Wealth and Politics in the United States

Wealth, Money-Culture, Ethics, and Corruption

Greed, Speculative Bubbles, and Reform

excerpted from the book

Wealth and Democracy

a political history of the American rich

by Kevin Phillips

Broadway Books, 2002, paper

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Theodore Roosevelt

There are only two kinds of rich-the criminal rich and the foolish rich.

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Wealth and politics have a long history of intense interaction in the United States. From the 1780s on, foreign visitors remarked about Americans being money-fixated. John Stuart Mill, the English political economist, suggested in 1860 that in America, "the life of the whole of one sex is devoted to dollar-hunting, and the other to breeding dollar hunters." A generation earlier, Alexis de Tocqueville had observed that, "Whenever the reverence which belonged to what is old has vanished, birth, condition, and profession no longer distinguish men, or scarcely distinguish them, hardly anything but money remains.... Among aristocratic nations, money reaches only to a few points on the vast circle of man's desires; in democracies, it seems to lead all."

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The Twelve Shared Characteristics of the "Capitalist Heyday" Periods-the Gilded Age, the Roaring Twenties, and the Great Bull Market of the 1980s and 1990s

1. Conservative politics and ideology, with mostly Republican presidents but even Democratic presidents in these eras - Grover Cleveland, Bill Clinton-tend to be economically conservative.

2. Skepticism of government-from laissez-faire to program cuts and deregulation-and emphasis on markets and the private sector.

3. Exaltation of business, entrepreneurialism, and the achievements of free enterprise.

4. Replacement of public interest politics by private interest politics, with high levels of corruption.

5. Aspects of survival-of-the-fittest thinking-from social Darwinism to welfare reform and globalization.

6. Labor union weakness and/or membership decline.

7. Major economic and corporate restructuring-repeating merger waves and the rise of trusts, holding companies, leveraged buy-outs, spin-offs et al.

8. Obstruction, reduction or elimination of taxes, especially on corporations, personal incomes, or inheritance.

9. Pursuit of disinflation-supportive of creditors-in response to prior inflation (from the Civil War, World War I, and the Vietnam era).

10. A two-tier economy with stronger prosperity along the coasts and in the Great Lakes area, and greatest weakness in the commodity-producing interior.

11. Concentration of wealth, economic polarization, and rising levels of inequality.

12. Bull markets and rising, increasingly precarious levels of speculation, leverage, and debt.

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with Socialist Eugene Debs, running on a government ownership platform, carving out another 6 percent. This left William Howard Taft, the incumbent conservative Republican, in third place with just 23 percent. Business and finance had cause to be nervous.

Chapter 1 has told much of the story of the rise of the "money issue" in the 1870s, 1880s, and 1890s. The objects of agrarian scorn were eastern finance, Wall Street, and the "money power," more or less in that order. New York and Philadelphia bankers had been targets since the 1790s; Thomas Jefferson labeled financially-attuned Manhattan "Hamiltonople" while Andrew Jackson loathed Chestnut Street, the Philadelphia financial district where Nicholas Biddle and the Second Bank of the United States had their white marble lair. The insurgents of the 1870s, 1880s, and 1890s hurled their epithets against "eastern finance"-"the East has placed its hands on the throat of the West," said Sen. William Allen of Nebraska-until "Wall Street" took over as the preferred opprobrium.

In 1890 the Populist firebrand Mary Ellen Lease, she who had urged Kansans to "raise less corn and more hell," told her audiences that "Wall Street owns the country. It is no longer a government of the people, by the people and for the people, but a government of Wall Street, by Wall Street and for Wall Street." Two years later Populist presidential nominee James B. Weaver deplored how "Wall Street has become the Western extension of Threadneedle and Lombard streets," the London location of the Bank of England. Eastern finance had grown into what would become an enduring symbol.

For the farm states in particular, trying to separate the various strands of late-nineteenth and early-twentieth-century discontent may be pointless for reasons well-summarized by Professor Russel Nye in his classic Midwestern Progressive Politics:

The whole inter-related problem of credit, monopoly, currency and tariff fused into one major issue in the Midwest-the impoverished farmer versus the Eastern "money king." The railroad man, the monopolist, the speculator, the banker, the mortgage holder, the manufacturer, all merged into a single composite creature, the "plutocrat," whom the farmer hated and feared. The "plutocrat" planted no corn or wheat, built no towns, and battened on the labor of those who did; he foreclosed mortgages, raised freight rates, charged high interest, stole public lands and bought legislatures.

The "money power" was an old term used by Jacksonians and then Populists. The more conspiracy-minded among them saw the moneymen as the root of all evil: the dragon whose slaying would remove most other problems. Kansas senator William Peffer, for example, promised that, "With the destruction of the money power, the death knell of gambling in grain and other commodities will be sounded."

Hitherto vague, the term took on new (and more specific) meaning during the Progressive era as shorthand for the interlocking groups of banks, investment firms, and insurance companies through which J. P. Morgan was said to control American finance. A congressional (Pujo Committee) investigation in 1912 laid out the supposed interlock. The Morgan interests at the helm of the system held 341 directorships in 112 corporations (insurance, trading, manufacturing, transportation, and utilities) with a capitalization totaling $22 billion. This single network of interests, foes charged, commanded more than twice the assessed value of all real and personal property in the thirteen southern states and indeed more than the assessed value in all twenty-two states west of the Mississippi.

