Robert Reich explains why the conservative formula for our economy—low taxes, few regulations and low wages—might not be all it’s cracked up to be.

Listen to Robert Reich discuss the Republican myth about taxes on the Start Making Sense podcast.

How can the Democratic Party best respond to Donald Trump’s election? The current debate rages around whether to unify around class or instead to build a coalition of identity groups, key among them racial minorities. We reject as fundamentally flawed the implicit assumption that class and race are incompatible bases for moving forward. Race is not a distraction from but a key driver of widening inequality and stagnant or declining wages for the majority. To meaningfully help working people, the Democratic Party must simultaneously engage class and race.1

Trump’s election reflects the triumph of dog-whistle politics—the use of (barely) coded racial appeals to mobilize white voters who have become anxious about their social position and economic standing. Nothing better illustrates this strategy’s potency than the demographics of Trump’s support. Exit polls show non-Hispanic whites contributed 86 percent of Trump’s votes, while a further 3.4 percent came from Hispanic whites. African Americans constituted only 2 percent of Trump’s votes.2

But Trump’s campaign also spoke powerfully to the economic anxieties experienced by so many white working-class voters. Trump’s greatest success came among white men without a college degree, where Trump bested Clinton by 73 to 23 percent. Even the higher-income whites who voted for him have been on a downward economic escalator. They’re clearly worried about their futures.3

So how should Democrats move forward? Despite the obvious role of race, many hesitate to acknowledge this fact, worrying that even raising the issue of racism would unfairly and unwisely insult Trump voters. Because race divides us, a developing consensus seems to hold that we should move forward on what instead ostensibly unites us: a common interest in addressing surging economic inequality. The injunction to eschew “identity politics” has become shorthand for a strategy that sets aside seemly divisive matters like racism and focuses almost exclusively on economic inequality.4

Yet in order to more clearly discern the way forward, Trump’s election must be placed in historical context. In the 1960s, the Republican Party spied a possible advantage in the rising racial resentment among whites generated by the civil-rights movement, and quickly sought to harness and then to foment this seething sense of insecurity. From Richard Nixon’s invocations of “law and order” and “the silent majority” to Trump’s resurrection of those loaded terms, the GOP has made racial grievance a core organizing principle.5

For all its ugliness, this was strategy, not simply bigotry. The goal was to win elections and to satisfy the demands of the moneyed class funding Republican campaigns. This required stoking resentment not only against nonwhites but also against liberal government, which was painted as coddling minorities with welfare while refusing to control them with lax criminal laws and weak border enforcement. By pandering to racial anxiety and enflaming hatred against government, powerful elites distracted voters from recognizing the threat posed to whites as well as people of color by increasing concentrations of wealth and power. In other words, white resentment helped build a toxic degree of economic inequality.6

The strategy worked. No Democrat has won a majority of the white vote since 1964, when GOP dog whistling began. And no one better epitomizes this conjoined politics of race and class than Donald Trump, the self-serving billionaire who convinced three in four white working-class men to vote for him by promising to ban Mexicans and Muslims.7

Democrats struggle to respond because they have their own sorry history. Democrats have occupied the White House for 16 of the past 24 years, and in that time scored some important victories for working families. But as early as the 1980s, the Democrats began feeding from the same campaign-funding trough as the Republicans—big corporations, Wall Street, and the very wealthy. The Democrats soon achieved a rough parity with Republicans in contributions from these coffers, but the deal proved a Faustian bargain as Democrats become financially dependent on big corporations and the Street.8

Meanwhile, the Democrats also moved in the wrong racial direction. Bill Clinton understood the need to address racial resentment among whites. But rather than speak to how everyone loses when working people turn on one another, he pandered to white racial fears, pursuing his own version of dog-whistle politics around welfare and crime.9

The Democratic response to Trump that will guide the next few years is being set right now. Democrats could still forge a powerful coalition of the working class and poor of all races, of everyone who has been shafted by the shift in wealth and power to the top. This would give Democrats the political clout to restructure the economy—rather than merely enact palliatives that paper over increasing concentrations of wealth and power in America. To do so, Democrats must immediately start addressing the deepest concerns of the 70 percent of Americans who are being left behind and demonized.10

Democrats cannot speak authentically to white concerns by addressing pocketbook issues alone. However important those issues are, many whites have been conditioned to fear for their place in a society that is rapidly becoming more racially and ethnically mixed. Similarly, many men struggle to understand their roles in families moving beyond patriarchy. We cannot pander to these insecurities, as Trump does, but neither can we ignore them.11

Moreover, a class-only strategy risks alienating the Obama coalition—the people of color, women, and millennials who provide the party’s energy as well as its demographic future. It betrays their lived experiences to ask them to ignore the threats of mass deportation, mass incarceration, abortion restrictions, and religious tests, out of some presumably more basic economic interests shared in common with white men.12

Engaging with identity doesn’t mean seeking to set blame by accusing white men of being racist or sexist, nor does it mean neglecting class issues.13

To the contrary, it requires that Democrats develop a narrative about how political opportunists have used race and gender to divide us, to demonize government in the eyes of many working-class whites, and to prevent us from joining together in a broad-based coalition to fight widening inequalities of income, wealth, and political power. Democrats must re-tell the story of the last 50 years, emphasizing how race and other culture-war issues have been used to divide and conquer.14

More than a story of blame, Democrats must also offer a positive alternative identity, one capable of supplanting the false allure of racism and sexism. We must articulate a renewed sense of solidarity in America—a shared identity as part of a multiracial social movement of people coming together to retake the country from the rising plutocrats. A sense of belonging across the lines of race, ethnicity, and gender is a necessary precondition for a new politics and a new political coalition.15

Our deepest American ideals insist that everyone is created equal and that, out of many, we forge one people. Only by recognizing the totality of what we share can we form a coalition sufficiently powerful to wrest government from the hands of the corporations.16

President-elect Donald Trump has made it clear that he wants to repeal President Barack Obama’s signature climate policies—the Clean Power Plan and the Paris Agreement on global emissions reductions. If he is successful, we will need a Plan B that the Republicans cannot obstruct. That means turning to states and cities, and in a big way.1

Some have already started to think about how climate change can be fought at the state level. But there is a lot more work to be done. One of the most hotly debated ballot initiatives in 2016 was Washington’s first-of-its-kind proposal for a statewide carbon tax, known as Ballot Initiative 732 (I-732). Despite the robust debate over its merits, however, the proposal went down to defeat with only 41 percent of the vote. That was at least in part because many who support aggressive carbon taxes or other carbon pricing approaches welcomed I-732’s defeat. We were among them.2

A quick review of the proposal shows why we objected. The tax side of I-732 was actually quite strong. It would have covered 85 percent of greenhouse-gas emissions in the state, and, starting at $15 per metric ton of fossil-fuel emissions in the first year, and rising to $25 per ton in the second year, the tax would have risen 3.5 percent annually thereafter, up to $100 per ton by the middle of this century. Taxable sources of emissions would have included both fossil-fuel consumption and the carbon emissions embedded in any imported energy. The tax schedule offered by I-732 appeared to be one of the most aggressive in the world at any level. 3

So why did we oppose it? Unfortunately, the proposal went badly wrong on the revenue side of the equation, starting with the major flaw of adopting a “revenue-neutral” stance. Revenue neutrality means that the burden of the carbon tax should be offset by other tax cuts or tax benefits. I-732 provided for hundreds of millions of dollars in tax cuts for corporations, helping to generate an estimated net revenue loss of $800 million over six fiscal years, according to the state’s Department of Revenue. That made I-732 not revenue neutral but revenue negative. Underscoring these problems, the advocacy group behind the initiative, Carbon Washington, did not seriously seek out and incorporate input from environmental and social-justice advocates and community leaders. 4

