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Mr. McDermott

January 20, 2011

Reasons, Rules, and Riots:
Our Societal Panic

By David Cay Johnston

On the surface, what’s going on with tax policy
in Washington right now seems crazy.ADemocratic
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

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

Consider what happened to the Greeks 2,700
years ago. The Lydians, Greek settlers in 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 ofWestern Civilization—the moral basis
for progressive taxation and democracy.

America was in the grip of a societal panic from
the end of the CivilWar 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.

David Cay Johnston is a former tax reporter for The
New York Times and teaches at Syracuse University. He
has also written two books about taxes, Free Lunch and
Perfectly Legal.
Johnston shows how lessons from history can inform
our chaotic tax debate.

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.

Societal 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

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

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

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 selfrule
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.

Eventually 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 Bushera
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.