economic disparity and american democracy: is it time for a new new deal

7/31/2019 Economic Disparity and American Democracy: Is it time for a new New Deal

1/40

1

Economic Disparity and American Democracy:

Is it time for a new New Deal?

Jacob Vogel

5/2/2012


2/40

2

Modern Economic Disparity

From 1979 to 2007 inflation adjusted incomes for the top 1% of earners increased

by 224%.1 The top .01% saw their incomes grow by 390%.2During the same period the

incomes of the bottom 90% grew only 5%.3Fewer families moved up the income ladder

in the 1980s than in the 1970s, and even fewer moved up in the 1990s.4 Adjustments to

the tax code made the gap between the after tax income of top earners and the rest of

America greater than the pre-tax gap.5

As a result of decades of policy favoring the

wealthy, income inequality has reached a level not seen since the run-up to the Great

Depression.

6

The progressive tax system, which was set up to ensure that wealthier Americans

carry more of the tax burden, has been under attack.7

Using their political allies in

Washington, the wealthy have been able to shrink the estate tax and roll back taxes paid

by investors and corporations.8 The rest of Americans end up paying for these tax cuts in

the form of reduced governmental services.9The average American is losing because,

unlike the wealthy, they do not have K street lobbyists to fight for their causes.10

It is a dying myth that in America hard work leads to financial success. Higher

Education, while necessary to get ahead for most Americans, is becoming harder to

1See Lawrence Mishel,Data on Income Gains Support 99ers Gripes, ECON.POLY INST. (Oct.19, 2011),

http://www.epi.org/publication/data-income-gains-support-99ers/.2Id.3Id.4 Richard Delgato, The Myth of Upward Mobility, 68 U.PITT.L.REV. 879, 901-902, n.142 (2007).5

John W. Lee, Class Warfare 1988-2005 Over Top Individual Income Tax Rates: Teeter-Totter from Soak-the-Rich to Robin-Hood-in-Reverse, 2 HASTINGS BUS.L.J. 47 (2006).6 Ezra Klein,Inequality Back at Record Highs, WASH.POST, June 11, 2010, available athttp://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.html.7 Teresa Tritch, Tilting the Tax System in Favor of the Rich, N.Y.TIMES,available athttp://select.nytimes.com/ref/opinion/04talking.main.html?_r=1.8Id.9Id.10Seniboye Tienabeso, Warren Buffet and His Secretary Talk Taxes, ABCNEWS, (Jan. 25, 2012),http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/.
http://www.epi.org/publication/data-income-gains-support-99ers/http://www.epi.org/publication/data-income-gains-support-99ers/http://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/http://select.nytimes.com/ref/opinion/04talking.main.html?_r=1http://voices.washingtonpost.com/ezra-klein/2010/06/inequality_back_at_record_high.htmlhttp://www.epi.org/publication/data-income-gains-support-99ers/


3/40

3

obtain. The cost of going to college increased 439% from 1982-2007 (not adjusted for

inflation).11

Students from lower-income families get smaller grants than more affluent

students, and overall student borrowing has doubled in the last decade alone.12 In recent

years the proportion of students from upper-income families has grown at the most

selective United States (U.S.) colleges.13 Less advantaged students are more likely to

attend a for-profit college.14 For-profit students get the special disadvantage of higher

unemployment rates, lower earnings, and far greater debt burdens than their public or

non-profit student counterparts.15In fact, downward mobility is just as likely for a

majority of middle class Americans.

16

Many students are attempting to buck this trend by achieving advanced degrees.

Between 1983 and 2009 post baccalaureate enrollment increased from 1.6 to 2.9 million

students.17 As enrollment has increased so have the costs, especially for students who

choose to become lawyers. In 1980 obtaining a JD was not particularly expensive

compared to other types of graduate level training and law students graduated with little

or no debt.18 Law Students today borrow heavily and begin their careers with substantial

student loan debt.19

Several recent law school graduates, burdened by massive debt and

bleak job prospects, are suing their respective Alma maters for distorting their post-

11 Tamar Lewin, College May Become Unaffordable for Most in U.S., N.Y.TIMES, Dec. 3, 2008, availableathttp://www.nytimes.com/2008/12/03/education/03college.html.12Id.13 Delgato, supra note 4, at 903.14

