Saving Capitalism

You do not have to be a rocket scientist or even a Wall Street banker to calculate that the hidden subsidy the Wall Street banks enjoy because they are too big to fail totaled about three times Wall Street’s 2013 bonus payments of $26.7 billion. Without the subsidy there would have been no bonus pool at all. The lion’s share of that subsidy, $64 billion, went to the top five banks—JPMorgan, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs.

markets depend for their very existence on rules governing property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what terms), bankruptcy (what happens when purchasers can’t pay up), and how all of this is enforced.

n short, much of the American middle class has become poorer.

The vast American middle class employed several techniques to maintain its purchasing power notwithstanding.1 The first was for mothers to move into paid work; the second, for everyone to work longer hours; the third, to use rising home values to extract money through home equity loans or refinancing. By late 2007, debt reached 135 percent of disposable income. But none of these techniques was sustainable. In 2008, the debt bubble burst, just as a similar bubble had burst in 1929. It is not coincidental that 1928 and 2007 marked the two peaks of income concentration in America over the last hundred years, in which the richest 1 percent raked in more than 23 percent of total income. The economy cannot function without the purchasing power of a large and growing middle class.

Another era of innovation in the 1920s centered on largescale enterprise and the mass production of consumer goods—automobiles, telephones, refrigerators, and other durables powered by electricity. Here again, income and wealth became highly concentrated, and Wall Street’s riches and influence soared. By the time of the Great Crash of 1929, most Americans could not pay for all the new products and services without going deeply and hopelessly into debt—resulting in a bubble that loudly and inevitably popped. On the heels of this economic crisis came the reforms of the New Deal, giving organized labor the right to bargain collectively with employers, small investors protection from financial fraud, and small businesses protection from large retail chains.

President Theodore Roosevelt, railing at the “malefactors of great wealth,” used government power to break up the trusts and impose new regulations barring impure food and drugs. He proposed “all contributions by corporations to any political committee or for any political purpose should be forbidden by law,” leading Congress to pass the Tillman Act, the first federal law to ban corporate political donations

Similar questions arose during the last decades of the nineteenth century when the second industrial revolution ushered in railroads, steel, oil, and electricity—and at the same time created vast economic combinations (then called “trusts”), concentrated wealth at the top, and fostered urban squalor and political corruption. The lackeys of robber barons literally deposited sacks of money on the desks of pliant legislators, prompting the great jurist Louis Brandeis to note that the nation had a choice: “We can have a democracy or we can have great wealth in the hands of a few,” he said, “but we cannot have both.”

A few years back, Meg Whitman, now CEO of Hewlett-Packard, contributed $30 million to Princeton. In return she received a tax break estimated to be around $10 million. In effect, Princeton received $20 million from Whitman and $10 million from the U.S. Treasury—that is, from you and me and other taxpayers

The “self-made” man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest Americans are heirs to prominent fortunes.

As more of the gains have gone to the top, the middle class has lost the purchasing power necessary for ensuring that the economy grows as quickly as it did as recently as the early 2000s. Once the middle class exhausted all its methods for maintaining spending in the face of flat or declining wages—with wives and mothers surging into paid work in the 1970s and 1980s, everyone putting in longer hours in the 1990s, and households falling ever deeper into debt before 2008—the middle class as a whole was unable to spend more. The inevitable consequence has been fewer jobs and slower growth. Both have hit the poor especially hard.