Chapter 3: What History Should Have Taught Us

HOW THE GREAT RECESSION CHANGED US

For more than 40 years, the middle-class standard of living has been trapped in a slow but steady downward slide. Then, America and the world were hit with the recession of 2008, now known as the Great Recession. In a flash, the steady downward slide of the middle class’s standard of living became a plunge into the deep. Far and away, the Great Recession posed the greatest financial threat to the American and world economy since the Great Depression of the 1930s, and years later its tremors still rumble.

In the fall of 2008, Wall Street’s misdeeds precipitated the Great Recession. By early 2009, (1) unemployment was rising at a terrifying rate, (2) the GDP was plunging to as low as a negative 8.2% in the last quarter of 2008, and (3) the bottom had fallen out of the Dow Jones Industrial Average with it falling from over 13,000 to below 7,000. All of this imperiled the functioning of international capital markets. For many in the middle class, the Great Recession meant that, instead of suffering from a slow and steady decline in their standard of living, their loss was immediate and acute. A 2012 study by the FED found that in the aftermath of the Great Recession, the middle class took a double hit with median income falling by 7.7% and median wealth falling by 38.8%.

To prevent the Great Recession from collapsing into another Great Depression, the government increased spending dramatically to stabilize the economy and infuse liquidity into the credit markets. It further cut taxes to spur economic growth. This emergency action staved off a depression, but at the cost of ballooning the national debt. On top of more than a generation of substantial under-taxing relative to spending, the emergency spending and tax-cutting forced by the Great Recession increased America’s national debt to a level that alarmed international credit markets. As much as the level of debt, credit markets by 2010 were troubled by the government spending about 24% of the GDP annually while taxing only about 15% with no immediate prospect of this gap closing.

From 1981-2012, except for an eight-year interlude from 1993-2001, the American government disconnected taxing from spending by cutting taxes substantially. While taxes were cut primarily for the very wealthy (the super extraordinary and capitalists) several times during this period, spending and the national debt grew. Because of this policy of low taxes, the national debt mushroomed from only 33% of the GDP in 1981 to over 70% of the GDP by 2009, and headed upward. Although the international debt markets tolerated a national debt-to-GDP ratio of 33%, they were not willing to tolerate a ratio of 70%, especially if the national debt was on an unrelenting growth path.

Before the Great Recession, America’s burgeoning national debt went largely ignored for over a generation by both America’s creditors, who believed America to be so wealthy that it did not matter, and America’s taxpayers, who happily enjoyed the free ride. However, after the Great Recession, the economic aftershock left in its wake, coupled with the magnitude of the national debt, led America’s creditors to demand a change of culture. Going forward, if America was to retain its credit, America must start paying for what it spends with tax dollars instead of borrowed dollars.

Realizing that America’s borrowing power was in jeopardy, President Obama appointed The National Commission on Fiscal Responsibility and Reform to propose a solution. The Simpson-Bowles Commission was a bipartisan commission co-chaired by its two namesakes, former Republican Senator Alan Simpson, and former Chief of Staff to President Bill Clinton, Erskine Bowles. The report, aptly named The Moment of Truth, approved by a majority of the commission, recommended that the government bend the national debt curve downward and reduce the debt to below 40% of the GDP by 2040. To do this, spending would have to be cut from 24% to 21% of the GDP, and taxes must be increased from 15% to 21% of the GDP. This means that about $4 trillion would have had to be taken out of the economy over the next 10 years, in which about $2.5 trillion would be in spending cuts and $1.5 trillion in tax increases.

Cutting spending by 3% of the GDP would mean that not only run-of-the-mill government programs would be on the chopping block, but so would almost all programs on which the standard of living of the middle class in retirement, particularly Social Security and Medicare, and the opportunity of their children to get the post-secondary education they need to earn a decent income, depends. Increasing taxes by 6% of the GDP would mean that a generation-old culture of current taxpayers getting a free ride at the expense of future taxpayers would have to end. If borrowing (as a substitute for taxing) is taken off the table, then spending must be paid for with taxes. Reestablishing financial responsibility, as discussed in The Moment of Truth, would require that for the next generation or so, Americans would have to suffer through a period of combined increased taxes and/or dramatic cuts in the types of spending that would affect all the middle class.

