The Win-Win Tax Reform Fantasy

Apr 17, 2012Mark Schmitt

Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code.

Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code.

With your taxes due today, the Buffett Rule blocked in the Senate, and the next fiscal showdown (during the lame duck congressional session between the election and the seating of the new Congress in January) coming into sight, the phrase “tax reform” is beginning to be heard throughout the land. For those of us who have been pushing for comprehensive tax reform for many years, this should be a beautiful, thrilling moment.

But count me worried, not thrilled. We seem to be approaching tax reform for all the wrong reasons, and politicians of both parties are possessed of some dangerous illusions about what tax reform can and can’t achieve.

The push for tax reform is not based, as it was in the mid-1980s, on a shared belief by a wide range of politicians that the tax code is inefficient, overcomplicated, and unfair. Rather, it’s based on the fact that something called “tax reform” seems to be the only way out of the box that politicians have put themselves in. Obama has boxed himself in by his promise not to let taxes go up on any household with taxable income under $250,000. The Republicans have limited themselves even further by refusing to discuss any tax increases at all. Some Republicans, just a few, are willing to consider something called “tax reform” if it increases “revenues” slightly without increasing “taxes,” that is, tax rates. The option of letting the Bush tax cuts expire is unacceptable even to most Democrats, because it would raise taxes for the middle class, while a deal on extending the middle-class cuts is unacceptable to the Republicans because it would raise taxes on the wealthy.

But as last summer’s debt limit deal expires at the end of the year, the only alternative to the brutal sequesters of defense and non-defense spending promised in the deal is some movement on revenues in order to facilitate a deal to cut spending. And all that is left is something called “tax reform.” In the current environment, tax reform is not a positive goal, built on a vision of a fairer and more efficient tax system. Instead, it seems to be just the only way out of a situation that should never have been created in the first place.

And all too many politicians, including many Republicans and a good many Democrats, are caught in a fantasy: that tax reform might be a “win-win,” in which rates can go down and revenues go up, simply by “broadening the base.” Tax reform often represents a fantasy of a common-sense middle ground between the parties, one they could embrace if they just understood how easy it would be. Here’s John Avlon, a self-identified centrist and advocate for bipartisan solutions, on CNN last month: Tax reform is “the Bowles-Simpson idea. You can lower rates, close loopholes, and raise revenue. That should be a win- win. Only in Washington is that not a win-win.”

In fact, the idea of a win-win is all too appealing in Washington. Lowering rates, closing the loopholes (also known as “broadening the base”), and raising more revenue is the idea that most Democrats, and a few Republicans -- including, without details, House Budget Chair Paul Ryan -- have latched onto. But to call it a win-win is deeply misleading.

It’s useful to compare our situation with the circumstances of the mid-1980s, when the legendary bipartisan tax reform of 1986 was passed. At that time, tax rates were actually high (the nominal top rate was 70 percent) and the loopholes were many and insane. The top tax rates were effectively meaningless. The biggest loophole involved the deductibility of passive losses – investments in which the taxpayer didn’t actually take a risk. Even then, there were losers, particularly the oil- and gas-producing sectors, that relied on passive investment, and the powerful members of Congress who represented them. And even in that legendary win-win, only two of the three big goals were achieved. Rates were lowered. Loopholes closed. (Leaving many rich people better off, on net.) But revenues were not raised, because the goal of tax reform at the time was to separate it from arguments about raising or cutting taxes by making it revenue-neutral.

If all three goals couldn’t be achieved in 1986, that’s even more true in today’s very different circumstances. Today rates are very low by historic standards (not quite as low as the 28 percent achieved in the cleaned-up system of 1986, but that was unsustainable), and loopholes are many – but many of them reach the middle class. We can broaden the base, but if we do so in the context of long-term deficit reduction, the revenues will have to go to that purpose first.

And even doing that would require going far, far beyond the loopholes that President Obama has talked about (deductibility of expenses for private planes) and that Mitt Romney hinted he might close, in an overheard speech at a fundraiser, such as the deductibility of mortgage interest for second homes. (Or, in his case, third and fourth homes as well.) Neither of those are in the top 12 list of tax expenditures (the more formal term for loopholes, or spending through the tax code) maintained by the Tax Policy Center. To have any real impact on either revenues or tax rates, Congress would have to be willing to consider the big ones: the tax deduction for mortgage interest on high-end houses, the deduction for employer-paid health insurance (which would be far more disruptive than the Affordable Care Act), charitable contributions, or the special rate for capital gains. Much of the complexity of the tax code is now at the low end, in the myriad of credits that are partially refundable, such as the Child Tax Credit. While these should be simplified, the goal of doing so shouldn’t be to raise revenue, since it would mean raising taxes on lower-income workers.

What we need is not tax reform, but revenue reform – a system that is not only fair and efficient, but brings in adequate revenues to support, over the fairly long term, the services we want government to provide. Nothing on the table right now – not the Buffett Rule in either its specific form (a version of the Alternative Minimum Tax for those earning more than $1 million) or the general principle, nor anything in Paul Ryan’s budget – constitutes anything like revenue reform. And when we do see real revenue reform, it won’t be a “win-win” for everyone. It will have to mean that those who have been the big winners in tax policy for the last 30 years will have to pay a bit more.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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Does Expansionary Monetary Policy Primarily Benefit Finance and Rentiers?

Apr 17, 2012Mike Konczal

Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

Joe Weisenthal calls it the Biggest Myth in Monetary Policy Today, and recently there's been a wave of posts about it.  Would another round of expansionary monetary policy at this point - in either a QE3, a conditional higher inflation target or NGDP targeting - primarily benefit the financial sector, rentiers and the wealthy?

Here are Daron Acemoglu and Simon Johnson at Economix, making the case in Who Captured the Fed?:

Thus was born the idea of independent central bankers, steering the monetary ship purely on the basis of disinterested, objective and scientific analysis. When inflation is too high, they are supposed to raise interest rates. When unemployment is too high, they should make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control.

Increasingly, however, it seems that technocratic policy-making is just a myth. We have come full circle, and the Wall Street banks are calling the shots again...

Monetary policy has an impact on inflation, output and employment. But it also has a major impact on stock market prices. Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives....

Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse....

We have lost track of the number of research notes from major banks pleading for easier credit, lower capital requirements, delay in implementing financial reforms or all of the above...

As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen.

I'm a huge fan of both Daron Acemoglu and Simon Johnson (I'm about to start each of their books, Why Nations Fail and White House Burning), so I want to take this argument carefully.  How to approach it?

