The New Deal, Progressive Taxation & the Greatest Sustained Economic Boom in U.S. History

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Tue Nov-13-07 07:07 PM
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The New Deal, Progressive Taxation & the Greatest Sustained Economic Boom in U.S. History

Business and financial monopoly� class antagonism� war profiteering We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me � and I welcome their hatred. � Franklin Delano Roosevelt, on the eve of the 1936 presidential election

While George W. Bush has doled out trillions of dollars in tax cuts for the wealthy and hundreds of billions for a catastrophic war, our national debt has skyrocketed, social programs have become starved for funds, the income gap has widened to Gilded Age proportions, and tens of millions of Americans have suffered the consequences.

Yet, when politicians dare to suggest reinstating pre-Bush taxes on the wealthy to pay for much needed social programs such as health care, they are countered with dire predictions of financial collapse and accusations of �class warfare�.

There is indeed a kind of class warfare going on in our country, manifested as a reaction of wealthy right wing ideologues against any infringements on their prerogatives. Its history can be briefly summarized as follows:

1) Prior to the presidency of Franklin Delano Roosevelt great income disparity existed in our country, with the top 1% of individuals accounting for 17% of annual income and the top 10% accounting for 44% of annual income. (And that�s not even counting income from capital gains, which create even greater income inequality.)

2) FDR, after ascending to the presidency in 1932, initiated a wide range of policies � collectively referred to as the New Deal � which had the effect of substantially reversing income inequality for the first time in U.S. history. These policies included: Progressive taxation; labor protection laws; and several policies to provide a social safety net for Americans and otherwise reduce income inequality, including the Social Security Act of 1935, the GI Bill of Rights, and the development of several policies to facilitate job creation.

3) FDR�s New Deal was so successful that it lasted for several decades, despite tremendous opposition from the right wing elites whose wealth and power had been reduced. Then, beginning in the 1980s, right wing conservatives began to have success in dismantling the New Deal, such that today we have income inequality in our country that equals that seen in the pre-New Deal days.

Since today�s right wing ideologues warn of dire financial consequences from any attempt to approximate the conditions created by FDR�s programs, it is worth taking a close look at the effects of those programs as they played out over the several decades after they were initiated in the early 1930s:

Progressive taxation

A high top marginal tax rate is one of the mechanisms that FDR used to reduce income inequality, by making the wealthy pay their fair share of taxes(*). One good indication of progressive taxation is the �top marginal tax rate�, which is the highest tax rate paid on income above a certain level. You can see from this graph that, except for a brief high top marginal tax rate during and shortly after World War I, the only long lasting high top marginal tax rate in U.S. history began with FDR�s presidency. It then continued at high levels, 70% or more, for several decades after FDR�s death, until it declined precipitously at the start of the Reagan presidency in 1981. It continued to decline during the Reagan and Bush I years, then rose moderately during Bill Clinton�s presidency, before substantially declining again under Bush II.

* -- Some refer to high top marginal tax rates as �income redistribution�. I think that it is more appropriate to consider it as making the wealthy pay their fair share of taxes. The wealthy don�t accumulate their money in a vacuum. Rather, they benefit immensely, more than most other Americans, from government programs and infrastructure (e.g., corporate charters, roads, airports, airwaves, electricity, fire and police protection, the courts, etc.) that allow them to accumulate and maintain their wealth.

Labor Unions

Labor unions are a great means for reducing income inequality because they empower ordinary workers with the means of negotiating fair wages and benefits in relation to their more wealthy and powerful employers. They also tend to increase the political awareness of their members, thereby facilitating greater citizen participation in the electoral process. Furthermore, they not only raise wages and benefits for their members, but do the same for non-members as well, since they provide all employers with incentives for offering fair wages, lest their members be tempted to join unions.

Table 1 in this article shows that prior to FDR�s presidency the highest percentage of nonagricultural U.S. workers who were members of labor unions was about 10%. That percent rose precipitously during FDR�s presidency and remained at close to 30% for several decades thereafter. However, with the anti-labor policies of the Reagan administration, the percent of workers in unions declined precipitously. And today only 13% of American workers belong to labor unions � one of the lowest if not the lowest rates of union membership among the industrialized nations of the world.

Income equality following FDR�s New Deal

The United States achieved unprecedented levels of income equality beginning with FDR�s New Deal and continuing for several decades thereafter. Economist Paul Krugman, in his new book, �The Conscience of a Liberal�, discusses this issue:

Where the America of the twenties had been a land of extremes, of vast wealth for a few but hard times for many, America in the fifties was all of a piece. �Even in the smallest towns and most isolated areas,� the Time report began, �the U.S. is wearing a very prosperous, middle-class suit of clothes� People are not growing wealthy, but more of them than ever before are getting along.� And where the America of the twenties had been a land of political polarization, of sharp divides between the dominant right and embattled left, America in the fifties was a place of political compromise� Unions had become staid establishment institutions. Farmers cheerfully told the man from Time that if farm subsidies were socialism, then they were socialists.

The entrenchment of the New Deal in the United States over several decades

As noted in all the above accounts, the New Deal didn�t just fade away after FDR�s death. Instead, due to its stunning success, most of its components lasted for decades. Even the Republican Party gave up on trying to fight it. In 1952, Dwight Eisenhower became the first Republican elected to the U.S. presidency in 24 years. A large part of his appeal was that he demonstrated no inclination whatsoever to overturn the New Deal. This is what he wrote to his brother on the subject:

Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are�. a few Texas oil millionaires� Their number is negligible and they are stupid.

