How 1978 Shifted Power In America And Laid The Groundwork For Our Current Political Moment (critical path history)

How 1978 Shifted Power In America And Laid The Groundwork For Our Current Political Moment

Joshua Green, January 12, 2024 [Talking Points Memo]


…There is a backstory that illuminates the Democratic Party’s embrace of finance in the years leading up to the [2008] crash — a story that begins in 1978. At the time, Democrats were still reliable partisans of the New Deal, but the steady economic progress of the American middle class was coming to a turbulent end. Jimmy Carter was president. He was struggling, without much success, to manage an economy buffeted by inflation, oil shocks and recessions — problems for which his party had no answers. A conservative countermovement of business groups and Republican politicians was beginning to gather force. One of history’s critical inflection points arrived that fall, when Wall Street made its first deep incursion into the Democratic Party in a way that would have lasting significance, although it passed mostly unnoticed at the time.

The great irony of this early conquest is that it began with Carter’s ambitious attempt to change the tax code to favor workers at the direct expense of Wall Street investors. Instead, Carter and his fellow reformers suffered a defeat so thorough that the financial lobby not only got to preserve its favorable tax treatment, but was able, with Democratic help, to rewrite the rules of the economy in a way that gave Wall Street an enduring structural advantage at the expense of the middle class — the opposite of what Carter had set out to do….

Soon after Carter launched his presidential bid, [Charls] Walker took over a sleepy financial industry trade group called the American Council on Capital Gains and Estate Taxation and rebranded it as the more exalted-sounding “American Council on Capital Formation,” a euphemism for the aggressive accumulation of wealth. Walker began pushing the idea that the economy’s productivity crisis could be solved if the government changed the way it induced business investment. Since the New Deal, the preferred method had been the investment tax credit, which rewarded companies for building factories. This generally satisfied labor interests, since factories produce jobs. The major business lobbies like the Chamber of Commerce and the National Association of Manufacturers liked the investment tax credit because many of their members were large industrial corporations. Carter’s plan to eliminate the capital gains preference didn’t threaten them.

But it terrified Wall Street. Walker’s project was to pull off a feat of legislative legerdemain by persuading lawmakers that the solution to U.S. economic malaise lay in shifting the government’s focus to encouraging capital formation — a move that would, its backers insisted, revitalize the supply side of the economy by spurring investment, unleashing entrepreneurial energies and turbocharging productivity. In practical terms, this meant preserving the biggest giveaway to investors in the tax code: the capital gains preference….

At Walker’s urging, several members of Congress, having fought off a capital gains increase, now turned around and started pushing for a tax cut. Wall Street brokerage houses led by Merrill Lynch and E.F. Hutton bombarded investors with mail telling them of the riches they stood to gain if rates were reduced. As the insurrection mounted over the spring, Ullman stopped work on the tax bill. But the momentum against Carter didn’t slow. On June 6th, California voters overwhelmingly passed the landmark ballot initiative Proposition 13, which slashed property taxes, made the cover of Time, and sparked a nationwide tax revolt. Dozens of anti-tax measures popped up in states across the country, helping shift the national mood in a more conservative direction and prefiguring the rise of Ronald Reagan.

In Washington, Carter’s reformers were overrun like Custer’s cavalry. Yet his humiliation wasn’t finished. In a remarkable feat of legislative jujitsu, Walker’s congressional allies prevailed upon Ullman to swap out the president’s tax reform bill for one of their own that, on every major front, was a repudiation of Carter’s principles. Instead of raising the capital gains rate to match income tax rates, the new bill slashed it, while adding a blizzard of new shelters and exemptions for the wealthy.…

Troubled by growing inequality, Carter had set out to rebalance in favor of the middle class the rewards government allots through the tax code. What he ended up with was a law that further empowered the very forces whose influence he sought to curb. Not only did the Revenue Act of 1978 cut corporate and capital gains taxes — redirecting investment from factories and equipment to financial instruments — but it also established the 401(k) retirement account, which channeled trillions of dollars more directly into the markets and undermined a pillar of middle-class security by eliminating employers’ obligation to provide pensions that ensured workers a stable retirement. If you go back to the Great Depression and trace the share of U.S. wealth held by the richest one percent of Americans, it falls steadily until 1978, whereupon it reverses and begins a steep ascent that continues to this day:

The law’s lasting impact on Democratic politics was that it ended a set of arrangements and a way of thinking about the economy that had held for four decades and replaced them with a new arrangement. Without quite realizing it or intending for it to happen, Carter’s signing the Revenue Act marked the beginning of the ascendance of finance capitalism as the major influence on Democratic policymaking. As organized labor declined, Wall Street assumed the role of senior partner in the party coalition. Democratic politicians, in turn, began emphasizing different priorities than during the Great Compression: fiscal austerity, soft labor markets, free trade with low-wage countries, and the further weakening of private-sector unions….