November 3, 2020. The newly formed Independence Party pulls enough votes away from both the Republican and Democratic candidates to give its own candidate, Margaret Jones, a plurality of votes, an Electoral College victory and the presidency. A significant number of Independence Party members have also taken seats away from Democrats and Republicans in Congress.
The platform of the Independence Party, as well as its message, is clear and uncompromising: Zero tolerance of illegal immigrants; reduced legal immigration from Latin America, Africa and Asia; increased tariffs on all imports; a ban on American companies moving their operations to another country or outsourcing abroad; a prohibition on foreign “sovereign wealth funds” investing in the United States. America will withdraw from the United Nations, the World Trade Organization, the World Bank and the International Monetary Fund, end all “involvements” in foreign countries, refuse to pay any more interest on our debt to China, essentially defaulting on it, and stop trading with China unless China freely floats its currency.
Profitable companies will be prohibited from laying off workers and cutting payrolls. The Federal budget must always be balanced. The Federal Reserve will be abolished. Banks will be allowed only to take deposits and make loans. Investment banking (and derivatives) will be prohibited. Anyone found to have engaged in insider trading, stock manipulation or securities fraud will face imprisonment for no less than ten years.
Finally, but not least: In order for the government to balance the budget, provide for national defense, guard our borders and pay down the national debt, all personal incomes will be capped at $500,000 per year; earnings in excess of that amount will be taxed at 100 percent; incomes above $250,000 are to be taxed at 80 percent. The capital gains rate will be 80 percent. All net worth above $100,000 will be subject to a 2 percent annual wealth tax. Any American found to be sheltering his income in a foreign nation will be stripped of his citizenship.
In her victory speech, President-elect Jones is defiant:
My fellow Americans: You have voted to reclaim America. Voted to take it back from big government, big business, and big finance. To take it back from the politicians who would rob us of our freedoms, from foreigners who rob us of our jobs, from the rich who have no loyalty to this nation, and from immigrants who live off our hard work. (Wild applause.) We are reclaiming America from the elites who have rigged the system to their benefit, from the money manipulators on Wall Street and the greed masters in corporate executive suites, from the influence peddlers and pork peddlers in Washington, from the so-called intellectuals who want to impose their socialist views on the rest of us—from all the privileged and the powerful who have conspired against us. (Wild applause and cheers.) They will no longer sell Americans out to global money, and pad their nests by taking away our jobs and livelihoods! (Wild applause, cheers.) This is our nation, now! (Wild applause and cheers that continue to build.) A nation of good jobs and good wages for anyone willing to work hard! Our nation! America for Americans! (Thunderous applause.)
Her opponents’ concession speeches are bitter. George P. Bush, the Republican candidate, is irate. “I cannot stand before you and congratulate my opponent who based her entire campaign on fear and resentment”, he tells his supporters. Chelsea Clinton, the Democratic candidate, is indignant. “Margaret Jones and the Independence Party pose a grave danger to the future of this nation.” Foreign leaders try to be respectful but cannot hide their anxieties. The presidents of the U.S. Chamber of Commerce and the Business Roundtable issue a joint statement warning that Margaret Jones and the Independence Party “will push America into another Great Depression.” And the CEOs of the four remaining giant Wall Street firms warn of economic collapse.
On November 4, the day after Election Day, the Dow Jones Industrial Average drops 50 percent in an unprecedented volume of trading. The dollar plummets 30 percent against a weighted average of other currencies. Wall Street is in a panic. Banks close. Business leaders predict economic calamity. Mainstream pollsters, pundits and political consultants fill the airwaves with expressions of shock and horror. Over and over again, they ask: How could this have happened?
The Political Economy
How indeed. To get some insight, let’s examine what could very well occur in the decade preceding the election of Margaret Jones.
History teaches us that politics is inextricably bound up with economics. Presidents are not nearly as responsible for the economy as voters assume, but they are held accountable nonetheless. Jimmy Carter lost his bid for re-election in 1980 because the economy had been suffering double-digit inflation, mostly brought on by soaring oil prices. In order to “break the back of inflation”, Paul Volcker, then chairman of the Fed, raised interest rates so high that he also broke the back of the economy, pushing unemployment into the stratosphere. That also broke the back of the Administration. Voters blamed Carter and elected Ronald Reagan.