If I-732’s backers had sought guidance from advocates, they would have realized that the principle of revenue neutrality is deeply out of touch with the realities of both climate change and inequality. It essentially suggests that polluters don’t really need to pay for the carbon reductions, and that nothing else in the economic system really needs to change. Yet for tens of millions of Americans, and especially for people of color, climate problems are indissolubly linked to problems of racial inequity and economic exclusion. Many are doubly hard-hit by the fossil-fuel economy—disproportionately hurt by its pollution and climate impacts, yet largely excluded from its economic benefits. There is nothing neutral about the consequences of carbon pollution and economic exclusion. Therefore, policies that determine who pays for carbon pricing and other climate policies—and who benefits from such reforms—must not be neutral, either. Indeed, they should be specifically targeted for the benefit of the communities that suffer the most.5

Some “revenue-neutral” climate-change proposals—including I-732—include tax cuts and/or tax benefits targeted for lower-income households, and proponents may characterize such policy features as a blow for equity. But this misses the point: While neutrality on revenue may sound fair or maybe even equitable in some forms, in fact it is neither, because it simply maintains an already highly inequitable and unsustainable status quo of revenue starvation and public disinvestment. In Washington, the state Supreme Court has mandated K-12 spending increases estimated at nearly $6 billion, and long-term disinvestment in the state’s higher-education system has driven up the cost of college tuition by 154 percent since 1990. Given such realities, keeping revenue neutral may be a plus for the corporations whose taxes are cut, but it’s a negative for people.       6

The better way forward, for people and for the climate, is a “revenue-positive” approach, whereby polluters pay for carbon reduction either through a carbon tax or a cap-and-trade system, and the revenue generated is directly invested in disadvantaged communities. This “price-and-invest” model, in other words, takes money from the polluters and gives it back to those they have harmed. The money is invested in clean-energy and clean-transportation projects, with three important results: improving community health, creating new green jobs for residents, and reducing carbon in the atmosphere.  7

Some advocates of price-and-invest propose a hybrid spending design that includes both direct investment and targeted cash dividends or tax rebates for low-income households. While such a hybrid approach is certainly worth considering, it’s important to keep in mind the fact that carbon-tax revenue is inherently transitional and will shrink over time as emissions are reduced. In that light, spending choices may have significantly varying impacts and they need to be evaluated not just in the short term (i.e., to address temporary problems such as a spike in energy costs) but from a long-run perspective as well. For example, direct investment in energy efficiency, renewable energy, and mass transit, which could create thousands of green jobs in cities like Atlanta or Milwaukee, could be much more impactful in the long run than temporary cash dividends targeted for low-income households in those cities. According to UCLA’s Luskin Center for Innovation, achieving just 10 percent of Los Angeles County’s solar potential (where half of low-income Californians live) would create 47,000 jobs. Energy-efficiency investments for public housing could provide significant savings for many low-income residents—not just transitionally, but over a lifetime for those with stable housing. Public financing to underwrite new forms of community ownership of energy assets could help close the yawning racial wealth gaps that afflict large and small cities alike. These sorts of investments are good for economic growth as well. A recent study of the Regional Greenhouse Gas Initiative’s program in the Northeast found that for every $1 in program investment, $2 to $4 was generated in economic and health benefits for communities. Sustainable growth that helps families, not more budget-busting tax cuts—that’s exactly what we need.8

Some advocates are promoting the idea of a revenue-neutral “fee and dividend” policy, which would see 100 percent of carbon-tax revenue returned to households through some type of rebate program. But this approach—especially if the policy assumes the need for a broad distribution of dividends—would have little or no long-run impact on employment, household savings, or community wealth in poor neighborhoods. This is not even to mention the fact that direct investment in job-creating clean-energy programs and infrastructure can help to accelerate emissions reductions and enable more aggressive reduction targets. For climate activists, this should be a key selling point for the price-and-invest approach.9

Another, more political concern is that the dividend-only idea is being heavily promoted to Republicans at the state and federal level, particularly by a group called the Citizens’ Climate Lobby (CCL). Yoram Bauman, the architect of I-732, has partnered with CCL, while dismissing critics’ racial-equity concerns as a “political weapon” for expanding government. (Certainly, many supporters of I-732 would not agree with this sentiment.)10

Pointing in the opposite direction, a revenue-positive, price-and-invest approach could be politically winnable in some states, particularly given the new urgency for state and local action on climate. In the 2016 elections, the passage of a number of revenue initiatives connected to direct investment in things people want could be a bellwether for carbon price-and-invest policies. While Washingtonians rejected I-732 statewide, residents of the Puget Sound region voted yes on a $50 billion mass-transit program, which will create an estimated 200,000 jobs. This huge investment must have seemed very worthwhile to voters, given the relatively high price they will pay on their tax bills in exchange—an estimated $169 annually for the median household.    11

Similarly, support for carbon pricing is likely to be much stronger if a large share of the revenue is invested in communities in desirable ways. Pushed by grassroots environmental and social-justice groups, California has led the way on this approach, with 2012 legislation (Senate Bill 535) requiring that 25 percent of carbon revenue from the state’s cap-and-trade program must be spent on clean-energy investments that benefit environmentally vulnerable low-income communities in places like Stockton, Fresno, Richmond, Riverside, San Bernardino, and Los Angeles (the targeted share for these communities was recently raised to 35 percent). In 2015 and 2016, according to TransForm (a transportation advocacy group), approximately $1.2 billion in cap-and-trade revenue was invested in clean energy and transportation projects either within such communities or targeted for their benefit. To put this in perspective, the Community Development Block Grant program (the largest federal community grants program) allocated only about $300 million to California cities and counties in fiscal year 2016.12

California has inspired other states to go even further. In New York, the Climate and Community Protection Act, the most progressive climate-equity policy we’ve seen, is gaining traction, after being passed by the state Assembly last spring. The bill would set a mandate of 100 percent renewable energy in New York by 2050, with 40 percent of investment (whether through carbon pricing or other avenues) targeted for environmentally vulnerable low-income communities. Importantly, and in contrast with I-732 in Washington, both the California and the New York policies were forged in deep engagement with grassroots coalitions led by racial justice organizations, alongside trade unions, environmental groups, and community organizing groups. In Washington state, the main progressive opposition to I-732 came through the Alliance for Jobs and Green Energy, a very similar coalition. The Alliance is now working to re-tool the carbon tax agenda in Washington with a broader and bolder vision for uniting climate and equity advocates in a single larger campaign aimed at getting a bill passed in the state legislature. 13

Taxing carbon for investment in oppressed and under-served communities is the core of a new progressive politics that marries climate and equity goals in a powerful, simultaneous rejection of polluters’ free ride on climate change and the ruinous, often racist, austerity politics of the last 40 years. The coalitions of racial justice, labor, and environmental groups that will be needed to win price-and-invest campaigns in the states might also be the template we need for rebuilding progressive power nationally. When we choose this path, the communities that have been hurt the most by, and gained the least from, the fossil-fuel economy are put at the center of action on climate change and broadly included in the huge clean energy and clean economy investment opportunity that lies before us. That is the right thing to do, and it is the best path forward for our people, our country, and our planet. 14

Not content to keep his terribly misleading musings about the role he suspects Goldman Sachs played in Greece’s financial woes to his Facebook page, Robert Reich, a Berkeley economics professor and a former secretary of labor, has reiterated them this past week to a wider audience in the pages of The Nation. That’s a shame, not because the former Rhodes scholar is not entitled to his views, but rather because, as I wrote in a recent New York Times DealB%k column, he should know better than to stoop to populist demagoguery to try to sort out responsibility for the Greek economic tragedy. “The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO LLoyd Blankfein,” Reich wrote. “Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role.”

Reich’s facts are wrong on so many different levels that he must again be called out for such obvious pandering. When I did this previously in DealB%k, Reich’s feeble rejoinder to me—also on Facebook—was that of course I was defending Goldman Sachs, because I used to work on Wall Street. While it is true that I worked as a Wall Street banker for 17 years, from 1987 to 2004, at which time I returned to journalism, only in a polarized early-21st-century America could relaying the actual facts of what Goldman and Greece did together in 2001 and 2002 be dismissed as a bias in favor of Wall Street. As anyone who has taken the time to read any of my three books about Wall Street or countless magazine articles or opinion columns knows all too well, I am more than happy, in fact eager, to criticize Wall Street for its seemingly unending self-interested and hugely detrimental behavior.