First off, it isn't just the financial sector calling for low rates (if they are, in fact, calling for it, as we'll see in a second).  A generic Taylor Rule, as Paul Krugman recently pointed out, calls for low rates until 2015.  Mess with the rule and the data a bit to adjust that date at the margins, but generic macroeconomic stabilization rules still see low rates for quite some time as necessary.

I always find the following to be a useful thought exercise: imagine we wake up and find that interest rates aren't set at zero but instead at one percent.  Whoops!  Should we turn around and have the Federal Reserve lower interest rates?  Those who think that Taylor Rule is correct and that the zero lower bound is blocking monetary policy from being effective would say yes; so would people who think the Federal Reserve isn't out of ammunition at the zero lower bound, people like Christina Romer and Charles Evans.

The post argues the Federal Reserve should, when unemployment is high, "make it cheaper and easier to borrow, all the while working to make sure that inflation expectations remain under control."  The post seems to concede that monetary policy works as normal, and unemployment is high and inflation expectations are, if anything, lower than what we want.

But I feel the entire vibe of the article is wrong. The financial sector is calling for higher interest rates.  This is why Carmen Reinhart told Institutional Investor that “Financial repression is manifesting itself right now” alongside the notion that financial repression is like “the rape and plunder of pension funds.”  Members of the financial community complain to reporters about "low interest rates that have been 'artificially manipulated' by the Federal Reserve."

Or take Brad Delong's six minute debate about QE with Jim Grant from last year.  As Delong summarized it (my bold):

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed...

You can read that in the recent statement by Mohamed A. El-Erian of Pimco, who, as Karl Smith noted, wants the Federal Reserve to focus on microeconomic goals instead of the macroeconomic problem of full employment.  This isn't new.  As Keynes noted, "the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners."

The implicit argument is that the interest rate compatible with full employment is too low for financial investors to accept.  Do we then just accept mass unemployment and the subsequent hysteresis-induced slowing of growth and human potential so Jim Grant and Pimco can make a profit they feel is worthy of their financial talents?  Of course not.

Now if you check out Jim Grant's argument to Brad Delong, there's an argument that we should split finance in two sectors - an established one that is hurt by low interest rates and one that is more focused on intermediation and/or trading for themselves, which could benefits from low rates and bubbles is stock prices and assets.

The stock market is following unemployment claims pretty closely, so it isn't clear to me that the stock market is broken from its function as a prediction of future economic activity (i.e. in a bubble).  I like two MIT economists arguing that we should disconnect stock prices from the real economy, but I think that requires an additional layer of explanation.  For instance, if monetary policy was constant and we passed another round of deficit-funded fiscal stimulus to rebuild infrastructure and employ people, I would expect the stock market to increase because the economy would be stronger.

If that's the case, that there's two financial sectors and one of them benefits from monetary expansion we have to ask - so what?  If monetary policy is working, and bringing us closer to full employment, and some hedge funds and Wall Street traders make some money off of it, why should that impact our commitment to using all levers for full employment?  Monetary policy is not a morality play, and it's not about rewarding the good people and punishing the bad ones.  It’s about stabilizing growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen.

As Josh Mason's great guest post here mentioned, if we are worried about where the financial sector channels money, that's an argument for regulation instead of mass unemployment and scarce liquidity.  We should commit to better regulations as well as progressive taxes and/or financial taxes.  If those aren't in place (and I don't believe they sufficently are), those shouldn't be attempted with monetary policy, and they absolutely must not distract us from taking our eye off the goal - full employment in the wake of the Great Recession.

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How Can Herbert Spencer's 1892 Revisions to his Social Statics Help Us Understand Conservative Opposition to the Individual Mandate?

Apr 16, 2012Mike Konczal

What should liberal wonks make of the conservative movement's abandonment of center-right policy innovations like the individual mandate and cap-and-trade once President Obama took them up?

What should liberal wonks make of the conservative movement's abandonment of center-right policy innovations like the individual mandate and cap-and-trade once President Obama took them up? To answer this, it might be useful to look at revisions made to the 1892 edition of Herbert Spencer's classic 19th century handbook of laissez-faire, Social Statics or The Conditions essential to Happiness specified, and the First of them Developed.  That's the book Oliver Wendell Holmes alluded to when dissenting in Lochner, famously saying, "The Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics."

I

Herbert Spencer's name bounced around the internet while I was on vacation after President Obama referred to Paul Ryan's budget as “thinly-veiled Social Darwinism.” Damon Root at Reason wrote that that it's unfortunate that Spencer is smeared as a monster when he was a proponent of free markets, a defender of private charity, and had "pioneering support for feminism and women’s equality."

The feminism, women's equality, and women's suffrage points are correct. In his book Social Statics, originally written in 1851 and with the following taken from the 1888 reprint, Spencer had chapter 16 titled "The Rights of Women," which opens, "Equity knows no difference of sex." Spencer thought dominion of man over women in the household was a form of feudalism, something he believed his evolutionary thought was there to bury: "in as far as our laws and customs violate the rights of humanity by giving the richer classes power over the poorer, in so far do they similarly violate those rights by giving the stronger sex power over the weaker."

Spencer embraced the worry of critics that giving women some rights would inevitably lead to demands for suffrage: "The extension of the law of equal freedom to both sexes will doubtless be objected to, on the ground that the political privileges exercised by men must thereby be ceded to women also. Of course they must; and why not?" He concludes, "it has been shown that the rights of women must stand or fall with those of men; derived as they are from the same authority; involved in the same axiom; demonstrated by the same argument."

He was a serious defender of women's rights... until it looked like women might actually start getting rights. He then suddenly became very concerned about equality between the genders. The revolutionary language and political equality above was removed from the 1892 edition of Social Statics.

And Spencer had changed his position much earlier. In August 1867, when John Stuart Mill asked Spencer to join the Women's Suffrage Society, he declined, saying that there had been a "modification" of his views. The same year, Spencer also declined Mill's request, on behalf of his step-daughter Helen Taylor, that "The Rights of Women" from Social Statics (the essay that Root linked to in his post) be included in a collection of essays she was putting together. When Mill sent him a copy of The Subjection of Women, Spencer replied that someone should write an essay called The Supremacy of Women, about how women nag men and that gives them a lot of hidden power. (Mill responded, "two contradictory tyrannies do not make liberty.")

