Free Lunch (2 page)

I
IT'S BEEN NEARLY 30 YEARS SINCE RONALD REAGAN ASKED,
“ARE
you better off now than you were four years ago?” and tens of millions of
American voters responded with a resounding no.

With their votes the citizenry fired not just
one unpopular and unlucky president but granted the new president, and eventually his party, broad authority to reconstruct the
relationship between the government of the United States and its economic system. By overwhelming numbers, middle-class,
well-to-do, and wealthy voters agreed that the economic malaise of the seventies—inflation, skyrocketing energy costs, deficits,
high unemployment—was the sour fruit of a half-century of government interference with the “invisible hand” of the nation's
market-based, capitalist economy.

The promised solution was to get government out of the
way—to let business operate largely free of public oversight in the form of government programs, rules and regulations, or at least
with a lot fewer of them. The voters agreed to let the “private sector” of companies, corporations, associations, and charitable
organizations take over as many of the duties of government as practical. “Government is not the solution,” Reagan famously
declared as the battle cry of his revolution. “Government is the problem.”

So, it is only
reasonable nearly three decades later to ask a new question: Are we better off than we were a generation ago?

On the surface the answer is obvious: Of course we are. Since 1980, the national economy has more than
doubled in size in real terms. More than half the wealth built up since the United States began was created in just the past quarter
century. Even taking into account population growth, the overall economic success is striking. For each dollar per person in 1980,
the economy in 2006 generated $1.68.

At the same time the costs of many goods have fallen
and their quality has improved. The real price of color televisions plummeted more than 75 percent—and for the same money you
can buy bigger screens with images so fine they reveal every skin pore or errant strand of hair.

Even at $3 a gallon, gasoline in 2007 costs about the same in inflation-adjusted dollars as it did in 1980. Tires
last far longer, costing less per mile. Airfares are much cheaper. Long distance telephone calls are virtually free. Useful and fun
products that did not exist in 1980 can be bought cheaply, from Dell laptops playing feature-length DVD movies to stylish Razr cell
phones to iPod music players, smaller and lighter than a pack of cigarettes, that hold 5,000 songs. The stock market has replaced
the local bank as the place where people keep their savings. The inflow of buyers has helped drive the total real value of the stock
market to five times its worth in 1980. Seventy percent of Americans own their own homes. A few million own two. All these
residences are collectively worth about $20 trillion.

Yet despite all this success in hard dollars
and improved product quality, for the vast majority of Americans the answer as to whether they are better off is again, almost three
decades later, a resounding no.

The gross numbers and averages about economic growth
obscure one overwhelming truth: The benefits of this bonanza flowed overwhelmingly to those at the apex of the economic
pyramid. The base of that pyramid has weakened as average incomes have shrunk and more risks were forced upon them by
government policies that favor those at the top.

For the bottom 90 percent of Americans, a
group we will refer to as the vast majority, annual income has been on a long, mostly downhill slide for more than three decades.
The vast majority's average income peaked at $33,000 way back in 1973. By 2005 it had fallen to a bit more than $29,000. Even with
three decades of economic expansion, the vast majority has to get by on about $75 less each week than it did a generation earlier,
tax return data show.

Since the economy grew and grew, where did all the money go? Part of it
went to corporate profits, which have been growing much faster than wages. And the portion that flowed to individuals as wages,
interest, dividends, and other forms of income generated by the market? The growth went straight to the top.

Of each dollar people earned in 2005, the top 10 percent got 48.5 cents. That was the top tenth's greatest
share of the income pie since 1929, just before the Roaring Twenties collapsed into the Great Depression.

Within that top 10 percent, basically those who made more than $100,000, the gains were highly concentrated
at the very top. Most of the increase went to the top half of 1 percent and most of that to the top tenth of 1 percent, who made at
least $1.7 million that year.

How government encourages this concentration of incomes at the
very top, resulting in worsening conditions for most Americans, will be examined in a later chapter. For now, keep in mind this one
astonishing fact extracted from official government tax data: in 2005, the 300,000 men, women, and children who comprised the top
tenth of 1 percent had nearly as much income as all 150 million Americans who make up the economic lower half of our population.
Add the income the rich are not required to report and those 300,000 made more than the 150 million.

This growing concentration of income at the top is nothing like the distribution of income America
experienced in the first three decades following World War II. Nor is it like that found in Canada, Europe, Japan, Australia, and New
Zealand. Instead it resembles the distribution of income found in three other major countries: Brazil, Mexico, and
Russia.

In ways that most Americans do not imagine, but that have been thoroughly
documented by political scientists, sociologists, and others, these three nations and the United States are alike. They all have a
rapidly growing class of billionaires. They have growing, and seemingly intractable, poverty at the bottom. And all four countries
have a middle class that is under increasing stress. These four countries are also societies in which adults have the right to vote,
but real political power is wielded by a relatively narrow, and rich, segment of the population.

Many Americans read about soaring incomes at the top and assume that making a lot of money is the just
deserts for those who worked hard and created flourishing enterprises. Real economic growth, after all, requires a society of
industrious people who labor, save, invest, and take risks in search of economic reward. Those who succeed deserve the fruits of
their labors.