The long term economic effects of the New Deal

As I noted at the beginning of this post, today�s right wing conservatives warn of dire consequences to our economy that would result from any attempt to increase taxes on the wealthy, even to the relatively moderate levels that existed just prior to the Bush II presidency. From these warnings you would think that the very high rates of taxation on the wealthy, starting with FDR�s presidency and lasting for half a century, would have resulted in catastrophic economic consequences, notwithstanding the reductions in income inequality.

This chart shows median family income levels, beginning in 1947, when accurate statistics on this issue first became available. With the top marginal tax rate approaching 90% at this time, median family income rose steadily (in 2005 dollars) from $22,499 in 1947 to more than double that, $47,173 in 1980. Then, for the next 25 years, except for some moderate growth during the Clinton years, there was almost no growth in median income at all, which rose only to $56,194 by 2005 (85% of that growth accounted for during the Clinton years). However one wants to interpret those numbers, nobody could possibly conclude that they indicate overall bad financial consequences accruing from high tax rates on the wealthy. To the contrary, as Krugman notes, this period coincides with �the greatest sustained economic boom in U.S. history�.

It is also of interest to consider the effects on our national debt, which has currently reached unprecedented levels, and which really does portend a financial crisis in our country. This graph, which shows change in our national debt by year, says it all:

Note the two huge mountains of increasing national debt in this picture. One began with the Reagan administration and went on for the 12 years of Reagan and Bush I presidencies. Then following 8 years of precipitous decrease in the rate of debt accumulation, the onset of the Bush II presidency was marked by another, even more precipitous increase in debt accumulation than was the Reagan presidency. In other words, where we have seen huge tax reductions for the wealthy we have concurrently seen huge increases in our national debt, with no compensatory increase in median income.

Our current status

Today, 46 million Americans are without health insurance, which results in thousands of premature deaths every year, including thousands of infants; approximately 7 million Americans who want jobs are unemployed; 12% of American households lack adequate food; approximately 3 million Americans are homeless in any given year; and 37 million Americans are in poverty, while the poverty rate continues to rise under George W. Bush�s administration.

Despite all this, and despite the fact that income inequality has risen back to pre- New Deal levels, most Americans are better off today than they were prior to the Great Depression of 1929. Krugman explains why:

Though the inequality of income (prior to the Great Depression) was no greater than it is now, the inequality of living conditions was much greater, because there were none of the social programs that now create a safety net, however imperfect, for the less fortunate. All the same, the family resemblance between then and now is both striking and disturbing.

The social programs that Krugman refers to, of course, were those created by FDR and extended by some of his successors, especially including Truman, Kennedy and Johnson. But those are precisely the social programs that George W. Bush and his fellow right wing ideologues would desperately love to completely dismantle.

These ideologues would like to dismantle all government programs that have been created for the well being and protection of American citizens � to let all fend for themselves, so long as they have the money to do so. Naomi Klein, writing in The Nation, recently explained how this kind of philosophy promises to work out even with regard to such government services as Americans have long taken for granted. Referring to the recent California wildfire tragedy, and the private fire fighting services purchased by some wealthy Californians, she writes:

�There were a few instances,� one of the private firefighters told Bloomberg News, �where we were spraying and the neighbor�s house went up like a candle.� With public fire departments cut to the bone, gone are the days of rapid response, when everyone was entitled to equal protection. Now, increasingly intense natural disasters will be met with the new model�

The �new model� of course means continuing to dismantle New Deal programs and any program which serves the great majority of Americans. This has been the goal of the right wing ideologues ever since their idyllic world was interrupted by FDR and his New Deal. When the wealthy right wing ideologues have so many hundreds of times more wealth than everyone else they see no reason for government programs that benefit other people. Such programs require taxes, and those taxes reduce their own wealth and power. As far as they�re concerned, the ideal state of affairs is for them to have so much money that every government program other than the military can be safely eliminated.

Lessons for today�s liberal/progressive politicians

Between 2002 and 2006, right wing ideologues in our country and the Republican Party that represented them controlled the presidency, both houses of Congress, most of the federal judiciary, our national news media, and a great proportion of the wealth in our country. Yet, to distract from this eye opening truth they continually referred to liberals who would dare to question their policies as �the liberal elite�.

These are the same types of people who aggressively fought FDR in his attempts to reduce poverty and create a sizable middle class in our country. FDR was not at all timid about confronting them and explaining the situation to the American people, as he did when he accepted his second nomination for President:

Throughout the Nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

An old English judge once said: "Necessitous men are not free men." Liberty requires opportunity to make a living � a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor � other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of Government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it. Under that mandate it is being ended.

Today�s liberals should not be hesitant to meet this issue head on. The myth that policies that reduce income inequality hamper financial growth is easily disprovable, as New Deal policies clearly resulted in just the opposite of that for several consecutive decades. The idea that policies that reduce income inequality are somehow �unfair� to the wealthy are equally absurd. All Americans should have the opportunity to work, and all Americans who work should be able to earn a decent living through their work. That�s what the American Declaration of Independence says. If wealthy right wing ideologues don�t like that idea, they can go somewhere else. FDR wasn�t afraid to tell it like it is, and he didn�t exactly have to pay a political price for his courage. Today�s politicians could do a great deal of good for our country and for themselves by striving to emulate him.