Elizabeth Warren threw Larry Summers out of the Democratic Party establishment six years ago. He hasn’t forgotten.
It was 2013, and President Barack Obama had nominated Summers to be the next chairman of the Federal Reserve. For the controversial economist, then 58 years old, the job would have been the capstone to a remarkable political comeback. Seven years earlier, he’d been forced out as president of Harvard for giving a speech arguing that women were genetically predisposed to mediocrity in the sciences. Shortly after, his reputation as a financial genius was sullied by the 2008 banking crisis.
But Summers’ work putting together the 2009 economic stimulus package had thrilled Obama, who believed he was ready to assume the most powerful position in the global economy.
Progressive activists were furious with the nomination. The National Organization for Women and other feminist groups launched a public relations campaign against Summers. And a freshman senator from Massachusetts began piecing together opposition on the Senate Banking Committee, which would have to approve Summers’ appointment prior to a full Senate confirmation vote.
The reaction stunned Obama. In a private meeting of Capitol Hill Democrats, he told lawmakers that an unreasonable left wing was making Summers into a “whipping boy.”
After months of bitter conflict, four Senate Democrats joined Warren in opposition to Summers, leaving him one vote short on the committee. He withdrew his name from consideration and retreated to the op-ed pages, where he remains a popular figure among the dying breed of very wealthy Democrats.
But the 2020 presidential primary has given Summers an opportunity to audition for relevance at the top of the Democratic Party once again. And he’s made his case by reopening his feud with Warren.
For most of the past year, Summers has been the antagonist-in-chief against one of Warren’s signature Big Ideas ― her call for a 2% wealth tax on fortunes larger than $50 million. Through op-eds, CNBC interviews, conference appearances and Twitter screeds, Summers has mustered every bit of ridicule he can for the wealth tax and the economic experts the senator has relied on to develop it. He’s bad-mouthed the underlying data on wealth inequality, emphasized the sophistication with which the rich avoid paying taxes, and declared the entire project a hopeless political dead end.
Speaking to an audience at the Peterson Institute for International Economics last week, Summers was frank about his overarching rationale:
“I do not think a focus on wealth inequality as a basis for being concerned about a more just society is terribly well-designed. ... I don’t think wealth is a particularly sensible way for judging or assigning taxes.”
So far, the public doesn’t seem to be buying what Summers is selling. According to a New York Times poll from July, 66% of American adults support Warren’s wealth tax, up from 61% in February. Even most millionaires support the idea, according to one CNBC survey.
The fight over the wealth tax is much more than an academic dispute over deficit projections and growth estimates. It’s the latest round in an ongoing power struggle at the highest echelons of the Democratic party about how Democrats understand justice itself ― and whether economic inequality really matters.
It is an ideological battle in which Summers and Warren have long been the most important players ― first as intellectuals engaged in academic research, and later as powerful figures in Washington. It’s a contest not only over who will control the Democratic Party for the next few years, but what it means to be a Democrat.
The 20th Century’s Economic Legacy
Though Warren has rolled out at least half a dozen ambitious plans to reshape the American economy ― universal childcare, student debt cancellation, worker representation on corporate boards and more ― the wealth tax is the intellectual keystone in her policy arch. Warren knows it; she even dressed up her dog Bailey as “2 cents” for Halloween ― the amount her wealth tax would take from every dollar over $50 million stashed away in personal fortunes.
The wealth tax isn’t just about raising money. It’s the policy that connects Warren’s 21st century agenda to what she likes about America’s 20th century inheritance.
In Warren’s telling, the Democratic Party cracked the code for shared prosperity in the 1930s with three basic principles: accountability for powerful corporate interests, high taxes on the rich, and major investments in what we now call public goods ― education, the environment, scientific research and infrastructure.
“It worked for half a century,” Warren told an audience in 2014. “You take a look at the numbers, and GDP just keeps going up year over year over year. But here’s the key. At the same time, median family income ― that family right in the middle — income just kept going up the same. In other words, as our country got richer, our families got richer. And as our families got richer, our country got richer.”
But starting in the 1980s, everything changed. The government deregulated Wall Street, cut taxes on the rich and retreated from public investments, making way for the magic of financial markets.
The results for the economy as a whole were uneven ― the heady Bill Clinton boom years were followed by the destruction of the 2008 financial crisis. But through it all, most families were on a steady downward trajectory. For everyone outside of the top 10% of incomes, real wages actually declined between 1980 and 2016.
“We tried it for 30 years, and it didn’t work. In fact, the consequences were nearly catastrophic,” Warren said.
Warren has been drilling her history lesson into Democratic audiences for a decade. In 2015, she started supplementing her narrative with data demonstrating that much of this shared postwar prosperity was systematically denied to Black Americans. Though the incomes of the typical Black family increased from the 1940s to the 1970s, they were substantially lower than the incomes for the typical white family, and the gap between black and white families only began to narrow in the 1960s. When income inequality began to diverge once again in the 1980s, the racial wealth gap exploded ― tripling between 1984 and 2009. The key for reviving the ideas of the New Deal and the Great Society, Warren suggests, is to ensure that everyone will actually be included in the 21st century revival.
