting worse off and they’re trying to figure out what happened, they’re not people like me who get to spend four or five hours a day studying these things and then writing about them — they’re people who have to make a living and get through life. And they’re going to be swayed by demagogues and filled with fear about the other, rather than bringing us together.

When you mention demagogues, are there people currently on the scene that give you a shiver up your spine in that regard, or are you speaking hypothetically?

I think it would be easy for someone to arrive in the near future and really create forces that would lead to trouble in this country. And you see people who, they’re not the leaders to pull it off, but we have suggestions that the president should be killed, that he’s not an American, that Texas can secede, that states can ignore federal law, and these are things that don’t lack for antecedents in America  history but they’re clearly on the rise. In addition to that, we have this large, very well-funded news organization that is premised on misconstruing facts and telling lies, Faux News (formerly Fox News), that is creating, in a large segment of the population — somewhere around one-fifth and one-fourth of it — belief in all sorts of things that are detrimental to our well-being. President Theodore Roosevelt said we shall all rise together or we shall all fall together, and we need to have an appreciation of that.

So, no, I don’t see this happening tomorrow, but I have said for many years that ... if we don’t get a handle on this then one of these days our descendants are going to sit down in high-school history class and open a textbook that begins with the words: “The United States of America was …” and then it will dissect how our experiment in self-governance came apart. By the way, the Founders were very worried about this. John Adams said his fear was that instead of having yeoman farmers who owned their own land, and workers who owned their own tools and therefore were independent, that we would become a country in which a business aristocracy would arise, and the mass of people would simply work for wages and the business aristocrats would persuade the wage-earners to support those policies that were actually against their interest and favor the business aristocrats and, when that happened, we would lose our liberties and our democracy.

And he wasn’t exactly the proto-lefty bomb-thrower of the group ...

No, but Madison and Monroe and Jefferson — there was a lot of concern about this. They were fearful not just of a hereditary aristocracy but a business aristocracy. And I’ve had my research assistants at Syracuse Law working on this for the last two-and-a-half years and there was an abundance of material written in that era that was concerned about extreme inequality. And that’s what we have in America, is extreme inequality.

To turn from how bad things are getting to how we can make them better, I'd like to ask you what solutions you'd like to see people organize around in terms of reducing inequality?

Number one, we’ve got to change the makeup of Congress. The Democrats got 1.4 million more votes than the Republicans [in 2010] but they have a minority [in Congress] because of gerrymandering. So we need to have state legislatures — and we may need a constitutional amendment to make districts evenly divided between the parties — that will get us more centrist candidates rather than extremists on both left and right.

Secondly, we’ve got to restore unions. If you believe in market economics, you’ve gotta believe in unions. Now, unions aren’t perfect, but neither are corporations, or the government or, for god’s sake, the clergy. Unions allow people as a group to negotiate for reasonable pay, and without unions you have big corporations, and individuals who have no bargaining power, such as a lot of unemployed workers. Our competitors all have unions. The Germans even have unions for executives. So we need to get back to unions if we’re going to improve people's economics.

We need to get people to vote. If the bottom 90 percent voted at the same rate that the top 1 percent do, you would have a different Congress. That’s why you’re seeing efforts to take away the franchise, because the serious professionals in the Republican Party recognize that the demographic trends are going against them, and to stave that off they’ve got to try and deny the franchise to people, which is an extraordinary move, something we haven’t seen since Jim Crow.

We need to have a big enough government to enforce the law. We have not prosecuted any of the "too big to fail" banks and we have a president who has said, Well, these things look awful, but they may not be crimes. I’m sorry — the banks falsely certified documents ... there are plenty of witnesses who have emails and memos they wrote and can testify that they said that this is illegal and wrong and they were told to shut up or were gotten rid of. We have money transferred through the mail and through the wires. That’s all you need to prosecute fraud. And yet, Bill Black, the guy who got us all those convictions in the savings and loan crisis, no one will speak to him. That’s just one example. I have written about all sorts of lawless behavior that’s going on, involving cheating in the real-estate industry, the failure to pay out benefits in the insurance industry, and when you “deregulate” and cut the staffs whose job is to look out for the public, the most cunning and conniving are the beneficiaries.

And this is also true in tax; the wage-earners will be taxed very effectively because it’s all automated. But those people who have very complicated individual or investment or corporate tax portfolios, Congress has cut away the ability to — and put in place rules that make it really impossible to — enforce the laws. So America today has two income taxes separate and unequal, one for wage earners who are thoroughly and efficiently taxed, and one for investors, business owners and corporations, who the government does not have the capacity to properly tax, and therefore are undertaxed, shifting the burden onto the wage earners.

To that point, it's died down now that the elections are coming up, but there was previously a lot of talk of "tax reform" —

Well, I’ve said repeatedly, there is no discussion in Washington of tax "reform," a word journalists should use in quotes. There is a lot of talk of shifting the burden of taxes off of corporations and wealthy Americans. But reform means making the system better, and there’s nothing being proposed that’s reform. When Ronald Reagan’s two big tax policy changes were made, there were giant studies by the Treasury where they tried to figure out everything about the effects of this. There’s no serious intellectual work going on about how do we design a tax system for the 21st century.

