Kevin Phillips, “Reagan’s America: A Capital Offense” New York Times Magazine (17 June 1990)

Kevin Philips became the wonder boy of the emerging conservative order with the publication of his book The Emerging Republican Majority. In that book, Phillips argued that by putting together the Sunbelt votes of the old Confederacy, the Southwest, and the West Coast, the Republicans could win national elections without carrying a single state of the industrial 'rustbelt" in the Northeast and Midwest. Phillips's insights were prophetic, defining a new political paradigm essential to Republican dominance. Phillips also ensured his own reputation for sagacity. Since 1968 he has become one of the country's leading political pundits, often identifying years ahead of others the incipient political dynamics that will shape the next generation of elections. Thus, for example, he was one of the first political writers to detect the emergence of anger among middle-class voters who were riled by the way Reagan administration policies favored the rich without helping the average citizen.

The 1980s were the triumph of upper America--an ostentatious celebration of wealth, the political ascendancy of the rich and a glorification of capitalism, free markets, and finance. Not only did the concentration of wealth quietly intensify, but the sums involved took a megaleap. The definition of who's rich-and who's no longer rich- changed as radically during the Reagan era as it did during the great nouveaux riches eras of the late nineteenth century and the 1920s, periods whose excesses preceded the great reformist upheavals of the Progressive era and the New Deal.

But while money, greed, and luxury became the stuff of popular culture, few people asked why such great wealth had concentrated at the top and whether this was the result of public policy. Political leaders, even those who professed to care about the armies of homeless sleeping on grates and other sad evidence of a polarized economy, had little to say about the Republican Party's historical role: to revitalize capitalism but also to tilt power, government largess, more wealth and income toward the richest portion of the population.

The public, however, understood and worried about this Republican bias, if we can trust late 80s opinion polls; nevertheless, the Democrats largely shunned the issue in the '88 election, a reluctance their predecessors also displayed during Republican booms of the Gilded Age of the late nineteenth century and the Roaring Twenties.

As the decade ended, too many stretch limousines in Manhattan, too many yacht jams off Newport Beach and too many fur coats in Aspen foreshadowed a significant shift of mood. Only for so long would strungout $35,000-a-year families enjoy magazine articles about the hundred most successful businessmen in Dallas, or television shows about greed and glitz. Class structures may be weak in the United States, but populist sentiments run high. The political pendulum has swung in the past, and may be ready to swing again.

Indeed, money politics-be it avarice of financiers or the question of who will pay for the binges of the 80s,-is shaping up as a prime theme for the 1990s. As we shall see, there is a historical cycle to such shifts: Whenever Republicans are in power long enough to transform economic policy from a middle-class orientation to capitalist over-drive, the rich get so far ahead that a popular reaction inevitably fol- lows, with the Democrats usually tagging along, rather than leading.

But this time, the nature of the reaction against excess is likely to be different. The previous gilded ages occurred when America was on the economic rise in the world. The 1980s, on the other hand, turned into an era of paper entrepreneurialisrn, reflecting a nation consuming, rearranging and borrowing more than it built. For the next generation of populists who would like to rearrange American

"wealth, the bad news is that a large amount of it has already been redistributed-to Japan, West Germany and to the other countries that took Reagan-era I.O.U.s and credit slips.

Society matrons, Wall Street arbitrageurs, Palm Beach real-estate agents, and other money- conscious Americans picking up USA Today on May 22, 1987, must have been at first bewildered and then amused by the top story. In describing a Harris survey of the attitudes of upper-bracket citizens, the article summed up the typical respondent as 'rich. Very. He's part of the thinnest economic upper crust: households with incomes of more than $100,000 a year.'

A surprising number of 1980s polls and commentaries contributed to this naive perception-that 'rich" somehow started at $50,000 or $100,000 a year, and that gradations above that were somehow less important. The truth is that the critical concentration of wealth in the United States was developing at higher levels-decamillionaires, centimillionaires, half-billionaires and billionaires. Garden-variety American millionaires had become so common that there were about 1.5 million of them by 1989.

In fact, even many families with what seemed like good incomes- $50,000 a year, say, in Wichita, Kansas, or $90,000 a year in New York City (almost enough to qualify as 'rich," according to USA Today)- found it hard to make ends meet because of the combined burden of Federal income and Social Security taxes, plus the soaring costs of state taxes, housing, health care and children's education. What few understood was that real economic status and leisure-class purchasing power had moved higher up the ladder, to groups whose emergence and relative affluence Middle America could scarcely comprehend.