Curbing the money power was one of Woodrow Wilson's ambitions, albeit naive, in pushing the Federal Reserve Act of 1913. In his "New Freedom" speech of 1912, Wilson worried: "We have been dreading all along the time when the combined power of high finance would be greater than the power of the government. Have we come to a time when the President of the United States or any man who wishes to be President must doff his cap in the presence of this high finance, and say 'You are our inevitable master, but we will see how we can make the best of it'?" However, the Federal Reserve did not turn out to be the counterbalance Wilson had sought.

Franklin D. Roosevelt, after the success of his 1933 speech excoriating "the unscrupulous money-changers" who "stand indicted in the courts of public opinion, rejected by the minds and hearts of men," took up related themes through the 1936 elections. New Deal Democrats had passed the Glass-Steagall Act to separate the ownership of banks and investment firms in order to decouple bank profits and lending patterns from the stock market. The Securities Exchange Act, in turn, prohibited stock market pools, insider trading, and market manipulations while creating a new Securities and Exchange Commission to police the markets. The Federal Reserve Act was amended to give the board power to curb margin loans and confine the purchase of U.S. government securities by the regional Federal Reserve banks to what was needed for their performance of open-market operations.

Roosevelt's sense that he was confronting another incarnation of the

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Elizabeth Drew, The Corruption of American Politics, 1999

The most successful politicians are no longer the best executives or the best legislators, but rather the best fundraisers.

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R D. Tawney, British historian

A society which reverences the attainment of riches as the supreme felicity will naturally be disposed to regard the poor as damned in the next world, if only to justify making their life a hell in this.

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Corruption, like larceny, comes in many forms, some blatant, others more subtle. Booms, speculative heydays, and other periods of money worship bring the highest ratios of both corruptions, the hard and the soft. It stands to reason that bribery, embezzlement, fraud, swindling, and other "hard"-criminal-forms of avarice rise with the heat of soaring stock indexes, market worship, and the glorification of consumption and gain. The 1980s and 1990s saw political and governmental corruption in the United States recapture the laxity of the Gilded Age and Roaring Twenties. In the late twentieth century, however, venality was also endemic among the other Group of Seven industrial nations-Japan, Germany, Italy, France, Canada, and Britain-a moral convergence to match the contagion of market-driven philosophy.

... Charles Kindleberger capsuled the practical and philosophic interrelationships of financial booms and unlawful behavior. A megaboom was bound to breed even more. Many, many books and articles have explored the transgressions, and the Wall Street Journal, in an ethical retrospective on the nineties, acknowledged that "historians are intrigued by the parallels they see between this era's frauds and those from past periods of financial frenzy." From Kindleberger's research, crashes and panics have often "been precipitated by the revelation of some misfeasance, malfeasance or malversation {the corruption of officials} engendered during the mania. It seems clear from the historical record that swindles are a response to the greedy appetite for wealth stimulated by the boom."

Less obtrusive but at least as important has been the corollary corruption of thinking and writing-the distortions of ideas and value systems to favor wealth and the biases of "economic man." In this sense, too, the eighties and nineties echoed the Gilded Age and the 1920s.

Unusual corruption amid periods of boom and speculation goes back to ancient times. However, chroniclers of the interplay between speculative finance and corruption in Britain and the United States usually pick up their tale with the "financial revolution" between 1690 and the 1720 implosion of the South Sea bubble. Rules and stock markets were emerging together. Bribes of call options given to members of Parliament to facilitate an East India Company charter in the 1690s led to the expulsion of the speaker of the House of Commons, the impeachment of the lord president of the Council, and the imprisonment of the governor of the East India Company. When the famous South Sea Company stock bubble burst in 1720, crowds outside Westminster howled for retribution against the stock-owning officeholders-some one hundred lords and three hundred members of the House of Commons had shares-who had cooperated in the laxity that had left the populace "bubbled." Parliament expelled the four MPs who were South Sea directors, and the chancellor of the exchequer was sent to the Tower.

Transgressions were just as grand in the Gilded Age. The Credit Mobilier scandal turned up proof that both the previous and present vice presidents had been given railroad stock to enlist their sympathies. During the Harlem Railroad battles of 1864, members of the New York legislature openly speculated against Vanderbilt's Harlem position, lost, and had to meet their obligations. The old Commodore chortled that, "We busted the whole Legislature, and scores of the honorable members had to go home without paying their bills."

By 1892 the men and women writing the preamble to the Populist platform were seething in recollection: "We have witnessed for more than a quarter of a century the struggles of the two great political parties for power and plunder . . . to secure corruption funds from millionaires."

Of course, the bounds of honesty are always being updated. In 1720 a man could hire a clerk but could not count on his loyalty; the lines between business and theft were imprecise. In the United States the borrowing of bank funds by officials was not definitively ruled illegal until 1799. Insider trading was outlawed in the U.S. in the 1930s, but not until 1980 by Britain and the late 1980s by Japan. In the meantime, new practices, relationships, and gray areas have emerged.

