The Current Debate: Supply-Side vs. Demand-Side Economics · Chapter VIII The Current Debate: Supply-Side vs. Demand-Side Economics ince the s the dispute between demand-side and

Chapter VIIIThe Current Debate: Supply-Side

vs. Demand-Side Economics

ince the s the dispute between demand-side andsupply-side economics has dominated the debate overU.S. tax policy.1 Both sides acknowledge that tax cutscan stimulate the economy during a downturn, but the

two sides view the problem, as it were, through opposite endsof the telescope.

Demand-siders emphasize the centrality of aggregate de-mand in driving economic expansions and contractions. Whendemand-siders discuss the potential benefits of cutting taxesduring a recession, they emphasize the need to put money intothe hands of the vast mass of consumers. The point is to in-crease consumer spending, which in turn will stimulate increasedproduction—resulting in greater employment, investment, anda continuing growth in Gross Domestic Product (GDP). De-mand-siders therefore favor tax cuts that are weighted towardthe middle and lower ranks of earners, who will naturally tendto spend more of any money they receive from tax reductions.

Supply-siders turn this approach on its head. As theirname implies, supply-siders see production, or supply, ratherthan demand as the main engine of U.S. economic growth.Their emphasis is on increasing business investment: in thesupply-siders’ view, higher rates of investment will lead to higherrates of growth in GDP. For supply-siders, a key feature of thetax code is its “incentive effects.” By changing individual eco-nomic incentives, they believe, they can change economic be-havior by encouraging more business investment by upper-income taxpayers (the investor class).

Supply-siders speak of lowering marginal tax rates acrossthe board to increase incentives to “work, save, and invest.” Butthe supply-siders’ emphasis (and the feature that makes theirprogram controversial) is clearly on lowering the top marginalrate, and the reason is its presumed impact on U.S. economicgrowth. While supply-siders commonly argue that tax ratecuts will increase incentives for “work effort” or productiveeconomic activity across the board, the controversial aspect oftheir program is their heavy focus on lowering the top mar-ginal rate, with the avowed purpose of boosting business in-vestment or “capital formation.”

The key contention of supply-side economics is that low-ering the top marginal income tax rate increases the incentivesof business owners to invest in their businesses, which in turnresults in increased production, employment, and growth inGDP. The upshot of all this is that supply-siders favor tax cutsweighted toward the highest-income taxpayers.

Importance of Issue to Current Policy Discussion

Supply-side claims have been central to recent policy debateon taxation. The emphasis on reducing the top marginal tax

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rate to accelerate growth by spurring investment was clear incongressional testimony at the very beginning of the Bush ad-ministration by R. Glenn Hubbard, then-chairman of Presi-dent Bush’s Council of Economic Advisers (CEA): “The key tothe President’s plan is its focus on reducing marginal tax rates.We are now quite familiar with the notion that accumulatingphysical capital, human capital . . . and new technologies is theheart of sustained economic growth and prosperity. There is nowa large body of evidence that improving marginal incentives . . .is the key to ensuring these investments in our economic fu-ture” (emphasis added).2

President Bush set forth essentially the same supply-siderationale for his tax-cutting program. On numerous occa-sions, he justified cutting the top marginal rate in order to en-hance incentives for investment or, in his usual phrase, capitalformation. To cite just a few examples:

But I want Congress to also understand that it’s notonly important to drop the bottom rate, it’s impor-tant to drop the top rate as well. By dropping the toprate, we encourage growth, capital formation and theentrepreneurial spirit.

When we cut that top rate from . percent to

percent, we’re saying a loud and clear message thatthe entrepreneurial spirit will be reinvigorated aswe head into the st century. It’s a way to pass capi-tal formation in the small business sector in Amer-ica. And it’s the right thing to do.

When we cut individual tax rates, we are stimulat-ing capital formation in the small business sector ofAmerica. (emphasis added)3

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The supply-side argument cannot be sustained purely ontheoretical grounds. The claim is subject to empirical factualanalysis of the historical record to establish its credibility orlack of credibility. Given the centrality of this argument to thedebate over fiscal policy, it is worth asking what empirical evi-dence exists for the supply-side theory that low top marginalincome tax rates increase rates of investment, employment,and economic growth.

A review of the literature shows empirical evidence sup-porting the supply-side claim to be sparse to nonexistent. Sur-prisingly enough, a pair of studies by the leading supply-sidetheorist, Martin Feldstein, and Douglas Elmendorf found vir-tually no net growth benefit from the Reagan supply-side mar-ginal rate cuts of . Feldstein and Elmendorf noted, “Therapid expansion of a nominal GNP [during the Reagan-era ex-pansion of the s] can be explained by monetary policywithout any reference to changes in fiscal and tax policy.” Inaddition, Feldstein and Elmendorf explicitly ruled out thatsupply-side tax incentives were a factor in the recovery: “Wealso find no support for the proposition that the recovery re-flected an increase in the supply of labor induced by the re-duction in personal marginal tax rates.” The verdict of leadingsupply-side economists on the first supply-side experiment, inother words, found no empirical evidence to support a directrelationship between marginal tax rate cuts and growth in em-ployment or GDP.4

The Key Policy Questions

Does a low top marginal tax rate increase the rate of real GDPgrowth? The straightforward way to answer this question wouldbe to examine actual rates of real GDP growth in the years with

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low top marginal tax rates. If low top marginal income tax ratesare said to increase growth, then it logically follows that weshould see higher rates of real GDP growth in periods whenthe top marginal income tax rate is low. For policymakers, thiswould be decisive evidence and arguably the only evidence ofpractical merit. If low top marginal income tax rates have notbeen associated with high rates of growth in the past, then ithardly seems likely that cuts in the top marginal tax rate willproduce high rates of growth in the present or future, and thesupply-side case for enacting such cuts cannot be accepted assupported by historical data.

In recent years, the study most commonly cited by supply-side economists in support of the presumed growth effects oftheir tax-cutting program is by Eric Engen and Jonathan Skin-ner. For example, in arguing for making the Bush administra-tion tax cuts permanent, Bush CEA member Harvey S. Rosencited estimates from the Engen and Skinner article as the mainsupport for his claim that continued low marginal income taxrates increase growth. Similarly, in a Wall Street Journal op-edcolumn backing the Bush supply-side tax policy, Hubbardcited Engen and Skinner as main evidence that large tax bur-dens reduce growth.5

A more careful look at the data presented by Engen andSkinner, in fact, reveals little, if any, factual support for thesupply-side argument. Engen and Skinner attempted a straight-forward approach to the question, examining rates of growthin the six years following the Kennedy–Johnson tax cuts of

( –) and the seven years following the Reagan tax cuts of (–). Both tax cuts involved across-the-board reduc-tions in marginal income tax rates, including significant cutsin the top marginal rate.

Engen and Skinner focused mainly on the years follow-

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ing the two major tax cuts. According to Engen and Skinner,“The time-series correlation between marginal tax rates andgrowth rates yields a decidedly mixed picture; some decadeswere correlated positively and others negatively.” Suffice it tosay that Engen and Skinner acknowledge “the uncertainty in-herent in nearly every parameter used in [their] calculations.”

In the end, Engen’s and Skinner’s evidence for a growtheffect from a cut in marginal tax rates is far more speculative,and the predicted growth effect much less robust, than onewould imagine from the frequent citation of their study bysupporters of the supply-side theory. Certainly, the carefullyhedged Engen and Skinner study provides little substantiationfor the sweeping generalizations that are prevalent in the supply-side arguments made by politicians for lowering the top mar-ginal tax rate.

Marginal Tax Rates and Investment

The failure of the Engen and Skinner study to provide factualsupport for the supply-siders’ overall claim that cuts in the topmarginal personal income tax rate increase investment, hiring,and real GDP brings us back to their theoretical claim. Theprimary mechanism by which supply-side theorists predict in-creased GDP growth from cuts in the top marginal income taxrate has to do with investment decisions by entrepreneurs. In, the combined Bush tax cuts put an estimated additional$ billion in the hands of high-income taxpayers (those withan Adjusted Gross Income of $, or more), compared tothe amount these taxpayers would have paid under pre–Bushadministration tax law.6 Supply-siders claim that such changesin the tax laws cause a substantial increase in entrepreneurialinvestment by these taxpayers. This concept clearly lay behind

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the statement by President Bush defending cuts in the topmarginal rate on grounds they would increase investment bysmall businesses: “Most small businesses are sole proprietor-ships, or limited partnerships, or sub-chapter S corporations,which means that they pay tax at the individual income taxrate. And so, therefore, when you accelerate rate cuts, you’rereally accelerating capital to be invested by small businesses.”Supply-side theorists base this case on a single empirical study,by Robert Carroll et al., of Internal Revenue Service data onthe tax returns of a few thousand taxpayers who filed ScheduleCs (sole proprietorship) in both and , before and afterthe Reagan Tax Reform Act of , which enacted a major cutin top marginal income tax rates.7 For these taxpayers, busi-ness gains or losses are directly passed through to the businessowner’s Adjusted Gross Income and taxed at individual in-come tax rates. The supply-siders’ theoretical argument is thatwhen a reduction in the top marginal individual income taxrate puts more money into the hands of business owners, theyuse this money to substantially increase investment in theirbusinesses.

Rosen cited the Carroll et al. study (of which he was acoauthor) in arguing that lowering top marginal rates increasesinvestment by entrepreneurs—a major reason he presentedfor making the Bush tax cuts permanent. Hubbard cited thesame study in his testimony before Congress as CEA chair-man, urging Congress to approve the first Bush tax cuts.8

But the study they cite does not support the supply-siders’ conclusions. Carroll and his colleagues analyzed the returns of a small sample of taxpayers who paid personal in-come taxes on their profits or losses rather than corporatetaxes. Between and , the Tax Reform Act of re-duced the top marginal personal income tax rate from per-

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cent to percent. The authors argued that the lower top mar-ginal tax rate increased investment by these taxpayers in theirentrepreneurial businesses.

This conclusion requires close scrutiny. First, the infer-ences drawn by Carroll et al. from their own data seem at bestquestionable. The analysis focused on a tiny sample of Sched-ule C filers. Of some , tax returns examined, only ,

taxpayers filed Schedule Cs in both and and thereforefit the criteria of the study. Notably, of this small sample of, the vast majority ( percent) failed to make an invest-ment in at least one of the two years. Even more striking, in, after the substantial top marginal tax rate cut of , thesmall percentage of taxpayers in the Carroll et al. sample whomade any investment in their businesses did not increase over-all, but actually declined—a critical fact on which the authorsfail to comment. In addition, among high-income businessowners (those who most directly benefited from the cut in thetop marginal rate) the percentage who made investments intheir businesses actually declined from percent in to

percent in . This hardly adds up to a robust case for theproposition that cuts in the top marginal income tax rate in-crease entrepreneurial business investment.

The Carroll et al. data on hiring yielded broadly similarresults. Between and , the percentage of high-incomebusiness owners in their study who had any employees actuallydeclined, from percent in to percent in .

It is surprising that small business behavior has been acenterpiece of the supply-side case. We should consider what arelatively small pool of taxpayers these high-income “entre-preneurs” represent. According to Internal Revenue Service es-timates for , the vast majority of high-income taxpayerswho benefited from the – cuts in the top marginal rate

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(roughly percent) owned no small business entity. Even ifthe data of the Carroll et al. study had supported the conclu-sions the authors draw about small business investments, cutsin the top marginal income tax rate would be a very blunt andinefficient instrument for encouraging total business investmentor employment in the economy as a whole, since the benefit ofthis personal income tax cut goes mostly to taxpayers who donot own small businesses.

Carroll et al. acknowledge that individual business own-ers account for a small fraction—about percent—of totalbusiness investment in the U.S. economy. This figure suggeststhat even a substantial increase in investment by individualbusiness owners would have comparatively little impact on over-all levels of business investment in the economy. For example,a percent increase in investment by individual businessowners, which would represent a substantial increase, wouldtranslate into a mere percent increase in total investment inthe economy.

Given these realities, we would expect to see little effecton investment or hiring from cuts in the top marginal incometax rate, and this indeed proves to be the case. The more closelyone scrutinizes the “large body of evidence” that the supply-siders claim supports their key arguments, the more the citedfactual evidence for supply-side contentions turns to sand.

Toward a Straightforward Assessment

It is time to return to the straightforward analysis that Engenand Skinner partially attempted and then rejected in the faceof what they concluded to be “mixed” results. The straight-forward policy claim of supply-side theorists is that a low topmarginal income tax rate leads to higher rates of investment,

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employment, and GDP growth. If this is indeed the case, thenthe historical record of U.S. economic performance shouldyield evidence of this pattern.

We can approach this question in a more definitive waythan Engen and Skinner by greatly expanding the time-seriesdata under examination. Engen and Skinner focused theiranalysis primarily on two small sets of time-series data, the sixyears following the Kennedy–Johnson tax cuts and the sevenyears following the Reagan tax cuts (using the two years pre-ceding each episode as a baseline). A more complete data setfrom the post–World War II period can provide more com-prehensive results.

To test the supply-side theory I examined the interrela-tionship of key economic indicators for the fifty-four yearsfrom to (see appendix for detailed data).9 My empir-ical approach divided the fifty-four years into three equalgroupings ranked best performance, middle performance, andworst performance for each of the following variables:

• Real GDP growth• Real growth in personal consumption expendi-

tures• Real growth in gross nonresidential fixed invest-

ment10

• Employment growth• Unemployment rate

Table summarizes the performance of the U.S. econ-omy in the eighteen years of this fifty-four-year period whenthe top marginal income tax rate was lowest. It shows thenumber of these years when the economy had “best,”“middle,”

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or “worst”performance levels on () real (noninflationary) GDPgrowth, () employment growth, () the unemployment rate,and () real (noninflationary) growth in business investment(gross nonresidential fixed investment).

