Kevin Phillips
Kevin Phillips; drawing by David Levine


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.

Similarly, in the 1920s, income tax rates for the well-to-do were repeatedly cut. Even as the economy boomed in these years, Phillips reminds us, many lost jobs as a result of technological change at a time when there was no unemployment insurance. The accretion of fabulous wealth fueled the financial speculation that resulted in the painful 1929 stock market crash.

But despite all this, in the Gilded Age and in the Twenties, productivity, the key measure of an economy’s vitality, grew rapidly. Productivity, or the output of goods and services per hour of work, is the source of a rising standard of living. Average real wages, in fact, rose in these periods, even as inequality increased. Some workers did not do well, but many did. (The incomes of low-skilled workers, subject to competition from immigrants, increased more slowly than those of most other workers.) Sixty percent of families owned an automobile in 1929 compared to only 25 percent or so in 1920. Rising wealth at the top did not interfere, at least on the face of it, with economic growth.2

During the 1980s and the first half of the 1990s, however, productivity rose at historically slow rates. Average real wages declined. Typical family incomes today are only modestly higher, after inflation, than they were in the 1980s, but even this improvement required both spouses to work many more hours than in the past and family income levels still have not risen nearly as fast as the costs of college tuition, health care, drugs, and housing. More sophisticated measures of income show that income actually declined for many—and in some age groups, it declined for most males—even over a twenty-year period. In his determination to show the similarities between the 1990s and the two previous ages of great wealth creation, Phillips misses a key point. The economic experience of the 1980s and much of the 1990s was especially disturbing because enormous fortunes were made even as the economy badly underperformed. The boom of the late 1990s only partly compensated for the declines in real income of the previous decades.

Despite all this, there was still no serious progressive political backlash. The public discourse in the 1990s was every bit as pro-business as it was in the Gilded Age. Today, in Phillips’s view, globalization is the equivalent of the Social Darwinism of the late 1800s. He could well have added market ideology. “Democracy and markets cannot be the same thing,” he writes. It is an odd turn of events that we have to be reminded of this.


Phillips’s anger about inequality is more moral than economic; and he expresses that anger in powerful and moving arguments for a point of view that needs to be stated. He believes extreme inequality is bad in itself, a position too easily ignored in a money-conscious age. Do corporate CEOs deserve to make 419 times the hourly wages of production workers? Even in 1988, they made only 93 times as much, which was still unconscionably high. The compensation of top executives rose five times faster than did profits between 1990 and 1998. Are workers really being paid what they deserve?

But I think that Phillips’s principal moral and political concern is that extremes of wealth can subvert democracy. He finds this to have been the case in the late 1800s, when the courts and the Senate were dominated by business interests, and again in the 1920s. Today, he points out, three quarters of total political campaign contributions to presidential and congressional elections are from families with incomes above $200,000 a year. As voter turnout declines, Phillips cites a study that shows it is lowest among lower-income workers.

In such an environment, it is no surprise that tax cuts were passed for people with high incomes and that the House of Representatives tried to make estate tax reductions permanent even after the greatest accrual of private wealth in history. The Senate has since defeated the bill. Calls for the privatization of Social Security are still taken seriously. Corporations can adopt pension plans to which employees contribute and those who want to save for retirement are encouraged to participate in such plans as 401(k)s; but the evidence is growing that under the former private benefit pension system (when corporations simply guaranteed an annual annuity), workers of middle and lower incomes were much better off. There is no serious consideration of a tax on gasoline that would reduce pollution and reliance on foreign oil.

In the meantime education requires more public investment, and partly because it is funded locally in America, its quality is highly uneven. Forty million Americans have no health insurance and the costs of drugs are skyrocketing beyond the ability of many Americans—particularly the elderly—to pay for them. The proportion of poor children in America is higher than in any other developed nation. Day care is generally inadequate for a nation where most parents go to work. Do such arrangements truly reflect the desires of most Americans?

The press and television also have a part in the narrowing of the public discourse, although Phillips does not give them sufficient attention in this book. Increasingly, they are dominated by a few large corporations, typically headed by some of the richest men and women in America, now including Steve Case of AOL–Time Warner, Rupert Murdoch of News Corp, and the sisters who own the Cox media empire. More subtly, no matter who owns them, they have been under the same pressure to cut costs and meet higher profit objectives in the over-intense competitive race encouraged by Wall Street. In the business press, enthusiasm for the New Economy and for Federal Reserve chairman Alan Greenspan, and the scant attention paid to misleading accounting and conflicts of interest among financial analysts, reflected the growing sense that the media were now participants in the rush to wealth, not clear-eyed observers. They seemed particularly hesitant to bear bad economic news, until crises in 1997 and 1998, the market crash of 2000, and the Enron scandal forced them to do so.

