The Case for Compassionate Capitalism

The election of Pope Francis, himself a lifelong advocate for economic justice, creates a perfect moment for us to reflect on the role of capitalism in our democracy. The current notion that Americans are sharply divided between free market capitalists and big government socialists is complete baloney. When it comes to the economy, this country is lousy with consensus, though you wouldn’t know it from the rhetoric rolling out of Washington these days.

Every poll taken over the past year and culminating in the president’s five million vote victory in November confirms an economic value system which is deeply embedded in the DNA of the vast majority of Americans and is based upon a century of experience with capitalism in this country.

For the first third of the twentieth century, capitalism American style was the Wild West. Low taxes. No regulation. No unions. Anything goes. We had a name for it: The Roaring Twenties. The rich got filthy rich. Everybody else just got filthy. The Roaring Twenties officially ended on October 29, 1929 when the entire American economy crashed, ushering in a decade of unrelenting misery and despair featuring 25% unemployment, widespread bank failures, bankruptcies, foreclosures and food lines. We called that The Great Depression. True to its name, it was greatly depressing. The closer we looked at capitalism, the more we found it wanting. So we did what Americans always do when we see a problem. We fixed it.

In this case, the Fixer-In-Chief was president Franklin Delano Roosevelt. Here’s the thing about FDR. He was rich and powerful. Most of his friends were rich and powerful. Yet the damage done to the country during the Great Depression convinced him that unregulated capitalism always favors people like himself at the expense of everyone else. To Roosevelt, it suddenly became as self-evident as the truths enumerated in the Declaration of Independence, that the biggest obstacle to achieving the American dream was fear—specifically, fear of financial destitution. FDR expressed this insight in the signature sentence of his first inaugural address: “The only thing we have to fear, is fear itself.”


 


For Roosevelt, removing fear from the equation of capitalism became the key to unlocking America’s productive energy and entrepreneurial spirit while at the same time advancing our fundamental values of life, liberty and the pursuit of happiness. So he set out to save capitalism from itself by introducing what turned out to be the crucial missing ingredient: compassion.

Roosevelt understood better than most that compassion does not grow naturally in the harsh climate of an unfettered free market. He knew that fairness—a basic necessity to any functioning democracy—is a completely alien concept to pure capitalism. So FDR gave us his new, improved version: compassionate capitalism.

No senior citizen ends up destitute (social security). Banks and Wall Street don’t get to gamble with peoples’ savings (FDIC and SEC). Anybody who serves their country goes to college (GI Bill). Everybody who wants to work gets a job that the country needs to have done (CCC and WPA).

Far from hobbling private sector growth, these programs fueled it. Even though tax rates were much higher then than now, tons of people still got very rich—with one glaring difference. The immense wealth created in America during the post-Roosevelt years was much more evenly distributed across all income levels--with the biggest chunk going to a rapidly growing middle class. Somehow compassionate capitalism worked for everyone without busting the federal budget.

But don’t take my word for it. Look it up. During the Roaring Twenties, the top income tax rate in America was slashed from 73% to 24%. Instead of stimulating economic growth, these massive tax cuts brought us unprecedented budget deficits (not to mention the Great Depression). When Roosevelt took over from Herbert Hoover in 1933 the annual federal deficit had ballooned to more than half the size of the entire US budget. Under Roosevelt’s compassionate capitalism, that deficit dropped steadily until the federal budget was practically balanced in 1938. 

Then came World War II. Government spending on the war effort pushed the deficit way back up again. By 1943 the size of the annual deficit had exploded to an unimaginable 69% of the budget itself. But once again, Roosevelt’s policies chipped away at that deficit until 1947 when the federal government ran a budget surplus! Are you beginning to see the pattern here? Massive tax cuts mean massive deficits. Big wars beget big deficits.

Yet under Roosevelt’s compassionate capitalism—even with a Great Depression and a Second World War--the federal budget quickly and stubbornly came right back into balance. President Harry Truman stuck to FDR’s playbook and ran a net surplus during his six years in the White House. By the time Eisenhower was elected, compassionate capitalism was deeply woven into the fabric of American democracy.