The most critical supply-side argument deals with the re-lationship between low top marginal income tax rates and realgrowth in GDP. Of the eighteen years in which the top marginalincome tax rate was lowest, only two were also in the group ofeighteen years with the highest real GDP growth.

Supply-side economists have argued that a low top mar-ginal tax rate would lead to high growth in employment and alow unemployment rate. Yet of the eighteen years in which topmarginal tax rates were lowest, only two were also in the groupof eighteen years with the highest employment growth. Also,of the eighteen years in which top marginal tax rates were low-est, only five were also in the group of eighteen years with thelowest unemployment rate.

The main mechanism by which a low top marginal in-come tax rate is said to increase economic growth is by encour-aging increased business investment. Yet of the eighteen yearsin which the top marginal tax rate was lowest, only seven werealso in the group of eighteen years with the highest real growthof business investment. Notably, six out of these seven yearsoccurred during the period from through , immedi-ately after the top marginal income tax rate was increased underPresident Clinton in , from . percent to . percent(see appendix).

In any given year, exogenous conditions may have con-tributed to high or low performance on one or more of themajor economic variables. But if the supply-side claims werevalid, one would expect to see some reflection of the associa-

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tion between low top marginal income tax rates and high per-formance on the other parameters over a historical samplecovering fifty-four years. The data yield no such pattern.

Demand-Side Views of Taxation

What of the merits of the demand-side model? At the core ofmodern demand-side economics is the argument that a maindriver of growth in the American economy is consumer de-mand. Since consumer spending comprises two-thirds of theAmerican economy, it is obvious that a substantial increase inconsumer spending is likely to produce a substantial increasein GDP.

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Table 1

Economic Performance in the Eighteen Years With the Lowest Top Marginal Income Tax Rate*

Real Lowest Real GDP Employment Unemployment Investment

Growth Growth Rate Growth**

Years With LowestTop Marginal Income Tax Rates

Best Performance

Middle Performance

Worst Performance

*Top marginal tax rate of percent or less.

**Real growth in gross nonresidential fixed investment.

Sources: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Prod-

uct Accounts; U.S. Department of Labor, Bureau of Labor Statistics; author’s calculations.

Demand-siders argue that while levels of business in-vestment may vary substantially from year to year, consump-tion is the principal factor that drives the business cycle. As thelate Nobel laureate economist James Tobin wrote, “Economy-wide recessions and booms reflect fluctuations in aggregatedemand rather than in the economy’s productive capacity.”Demand-side policies, therefore, “work by stimulating or dis-couraging spending on goods and services.”11 A demand-sidestimulus to the economy can be applied via either fiscal policy(reducing taxes and/or increasing government spending) ormonetary policy (reducing interest rates and increasing thesupply of money). In either case, the focus is on producing anincreased overall demand for goods and services within theeconomy.

For demand-siders, the legitimate economic purpose fortax cuts at a time of economic downturn is “to stimulate theeconomy by putting more money in the pockets of consumers.”The latter language comes from a statement signed by onehundred economists, including seven Nobel laureates, critiquingthe Bush administration’s supply-side tax cut proposals. Incharacteristic demand-side terms, the statement described theBush supply-side tax cuts as “too large, too skewed to thewealthy, and [arriving] too late to head off a recession.” Thedemand-side economists’ statement called for a funda-mentally different approach: “Instead of an ill-conceived taxcut, the federal government should use this year’s surplus to fi-nance a temporary, one-time tax cut or ‘dividend.’ We shouldsend a sizeable check this summer to every American, provid-ing the immediate help the faltering economy needs. Comparedwith the President’s tax cut proposal, a temporary dividendwould be more equitable, more efficient, and more appropri-ately targeted at the economic problem.”12

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Behind this proposal was the core demand-side view thatpersonal consumption, the major component of aggregate de-mand, is a main driver not only of GDP growth, but also ofgrowth in business investment and employment. At the core ofthe demand-side approach is an understanding that risk-aversebusiness managers’ investment and hiring behavior respondprimarily to increased demand for their products and services.Their principal incentive to produce more is an increase in de-mand for the product. To attempt to stimulate business invest-ment in the absence of this incentive is, in effect, to “push on astring.”

Note that President Bush and his economic team alsoagreed with the need for a consumer-based economic stimulusin his first term. Part of the announced rationale for the

and tax cuts was to expand aggregate demand so as to helpthe economy recover from recession: and indeed tax rates werecut across the board to increase aggregate demand.13 At thesame time, interest rates were cut substantially by the FederalReserve to provide a monetary stimulus to the economy. Themonetary policies of Alan Greenspan, chairman of the Fed, sup-ported consumer demand through low mortgage rates, whichenabled up to percent of households to increase their “ag-gregate demand” by borrowing on the increased value of theirhomes. Indeed, this demand-side support was undoubtedlythe major factor in moderating the recession of –.

The Bush administration justified cuts in the top mar-ginal rate not on demand-side, but on supply-side grounds, asa means to increase business investment, which would result in increased growth in employment and GDP. Where Bushand the demand-siders differed was on three counts: Thedemand-siders rejected the supply-side theory that supply cre-ates demand—the notion that, “If you build it, they willcome.” The demand-siders objected to the substantial cuts in

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the top marginal rate because they believed these cuts woulddrain the Treasury of billions in needed revenue in order togive an unneeded windfall tax benefit to the richest taxpayers.The demand-siders objected to the permanence of the taxcuts, which were bound to result in continuing large federaldeficits. The demand-siders who signed the statement be-lieved it was possible to stimulate consumption and aggregatedemand via a temporary tax cut for all Americans rather thana permanent structural change in the tax code favoring thewealthiest segment of society.

Empirical Data for the Demand-Side Model

Whereas the data for the fifty-four years between and

offer no support for the supply-side claim that a low top mar-ginal tax rate is correlated with high growth in investment, em-ployment, and GDP, if we examine the data through the oppo-site end of the telescope—and analyze economic performancefrom a demand-side rather than a supply-side perspective—adifferent pattern emerges. Data from the fifty-four years be-tween and provide ample historical evidence for thecore assumption of the demand-side model—namely, that highreal growth in consumption is strongly associated with high per-formance of the most important economic growth variables.

First, consider real growth in GDP. The relationship be-tween high real growth in personal consumption expendituresand high real growth in GDP is to be expected; indeed it is al-most axiomatic. Since consumption amounts to about two-thirds of GDP, increases in consumption and GDP tend to gotogether. Of the eighteen years in which real growth in per-sonal consumption expenditures were at their highest level,fifteen were also in the group of eighteen years with the high-est real GDP growth, as shown in table .

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Moreover, as table shows, increased real growth in con-sumption was strongly associated not only with real GDPgrowth, but also with other positive economic indicators, in-cluding employment growth and increased real growth in busi-ness investment.

The data show a strong association between growth inpersonal consumption expenditures and growth in employ-ment. Of the eighteen years in which growth in personal con-sumption expenditures was at its highest level, eleven werealso in the group of eighteen years with the highest employ-ment growth. The data show a similar relationship betweenhigh real growth in consumption and a low unemploymentrate. Of the eighteen years with the highest growth in personal

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Table 2

Economic Performance in the Eighteen Years With the Highest Real Growth in Personal Consumption Expenditures

Real Lowest Real GDP Employment Unemployment Investment

Growth Growth Rate Growth*

Years With Highest Real Growth In Personal Consump-tion Expenditure

Best Performance

Middle Performance

Worst Performance

*Real growth in gross nonresidential fixed investment.

Sources: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Prod-

uct Accounts; U.S. Department of Labor, Bureau of Labor Statistics; author’s calculations.

consumption expenditures, nine were also in the group ofeighteen years with the lowest unemployment rate.

Finally, while the fifty-four-year record shows little asso-ciation between low top marginal income tax rates and highrates of business investment, the data do yield a strong associa-tion between high growth in consumption and high growth inbusiness investment. Of the eighteen years in which real growthin personal consumption expenditures was at its highest level,twelve were also in the group of eighteen years with the high-est real growth in business investment.

Figure shows the differences between demand-side andsupply-side perspectives with respect to the data on the keyvariables in the analysis.

Demand-Side vs. Supply-Side Tax Cuts in Practice

The data on economic growth in the United States between and support the demand-side view that high per-sonal consumption expenditures have a strong relationship tothe performance of the economy. By contrast the supply-sideview that low top marginal rates are directly related to eco-nomic growth is not supported by the data. To see how the two approaches worked out in specific periods, it is of addi-tional value to examine more closely the impact of the threemajor tax reduction programs enacted during the period: theKennedy–Johnson demand-side tax cuts of –, the Rea-gan supply-side tax cuts of , , and , and the Bushsupply-side tax cuts of –.

The Kennedy–Johnson tax cuts of – (proposed byPresident Kennedy and enacted under President Johnson) weredesigned on demand-side premises. Supply-side economistshave sometimes cited the Kennedy tax cut as a precedent for

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the supply-side program because it included a reduction of thetop marginal income tax rate from percent to percent.While the Kennedy tax cut did include a modest reduction inthe top marginal rate, the philosophy behind the Kennedy taxcut was clearly demand-side in nature. The Kennedy economicteam, comprising leading Keynesian economists of the day, ex-plicitly aimed to expand aggregate demand. That is, they sought

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Figure . Growth in GDP, Business Investment, and EmploymentRelated to Low Marginal Tax Rates and High Personal

Consumption Expenditures. Sources: U.S. Department ofCommerce, Bureau of Economic Analysis, National Income andProduct Accounts; U.S. Department of Labor, Bureau of Labor

Statistics; author’s calculations (see appendix).

to put more money in the hands of consumers, whose spend-ing would then stimulate higher GDP growth and strongeremployment. The demand-side nature of the program can beseen in the structure of the tax reduction. The bulk of theKennedy tax cut went to middle- and lower-income taxpayers.Nearly percent of the Kennedy tax cut went to taxpayers in thelower percent of the income distribution, according to con-temporary estimates by the U.S. Congress’s Joint Committeeon Internal Revenue Taxation.14

By contrast, the Reagan tax cuts implemented in ,, and and the Bush tax cuts fully implemented in

were largely focused on the supply-side objective of reducingthe top marginal rate paid by top-bracket taxpayers. The Rea-gan and Bush tax cuts put more money in the hands of tax-payers with the highest incomes. According to an analysis bythe Congressional Budget Office, half of Reagan’s tax cut in

went to households in the top . percent of the income distribu-tion; the vast majority of households (. percent) split the otherhalf. And Reagan’s further tax-cutting program in and granted substantial additional reductions in the taxes paidby top-bracket taxpayers. The Bush tax cuts were targeted evenmore directly to the upper end of the income scale. Bush’s cutsnot only reduced the top marginal tax rate, but also substan-tially reduced the rates paid on dividends, capital gains, and es-tate taxes. By , according to the Tax Policy Center, over half(. percent) of the combined Bush tax cuts went to taxpayerswith the top . percent of incomes; the remainder of the tax cut (. percent) was divided among the lower . percent ofhouseholds.15

The data in figure show that the Kennedy demand-sidetax cuts in and were clearly associated with strongerperformance on the major economic variables than were the

The Current Debate

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The economic growth immediately following the Kennedy–Johnson demand-side tax cut illustrates what economists some-times call a virtuous cycle. In , the year the tax cut was fullyimplemented, personal consumption expenditures grew by astrong . percent in real terms, and business investment(gross nonresidential fixed investment) grew by a strong .percent in real terms, accompanied by strong growth in em-ployment. By contrast, there was little evidence of a virtuouscycle in operation in the years of the Reagan and Bush supply-side tax cuts. Growth in the centerpiece of the supply-sideprogram—business investment—was typically in the low tomiddle range in the years of the supply-side tax cuts. This rela-tively weak investment growth was accompanied by lacklustergrowth in GDP and employment.

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The Current Debate

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side pattern in the follow-on years with regard to GDP growth,consumption growth, and investment growth.16

In short, the historical record of the performance of theAmerican economy from through provides little tono support for the supply-side economists’ claim that cuts inthe top marginal income tax rate caused improved performanceon the key economic parameters of GDP growth, employmentgrowth, and investment growth. By contrast, substantial sup-port exists for the demand-side view that high personal con-sumption expenditures (the largest component of aggregatedemand) are associated with high growth in GDP, employ-ment, and investment.

Nor do historical data from the American economy sup-port the oft-repeated supply-side claim that the very size ofgovernment imposes a drag on economic growth. Supply-siders have argued that virtually every dollar the governmenttakes in has a “dead weight” effect in reducing GDP growth.Cutting the size of government has been a major supply-sidegoal since the time of President Reagan. Supply-side tax cutswere intended to force government spending cuts. Reagan’sbudget director David Stockman described the strategy as oneof “starving the beast.” “The surest way to bust this economy,”candidate George W. Bush said in , “is to increase the roleand the size of the federal government.” In Bush told re-porters he intended his tax cuts to serve as a “fiscal straitjacket”for Congress to reduce the size of government and thereby in-crease economic growth.17

Yet the American economy has actually grown faster inthe era of “larger government” than it did in the era of “smallergovernment.” There is little to no empirical support for thesupply-side claim that a lower overall tax burden (taxes as apercentage of GDP or GNP) goes hand in hand with higher

The Current Debate

growth in GDP.An empirical study by William Gale and SamaraPotter examined the federal tax burden, top income tax rate,federal spending as a percent of GDP, and average per capitaGDP growth rates for long periods in the nineteenth andtwentieth centuries. They found no consistent correlation be-tween low taxes and per capita GDP growth. In particular, theynote that the period –, when there was no income tax,had the same average per capita GDP growth (. percent) asthe period –, when there were substantial income taxes.18

Moreover, from through , when federal outlaysaveraged just percent of GNP, real GNP growth averaged .percent per year, while unemployment averaged . percentper year. From through , when federal outlays aver-aged percent of GNP, real GNP growth averaged . percentannually, while unemployment averaged just . percent ayear. Not only has growth been somewhat greater in the largergovernment era; the economy has shown more stability in em-ployment than in the years of smaller government.