No parallel upsurge of riches had been seen since the late nineteenth century, the era of the Vanderbilts, Morgans, and Rockefellers. It was the truly wealthy, more than anyone else, who flour- ished under Reagan. Calculations in a Brookings Institution study found that the share of national income going to the wealthiest I per- cent rose from 8.1 percent in 1981 to 14.7 percent in 1986. Between 1981 and 1989, the net worth of the Forbes 400 richest Americans nearly tripled. At the same time, the division between them and the rest of the country became a yawning gap. In 1980, corporate chief executive officers, for example, made roughly 40 times the income of average factory workers. By 1989, C.E.O.s were making 93 times as much. (RF: By 2001 it is 500 times as much.)

Finance alone built few billion-dollar fortunes in the 1980s relative to service industries like real estate and communications, but it is hard to overstate Wall Street's role during the decade, partly because Federal monetary and fiscal policies favored financial assets and be- cause deregulation promoted new debt techniques and corporate restructuring.

Selling stock to retail clients, investment management firms or mutual funds paid well; repackaging, remortgaging or dismantling a Fortune 500 company paid magnificently. In 1981, analysts estimate, the financial community's dozen biggest earners made $5 million to $20 million a year. In 1988, despite the stock-market collapse the October before, the dozen top earners made $50 million to $200 million.

The redistribution of American wealth raised questions not just about polarization, but also about trivialization. Less and less wealth was going to people who produced something. Services were ascendant-from fast food to legal advice, investment vehicles to databases. It is one thing for new technologies to reduce demand for obsolescent professions, enabling society to concentrate more resources in emerging sectors like health and leisure. But the distortion lies in the disproportionate rewards to society's economic, legal and cultural manipulators-from lawyers and financial advisers to advertis- ing executives, merchandisers, media magnates and entertainers.

A related boom and distortion occurred in nonfinancial assets---art and homes, in particular. Art and antiques appreciated fourfold in the Reagan era, to the principal benefit of the richest 200,000 or 300,000 families. Similar if lesser explosions in art prices took place in the Gilded Age and in the 1920s. While the top one-half of I per- cent of Americans rolled in money, the luxuries they craved-from Picassos and eighteenth-century English furniture to Malibu beach houses-soared in markets virtually auxiliary to those in finance.

Meanwhile, everyone knew there was pain in society's lower ranks, from laid-off steelworkers to foreclosed farmers. A disproportionate number of female, black, Hispanic and young Americans lost ground in the 1980s, despite the progress of upscale minorities in each category. According to one study, for example, the inflation-adjusted in- come for families with children headed by an adult under 30 col- lapsed by roughly one-fourth between 1973 and 1986.

Even on an overall basis, median family and household incomes showed only small inflation-adjusted gains between 1980 and 1988. Middle America was quietly hurting too. While corporate presidents and chairman feasted in the 1980s, as many as 1.5 million midlevel management jobs are estimated to have been lost during those years. Blue-collar America paid a larger price, but suburbia, where fathers rushed to catch the 8:10 train to the city, was counting its casualties, too. "Middle managers have become inse- cure," observed Peter F. Drucker in September 1988, 'and they feel unbelievably hurt. They feel like slaves on an auction block."

American transitions of the magnitude of the capitalist blowout of the 1980s have usually coincided with a whole new range of national economic attitudes. Evolvng government policies-from tax cuts to high interest rates--seem distinct, but they are actually linked.

Whether in the late nineteenth century, the 1920s or the 1980s, the country has witnessed conservative politics, a reduced role for government, entrepreneurialism and admiration of business, corporate restructuring and mergers, tax reduction, declining inflation, pain in states that rely on commodities like oil and wheat, rising inequality and concentration of wealth, and a buildup of debt and speculation. The scope of these trends has been impressive-and so has their repetition, though the two periods of the twentieth century have involved increasingly more paper manipulation and less of the raw vigor typical of the late nineteenth-century railroad and factory expansion.

Federal policy from 1981 to 1988 enormously affected investment, speculation and the creation and distribution of wealth and income, just as in the past.

The reduction or elimination of Federal income taxes was a goal in previous capitalist heydays. But it was a personal preoccupation for Ronald Reagan, whose antipathy toward income taxes dated back to his high-earning Hollywood days, when a top tax bracket of 91 percent in the 40s made it foolish to work beyond a certain point. Under him, the top personal tax bracket would drop from 70 percent to 28 percent in only seven years. For the first time since the era of Franklin D. Roosevelt, tax policy was fundamentally rearranging its class loyalties.