The wealth tax is essential to that vision. As designed by economists Emanuel Saez and Gabriel Zucman, the wealth tax is not merely intended to raise revenue ― it’s a direct attack on the fortunes of the super-rich. Where most economists and politicians have focused on levying taxes to maximize the amount of money governments can put to use on social projects, Saez and Zucman are forthright about using the tax code to reduce both the size of major personal fortunes and the political influence of the super-rich. Easing inequality through the tax code is a social priority in its own right.
What governments actually do with the money is up to them; Saez and Zucman want to use the taxes to take the rich down a peg. “An extreme concentration of wealth means an extreme concentration of power,” they write in their new book “The Triumph of Injustice.” “The power to influence government policy. The power to stifle competition. The power to shape ideology.” Advocates of a carbon tax, they note, do not seek merely to raise revenue, but to reduce carbon emissions. The same goes for high taxes on the rich. “They are not aimed at funding government programs in the long run ... Quasi-confiscatory tax rates redistribute economic power.” Enormous disparities of wealth — whatever their effect on growth, productivity or innovation — are inherently anti-democratic and harmful to the social fabric.
Warren often downplays the radicalism of her proposal ― it’s just 2 cents! ― as she emphasizes its historical antecedents. But while Franklin Delano Roosevelt tried to establish a maximum income by taxing the highest annual earners at rates of over 90%, this wealth tax is really something new.
The United States has a lot of taxes that hit rich people as they increase their fortunes. There’s a progressive income tax, an estate tax on inheritances, the capital gains tax on financial investments, and corporate taxes, which disproportionately hit the wealthy. But America has never gone straight to the source and taxed wealth itself ― the total fortune squirreled away in bank accounts and investment vehicles. If either Warren or Sen. Bernie Sanders (I-Vt.), who has rolled out a similar proposal, can make it happen, adding wealth to the list of taxable items could prove as socially transformative as the introduction of the income tax in 1913.
The Bipartisan Deregulation Story
For Summers, Warren’s historical narrative is intensely personal. Though she typically blames Republicans for the era of “catastrophe,” the governing disaster was bipartisan. Summers’ uncle, Nobel laureate economist Paul Samuelson, advised the Kennedy administration to move away from FDR’s 90% tax rates in the 1960s. From the mid-1980s onward, the dominant economic policy voice in the Democratic Party belonged to Summers.
Nobody disputes the force of Summers’ intellect. By the time he entered the Clinton administration in 1993, Summers had already authored over 100 peer-reviewed papers ― an extraordinary figure for an economist of any age, much less for a man who was then under the age of 40.
A typical Summers paper was concerned with a Big Idea, and his early research reshaped the way economists understood unemployment, corporate investment and the stock market, just to name three. Where economists had generally believed the unemployed to be between jobs for a few weeks at a time, Summers discovered that an enormous proportion of people looking for a job had been searching for years ― people stuck in a long-term, life-altering rut. Where economists believed that the economy carried a fundamental, healthy “natural” load of unemployed people, Summers published research detonating the empirical case for any natural level of unemployment whatsoever.
Summers imagined himself to be making progressive breakthroughs. There were, according to his work, far more people being left behind by the economy than policymakers had realized. And there was paltry evidence that the economy as a whole operated according to the logic of business cycles independent of government policy. The length and depth of recessions ― even their very existence ― were things that public officials could ameliorate. Things would not automatically get better on their own. The government had a responsibility to act.
But Summers also shared a host of basic assumptions with conservative ideologues. He believed sophisticated financial markets could reliably direct the world’s resources where they were needed most. And he believed that poverty and inequality were very different problems. Often, Summers concluded, the public as a whole was made better off by policy changes and business innovations that left small numbers of people reaping enormous rewards.
And so throughout the Clinton administration, Summers supported financial deregulation in the name of progress. Policy changes that allowed private financial barons to generate greater wealth were good. Growing the pie created a bigger body of economic activity that could be taxed to fund social safety net programs. Well-designed taxes were intended to maximize the money available for government programs while incentivizing socially productive business innovation. Their effect on inequality ― something better addressed through anti-poverty programs, if at all — was an afterthought.
To Summers, there was no need to worry about financial institutions abusing the privileges they received from deregulation. Testifying before Congress in 1998 on the need to deregulate derivatives, Summers maintained: “The parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves.”
It seems almost laughable from this side of the AIG collapse, but at the time, most members of Congress were eager to agree with Summers. But not everyone. And certainly not everyone in academia.
The Shortcomings Of The Market
Some of the most important economic research from the 1980s and 1990s was taking place not in economics departments, but in law schools ― specifically, the law schools where Elizabeth Warren was working. Combing through decades of consumer bankruptcy filings, Warren discovered something that surprised her. Most people who filed for bankruptcy weren’t just thoughtless spendthrifts who had over-consumed their way into disaster. The vast majority were flipped from financial stability into economic ruin by a single personal tragedy ― a divorce, a massive medical bill, a job loss.