Reagan, by contrast, won re-election handily in 1984 largely because the economy was surging by then and voters credited him. George Bush lost his re-election bid in 1992, this time at the hands of Alan Greenspan. Greenspan raised interest rates to ward off inflation, which also raised unemployment. Voters blamed Bush and gave Bill Clinton a plurality of votes because he promised to fix the economy (in the words of his colorful political adviser, James Carville, “it’s the economy, stupid”). Clinton was re-elected in 1996 mainly because jobs were returning. Barack Obama won in 2008 as the economy teetered precariously on the edge of a precipice. Many blamed the bad economy on George W. Bush, and that blame spilled over to John McCain, the Republican candidate. (It’s not just the economy: George W. Bush defeated Al Gore in 2000 by the narrowest of margins, even though the economy was still in fine shape and Gore had been part of the Administration that was credited for it; and in 2004, Bush won re-election mainly because of the political psychology surrounding the War on Terror. The only thing that can be said with confidence is that jobs and the economy are almost always high on voters’ list of priorities.)
But even accepting the powerful effect of the economy, a backlash on the scale of my hypothetical Margaret Jones scenario would have as much to do with voters’ cumulative frustrations and pent-up anger as with specific economic conditions on Election Day. It is not difficult to foresee a plausible trajectory: After the stimulus ends and the Federal Reserve tightens the money supply and raises interest rates, and after businesses replenish inventories and consumers replace worn-out products, the jobs machine stalls and economic growth slows. Over the slightly longer term, more companies decide their American employees are overpaid relative to equally productive workers elsewhere in the world who work at a fraction of American wages, or to readily available software and automated equipment. Consequently, large numbers of middle-class Americans have to accept lower pay if they want to stay employed.
Poor families with minimal education are especially hard hit. The middle class adapts in various ways. More middle-class young adults choose to live with their parents and delay marriage and children. Most Americans search harder for bargains, buy more private-labeled groceries and generic drugs, settle for lower grades of meat at the supermarket, stay home more, and take fewer vacations. Many give up second cars and consequently depend more on public transportation. A significant number grow their own food, do their own home repairs and mend their own clothes.
This new frugality will not come naturally. According to common stereotypes, the French draw deep satisfaction from good food and wine, the Germans from music, the English from their parks, and Americans from shopping. These facile generalizations are not entirely baseless. Just before the Great Recession, personal consumption in America equaled almost 70 percent of the country’s Gross Domestic Product (more than 75 percent if you included the purchases of homes). By contrast, personal consumption constituted only 65 percent of the British economy, 55 percent of Germany’s, and 52 percent of Japan’s. (Personal consumption did not always constitute 70 percent of the American economy. During the Great Prosperity of 1947–75, it held fairly steady at 62 percent, without noticeable concern. But the economy was different then. Income and wealth were far more equitably shared. And most Americans were on an upward trajectory.)
Yet forced frugality alone is unlikely to ignite a political firestorm. We have had to pull in our belts before. To understand why Margaret Jones and the Independence Party (or their reasonable facsimile) could take control, we need a deeper understanding of the confluence between economics, politics and behavior.
Behavioral research shows that losses are more painful than gains are pleasurable. Most of us put a higher premium on the cost of giving something up than we do on receiving an item in the first place. Princeton psychologist Daniel Kahneman demonstrated this by placing people into two randomly selected groups. Those in the first group were shown a particular type of mug and asked how much they would be willing to pay for it. Those in the second were given the mug and then asked how much money they would want in order to give it back. It turned out that the second group demanded twice as much to part with the mug as those in the first group were willing to pay for it.1
Gains and losses aren’t symmetrical because whatever we possess sets a minimum standard for how we judge our material well-being thereafter. When we lose something of value, we retain the memory of having once had it and regret the loss. If we lose a convenience or benefit that we relied on, even worse: We must also forego our dependence on it. Someone who has enjoyed the benefit of air conditioning and then has to do without because he can’t afford to fix it after it breaks, for example, is likely to feel much worse off than someone who could not afford air conditioning in the first place.