Reaganite theorists reminded the country that the Harding- Coolidge income-tax cuts-from a top rate of 73 percent in 1920 to 25 percent in 1925-helped create the boom of the 20s. Back then, just as in the 80s, the prime beneficiaries were the top 5 percent of Americans, people who rode the cutting edge of the new technology of autos, radios and the like, emerging service industries, including new practices like advertising and consumer finance, a booming stock market and unprecedented real-estate development. Disposable income soared for the rich, and with it, conspicuous consumption and financial speculation. After the 1929 crash and the advent of the New Deal, tax rates rose again; the top rate reached 79 percent by 1936 and 91 percent right after the war. In 1964, the rate fell in two stages, to 77 percent and then to 70 percent.

Under Reagan, Federal budget policy, like tax changes, became a factor in the realignment of wealth, especially after the 1981-82 recession sent the deficit soaring. The slack was made up by money borrowed at home and abroad at high cost. The first effect lay in who received more Government funds. Republican constituencies- military producers and installations, agribusiness, bondholders and the elderly--clearly benefited, while decreases in social programs hurt Democratic interests and constituencies: the poor, big cities, housing, education. Equally to the point, the huge payments of high- interest charges on the growing national debt enriched the wealthy, who bought the bonds that kept Government afloat.

Prosperous individuals and financial institutions were beneficiaries of Government policies in other ways. Starting in the Carter years, Congress began to deregulate the financial industry; but the leap came in the early 1980s, when deposit and loan interest ceilings were removed. To attract deposits, financial institutions raised their interest rates, which rose and even exceeded record postwar levels. The small saver profited, but the much larger gain, predictably, went to the wealthy. (The benefits of high interest were intensified, of course, by the declining maximum tax rate on dividend and interest income. The explosion of after-tax unearned income for the top I percent of Americans was just that-an explosion.)

The savings and loan crisis weighing on American taxpayers in 1990 also had roots in deregulation. Before 1982, savings and loan associations were required to place almost all their loans in home mortgages, a relatively safe and stable class of assets. But in 1982, after soaring interest rates turned millions of low-interest mortgages into undesirable assets, a new law allowed savings and loans to invest their funds more freely--100 percent in commercial real-estate ventures if they so desired. Like banks in the 1920s, many thrifts proceeded to gamble with their deposits, and by 1988, many had lost. Gamblers and speculators enriched themselves even as they stuck other Americans with the tab.

Reagan's permissiveness toward mergers, antitrust enforcement and new forms of speculative finance was likewise typical of Republican go-go conservatism. Unnerving parallels were made between the Wall Street raiders of the 1980s-lvan Boesky and T. Boone Pickens-and the takeover pools of the 1920s, when high-powered operators would combine to "boom" a particular stock. For a small group of Americans at the top, the pickings were enormous.

As egregious misperception of late twentieth-century politics is to associate only Democrats with extremes of public debt. Before 1933, conservatives--Federalists, Whigs and Republicans alike-sponsored Government indebtedness and used high-interest payments to redistribute wealth upward.

In addition, Republican eras were noted for a huge expansion of private debt. In the 1920s, individual, consumer and corporate debt kept setting record levels, aided by new techniques like installment purchases and margin debt for purchasing securities. In the kindred 80s, total private and public debt grew from $4.2 trillion to more than $1 0 trillion. And just as they had sixty years earlier, new varieties of debt became an art form.

Government fiscal strategists were equally loose. In part to avoid the deficit-reduction mandatesiof the Gramm-Rudman-Hollings Act, they allowed Federal credit programs, including student and housing loans, to balloon from $300 billion in 1984 to $500 billion in 1989. In contrast to previous capitalist blowouts, the fast-and-loose Federal debt strategies of the 80s did not simply rearrange assets within the country but served to transfer large amounts of the nation's wealth overseas as well. America's share of global wealth expanded in the Gilded Age and again in the 1920s. The late 1980s, however, marked a significant downward movement: one calculation, by the Japanese newspaper Nihon Keizai Shimbun, had Japan overtaking the United States, with estimated -comparative assets of $43.7 trillion in 1987 forjapan, versus $36.2 trillion for the United States.

The United States was losing relative purchasing power on a grand scale. There might be more wealthy Americans than ever before, but foreigners commanded greater resources. On the 1989 Forbes list of the world's billionaires, the top twelve, with the exception of one American, were all foreigners-from Japan, Europe, Canada and South Korea. Dollar millionaires, once the envy of the world, were becoming an outdated elite.

This shift reflected the ebb of America's postwar-eminence. Yet the same Reagan policies that moved riches internally also accelerated the shift of world wealth, beginning with the budget deficits of the early 1980s but intensifying after the ensuing devaluation of the dollar from 1985 to 1988.

