Major Economic Boom--or Merely 1920s Revisited?

Public ambivalence about the Senate’s new tax-reform package is confirmed in ho-hum national opinion polls. This underscores an insufficiently discussed political dynamic: The real spur for overhaul is now coming from elites--liberal and conservative, greedy and idealistic alike.

Two abstract visions are at work. The one side, enraptured by the idea of a 27% top tax bracket applicable to both David Rockefeller and a Los Angeles police lieutenant, imagines a return to the capitalist heyday of the 1920s. The other perceives a progressive triumph, as the tax-sheltered rich take on added burdens to remove the poor from the rolls. The result is that enactment seems ever more likely, although each week keeps turning up new warts, new revenue problems and new state and local tax tie-ins. Middle-income citizens in many areas may pay enough additional in state taxes, higher rents or lost real estate buildup to negate any minor federal tax savings.

But then, hardly anyone in power has ever held this out as a great middle -c lass tax cut. For better or worse, the supporting argument has been broader. The United States, protagonists say, is poised to enter a great new growth era, spurred by lower tax burdens, rising entrepreneurship and declining interest rates. The private sector--the fabled marketplace--will allocate resources far better than existing tax-code preferences and government decisions.

Needless to say, such abstractions don’t greatly motivate the average voter, who asks, first, what’s in it for me? and then, where’s the catch? Opinion polling underscores this ambiguity. A Wall Street Journal/NBC survey last week showed that 69% of the public believes tax reform would help the country but less than 50% thinks it will help them, personally. National consumer pollster Albert E. Sindlinger explains public skepticism: “People think a lot of it is just election-year promises--tax relief instead of jobs.”

This helps explain why so many ambitious senators, liberal tax reformers, supply-side tax-cut theorists and business lobbyists all seem in a rush to get it through the Senate--and then through a summer House-Senate conference--before the various warts, glitches and apparent public yawns can undo the existing momentum.

Optimists will say: Yes, but that’s because it’s such an obvious confluence of public interest, yielding benefits to so many at the expense of relatively few. And they may be right, in which case we will have a new public philosophy and a new chapter in U.S. economic history. On the other hand, there is also an element of deja vu --a feeling that we’ve driven down this road before, and it led to a crash.

The previous era in question was, of course, the 1920s. Between 1921 and 1927, Republican administrations of Warren G. Harding and Calvin Coolidge slashed the top tax bracket from 65% to 25%. Note the 1980s parallel. Starting from a level of 70% in 1980, the top bracket came down to 50% as a result of the 1981 tax cut and could decline to 27% after this year’s expected action. And there’s another parallel, too. The reductions of the ‘20s were not couched in terms of aggrandizing the rich. Most people got benefits, and the Harding-Coolidge tax cuts also took large numbers of less affluent families off the rolls altogether. Nonetheless, there was a basic problem.

True, the 1920s were a fascinating decade, witness to a great surge of technology, innovation and glitter. The trouble is it was also a decade of risky reduction in government regulation of the economy, of worship of entrepreneurship and the marketplace, of widening income disparities, of garish overconsumption by the rich, of books about excellence and self-perfection, of virtual depression in farming and mining areas as commodity prices crumbled--and of reckless financial speculation ultimately leading to the crash of 1929 and thence into the Great Depression.

An unnerving percentage of these same problems and moods are evident today, along with other eerie parallels to the pre-Depression ‘20s: shaky banks, real-estate bubbles possibly about to be pricked, uncollectible international loans slipping toward default, chronic currency gyrations and the possibility of a trade war. Yet, after 60 years, there are major differences. International financial coordination is much greater these days, and stringent government safeguards reduce risk of a stock market debacle. So the likelihood of a direct 1929 replay seems quite slim.

What we probably do have to worry about, though, is the extent to which the United States seems to be in another of the raw capitalist, market-worshipping, let-the-rich-do-their-thing surges that occur at fairly regular intervals in U.S. history--in the late 19th Century, then most recently in the 1920s. At first, these are constructive because they get America’s creative and economic juices flowing again. But then destructive elements often take over in a self-discrediting round of conspicuous consumption, rising income inequality, financial speculation and national economic trauma.

This is why it’s disturbing when so many Reaganites have actually talked about repeating and recapturing the 1920s pattern. Back in 1981, right after Ronald Reagan hung Coolidge’s portrait on the White House wall, then-Treasury Secretary Donald T. Regan said: “We’re not going back to high-button shoes and celluloid collars. But the President does want to go back to many of the financial methods and economic incentives that brought about the prosperity of the Coolidge period.”

A leading congressional tax-cut drumbeater, Jack Kemp (R-N.Y.), has also heaped continuous praise on Coolidge and his tax-cutting Treasury secretary, Andrew Mellon. These conservative predilections are probably more definitive of the 1980s tax-bracket-reduction push than the left’s hazy focus on tax relief for the poor or delight about $500,000-a-year doctors losing oil and gas shelters. Granted that much of the early rhetoric of the new Senate package emphasized progressive effects, the reality of the Washington business lobby mobilizing for the package in Juneis very different--and so is the materialist dynamic of mid-1980s U.S. culture.

This is pivotal. One can argue that the United States is well into an economic culture evocative of the late 19th Century Gilded Era and ballyhoo days of the 1920s. Today’s dominant, opinion-molding classes and regions, caught up in a boom, don’t have much concern for the 20% to 40% of the nation that is in trouble. Indeed, many of the poor, as in the late 19th Century or the 1920s, blame themselves for failure in a Horatio Alger society. The Democratic Party, traditional spokesman for the less fortunate, has little to say for them or its own beliefs.

In an era when their constituents tune into the upper-crust television make-believe of “Dynasty,” “Dallas” and “Falcon Crest,” few national Democratic strategists seem inclined to oppose tax cuts or upper-bracket reductions. (Nor did most Democrats oppose the 1920s cuts while their constituents were applauding business entrepreneurs and fixating on the runaway stock market.) Besides, young people coming of age in the 1980s milieu, like the youthful crowd F. Scott Fitzgerald immortalized in his 1925 novel, “The Great Gatsby,” are lopsidedly materialistic, consumption-oriented and disproportionately Reaganite and Republican.

In the end, it may be that the ultimate economics and ultimate politics of 1986 tax “reform” depend on the same question: Where are we, chronologically, in this second Gatsby era? If we’ve only been through a lead-in, and the heyday is yet to come, then the GOP--and the economy--should benefit from the tax overhaul, despite Middle American ambivalence about the near-term dollars and cents. If the economy booms, tax reform will share the credit. On the other hand, if we’re close to the end of a national binge of borrowing, spending, speculation and economic pretense, then the reduction of the top rate to 27% could come just in time to help spark a new round of American political progressivism.

This isn’t idle speculation. Some serious economists think an economic turndown is close at hand, and that the dislocations of tax reform could accelerate it. Taking some $100 billion away from troubled capital-intensive industries--oil, machinery, chemicals and others--over the next five years, to give it to individuals and prosperous industries in the name of top-bracket reduction and the magic of the marketplace, could add to the manufacturing havoc already wrought by the trade crisis. If the business cycle does catch up with us in the next few years, and joblessness and the deficit climb together, then the ultimate politics of tax rates is predictable--to paraphrase and reverse Newton’s law of gravity: “What came down must go up again.”