A Dose of History
For a country fixated on the new and the now, Kevin Phillips' new book "Wealth and Democracy" is a hard dose of history, which puts today's headlines about money in politics in sobering context. From Enron and the burst Internet bubble to the war on terrorism, Phillips shows us that there is always much of the past in the present.
In his definitive account of big money and political power in America, Phillips traces the foundations of wealth in our society -- where it comes from, why and how it intersects with politics. He illustrates both the breathtaking gap that has opened up in the 21st century between rich and poor, and the dangers that gap represents for democracy. By comparing America to Holland and Britain in the past, he diagnoses the same symptoms of old age that were once exhibited by those great financial powers in their twilight.
Phillips' 1969 book, "The Emerging Republican Majority," both predicted and helped mold the rise of the Republican Party. Since then, however, Phillips has become disenchanted with the GOP. Although he's no fan of the Democrats, either.
"Because my own background is Republican, and I now know much more of GOP history on these subjects, it is hard to avoid the conclusion that the Republican economic policies and biases of the 1990s and early 2000s are a narrow-gauge betrayal of the legacy of the two greatest Republican presidents, Lincoln and Teddy Roosevelt," he writes. "But that is a debate I will leave to the elections."
AlterNet spoke with Kevin Phillips while he was in San Francisco promoting his book.
AlterNet: When you talk about the boom years in "Wealth and Democracy," you lay out umpteen prior examples of economic bubbles in the past. Was there anything particularly new or surprising about this last one?
KP: I was surprised when I got back into the issue in the late 1990s at the size of the fortunes, at the amount of wealth that had been built up. And then when I started measuring the size of the gains in wealth, the importance of the increases and the size of the bubble (which I assumed would be a bubble), it really suggested a number of historical parallels.
After the railroad bubbles in the 19th century, the major tech bubble was in the 1920s, when there was a convergence of automobiles, of motion pictures, of radio, of aviation, of electricity. Technology enables the stock market bubble, it's something that people can get into -- the whole new world, the past doesn't apply, it's a new economy and this, that and the other. It never iswholly a new economy. It never is a totally new era. There's always a lot of the past.
So there's nothing new under the sun, and yet, you were taken aback at the size of this latest bubble?
I didn't know that we were going to see a tech bubble that would take it up to a new level. If you think back, and I don't have precise numbers on the Nasdaq here, but it was 1,100 or 1,200 in 1999. It reached 4000 by the end of the year, 5000 by March or April of 2000. It's just mind blowing. And it's amazing how far down it's gone. In that sense, the decline in the Nasdaq, the percentage is almost as high as the decline in the Dow Jones between 1929 and 1932. It's a serious market crash.
What do you make of the fact that consumer confidence remains high in the face of all of this?
I think it's very unfortunate. What it probably means is that there's going to be another down leg to this economic decline.
Then this isn't the bottom?
This isn't the bottom. There's a very real chance that the major stimulus, both monetary and fiscal, that came with Greenspan's 11 rate cuts and with the spending after 9/11, has given the economy a hot shot. I think it's certainly 50/50 that we'll have another recession within six quarters from now. And if that's the case, that's the one that'll take care of the credit bubble and the real estate bubble.
That's the one that's going to get ugly, then.
In 1970, a pretty light recession started. Nixon was in the White House, and he wanted to be sure that the economy was strong by 1972 for the elections. So he had his close associate, Arthur Burns, stimulate the money supply of the Federal Reserve. That's a little bit of an overstatement, but it's true enough. By 1972 things were really ripping along again, they hadn't let the 1970-71 recession become anything serious. But by 1973, we're in another recession, because basically, you had things that hadn't worked themselves out of the system. You hadn't put the economy through the ringer and the stock market decline that was necessary. So then it came in 1973 and 1974.
The same thing happened in 1980. I think the danger is that we're going to have another significant recession underway by probably 2003 or 2004.
So that's the short-term, worst-case scenario. What about the long term? The bigger picture that you paint in the book is of the decline of an empire. What does that look like?
The long-term problem, I think, is several fold. The first is that the U.S. is what I call financialized. We're so caught up in money games and speculation and derivatives and instruments. No longer do people want to make things or transport things or grow things, they just want deals and money.
That's been a bad thing when it's happened in other great economic powers, the Dutch and the British, in particular. And that's not a good augury. The second thing is there's a pretty substantial danger of technology transfer away from the U.S. We're such an internationalized economy, there are so many people from other countries in both finance and technology. Almost half of Cisco's workforce is foreign. It's hard for me to imagine that a lot of these people at some point 10, 15 years from now aren't going to go home with a lot of expertise in a lot of cutting edge stuff, that is going to move to India or China within 25 or 30 years. That's another big caveat for the United States.
