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Norton Garfinkle: The American Dream vs The Gospel of Wealth

By Levi Clancy for Student Reader on

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Garfinkle's The American Dream vs. The Gospel of Wealth: The Fight for a Productive Middle-Class Economy (2007) is a polemic against laissez-faire and supply-side economics.

The book is built around the dichotomy between two economic, political and moral visions for American society: as named by the author, the American Dream versus the Gospel of Wealth. American history (spanning from Tocqueville's bucolic 1830s imagery all the way to The American Dream's publication in 2007) is narrated through this American Dream vs Gospel of Wealth lens.

The historical narrative climaxes with Garfinkle's quantitative analysis of the 56 years spanning 1951 to 2006, where he reiterates the conclusions drawn from his episodic qualitative analyses.

Despite being quantitatively weak, Garfinkle makes a very strong qualitative argument that the middle-class (and the aggregate demand it fuels) drives the economy and that policies supporting the middle-class are good for the economy as a whole.

Garfinkle asks, "Is there an American economic vision? Is there some guiding principle of economics implicit in our Declaration of Independence, our Constitution, and our form of government?" (Garfinkle, p 12)

And he answers his own question simply: there is. Garfinkle calls it the American Dream, "an economic vision familiar to virtually all Americans": it is "the dream that all Americans will have the opportunity through hard work to build a comfortable middle-class life." Garfinkle honors Abraham Lincoln as the first true champion of the American Dream, because Lincoln viewed economic opportunity as the very core of the United States (p 29). This required a strong national government that cleared the path for the average man to have economic opportunity, and oversaw charities, orphanages, infrastructure, education and a national bank (p 13 - 15, 28 - 29, 36 - 37, 44).

"I have never had a feeling politically that did not spring from the sentiments embodied in the Declaration of Independence," were Lincoln's famous words (Neely, 1982; from Lincoln, 1861). These words are relished by Garfinkle, who adds that "the freedom guaranteed by the Declaration of Independence and the Constitution was of value, in Lincoln's view, precisely because it enables humble individuals to attain an independent, middle-class standard of living by the work of their own hands" (Garfinkle, p 13).

As Garfinkle analyzes United States economic history from Lincoln’s era onward, he builds upon Lincoln's simple, prototypical American Dream

The American Dream comes to include Alfred Keynes' theories on recession; Franklin Delano Roosevelt's New Deal system of regulation and insurance; and to a lesser extent, Johnson's Great Society. After describing the advent of modern monetary policy via Milton Friedman (p 141 - 143), Garfinkle reframes the American Dream in demand-side terminology: "Demand-side economic policies not only increase the ability of all Americans to improve their living standards, but also provide positive support for the economic, moral, and political objectives of American democracy (Garfinkle, p 190)"

In total, the American Dream rests on these key policy points which are all supported by a strong national government:
RegulationRegulation reduces risk in the market. "A more regulated economy -- one in which the government played an active oversight role -- might produce somewhat lower levels of economic growth; but it also might offer greater insurance against the [same] kind of catastrophe … [as] the Great Depression” (Garfinkle, p 99).
InsuranceInsurance insulates aggregate demand and protects its prime source, the middle- and lower-class. "While regulation may have reined in business, the combination of regulation and insurance instilled consumer confidence, especially in banks and financial institutions" (p 113). Examples include Social Security and unemployment benefits.
National bank,
Fiat currency
These allow the United States to exert strong monetary policies. "Roosevelt's abandoning of the gold standard in 1933 may have been the most important single policy measure setting the American economy on a path to recovery" (p 110).
Progressive taxesProgressive tax rates finance expensive government policies. "Tax cuts had obviously not ‘paid for themselves’ (almost no mainstream economist expected they would) (p 9)."
Garfinkle speaks glowingly of government's role in road-, canal- and bridge-building, and also of public education, as a means of "clearing the path" (Garfinkle, p 13 - 15, 28 - 29, 36 - 37, 44).
Labor protectionsGarfinkle praises New Deal legislation that implemented a forty-hour workweek, minimum wage and ban on child labor (p 116). Garfinkle is vague about unions but speaks positively of union membership growth (p 116), and negatively of declining membership (p 97).
KeynesianismGarfinkle advocates deficit spending and lower taxes to stimulate demand during recessions; this is opposed to Neo-Keynesian use of these tools to energize (and ultimately inflate) the economy during growth periods.
Garfinkle begins the Gospel of Wealth story in the 19th century, originating with mugwumps, laissez-faire capitalists and Social Darwinists; (p 51, 64 - 65).

The name itself is a reference to Andrew Carnegie's 1889 article "The Gospel of Wealth" (Garfinkle, 14). "Any government effort to intervene on workers' behalf was to be fiercely resisted as a violation of natural law" (p 56). Garfinkle describes this first phase of the Gospel of Wealth as a purely negative doctrine; he does not elaborate what policies it advocated, but only its efforts to repeal and obstruct policies. Later, Garfinkle describes the supply-side reinvention of the Gospel of Wealth, led by the figurehead Ronald Reagan. This new Gospel of Wealth had a critical difference from its first iteration: it adopted the rhetoric of abundance popularized by the New Deal to support deregulation and a restructuring of the tax code to let high earners keep more money in their pockets.

The right kind of tax cut, structured to release these economic energies, would not even increase the deficit. The specific tax cut they had in mind was a cut in the marginal personal income tax rate for the highest-income taxpayers. They claimed that in response to this cut the investor class would put their newfound money to work in their own businesses by hiring new workers and buying new equipment. Such a tax cut, argued supply-siders, would not only reduce the gap between demand and supply but would generate enough new growth to boost government revenues equal to the cut in taxes. The tax cut would pay for itself." p 147 - 148

By studying various booms and busts throughout United States history, Garfinkle’s book compellingly argues that de-regulation and dismantling of social safety nets (principles embodied in the Gospel of Wealth) precipitate and aggravate economic collapses.

Garfinkle sees the renewal of the American Dream as essential for the United States' future. Under President George W Bush, the government underwent a decisive supply-side shift. This stimulated the rise of systemic risk and income inequality, leading to economic and political instability. Recalling that during the Great Depression "millions of Americans were literally homeless and starving" (p 6 - 7), Garfinkle reminds the reader of the importance of a strong government ensuring widespread prosperity:

Aristotle observed that the most politically stable polities were democracies with a large middle class. The middle class acted as a buffer between the rich, who sought to control society through their superior economic and political resources, and the many, who sought through their superior numbers to seize power from and dispossess the rich. Garfinkle, p 22

Unfortunately, Garfinkle pollutes his strong message by brutally jamming almost 200 years of American economic history into his binary dichotomy between the American Dream vs Gospel of Wealth.

A particularly egregious example is when Garfinkle describes "the slave-owning South" as having "adhered to the doctrine of pure free market economics" (p 44). Garfinkle would do well to realize that slavery is neither Gospel of Wealth free-market economics nor American Dream progressivism. Garfinkle's credibility is sorely blemished by his effort to cram slavery under the free-market label.

Garfinkle performs a poor quantitative analysis of tax policies during the 56 years years spanning 1951 to 2006.

The data analyzed in this book clearly indicate that regressive tax policies based on a Gospel of Wealth supply-side theory are not helpful to economic growth, while progressive tax policies based on demand-side theory can provide a continuing spur to economic growth consistent with the economic and political vision of the American dream. Garfinkle, p 5

First, Garfinkle groups the 56 years into three groups labeled highest, middle or lowest topmost-tax rates; these vague labels disguise misleading statements and data omissions. A centerpiece of Garfinkle’s quantitative analysis is that out of 56 years, those years with the lowest uppermost-tax-rate included only two years with the highest GDP growth. Garfinkle uses this as the foundation for his praise of Clinton tax policies, and his stinging critique of Bush and Reagan tax policies. However, there are two big problems: Garfinkle omits data, and misleads the reader. First, out of all the eight pages (p 172 - 179) where Garfinkle performs an analysis based on various parameters, he surprisingly and conspicuously never uses neither the highest nor the middle uppermost-tax-rate as parameters.

Garfinkle writes a glowing hagiography of Clinton's 1990s economic boom: "The sustained boom of the 1990s had been ushered in by a major tax increase during the Clinton administration while the Bush tax cuts produced nothing of the kind" Garfinkle, p 3). In fact, there was no such major tax increase. Reagan and Clinton had among most similar tax rates in the sixty years since the Great Depression. Instead, he years with the lowest uppermost-tax-rate (which Garfinkle portrays as years of malaise) include the Clinton years that Garfinkle celebrates and were indeed better than the middle and highest uppermost-tax-rate years (Garfinkle sets the cutoff for the lowest uppermost-tax-rate at 41% -- and Clinton only raised the highest bracket to 40%).

Furthermore, consider that for most Reagan's terms the top income tax rate was 28% (tax data from Blodget, 2011). Before Reagan, income tax rates topped out at 225% higher (at 90%). After Reagan, income tax rates topped out at 43% higher (at 40% top tax rate) under Clinton and 25% higher (at 35% top tax rate) under Bush. Top income tax rates shifted relatively little after Reagan: it is not possible to draw a bold line between Clinton and Reagan tax rates as Garfinkle tries to. Economic growth in the 1990s is not clearly attributable to Clinton's relatively modest tax hike compared to Reagan’s aggressive tax lowering. Indeed, Clinton's income tax hike seems so modest that his tax rates are historically continuous with Reagan’s tax policies.

Clinton was firmly within the tax era established by Reagan. The historical similarity between Clinton and Reagan tax policies might even vindicate Reaganomics. The highest-tax years encompass the neo-Keynesian catastrophes against which Garfinkle strains to distinguish Keynesianism and the American Dream (Garfinkle, p 128), while the lowest uppermost-tax-rate years include the Reagan, Clinton and Bush booms (as Garfinkle points out, it is de-regulation and not tax policy which precipitate the accompanying busts).

Garfinkle makes successfully argues for a strong national government that intervenes in the economy.

Garfinkle fails when he tries to establish a direct link between economic growth and higher uppermost-tax-rates. However, relatively high tax rates are needed to finance the American Dream that Garfinkle advocates. Furthermore, lower uppermost-tax-rates do not necessarily lead to better economic growth, either; Garfinkle tears apart widely cited supply-side studies by Engen and Skinner, finding them at best inconclusive (p 167). In conclusion, it is debatable whether higher or lower taxes have a direct, substantial economic impact either way.

It was not a tax rate that rose by a few percentage points which precipitated economic booms; it was was monetary policy (how readily money was available) and fiscal policy (how the tax revenue was spent). Garfinkle shows that protecting the average, middle-class worker (and the aggregate demand that worker supplies) fuels the economy. While higher taxes alone on the wealthiest have little impact on the United States’ economic health, those tax revenues afford protections that improve economic security and prosperity for everyone.

A strong national government can create indirect and direct economic opportunity; however, extreme supply-side and demand-side economics both lead to a national government that diminishes opportunity.

The national government can serve as a buffer against unemployment and destitution during an economic downturn; and a regulator to limit risk-taking and predatory practices during an upturn. These two mechanisms -- regulation and insurance -- are celebrated by Garfinkle and work hand-in-hand. "While regulation may have reined in business, the combination of regulation and insurance instilled consumer confidence, especially in banks and financial institutions" (Garfinkle, p 113). As a buffer, the government can provide direct benefits to the lowest earners, and also provide employment opportunities through infrastructure and other investments. As a regulator, the government can provide security and stability against capitalist speculation. Aggregate demand is thus nurtured and protected.

However, a rapidly growing government can amass debts and deficits. And in many cases, as with spending on defense contractors and privatized prisons, there is not a significant benefit to most of the population. Furthermore, this red ink destabilizes the economy, as worries mount about massive tax increases and/or budget cutbacks. In this sense, supply-side economists rightly seek to limit the federal government. However, just as Keynesianism was demented by Neo-Keynesianism, supply-side economics can lead to corporate welfare. Supply-side tax doctrine has flaws when taken to an extreme. A prominent example is the very low 15% tax rate on capital gains, an enormously regressive policy since top earners receive more of their income through capital gains.

In reality, a balance between demand-side and supply-side is wisest.

Letting all earners keep most of their money in their pockets provides each citizen with significant autonomy. On the other hand, repairing the United States' regressive tax code provides tremendous government revenue. This revenue can be used to fund regulation and insurance that protects the ordinary worker, and fosters the poorest rungs so that their lives may be bettered. On the other hand, it must be used wisely to limit national debt and eliminate budget deficits. Yet this supply-side balanced budget doctrine must be softened in times of recession, when deficits and debt are a useful tool to flood the economy with demand.

Regulation is essential to protect against predatory practices. However, large companies may lobby for regulations that reduce competition and negatively impact consumers. Supply-side and demand-side economics are incomplete in and of themselves. Together, they provide a broad repertoire of tools and ideas necessary for a successful economy.


Alfred KeynesBritish economist who developed Keynesianism, defined above along with neo-Keynesianism.
Middle classA vague term for families whose income is at or somewhat above the national average.

Pre-Civil War

Garfinkle depicts the early 19th century, beginning with a bucolic fantasy manipulated out of writings by Tocqueville.

Unfortunately, what Garfinkle describes never existed. Commercially enslaved Africans and domestically enslaved women provided the huge workforce needed to subsidize an agricultural economy. This cheap and highly abundant workforce hindered innovation: suckled on the bosom of chattel humans, the need for technological advancement was diminished. Why build a more efficient plow when you can more easily and cheaply buy another slave? This is the opposite of laissez-faire economics, the opposite of a progressive economy: it is a slave economy, whether based on African Americans or women.

Further, Tocqueville also was not necessarily speaking about the whole of American society. Why include the invisible people: indentured servants, marginalized widows, those who were so bad off that they did not even warrant Tocqueville's attention? How reliable is Tocqueville's account? Why trust it so much? Garfinkle is letting storytelling get in the way of solid critical analysis.

