Point of View

History lessons: Beware the power of income imbalance

September 21, 2012 

— In the midst of one of the most important elections in our nation’s history, it is stunning how little attention the American people, the media and the candidates themselves pay to the lessons of our recent past.

Seemingly no one remembers that our most recent decade of prosperity came when Bill Clinton raised taxes on the wealthy, making possible deficit reduction and a surplus, while in the process creating an economic environment that produced 22 million new jobs. That’s 10 times the number created in the same time period under George W. Bush, who, of course, cut taxes on the wealthy, the so-called job creators.

Just as worrisome is our long-term memory failure. Everyone talks about the Great Depression – the ultimate “no-no” that we must avoid at all costs. But what do we remember about the causes of the Great Depression, or the solution to it?

Most people have some image in their minds of the “Roaring Twenties.” After World War I, Americans went on a buying spree. Consumer industries soared. Washing machines, Model T Fords and women’s cosmetics reached new heights in sales. Taxes were low, the stock market was booming, millionaires were being created overnight. So why did it suddenly come to a crashing halt in 1929?

Virtually every economist and historian who has written about the 1920s has pointed to income imbalance – the inability of the average worker to keep on buying new products on credit – as the primary problem. As upper-income individuals saw their earnings reaching new heights, middle- and working-class people saw their share of the national income shrink. Their wages remained static, or fell, while the rich gained more and more.

In addition, instead of investing their income in job-producing ventures, the rich poured their bounty back into stock market speculation. When the consumer power of the average citizen reached its limit, the foundation of the economy collapsed. The result: the stock market crash of 1929, a 25 percent unemployment rate and a decade of misery.

Some say that FDR and the New Deal ended the Depression. Not true. Roosevelt’s New Deal legislation created the safety net that kept suffering Americans alive – Social Security for the aged, minimum wages, unemployment insurance, aid to dependent children. But one of the worst years of the Depression was 1938, five years after the New Deal began.

It was World War II that ended the Great Depression. Instead of 20 percent to 25 percent of workers being out of work, full employment became a reality.

What then caused postwar America to become an “affluent society,” in John Kenneth Galbraith’s phrase? Was it tax cuts? A return to a totally government-free economy? Deregulation? Actually, none of the above. As late as the Eisenhower administration, the tax rate on the highest income group was 91 percent.

Rather, it was a series of measures that involved government spending. The first involved the GI Bill, a measure enacted in 1944 that allowed millions of war veterans to secure a college education at government expense and become part of the “knowledge revolution” that created a new educated professional class to manage the American economy.

Second, it was federal housing loans that fueled the massive expansion of suburbia by allowing veterans and others to buy their own homes for the first time. This, in turn, led to new shopping centers, a new road system and a degree of prosperity that never had been seen in America before.

Interestingly, the growth of the middle class and the increasing redistribution of income toward the middle and working classes continued until 1976. That year, the top 1 percent of America’s earners brought home 9 percent of the country’s income. But ever since then, and with a rapidly increasing rate during the 2000s, income inequality has burgeoned. Today, as the middle and working classes struggle, the top 1 percent has increased its share of the nation’s income to 29 percent.

Reasonable people can disagree about such issues as the merits of raising or lowering taxes, the size of government and income disparity. But as a historian I feel it is vitally important that we understand and pay attention to the historical record when debating such weighty matters. Those who ignore history are bound – or doomed – to repeat it.

William H. Chafe, who teaches history at Duke University, is past president of the Organization of American Historians and is author of 13 books, the latest is “Bill and Hillary: The Politics of the Personal,” published earlier this month.

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