But the distribution of income in a society does not take place in a vacuum. It is
also the product of government rules. And those rules were written by people, not handed down from some immutable power.
Government can, and does, take from some to give to others. Taxing adults so that children can be educated is an obvious
example.

Without even touching money, government can cause huge transfers of wealth
within the economy. For example, the Big Four commercial sports leagues are exempted from the laws of competition, allowing
them to charge higher admission prices than they could get in a free market. Movie theaters and video arcades enjoy no such
protection from competition for the limited amounts people can spend on entertainment.

Government can, and increasingly does, give money to businesses outright. It also funnels it in subtle ways
to places like the Bandon Dunes Golf Resort. Government also gives away public assets, such as land or minerals, or sells them for
far less than their value. Conversely, government can use its constitutional power of eminent domain to seize private property from
one owner and give the land to someone else, as it once did for President George W. Bush, making him a wealthy man in the
process.

Rewriting the economic rules that define our society in the past few decades has
been done under the banner of “deregulation” and its promise that less government means more economic growth. The term itself
is a misnomer. No society is free of regulation. Everything has rules, everything. Baseball's rules go right down to how many
stitches are on the ball (104).

In the past quarter century or so our government has enacted
new rules that have created not only free markets, but rigged ones. These rules have weakened and even destroyed consumer
protections while increasing the power of the already powerful.

The distribution of incomes
also reflects the tools that society provides citizens to support themselves. Children who go to schools with minimally competent
teachers, outdated textbooks, and asphalt playgrounds are unlikely to have the same economic success as children who attend
schools with master teachers, the latest books supplemented by music, arts, and laboratories, and expanses of lawn for
play.

We do not live in a laissez-faire economy in which there is no interference from
government and people are allowed to do as they please, operating the economy by making contracts with one another. We have
rules. Over the past three decades the rules affecting who wins and who loses economically have been quietly and subtly
rewritten.

The richest Americans and the corporations they control shaped and often wrote
these new rules and regulations under which our economy now functions. The rich and their lobbyists have taken firm control of
the levers of power in Washington and the state capitals while remaking the rules in their own interests. They have also imbued
private organizations with the power to make rules that few outside of the process understand, but that influence the distribution of
income. These same people also just happen to be the primary source of the campaign donations that put politicians in office and
keep them there. Politicians, as lawmakers, enact the rules. As presidents and governors they appoint both the administrators who
decide when to enforce the rules and many of the judges who interpret them.

Rules define a
civilization. Without rules, there is no civilization. Over the great sweep of human history, brute force has held sway. But with the
Enlightenment, the spread of literacy, and mass communication, we began to expand the sphere of rule-making beyond warlords
and kings to the nobles; then to the manufacturers and traders who started the world on its long march to economic growth; and
finally, in America, to the common man. Wherever the world has civilizing rules based on some moral or practical principle we see
prosperity and freedom, though not always together.

In America, however, the long expansion
of who plays a role in deciding the rules has ended. The base of influence has begun to contract. In part this is because of the
campaign finance system, which transfers power to those who donate and who steer donations. In part it is because advances in
human knowledge have made the economy so much more complex that fewer people understand, or have the time to learn about,
the issues. Less than a century ago, Congress debated economic policy by reviewing the life cycle of a cow. Today hearings are
filled with talk of complex abstractions such as a supposedly naturally occurring rate of unemployment, monetizing debt, and
acronyms such as LIBOR (the London Interbank Offered Rate of interest).

The rules on which
we founded this nation sought, imperfectly for sure, to create individual freedom with equal justice and opportunity for all. We
spent two centuries refining those rules through experience, political struggle, a civil war that cost 620,000 American lives, and a
civil rights movement that wrought change peacefully.

To succeed in the long run, rules must
have a moral or practical basis and the support of the people. If society says that you may do one thing and not another, there must
be some rationale or the rule will be flouted. There is no legitimacy in officials writing rules as they choose simply because they
have the power to do so. Such is tyranny.

The Founding Fathers recognized this when they
took that great leap to create our republic more than two centuries ago. They provided for checks and balances, recognizing the
need to limit power and to control it. To many people, power is of little consequence, just as many people care little about beauty or
riches. But to those who lust for power, of what use is acquiring power unless they can abuse it? In this, the philosophy of the
power monger is no different from that of the cancer cell, which mindlessly seeks growth for the sake of growth until it overwhelms
its host.

To control abuses of power, we write rules. The nature of those rules determines the
shape of the society we live in. The rules we put in place during the five decades following the collapse of the Roaring Twenties
economy marked a historic change in America.

Beginning with the New Deal in 1933 and,
especially, with bipartisan consensus after World War II, our elected leaders worked to build and strengthen the middle class.
Government invested in the nation's most valuable assets: the brains of its citizens. Government financed higher education for
millions through the GI Bill and made college free or kept tuition so low that anyone with ambition and smarts could get a degree.
Government invested in basic sciences, public health, and medical research; built the interstate highways; and allowed unions to
negotiate for higher wages. We created consumer protections and environmental protections. We created a set of rules to make
America a land with a large, growing, and stable middle class.

An unexpected by-product of
this, fueled by the increased value of human minds and the economic demand this knowledge created, was the rise of a
prosperous upper middle class of people who had plenty but still had to work to enjoy the fruits of their labor. These are the
two-income professional couples, the working wealthy whose economic substance is far greater than their political
influence.