How America Lost Its Balance

Friends,

Forty years ago today, on March 22, 1984, I had lunch with John Kenneth Galbraith at the Faculty Club at Harvard. I remember the date because it marked the beginning of a beautiful friendship. No one has influenced my thinking more than Ken (as he preferred to be called).

Not just my thinking — also my sense of what a public life could be.

Ken ran the Office of Price Administration in World War II. John F. Kennedy appointed him ambassador to India. He was often consulted by national leaders, especially Democrats, and he gave advice freely (though it may have been ignored as often as it was taken).

He wrote fluidly, even on complex topics. He was the most widely read economist of the 20th century — writing 46 books that together sold more than 7 million copies — as well as one of America’s most engaged and celebrated public intellectuals. Many of his phrases — “the affluent society,” “conventional wisdom,” and “countervailing power” — became part of our language.

I read his books in high school and college, and they formed the basis of my understanding of how the world worked. I gulped down American Capitalism: The Concept of Countervailing Power, published in 1952; The Affluent Society (1958); and The New Industrial State (1968). His writing was urbane and witty, and his arguments richly provocative, especially to a young person curious about the system.

Ken didn’t regard economics as a form of applied mathematics. He understood it as embedded in politics, sociology, history, and moral philosophy. In this, he drew from an earlier tradition. In the 19th century, the study of economics was called “political economy.” In the 18th, thinkers like Adam Smith called themselves “moral philosophers.” The question they addressed was: What is a good society?

I had never considered aspiring to a career like Ken’s, but here I was on the Harvard faculty after years of public service. And now I was advising Democrats on what they should do.

I responded to Ronald Reagan’s brainless trickle-down economics with the idea that public investments in the American workforce — in their lifelong learning (education, job skills, continuous upgrading of skills), their health care, and in the infrastructure linking them together (all comprising a kind of bottom-up economics) — would be far more effective than trickle-down. And I urged that the United States adopt an explicit industrial policy for shifting to the technologies of the future.

Ken was eager to discuss all of this, and more. We began meeting regularly for lunch. He was then 76, a year younger than I am now, and with more energy and intellect than anyone half his age.

Larry Summers represented the other extreme on the Harvard economics faculty. Larry told me government couldn’t possibly ease the adjustment of the economy toward emerging industries — contrary to the argument I was espousing.

Ken understood my argument: that absent an explicit industrial policy, government would be at the mercy of the largest and most powerful interests — which would receive subsidies, loan guarantees, trade protection, pliant unions, and lax antitrust enforcement. In other words, without a clear industrial policy, we’d continue to have a hidden one, designed to preserve much of the status quo.

Ken and I had only two major differences. The first was his optimism about American capitalism. Always lurking within it, he argued, were corrective forces that would put back into balance whatever may temporarily have gone awry.

He conceded that large corporations were coming to dominate every industry, but he believed that over the long term, the system would achieve a balance between the private interests of those corporations and the public’s interest in the common good.

I was skeptical. It seemed to me that America had already entered into a vicious cycle in which the power of giant corporations, as well as Wall Street and wealthy individuals, was increasing. And their growing influence over the rules of the game was pushing ever more wealth and power to the top.

He countered that as the nation became wealthier, it had more capacity to achieve what he called a “social balance” between the production of private goods and the supply of public amenities. And when the Cold War ended — which both of us assumed would happen within a decade or so — America would have even more capacity for social balance as it shifted from military to civilian needs.

The Cold War ended more abruptly than either of us foresaw. The Berlin Wall fell in 1989, and on December 25, 1991, Soviet president Mikhail Gorbachev resigned, marking the end of the Union of Soviet Socialist Republics.

Although America entered into a brief debate over how to spend the “peace dividend,” George H.W. Bush and leaders of Congress from both parties decided it more prudent to keep most of our military intact, in the event that it might still be needed.

When Bill Clinton was elected, Ken and I expected him to lead the charge toward a better social balance. After all, during his campaign Clinton had promised major spending on education, job training, and social insurance that would help American workers adapt to the new economy — exactly the agenda I had been urging.

