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Critics of America's plans to oust Saddam Hussein militarily have
mounted powerful arguments, but not one has articulated a coherent
nonmilitary strategy to bring about the demise of the monstr

Tony Hall, just before leaving Congress in September, sat in his office
in Longworth House Office Building and thought of something that had
stuck with him since a trip to Appalachia.

In 2000, United Nations Secretary General Kofi Annan posed a question to
the Millennium Summit of the UN: "If humanitarian intervention is,
indeed, an unacceptable assault on sovereignty, how s

At a "Lean Workplace School" for union members, sponsored by the monthly
magazine Labor Notes in 1996, the discussion centered around how
to fight employers' speed-up and worker-manageme

One of the great disappointments of recent decades is that Democrats
have more or less swallowed whole the underlying economic theories of
their Republican rivals.

How did it all start? What triggered the 1990s political corruption, its
inequality in wealth and its stock market bubble? This is the decade
that Kevin Phillips rails against in his historical epic of how the rich
get richer and the poor get further in debt.

Arguably it all started in Silicon Valley, with a little help from the
Department of Defense (which pioneered the epochal
breakthroughs--transistor and Internet--that sparked the electronics
revolution). Given the government's basic research, such private
companies as Hewlett-Packard, Microsoft, Apple, Intel and Cisco
generated creative, profitable products using new technologies. As the
intellectual property of these well-managed companies began to rise,
their stock prices began to rise, as did those of their suppliers,
buyers, competitors, financial consultants, management analysts, lawyers
and accountants. Even the stock prices of companies unrelated to high
tech began to soar.

The frenzy struck executive salaries. Top-notch high-tech managers made
a lot of money because their pay was tied to stock options. As their
company's stock price skyrocketed, so did their salaries. Soon other
corporate leaders--good, bad and indifferent--tied their own salaries to
the price of their company's stock. The financial markets regarded stock
options as a way to make managers more "efficient" using the litmus test
of stock-price performance. In practice, some managers cooked the books
and inflated stock prices by making risky short-term investments and
acquisitions. Long-term investments in new plant, equipment, research
and intellectual property, necessary for permanent jobs, became an

As Phillips shows, the greed of corporate America was such that in the
1960s, the pay of corporate CEOs was "only" about twenty-five times that
of hourly production workers. In the 1970s, the ratio was around thirty
to one. It rose from ninety-three times in 1988 to 419 times in 1999.
Between 1990 and 1998, the wages of ordinary workers barely kept pace
with inflation or grew at single-digit rates. Meanwhile, top executives
of America's biggest corporations enjoyed compensation increases of 481
percent! (Appalled by the eye-popping numbers on executive pay, Paul
Krugman referred to Wealth and Democracy in one of his columns in
the New York Times.)

With so much money sloshing around, contributions by business to
politicians increased. With more campaign funding, deregulation resumed
where Reagan left off, and upper-bracket tax rates mellowed. Phillips
shows that the effective federal tax rate (income and FICA, or Social
Security and Medicare) for the top 1 percent of families fell from 69
percent in 1970 to about 40 percent in 1993, with plenty of loopholes
remaining. Over the same period, the tax rate for the median family
increased from 16 percent to 25 percent. Between 1950 and 2000,
corporate taxes as a percentage of total tax receipts fell from 27
percent to 10 percent while FICA (mostly paid by the middle class)
jumped from 7 percent to 31 percent.

Regulation was critically lax in the accounting industry's scandals, as
we now know. Phillips's book predates news of this disgrace, but he
anticipates most of what happened. Deal by deal, the Big Five all began
to relax established auditing norms; otherwise they would have lost big
customers to one another. When chairman Arthur Levitt Jr. of the
Securities and Exchange Commission proposed to investigate, the Big Five
went to Washington. The SEC was called off the job; the Clinton
Administration caved in. As for the telecommunications sector, now
bleeding billions from overcapacity, its relations with the government
were similar to those of the railroads in the robber-baron age. In the
late nineteenth century, railroad tycoons were given free access to land
worth millions of dollars; in the 1990s, the telecommunications industry
was given publicly owned electromagnetic spectrum worth billions of
dollars. Phillips shows that, among the top thirty billionaires reported
by Forbes for 2001, eight were in high-tech electronics,
including software, and eight were in media.