Societies whose living standards drop experience higher levels of stress than do those that never had as much to begin with, and the deeper the drop, the higher the stress. Suicide rates offer some evidence. When even a wealthy economy like the United States dips, the rate of suicides rises; the longer the downturn lasts, the higher the rate becomes. Behavioral economist Christopher Ruhm has found that for every 1 percent rise in a state’s unemployment rate, the number of suicides increases 1.3 percent. If people remain jobless for long, the suicide rate rises further. The stock market crash of 1929 caused an increase in suicides, and the suicide rate rose as the Great Depression wore on. In 1929, there were 15.3 suicides for every 100,000 people; by 1930, 17 per 100,000; by 1932, 18.6.2
An extreme example of the social and psychological stresses accompanying prolonged economic loss occurred in Germany after World War I, when most Germans became far poorer than they were before. The Treaty of Versailles required Germany to pay the Allies substantial sums in reparations for the cost of the war, making it difficult for Germany to rebuild and subjecting it to continued economic distress, including hyperinflation in the 1920s followed by widespread unemployment. By the time Adolf Hitler made his political debut many Germans were eager to turn to anyone who seemed to offer a solution to the problems they had long endured, as well as an easy set of scapegoats.
Perhaps the hardest loss for middle-class Americans will be the expectation that the future will be materially better. We’re used to personal advancement in America, surpassing ourselves, trading up. Middle-class Americans have long assumed that hard work will ensure a better future for themselves, and especially for their children. What will happen to an America where optimism becomes a species of nostalgia?
Social psychologists have long understood that people typically measure their own well-being by comparison to how others are doing. When the incomes of people at the top soar and they live better as a result, everyone else feels relatively poorer. This psychological truth is likely to become more important. While Americans have suffered economic reversals before, and the middle class has suffered relative deprivation, the years ahead are likely to mark the first time Americans will experience both together.
America’s rich did take a hit in the crash of 2008. Yet by 2010 most of the rich had bounced back, and the gap between them and everyone else was widening again. One major reason: Most of the assets of rich Americans are held in stocks, bonds and other financial instruments, whose values rose in the wake of the Great Recession as companies cut costs (especially their U.S. payrolls) and expanded their global operations. By contrast, the major asset of middle-class Americans has been their homes, whose prices took a beating in the downturn and, in most parts of the country, won’t return to their 2007 levels for many years.
In 2009, JP Morgan Chase more than doubled its profits from 2008, generating record revenues and paying out $27 billion to its already well-heeled executives, traders and other “vital” employees. Goldman Sachs posted its largest profit in history and distributed $16.2 billion in bonuses. (Goldman could have distributed bigger bonuses but, concerned about its tarnished public image, held back. According to the New York Times, Goldman’s employees accepted the less-than-expected payout but soon expected to be rewarded for going along with what one characterized as “a temporary public relations exercise.”) The 25 most successful hedge-fund managers each took home $1 billion. One billion. Few financial trends are as certain as the outsized rewards the denizens of Wall Street will continue to claim as their rightful winnings.
The compensation packages awarded to corporate CEOs and executives likewise continued to soar in 2009. Here again, top executive pay was back on the same trajectory it had coasted on before the Great Recession, as if nothing had happened in the intervening time. Executive pay was linked to the profitability and stock market performance of their companies. Both were on the rise, reflecting the increasing ease by which payrolls could be cut and work automated or parceled out overseas, as well as the telling fact that many foreign markets were emerging from recession more rapidly than the United States. This trend will surely endure.
“Wealth”, said H. L. Mencken, “is any income at least $100 more a year than the income of one’s wife’s sister’s husband.” Times have changed and many women are now breadwinners, but a family’s relative position (and not just compared to one’s relatives) still matters. Yet the desire to do better when the incomes of people at the top are rising is not just due to envy or some other character flaw. It is connected to an implicit upward shift in the social norm of what constitutes a good life. Even people whose incomes haven’t actually dropped feel deprived relative to how those at the top now live; people whose incomes have dropped feel even poorer.