By World War I the face of "corruption" in the United States had been changed by reforms like popular election of U.S. senators, direct primaries, initiatives and referenda, and in some states even voter recall of judges. What muckraker David Graham Phillips had called "The shame of the Senate" was washed away. But criminal activity resurged in war contracts and the loose climate of the twenties; witness the Teapot Dome scandal, the corruption that came with Prohibition and bootleg liquor, and the post-1929 convictions of dozens of financiers. Still, the many New Deal securities and banking reforms enacted between 1933 and 1935 point out just how many abuses had been legal and common practice up to and even through the Crash.

One legacy of the New Deal was to infuse American politics and policymaking with egalitarian and anticorporate biases, which many business leaders and conservatives found offensive. But beginning in the 1970s, as politics turned conservative again, a group of conservative multimillionaires and foundations underwrote an ever-growing network of policy journals, university chairs, and think tanks. Originally funded in a small way to counter the prevailing liberal bias, by the 1980s they had become influential in constraining government and scripting new directions for tax legislation, monetary policy, business regulation, and even judicial decision-making.

The result by 2000 was a Washington in which liberals found themselves muttering about "corruption" that was largely legal behavior- decision-making lubricated by so-called "soft money" political contributions, and resulting in flagrant tax favoritisms, bank bailouts, gutted regulations, and see-no-evil administration of the federal election laws. Little of it was morally defended. In 1996, when the federal government, after little debate, gifted some $70 billion worth of public spectrum-band to the telecommunications industry, even several conservative U.S. senators decried its resemblance to the freewheeling gifts of public lands to the railroads a century earlier.

Indeed, through both "hard" corruption-the straightforward, indictable kind-and the "soft" variety, in which bribes wore veils and laws and regulations were bent to dubious purposes, the domination of politics by wealth and corporations circa 2000 bore some resemblance to the captivity of the Senate by business a century earlier. Running for president on the Green Party ticket, Ralph Nader, in the last few days of the campaign, echoed the latter attacks of the Greenbackers and Populists. "The two parties," he declared, "have morphed together into one corporate party with two heads wearing different make-up."

Richard N. Goodwin, former speechwriter for John F. Kennedy, had several years earlier offered a Wilsonian reprise: "The principal power in Washington is no longer the government or the people it represents. It is the Money Power. Under the deceptive cloak of campaign contributions, access and influence, votes and amendments are bought and sold. Money establishes priorities of action, holds down federal revenues, revises federal legislation, shifts income from the middle class to the very rich. Money restrains the enforcement of laws written to protect the country from abuses of wealth-laws that mandate environmental protection, antitrust laws, laws to protect the consumer against fraud, laws that safeguard the securities markets, and many more." But so long as the economy and stock market remained strong, much of the electorate did not seem to care.

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Lord Acton's famous saying about power corrupting and absolute power corrupting absolutely ...

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What made the Gilded Age was not the individual scandals of the Reagan, Bush, or Clinton years... The new crux was the vast, relentless takeover of U.S. politics and policymaking by large donors to federal campaigns and propaganda organs. The S&L scandals showed the corruption in both parties, and junk-bond king Michael Milken claimed in a boast to the Washington Post that "the force in this country for buying high-yield securities has overpowered all federal regulation." Indeed, the eighties saw the financial sector take the lead in Washington lobbying outlays and in dollars provided to federal election campaigns. Both cemented a fast-returning relationship: politics was finance, and finance was politics, just as the men with diamond stickpins had said a century earlier.

Statistics help to tell the tale. From relative peanuts in the early eighties, the money contributed to federal politics by the finance, insurance and real estate (FIRE) sector rose almost as fast as the money channeled to finance by federal bail-outs and permissive regulation. According to the Center for Responsive Politics, the totals contributed rose from $109 million in the 1992 cycle to $162 million in the 1996 cycle and a walloping $297 million in the 2000 cycle, by which point the FIRE sector was collectively the largest giver. Of the total, the sector was particularly prominent in contributions from individuals-$148 million that cycle-and in soft money ($108 million), the quietest agent of influence. The congressional tax-writing committees were a particular target, and during the 2000 cycle (which for senators stretched from 1995-2000), the House and Senate committee members received $45.7 million from individuals in all sectors, not just FIRE.

The FIRE sector is also regularly the biggest spender on lobbying of corruption of the 1980s and 1990s rank with the all business sectors. It laid out more than $200 million-again based on Center calculations-in 1998, the year when industry executives and lobbyists led by Citigroup co-CEO Sanford Weill succeeded in convincing Congress to effectively revoke the New Deal era Glass-Steagall Act which among other things separated banks and insurance companies.

While a full portrait of the late-twentieth-century money-culture excesses and their carryover may await 2015 or 2020, one can see a basic resemblance to the four-decade period between 1870 and 1913. In its first stage, corruption took ten to fifteen years to become clear. Then, over the next fifteen, money became all-powerful while reform dawdled. The fourth decade, in each case coinciding with the iconoclasm of a new century, saw popular resentment of money politics and demand for remedies begin to gain the upper hand.

We have seen how the late eighties and nineties were the period of money's late twentieth-century rise to dominate U.S. politics, paralleling the simultaneous ascent of market philosophy and the boom in the financial markets. Besides the likeness to the Gilded Age, there was also a resemblance to the 1920s. Conservative theorists have ignored these overlaps, rarely criticizing money in politics because of their predilection for the example of markets-by definition places where things are bought-and their hope to recast politics in a market mode. The third-party candidacy of Ross Perot in 1992, which attacked corruption and two-party domination in American politics, provided a brief revitalization as money lost centrality and voter turnout jumped to 55 percent from 50 percent in 1988. However, money was back in 1994, fueling the Republican capture of Congress, and then again in 1996 when both major parties' fundraising set records, which were then shattered in the nineties. Chart 8.1 shows the enormous sums coming into what some donors did indeed hope was becoming a marketplace.