When Alexis de Tocqueville visited America in the 1830s, he was struck by the middle-class character of the country and the conspicuous absence of very rich people. In Tocqueville's eyes, inured as he was to the sharp divisions between wealth and poverty in monarchical France, Americans seemed to be remarkably equal economically. Some were richer, some were poorer, but within a comparatively narrow band. ... People who started as servants could end up as farm owners or professionals or business owners. Tocqueville believed that this combination of relative economic equality and high social mobility in some sense held the key to the American system. It was this combination of factors that defined American democracy's promise and simultaneously underwrote its stability. "I never met in America," he noted, "with any citizen so poor as not to cast a glance of hope and envy on the enjoyments of the rich, or whose imagination did not possess itself by anticipation of those good things which fate still obstinately withheld from him." ... "Between these two extremes of [wealth and poverty in] democratic communities stand an innumerable multitude of men almost alike, who, without being exactly either rich or poor, are possessed of sufficient property to desire the maintenance of order, yet not enough to excite envy. Such men are the natural enemies of violent commotions; their lack of agitation keeps all beneath them and above them still, and secures the balance of the fabric of society." Garfinkle, p 12 - 13, 31 - 33

Of course, the country was tailor-made for those seeking to improve their fortunes, with its virtually limitless land, a wealth of natural resources, and a geographical location that guaranteed the security necessary for the flourishing of commerce by providing the barrier of an ocean against Europe's conflicts and wars. Garfinkle, p 32

Garfinkle continues his summary of the early 19th century with Clay and the Whigs (who were based on Alexander Hamilton).

Alexander Hamilton and the Federalists were the predecessors of Henry Clay and his Whig Party. Clay advocated a strong union and federal government, with a nationalist stance concerned with the strength of the United States as a world power. By the mid-1820s, he summed up his program as the succinctly named American System. The Whigs focused on a national bank (for a stable financial system and currency), high tariffs (to protect domestic manufacturing) and federal infrastructure investment (financed by tariffs).

Another thread in early 19th century American politics was the expansion of voting rights.
Garfinkle also outlines Jackson's philosophy (based on Jefferson) as another big force in American politics in that era, alongside Whigism.

Garfinkle mentions Jackson's opening of the White House during his inauguration as though it were a bold populist move, when it was in fact continuing an old tradition. Garfinkle could have made his point just as elegantly that perhaps an especially boisterous mob indicated a populist trend, or something. Whatever. It's vivid imagery but stretched history.

Jackson, like Jefferson before him, strove to preserve the Union but saw a strong central government as a potential threat to liberty. ... The Jacksonian Democratic Party was, in present-day terms, anti-big government, viewing with deep suspicion economic development, urbanization, and virtually all the other developments the Whigs saw as progress. Jackson's economic policy approach was of a piece with his skepticism about what we would call today the public sector. Garfinkle, p 39

Growing sectionalism created two different economies coexisting under one flag.

Tariffs were the biggest issue of the day.

Tariffs were the financial centerpiece of Clay's American System. ... Much of the South opposed tariffs because their main purpose was to protect domestic manufacturing, largely a northern enterprise. At the same time, in the southern view, tariffs threatened the southern economy, which was critically dependent on trade with Great Britain. Garfinkle, p 39 - 40

The South opposed not only high tariffs but also federal government expenditures for internal improvements. Southern politicians questioned the constitutionality of such ambitious federal action. They argued that these activist government programs unduly benefited northern financial and industrial interests. In the South the idea of public investment in infrastructure remained largely an alien notion. Southern legislatures were controlled by slave-holders, who had little economic interest in public improvements, no need to create an active economy for a free labor force, and a substantial ability to surround themselves with luxury in the private preserve of their plantations. The southern political mind increasingly viewed both tariffs and internal improvements as northern ideas. Garfinkle, p 40

In the decades before the Civil War, the notion of material progress and the dream of social mobility took fire in the northern mind. Northern and western states from New York to Illinois actively pursued internal improvements and built up their public infrastructure to support this dream. By contrast, pursuing social mobility through social improvements offered no positive benefit, in the southern view. Garfinkle, p 40

America was increasingly dividing into two distinct sectional societies. The North was expanding its internal industrial capacity, while the South remained anchored in a highly profitable slave-based agricultural economy, heavily reliant on cotton exports to Great Britain. ... With the two economies came two cultures and worldviews, North and South. More and more, economic policy disputes were coming to be seen through the sectional lens. The growing sectional divide ... initially played out as a struggle over economic policy, and only later as an explicit conflict over slavery. ... It is difficult to grasp the degree to which the United States, on the eve of the Civil War, had truly evolved into a "house divided," virtually two separate nations based on very different economic systems. Garfinkle, p 41, 43

The growing sectionalism was also fueled by (and eventually exploded due to) the moral conflict over slavery.

What ultimately forced the issue was the nation's continued westward expansion. Would the new states added to the Union have an economy based on slave labor or free labor? The repeal of the Missouri Compromise with the passage of Douglas' Kansas-Nebraska Act in 1854, which allowed Kansas and Nebraska to choose by popular sovereignty, forced the issue of slavery to the center of the national stage. It brought the long-seething conflict to the heart of national life. Garfinkle, p 42

Garfinkle traces the American Dream to Abraham Lincoln (president 1861 - 1865) and his Whig policies.

"My politics are short and sweet, like the old woman's dance," Lincoln told audiences when he ran for a seat in the Illinois State Assembly in 1832. "I am in favor of a national bank. I am in favor of the internal improvement system and a high protective tariff." Lincoln's quip summarized the three key issues that divided the nation, and the political parties, in the decades leading up to the Civil War, before the issue of slavery overwhelmed them all: the national bank, tariffs, and government expenditures for internal improvements. Lincoln entered politics as a Whig, particularly as a follower of Henry Clay. ... When Lincoln, as he often did, used the word "system" in politics, he was consciously echoing Clay. ... Lincoln's "old woman's dance" was an echo of Clay's program. Garfinkle, p 34 - 35

To Lincoln, the economic, moral, and political elements [of the nation's principles] were inextricable intertwined. Together, they represented what is distinctively American about our economy and democracy. ... He believed, in the famous words of the Gettysburg address, that government should be not just "of the people" and "by the people," but also "for the people." ... Lincoln's American Dream emphasized prosperity and advancement for the ordinary worker. ... More than any other president, Lincoln is the father of the American Dream that all Americans should have the opportunity through hard work to build a comfortable middle-class life. For Lincoln, liberty meant above all the right of individuals to the fruits of their own labor, seen as a path to prosperity. "To each labourer the whole product of his labour, or as nearly as possible," he wrote, "is a most worthy object of any good government." Garfinkle, p 13 - 15, 28 - 29, 36 - 37, 44

The freedom guaranteed by the Declaration of Independence and the Constitution was of value, in Lincoln's view, precisely because it enabled humble individuals to attain an independent, middle-class standard of living by the work of their own hands. Garfinkle, p 13 ... "I have never had a feeling politically," Lincoln said, "that did not spring from the sentiments embodied in the Declaration of Independence." ... In Lincoln's mind, the opportunity "to improve one's condition" was an essential feature of the Declaration of Independence's claim that human beings have unalienable rights to "life, liberty, and the pursuit of happiness." ... For Lincoln, liberty meant above all the right of individuals to the fruits of their own labor, seen as a path to prosperity. ... For Lincoln, American liberty was intimately connected with economic opportunity. It was economic opportunity that gave liberty meaning. The universal promise of opportunity was for Lincoln the philosophical core of America; it was the essence of the American system. ... America was the first nation on earth to offer the opportunity of economic advancement to all, even to the humblest beginner, and this was what made the nation unique and worth preserving. Garfinkle, p 13 ... Lincoln also believed that government had an active role to play in sustaining and underwriting this "system." If the core meaning of freedom, if the very purpose of liberty, was to enable individuals to advance economically, to improve their condition, then government's role under the Constitution must be understood in light of this principle. Garfinkle, p 13 Garfinkle, p 13 - 15, 28 - 29, 36 - 37, 44

The founding principle of the nation was liberty. The purpose of liberty was to enable individuals to improve their condition. The role of government therefore was to serve that central purpose by, as Lincoln liked to put it, "clearing the path" for men to achieve economic success. "Clearing the path" for Lincoln meant more than government getting out of the way. Clearing the path was a frontier metaphor, suggestive of the hard work of clearing forest for a farm or a road, pulling stumps and rocks out of the ground with teams of oxen. "The legitimate object of government," he wrote in 1854, "is 'to do for the people what needs to be done, but which they cannot, by individual effort, do at all, or do so well, for themselves.'" ... As an inhabitant of a still-undeveloped frontier state, an Illinois bereft of decent roads and dependably navigable rivers -- to say nothing of canals and railroads -- he saw a need for government to act, to provide the infrastructure that would allow the expansion of internal commerce, to guarantee a sound currency to enable economic transactions, and to protect homegrown manufacturing from the treat of (mostly British) manufactured goods from abroad. Garfinkle, p 13 - 15, 28 - 29, 36 - 37, 44

Like political philosophers from the time of Thomas Hobbes and John Locke, Lincoln saw the first purpose of government as providing for physical security and the common defense. But he also believed that government should take positive action to promote the common good: "There are many such things -- some of them exist independently of the injustice of the world. Making and maintaining roads, bridges, and the like; providing for the helpless young and afflicted; common schools; and disposing of the deceased men's property are instances." He saw "charities, pauperism, orphanage" as government responsibilities. ... He favored large government expenditures for what were then called internal improvements -- canals, bridges, and railroads. He believed in a strong national bank to stabilize the currency. As president, he presided over the vast federally underwritten expansion of the national railroad system and provided the first major federal funding for education with the creation of land grant colleges. ... Not that Lincoln believed government's role should be intrusive; he thought it should be limited. But by the standards of his time ... he was in favor of an activist government -- on the grounds that the whole purpose of the United States was to serve the individual's economic opportunity ... . Garfinkle, p 13 - 15, 28 - 29, 36 - 37, 44

Lincoln's statement about his political feelings stemming from the Declaration of Independence was a radical argument against a society that enslaved men and women -- it was like a gay man fighting for the right to marry, telling the Pope, "I have never had a feeling politically that did not spring from the sentiments embodied in Christ."

The purpose of the United States was to "clear the path" for the individual to labor and get ahead. Lincoln understood that this purpose was challenged by the slave-based, aristocratic economic system of the southern states. It was this challenge that created a house divided: virtually two separate nations based on very different economic structures. He saw "saving the Union" not simply as a political effort but as a moral imperative to secure for the America of the future the middle-class economy of the northern states. Garfinkle, p 29

About receiving the product of your own labor -- how does that relate to modern-day welfare? You are receiving the product of somebody else's labor.

"The prudent, penniless beginner in the world," Lincoln wrote, "labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequent energy and progress and improvement of condition to all." ... President Abraham Lincoln was the first American leader to fully grasp that this condition of economic opportunity was, in truth, the defining feature of America, its very essence and its justification for existing. He was the first to fully grasp the meaning of what was later called the American Dream. Garfinkle, p 29 - 30

Lincoln emphasized the rights of African Americans to the same economic rights as all other Americans, setting these economic rights ahead of such issues as full citizenship or voting rights. The whole purpose of the United States was to clear the path for the individual to labor and get ahead. Garfinkle, p 44

Forming the Republican party.

By 1854, Whigs and antislavery former Democrats had combined to form the new Republican Party. What ultimately unified the Republican Party was an economic vision -- quite unified in important respects from that of the Republican Party later in the nineteenth century and that of the Republican Party today. ... Its watchword was the concept of free labor. ... It becomes especially clear against the background of its alternative -- which was the aristocratic economic life as it was known in the slave-owning South. The vision, especially in Lincoln's hands, was aimed primarily at improving the lot of ordinary citizens, of creating and sustaining a middle-class country. Garfinkle, p 43

Garfinkle really goes off his rocker when he describes "the slave-owning South, rather than the Republican North, which adhered to the doctrine of pure free market economics" (p 44). These sort of statements are very embarrassing to the author, because such errors diminish his overall credibility. Slavery is the precise opposite of a free market. It tears apart the fundamental principles which drive a free market. A free market cannot exist with slavery.

Industry, Darwinism and Reform

The Industrial Revolution changed the economic and political landscape.

Whereas the early American Republic had been characterized by a continuing labor shortage that kept wages relatively high, the influx of millions of immigrants in the post-Civil War era created a labor surplus. The notion that the laborer had significant negotiating power was simply a convenient upper-class myth. Workers everywhere were being forced to compete and settle for below-subsistence wages. While on average the U.S. economy saw a gradual rise in living standards between the end of the Civil War and the beginning of World War I, nearly half the workforce survived on below-poverty wages. Garfinkle, p 54 - 55

Even before the Civil War, the old system of independent artisans and home-based manufacturing was in decline; production was increasingly shifting to large mills and factories, driven by water and steam power. There, scores and sometimes hundreds of workers labored long hours in harsh conditions, churning out a growing flood of textiles, shoes, and other consumer and durable goods. A major source of labor for the growing industries was the swelling millions of immigrants -- some 13.5 million between 1865 and 1900 -- who poured into tenement neighborhoods in New York and other cities of the North. Garfinkle, p 48

Economic life also began to be organized in larger and larger units. Between 1850 and 1880, the corporation became the standard business entity. And many corporations were in turn absorbed into larger "trusts," as ambitious industrial magnates sought to achieve monopoly power over specific markets. John D. Rockefeller organized the Standard Oil Trust, which by 1879 controlled 90 percent of the nation's refining industry. By 1904, there were over three hundred such powerful industrial combinations holding dominant positions in a variety of industries. ... Enormous amounts of money were begin made, but it was increasingly concentrated in very few hands. By 1890, the richest 1 percent of the population was absorbing half of the entire national income and controlled more than half the nation's wealth. Garfinkle, p 47 - 48

As industrial life came to be organized on a larger scale, the size of the federal government also expanded. ... Many of these millions were finding their way, via government loans and other subsidies, into the hands of railroad magnates and other businessmen who secured special favors from the federal government. ... President Ulysses S. Grant's two terms from 1869 through 1876 were marred by an endless string of major scandals, in which executive branch officials and various members of Congress were exposed as colluding with industrialists to enrich themselves at taxpayer expense. ... Corruption at the federal level was mirrored in the big cities, where political machines seized power and, by trading jobs and favors for votes, maintained control of city hall and siphoned off thousands, sometimes millions, in graft, patronage, and kickbacks. ... In the end Republican and Democratic policies were often indistinguishable. Garfinkle, p 48 - 50

Mugwumps (aka liberals, radicals) were a new force that created an entirely new economic philosophy known as laissez-faire economics.