People change their minds all the time. But the reasons Spencer gave weren't impressive. One argument was that women don't share in military service, thus they shouldn't share political rights. Given how important it was to Spencer that his arguments be rigorous and hang together logically from his system of authority, axioms, and arguments, this reversal is so underdeveloped many argue it resulted from his lack of luck with romance and women.

But I think it's clear what his real objection was: universal suffrage has the potential to advance socialistic causes, interfering with his laissez-faire project. From his autobiography: "Another extension of the franchise since made...will inevitably be followed by a still more rapid growth of socialistic legislation." When he realized women's equality could potentially interfere with laissez-faire economics, it was time for women's equality to get cut from his overall theory of a better world. He would rather mutilate his intellectual project instead of allowing his enemies to continue to build their governance project.

II

Because Spencer was an ardent defender of laissez-faire. He thought evolution would bring about less government, he attacked the idea that government regulations "will work as it is intended to work, which it never does," he believed in a Right To Ignore The State, and, of course, he believed that private property in land was a joke and that all land should be nationalized and run like "a joint-stock company" by the State. His belief that the injustice of private property in land fell so naturally out of his rigorous theory of laissez-faire that he titled Chapter 9 of Social Statics "The Right To Uses of the Earth," which argued that "to deprive others of their rights to the use of the earth, is to commit a crime inferior only in wickedness to the crime of taking away their lives or personal liberties."

What's that you say? How could a laissez-faire person like Spencer be against private property in land? Spencer:

For if each of them “has freedom to do all that he wills provided he infringes not the equal freedom of any other,” then each of them is free to use the earth for the satisfaction of his wants, provided he allows all others the same liberty... Equity, therefore, does not permit property in land...

For if one portion of the earth’s surface may justly become the possession of an individual...eventually the whole of the earth’s surface may be so held...the rest of its inhabitants can then exercise their faculties—can then exist even—only by consent of the landowners; it is manifest, that an exclusive possession of the soil necessitates an infringement of the law of equal freedom. For, men who cannot “live and move and have their being” without the leave of others, cannot be equally free with those others.

Separate ownerships would merge into the joint-stock ownership of the public. Instead of being in the possession of individuals, the country would be he held by the great corporate body—Society. Instead of leasing his acres from an isolated proprietor, the farmer would lease them from the nation... A state of things so ordered would be in perfect harmony with the moral law.

This was a crucial part of Spencer's thinking... until it wasn't. In the 1892 edition of Social Statics, the entire chapter on land reform is gone. Spencer suddenly thought that his policy had some serious problems right around the time land reformers were making progress.

The equivalent of the late 19th century wonk blogosphere sprang into action to figure this out. Alfred Wallace, who you may know as the person who discovered evolution by natural selection separately from Darwin, was the president and founder of the Land Nationalization Society. He dedicated his 1892 presidential address to Spencer, noting that reading Social Statics in 1853 made him found the Society, and tried to clarify why Spencer's new policy was incorrect, both as they related to his overall theory and the practical reality of the policy itself. Clearly he just made a mistake.

Henry George wrote A Perplexed Philosopher, a large critique of Spencer's new opinion. George noted that Spencer took the brave and daring step of siding with the wealthy, landed aristocracy in his new policy. In the conclusion, George refers to the about-face as an act of "intellectual prostitution." Clearly he was bought off.

Spencer had always been under attack for that chapter of his book. The Economist magazine, god bless 'em, praised the laissez-faire parts of the original Social Statics but went after the land reform parts at length in its 1851 review. The conservative press, and well as laissez-faire organizational groups like the "Liberty and Property Defence League," were constantly attacking Spencer on the land question because they saw reformers do the "even Herbert Spencer agrees...." thing. Clearly he realized what the correct argument was all along.

But what if it is the same situation as women's suffrage? What if he saw, correctly, that this piece of his theory was emboldening his enemies in the progressive, socialist, and reform movements? Even though he agreed with them in principle, to see democratic challenges from below succeed would both show that the other side can deliver on its projects and would threaten the laissez-faire economy he wanted to build.

What's both fascinating and sad about the process is that, in order to defeat even the potential of his enemies gaining a policy priority he believed in, he was willing to butcher his elaborate theory of the world so that it could protect the thing - the regressive, anti-evolutionary, feudal, unproductive, landed British aristocracy - he was hoping it would bury.

Two quick endnotes:

1. Here's a thought:  All property in land exists through the might of a barrel of a gun and the subsequent property documents are dripping with the blood from a sword. To try and cynically create a calculus that x years wipes y amount of the blood off the documents makes you as cupable as the person who pulled the trigger. The thought of a radical, Kenyan, anti-colonialist thinker? Nope, just Herbert Spencer in Social Statics, Chapter 9, Part 3:

It can never be pretended that the existing titles to such property are legitimate. Should any one think so, let him look in the chronicles. Violence, fraud, the prerogative of force, the claims of superior cunning—these are the sources to which those titles may be traced. The original deeds were written with the sword, rather than with the pen: not lawyers, but soldiers, were the conveyancers: blows were the current coin given in payment; and for seals, blood was used in preference to wax...

“But Time,” say some, “is a great legaliser. Immemorial possession must be taken to constitute a legitimate claim"...To do this, however, they must find satisfactory answers to such questions as—How long does it take for what was originally a wrong to grow into a right? At what rate per annum do invalid claims become valid?

2.  I'm currently reading Free Market Fairness by John Tomasi; here they are debating the theory at Cato Unbound. In order to explain the difference between classical liberals and high liberals like Rawls, Tomasi uses the thought experiment of how each would set the rules for a game of Monopoly. He does it in the book and he does it in this blog post. Classical liberals want equal rules for everyone in Monopoly and are okay with unequal starting money; High Liberals are concerned about inequalities in wealth, even after the game begins. And so on.

How would Herbert Spencer approach Monopoly, a game entirely about private property in land? The crucial part of the game isn't the issue of fairness between players on turn one, it's how fair the game is to people who start on turn 30. At that point, the productive capital (all the land cards) have been purchased. The turn 30 players would run around the board hoping not to be bankrupted. Maybe they'd pass go enough times to build enough wealth to buy some land, but most likely all their income would be siphoned off in rents by the turn one players. To use Spencer's phrase, the turn 30 players cannot “'live and move and have their being' without the leave of others" and thus "cannot be equally free with those others."

Spencer answered Tomasi's rules question when he anticipated the incrementalist types in the land reform movement who thought redistributing the land once and setting up some side rules would suffice (i.e. restart the Monopoly game) by noting "what becomes of all who are to be born next year? And what will be the fate of those whose fathers sell their estates and squander the proceeds? These portionless ones must constitute a class already described as having no right to a resting-place on earth—as living by the sufferance of their fellow men—as being practically serfs. And the existence of such a class is wholly at variance with the law of equal freedom."

