Liberalism works

And why it beats plutocracy

As a supplement to my pages on what went wrong in the 20th century, and why libertarianism is bad, I thought I’d write about the economic system that works the best for the most people: liberalism.

I also have a page on the morality of liberalism. But this page will focus on practical measures.

Much of our political quagmire comes because politics takes the place once occupied by religion: people make creeds, seek converts, demonize the enemy, start wars, out of the fervency of their beliefs. And you may need that faithlike devotion if you want to fight totalitarians or end segregation. But it’s not appropriate for the basic questions of how to run a democracy. What systems actually work to measurably improve the lives of most people? We can only find out by seeing how they work in the world.

‒Mark Rosenfelder, September 2012

What’s liberalism?

For European readers, American liberalism is close to (but mostly to the right of) social democracy. (It’s not the so-called Washington Consensus of Reagan and Thatcher, which is called libéralisme in France at least.) It’s capitalism regulated by government, plus a substantial safety net.

Now, obviously there were Republican presidents in the liberal period‒ Eisenhower, Nixon, and Ford. But they were restrained by a Democratic Congress, and largely governed as liberals anyway. (Nixon created the EPA, expanded affirmative action, and raised social spending from 28% to 40% of the budget‒ raising it for the first time above defense spending .) And there have been Democratic presidents in the Reagan era‒ Clinton and Obama. But with the single exception of health care, they were mostly occupied with cleaning up the mess left by Republican presidents, and they were greatly restrained by Republicans in Congress; they did little to undo the rightward shift in politics. So it’s fair to compare the fifty years starting with Roosevelt to the thirty years starting with Reagan.

Studying broad periods also evens out the business cycle and the small-scale events that dominate the daily newspaper. Particular events can dominate a single presidency (e.g. you can hardly discuss Jimmy Carter without focusing on the fourfold rise in the price of oil), but looking at decades-long periods is a fair test of a political-economic system.

The basic case: Prosperity for all

(The economic definition of productivity is useful precisely because of its broadness and simplicity. It covers technological progress, capital investment, access to new resources or markets, organizational changes, even social changes like decreased corruption or a movement of women into the workplace. For the purposes of examining social progress, the importance of the number is that if it ain’t rising, we’re doing it wrong. There’s no iron law that makes wages go up over time. The basic mistake made by the USSR is that merely redistributing income at best makes for a stagnant and fairly poor society. Wages will keep rising only if productivity is rising.)

Before getting into the big bend in the income line, let me emphasize that productivity has risen at about the same rate over our entire period. I’d love to report that liberalism increases productivity, but I can’t. But more imporantly, liberalism doesn’t decrease productivity. That means that various conservative charges‒ that economic progress is stifled by high tax rates, or by unions, or by large government, or by “regulation”, or by health insurance‒ just aren’t true.

Now, let’s look at that dividing line, at 1980.

• Under liberalism, gains in productivity benefit the whole country, measured here as the income of the median family.
• Under Reaganism, the median income stagnates, and gains in productivity go to the rich.

Who’s winning? The 1%

This is even more striking when we look directly at incomes for different quintiles:
 

The Occupy Wall Street movement hasn’t taken the world by storm, but it’s given us a useful social category to think about: the 1%. These people are doing very well indeed: their share of national income was 8% in 1979, and more than doubled to 17% by 2007.

We need to be very clear on what this “income share” business means. It doesn’t just mean that they made twice as much money. Productivity is rising, so the total wealth of the country is rising; under liberalism, if productivity has gone up 50% since 1980, which is what the first graph tells us, then their incomes would go up 50% too. But they did much better than that: their incomes went up 300%.

And that’s just looking at the 1%, not the even smaller percentage that’s doing even better. In the 1960-85 period, CEOs made about 50 times the salary of the average worker. In the ’90s they made 500 times the average worker’s salary‒ that is, their relative incomes went up 1000%. (The recession clawed it down to 350 times.)
 