Sumner, Godkin and Spencer are cited as the most well-known thinkers of laissez-faire economics.

By and large, the backbone of the mugwump movement was a rentier class, perhaps the first representatives of such a class to exist in America, the college-educated, leisured young heirs of the old merchant, manufacturing, and banking families of hte Northeast (along with some sons of well-heeled clergymen and professors). Godkin at one point referred to this social group as the "unemployed rich." Garfinkle, p 51

At the core of their vision was an understandable revulsion from the corruption that had come to dominate Gilded Age politics. They felt that instead of the collection of scoundrels populating Grant's administration or the crude, uncultured machine bosses that ruled the cities, it was they and men like them who should rightly govern. Government should be run by the "best men," and in their own minds they fit the description. They were educated, cultured, wise, and incorruptible, and they had the public interest at heart. Besides, they were also in possession of what they considered the modern scientific understanding of the eternal laws of political economy, which in their view held the key to wise governance. Garfinkle, p 52

The notion that one's economic fortunes were connected with one's character -- one's hard work, one's thrift, one's persistence and dependability -- ran strong in the American bloodstream throughout the nineteenth century. The theme had its origins partly in the old Calvinist idea that good economic fortunes were a sign of God's favor, a visible symbol of belonging to the elect. It was also an outgrowth of individual experience, since many, like Lincoln, found that hard work did enable them to get ahead. But with the dawn of the Gilded Age, this belief was transmuted from Lincoln's message of hope into a verdict of condemnation. It became a rationale for blaming laborers for their desperation and condemning the working poor for their very poverty. Meanwhile, any government effort to intervene on workers' behalf was to be fiercely resisted as a violation of natural law. Proposals for legislation to mandate an eight-hour workday "threatened the very foundation of civilization." Even laws forbidding child labor were anathema. Godkin editorialized against a proposal for a New York state constitutional amendment forbidding employment in factories of children under ten. The government, wrote Godkin, might as well "tell us what to eat, drink, avoid, hope, fear, and believe." Garfinkle, p 56

These eternal laws were imported largely from Great Britain; Garfinkle contrasts this with Lincoln's "homegrown" principles.

The notion of free labor came to be understood in terms quite different from those embraced by Lincoln. It meant, essentially, that the laborer was on his own. Even as modern factories multiplied, destroying the old artisan system of manufacturing and driving millions of workers into increasingly desperate circumstances, with long hours, dangerous and unhealthy working conditions, and pay below subsistence levels, the self-styled reformers adamantly resisted government intervention. They opposed legislation on the eight-hour day and disparaged proposals for child labor laws. They wrote diatribes against unions and labor leaders. Garfinkle, p 52 - 53

The mugwumps looked askance both at those who stood above them and those who stood below them on the economic ladder. ... On the one hand, they despised the rapacious Robber Barons (it was Godkin who coined term in 1867 to describe the crude, allegedly self-made railroad magnates who absorbed millions in government loans and then exertd monopoly-like control over the communities that grew up along their rail lines). On the other hand, they disparaged the unwashed masses of workers -- the "ignorant proletariat" -- who threatened domestic tranquility with growing labor agitation. These they regarded as the "dangerous classes." Garfinkle, p 53 - 54

Lincoln had argued that government should actively assist Americans in their quest for economic advancement. It should help to promote equality of opportunity, "clear the path ... for all." By contrast, the new reformers insisted that the government should have absolutely no role. Garfinkle, p 55

The mugwumps' laissez-faire economics (as it came to be most popularly called) laid the ground for Social Darwinism, which went further in that it celebrated the Robber Barons as the fittest, with their wealth being an expression of natural law.

Greater inequalities were considered good by the mugwumps, as this advanced the race forward.

The new view of society was governed by evolutionary laws became known as Social Darwinism. ... According to Spencer, human social, political, and economic life, like all organic life, was governed by a universal law of adaptation. Those creatures who successfully adapted to their external conditions survived; those creatures who fail to adapt perished. This process of adaptation produced human progress, an inevitable, entirely natural ascent toward the creation of the ideal man. ... Spencer called the engine of progress "the survival of the fittest," a phrase he coined in 1864, later incorporated by Darwin himself into subsequent editions of The Origin of Species. In Spencer's view, any interference in the natural human competition for survival -- particularly by government -- was utterly counterproductive. By exposing the whole society to maladaptation, such government intervention could potentially spell society's destruction. ... Those societies that most perfectly did not interfere with the individual's absolute rights to life, liberty, and property would survive and progress; those societies that interfered with these rights would eventually die out. It followed that any attempt by the state to relieve the unemployed, to guarantee rights of employment, or even to provide charity for impoverished widows and orphans posed a threat to progress. Garfinkle, p 58 - 59

The laborer struggling with wages below subsistence, the sick and infirm, even impoverished widows and orphans, in short society's millions of "losers" -- all were unfit, and the most unfit among them deserved to die so that the race as a whole would prosper. The obvious cruelty of this new modern economic system, Spencer claimed, was actually kindness in disguise. Garfinkle, p 59

In one of the better passages in the book, Garfinkle contrasts Lincoln and the Social Darwinists,

Lincoln had regarded the equality posited by the Declaration of Independence as a core democratic value. Increasingly, the reformers and Social Darwinists saw inequality as a sign of a healthy democracy, albeit on that now exhibited sharp divisions between the rich and the wretched. ... Workers who looked to the government for help were actually violating one of the core principles of democracy. ... "Let it be understood," he [William Graham Sumner] wrote, "that we cannot go outside of this alternative: liberty, inequality, survival of the fittest; not-liberty, equality, survival of the unfittest. The former carries society forward and favors all its best members; the latter carries society downwards and favors all its worst members." Inequality had become the visible sign of democracy. Garfinkle, p 60

Laissez-faire economics and Social Darwinism swept through the country and profoundly shaped policy.

Industrial magnates and the business community enthusiastically took up the slogans of laissez-faire -- an irony, since at the same time big business lobbied the federal government increasingly energetically for what amounted to millions of dollars in preferential treatment. Federal land grants and loans for the railroads in the tens of millions, high tariffs to protect selected industries, and banking and financial regulations that enabled investors to line their pockets at the expense of the unwitting -- such were the policies of the federal government in the Gilded Age. Far from maintaining a scrupulous laissez-faire or hands-off attitude, the government had its thumb on the scale on behalf of its richest citizens. Still, despite the contradictions, even the hypocrisy, laissez-faire came to reign as a king of official ideology of the era. Garfinkle, p 61 - 62

In the course of a generation, American libertarians and Social Darwinists had in effect rewritten the nation's social contract, reinterpreted the country's founding documents as laissez-faire charters enshrining economic freedom as an absolute right of individuals and corporations -- empowering the fit to prosper while consigning the unfit to deserved suffering and presumably eventual extinction. In the process, Lincoln's American Dream had all but disappeared. In its place was a new vision. Garfinkle, p 64

Industrialization had brought profound changes to the American economy, and something new: "the extraordinary entrepreneur, the business owner, the industrial magnate as the engine of the new industrial prosperity" (p 14). All three branches of government were strongly influenced by laissez-faire ideology and acted accordingly. In a decision that struck down a limit on weekly work hours, Supreme Court Justice Oliver Wendell Holmes, Jr. famously dissented: "the Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics" (p 63).

Republicans were attacked at the party of big business, but even Democrats embraced laissez-faire economics. Democrat president Cleveland affirmed, "Though the people support the Government, the Government should not support the people." So much for government "for the people" (p 62)

Andrew Carnegie's 1889 article "The Gospel of Wealth" is said (by Garfinkle) to encapsulate the laissez-faire and Social Darwinist ideas of the era.

Toward the end of the nineteenth century, the industrial magnate Andrew Carnegie coined a phrase that captured the essence of the new vision: "the Gospel of Wealth." This new vision contemplated a society led by successful businessmen who were responsible for building a growing economy. Justice would be defined by the principle that those who contributed most to the economy deserved to be rewarded most and, in Carnegie's view, could be relied upon to use their wealth for the good of society. ... The new vision shifted the focus to the extraordinary entrepreneur, the business owner, the industrial magnate as the engine of the new industrial prosperity. Garfinkle, p 14 - 15

What was most noteworthy in Carnegie's new Gospel was his acceptance of the depressed condition of late nineteenth-century industrial workers (conditions that, despite occasional denials, he himself played no small role in creating) as not simply an ugly stage in history, but a permanent fact of nature. It was, observed Carnegie, simply the price society paid for enjoying a greater abundance of inexpensive consumer goods ... . Carnegie used Spencer's doctrine of the survival of the fittest as the justification for this new condition of society -- a condition similar in its "caste" system to the old European aristocracies and the antebellum South and profoundly different from the America that Lincoln had imagined he was fighting to preserve. Garfinkle, p 64 - 65

Garfinkle devotes a large block quote to Carnegie:

While the [natural] law may be sometimes hard for he individual, it is best for the race, because it insures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few; and the law of competition between these, as being not only beneficial, but essential to the future of the race. Having accepted these, it follows that there must be great scope for the exercise of special ability in the merchant and in the manufacturer who has to conduct affairs upon a great scale. That this talent for organization and management is rare among men is proved by the fact that it invariable secures enormous rewards for its possessor, no matter where or under what laws or conditions. Carnegie

The American Dream aspired to a middle-class society. The Gospel of Wealth was content with a society sharply divided between the rich and the poor. The American Dream saw government as a potentially constructive force. The Gospel of Wealth saw government as a problem. Garfinkle, p 16

In fact, laissez-faire economics is not a purely negative philosophy -- no to this! no to that! -- but in fact a view with very clearly defined affirmatives. Also, laissez-faire economics requires strong protections to be fully functional: litigation in the event of a dangerous product; prosecuting management for hazardous working conditions; etc.

The next big movement was a reaction to the horrors of the industrial revolution: the new trend was one of reform and worker protections.

Gold and tariffs became the symbolic focus of a growing class conflict. Democrats increasingly saw the gold standard and high tariffs as symbols of a government that had come to favor business, wealth, and privilege over the mass of citizens. Garfinkle, p 72 - 73

Increasingly, progressives had come to see tariff laws as, in effect, a regressive tax on consumers. Notoriously shaped by the efforts of lobbyists, the tariffs protected the trusts from foreign competition and kept prices high. Consumers footed the bill. Garfinkle, p 84

The first reforms were passed by states, but the federal government was also following the trend by the late 19th century. Henry Demarest Lloyd, Henry George and Edward Bellamy are cited as influential authors, especially Bellamy's Looking Backward from 2000-1887 and Lloyd's series for the Atlantic Monthly and North American Review, and his own book Wealth and Commonwealth. Fiction authors included Stephen Crane (Maggie: A Girl of the Streets) and William Dean Howells (Annie Kilburn and Traveler from Altruria). Lincoln Steffen's The Shame of the Cities, Ida Tarbell's History of the Standard Oil Company, Frank Norris' The Octopus and Upton Sinclair's The Jungle built up public support that would later energize Roosevelt's reforms.

These works challenged the widespread belief that inequality was inevitable and healthy, and were gobbled up by an increasingly literate public. The photographer Jacob Riis jolted America by revealing tenement conditions. Also, Protestant clerics from the north (especially George Washington Gladden and Walter Rauschenbusch) pushed a so-called Social Gospel that countered Social Darwinism with biblical themes of charity. Another force pushing for reform was college-educated women, including Jane Addams and Florence Kelley. The most famous reform politician of the day was Williams Jennings Bryan. However, while reforms were pushed through at the state level, they were not put in place by the federal government until later.

President McKinley (president 1897 - 1901)

Garfinkle gives a muddy summary of McKinley's time in office, making only point clear: McKinley was not progressive (or at least, not progressive enough for Garfinkle).

President Theodore Roosevelt (president 1901 - 1909)

Garfinkle next speaks about Roosevelt's Square Deal. This led to fighting between progressive and conservative Republicans. In fact, after stepping down after his second term, Roosevelt continued to maintain a progressive agenda. At one point, he even created a third party to detract votes from the conservative Republican. This aided the Democrat Woodrow Wilson's victory -- a triumph for the progressive agenda.

