In this presidential election year, populism is seeing a resurgence, no doubt because the last couple of decades have seen rising inequality of income in this country, so much so that the wealthiest families have opened up a larger gap between themselves and the rest of the country than we’ve had since the roaring twenties.
In The Conscience of a Liberal, Paul Krugman describes how that earlier inequality, what he calls the Long Gilded Age (from the 1870s to the early 1930s), came suddenly to an end, ushering in thirty years of prosperity for the middle class. And he suggests that the right policies now could conceivably do the same again.
In the twenties, taxes had been a minor factor for the rich. The top income tax rate was only 24 percent, and because the inheritance tax on even the largest estates was only 20 percent, wealthy dynasties had little difficulty maintaining themselves. But with the coming of the New Deal, the rich started to face taxes that were not only vastly higher than those of the twenties, but high by today’s standards. The top income tax rate (currently only 35 percent) rose to 63 percent during the first Roosevelt administration, and 79 percent in the second. By the mid-fifties, as the United States faced the expenses of the Cold War, it had risen to 91 percent.
Moreover, these higher personal taxes came on capital income that had been significantly reduced not by a fall in the profits corporations earned but in the profits they were allowed to keep: The average federal tax on corporate profits rose from less than 14 percent in 1929 to more than 45 percent in 1955.
And one more thing: Not only did those who depended on income from capital find much of that income taxed away, they found it increasingly difficult to pass their wealth on to their children. The top estate tax rate rose from 20 percent to 45, then 60, then 70, and finally 77 percent. Partly as a result, the ownership of wealth became significantly less concentrated: The richest 0.1 percent of Americans owned more than 20 percent of the nation’s wealth in 1929, but only around 10 percent in the mid-1950s.
So what happened to the rich? Basically the New Deal taxed away much, perhaps most, of their income. No wonder FDR was viewed as a traitor to his class. (pp.47-48)
Along with these changes in the tax code, labor unions tripled their membership from the early thirties to the mid-fifties. The Depression prompted angry workers to organize, and the new power of unions was self reinforcing because those new union members supported organizing efforts in other places. Furthermore, FDR (and the court members he appointed), unlike his predecessors, supported unions rather than helping industry suppress them.
As a result of all these changes, typical families in the postwar boom from 1947-1973 saw their real income double, from $22,000 in today’s dollars to $44,000.
Many of us in the progressive movement would like to see New Deal Redux. By the same token, though, many economists disagree and would argue that similar tax policies and governmental support of unions today would be disastrous to the economy. They would insist that attempts to defy the laws of supply and demand usually fail and that such radical tax policies “would wreak destruction on the economy by destroying incentives.” (p.54)
They would also point warningly to the possibility of:
“Eurosclerosis,” the relatively low employment and (to a lesser extent) economic growth in many Western European economies.” (p.54)
Perhaps those dire consequences would result from FDR-type policies. But consider that textbook economics would have said that FDR’s policies should fail. They didn’t. Perhaps instead, such policies should be a model:
For now let’s simply accept that during the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.
I’d be willing to risk soaking the rich and enforcing the long-neglected laws that should protect labor unions. What we need are leaders like FDR, similarly willing to take the chance. Willing to lead.