Social psychologists have found higher levels of satisfaction among people who live in states where incomes are more equal than where the gap is wider. The same holds among nations. Scandinavians express more contentment with their lot in life than do inhabitants of southern Europe, where inequality is higher. Researchers have found that inequality also correlates with health, for much the same reason. Richard Wilkinson of Nottingham University in England has discovered that once economic growth lifts a country out of extreme poverty, its citizens are likely to live longer and healthier lives—but only if there are not large differences in their incomes. The inhabitants of poorer countries with more equal incomes are healthier on average than are the citizens of richer countries whose incomes are more unequal.3
Even people whose incomes rise feel less satisfied than beforehand when they are exposed to others whose incomes are higher still. After the Berlin Wall tumbled, living standards for the former inhabitants of East Germany soared, but their level of contentment declined. The reason: They began comparing themselves to West Germans rather than to others in the former Soviet bloc.
Few middle-class people aspire to live in a 44,000-square-foot mansion like the one Bill Gates built for himself near Seattle. But by building that mansion Gates set a new norm for other exceedingly wealthy people, some of whom subsequently built mansions just as big. These giant mansions also ratcheted up the aspirations of people below them, who were rich rather than exceedingly wealthy, and who began building larger homes than they had ever lived in before. And so on down the income ladder, until the new norm reached the middle class.
As economist Robert H. Frank has pointed out, something like this chain of comparisons helps explain why the typical new home built in the United States in 2007 (2,500 square feet) was about 50 percent larger than its counterpart built in 1977 (1,780 square feet), even though median incomes barely rose.4 A similar comparative process operated on other purchases. As the exceedingly rich threw million-dollar birthday parties and even more extravagant weddings, a chain of comparison also pushed up the price of middle-class celebrations. The typical American wedding cost $11,213 in 1980; by 2007 it cost $28,082 (both adjusted for inflation).
The middle class couldn’t really afford these homes, weddings and many of the other things it bought, which is why so many people went so deeply into debt. But by 2008 that debt option disappeared—which may help explain why, for example, the typical new home in 2009 slipped back to 2,392 square feet. Yet the chain of comparison has not disappeared.
The very rich may have become somewhat more guarded about displaying their opulence. During the Great Recession, conspicuous consumption became unseemly. “Shopping is a little vulgar right now”, said an editor at Allure magazine. Yet in a world of instant and pervasive communication, the rich cannot easily hide their wealth. Shortly after Lehman Brothers went bust, the Daily Beast reported that Kathleen Fuld, wife of former Lehman Brothers CEO Richard Fuld, selected a plain white bag to conceal her purchase of three $2,225 cashmere scarves at a Hermes boutique in New York. One website, created in 2009, allows the curious to type in the name of any CEO or financial tycoon and zoom in on a bird’s-eye view of their personal estates.
As income and wealth have continued to accumulate at the top, the rich also have been able to buy more highly desirable things whose supply is necessarily limited. Prestigious universities have only a limited number of places, which is one way they maintain their prestige. Because those schools are often gateways to the best jobs, competition for admission is intense. As the rich have grown richer while the middle has lost ground, children from wealthy families have been at an increasing advantage in this regard: They attend high-quality private high schools (or, which amounts to the same thing, top-ranked public high schools accessible only to families wealthy enough to live in the areas they serve), even as the quality of public schools available to most families has declined. Their children have access to pricey private tutors to help them with difficult subjects, to test preparation services that guide them through SATs and other entrance exams, and to coaches to help ready their applications. Some children of the wealthy also gain favorable treatment by admissions officials because their parents are major donors to the college (or likely to become so if their child is admitted).
Increasingly, too, the most accomplished doctors and medical specialists, and the best hospitals and healthcare facilities, have become available only to the very rich. The recent health care legislation will extend care to more people and necessarily limit what doctors and hospitals can charge, as does Medicare. For this reason, the reform is unlikely to dramatically increase the supply of either. One likely result will be to raise the market price of the most desirable physicians and facilities, making them accessible mainly to those who can afford them.