So, starting with Silicon Valley, one can tell a story about the 1990s
that may be flat-footed but that at least moves from cause to effect in
a linear fashion. This, however, is not the story that Kevin Phillips
chooses to tell. Or maybe it is, but his writing style is so roving,
rambling and roundabout that it is difficult to find a coherent story
anywhere, although the parts are sure to be found somewhere, and are
often juicy. He aims a shotgun rather than a rifle at the fin de
's cast of cruddy characters.

Phillips doesn't start in Silicon Valley because, at heart, he is an
antitechnologist. For Phillips, technology merely makes mischief. "From
early textile machinery to the Internet," he writes, the early stages of
major innovations have generated rising social and economic inequality
almost as a matter of course." (But how about the millions of jobs
created in textiles and the Internet at a slightly later stage?)
Elsewhere he states: "We can likewise doubt that technology has
outweighed representative government, effective markets, and
English-speaking freedoms in achieving the economic leadership of
Britain and then the United States." Really? Phillips's dismissal of
technology as a major factor in the economic hegemony of first England
and then the United States is strange because he shows contempt for the
alternative explanation--an obsessive love of market forces and
laissez-faire. Technology is bad in Phillips's view simply because it
breeds speculation. There are no heroes.

Notwithstanding Phillips's chaotic style and his neglect of the real
economic forces that govern wealth accumulation and distribution (such
as technology), he does a big service for his readers by providing them
with bytes of information on wealth inequality and democracy's warts.

Phillips, historically a card-carrying Republican, regards his
reformist, liberal politics as nothing strange. It follows in the
footsteps of great past Republican reformers like Lincoln and Theodore
Roosevelt. Phillips considers Franklin D. Roosevelt one of the team
because--his affiliation to the Democratic Party notwithstanding--he was
rich but a reformer of radical scope (responding, one might add, not
necessarily to his conscience but to social unrest). For most
Republicans, Phillips has nothing kind to say. "The Democrats," he
writes, "were the more important incubators of the Internet mania, but
the underpinning economic spirit was the market-deifying,
tax-cutting, and assets-aggrandizing conservatism given its head in the
eighties. This part of the framework was more Republican."

The Republican pedigree lets Phillips get away with murder. He rants and
raves in a way that someone on the left would be skewered for. The
result, however, is welcome. It is satisfying to read an analysis of the
US economy from the standpoint of greed and conservative morality.

The history lessons Phillips administers range from Aristotle to the
Gilded Age of the 1920s, which he contrasts with Gilded Age II of the
1990s. He examines Holland's tulip mania and its economic decline as a
world power, comparing its fall with that of Britain and possibly the
United States. In one table, culled from the Wall Street Journal,
he lists the wealthiest people of the past 1,000 years, starting with
Al-Mansur (938-1002), the Moorish regent of Cordoba, who got rich through plunder,
moving to Kublai Khan, ruler of China (1215-94), who got rich from
inheritance and confiscation, and ending with Bill Gates (1955-), the US
software executive, who got rich on stock ownership in Microsoft.

Other facts and figures are no less interesting, and some of Phillips's
charts are ingenious. To show the "giantizing" of wealth enjoyed by the
richest person in the realm, Phillips compares the largest fortune at
the time to that of the median family or household. In 1790, the ratio
of the richest man's wealth, Elias Derby, to the median was 4,000 to 1.
By 1868, the ratio of Cornelius Vanderbilt's wealth (in railroads) to
the median was 80,000 to 1. For John D. Rockefeller in 1912, the ratio
was 1,250,000 to 1 (in 1940, it fell to 850,000 to 1). In 1962, the
ratio for Jean Paul Getty was 138,000 to 1. For Sam Walton in 1992, it
was 185,000 to 1. For Bill Gates in 1999, it was the blockbuster,
1,416,000 to 1! Presumably, the ratio increased over time as the United
States moved from an agrarian economy to one based on modern
transportation (railroads), natural resource exploitation (copper, oil)
and then manufacturing, where new product innovations could flourish.