If the devalued dollar made the Japanese, French, and Germans relatively richer, it also increased their purchasing power in the United States, turning the country into a bargain basement for over- seas buyers. This is the explanation for the surging foreign acquisition of properties, from Fortune 500 companies to Rockefeller Center in Manhattan and a large share of the office buildings in downtown Los Angeles.

The dollar's decline also pushed per capita gross national product and comparative wages in the United States below those of a number of Western European nations. The economist Lester C. Thurow summed up the predicament: 'When it comes to wealth, we can argue about domestic purchasing power. But, in terms of international purchasing power, the United States is now only the ninth wealthiest country in the world in terms of per capita G.N.P. We have been surpassed by Austria, Switzerland, the Netherlands, West Germany, Denmark, Sweden, Norway and Japan."

Not everyone looked askance at foreign wealth and investment. American cities and states welcomed it. From the textile towns Of South Carolina to the rolling hills of Ohio, foreigners were helping declining regions to reverse their fate. Yet as Warren Buffett, the investor, said: "We are much like a wealthy family that annually sells acreage so that it can sustain a life style unwarranted by its current output. Until the plantation is gone, it's all pleasure and no pain. In the end, however, the family will have traded the life of an owner for the life of a tenant farmer."

Nowhere was Japanese investment more obvious than in Hawaii, where real-estate moguls from Tokyo pronounced the property they were grabbing up "almost free.' An economist at a Hawaiian bank warned that the state was "a kind of test lab for what's facing the whole country.' Indeed, in 1988, broader foreign ambitions were ap- parent. The author Daniel Burstein quoted Masaaki Kurokawa, then head of Japan's Nomura Securities International, who raised with American dinner guests the possibility of turning California into a joint U.S.-Japanese economic community.

Public concern over America's international weakness had been a factor in Ronald Reagan's election back in 1980. Voters had wanted a more aggressive leader than Jimmy Carter. For various reasons, the great things promised were not delivered. Reagan could re-create a sense of military prowess with his attacks on Grenada and Libya. But in the global economy he took a country that had been the world's biggest creditor in 1980 and turned it into the world's largest debtor. Despite opinion polls documenting public concern about this erosion, surprisingly little was made of the issue in the 1988 Presidential campaign, possibly because the Democrats could not develop a coherent domestic and international alternative.

Much of the new emphasis in the 1980s on tax reduction and the aggressive accumulation of wealth reflected the Republican Party's long record of support for unabashed capitalism. It was no fluke that three important Republican supremacies coincided with and helped generate the Gilded Age, the Roaring Twenties and the Reagan-Bush years.

Part of the reason survival-of-the-fittest periods are so relentless, however, rests on the performance of the Democrats as history's second-most enthusiastic capitalist party. They do not interfere with capitalist momentum, but wait for excesses and the inevitable popular reaction.

In the United States, elections arguably play a more important cultural and economic role than in other lands. Because we lack a hereditary aristocracy or Establishment, our leadership elites and the alignment of wealth are more the product of political cycles than they are elsewhere. Capitalism is maneuvered more easily in the United States, pushed in new regional and sectoral directions. As a result, the genius of American politics-failing only in the Civil War-has been to manage through ballot boxes the problems that less-fluid societies resolve with barricades and with party structures geared to class warfare.

Because we are a mobile society, Americans tolerate one of the largest disparities in the industrial world between top and bottom in- comes, as, people from the middle move to the top, and vice versa. Opportunity has counted more than equality.

But if circulating elites are a reality, electoral politics is an important traffic controller. From the time of Thomas Jefferson, the nation has undulated in 28- to 36-year waves as each watershed election puts a new dominant region, culture, ideology or economic interest (or combination) into the White House, changing the country's direction. But after a decade or two, the new forces lose touch with the public, excessively empower their own elites and become a target for a new round of populist reform. Only the United States among major nations reveals such recurrent electoral behavior over two centuries.

The Republicans rode such a wave into office in 1968, as a middle- class, anti-elite correction, successfully squelching the social permissiveness and disorder of the 60s. Significantly, each Republican coalition-from Lincoln's to Nixon's-began by emphasizing national themes and unity symbols, while subordinating commercial and financial interests.

But it is the second stage-dynamic capitalism, market economics, and the concentration of wealth-that the Republican Party is all about. When Republicans are in power long enough, they ultimately find themselves embracing limited government, less regulation of business, reduced taxation, disinflation and high real interest rates. During America's first two centuries, these policies shaped the three periods that would incubate the biggest growth of American millionaires (or, by the 1980s, billionaires). History suggests that it takes a decade or more for the Republican party to shift from broad middle- class nationalism into capitalist overdrive, and the lapse of twelve years between the first Nixon inauguration in 1969 and the first Rea- gan inauguration repeats this transformation.