David J. Deming et al., The For-Profit Postsecondary School Sector: Nimble Critters or AgilePredators? (NATL BUREAU ECON.RESEARCH, Working Paper No. 17710, 2011), available athttp://www.nber.org/papers/w17710.15Id.16 Delgato, supra note 4, at 901.17 Susan Aud et al., NCES 2010-028, NATL CTR.EDUC.STATISTICS: The Condition ofEducation, at36 (2010).18 N. William Hines, Ten Major Changes in Legal Education Over the Past 25 Years, ASSN AM.L.SCH.,http://www.aals.org/services_newsletter_presAug05.php(last visited April 27, 2012).19Id.
http://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nytimes.com/2008/12/03/education/03college.htmlhttp://www.nber.org/papers/w17710http://www.nber.org/papers/w17710http://www.aals.org/services_newsletter_presAug05.phphttp://www.aals.org/services_newsletter_presAug05.phphttp://www.aals.org/services_newsletter_presAug05.phphttp://www.nber.org/papers/w17710http://www.nytimes.com/2008/12/03/education/03college.html


4/40

4

graduation employment and salary statistics.20 In Modern America the barriers to

financial success are higher than ever. When hard work does not pay off it is evidentiary

of the existence of an American caste system.

While it is nearly impossible to climb to the next socio-economic level, the

system is more than willing to let Americans fall. Unemployment serves as a lubricant on

the slide to the bottom of the caste system. In October of 2011 around 14 million

Americans were unemployed.21

Add to that figure the additional 9.3 million Americans

that are considered underemployed and the 2.5 million considered marginally attached

to the labor force and you come up with a total of nearly 26 million Americans who

were, at the very best, underemployed that month.22The problem is not just in the

quantity of jobs, but also in the quality of the jobs available.23

20% of adults in America

have jobs that pay poverty-level wages.24 In fact, most of the new jobs created are in the

low-wage, low-skill service sector.25

Unemployment makes life difficult for families that have savings to rely on, but in

modern America many families are burdened by unprecedented household debt coupled

with inadequate savings.26

Beginning in 2000, mortgage related debt dramatically

accelerated the pace of debt accumulation.27 Prior to that, the growth of real household

20 Patrick G. Lee,Law Grads Sue Over Tuition, WALL ST.J. (Aug. 11, 2011), available athttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.html.21 Ben Baden, The Ranks of the Underemployed Continue to Grow, U.S.NEWS (Oct. 19, 2011), available at

http://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-grow .22Id.23Id.24Id.25 Delgato, supra note 4, at 901.26 Reuven Glick & Kevin J. Lansing, (FRBSF 2009-16), FED.RESERVE BANK S.F: U.S. HouseholdDeleveraging and Future Consumption Growth (2009), available athttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.html .27Id.
http://online.wsj.com/article/SB10001424053111904823804576500694179259396.htmlhttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.htmlhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.htmlhttp://www.frbsf.org/publications/economics/letter/2009/el2009-16.htmlhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://money.usnews.com/money/careers/articles/2011/10/19/the-ranks-of-the-underemployed-continue-to-growhttp://online.wsj.com/article/SB10001424053111904823804576500694179259396.html


5/40

5

debt far outpaced the growth of real disposable income and wealth.28 In 2007 Americans

owed $750 billion in revolving debt, up six-fold over a twenty-year period.29

This debt

increase was fueled by an environment of easy credit tied to higher housing and stock

prices.30

When the housing market crashed many families lost the collateral they assumed

they could rely on in hard times.

With little or no savings, a sea of underwater mortgages, and a shaky job market,

less-fortunate Americans braced for financial ruin. In 2009, 1.41 Million Americans filed

for bankruptcy, up a third from the prior year.31 The surge in bankruptcies was attributed

to foreclosures and job losses.

32

A large number of those were Chapter 7 bankruptcies,

indicating that many Americans chose to walk away from their underwater homes.33 In

2005 an overhaul of federal bankruptcy laws aimed to promote Chapter 13 filings, which

force consumers into debt repayment plans but allow them to keep certain assets. 34The

overhaul failed because many smart Americans realized they would be better off without

the debt and their assets were not worth the headache.