I think we can stipulate that Wall Street’s culture is badly broken and in dire need of a makeover, before its prudential regulators impose such changes in ways that Wall Street will like even less. One good place to start would be by revamping Wall Street’s asynchronous compensation system, which rewards bankers, traders, and executives with big bonuses for taking risks with other people’s money without the slightest hint of accountability when things go wrong.

Lord knows, I hate being put in the position of defending Goldman Sachs. But for the second time in two weeks, Reich leaves me little choice, if only because I cannot stand that people like Reich, or Elizabeth Warren—who should know better and still choose to be intentionally misleading—need to be corrected, over and over again.

The truth is: First, Lloyd Blankfein had nothing to do with the currency swaps Goldman’s bankers in London constructed for Greece more than a decade ago. Second, Greece’s current financial woes were not “exacerbated” by Goldman Sachs. In 2001, Greece had a problem that it wanted help solving: Its debt as a percentage of its GDP was at a level above what would be acceptable to the people running the European Union. If Greece wanted to join the EU, it needed to show the EU that it could reduce its debt. Greece’s problem was that it wanted a legal way to reduce its dollar- and yen-denominated debt and show the EU that it was serious about debt reduction. In other words, Greece’s excessive leverage was already a big problem long before Goldman Sachs came along, which Reich tacitly acknowledges in his Nation piece, but not before he then blames Goldman for being Greece’s “biggest enabler.” It is simply not conceivable that a former labor secretary, Rhodes scholar, and current economics professor would not know the nature of a Wall Street bank’s relationship to its clients and counterparties. Greece had a problem it wanted to solve, and it turned to Goldman Sachs to solve it, just as millions of other clients and counterparties have turned to Goldman and other Wall Street firms to help solve a myriad of financial problems. Greece and Goldman agreed to a deal. No one was forced into the agreement, and to claim that somehow Goldman snookered the Greek finance minister is unfair and condescending. Would Reich ever think for a moment that Goldman Sachs could snooker him? Not likely.

It’s true the deal worked out very poorly for Greece, which ended up with twice as much debt as it bargained for—$2.8 billon of debt became $5.1 billion of debt—and Goldman did make a tremendously lopsided fee, something on the order of $500 million or more. But that unhappy—or happy—circumstance (depending on your perspective) occurred because interest rates fell precipitously after the September 11 attacks, an event that neither Greece nor Goldman Sachs could have anticipated. Had interest rates suddenly spiked, instead of suddenly falling, then Goldman would have been left holding the bag, instead of Greece. It’s doubtful that Reich would be shedding a tear for Goldman in that circumstance. Reich goes on to blame Goldman for Detroit’s and Oakland’s financial woes, for the financial problems experienced by Chicago’s school system, and of course for the financial crisis as a whole. “In all these cases, Goldman knew very well what it was doing,” Reich wrote. “It knew more about the real risks and costs of the deals it proposed than those who accepted them.”

This is a classic argument made by pandering politicians who somehow think that the losing side of every trade is a blameless victim, taken advantage of by an obviously cleverer opponent. Reich paints Goldman as immoral for what it did to Greece and these other municipalities. Goldman has made more than its share of mistakes over the years. But what Goldman and other Wall Street banks do has very little to do with morality. They are in the business of solving problems for their clients. Sometimes those relationships work out better for Wall Street than for their clients; sometimes it is just the opposite. Reich is wrong to blame Goldman for what happened to Greece. But it is worth remembering that Wall Street is not that much different than a scorpion. Is it the scorpion’s fault that it’s rigged to sting? No. But I’d still steer clear.

Reich Replies

Mr. Cohan’s complaint isn’t about the facts I recount, which have been checked and double-checked, but about my holding Goldman Sachs accountable for worsening Greece’s debt problem in the early 2000s. He concedes the deal Goldman did with Greece to secretly take debt off its public accounts ended up doubling that debt, while giving Goldman a “tremendously lopsided fee.” But Cohan argues that Goldman did nothing wrong because Greece agreed to the deal. Yet, as we all know, an agreement doesn’t make a contract morally justifiable. He then argues that “what Goldman and other Wall Street banks do has very little to do with morality.” That’s precisely the problem. Goldman and other big Wall Street banks have long records of leading clients into excessively risky deals that end up hurting the public—deals for which Goldman and the other banks should be held morally accountable. Oddly, Cohan seems to agree with me on this. He criticizes “Wall Street’s asynchronous compensation system, which rewards bankers, traders, and executives with big bonuses for taking risks with other people’s money without the slightest hint of accountability when things go wrong.” Exactly.

The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts.

The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role.

In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction. Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

As a result, about 2 percent of Greece’s debt magically disappeared from its national accounts. Christoforos Sardelis, then head of Greece’s Public Debt Management Agency, later described the deal to Bloomberg Business as “a very sexy story between two sinners.” For its services, Goldman received a whopping 600 million euros ($793 million), according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12 percent of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein.

Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion. In 2005, the deal was restructured and that 5.1 billion euros in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman’s international division.

Greece wasn’t the only sinner. Until 2008, European Union accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities.

But Greece was in the worst shape, and Goldman was the biggest enabler. Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt—along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.

Even with the global economy reeling from Wall Street’s excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country’s debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece’s healthcare system far into the future. This time, though, Greece didn’t bite.

As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman’s were trading at $53 a share in November 2008; they’re now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman’s CEO, raked in $24 million last year alone.

Meanwhile, the people of Greece struggle to buy medicine and food.

There are analogies here in America, beginning with the predatory loans made by Goldman, other big banks, and the financial companies they were allied with in the years leading up to the bust. Today, even as the bankers vacation in the Hamptons, millions of Americans continue to struggle with the aftershock of the financial crisis in terms of lost jobs, savings, and homes.

Meanwhile, cities and states across America have been forced to cut essential services because they’re trapped in similar deals sold to them by Wall Street banks. Many of these deals have involved swaps analogous to the ones Goldman sold the Greek government. And much like the assurances it made to the Greek government, Goldman and other banks assured the municipalities that the swaps would let them borrow more cheaply than if they relied on traditional fixed-rate bonds—while downplaying the risks they faced. Then, as interest rates plunged and the swaps turned out to cost far more, Goldman and the other banks refused to let the municipalities refinance without paying hefty fees to terminate the deals.

Three years ago, the Detroit Water Department had to pay Goldman and other banks penalties totaling $547 million to terminate costly interest-rate swaps. Forty percent of Detroit’s water bills still go to paying off the penalty. Residents of Detroit whose water has been shut off because they can’t pay have no idea that Goldman and other big banks are responsible. Likewise, the Chicago school system—whose budget is already cut to the bone—must pay over $200 million in termination penalties on a Wall Street deal that had Chicago schools paying $36 million a year in interest-rate swaps.

A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee—prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Blankfein explained that it was against shareholder interests to tear up a valid contract.

Goldman Sachs and the other giant Wall Street banks are masterful at selling complex deals by exaggerating their benefits and minimizing their costs and risks. That’s how they earn giant fees. When a client gets into trouble—whether that client is an American homeowner, a US city, or Greece—Goldman ducks and hides behind legal formalities and shareholder interests.

Borrowers that get into trouble are rarely blameless, of course: They spent too much, and were gullible or stupid enough to buy Goldman’s pitches. Greece brought on its own problems, as did many American homeowners and municipalities.

But in all of these cases, Goldman knew very well what it was doing. It knew more about the real risks and costs of the deals it proposed than those who accepted them. “It is an issue of morality,” said the shareholder at the Goldman meeting where Oakland came up. Exactly.

Some inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy.

We are near or have already reached that tipping point. It is incumbent on us to dedicate ourselves to reversing this diabolical trend. It will not happen automatically, because the dysfunctions of our economy and politics are not self-correcting when it comes to inequality. In order to reform the system, we need a political movement for shared prosperity. Herewith, a short summary of what has happened, why it has happened, how it threatens the foundations of our society, and what we must do to reverse it.