By the way, the picture looks the same even if we look at total compensation (that is, including nonwage benefits) rather than wages:

The 10% and everyone else

Here’s a closer look at the income story, from this neat interactive chart. First, under liberalism:
 

Now, under plutocracy:
 

The 10% and the 1%

It doesn’t take a stratospheric income to make the 10%‒ as of 2010, it took about $114,000 a year. People at that level don’t think of themselves as rich; they think of themselves as middle class. (I certainly did when my income was close to that level.)

And a key fact about our system is that this tier is doing all right; in fact, since 1980 it’s pretty much received its fair share of productivity gains. The top 10% is also, of course, little affected by 8% unemployment. This is undoubtedly the key factor in our political inertia. Because they’re doing all right, the top 10%‒ which includes the leadership of both parties‒ doesn’t see any great problem.

Why do the 90% stand for this? We’ll get back to this question below, but for now I’ll note that probably most people don’t realize what’s happening. The country doesn’t look all that different; there’s still social spending and politicians gravely talk about the problems of ordinary people. That is, there’s a pretense that the liberal society is still in effect. The quiet change to plutocracy is rarely discussed, and if it is it’s presented as an intractable problem that probably requires punishing ordinary people, not as something that was solved for a fifty-year period.

The middle class country

In the liberal period, poverty declined from 30% of the population to under 10%. Thus the idea that the US was a middle class country, one where the average person was doing well. This was almost unprecedented in history! The middle class had always been a minority.

Under plutocracy, efforts to reduce poverty ended. And now poverty is rising again; it’s up to 15%.

The depression and the stimulus that ended it

Laissez-faire can produce big booms, and it did so in the ’20s. Then it blew up, spectacularly. The stock market crashed, then the economy. And then, for four years, pretty much nothing happened: the Very Serious People of the time thought that the economy needed to be “liquidated”, so they just let it spiral into misery. Unemployment reached 25%; the banking system entirely disintegrated.

FDR started pumping money into the economy, and things got better. In 1937 he made the mistake of listening to the Very Serious People and cut back spending; the economy went into a recession and much of the progress made was lost. (This wasn’t mature liberalism‒ FDR was improvising much of the time, and not everything he did actually helped.)

See also my reviews of Frederick Lewis Allen’s Only Yesterday and William Leuchtenberg’s Franklin D. Roosevelt and the New Deal.

As everyone knows, World War II came along and the economy soared.
 

Some folks seem to think that WWII doesn’t count, somehow, because it was a war. It sure was, but spending is spending. Of course, it gave great political cover; it was the perfect excuse to increase government spending 800%. Plus, as a bonus, we defeated the Nazis! On the other hand, we might have needed far less spending if we weren’t essentially throwing most of that money away. Buying useful things, like roads and universities and health care and solar energy and spaceships, should be better stimulus than fighting wars.

Does that mean that government spending is always good? Of course not. It’s good in a depression, and that includes the crisis the Bush administration gave us in 2008. Keynes told us to cut back spending in good times, and ramp it up in bad times. But that gets us into the next subject: debt.

But debt!

No. Conservatives like to focus on total debt (when Democrats are in power) because it’s scarier; but we’re constantly increasing our wealth. The economy is twelve times the size it was in 1929; we can afford more debt. The important measure is debt as a percentage of GDP. (That’s the equivalent of comparing your mortgage to your current income.) Here it is (from Wikipedia):
 

Second thing to notice: by contrast, plutocracy is spendthrift. Reagan, Bush I, and Bush II exploded the debt. Between them, they erased thirty years of progress. Clinton undid some of the damage‒ again, liberals believe in actually governing responsibly, so it was the right thing to do and he did it. Obama inherited the worst crisis since Hoover’s; most of the debt increase since he took office is due to automatic extensions of the safety net, plus stimulus tax cuts‒ and it’s been more than offset by misguided cuts in state government spending. Right-wingers fantasize that Obama has greatly expanded government, but it’s a myth.

So what happened?

What was the actual mechanism? Obviously it wasn’t just electing Ronnie. Several things went together:

• A push to lower income taxes. This is of key importance, partly because high taxes do discourage high executive salaries and thus leave more for the rest of us, and partly because it’s all-important to the GOP, so we’ll get back to it below.

• A rebellion against high property taxes‒ principally because middle class people didn’t want to help finance schools for poor people.