So we risk losing our financial status as a superpower, and with it, you also write about how we risk losing our sense of American exceptionalism.
Well, the problem with exceptionalism is that all these other countries, Spain in the 15th and 16th century, the Dutch, the British, they were all convinced that they were unique. We're not the first who have thought we were unique. The exceptionalism, I'm afraid, is riding for a fall.
It makes me nervous to see a president, who's not one of my favorite animals, so anxious to start a war in Iraq. Iraq is right in the middle of everything. If you're concerned about problems in India, Pakistan or Afghanistan or the Caucuses, Israel, Palestine or the Persian Gulf -- Iraq's right in the middle of all of it. Why would you pick Iraq? I understand why they don't like Saddam Hussein, and would like to take him out, but it doesn't seem like such a smart thing at the present time to start a war there.
Is this a classic example of a decadent empire's over-reach?
Well, maybe not decadent. But during the Gulf War, we had to raise some of the money from our allies. We had a budget deficit at the time, so we had to pass the hat to finance the war. That sounds sort of like the British in the two world wars. They had to borrow a lot of the money to do it. And after the two wars were over, they were a financial basket case.
If the worst-case scenario comes about -- the brain drain, the collapse of a vulnerable, financialized economy -- what happens? Who does it hurt most here?
It's hard to say. If you have a financial implosion from this, it'll hurt people who have money, they'll lose value in the stock market, big time. If you lose industry, slowly but surely it'll hurt more average people. You can have scenarios for everyone being hurt.
It's always hard to discuss all of this in the future tense, because it hasn't happened yet. The whole sense of invulnerability and triumphalism is there. The politicians say "It can't happen thus."
The British had all these discussions, and one of the conservative party leaders actually made a speech that I have in the book about how "you say the financial sector will be able to carry the load. But if the real economy isn't there, the banking and finance is going to wither." He was absolutely right. You can't shift and say it's all going to be finance, we're going to make all this money speculating and providing services, because we've got the global financial network.
It always sounds a little silly to be talking about this because people in this position, even if they don't think they're historically invulnerable, they sort of think history doesn't matter anymore. And I think a lot of Americans have been ahistorical anyway.
I know you don't like to make suggestions, but how do you get people to care about history? Is there a broader way to get people to take the longer, historical view, as an electorate?
Not as an electorate, no, I really don't think so. Most investors, 80 or 90 percent if not college grads have a fair amount of college. In that portion of the population, you should be able to assume a greater databank, so to speak. But I'm not sure even that applies. People would have said, during the bubble, "What does 1929 have to do with this? That was 70 years ago, and everything's different now." It always is different in very important ways, it's just that unfortunately human nature is still playing in the same sandbox.
You mention the politics of resentment that's building around the great and growing disparity between rich and poor, and how it might bring about reform.
I think the public has an outline, they know Enron and they know some of the names. But I have loads of charts in the book, and some of the charts have some incredible numbers. I don't believe the public has a great sense yet of how extreme all this was.
So how do we crystallize that resentment? What can we do to bring about change?
Several things that can be done. Let me give you the barebones approach, and then the slightly more elaborate approach. The barebones approach is: You really want to get more people registered. People who feel the whole process is stacked against us, you want to get them to say yeah it is stacked against us, but unless we register and vote it's going to be more stacked against us. And they have to not only vote, but get active. It's not very likely that too many people will. This has been tried so many times...
There are starting to be some signs of pressure for change in the tax system or the living wage. In my own state of Connecticut, we had some Enron deal that fell apart. It left a gap in the state framework, and they had to raise 150 million they didn't think they were going to have to raise. So the proposal was to put an income tax surcharge on incomes over $1 million a year. There were enough incomes of over a million that by putting a 2 percent surtax on them, you would have raised $160 million dollars.
Just tax Greenwich!
Yes. People are starting to say the tax burden should be moved off of the people who actually work and do something, and onto the people who are sitting around playing with all the financial stuff.
New taxes seem so politically unfeasible right now, in America. But maybe those political realities are short lived, relatively speaking?
It may be unfeasible in 2002, but I'm not sure you can say with much certitude what's feasible in 2004. Another dimension is that you can take advantage of all the indignation over corporate behavior to change the rules governing options and pension funds. It's kind of humdrum stuff, but on the other hand it's important.
One of the charts in the book shows the increase in the 10 highest compensated executives, in 1981, 1988 and 2000. In 1981, they had an average of 3.45 million dollars. By 1988 they had an average of 22 million dollars. By 2001 the top 10 highest compensated executives had an average of 155 million dollars. That was a 45-fold increase.
Now that's pretty amazing. If the average American knew that, he'd have a lot more understanding of why these people went berserk. They were just trying to do everything to get money. But you're not going to see that sort of stuff on the front pages of a major publication.