Think about it. Between 1952 and 1980 Democrats and Republicans argued about a lot of stuff: communism, civil rights, Vietnam, marijuana, abortion, nuclear power—you name it. But throughout all those years of political and economic upheavals, no president of either party seriously argued that America couldn’t afford the twin pillars of compassionate capitalism: social security and Medicare—and for good reason. What do you suppose the cumulative US deficit as a percentage of total federal spending was during that quarter century of “budget busting” entitlements? The answer is: 7.8%. Indeed if it weren’t for the war in Vietnam and the energy crisis in the seventies, the deficit would have been even smaller!

Then along came Ronald Reagan--and this is where things get crazy. Reagan was much too smart a politician to advocate shredding the social safety net. Instead, he cut taxes so drastically that there was not enough money to pay for it. Sure enough, during the next twelve years of Reagan/Bush the deficit skyrocketed to such a frightening level that Reagan’s own budget director, David Stockman, quit the administration to write a scathing book titled “Why the Reagan Revolution Failed.”

Deficit hawks didn’t know it at the time, but the answer to their prayers arrived with the presidency of Bill Clinton who inherited a quarter trillion dollar deficit and turned it into a quarter trillion dollar surplus. Everybody knows the rest of the deficit story. George W. Bush took the Clinton surplus, proceeded to slash taxes, and launch two major wars and presto-chango: trillion dollar annual deficits as far as the eye can see!

The social safety net was never viewed as the cause of these eye-popping deficits until a radical group of political nihilists, led by the likes of Grover Norquist decided that the best way to kill the compassion in capitalism was to stubbornly refuse, under any circumstances, to pay for it—and then blame the resulting deficits on the lie that compassion itself is just too damn expensive.

The so-called controversy over “raising taxes vs cutting entitlements” exists only in Washington. For the rest of America, this issue was settled in 1932 and then again in 2012. Americans know how to fix the problem, even if Washington does not:

Social Security. Today, somebody earning 113 thousand dollars pays the same exact dollar amount in social security taxes ($7K) as somebody earning 113 million dollars. Fix that ridiculous situation, and this “problem” is solved.

Medicare. Time Magazine recently devoted its cover story (“Bitter Pill”) to the longest investigative report in the magazine’s 90-year history—a brilliant examination of why health care costs in America are out of control. Reporter Steve Brill described how our healthiest and wealthiest citizens buy private insurance, which pays for insanely high administrative costs with obscene mark-ups in order to generate huge profit margins. Meanwhile the old, the poor, and the sick are left to rely on the Medicare. The result? Private health insurance is unaffordable and Medicare is unsustainable. Brill’s conclusion? Medicare should cover everybody. Spread the risk over the entire population. Cut out the middleman. Lower overall costs. And most important of all, get the burden of health insurance premiums off the backs of small businesses in order to free up their resources to create new jobs at decent wages. Brill summed up the fatal flaw of the “free market” approach to health care as follows, “Nobody wakes up in the morning and says, ‘I think I’ll take a run down to the Emergency Room to see what’s on sale.’”

Taxes. For openers, how about taxing wealth at the same rate as work? Why should a stockbroker pay a lower tax rate than a landscaper? There is no justification for a hedge fund manager paying half the tax rate of a hedge cutter. And while we’re at it, millionaires and billionaires should always pay a minimum tax of 30%-- no matter how many phony tax shelters and deductions congress gives them. If Warren Buffet can live with that, how painful can it be?

In other words, before we start inflicting real honest-to-goodness pain on the bottom 99%, the top 1%—at the very least—should pay the same portion of their income in taxes as the rest of middle America. Not higher taxes mind you, just the same rate as everyone else. After all, we will never know if there’s enough money to pay our national bills until everybody chips in.

History has shown us--over and over again--that compassionate capitalism leads to balanced budgets, a robust economy, and a piece of the opportunity pie for every citizen seated at America’s table. If we take the compassion out of capitalism, what’s left? 1929.