Roosevelt radically redefined the role and vastly expanded the prerogatives of the federal government. Taking advantage of the long-dormant provisions of the Sherman Antitrust Act, his administration pursued a series of highly visible prosecutions against the trusts, beginning with a case against the Northern Securities Company in 1902. Federal prosecutors took action against Standard Oil of New Jersey and the American Tobacco Company. In 1906 and 1908 -- following the publication of Sinclair's The Jungle, exposing in gruesome detail the abusive and unsanitary practices in Chicago's meatpacking industry -- Roosevelt signed the Pure Food and Drug Act and the Meat Inspection Act, the first real consume protection legislation. And he also sponsored a series of laws aimed at conservation of the natural environment. Garfinkle, p 78

Roosevelt's Progressivism still had about it a conservative tenor. His policies were motivated in large measure by a desire to preserve political stability. ... Roosevelt aimed his reforms primarily at the issues that most troubled the urban managerial and profesional classes -- the power and abuses of the trusts and the railroads (which often translated into higher consumer prices) and later the safety of consumer food and drugs. On the labor issues, he was less engaged, though his efforts to mediate the Pennsylvania mine strike in 1902, and the pressure he brought directly and indirectly on the mine owners, helped win important concessions for the miners. Garfinkle, p 78 - 79

President Woodrow Wilson (president 1909 - 1913)

Wilson had recovered the essence of the Lincolnian vision and had the words to convey it to his fellow citizens. Ironically, he torch had been passed from Lincoln to Wilson and the Democrats, who now boasted a comprehensive agenda to support their long-standing claim to the mantle of champion of the common people. Garfinkle, p 86

Garfinkle gives Wilson a glowing hagiography, beginning with Wilson's Congressional Government idea to reshape the American government away from a separated-powers system. Garfinkle goes on to summarize Wilson's career from Harvard to United States president -- and even throws in a platitude that Wilson had "insight that took him back to Lincoln" (p 82). Garfinkle contrasts Roosevelt's "patrician" (p 78) stance with Wilson's "bottom up" (p 82) approach, then explains that in many ways Wilson was Lincoln's philosophical heir.

According to Garfinkle, "The list of his domestic achievements was stunning and amounted to a comprehensive new set of government economic policies" (p 84).

According to Wilson, what had been lost in the Gilded Age -- and in the Republican Party -- was precisely Lincoln's profound sense that America was about the fate of the average person, about opportunities for the ordinary worker to get ahead. Wilson chided the Republicans for their elitism. "It is amazing," he said, "how quickly the political party which had Lincoln for its first leader, -- Lincoln, who not only denied, but in his own person so completely disproved the aristocratic theory, -- it is amazing how quickly that party, founded on faith in the people, forgot the precepts of Lincoln and fell under the delusion that the 'masses' needed the guardianship of 'men of affairs.'" Garfinkle, p 83

Wilson rejected outright the Gospel of Wealth notion that the industrial magnate was to be revered as the engine of the nation's prosperity: "For indeed, if you stop to think about it, nothing could be a greater departure from original Americanism, from faith in the ability of a confident, resourceful, and independent people, than the discouraging doctrine that somebody has got to provide prosperity for the rest of us." Garfinkle, p 83

Garfinkle extensively quotes Wilson's The New Freedom -- particularly "American industry is not free, as once it was free" and so on. Garfinkle cleverly compares Wilson's man "with only a little capital" with Lincoln's "prudent, penniless beginner" (p 83). "This was vintage Lincoln" (p 84).

Legislation during Wilson's first year as president essentially overturned the tariff regime of the nineteenth century, radically reducing rates on hundreds of items (while raising rates on certain luxury goods), and -- at the initiative of Representative Cordell Hull -- instituted a graduated income tax to provide a new revenue base for the government. In effect, the law shifted the source of federal revenues from a regressive consumption tax in the form of tariffs to a progressive tax on income. In 1916, the tax was significantly raised to cover war preparedness (after U.S. entry into World War I, income taxes were raised again), and for the first time a federal estate tax on large inheritances was established (the latter was a long-standing item on the Progressive agenda, advocated by President Roosevelt as early as 1906). This was both a new technical approach to and a new philosophy of taxation, an effort to gain lower prices through tariff reductions and simultaneously to shift the burden of taxation away from the middle class. Garfinkle, p 84 - 85

Garfinkle mentions "as we have seen" about a "raucous boom-and-bust economy" in the nineteenth century but, maybe it is just me, I do not remember Garfinkle describing a boom-and-bust economy in the nineteenth century, let alone its cause: "mismanagement of the money supply" (uggghhh, Garfinkle has passive sentences galore) (p 85). Garfinkle is tediously redundant throughout much of the book, but not here.

Wilson played a key role in crafting the Federal Reserve Act of 1913, which created a sophisticated system for regulatingbanks and controlling credit and the money supply. The Federal Trade Commission Act of 1914 gave the federal government decisive control over corporate business practices, empowering the commission to require reports from corporations, conduct investigations, and issue "stop and desist" orders to halt illegal practices. The Clayton Antitrust Act expanded prohibitions on monopoly practices and also provided new protections for labor, above all mandating that strikes not be considered acts "in restraint of trade" under the Sherman Antitrust provisions. In addition, laws were passed to require humane conditions for merchant marine sailors, to mandate an eight-hour day for workers on interstate railroads, and to ban from interstate commerce products produced by children under fourteen -- though the last was struck down by the Supreme Court. Garfinkle, p 85

World War I tarnished Wilson's legacy and undid progressive reform's hot pace. A return to Republican business policies ensued.

The war boom was followed by a post-war bust, leading to a recession and eventually a depression (p 86 - 87). Inflation rose out of control. The draft disrupted the life of every American.

Roaring Twenties and Great Depression

Second Industrial Revolution

The 1920s were a decade of dramatic economic growth and an unprecedented rise i the living standards of most Americans. ... In the nineteenth century, the engines of technological change had been the railroads and steam power. In the 1920s, they were the internal combustion engine and electricity. Within a very few years, the automobile reigned as the new symbol of American life. Between 1919 and 1929, cars on the American road more than tripled, from fewer than 8 million to nearly 27 million, almost one automobile for every household in the nation. ... By 1929, two-thirds of homes had electricity, and 40 percent had telephones. A proliferation of new "labor-saving devices" filled the household -- washing machines and vacuum cleaners, even some refrigerators, to say nothing of those modern marvels, the phonograph and the radio. A host of new products emerged. The modern retail chain stores took shape. Garfinkle, p 89

This was against the backdrop of a Republican resurgence and a corresponding revival of laissez-faire economics. The Gospel of Wealth had made a comeback. The era's economic policies were dominated by Say's Law (its namesake was Jean-Baptiste Say) which is summarized as "supply creates its own demand" (p 93). However, Garfinkle believes this is only a part of why the twenties were such a successful era.

"The business of America is business," affirmed President Calvin Coolidge. The Republican administrations of the 1920s saw their economic mission as one of enabling business to do its job. For government, this meant mainly getting out of the way. Lower taxes. Less regulation. Indeed, virtually no regulation. Business should be helped or otherwise left alone. As business prospered, so would America. From their probusiness perspective, the Republicans saw prosperity coming from the producer, from the top down. ... This production- and supply-oriented vision of economic life -- codified in Say's Law -- was the basis for the notion that wealth by nature "trickled down" from above (to use the phrase made famous by Treasury Secretary Andrew W. Mellon). Garfinkle, p 94

Despite a hands-off approach regarding businesses, the Republican administrations of the 1920s were fiercely activist against unions and companies were unabated as they fought unions (p 97). Union membership declined 30% during the 1920s.

The 1920s were also characterized by a surge in income inequality. Workers' wages declined while top earners' incomes increased.

Treasury Secretary Andrew Mellon

Appointed as secretary of the treasury by Harding, Mellon continued in the post through the subsequent administrations of President Calvin Coolidge and Herbert H. Hoover. As treasury secretary, Mellon's main initiative was a series of tax cuts designed to reduce the wartime income tax rates on the nation's highest-income citizens. He was, in fact, the nation's first supply-side economist, though the term had not yet been coined. Adherents of supply-side economics in more recent years, under Presidents Ronald Reagan and George W. Bush, would later cite Mellon as a progenitor and a hero of the supply-side agenda. Garfinkle, p 96

Demand-side prosperity

Garfinkle lays out what so far is his most compelling argument in the whole book.

To a degree that almost no one understood at the time, the prosperity of the 1920s was demand-driven, the product of the newly eager, big-spending, big-borrowing American consumer. ... The rapidly expanding demand within the U.S. economy had its source in a startling new phenomenon: widespread borrowing by American consumers. ... Installment buying put the new luxuries of the second industrial revolution within reach of people who, by earlier standards, could not afford them. Installment buying made the new luxuries suddenly "affordable." ... In combination with installment buying, advertising helped foster a culture of competitive acquisition, a true consumer economy. ... The impact of installment buying was to significantly expand consumer spending -- both directly, by putting more (borrowed) money in the hands of consumers, and indirectly, by creating a culture of acquisition in which everybody was expected to own an automobile, a washing machine, a vacuum cleaner, a phonograph, a radio, and so forth. As installment buying spread from automobiles to other consumer durables such as furniture, washing machines, vacuum cleaners, radios, phonographs, jewelry, and even clothes, demand for such items accelerated. By the end of the decade, three-quarters of automobiles and washing machines, some 90 percent of furniture, two-thirds of vacuum cleaners, three-fourths of radio sets, and 80 percent of phonographs were being purchased on installment-based credit.

Between 1919 and 1929, consumer debt nearly tripled, from $2.6 billion to $7.1 billion. ... A second sector critically dependent on consumer borrowing was residential construction. Growth in mortgage borrowing for family homes followed roughly the same pattern as installment borrowing, with mortgage debt nearly tripling from $10.1 billion in 1919 to $31.2 billion in 1929. Garfinkle, p 94, 90 - 92

Until the end of World War I, installment buying had been largely confined to lower-income consumers, and it carried a social stigma. GM's creation of GMAC changed all that. ... In 1919, General Motors Corporation established a financial arm, the General Motors Acceptance Corporation (GMAC), to enable customers to buy GM cars on installment. It was a fateful decision, with revolutionary implications not only for the automobile industry, but also for the American economy as a whole. ... Overnight, installment buying became a middle-class passion. Indeed, consumers at all levels -- except the most wealthy -- took advantage of installment buying to acquire cards and eventually the host of new consumer durables produced by America's "second industrial revolution." Garfinkle, p 90

GM had done something brilliant. The company had found a way to give consumers the money with which to purchase its automobiles -- and to charge consumers for the money they had been lent. The system obviously increased GM's profit per sale: not only did the company pocket the margin for the actual sales transaction; it also collected handsome interest on the financing. Most important, GM had found a way to create the demand for its product. GM'a strategy set a new tone for American business. ... Twentieth-century American business was no longer waiting passively for the customer to appear in the doorway. It was going out and roping customers in. The strategy of American business shifted from one of merely selling products to one of actively nurturing, shaping, and, where possible, creating consumer demand on a mass scale. Garfinkle, p 91

The 1920s saw the birth of advertising in its modern form. It hallmark was often the direct use of emotion to foster demand for products and services. "They Laughed When I Sat Down at the Piano -- But When I Began to Play!" So read the headline of one of the era's most famous and successful ads -- for a correspondence course purporting to teach customers how to play the piano. "I still believe that one can learn to play the piano by mail and that mud will give you a perfect complexion," Zelda Fitzgerald, the novelist F. Scott Fitzgerald's wife, observed wryly after the boom was over. Garfinkle, p 91


The principle is basic to finance: investments that yield high returns usually carry higher risk; lower-risk investments generally yield lower returns. The Republicans' laissez-faire approach was a potentially high-return strategy, but it also carried terribly high risks that at the time were not at all understood. A more regulated economy -- one in which the government played an active oversight role -- might produce somewhat lower levels of economic growth; but it also might offer greater insurance against the kind of catastrophe in which the Roaring Twenties culminated: the Great Depression. Garfinkle, p 99

In the absence of government oversight, businesses engaged in increasingly risky practices. The fact that administration officials continually telegraphed an "anything goes" message to the business community hardly helped. The problem was particularly acute in the booming financial sector. On Wall Street, stock manipulation and insider trading were rampant. Ordinary investors were repeatedly cheated as big investors secretly pooled or coordinated their market activity to push stock prices up or down at will, getting out of a stock before the mass of investors suffered the loss. Brokers, meanwhile, promoted their own especially dangerous form of the installment plan, encouraging investors to buy stocks "on margin." Individuals purchased stocks by paying as little as 10 to 25 percent of their value, essentially borrowing the rest from the stockbrokers. Such high "leveraging" was the essence of risk. An investor who bought a $100 stock by plopping down just $10 stood to double his money if the stock rose to $110. Fine and good. But if the stock fell to $50, he would not only lose his $10 but also be out an additional $40, which he now owed to his broker. Multiply that by 100 shares, and you were talking real money. Garfinkle, p 98

Garfinkle actually begins the previous quote with "Republicans failed to grasp that..." (p 98). Question: what about Democrats? Did they fully understand the consequences of de-regulation and risk? Or was this a mere stab by Garfinkle against a broad group, a political party. Personally I do not believe that it is wise to ever take a stab against a political party as a whole. Does he mean politicians? The everyday voter? The what? Who? When?

Meanwhile, the richest of the rich on Wall Street were failing to pay their fair share. A congressional investigation in 1932 revealed that twenty partners of the nation's leading and most prosperous investment bank, the House of Morgan, had paid not a penny in income tax. Garfinkle, p 98

Those who wish to turn the clock back to a time before the New Deal often forget that the same forces that produced the prosperity of the Roaring Twenties also brought the catastrophe of 1929. Economic policies that maximize business and consumer risk taking may for a time encourage high rates of growth; but they also incur a much greater chance of economic disaster. The two go hand in hand. Garfinkle, p 118

Stock market crash

In 1929, the stock market crashed. This wiped out an enormous amount of wealth and catalyzed the Great Depression which ensued.