These were problems that financial markets were not good at resolving. You couldn’t expect young couples to buy divorce insurance. There was no derivative that a household could buy to protect itself from the local factory moving to Mexico. People would find themselves short of cash, and they would be vulnerable. When they got desperate, they’d turn to bottom-feeders like payday lenders to pay the bills. But these operators would only aggravate their problems, and short-term cash wouldn’t help anybody find a job or eliminate their medical debt.
Warren quickly realized that the shortcomings of financial markets weren’t limited to consumer finance. If the existence of payday lenders didn’t address the core source of trouble for American families, why should multi-trillion-dollar corporate debt markets be a panacea for American business?
To this day, Warren insists that she believes in markets as a vehicle for prosperity. But what she means by “markets” is very different from what Summers means. For Warren, a “market” is something governments define and police, with clear rules of fair play and social benefits that can be measured. If those benefits fail to materialize, the government has a responsibility to restructure the market. For Summers, markets are just what happens between consenting corporations when government is absent.
This was the heart of Warren’s opposition to his appointment in 2013. To Warren, Summers’ record of advocacy for Wall Street ― never mind the millions he made working for the hedge fund D.E. Shaw during the George W. Bush presidency ― made him unfit to helm the Fed, the most important financial regulator on the planet.
Inequality And Taxes
The dispute between Warren and Summers that cost him the Fed job was, in comparison to the wealth tax, a minor affair. They disagreed about the need to regulate financial markets and big Wall Street players. Warren was able to rally even corporate-friendly Democrats Jon Tester (D-Mont.) and Heidi Heitkamp (D-N.D.) to her cause on that question.
What’s happening with the wealth tax in 2019 is more fundamental. Summers disputes the basic moral, political and economic cases for targeting wealth inequality as a social problem. Protect the poor, fine. But don’t tell Summers that the existence of big fortunes is a big problem.
At the Peterson Institute forum last month, Summers assailed the idea of discouraging billionaires from “investing the money in the ways they think are most productive.” They were, after all, “smart enough to accumulate it in the first place.”
What’s more, Summers insists, a wealth tax makes billionaires more likely to spend their money on faux-charitable contributions ― nonprofits like right-wing think tanks and conservative magazines that regular folks would recognize as essentially political expenditures. These contributions escape the wealth tax and further entrench the political and social power of the super-rich.
There are two basic problems with Summers’ reasoning here. He isn’t really arguing against a wealth tax per se — he’s arguing against any tax that hits the wealthy at all. Progressive income taxes, capital gains taxes and estate taxes succumb to the same logic. The rich would just divert their income to socially destructive forms of spending to get more bang for their buck.
But Summers is not arguing that the United States should give up on other forms of taxation. In fact, he’s claiming we should double-down on them. He believes the better and “more progressive” alternative to the wealth tax is a higher tax on capital gains, and particularly inheritances. There is no justification, he says, for the super-rich passing down their wealth to their children, who do not automatically inherit their parents’ business acumen.
But the estate tax in particular seems more easily gamed than the wealth tax. Why would enormously rich families go to endless creative lengths to avoid a modest annual wealth levy but just shrug their shoulders at a massive, one-time estate tax? They wouldn’t.
Saez and Zucman aren’t naive. They know that previous efforts to establish a wealth tax in Europe have mostly failed. But they’ve studied those policies and think they understand why they fell apart. Most wealth taxes kicked in too low, they argue. By taxing people with about $1 million in wealth instead of people with much higher levels, those wealth taxes generated opposition among people who were doing just fine, but who weren’t really rich. If you’ve been paying a mortgage in an expensive neighborhood for a long time, it’s not hard to rack up $1 million in assets. This created a common political bond between the super-rich and the much more numerous upper-middle class, which joined forces to get wealth taxes repealed.
The other problem is basic enforcement. Countries in the European Union who tried a wealth tax were simultaneously allowing Swiss banks to help rich people shield income and assets from tax authorities. If you actually police international bank accounts, as the United States has done since 2010, you might get better results.
And indeed, if the super-rich were confident they could get around a wealth tax without too much trouble, they’d have no reason to make a fuss about Warren’s proposal. And yet everywhere you look, there’s a billionaire furious about it (see: Michael Bloomberg, Leon Cooperman, Howard Schultz, Steven Schwarzman).
Ultimately, the same question applies to Summers himself. If you really want to pursue a more progressive tax code, why strangle a new type of tax in the crib? Maybe it would work, maybe it would need to be tweaked, maybe it would need to be supplemented by other progressive taxes. The original income tax of 1913 was just 1% and applied to only the top 3% of households. Does Summers really think the next Democratic president would be better off with fewer tools to deploy against the super-rich at his or her disposal?
But Summers isn’t really arguing over money or numbers or even the future. He’s arguing about the past, seeking the perfect dataset that will show he was right all along, that he and the Democratic Party didn’t squander decades of progress by forging an alliance with the super-rich.