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How Government Became “The Problem”

By JON D. WISMAN, 19/02/15

VERY FUNNY CARTOON..........IF IT WASN'T TRUE....

Over the past 40 years, more and more Americans have come to view government as incompetent, corrupt, or even as the enemy. And it’s not just the Tea Partyers. Whereas in the 1970s, 70 percent of Americans had “trust and confidence” that the government could successfully deal with domestic problems, only 22 percent held the same view in 2011 (Ford, 2012). Rising distrust of government is not unique to the U.S. (Pharr and Putman, 2000) It is practically as strong in Great Britain, and it is gaining momentum on the Continent. Space here only permits a look at the American case.

What’s behind such a radical change in views? An answer requires delving into the historical role of government. Until the nineteenth century, government was indeed the enemy of most people. It was generally, as Marx (1848) aptly put it, “the executive committee of the ruling class.” Although it provided for defense, law and order, and a degree of social stability, it also ensured that elites could extract as much as possible from the working population. Workers, whether slaves, serfs, indentured servants, or wage workers, retained merely the wherewithal to survive. Yet, the goodness of government was rarely in doubt. Ideology, crafted and controlled by elites and embedded in religion, depicted the state as sacred, its rulers chosen by gods, or themselves gods. Government was part of the sacred order of things. Even when the state came to be legitimated in secular terms (as a social contract), the state continued to insure that elites could capture most of the workers’ output beyond that needed for survival.

All of this came under challenge when the maturation of capitalism in the nineteenth century brought workers together in factories and urban areas where they could organize and violently resist long workdays, low wages, child labor, and unhealthy working conditions. To reduce and hopefully eliminate the threat of violence, elites began bribing the working class with various benefits such as higher wages, better working conditions, a legal limit to the work day, bans on child labor, education for their children, and the franchise (Acemoglu and Robinson, 2000). Elites realized that sharing political power with the working class would limit their extraction of surplus, but viewed it as far superior to revolution.

The franchise empowered workers to peacefully claim a fairer share of society’s income, wealth and privilege. The role of the state was in principle reversed from a social agency that provided the backup of violence to enable elites to capture virtually all income beyond subsistence, to one that could impede them from doing so (Wisman, 2013a). If the state were to become truly democratically controlled, then for elites, government would indeed become “the problem” as Reagan put it in his 1981 inaugural address. Their only remaining weapon would be in maintaining control over ideology. They would have to convince enough of the electorate that their best interests would result from those policies that would in fact enable elites to retain, if not augment, their wealth, power, and privilege.

Although worker living standards improved after the franchise was democratized, so too did inequality (Wisman, 2014). The big break came in the 1930s. The dire conditions of the Great Depression delegitimated the elite’s ideology, permitting the widespread acceptance of doctrines and policies that produced a 40-year period of declining inequality and substantial improvement in the lives of practically all Americans – a “great compression” in income, wealth, and privilege (Goldin and Margo, 1992).

Government measures reducing inequality and improving conditions for the broad population included workers’ rights to bargain collectively, minimum wages, Social Security, the G.I. Bill, Medicare, Medicaid, Food Stamps, public housing, rent subsidies, Project Headstart, Job Corps, Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Mine Enforcement and Safety Administration, and the Environmental Protection Agency. The franchise was further extended to African Americans and desegregation began in earnest. Public goods that benefit the general population such as schools, universities, parks, playgrounds, and public transit were vastly expanded in quantity and quality (Wisman, 2014). Highly progressive income taxation also revealed the intent of redistribution toward greater equality. The highest marginal income tax rates were: 1942-43: 88 percent; 1944-45: 94 percent; 1946-50: 91 percent.  Top marginal tax rates remained in the upper 80s percent from 1951 until 1964, and at 70 percent from 1965 until 1981 (Wisman, 2013a).

However, conditions emerged in the 1970s that enabled a resurgence of laissez-faire ideology, allowing elites to regain the ability to use government to increase their share of income, wealth, and privilege. Keynesian policies were alleged to be at the root of what pundits claimed was the decline of the American century. Evidence cited included stagflation, loss of gold backing of the dollar and its devaluation, loss of the Vietnam War, and with the widespread use of recreational drugs and sexual promiscuity, moral degeneracy. Government policies such as high taxes, regulation, welfare, and union power were claimed to have sapped incentives to work hard, save and invest (Wisman, 2013b). Ideologues began re-crafting ever-more convincing doctrines that depicted government as the problem. Central to this ideology was the discrediting of Keynesian economics and its replacement with a recrafted version of laissez-faire doctrine – so-called supply-side economics. The proof that these doctrines depicting government as the problem were convincing came in election results that put in office politicians especially friendly to the elite’s interests (Wisman, 2013a).

By 1980, the ideological advantage had shifted decidedly back in favor of elites. This shift was facilitated by two phenomena: First, Americans underestimate the degree of inequality. A second, far more powerful reason is that they believe that anyone can get rich if they only work hard and save. Those who are rich have earned it and those who are poor also get their just deserts. This view of fluid social mobility has deep roots in U.S. culture. Indeed, for much of U.S. history, thanks to abundant land and emigrants who fled Europe’s rigid class structure, there was greater social mobility in America than anywhere else on earth. In the 1830s, Alexis de Tocqueville noted an exceptionally high degree of vertical mobility in the U.S. and termed it “American exceptionalism.” He exclaimed that “To tell the truth, though there are rich men, the class of rich men does not exist…the rich are constantly becoming poor.”  Tragically, whatever might have been the case in earlier American history, today such exceptionalism is no longer valid. Over the past decade, multiple studies have found that vertical mobility in the U.S. is less than in most other rich societies such as Canada, Sweden, Germany, Spain, Denmark, Austria, Norway, Finland, and France. A Pew Research Center report (2012) finds that for the United States 43 percent of individuals born into the bottom quintile of the income distribution remain there as adults, and 70 percent remain below the middle quintile.