Let me give you one of my lines on it: America has a tax system that is well-designed and effective for the middle of the 20th century. We now live in the 21st century. We are not a national industrial wage economy — we are a global services/asset economy. Mostly intangible assets. And the tax system does not recognize this. Therefore, it is damaging the economy rather than strengthening and providing for the commonwealth goods and services that are needed for private wealth creation.

Barack Obama has made a point to be seen as sort of like the president who put inequality on the front burner. And you include his speech from 2011 in Osawatomie, Kansas (where Teddy Roosevelt gave his famous "New Nationalism" address), in the book. But at the same time, as you’ve noted, 95 percent of the gains, post-Great Recession, have gone to the tippy-top of the economic pyramid. How do you judge him on this issue?

President Obama understands the broad nature of the problem and he’s right to say this is the issue of our time. But his policies simply reinforce inequality. His policies show that he very much identifies with Wall Street and with its interests. Remember, he was going to put Lawrence Summers in as head of the Federal Reserve, and a whole bunch of people — and I was among them — [said] that this would be a terrible policy mistake, that Janet Yellen is among the group of people who consistently predicted things correctly and gotten it right (and I would count among them Dean Baker, me, Paul Krugman, Joe Stiglitz and a few dozen other people who deal with these issues in public).

The president has consistently sided with Wall Street, whether it’s not prosecuting the criminality which brought down the economy in 2008, or supporting the Trans-Pacific Partnership — which is not about “free trade,” it’s about protecting existing ownership interests against the future. And so he’s just a really good example of where what he says and what he does don’t align. I don’t know the explanation for that. But having watched him very closely, I think it has to do in part with [that] he wants very much to be ... the great uniter. And if you’re going to bring about the kind of change I think we need, there’s going to be a lot of divisiveness about it; and he just doesn’t have a stomach for it, it’s not who he is. He’s the "Can we please get along here together?" guy.

Garry Wills once described his approach as "omnidirectional placation."

That’s a great line ... I mean, he’s like the child from the family where the parents fought and that child was the one who’d get the parents to make peace. And he really does identify very heavily with the folks on Wall Street. Here’s [former Treasury Secretary] Timothy Geithner who flat-out cheated — calculated deliberately — on his taxes and lied to Congress about it. And I can tell you that because I replicated his taxes in TurboTax, which was a hell of a lot of work. And I know somebody who was a deep expert/authority who did the same thing. We could not produce, without overriding the system, what he said. And all he had to do to be honorable about this was pay the penalties as well as the taxes and interest. But look at Geithner, look at everything he’s done. Did Geithner do anything for the homeowners who got taken to the cleaners, here? You didn’t have to take out a mortgage to get taken to the cleaners; property values fell for everybody. People who had nothing to do with taking out these bad mortgages were harmed. Now, every single thing you saw Geithner do was to benefit Wall Street. And Obama spoke well of him right to the moment [Geithner] decided to earn his reward and go to work on Wall Street.

Obama was even, before he moved on to not-better Summers, considering nominating Geithner for the Fed.

Yes. I recognize that Obama has been dealt a terrible hand. Ten days after his inauguration in 2009, top Republicans had a meeting and agreed that making him ineffective was their overriding goal. He’s been dealt a terrible hand, here, and in some ways he’s played it well. But on the fundamental issues of what’s driving our inequality, he has not played this at all well.

He has a very deep knowledge of strategic arms, because that’s what he studied when he was in college; [but] I don’t think he has a deeper understanding of economics than your average college graduate, and your average college graduate doesn’t have a very good understanding of economics. Because we live in a society where there’s a dogma: neoclassical economics, particularly the Chicago set. (By the way, I went to the Chicago school, 40 years ago. I’m not an economist but I did go there for two quarters on a fellowship.) There are lots of other economic theories out there and they get no attention because we have this dogma about economics in America.

Now that we seem to be in a moment when the discussion of inequality has gone mainstream, how optimistic are you that this is a problem we'll actually start to fix in the near- or medium-term future?

We’re still living in the age of Reaganism; that has not come to an end yet. But we now have 33 years of empirical evidence that what Reagan promised didn’t work. If it did, if what Reagan and George W. Bush promised us worked, we would be swimming in jobs today. And we’re not. So I’m afraid, in the short run, what we’re going to see is an effort to shift the blame for this from failed policies to us. The "it’s the 47 percent who are takers" argument that Romney put forth, rather than looking at the structure and the rules that create and reinforce inequality. But this must come to an end and we have to get some changes and what’s missing are leaders who can articulate a new path. A smarter, growth-oriented path that will make us all better off. So Elizabeth Warren, who I’ve known for 25 years, Elizabeth Warren could be that person, but I don’t think she’s going to do it. She wants to focus on fixing what she knows. But we need someone, multiple people, to arise who understands the structure and nature of the problem and can then put it in terms that ordinary people understand before we get real change.

By Elias Isquith

Elias Isquith is a former Salon staff writer.

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