The notion that America is sharply divided between free market capitalists and big government socialists is complete baloney. This country is lousy with consensus around an economic value system, which is deeply embedded in the DNA of most Americans and based upon generations of experience with capitalism in this country.
For the first third of the 20th century, America was the Wild West. Low taxes. No regulation. No unions. Anything goes. We called it the Roaring ’20s. The rich got filthy rich. Everybody else just got filthy. The Roaring ’20s officially ended on October 29, 1929 when the entire American economy crashed, ushering in a decade of unrelenting misery and despair featuring 25 percent unemployment, widespread bank failures, bankruptcies, foreclosures and food lines. We called that the Great Depression. The closer we looked at capitalism, the more we found it wanting. So we did what Americans always do when we see a problem. We fixed it.
In this case, the fixer-in-chief was President Franklin D. Roosevelt. The damage done to the country during the Depression convinced him that unregulated capitalism always favors the rich at the expense of everyone else. So to save capitalism from itself, FDR introduced what turned out to be the crucial missing ingredient: compassion.
Roosevelt understood that compassion did not grow naturally in the harsh climate of an unfettered free market. He knew instinctively that fairness — essential to any functioning democracy — was an alien concept to pure capitalism. So FDR gave us a new, improved version. Call it compassionate capitalism. No senior citizen ends up destitute (Social Security). Banks and Wall Street don’t get to gamble with peoples’ savings (FDIC and SEC). Anybody who serves their country goes to college (GI Bill). Everybody who wants to work gets a job that the country needs to have done (CCC and WPA).
Far from hobbling private sector growth, these programs actually fueled it. Tons of people got very rich. However, the immense wealth created in America during the post-Roosevelt years was much more evenly distributed — with the biggest chunk going to a rapidly expanding middle class. Compassionate capitalism worked for everyone without busting the federal budget.
The numbers speak for themselves. During the ’20s, the top income tax rate in America was slashed from 73 percent to 24 percent. Instead of stimulating economic growth, these huge tax cuts brought us unprecedented budget deficits. When Roosevelt took over from Hoover in 1933 the annual federal deficit had ballooned to more than half the size of the entire U.S. budget. Roosevelt drove that deficit steadily downward until the federal budget was practically balanced in 1938. But government spending on WWII pushed those deficits right back up. By 1943 the size of the deficit had exploded to an unimaginable 69 percent of the budget itself. But once again, Roosevelt’s policies chipped away at that deficit until 1947 when the federal government ran a budget surplus.
The lesson? Massive tax cuts mean massive deficits. Big wars beget big deficits. Yet under Roosevelt’s compassionate capitalism — even with a Great Depression and a Second World War — the federal budget quickly came right back into balance. His successor, Harry Truman, stuck to FDR’s playbook and ran a net surplus during his six years in the White House. By the time Eisenhower was elected, compassionate capitalism was tightly woven into the fabric of American democracy.
Between 1952 and 1980 Democrats and Republicans argued about a lot of stuff: communism, civil rights, Vietnam, marijuana, abortion, nuclear power — you name it. But throughout all those years of political and economic upheavals, no president — of either party — seriously argued that America couldn’t afford Social Security and Medicare.
Then along came Ronald Reagan and things got crazy. Reagan was too smart a politician to advocate shredding the social safety net. Instead, he cut taxes so drastically that there wasn’t enough money to pay for it. Sure enough, during the Reagan/Bush years the deficit skyrocketed to such a frightening level that Reagan’s own budget director, David Stockman, quit the administration to write a scathing book titled “Why the Reagan Revolution Failed.”
Deficit hawks didn’t know it at the time, but the answer to their prayers arrived with the presidency of Bill Clinton who inherited a quarter trillion dollar deficit and left his successor with a quarter trillion dollar surplus. Everybody knows the rest of the story. George W. Bush took that Clinton surplus, proceeded to slash taxes, and launch two major wars and presto: trillion dollar annual deficits as far as the eye can see.
The reason compassionate capitalism is still hugely popular — Tea Party extremists notwithstanding — is because it works. America’s social safety net was never viewed as the cause of eye-popping deficits until a radical group of political nihilists, led by people like Grover Norquist, decided that the best way to kill the compassion in capitalism was to stubbornly refuse to pay for it — and then blame the resulting deficits on the lie that compassion itself is just too damn expensive.
The so-called controversy over “raising taxes vs. cutting entitlements” exists only in Washington. For the rest of America, this issue was settled in 1932 and then again in 2012. History has repeatedly demonstrated that compassionate capitalism leads to balanced budgets, a robust economy, and a piece of the opportunity pie for every citizen seated at America’s table. If we take the compassion out of capitalism, what’s left? 1929.