• The decline of unions, which had operated as a restraining force on big business and a political organizing force supporting liberalism. Reagan signalled, by firing the striking aircraft controllers, that government would ally with the rich rather than with labor. Management went on the offensive, too: Paul Krugman points out that in the late ’70s and early ’80s companies routinely and illegally fired workers who voted for unions.

• Not coincidentally: manufacturing, with its well-paid and unionized workforce, was offshored. Though this didn’t seem to matter in the tech-boom ’90s, it doesn’t seem like such a smart move today, with 8% unemployment, and the jobs available to the former manufacturing workers being lower-paid, precarious, and without health benefits.

• A movement to pay executives in massive amounts of stock rather than money. The rationalization was that they’d be more motivated to benefit the stockholders, as they’d benefit only if stocks went up. Naturally they took the increased incomes but made sure they’d make money even if the company tanked. This was particularly prevalent in the financial sector... which destroyed itself by 2008.

• The cult of the CEO began in the ’70s;. Before then, CEOs were rarely celebrities, and companies tended to promote from within. Rock star CEOs got more money, and as it became the norm to hire from outside, boards had to pay more to attract the top names.

• The inflation of the ’70s; also played a role, in that it shifted the Fed’s attention from keeping employment high to keeping inflation low. More people out of work means downward pressure on wages for the working class. The chart of unemployment below has lots of ups and downs, but on the whole, unemployment in the liberal era was at rates that would seem like a dream today.

There had always been opposition to the New Deal, but it was marginal. A key element was the movement of Southern whites from the Democrats to the Republicans, largely due to opposition to civil rights. As we’ve seen, Nixon expanded the safety net, so he certainly wasn’t anti-black. But the anger of Wallace voters in 1968 must have been educational. Picking up southern whites removed a key element of FDR’s coalition and paved the way for Reaganism.

Obviously, a lot of this was done using smoke and mirrors. Though Republicans haven’t been coy about favoring the rich, Republican candidates don’t campaign on the slogan “Nothing for the majority; everything for the super-rich.” They have to distract the electorate with cultural issues, and pretend that their policies are good for everyone.

Now, in 1980, they could claim ignorance: maybe Reaganism would work, maybe tax cuts really would increase tax revenue! Maybe this next perpetual motion machine will really work! But we’ve been drinking the magic kool-aid for thirty years now, and it’s not working. So the program now has to be maintained by pure denial.

For much more detail on how the 1933-80 period worked and how it was different from what came before and after, see Paul Krugman’s The Conscience of a Liberal.

The death of taxes

Oh, and they want to end health insurance for the elderly and those newly insured by Obamacare, repeal financial regulation, and maybe start a new war on Iran.

To Republicans, it’s always 1968, with taxes sky-high and hippies revolting in the streets. Whatever the situation, their answer is always to lower taxes on the rich. But we’ve been doing that since the sixties, and it never helps the rest of us. Quite the opposite; the rest of us are stagnating or worse off.

When we talk about taxes, by the way, don’t get snowed by the GOP preference to talk only about the federal income tax, which is highly progressive. For the poor, state and local taxes are a much bigger bite:
 

Don’t tax cuts promote growth?

• Bush II cut taxes, and the economy tanked. Real GDP increased at about 2% a year.

  Common sense suggests that when you reduce government revenue, government revenue will go down. And it’s right! Over Bush’s term, as a percentage of GDP, federal revenue dropped from 20.5% to 17.5%. (One consie trick is to count dollars instead. But revenue in dollars will go up due to population growth and productivity growth; you have to look at the percentages, instead.)

  Ironically, one of Bush’s justifications at the time was precisely to reduce the budget surplus. That was the conservative doctrine of 2001: Alan Greenspan gravely informed Congress of the terrible dangers of reducing the debt. They don’t really care about the debt; all they care about is taxes.

• In 1993, Clinton raised taxes, in order to reduce the deficit brought by years of Reagan-Bush irresponsibility. Right-wingers frantically prophesied disaster. Instead we had an economic boom; real GDP increased at 4% per year for the rest of the ’90s‒ far higher than under Bush II. Growth also rose after the 1982 tax increases. (Do you think modern conservatives remember that Reagan raised taxes?)

