That system came under increasing stress in the 1970s as the global economy began to impinge on those comfortable postwar arrangements, as European and Japanese companies challenged our industrial supremacy with high-quality and efficiently produced exports, and as the oil shocks of 1973 and 1979 caused energy prices to soar. By early 1980, unemployment was running at 7.5 percent, inflation at 14 percent, and interest rates at 21 percent—marking a decade of slow growth and inflation.
Liberals have often criticized Ronald Reagan’s policies of low marginal tax rates, deregulation of business, and free trade as an ideologically motivated attack on key features of the New Deal. It would be more accurate, though, to view those policies as adaptations to a changing global economy and as remedies for a severe and prolonged economic crisis. Some such measures would have had to be adopted sooner or later to break the cycle of inflation and unemployment. Those adjustments in policy have been ratified not only by two decades of robust growth but also by the tacit endorsement of leading Democrats. After all, despite much weeping and wailing, prominent Democrats gradually accommodated themselves to the new framework, much as President Eisenhower adapted his administration to the New Deal reforms. President Clinton, after being elected to reverse the Reagan-era policies, instead signed the North American Free Trade Agreement, kept marginal tax rates low, did little to promote unionization, and signed a welfare reform bill that dismantled a main feature of FDR’s Social Security Act of 1935. As a consequence of these steps, Clinton left office with a strong economic record.
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The desire to overturn the market revolution that began in the 1980s and replace it with an updated version of the New Deal was thus the ultimate snare for Democrats when the Obama administration began. High marginal and corporate tax rates, managed trade and protectionism, the undoing of NAFTA and other trade agreements, private sector unionization, new health-care mandates on business, subsidies for politically favored industries, increases in public sector employment—all of which have been enacted or proposed in one form or another during the Obama presidency—are a recipe for an extended period of slow growth and stagnation. The recovery from the recession of 2008 has thus been the most anemic of all postwar recoveries, with annual growth rates rarely exceeding 2 percent. President Obama’s decision to embrace a “government agenda” rather than a “growth agenda” is largely responsible for this unfortunate outcome, which is discrediting Democrats once again as ham-fisted on the great question of economic growth. While this approach has been much to the advantage of Republicans, it has done immeasurable harm to the country, which may take decades to repair.
A wiser though less exciting course would have been to accept the inherited framework of policy with its emphasis on growth rather than redistribution, while finding other avenues by which to address Democratic priorities. More than six years into the Obama presidency, it is now far too late to reverse course. The Obama years are destined to be recalled as a time of wasted opportunity and stagnation for the American economy. One hopes that things will not get worse over his final two years in office, though that possibility cannot be discounted. If the president and his supporters wanted to find inspiration in the New Deal, they could have done worse than to look to FDR’s successful efforts to modernize the financial system as a foundation for economic recovery. FDR understood, even if many of his aides and advisers did not, that if a party in power cannot deliver economic growth, there is little else that it can hope to accomplish.
A version of this chapter appeared in The Weekly Standard, January 19, 2009.
American Capitalism and the ‘Inequality Crisis’
Just as the Great Depression launched an expansion of government powers and programs, and the financial crisis of 2008 led to calls for another New Deal, liberals and progressives over the past five decades have announced a variety of other “crises” as reasons to raise taxes, adopt expensive government programs, impose new regulations on business, or, perhaps, to increase their own influence. In the 1960s they gave us the “poverty crisis” and the “urban crisis,” followed in the 1970s and 1980s by the “environmental crisis,” the “energy crisis,” and the “homeless crisis.” More recently we have had the “health-care crisis” and a civilization-threatening “global warming crisis,” now rebaptized as a “climate crisis.” Some progressives have found it useful to turn multifaceted problems into crises in order to stampede the voters into supporting policies they might otherwise (quite sensibly) reject.
Today, the issue of the hour is the “inequality crisis,” another complex subject that is being seized upon in some quarters as an opportunity to raise taxes, attack “the rich,” and discredit policies that gave us three decades of prosperity, booming real estate and stock markets, and an expanding global economy. In recent years, journalists and academics have been turning out books and manifestos bearing such titles as The New Gilded Age; The Killing Fields of Inequality; The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It; and The Price of Inequality: How Today’s Divided Society Endangers Our Future—to list just a few of the many dozens on the subject. The common message of these books is not subtle: “the rich” have manipulated the political system to lay claim to wealth they have not earned and do not deserve, and they have done so at the expense of everyone else.
In the past, those who wrote about inequality focused on poverty and the challenge of elevating the poor into the working and middle classes. No more. Today they are preoccupied with “the rich” and with schemes to redistribute their wealth downward through the population, as if it were possible to raise the living standards of the bottom “99 percent” by raising taxes on the top “1 percent.” Many of the new egalitarians—professors at Ivy League universities, well-paid journalists, or heirs to family wealth—are themselves materially comfortable by any reasonable standard. Their complaints about “the rich” or “the 1 percent” call to mind Samuel Johnson’s barbed comment about the reformers of his day: “Sir,” he said, “your levelers wish to level down as far as themselves; but they cannot bear leveling up to themselves.” Judging by recent polls, the wider public has not bought into this new crisis. In essence, members of the top 2 or 3 percent of the income distribution are waging class warfare against the top 1 percent while everyone else looks on from a distance, apparently feeling that the new class struggle has little to do with their own circumstances.
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The controversy over inequality gained more fuel in 2014 with the publication of Thomas Piketty’s Capital in the Twenty-First Century,a a dense and data-filled work of economic history that makes the case against inequality far more extensively and exhaustively than any that has appeared heretofore. The book quickly climbed to the top of the bestseller lists and remained there for several weeks. All the attention quickly turned Piketty, a scholarly-looking professor at the Paris School of Economics, into something of a literary celebrity and made his treatise a rallying point for those favoring income redistribution and higher taxes on “the rich.”
The New York Times called Piketty “the newest version of a now-familiar specimen: the overnight intellectual sensation whose stardom reflects the fashions and feelings of the moment.” Paul Krugman, in a review essay in the New York Review of Books, called the book “magnificent” and wrote that “it will change both the way we think about society and the way we do economics.” Martin Wolf of the Financial Times described it as “extraordinarily important,” while a reviewer for the Economist suggested that Piketty’s book is likely to change the way we understand the past two centuries of economic history. The Nation called it “the most important study of inequality in over fifty years.” Not since the 1950s and 1960s when John Kenneth Galbraith published The Affluent Society and The New Industrial State has an economist written a book that has garnered so much public attention and critical praise.
Liberals and progressives have