Compared with other wealthy countries, inequality in the United States
is extreme. In the 1990s, the income ratio in Japan of the top fifth of
households to the bottom fifth was only 4.3 to 1. (A similar ratio
exists in Korea and Taiwan, which, like Japan, had a land reform after
World War II.) European social democracies tended to have ratios of 6 or
7 to 1 (5.8 in Germany). The US ratio was 11 to 1 or higher, depending
on the source. Presumably this reflected the United States' cowboy
capitalism, its rich raw materials, its pioneering technologies and its
corporations' ability to mass-produce for a vast domestic market.

Wealth (which Phillips never defines) is essentially the difference
between inflows and outflows of income, which is savings in the case of
households and profits in the case of firms. Once wealth is attained,
its holder has to figure out what to do with it. Thus, the financial
services industry usually expands as wealth expands. In the 1990s the
finance, insurance and real estate sector (FIRE) overtook manufacturing
in US national income, "enabled by a dozen federal rescues and
preferences, begun in the eighties and consummated in the nineties." The
thirty richest individuals in 2001 also included eight in finance,
investments and real estate--including Warren Buffett, George Soros and
Ross Perot. As finance grows, Phillips argues, the likelihood of a
technobubble grows exponentially.

What does it all mean, the rising inequality and "financialization" of
the economy?

Business as usual, insofar as Gilded Age II is merely a catch-up with
Gilded Age I. Between 1922 and 1997, the share of total wealth of the
top 1 percent of households spiked in 1929 at 44.2 percent, tumbled to
33.3 percent in 1933, reached a nadir of 19.9 percent in 1976 (as
profits plunged with the energy crisis) and hit 40.1 percent in 1997
(the estimates are from Edward Wolff). As the stock market boomed in
1997-2000, the wealth of the richest rose further, but atomized with the
crash of 2000, into the present. Wealth inequality appears to be wired
into the American system.

Relative increases in the wealth of the rich, moreover, are often
compatible with increases in real wages and productivity. The average
family's real income increased 30 percent between 1960 and 1968 as the
ranks of millionaires swelled. Then came the era of stagflation.
According to the Council of Economic Advisers, average hourly earnings,
adjusted for consumer prices, fell by 0.5 percent a year from 1978 to
1995. They then rose at a piddling 2 percent a year from 1995 to 2000,
in tandem with rising productivity and the "irrational exuberance" of
the stock market. Thus, wealth inequality does not preclude modest
increases in income for other social classes.

Yet, inequality matters, depending on the use to which wealth is put.
And that in turn depends on the economic and social profile of the
accumulating classes. Kevin Phillips, however, is not keen on "class
analysis." "'Class warfare'...is a false description," he writes, "a
perverse conservative borrowing from Karl Marx," because the United
States has had rich reformers and poor Republicans.

Still, one doesn't have to emulate Karl Marx in the Grundrisse to
emphasize that the new American class of rich is different from the
railroad barons or the oil money of old. For one, it is extremely well
educated. Between 1975 and 1998, the mean annual earnings of US workers
with less than four years of high school fell steadily. Those of high
school graduates stagnated. Those of college graduates rose slightly.
Those of people with advanced degrees soared, particularly after 1990,
when the demand for economists, lawyers, accountants and MBAs heated up
(as noted by Edward Wolff).

Investments of the new superrich, therefore, are likely to gravitate
toward new technologies in manufacturing and services, and fancy
finance. With high educational attainments, the new elite may be
expected to command a lot of money and social legitimacy, which the old
tycoons never quite managed. A mere college education is no longer a
guarantee of upward mobility, as Washington policy-makers still believe.
For most ordinary people without a college degree or fancy MBA, the new
rich have created a tougher world. Horatio Alger now goes to graduate

The second defining characteristic of the new rich is their
internationalism. They hire, produce and market globally, and have
mobilized bipartisan political support for operating overseas.

That all started with strong competition from Japan in the 1980s.
Technologically behind the United States, Japan had more government
interventions to help business grow (as did Korea, Taiwan, China, India,
etc.). The United States regarded this as unfair, and shoved a "level
playing field" down everyone's throat--backward and advanced countries
have to be equal with open markets, free of government's foul play.

