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A sordid history of wealth and power in the U.S.
Democracy to the high bidder

July 26, 2002 | Page 8

LANCE SELFA takes a look at Kevin Phillips' new book Wealth and Democracy.

A LITTLE more than two years ago, the NASDAQ stock exchange crashed through the 5,000-point plateau, capping a three-year run in which the technology-heavy stock index increased by 500 percent. At the time, new Internet firms like were worth more in dollar terms than long-established manufacturing companies.

The boom also produced a legion of publicists and promoters who insisted that capitalism had overcome the business cycle and everyone could be The Millionaire Next Door.

In the wake of today's stock market crash, corporate scandals and mass layoffs, all of that seems like a distant memory. But to Kevin Phillips, it's the latest chapter in U.S. capitalism's boom-and-bust cycles that allow a wealthy few to line their pockets while the majority of Americans fall behind.

In Wealth and Democracy, Phillips explains the cycles of U.S. economic history and their political echoes. From the beginning of the republic, politics has oscillated between eras of unfettered aggrandizement of the wealthy and periods where ordinary people fight back, he argues.

The recently ended Internet tech mania was an example of a period where the wealthy flourished. The money they pocketed in the late 1990s was staggering, as Phillips' comparisons of the largest American family and individual fortunes through the decades shows.

The wealthiest families in the 1950s and 1960s--people like the Texas oil Hunts or the old-money Rockefellers--hardly increased their wealth over the three post-Second World War decades. In comparison, the average fortune on the Forbes 400 in 1999--with Microsoft's Bill Gates topping the list--was 10 times the size of the average Forbes 400 fortune in 1982.

The late 1990s' stock market boom produced a class of super-wealthy people without parallel in U.S. or even world history.

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DESPITE THE hype about the democratization of stock ownership and the oft-quoted fact that millions of American families are invested in the stock market, the superrich remained the real winners from the stock market mania. "Thus, the fact that 48 percent of Americans, at least indirectly, held some stock in 2000 may not tell us a whole lot more than the likelihood that 30 or 40 percent of the farmers of 1840 counted a small net worth grouped around a land office receipt," Phillips writes. "Opportunity did exist, but the concentration of riches and power was elsewhere."

Of course, the stock market hype also covered for the fact that ordinary Americans were falling behind. Until only the last three years of the 1990s, when working-class incomes began to rise, most Americans' incomes remained flat or had declined in relation to their incomes in the 1970s.

Phillips deploys an arsenal of statistics to show how the quality of life for most Americans declined amidst the creation of a new "plutocracy" in the 1990s. The starkest of these is a graph comparing the increase in the U.S. per capita income and an index of "social health," including measures of health care coverage, child poverty and other indicators. The graphs show a growing chasm between increasing per capita incomes and decreasing social health between the mid-1970s and 2000.

These trends since the mid-1970s reversed the era of what Phillips calls "the Great Compression" in the three decades following the Second World War. Then, a combination of strong unions, government investment in education and health, and higher taxes on the rich and corporations assured a fairly even growth in family income across the income spectrum.

The reversal of these trends, the underpinning of the "American dream" in the 1950s and 1960s, followed directly from conservative economic policies and an employers' offensive in the 1980s. "Conservative rhetoric about leaving everything to the marketplace was misleading. Laissez-faire had been a myth in the Gilded Age and was again in the eighties. Simply to imprint a new bias on the federal government required a calculated politics--an effective use of Washington, not marketplace policy levers," Phillips writes.

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ORGANIZED BUSINESS and the rich, acting through their Democratic and Republican servants in Washington, pushed through the familiar set of policies--tax cuts for the rich, tax increases for workers, deregulation, curtailing of union rights, and the shredding of the social safety net.

If business' greed got it into trouble--as in the early 1990s savings and loan crisis, or in the near collapse of Long-Term Capital Management in 1997--Washington stood by, ready to bail it out. This has been the American way from the start.

Phillips shows that most of the great American fortunes depended on their proximity to power and government-provided corporate welfare, rather than the mythical "free market." From war profiteering in the Revolution to government land giveaways to railroads after the Civil War to government creation of the Internet, the American rich have usually found a partner--not an enemy--in government. Perhaps this disturbs Phillips the most.

All capitalist heydays, like the Gilded Age of the 1870s-1880s or the last 20 years, have generated an increase in open political corruption and a decline in democracy. In the 1880s, the railroads virtually owned state legislatures. Today, three-quarters of all political contributions come from families worth $200,000 or more. In the face of facts like these, is there any doubt why so many government policies reward the rich?

Phillips finds an even more sinister erosion of democracy in the tendency of U.S. rulers to push decisions that affect the lives of millions into the corridors of unelected and unaccountable bodies like the World Trade Organization and the Federal Reserve.

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ALL OF this--huge inequality, a declining quality of life and a decline in democracy--may be the gathering clouds of a perfect storm for a populist revolt to rein in corporate greed. This is the history of how ordinary Americans reacted to "capitalist heydays"--the Populist movement of the late 1800s or the labor movement the 1930s, for example. "By mobilizing against corruption, polarization and market Darwinism--living specifics, not gray abstractions--politics might be able to regain the relevance and popular support it had lost in the late twentieth century," Phillips writes. "Belief that Americans faced with the onset of decline would not be radical ignores both the polarization and wealth concentration of the eighties and nineties and the vein of recurring hostilities [to the rich]."

Kevin Phillips is an unlikely herald for populist revolt. As a lawyer in the Justice Department in the first Nixon administration, Phillips wrote The Emerging Republican Majority, a virtual blueprint for the conservative Republican ascendance that took root over the next two decades.

Apparently, Phillips has had some second thoughts since the Reagan-Bush years. Beginning in 1990 with his publication of The Politics of Rich and Poor, he has become a vocal critic of what he calls "free-market theology" and the extreme income inequality conservative policies produced.

Phillips is no socialist, even if he's not too welcome at the yacht club these days. He still calls himself a Republican, identifying with early 1900s Republican President Theodore Roosevelt's blasts against "malefactors of great wealth." And some of his arguments tend toward the economic nationalism and protectionism associated with figures like Ross Perot or even Patrick Buchanan.

If anything, Wealth and Democracy is a warning to the ruling class to curb its excesses lest it generate a radical, anticapitalist movement: "Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime--plutocracy by any other name. Over the coming decades, American exceptionalism may face its greatest test simply in convincing the American people to continue to believe in its comfort and reassurance."

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