The data on widening inequality are remarkably and disturbingly clear. The Congressional Budget Office has found that between 1979 and 2007, the onset of the Great Recession, the gap in income—after federal taxes and transfer payments—more than tripled between the top 1 percent of the population and everyone else. The after-tax, after-transfer income of the top 1 percent increased by 275 percent, while it increased less than 40 percent for the middle three quintiles of the population and only 18 percent for the bottom quintile.

The gap has continued to widen in the recovery. According to the Census Bureau, median family and median household incomes have been falling, adjusted for inflation; while according to the data gathered by my colleague Emmanuel Saez, the income of the wealthiest 1 percent has soared by 31 percent. In fact, Saez has calculated that 95 percent of all economic gains since the recovery began have gone to the top 1 percent.

Wealth has become even more concentrated than income. An April 2013 Pew Research Center report found that from 2009 to 2011, “the mean net worth of households in the upper 7 percent of wealth distribution rose by an estimated 28 percent, while the mean net worth of households in the lower 93 percent dropped by 4 percent.”

* * *

This trend is now threatening the three foundation stones of our society: our economy, our ideal of equal opportunity and our democracy.

In the United States, consumer spending accounts for approximately 70 percent of economic activity. If consumers don’t have adequate purchasing power, businesses have no incentive to expand or hire additional workers. Because the rich spend a smaller proportion of their incomes than the middle class and the poor, it stands to reason that as a larger and larger share of the nation’s total income goes to the top, consumer demand is dampened. If the middle class is forced to borrow in order to maintain its standard of living, that dampening may come suddenly—when debt bubbles burst.

Consider that the two peak years of inequality over the past century—when the top 1 percent garnered more than 23 percent of total income—were 1928 and 2007. Each of these periods was preceded by substantial increases in borrowing, which ended notoriously in the Great Crash of 1929 and the near-meltdown of 2008.

The anemic recovery we are now experiencing is directly related to the decline in median household incomes after 2009, coupled with the inability or unwillingness of consumers to take on additional debt and of banks to finance that debt—wisely, given the damage wrought by the bursting debt bubble. We cannot have a growing economy without a growing and buoyant middle class. We cannot have a growing middle class if almost all of the economic gains go to the top 1 percent.

Widening inequality also challenges the nation’s core ideal of equal opportunity, because it hampers upward mobility. High inequality correlates with low upward mobility. Studies are not conclusive because the speed of upward mobility is difficult to measure. But even under the unrealistic assumption that its velocity is no different today than it was thirty years ago—that someone born into a poor or lower-middle-class family today can move upward at the same rate as three decades ago—widening inequality still hampers upward mobility. That’s simply because the ladder is far longer now. The distance between its bottom and top rungs, and between every rung along the way, is far greater. Anyone ascending it at the same speed as before will necessarily make less progress upward.

In addition, when the middle class is in decline and median household incomes are dropping, there are fewer possibilities for upward mobility. A stressed middle class is also less willing to share the ladder of opportunity with those below it. For this reason, the issue of widening inequality cannot be separated from the problems of poverty and diminishing opportunities for those near the bottom. They are one and the same.

The connection between widening inequality and the undermining of democracy has long been understood. As former Supreme Court Justice Louis Brandeis is famously alleged to have said in the early years of the last century, an era when robber barons dumped sacks of money on legislators’ desks, “We may have a democracy, or we may have great wealth concentrated in the hands of a few, but we cannot have both.”

As income and wealth flow upward, political power follows. Money flowing to political campaigns, lobbyists, think tanks, “expert” witnesses and media campaigns buys disproportionate influence. With all that money, no legislative bulwark can be high enough or strong enough to protect the democratic process.

The threat to our democracy also comes from the polarization that accompanies high levels of inequality. Partisanship—measured by some political scientists as the distance between median Republican and Democratic roll-call votes on key economic issues—almost directly tracks with the level of inequality. It reached high levels in the first decades of the twentieth century when inequality soared, and has reached similar levels in recent years.

When large numbers of Americans are working harder than ever but getting nowhere, and see most of the economic gains going to a small group at the top, they suspect the game is rigged. Some of these people can be persuaded that the culprit is big government; others, that the blame falls on the wealthy and big corporations. The result is fierce partisanship, fueled by anti-establishment populism on both the right and the left of the political spectrum.

* * *

Between the end of World War II and the early 1970s, the median wage grew in tandem with productivity. Both roughly doubled in those years, adjusted for inflation. But after the 1970s, productivity continued to rise at roughly the same pace as before, while wages began to flatten. In part, this was due to the twin forces of globalization and labor-replacing technologies that began to hit the American workforce like strong winds—accelerating into massive storms in the 1980s and ’90s, and hurricanes since then.

Containers, satellite communication technologies, and cargo ships and planes radically reduced the cost of producing goods anywhere around the globe, thereby eliminating many manufacturing jobs or putting downward pressure on other wages. Automation, followed by computers, software, robotics, computer-controlled machine tools and widespread digitization, further eroded jobs and wages. These forces simultaneously undermined organized labor. Unionized companies faced increasing competitive pressures to outsource, automate or move to nonunion states.

These forces didn’t erode all incomes, however. In fact, they added to the value of complex work done by those who were well educated, well connected and fortunate enough to have chosen the right professions. Those lucky few who were perceived to be the most valuable saw their pay skyrocket.

But that’s only part of the story. Instead of responding to these gale-force winds with policies designed to upgrade the skills of Americans, modernize our infrastructure, strengthen our safety net and adapt the workforce—and pay for much of this with higher taxes on the wealthy—we did the reverse. We began disinvesting in education, job training and infrastructure. We began shredding our safety net. We made it harder for many Americans to join unions. (The decline in unionization directly correlates with the decline of the portion of income going to the middle class.) And we reduced taxes on the wealthy.

We also deregulated. Financial deregulation in particular made finance the most lucrative industry in America, as it had been in the 1920s. Here again, the parallels between the 1920s and recent years are striking, reflecting the same pattern of inequality.

Other advanced economies have faced the same gale-force winds but have not suffered the same inequalities as we have because they have helped their workforces adapt to the new economic realities—leaving the United States the most unequal of all advanced nations by far.

What We Must Do

There is no single solution for reversing widening inequality. French economist Thomas Piketty has shown that rich nations are moving back toward the large wealth disparities that characterized the late nineteenth century, as the return on capital exceeds the rate of economic growth. His monumental book Capital in the Twenty-First Century paints a troubling picture of societies dominated by a comparative few, whose cumulative wealth and unearned income overshadow the majority who rely on jobs and earned income. But our future is not set in stone, and Piketty’s description of past and current trends need not determine our path in the future. Here are ten initiatives that could reverse the trends described above:

1) Make work pay. The fastest-growing categories of work are retail, restaurant (including fast food), hospital (especially orderlies and staff), hotel, childcare and eldercare. But these jobs tend to pay very little. A first step toward making work pay is to raise the federal minimum wage to $15 an hour, pegging it to inflation; abolish the tipped minimum wage; and expand the Earned Income Tax Credit. No American who works full time should be in poverty.

2) Unionize low-wage workers. The rise and fall of the American middle class correlates almost exactly with the rise and fall of private-sector unions, because unions gave the middle class the bargaining power it needed to secure a fair share of the gains from economic growth. We need to reinvigorate unions, beginning with low-wage service occupations that are sheltered from global competition and from labor-replacing technologies. Lower-wage Americans deserve more bargaining power.

3) Invest in education. This investment should extend from early childhood through world-class primary and secondary schools, affordable public higher education, good technical education and lifelong learning. Education should not be thought of as a private investment; it is a public good that helps both individuals and the economy. Yet for too many Americans, high-quality education is unaffordable and unattainable. Every American should have an equal opportunity to make the most of herself or himself. High-quality education should be freely available to all, starting at the age of 3 and extending through four years of university or technical education.