Nor does the size of government necessarily tell us any-thing about the kind of role that government may play in theeconomy. Larger government does not have to be overly intru-sive government. To be sure, highly bureaucratic command-and-control-style regulation can inhibit business activity andnegatively affect economic growth. But the choice we face is notone between command-and-control government and as littlegovernment as possible. History has shown that governmenthas often found nonbureaucratic methods of accomplishingmajor economic and social objectives. Through programs andpolicies such as Social Security, unemployment insurance, theGI Bill, and federal tax policies and loan guarantees to promotewidespread home ownership, the federal government has man-aged to accomplish large economic and social objectives witha minimum of bureaucratic interference in the economy. In re-

The Current Debate

cent decades, government agencies have found less intrusive,less bureaucratic methods of achieving socially useful objec-tives. The size of government tells us nothing about the wis-dom of government policies. To the degree that larger govern-ment chooses smart, nonbureaucratic policies to accomplishsociety’s shared objectives, its role in the economy can be quiteconstructive.

Summary

The data analyzed in this chapter raise serious questions aboutthe empirical basis for the supply-side theory and particularlyabout the central—and controversial—supply-side contentionthat cuts in the top marginal income tax rate bring substantialeconomic benefits. Supply-side economists and policy advo-cates have cited a body of empirical literature that provideslittle, if any, support for their argument. Contrary to the refer-ences to empirical data in the public statements of supply-siders, there is little specific evidence in the literature they citeof an association between low top marginal income tax ratesper se and high growth in GDP. Indeed, even one of the lead-ing supply-side theorists, Martin Feldstein, concluded that ex-pansion of nominal GDP in the two years following the

Reagan supply-side tax cuts “can be explained by monetary pol-icy without any reference to changes in fiscal and tax policy.”

The study cited by supply-siders to support the argu-ment that a reduction in the top rate results in increased over-all business investment because of incentive effects on entre-preneurs provides data that contradict such a conclusion. Thepaper reports that the small number of individual businessowners who pay taxes on business income at the personal in-come tax rate account for only about percent of total busi-ness investment. Given these data, the theoretical argument

The Current Debate

that marginal rate cuts for these taxpayers can substantially in-crease total business investment falls by the wayside.

Most important, the new empirical analysis of the per-formance of the U.S. economy over the fifty-four years from to presented here finds no association between lowtop marginal personal income tax rates and high real growthof GDP or investment or employment.19 By contrast, the analy-sis finds a substantial association of demand-side increases inreal growth in personal consumption expenditures with highgrowth in GDP, investment, and employment.

The supply-siders’ subsidiary claim that there is substan-tial evidence for a link between high GDP growth and a loweroverall tax burden (that is, overall taxes as a percentage of GDP)is qualified by numerous caveats in their cited literature andremains highly speculative in nature. (This is the supposedeconomic rationale for the starve-the-beast strategy of cuttingtaxes to reduce the size of government.) But as we have seen,historical data on the comparative performance of the U.S.economy in eras of smaller government versus larger govern-ment do not support this claim.

Supply-siders sometimes argue that economic growth,though unimpressive following supply-side tax cuts, might havebeen lower without them. But neither the existing literaturenor the historical record provides substantial evidence to sup-port this theory. The central claim of the supply-side school—that low top marginal income tax rates lead to increased invest-ment, employment, and GDP growth—is not supported by theempirical evidence. Given that cuts in the top marginal incometax rate have also increased income inequality—and that supply-side tax cuts have resulted in large federal deficits—history’sverdict on supply-side tax policy is likely to be unfavorable.

The Current Debate

Chapter IXThe Way Forward

Addressing the Economic Questions

Two opposing ideas compete today as they have through muchof our history for the support of all Americans. One is theAmerican Dream, inspired by President Lincoln and carriedforward by Presidents Theodore Roosevelt, Woodrow Wilson,Franklin Roosevelt, and Bill Clinton. The other is the Gospelof Wealth, developed in the second half of the nineteenth cen-tury and carried forward in the twentieth century by Presi-dents Harding, Coolidge, and Hoover and more recently byPresidents Ronald Reagan and George W. Bush. The imple-mentation of one or the other of these ideas has had and willhave major economic, moral, and political consequences forthe future of American democracy.

Early in the twenty-first century, much of the debate be-tween the two ideas has focused on the economic conse-quences of supply-side economic policies that are central tomodern proponents of the Gospel of Wealth versus demand-side economic policies that are central to modern proponentsof the American Dream.

The findings of my empirical study, discussed in chapter, should put to rest the notion that there is an inherent con-flict between economic and tax policies that spur economicgrowth and policies that contribute to a fair and balanceddemocratic society. The win–win conclusion is, demand-sideeconomic policies not only increase the ability of all Ameri-cans to improve their living standards, but also provide posi-tive support for the economic, moral, and political objectivesof American democracy.

Disregarding the evidence that demand-side economicpolicies provide the best support for our economy, the admin-istration of George W. Bush has taken the strongest steps inmore than fifty years to change the direction of economic pol-icy to Gospel of Wealth, supply-side programs. During theBush administration, there has been a growing acceptance ofthe idea that it is fair for some Americans to start life with in-herited millions, while others begin dirt-poor. Under Bush,America has been evolving into what the economists RobertH. Frank and Philip J. Cook called a “winner-take-all society.”1

The top percent of households are taking in half the incomeof the entire nation. Salaries of chief executive officers are overfive hundred times those of the ordinary production workersin their corporations. Investment bankers and business execu-tives collect tens of millions of dollars in bonuses and sever-ance and retirement packages, while American soldiers whorisk their lives to ensure the safety of prosperous and pooralike can barely make ends meet.

George W. Bush’s Gospel of Wealth policies have widenedthe inequality of income between the richest Americans andall other Americans. In , the percent of American house-holds with the highest incomes had a percent larger share oftotal national income than in , while at the lower end of

The Way Forward

the income distribution, percent of American householdshad a percent smaller share. Under present tax policies, thefive to six million households in the top percent income groupreceive an increasingly larger share of America’s national in-come, while ninety million middle- and lower-income house-holds—representing percent of all households—are find-ing it increasingly difficult to maintain their standard of livingexcept by borrowing on their homes, their credit cards, andany other means available.

President Bush, meanwhile, has deliberately increasedthe winners’ share of the takings, cutting top marginal incometax rates, reducing taxes on dividends and capital gains, andeven undertaking to eliminate the estate tax—a measure self-consciously designed by Progressive Era political leaders toprevent America from degenerating from a democracy of po-litical equals into an aristocracy of wealth.

In contrast to the supply-side winner-take-all tax struc-ture, a progressive tax structure based on demand-side prin-ciples would help to sustain virtuous economic cycles in whichsteadily increasing consumption leads to continuing growth inproduction and increasing employment income for most Ameri-cans, which then sustains increasing growth in GDP. Henry

The Way Forward

Table 3

Distribution of U.S. Household Income, 1967 and 2003

Income Level Percent Change

Top % . .

Next % . .

Next % . . ()Lowest % . . ()

Source: U.S. Census Bureau

Ford succinctly summarized the essential understanding ofdemand-side virtuous economic cycles when he said, “If youdon’t pay the people enough money, they can’t buy the cars.”

But there is no simplistic approach to successful eco-nomic policy. There is always a substantial risk that either in-correct monetary or misguided fiscal policies can producenegative economic results. The fiscal policies followed by Lyn-don Johnson and his successors in the late s and the sproduced an economic boom followed by runaway inflation.The restrictive monetary policies of the early s deepenedthe Great Depression. By contrast, properly managed mone-tary and fiscal policies can achieve the desired positive goals.

The data for the fifty-four years from to ana-lyzed in chapter indicate that demand-side fiscal policiesproduced the healthy growth of our middle-class economy dur-ing the s and early s. And intelligent monetary policiesduring the s and s were the basis of a healthy, consis-tent growth of the economy.

In contrast to the positive evidence supporting properlyexecuted monetary policies and demand-side fiscal policies,there is no evidence that supply-side tax cuts for the wealthiesttaxpayers during the Reagan and George W. Bush presidenciesactually increased investment and growth. Neither empiricalresearch nor the historical experience of supply-side tax cutsprovides evidence for this claim. Indeed, the evidence is thatvery little of the money put in the hands of the wealthiest tax-payers ended up as investment in their businesses or sustainedgrowth in the economy. Moreover, the distributional effects ofthe Bush tax cuts provided a windfall for the rich while elimi-nating revenues that are needed, first, to pay the government’sbills, second, to begin to address the anticipated problems ofSocial Security and Medicare for an aging population, and,

The Way Forward

third, to provide the federal government with the resourcesneeded to deal with new national defense obligations and natu-ral disasters such as Hurricanes Rita and Katrina.

The Future of American Democracy

It is fortunate for the future of American democracy that thedata supporting the economic growth case for demand-sideeconomics are strong while there is no significant evidence tosupport supply-side economic policies. The additional benefitof demand-side economic policy that supports growth in per-sonal consumption for all Americans is its contribution to afairer and more stable American democratic society.

History teaches us that the future of any democracy de-pends on a thriving middle class. This is true in both an eco-nomic and a political sense. From the standpoint of econom-ics, middle-class consumer spending is the primary engine ofeconomic activity and growth. Sustaining the incomes—andtherefore the spending—of the middle class is essential to sus-taining the growth of the economy as a whole. It is the key tothe virtuous economic cycle. From the standpoint of politics,in a democracy the existence of a large, vibrant middle class iscrucial to political stability. The middle class acts as a buffer,softening the age-old struggle between the haves and the have-nots. It is through the middle-class dream that Americanscome to share common aspirations—aspirations that help tomute the differences in wealth, culture, race, and ethnicity thatmight otherwise threaten to tear a democracy apart. To survive,a democracy must also be a community—a society bound byshared values.

From the standpoint of morality the public needs to be-lieve that America operates on the principle of fairness. Ameri-

The Way Forward

cans must view their government as pursuing policies that are fair to all citizens, and not hopelessly skewed to those who, by dint of their wealth, can command greatest controlover government policy and the distribution of society’s re-sources. If, under the influence of supply-side economic poli-cies, income inequality continues to grow, and America evolvesfrom a middle-class society into an asymmetrical “hourglasseconomy”—with a few at the top, many at the bottom andever fewer in the middle—it will be increasingly difficult tosustain the belief that Americans share a common destiny thatoutweighs the differences that divide us. The belief in fairnesswill wither, and with it the sense of democratic community.

Conclusion

This book has focused on the contrast between economic poli-cies animated by the American Dream and policies animatedby the Gospel of Wealth. What seems clear is that fulfilling theAmerican Dream is a work in progress. Americans need to cometogether to genuinely meet the economic and noneconomicchallenges before us.

In recent times we have witnessed an increasingly sharpbreak with the policies that forged American greatness andmade the twentieth century, in Henry Luce’s famous phrase,“the American century.” Only a few years ago, the United Stateswas the leader of a powerful and unified Western alliance.Today, as our enemies multiply, we are alienated, in one degreeor another, from many of our old friends. Americans have al-ways had some partisan differences, but for decades there wasa strong consensus around a society that removed barriers toopportunity, provided a basic social safety net for the poor,and above all ensured that Americans who work hard and play

The Way Forward

by the rules could maintain a decent middle-class standard ofliving, ultimately bettering their circumstances and creatingnew opportunities for their children.

All this is under challenge today. In foreign policy, thereis a new commitment to the doctrine of preemptive war. In do-mestic policy, there is an increasing effort to move toward awinner-take-all model, in which the wealthiest householdsclaim an ever-growing share of national income, while middle-class families struggle to make ends meet.

To build a future based on the American Dream, we needto remind ourselves that the American success story has alwaysbeen about more than mere individualistic economic striving.America has succeeded because the nation came together atcritical moments in our history to support common programsto serve the common good. These programs were informed bycore values held in common by most Americans, values whichwere originally defined by the Declaration of Independence,the Constitution, and the Bill of Rights and have since beenelaborated and sustained by our shared history. The valuesthat define the American community include the belief thatsociety should provide its citizens with equality of opportu-nity, material well-being, and the opportunity for individualself-fulfillment and that American society should operate onthe principles of fairness, justice, and compassion. These val-ues include the essential idea that the rights of citizens to thebenefits of society must be accompanied by the assumption ofresponsibility for the good of society. We need to reexaminethe premises of both current-day conservatism and current-day liberalism. We need to think through our policy challengesanew and to recover the historical balance between our ad-mirable belief in individualism and our sense of community asa nation.

The Way Forward

What kind of a nation are we? what kind of a nation dowe seek to become? and what kind of world do we seek to cre-ate? Are we a nation always ready to defend ourselves, yet dedi-cated to principled action in the international realm? Are westill a people, as we once were, committed to economic oppor-tunity for all and compassionate toward the least fortunateamong us? or are we a society that now disproportionately re-wards the big winners and leaves ordinary citizens to fend forthemselves? Are we still the America of the great “Americancentury” or are we being transformed into something quitedifferent—no longer the strong and benevolent nation thatonce stood as a “shining city on a hill”?

The most disappointing feature of the current era hasbeen the absence of a powerful vision—one that fully recog-nizes the importance of the American legacy. To date, efforts todesign new programs for the future have largely focused ontactics rather than substance. They have been uninformed by acommanding vision—a larger idea of America of the kind thatinspired us throughout American history. We must rekindlesuch a vision of America, if the American democracy we havecome to know and love is to survive and prosper in the newcentury.