This new culture of lower spending and higher taxes would pit the middle class, who benefits the most from spending, against the wealthy and those with the highest incomes, who benefit the most from low taxes. This split would be complicated enough, but that split is only a small part of the divisions that are likely to erupt in this new culture. Within both the middle class and those with wealth and/or very high incomes, there are innumerable individuals and groups that have sharply divergent interests. Among groups in both classes with divergent interests, there are lobby organizations and trade and professional associations representing all parts of the American economy, including all types of small and big business interests; public and post-secondary education organizations; medical providers; the real estate industry; labor unions; and countless other groups. In the new culture of having to tax in order to spend, these individuals and groups will be in fierce competition for scarce resources. If middle-class citizens want to keep the programs that benefit them, they will have to fight for higher taxes to pay for them.

THE VIEW FROM ANCIENT ATHENS

Disputes between the haves and the have-nots are nothing new. Ancient Athens in the 6^th century B.C. was a society that was transitioning from a predominantly agrarian society to an aboriginal commercial society, in which most wealth was still based on the ownership of land. Only the most primitive elements of a commercial and money-based economy were beginning to appear. Most wealth was accumulated in ancient Athens through inheriting land, being an able farmer, merchant, or trader, or being lucky. As economies evolve from agriculture, then to commerce and industry, and now to information and technology, knowledge increasingly accounts for wealth creation. Since knowledge and skill have never been the exclusive traits of any social or economic class, those members of the lower class who took the trouble to learn a scarce skill gradually edged their way into the middle class.

During the 6^th and 7^th centuries B.C. in Athens, economic class warfare between its haves and have-nots erupted in what historians refer to as the “Social War.” At this time, Athens was a developing commercial society with a promising future as a center of commerce. Its society was composed of a “wealthy class” of landowners, merchants, and traders; a “middle class” of craftsmen, artisans, smaller merchants, and traders; and a “lower class” of peasants who owned small tracts of land. How the Athenians ended their Social War can teach us much about what it takes to have a healthy political landscape when the wealth and income disparities between the haves and have-nots get out of control.

The wealthy landowners controlled the Athenian government. No governmental over-regulation or restrictions disturbed the workings of the marketplace or impaired the legal right of contract among merchants and other parties in economic matters, nor did the government provide public services such as education or welfare. The wealthy landowners, merchants, and traders used slaves and cheap labor to do their work. As Athens grew, slaves and cheap labor contributed to the ever-increasing prosperity of the wealthy class. However, the fate of Athens’ land-owning peasants worsened over time because their land was limited in size and their small tracts were broken into smaller parcels through inheritances. Eventually, these tracts became so small that they would not support a family. The tiny tracts, and a few years of bad crops, forced the peasants to mortgage their land to wealthy landowners to survive.

Inevitably, the peasants were unable to pay their mortgages. Lenders foreclosed on their properties. Many of the desperate peasants, in a futile effort to retain their land, mortgaged themselves and their children. As they defaulted on the mortgages, the lucky peasants fell into work as sharecroppers and the unlucky as slaves. The addition of many new slaves and sharecroppers to the labor market markedly reduced the cost of labor. The wealthy became wealthier, and the marginally poor became poorer. Given this chain of events, it is not surprising that Athens broke out into bloody class warfare between the rich and the poor.

By 594 B.C., the bloodshed had gotten so bad that the warring factions brought in a respected merchant, Solon, to save Athens. The rich upper class accepted Solon because he was one of them—a man of substantial wealth. The middle class and peasants accepted Solon because he was a man of unquestioned honesty and integrity. After consulting with many parties, Solon imposed a number of sweeping and fundamental reforms, which included:

• Cancellation of all debts owed to private lenders and the state
• Forbidding individuals from mortgaging themselves and their families
• Freeing from slavery those who had mortgaged themselves and their children
• Instituting what amounted to a mildly progressive income tax
• Adopting a coinage intended to promote commerce that favored debtors over creditors (an ancient way of inflating the currency to devalue debt)
• Permitting some of the lower classes to participate in the political process and serve on juries.