For the broke Americans who decide not to file for bankruptcy protection, the

U.S. debt collection industry is ready to make them pay.35

The number of debt-related

arrest warrants has been on the rise.36Debtors Prisons were outlawed in 1833, but some

28Id.29

Delgato, supra note 4, at 912.30Glick & Lansing, supra note 26.31 Sara Murray & Connor Dougherty, Personal Bankruptcy Filings Rising Fast, WALL ST.J. (Jan. 7, 2010),available athttp://online.wsj.com/article/SB126263231055415303.html.32Id.33Id.34Id.35 Jessica Sliver-Greenberg, Welcome to Debtors Prison, 2011 Edition, WALL ST.J. (Mar. 16, 2011),available athttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.html .36Id.
http://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB126263231055415303.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB10001424052748704396504576204553811636610.htmlhttp://online.wsj.com/article/SB126263231055415303.html


6/40

6

judges are worried that the jump in debt-related arrests is creating a modern day

version.37

More than a third of all U.S. states throw people who cant pay in jail.38

While our system of justice is incarcerating the unfortunate, the modern day

robber-barons are relaxing on their yachts. Federal prosecutions for financial institution

fraud fell to a twenty year low in 2011.39 The decade long trend of reduced financial

institution fraud prosecutions indicates the close relations between DC insiders and the

big banks, especially when coupled with the financial sector misconduct over recent

years.40In the information age Americans are more informed than ever, and it is not a

coincidence that large masses of people are outraged at the inequalities that exist in the

status quo. The Occupy Movement and the Tea Party indicate the power of collective

knowledge can shift the focus of modern political debate, but is there evidence that real

change is coming?

A look into Americas past struggles has convinced me that a progressive shift is

approaching. Lines can be drawn connecting the economic conditions that led to the

American Revolution, the financial panics of the late 19th and early 20th centuries, the

Great Depression, and the Great Recession. The legislative response to the current crisis

will dictate the extent of the changes ahead.

37Id.38Id.39 Alexander Eichler, Federal Prosecution of Financial Fraud Falls to 20-Year Low, New Report Shows,THE HUFFINGTON POST (Nov. 15, 2011),available at http://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.html .40Id.
http://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.htmlhttp://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.html


7/40

7

Economic Reasons for the American Revolution

In the decades leading to the American Revolution the colonists were burdened by

economic policies that favored British nationals to the detriment of the colonies. The

Navigation Acts, Scottish Rationalization, Parliaments Western Land Policies, The

Stamp Act, and the Tea Act were among the Patriots leading economic reasons to revolt.

Navigation Acts

Initiated in 1642, Parliament enacted the Navigation Acts in order to reestablish

control and keep other nations out of the colonies.

41

The Navigation Acts forced colonists

to route certain enumerated goods to British ports before their re-exportation to their

final destinations.42

Similarly, enumerated goods bound to the colonies had to be routed

through British ports.43 The acts reserved all commerce between Europe and the colonies

to British citizens (including colonists); this initially benefitted colonial merchants by

reducing competition with the French and Dutch. 44Over time, however, increased

competition between the colonists and the British coupled with an expansion of the laws

intended to protect British industry created hostility.45

Prior to 1776 the country was evenly split between loyalists and patriots.46 The

most predominant leaders of the Revolution were the very people who would gain from

repealing the Navigation Acts: merchants, tobacco planters, and artisans.47

41 Larry Sawyers, The Navigation Acts Revisited, 45ECON.HIST.REV. 262, 262 (1992).42

Id. at 263.43Id.44Id. at 275.45Id.46Id. at 266.47

Id.


8/40


9/40

9

Revolution.58 These factors threatened the livelihood of artisans.59 British goods were

produced at lower wages and with higher productivity, creating a competitive advantage

for the British.60 At the same time the cost of Transporting goods across the Atlantic was

reducing, eroding the only advantage of colonial artisans.61

The non-importation boycotts

stimulated manufacturing for colonial artisans and they wanted to continue the

prosperity.62 The Navigation Acts allowed for an expansion of restrictions on colonial

manufacture and Parliament was known to act to protect British industry without concern

for the colonies.63 For artisans the threat of the status quo under the Navigation Acts was

very real.

64

Scottish Rationalization

Scottish Rationalization, a process that lowered transaction costs in the South,

was widely viewed as an invasion in an economic war.65 Prior to the Scottish invasion

the colonialplanters themselves dominated the regions commerce. 66Planter

indebtedness skyrocketed under the Scottish Rationalization.67 Scottish firms were

successful because they financed their exports to Virginia out of pocket by advancing

58

Id. at 271.59See id. at 276.

60Id. at 276-277.61Id. at 276.62

Id. at 277.63Id.64Id.65 Sawyers, supra note 41, at 274.66Id.67 Egnal & Ernst, supra note 54, at 25.


