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Interview with Robert Reich on Saving Capitalism and Democracy

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Three decades of growing inequality and collapsing public morality have pitched America into crisis, imperiling its democracy. But there are precedents for a way out, says Robert Reich

In a recent post on your website, you said there was "moral rot" in America. And you say: "It's located in the public behaviour of people who control our economy and are turning our democracy into a financial slush pump." Can you expand on this?

An economy depends fundamentally on public morality; some shared standards about what sorts of activities are impermissible because they so fundamentally violate trust that they threaten to undermine the social fabric. Without trust it has to depend upon such complex contracts and such weighty enforcement systems that it would crumble under its own weight. What we've seen over the last two decades in the United States is a steady decline in the willingness of people in leading positions in the private sector – on Wall Street and in large corporations especially – to maintain those minimum standards. The new rule has become making the highest profits possible regardless of the social consequences.

In the first three decades after World War II – partly because America went through that terrible war and also experienced before that the Great Depression – there was a sense in the business community and on Wall Street of some degree of social responsibility. It wasn't talked about as social responsibility, because it was assumed to be a bedrock of how people with great economic power should behave. CEOs did not earn more than 40 times what the typical worker earned. Rarely were there mass layoffs by profitable firms. The marginal income tax on the highest income earners in the 1950s was 91%. Even the effective rate, after all deductions and tax credits, was still well above 50%. The game was not played in a cutthroat way. In fact, consumers, workers, the community, were all considered stakeholders of almost equal entitlement as shareholders.

Around about the late 1970s and early 1980s, all of this changed quite dramatically. The change began on Wall Street. Wall Street convinced the Reagan administration, and subsequent administrations and congresses, to deregulate and to undermine the set of regulations that were put in place after the crash of 1929 – particularly during the Roosevelt administration – to prevent a repeat of the excesses of the 1920s. As a result of that move towards deregulation, we saw a steady decline in standards – a kind of race to the bottom – on Wall Street and then in executive suites. In the 1980s we had junk bond scandals combined with insider trading. In the 1990s we had the beginnings of a speculative binge culminating in the dotcom bubble. Sad to say, under the Clinton administration the Glass-Steagall Act – that had been part of the banking act of 1933, separating investment banking from commercial banking – was repealed. In 2001 and 2002 we had Enron and the corporate looting scandals. Not only did this reveal the dark side of executive behaviour among some of the most admired companies in America – Enron had been listed among the nation's most respected companies before that time – but also the complicity of Wall Street. Wall Street traders were actively involved in the Enron travesty. And then, of course, we had all of the excesses leading up to the crash of 2008.

Where has the moral centre of American capitalism disappeared? It's ironic that at a time the Republican presidential candidates and state legislators are furiously focusing on private morality – what people do in their bedrooms, contraception, abortion, gay marriage – we have this far more significant crisis in morality. Wall Street is back to its same old tricks. Last week, Greg Smith, a vice-president of Goldman Sachs, accused the firm of putting profits before clients. What else is new? Almost every other Wall Street firm is doing precisely the same thing and they've been doing it for years.

Having identified the problem with American capitalism today, what's the solution? You have said elsewhere that progressives need to save capitalism from its own excesses, but there has been a Democrat in the White House since 2009 and few signs of major reform. Who's going to tackle this "moral rot"?

It hasn't happened. The Dodd-Frank bill was an attempt to rein in Wall Street, but Wall Street lobbyists have almost eviscerated that act and have been mercilessly attacking the regulations issued. Pursuant Republicans have not even appropriated sufficient money to enforce the shards of the act that remain.

The Glass-Steagall Act has to be resurrected. There has to be a limit on the size of big banks. The current big banks have to be broken up using anti-trust laws, as we broke up the oil cartels in the early years of the 20th century. We've got to put limits on executive pay and have a much more progressive income tax so that people who are earning tens if not hundreds of millions of dollars a year are paying at a rate that they paid before 1981, which is at least 70% at the highest marginal level. We also need to get money out of politics.

But how are these changes going to come about while the very wealthy can so effectively control and manipulate the political process?