As for job creation, over the eight years of Bush II, 2.6 million jobs were created. Over Clinton’s presidency the figure was 22.7 million, nearly ten times larger. (And that actually gives too much credit to Bush, as jobs were hemorraging in the first months of Obama’s term, delayed casualties of Bush’s blow to the economy.)

Perhaps confusingly, to get us out of our present crisis, Keynesian economists advocate... tax cuts, among other things. This isn’t a contradiction; we’re in a liquidity trap, when the economy can’t be jumpstarted simply by lowering interest rates (because they’re already effectively zero). This isn’t the sort of recession we’re used to in the post-WWII era, though it’s very similar to the Great Depression. Tax cuts are a cheap stimulus right now, because the cost of borrowing is very low. However, tax cuts can’t be the only solution‒ they do very little for the unemployed and the poor, for instance. They need money and jobs, not tax cuts.

But aren’t Republicans better for business?

This is why Bob Deitrick and Lew Goldfarb’s book Bulls, Bears, and the Ballot Box is so interesting. They compare the economy under Republican and Democratic presidents from 1929 to 2008‒ as it happens, that works out to 40 years each. Their results are stunning.

	Under Democrats	Under Republicans
Avg. annual stock market return	9.60%	0.58%
Avg. annual change in GDP per capita	3.48%	0.50%
Avg. annual change in national debt per capita	0.83%	3.90%
Percent of months in recession	8.22%	29.59%
Avg. annual change in corporate after tax profit	4.53%	-11.65%
Avg. annual trade balance	-34.38b	-174.10b

The liberal market

The model of a super-rich class that takes in most of the wealth has been tried. You can see it today in most of the Third World. And, contrary to what conservatives claim, the wealth doesn’t trickle down. The bulk of the population stays poor, and the situation maintains itself for centuries.

Suppose you want to sell automobiles, or iPads, or houses. Where do you think you’ll make more money, the US or the similarly populous Indonesia?

If you’re hesitating, consider a couple quick facts:

	Indonesia	USA
GDP (total)	$845 billion	$15 trillion
GDP per capita	$3500	$48,000

As we saw above, from 1933 to 1980 the average income went up $31,767, of which 69% went to the bottom 90%. To simplify things for these rough calculations, let’s pretend all the ninety-percenters were paid the same. In that case, their incomes increased by $21,284.

In the 1981-2008 period, the 90% got just 4% of the pie: their incomes went up $488.

If the income distribution had stayed the same as in the liberal era, their incomes would have gone up $8,167. That’s a lot more automobiles, iPads, or houses sold.

Perhaps it doesn't matter, because no matter who gets the income, they spend it and it becomes consumption? No; as economist Joseph Stiglitz has shown, the middle class spends most of its income, while the rich save 15-25% of it. So giving money to the middle class is the better way to increase consumption. And giving money to the rich leads to more investment, which is liable to produce a speculative boom and crash.

Is this the best we can do?

By now it’s clear that communism isn’t an alternative. Capitalism does better than communism, for both rich and poor. This was of course not obvious a priori‒ for all anyone knew in 1932, Marx and Orwell were right, and capitalism was too stupid to thrive. In the early part of the 20th century, in fact, there were times when the USSR was doing better‒ it didn’t suffer the Great Depression, for one thing. But it’s now clear that this was the one-time effect of a transition from agricultural to industrial production. Once it was done, the USSR stagnated. China didn’t prosper until it effectively abandoned communism.

Dictatorships in general are also a bad idea, from a purely pragmatic point of view: either they strangle the economy with crony capitalism, or they destroy it with war.

From my point of view, there’s no great difference between American liberalism and European or Japanese social democracy. Other countries often do a better job at the social part‒ our Social Security is well run, but we tend to half-ass the rest of the safety net. For awhile conservatives thought that the safety net was slowing Europe down, but that’s not the case. The irony is that Europe is now being mismanaged on conservative principles: the Europeans’ solution to a depressed economy is to put people out of work, tighten money, and lower spending. So they’re implementing Hooverism right now, and it’s working about as well as it did for Hoover. (Hint: not well.)