10/40

10

the Virginians credit to make up trade deficits.68 The credit allowed the planters to defer

payment for European goods and freed up cash for expansion.69

By the 1760s the Scottish influence on Southern commerce threatened colonial

planters hold on the regions commerce.70

The Scottish merchants were wielding

political power to block legislation harmful to their cause in the Virginia House of

Burgesses.71Southern planters accused the Scottish traders of controlling tobacco prices,

fixing exchange rates, and bribing legislators.72

The Scots also used their influence to

manipulate Virginias monetary policy in their favor.73 During the Economic depression

of 1772 and 1773 planters across the south stood shoulder to shoulder in a movement

directed in large part against the Scottish mercantile community. 74

Parliaments Western Land Policy

Prior to 1763 colonial boundaries stretched from sea to sea.75 After the French

and Indian War the crown altered its position regarding western settlements, a position

that aggravated colonists. 76 In a move to appease Indians for abandoning their French

allies, the crown issued the royal proclamation of 1763, reserving western lands for

Indian hunting grounds.77The king also forbid colonist expansion into the west and

68Id.69Id. at 26.70

Sawyers, supra note 41, at 274. The Scottish Tobacco houses extended credit to southern farmers inexchange for their future tobacco crops. The farmers used the credit to purchase imported goods from theScots and, over time, became greatly indebted to them. Egnal & Ernst, supra note 54, at 25.71 Sawyers, supra note 41, at 274.72See Egnal & Ernst, supra note 54, at 26.73Id..74

Id. at 28.75

B.A.HINSDALE,THEOLDNORTHWEST, 120 (1888).76Id. at 121-123.77Id. at 123.


11/40

11

required frontiersmen seated upon western lands to abandon them.78Despite great

sacrifice in support of Britain in its war with the French, the colonists were worse off

after winning the war.79

George Washington and other prominent colonists viewed the proclamation as a

mere vehicle to appease the Indians that would be abandoned in a few years.80 Patrick

Henry led a land speculation group in Virginia and he boldly ignored the proclamation.81

In 1770 a group including Benjamin Franklin was denied the opportunity to purchase

2,400,000 acres south of the Ohio River with the purpose to establish a western colony. 82

The denial was included in a report by the Privy Council, who concluded by

recommending the crown immediately issue a new proclamation upholding the

Proclamation of 1763.83

Other land policies further infuriated the colonists. In 1774 the Quebec Act

permanently severed the coastal colonies from the west by expanding the Canadian

province to include all extra-colonial territory north of the Ohio River and west to the

Mississippi River.84The colonists viewed the Quebec Act as an attack against them.85

The British victory over the French in 1763 marked a major shift in the colonies.86

For the first time in history English-speaking people did not live under the fear of French

or Spanish invasion, and the benefit of British protection no longer outweighed the

78

Id.79Id. at 125.80

Id. at 124-125.81 Lawrence Henry Gipson, The American Revolution as an Aftermath of the Great War for the Empire,1754-1763, 65 POL.SCI.Q. 86, 94 (1950).82 Hinsdale, supra note 75, at133.83Id. at 134.84Id. at 141.85Id. at 142.86See generally Gipson, supra note 75, at 86-104.


12/40

12

burden of British regulation.87At the same point in history Parliament took several

missteps that pushed their once loyal colonies beyond the brink.

The Stamp Act

American Whigs believed that under their constitutional charter they had a right

not to be taxed except by their own consent or the consent of their representatives.88 The

Stamp Act of 1765 challenged an established relationship between Britain and her

colonies by imposing internal taxation.89 The Whigs viewed the drastic imposition as a

breach of contract that could only be legal if both parties consented.

90

The British enacted the Stamp Act to offset some of the costs associated with the

seven-year long French and Indian War.91

The view was that because America greatly

benefitted from the result they should help with the cost.92 The Whigs argued the

colonists bore a great burden during the war and they were only contractually obligated to

submit to British regulation in exchange for protection.93The Whigs also argued that a

sizeable portion of the war debt was incurred fighting the French in Europe, the military

contest was commenced to protect British and not colonial interests, and British, not

colonial citizens were enjoying the spoils of the war.94

Governor Francis Bernard of Massachusetts agreed that his citizens probably

could not bear the added tax after submitting to an amazing burthen of taxes during the

87Id. at 102.88John Phillip Reed, In Our Contracted Sphere: The Constitutional Contract, The Stamp Act Crisis, andthe Coming of the American Revolution, 76 COLUM.L.REV. 21, 22 (1976).89Id. at 46-47.90Id. at 47.91Id. at 34.92

Id.93Id. at 37-40.94Id. at 36.