4) Invest in infrastructure. Many working Americans—especially those on the lower rungs of the income ladder—are hobbled by an obsolete infrastructure that generates long commutes to work, excessively high home and rental prices, inadequate Internet access, insufficient power and water sources, and unnecessary environmental degradation. Every American should have access to an infrastructure suitable to the richest nation in the world.

5) Pay for these investments with higher taxes on the wealthy. Between the end of World War II and 1981 (when the wealthiest were getting paid a far lower share of total national income), the highest marginal federal income tax rate never fell below 70 percent, and the effective rate (including tax deductions and credits) hovered around 50 percent. But with Ronald Reagan’s tax cut of 1981, followed by George W. Bush’s tax cuts of 2001 and 2003, the taxes on top incomes were slashed, and tax loopholes favoring the wealthy were widened. The implicit promise—sometimes made explicit—was that the benefits from such cuts would trickle down to the broad middle class and even to the poor. As I’ve shown, however, nothing trickled down. At a time in American history when the after-tax incomes of the wealthy continue to soar, while median household incomes are falling, and when we must invest far more in education and infrastructure, it seems appropriate to raise the top marginal tax rate and close tax loopholes that disproportionately favor the wealthy.

6) Make the payroll tax progressive. Payroll taxes account for 40 percent of government revenues, yet they are not nearly as progressive as income taxes. One way to make the payroll tax more progressive would be to exempt the first $15,000 of wages and make up the difference by removing the cap on the portion of income subject to Social Security payroll taxes.

7) Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death. As Piketty warns, the United States, like other rich nations, could be moving toward an oligarchy of inherited wealth and away from a meritocracy based on labor income. The most direct way to reduce the dominance of inherited wealth is to raise the estate tax by triggering it at $1 million of wealth per person rather than its current $5.34 million (and thereafter peg those levels to inflation). We should also eliminate the “stepped-up basis” rule that lets heirs avoid capital gains taxes on the appreciation of assets that occurred before the death of their benefactors.

8) Constrain Wall Street. The financial sector has added to the burdens of the middle class and the poor through excesses that were the proximate cause of an economic crisis in 2008, similar to the crisis of 1929. Even though capital requirements have been tightened and oversight strengthened, the biggest banks are still too big to fail, jail or curtail—and therefore capable of generating another crisis. The Glass-Steagall Act, which separated commercial- and investment-banking functions, should be resurrected in full, and the size of the nation’s biggest banks should be capped.

9) Give all Americans a share in future economic gains. The richest 10 percent of Americans own roughly 80 percent of the value of the nation’s capital stock; the richest 1 percent own about 35 percent. As the returns to capital continue to outpace the returns to labor, this allocation of ownership further aggravates inequality. Ownership should be broadened through a plan that would give every newborn American an “opportunity share” worth, say, $5,000 in a diversified index of stocks and bonds—which, compounded over time, would be worth considerably more. The share could be cashed in gradually starting at the age of 18.

10) Get big money out of politics. Last, but certainly not least, we must limit the political influence of the great accumulations of wealth that are threatening our democracy and drowning out the voices of average Americans. The Supreme Court’s 2010 Citizens United decision must be reversed—either by the Court itself, or by constitutional amendment. In the meantime, we must move toward the public financing of elections—for example, with the federal government giving presidential candidates, as well as House and Senate candidates in general elections, $2 for every $1 raised from small donors.

It’s doubtful that these and other measures designed to reverse widening inequality will be enacted anytime soon. Having served in Washington, I know how difficult it is to get anything done unless the broad public understands what’s at stake and actively pushes for reform.

That’s why we need a movement for shared prosperity—a movement on a scale similar to the Progressive movement at the turn of the last century, which fueled the first progressive income tax and antitrust laws; the suffrage movement, which won women the vote; the labor movement, which helped animate the New Deal and fueled the great prosperity of the first three decades after World War II; the civil rights movement, which achieved the landmark Civil Rights and Voting Rights acts; and the environmental movement, which spawned the National Environmental Policy Act and other critical legislation.

Time and again, when the situation demands it, America has saved capitalism from its own excesses. We put ideology aside and do what’s necessary. No other nation is as fundamentally pragmatic. We will reverse the trend toward widening inequality eventually. We have no choice. But we must organize and mobilize in order that it be done.

Progressives have a lot at stake in “fiscal cliff” negotiations, including fair taxation for the wealthy, reasonable military spending and preserving the social safety net. With the daily back-and-forth, it can be confusing to keep track of all the details. Robert Reich boils it all down with these 8 principles to guide you through the fiscal cliff crisis in this video from MoveOn.org.

Economist Robert Reich took to the easel to break down the tenets of Paul Ryan’s economic plan—what would very likely be the premise of a Romney administration. Despite cartoonish sketches of the GOP pair, the outlook is anything but humorous. "It would be the same austerity trap now throwing Europe into recession," Reich explains, opening the video with the harsh reality of higher unemployment if Romney makes it to the White House. If you need a quick refresher on what the VP pick means for the GOP ticket—and for you—this stripped-down tutorial from MoveOn.org will do the trick.

—Zoë Schlanger

The 2012 election is about the forces of the Regressive versus those of the Progressive, explains Nation contributor Robert Reich in this MoveOn.org video. American history over the past century has been made by progressives—those who believe in human rights and social justice. Meanwhile the Regressives—the Romneys and Roves and Santorums—would return America to the nineteenth century, before it became a more equitable society. Reich describes exactly what’s at stake in this election and how Regressives cannot be allowed to pull the country backwards.

Don’t miss Reich’s article “Mitt Romney and the New Gilded Age” in this week’s double issue.

—Max Rivlin-Nadler

Republican presidential candidate, former Massachusetts Gov. Mitt Romney speaks during a campaign stop at Cornwall Iron Furnace on Saturday, June 16, 2012, in Cornwall, Penn. (AP Photo/Evan Vucci)

The election of 2012 raises two perplexing questions. The first is how the GOP could put up someone for president who so brazenly epitomizes the excesses of casino capitalism that have nearly destroyed the economy and overwhelmed our democracy. The second is why the Democrats have failed to point this out.

The White House has criticized Mitt Romney for his years at the helm of Bain Capital, pointing to a deal that led to the bankruptcy of GS Technologies, a Bain investment in Kansas City that went belly up in 2001 at the cost of 750 jobs. But the White House hasn’t connected Romney’s Bain to the larger scourge of casino capitalism. Not surprisingly, its criticism has quickly degenerated into a “he said, she said” feud over what proportion of the companies that Bain bought and loaded up with debt subsequently went broke (it’s about 20 percent), and how many people lost their jobs relative to how many jobs were added because of Bain’s financial maneuvers (that depends on when you start and stop the clock). And it has invited a Republican countercharge that the administration gambled away taxpayer money on its own bad bet, the Solyndra solar panel company.

But the real issue here isn’t Bain’s betting record. It’s that Romney’s Bain is part of the same system as Jamie Dimon’s JPMorgan Chase, Jon Corzine’s MF Global and Lloyd Blankfein’s Goldman Sachs—a system that has turned much of the economy into a betting parlor that nearly imploded in 2008, destroying millions of jobs and devastating household incomes. The winners in this system are top Wall Street executives and traders, private-equity managers and hedge-fund moguls, 
and the losers are most of the rest of us. The system is largely responsible for the greatest concentration of the nation’s income and wealth at the very top since the Gilded Age of the nineteenth century, with the richest 400 Americans owning as much as the bottom 150 million put together. And these multimillionaires and billionaires are now actively buying the 2012 election—and with it, American democracy.

The biggest players in this system have, like Romney, made their profits placing big bets with other people’s money. If the bets go well, the players make out like bandits. If they go badly, the burden lands on average workers and taxpayers. The 750 peo-
ple at GS Technologies who lost their jobs thanks to a bad deal engineered by Romney’s Bain were a small foreshadowing of the 15 million who lost jobs after the cumulative dealmaking 
of the entire financial sector pushed the whole economy off a cliff. And relative to the cost to taxpayers of bailing out Wall Street, Solyndra is a rounding error.