Fortunately, the basis for this vision exists in the valuesthat are held in common by most Americans. In a recent book,Uniting America: Restoring the Vital Center to American De-mocracy, Daniel Yankelovich, the leading analyst of Americanpublic opinion, shows that the American public has not joinedthe politicians in their partisan divisiveness. A majority ofAmericans desire social cohesion and common ground basedon pragmatism and compromise, patriotism, community andcharity, child-centeredness, acceptance of diversity, and coop-eration with other countries. Coupled with these values that

The Way Forward

promote social cohesion are well-accepted beliefs in hard workand productivity, self-confidence, individualism, and religiousbeliefs. Yankelovich concludes that the values that unite us faroutweigh any that divide us and can provide the basis for a fu-ture consistent with the American Dream.

A new commitment to the American Dream is the firststep. Wise, consensus-based policy is the second step. UnitingAmerica engaged some of our most thoughtful experts to pre-sent consensus building solutions to our most important pub-lic policy issues. In separate compelling essays, they offer freshinsight into some of the most pressing problems that face us:Daniel Yankelovich on “Overcoming Polarization,” FrancisFukuyama on “The War on Terrorism,” Alan Wolfe on “Reli-gion as Unifier and Divider,” Norton Garfinkle on “EconomicGrowth and the Values of American Democracy,” Tsung-meiCheng and Uwe Reinhardt on “The Ethics of America’s HealthCare Debate,” Will Marshall on “Social Security and MedicareReform,” Amitai Etzioni on “The Fair Society,” and ThomasMann on “Electoral System Reform,” among other contribu-tors. These essays and the independent work of other dedi-cated public policy experts provide the basis for needed pro-grams to fulfill the American dream.

The stakes are high. In a very few years, our once-reverednation has come to be perceived across the globe, by majoritiesin nearly every country surveyed, in a negative light. Our na-tion is now being described as unwilling to engage in alliancesunless our allies agree to support our leadership without theirinput as to strategy or tactics. As a consequence, we are lessable than in the past to forge successful alliances to deal withcontinuing and increasingly difficult issues beyond our shores.

At home, meanwhile, we witness an unremitting chal-lenge to programs crafted over decades that helped to build

The Way Forward

and sustain the middle-class basis of American society. Fromthe s through the s, American political leaders of bothparties shaped policies designed to extend economic opportu-nity, protect against economic insecurity, and above all to makea middle-class standard of living accessible to most Americans.These policies included a progressive income tax; Social Secu-rity; unemployment insurance; federal support for educationin the form of the GI Bill, student loans, and vital millions forresearch; policies to foster widespread home ownership; andprograms such as Medicare, Medicaid, and Food Stamps toprovide a minimum hedge against sickness and hunger amongthe least fortunate members of our society. All these measuresworked together to create the America we know: a dominantlymiddle-class society, with great opportunities for economicadvancement, a proper measure of compassion for the leastfortunate, and a shared American dream.

But now we face a contrasting doctrine that disparagesthe progressivity of the tax code, desires to change the firmcommitment to Social Security, and views health care for theleast fortunate among us as something our affluent societycannot afford. New tax cuts have transformed a multibillion-dollar federal surplus into multibillion-dollar deficits. Andnow the deficit has become a weapon “to starve the beast”—the new parlance for a comprehensive plan to undo the effortsby both parties, over many decades, to use government policiesto sustain a fair, prosperous middle-class society. The beliefthat government has little responsibility to care for commonneeds, and the claim that government is largely incompetent toaccomplish common purposes—such has become a majorideology of our time. Yet such assertions not only fly in the faceof decades of historical experience during the great American

The Way Forward

century: they also disarm and disable us as we face the chal-lenges of the future.

An extremely individualistic vision is precisely the wrongprescription for the foreign and domestic issues that loom beforeus. In foreign affairs we are confronted by the continuing threatof a major terrorist attack, an unstable Middle East, emergingnuclear capabilities in hostile states such as Iran and NorthKorea, and a shift in the balance of power toward China—allwhile our military is strained almost to breaking by existingcommitments. Coping with these foreign dangers—and espe-cially the elusive international networks of terrorists—willrequire a statecraft that understands cooperation and appreci-ates the vital importance of close alliances. Supporting de-mocracy in the rest of the world requires more than militarymight to change foreign regimes. And it requires more thanbuilding a “city on the hill,” to be admired and reproduced byother countries. Exporting democratic values is a worthy en-deavor that can succeed only through carefully developed pro-grams implemented by wise government leaders. Above all,these programs should be guided by the principle that successcan be achieved only by using realistic means to achieve ideal-istic goals.

In the domestic arena, we confront depressed wage growth;a widening income divide between the rich and the rest of ourcitizens; and massive increases in debt at both the federal andhousehold levels. We must also address the daunting challengeof an aging population; large unfunded liabilities for SocialSecurity and especially Medicare; galloping health care cost in-flation that threatens to bankrupt the federal and state bud-gets, making health care increasingly unaffordable for middle-class Americans and a growing burden on corporations. A

The Way Forward

rethinking of current approaches to domestic policy is clearlyin order. We need to overcome the historical forgetfulness thatbesets contemporary policy debate—the lack of appreciationfor the vital role that well-crafted government policies haveplayed in creating the America most of us grew up in. And weneed to change the short-term focus of contemporary policydebate. To build a confident American democratic future, short-term, politically expedient policies must be replaced by wiseand strategic long-term solutions. Addressing these domesticissues will require cooperative action of the kind that onlyeffective government policy can provide.

One thing is clear: Americans must understand the pro-foundly different directions in which policies based on theGospel of Wealth and policies based on the American Dreamwill take them. Political leaders seeking to serve the commongood must reawaken our understanding of the true AmericanDream and remind us again of what Lincoln meant when heexpressed the profound hope that “government of the people,by the people, for the people, shall not perish from the earth.”

The Way Forward

AppendixGDP, Consumption,

Investment, Employment,Unemployment, and Marginal

Tax Rates ‒*

*Years have been divided into three 18-year groups, ranked BEST, MIDDLE,and WORST.Sources: GDP growth, growth in real personal consumption expenditures,real business investment growth (real growth in gross nonresidential fixedinvestments): U.S. Department of Commerce, Bureau of Economic Analy-sis, National Income and Product Accounts. Employment growth and un-employment rate: U.S. Department of Labor, Bureau of Labor Statistics. Topmarginal income tax rates: Tax Policy Center.

Ranking of Personal% Real GDP % Real Consumption % Real PCE

Year GDP Growth GDP Growth Expenditures Growth

1951 339.3 7.7 BEST 208.5 1.61952 358.3 3.8 MIDDLE 219.5 3.21953 379.4 4.6 BEST 233.1 4.81954 380.4 �0.7 WORST 240 21955 414.8 7.1 BEST 258.8 7.31956 437.5 1.9 WORST 271.7 2.91957 461.1 2 WORST 286.9 2.51958 467.2 �1 WORST 296.2 0.81959 506.6 7.1 BEST 317.6 5.61960 526.4 2.5 WORST 331.7 2.81961 544.7 2.3 WORST 342.1 2.11962 585.6 6.1 BEST 363.3 51963 617.7 4.4 MIDDLE 382.7 4.11964 663.6 5.8 BEST 411.4 61965 719.1 6.4 BEST 443.8 6.31966 787.8 6.5 BEST 480.9 5.71967 832.6 2.5 WORST 507.8 31968 910 4.8 BEST 558 5.71969 984.6 3.1 MIDDLE 605.2 3.71970 1,038.5 0.2 WORST 648.5 2.31971 1,127.1 3.4 MIDDLE 701.9 3.81972 1,238.3 5.3 BEST 770.6 6.11973 1,382.7 5.8 BEST 852.4 4.91974 1,500.0 �0.5 WORST 933.4 �0.81975 1,638.3 �0.2 WORST 1,034.4 2.31976 1,825.3 5.3 BEST 1,151.9 5.51977 2,030.9 4.6 BEST 1,278.6 4.21978 2,294.7 5.6 BEST 1,428.5 4.41979 2,563.3 3.2 MIDDLE 1,592.2 2.41980 2,789.5 �0.2 WORST 1,757.1 �0.31981 3,128.4 2.5 WORST 1,941.1 1.41982 3,255.0 �1.9 WORST 2,077.3 1.41983 3,536.7 4.5 BEST 2,290.6 5.71984 3,933.2 7.2 BEST 2,503.3 5.31985 4,220.3 4.1 MIDDLE 2,720.3 5.21986 4,462.8 3.5 MIDDLE 2,899.7 4.11987 4,739.5 3.4 MIDDLE 3,100.2 3.31988 5,103.8 4.1 MIDDLE 3,353.6 4.11989 5,484.4 3.5 MIDDLE 3,598.5 2.81990 5,803.1 1.9 WORST 3,839.9 21991 5,995.9 �0.2 WORST 3,986.1 0.21992 6,337.7 3.3 MIDDLE 4,235.3 3.31993 6,657.4 2.7 MIDDLE 4,477.9 3.31994 7,072.2 4 MIDDLE 4,743.3 3.71995 7,397.7 2.5 WORST 4,975.8 2.71996 7,816.9 3.7 MIDDLE 5,256.8 3.41997 8,304.3 4.5 BEST 5,547.4 3.81998 8,747.0 4.2 MIDDLE 5,879.5 51999 9,268.4 4.5 BEST 6,282.5 5.12000 9,817.0 3.7 MIDDLE 6,739.4 4.72001 10,128.0 0.8 WORST 7,055.0 2.52002 10,487.0 1.9 WORST 7,376.1 3.12003 11,004.0 3 MIDDLE 7,760.9 3.32004 11,733.5 4.2 MIDDLE 8,229.1 3.8

Ranking of % Gross Non� % Real Ranking of % Real PCE residential Fixed GNRFI Real GNRFI Total Nonfarm

Year Growth Investment Growth Growth Employment

1951 WORST 31.8 4.6 MIDDLE 47,9301952 MIDDLE 31.9 �1.9 WORST 48,9091953 BEST 35.1 9 BEST 50,3101954 WORST 34.7 �2.1 WORST 49,0931955 BEST 39 11.1 BEST 50,7441956 MIDDLE 44.5 5.7 MIDDLE 52,4731957 WORST 47.5 1.5 MIDDLE 52,9591958 WORST 42.5 �11 WORST 51,4261959 BEST 46.5 8 MIDDLE 53,3741960 WORST 49.4 5.7 MIDDLE 54,2961961 WORST 48.8 �0.6 WORST 54,1051962 BEST 53.1 8.7 MIDDLE 55,6591963 MIDDLE 56 5.6 MIDDLE 56,7641964 BEST 63 11.9 BEST 58,3911965 BEST 74.8 17.4 BEST 60,8741966 BEST 85.4 12.5 BEST 64,0201967 MIDDLE 86.4 �1.4 WORST 65,9311968 BEST 93.4 4.5 MIDDLE 68,0231969 MIDDLE 104.7 7.6 MIDDLE 70,5121970 WORST 109 �0.5 WORST 71,0061971 MIDDLE 114.1 0 WORST 71,3351972 BEST 128.8 9.2 BEST 73,7981973 BEST 153.3 14.6 BEST 76,9121974 WORST 169.5 0.8 WORST 78,3891975 WORST 173.7 �9.9 WORST 77,0691976 BEST 192.4 4.9 MIDDLE 79,5021977 MIDDLE 228.7 11.3 BEST 82,5931978 BEST 280.6 15 BEST 86,8261979 WORST 333.9 10.1 BEST 89,9321980 WORST 362.4 �0.3 WORST 90,5281981 WORST 420 5.7 MIDDLE 91,2891982 WORST 426.5 �3.8 WORST 89,6771983 BEST 417.2 �1.3 WORST 90,2801984 BEST 489.6 17.7 BEST 94,5301985 BEST 526.2 6.6 MIDDLE 97,5111986 MIDDLE 519.8 �2.9 WORST 99,4741987 MIDDLE 524.1 �0.1 WORST 102,0881988 MIDDLE 563.8 5.2 MIDDLE 105,3451989 WORST 607.7 5.6 MIDDLE 108,0141990 WORST 622.4 0.5 WORST 109,4871991 WORST 598.2 �5.4 WORST 108,3741992 MIDDLE 612.1 3.2 MIDDLE 108,7261993 MIDDLE 666.6 8.7 MIDDLE 110,8441994 MIDDLE 731.4 9.2 BEST 114,2911995 WORST 810 10.5 BEST 117,2981996 MIDDLE 875.4 9.3 BEST 119,7081997 MIDDLE 968.7 12.1 BEST 122,7761998 BEST 1,052.6 11.1 BEST 125,9301999 BEST 1,133.9 9.2 BEST 128,9932000 BEST 1,232.1 8.7 MIDDLE 131,7852001 WORST 1,176.8 �4.2 WORST 131,8262002 MIDDLE 1,063.9 �8.9 WORST 130,3412003 MIDDLE 1,094.7 3.3 MIDDLE 129,9312004 MIDDLE 1,220.2 10.5 BEST 131,481

% Ranking of % Ranking of Ranking ofEmployment Employment Unemployment Unemployment Marginal Marginal