13/40

13

war.95 The regulation of colonial trade was worth two million pounds every year; the

colonists thought that amount was enough to pay for British protection.96

Angry mobs

terrified stamp agents into resigning and forced the repeal of the tax.97 If Parliament

had determined to enforce the Stamp Act it might have led to open rebellion and civil

war, ten years before the American Revolution. 98

The Tea Act

When Parliament passed the Tea Act in 1773 the colonists reacted with

unprecedented hostility.

99

Allowing the East India Company to sell tea directly to the

colonies was seen not as a scheme to reduce colonial tea prices, but as another instance

of a British exporter seeking to swell his trade by dealing outside of established

channels.100In Marc Egnal and Joseph A Ernsts 1972 article,An Economic

Interpretation of the American Revolution, the authors stress the contextual importance

of the long-term struggle between the colonial merchants and the empire, but they also

point to the rising involvement of the lower orders of colonial society in

demonstrations against the British.101

The Whig elite initially brought tradesmen, sailors, and laborers into the political

fray during the 1760s.102

The wealthier patriots directed the mobs to attack and

intimidate the stamp distributors and customs officials.103

The lower classes fury can be

95Id. at 37.96Id. at 40.97 Gordon S. Wood,A Note on Mobs in the American Revolution, 23 WM.&MARY Q. 635, 642 (1966).98 Gipson, supra note 81, at 100.99See Egnal & Ernst, supra note 54, at 24.100Id.101Id.102Id. at 28.103Id.


14/40

14

attributed to the fact that they were among the first encouraged to buy with easy credit

and, subsequently, the first to feel the economic pain during periods of business

contraction.104 The more the lower classes became involved in the struggle the bolder

their demands became.105

This new militancy frightened many of the merchants who

now saw the threat of social upheaval.106

Research into areas such as the confiscation of loyalist estates, the nature of the

new state governments, and so on, has shown that there was no social overturn

accompanying the American Revolution and that what change did come about in the

nature of society was most moderate.

107

Viewed in this light the American Revolution

was not a battle for freedom from tyranny but a fight over economic control. 108

The parallels between the modern economic system and the system in the decades

leading to the American Revolution are striking. High levels of indebtedness, increasing

bankruptcies, legislation favoring one group over the other, disparate access to

legislators, courts that perpetuate unfairness, high barriers to enter lucrative fields, and

increasing poverty seem prevalent both in 1776 and 2012. The solution in 1776 was a

bloody revolt to replace the old boss with a new boss. In 2012 will the angry mob

prevail?

Boom, Bust, and Distrust

Consolidated Economic power has long been a fear of the American people. After

the Revolution several states submitted proposed amendments that directly addressed the

104Id.at 29.105Id.106Id. at 29-30.107Id. at 6.108See id.


15/40

15

issue. 109New York proposed that the Congress do not grant monopolies.110

Massachusetts, New Hampshire, and Rhode Island proposed that the Congress erect no

company of merchants with exclusive advantages of commerce.111 Economic panics in

the late 19th

and early 20th

century stirred public outrage and lead to the establishment of

greater public safeguards.

The Sherman Antitrust Act of 1890

In the years immediately before the Sherman Act, between 1888 and 1890, there

were few who doubted that the public hated the trusts fervently.

112

The trusts were

accused of creating poverty and dividing the country into two classes, the rich and the

poor.113

It is widely believed that Congress passed the Act in response to the public

outcry.114 Unfortunately, the legislation was not strong enough to prevent the boom and

bust volatility of the free market.

The Panic of 1893

A bank panic is indicative of thepublics distrust of the banking system.115

During panics multiple banks in several regions suffer bank runs, where fearful

depositors rush to withdraw at once.116

During the Panic of 1893, 575 banks closed their

109

William L. Letwin, Congress and the Sherman Antitrust Law:1887-1890, 23 U.CHI.L.REV. 221, 226(1956).110Id.111Id.112Id. at 222.113Id. at 225.114Id. at 222.115 Mark Carlson, Causes of Bank Suspensions in the Panic of 1893, 42 EXPLORATIONS ECON.HIST. 56,61-62 (2005).116Id. at 57.