Connect the dots of casino capitalism, and you get Mitt Romney. The fortunes raked in by financial dealmakers depend on special goodies baked into the tax code such as “carried interest,” which allows Romney and other partners in private-equity firms (as well as in many venture-capital and hedge funds) to treat their incomes as capital gains taxed at a maximum of
15 percent. This is how Romney managed to pay an average of 14 percent on more than $42 million of combined income in 2010 and 2011. But the carried-interest loophole makes no economic sense. Conservatives try to justify the tax code’s generous preference for capital gains as a reward to risk-takers—but Romney and other private-equity partners risk little, if any, of their personal wealth. They mostly bet with other investors’ money, including the pension savings of average working people.

Another goodie allows private-equity partners to sock away almost any amount of their earnings into a tax-deferred IRA, while the rest of us are limited to a few thousand dollars a year. The partners can merely low-ball the value of whatever portion of their investment partnership they put away—even valuing it at zero—because the tax code considers a partnership interest to have value only in the future. This explains how Romney’s IRA is worth as much as $101 million. The tax code further subsidizes private equity and much of the rest of the financial sector by making interest on debt tax-deductible, while taxing profits and dividends. This creates huge incentives for financiers to find ways of substituting debt for equity and is a major reason America’s biggest banks have leveraged America to the hilt. It’s also why Romney’s Bain and other private-equity partnerships have done the same to the companies they buy.

These maneuvers shift all the economic risk to debtors, who sometimes can’t repay what they owe. That’s rarely a problem for the financiers who engineer the deals; they’re sufficiently diversified to withstand some losses, or they’ve already taken their profits and moved on. But piles of debt play havoc with the lives of real people in the real economy when the companies they work for can’t meet their payments, or the banks they rely on stop lending money, or the contractors they depend on go broke—often with the result that they can’t meet their own debt payments and lose their homes, cars and savings.

It took more than a decade for America to recover from the Great Crash of 1929 after the financial sector had gorged itself on debt, and it’s taking years to recover from the more limited but still terrible crash of 2008. The same kinds of convulsions have occurred on a smaller scale at a host of companies since the go-go years of the 1980s, when private-equity firms like Bain began doing leveraged buyouts—taking over a target company, loading it up with debt, using the tax deduction that comes with the debt to boost the target company’s profits, cutting payrolls and then reselling the company at a higher price.

Sometimes these maneuvers work, sometimes they end in disaster; but they always generate giant rewards for the dealmakers while shifting the risk to workers and taxpayers. In 1988 drugstore chain Revco went under when it couldn’t meet its debt payments on a $1.6 billion leveraged buyout engineered by Salomon Brothers. In 1989 the private-equity firm of Kohlberg, Kravis, Roberts completed the notorious and ultimately disastrous buyout of RJR Nabisco for $31 billion, much of it in high-yield (“junk”) bonds. In 1993 Bain Capital became a majority shareholder in GS Technologies and loaded it with debt. In 2001 it went down when it couldn’t meet payments on that debt load. But even as these firms sank, Bain and the other dealmakers continued to collect lucrative fees—transaction fees, advisory fees, management fees—sucking the companies dry until the bitter end. According to a review by the New York Times of firms that went bankrupt on Romney’s watch, Bain structured the deals so that its executives would always win, even if employees, creditors and Bain’s own investors lost out. That’s been Big Finance’s MO.

By the time Romney co-founded Bain Capital in 1984, financial wheeling and dealing was the most lucrative part of the economy, sucking into its Gordon Gekko–like maw the brightest and most ambitious MBAs, who wanted nothing more than to make huge amounts of money as quickly as possible. Between the mid-1980s and 2007, financial-sector earnings made up two-thirds of all the growth in incomes. At the same time, wages for most Americans stagnated as employers, under mounting pressure from Wall Street and private-equity firms like Bain, slashed payrolls and shipped jobs overseas.

The 2008 crash only briefly interrupted the bonanza. Last year, according to a recent Bloomberg Markets analysis, America’s top fifty financial CEOs got a 20.4 percent pay hike, even as the wages of most Americans continued to drop. Topping the Bloomberg list were two of the same private-equity barons who did the RJR Nabisco deal a quarter-century ago—Henry Kravis and George Roberts, who took home $30 million each. According to the 2011 tax records he released, Romney was not far behind.

* * *

We’ve entered a new Gilded Age, of which Mitt Romney is the perfect reflection. The original Gilded Age was a time of buoyant rich men with flashy white teeth, raging wealth and a measured disdain for anyone lacking those attributes, which was just about everyone else. Romney looks and acts the part perfectly, offhandedly challenging a GOP primary opponent to a $10,000 bet and referring to his wife’s several Cadillacs. Four years ago he paid $12 million for his fourth home, a 3,000-square-foot villa in La Jolla, California, with vaulted ceilings, five bathrooms, a pool, a Jacuzzi and unobstructed views of the Pacific. Romney has filed plans to tear it down and replace it with a home four times bigger.

We’ve had wealthy presidents before, but they have been traitors to their class—Teddy Roosevelt storming against the “malefactors of great wealth” and busting up the trusts, Franklin Roosevelt railing against the “economic royalists” and raising their taxes, John F. Kennedy appealing to the conscience of the nation to conquer poverty. Romney is the opposite: he wants to do everything he can to make the superwealthy even wealthier and the poor even poorer, and he justifies it all with a thinly veiled social Darwinism.

Not incidentally, social Darwinism was also the reigning philosophy of the original Gilded Age, propounded in America more than a century ago by William Graham Sumner, a professor of political and social science at Yale, who twisted Charles Darwin’s insights into a theory to justify the brazen inequality of that era: survival of the fittest. Romney uses the same logic when he accuses President Obama of creating an “entitlement society” simply because millions of desperate Americans have been forced to accept food stamps and unemployment insurance, or when he opines that government should not help distressed homeowners but instead let the market “hit the bottom,” or enthuses over a House Republican budget that would cut $3.3 trillion from low-income programs over the next decade. It’s survival of the fittest all over again. Sumner, too, warned against handouts to people he termed “negligent, shiftless, inefficient, silly, and imprudent.”

When Romney simultaneously proposes to cut the taxes of households earning over $1 million by an average of $295,874 a year (according to an analysis of his proposals by the nonpartisan Tax Policy Center) because the rich are, allegedly, “job creators,” he mimics Sumner’s view that “millionaires are a product of natural selection, acting on the whole body of men to pick out those who can meet the requirement of certain work to be done.” In truth, the whole of Republican trickle-down economics is nothing but repotted social Darwinism.

The Gilded Age was also the last time America came close to becoming a plutocracy—a system of government of, by and for the wealthy. It was an era when the lackeys of the very rich literally put sacks of money on the desks of pliant legislators, senators bore the nicknames of the giant companies whose interests they served (“the senator from Standard Oil”), and the kings of finance decided how the American economy would function.

The potential of great wealth in the hands of a relative few to undermine democratic institutions was a continuing concern in the nineteenth century as railroad, oil and financial magnates accumulated power. “Wealth, like suffrage, must be considerably distributed, to support a democratick republic,” wrote Virginia Congressman John Taylor as early as 1814, “and hence, whatever draws a considerable proportion of either into a few hands, will destroy it. As power follows wealth, the majority must have wealth or lose power.” Decades later, progressives like Louis Brandeis saw the choice starkly: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

The reforms of the Progressive Era at the turn of the twentieth century saved American democracy from the robber barons, but the political power of great wealth has now resurfaced with a vengeance. And here again, Romney is the poster boy. Congress has so far failed to close the absurd carried-interest tax loophole, for example, because of generous donations by Bain Capital and other private-equity partners to both parties.

