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Reasons, Rule and Riots: Our Societal Panic

David Cay Johnston | Dec. 20, 2010 11:57 AM EST

On the surface, what’s going on with tax policy in Washington right now seems crazy. A Democratic president whose enemies call him a socialist makes a deal with Republicans that sells out both his party and the very tax promises that won him the election, while Republicans leaders who say that debt is our overwhelming domestic problem insist on borrowing tens of billions of dollars to give tax savings to the richest among us. The polls, at the same time, show the public overwhelmingly favors ending tax cuts for high earners.

What we are witnessing, however, is much more profound than political, economic, or fiscal insanity. And it goes much deeper than disputes over whether extending temporary tax cuts for two years and long-term jobless benefits for 13 months is politically or economically smart. Those are mere manifestations of a much more pervasive problem.

America is in the grip of a full-blown societal panic. Crazy, irrational, contradictory ideas about tax policy are just the most obvious symptom.

Societal panics occur when the expectations and rules everyone has been accustomed to living under no longer work. They occur when some new force changes the rules of the game — a force that may be easy to identify or invisible, but whose effects are far-reaching and unstoppable.

Sometimes that force comes from nature, sometimes from a discovery, sometimes from inventions of the human mind. But in every case throughout history, that force, like the waters pouring over Niagara Falls, cannot be stopped, although sometimes it can harnessed.

Because no one knows quite what to do when the old ways stop working, panic sets in, replacing reason. Crazy responses spread until an idea or a leader emerges, a new way to make sense of the change. The new leader is often the one who persuades people that it is better to live by new rules.

Humans have experienced societal panics time and time again. Sometimes they end in tragedy, sometimes in triumph. And those unexpected accidents of history often play a huge role in the outcome.

Consider what happened to the Greeks 2,700 years ago. Greek settlers in Lydia, what is now the Mediterranean coast of Turkey, found a mine rich with electrum, a naturally occurring alloy of gold and silver. This find resulted in the invention of coinage, an invention so revolutionary that it launched the ancient Greeks into a societal panic that lasted two centuries, but at its end gave us two of the most powerful, intertwined, and enduring principles of Western Civilization — the moral basis for progressive taxation and democracy.

America was in the grip of a societal panic from the end of the Civil War until 1893, an era historians call the Gilded Age, but that could just as easily be called the Agrarian Death or the Industrial Triumph as America the land of yeoman farmers became America the land of industrial might. It was an era of turmoil and conflict — gilded mansion ceilings and a famous speech about oppressive debt and a gold cross; the invention of the electric light and violent night-time attacks on workers seeking more pay; and our first encounter with a politician who lost the popular vote but became president anyway.

Our current societal panic began almost four decades ago, when the economic glow created by emerging from World War II with half the world’s industrial capacity wore off and President Nixon went to Beijing, opening the door to the transfer of that manufacturing capacity to China.

The long-term effects of this, and the faux “free trade” policies adopted at the behest of our financier class, took time to affect society, just as the invention of coinage did not instantly disrupt ancient Greek social and commercial relations.

Our panic turned into wildly unthinking behavior at the end of the last century, with taxes as the first sign that reason was giving way to belief, that dogma was trumping empirical evidence.

But while the symptoms we see are crazy tax policies, crazy borrowing, and neglect of the commonwealth property and policies that are the foundation for private wealth creation, our panic is about something much deeper.

Our societal panic is about what we as a nation fear almost as much as death itself — the end of American abundance, the death of the idea that each generation would do better than the last, the end of the notion that everyone who works hard and plays by the rules will at least prosper in the sense of having a roof over their heads and enough to eat. Our societal panic is about a new world of mind-numbing complexity where speculation with algorithms and borrowed money pays more in a day than thoughtful investment may return in a lifetime, where jobs pay less tomorrow than yesterday, and where loyalty is something we associate with frequent flier programs rather than careers.

Theodore RooseveltSocietal panics are like riots, something I found myself in the middle of a number of times in the turbulence of the ’60s and ’70s. When crowds turn violent, with steel pipes intended to support saplings pulled from the ground as weapons, when lines of police swing batons at anyone in their way, when rocks and bottles rain down from rooftops through a fog of tear gas, the natural instinct is to join the wildness, to become mindless because nothing makes sense but escaping the fear, the terror, that envelops you.

Keeping your head, becoming coldly rational, makes it possible to sidestep the cudgels and spot the street furniture that can provide a canopy from the hail of deadly missiles launched from the rooftops.

But even if you keep your head, in riots there is no place for rational discussion. Fear is all consuming. As the novelist Frank Herbert taught us in Dune, his tale of an entire universe in panic and a new leader who ended the panic, fear is the mind killer.

The fear of what the new American economy means is killing reasoned debate about taxes, tax policy, and how to distribute the burdens of making our great nation function.

Fear keeps us from talking about how to create an economy in which prosperity is widespread and how using taxes can make us richer by insuring the efficient and bountiful supply of the common goods and services that modern economies require: education, research, infrastructure, and universal healthcare as a service, not a profit-making insurance product.

While societal panics are difficult to appreciate when you are in them, once they have passed they are easy to identify, along with their causes and how the problem that brought on the panic was resolved.