To convey some idea of the growth of campaign finance since, say, the late seventies-and with it the pressure on legislators to be able to enlist donors-Common Cause presented the relevant statistics to a 1994 Congressional hearing. In 1976, winning Senate incumbents laid out an average of $610,000 on their races. By 1986, the figure had grown to $3 million. By 2000, the average figure for all Senate incumbents was $4.4 million, while the average winner in all races raised $7.3 million.

As the fundraising chase mounted, critics of the political process focused more and more on the determinative role of money in election outcomes. Reports by the Center for Responsive Politics and Citizen Action contended that in the 1996 congressional races, the candidates who raised the most money won 92 percent of the time in the House and 88 percent of the time in the Senate. In the sixty House districts identified before the election as toss-ups, Republicans had an average of 42 percent more money to spend. By 1999, pundits began describing the initial fundraising of presidential candidates a decisive "wealth primary," pointing out

the close correlation between the frontrunners' share of their party's early cash-60 percent for Republican George Bush and 64 percent for Democrat Albert Gore-and their support in the polls. Over the first six months of 1999 the $103 million taken in by all presidential candidates was three times the amount for the comparable period four years earlier.

Television helped create the nexus, being a medium of marketing and entertainment-and an expensive one. As television advertising took over elections, so did communications markets and audience sampling. In 1999 and 2000, the Republican and Democratic parties followed the market message to its logical conclusion: raising ever-larger contributions in soft dollars-ostensibly limited to use for party-building activities - from donors that were overwhelmingly corporate.

The reaction by the Republican and Democratic contenders taking the reform side was angry. Former New Jersey senator Bill Bradley, the Democrat, insisted that "democracy doesn't have to be a commodity that is bought and sold." On the day front-runner George W. Bush announced having raised $37 million, enough so that he could forgo federal matching funds and avoid spending limitations, the reform-minded Republican, Senator John McCain, denounced the campaign finance system as "an elaborate influence-peddling scheme by which both parties conspire to stay in office by selling the country to the highest bidder."

McCain also denounced the House Republicans' big tax bill glutted with provisions favorable to banking and securities firms, oil and gas operators, and insurance and utility companies, thought by some to be the quid pro quo for the many millions in party donations. Charging that it broke the GOP promise to deal with "corporate welfare," the Arizona senator said, "Now we're going to see this big thick tax code on our desks, ) and the fine print will reveal another cornucopia for the special interests and a chamber of horrors for the taxpayers."

The Democrats, for their part, had pioneered in 1996 on another dimension, raising funds abroad, of which many came from international favor-seekers-apparently including intelligence services of nations like China. President Clinton was embarrassed, and some commentators believed that the preelection White House fundraising scandal in 1996 helped influence voters to keep the Republicans in control of Congress.

As with Mark Twain's writings during the Gilded Age, satire could be devastating. During the 2000 campaign, a group called billionairesforbushorgore.com, joining in the market analogy, posted the following on their website:

While you may be familiar with stocks and bonds, currency speculation, IPOs and all the rest, there's a new investment arena you should be aware of: legislation. If a mutual fund returns 20% a year, that's considered quite good, but in the low-risk, high-return world of legislation, a 20% return is positively lousy. There's no reason why your investment dollar can't return 100,000% or more.

Too good to be true? Don't worry, it's completely legal. With the help of a professional legislation broker (called a Lobbyist), you place your investment (called a Campaign Contribution) with a carefully selected list of legislation manufacturers (called Members of Congress). These manufacturers then go to work, crafting industry-specific subsidies, inserting tax breaks into the code, extending patents or giving away public property for free.

Just check out these results. The Timber Industry spent $8 million in campaign contributions to preserve the logging road subsidy, worth $458 million-the return on their investment was 5,725%. Glaxo Wellcome invested $1.2 million in campaign contributions to get a 19-month patent extension on Zantac worth $1 billion-their net return: 83,333%. The Tobacco Industry spent $30 million in contributions for a tax break worth $50 billion-the return on their investment: 167,000%. For a paltry $5 million in campaign contributions, the Broadcasting Industry was able to secure free digital TV licenses, a give-away of public property worth $70 billion-that's an incredible 1,400,000% return on their investment.

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The second imprint left by the money culture during eras of unleashed capital and speculation has been cultural and intellectual: the marshaling of thinkers, writers, publications, and academies on behalf of wealth, markets, and corporations. Certain themes keep coming back like homing pigeons.

Human nature itself goes through stages of self-interpretation. Conservative eras rediscover the greed and marketplace, polish the image of freebooters like Jay Gould and after awhile think nothing of drowning politics in money. Liberals rediscover social justice, polish the image of Robin Hood and after awhile, think nothing of drowning policymaking in sociology. But for the millennial context, the open Pandora's Box is "conservative." There is also a relevant literature going back some six centuries that explains how yesteryear's private sins and vices-individual compulsions to self-interest, avarice, luxury, and pride-can and do reemerge from time to time as commercial and civic virtue, indeed props of unusual national success.