The wealthy disliked the cancellation of debts owed by the middle class and lower class, and the middle class and lower class were disappointed that they did not receive more property. But grudgingly, all classes accepted and lived with the reforms. Essentially, Solon solved Athens’ problem by redistributing wealth.

About 250 years after Solon’s reforms, Aristotle, with the benefit of knowing how Athenian society and the other Greek city-states dealt with the battles between the haves and have-nots over wealth disparities, prescribed his solution for avoiding strife. In Book IV, chapter 11 of Politics, Aristotle said that the best prospects for political stability and virtuous laws depend upon a large middle class. Aristotle reasoned that, in a society made up of only the rich and the poor, the rich would connive to enact laws to protect their wealth, and the poor would connive to enact laws to confiscate the wealth of the rich. Such a society, Aristotle believed, would be a perpetual contest between greed and envy with little room left for virtue.

Since wealth variations among the middle class would be moderate, Aristotle thought that there would be less greed and envy among the middle class, and a greater willingness to have laws that benefitted the entire society, as opposed to either the rich or the poor. With respect to political stability, in Book IV, chapter 6 of Politics, Aristotle observed that the conflict between the rich and the poor caused political revolution in a number of societies. Any time the wealth disparity between the rich and the poor grows, so too does the risk of revolutionary change. Comparing Solon with other of Greece’s ancient lawgivers, each of whom dealt with problems that have since bewildered governments, Aristotle, in Book II, chapter 12 of Politics, ranked Solon as the best, because he mediated the dispute between the rich and the poor, and pointed them both to a course of moderation and virtue.

Regarding the lesson of the Social War, Will Durant, in his book, The Life of Greece (p. 112), reminded those who did not know: equality is unnatural; and where ability and subtlety are free, inequality must grow until it destroys itself in the indiscriminate poverty of social war; and liberty and equality are not associates but enemies. The concentration of wealth begins by being inevitable and ends by being fatal.

The principles necessary to manage the perennial conflict between the few haves and the many have-nots—all derived in one form or another from enlightened sharing—were known no later than 23 centuries ago. Today, many of these principles are forgotten and languish in dusty old history books. Unfortunately, each generation must learn the principles anew.

HOW CONSERVATIVE LEADERSHIP USED TO LOOK: LYCURGUS & BISMARCK

Looking at several other historical examples, two leaders, Lycurgus in Sparta and Bismarck in Germany, arose who understood the challenges confronting their societies. Both leaders undertook a mission to strengthen their societies, and each understood that change was essential to mission accomplishment. Both Sparta and Germany were deeply conservative societies, ruled by wealthy, landed aristocracies who were jealous of their prerogatives, distrusted change, and were afflicted with class warfare between haves and have-nots. Sparta’s mission was to build a warrior force superior to its competitors; and Germany’s mission was to secure the political support of its rising industrial working class in its quest to become a leading world power. Neither Sparta nor Germany could accomplish its mission without dramatic social, economic, and political change.

Both Lycurgus and Bismarck emerged as leaders in a time of crisis; and both made their mark in history by responding to their respective crises with wisdom, courage, and skill—wisdom in that both recognized the need for fundamental change in their societies; courage in that both risked their political futures in challenging the orthodoxy of their time; and skill in that both overcame long odds in convincing the powers that be to accept harsh change. The changes wrought by both required that the wealthy, ruling aristocracies of Sparta and Germany agree to give up a significant portion of their wealth in the interest of inducing many of those who were disadvantaged to “bond” in such a way as to accomplish the mission of advancing the interest of each society.

Lycurgus found Sparta with many indigents and only a few with extreme wealth. Its people were plagued by the arrogance of the few, and the envy of many, resulting in indulgent luxury for some, and poverty and crime for many more. A society splintered by extreme wealth disparities made it impossible for Sparta to field a formidable force of warriors. Lycurgus knew a great truth: inequality of wealth among its warriors would destroy the unity of purpose that was necessary for them to become an indomitable fighting force. To encourage all Spartans to bond, Lycurgus’ laws eliminated wealth inequality by redistributing property and made individual merit as warriors the sole basis for its citizens to gain eminence. Lycurgus’ laws led to the creation of a powerful warrior state, making Sparta the preeminent power among its competitors.

