The great hope of some reform-minded Americans is that there will be, sooner or later, a political backlash against rising inequality in America. Kevin Phillips, a former Republican adviser, is one of these. A principal aim of his wise if sprawling new book, Wealth and Democracy, is to show that the growth of private wealth in the 1990s was analogous to the rise of private wealth in previous eras, especially the Gilded Age of the late nineteenth century and the 1920s.
In all these periods, Phillips argues, great fortunes had the effect of undermining democratic values and creating difficult economic times for many and perhaps even most other Americans. In the past, the nation always seemed to alternate between the domination of private and of public interests, and it is possible that it will do so again. The Gilded Age of Vanderbilt, Rockefeller, Carnegie, Astor, and Morgan was followed by new regulations on business and commerce, progressive income taxes, and the establishment of the Federal Reserve under Presidents Theodore Roosevelt and Woodrow Wilson. The 1920s of the Fords, Mellons, duPonts, and Joseph Kennedy, among others, were followed by Franklin D. Roosevelt’s New Deal, which adopted further serious restrictions on business, established Social Security and unemployment insurance, created a minimum wage, and raised income taxes. Joseph Kennedy himself was the effective first chairman of the newly created Securities and Exchange Commission. “The early twenty-first century should see another struggle because corporate aggrandizement in the 1980s and 1990s went beyond that of the Gilded Age,” Phillips writes.
But why hasn’t it happened yet? To the contrary, between 1979 and 1995, American workers accepted widening inequalities in income and wealth and rapidly rising corporate profits with equanimity and even, it seemed, self-reproach. There was surely voter frustration in this period of slow economic growth, but it generally favored Republican tax-cutters like Ronald Reagan or centrist Democrats like Bill Clinton, and it was channeled toward re- straining government rather than business. Most Americans seemed to take satisfaction from breaking up unions, such as the air traffic controllers’ union, and from reforming welfare, although it saved the federal government much less than 1 percent of the Gross Domestic Product a year, and from cutting taxes, mostly for the rich. There were hardly any serious attempts to regulate business. Even conservative populists like Patrick Buchanan or Ross Perot could not attract a wide following. The expansion of the earned income tax credit, which has helped countless low-income workers, seemed almost to sneak in under the radar.
The economic boom of the late 1990s, in turn, suppressed almost completely any lingering concerns about the power of the rich as wages, after stagnating for two decades, rose for all income levels. Unemployment rates fell to 4 percent and the soaring stock market, though it still significantly benefited only a small percentage of the population, became the national sport. The 1997 and 1998 international financial crises, the bursting of the stock market bubble in 2000, and even the recent Enron scandal have produced as yet only modest proposals for financial reform and have not appreciably diminished political support for further tax cuts for the well-to-do. The recent campaign finance reform legislation is arguably the one exception but few are enthusiastic about how effective it will be.
For those who feel that a shift toward a more egalitarian politics has now become impossible, Phillips points out that the backlash of the early 1900s took decades to develop; pro-business attitudes dominated the nation for three decades after the Civil War. The broad reforms of the Progressive period and the New Deal were also prompted by a severe crisis. In 1893, the nation had the worst depression in US history, leading to populist agitation that set the stage for the more moderate Progressives almost a decade later. The New Deal was of course a response to the market crash of 1929 and the Great Depression of the 1930s. If the nation again requires such severe suffering to produce effective reforms, however, it is hardly solace for critics. The price would be high, and indeed reforms may never come. Rather than sudden crisis, the nation may struggle through another couple of decades of historically slow growth whose consequences may be harsh but too gradual to provoke serious political change.
The rising inequality of incomes and wealth in America since the late 1970s has been striking, although few seem consciously aware of it. More than 40 percent of total income in America now goes to the highest 10 percent of earners, about the same level as in the 1920s and well up from 30 or so percent between the early 1940s and the late 1970s. The average income of the highest-earning 5 percent of families was nineteen times that of the lowest 20 percent in 1999; in 1979, it was a little more than eleven times. The wealthiest 1 percent of households now own more than 40 percent of all assets, including homes and financial investments (after deducting debt)—higher than in any year since 1929.
Partly, this skewing is caused by the great fortunes made as stock prices soared in the 1990s. Forbes magazine’s four hundred richest Americans were more than ten times richer in 2000, on average, than the four hundred richest Americans Forbes tallied in 1990, but the economy was only two times bigger. Probably ten thousand American families had net worth of more than $65 million in 2000. A quarter of a million had a net worth of more than $10 million.