16/40

16

doors either permanently or temporarily.117 The flash of money hording causes a ripple

effect in the rest of the economy, exacerbating the effect of the panic.118

The Panic of 1893 was preceded by a slew of banking missteps.119 In the months

prior to the crisis, the gold reserves of the Treasury were nearing the legal limit required

to maintain gold parity. Some contemporary scholars claim that this led to a fear of

depression and that the crisis was really a run on the currency.120The panic was

preceded by a stock market crash and a large increase in the interest rate on call loans.121

The panic resulted in 15,000 business failures in 1893.122

Due to the Panic of 1893, some 20% of the labor force was unemployed.

123

In

May of 1894 armies of unemployed men marched on Washington, D.C.124Known

most notably as Coxeys Army after one of the organizers, the men pressed for public

works projects and articulated the need for a safety net in a commercialized industrial

economy.125 The cause received widespread support in the public and was the first

national protest against unemployment and the first movement to call for the Federal

Government to take action.126

117Id.118Seeid. at 62.119See generally Id.120

Id. at 59.121Id. at 59-60. banks used a substantial amount of the bank deposits they received to provide loans tobrokerage houses involved in the stock and commercial paper/bond markets[t]he loans could be called inat the banks discretion and were therefore referred to as call loans. Id.122Id. at 60.123 Anne Mayhew,Polanyis Double Movement and Veblen on the Army of the Commonweal, 23J.ECON.ISSUES 555-562, 556 (June 1989).124Id.125Id.126Id. at 556-557.


17/40

17

The Panic of 1907

The Panic of 1907 was different than its predecessors.127

One of the differences is

exemplified in the increased role of the trusts.128Before 1907 the financial distress during

the busts were mostly centered at banks.129

By 1907 the aggregate value of trust

company assetswas nearly the same as that of national banks and much larger than that

of state banks.130 During the Panic of 1907 the contraction of loans and deposits of trust

companies dwarfed those of banks.131

It is important to note the differences between banks and trusts in 1907. Trusts

were regulated less than banks, had fewer restrictions on their activities and choice of

assets, and until 1906 trusts in New York were not required to hold minimum reserves.132

With trusts investors faced higher risk, but there was also a potential for greater

rewards.133 Because trusts took advantage of investment opportunities to which banks

had limited access, trusts had relatively undiversified portfolios.134 In 1906 every sector

of the economy seemed to be growing and Wall Street Oligarchs were amassing

unprecedented wealth and power.135

The increasing role of Bucket Shops also led the way to the Panic of 1907.136

Bucket Shops allowed smaller players to place bets on future stock values; they were

127 Jon Moen & Ellis W. Tallman, The Bank Panic of 1907: The Role of Trust Companies, 52 J.ECON.HIST. 611, 612 (1992).128Id.129Id.130

Id.131Id.132Id. at 614.133Id. at 616.134 Ellis W. Tallman & Jon R. Moen,Lessons from the Panic of 1907, ECON.REV. (May/June 1990),available athttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdf135 Brendan Sapien, Financial Weapons of Mass Destruction: From Bucket Shops to Credit Default Swaps,19 S.CAL.INTERDISC.L.J. 411, 417 (2010).136Id.
http://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdfhttp://www.econseminars.com/Financial%20Panics/_Pre-Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdf


18/40

18

more like casinos than the stock market.137In essence, Bucket Shops created a derivatives

market that added to the unfettered speculation [that] contributed to the panic and stock

market crash of 1907.138

The Panic of 1907 also displayed the traditional features of the previous panics.139

There were bank runs, the stock market crashed, interest rates spiked, and credit markets

tightened.140 The panic started when a pair of wealthy financiers failed to corner the

copper market in an attempt to prop up the United Copper Company.141

After the failed

attempt the potential that United Copper could collapse caused a run on the

Knickerbocker Trust Company.

142

When Knickerbocker was forced to close its doors the

panic spread.143The panic subsided after a group of bankers led by J.P. Morgan poured

capital into the failing banks, trusts, brokerage houses, and the New York Stock

Exchange.144

In the wake of the Panic of 1907 Congress enacted the Aldrich-Vreeland Act,

which put an emergency currency scheme in place.145Congress also enacted the Federal

Reserve Act to provide the establishment of Federal Reserve Banks, to furnish elastic

currency, to afford means of rediscounting commercial paper, to establish more effective

supervision of banking, and for other purposes.146 In addition to Federal responses,

137

See Id. at 413.138Id.139 Moen & Tallman, supra note 127, at 616.140Id.141 Sapien, supra note 135, at 419.142Id. at 419-420.143Id. at 420.144Id. at 421.145Idat 422. The currency scheme created a method of issuing currency based on the reserves in banks. Id.146Id.