Year Growth Growth Rate Rate Tax Rate Tax Rate

1951 5.84 BEST 3.3 BEST 87.20% HIGHEST1952 2.04 MIDDLE 3 BEST 88.00% HIGHEST1953 2.86 MIDDLE 2.9 BEST 88.00% HIGHEST1954 �2.42 WORST 5.5 MIDDLE 87.00% HIGHEST1955 3.36 BEST 4.4 BEST 87.00% HIGHEST1956 3.41 BEST 4.1 BEST 87.00% HIGHEST1957 0.93 WORST 4.3 BEST 87.00% HIGHEST1958 �2.89 WORST 6.8 WORST 87.00% HIGHEST1959 3.79 BEST 5.5 MIDDLE 87.00% HIGHEST1960 1.73 MIDDLE 5.5 MIDDLE 87.00% HIGHEST1961 �0.35 WORST 6.7 WORST 87.00% HIGHEST1962 2.87 MIDDLE 5.5 MIDDLE 87.00% HIGHEST1963 1.99 MIDDLE 5.7 MIDDLE 87.00% HIGHEST1964 2.87 MIDDLE 5.2 MIDDLE 77.00% HIGHEST1965 4.25 BEST 4.5 BEST 70.00% HIGHEST1966 5.17 BEST 3.8 BEST 70.00% MIDDLE1967 2.99 MIDDLE 3.8 BEST 70.00% MIDDLE1968 3.17 BEST 3.6 BEST 75.30% HIGHEST1969 3.66 BEST 3.5 BEST 77.00% HIGHEST1970 0.7 WORST 4.9 BEST 71.80% HIGHEST1971 0.46 WORST 5.9 MIDDLE 70.00% MIDDLE1972 3.45 BEST 5.6 MIDDLE 70.00% MIDDLE1973 4.22 BEST 4.9 BEST 70.00% MIDDLE1974 1.92 MIDDLE 5.6 MIDDLE 70.00% MIDDLE1975 �1.68 WORST 8.5 WORST 70.00% MIDDLE1976 3.16 BEST 7.7 WORST 70.00% MIDDLE1977 3.89 BEST 7.1 WORST 70.00% MIDDLE1978 5.13 BEST 6.1 WORST 70.00% MIDDLE1979 3.58 BEST 5.8 MIDDLE 70.00% MIDDLE1980 0.66 WORST 7.1 WORST 70.00% MIDDLE1981 0.84 WORST 7.6 WORST 70.00% MIDDLE1982 �1.77 WORST 9.7 WORST 50.00% MIDDLE1983 0.67 WORST 9.6 WORST 50.00% MIDDLE1984 4.71 BEST 7.5 WORST 50.00% MIDDLE1985 3.15 BEST 7.2 WORST 50.00% MIDDLE1986 2.01 MIDDLE 7 WORST 50.00% MIDDLE1987 2.63 MIDDLE 6.2 WORST 38.50% LOWEST1988 3.19 BEST 5.5 MIDDLE 28.00% LOWEST1989 2.53 MIDDLE 5.3 MIDDLE 28.00% LOWEST1990 1.36 WORST 5.6 MIDDLE 31.00% LOWEST1991 �1.02 WORST 6.8 WORST 31.00% LOWEST1992 0.32 WORST 7.5 WORST 31.00% LOWEST1993 1.95 MIDDLE 6.9 WORST 40.80% LOWEST1994 3.11 BEST 6.1 WORST 40.80% LOWEST1995 2.63 MIDDLE 5.6 MIDDLE 40.80% LOWEST1996 2.05 MIDDLE 5.4 MIDDLE 40.80% LOWEST1997 2.56 MIDDLE 4.9 BEST 40.80% LOWEST1998 2.57 MIDDLE 4.5 BEST 40.80% LOWEST1999 2.43 MIDDLE 4.2 BEST 40.80% LOWEST2000 2.16 MIDDLE 4 BEST 40.80% LOWEST2001 0.03 WORST 4.7 BEST 40.30% LOWEST2002 �1.13 WORST 5.8 MIDDLE 39.80% LOWEST2003 �0.31 WORST 6 MIDDLE 36.10% LOWEST2004 1.19 WORST 5.5 MIDDLE 36.10% LOWEST

Notes

Introduction

. U.S. Department of Commerce, Bureau of Economic Analysis, Na-tional Income and Product Accounts (data available at www.bea.doc.gov);U.S. Department of Labor, Bureau of Labor Statistics (data available at www.bls.gov); White House, Office of Management and Budget, Historical Tables:Budget of the United States: Fiscal Year (Washington, D.C.: GPO, ),–.

. Tax Policy Center, “EGTRRA, JCWA, and JGTRRA: Distribution ofIndividual Income, Corporate, and Estate Tax Change by Cash Income Class,,” Table T– (available at http://taxpolicycenter.org/TaxModel/tmdb/TMTemplate.cfm?DocID=&topicID=&topicID=&DocTypeID=).

. U.S. Department of Commerce, Bureau of Economic Analysis, Na-tional Income and Product Accounts; U.S. Department of Labor, Bureau ofLabor Statistics; White House, Historical Tables, .

. Tax Policy Center, “Individual Tax Brackets –,” available athttp://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=

and Tax Policy Center, “Individual Tax Brackets ,” available at http://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=.

. U.S Department of Commerce, Bureau of Economic Analysis, Na-tional Income and Product Accounts.

Chapter .The American Economic Vision

. Andrew Carnegie, The Gospel of Wealth (London: F. C. Hagen, ).. Franklin D. Roosevelt, “State of the Union Address,” January , .

. See, for example, Dana Milbank, “For Bush Tax Plan, a Little InnerDissent,” Washington Post, February , .

. Warren Buffett, “Dividend Voodoo,” Washington Post, May ,, A.

. George W. Bush, “Remarks by the President at Chicago MercantileExchange,” March , .

. Aristotle, Politics, book , chapter ; Richard McKeon, ed., TheBasic Works of Aristotle (New York: Random House, ), –.

Chapter .The Origins of the American Dream

. The Collected Works of Abraham Lincoln, ed. Roy P. Basler (NewBrunswick, N.J., Rutgers University Press, ), :.

. Ibid., :–, :.. Ibid., :.. Cited in Gabor Boritt, Lincoln and the Economics of the American

Dream (Memphis: Memphis State University Press, ), .. Robert Hendrickson, The Facts on File Encyclopedia of Word and

Phrase Origins (New York: Checkmark, ), .. James Truslow Adams, The Epic of America (Boston: Little, Brown,

), : “But there has been also the American dream, that dream of a landin which life should be better and richer and fuller for every man, with op-portunity for each according to his ability or achievement. It is a difficultdream for the European upper classes to interpret adequately, and too manyof us ourselves have grown weary and mistrustful of it. It is not a dream ofmotor cars and high wages merely, but a dream of a social order in whicheach man and each woman shall be able to attain to the fullest stature ofwhich they are innately capable, and be recognized by others for what theyare, regardless of the fortuitous circumstances of birth or position.” Adamswent on to write, “In a modern industrial State, an economic base is essen-tial for all. We point with pride to our ‘national income,’ but the nation isonly an aggregate of individual men and women, and when we turn from thesingle figure of total income to the incomes of individuals, we find a verymarked injustice in its distribution. There is no reason why wealth, which isa social product, should not be more equitably controlled and distributed inthe interests of society. . . . If [the American Dream] is to come true, thoseon top, financially, intellectually, or otherwise, have got to devote themselves

Notes to Pages ‒

to the ‘Great Society,’ and those who are below in the scale have got to striveto rise, not merely economically, but culturally. . . . Lincoln was not great be-cause he was born in a log cabin, but because he got out of it—that, becausehe rose above the poverty, ignorance, lack of ambition, shiftlessness of char-acter, contentment with mean things and low aims which kept so manythousands in the huts where they were born.” Ibid., –.

. Alexis de Tocqueville, Democracy in America, trans. Henry Reeve,rev. by Frances Bowen, ed. Phillip Bradley (New York: Vintage, ), :.

. Ibid. :–.. Ibid. :.. Ibid. :–.. Ibid. :–.. Ibid. :.. Boritt, Lincoln, .. Robert V. Remini, Henry Clay: Statesman for the Union (New York:

W. W. Norton, ), –.. Ibid., , –.. Boritt, Lincoln, xxiv, .. Collected Works of Abraham Lincoln, :; Boritt, Lincoln, .. Collected Works of Abraham Lincoln, :.. Ibid., :.. Boritt, Lincoln, . Interestingly, the reason Lincoln most admired

the great African American leader Frederick Douglass was that, like Lincolnhimself, Douglass embodied the “self-made” ethic. Douglass had struggledfrom nowhere to become one of the nation’s most eloquent politicians andprominent citizens. Lincoln remarked to an associate that “considering thecondition from which Douglass rose, and the position to which he attained,he was . . . one of the most meritorious men in America.” Douglass, mean-while, found in Lincoln “the first great man that I talked with in the UnitedStates, who in no single instance reminded me . . . of the difference of color.”Boritt, Lincoln, .

. Ibid., .

Chapter .The Gospel of Wealth

. U.S. Department of Commerce, Bureau of the Census, HistoricalStatistics of the United States: Colonial Times to (Washington, D.C.: GPO,), :–, :–, :, :.

Notes to Pages ‒

. Thomas C. Cochran and William Miller, The Age of Enterprise: A So-cial History of Industrial America (New York: Harper Torchbooks, ), –, –.

. Historical Statistics of the United States, :–.. Eric Foner, The Story of American Freedom (New York: W. W. Nor-

ton, ), .. Historical Statistics of the United States, :.. Seymour J. Mandelbaum, Boss Tweed’s New York (New York: J. Wiley,

), .. Louis Gould, Grand Old Party: A History of the Republicans (New

York: Random House, ), .. Mark Twain and Charles Dudley Warner, The Gilded Age: A Tale of

To-Day (Hartford: American Publishing Company, ).. John G. Sproat, The Best Men: Liberal Reformers in the Gilded Age

(New York: Oxford University Press, ), .. Ibid., , –.. Ibid., .. Spencer coined the term in volume of his Principles of Biology,

published in . Herbert Spencer, The Principles of Biology (New York:D. Appleton, ), :. On Spencer’s influence in America, see RichardHofstadter, Social Darwinism in American Thought, intr. Eric Foner, Recon-struction (Boston: Beacon Press, ), –.

. Sproat, Best Men, ; Foner, Reconstruction, –.. Foner, The Story of American Freedom, .. David Montgomery, “Labor in the Industrial Era,” in Richard B.

Morris, ed., A History of the American Worker (originally published as TheU.S. Department of Labor History of the American Worker) (Princeton: Prince-ton University Press, ), ; Melvyn Dubofsky, Industrialism and the Ameri-can Worker, – (New York: Thomas Y. Crowell, ), .

. Sproat, Best Men, .. Ibid., –.. Charles Dickens, Hard Times (New York: T. L. McElrath, ).. Charles Darwin, The Origin of Species, intr. Julian Huxley (New

York: Mentor, ).. Herbert Spencer, “Progress: Its Law and Causes,” Westminster Re-

view (April ): – .. Hofstadter, Social Darwinism, –; Sidney Fine, Laissez-Faire

and the General-Welfare State: A Study of Conflict in American Thought – (Ann Arbor: University of Michigan Press; London: Geoffrey Cumber-lege, Oxford University Press, ), – .

Notes to Pages ‒

. See Darwin, The Origin of Species, .. Herbert Spencer, The Principles of Sociology (New York: D. Apple-

ton, ), :–.. Herbert Spencer, Social Statics: The Conditions Essential to Happi-

ness Specified, and the First of Them Developed (New York: Robert Schalken-bach Foundation, ), –.

. Sproat, Best Men, .. Foner, Story of American Freedom, –.. Hofstadter, Social Darwinism, .. Ibid., , .. Cited in Fine, Laissez-Faire and the General-Welfare State, .. Sproat, Best Men, .. Robert G. McCloskey, The American Supreme Court, d ed., rev.

Sanford Levinson (Chicago: University of Chicago Press, ), .. Ibid., –; Richard A. Posner, ed., The Essential Holmes: Selec-

tions from the Letters, Speeches, Judicial Opinions, and Other Writings of OliverWendell Holmes, Jr. (Chicago: University of Chicago Press, ), .

. Harold C. Livesay, Andrew Carnegie and the Rise of Big Business, ed.Oscar Handlin (Boston: Little, Brown, ), –.

. Andrew Carnegie, The Gospel of Wealth (Bedford, Mass.: Apple-wood Books, ), .

. Ibid., –.

Chapter .The Age of Reform

. John L. Thomas, Alternative America: Henry George, Edward Bel-lamy, Henry Demarest Lloyd and the Adversary Tradition (Cambridge, Mass.:Belknap, ), –, –; David W. Noble, The Progressive Mind, – (Chicago: Rand McNally, ), –.

. John G. Sproat, The Best Men: Liberal Reformers in the Gilded Age(New York: Oxford University Press, ), –; Charles R. Williams, ed.,Diary and Letters of Rutherford Birchard Hayes (Columbus: Ohio State Ar-chaeological and Historical Society, ), :–.

. Allen F. Davis, Spearheads for Reform: The Social Settlements and theProgressive Movement – (New York: Oxford University Press, ),, –.

. Kevin Phillips, William McKinley (New York: Times Books, ),–, –.

Notes to Pages ‒

. John Steele Gordon, An Empire of Wealth (New York: Harper-Collins, ), .

. Phillips, William McKinley, –, – .. Thomas, Alternative America, –; Jay Martin, Harvest of Change:

American Literature – (Englewood Cliffs: Prentice-Hall, ), –,– , –.