The Great Depression

Given that the top 20 percent of earners were taking in more than half of the nation's total yearly income, any change in the consumer spending behavior of this group would have a noticeable effect. Particularly because of the practice of buying stocks on margin, many of these individuals had gone from wealth to poverty nearly in a matter of days in October 1929. .... Middle-income consumers had been buying automobiles and other durables on installment. Loans seemed a good bet when the market was booming. The Stock Market Crash suddenly raised questions about the future health of the economy. Consumers became cautious, reluctant to take on new borrowing commitments until the smoke from the stock market disaster cleared. The impact of the new consumer caution was especially profound in two key sectors, automobile sales and new housing construction, both big-ticket items and both heavily dependent on consumer borrowing. From 1929 to 1930, the number of cars sold dropped by close to 40 percent; the value of new residential housing put in place fell by nearly half. These were catastrophic declines. They occurred precisely in sectors with an especially strong multiplier effect on the rest of the economy. Garfinkle, p 101 - 102

When the economy nosedived after the Great Stock Market Crash of 1929, the federal government literally did not know what to do. ... Unemployment rose to catastrophic levels, eventually as high as 25 percent. ... It is hard for Americans today to imagine unemployment at such levels, or what unemployment could be like in the absence of any federal unemployment insurance program. Millions of Americans were literally homeless and starving. Men rode the rails from town to town in vain search of employment. Hundreds of thousands of families, ejected from homes and apartments for which they could no longer pay mortgages or rent, lived in camps of tents and shanties that popped up in vacant lots of major cities -- popularly called Hoovervilles. Most Americans became convinced of three things: that the government under Hoover did not know what it was doing, that the fate meted out to ordinary workers and their families was patently unfair, and that unemployment and spreading poverty threatened the very basis of American democracy. Garfinkle, p 6 - 7

More than a thousand banks failed in 1930; from 1930 through 1932, the total would rise to over five thousand. In three years, nearly $3 billion in deposits were wiped out, the life savings of millions of Americans. Another nearly $3 billion would go up in smoke in 1933. Meanwhile, depositors rushed to withdraw their cash before banks went belly-up. Runs on banks became commonplace. From 1929 to 1932, the broader measure of the money supply (M2, which, roughly speaking, included currency in circulation as well as money in checking and savings accounts) plummeted by $10 billion, or 22 percent. Money available for both lending and spending was simply evaporating, as banks collapsed and consumers hoarded cash; demand was rapidly draining out of the economy. Garfinkle, p 105 - 106

Business had taken the risks; now ordinary Americans were paying the terrible price. Overnight, the 1920s land of milk and honey had turned into a biblical land of famine. Garfinkle, p 99 Americans had remained relatively unfazed by the growing income inequality of the 1920s. What they found intolerable after 1929 was the unequal distribution of the terrible consequences of economic risk. Garfinkle, p 113

Millions of tons of grains rotted in elevators as children went hungry. Warehouses remained stocked with goods that no one had the money to purchase. Thousands of factories simply shut down. Garfinkle, p 106

Great Depression policymaking

Garfinkle states that there were two ways to address the Great Depression: fiscal policy, and monetary policy. But as government interventionism, the laissez-faire orthodoxy prohibited both (p 102). Regarding fiscal policy (government spending), the government was too small anyhow; the economic decline could not have been ameliorated by government spending, because the government was so tiny and could not have spent enough money (p 103). This changed in World War II, when federal outlays boomed from $3.3 billion in 1930 (4% of GNP) to $35.1 billion in 1942 (22% of GNP).

Regarding monetary policy (issuing money, lowering interest rates), the government was impotent (p 104). Currency was on the gold standard, a cornerstone of the Gospel of Wealth. There was little the government could do with the money supply. However, the government was required only to keep $40 of gold for every $100 in circulation. A run on gold could ensue if interest rates were lowered, to push people to withdraw their savings and spend money. So the government was forced to keep interest rates high, so people preferred collecting interest than cashing in their gold.

Garfinkle mentions weak efforts by Hoover to increase federal spending, but they were overshadowed by his strong support for a sound budget and limited federal outlay.

New Deal

Franklin Delano Roosevelt (president 1933 - 1945)

While sharing some of the orthodox beliefs of the time -- in particular, favoring balanced budgets and sound money -- Roosevelt departed from the orthodoxy in one critical respect: he believed strongly in the possibility of constructive government action. Roosevelt was a progressive, an heir to the progressive tradition on two different sides: he had served in Woodrow Wilson's administration (as assistant secretary of the navy), and he had married Theodore Roosevelt's niece, the formidable Eleanor. Roosevelt knew from watching Wilson, and for that matter Teddy, that government could be an active instrument of change ... . Garfinkle, p 107 - 108

The psychological impact of Roosevelt's leadership is not to be underestimated. By 1932, depression was not merely an economic phenomenon; it was an apt description of the country's state of mind. Roosevelt's easy optimism, self-confidence, and bold experimental spirit instilled hope, and hope was a vital ingredient of recovery. The famous line fro FDR's first inaugural -- "The only thing we have to fear is fear itself" -- was not just a masterful piece of rhetoric. It was also an economic analysis. ... The country had absorbed the full brunt of risk inherent in a modern economy. But for modern economic life to move forward, Americans had to be persuaded to begin taking risks once again: the risk of spending, the risk of investing, the risk of borrowing, and for that matter the risk of putting one's money in a bank. Garfinkle, p 112 - 113

At the Democratic National Convention, Roosevelt pledged "a new deal for the American people." "New Deal" became the slogan of his administration and the synonym for a revolution in federal government policy. Garfinkle, p 108 ... Together, these elements -- regulation, social insurance, federal underwriting of home ownership, and protection of workers and their right to organize -- would eventually help bring forth a fundamentally new kind of industrial economy in the post-World War II era, one in which ordinary industrial workers could aspire to and attain a middle-class standard of living and in which they enjoyed decent wages, relative job security, savings protected from financial mismanagement and malfeasance, the benefits of home ownership, and a measure of security in retirement. It helped put the American Dream within reach once again of the prudent laborer who started from the low rungs of the economic ladder. Garfinkle, p 116 - 117

The source of the economy's weakness lay in the collapse of demand, and especially consumer demand. The Roosevelt administration never developed anything approaching systematic fiscal or monetary policies to address this core macroeconomic issue. One reason was lack of knowledge about how the economy worked: the conceptual tools for positive macroeconomic policies had not yet been developed. Only in 1936 would John Maynard Keynes publish his General Theory, and it would take the economics profession and policymakers a few years to absorb the lessons of Keynes's new understanding. Garfinkle, p 109

New Deal monetary policy

[Regarding monetary policy,] Roosevelt's abandoning of the gold standard in 1933 may have been the most important single policy measure setting the American economy on a path to recover -- though there is little evidence that the president fully understood this. ... The new law freed the Federal Reserve Banks to pursue an easier money policy, pointing a way out of the killing credit crunch that was choking the economy nearly to death. ... The New York Federal Reserve Bank ... lowered its discount rate ... to 1.25 percent by February of the following year. Garfinkle, p 110

New Deal fiscal policy

As for fiscal policy, there is no evidence that Roosevelt made conscious use of deficits to increase overall demand, or that he was in any measure influenced by Keynes's new macroeconomic ideas. The federal government did run substantial deficits ... but the dollar increase in federal deficit spending [from 1932 to 1936] only amounted to about 1 percent of GNP over four years, a figure probbaly insufficient to affect the economy significantly. Garfinkle, p 111 In addition, Roosevelt, still probably believing in balanced budgets, pursued a series of un-Keynesian tax increases in 1935, 1936, and 1937 that doubled federal revenues as a share of GDP, from 3 to 6 percent. Garfinkle, p 111 - 112 In addition, whatever minor stimulant effect the increased federal spending might have had was largely canceled out by tax hikes at the state level. As the states battled to eliminate their budget deficits, they increased annual revenue collection between 1932 and 1936. ... Much of what came in one door went out the other. Garfinkle, p 111

This is not to discount the importance of the many direct relief programs put in place by the Roosevelt administration -- the Civilian Conservation Corps, the Civil Works Administration, the Public Works Administration, and later the Work Projects Administration, and so on. One critical effect of these federal investment and public works programs was to lower unemployment. It is a little-known fact that later statistics developed by the scholar Stanley Lebergott and the Bureau of Labor Statistics -- and usually treated as the official estimates for unemployment during the era -- counted the millions employed in federal public works projects as part of the unemployed (they were thought to be in temporary employment). ... Real unemployment was actually 4 to 7 percent [2 to 3.5 million workers] lower than the numbers the bureau has provided. Garfinkle, p 114

New Deal regulation and insurance

The most enduring programs of the New Deal were designed to wring extreme risk out of the economy and to ensure that whatever risk remained was distributed more equitably among all segments of the population. Its major tools were regulation and insurance. Roosevelt sought to use regulation to prevent businesses from taking undue risks (and engaging in corrupt practices) of the kind that had brought on the stock market crash. At the same time, he sought to put in place social insurance programs -- such as unemployment insurance and Social Security -- to protect ordinary Americans from the worst perils of modern economic life. These two measures, regulation and insurance, were mutually reinforcing. While regulation may have reined in business, the combination of regulation and insurance instilled consumer confidence, especially in banks and financial institutions ... . Garfinkle, p 113

Examples of these regulation-insurance programs are: in 1933, the Emergency Banking Act, granting increased presidential power over banking; also in 1933, the Glass-Steagal Banking Act, a tremendous reform that increased Federal Reserve power and created the Federal Deposits Insurance Corporation (which insured deposits up to $5,000 at that time); in 1935, the Baking Act to further strengthen the Federal Reserve and reform banking; in 1934, the Securities Exchange Act to regulate the scam-filled stock market and create the Securities and Exchange Commission; in 1933, the Home Owners Loan Corporation to refinance homes nearing foreclosure; in 1934, the Federal Housing Administration to provide federal insurance for mortgage lenders; and in 1935, the Social Security Act, which disbursed funds to states for small old-age pensions and unemployment insurance (creating the first true national safety net).

New Deal labor policy

One major consequence of the Depression was a rehabilitation of organized labor -- and the extension of unions from skilled crafts to the nation's major industries. ... The pain of unemployment had become so widely shared that public opinion, once hostile to unions, grew more sympathetic. Roosevelt preferred to see cooperative relations between labor and management and disliked strikes. ... Ultimately the New Deal was responsible for two key pieces of legislation that revolutionized the American workplace [the National Labor Relations Act and the Fair Labor Standards Act]. Garfinkle, p 116

Garfinkle describes the National Labor Relations Act (1935) and the Fair Labor Standards Act (1938). The National Labor Relations Act created a board with power to stop unfair labor practices, and protect workers' rights to organization, union elections and collective bargaining. Labor union membership increased from 3.7 million (1932) to 7.2 million (1940). The Fair Labor Standards Act established a forty-hour workweek; time and a half overtime; and a means to calculate minimum wages. It also banned hiring of minors under sixteen. Garfinkle, p 116

New Deal failures

The National Industrial Recovery Act (1933) was and is considered a failure. Moving the United States toward a centrally planned economy, it was struck down by the Supreme Court. Also, Roosevelt sought to shift the Supreme Court in his favor by appointing favorable judges in addition to the traditional nine (who were not so favorable to him); but his plan was ended by conservative Democrats in the Senate.

Interestingly, FDR's New Deal did not really solve the problem of the Depression, or it did so slowly and partially and more often by happenstance than by design. ... The fact that even by the end of the decade the economy had not yet returned to a state of prosperity was plain for all to see. Garfinkle, p 108

World War II

It was the World War II economy that finally ended the long Depression. Perhaps only war could have justified the truly massive expansion of government investment and government employment that was necessary to sufficiently expand aggregate demand. From 1941 to 1943, federal outlays as a percentage of GNP nearly quadrupled, from 11 percent to 41 percent, while the federal deficit expanded nearly sevenfold, from 4 percent to nearly 29 percent of GNP. As the ranks of the armed services rapidly swelled from prewar levels of well under a million to some nine million personnel in 1943, unemployment quickly fell -- from nearly 10 percent in 1940 to 3.1 percent in 1942 and less than 2 percent in 1943. Eventually there was an acute labor shortage, which was largely met by millions of women who newly entered the workforce. Garfinkle, p 118

Second Bill of Rights

Roosevelt was careful to continue his domestic policies during wartime (unlike Wilson, whose neglect resulted in the end of the Progressive Era). Roosevelt included the Second Bill of Rights in his 1944 State of the Union. The Second Bill of Rights enumerated a myriad of entitlements and was a diametric contradiction against laissez-faire economics.

Roosevelt had succeeded in overturning laissez-faire orthodoxy.

FDR succeeded in forging a new economic consensus that would survive mostly intact under both Democratic and Republic presidents for three and one-half decades. In 1945, congressional sponsors of a proposed Full Employment Act sought to enshrine in law the right to a job and legislate Keynesian economics, requiring the government to engage in "compensatory spending" in times of recession to ensure "full employment." Opponents of the act whittled down its provisions. The right to employment was excised, as was the requirement for compensatory spending. ... But it was a symbolic statement of the federal government's new role. Not only was government's right to intervene in the economy established; government's role in the economic was now understood to be a responsibility. Garfinkle, p 121 - 122

[From the Full Employment Act came] the compromise Employment Act of 1946 [which] established government's responsibility to promote the more ambiguously phrased "maximum employment." ... Like it or not, employment had now become the barometer by which presidents and their administrations were to be judged. As perhaps the leading measure of presidential performance, employment forged a direct link between the electoral fortunes of the president and his party, on the one hand, and the fate of the ordinary worker, on the other. It stood as a constant reminder that the economy existed to serve the American worker, and not (as had often been believed in previous eras) vice versa. Garfinkle, p 122

GI Bill

[The GI Bill (1944)] provided unemployment compensation, mortgage loan guarantees, and educational stipends for returning World War II veterans. Returning GIs received some $2.5 billion in unemployment payments in 1946 and 1947. From 1945 through 1950, the government provided veterans with over $10 billion for college and vocational training. ... The money for veterans came in a form largely shaped by the social vision Roosevelt had set forth in his 1944 State of the Union message. Veterans were given immediate cash to tide them over through unemployment. But they were also given assistance, specifically, with gaining a college education and purchasing a home. Americans were perhaps especially prepared to extend these "rights" of education and home ownership to individuals who had risked their lives in defense of the nation. But the added effect of the G.I. Bill was to use government aid to build an entire new generation of middle-class Americans. Garfinkle, p 120 - 121

Keynesian 1950s prosperity

Garfinkle asserts that Keynesianism was "the consensus position among both Republicans and Democrats" (p 137) as evidenced by the continuation of New Deal policies. Whether or not it was referred to as Keynesiasm, a big government was accepted as an important, good tool for moderating the economy. Garfinkle cites this Keynesianism as the driving force behind the prosperity and stability of the 1950s.