* * *

In the 2012 election, Romney wants everything Wall Street has to offer, and Wall Street seems quite happy to give it to him. Not only is he promising lower taxes in return for its money; he also vows that, if elected, he’ll repeal what’s left of the Dodd-Frank financial reform bill, Washington’s frail attempt to prevent the Street from repeating its 2008 pump-
and-dump. Unlike previous elections, in which the Street hedged its bets by donating to both parties, it’s now putting most of its money behind Romney. And courtesy of a Supreme Court majority that seems intent on magnifying the political power of today’s robber barons, that’s a lot of dough. As of May, thirty-one billionaires had contributed between $50,000 and
$2 million each to Romney’s super-PAC, and in June another—appropriately enough, a casino magnate—gave $10 million, with a promise of $90 million more. Among those who have contributed at least $1 million are former associates from Romney’s days at Bain Capital and prominent hedge-fund managers.

To be sure, Romney is no worse than any other casino capitalist of this new Gilded Age. All have been making big bets—collecting large sums when they pay off and imposing the risks and costs on the rest of us when they don’t. Many have justified their growing wealth, along with the growing impoverishment of much of the rest of the nation, with beliefs strikingly similar to social Darwinism. And a significant number have transformed their winnings into the clout needed to protect the unrestrained betting and tax preferences that have fueled their fortunes, and to lower their tax rates even further. Wall Street has already all but eviscerated the Dodd-Frank Act, and it has even turned the so-called Volcker Rule—a watered-down version of the old Glass-Steagall Act, which established a firewall between commercial and investment banking—into a Swiss cheese of 
loopholes and exemptions.

But Romney is the only casino capitalist who is running for president, at the very time in our nation’s history when these views and practices are a clear and present danger to the well-being of the rest of us—just as they were more than a century ago. Romney says he’s a job-creating businessman, but in truth he’s just another financial dealmaker in the age of the financial deal, a fat cat in an era of excessively corpulent felines, a plutocrat in this new epoch of plutocrats. That the GOP has made him its standard-bearer at this point in American history is astonishing.

So why don’t Democrats connect these dots? It’s not as if Americans harbor great admiration for financial dealmakers. According to the newly released twenty-fifth annual Pew Research Center poll on core values, nearly three-quarters of Americans believe “Wall Street only cares about making money for itself.” That’s not surprising, given that many are still bearing the scars of 2008. Nor are they pleased with the concentration of income and wealth at the top. Polls show a majority of Americans want taxes raised on the very rich, and a majority are opposed to the bailouts, subsidies and special tax breaks with which the wealthy have padded their nests.

Part of the answer, surely, is that elected Democrats are still almost as beholden to the wealthy for campaign funds as the Republicans, and don’t want to bite the hand that feeds them. Wall Street can give most of its largesse to Romney this year and still have enough left over to tame many influential Democrats (look at the outcry from some of them when the White House took on Bain Capital). But I suspect a deeper reason for their reticence is that if they connect the dots and reveal Romney for what he is—the epitome of what’s fundamentally wrong with our economy—they’ll be admitting how serious our economic problems really are. They would have to acknowledge that the economic catastrophe that continues to cause us so much suffering is, at its root, a product of the gross inequality of income, wealth and political power in America’s new Gilded Age, as well as the perverse incentives of casino capitalism.

Yet this admission would require that they propose ways of reversing these trends—proposals large and bold enough to do the job. Time will tell whether today’s Democratic Party and this White House have the courage and imagination to do it. If they do not, that in itself poses almost as great a challenge to the future of the nation as does Mitt Romney and all he represents.

The tax rate paid by the super wealthy in this country is at a historic low. In this video from MoveOn.org, Robert Reich explains why that has to change, and fast.

In this video from MoveOn.org, Robert Reich explains that the problem with America isn’t what people do in their bedrooms but what they’ve been doing in boardrooms.

In this video from MoveOn.org, Robert Reich, Professor of Public Policy at the University of California at Berkeley, explains in eight simple steps how private equity partnerships make money. Spoiler alert!—the answer involves cutting costs, jobs and benefits.

—Erin Schikowski

Republican presidential candidate, former Massachusetts Gov. Mitt Romney responds to cheers from the crowd as he speaks at a campaign rally at West Hills Elementary School in Knoxville, Tenn., Sunday, March 4, 2012. (AP Photo/Gerald Herbert)
 
Conservatives love to rail against “big government.” But the surge of cynicism engulfing the nation isn’t about government’s size. It flows from a growing perception that government doesn’t work for average people but for big business, Wall Street and the very rich—who, in effect, have bought it. In a recent Pew poll, 77 percent of respondents said too much power is in the hands of a few rich people and corporations.

That view is understandable. Wall Street got bailed out by taxpayers, but one out of every three homeowners with a mortgage is underwater, caught in the tsunami caused by the Street’s excesses. The bailout wasn’t conditioned on the banks helping these homeowners, and subsequent help has been meager. The recent settlement of claims against the banks is tiny compared with how much homeowners have lost. Millions of people are losing their homes or simply walking away from mortgage payments they can no longer afford.

Homeowners can’t use bankruptcy to reorganize their mortgage loans because the banks have engineered laws to prohibit this. Banks have also made it extremely difficult for young people to use bankruptcy to reorganize their student loans. Yet corporations routinely use bankruptcy to renege on contracts. American Airlines, which is in bankruptcy, plans to fire 13,000 people—
16 percent of its workforce—while cutting back health benefits for current employees. It also intended to terminate its underfunded pension plans, until the government agency charged with picking up the tab screamed so loudly that American backed off and proposed to freeze the plans.

Not a day goes by without Republicans decrying the budget deficit. But its biggest driver is Big Money’s corruption of Washington. One of the federal budget’s largest and fastest-growing programs is Medicare, whose costs would be far lower if drug companies reduced their prices. It hasn’t happened because Big Pharma won’t allow it. Medicare’s administrative costs are only 3 percent, far below the 10 percent average of private insurers. So it would be logical to tame rising healthcare costs by allowing any family to opt in. That was the idea behind the “public option.” But health insurers stopped it in its tracks.

The other big budget expense is defense. The US spends more on its military than China, Russia, Britain, France, Japan and Germany combined. The “basic” military budget (the annual cost of paying troops and buying planes, ships and tanks—not including the costs of actually fighting wars) keeps growing. With the withdrawal of troops from Afghanistan, the cost of fighting wars is projected to drop—but the base budget is scheduled to rise. It’s already about 25 percent higher than it was a decade ago, adjusted for inflation. One big reason is that it’s almost impossible to terminate large military contracts. Defense contractors have cultivated sponsors on Capitol Hill and located their facilities in politically important districts. Lockheed, Raytheon and others have made national defense America’s biggest jobs program.

“Big government” isn’t the problem. The problem is the Big Money that’s taking over government. Government is doing fewer of the things most of us want it to do—providing good public schools and affordable access to college, improving infrastructure, maintaining safety nets and protecting the public from dangers—and more of the things big corporations, Wall Street and wealthy plutocrats want it to do.

Some conservatives argue that we wouldn’t have to worry about this if we had a smaller government to begin with, because big government attracts Big Money. On ABC’s This Week a few months ago, Congressman Paul Ryan told me that “if the power and money are going to be here in Washington…that’s where the powerful are going to go to influence it.” Ryan has it upside down. A smaller government that’s still dominated by money would continue to do the bidding of Wall Street, the pharmaceutical industry, oil companies, agribusiness, big insurance, military contractors and rich individuals. It just wouldn’t do anything else.

Millionaires and billionaires aren’t donating to politicians out of generosity. They consider these expenditures to be investments, and they expect a good return on them. Experts say the 2012 elections are likely to be the priciest ever, costing an estimated $6 billion. “It is far worse than it has ever been,” says Senator John McCain. And all restraints on spending are off now that the Supreme Court has determined that money is “speech” and corporations are “people.”

I don’t know where the Occupy movement is heading, but I do know there’s more grassroots energy for progressive change than I’ve seen in decades. The question is how to channel it into a sustainable movement. If you believe as I do that Obama and the Democrats didn’t push hard enough in the president’s first term for the things we believe in, we must push harder next term.