Bismarck found Germany in transition from an agricultural-peasant economy to an industrial-worker economy. The country was fraught with social, economic, and political friction between a wealthy, landed aristocracy who liked the status quo, and industrial workers clamoring for a bigger slice of the economic pie. Having been unified only a decade before, Germany was eager to become a leading world power militarily, economically, and politically. Without a citizenry who supported its quest for national greatness and who were willing to spend the money to make it so, Germany could not succeed. Realizing that German workers would not forever accept a small slice of a growing economic pie, Bismarck implemented many costly social and economic reforms that guaranteed workers retirement income, insurance against disability, and subsidized health care.

Bismarck knew a great truth: social friction at home would preclude Germany from projecting power abroad. He has been quoted (in Emil Ludwig’s biography) in justifying the cost of his reforms by observing that “money thus spent is well invested; it is used to ward off a revolution, which […] would cost a great deal more.” Bismarck’s social reforms, which led to the redistribution of wealth from the haves to the have-nots, salved much of the friction between industrial workers and the state that afflicted many industrial powers in the late 19^th and early 20^th Centuries and contributed to Germany becoming the preeminent industrial and military power in Europe on the eve of World War I.

The challenges that confront societies change as different circumstances arise, so the changes made by Lycurgus and Bismarck are specific to their time. Even so, modern leaders can learn from their examples. Even though each was conservative, neither Lycurgus nor Bismarck shied away from doing whatever was necessary to give their societies an edge over their competitors. As change agents, both Lycurgus and Bismarck put patriotism above political ideology and class preference, and both enacted laws that subordinated domestic social, economic, and political goals to the paramount goal of enabling their societies to prevail over their competitors.

ENDING CLASS WARFARE

Brewing resentment among the English peasantry resulted in the Peasants’ Revolt in the 14^th Century. Increasing awareness of wealth and political disparities among a rising middle class ignited the French Revolution in the late 18^th Century. The accumulation of centuries of grievances of the serfs and the urban proletariat against the landed aristocracy and emerging capitalists, coupled with no hope for peaceful reform, resulted in the Russian Revolution in the early 20^th Century. These bloody episodes that linger on the pages of history books could be ignited once again, and most certainly will be, given the right set of circumstances.

Lycurgus’ Ancient Sparta of the 7^th century B. C. and Bismarck’s Germany of the late 19^th century responded to the competitive challenges of their time and won. Both were in intense competition with other surrounding states, and both won by mobilizing their resources to achieve a common goal. Sparta was a small Greek city-state beset by internal division and surrounded by other covetous city-states, all competing for the same turf. Germany was a burgeoning economic power competing for its place in the sun against other world powers, and had an emerging class of industrial workers who were demanding a better standard of living.

To surpass their rivals, Sparta and Germany used a time-honored strategy that some modern-day military leaders would call “unit cohesion.” Former Army Chief of Staff, General Edward C. Meyer, described unit cohesion as “the bonding together of soldiers in such a way as to sustain their will and commitment to each other, the unit, and mission accomplishment.” Unit cohesion applies anytime one unit competes with others to achieve the mission—victory in the case of war, and supremacy in the case of economic competition. In the world of military competition, unit cohesion means one military group competing against others; while in the world of international economic competition, unit cohesion means one nation competing against others. In both cases, it is units that compete, not individuals. Individuals participate in such contests as members of a unit—team members united by a common purpose.

For a nation to win a military or economic contest against one or more well-equipped and motivated competitors, it must mobilize all its resources. Sparta and Germany both succeeded in mobilizing their resources to accomplish their mission. As a reminder, Sparta’s mission was to develop and maintain a warrior force superior to all competitors, and Germany’s mission was to win and maintain the loyalty of its industrial workers to support its national goals. A nation cannot mobilize all its resources unless a substantial majority of its citizens can be convinced to bond “in such a way as to sustain their will and commitment to each other, the unit [nation] and mission accomplishment [supremacy in a given sphere].”