19/40

19

several state legislatures passed bills outlawing bucket shops in the years after the

panic.147

The parallels between the financial panics of the late 19th and early 20th century

and the Great Recession are numerous. In both eras people believed that the system was

rigged to create two classes, rich and poor. In both 1907 and 2008 the financial crisis

came to a head after a big player was forced to shut its doors. In the aftermath of 1907

and 2008 selected institutions were saved by a collective while others failed and laborers

remained unemployed. Coxeys Army marched on Washington and paved the way for

todays Occupiers. When bubbles burst tempers flare.

The Great Depression and the New Deal

The greatest economic collapse in Americas history was followed by the greatest

expansion of the Federal government. We will briefly look at the environment that lead to

the financial collapse then focus a majority of our attention on the legislative response to

the issues triggered by the Great Depression and their shortcomings.

1920s Laissez-Faire

In the 1920s there was a widely accepted view that the government should not

regulate business because the markets were self-correcting.148

This pro-business

attitude was coupled with other perks for the wealthy. In 1926 congress reduced the top

marginal tax rate from 40% to 20%, doubled each taxpayers lifetime exemption from the

147Id.148 Steven A. Ramirez, The Law and Macroeconomics of the New Deal at 70, 62 MD.L.REV. 515, 516 n.6.(2003).


20/40

20

estate tax to $100,000, and repealed the 1924 gift tax. 149 The 1926 legislation also aimed

to defund the Federal government by increasing the state death tax credit to 80%, from

25% of the federal tax due.150In 1929 congress further reduced a variety of tax rates.151

At the same time the roaring 20s created vast wealth disparity.152

Between 1921

and 1928, the number of Americans with annual incomes over $1,000,000 increased from

21 to 511, while the number earning between $500,000 and $1,000,000 annually

increased from 63 to 983.153

The wealth growth was fueled by a highly speculative and

mostly unregulated stock market.154 In 1927 the Federal Reserve, fearing the existence of

a speculative bubble, took a misstep by cutting rates and injecting more liquidity into the

market.155This fueled even more speculation.156In October 1929 the stock market

crashed and ushered in the Great Depression.157

The Great Depression

After the crash the market continued to drop and general economic decline took

hold.158 Demand tightened leading to deflated prices, especially for farm goods and

commodities.159

The country was swept with a tidal wave of bankruptcies.160

Home

149 Jeffrey A. Cooper, Ghosts of 1932: The Lost History of Estate and Gift Taxation, 9 FLA.TAX REV. 875,883 (2010).150Id.151Id. at 892.152

Id. at 885.153Id.154 Ramirez, supra note 148, at 526-527.155Id. at 527.156Id.157 Thomas Ferguson, From Normalcy to New Deal: Industrial Structure, Party Competition, and AmericanPublic Policy in the Great Depression, 38 INTL ORG. 41, 41-42 (1984).158Id. at 42.159See id.160Id.


21/40

21

lending evaporated.161 Home foreclosures tripled.162Unemployment rose to 25.2% and

30% of the 1929 Gross National Product evaporated by 1933.163

Panic stricken depositors

ran on the banks leading to 5,000 bank failures between 1929 and 1933.164

At the time the money supply was linked to the nations gold reserves.165

The

gold standard created an inelastic money supply, preventing the government from

enacting monetary policy to combat the decline. 166Under the gold standard the country

could increase the money supply only by increasing the physical quantity of gold reserves

or by devaluing the price at which the Federal Reserve stands ready to buy and sell

gold.

167

In 1932 congress increased estate taxes in an attempt to generate additional

revenue and avoid a downgrade of the nations credit rating.168

Congress also enacted a

gift tax to insure wealthy taxpayers could not avoid the estate tax. 169 The Hoover

Administrations response to the crisis was aimed at enhancing business confidence. 170

He believed that government should not coerce, but it should cajole.171

The Great Depression destabilized the nations commitment to capitalism.172

Twenty-thousand poverty stricken World War I veterans occupied Washington D.C. (in

1932) in an attempt to compel the government to pay a bonus before the promised 1945

161 Ramirez, supra note 148, at 525.162Id.163Id. at 524.164

Id. at 525.165Id. at 528.166Id.167 Ben S. Bernanke, The Macroeconomics of the Great Depression: A Comparative Approach, 27 J.MONEY CREDIT &BANKING 1, 5 (Feb., 1995).168 Cooper, supra note 143, at 896-897.169Id. at 879.170 Ramirez, supra note 148, at 526-528.171Id. at 529.172Id. at 525.