The financial services sector, with large-scale economies, benefited
enormously from Washington's dismantling of developing countries'
barriers to foreign banking and regulations of inflows and outflows of
"hot," destabilizing money. Deregulation was soon followed by the Asian
financial crisis of 1997. The Treasury still publishes a book each year
documenting on a country-by-country basis the remaining obstacles abroad
to American financial institutions. The pharmaceuticals industry
benefited from the extension of patent enforcement to developing
countries notwithstanding their need for cheap medicines. The software
industry pressed for protection of intellectual property.

Strangely, Phillips hardly talks about globalization at all. But from
stray sentences we can assume he doesn't like it, especially its effect
on domestic jobs. Yet lobbying in Washington for protection of jobs that
can be provided more efficiently in lower-wage countries is little
different in principle from lobbying for tax breaks and deregulation for
the rich. They are both a form of political corruption.

Phillips ends his 470-page book with a tepid recommendation, given the
preceding fire and brimstone. It is to end the "democratic deficit,"
which puts power in the hands of unelected organizations--the judiciary,
the Federal Reserve and the WTO. But Washington has a large say in the
WTO, controls the World Bank and has a loud voice in the International
Monetary Fund. For American business, that deficit is small.

Is, therefore, American foreign economic policy likely to give the new
class of rich the global stability it desperately requires? No, if Kevin
Phillips is right and inequality does matter. Internationally, economic
inequality among countries has grown like Topsy. As industrialization
spread unevenly, the ratio in per capita income of the richest to the
poorest regions of the world rose from about 3 to 1 in 1820, to 5 to 1
in 1870, to 9 to 1 in 1913, to 15 to 1 in 1950. Then, as East Asia grew,
the ratio fell in 1972 to 13 to 1, but rose steeply to 19 to 1 in 1998,
the age of hardball globalism (data are from Angus Maddison, The
World Economy
). Global distribution of income and wealth is becoming
as important to the American rich as domestic distribution, and both are
highly skewed.

Phillips doesn't consider any of this, but that's fine. He makes a real
contribution by showing how American politics works, what really goes on
behind the fortunes.

Yech! What a scene!

One bubble burst, then another and another. Enron, Global Crossing,
WorldCom. The rectitude of auditors--pop. Faith in corporate CEOs and
stock market analysts--pop, pop. The self-righteous prestige of
Citigroup and J.P. Morgan Chase--pop and pop again. The largest bubble
is the stock market's, and it may not yet be fully deflated. These
dizzying events are not an occasion for champagne music because the
bursting bubbles have cast millions of Americans into deep personal
losses, destroyed trillions of dollars in capital, especially retirement
savings, and littered the economic landscape with corporate wreckage.
Ex-drinker George W. Bush explained that a "binge" is always followed by
the inevitable "hangover." What he did not say is that the "binge" that
has just ended with so much pain for the country was the conservative

Economic liberalism prevailed from the New Deal forward but broke down
in the late 1960s when it was unable to resolve doctrinal failures
including an inability to confront persistent inflation. Now market
orthodoxy is coming apart as a result of its own distinctive failures.
It can neither explain the economic disorders before us nor remedy them
because, in fact, its doctrine of reckless laissez-faire produced them.
The bursting bubbles are not accidents or the work of a few
larceny-prone executives. They are the consequence of everything the
conservative ascendancy sought to achieve--the savagery and injustice of
unregulated markets, the blind willfulness of unaccountable

We will be a long time getting over the conservative "hangover." It may
even take some years before politicians and policy thinkers grasp that
the old order is fallen. But this season marks a dramatic starting point
for thinking anew. Left-liberal progressives have been pinned down in
rearguard defensive actions for nearly thirty years, but now they have
to learn how to play offense again. Though still marginalized and
ignored, progressives will determine how fast the governing ethos can be
changed, because the pace will be set largely by the strength of their
ideas, their strategic shrewdness and, above all, the depth of their
convictions. That may sound fanciful to perennial pessimists, but if you
look back at the rise of the conservative orthodoxy, it was not driven
by mainstream conservatives or the Republican Party but by those
dedicated right-wingers who knew what they believed and believed, most
improbably, that their ideas would prevail.