So if you asked the young Herbert Spencer how to fairly set up the rules of Monopoly, he'd probably say "there are no fair rules to this game," flip the board over and walk away. Like a boss.

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For Capitalism to Survive, Crime Must Not Pay

Apr 12, 2012Bruce Judson

money-justice-scalesUnequal enforcement of the law will distort and destroy any capitalist society, and we may be witnessing just such a downward spiral in the financial sector.

money-justice-scalesUnequal enforcement of the law will distort and destroy any capitalist society, and we may be witnessing just such a downward spiral in the financial sector.

Capitalism is not an abstract idea. It is an economic system with a distinct set of underlying principles that must exist in order for the system to work. One of these principles is equal justice. In its absence, parties will stop entering into transactions that create overall wealth for our society. Justice must be blind so that both parties — whether weak or powerful — can assume that an agreement between them will be equally enforced by the courts.

There is a second, perhaps even more fundamental, reason that equal justice is essential for capitalism to work. When unequal justice prevails, the party that does not need to follow the law has a distinct competitive advantage. A corporation that knowingly breaks the law will find ways to profit through illegal means that are not available to competitors. As a consequence, the competitive playing field is biased toward the company that does not need to follow the rules.

The net result of unequal justice is likely to be the destruction of the overall wealth of our society. I don’t mean the wealth of individuals; I mean the total wealth of goods and services that are the benefits of healthy competition. To the extent that unequal justice prevails, entities that are exempt from the laws will, in all likelihood, be more profitable than law abiding competitors. Then they use their profits to further weaken competitors by using their illegal profits to further build their businesses at the expense of competitors. All of this business building activity is based on a foundation of sand, and ultimately the entire industry — or even the larger economy — becomes distorted. The “rogue” company gains power, changes markets, and destroys direct and indirect competitors because it is playing by different rules.

The above scenario is not simply a hypothetical example. It is exactly what happened at Worldcom. As the company succeeded because of its then-unknown illegal activities, it grew, managed to take over MCI (one of the true innovators in the industry), and weakened competitors who could not match its profitability. Ultimately the whole edifice collapsed, causing massive wealth destruction in the telecommunications industry and the economy as a whole.

In the WorldCom example, appropriate legal enforcement and prosecution did not occur until the accounting fraud and other crimes were detected. Thus, while it is more an example of undetected accounting fraud than unequal justice, the results are illustrative. In a society with unequal justice, the appropriate laws are never enforced, so entities acting outside the law continue to grow more profitable and powerful (as compared to everyone operating according to the rules). Moreover, the profits from illegal activities can be used to subsidize competition across the spectrum of business activities of companies acting outside the law — which further enforces the competitive advantage, and possible hegemony, of entities operating on a different playing field.

Now, here’s why the above discussion is so important if we hope to return our economy to the dynamo of wealth creation for the entire society that is, in part, what made America a great nation. As economic inequality increases, two sets of laws implicitly develop: one set for powerful members of society and another set for the weaker. These two sets of laws are often defined by a single question: who is prosecuted for crimes and who is not. When powerful members of society can break the law without fear of prosecution, they will inevitably exploit this competitive advantage by engaging in profitable (but illegal) activity. At the same time, the weaker members of society can’t compete; they are shackled by the need to follow the laws of the land. Meanwhile, everyone loses as the profits of companies violating the law distort the competitive playing field and the activities of everyone in it and divert societal activity from the creation of real wealth.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

In effect, equal enforcement of the law is not simply important for democracy or to ensure that economic activity takes place, it is fundamental to ensuring that capitalism works. Without equal enforcement of the law, the economy operates with participants who are competitively advantaged and disadvantaged. The rogue firms are in effect receiving a giant government subsidy: the freedom to engage in profitable activities that are prohibited to lesser entities. This becomes a self-reinforcing cycle (like the growth of WorldCom from a regional phone carrier to a national giant that included MCI), so that inequality becomes ever greater. Ultimately, we all lose as our entire economy is distorted, valuable entities are crushed or never get off the ground because they can’t compete on a playing field that is not level, and most likely wealth is destroyed.

The central question for the nation right now is whether we are, in fact, in the middle of the dire and dangerous cycle described above. Washington insiders have reportedthat the Justice Department is explicitly choosing not to prosecute seemingly illegal bank activities. Indeed, in my previous column I noted that the audits released by the Office of the Inspector General of the Department of Housing and Urban Development detailed activities by senior banking officials associated with the robo-mortgage scandal that seem to constitute clear evidence of multiple federal felonies, and most likely violated state laws as well. Yet no one has been indicted.

In an entirely different sector of financial services, the venerable American Banker just completed a three-part series on past credit card debt collection practices. Many of these activities are now under investigation by the Office of the Comptroller of the Currency. But if the past is prologue, it’s unlikely that any criminal indictments will result, no matter what these investigations uncover.

Indeed, as has been repeatedly documented, when illegal activity is detected, the SEC settles with the banks in civil lawsuits for sums that, while appearing to be large, are a pittance compared to the profits of the institutions involved. While these same activities would in many cases constitute criminal violations, no prosecutions have occurred. The bankers who operate our largest financial institutions can rightfully assume that they are above the laws that constrain everyone else.

The evidence that crime does, in fact, pay is perfectly clear. Before the 1990s, the total profits of the financial services sector rarely accounted for more than 20 percentof the total corporate profits of the nation’s economy. By 2005, they averaged aboutone-third of all corporate profits. After sinking as a result of the crash, they rebounded dramatically. By early 2011, the sector once again accounted for about 30 percent of total corporate profits. As The Wall Street Journal noted, “That’s an amazing share given that the sector accounts for less than 10 percent of the value added in the economy.”

Finance serves a valuable function. Its principal role is to ensure that capital is most efficiently allocated in a society. However, financial services are also an intermediate good. They grease the wheels, through capital allocation, so that real goods and services that people consume or experience can be created. Yet, as the Journal noted, the sector’s profits are far in excess of the value the sector adds to the overall economy. At the same time, recent academic research has suggested that the financial sector has become less efficient over time, with the gains from information technology cancelled out by increases in trading activity (whose social value is certainly open to question).