Demand-side economics, which became a kind of unofficial economic policy for the nation in the postwar years ... integrated technical economic insights developed by the British economist John Maynard Keynes with the moral and political imperatives that had grown out of the Great Depression. Garfinkle, p 6

Keynes's [sic] key innovation was to shift the focus of economists from production, or supply, as the engine of economic growth to the importance of consumption, or demand. The main lesson economists drew from Keynes was that the government could restore growth to an economy suffering from high unemployment by engaging in deficit spending to expand "aggregate demand." Expanded demand would get the economy moving again, provide customers for business, give investors a reason to invest, and bring down unemployment. Garfinkle, p 6

In the 1950s, thanks largely to the legacy of the New Deal, millions more Americans had access to home ownership, a college education, and decent-paying jobs with good working conditions. The forty-hour workweek was standard. Unions protected millions of workers from arbitrary actions by management. Child labor had been outlawed. Banking and investment were much safer activities. And, with or without conscious Keynesian policies, the large presence of government in the economy served as a kind of buffer against a total collapse of demand such as had been seen beginning in 1929. Garfinkle, p 124

The post-World War II federal budget had become, in short, a kind of Keynesian counterdepression machine. It automatically produced additional government spending whenever the economy began descending into a slump. The result was a pronounced moderation of downturns. The fiscal stimulus from increased government expenditures was an important hedge against an economic tailspin. Garfinkle, p 126

The new expanded government was providing a substantial cushion against economic free fall. As the economy slowed in postwar recessions, federal revenues naturally dropped, but federal expenditures continued at a high level. And now the government was large enough for these expenditures to matter. They substantially stimulated the economy by sustaining aggregate demand with increased federal spending largely because of the New Deal program of unemployment insurance. As unemployment went up, federal disbursements for unemployment payments went up automatically. This "automatic" support for aggregate demand kicked in essentially immediately when recessions occurred and employment declined. Garfinkle, p 125 - 126

President Eisenhower (president 1953 - 1961)

Eisenhower proclaimed himself as a fiscal conservative, but did not erode any of the New Deal programs. In fact, he expanded upon them with infrastructure, education and defense spending (which he justified via the Russian threat).

Garfinkle sets forth a powerful contrast between: the 1950s post-New Deal economy; and the 1920s laissez-faire pre-New Deal economy.

By the mid-1920s, federal outlays stood at only about 3 percent of GNP. By the mid-1950s, federal spending hovered around 17 to 19 percent of GNP, a legacy partly of cold war defense requirements, partly of the New Deal programs. The government of the 1950s, in other words, was roughly a six times larger presence in the economy than the government of the 1920s. Yet growth rates in the two decades were comparable. Garfinkle, p 123

Unemployment in the 1950s stood at about the same level as in the 1920s -- an average of 4.6 percent for 1921 through 1929 and of 4.4 percent for 1951 through 1959. In both decades, the economy had its ups and downs. But the difference was the unemployed of the 1950s could count on unemployment insurance and were not threatened with poverty and starvation, as were the unemployed of the earlier decade.Garfinkle, p 124

From 1920 to 1929, average hourly wages of manufacturing production workers declined in real terms, even while productivity and manufacturing profits increased. From 1950 to 1959, average hourly wages of workers in the same category grew by 21 percent in real terms. The 1950s enjoyed a level of prosperity similar to that of the 1920s, but prosperity was much more widely shared. In 1929, families with the top fifth of incomes took in over half of the national income; by 1959, the share of this group was 44 percent. Garfinkle, p 124

The contrast could be soon perhaps most dramatically in the way the economy now responded to recessions. ... The three Eisenhower recessions lasted an average of just over nine months each. Unemployment peaked in 1958, at 6.8 percent. By contrast, from 1869 to 1933, economic downturns had typically lasted an average of twenty-three months. From 1869, the dawn of the Gilded Age, through 1933, the U.S. economy suffered seventeen downturns. Of these, three dragged on for more than three years, five persisted for two years or longer, and only one ended in fewer than ten months. Moreover, the earlier slumps had typically brought catastrophic levels of unemployment, typically in the range of 12 to 25 percent. Garfinkle, p 124 - 125


Central proposition of Neo-Keynesianism

If deficit spending could lower unemployment in a recession, could it not also be used to reduce unemployment to an even lower level during a boom? That is, might not deficit spending hold the key to permanently reducing unemployment to levels below the 4 to 5 percent range that seemed to persist even when the U.S. economy was doing well? And would not such a reduction in unemployment lead to even stronger growth and greater national income? Garfinkle, p 128

Virtually all mainstream economists, Republic and Democrat, agreed by the mid-1950s that deficit spending was an effective antidote to recessions. What was new in the neo-Keynesian economics was the proposal to use deficit spending during an economic expansion to permanently lower unemployment and increase rates of growth. ... What harm could there be in a little inflation, if millions more Americans could be put to work? Garfinkle, p 129

This new theory was known as New Economics (p 136).

Phillips Curve

A turning point came in 1958, with the publication of an article by the British economist A. W. H. Phillips. The article focused on the historical relationship between unemployment and inflation. Phillips showed how in the United Kingdom these two numbers had historically tended to seesaw. When inflation was low, unemployment rose. When inflation increased, unemployment declined. He pictured the relationship between the unemployment and inflation rates graphically in what famously became known as the Phillips Curve. Garfinkle, p 128

President John F Kennedy (president 1961 - 1963)

Kennedy did not win in a landslide, nor was there a sense of crisis. But Kennedy nonetheless called his program the New Frontier. However, Kennedy did not push any large policies besides Medicare (which failed). He pursued "technical solutions" (p 130) to manage the modern economy. Kennedy initially opposed a tax cut, but then supported it as an emergency measure after the 1962 Black Monday stock market crash; yet his proposal failed under legislative and public opposition.

Kennedy still strongly supported the tax cut in 1963, with his neo-Keynsian Council of Economic advisers championing deficit spending (brought on by decreased federal revenues) to nearly eliminate unemployment.

Kennedy assassination (1963)

Kennedy had died a martyr, and amid the shock and grief following his assassination, he was well on his way to becoming a national saint. Now, it seemed, almost anything could be accomplished in Congress in John F. Kennedy's name. Garfinkle, p 133

President Lyndon B Johnson (president 1963 - 1963)

Johnson, a powerful former Senate majority leader and an old hand at ramming laws through Congress, now basking in Kennedy's sainted aura, pushed through the tax legislation [Kennedy's tax cut] in record time, a little over three months, signing the $11.5 billion tax cut bill at the end of February 1964. Yet by the time the tax cut was passed, Kennedy's original motivation for the measure had largely disappeared. Kennedy first proposed cutting taxes when the recovery seemed to falter in 1962. ... Yet throughout 1963, the economy enjoyed strong, sustained growth ... The continuing justification was the disappointing number in the unemployment reports. ... It was the new neo-Keynesian economics in action: using deficits to supercharge the economy and squeeze out better-than-historical rates of unemployment and growth. Garfinkle, p 133 - 134

Economic growth provided Johnson the popularity to push through his Great Society program.

The tax cut was a tremendous success. GNP grew and unemployment dropped. It was even thought that neo-Keynesianism had overcome recessions. This buoyed Johnson to electoral victory in 1964, after which he announced his Great Society program. The Great Society was a vast, enormous array of programs including Medicare. But these programs would cost many billions, and Johnson was escalating the Vietnam War. Federal spending increased 15% and the deficit more than doubled.

Inflation and stagflation

President Lyndon Johnson embarked simultaneously on massive federal spending to pay for a rash of Great Society antipoverty programs and equally massive spending to pay for the Vietnam War. The resulting huge expansion in the federal deficit (combined with the president's pressure on the Federal Reserve to keep money "easy") resulted in the emergence of high inflation. For roughly fifteen years, inflation remained a problem that would not go away. As inflation grew, the only alternative seemed to be the restrictive policies that would create high unemployment -- but preventing unemployment was the central goal of demand-side economics. By the 1970s, the economy began to experience "stagflation" -- high inflation together with high unemployment. For middle-class Americans, stagflation represented the worst economic crisis since the Great Depression. Prices became unpredictable. Raises in salaries and wages were eaten up by price increases. Savings eroded as the value of money declined. Mortgage interest rates went through the roof. Moreover, Americans experienced ever-higher taxes as inflation drove them into higher and higher income tax brackets, brackets originally intended for the very rich. Garfinkle, p 7 - 8

By the spring of 1966, the New York Times was reporting a division with the new economists' camp. [Walter] Heller, now out of office, was calling for a tax increase to curb inflation, seconded by [Paul] Samuelson and other major neo-Keynesian thinkers. By contrast, Gardner Ackley, Lyndon Johnson's chairman of the Council of Economic Advisers, was defending the Johnson administration line that no tax increase was needed. Garfinkle, p 136

"Politicians generally recognized the need for restrictive policies to reduce inflation" (p 143). This meant raising either taxes or interest rates. But Johnson feared that raising taxes would force him into a political tradeoff that would sacrifice his Great Society or the Vietnam War. Johnson favored raising interest rates, and though this stemmed inflation, it also hurt economic growth and raised unemployment. For Johnson and Nixon's administrations, the political cost of raising taxes enough to end inflation exceeded its political benefit, and inflation would balloon.

Inflation and unemployment both ran high in the 1970s; together, they were known as stagflation (Garfinkle, p 139). The Phillips Curve was dead. However, ironically, the economy maintained a seemingly healthy GDP growth rate averaging 3.1% from 1967 through 1980 (p 140). The New Deal had provided stability and cushioning, but stagflation robbed that (p 141). Americans no longer felt economically secure.

Inflation introduced enormous unpredictability and stress into economic life. Year to year, one never knew what inflation rate to expect. In a single year, it was possible that inflation could reduce the real value of one's savings by 10 percent. No matter how big a raise one received, it might be eaten up by higher prices. Mortgage rates were in the double digits. A mortgage could become dangerously burdensome if inflation rates were suddenly to decline. With unemployment falling and rising wildly, jobs were clearly less secure. Garfinkle, p 140

President Richard Nixon (president 1969 - 1974)

Nixon tried wage and price controls to restrict inflation (p 138). These begin in 1971 and temporarily worked somewhat, but when they were lifted in 1973 (in response to mounting unpopularity) then inflation skyrocketed even higher than before: from 5.6% annually before the controls, to 9% after their repeal.

President Gerald Ford (president 1974 - 1977)

Garfinkle does not mention Ford, except that inflation continued its upward rise under his presidency (and was pushed even higher by an OPEC boycott in retaliation for US support of Israel in 1973's Yom Kippur War (p 139).

President Jimmy Carter (president 1977 to 1981)

Garfinkle treats Carter as initially failing to address the problem. Carter had the Fed expand the money supply even more and thus causing inflation to crest to 13.3% in 1979. But eventually, Carter shifted monetary policy toward higher interest rates as Friedman's economic thinking gained traction, and the political benefit outweighed the enormous burden of stagflation.

Milton Friedman

Garfinkle provides a muddy, confusing description of economist Milton Friedman's theories (p 141 - 143). I can understand that Friedman championed the use of monetary policy, but beyond that Garfinkle confuses me. Was monetary policy recognized before Friedman? Garfinkle says that Friedman did not gain traction for a long time, but had earlier described Johnson's use of monetary policy. Was this due to Friedman, or was it already a commonly accepted remedy? In the latter case, what was so revolutionary about Friedman's theories? Garfinkle then jumps headfirst into the Reagan presidency and Friedman's economics seem to quickly disappear.

Supply-side economics

Origins of neoconservatism

Neoconservatives returned to antiregulation, laissez-faire doctrines with renewed emphasis on production or supply. Inflation, they argued, as too much money chasing after not enough goods. The problem, they contended, was not simply that government was artificially inflating demand through deficit spending. The problem was that government policy -- and especially tax policy -- was inhibiting producers, causing inflation by inhibiting supply. High taxes were inhibiting work, savings, and investment -- especially the last. High taxes were discouraging businesspeople from from engaging in business. Thus was born supply-side economics. Garfinkle, p 145

Supply-side economic policy, brought into effect by Ronald Reagan after his 1980 victory, was a direct response to the stagflation crisis. Political economy at the time was ripe for the rise of supply-side economics (p 144). The main problem was inflation. Tax cuts were strongly favored due to bracket creep, whereby inflation caused people to rise into income tax brackets not really intended for them. Also, businesspeople argued that the United States had become anti-business. The government was spending too much and regulating too much, causing inflation (increasing demand) while it stifled productivity (decreased supply); thus, the government distorted the natural incentives to invest and work.

Supply-side economics arose in direct reaction to the inflation crisis. The architects of supply-side economics -- most of them political commentators rather than trained economists -- created, in effect, a mirror image of demand-side theory. The real engine of growth in an economy was not demand, said the supply-siders, but rather supply. The problem was that the government was pumping too much demand into the economy via its deficits, while its high taxes were inhibiting supply, by killing off economic "incentives" to produce. Taxes were too high to encourage investors to invest. Fewer products and services were begin generated. Demand therefore had nowhere to go, which is why inflation was so high. Only the private sector could generate economic growth, and the private sector needed to be set free to do its job. Supply-siders saw tax cuts -- and especially tax cuts for the highest-income taxpayers -- as the key to generating new investment and production and, so they guessed, eliminating inflation. Garfinkle, p 8

Of course tax rates for the highest-income earners especially needed to be reduced. Most of their income went straight to the government. If it had been the case for lowest-income earners, that too would have been especially important. It is unfair for a literal majority of your income to be skimmed by the government.