The new agenda falls roughly into three parts, and the first might be
described as "restoring the New Deal." That is, the first round of
necessary reforms, like the Sarbanes bill already enacted, must
basically restore principles and economic assurances that Americans used
to enjoy--the protections inherited from the liberal era that were
destroyed or severely damaged by right-wing deregulation and corporate
corruption of government. Pension funds, for instance, lost horrendously
in the stock market collapse and face a potentially explosive crisis
because corporate managers gamed the pension savings to inflate company
profits. Employees of all kinds deserve a supervisory voice in managing
this wealth, but Congress should also ask why corporations are allowed
such privileged control over other people's money. Broader reform will
confront the disgraceful fact that only half the work force has any
pension at all beyond Social Security and set out to create tax
incentives and penalties to change this.

Another major reconstruction is needed in antitrust law, to restore and
modernize the legal doctrine systematically gutted by the Reagan era
(and only marginally repaired under Clinton). The financial debacle
includes scores of companies concocted by endless mergers that pumped up
the stock price but added no real economic value. Others sought to build
the dominance of oligopoly and have succeeded across many sectors.
Spectacular failures include AOL Time Warner and the airline industry.
Skepticism of unlimited bigness needs to be renewed and should start
with the banking industry--reining in those conflicted conglomerates,
like Citigroup and J.P. Morgan Chase, created with repeal of the New
Deal's wise separation of commercial and investment banking.

New Dealers got a lot of things right, but the second dimension of new
progressive thinking requires a recognition that returning to the New
Deal framework is essentially a retrograde option (and not only because
the country is a different place now). Liberals ought to ask why so many
New Deal reforms proved to be quite perishable or why some of its
greatest triumphs, like the law establishing the rights of working
people to organize, have been perverted into obstacles for the very
people supposedly protected. In short, this new era requires
self-scrutiny and the willingness to ask big, radical, seemingly
impossible questions about how to confront enduring social discontents
and economic injustice.

Who really owns the corporation (clearly it's not the shareholders), and
how might corporations be reorganized to reduce the social injuries? Is
the government itself implicated in fostering, through subsidy and
tax-code favoritism, the very corporate antisocial behavior its
regulations are supposed to prevent? Congress, aroused by scandal, is
considering penalizing those companies that moved to Caribbean tax
havens yet still enjoy US privileges and protection. That's a good
starting point for rethinking the nature of government's corporatized
indulgences (old habits first formed in the New Deal) and perhaps
turning them into leverage for public objectives. To explore this new
terrain, we need lots of earnest inquiry, noisy debate and re-education
by a reinvigorated labor movement, environmental and social reformers
and ordinary citizens who yearn for serious politics, significant

A third dimension for new thinking is the economic order itself. During
the past two decades, a profound inversion has occurred in the governing
values of US economic life and, in turn, captured politics and elite
discourse--the triumph of finance over the real economy. In the natural
order of capitalism, the financial system is supposed to serve the
economy of production--goods and services, jobs and incomes--but the
narrow values of Wall Street have become the master. The Federal Reserve
and other governing institutions are implicated, but so are the media
and other institutions of society.

The political system is, of course, not ready to consider any of these
or other big matters. One of the first chores is to bang on the
Democratic Party, which, despite some advances, has expressed its fealty
to corporate money by clearing the fast-track trade bill and bankers'
bankruptcy bill for passage. This amounts to selling out principle and
loyal constituencies before the election, instead of afterward. Of
course the politicians are hostile--what else is new?--but now it's the
left that can say, They just don't get it.

Reversing the nation's deformed priorities will be a hard struggle but
has renewed promise now that the stock market bubble and other New
Economy delusions have been demolished. People do not live and work in
order to buy stocks. People exist in complex webs of relationships with
family, work, community and many other rewarding adventures and
obligations. The larger purpose of the economic order, including Wall
Street, is to support the material conditions for human existence, not
to undermine and destabilize them. If that observation sounds quaint,
it's what most Americans, regardless of ideology, happen to believe. If
our progressive objectives are deeply aligned with what people truly
seek and need in their lives, the ideas will prevail.

Thou hast taken usury and increase, and thou hast greedily gained of thy neighbor by extortion, and hast forgotten me, saith the Lord God.


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