But even without including capital gains from stocks and other investments, incomes grew highly unequal. Measuring only what the Census Bureau calls “money income,” which excludes capital gains but includes wages, salaries, government payments, rent, dividends, and interest, family incomes grew significantly more unequal. The average income of the top 20 percent of families rose to thirteen times the income earned by the bottom 20 percent by the late 1990s; in the late 1970s, it was only ten and a half times greater.1
If many measures of income and of inequality of wealth have returned America to the levels of the 1920s, the fabulous personal fortunes of the 1980s and 1990s now rival and in some ways even exceed the mythical fortunes of the Gilded Age. This was not the case before the 1980s, as Phillips demonstrates. In 1957, several families, including the duPonts, the Rockefellers, the Mellons, and J. Paul Getty, the oil magnate, were certainly billionaires, but their fortunes were not comparable to the dominating positions of Rockefeller and Carnegie at the turn of the century. The richest Americans in 1968, which by then included the Hunt oil family, Howard Hughes, and Polaroid’s Edwin Land, were not appreciably richer. The gains of this post–World War II period largely went to America’s growing middle class. As late as 1982, great wealth in America was relatively contained. “Next to the titans of the Gilded Age,” writes Phillips, “the individual billionaires of 1982, five of them children of Texas oilman H.L. Hunt, represented a telling slippage in both real wealth and political and economic stature.”
This changed by the late 1980s. Disinflation, deregulation, and rising profits helped the stock market soar. Meanwhile, President Reagan engineered a major tax cut for high-income Americans. “Wealth had ballooned,” writes Phillips, “making the top individual and family fortunes of 1992 two to three times the size of their 1982 counterparts. The gap between the rich and everyone else was yawning to widths unseen since the 1920s and 1930s.”
By 1999, the sum of personal wealth in America was staggering. The four hundred richest Americans in 1982 were worth on average $230 million, according to Forbes. In 1999, their average wealth was more than ten times greater, or $2.6 billion. Many of the wealthy were newcomers, such as Sam Walton of Wal-Mart, Bill Gates of Microsoft, the Fisher family of the Gap, the investor Warren Buffett, and Ted Turner. The Rockefellers, duPonts, Mellons, Phippses, and Hearsts, however, if no longer dominant, participated in the boom in private wealth as well, and were worth ten times as much as they were in the 1930s.
Even after the stock market bubble burst, many personal fortunes remained huge. Meanwhile, the net worth of Americans in the middle had declined slightly since the 1980s. Despite claims about a shareholder democracy, the rising stock market still only significantly helped the rich. And though home prices rose in this period, Americans borrowed aggressively against their main asset—the place where they lived. Debt reduced their net worth although it improved their way of life for the time being.
But critics of concentrated private wealth in America must contend with a strong counterargument. Despite the rising personal fortunes, unmatched anywhere else in the world until after World War II, and the abuses of power that have often accompanied them, American economic history has to be considered a remarkable success for most of its citizens. The standard of living rose inexorably if not continuously for most Americans. Reality kept exceeding expectations. Many Americans, particularly blacks, remained poor or lost their jobs; but on balance, most people lived much longer, worked much less hard, owned their own homes, and could buy countless new and exciting products. Their children usually did better than they did.
Was government intervention an essential part of the American economic success story? In my view, there is no doubt that it was. But according to much mainstream economic thinking, government and even democracy itself are generally considered costs, not benefits—“inefficiencies” that interfere with the workings of markets. The main duty of government, according to this thinking, is to establish the rule of law, including the sanctity of contracts. Competition should not be undermined by monopoly; but even here many economists are hesitant to encourage government intervention.
Phillips, for his part, has no doubts. He unhesitatingly emphasizes how much government contributed to economic growth in America, including investments in roads, canals, public education, the railroads, electricity, communications, and the Internet, as well as spending on defense in preparation for and during war. He neglects some important government contributions—public health, for example, and early America’s attempts to guarantee inexpensive property for all. Private capital would not have accomplished all this alone, especially when it comes to investments that did more for the public good than private bounty, such as education, health care, and transportation. Phillips points out, as have many before him, that laissez-faire was always a misnomer. The rich often worked closely with the government, winning defense contracts or subsi-dies for their railroads, for example. Phillips puts technology in its place, reminding us that government investment and preferment may well have been more important as a source of economic growth—and certainly of personal fortunes.
He also traces the suffering of some economic groups during the economic booms that produced the nation’s great wealth. Farmers were especially hurt during the late 1800s; factory workers were often treated harshly. Labor organizing was violently suppressed. The courts and the US Senate, then elected by state legislatures, were highly conservative, pro-business institutions in these post–Civil War years.
Much of these data are cited by Phillips. Additional data are from Lawrence Mishel, Jared Bernstein, and John Schmitt, The State of Working America, 2000/2001 (Economic Policy Institute, Cornell University Press, 2001). See also Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913–1998," National Bureau of Economic Research Working Paper No. W8467, September 2001. ↩
Much of these data are cited by Phillips. Additional data are from Lawrence Mishel, Jared Bernstein, and John Schmitt, The State of Working America, 2000/2001 (Economic Policy Institute, Cornell University Press, 2001). See also Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” National Bureau of Economic Research Working Paper No. W8467, September 2001. ↩