Well, exactly. That's why we've got to have campaign finance reform that provides public financing in general elections and we need a constitutional amendment that reverses the grotesque decision of the Supreme Court at the start of 2010, in a case called Citizens United versus the Federal Election Commission. I could go on, but you get my drift.

None of this is possible without an upsurge in the public at large – a movement that may have already begun with the so-called Occupiers, but a movement that rescues our democracy and takes back our economy. You can't do one without the other. The economy and our democracy are intertwined – the system's called democratic capitalism. Much the same challenge exists in Europe and Japan and elsewhere around the world, where systems profess to combine capitalism and democracy. You see, when you have the extraordinary moves to inequality that we've seen over the past 30 years, there is simply no way that democracy can be maintained. Massive inequality is incompatible with robust democracy. Today, in the United States, the top 1% is taking home more than 20% of total income and owns at least 38% of total wealth. The richest 400 people in America have more wealth than the bottom 150 million Americans put together. As we've already seen in this Republican primary election, a handful of extraordinarily wealthy people can virtually control the election result – not entirely, but have a huge impact. That's not a democracy. As the great American jurist and Supreme Court associate justice Louis Brandeis once said: "We can have huge wealth in the hands of a relatively few people or we can have a democracy. But we can't have both."

You've selected five books for us. Is there a single theme that ties them together?

Yes. All five books are about the structure of the economy and how that structure affects and is affected by the social life of a society. They are all economic books in one sense, but they are also political and sociological books in another. The field of economics didn't exist until the great Alfred Marshall wrote his Principles of Economics in 1890. Before that, in the 19th century, it was called political economy – no one assumed you could separate politics from economics. Then before that in the 18th century it was called moral philosophy. Adam Smith called himself a moral philosopher. He took the greatest pride not in his Wealth of Nations but in his Theory of Moral Sentiments, which is all about the ways in which people felt connected to one another in the same society. So the books – and I'm not suggesting these are necessarily the best books – that have been most influential to me in my formative years and in thinking about economics and social life have been these five.

In Herbert Croly's book, The Promise of American Life, we have a description of wealth in the hands of the few and US politics swamped and corrupted by patronage. It sounds very familiar, but Croly is writing in the early 20th century. Tell us more.

It was written in 1909 and it had an electrifying effect on America and in the formation of modern American capitalism. [President Theodore] Teddy Roosevelt used the book in formulating his so-called "New Nationalism" which he presented to the country shortly thereafter. [President] Barack Obama used the occasion marking Teddy Roosevelt's speech in Kansas in 1911 on New Nationalism – I believe it was the 100th anniversary of the speech – to give what I consider the best speech of his presidency just last December, setting forth a similar set of problems and a similar set of solutions.

Herbert Croly was the first to understand that modern capitalism required a government that was robustly democratic, but was large enough and strong enough to counterbalance the forces of large corporations. In a sense, he married the national vision of [Founding Father and first US Secretary of the Treasury] Alexander Hamilton to the commitment of [Founding Father and principal author of the Declaration of Independence] Thomas Jefferson toward average people, rather than the wealthy and the privileged. That fusion of the two strands of American political thought was extremely important for the 20th century and I dare say that Croly's influence and the influence of his thinking spread beyond the United States.

You touch on the debate between Hamilton and Jefferson, with Croly really siding with Hamilton and his belief in the need for a strong national government. But today in the United States there doesn't seem much popular support for the idea of government being a positive force for change. In fact, government is seen as a threat to individual freedom even by people who might benefit from a more interventionist approach to the economy.

Yes, and some of these people seem to believe that a smaller government will give them more freedom. But they overlook the overwhelming power of big corporations and Wall Street. The only way they are going to have more freedom is if government, as Croly envisioned, counterbalances the enormous power of the large corporations and Wall Street. But in order to do so, government has to be more responsive to average people. This, of course, gets us back to the points I was making a moment ago. We have got to have a democracy that is not corrupted by great wealth and power. Otherwise the government simply becomes another vehicle for the wealthy to entrench their privileged position.



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