. Theodore Roosevelt,“State of the Union Message,” December , .. Lewis L. Gould, The Presidency of Theodore Roosevelt (Lawrence:

University Press of Kansas, ), .. Louis Filler, The Muckrakers (University Park: Pennsylvania State

University Press, ), , , –, –, .. Gould, Presidency of Theodore Roosevelt, –, –.. Gould, Grand Old Party: A History of the Republicans (New York:

Random House, ), .. Gould, Presidency of Theodore Roosevelt, –.. Richard Hofstadter, The Age of Reform (New York: Vintage, ), .. Gould, Grand Old Party, .. Paolo E. Coletta, The Presidency of William Howard Taft (Lawrence:

University of Kansas Press, ), –, –, .. Woodrow Wilson, Congressional Government: A Study in American

Politics (Boston: Houghton, Mifflin, ).. Arthur S. Link, Woodrow Wilson and the Progressive Era –

(New York: Harper and Brothers, ), –.. Woodrow Wilson, The New Freedom: A Call for the Emancipation

of the Generous Energies of a People, intr. William E. Leuchtenburg (Engle-wood Cliffs: Prentice-Hall, ), .

. Ibid., .. Ibid.. Ibid., , , , , –.. Link, Woodrow Wilson and the Progressive Era, – , –;

Gould, Presidency of Theodore Roosevelt, .. Ibid., –, –, –.. William E. Leuchtenburg, The Perils of Prosperity –, d ed.

(Chicago: University of Chicago Press, ), ; U.S. Department of Com-merce, Bureau of the Census, Historical Statistics of the United States: Colo-nial Times to (Washington, D.C.: GPO, ), :– .

. Ibid., :, :, :; National Bureau of Economic Research,“Business Cycles Expansions and Contractions”; available at http://www.nber.org/cycles.html/.

Notes to Pages ‒

Chapter .The Business of America Is Business

. William E. Leuchtenburg, The Perils of Prosperity –, d ed.(Chicago: University of Chicago Press, ), .

. U.S. Department of Commerce, Bureau of the Census, HistoricalStatistics of the United States: Colonial Times to (Washington, D.C.:GPO, ), :, :, :, :, :; Frederick Lewis Allen, Only Yes-terday (New York: Perennial Classics, ), – ; Samuel Eliot Morison,The Oxford History of the American People (New York: Oxford UniversityPress, ), .

. Lendol Calder, Financing the American Dream: A Cultural History ofConsumer Credit (Princeton: Princeton University Press, ), –.

. Ibid., .. John Caples, Tested Advertising Methods, th ed. (Paramus: Prentice-

Hall, ); Leuchtenburg, Perils of Prosperity, .. Allen, Only Yesterday, .. Calder, Financing the American Dream, .. Historical Statistics of the United States, :; U.S. Department of

Commerce, Bureau of Economic Analysis, National Income and ProductAccounts (available at www.bea.doc.gov).

. That is, mortgages for one- to four-family homes. Historical Statis-tics of the United States, :; U.S. Department of Commerce, Bureau ofEconomic Analysis, National Income and Product Accounts.

. Jean-Baptiste Say, A Treatise on Political Economy, Reprints of Eco-nomic Classics (New York: Augustus M. Kelley, ), ; John MaynardKeynes, The General Theory of Employment, Interest, and Money (New York:Harcourt Brace, ), –.

. Andrew W. Mellon, Taxation: The People’s Business (New York:Macmillan, ), .

. Leuchtenburg, Perils of Prosperity, , , ; Historical Statisticsof the United States, :.

. Historical Statistics of the United States, :, :, :, :.. Burton G. Malkiel, A Random Walk Down Wall Street (New York:

W. W. Norton, ), –.. William E. Leuchtenburg, Franklin Roosevelt and the New Deal

(New York: Harper Torchbooks, ), .. Ibid., –; for unemployment estimate, see Historical Statistics of

the United States, :.

Notes to Pages ‒

. Peter Temin, Did Monetary Forces Cause the Great Depression?(New York: W. W. Norton, ).

. Historical Statistics of the United States, :, :.. Ibid., :; White House, Office of Management and Budget, His-

torical Tables: Budget of the United States: Fiscal Year (Washington, D.C.:GPO, ), –.

. Later official estimates of unemployment by the Bureau of LaborStatistics, based on work by the scholar Stanley Lebergott, placed unemploy-ment in at . percent. However, these estimates treated workers em-ployed in federal public works programs as unemployed. When public worksworkers are treated as employed, the estimate is reduced from . to . per-cent. See Michael R. Darby,“Three-and-a-Half Million U.S. Employees HaveBeen Mislaid: Or, an Explanation for Unemployment, –,” Journal ofPolitical Economy , no. (): , and also discussion in chapter below.

. See Peter Temin, Lessons from the Great Depression (Cambridge:MIT Press, ).

. The centrality of monetary policy as a cause of the Great Depres-sion was first argued by Milton Friedman and Anna Jacobson Schwartz, AMonetary History of the United States – (Princeton: Princeton Uni-versity Press, ), – .

. Leuchtenburg, Perils of Prosperity, .. U.S. Department of Commerce, Statistical Abstract of the United

States (Washington, D.C.: GPO, ), .. Historical Statistics of the United States, :.. Leuchtenburg, Perils of Prosperity, –.

Chapter .The Renewal of the American Dream

. William E. Leuchtenburg, Franklin Roosevelt and the New Deal(New York: Harper Torchbooks, ), .

. Arthur M. Schlesinger, Jr.,“The ‘Hundred Days’ of F.D.R.,” New YorkTimes, April , .

. Frances Perkins, The Roosevelt I Knew (New York: Viking, ),–.

. Leuchtenburg, Franklin Roosevelt, .. U.S. Department of Commerce, Statistical Abstract of the United States

(Washington, D.C.: GPO, ), ; National Bureau of Economic Re-

Notes to Pages ‒

search, “Business Cycles Expansions and Contractions”; available at http://www.nber.org/cycles.html/; Historical Statistics of the United States, :.

. See Federal Reserve Bank historical data on federal funds rate athttp://www.federalreserve.gov/releases/H/data/m/fedfund.txt.

. White House, Office of Management and Budget, Historical Tables:Budget of the United States: Fiscal Year (Washington, D.C.: GPO, ),–; Historical Statistics of the United States, :.

. Jeremy Atack and Peter Passell, A New Economic View of AmericanHistory, d ed. (New York: W. W. Norton, ), – .

. White House, Office of Management and Budget, Historical Tables:Budget of the United States: Fiscal Year (Washington, D.C.: GPO, ),–; Historical Statistics of the United States, :.

. Michael R. Darby, “Three-and-a-Half Million U.S. Employees HaveBeen Mislaid: Or, an Explanation for Unemployment, –,” Journal ofPolitical Economy , no. (): –. Cf. Atack and Passell, A New EconomicView of American History, –.

. Leuchtenburg, Franklin Roosevelt, –.. Darby, “Three-and-a-Half Million U.S. Employees,” .. Franklin D. Roosevelt,“State of the Union Address,” January , .. Historical Statistics of the United States, :.. Ibid.. G. J. Santoni,“The Employment Act of : Some History Notes,”

Federal Reserve Bank of St. Louis Review (March ): –.. Stephen E. Ambrose, Eisenhower, vol. , The President (New York:

Simon and Schuster, ), , , –.. Historical Statistics of the United States, :; White House, Office

of Management and Budget, Historical Tables: Budget of the United States:Fiscal Year (Washington, D.C.: GPO, ), –.

. Historical Statistics of the United States, :.. Ibid., :–, :.. National Bureau of Economic Research, “Business Cycles Expan-

sions and Contractions”; available at http://www.nber.org/cycles.html/; His-torical Statistics of the United States, :

. Historical Tables: Budget of the United States, –, –; Histori-cal Statistics of the United States, :.

. “The New Doctrinarianism,” New York Times, October , , .. U.S. Department of Commerce, Bureau of Economic Analysis,

National Income and Product Accounts; U.S. Department of Labor, Bureauof Labor Statistics. Estimates for poverty in the pre-s era were developed

Notes to Pages ‒

by James Tobin. See Herbert Stein, Presidential Economics (Washington,D.C.: American Enterprise Institute, ), n.

. A. W. H. Phillips, “The Relation between Unemployment and theRate of Change of Money Wage Rates in the United Kingdom, –,”Economica n.s. , no. (): –.

. Paul A. Samuelson and Robert M. Solow, “Analytical Aspects ofAnti-Inflation Policy,” American Economic Review , no. (): –.

. Arthur M. Schlesinger, Jr., A Thousand Days (Boston: HoughtonMifflin, ), – .

. Robert E. Thompson, “Heller’s Concepts Now Prevail,” Washing-ton Post, Times Herald, February , , A.

. John F. Kennedy, “State of the Union Address,” January , ;John F. Kennedy, “State of the Union Address,” January , .

. John F. Kennedy, “Commencement Address at Yale University,”June , .

. Bernard D. Nossiter, “Taxes to Be Reduced If Recovery Falters,”Washington Post, Times Herald, June , , A; Bernard D. Nossiter,“Kennedy Sees Tax Cut Stimulating Economy,” Washington Post, Times Her-ald, June , , A; “Case and Goldwater Urge Tax Cuts Now,” WashingtonPost, Times Herald, July , , A; Bernard D. Nossiter, “Job Figures DimHope for Tax Cut; Kennedy Indicates Reduction Request Unlikely This Year,”Washington Post, Times Herald August , , A.

. Carroll Kirkpatrick, “Kennedy Puts Tax Cut at Top of His List for Legislation,” Washington Post, Times Herald, January , , A; JosephA. Loftus, “Economy Viewed in Human Way in Report by Kennedy Advis-ers,” New York Times, January , , ; Thompson, “Heller’s ConceptsNow Prevail.”

. U.S. Department of Commerce, Bureau of Economic Analysis, Na-tional Income and Product Accounts; U.S. Department of Labor, Bureau ofLabor Statistics.

. “The Economic Report,” Washington Post, Times Herald, January, , A; Time, December , .

. Historical Tables: Budget of the United States, – ; U.S. Depart-ment of Commerce, Bureau of Economic Analysis, National Income andProduct Accounts.

. Stein, Presidential Economics, –.. Ibid., .. M. J. Rossant, “An Economic Schism,” New York Times, May ,

, .. Stein, Presidential Economics, .

Notes to Pages ‒

. U.S. Department of Labor, Bureau of Labor Statistics.. A. M. Okun, “Efficient Disinflationary Policies,” American Eco-

nomic Review , no. (): –; Stein, Presidential Economics, –;U.S. Department of Labor, Bureau of Labor Statistics.

. Daniel Yankelovich, “Taking Account of the Non-Economic Fea-tures of Inflation,” presented to American Council of Life Insurance, Febru-ary , cited in Robert J. Samuelson, “Unsung Triumph,” Washington Post,June , , A.

. Milton Friedman and Anna Jacobson Schwartz, A Monetary Historyof the United States – (Princeton: Princeton University Press, ).

. Milton Friedman, “The Role of Monetary Policy,” American Eco-nomic Review (March ): –.

Chapter .The New Gospel of Wealth

. Bruce Bartlett, Reaganomics: Supply-Side Economics in Action (NewYork: Quill, ), .

. Herbert Stein, Presidential Economics (Washington, D.C.: AmericanEnterprise Institute, ), .

. Cited in ibid., – .. Irving Kristol, “American Conservatism –,” The Public In-

terest, no. (Fall ).. Stein, Presidential Economics, , –.. Ibid., – .. Leonard Silk, “Trying to Repeal Keynes,” New York Times, February

, .. Stein, Presidential Economics, .. Lou Cannon, Reagan (New York: Perigree, ), –; see texts of

Reagan’s Eureka College Commencement Address and speech “ATime for Choosing,”at http://.../reagan/html/reagan_speeches.shtml;Haynes Johnson, “Resurrection of Coolidge—The Stamping of Nostalgia’sClay Feet,” Washington Post, June , , A.

. Cannon, Reagan, –; see, for example, Rowland Evans andRobert Novak, “Reagan’s Social Security Gaffe,” Washington Post, December, , A.

. Cited in Stein, Presidential Economics, .. Ronald Reagan, “Inaugural Address,” January , ; Leonard

Notes to Pages ‒

Silk, “Major Change in Theory Seen,” New York Times, March , , D;Silk, “Trying to Repeal Keynes.”

. U.S. Department of Commerce, Bureau of Economic Analysis, Na-tional Income and Product Accounts; U.S. Department of Labor, Bureau ofLabor Statistics.

. See, for example, Jack F. Kemp, “New York State’s (Groan) Taxes,”May , , .

. For a detailed discussion of this literature, see chapter .. See, for example, White House, Economic Report of the President

(Washington, D.C.: GPO, ), –.. George W. Bush, “President’s Remarks to the Latino Coalition,”

February , ; George W. Bush, “Remarks by the President to WomenBusiness Leaders,” March , .

. Cited in William Greider, “Rolling Back the Twentieth Century,”The Nation, May , .

. Alan Greenspan and James Kennedy, “Estimates of Home Mort-gage Originations, Repayments, and Debt On One-to-Four-Family Resi-dences,” Working Paper – (Washington, D.C.: Board of Governors ofthe Federal Reserve, ); William G. Gale and Peter R. Orszag, “Bush Ad-ministration Tax Policy: Short-Term Stimulus,” Tax Notes (Tax Policy Cen-ter), November , . The short-term stimulus effect of either home equitycash-outs or tax cuts depends on how much of the money consumers chooseto spend. Estimates of this “marginal propensity to consume” (MPC) vary andare difficult to make precise. A Fed study based on surveys of homeownerswho cashed out home equity in and estimated that homeownersspent percent of the money on consumer goods and ploughed another

percent into home improvement—i.e., returning percent to the economyin the form of consumption or residential investment spending. A separateFed study of taxpayers’ propensity to spend the reduced withholding andchild credit allowances under the Bush tax cuts estimated the MPC atapproximately percent, but acknowledged it could be significantly higher.Since these MPC estimates are known to be slippery, I have simply cited thetotal cash amounts for equity cash-outs and tax cuts. See Margaret M. Mc-Connell, Richard W. Peach, and Alex Al-Haschimi, “After the RefinancingBoom: Will Consumers Scale Back Their Spending?” Current Issues in Eco-nomics and Finance (Federal Reserve Bank of New York) , no. (December), and Julia Lynn Coronado, Joseph P. Lupton, and Louise M. Sheiner,“The Household Spending Response to the Tax Cut: Evidence fromSurvey Data,” Working Paper – (Washington, D.C.: Board of Gover-nors of the Federal Reserve Bank, ).

