Catastrophe (9 page)

The 25 percent of Americans who pay 86 percent of the income taxes (to say nothing of the 1 percent who pay 40 percent) will be like New York City’s benighted landlords. Outvoted by their tenants, they’re forced by state law to conduct their business under draconian rent controls, which so limit their incomes that many just walk away from their properties. Likewise, taxpayers could become a hostage class, subject to the political impulses and inclinations of those who don’t share their tax burden.

No politician will come to their aid, since their collective voting strength isn’t sufficient to win any election—not to mention the fact that any politician suspected of coddling the rich at the expense of the bulk of the voters who pay no taxes, and the sizable minority who reap benefits through “refundable” tax credits would be slated for extinction.

In the meantime, the majority continue to receive refundable tax checks in even larger amounts. It is their job to eat the tax money, not to generate it.

Of course, there’s a political fallacy in Obama’s worldview. The richest taxpayers may be impotent politically due to their small numbers, but they’re not impotent economically. The top 20 percent of earners account for 46 percent of all consumer spending.
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They’re the ones who
spend
money. If Obama declares war on them, as he appears to be doing, he cannot recover economically without them. It’s to them that he must look to make sure the American people start doing everything they’re not doing right now: buying stock, paying taxes, consuming goods and services. Without their participation, the economy has no hope of recovery.

Obama cannot succeed by waging war on the rich. It didn’t work when FDR tried it, and it cannot work now.

OBAMA: FOLLOWING THE LESSONS OF FDR’S SECOND TERM

As he prepared to become president in the days between his election and the inauguration, Obama and his aides made it known that he was focusing, with special attention, on two figures from our history: Abraham Lincoln and FDR. With luck, he learned important lessons from Lincoln, who has so many to teach.

But he appears to have learned some more dangerous lessons from the story of how Franklin D. Roosevelt handled the economy during his second term—the years from 1937 until 1941, when the depression seemed to drag on with no end in sight.

To understand Obama’s political strategy—so that we can defeat it—we need to learn how FDR faced a crisis very similar to that which engulfs us now. Unfortunately, Obama’s tactics suggest much of the same emphasis on class warfare and special interests that characterized Roosevelt’s second term.

FDR deserves his heroic reputation as an American icon. He brought us Social Security, the minimum wage, securities regulation, and widespread unionization and, of course, saved us in World War II.

But the most important brick in the wall of respect that has been erected to him was that he cured the Depression. In reality, he did no such thing.

When Roosevelt first took office in March 1933, the nation’s banking structure was in a state of collapse and chaos. Most banks either had failed or were teetering on the brink. Long lines formed outside many banks, as anxious people clamored to reclaim their life savings.

FDR handled the situation brilliantly, closing all the banks and then gradually reopening them—one by one—assuring the public that he had determined that they were sound. In his inaugural address of 1933, he denounced “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
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The effect was electrifying. The crowds no longer beseiged the banks, and the system was restored.

In his first hundred days in office, FDR bombarded Congress with proposals to catalyze recovery. For the farms, he proposed to limit production to raise prices. For business, he sought to stop deflation and increase wages.
For the unemployed, he created the Civilian Conservation Corps, to put them to work in rural areas protecting our national resources. Elsewhere, he spent prodigiously on public works to offer short-term employment.

Ironically, in view of his subsequent lurch to the left, Roosevelt’s first hundred days were a model of conservatism. Raymond Moley, the FDR aide who founded the “Brain Trust” that advised Roosevelt and remained its most important member during Roosevelt’s first term, wrote in 1939 that “it cannot be emphasized too strongly that the policies which vanquished the bank crisis were thoroughly conservative…. Those who conceived and executed them were intent upon rallying confidence first, of the conservative business and banking leaders of the country and, then, through them, of the public generally.”
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Even when the hundred days were over, Roosevelt maintained a brisk pace of national legislation to end the Depression and (as the Democratic Party theme song put it) make America a place where “Happy Days Are Here Again.”

But FDR had only limited success with his bold, innovative programs. When he took office, unemployment stood at a shocking 23 percent. But by the end of his first term, it remained stubbornly high at 13 percent. There were still 10 million people for whom Roosevelt couldn’t create jobs.

Roosevelt had put Keynesian economics to the test—and reached the limits of what it could do.

There is actually substantial evidence that FDR’s policies extended and deepened the depression. Amity Shlaes, a senior fellow at the Council on Foreign Relations and a syndicated columnist for Bloomberg, writes in her excellent, must-read book
The Forgotten Man
that “both Hoover and Roosevelt misstepped in a number of ways.”
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She writes that Roosevelt “created regulatory, aid, and relief agencies based on the premise that recovery could be achieved only through a large military-style effort.”
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But, she notes, Roosevelt’s interventions created massive uncertainty and left potential investors wondering what would happen next. The National Recovery Administration (NRA), the centerpiece of his program, tried to raise wages and promote unionization. Its bureaucrats “frightened away capital…and discouraged employers from hiring workers.”
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“Another problem,” Shlaes continues, “was that laws like that which cre
ated the NRA…were so broad that no one knew how they would be interpreted. The resulting hesitation in itself arrested growth.”
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So how did FDR get elected four times? Shlaes ascribes his political success to the fact that he “systematized interest-group politics…to include many constituencies—labor, senior citizens, farmers, union workers. The president made groups where only individual citizens or isolated cranks had stood before, ministered to those groups, and was rewarded with their votes.”
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Unable to restore prosperity, FDR switched strategies as his 1936 reelection campaign approached. Rather than hinge his case to the nation on his record in eradicating the depression, he focused instead on class warfare, attacking the “economic royalists” who had led us into the depression. “I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match,” he declared. “I would like to have it said of my second administration that in it these forces met their master.”
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By channeling the nation’s anger about the economic mismanagement and greed that had caused the depression, FDR was able to distract voters from the grim fact that the depression had not been cured by his four years of Keynesian policies.