Garfinkle asserts that neoconservatives viewed themselves as a revival of classical economics, but that they were different in a key respect: they also claimed that regulations and taxes were so onerous that their repeal would stimulate so much business activity, as to pay for the repeal (p 145 - 146). Indeed, rather than reviving pre-Keynesian economics, neoconservatism was a response to Keynes (p 147): supply-side economics was a path to economic growth, so much growth in fact that the increase in tax revenue would offset lower tax rates and the deficit would decrease.

Keynes posited that demand was the economic engine; thus, government spending would pay for itself by stimulating aggregate demand. Neoconservatives thought that government spending would only cause inflation, because productivity (supply) was the economic engine; thus, government spending, funded by extracting money from producers, was a wet blanket on economic growth.

The right kind of tax cut, structured to release these economic energies, would not even increase the deficit. The specific tax cut they had in mind was a cut in the marginal personal income tax rate for the highest-income taxpayers. They claimed that in response to this cut the investor class would put their newfound money to work in their own businesses by hiring new workers and buying new equipment. Such a tax cut, argued supply-siders, would not only reduce the gap between demand and supply but would generate enough new growth to boost government revenues equal to the cut in taxes. The tax cut would pay for itself. Garfinkle, p 147 - 148

Political policy or economic policy

Garfinkle asserts that, led by Irving Kristol, supply-side economics solved a political problem but was not a true economic solution. Indeed, Garfinkle iterates that supply-side economics' key tenets were not even accepted by mainstream economists, but merely served a political purpose: the tax cut would not solve the stagflation crisis; and the tax cut would not pay for itself.

The supply-side doctrine was, at bottom, an effort to solve a political problem rather than an economic one. The political problem was this: how to craft a credible, politically saleable conservative Republic alternative to the Democrats' Keynesian economic policies. The problem Republican conservatives faced was that the readily available Friedman monetarist prescriptions for curing the inflation problem were tight money and fiscal austerity, often referred to tat the time as "castor oil economics." ... Fiscal responsibility. Belt tightening. It did not sell very well. ... The conservative message was too dour -- all castor oil and no fun. ... Garfinkle, p 148 - 149

The first task was to give the Republicans an upbeat, optimistic, saleable platform that was probusiness and populist at the same time. The supply-side tax cut provided that. The second task was to get the Republicans out of the business of attacking the New Deal. The key was to draw a sharp line between the New Deal programs, which were popular, and the Great Society programs, which by and large were not. It was fine to attack Great Society programs [except Medicare, which had New Deal levels of popularity], but key New Deal programs, especially Social Security, should be treated as sacrosanct. Garfinkle, p 149 - 150

Garfinkle's hostility toward supply-side economics is perhaps political, not economic; and how is this a disparaging argument? Garfinkle had previously lauded the inextricable moral, political and economic value of his favorite policies.

President Ronald Reagan (president 1981 - 1989)

Reagan was the "standard-bearer" of neoconservatism (p 150). Also, he was also in touch with Friedman and recognized the need for harsh "castor oil" monetary policy (p 152). Yet despite bold rhetoric, he had little change on the shape of the economy: in 1980, federal outlays were 22.3% of GDP; and when he left office, they stood at 21.2% percent (Garfinkle says 22.1%, perhaps choosing an earlier year to heighten dramatic effect) (p 153). Instead, Reagan greatly diminished the New Deal mindset: he replaced the notion of a government steward with a free market individual (p 153).

His radical proposals for cutting the federal government and his seemingly hostile remarks about Social Security had helped cost him the nomination in his presidential run against Ford in 1976. He grasped instinctively the need to reshape his message. He hated taxes. And he snapped up the proposal for the supply-side tax cut. Indeed, the proposal was almost tailor-made for him. He wished to cut the size of government, and a tax cut would be an effective first step. He also knew that taxes had become a cutting-edge populist issue. ... Finally, an inveterate optimist, Reagan was just Pollyannaish enough to accept the supply-siders' claim (shown in a graph apparently sketched for him on a restaurant napkin by Laffer) that the tax cut would pay for itself. Garfinkle, p 151 - 152

Disinflation: tax vs monetary policy

In his economic message to Congress in February 1981, Reagan declared his opposition to the Keynesian approach to fiscal policy: "The taxing power of Government must be used to provide revenues for legitimate Government purposes. It must not be used to regulate the economy or bring about social change." He also announced his support for a restrictive monetary policy, along the lines recommended by Friedman, calling for a "national monetary policy that does not allow money growth to increase faster than the growth of goods and services." Garfinkle, p 154

From here, Garfinkle makes one of the central arguments in The American Dream vs The Gospel of Wealth: it was Reagan's restrictive monetary policy that caused reduced inflation; it was not Reagan's tax policy (p 154). Garfinkle contrasts with Reagan's claim to the opposite. Garfinkle supports his argument by criticizing the tepid economy of Reagan's first years, and attributes 1984 growth to inflation having finally been squeezed out by restrictive monetary policy.

Reagan's supply-side tax cuts and the shift to a laissez-faire regulatory philosophy in the end had little to do with the economic recovery of the 1980s. The key to a return to economic health lay almost entirely in defeating inflation, and this was a matter not of taxes or spending, but of monetary policy, controlled not by the president but by the chairman of the Federal Reserve. Credit for the recovery of the eighties lies mostly in the willingness of Chairman Volcker to put the brakes on the money supply. Previous presidents, including Johnson and Nixon, had pressured the Fed to keep money loose, even at the expense of long-term economic stability. Reagan left the Fed chairman a free hand. Garfinkle, p 156 - 157

Cuts in taxes for the highest-income earners [did not] bring the promised investment boom. In the seven years following the 1981 tax cut (1982-88), growth in new business investment averaged a weak 3.1 percent. Compare that to the 10.1 percent average growth in new business investment in the seven years following the Clinton administration's 1993 tax increase (1994-2000). To be sure, the economy showed healthy growth during the later Reagan years. But economists generally agree that the recovery was primarily a result of gaining control over inflation. This had nothing to do with tax cuts (indeed, the tax cuts aggravated the situation by contributing to large deficits). Rather, the recovery was mostly the result of a decisive shift toward a more disciplined monetary policy by the Federal Reserve. Garfinkle, p 9 - 10

Tax cuts and the deficit

The tax cuts had obviously not "paid for themselves" (almost no mainstream economist expected they would). The Reagan administration's taxing and spending policies produced the largest peacetime federal deficits in American history. Garfinkle, p 9

Reagan had initially promised tax cuts to be followed by major cuts in federal government spending. Predictably, however, the inevitably unpopular spending cuts had proved difficult to follow through on. Garfinkle, p 155

Cutting the size of government has been a major supply-side goal since the time of President Reagan. Supply-side tax cuts were intended to force government spending cuts. Reagan's budget director David Stockman described the strategy as one of "starving the beast." Garfinkle, p 185

Political success: Ordinary worker → exceptional entrepeneur

According to Garfinkle, supply-side economics and Ronald Reagan were a political success but not much of an economic success. Attitudes shifted regarding which subset of the population was the United States' economic engine. Garfinkle especially cites Harvard economist Martin Feldstein and the deadweight effect of taxation: the theory that "taxes imposed greater costs on the economy than the benefits received from the revenues collected" (p 157). Investment was what drove an economy (p 157). This focused on "an inverse relationship between taxation and investment: that is, the less taxation you have, the more investment you get, and consequently the more growth" (p 157 - 158).

Perhaps the clearest indication of the fundamental shift in perspective was the gradual refocusing of attention from employment to overall economic growth (growth in GDP) as the main barometer of economic health and presidential performance. As long as there was growth, wealth would eventually also find its way into the hands of, well, the less productive. Critics disparaged the approach as "trickle-down economics," recalling the phrase of Andrew Mellon. Garfinkle, p 156

Clinton era

President William Clinton (president, 1993 - 2001)

Garfinkle paints a picture of a robust 1990s America, with some enormous inaccuracies, "As a new millennium dawned in 2000 ... the federal government was not only able to pay down trillions in accumulated debt; it had money left over to help cope with looming crises in Social Security and Medicare" (p 1 - 2). The government accumulated more debt except in one year, and it paid just 150 billion. Garfinkle is misleading at the very least, though Clinton did oversee the creation of a budget surplus. Garfinkle points to two factors that would eventually end this boom: the 2000 tech bust; and the 2001 onset of Bush policies.

The explosive growth following the Clinton administration's increase in the top marginal tax rate in 1993 might well have been understood as a refutation of the supply-side claim that low marginal tax rates hold the key to rapid economic growth. Garfinkle, p 159

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Bush era

President George Bush (president, 2001 - 2009)

Bush used supply-side economics to justify his policies, and also took advantage of the 2000 recession to invalidate his predecessor's arguments.

In 2003, Grover Norquist, probably the most important behind-the-scenes strategist of the antitax program, candidly stated the goal of the movement: to turn back the nation's clock to the period not just before the New Deal, but before the Progressive Era -- to the Gospel of Wealth policies dominant during the Gilded Age. Garfinkle, p 161

Note that President Bush and his economic team also agreed with the need for a consumer-based economic stimulus in his first term. Part of the announced rationale for the 2001 and 2003 tax cuts was to expand aggregate demand so as to help the economy recover from recession: and indeed tax rates were cut across the board to increase aggregate demand. At the same time, interest rates were cut substantially by the Federal Reserve to provide a monetary stimulus to the economy. The monetary policies of Alan Greenspan, chairman of the Fed, supported consumer demand through low mortgage rates, which enabled up to 80 percent of households to increase their "aggregate demand" by borrowing on the increased value of their homes. Indeed, this demand-side support was undoubtedly the major factor in moderating the recession of 2001-03. Garfinkle, p 176

Bush tax policy

The Bush administration cited the writings of the supply-side academics to provide what appeared to be an academically respectable justification for a major reorientation of the tax code, away from progressive taxes on income toward regressive taxes on consumption. And President Bush led the political battle to establish the supply-side argument as accepted economic wisdom. Repeatedly he justified his tax cuts with supply-side arguments ... . Garfinkle, p 159 ... Bush engineered a cut in marginal income tax rates as well as tax cuts on dividends and capital gains. Even the estate tax -- a centerpiece of Progressive Era legislation -- was repudiated as a "death tax." Garfinkle, p 160

The president repeatedly cited the entrepreneur as the true engine of economic growth -- the key to a vibrant economy. The goal, he argued, was to free this enterprising individual from the burdens of excessive taxes and government regulation. Indeed, the president seemed to imagine that America -- where the vast majority of citizens still labored for wages and salaries -- had transformed itself overnight into a nation of independent entrepreneurs and business owners. He spoke repeatedly of an "ownership society." But in truth the ownership society was one in which government policies increasingly favored wealthy business owners and investors over middle-class professionals and wage earners. Garfinkle, p 160 - 161

Bush monetary policy

Once again, as under Reagan, the return to prosperity was largely engineered by the Fed, which loosened money to the point where the short-term interest rate was actually, at one point, negative in real terms. Not only did this radical easing of money provide a powerful across-the-board stimulus to the economy, but the short drop in interest rates -- combined with the rapid run-up in housing prices -- helped spur an unprecedented onetime surge in home equity borrowing and cash-out refinancing that pumped several hundred billion dollars of new consumer spending into the economy each year. From 2001 to 2004, American homeowners extracted an estimated $1.6 trillion in cash from their homes (after subtracting various fees and charges for loans and refinancing), according to a Federal Reserve study. In 2004 alone, homeowners extracted a net of nearly $600 billion in cash from their homes -- a sum more than twice that (an estimated $285 billion) put in the hands of taxpayers as a result of the 2001-03 Bush tax cuts. As in the Reagan era, monetary effects -- including, but not limited to, the equity cash-out boom -- played a far greater role in the recovery than the tax reductions. Garfinkle, p 162

Bush budget deficits

"The surest way to bust this economy," candidate George W. Bush said in 2000, "is to increase the role and the size of the federal government." In 2001 Bush told reporters he intended his tax cuts to serve as a "fiscals straitjacket" for Congress to reduce the size of government and thereby increase economic growth. Garfinkle, p 185

Garfinkle asserts that Bush's agenda was to cut taxes -- "with most of the money going to those in the top 12 percent of the income scale" (p 2). But instead of generating increased surpluses and economic growth, deficits ensued and growth slowed.

After six years of their ambitious tax-cutting program, in other words, the central claim of President Bush and his advisers -- that tax cuts would create a fundamentally new economic environment that fostered historically high rates of investment, job creation, and growth -- had not panned out. At the same time, having added nearly $3.0 trillion to the national debt in the brief span of six years, the administration was still confronted with an array of urgent spending requirements -- billions for homeland security following the terrorist attacks of September 11, 2001, a protracted and costly military occupation of Iraq, substantial relief and reconstruction costs after Hurricanes Katrina and Rita, and burgeoning oil prices -- all destined to take their continuing toll on both the federal budget and the U.S. economy.

The crowning irony was that the sustained boom of the 1990s had been ushered in by a major tax increase during the Clinton administration while the Bush tax cuts produced nothing of the kind. Garfinkle, p 3

Objections to Bush policy

Where Bush and the demand-siders differed was on three counts: The demand-siders rejected the supply-side theory that supply created demand -- the notion that, "If you build it, they will come." The demand-siders objected to the substantial cuts in the top marginal rate because they believed these cuts would drain the Treasury of billions in needed revenue in order to give an unneeded windfall tax benefit to the richest taxpayers. The demand-siders objected to the permanence of the tax cuts, which were bound to result in continuing large federal deficits. The demand-siders who signed the 2001 statement believed it was possible to stimulate consumption and aggregate demand via a temporary tax cut for all Americans rather than a permanent structural change in the tax code favoring the wealthiest segment of society. Garfinkle, p 176 - 177

Supply-side vs demand-side

I have incorporated much of Garfinkle's comparison and contrast into a dedicated article on supply- vs demand-side economics (p 163 - 165). Garfinkle then proceeds to point out that leading supply-side economists really lack strong evidence for supply-side policies.