Nixon, like the previous Republican nationalist Presidents Abraham Lincoln and William McKinley, was altogether middle class, as was his "new majority" Republicanism. He had no interest in unbii- dled capitalism during his 1969-74 Presidency.

In fact, many of the new adherents recruited for the Republican coalition in 1968 and 1972 were wooed with the party's populist at- tacks on inflation, big government, social engineering and the Liberal Establishment. Many Republican voters of that era embraced outsider and anti-elite values, and like similar participants in previous Republican national coalitions, they would become uneasy in the 1980s as Reagan or Bush Republicanism embraced Beverly Hills or Yale culture and the economics of leveraged buyouts, not of Main Street.

Besides this uneasiness, reflected in opinion polls, a second sign that a conservative cycle is moving toward its climax has been the extent to which Democratic politics has been cooperative: when wealth is in fashion, Democrats go along. The solitary Democratic President of the Gilded Age, Grover Cleveland, was a conservative with close Wall Street connections. In the 20s, the Democratic Presidential nominees in both 1920 James Cox, an Ohio publisher and 1924 John W. Davis, a corporate lawyer were in the Cleveland mold. Alfred E. Smith, who ran in 1928, would eventually oppose Roosevelt and the New Deal. In the 20s, Congressional Democrats competed with Republicans to cut upper-bracket and corporate taxes.

Fifty years later, Jimmy Carter, the only Democratic President to interrupt the long Republican hegemony after 1968, was accused by the historian Arthur M. Schlesinger Jr.. of an "eccentric effort to carry the Democratic Party back to Grover Cleveland." Despite his support for substantial new Federal regulation, Carter clearly deviated from his party's larger post-New Deal norm. He built foundations that would become conservative architecture under Reagan: economic deregulation; capital-gains tax reduction and the tight-money policies of the Federal Reserve. (The Fed's chairman, Paul A. Volcker, was a Car-ter appointee.) Congressional Democrats echoed their policies of the 1920s by colluding in the bipartisan tax-bracket changes of 1981 and 1986.

Thus, the Democrats could hardly criticize Reagan's tax reductions. For the most part, they laid little groundwork for an election- year critique in 1988, leaving the issue to Jesse Jackson, whose appeal was limited by his race and third-world rhetoric, and to non-candidates like Mario M. Cuomo. Michael S. Dukakis was obviously uncomfortable with populist politics. Though several consultants and economists urged him to pick up the theme of economic inequality, Dukakis made competence, not ideology, his initial campaign issue. Only in late October, with his campaign crumbling, did the Democratic candidate reluctantly convert to a more traditional party line. It came too late.

Republican strategists could hardly believe their luck. Said Lee Atwater, Bush's campaign manager, after the election: "The way to win a Presidential race against the Republicans is to develop the class warfare issue, as Dukakis did at the end-to divide up the haves and the have nots and to try to reinvigorate the New Deal coalition and to attack.'

On the surface, this was a missed Democratic opportunity. But the lesson of history is that the party of Cleveland, Carter and Dukakis has rarely rushed its anti-elite corrective role. There would be no rush again in 1988-nor, indeed, in 1989.

Early in his presidency, George Bush replaced the Coolidge portrait hung by Ronald Reagan in the White House with one of Theodore Roosevelt, reflecting Bush's belief in T.R.'s commitment to

conservation, patrician reform, and somewhat greater regulatory involvement.

Yet there has not been too much evidence of a kinder, gentler America beyond softer, more conciliatory rhetoric. The budget remained unkind to any major expansion of domestic programs, and Bush's main tax objective was a reduction in the capital gains rate, a shift that critics said would continue to concentrate benefits among the top 1 percent of Americans.

By spring 1990, Washington politicians confronted the most serious debt- and credit-related problems since the bank failures, collapsed stock prices, farm foreclosures and European war debt defaults of the Great Depression. From the savings and loan associations bailout to junk bonds, from soaring bankruptcies and shaky real-estate markets to Japanese influence in the bond market, Federal policy makers were forced to realize that a crucial task--and peril--of the 1990s would involve cleaning up after the previous decade's credit-card parties and speculative distortions. . .

Whether the populist reactions that followed past boom periods recur in the 90s no one can know. But there could be no doubt that the last decade ended as it had begun: with a rising impeative for a new political and economic philosophy, and growing odds that the 1990s will be a very different chapter than the 1980s in the annals of American wealth and power.