When Clinton asked me to run his economic transition team, Ken was delighted. When Clinton asked me to join his Cabinet, Ken was exuberant. “Now you’ll have a chance to put in place everything you’ve been advocating,” he told me over coffee in the dining room of his house, which was shaped in the form of an oval. “We shall have social balance! How wonderful!”

But Clinton’s Wall Street advisers, chiefly Bob Rubin (who came to the administration directly from being CEO of Goldman Sachs), were adamant that before Clinton could do anything else, he had to reduce the budget deficit. Which Clinton did over the next four years.

The bar was lifted again in 1995 when Newt Gingrich, then the Republican speaker of the House, along with several Democrats, threatened to seek a constitutional amendment to balance the budget. To forestall it, Clinton postponed his agenda once again, until the budget was, in fact, balanced.

A few years later, when the budget showed a surplus, Ken was certain the time had come. “Splendid! Clinton can now do what he promised for social balance!”

I wasn’t sure there was political will for it. By then I was out of the administration, and Bob Rubin and his protege at the Treasury Department, Larry Summers, were the loudest economic voices inside.

Ever optimistic, Ken prophesied that to win the 2000 election, Democrats would have to propose a bold social agenda.

Instead, the bar was lifted once again. Clinton and then Al Gore, running for president in 2000, promised — at the urging of Rubin and Summers — that it was first necessary to use the budget surpluses to “rescue” Social Security (even though the program could be made fully solvent forever if the cap was removed on incomes subject to Social Security taxes).

So much for social balance.

During the 2000 election, I met with Ken in his oval dining room. It was the first time I detected a slight gloom. “What happened to your Democrats?” he asked, emphasizing the “your” as if he no longer had any stake in the party. “The nation is richer than ever! Surely ….” His voice trailed off.

He was by then 92 years old — still formidable, still writing, still sending letters off to politicians telling them what they should do.

I explained that although America as a whole could easily afford a better social balance, most Americans could not afford to pay more taxes.

Which brings me to my second difference with Ken.

He was an imposing presence, lanky and angular at 6 feet 8 inches tall. I was 4 feet 11 inches (now even shorter). The gap didn’t much matter when we were dining at the Faculty Club or his home, but vertical conversations — say, walking along the streets of Cambridge, or talking in his backyard at his annual commencement party — were always challenging (and becoming more so as he became hard of hearing).

Our average height was 5 foot 9, but that was irrelevant. When the distribution of anything becomes widely disparate, talk of “averages” can mislead.

So it was with American incomes. Although the average American income was much higher by 2000 than it had been nearly a half-century before, when Ken wrote The Affluent Society, the typical American couldn’t afford to pay higher taxes because their own incomes had barely increased for decades, when adjusted for inflation. Most gains had gone to the top. America had the most unequal distribution of income among all advanced countries — and inequality was increasing further and faster than in any comparable nation.

Ken didn’t want to focus on inequality, lest we lose sight of the more crucial battle to improve the social balance. But I thought it impossible to achieve a better social balance without addressing inequality.

When he wrote The Affluent Society, Ken had assumed that inequality was declining and would continue to. The book appeared in the middle of a historic — some might say unique — shift: Between 1950 and 1978, families in the top fifth doubled their incomes, adjusted for inflation. Families in the bottom fifth did even better — their incomes rose by almost 140 percent.

As Ken wrote:

“The first reason inequality has faded as an issue is that it has not been showing the expected tendency to get worse. And thus the Marxian prediction, which earlier in this century seemed so amply confirmed by observation, no longer inspires the same depth of fear. It no longer seems likely that the ownership of the tangible assets of the republic and the disposal of its income will pass into a negligible number of hands despite the approving sentiment of those who would abandon the progressive income tax or widen its present loopholes.”

But starting in the late 1970s, the trend reversed itself. The median income, which had steadily risen during the three decades after the Second World War, stopped growing. Total national income became more concentrated in the hands of a few.

Wealth became even more concentrated than income. America had entered its second Gilded Age. The economic tide continued to rise, but it was now lifting only the yachts. The rowboats were barely staying afloat.