Whether it’s been prestigious schools, excellent medical facilities or even gorgeous ocean-front property, anything that’s desirable but in limited supply has become less accessible to the vast middle class as purchasing power has concentrated at the top. As the income gap continues to widen, deprivations like these are likely to cause many Americans to feel even poorer and, in many cases, more frustrated. In other nations, at other times, wide disparities in income and wealth have led to political instability. Summarizing the research, economists Alberto Alessina and Roberto Perotti have found that “[i]income inequality increases social discontent and fuels social unrest. The latter, by increasing the probability of coups, revolutions, [and] mass violence.”5
This has not been the case in America, at least not so far. Here, opulence has provoked more ambition than hostility. In this respect we are different from older cultures with feudal origins and long histories of class conflict. For most Americans, the rich have not been “them”; instead, they’re people whom we aspire to become. Given the chance, most of the middle class want to join the ranks of the rich and gain all the perks that come with great wealth. We worry only when private wealth exercises political power—in other words, when democracy morphs into plutocracy. It was here that Theodore Roosevelt and Woodrow Wilson drew the line on the trusts, and Franklin D. Roosevelt damned the “economic royalists.” Private wealth applied to ostentatious consumption is perfectly appropriate; applied to the purchase of political power, it becomes diabolic.
The Tilted Playing Field
Thus, the real frustration, and the final straw, will come if most Americans no longer feel they have a chance because the dice are loaded against them.
Something like this is already happening on a national scale. Even before the Great Recession, evidence was accumulating that the game tilted in the direction of big business and the wealthy. In the 1980s, irresponsible bets by some savings and loan banks cost taxpayers $125 billion. One such bank was owned by Charles Keating, who “donated” $300,000 to five U.S. Senators, thereby greasing the skids with Federal regulators. Insider-trading scandals involving junk-bond kings like Ivan Boesky and Michael Milken did their damage. The BCCI money-laundering scandal ruined the reputation of Clark Clifford, adviser to four Presidents. Then came the corporate looting scandals: In 2002, CEOs of giant corporations like Enron and WorldCom were found to have padded their nests at the expense of small investors. Other corporations that cooked their books included Adelphia, Global Crossing, Tyco, Sunbeam and ImClone, to name a few. Every major U.S. accounting firm either owned up to negligence or paid substantial fines without admitting guilt. Nearly every major investment bank played a part in defrauding investors, largely by urging them to buy stocks that the banks’ own analysts privately described as junk.
In the years leading up to the crash of 2008, Goldman Sachs, among others, created bundles of mortgage debt and persuaded investors to buy them, hawking them as good investments. Goldman even lobbied credit ratings agencies to give the mortgage bundles high ratings as solid bets. Yet Goldman simultaneously, but quietly, bet against them—“shorting” them, in the parlance of Wall Street. When the bottom fell out of the mortgage market, Goldman made a huge profit. Through it all, government regulators slept.
The giant bailout of Wall Street was sold to the American people as a way to save Main Street and jobs. But it appeared to do neither. The bankers on Wall Street saved themselves, using the taxpayers’ money to keep their banks sufficiently solvent to do a new round of deals that generated billions of dollars for them. Yet little or nothing trickled down to Main Street. Not surprisingly, in a poll taken by Hart Associates in September 2009, over 60 percent of respondents felt that “large banks” had been helped “a lot” or “a fair amount” by government economic policies but only 13 percent felt that the “average working person” had been.
When Treasury Secretary Henry Paulson and New York Fed chief Tim Geithner considered whether to bail out giant insurer AIG, which owed Goldman Sachs $13 billion, they consulted with Lloyd Blankfein, CEO of Goldman. They did not demand that Goldman (or any of the other parties to whom AIG owed money) accept a single penny less than they were owed—even though, as the Inspector General who oversaw the bailout subsequently noted in a critical report, Goldman would have collected far less had AIG been forced into bankruptcy. In effect, $13 billion went from taxpayers to AIG and then promptly from AIG to Goldman—although for many months Geithner and the Treasury refused to disclose that, and Goldman refused to acknowledge it. The Inspector General concluded that the AIG deal “offered little opportunity for success”, and left taxpayers holding the bag.