This will ultimately lead us in a downward spiral: A few large powerful entities and people operate above the law, inequality is extreme, citizens have lost faith in their political systems, real societal wealth is not created, and political instability becomes a potential reality. John Adams held that “We are a nation of laws, not men” for a valid reason. Now, we need those charged with enforcing our laws to do their job.

Bruce Judson is Entrepreneur-in-Residence at the Yale Entrepreneurial Institute and a former Senior Faculty Fellow at the Yale School of Management.

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Eric Schneiderman Urges Progressives to "Dig Deeper" to Transform the System

Apr 6, 2012

Last Thursday, Roosevelt Institute Senior Fellow Jeff Madrick kicked off the Roosevelt Institute’s new flagship initiative, Rediscoverin

Last Thursday, Roosevelt Institute Senior Fellow Jeff Madrick kicked off the Roosevelt Institute’s new flagship initiative, Rediscovering Government, at an event with a keynote address from New York Attorney General Eric Schneiderman. Why are Americans so distrusting in government? Schneiderman's answer is that we've been led to believe in the "magical market" that supposedly guides us to equality and prosperity. "Its like the conservatives are pretending they've found some missing pages of Genesis that the rest of us are missing," he said. But in reality humans are to blame for profound changes -- like skyrocketing income inequality -- not supernatural forces. "The distribution of wealth is not determined by nature," he said, "it is determined by public policy."

 

Progressives' efforts at making significant changes to the system after the financial crisis have mostly borne little fruit, he noted. We therefore "need to dig deeper" see how deeply the unfettered propaganda that less regulation leads to growth and higher taxes always create jobs has affected the American mindset and economy. We also have to aim for long-term, "transformational" change instead of the everyday "transactional" change we usually get bogged down in. We have to move past the election cycles and everyday battles to politics that involve working today to improve circumstances in the future and challenging the way that people think about issues in the first place.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

But the importance of progressives' efforts can't be overstated. "Great strides in social justice don't come out because of politicians, they come out because of movements." The movement has to put pressure in all the right places -- most importantly by reviving the fact that government plays a vital and positive role in every American's life. "By demonstrating that the government can and will enforce one set of rules for everyone, and protect the interests of all Americans, not just the most fortunate, we begin the process of transforming people's awareness of themselves and our collective life," he said. "And if we do this work, we can put to rest the deep fallacies that have allowed injustice and inequality to grow unchecked for so long, and we can begin to rediscover the potential of government to get us back in touch to start building, as our counterparts in the 1930s did, a more equitable, educated, healthy, and compassionate nation."

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How We Can End DOMA's Unfair Tax Burden on Same-Sex Couples

Apr 5, 2012

money-justice-scalesAs part of the 10 Ideas: Social Innovation to End Discrimination series, a proposal to adjust wages for same-sex couples to reduce inequity in the tax code and undermine

money-justice-scalesAs part of the 10 Ideas: Social Innovation to End Discrimination series, a proposal to adjust wages for same-sex couples to reduce inequity in the tax code and undermine DOMA.

While media reports characterize the United States as increasingly hospitable to lesbian, gay, bisexual, transgender, and queer (LGBTQ) people, lived experience clearly speaks to the discrimination, isolation, and dehumanization faced by queer folks. Unfortunately, LGBTQ people in the United States face discrimination on a regular basis, often in the workplace, in public spaces, or in relation to their own government. As the LGBTQ movement builds upon successes, it is important that it continues to ground itself in the personal experiences of queer people. A recurring trend in their stories is widespread discrimination under federal law, in many cases due to the Defense of Marriage Act (DOMA).

LGBTQ activists have understood the discriminatory nature of DOMA since President Clinton signed it into law in 1996. It contains a passage that defined marriage as "only a legal union between one man and one woman as husband and wife, [where] the word 'spouse' refers only to a person of the opposite sex who is a husband or wife," and an addendum that says individual states are not required to recognize same-sex marriages accepted in other states. As a result, DOMA has been a prominent target of state-led efforts to permit same-sex marriages in individual states, whether legislatively or judicially.

Yet LGBTQ activists have thus far ignored a major impact of DOMA on same-sex couples: Internal Revenue Service (IRS) policy whereby health care benefits transferred by employees to domestic partners (within those organizations that recognize domestic partnerships) are taxed as income. While the abolition of this practice may seem like a trivial point in the grand scheme of the LGBTQ movement, it holds promise as a way to gradually undermine DOMA as well as improve the lives of the conservative estimate of 901,997 U.S. same-sex couples by saving them, on average, $1,609 a year in comparison to identical heterosexual couples.

The most common way progressive organizations are combating this unjust tax is by "grossing up" the wages of employees in same-sex partnerships. This involves increasing employees' pre-tax salaries in order to account for the value of the tax on shared benefits as well as a possible shift in income bracket triggered by that practice.

Surprisingly, the bulk of action already taken to combat these inequitable practices has occurred within the corporate sphere. Tech start-ups and investment houses in particular, including Google, Facebook, Apple, Barclays, and Goldman Sachs, all gross up domestic partners' wages. Meanwhile, Bowdoin College, Syracuse University, Yale University, and Columbia University (as well as its affiliate Barnard College) are the only institutions of higher education to have adopted similar policies. In a promising move, the municipality of Cambridge, Massachusetts also now grosses up.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

Unfortunately, action by local, state, and federal government to mirror corporate practices lags far behind their private sector counterparts. There is a glimmer of hope, though, in a bill introduced by Senator Charles Schumer named The Tax Parity for Health Plan Beneficiaries Act of 2011 or Senate Bill 1171. However, despite being introduced July 1, 2011, the Congressional Research Service reports no action on the bill save for being referred to committee.

As states like Maryland, Washington, and New York continue to legalize same-sex marriage, we must remember that same-sex couples under federal law remain subject to the unfortunate impacts of the DOMA. Moreover, those organizations, universities, and corporations that provide domestic partner benefits for same-sex couples do not unilaterally "solve" the problem of unfair treatment experienced by LGBTQ people at the hands of their government.

By removing the unfair tax burden currently enforced by the IRS, LGBTQ activists can make using health care, filing tax returns, and pursuing employment that much easier for same-sex couples. Moreover, they can strategically undermine the strength of the DOMA. By highlighting the ways in which it financially isolates certain types of partnerships, queer advocates may be able to appeal to a wider political base and subsequently build power among fiscal voters.