The rich were paying more in taxes, but they paid less as a percentage of their total wealth or even of their total incomes than at any time in the postwar era. Meanwhile, government had shifted its sources of revenue from relatively more progressive ones that demanded higher payments from the rich (taxes on income, property, estate, gifts, and capital gains) to more regressive ones that required that the working class and poor provide higher portions of their earnings (payroll taxes, sales taxes, and legalized gambling).

Working middle-class families were squeezed the hardest. They simply could not afford a better social balance. The nation as a whole could afford it, but only because the rich had grown breathlessly wealthier and they could well afford it.

Ken and I discussed the possibilities for a progressive wealth tax, which we thought Gore and the Democrats should push for. I feared they were so dependent on campaign funding from the wealthy (including large corporations and Wall Street) they would not.

Another reason for America’s miserliness, despite the extraordinary affluence of the wealthy, was the public’s loss of confidence in the capacity of government to act in the public’s best interest.

That prevailing cynicism was in stark contrast to the public attitude when The Affluent Society was published.As Ken wrote then, “In the last half century, the power and prestige of the US government have increased. If only by the process of division, this has diminished the prestige of the power accruing to private wealth.”

In The New Industrial State, Ken even envisioned government as part of an industrial “planning system,” sharing responsibility with large corporations for determining the direction of the economy. To make sure the public’s interest was fully considered, he urged that “the educational and scientific estate” take more responsibility for political leadership.

But Ken’s hope for such leadership had not borne much fruit. Over the years, the professoriate had become more specialized and technical. Economists — most of whose theories were by then expressed in mathematical formulae and grounded in “rational self-interest” — tended to overlook the values of community, mutual obligation, and compassion.

Rational self-interest might explain much that people do, but it offers only limited guidance for determining what society should try to accomplish.

In one of our last conversations, Ken and I concluded that a fundamental problem for modern America was a lack of social cohesion. Americans no longer faced the common perils of Depression, hot war or Cold War, which almost all citizens had experienced directly or indirectly in the early and middle years of the 20th century. These common perils created a palpable sense of mutual dependence and shared responsibility, which exacted sacrifices for the common good.

But in the emerging global economy, those who are more skilled, more talented, or simply wealthier were not nearly as dependent on the productivity of their compatriots. They were linked by modem and fax to the great financial or commercial centers of the world.

Social cohesion also depends on “it could happen to me” thinking. Support for social insurance, education, and infrastructure is premised on widely shared risks. But America’s wealthy no longer lived under a “veil of ignorance” (to use philosopher John Rawls’s famous thought experiment) about what might happen to them or their heirs: They knew they would be fine, regardless. They also knew that achieving any social balance for the rest of society would require big tax increases on them.

Ken still believed that the “corrective forces” within America would prevail. I remained doubtful. It seemed to me that to respond to public needs, an affluent society needed a robust civic culture. Otherwise, there’d be no moral community in which claims based on fairness, social justice, or even public welfare could be devised.

The last time I saw Ken, he was bedridden. His voice had become a high chirp, and he was nearly deaf. I had to yell in order for him to hear me.

But his mind was as sharp and subtle as ever. And his activism undeterred. When I entered his bedroom, he was writing a letter to George W. Bush, explaining why Bush’s idea for turning Social Security payments into personal investments on Wall Street — creating what Bush called the “ownership society” — would fail.

“Do you think Bush or even one of Bush’s underlings will be persuaded?” I said loudly so Ken could hear me.

“Not at all,” he said.

“Then why write the letter?” I asked, genuinely curious about why such an esteemed man would waste his time on a second-rate politician.

“It’s therapeutic for me!” he said, and then grinned.

Ken died on April 29, 2006, at the age of 97.

Two years later, Wall Street imploded, nearly taking the world economy with it.

Robert Reich was U.S. Secretary of Labor from 1993 to 1997. He was a longtime professor at University of California, Berkeley, and is the author of eighteen books, as well as chair of Common Cause, co-founder of The American Prospect, the Economic Policy Institute, and Inequality Media. This piece originally appeared in his Substack column, under the title "My Mentor and Friend, Ken Galbraith." Read more of Reich here.