It’s true that a very generous welfare state seems to reduce GDP per capita; e.g. the ratio of French to US GDP per capita is .731 (as of 2008). But if you look at GDP per hour worked, the ratio is .988. That is, French workers are just as productive as Americans; they just work fewer hours. And that’s basically a social choice: they start work later, they retire earlier, and they have longer vacations. That’s just a different set of choices on what to do with productivity gains. (And it’s not like we’re at the opposite end of the scale; the five-day week and the eight-hour day are 19th century innovations.)

Is there an untested alternative? I hope so! The modern economy is the culmination of centuries of experimentation and revolution, and I’m sure we’ll come up with something better. Heck, I’ve written an sf novel about it. On the other hand, the more radical your proposed changes, the less likely they are to a) work, and b) convince me to vote for you. Plus, if your new idea is “laissez-fair plus marijuana and maybe the Singularity”, don’t bother.

More practical benefits

• The paradox of plutocracy is that when business can do exactly as it wants, the economy tanks. As Adam Smith noted two hundred years ago, businessmen distrust general prosperity; they’re so focused on reducing labor costs that they kind of prefer recessions. But if everyone reduces labor costs, national income is going down, which means the market is languishing.

• A safety net encourages innovation. New businesses aren’t started by the super-rich, but by nobodies. The US’s liberal bankruptcy laws, for instance, encourage entrepreneurship, because the entrepreneur won’t be destroyed by failure. Curious how the “pro-business” party actually passed a law to make bankruptcy more punitive.

• Regulation increases public health and safety. Sometimes it can be excessive, but that can be corrected. This is another instance of people forgetting the evils that liberalism got rid of. It was not actually a good thing when companies could put filth in our meat, dump industrial waste in our drinking water, and build deathtrap automobiles.

• Matt Yglesias points out that high taxes encouraged firms to spend money on investment and research‒ things that benefit the country as a whole, rather than (say) William Koch building himself a replica private frontier town.

• Liberals encourage immigration, which grows the market for everyone and brings in people with high skills and motivation. As Yglesias notes, everyone accepts that internal migration is good‒ if Chicago declared that no one could move to Chicago, this wouldn’t “protect Chicago jobs”; it’d make the city stagnate. But somehow conservatives want a stagnant national population.

• Inclusiveness produces a smarter, bigger labor force. Racism, sexism, and homophobia are wasteful: getting rid of them means a bigger market, more efficient use of human resources, and a better chance of getting the right person for the job.

• People compensate for inequality with credit spending. Household debt as a percentage of GDP was under 50% from the ’50s through the ’70s, and has steadily climbed since; it’s now about 90%. IMF economists have found that inequality leads to loose credit, which leaves the economy vulnerable to major shocks, as in 1929 and 2008.

• Dampening unrest. If people see their income rising, they won’t storm into your mansion and hang you from the nearest lamppost. Oppressed people revolt‒ the medieval peasants were doing it all the time‒ but oppressed modern people have guns and bombs and a good deal less tolerance for misery than the peasants.

  Of course we don’t think about violent revolution in the US, but why not? It happened in some very advanced countries (Germany, Italy), and there were some very restless people in the Depression and in the 1960s. Very simply, liberalism calmed them down‒ because people could see that they were getting better off. What if the conservatives succeed in impoverishing the middle class? How long will people buy into a system that’s operated only for the benefit of the Romneys and Galts and Gekkos?

• If we do keep impoverishing people, we’ll be outcompeted by countries that mobilize their entire adult population for useful work. Having a permanent underclass, or a huge unemployed population, is in a strange way a luxury. It means we’re wasting productive resources. Right now our major competitors‒ Europe and Japan‒ are trying to outdo us in making bad choices. But we can’t count on that forever. And the day of a small First World is past anyway. China, India, and Brazil matter more than they ever did, and though they don’t have our efficiency, they have the manpower to make up for it. Hobbling ourselves by keeping the middle class struggling is just a poor choice going forward.

Romney vs. his lessers

You can’t get much clearer than that: the Presidential nominee for the Republicans makes it completely clear that he is only concerned for that 53% who happen to pay federal taxes. That’s immoral, un-Christian, and disgusting.

