I’ve repeatedly mentioned that the US is a rich country. It is also a country founded on the Enlightenment ideals of individual freedom, equality and opportunity. The government is there to serve the people by “promoting the general welfare”, not the other way around. Individuals are “born equal” and have “inalienable rights”. These principles, baked into the Declaration of Independence and Constitution, are the guiding lights of our democracy. Obviously forming “a more perfect union” was and is an ongoing project. Slaves had to be freed, and women had to get the right to vote. It has not been smooth sailing, but great progress has been made. If we keep these basic principles in mind, it is actually quite easy to see what makes for a more perfect union. Of course, everyone has their own interests. Plantation owners were made rich by the labor of their slaves, and it took a civil war to outlaw slavery. Religious zealots have at times not been happy with the separation of church and state. The progress that has been made is a testament to our belief in, and commitment to, these principles over many generations.
Many of us, me included, see a managed capitalist market economy as complimentary to the Enlightenment belief in freedom of the individual. This preference is not just based on market economics’ proven ability to deliver, but also on the implicit concept of us humans as economic free actors. We can start a business, choose a career, change jobs, and buy and sell whatever we want within the limits of the law (if we obey it). However, a capitalist market economy, if left to its own devices, certainly does not promote equality of opportunity or general welfare. Basic market economic theory assumes that “labor” and “capital” will find their “best” uses, but if there is inequality of opportunity, the efficiency of the market is undermined. A capable child who misses out on education will probably not be as productive as they could be. That is a waste of human capital and lowers overall productivity. Put simply, it is good economically as well as in line with our core principle of equality that opportunity be widespread.
I’m going to outline my proposals for how we can address the US economic issues of growing income and wealth inequality, low mobility for those born poor, and an increasing deficit, and do so in a way that is consistent with our core principles and a managed capitalist market economy. But we must address one last philosophic problem. Some claim that taxation infringes on the individual and economic freedoms I espoused above. Nothing could be further from the truth. There is nothing in non-onerous progressive taxation that impacts personal or market freedom. In fact, progressive taxation is designed precisely to make sure that the tax load isn’t onerous. Someone earning a million dollars a year can afford to pay a lot more taxes than someone earning twenty-five thousand without hurting. On the flip side economic deprivation certainly can impact both individual and economic freedom. The US had to come to grips with the effects of unfettered capitalism and the concentration of income and wealth in the first half of the twentieth century, and the result was the New Deal. I can do no better than quote from Teddy Roosevelt who set the stage. Here is a quote from a speech he gave in Osawatomie, Kansas in 1910[1].
“In every wise struggle for human betterment one of the main objects, and often the only object, has been to achieve in large measure equality of opportunity. In the struggle for this great end, nations rise from barbarism to civilization, and through it people press forward from one stage of enlightenment to the next. One of the chief factors in progress is the destruction of special privilege. The essence of any struggle for healthy liberty has always been, and must always be, to take from some one man or class of men the right to enjoy power, or wealth, or position, or immunity, which has not been earned by service to his or their fellows.”
“At many stages in the advance of humanity, this conflict between the men who possess more than they have earned and the men who have earned more than they possess is the central condition of progress. In our day it appears as the struggle of freemen to gain and hold the right of self-government as against the special interests, who twist the methods of free government into machinery for defeating the popular will. At every stage, and under all circumstances, the essence of the struggle is to equalize opportunity, destroy privilege, and give to the life and citizenship of every individual the highest possible value both to himself and to the commonwealth. That is nothing new.”
“I stand for the square deal. But when I say that I am for the square deal, I mean not merely that I stand for fair play under the present rules of the game, but that I stand for having those rules changed so as to work for a more substantial equality of opportunity and of reward for equally good service. One word of warning, which, I think, is hardly necessary in Kansas. When I say I want a square deal for the poor man, I do not mean that I want a square deal for the man who remains poor because he has not got the energy to work for himself. If a man who has had a chance will not make good, then he has got to quit.”
“The Constitution guarantees protection to property, and we must make that promise good. But it does not give the right of suffrage to any corporation…. There can be no effective control of corporations while their political activity remains. To put an end to it will be neither a short nor an easy task, but it can be done…Corporate expenditures for political purposes, and especially such expenditures by public-service corporations, have supplied one of the principal sources of corruption in our political affairs.”
This speech outlined a progressive Republican platform (how things have changed!) that called for a national health service, an inheritance tax, a constitutional amendment to allow a federal income tax, an eight-hour workday, farm relief, workers’ compensation for work-related injuries, and social insurance to provide for the elderly, the unemployed, and the disabled. The 26th Amendment allowing Congress to assess taxes on income was adopted in 1913, some other parts of the program were adopted during the presidency of Franklin Roosevelt. In any case, the balance between “property rights” and what is best for the country and the “general welfare” was debated extensively over the first half of the 20th century. To quote the Osawatomie speech one last time:
I believe in shaping the ends of government to protect property as well as human welfare. Normally, and in the long run, the ends are the same; but whenever the alternative must be faced, I am for men and not for property…
Teddy makes clear that there is a balance. But he was certainly on to something when he says, “in the long run, the ends are the same.” As the president of General Motors remarked in 1953, he thought that what was good for the country was good for General Motors, and vice versa. Opponents of the reforms put in place during the first half of the twentieth century predicted dire consequences for business. Instead, these reforms ushered in the fastest productivity and widespread income growth in US history. While called “socialist” the reforms did not call for government ownership of the means of production, the economic system remained capitalist. What did change a bit were the rules by which business had to play, along with higher income tax rates for the rich. This turned out to be good not just for the country, but for business as well.
As we’ve seen, since Reagan there has been a considerable reversion to lower tax rates on high incomes, and a weakening of general labor’s market power due to a number of factors. The result has been the growth in income and wealth inequality we’ve discussed.
As the above history shows, the US has wrestled with the issue of taxation and regulation versus an extreme version of property rights that would call into question something as basic as progressive taxation. Precisely where the line is drawn has shifted over time, but the history of the 20th Century tends to support the contention that what is good for labor is good for the country and is good for business as well.
A thought experiment may help clarify the issue. One of the main causes of the loss of market power by general labor has been the automation of manufacturing. It simply takes far fewer workers to produce as many manufactured goods now as 50 years ago. Let us imagine that artificial intelligence likewise automates service jobs. Trucks drive themselves. AI largely automates the work of lawyers and accountants. Even writing is largely automated. All of this is great news for productivity: it takes far less labor to make and do these things. But labor loses market power (there is decreased demand for labor) while wealth and income inequality rise further. In an extreme version of this vision, machines manufacture the goods we make, and AI largely provides the services we consume. Labor and capital are no longer complimentary but competitive. Clearly, for the good of us all including business, we need to figure out how everyone can share in the wealth we produce. Below I suggest a program that extends the New Deal to account for the realities of our current world. Of course, such a program, like the New Deal will have to be driven from below, it will certainly not be handed to us on a platter.
[1] This historic speech is well worth reading in its entirety. It can be found at https://obamawhitehouse.archives.gov/blog/2011/12/06/archives-president-teddy-roosevelts-new-nationalism-speech. For background see https://www.kshs.org/p/kansas-historical-quarterly-theodore-roosevelt-s-osawatomie-speech/13176