Garfinkle breaks supply-side tax policy into theoretical and factual claims: the theoretical claim that cutting taxes on the wealthiest will spur business investment; and the factual claim this business investment will in turn spur GDP growth.

Supply-side tax cuts vs GDP growth

Regarding whether cutting taxes for the wealthiest really does cause the economy to grow, Garfinkle goes after studies by Martin Feldstein, and Eric Engen and Jonathan Skinner; he claims that these are the leading supply-side economic studies (p 167).

The Engen and Skinner study was cited by Bush CEA member Harvey Rosen and also Wall Street Journal editorialist Glenn Hubbard (p 167).

A pair of studies by the leading supply-side theorist, Martin Feldstein, and Douglas Elmendorf found virtually no net growth benefit from the Reagan supply-side marginal rate cuts of 1981. Feldstein and Elmendorf noted, "The rapid expansion of a nominal GNP [during the Reagan-era expansion of the 1980s] can be explained by monetary policy without any reference to changes in fiscal and tax policy." In addition, Feldstein and Elmendorf explicitly ruled out that supply-side tax incentives were a factor in the recovery: "We also find no support for the proposition that the recovery reflected an increase in the supply of labor induced by the reduction in personal marginal tax rates." The verdict of leading supply-side economists on the first supply-side experiment, in other words, found no empirical evidence to support a direct relationship between marginal tax rate cuts and growth in employment or GDP. Garfinkle, p 166

The data presented by Engen and Skinner, in fact, reveals little, if any, factual support for the supply-side argument. Engen and Skinner attempted a straight-forward approach to the question, examining rates of growth in the six years following the Kennedy-Johnson tax cuts of 1964 (1964-69) and the seven years following the Reagan tax cuts of 1982 (1983-89). Both tax cuts involved across-the-board reductions in marginal income tax rates, including significant cuts in the top marginal rate. ... According to Engen and Skinner, "The time-series correlation between marginal tax rates and growth rates yields a decidedly mixed picture; some decades were correlated positively and others negatively." ... Engen's and Skinner's evidence for a growth effect from a cut in marginal tax rates is far more speculative, and the predicted growth effect much less robust, than one would imagine from the frequent citation of their study by supporters of the supply-side theory. Garfinkle, p 168

Supply-side tax cuts vs investment

Having eroded the supply-side factual claim that lowering wealthy people's tax rates leads to GDP growth, Garfinkle next goes after the theoretical claim that business owners will use the money they saved toward investment. Garfinkle states that the only empirical study to analyze this is by Robert Carroll, who studied tax return data (from the IRS) on people who filed Schedule C (sole proprietorship) forms in both 1985 and 1988. Carroll' study thus should determine whether the Reagan Tax Reform Act of 1986, which slashed top tax rates from 50% to 28%, did indeed spur business investment.

Rosen cited the Carroll et al. study (of which he was a coauthor) in arguing that lowering top marginal rates increases investment by entrepreneurs -- a major reason he presented for making the Bush tax cuts permanent. Hubbard cited the same study in his testimony before Congress as CEA chairman, urging Congress to approve the first Bush tax cuts. Garfinkle, p 169

Carroll and his colleagues analyzed the returns of a small sample of taxpayers who paid personal income taxes on their profits or losses rather than corporate taxes. ... Of some 19,255 tax returns examined, only 3,480 taxpayers filed Schedule Cs in both 1985 and 1988 and therefore fit the criteria of the study. Notably, of this small sample of 3,480 the vast majority (80 percent) failed to make an investment in at least one of the two years. Garfinkle, p 169 - 170

In 1988, after the substantial top marginal tax rate cut of 1986, the small percentage of taxpayers in the Carroll et al. sample who many investment in their businesses did not increase overall, but actually declined -- a critical fact on which the authors fail to comment. In addition, among high-income business owners (those who most directly benefited from the cut in the top marginal rate) the percentage who made investments in their businesses actually declined from 45 percent in 1985 to 40 percent in 1988. This hardly adds up to a robust case that cuts in the top marginal income tax rate increase entrepreneurial business investment. Garfinkle, p 170

The Carroll et al. data on hiring yielded broadly similar results. Between 1985 and 1988, the percentage of high-income business owners in their study who had any employees actually declined, from 43 percent in 1985 to 42 percent in 198. Garfinkle, p

Carroll et al. acknowledge that individual business owners account for a small fraction -- about 10 percent -- of total business investment in the U.S. economy. This figure suggests that even a substantial increase in investment by individual business owners would have comparatively little impact on overall levels of business investment in the economy. Garfinkle, p 171

According to Internal Revenue Service estimates for 2001, the vast majority of high-income taxpayers who benefited from the 2001-03 cuts in the top marginal rate (roughly 70 percent) owned no small business entity. Even if the data of the Carroll et al. study had supported the conclusions the authors draw about small business investments ... the benefit of this personal income tax cut goes mostly to taxpayers who do not own small businesses. Garfinkle, p 171

Garfinkle's whiteout analysis

The straightforward policy claim of supply-side theorists is that a low top marginal income tax rate leads to higher rates of investment, employment, and GDP growth. If this is indeed the case, then the historical record of U.S. economic performance should yield evidence of this pattern. Garfinkle, p 171 - 172

Garfinkle analyzes the 56 years spanning 1951 - 2006. He equally divides the years into three categories: highest, middle and lowest top marginal tax rates (18 years, 20 and 18) (p 172). Garfinkle also divides the years based on five parameters: real GPD growth; real personal consumption expenditures growth; real gross nonresidential fixed investment growth (business investment); employment growth; and the unemployment rate. "In any given year, exogenous conditions may have contributed to high or low performance on one or more of the major economic variables" (p 173). But some level of association will be expected amid the five variables. Garfinkle seeks to find a correlation between year with a given marginal tax rate, and performance in one of the five parameters.

The lowest top marginal tax rate has a cutoff of 41%. Sources are the US Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, US Department of Labor, Bureau of Labor Statistics, and crunched through Garfinkle's own calculations.

Parameter18 years with highest
top marginal tax rate
18 years with lowest
top marginal tax rate
highest growth (18 years)
2 years
middle growth (20 years)
11 years
lowest growth (18 years)
5 years
Personal cnsmptn expenditures
highest growth (18 years)
Personal cnsmptn expenditures
middle growth (18 years)
Personal cnsmptn expenditures
lowest growth (18 years)
Business investment
highest growth (18 years)
7 years
Business investment
middle growth (20 years)
6 years
Business investment
lowest growth (18 years)
5 years
highest growth (20 years)
2 years
middle growth (18 years)
9 years
lowest growth (18 years)
7 years
Unemployment rate
highest performance (18 years)
5 years
Unemployment rate
middle performance (20 years)
8 years
Unemployment rate
lowest performance (18 years)
5 years

Garfinkle conspicuously does not provide the data for the years with the highest top marginal tax rate. Instead of providing data for years with the highest and lowest top marginal tax rates, he only provides data for years with the lowest top marginal tax rate. He then goes on to supply data for years with the highest real growth in consumption; he expects to see strong performance in the other parameters too.

Well, duh! But the issue is not whether there is a numerical coincidence, it is to demonstrate that there is a correlation. Supply-siders do not argue that there was less consumption in the Depression or greater consumption in boom times. The supply-side argument is that that consumption did not drive the economic growth or collapse. There is higher gasoline consumption during holidays. Does gasoline consumption cause holidays?

Garfinkle does not even compare personal consumption expenditures with the tax rates. Note that personal consumption does not even appear in the table above! He did not provide that information. What is Garfinkle trying to hide? He next provides tables only comparing personal consumption to the other four parameters, irrespective of tax rates. It would be interesting to see that data in conjuction with tax rates, since tax rates are what I thought he was trying to argue.

While the fifty-six-year record shows little association between low top marginal income tax rates and high rates of business investment, the data do yield a strong association between high growth in consumption and high growth in business invsetment. Of the eighteen years in which real growth in personal consumption expenditures was at its highest level, twelve were also in the group of eighteen years with the highest real growth in business investment. Garfinkle, p 179

Duh. Supply-siders nor demand-siders never argued that. The argument was whether consumption drove investment, or investment drove consumption. This sort of whiteout analysis only shows you a little bit of the picture, and I was really eager to see what Garfinkle had found. Unfortunately much of the data is just left out, effectively whited out.

Garfinkle's comparison/contrast

To see how the two approaches worked out in specific periods, it is of additional value to examine more closely the impact of the three major tax reduction programs enacted during the period: the Kennedy-Johnson demand-side tax cuts of 1964-65, te Reagan supply-side tax cuts of 1982, 1987, and 1988, and the Bush supply-side tax cuts of 2001-03. Garfinkle, p 179

Garfinkle compares the three tax cut programs: nearly 60% of the Kennedy-Johnson tax cut went to the lower 85% of incomes (contemporary estimates by the U.S. Congress's Joint Committee on International Revenue Taxation); half of the 1982 tax cut went to the lower 82.5% of incomes, which was exacerbated in the 1987 and 1988 reductions (Congressional Budget Office); and just 42.5% of the combined Bush tax cuts went to the lower 87.9% of incomes (Tax Policy Center).

The Kennedy-Johnson tax cuts of 1964-65 (proposed by President Kennedy and enacted under President Johnson) were designed on demand-side premises. Supply-side economists have sometimes cited the Kennedy tax cut as a precedent for the supply-side program because it included a reduction of the top marginal income tax rate from 87 percent to 70 percent. While the Kennedy tax cut did include a modest reduction in the top marginal rate, the philosophy behind the Kennedy tax cut was clearly demand-side in nature. The Kennedy economic team, comprising leading Keynesian economists of the day, explicitly aimed to expand aggregate demand Garfinkle, p 180 - 181

The Reagan tax cuts implemented in 1982, 1987, and 1988 and the Bush tax cuts fully implemented in 2003 were largely focused on the supply-side objective of reducing the top marginal rate paid by top-bracket taxpayers. The Reagan and Bush tax cuts put more money n the hands of taxpayers with the highest incomes. The Bush tax cuts were targeted even more directly to the upper end of the income scale. Bush's cuts not only reduced the top marginal tax rate, but also substantially reduced the rates paid on dividends, capital gains, and estate taxes. Garfinkle, p 181

Garfinkle sets out to see whether there was a positive economic effect from major tax cut programs in the year they went effect or, if there were a lag effect, the following year:

Parameter (growth)19641965196619821983198719881988198920032004
GDP~6%~7%~7%~ -2%~4.5%~4%~4%~4.5%~3.5%~3.5%~4.5%
Business investment~13%~17.5%~13%blank~ -1.5%~ -4.5%~5%~6.5%~5.5%~3.5%~10.5%
Personal consumption~6%~6%~5.5%~1.5%~5.5%~3.5%~4%~4.5%~3%~3.5%~4%

The historical record of the performance of the American economy from 1951 through 2006 provides little to no support for the supply-side economists' claim that cuts in the top marginal income tax rate caused improved performance on the key economic parameters of GDP growth, employment growth, and investment growth. By contrast, substantial support exists for the demand-side view that high personal consumption expenditures (the largest component of aggregate demand) are associated with high growth in GDP, employment, and investment. Garfinkle, p 185

Nor do historical data from the American economy support the oft-repeated supply-side claim that the very size of government imposes a drag on economic growth. Supply-siders have argued that virtually every dollar the government takes in has a "dead weight" effect in reducing GDP growth. ... Yet the American economy has actually grown faster in the era of "larger government" than it did in the era of "smaller government." Garfinkle, p 185

The economy grew faster in the era of larger government? What about the aftermath of the Great Society? Or is that not held to the same it's-just-monetary-policy-not-fiscal-policy-that-helped standard? What about how long it took for the United States to emerge from the Great Depression, even with the alphabet soup?

There is little to no empirical support for the supply-side claim that a lower overall tax burden (taxes as a percentage of GDP or GNP) goes hand in hand with higher growth in GDP. An empirical study by William Gale and Samara Potter examined the federal tax burden, top income tax rate, federal spending as a percent of GDP, and average per capita GDP growth rates for long periods in the nineteenth and twentieth centuries. They found no consistent correlation between low taxes and per capita GDP growth. In particular, they note that the period 1870-1912, when there was no income tax, had the same average per capita GDP growth (2.2 percent) as the period 1947-99, when there were substantial income taxes. Garfinkle, p 186

Moreover, from 1890 to 1940, when federal outlays averaged just 5 percent of GNP, real GNP growth averaged 3.4 percent per year, while unemployment averaged 8.7 percent per year. From 1941 through 2004, when federal outlays averaged 20 percent of GNP, real GNP growth averaged 3.8 percent annually, while unemployment averaged just 5.4 percent a year. Not only has growth been somewhat greater in the larger government era; the economy has shown more stability in employment than in the years of smaller government. Garfinkle, p 186

For the government to be four times larger I would expect more than a 40% drop in unemployment and 40% increase in GDP growth. That seams quite modest for the government to have quadrupled.

Income inequality

The top 20 percent of households are taking in half the income of the entire nation. Salaries of chief executive officers are over five hundred times those of the ordinary production workers in their corporations. Investment bankers and business executives collect tens of millions of dollars in bonuses and severance and retirement packages, while American soldiers who risk their lives to ensure the safety of prosperous and poor alike can barely make ends meet. Garfinkle, p 190

Household income levelShare in 1967Share in 2003Percent change
Top 5%17.5%21.4%22%
Next 15%26.3%28.4%8%
Next 20%24.2%23.4%-5%
Lowest 60%32.0%26.8%-16%
US Census Bureau. Garfinkle, p 191


Neely, Mark E. Jr. 1982. The Abraham Lincoln Encyclopedia. New York: Da Capo Press, Inc. Via (retrieved March 2013)

Blodget, Henry. July 12, 2011. Business Insider. THE TRUTH ABOUT TAXES: Here's How High Today's Rates Really Are. (retrieved March 2013)