When Lloyd Blankfein tried to defend Goldman’s giant $16 billion bonus pool for 2009 by saying the firm had been “doing God’s work”, he was roundly criticized. A week later he issued a formal apology, admitting that Goldman “participated in things that were clearly wrong.” He did not offer to return the $13 billion, however.
After the bailout, there was much talk in Washington about regulating Wall Street to prevent a similar collapse and bailout in the future. But remarkably little has come of it. New rules to constrain the trading of derivatives—bets made on changes in the values of real assets—are riddled with loopholes big enough for bankers to drive their Ferraris through. The new rules do nothing to alter the conflict of interest at the heart of credit rating agencies—paid by the very companies whose issues they rate. Nor did Congress allow distressed homeowners to declare bankruptcy.
Nor was there any enthusiasm in Congress or the White House for using the antitrust laws to break up the biggest banks—a traditional tonic for any capitalist entity “too big to fail.” If it was in the public’s interest to break up giant oil companies and railroads a century ago, and years ago the mammoth telephone company AT&T;, it was not unreasonable to break up the extensive tangles of Citigroup, Bank of America, JP Morgan Chase, Goldman Sachs and Morgan Stanley.
Why didn’t politicians do more? It may have had to do with Wall Street’s money. The Street is where the money is, and money buys campaign commercials on television. It is difficult to hold people accountable for bad behavior while simultaneously asking them for money. In recent years Wall Street firms and their executives have been uniquely generous to both political parties, emerging as one of the largest benefactors of the Democratic Party. Between November 2008 and November 2009, Wall Street firms and executives doled out $42 million to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders. In 2009, the financial industry spent $300 million lobbying members of Congress. During the 2008 elections, Wall Street showered Democratic candidates with well more than $88 million and Republicans with more than $67 million, putting the Street right up there with the insurance industry as one of the nation’s largest equal-opportunity donors.
Had the banks not been rescued from their wildly irresponsible bets, several would have disappeared just as Lehman Brothers did. Yet less than a year later they were back at it, confident they would be bailed out by taxpayers if their new bets went sour. And they were using a portion of their winnings to essentially bribe lawmakers to keep the game going much as it had been before. Who could blame the public for believing the game was fixed?
Modern Washington is far removed from the Gilded Age at the end of the 19th century and start of the 20th when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s culture of political corruption rarely takes the form of outright bribes or campaign contributions expressly linked to particular votes. It is more subtle. As lobbying has become more lucrative, an ever larger portion of former Federal officials have turned to it. In the 1970s, only about 3 percent of retiring members of Congress became Washington lobbyists. But by 2009 more than 30 percent did, largely because the financial incentives had become so large. Starting salaries for well-connected congressional or White House staffers had ballooned to about $500,000. Former chairs of congressional committees and subcommittees commanded $2 million or more to influence legislation in their former committees. When Dick Gephardt ran for President in 1988 he said, “I’m running for President because I’ve had enough of the oil barons, the status-quo apologists, the special-interest lobbyists running amok.” By 2009, the former House Majority Leader was heading up a major Washington lobbying firm that counted among its clients Goldman Sachs, multiple insurance companies and Peabody Energy, the self-proclaimed “world’s largest private-sector coal company.” When Democratic Congressman Elijah Cummings threatened to investigate Goldman, it was Gephardt who ushered Goldman’s president to a Capitol Hill meeting. A longtime advocate of universal health care when he was in Congress, by 2009 Gephardt was chairing the Council for American Medical Innovation, a group sponsored by the pharmaceutical industry.