But that’s just morality. Just as appalling is his use of this stale consie trope to tell his big lie‒ that Obama voters are irresponsible.

Let’s look at who pays federal taxes‒ and why not.

• 53% of Mitt’s targets (28.3% of the population) pay federal payroll taxes (the specific, regressive tax for Social Security and health care). That is, they are taxpayers.
• Another 22% are old people. They don’t pay income taxes because they’re f‒ing retired. And they’re overwhelmingly voting for Romney.
• Another 15% are non-elderly but poor‒ their total income is under $20,000. Maybe they’re part of our 8% unemployment rate; maybe they’re students; maybe they’re disabled. Decent people would like to help these folks, not castigate them.
• Also, remember that everyone pays sales taxes, and almost all of Mitt’s targets pay state taxes.

Answers to a few objections

But postwar prosperity was due to <mumble>!

Maybe a modern economy just produces inequality?

No, because in that case we'd see the trend across all modern economies, and we don’t. Here's a chart (from Wikipedia) of the Gini coefficient, which is a measure of inequality. It’s a little cluttered, but just follow the colors. The top of the chart represents greater inequality.
 

But Germany, Japan, Canada, and Australia are all pretty stable, and France’s inequality has plummeted.

Rising inequality is not inevitable. It’s a social choice the US and UK have made.

But the rich deserve to be rewarded!

The question is not “Do the rich perform some function for the rest of us?” but “Did they suddenly perform this function ten times better, so they deserve ten times more than they used to get, and the 90% deserve nothing at all?” There’s simply no metric that justifies this pay increase, nor the marginalization of the middle class.

But <the ’60s>!

And you know, things did get a little crazy in the ’60s. Some of it was defensible, much of it wasn’t. Some of the raucousness is because asking politely for more rights just doesn’t work. It’s been tried, and it gets ignored.

But again, it’s irrelevant to the liberalism-vs-plutocracy debate. It’s not 1968 any more; the hippies all cut their hair and stopped talking about Chairman Mao, which didn’t make it with anyone anyhow. Ironically, the young people of the ’60s are now likely Romney voters.

But liberals also want to <mumble>!

But capitalism is exploitative!

One, we’re looking at actual track records here. And just as I don’t buy libertarian fantasies, I don’t buy socialist fantasies. The actual attempts at building non-capitalist societies have been, at best, stagnant and inefficient, and at worst genocidal. If you want a really radical reform, you’d better have a really good plan to avoid the failures of your predecessors.

Two, I’m sympathetic to many left-wing complaints about liberalism (and, even more so, to complaints about liberal politicians). But the main obstacle to a more progressive society is not liberals, it’s conservatives. The brute fact is that many progressive positions appeal to no more than 25% or so of the American public. That means they don’t win elections. There are things I wish Democrats would champion more, but even if they were all angels that wouldn’t give us the House or get rid of the filibuster.

Was liberalism sustainable?

But there are more important things than utilitarianism!

The Republican Party is pretty clear on its preference: much more important than general prosperity is low taxes for the rich. I think their morality is deplorable, but I can’t fault their understanding of their self-interest. But whatever your bigger value is, the first question is, why should anyone else agree with you? Why should the 90% go along with a system that marginalizes them, when there is an alternative that doesn’t? Or if you think (erroneously) that liberalism is anti-religion, well, why should the non-religious help build your spiritual utopia?

The other important question is, why are you so sure that your good is incompatible with social justice and a prosperous capitalist society? The rich and the religous didn’t die off under liberalism, quite the reverse. The rich got richer; Evangelicalism became dominant. Look at what actually happened, not at the fear-mongering in the latest fundraising letter.

Besides, whatever Republican leaders have in their hearts, they say that their policies will produce more prosperity, more jobs, less debt. It's fair, indeed essential, to look at whether their claims are true.

The bottom line

I hope this page will help. Liberals don’t need to apologize for their vision of how American society should work. Liberalism saved American capitalism and democracy, defeated Naziism, created a prosperous middle class, and benefitted every sector of society, from the back streets to Wall Street.