More than ever, globalization and technological innovation make economic competition in today’s world a contest among nations and multi-national corporations. Nations, not individuals or companies, enter into trade agreements that provide for the rule of law in international commerce; maintain open access to sea and air lanes, and e-commerce on which international trade depends; set financial regulatory standards that prescribe the terms of international finance; set tax policies that affect each nation’s competitiveness; educate the workers that comprise each nation’s workforce; and provide the transportation and communication infrastructure that enables each nation’s businesses to market their goods and services in international commerce. Without a nation’s full support in competing in world markets, its businesses would be certain to fail.

Now, the twin challenges of globalization and technological innovation threaten the standard of living of millions of Americans. As other societies have in the past, America must respond to these threats or fail. The question remains whether or not Americans will choose to bond together to stave off these threats, and take the necessary action of strengthening our society from within. We might draw some inspiration from the military concept, “leave no one behind,” which refers to the idea that in battle, everyone must be carried forward as a member of the unit. We could apply this ethos in order to cohere the unit of the American workforce to advance America’s economy in the 21^st century, and, thereby, remain competitive internationally.

Fortunately, history also offers examples of times where reason and mutual understanding between the haves and the have-nots has led to moderation, compromise, and lawful change. The Great Depression of the 1930s almost destroyed the middle class in America and Western Europe by threatening to force approximately half of all Americans and Western Europeans into the lower class. Franklin D. Roosevelt’s New Deal gave hope to the many have-nots that the government would help them through troubling times, such that they resisted calls by political extremists to resort to lawlessness and violence.

As disparities in individual wealth grew to an alarming level, the New Deal provided the haves and have-nots with a way to work out their differences within the rule of law without resorting to violence. Over a period of 15 years, the American political process enacted laws creating Social Insurance, and establishing a progressive economic policy that not only saved, but also broadened, the middle class.

While America worked its way through the Great Depression relatively peacefully, the Great Depression led many European nations to abandon moderation, compromise, and the rule of law for the false promises of demagogues. The most infamous demagogue in modern history, Adolph Hitler, seized upon the Great Depression’s threat to the middle class to grab power in Germany, and the result was World War II.

Due process of law, respect for the interests and rights of others, and reasonable patience and forbearance account for why America has avoided much of the violence and strife that has afflicted other societies confronted with class warfare. The fact that the America of the 1930s worked its way through a time of economic and social turbulence does not guarantee that some future America confronted with another depression will be so fortunate.

INVESTING IN A WORKFORCE SECOND TO NONE

America faces international economic competition more intense than any other time since the beginning of the 20^th century, threatening its future as a superpower and the standard of living of most of its citizens. All businesses are now free to pick and choose whom they wish to hire from employees anywhere on Earth based on what is best for their bottom line. Moreover, any business that does not hire the highest skilled workers for the best value is setting itself up for failure. In this new age of international commerce in which businesses are free to seek out and find the highest skilled, lowest cost labor, American workers must compete as never before.

Every American worker who loses out in the competition with a foreign worker for a high-paying job not only suffers from the loss, but other workers, who would have benefitted from the money that the losing worker would have spent on goods and services in America, also suffer. America must be prepared to make whatever changes are necessary to enable its workers to win the contest, and that includes raising the revenue to ensure that its workforce is armed with “second to none” skills.

In a dynamic economy driven by technology and global competition and discriminating, non-sentimental capital on the prowl for its highest return, only workers and businesses who are better than their competition will win; and to the winner, the spoils will go. So, to be an economic winner, workers must acquire the skills that enable them to do things that their competitors cannot do, and businesses must be able to produce goods and services demanded by consumers more cheaply and of a higher quality than their competitors. All of this means, both workers and businesses, to be economic winners, must be extraordinary. To succeed in the 21st-century global economy, America must invest whatever is required to provide all workers with the opportunity to become the most skilled and highly motivated workers in the world.

I was privileged to have all the support I needed to join the great American middle class. The easily affordable, high quality, higher educational opportunities that were available to me and others like me enabled us to get the education necessary to have successful professional and business careers. Sadly, as a quality post-secondary education has become even more critical to achieving economic success, it has also become much less affordable to those from low and middle-income families. For all Americans to have a fair shot at realizing their full economic potential, America must do much better in making quality post-secondary education affordable to all. Whether or not those from low and middle-income families will have the same opportunity that I had to get a quality post-secondary education will play out in tax and budgetary policy.