We also must engage with people who may disagree. Reach across to independents, even to Republicans and self-styled Tea Partiers. Find people who are open to arguments and ideas, regardless of the label they apply to themselves. We must also get out of our issue cocoons. It’s fine to fight against climate change, or to push for gay rights or a single-payer health system. But we can’t be so mesmerized by any single issue that we fail to take on the stuff that makes it harder for average Americans to be heard on these issues and more: the growing concentration of income, wealth and political power at the top; the increasing clout of global corporations and Wall Street; and the corruption of our democracy.

Don’t focus solely on Washington or entirely on elections. Corporate campaigns—consumer boycotts of companies behind the largest political contributions, media attention to those that award top executives the fattest compensation packages while laying off the most workers—can play an important role. And when candidates are the targets, don’t wait for them to emerge with agendas and policy positions. Take an active role in creating those agendas—and get candidates to run on them.

We should demand, for example, that the marginal income tax on the top 1 percent return to what it was before 1981—at least 70 percent; that a transactions tax be imposed on all Wall Street deals; that distressed homeowners be allowed to reorganize their mortgages under bankruptcy; that Medicare be available to all; that the basic military budget be cut by at least 25 percent over the next decade; that the Glass-Steagall Act be resurrected and Wall Street’s biggest banks be broken up; and that all political contributions be disclosed, public financing be made available to candidates in general elections and a constitutional amendment be enacted to reverse Citizens United.

Tell incumbents you’ll work your heart out to get them re-elected on condition they campaign on such an agenda. If and when they’re elected, keep up the heat and the support. Too many of us think political activism begins a few months before election day and ends when winners are announced.

The day after election day is the real beginning. Newly elected officials must know that we will continue to mobilize support for a progressive agenda, reward them for pushing it and hold them accountable in the next election cycle if they don’t. We will even go so far as to run candidates against them in their next primary—candidates who will run on that agenda.

Progressives must take back our economy and our democracy from a regressive right backed by a plutocracy that has taken over both. The stakes are especially high. It will not be easy to accomplish. But it must be done. And it is within your power—our power—to do it.

Banks and their executives have yet to be held accountable for the “predatory lending, inadequate disclosures, deception, false signatures” and “manipulations of every kind” that led to the loss of millions of Americans’ homes, declares Robert Reich. More alarmingly, they are on the brink of getting away with their actions. Reich explains why the president has to open an investigation to get to the bottom of what happened, and do so now.

This video is the fifth in a series by MoveOn.Org on Occupy Wall Street, the financial crisis and related debates that currently stir the country. Click to access the first, second, third and fourth, and check back at TheNation.com each week for new episodes.

—Elizabeth Whitman

As 2012 approaches, will President Obama commit to support the 99 percent? In this video by MoveOn.org, Robert Reich spells out what policies the voters should demand Obama include in his re-election campaign.

—Jin Zhao

“The First Amendment is being stood on its head,” says Robert Reich, in a recent video produced by MoveOn.org. Critics of the Occupy Movement may view its nonviolent protests as rowdy and inconvenient, he argues, but the real public nuisance is the big money that has engulfed our democracy—and mass demonstrations are the only effective way for “real people” to be heard.

This video is the third in this new series. Click here to watch the first episode and here to watch the second, and check back at TheNation.com each week for new episodes.

—Teresa Cotsirilos

The Congressional supercommittee was created in August to reduce budget deficit by $1.2 trillion by November 23. But what does this budget reduction mean? In Washington’s current political climate, It means cutting Social Security, healthcare, education, infrastructure and other public programs that are important to the recovery of the economy for the majority of Americans, of whom 14 million are unemployed.

In this video produced by MoveOn.org, Robert Reich explains how the supercommittee’s budget cuts will depress the economy even further. But there is another way: Reich proposes four ways the supercommittee could cut the budget and help all Americans. Find out what they are and act.

This video is the second in this new series. Click here to watch the first episode and check back at TheNation.com each Wednesday for new episodes from Reich and MoveOn.org.

—Jin Zhao

Wall Street’s banditry was the proximate cause of the Great Recession, not its underlying cause. Even if the Street is better controlled in the future (and I have my doubts), the structural reason for the Great Recession still haunts America. That reason is America’s surging inequality.

Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

Each of America’s two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

China, Germany and Japan have surely contributed to the problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn’t that typical Americans have spent beyond their means. It’s that their means haven’t kept up with what the growing economy could and should have been able to provide them.

A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets—commodities, stocks, dot-coms or real estate—to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral.

The crash of 2008 didn’t turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn’t change the economy’s underlying structure. Median wages are continuing their downward slide, and those at the top continue to rake in the lion’s share of income. That’s why the middle class still doesn’t have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid—maybe even leading to a double dip. It’s also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come.

The structural problem began in the late 1970s, by which time a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) had radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called "talent" who reached the pinnacles of power in executive suites and on Wall Street—soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and ’60s to 28–40 percent; it allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.

Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and ’60s), while the pay of financial executives and traders rose into the stratosphere.

It’s too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton’s labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever bigger platoons of lobbyists and their hordes of PR flacks.

The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform. Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy would return to normal, he missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy was on the mend left the public with a diffuse set of economic problems that seemed unrelated and inexplicable, as if a town’s fire chief dealt with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites.

Legislation to improve America’s healthcare system illustrates the paradox. Initially, the nation was strongly supportive. But the president and Democratic leaders failed to link healthcare reform to the broader agenda of widely shared prosperity. So as unemployment rose through 2009, the public understandably focused its attention on the loss of jobs and earnings, to which healthcare appeared tangential. Consequently, the nation was not as actively supportive of reform as it needed to be in order to weaken the hold of Big Pharma and private health insurers, who demanded that any so-called reform improve their bottom line. The resulting law is fodder for the right, because it won’t adequately control future costs and requires Americans to pay more for health insurance than they would have had the deals not been made.

Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution thereby shriveled to a set of technical fixes for how the Street should conduct its business.

Even the disaster in the Gulf of Mexico could have been put into the larger frame of how giant corporations use their influence to capture regulators and impose risks and costs on the broader public, and the central importance of public health and environmental safety to widespread prosperity. But here again, the administration and Democratic leaders failed to connect the dots. The disaster morphed into a technical question of how to plug the gusher and a policy discussion of how best to regulate deepwater drilling.

If nothing more is done, America’s three-decade-long lurch toward widening inequality is an open invitation to a future demagogue who misconnects the dots, blaming immigrants, the poor, government, foreign nations, "socialists" or "intellectual elites" for the growing frustrations of the middle class. The major fault line in American politics will no longer be between Democrats and Republicans, liberals and conservatives. It will be between the "establishment" and an increasingly mad-as-hell populace determined to "take back America" from them. When they understand where this is heading, powerful interests that have so far resisted reform may come to see that the alternative is far worse.

A virtual pendulum underlies the American political economy. We swing from eras in which the benefits of economic growth concentrate in fewer hands to those in which the gains are more broadly shared, and then back again. We are approaching the end of one such cycle and the start of the next. The question is not whether the pendulum will swing back but how it will swing—whether with reforms that widen the circle of prosperity or with demagoguery that turns America away from the rest of the world, shrinks the economy and sets Americans against one another.

None of us can thrive in a nation divided between a small number of people receiving an ever larger share of the nation’s income and wealth, and everyone else receiving a declining share. The lopsidedness not only diminishes economic growth but also tears at the social fabric of our society. The most fortunate among us who have reached the pinnacles of economic power and success depend on a stable economic and political system. That stability rests on the public’s trust that the system operates in the interest of us all. Any loss of such trust threatens the well-being of everyone. We will choose reform, I believe, because we are a sensible nation, and reform is the only sensible option we have.
 

Also in This Forum

Dean Baker, "The Right Prescription for an Ailing Economy"

Katherine Newman and David Pedulla, "An Unequal-Opportunity Recession"

Orlando Patterson, "For African-Americans, A Virtual Depression—Why?"

Jeff Madrick, "American Incomes: Soaring or Static"

Matt Yglesias, "A Great Time to Be Alive?"