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The Last Time Fatcats Tanked the Economy, the Backlash Was Huge. Why Didn't That Happen This Time?

Explaining the power of 21st century plutocracy

Hulton Archive/Getty Images

In 2008, the United States suffered the worst financial crash since 1929. It was followed by the worst downturn since the Great Depression. Big banks, which had bent the law to reap millions, were widely seen to have precipitated the calamity. And the super-rich, in turn, have been the big winners in the recovery: Labor participation has been at record lows and workers’ wages are lagging, yet the income of the top one percent has continued to skyrocket: According to University of California economist Emanuel Saez, it shot up 31.4 percent from 2009 to 2012.

It’s not news that most Americans are troubled by this growing gap. Two vocal critics of inequality, Elizabeth Warren and Thomas Piketty, have become rock stars in the past couple years. Occupy Wall Street commanded attention, and commandeered a chunk of lower Manhattan, during the fall of 2011. And Barack Obama rode to a surprisingly easy reelection by painting Mitt Romney as an apologist for the wealthy. In a Pew poll last January, 66 percent of people, including 61 percent of Republicans, agreed that there is a “growing gap between the rich and everyone else.” Sixty percent agreed and only 36 percent disagreed that “the economic system in this country unfairly favors the wealthy.”

The surprising thing, though, is just how limited the backlash has been. Public alarm about economic inequality could have sparked the sort of tumult that buffeted American politics in the late 19th century and again during the 1930s. But a powerful movement has not emerged. Warren and Piketty remain well outside the mainstream. Occupy Wall Street petered out after a few months. And after coasting to victory as a foe of plutocracy, Obama couldn’t even win support ending the tax loopholes that benefit hedge fund operators—or for a mere hike in the minimum wage. Republicans, generously funded by business leaders eager to roll back regulations on corporations and taxes on the wealthy, are poised to win control of the Senate in November.

Why did movements against economic inequality flourish in the past, but not now? Some people on the left blame the President. If only Obama had taken a stronger stand against what Theodore Roosevelt called “the malefactors of great wealth,” the logic goes, he could have roused the country to action and prevented the rise of the Tea Party. That argument seemed persuasive to me four years ago, but no longer. If you compare the circumstances in which the older challenges to inequality took place with those now, you discover that something important has been missing and would have been missing regardless of whether Obama had sounded the tocsin. For all the talk today about stagnant wages and the long-term unemployed, today’s foot soldiers of a movement remain significantly more invested in the status quo than those who embraced populist agitators Sockless Jerry Simpson or Huey Long.

There have been two great movements against economic inequality in American history: One was led by the populists, socialists, and progressives of the late nineteenth and early twentieth centuries. The other featured the populists, socialists, and liberals of the 1930s. Both took place during sharp economic downturns—the farm crises and depression of the 1880 and 90s, and the Great Depression of the 1930s. These upsurges didn’t originate out of resentment or envy of the rich, but out of the belief that the wealthy, through their actions, had precipitated the downturns. The movements demanded and got, among other things, a progressive income and inheritance tax, banking and railroad regulation, government support for collective bargaining, social security, unemployment compensation, and a minimum wage.

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A rally of the Populist movement in Willowdale Township, Dickinson County, Kansas, USA, ca. 1900

There is a romantic view that depicts these movements as having pitted the poor against the rich and the rabble against the top-hats. In fact, both rested on the workers, farmers, small business owners and professionals who make up the middle and lower-middle rungs of the socio-economic ladder. These middle-class Americans saw their livelihoods and social identities threatened. At a time when the welfare state did not exist, they feared being cast downward into the pit of the jobless and charity-dependent poor.

The populists of the late 19th century, for instance, were led by farmers who owned their land and could afford to join cooperatives. These farmers had to have “the resources to hold products off the market,” Charles Postel explains in The Populist Vision. Likewise, the socialists of the early labor movement were drawn largely from what was called the “aristocracy of labor” – the better paid, organized craft workers. And the progressives were eminently middle class; the movement even included some renegades from the upper classes like Morgan & Co.’s George Perkins.

The class dynamics were similar in the 1930s. The first stirrings of New Deal-era labor politics were not among common unskilled laborers, but among teamsters, longshoreman, miners and even journalists. In 1935, The New Republic wrote that the two leading populist movements, Huey Long’s Share the Wealth movement and Father Coughlin’s National Union for Social Justice, were rallying the “lower middle class” in a “militant and honorable protest.” (Coughlin’s group would subsequently take a right turn.) The pharmacists, barbers, teachers, bank clerks, or machinists who joined these movements, Alan Brinkley writes in Voices of Protest, “stood in danger of being plunged back into what they viewed as an abyss of powerlessness and dependence. It was that fear that made the middle class, even more than those who were truly rootless and indigent, a politically volatile group.”