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Especially in the 1890s, millionaires like Andrew Carnegie, John D. Rockefeller, Chauncey Depew, and James J. Hill proudly identified themselves as Darwinian selectees. Clawing self-interest had made them the lions of the economic veldt, the commercial chosen ones. Successful over three decades, social Darwinism probably represents the longest-lasting philosophic shield ever held up by American wealth accumulators.

By the end of the century, however, contrary interpretations were catching hold. Thorstein Veblen in his famous Theory of the Leisure Class (1899) mocked the idea that the avaricious capitalists were any sort of "fittest." Indeed, the self-interested "pecuniary" man, with his chicanery, luxury, and conspicious consumption, far from turning these private traits into a public virtue, played a predatory and morally delinquent role. Oliver Wendell Holmes likewise turned the tables in a Massachusetts state court opinion, trapping social Darwinism in its own Pleistocene jungle by upholding a strike by organized labor as "a lawful instrument in the universal struggle of life."

By the 1 920s the trinity of Darwinism, conspicuous consumption, and economic self-interest were ready for another boom-era revival. "The business of America is business," proclaimed President Calvin Coolidge. Government regulation was curbed and in some circumstances gutted. A few years earlier even the pundit Walter Lippmann had linked democracy to "the right to purchase consumer goods at low prices." Bruce Barton, later a Republican congressman, published a book portraying Jesus Christ as the world's first great salesman. Sinclair Lewis, the iconoclastic novelist, wryly observed that "the Romantic Hero was no longer the knight, the wandering poet, the cowpuncher, the aviator, nor the brave young district attorney, but the great sales manager, who had an Analysis of Merchandizing Problems on his glass-topped desk, whose title of nobility was 'Go-getter....' "

Expansions of merchandising and consumption-the ties to self-indulgence jump out-also tend to correlate with the great economic upheavals, partly because the successful want to put their achievement on display, but also because expansive "can't help ourselves" popular consumption surges can be huge wealth generators. The point is that great economic events and their supporting philosophic justifications cross-fertilize each other. The economic thrust may come first, but supporting ideology, with its deification of self-interest, greed, and consumption, gives boom and bull market circumstances greater momentum and longevity.

After the egalitarian milieus of the New Deal, the Eisenhower years and even the early sixties, self-interest, greed, and consumption made a major comeback during the Reagan years. The new president said that, "More than anything else, I want to see the United States remain a country where someone can get rich," His treasury secretary, Donald Regan, J acknowledged their hope of recapturing the 1920s, saying, "We're not going back to high-button shoes and celluloid collars. But the President does want to go back to many of the financial methods and economic incentives that brought about the prosperity of the Coolidge period."

Adam Smith ties appeared all over Washington. New magazines wooed economic ambition with titles like Inc., Venture, Millionaire, Entrepreneur, and Success. Hostile takeovers, leveraged buyouts, and junk bonds became the jousting lances. Risk arbitrageur Ivan Boesky, one of their paladins, told cheering business school audiences that, "Anyone who thinks greed is a bad thing, I want to tell you that it's not a bad thing. And I think that in our system, everybody should be a little bit greedy."

Fashion industry historians add their insight that the Reagan years outconsumed the twenties. Through a series of opulent New York parties centered on the Metropolitan Museum of Art and several department stores, Nancy and Ronald Reagan, advised by former Vogue and Harper's Bazaar editor Diana Vreeland, appeared to be favoring a new "aristocracy." Instead of producers, they saluted packagers and promoters: movie stars, Hollywood glitterati, department store chief executives, dress designers, media moguls, and fashion purveyors. Vreeland herself had said, "Everything is power and money and how to use them both.... We ? mustn't be afraid of snobbism and luxury."

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Milton Friedman had been an adviser to Barry Goldwater and then Richard Nixon before "monetarism" got its name from a sympathetic academician in 1968. Those on the Right liked the downgrading of government in his theory that the money supply itself was the key to both GNP growth and inflation management. Governmental interference in the economy, Friedman advised, was almost always counterproductive. He also excused both the stock market crash and speculators from blame for the Great Depression; that he assigned to the Federal Reserve.

Vice-into-civic-virtue theology had a new set of rostrums. To Friedman, greed was the basis of society. The challenge of social organization, he said, was to "set up an arrangement under which greed will do the least harm: capitalism is that kind of system." Speculators, seeking personal profit, played a useful role. He dismissed the idea of a res pablica-a public interest apart from individual and group self-interests. One could almost see the ghosts of Mandeville, Spencer, and Sumner snapping off salutes.

The larger "Chicago school," pushed to the forefront by the failures of sociology and liberal "fine-tuning" economics in the 1960s and early 1970s, emphasized a free-market core theology that broadly dismissed the role of governments. A few enthusiasts proved embarrassing with their claims that markets and economics also explained behavior from racial discrimination to divorce, suicide, and drug addiction. One such was Chicago law professor-turned-federal appeals court judge Richard Posner's suggestion of a market for babies to make it easier for couples to adopt. But the school's basic message was unimpaired.