In order to be enacted, almost all major legislation now requires payoffs to powerful corporations and industries. If he was to have a prayer of passing health care reform, President Obama felt it necessary to guarantee the executives and shareholders of big health insurers and pharmaceutical manufacturers that they’d come out ahead—promising them tens of million of new customers along with generous Federal subsidies—lest these powerful moneyed interests use their clout to kill the legislation, as they did with Bill Clinton’s healthcare reform proposal. Yet this payoff would necessarily mean higher costs for middle-class Americans than otherwise. Similarly, in order to get off first base with legislation to cap greenhouse gases and allow companies to trade permits to pollute within the cap, Congress had to promise generous subsidies for the nuclear industry and big agribusiness’s ethanol, and for the development of so-called “clean” coal. (Wall Street was supportive, one expects, because the Street would collect billions of dollars on the “trade” part of cap-and-trade, and the market for trading permits would include derivatives and be open to speculators.) Here again, the middle class would be left with much of the tab.
Kill the Cow
There is an old Russian story about a suffering peasant whose neighbor is rich and well-connected. In time, the rich neighbor obtains a cow, something the peasant could never afford. The peasant prays to God for help. When God asks the peasant what he wants God to do, the peasant replies, “Kill the cow!”
In Russia, the game was often rigged, and peasant uprisings were directed more often at bringing down the rich than at bringing everyone else up. Unless present trends are reversed, we could find ourselves in a similar position. The Independence Party or its facsimile will kill the cow—and bring with it nationalism, isolationism, intolerance and paranoia.
For years I’ve conducted a simple experiment in my classes. I ask my students to pair up with a classmate, and I then announce I’m going to give one member of the team a simulated $1,000 bill and ask that person to write down on a piece of paper how much of that will be shared with his teammate. The person is then to silently pass the paper over. I make it very clear to both that unless the teammate accepts the offer on the slip of paper, neither of them will receive anything.
Some recipients willingly accept a small amount, as little as $1. After all, they reason, they’re better off than they were before, regardless of how much their teammate has ended up with. But most of my students on the receiving end refuse anything short of $250, and a surprising number refuse any offer less than $500. They would rather end up with nothing than have their teammate “get away with” far more. Are such students being vindictive? Are they allowing feelings of envy and spite to obstruct rational thinking? When I ask them why they’re willing to sacrifice so much, they often say it’s worth it to them in order to prevent an unfair outcome and disrespectful treatment.
It is no great leap from my simple classroom exercise to a national movement. Americans who would slash trade and investment with other nations, for example, might fully understand that this would deny all Americans access to cheaper goods from abroad. Yet they might still support such a move if they believed it would cause people at the top even greater loss. Likewise, they’d support confiscatory taxes on the wealthy, even understanding that such rates will discourage investment and thereby hurt everyone, because such taxes would hurt the rich most of all. They would favor all sorts of policies that slowed the economy and reduced efficiencies if those at the top would lose out to a greater extent than they did. In short, they would opt to kill the cow.
Economic anger could be detected in March 2009 when, after the government bailed out AIG with more than $150 billion, the firm awarded its top executives $165 million in “retention bonuses” and a $440,000 spa retreat at the St. Regis resort. Angry citizens traveled by bus to the estates of AIG executives to tell them exactly what they thought. Others wrote threatening letters and emails. AIG executives were forced to hire private security guards to protect themselves and their families.
It could be detected in voters’ reactions to wealthy and well-connected politicians. This May, Utah’s GOP refused to support the re-election of conservative senator Robert Bennett because of his vote in favor of the Wall Street bailout. In November 2009, New Jersey governor Jon Corzine lost his re-election bid despite spending a substantial fortune on his campaign. Pundits assigned part of the blame to his being a former head of Goldman Sachs. In 2010, Connecticut Senator Chris Dodd did not run for re-election in part due to voters’ disquiet over his history of cozy relations with the financial industry. New York City’s Mayor Michael Bloomberg won a surprisingly narrow re-election in the fall of 2009, despite his creditable record and sizeable campaign spending. Voters, it seemed, were turned off by his vast wealth and his willingness to spend it on the campaign. (Just prior to the election, New York magazine blared, “Michael Bloomberg Is About to Buy Himself a Third Term.”)