If you look now at what has happened to the American middle class since the Great Depression, you can understand why—for all the miseries of the Great Recession—it has not led a popular revolt against income inequality.

From the end of World War II through the late 1970s, incomes at bottom, middle, and top grew at roughly the same pace. That was a result in part of the reforms adopted during the New Deal and during the Truman and Eisenhower administrations and of the growth of the labor movement. The middle class’s stake in the status quo grew. In 1940, 43.6 percent of Americans owned their own home. By 1980, 64.4 percent did. In 1958, John Kenneth Galbraith could write in The Affluent Society, “Few things are more evident in modern social history than the decline of interest in inequality as an economic issue.”

Of course, things did not stay so rosy. After the ‘70s, what Timothy Noah calls “the great divergence” began. Incomes for the very rich soared; incomes for the bottom and middle slowed. But middle class income did not collapse or even stagnate—and, even during the Great Recession and its aftermath, did not fall sharply. According to the recent Congressional Budget Office (CBO) report, after-tax incomes of the middle 60 percent rose 42 percent from 1979 to 2007. From 2007 to 2009, when the recession was at its height, after-tax income of the middle fifth fell only 1.4 percent. When transfers, including Medicaid, Medicaid, unemployment compensation and social security are included, the median income fell less than one percent between 2007 and 2010. Today, according to economist Scott Winship of the Manhattan Institute, total income for the middle third is back to where it was in 2007. And while some home-purchases were victims of mortgage fraud, overall homeownership was at 66.9 percent in 2010.

It is true that most Americans have understood that there is a growing gap between the very wealthy and everyone else, and blame the wealthy for helping to precipitate the financial crash and the recession. Using the extensive General Social Survey conducted by the National Opinion Research Center, Leslie McCall, the author of The Undeserving Rich, has shown that concern about economic inequality began to rise after 1987, peaked in 1996, abated during the boom of the late ‘90s and George W. Bush’s war on terror, and began rising again after 2007. From 2008 to 2012, respondents’ agreement that inequality benefits the rich and powerful rose 10 points to 65 percent.

This concern with inequality has, at times, had political repercussions. It contributed to Bill Clinton’s victory in 1992. (In his campaign manifesto, Clinton wrote of George H.W. Bush’s tenure that “while the rich got richer, the forgotten middle class - the people who work hard and play by the rules - took it on the chin.”) And it was a factor in Obama’s 2008 and 2012 victories. But what it hasn’t done is turn into the kind of movement that can re-orient national politics. With the middle class protected from falling into the “abyss of powerlessness and dependence,” critical opposition to economic inequality never crystallized into a powerful movement that could transform American politics the way that the earlier movements had.

Obama could have helped his political cause and the Democrats in 2010 if he had been tougher on the bankers and speculators in his first year in office, and he might have deflected some opposition by focussing on programs that benefitted the middle class and not primarily the poor or unemployed or uninsured, but it’s doubtful that his doing so would have sparked a big movement or forestalled the Tea Party.

The Tea Party first emerged in opposition to the 2009 stimulus bill. It later focused its ire on the Affordable Care Act and on rising government spending and debt. Its primary target was government politicians and officials and the people Tea Party backers assumed to be their clients and beneficiaries. These included the poor, illegal immigrants, people without health insurance, and people who had lost their homes to unscrupulous lenders.

The movement itself was rooted in the upper part of the middle class, with a majority reporting incomes over $50,000. In a 2010 New York Times/CBS poll, 70 percent of Tea Party supporters rated their financial situation “fairly good” and 8 percent “very good.” Tea Party supporters were concerned with protecting what they had against the demands that those victimized by the crash and recession were making on the government  “Your mortgage is not my problem” was a typical sign at an early Tea Party demonstration. They saw Obama’s health care plan as a scheme to force them to pay for someone else’s health care. Even though illegal immigration stalled during the Great Recession, Tea Party chapters in the South and West railed against these immigrants, whom they assumed to be a drain on state budgets and a future vote for big spending politicians.

A tea-party supporter protest outside the US Supreme Court on March 28, 2012 in Washington, D.C. 

The Tea Party phenomenon is a familiar story in American history. There have always been movements that reflect the narrow interests of a particular stratum of the population and who blame their plight on vulnerable out-groups. Under politicians like South Carolina’s “Pitchfork” Ben Tillman or Georgia’s Tom Watson, Southern Populism eventually degenerated into a race-baiting movement to sustain white rule. But there were special reasons why the Tea Party gained traction during the Great Recession. The Tea Party and its backers echoed a tradition of American anti-statism that goes back to the American Revolution and to the identification of strong government with tyranny and government economic intervention with support for monopoly.