The pervasiveness of self-interest also led economist Arthur Laffer and journalist Jude Wanniski in 1973-74 to place tax cut theology alongside market freedom in the pantheon of the new politics. Republican economist Herbert Stein labeled their work "supply-side fiscalism" because it called for fiscal (tax) policy to strengthen the supply (investment) side rather than the demand (Keynesian) side of the national economy. This the two shortened to "supply side." They also acknowledged borrowing from French economist Jean Baptiste Say (1767-1832), whose dicta was that "supply creates its own demand." Soon a third supply-side architect, George Gilder, took the idea of supply creating its own demand back to the potlatch ceremonies of the Kwakiutl Indians of the Pacific Northwest.

Potlatches or no, here was a rationale for two important capitalist impulses-the desire to overinvest and overproduce (without running afoul of slumping demand) and to stimulate expansion through tax breaks for (rich) producers rather than (relatively poor) consumers. The drawback, unfortunately, involved the chastening memories of U.S. overproduction after the Napoleonic Wars, again in the 1880s and 1890s, and then, most conspicuously, in the 1920s. Overinvestment was also recurrent. However, even if the real world had periodically discredited Say's Law, supply-side enthusiasm helped enact the Reagan administration tax cuts of 1981; businessmen were happy to applaud if not altogether believe.

Wanniski's work was funded by a grant from one of the small but influential group of conservative foundations. Many more grants followed to others. By the late 1970s the funder group included the John M. Olin, Sarah Scaife, Harry and Lynde Bradley, and Smith Richardson foundations. Through the seventies and eighties their decisions helped support and fortify American enterprise along a broad front of intellectual engagement.

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Selfishness as civic virtue, however, also renewed its consumptionist drumbeat. Researchers at the Dallas Federal Reserve Bank proffered the thesis that household circumstances were best measured by what the householders consumed, not the mere "proxy" of earnings or income. Consumption, as glorified from the Renaissance and the English regency to the fascination of president and Mrs. Reagan with Oscar de la Renta, Bill Blass, Ralph Lauren, Yves St. Laurent, and Bloomingdales has been an economic mainstay and cultural fascination of heyday capitalism.

The economic utility of promoting consumption is that during heydays the public typically pursues the most popular new innovations and products-automobiles, radios, and movies in the twenties, athletic shoes, video games, and cellular phones toward the millennium-at the expense of such humdrum needs like indoor plumbing, education, and medical care. Consumer spending booms are also profits booms. Besides, using consumption as a gauge works to overstate popular well-being, all the more so because its measurements ignore assets and leave out debt burdens, which climbed most during periods like the 1920s, 1960s, and the 1980s and 1990s precisely for those least able to afford them.

By an even more expansive view, consumption had become part of the new edifice of democracy-as-market. By driving a car, buying a movie ticket, or watching a television commercial, U.S. consumers participated every day in the democracy of the marketplace, or so suggested the editorial pages of the Wall Street Journal. What was widely purchased was, ipso facto, democratically approved. Buying and selling, indeed, was a large part of what democracy was about.

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Social Darwinism, in turn, made a further comeback through the insistence by many political officeholders, financiers, and leaders of multinational corporations that the onrush of globalization was inevitable ... This time, the jungle in which the fittest, both individual and corporate, would survive was to be worldwide. "There is no alternative," said British prime minister Margaret Thatcher. In the 1880s and 1890s social legislation had been dismissed as the unwisdom of government meddling with evolutionary inevitability. A century later a similar cloak of unstoppability was thrown over the globalization of labor markets and management of trade markets by corporate-dominated institutions like the World Trade Organization.

A century earlier, reform legislation had finally gathered momentum as social Darwinism was displaced by early-twentieth-century Progressivism; pre-1914 globaiization itself was badly wounded in the trenches along the Somme and Marne, dying in the twenties and thirties with free trade and Liberal England. Past "globalizations," as we have seen, were not inevitable, but elite-driven and often related to the heyday of a particular world power.

The 1990s brought a new wave of neo-Darwinian self-assuredness. In 1999 billionaire Philip Hampson Knight of Nike posed for Forbes' annual photograph alongside his corporate reflecting pool, sneakered feet extended, with a snarl on his lips against critics who charged him with making his shoes and his profits through low-wage labor in Asian sweatshops. "That isn't an issue that should even be on the political agenda today," said Knight. "It's just a sound bite of globalization." But some of this confidence withered when the new century began with mass rallies against the annual meeting of the World Trade Organization.

In the mid-1980s, the historian Arthur Schlesinger Jr. dismissed the Reagan-era package of conservative economic issues-attacks on regulation, glorification of the unfettered market, and embrace of supply-side (or "trickle-down") tax policy-as being less new ideas than "the boilerplate of every private interest era." Perhaps, but by 2000 the conservative restatement of old-market theology, antiregulatory shibboleths, God-wants-you-to-be-rich theology, and Darwinism had built up the greatest momentum since the days of Herbert Spencer and William Graham Sumner.

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Party watersheds have involved opposition to financial, mercantile, or speculative elites, often (but not always) crystallized by public reaction to an economic downturn that had begun under a conservative regime. In the middle of conservative or Republican cycles, however, amid boom circumstances, the Democrats tend to lose their bearings and become almost as collaborative with heyday capitalism as the dominant GOP. Examples include the Gilded Age twin conservative administrations of Grover Cleveland, the pro-business economics of congressional Democrats during the 1920s, the policies of the Carter administration of 1977-81, and the money-culture bias of the eight Clinton years with their bond market and Wall Street orientation. The "corruption" here is that the system loses an essential counterbalance.