The elite’s recapture of ideological leadership translated into political power, resulting in massive tax cuts for the rich, shredded welfare for the poor, busted unions, and deregulation. Income, wealth, and privilege were massively redistributed in favor of a thin elite at the top (Saez, 2009). Beginning with the Reagan administration, the elite regained its historic capacity to use government to enable it to capture practically everything beyond what workers need for survival (Wisman, 2013a). And as government programs benefiting the larger population are cut, their quality worsens, thereby giving credence to the view that government is incompetent and thus “the problem.” And for some who may not agree, measures are being implemented that restrict the franchise (Wisman and Pacitti, 2014). The ideology of ‘government as the problem’ has been so successful that a huge percent of Americans don’t recognize very substantial benefits they receive from government: 40 to 44 percent of those who receive Social Security, unemployment benefits, and Medicare claim that they “have never used a government program,” (Stiglitz, 2012).

The 40-year period of declining inequality from the 1930s to the 1970s was a historical anomaly, if not a singularity. The reason the rich can be expected to reverse any setbacks and regain disproportionate shares of wealth, income and privilege is located in their greater potential for crafting ideology that is widely persuasive (Wisman, 2013a). In addition to greater material assets that in the U.S. enable them to essentially purchase elections, the wealthy have the best educations, the most gifted friends and acquaintances, all of which make them on average more astute and successful in identifying and attaining their interests than less-privileged citizens.

The wage stagnation and heightened inequality that accompanied the reclaiming of ideological control by an elite generated forces that made the economy vulnerable to systemic dysfunction. Curiously, the same forces that unfolded in the 1920s as a resurgence of laissez-faire ideology was used to discredit two prior decades of greater government intervention that had improved the welfare of workers. These forces in the 1920s set the stage for the financial collapse of 1929 (Wisman, 2014), just as they would later set the stage for the financial crisis of 2008 (Wisman, 2013b). In both instances, stagnant worker incomes constrained consumption, reducing profitable investment potential in the real economy, and thereby encouraging an ever-wealthier elite to flood financial markets with credit, helping keep interest rates low, encouraging the creation of new credit instruments and greater indebtedness, and fueling speculation. A second dynamic is that consumption externalities were generated by the conspicuous consumption of the increasingly richer elite, forcing those below to struggle harder to find ways to maintain the welfare and relative social status of their families. Prior to both crises, household saving rates plummeted, households took on significantly greater debt, and worked longer hours as they tried to make ends meet. And in both instances, as the rich took larger shares of income and wealth, they gained more command over ideology and hence politics (Wisman and Baker, 2011). Reducing the size of government, cutting taxes on the rich, reducing welfare for the poor, deregulating the economy, and failing to regulate newly evolving credit instruments flowed out of this ideology.

The Great Depression delegitimated the ideology of the elite and ushered in a 40-year period in which many government actions served the interests of workers. But the current Great Recession in the wake of the financial crisis of 2008 has yet to have the same effect. Laissez-faire economics continues to reign and inequality continues to increase (Saez, 2015). Might it be that policy makers have learned to successfully limit the broader consequences of a financial crisis, constraining unemployment to rise only to 10 percent vs. the 25 percent of the Great Depression? Is a far more severe crisis necessary to awaken people to the fact that the elite’s ideology is legitimating their relative impoverishment?

About the Author

JON D. WISMAN is Professor of Economics at American University, Washington DC. His research spans a broad spectrum of domains from history of economic thought and methodology to labor and other social issues.

 

References 

Acemoglu, D., & Robinson, J. (2000). Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective. The Quarterly Journal of Economics, 115(4), 1167-1199.

Ford, M. (2012, January 6). Five myths about the American dream. Retrieved from: http://www.washingtonpost.com/opinions/five-myths-about-the-american-dream/2011/11/10/gIQAP4t0eP_story.html

Goldin, C., & Margo, R. (1992). The Great Compression: The Wage Structure in the United States at Mid-Century. The Quarterly Journal of Economics, 107(1), 1-34.

Marx, K., & Engels, F. (1848). Manifesto of the Communist Party. New York: International.

Pharr, S., & Putman, R. (2000). Disaffected Democracies: What’s Troubling the Trilateral Countries? Princeton, N.J.: Princeton University Press.

Saez, E. (2009, August 5). Striking it Richer: The Evolution of Top Incomes in the United States. Retrieved from: http://eml.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

Saez, E. (2015, January 15). Striking it Richer: The Evolution of Top Incomes in the United States. Retrieved from: http://eml.berkeley.edu/~saez/saez-UStopincomes-2013.pdf

Stiglitz, J. (2012). The price of inequality: How today’s divided society endangers our future. New York: W.W. Norton & Co.

Wisman, J., & Baker, B. (2011). Rising Inequality and the Financial Crises of 1929 and 2008, in Consequences of Economic Downturn.  Edited by Martha Starr.  New York: Palgrave Macmillan,  63-82.

Wisman, J. (2013b). Wage stagnation, rising inequality and the financial crisis of 2008. Cambridge Journal of Economics, 37(4), 921-945.

Wisman, J. (2013a). Government is Whose Problem? Journal of Economic Issues, 47 (4),  911-37.

Wisman, J. (2014). The Financial Crisis of 1929 Reexamined: The Role of Soaring Inequality. Review of Political Economy, 26(3), 372-391.

Wisman, J., & Pacitti, A. (2014, September 24). Exploding Inequality Is Threatening Our Democracy. Retrieved from: http://www.huffingtonpost.com/jon-wisman/exploding-inequality-is-t_b_5869650.html

 

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