It could also be seen in Americans’ sharp turn against international trade. By 2010, the so-called Doha round of multilateral tariff reductions, initiated in 2001, was still on life support. President Obama’s single trade request during his first year of office—duty-free status on exports from Afghanistan and Pakistan in order to boost employment in these countries and thereby counter terrorist groups—was shot down by Congress despite its obvious importance. Pending trade agreements with South Korea and Colombia were put on hold. In a December 2009 poll conducted by the Pew Research Center, only 43 percent of Americans thought trade agreements benefited the U.S. economy.
Economic resentments lay behind the public’s growing suspicions of the Federal Reserve Board and its Chairman. In early 2010, reflecting that backlash, the Senate nearly blocked Ben Bernanke’s confirmation to a second term. Members of Congress from both parties pushed legislation to make the Fed’s actions more transparent to political scrutiny. Bond traders on Wall Street feared the Fed’s independence would be compromised.
The shrillest part of the backlash could be heard in the increasing bitterness and virulence of the nation’s politics. In early February 2010, at the first national convention of the self-described “Tea Party Nation” in Nashville, Tennessee, Tom Tancredo, a former Congressman and presidential candidate from Colorado, brought the crowd to its feet by denouncing the “cult of multiculturalism” and accusing immigrants of threatening America’s Judeo-Christian values. “This is our country”, he declared to wild cheers. “Take it back!” Later that month, at the Conservative Political Action Conference, Governor Tim Pawlenty of Minnesota attacked “the elites” who believe Tea Partiers are “not as sophisticated because a lot of them didn’t go to Ivy League schools” and “don’t hang out at our Chablis-drinking, Brie-eating parties in San Francisco.” After his son Rand Paul was selected for Kentucky’s Senate seat in May 2010, Congressman Ron Paul explained that voters wanted to “get rid of the power people who run the show, the people who think they’re above everybody else.”
Talk radio and yell television emit escalating vitriol. The ire has been directed at a variety of targets: immigrants, African Americans, the poor, foreigners, “East Coast elites” and “intellectuals”, as well as corporate leaders and Wall Street executives. While the Right has railed at big government and the Left has fulminated against big business and Wall Street, there is a widening overlap. “The wizards in Washington and on Wall Street have us figured out”, says Chuck Baldwin, as quoted in the Pocatello Tea Party’s online newsletter. “Along with their compatriots in the propaganda press corps, they know that no matter how loudly we scream, how much we protest, or how angry we become, the system is rigged to protect them.” It was the bailout of Wall Street that really “got this ball rolling”, says Joseph Farah, publisher of WorldNetDaily, a website popular among Tea Party adherents. “That’s where the anger, where the frustration took root.” At the Utah state convention that unseated Robert Bennett, the mob repeatedly shouted “TARP! TARP! TARP!”
Prolonged and severe economic stress could open the door to demagogues who prey on public anxieties in order to gain extraordinary power. A classic sociological study of 35 dictatorships found that when people feel economically threatened and unhinged from their normal habits they look to authority figures who proffer simple remedies and scapegoats. Just before Roosevelt’s inauguration, as the nation fell into the depths of the Great Depression, some influential Americans thought the nation needed a dictator. Even Walter Lippmann advocated a “mild species of dictatorship” that would “help us over the roughest spots in the road ahead.” Some of Roosevelt’s closest advisers warned him that unless he assumed dictatorial power, the country would face revolution.
The revolution never happened; nor did the dictatorship. So far, the American political system has shown a knack for stopping backlashes before they get out of hand. The question is whether reform will come this time on the scale that’s needed. By the time someone like Margaret Jones and something like her Independence Party take control, it will be too late.
2Ruhm, “Are Recessions Good for Your Health?” Quarterly Journal of Economics (May 2000).
3Wilkinson and Kate Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger (Bloomsbury Press, 2009).
4Frank, Falling Behind: How Rising Inequality Harms the Middle Class (University of California Press, 2007).
5Alessina and Perotti, “Income Distribution, Political Instability, and Investment”, NBER Working Paper No. W4486 (October 1993).