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The Democratic presidencies during the post-1968 Republican era continued to fit the pattern. Georgian Jimmy Carter, elected in 1976 in the wake of Watergate, was moderately conservative in his economics, kept on close terms with home state bankers and corporate chiefs (CocaCola and Lockheed), undertook financial deregulation before Reagan, and appointed Paul Volcker, a moderate with conservative leanings, as chairman of the Federal Reserve Board. Liberal historian Schlesinger, after citing Carter's conservative views-"Government cannot solve our problems. It can't set our goals...." charged him with "an eccentric effort to carry the Democratic Party back to Grover Cleveland."

In a number of ways Bill Clinton continued where Carter left off. However, the nineties had also intensified a larger transformation within the Democratic Party. Its internal economic balance of power had shifted appreciably. This change occurred between the 1950s, when the Democrats started showing gains among college graduates and urban and suburban professionals, and the 1 990s, when the onetime party of Jefferson and Jackson emerged as the clear choice of many of the new Internet and telecommunications rich headed to the top of the Forbes 400.

Much more was involved than the Democrats' familiar practice of conforming to financial booms. The increased party support visible among urban professionals after the late 1950s might have been no more than a new round of Mugwumps and Progressives. What made the transformation deeper and different was the rise of the knowledge sector ... the soaring numbers of Americans employed in education, communications, research, and professions from law to psychiatry. In the midst of the liberal political failure of the late 1960s and early 1970s, Democratic responsiveness to this sector was at first a political minus. However, with the demographics looking far more auspicious, Will Marshall, president of the "New Democrat" Progressive Policy Institute, could argue in 1997 that, "Just as industrial workers formed the backbone of the New Deal coalition, the party needs to attract the knowledge workers emerging as the dominant force in the information economy," the "wired workers" who use computers.

The elites of the knowledge sector were more important, however, both as big-dollar contributors and powerful opinion molders. David Friedman, a fellow at the New America Foundation, argued in the Los Angeles Times that a "cleansing of working-class concerns from America's once progressive politics" reflected the emergence of a "new, fabulously privileged elite-including Web-site and computer gurus, actors, directors, media magnates and financial power brokers" who exercised "unparalleled influence" over mainstream liberalism. As chapter 6 has discussed, they were not simply a cultural elite but an important economic elite frequently at loggerheads with the ordinary, nonprofessional workforces of their industries.

Thomas Ferguson, an expert on political fundraising, identified telecommunications as the industry that stood out in its 1996 support for Bill Clinton. This commitment, he explained, congealed around influencing what became the high-stakes Telecommunications Act of 1996: "For years, Hollywood, network and cable television, book publishers, news concerns, radio stations, computer and software makers and phone companies had all been making vast sums of money as individual entities. By 1993, however, changes in technology and regulatory practice were bringing these industries together at an explosive pace, and almost everyone wanted legal rights to get into everyone else's business."

Besides these ties to a specific, hugely wealthy economic sector, the need of Democratic candidates for large-scale campaign funding had its own profound influence. "Unfortunately, we've been cowed into the position of not sticking up for working people," one Democratic strategist told the Philadelphia Inquirer in 1995, "because we've been looking increasingly to wealthy interests in order to fund our campaigns. You end up spending time with wealthy people who say 'Let's not make this a class thing.'" That many, if not most, Democratic-connected lawyers, consultants, and lobbyists in Washington also worked on behalf of corporations, trade associations, and the wealthy bolstered the reorientation.

The larger pressure, however, arose from the underlying partial transformation of the Democrats into the party of a wealthy cultural and technological elite ...

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Federal publication in 1966 of the first Social Indicators was followed in 1967 by Minnesota senator Walter Mondale's proposal for a Council of Social Advisers to be on a par with the Council of Economic Advisers. Both projects soon drowned in the public's disillusionment with experiments like the War against Poverty, school busing, and rent subsidies as well as the underlying skepticism of Republican presidents. The Nixon administration turned the next (1974) volume of Social Indicators into a neutral chartbook. In 1981 the Reagan administration discontinued publication altogether. Republican policy intellectuals committed to a market emphasis generally distrusted social yardsticks, which had sometimes been abused.

The serious revival of interest in social indicators in the late 1980s and early 1990s reflected concern over the Reagan era's rising inequality and seemingly shrinking social safety net. The Index of Social Health was begun in 1987 by the Fordham (University) Institute for Innovation in Social Policy under director Marc Miringoff. Of its sixteen criteria, half were economic, ranging from wages, unemployment, and health coverage to child poverty. The others were noneconomic, including infant mortality, high school dropout rates, violent crime, and teenage drug use. From a peak of 76.9 in 1973, the index fell to 40 in 1986 and 38 in 1993, rising slightly to 43 in 1996 and 46 in 1999 ...

A second index, quite different in its mechanics, was the Genuine Progress Indicator, begun in 1994 by San Francisco-based Redefining Progress. In many ways this was an alternative gross domestic product calculus in which unproductive activities counted in official-defined "growth"-the cost of commuting, environmental burdens, growth that made incomes more unequal, foreign borrowing, family outlays made to cope with ill-health and so on-were reentered as minuses. On the other side of the ledger, activities not hitherto counted in the official gross product-housework, for example were added in as pluses.