Notes to Pages ‒

Chapter .The Current Debate

. The basic findings of this chapter are presented in greater detail in Norton Garfinkle, “Supply-Side vs. Demand-Side Tax Cuts and U.S.Economic Growth –,” Critical Review , nos. – (). www.criticalreview.com.

. R. Glenn Hubbard,“Testimony before U.S. Congress Joint EconomicCommittee,” May , .

. George W. Bush,“Remarks by the President at Electronic IndustriesAlliance Government Industry Dinner,” May , ; George W. Bush, “Re-marks by the President at Chicago Mercantile Exchange,” March , ;George W. Bush, “President Welcomes Treasury Secretary John Snow toCabinet: Remarks by the President at the Swearing-In Ceremony for Trea-sury Secretary John Snow, The Cash Room, The Treasury Building,” Febru-ary , .

. William G. Gale and Samara R. Potter, “An Economic Evaluation ofthe Economic Growth and Tax Relief Reconciliation Act of ,” NationalTax Journal , no. (): –; Martin Feldstein, ‘‘Budget Deficits, TaxRules, and Real Interest Rates,’’ Working Paper no. (Cambridge, Mass.:National Bureau of Economic Research, ); Martin Feldstein and DouglasW. Elmendorf, “Budget Deficits, Tax Incentives, and Inflation: A SurprisingLesson from the – Recovery,” Working Paper no. (Cambridge,Mass.: National Bureau of Economic Research, ); Martin Feldstein andDouglas W. Elmendorf, “Budget Deficits, Tax Incentives, and Inflation: ASurprising Lesson from the – Recovery,” in Lawrence H. Summers,ed., Tax Policy and the Economy (Cambridge, Mass.: National Bureau of Eco-nomic Research, ), :–.

. Eric Engen and Jonathan Skinner,“Taxation and Economic Growth,”National Tax Journal , no. (): – . Harvey S. Rosen,“The Case forMaking the Tax Cuts Permanent.” White House, May , (available athttp://www.whitehouse.gov/cea/nta-spring.html); R. Glenn Hubbard, “TheSecond-Term Economy,” Wall Street Journal, November , .

. Tax Policy Center, “EGTRRA, JCWA, and JGTRRA: Distribution ofIndividual Income, Corporate, and Estate Tax Change by Cash Income Class,,” Table T –, (available at http://www.taxpolicycenter.org/TaxModel/tmdb/TMTemplate.cfm?DocID=&topicID=&topicID=&DocTypeID=).

. Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S.Rosen, “Entrepreneurs, Income Taxes, and Investment,” in Joel Slemrod, ed.,

Notes to Pages ‒

Does Atlas Shrug? The Economic Consequences of Taxing the Rich (Cambridge:Harvard University Press, ), –; Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen, “Income Taxes and Entrepreneurs’Use of Labor,” Journal of Labor Economics , no. (): –; RobertCarroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen, “PersonalIncome Taxes and the Growth of Small Firms,” in James Poterba, ed., TaxPolicy and the Economy (Cambridge: MIT Press, ), : – .

. Rosen, “The Case for Making the Tax Cuts Permanent”; Hubbard,“Testimony before U.S. Congress Joint Economic Committee.”

. Sources for data are as follows: GDP growth, growth in real per-sonal consumption expenditures, real business investment growth (real growthin gross nonresidential fixed investment): U.S. Department of Commerce,Bureau of Economic Analysis, National Income and Product Accounts. Em-ployment growth and unemployment rate: U.S. Department of Labor, Bureauof Labor Statistics. Top marginal income tax rates: Tax Policy Center. Foreach statistical series, I classified the fifty-four years into three eighteen-yeargroups described as “best,” “middle,” and “worst” performance levels. Seeappendix.

. Figures for gross nonresidential fixed investment provide a betterindex of the behavioral effect of tax policy changes than the net figures,which include depreciation. Gross figures reflect the actual amount of moneyinvested in businesses in a given year.

. James Tobin, “Monetary Policy,” in David R. Henderson, ed., TheConcise Encyclopedia of Economics () (available at http://www.econlib.org/library/Enc/MonetaryPolicy.html).

. Economic Policy Institute,“Economists’ Statement” () (availableat http://www.epinet.org/press_releases/economiststatement.pdf).

. White House, Economic Report of the President (Washington, D.C.:GPO, ).

. Peter R. Orszag, “The Bush Tax Cut Is Now about the Same Size asthe Reagan Tax Cuts,” Center on Budget and Policy Priorities () (avail-able at http://www.cbpp.org/ ––tax.htm).

. Congressional Budget Office, The Changing Distribution of FederalTaxes: A Closer Look at . Tax Policy Center, “EGTRRA, JCWA, andJGTRRA: Distribution of Individual Income, Corporate, and Estate Tax Changeby Cash Income Class, ,” Table T– () (available at http://www.taxpolicycenter.org/TaxModel/tmdb/TMTemplate.cfm?DocID=&topicID=&topicID=&DocTypeID=).

. The growth in investment in can best be understood as a re-sponse to the Bush administration’s one-year percent “bonus depre-

Notes to Pages ‒

ciation” tax deduction for all business investment by corporations and indi-viduals. Corporate taxpaying entities that account for roughly percent ofall business investment in the economy were primarily responsible for thehigh rate of business investment in . It would be hard to attribute thisinvestment level to a response by pass-through business owners to the

reduction in the top marginal personal income tax rate since these businessowners account for only percent of all business investment.

. Commission on Presidential Debates, “The First Gore–Bush Pres-idential Debate,” October , , unofficial transcript (available at http://www.debates.org/pages/transa.html); “The President’s News Confer-ence in Crawford, Texas,” Weekly Compilation of Presidential Documents ,no. ( August ): –.

. See Gale and Potter, “An Economic Evaluation of the EconomicGrowth and Tax Relief Reconciliation Act of .”

19. Employment during the period under study is best measured bygrowth in employment rather than by the unemployment rate. Employ-ment growth is a directly measurable statistic. By contrast, the unemploy-ment rate is derived by dividing the number of people employed by thenumber classified as being in the workforce (i.e., employed or “looking forwork”). The unemployment rate can be an unreliable statistic. The numberof people working or available for work can be misclassified as in the statis-tics for the Depression years or can be substantially affected by a change inthe number of people who temporarily or permanently enter or drop out ofthe workforce. In some cases, such as the relatively weak economic period ofJanuary –March , the unemployment rate declined while employ-ment growth was only , per month, substantially less than the ,

per month required to provide jobs for new entrants to the workforce. Theanomaly can best be understood as a result of people dropping out of theworkforce due to a decline in the number of available jobs. By contrast, inthe relatively strong economic period – employment growth wassubstantially higher (, per month) as new people entered the work-force in response to an increase in the number of available jobs.

Chapter .The Way Forward

. Robert H. Frank and Philip J. Cook, The Winner-Take-All Society(New York: Free Press, ).

Notes to Pages ‒

abolitionist movement, ,

Ackley, Gardner,

activist government, , , , – ,, –

Adams, Charles Francis,

Adams, Henry,

Adams, James Truslow,

Addams, Jane,

advertising, impact on economy,–

aggregate demand: consumer demandand borrowing, –; deficitspending programs, , ; de-mand-side economics, , –,; federal expenditures, –;Keynesian economics, , –,, ; recessions, –; supply-side economics, ; tax cuts,–

Altgeld, John Peter,

American Dream: concept, n;economic policy, –; Lin-colnian ideal, –, , –;middle-class ideal, –, –;origins, –; Wilsonianism,–. See also demand-side economics; Lincoln, Abraham

American System, –, – ,

Annie Kilburn (Howells),

Annual Economic Report,

antipoverty programs, ,

Appalachian Regional DevelopmentAct (),

Aristotle,

Atlantic Monthly,

automobiles, , –, –

balanced budgets, , –

Banking Act (),

banking industry, –, , , –, –

Barro, Robert,

Bartlett, Bruce,

Bellamy, Edward,

Bill of Rights (Roosevelt), –

Blaine, James G.,

Boritt, Gabor,

Bryan, William Jennings, , , –

Bryce, James, ,

Buffett, Warren,

Bundy, McGeorge,

Bureau of Labor Statistics,

Burns, Arthur F., ,

Bush, George H. W., ,

Index

Bush, George W.: economic policy,– , , –, , –; SocialSecurity crisis, ; supply-side eco-nomics, , –, –, –

business investments: consumer demand and borrowing, –;demand-side economics, –;Great Depression, ; growth rate,–, –, –; regulation legis-lation, –, , ; RepublicanParty policies, , –, –, –, –, –; risk-takingpractices, –, ; Say’s Law, ;supply-side economics, –, ,–, –, –; tax cuts,–, –, – , –,–, –, n

capital formation, –, ,

Carnegie, Andrew, , –,

Carroll, Robert, et al., study by, –

Carter, Jimmy, , – ,

Cheng, Tsung-mei,

child labor, , , , , ,

Civilian Conservation Corps,

Civil War, –

Civil Works Administration,

class conflict, –, ,

Clay, Henry, –, – , –

Clayton Antitrust Act (),

Cleveland, Grover, ,

Clinton, William Jefferson, –, ,–, –

Collier’s,

Congressional Government (Wilson),–

consumer demand and borrowing:business investments, –;Clinton administration, ; con-sumer debt, –, –; demand-side economics, –, –;

employment rates, –; GreatDepression, –, ; Gross Domestic Product (GDP), –;home equity borrowing, , ,n; post–World War I decade,–; Reagan administration, ;risk-taking practices, –. Seealso middle-class society

consumer safety, –

Cook, Philip J.,

Coolidge, Calvin, , ,

corporations, economic issues and,– , ,

corruption, , –, , –,

Cosmopolitan,

Council of Economic Advisers,

Cox, James M.,

Crane, Stephen,

Curry, Leonard P.,

Darwin, Charles, , –

Daugherty, Harry,

deficit spending programs: impact oneconomic growth, –, –, ;Johnson administration, –;Kennedy administration, –;Keynesian economics, , –;neo-Keynesian economics, –;Reagan administration, – , ;Roosevelt administration, ,–, ; unemployment, –

deflation,

demand-side economics: business investments, –; Clinton administration, –; consumerdemand and borrowing, –, –; as economic policy, –,–, , –, –; effective-ness, –; Keynesian economics,–; post–World War II decades,–; taxation, –, –;time-series analysis, –. See

Index

also supply-side economics; topmarginal income tax rate

Democratic Party, , , , , –

democratic principles: future direc-tions, –; Jacksonian politics,–; Lincolnian ideal, –, ,–, ; Social Darwinism, –

Dickens, Charles,

Dillon, C. Douglas,

Douglas, Stephen, –

Douglass, Frederick, n

durable goods purchases, –,–

economic freedom. See economic opportunity

economic growth: Bush administra-tion, –, –; Clinton adminis-tration, –, –; consumer demand and borrowing, –,–, , , –; deadweighteffect, , ; democratic ideals,; economic vision, –; Eisen-hower administration, , –;fairness, ; government involve-ment, –, , –; inflationrates, – ; middle-class society,, –; post–World War I decade,–; post–World War II decades, –; progressive tax system, –, –; risk-taking practices,–, –; and size of govern-ment, –; Social Darwinism,, –; tax cuts, –, –,–, –; time-series analy-sis, –, –, ; virtuous cycles, , –; war productionimpact, . See also demand-sideeconomics; supply-side economics;top marginal income tax rate

economic opportunity: AmericanDream, –, –, ; Carnegie’s

ideal, –; government involve-ment, – , –; Lincolnianideal, –, –, –, , ,–; Roosevelt administration,–; Wilsonianism, –

Economic Opportunity Act (),

economic policy: abuses and inequali-ties, , –, –, –,; Bush administration, –,–, –, –, –,–; Carter administration,– , ; Clinton administra-tion, –, –; consequences,–, –, –; corporations,– , , ; demand-side eco-nomics, –, –, –,–; Eisenhower administra-tion, –; fairness, , , –,–; federal expenditures,– , –; future directions,–; Harding administration,–; impact on society, –;Kennedy administration, –,–; Keynesian economics, ,–, –, ; mismanage-ment issues, ; neoconservativepolicies, –; neo-Keynesianeconomics, –, –, –; political debates, –, –;Reagan administration, , –,, –, ; reform efforts, ,–, –, –, –; regu-lation legislation, , , ; Repub-lican Party, , , –; Rooseveltadministration, –; sectional-ism, – , ; self-correction philosophy, , –; southernviewpoint, – , – ; supply-side economics, –, –;taxation, –; unemployment, ,; Wilsonianism, –. See alsofiscal policy; monetary policy

Index

economic vision: economic growth, –; future directions, –;laissez-faire economics, –, ,–, , , – ; Lincolnianideal, –, –, –, – ;middle-class ideal, –, –;Republican Party, – ; Rooseveltadministration, –; scientific approach, –; trickle-down economics, , –, . See alsodemand-side economics; progressivetax system; regressive tax system;supply-side economics

