What Went Wrong With Liberalism? (part 2)

Yesterday I wrote about part of Eric Alterman's review of “What Went Wrong with Liberalism?” by Douglas S. Massey. I am continuing that today.

There is a section on the effects of the Viet Nam war. I am going to skip that part for now. I disagree with the chronology and the cause and effect given so I will save that for a rebuttal. For now I am expanding on the parts that I agree with.

Which brings us to this:

Economically, Johnson’s attempt to support guns and butter without raising taxes laid the foundation for inflationary spirals and stagflation in the 1970s. The 1973 oil boycott would have dealt a serious blow to the U.S. economy under any circumstances, but the fiscal excess of the Great Society combined with the Vietnam War turned what in Europe and Japan were severe but manageable recessions to a disastrous brew of inflation, unemployment, and long-term recession in the United States.

A particular challenge to liberals stemmed from the fact that high rates of inflation in the 1970s produced rising nominal wages but declining spending power in real terms, causing a serious problem of “bracket creep” in the federal tax system. In the course of the 1970s, more and more Americans were pushed by inflation into income tax brackets that were originally intended to apply only to the very affluent. Middle income Americans were working harder for less money in real terms, but were being taxed at higher and higher rates.

High inflation also brought about an escalation in the value of real assets, particularly housing. Families with modest incomes suddenly found themselves owning homes—and paying real estate taxes—far above what they could really afford. Rather than sympathizing with the plight of middle class families struggling to pay taxes in an era of stagflation, however, liberals viewed rising tax revenues as a source of easy money. Bracket creep and asset inflation offered liberal legislators a seemingly costless way to raise taxes steadily without ever voting to do so.

But there were costs. The unwillingness of Democratic legislators to adjust tax brackets or accommodate the inflation of housing prices set the stage for a middle class tax revolt. As is often the case, the revolution began in California. By a large majority, voters in that state passed Proposition 13 to cap property taxes permanently at unrealistically low levels. Riding the wave of middle class anger and resentment, won a landslide victory over the hapless Jimmy Carter in 1980, and one of his first acts was to cut tax rates sharply and to reduce their progressivity. When combined with a massive increase in defense spending, these actions shut off the flow of money that had financed the expansion of liberalism. Following a path that led from intervention in Vietnam to hyperinflation to bracket creep, liberal Democrats, through a remarkable combination of arrogance and self-righteousness, dug their own graves in the 1970s and created the political conditions whereby conservatives could achieve their cherished goal of “de-funding” the New Deal.

It was economics that really brought Reagan into office. The economy was poor under Nixon/Ford but it was intollerable under Carter. Inflation was in the double digits (by contrast, it has been running at less than 2% for years - 1/10 the rate of the 1970s). This was bad. Very few people received cost of living increases high enough to meet the inflation rate. Banks paid at best 5% which meant that the value of your savings were dropping. Many people tried investing in real estate, gold, and collectables as a hedge against inflation.

The progressive tax rate made things much worse. The top income tax rate was 70% with numerous steps inbetween. Almost any cost of living increase pushed you into a higher tax bracket which meant a larger percentage of your income went to the government. If the annual inflation rate was 10%, you had to increase your income by 12% just to stay even.

No one could keep up and nearly everyone lost ground in terms of real spending power. It only made matters worse that the government was part of the problem.

The late 1970s were an economic disaster. The only thing that saved many families was the number of women getting jobs. Prior to the 1970s, a family could easily exist with a single wage earner. By 1980, most women worked. In this case, an economic shift coincided with a social shift so it was not commented on much. Regardless, due to the inflation of the 1970s, a typical family with two wage-earners had less buying power than a typical family with one wage-earner in the 1960s.

None of this was a secret. Everyone knew that they were falling behind, year by year. At the same time, state and local politicians raised taxes citing inflationary pressures.

When Reagan proposed tax cuts, it was to a population that felt over-taxed. Although it passed a Democrat-controlled House of Representatives, all of the opposition came from Democrats. Reagan also put through spending cuts to help pay for the tax cuts and this was also opposed by Democrats.

Reagan used the debate to label his opponents "tax and spend Democrats".

Interestingly, Democrats still have not figured this part out. Here is part of one person's reply:

... Rather than offer pros and cons on his arguments I feel compelled to comment on his statement concerning taxes and its affect on the support liberalism receives from the working class. Cutting to the chase: Americans are not overtaxed and I am sick of hearing this phrase repeated ad nauseum. In fact, the belief in over taxation is a red herring begun by anti-tax groups to drum up support for their beliefs. The main problem with taxation in America is that Americans see little direct benefit from their tax dollars. Considering how much we pay combining all forms of taxation, I think it fair to say Americans come nowhere close to getting their money's worth.

He totally missed that Massey was talking about tax policy 30 years ago and goes on to talk about today's taxes. HE also seems totally ignorant of how poorly "old Europe" is doing. Like many liberals, he only looks at the services that the government is currently providing, not things like the unemployment rate (several times ours) or the rate of economic growth (a fraction of ours). It's that sort of thinking that holds the Democrats back.