Anger brings out courageous streaks of populism in Phillips. He is particularly concerned about the rise in political power of nonelected officials. Writing as a Republican, he points out that, after years of Republican appointments, the judiciary is increasingly conservative. He has a strong distaste for Greenspan’s Federal Reserve—always a bastion of unelected power—whose policies have been so beneficial to investors and those who hold financial influence. The power of unelected institutions, in Phillips’s view, amounts to a loss of national sovereignty. He is predictably concerned with the loss of sovereignty to international corporations, who minimize labor costs by investing abroad and minimize taxes by seeking offshore shelters.

But, in the end, is all this bad for economic growth? This requires an answer. The revitalizing of markets in America has produced many benefits. Rising corporate profits have led to more useful capital investment. To some observers, America’s political complacency is evidence that the markets, even if they have bestowed fabulous benefits on a relative few, are serving most Americans well. Some defenders of the new fortunes argue that they were simply the prelude to the economic boom of the late 1990s, in which wages rose handsomely for all income categories. Entrepreneurs were getting their just deserts for infusing the American economy with new vitality.3

There is a strong case, however, that inequality, especially as it has become more extreme, is harmful to economic and productivity growth, and certainly is rarely a benefit. One of the arguments in favor of personal fortunes, for example, is that the rich save their money, providing the capital for a nation to invest. But on the whole personal savings fell inexorably in America as private fortunes grew in the 1980s and 1990s. As a result, America has had to borrow from abroad in record amounts and is now the largest debtor nation of all time.

Similarly, the sharp cut in personal income tax rates under President Reagan in the early 1980s did not result in faster productivity growth, as his supporters predicted. It took a dozen years for productivity to rise, and its steep movement upward occurred after President Clinton increased the upper income tax rates in 1993.

Phillips suggests at least one key reason that great fortunes can have damaging economic effects. They feed financial speculation that in the past has typically led to market crashes and often recession. The rising stock market itself became a key source of economic growth in the 1990s, as investors spent their gains or borrowed against them to buy more goods and services. This also helped raise the value of the US dollar, which kept import prices down and attracted capital to the savings-starved nation. But the American economy must now deal with high levels of debt, a vulnerable dollar, a falling stock market, and hundreds of billions of dollars of lost and misallo-cated investment in the crash of high-technology stocks.

One other problem with inequality, perhaps the most important one, is often overlooked. The growth of domestic demand is itself a key stimulant of economic growth and rising productivity. The very rise in demand in the late 1990s across the income spectrum was a primary source of the boom. Corporations invest because they can sell products and can achieve new economies of scale as middle-income markets grow. Inequality undermines domestic markets by reducing purchasing power. A strong domestic market is even more important than international trade, and America’s surviving economic advantage over two hundred years of exceptionalism derives in fact from its continent-wide market as yet unmatched anywhere in the world.

Democracy in America, we should keep firmly in mind, promoted widespread land ownership, free and mandatory public education, legal guarantees of competition, public health programs from municipal sanitation to free vaccinations, a free interstate highway system, Social Security and unemployment insurance, a public university system, and subsidies for private colleges. These contributed to strong domestic markets, economic growth, and confidence in economic justice.

This heritage is more and more neglected. Remuneration for America’s workers has not been high enough to support consumption without borrowing; nor has it been enough to help workers invest adequately in their own educations or their financial future. A strong domestic market requires public investment in equal education, adequate health care for all, first-rate transportation and communications, and new institutions, such as early child care. In the past America managed to meet the needs of its changing economy. Today, in the age of wealth creation that Phillips deplores, it is too often failing to meet them.

Phillips believes the American electorate may yet turn “radical.” He does not anticipate a class war. Rather, to him, inequality can produce an elite—an aristocracy of sorts that passes wealth on to heirs and has undue political power. He argues that Americans have traditionally been opposed to such elites, not to private wealth itself. He can imagine, for example, that Americans will call for a tax on wealth and for protective tariffs. His affections are for Republicans like Lincoln, Theodore Roosevelt, and even Richard Nixon, who were sympathetic to the needs of workers compared to their Republican successors, and ill-disposed to the elitist plutocracy of wealth.

But Phillips, for all his disposition to an optimistic reading of American history, is also concerned that the rise of Wall Street power and Wall Street values in America might not be overcome. He devotes a long chapter to similar financial tendencies in nineteenth- century Britain and eighteenth-century Netherlands before the decline of those economies, but he does not push the analogies too far. In fact, they would not completely hold. In my view, these nations were overcome because they were superseded by nations with still larger domestic markets. Britain supplanted the Netherlands, and the US supplanted Britain. But narrowly conceived financial values also turned these nations away from the needs of their domestic markets, and from public investment as well.

Wealth and Democracy is at times a rambling and repetitive book, and Phillips deals with some issues he has addressed before. But his moral anger is more intense now. He warns that America is fast becoming a plutocracy, that the spirit of democracy is on the wane. So distorted is the American economic debate that few influential economists are willing to argue that a weakening of democratic values can have destructive effects on economic and income growth; but an objective examination of the role of democracy in the American economy would show that this is the case. Phillips addresses many subjects in his book, but the heart of his thesis is that democracy is endangered. In his analysis of that danger, he has become one of our most valuable political and economic thinkers.

This Issue

July 18, 2002