Essentially, progressives across the United States ought to see the growing nongovernmental movement toward grossing up as a way to clarify their values in the national discourse. They can amplify the experiences of marginalized same-sex couples through listening tours and personal storytelling events. Using Senator Schumer's bill as a template, organizations that recognize domestic partnerships can join a coalition of at least 80 businesses committed to tax equity in order to place pressure on elected officials. Once this issue attracts more supporters -- particularly among employee LGBTQ affinity groups -- a critical mass will be able to force changes in Congress, change that (hopefully) will lead to the eventual repeal of DOMA.

Providing equitable tax structures for the transfer of health care benefits between domestic partners moves the cause forward, signals pragmatic solidarity between the queer and allied communities, and demonstrates the collective power of the progressive community. Additionally, it demonstrates that a wide body of people supports equity within the federal tax code over antiquated policy.

While the rhetoric around marriage equality has no doubt inspired wide swaths of the American public to support the struggle of LGBTQ folks, it's important that we express the meta-level concern that marriage is only one of the rights denied to queer people. Contextualizing same-sex marriage within a larger struggle for national nondiscrimination policies, visitation rights, care for homeless queer youth, anti-bullying work, as well as tax equity reflects the very real daily struggles of identifying (or being perceived as) LGBTQ in the United States.

Erik Lampmann is a Roosevelt Institute | Campus Network member and a sophomore at the University of Richmond studying philosophy, politics, economics, and law.

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Using Community to Grow Low-income Communities Out of Food Deserts

Apr 4, 2012Emily Apple

money-justice-scalesAs part of the 10 Ideas: Social Innovation to End Discrimination series, a proposal to put food stamps to work supporting community gardens and giving low-income famil

money-justice-scalesAs part of the 10 Ideas: Social Innovation to End Discrimination series, a proposal to put food stamps to work supporting community gardens and giving low-income families access to fresh produce.

March 20th marked the third anniversary of the planting of the White House vegetable garden, the first functioning garden since Eleanor Roosevelt's Victory Garden. The garden is an essential part of Michelle Obama's Let's Move! initiative that aims to help raise a generation of healthy, active kids. But while it provides an excellent jumping off point for discussing the importance of nutrition, it does not get to the root cause of the lack of nutrition across the country. Not everyone can have an organic garden in his backyard or, on an even more basic level, a supermarket that sells quality fruits and vegetables. According to the United States Department of Agriculture, more than 23 million Americans live in "food deserts": areas with limited access to affordable and nutritious food, particularly ones composed of predominantly lower income neighborhoods and communities. Before we begin to talk about the problem of nutrition in our country, we must first improve access to food for millions of Americans. And Michelle Obama is on the right path -- community gardens can be a powerful tool for improving access to produce for people across the country.

The problem of access and affordability is especially relevant in New York City. A study conducted in 2008 by the mayor's food policy task force concluded that more than 3 million New Yorkers lack adequate fresh food retailers in their neighborhood. Furthermore, according to the New York City Coalition Against Hunger, there are an estimated 1.4 million New Yorkers that are unable to afford a full supply of food, forcing many to choose more cost efficient, unhealthy options. What all of these numbers amount to is that there are far too many New Yorkers without the ability to access or afford nutritious foods.

Recognizing these problems, Daniel Bowman Simon, who helped spearhead the White House vegetable garden, has now has moved on to helping low-income individuals and families access healthy foods through his organization SNAP Gardens. As of March 2012, over 46 million Americans were enrolled in the Supplemental Nutrition Assistance Program (SNAP), often referred to as food stamps. Simon encourages SNAP beneficiaries to "grow" their benefits by utilizing a 1973 amendment to the Food Stamp Act that allows food stamp recipients to use their benefits to buy seeds.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

Simon's SNAP Gardens model is a great way to incorporate food stamps into the conversation on food accessibility. In New York City alone there are more than 1.8 million SNAP beneficiaries. However, many New Yorkers do not have the time to plant and care for their own food. Community gardens provide the space and infrastructure for growing food. All that is needed is someone to grow it. Most community gardens already have volunteers and staff, so it would just take a transition out of growing plants and into agriculture to grow food. There are over 500 community gardens across all five boroughs. Converting at least some to agricultural gardens would greatly expand access to fresh, locally grown produce for thousands of New Yorkers.

To accommodate SNAP beneficiaries, each community garden should be given a credit card machine with the capability to accept Electronic Benefit Transfer (EBT) cards. EBT machines are given to eligible retailers free of charge by the state. This would essentially convert the SNAP Garden model from using benefits to buy the seeds to using them to buy the actual produce from gardens.

There is ample precedent for SNAP benefits being used for purchasing fruits and vegetables at non-supermarket locations. GrowNYC, a New York City nonprofit, runs 43 greenmarkets that accept EBT cards. In 2010, EBT sales exceeded $500,000 across the city, with some farmers reporting that EBT sales comprised as much as 25 to 50 percent of their business. The New York City Department of Health and Mental Hygiene also has a farmers' market Health Bucks program that provides a $2 voucher for fruits and vegetables for every $2 spent at farmers' markets, increasing the amount of money an individual receiving SNAP benefits can spend on nutritious foods.

Based on the success of GrowNYC's and the city's own EBT initiatives, it is very difficult to make the argument that those on food stamps simply do not want nutritious food. It is not a problem of demand. It is a problem of access and affordability to nutritious foods, including fresh produce. Instead of strategies focused on changing demand, the priority should be expanding access and finding ways to make nutritious foods more affordable.

There is no one answer to expanding access and making produce affordable, but community gardens can be a vital part of the solution, and it is one that is often overlooked. By using the existing community garden infrastructure we can grow a better future for all Americans.

Emily Apple is a sophomore at CUNY-Hunter College and the Northeast Policy Coordinator for the Roosevelt Institute | Campus Network.

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Rediscovering Government

Stiglitz: The Invisible Hand is Invisible Because It Isn't There

Apr 2, 2012Elena Callahan

Americans have had it drilled into them that government is bad, but a new narrative is surfacing.

Americans have had it drilled into them that government is bad, but a new narrative is surfacing. Last Thursday, Roosevelt Institute Senior Fellow Jeff Madrick kicked off the Roosevelt Institute's new flagship initiative, Rediscovering Government, at an event in New York City, declaring, "There is no economy without government. There is no America without government. Government doesn't have a role; it is integral." In a keynote address, Roosevelt Institute Senior Fellow Joseph Stiglitz also argued that healthy societies have strong governments and that his research has shown that "the reason the invisible hand often was invisible was that it wasn’t there." Watch the full video of the opening remarks and keynote below:

 

Stiglitz says that "most Americans don’t realize that we are no longer the country of opportunity that we think of ourselves, that America today has less equality of opportunity than any of the other advanced industrial countries." He points out how many like to say that our economy is doing well because GDP is growing, but that "if you’re going to be judging how well an economy is doing, clearly I think the key metric that one wants to focus on is what is happening to the living standards of most citizens.” He says that most Americans don't realize how bad we're doing, including the fact that "the median income of a full-time male worker today is the same as it was in 1968," and "if you look at median household income it is the same today as it was a decade and a half ago."