Surprisingly, the trend, at least, of the Genuine Progress Indicator almost paralleled the Index of Social Health. Both rose with the upwardmoving gross domestic product through the early seventies. Then as per capita GDP kept rising, the indicator, like the index, flattened and turned down. Interestingly, the same 1970s downturn occurred in two other less recognized chartings: the Index of Leading Cultural Indicators drawn up by former education secretary William Bennett, and the Index of Sustainable Economic Welfare, an environmentally centered measurement conducted by University of Maryland economist Herman Daly. Obviously, some things were going wrong.

The various samplers agreed less on the whys and wherefores than over the decline. Fordham's Miringoff suggested the loss of well-paying bluecollar jobs might be to blame. However, both the timing of the divergence from mid-to-late seventies and the particular weaknesses demonstrated in Fordham's international social benchmarks by the more individualistic, capitalist English-speaking nations suggested an additional influence: the de-emphasis in the U.S. and Britain of social and environmental criteria and the effects of a triumphant conservatism loosely committed to markets, globalization, Darwinism, and distrust of non-economic criteria.

Indeed, as we have seen, the notion of an ebb barely hides in a half-dozen economic indices. Besides manufacturing, current account deficit, wage and household debt numbers, the Department of Labor admits that if part-timers wanting more work and those wanting jobs but lacking necessary transportation or child care were included, the unemployment level of 2000 would have been twice the official 5.5 million total, or some twelve million. The failure to count as unemployed older men who dropped out of the workforce in large numbers during the last quarter of the twentieth century also kept the jobless numbers down.

According to critics, definitions of poverty in the United States have served as much to hide the problem as to profile it. The Census Bureau, doubting the adequacy of the established-and relatively reassuring- poverty definition, recommended raising the household threshold to $19,500 a year, which would have left 46 million Americans short in 2000.

Miringoff, in his 1999 volume The Social Health of the Nation, also included revealing late-1990s individual rankings of the Western industrial nations for over two-thirds of his sixteen yardsticks. What these show is that in inequality measurements, the English-speaking nations, with their greater emphasis on markets and individualism, invariably led. In the percentage of poverty among those over sixty-five, the U.S., Australia, and Britain were the top three. For child poverty, the U.S., Britain, Australia, Canada, and Ireland were the five nations where it was highest. In the percentage of those finishing high school, the U.S. ranked lowest; and in overall inequality, the (negative) ranks were as follows: U.S. (1), Ireland (2), Australia (4), Britain (6), and Canada (8).

In rankings for other facets of the perils of the unfittest, the highest rates of youth homicide came in the U.S., Northern Ireland, New Zealand, Canada, Israel, Switzerland, and Australia. With respect to wage levels, such was the relative downward pressure since the seventies in the English-speaking countries that six-the U.S., Canada, Australia, Britain, Ireland, and New Zealand-were in the bottom eleven. The top eleven nations were all Continental European. It is hard not to conclude that the other English-speaking nations, sharing many of the benefits of U.S. financial and technological prowess, also share some of the accompanying inegalitarian economic and social trendlines.

Parenthetically, university and public health researchers in Britain and the United States also began to report during the 1990s that health and life expectancy were better in states, metropolitan areas, and other jurisdictions with greater community-mindedness and more egalitarian income distributions. One survey, done in 1998 by two researchers at Harvard's School of Public Health, found that among 282 metropolitan areas, mortality rates were more closely linked to relative than absolute income, with rising inequality meaning higher mortality. Their thesis: that erosion of trust or "social capital" may explain inequality's influence on health.

The United States of the millennium, caught up in the glories of markets and globalization, was scarcely more open to these debates than the Britain of 1900.

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Charles Kindleberger, 1994

... Hitler overstretched; Napoleon overstretched. In fact, in The Theory of Moral Sentiments, Adam Smith said that most of the world's troubles come from somebody not knowing when to stop and be content.

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The top 1 percent pocketed 42 percent of the stock market gains between 1989 and 1997, while the top 10 percent of the population took 86 percent.

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In 1995, although statistics showed 40 percent of Americans owning stock directly or through pension funds, mutual funds, or 401(k) plans, over half had only a minor involvement, often worth less than their cars. One study by M.I.T. economist James Poterba showed that 71 percent of families individually owned no shares or held less than $2,000 worth.

Economist Wolff calculated that between 1989 and 1997 the average stockholdings of the middle quintile, adjusted for inflation, doubled from $4,000 to $8,000, but their net worth declined because of taking on debt. Estimates for 1998 and 1999 saw the dollar value of shareholdings climb higher among the 50th to 90th percentiles, but these were soon reduced by the 2000-2001 bear market.

... As the mania crested, household discretionary portfolios regained and then surpassed their 1960s commitment to equities and equity mutual funds-at which point, the bubble popped.

Comparisons with the 1950s and 1960s are difficult because the earlier stock ownership data did not include those who owned stocks through pensions funds, retirement funds, or mutual funds. In his 1962 book Wealth and Power in America, Gabriel Kolko argued that even when the total number of shareholders increased, that made little difference to the concentration at the top, in which 1 to 2 percent of them owned 40 to 60 percent of the privately held stock. The 12.5 million shareowners of 1959, he said, actually represented a considerably smaller ratio of the total U.S. population than the 9 to 11 million shareholders of 1930. Sour memories lingered.

Wealth and Democracy

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