Eisenhower, Dwight D., , –

electricity, –

Elmendorf, Douglas,

Emergency Banking Act (), –

Emerson, Ralph Waldo,

Employment Act (), –

employment/unemployment: Carteradministration, – , ; con-sumer demand and borrowing, –; deficit spending programs,–; demand-side economics,–, ; economic policy, , ;Eisenhower administration, –, ; Great Depression, –, –; growth rate, –, , , ;and inflation rates, –, – ;insurance programs, –, –;Kennedy administration, –;neo-Keynesian economics, –,–; public works programs, ;Reagan administration, ; regula-tion legislation, –; Rooseveltadministration, , , –,n; time-series analysis, –,–; top marginal income taxrate, –, –, ; WorldWar II, . See also unionization;working conditions; working-classfamilies

Engen, Eric, –, –

estate taxes, , , , –,

Etzioni, Amitai,

evolution, theory of, –

factual economic consequences, , ,–

Fair Labor Standards Act (),

fairness, , , , –, –

Family and Medical Leave Act (),

Federal Deposit Insurance Corpora-tion (FDIC),

federal expenditures: Eisenhower administration, –; Hoover administration, ; Johnson ad-ministration, –; post–CivilWar decades, – ; post–WorldWar I decade, ; probusiness policies, –; Reagan adminis-tration, ; Roosevelt administra-tion, ,

Federal Housing Administration(FHA),

Federal Reserve: interest rates, , ,, –, –, , , ;monetary policy, , , –,; regulation legislation,

Federal Reserve Act (),

federal surpluses, –, , ,

Federal Trade Commission (FTC),

Federal Trade Commission Act (),

Feldstein, Martin, , ,

finance companies, –

fiscal policy, –, , –, ,, ,

Fisk, James,

flat tax,

Ford, Gerald, , ,

Ford, Henry, , –

Frank, Robert H.,

Index

free labor, , – , –,

free market economics, –, – ,–, . See also laissez-faire economics; supply-side economics

Frick, Henry Clay,

Friedman, Milton, – ,

Fukuyama, Francis,

Future of American DemocracyFoundation, viii

Garfinkle, Norton,

General Motors Acceptance Corpora-tion (GMAC),

General Motors Corporation (GM),–

General Theory of Employment, Interest,and Money (Keynes), –, ,

George, Henry,

G.I. Bill, –

Gilded Age politics, –

Gladden, George Washington,

Glass-Steagall Banking Act (),

Godkin, E. L., , , –, –,

gold standard, , , –

Goldwater, Barry, , ,

Gordon, Kermit,

Gospel of Wealth, –, –, ,, –. See also Bush, GeorgeW.; Reagan, Ronald; supply-sideeconomics

government involvement: business in-vestments, –; economic growth,–; Jacksonian politics, ;Lincoln administration, – ;Reagan administration, –;reform efforts, –; Social Dar-winism, , –; supply-side eco-nomics, –, ; Whigism, –.See also regulation legislation

graduated income tax, ,

Grant, Ulysses S., ,

Great Depression, –, –,–, –, –, –

Great Society program, , , ,

Great Stock Market Crash of , ,–

Greenspan, Alan, , –, ,

Gross Domestic Product (GDP): Bushadministration, ; Clinton adminis-tration, ; consumer demand andborrowing, –; demand-sideeconomics, , –, ; growthrate, , , –, –, –;Reagan administration, ; Roo-sevelt administration, ; supply-side economics, –, –; topmarginal income tax rate, –,–, –

Gross National Product (GNP):Eisenhower administration, –,; growth rate, , –, , ,, , ; Johnson administra-tion, ; Kennedy administration,, ; post–World War I decade,, , ; Reagan administration,; Roosevelt administration, ,

Hamilton, Alexander,

Hanna, Mark,

Harding, Warren G., , ,

Hard Times (Dickens),

Hayes, Rutherford B., ,

Heller, Walter, ,

higher education, –,

History of the Standard Oil Company(Tarbell),

Hobbes, Thomas,

Holmes, Oliver Wendell, Jr., –

home ownership, , , . See alsoresidential construction

Home Owners Loan Corporation,

Homestead Act,

Index

Hoover, Herbert, , , , –

household incomes, –

Howells, William Dean, –,

How the Other Half Lives (Riis),

Hubbard, R. Glenn, , ,

Hull, Cordell,

Hull House,

Humphrey, Hubert,

Humphrey, William E.,

ignorant proletariat, –

immigrants, , , ,

income tax. See taxationindustrialization: abuses and inequali-

ties, , –, –, ; industrialprosperity, –, , , –;laissez-faire economics, –; re-form efforts, –, –, –, –; rise of the Robber Barons,–; Roosevelt administration,–; Wilsonianism, –

inequality, as democratic principle,, –

inflation rates, –, , –,– , , –

insider trading,

installment buying plans, –, ,

insurance programs, –, –

interest rates: Federal Reserve, , ,, –, –, , , ;home equity borrowing, ,

internal combustion engine, –

internal improvement systems, – ,, , ,

Interstate Commerce Act (), ,

Interstate Highway System,

Jackson, Andrew, –

James, Henry,

Johnson, Lyndon B., , –,

judicial system,

Jungle, The (Sinclair), ,

Kansas-Nebraska Act,

Kelley, Florence,

Kemp, Jack, ,

Kennedy, John F., –

Keynes, John Maynard: aggregate demand, , –, – ;Roosevelt administration, ;Say’s Law, , ; in Time maga-zine,

Keynesian economics, , –,–, . See also neo-Keynesianeconomics

Kristol, Irving, – , ,

labor force: immigrants, , , ; jobcreation, –; regulation legisla-tion, –; wages and income, ,–, ; women in the work-force, ; working conditions,–, –, , –, . Seealso unemployment; unionization

labor movement. See unionizationLaffer, Arthur,

La Follette, Robert M.,

laissez-faire economics, –, ,–, , , –

Lebergott, Stanley,

liberty, importance of, , , –

Lincoln, Abraham, –, –, –, – , ,

living standards, –, , –,

Lloyd, Henry Demarest, ,

Lochner v. New York,

Looking Backward from -

(Bellamy),

Lynd, Robert and Helen,

machine bosses, ,

macroeconomic issues, –

Index

Maggie: A Girl of the Streets (Crane),

Mann, Thomas,

manufacturing sector: activist govern-ment, –, ; federal expendi-tures, ; free labor policies, –;Great Depression, ; growth rate,– , ; protective tariffs, ; Su-preme Court decisions, ; survivalof the fittest, –. See also freelabor; Robber Barons

Marshall, Will,

Martin, William McChesney, ,–

McClure’s,

McKim, James Miller,

McKinley, William, –,

Meat Inspection Act (),

Medicare, , , , –

Medicare Act (),

Mellon, Andrew W., , –,

Mellon, Thomas,

middle-class society: economic vision,–, –; G.I. Bill, –; growthrate, , –; historical impor-tance, –, –, ; impact ofeconomic policy on, –, ,–, ; inflation rates, ;installment buying plans, –,; living standards, –, , ,–, ; stagflation, –; taxa-tion, , , ; Wilsonianism, .See also consumer demand andborrowing

military forces, –, , –,

Mill, John Stuart,

Miller, G. William,

misery index,

Missouri Compromise,

monetarism, – , , –

Monetary History of the United States,A (Friedman and Schwartz),

monetary policy, –, –,– , –, , ,

Montgomery, David,

moral economic consequences, , ,–, –, –

Morgan, J. P.,

Morrill Act,

mortgage debt, ,

muckrakers, ,

mugwumps, –

Mundell, Robert,

Nation, , , –,

National Banking Act,

national bank system, –, ,

National Defense Education Act(),

National Industrial Recovery Act(),

nationalism, –

National Labor Relations Act (),

neoconservative policies, –

neo-Keynesian economics, –,–, – . See also Keynesianeconomics

New Deal, , –, , –

New Frontier,

Newton, Isaac,

Nixon, Richard, , –

Norquist, Grover,

Norris, Frank,

North American Review,

Norton, Charles Eliot,

Octopus, The (Norris),

Okun, Arthur,

Organization of Petroleum ExportingCountries (OPEC),

organized labor. See unionizationOrigin of the Species, The (Darwin),

–

Index

Parkman, Francis,

Perkins, Elmer,

Perkins, Frances,

personal consumption expendi-tures. See consumer demand andborrowing

philanthropy,

Phillips, A. W. H.,

Phillips, Kevin,

Phillips Curve, , , ,

political economic consequences, ,, –

populism, , ,

poverty, as a function of character,, –, . See also antipovertyprograms

progressive tax system, –, , ,, –,

Progressivism, –, –, , ,

prosperity: Bush administration, ;Eisenhower administration, ;post–World War I decade, –, –, ; post–World War II decades, ; Reagan administra-tion, –

protective tariffs, –, – , , ,, –

Public Works Administration,

Pure Food and Drug Act (),

railroads, economic issues and, , ,, ,

Rauschenbusch, Walter,

Reagan, Ronald, , , , –,

recessions: aggregate demand, –;Bush administration, , ; deficitspending programs, , –;demand-side economics, –;Eisenhower administration, –;post–World War I decade, , ;Roosevelt administration, –

Reconstruction Finance Corporation,

reflation,

reform efforts: banking industry, –; economic policy, , –,–; government involvement,–; industrialization, –,–, –, –; New Deal, ,–, ; protective tariffs, –;taxation, , –; Wilsonianism,–; women reformers,

regressive tax system, , ,

regulation legislation: banking indus-try, –; Bush administration,–; business investments, –, , ; Clinton administration,; corporations, , ; employ-ment, –; higher education,; inflation rates, –; Johnsonadministration, ; Reagan admin-istration, –; reform efforts,, , –, –; Roosevelt(Theodore) administration, –;Roosevelt administration, –;taxation reform, –; unioniza-tion, , ; Wilson administration, –

Reinhardt, Uwe,

Republican Party: divisiveness in, ;economic policy, – , , , –; elitism charges, ; neoconserv-ative policies, –; probusinesspolicies, , –, –, –,–, –

residential construction, , –. Seealso home ownership

Ricardo, David,

Riis, Jacob,

risk-taking practices, –, –,–, –

Robber Barons, , –, –, ,, –

Index

Rockefeller, John D., , ,

Rogers, Will,

Roosevelt, Eleanor,

Roosevelt, Franklin D., –, –

Roosevelt, Theodore, , –, ,

Rosen, Harvey S., ,

Samuelson, Paul A., –,

Say, Jean-Baptiste, –,

Say’s Law, –,

Schurz, Carl,

Schwartz, Anna, –

sectionalism, – ,

Securities and Exchange Commission,

Securities Exchange Act (),

Selective Service Act (),

Servicemen’s Readjustment Act(), –

Shame of the Cities, The (Steffens),

Sherman Antitrust Act (), , ,

Sinclair, Upton, ,

Singer Sewing Machine Company,

Skinner, Jonathan, –, –

slavery, – ,

Smith, Adam,

Social Darwinism, , , –

social mobility, –, , , –

Social Security: Bush administration,, ; future directions, –;Reagan administration, ; regula-tion legislation, –; Rooseveltadministration, , –

Social Security Act (), –

Social Statics (Spencer), ,

societal caste systems, –

Solow, Robert W., –

Sorensen, Theodore,

sound money, – ,

Spencer, Herbert, , –, ,

Sproat, John C.,

stagflation, –, , , – ,

Standard Oil Trust, ,

Starr, Ellen Gates,

Steffens, Lincoln,

Stein, Herbert, –

Stockman, David,

stock market transactions, ,–,

suffrage, ,

Sumner, William Graham, –

supply-side economics: Bush admin-istration, , –, –, –, –, –; business invest-ments, , –, –, –;economic growth, –, –,–, –, –, –;as economic policy, –, –,, –; effectiveness, –;inflation, –; post–World War Idecade, –, ; Reagan admini-stration, – , –, ,–; time-series analysis, –;top marginal income tax rate, , –, –, –, . See alsodemand-side economics

Supreme Court decisions, , ,

survival of the fittest, , –,–, –

Taft, William Howard, –

Tarbell, Ida,

taxation: Clinton administration,, ; deadweight effect, , ;demand-side economics, –,–; economic policy, –;estate taxes, , , , –, ;graduated income tax, , ; GreatDepression, ; income tax, , ;Johnson administration, –;middle-class society, , , ;Reagan’s philosophy, –; reformefforts, , –; Roosevelt

Index

taxation (continued) administration, –; stagflation,; top marginal income tax rate,–, –, –, –,–

tax cuts: Bush administration, –, –, , –, –, –,–, ; business investments,–, –, – , –,–, –, n; demand-side economics, , –, –;economic growth, –, –;Gross Domestic Product (GDP),–; Johnson administration,–, , –; Kennedy admin-istration, –, , –; Mel-lon’s viewpoint, ; neo-Keynesianeconomics, –; Reagan admin-istration, , – , , –,, –. See also supply-sideeconomics

Tax Reform Act (), –

technological revolution, –

Temin, Peter,

Tobin, James, ,

Tocqueville, Alexis de, –, –

top marginal income tax rate, –,–, –, –, –,

transportation infrastructure, –,, ,

Traveler from Altruria, A (Howells),

trickle-down economics, , –,

trusts, , , , –

Twain, Mark,

Tweed, William M. ”Boss,”

unemployment. See employment/unemployment

unionization, , –, , ,

United States, concept of the, –

United States v. E. C. Knight,

Uniting America, –

university system,

urban intellectuals, –

values, American, –

veterans, –

Vietnam War, , –

Volcker, Paul, , –

voodoo economics,

voting rights, , ,

Wagner, Robert,

Wall Street,

Wanniski, Jude,

Warner, Charles Dudley,

Wealth and Commonwealth (Lloyd),

Westinghouse, George,

Whigism, –,

White, Horace,

Wilson, Woodrow, , –, ,–,

Wolfe, Alan,

women, economic issues and, ,

working-class families, , –,

working conditions, –, –, ,–,

Work Projects Administration,

World War I, –

World War II,

Yankelovich, Daniel, , –

Index