Instead of economic recovery, he focused on building his support among three key constituency groups: labor, farmers, and the elderly. Piecing together an electoral coalition from these special interests, he managed to assure himself of a solid and ongoing majority.

The elderly were given Social Security, which offered—for the first time—the assurance of pensions in old age. The farmers were given the Agricultural Adjustment Act, which set limits on production and paid them to keep down crop yields, first stabilizing and then inflating agricultural prices. Unions were given the Wagner Act, which made it easy to form a labor organization, guaranteed the right to strike, and established a procedure of secret ballot in representation elections.

Barack Obama knows his history well. If his economic stimulus plan fails—and the economy continues to tank—he can fall back on class divisions to get reelected.

By continuously hammering on sensationalist topics such as extravagant executive compensation, bonuses for employees of bailed-out compa
nies, and the disproportionate earnings of the rich, he hopes to keep alive the spirit of anger and division—and keep his job.

But Obama misjudges the meaning of class in the United States. In Europe, where the heritage of Marxism is stronger, class divisions are seen as more permanent. Upward mobility has been lacking—historically thwarted in earlier times by class structure and prejudices and, these days, by the lack of economic growth.

In Europe, class lines have become rigid over the centuries; each class has developed a narrative to glorify its place in the social order. Americans see class divisions aspirationally, looking forward to the day when they can move up. Denied the easy prospect of upward mobility, the European worker is likely to feel envy and resentment, not ambition, toward the gentry.

Can Obama cash in on class resentments in the United States that mirror European politics? Is the American Dream dead?

The answer is a decisive NO! The dream is far from dead. Upward mobility in the United States continues, as it has historically.

Obama and liberals like to cite data showing that the top 20 percent of earners in the United States are making more, while the bottom 20 percent are making proportionately less. But the fact is that the makeup of that bottom 20 percent is changing constantly, as new immigrants, both legal and illegal, come in and find their footing on the lowest rung on the economic ladder. Meanwhile, those who were once in the bottom 20 percent continue their steady upward climb.

One recent study by the Congressional Joint Economic Committee analyzed those who were in the bottom 20 percent in 1979. By 1988, it found, “more of them had reached the top income quintile (14.7 percent) than had remained at the bottom (14.2 percent).”
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“In other words,” the committee concluded, “a member of the bottom income bracket in 1979 would have a better chance of moving to the top income bracket by 1988 than [of] remaining in the bottom bracket.”
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And 86 percent of those who were among the bottom 20 percent in income in 1979 rose out of this category in the ensuing nine years.

More typical of the traditional attitude of Americans toward class is the philosophy of John F. Kennedy, whose economic program was aimed at encouraging growth through tax cuts. “A rising tide,” he said, “lifts all boats.”
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This theory of shared outcomes has often been derided by liberals as “trickle-down economics”—as a theory that hopes the success of the rich will flow down to everyone else. The liberals have a point: In the past two decades, the income gains of the top 1 percent have not flowed down to the rest of the country very well. Every quintile in America experienced a growth in income in the past decade (after inflation), but the growth of the bottom four quintiles was minor compared to that at the top.

But if trickle-down doesn’t always work, irrigation does. The real key is to adopt policies that encourage the downward flow of wealth, as Bill Clinton did. The Earned Income Tax Credit, welfare reform, day care, college scholarships, and the like do exactly that.

And while the bottom 20 percent, taken as a whole, have had only small increases in their collective income, the congressional study makes it clear that there is a new bottom twenty percent each year as the formerly poor move up and new immigrants come in at the bottom. This churning, not a stagnant class structure, is typical of America.

But Obama’s approach is not to trickle down or irrigate, and certainly not to let a rising tide lift all boats. His policy is to undermine the wealthiest Americans by saddling them with heavy taxes, limiting their deductions, and undertaking a campaign of national vilification to subject them to universal obloquy. This approach won’t help the economy—and in the process it could sabotage both our economic growth and his own political career.

HOW OBAMA IS MAKING THINGS WORSE

Each week, President Obama seems to come up with another idea of how to transform the American economic system. He seems to be in a desperate hurry to churn out these proposals while he still controls Congress and before the continuing economic recession undermines his popularity.

Yet each time he makes a new proposal he changes the ground rules of the American economic system, introducing a new element of uncertainty into business decisions. It was exactly this kind of inconsistency and unpredictability that caused the Roosevelt recession of 1937–1939. Back then, businessmen didn’t know what the rules would be the next month, much less the next year. As a result, they prudently refrained from spending and investing, stymieing economic growth and recovery.

The same thing is happening now. In March 2009 alone, Obama proposed a major shift in the regulation of nonbank institutions such as hedge funds, brokerage houses, and insurance companies. He and Timothy Geithner, his Treasury secretary, spoke of the importance of regulating companies that are “too big to fail”—whose collapse would cause general economic mayhem. They implied that the federal government should be allowed to decide, on a case-by-case basis, which institutions fall into this category and be able to change the categorization whenever they feel the circumstances warrant.

How can a business operate when it doesn’t know whether it’s about to come under the government’s regulatory control? Will Obama’s bill pass? And if it does, what will it provide? A sound business procedure would be to make no long-term commitments to economic projects until these regulatory issues are resolved. The result would be paralysis at just the moment when we need these very businesses to take risks and move ahead—especially in the purchase of the so-called toxic assets held by our banking system.