Often the disruptive force is unknown to a society, like the microbes that brought the Black Death to Europe, bequeathing us the murals of the Danse Macabre, featuring skeletons holding hands with kings and popes. Sometimes the force is obvious, as when locking up all the land in perpetual trusts (which many states now allow) brought worsening poverty to 18th century France until Dr. Guillotine’s cutting edge severed the problem at the head.

Sometimes the disruptive force is obvious, as when the Lydians discovered electrum. The gold and silver alloy could be pressed into tokens that, in time, evolved into coins of different value.

The jingling of coins is so common today we think nothing of them. At their invention, however, the ease of engaging in transactions and building up a store of cash challenged ancient societies, which were built more on cooperative relationships than any medium of exchange.

It took the Greeks two centuries to work through the issues that began in Lydia, what we now call the Age of Tyrants. Their panic eventually produced the plays of Aristophanes and in time gave birth to two of the greatest ideas of Western Civilization, ideas intertwined to this day — the moral basis of progressive taxation and the various forms of self-rule we call democracy.

But before the classical age in Greece there was draconian law, named for the dictator Draco, who decreed death for all crimes because, he reportedly said, it was the appropriate sentence for petty theft and he could not think of a harsher punishment for worse offenses.

The Greeks endured these harsh laws for four decades, a reminder of how long people will endure harsh and unjust policies. Then came Solon, who repealed Draco’s harsh laws, except for death as punishment for murder. Solon also forgave all debts, which enriched those who had borrowed heavily at the expense of the lenders and, for a time, made credit hard to get for poor farmers.

SolonEventually the crisis created by coinage helped the Greeks work through the idea of what freedom meant, how laws could define conduct, and how economic power was separate from political power. This last insight resulted in the Greeks’ reasoning that it was only because of Athens — its laws, its courts, its military — that one could legitimately acquire riches and have them protected, for in his natural state man was in a jungle, a war of one against all in which riches came by luck or plunder and could be taken away by brute force.

That insight resulted in the first progressive taxation. The moral basis for this was the principle that the greater the wealth Athens made possible, the greater the burden the wealthy must bear to sustain Athens, which in turn protected that wealth through laws and its military. Intertwined with that was the birth of the ancient world’s first recorded example of self-rule through one-man, one-vote for Athenian citizens.

Societal panics, the ancient Athenians showed us, can have remarkably positive outcomes, although getting there can take a long time when much damage is done to society.

Our own nation was in a panic from the end of the Civil War until the economic collapse of 1893, the Gilded Age. After its collapse the underlying conditions changed little until one of those unexpected twists of history changed everything. In September 1901 a disgruntled office-seeker shot President William McKinley near Buffalo, N.Y. The new president was Theodore Roosevelt, who gave substance to the Progressive Era, an unexpected development because the Wall Street interests who detested Roosevelt as governor of New York had made him vice president to make sure he had no power to threaten their interests.

Imagine an America today without the many changes wrought by Roosevelt, or that he encouraged, in his assault on what he called “malefactors of wealth.”

In our panic today we are bedeviled by tax policy and an economy built on rules that no longer work.

The 20th century, what some historians will look back on as the American Century, prospered under a national, industrial-wage economy, flush with high-paying jobs and tax rules that discouraged withdrawals from operating businesses. Taxing wages was a smart way to finance government because wages were rising. But since 1973, with some brief exceptions, this has not been true for the vast majority, whose average income in 2008 was less than 1 percent greater than in 1980, while incomes at the top soared, spurred in part by rules that encourage withdrawals of capital from business for unproductive consumption because of extremely low tax rates.

The 21st century is an era of a global, digital, and asset economy with rules that favor the free flow of capital over labor, which is brutally suppressed in China and legally suppressed in America through anti-union laws, lack of enforcement of wage laws, and the dampening effects of a growing reserve army of the unemployed.

America’s current societal panic is not going away soon. Tens of millions of people are out of work and tens of millions more fear their next paycheck could be their last. The temporary Bush-era tax cuts will not end next month, even though the huge deficits run up since 1980 hover over us like dark clouds of debt that could drop enough worthless government bonds to drown us all.

Yet we must deal with the circumstances we have created for ourselves. The price of self-governance and its freedoms is making wise choices and electing wise leaders or suffering the consequences.

The adoption of misguided economic policies, the election of politicians unwilling to be disciplined in opening the public purse, and the artificial deadlines imposed on us by the legislative gamesmanship used in enacting the 2001 and 2003 tax cut laws, together with our faux free trade policies, have put us in a deep hole.

In clawing our way back we must keep in mind that those Bush tax cuts were not tax cuts at all but simply loans against a future which has now arrived in giant waves of red ink.

There is talk, by very thoughtful people, that we can never recover from this hole, that our fate is sealed, and that we will descend into a future worse than the past within living memory. I believe we can go on to a richer future, but it will take a leader who synthesizes an understanding of how the old rules must be discarded and new ones adopted that flow from the changes in the world economy.

Before we get there things may get worse, much worse, as the Greek experience with Draco and his draconian laws should remind us. But we will never get on a path to sound tax policy, policy that flows from the new economic order instead of against it, until enough of us stand back from the riotous conditions and find a place where rational debate about taxes can grow into popular understanding.

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