Just as some European nations look back on periods of strong state rule as their golden ages, many Americans look back upon what they assume was unfettered free enterprise as the key to their prosperity. They believe that any failings in the private economy can be traced to government interference with the market. Thus many Americans’ first recourse during economic crises has been to blame government and to call for reductions in government spending. That was even the case during the first three years of the Great Depression. Leading Democrats as well as Republicans backed government cutbacks; even Franklin Roosevelt supported them in his 1932 campaign. At other times, a new president’s failure to immediately fix the economy has been blamed on government itself: In 1994, Republicans successfully pinned the slow recovery from the 1991 recession on Clinton and big government.

That anti-statist sentiment has come to the fore during the Great Recession. In the 2010 elections, Republicans, like their Clinton era predecessors, were able to blame Obama’s intervention for the continued downturn, even though the administration’s initiatives prevented a much steeper decline. And this sentiment persists to this day. In a December Gallup poll, 72 percent of respondents, including 56 percent of Democrats, said that “big government” was the “biggest threat to the country in the future.” Only 21 percent named “big business.”

The Tea Party became the loudest voice for that sentiment. The minimally organized movement was particularly strong in the South and Rocky Mountain West, where opposition to Washington was reinforced a longstanding state’s rights tradition. Tea Party groups also benefited from wealthy backers eager to bankroll a movement that opposed government regulation of business and higher taxes on the rich. The Koch brothers’ network initially funded Americans for Prosperity—a key national group that has organized and funded local Tea Party activity. But money alone can’t explain the widespread appeal of these groups, particularly in Obama’s first term. They have reflected an important strain of American political thought.

It is likely that inequality between the very wealthy and everyone else will continue to grow. According to an Associated Press and Equilar report, median CEO pay rose 8.8 percent from 2012 to 2013 to a median $10.5 million. According to a recent study by Saez and Gabriel Zucman, inequality of wealth, which includes assets, has continued to grow between the very top .1 percent and everyone else. The U.S. is now back to levels of inequality not seen since the roaring 1920s.

Inequality will rise for reasons that Piketty describes in Capital in the Twenty-First Century. The continuing gap between the rate of return on capital and the overall rate of growth skews income in favor of capital over labor. In addition, inequality in America will be spurred by a regressive tax code, which fails to stem skyrocketing CEO salaries, and lax financial regulation, which has failed to curb speculation divorced from productive investment. Washington could halt the trend toward inequality with new legislation, but that’s unlikely to happen soon. Obama’s attempts to reduce inequality have stalled. None of the current Republican and Democratic president prospects have a history of battling the one percent, and none are likely to do so if they win the White House. And recent Supreme Court rulings on campaign finance give the wealthy an edge in lobbying Congress to oppose reform measures.

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Occupy Wall Street activists protest in Duarte Square after police removed the protesters early in the morning from Zuccotti Park on November 15, 2011 in New York City.

Whether rising inequality will finally fuel a populist backlash will depend on a combination of factors. A backlash from the left is more likely against a Republican than a Democratic president like Obama. If John McCain had won the White House in November 2008, the thrust of economic protest would have been on the left rather than the right. But the main factor is the trajectory of the American economy. If the economy is booming, as it did in the last half of the 1990s, the public will not be concerned with inequality. As McCall has recounted from the General Survey, the percentage of those concerned about whether inequality exists to benefit the rich and powerful fell from 63 to 48 percent from 1996 to 2000, even though inequality rose during this period.

A similar boom may occur again, but what looks more likely is either the kind of low-growth secular stagnation we are experiencing now or another crash and downturn. Rising inequality can itself impede growth by putting income and wealth in the hands of those less likely to spend it on new products, creating a lag in effective demand. Rising inequality can also precipitate bubbles and crashes, as happened in 1929, 2001 and 2008. So either continuing stagnation or another serious downturn is probably on the agenda.

If the economy stays in a low-growth limbo, as it has during the last four years, that is more likely to stir the self-protective instincts of middle and upper-middle class conservatives that to provoke a class-wide revolt against the very rich. Something very similar happened during the 1920s recessions (before the crash) and during the late 1970s and early 1980s. But if the pattern of slow and uneven growth and rising inequality spawns bubbles, busts, and even more recessions, these could eventually spark a populist revolt, as happened during the 1890s and the 1930s, in which leftwing opposition to inequality trumps anti-government conservatism. What’s clear is that for the time being, there will be no effective counter to rising inequality.