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

How did our society get to a place where government has taken a back seat and where people are wary of government control? Stiglitz thanks the conservatives who have successfully touted false ideology about markets over the past 40 years. While they like to blame the government for inequality, Stiglitz notes that not even Adam Smith thought markets were anything beyond efficient. "Nobody ever said that they were fair, that they would lead to a distribution of income that was socially acceptable." Furthermore, he says, "many of the aspects of our inequality are a result of market failure. People who don’t have health insurance when they get sick wind up in extreme poverty and they can’t get health insurance because of a whole set of market failures." He says it's "striking that in spite of the fact that there is no intellectual basis for what you might call a 'Smithian' view that unfettered markets lead to efficiency," conservatives have marched ahead with this idea.

So why was there so much economic growth after World War II? Stiglitz says one reason is "the legacy of the Roosevelts, the legacy that government made a difference.” In making the case for government he also points out that "government has played an important catalytic role in a whole variety of other areas. If you think about our modern economy, you think about Internet, you think about biotech, you think about telecommunications and all of these things rest on government-funded basic research." He recalls a conversation with a Scandinavian finance minister who, when asked how his economy was so successful, answered "high taxes." Stiglitz took away that "if you’re going to have a well-functioning economy... you have to pay for what you get. You need to have a well-functioning government that provides education, infrastructure, research, technology, all these things, and we have to pay for it." Given that markets are not predictable nor interested in social problems, our government should stop bailing the financial institutions out and start investing in its people and the institutions that benefit them.

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How Taxes Can Really Reduce Inequality

Mar 29, 2012Mark Schmitt

The progressive argument on taxes shouldn't focus exclusively on marginal rates. We need to rethink all the harmful incentives in our tax code to fight inequality.

The progressive argument on taxes shouldn't focus exclusively on marginal rates. We need to rethink all the harmful incentives in our tax code to fight inequality.

Just out in the Boston Review this month is a forum on inequality -- not just the problem, but what to do about it, featuring Roosevelt Institute Fellow Mike Konczal among the participants. The lead essay by David Grusky argues that progressives have rushed to assume that redistributive tax policy (that is, tax rate increases on the very rich) are the obvious remedy for inequality, neglecting the structural distortions -- what he calls, confusingly, "rents" or "market failures" -- that allow the very rich to build up an even greater share of wealth before taxes than after. Grusky argues that rather than hoping for redistributive taxes to ameliorate pre-tax inequality, we should address the structural forces. He mentions two: high CEO pay and profound inequalities in educational opportunity.

Grusky is right that there is a limit to what modest changes to the progressivity of tax rates at the high end can do. Even assuming that economists Thomas Piketty, Emanuel Saez, and Stefanie Stancheva are correct in their contribution to the forum that the top individual income tax rate could go as high as 83 percent without adverse economic impact, there is a political limit which is no less real than an economic limit. Even progressives are reluctant to talk about raising marginal rates higher than 39.6 percent (the pre-Bush top rate) or the low 40s, and then only on those with incomes more than five times the median. Tax rate increases, absent a radical political transformation, will adjust for inequality only at the edges.

Other than Piketty et al, the respondents don't disagree with that point, but doubt Grusky's basic assumptions about inequality from a variety of angles. Konczal, for example, points out that it's not just inequality of pure income we should be concerned about, but radical inequalities of voice and political power.

But there's an important point that none of the respondents make, which is that there's more to taxes than marginal rates. The structure of taxation itself affects the "rents" or distortions that benefit the very wealthy and burden the working poor. Both of Grusky's alternatives show this. Take, for example, high CEO pay. Grusky argues that a higher tax rate would do little to change the structural incentives (captive boards, for example) that have driven up CEO pay. That may be right. But the tax code has created its own incentives for companies to overpay CEOs. For example, the limit of $1 million on the amount of executive pay that can be deducted as a business expense can be avoided if the pay is linked to performance. This not only permits high pay packages, it encourages CEOs to focus on short-term performance, which is often not in the long-term interest of the company or its employees.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

Favorable tax treatment of stock options also encourages high CEO pay. And many economists believe that the 1986 Tax Reform Act, which brought the top individual income tax rate lower than the corporate tax rate, encouraged corporate executives to take profits as pay rather than let it stay in the corporation where it would be taxed at a higher rate. There is certainly a strong correlation, as the sharp climb in CEO pay begins at exactly that point.

Which is to say, we can do more with the tax code than just fiddle with rates. We can change incentives in the corporate tax or the individual income tax to change the incentives on executive pay. We could even vary the corporate tax rate based on CEO or top executive pay, or the ratio of the CEO pay to average-worker pay, benefitting corporations like Whole Foods that both pay their CEOs less and average workers more.

Grusky's other proposal is to radically broaden access to higher education, by "increasing the number of slots in higher education and committing to fair and open competition for them." He's not very specific about how to do that. But, again, the tax code provides some examples of how we already structure access to higher education in ways that benefit the better-off. Tax benefits -- deductions and credits -- form an ever-larger share of how we pay for higher education, totaling $14.7 billion in 2012. While one program, the (temporary) American Opportunity Tax Credit, is refundable, so that even families that pay no income tax can benefit, the majority are not, and programs such as 529 accounts for college savings benefit almost exclusively the well-off. A study by the College Board showed that households with incomes over $100,000 receive 26 percent of the benefits of higher education tax expenditures. Pell Grants, on the other hand, overwhelmingly benefit students from families with incomes below $50,000. Pell Grants are scheduled to be cut under last summer's budget deal. A shift from some of the tax expenditure programs to Pell Grants would preserve college opportunity for millions of low- and moderate-income students.

There's more to the tax code than marginal rates. In many ways, the code's complex web of incentives and preferences represents the deep structure of our national priorities, one that often seems to benefit the middle class while largely benefiting the wealthy. Tax reform that looks at much more than the top rate can address economic inequality in exactly the way Grusky proposes.

Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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FDR Countered Wall Street's Greed With Mass Prosperity

Mar 22, 2012David Woolner

Today's financial giants pursue greater wealth at any cost, but in order to build a sustainable economy, we have to make life richer for all Americans.

Today's financial giants pursue greater wealth at any cost, but in order to build a sustainable economy, we have to make life richer for all Americans.

Today, national progress and national prosperity are being held back chiefly because of selfishness on the part of a few... You know their reasoning. They say that in the competition of life for the good things of life "some people are successful because they have better brains or are more efficient; the wise, the swift and the strong are able to outstrip their fellowmen." And they say that that is nature itself and you cannot do anything about it and it is just too bad if some, the minority of people, get left behind.

It is that attitude which leads such people to give little thought, to give anything but lip service, to the one-third of our population which I have described as being ill-fed, ill-clad, and ill-housed. The majority of them say, "I am not my brother's keeper" -- and they "pass by on the other side." Most of them are honest people. Most of them consider themselves excellent citizens.

But, my friends, this Nation will never permanently get on the road to recovery if we leave the methods and processes of recovery to those people who owned -- I say "owned" -- the Government of the United States from 1921 to 1933. -Franklin D Roosevelt

The recent publication of an editorial in the New York Times by a top executive at Goldman Sachs has sparked a fierce debate about the culture of greed that has permeated Wall Street in recent years. Critics argue that the author of the article, Greg Smith, is right to point out that Wall Street has lost its moral compass and that firms like Goldman are no longer interested in their clients and couldn't care less about the long-term implications of their investment strategies. Today's Wall Street, they insist, is driven by one motive and one motive only: to make as much money as possible for themselves and for the firms they work for in the shortest possible time, whatever the consequences for the customers the company is supposed to be serving. On the other hand, the defenders of Wall Street insist that the desire to make money is nothing new -- that greed, in fact, has always been a part of the culture of the investment banking community, and that we should not be so surprised or alarmed that the people who work in the financial sector do so out of a desire to become rich.

Given the consequences of the recent financial crisis, the fact that Mr. Smith's article has provoked a debate about the culture of Wall Street seems understandable. With unemployment still over 8 percent nationwide, a good share of the population remains concerned about the possibility that the "toxic atmosphere" Mr. Smith describes on Wall Street might lead to another financial meltdown. Yes, we do have Dodd-Frank, but will this piece of legislation prove adequate to prevent a repeat scenario?

These are all legitimate questions, but given the poor state of our economy and the millions who remain unemployed or underemployed a full four years after the onset of the collapse of the financial sector, the real question that needs to be addressed concerns not just the behavior of Wall Street, but the impact that the singular pursuit of wealth in whatever field has on the nation as a whole.

Seventy-four years ago, on March 23, 1938, Franklin Roosevelt addressed this very question in a speech he made to the people of Gainesville, Georgia. Two years before, Gainesville had been devastated by a violent tornado that left over 200 people dead and destroyed much of its downtown area. But with the help of over $1 million in federal aid from the Reconstruction Finance Corporation (RFC) and a number of construction projects carried out by the Public Works Administration (PWA) and the Works Progress Administration (WPA), along with the financial support, hard work, and "unselfish cooperation" of the citizens of Gainesville, the city was rebuilt. Moreover, the new Gainesville was better than the old, with less congestion, better housing, and more parks and green space for the people to enjoy.

Buy a copy of The Unfinished Revolution: Voices from the Global Fight for Women’s Rights, featuring a chapter by Roosevelt Institute Senior Fellow Ellen Chesler.

Taking note of this, FDR observed that the efforts of the people of Gainesville to rebuild their city touched "the interest and life of the whole Nation" because they typified the concept of citizenship "which is latent in the American character." It was true that in the wake of the destruction the city had "great needs," but these needs "were met," he said, "in accordance with the democratic principle that those needs should be filled in proportion to the ability of each individual to help."

Not one to miss a teachable moment, FDR then went on to address the larger question of economic inequality that still plagued the country. Much of this inequality, he insisted, was the result of the selfishness and greed of those at the top end of the income ladder who refused to accept or acknowledge that a society built on such vast disparity of wealth was not only undemocratic, but also economically unsustainable. These individuals, he went on:

...are the kind of people who...were saying, "Oh, yes, we want nobody to starve" but at the same time were insisting that the balancing of the budget was more important than making appropriations for relief. And when I told them that I, too wanted to balance the budget but that I put human lives ahead of dollars and handed them the book of the government estimates and asked them just where they would out the appropriations, inevitably they folded up and came back and told me, "Mr. President, that is not my business, that is yours."

FDR then went on to speak about how such attitudes affected the nation as a whole, of the consequences of economic inequality and the critical need to provide work and better wages for the "bottom third" of the U.S. population. He insisted it was vital to improve the "buying power" of the millions of unemployed and other workers "who are so under-employed or so underpaid that the burden of their poverty affects the little business man and the big business man and the millionaire himself." Moreover, he also reminded his listeners that better buying power meant not just greater purchases in hard-hit industries but also "many other...things -- better schools, better health and hospitals, better highways."

In short, FDR insisted that the best way to work our way out of the Great Depression and sustain capitalism was to make sure it worked for all our citizens, rich and poor alike. Happily, the actions of the people of Georgia in the wake of tragedy had convinced him that more and more Americans from workers and farmers to bankers and businessmen were coming to see "that the continuation of the American system calls for the elimination of special privilege, the dissemination of the whole truth, and participation in prosperity by the people at the bottom of the ladder, as well as those in the middle and those at the top."

It is certainly not a bad thing that Mr. Smith's article about the culture of Wall Street has stirred up a debate about the values and motivations of the individuals working in the financial sector. But in a society where the same newspaper has recently reported that the number of poor and near poor in America -- those living "either in poverty or in the fretful zone just above it" -- has now reached approximately 100 million Americans, one wonders why more people are not focused on the "one third of a nation" that, as in FDR's day, sadly finds itself "ill-housed, ill-clad, ill nourished." Would an editorial bemoaning the increasing level of poverty in America have sparked the same amount of interest?

Viewed from this perspective, the culture on Wall Street, with its huge bonuses and drive for ever-increasing wealth no matter what the consequences for the client, becomes all the more disturbing. Not so much for what it says about the financial sector, but rather for what it says about the state of the country as a whole. The pursuit of wealth for wealth's sake is a poor foundation upon which to build a modern economy well-suited for the 21st century. Surely FDR is right when he reminds us that it is better for us to become "our brother's keeper" than to "pass on to the other side."

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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