22/40

22

date.173President Hoover declined and unleashed the Army on the men, injuring

thousands and killing three.174

Record numbers of Americans voted for the Socialist Party

and the Communist Party in 1932.175 Radicals like Upton Sinclair, Huey Long, and

Father Charles Coughlin became prominent political figures as the country reacted

against Republican inaction.176 In the 1932 election ninety-seven new Democrats won

seats in the House of Representatives, twelve new Democrats won seats in the Senate,

and Democrat Franklin Delano Roosevelt won the Presidency with 57.4% of the popular

vote.177

FDR and the New Deal

Taking office in 1933, President Franklin Delano Roosevelt (FDR)

implemented a series of emergency relief bills for the unemployed; an Agricultural

Adjustment Act for farmers; a bill to reform the banking structure; a Securities Act to

reform the stock exchange; and the National Industrial Recovery Act, which in effect

legalized cartels in American Industry.178 He also abandoned the gold standard,

promoted American exports, addressed the housing crisis, and investigated J.P. Morgan

& Co.179 Widespread government regulation and stimulatory expenditures had not been

tried before in a market based economy.180

173Id.174Id.175Id. at 526.176Id.177 Roger I. Roots, Government by Permanent Emergency: The Forgotten History of the New DealConstitution, 33SUFFOLK U.L.REV. 259, 260 (2000).178 Ferguson, supra note 157, at 42.179Id.180 Ramirez, supra note 148, at 516-517.


23/40

23

FDR grounded the New Deal reforms in his powers as Commander-In-Chief and

justified their extra-constitutionality under war powers jurisprudence.181

In essence,

FDR analogized the Depression to a wartime battlefield.182 Not only did the New Deal

reject the laissez faire tradition of American economic policy and legal jurisprudence;

FDRs emergency measures changed the relationship between executive and legislative

authority.183Roosevelts administration played the emergency card at virtually every

opportunity, alleging that the emergency doctrine allowed for virtually limitless action by

the President during a national crisis.184

During the depression there was a large contingent of hard-core unemployed

workers.185 The hard-core unemployed would be out of work or underemployed for years

at a time.186

10% of the labor force was considered hard-core unemployed during the

Great Depression.187 The federal government attacked the unemployment problem on

multiple fronts.188 Several provisions were intended to reduce the labor pool.189 The

Civilian Conservation Corps (CCC) kept young men out, child labor laws removed youth

under sixteen, andMexican Aliens were given one-way transportation back home.190

The National Industrial Recovery Act (NIRA) of 1933 was highly controversial

because it expanded federal responsibility to include the welfare of the economy. 191 The

NIRA gave the president the authority to approve codes of fair competition, which

181 Roots, supra note 177, at 261.182 Id. at 271.183

Id. at 262.184Id. at 272.185 Richard J. Jensen, The Causes and Cures of Unemployment in the Great Depression, 19 J.INTERDISC.HIST. 553, 556 (1989).186Id. at 555-556.187Id.188Id.189Id. at 571.190Id. at 571-572.191 Robert L. Rabin, Federal Regulation in Historical Perspective, 38 STAN.L.REV. 1189, 1243 (1986).


24/40

24

were federally enforceable standards for each industry.192If the industry failed to act the

president could promulgate a code of his own.193

The codes could cover a wide swath of

business practices including: price levels, wage and hour provisions, and output

restrictions.194

The goal of the NIRA was to address the problem of lagging business

productivity.195. FDR hoped to pump new life into the supply side of the market by

fostering intra-industry cooperation, eliminating price competition, and limiting output.

The NIRA helped the unemployment problem by reducing hours worked.196The heart of

the act was ultimately declared unconstitutional. 197

The Agricultural Adjustment Act (AAA) was another supply-side approach

with the aim of correcting the deflated value of crops.198 The AAA paid farmers if they

agreed to limit the acreage they farmed.199

. Unfortunately the AAA proved most

beneficial to wealthy farmers who needed help the least.200Despite FDRs intentions,

both the NIRA and the AAA failed to achieve the desired results.201

The Emergency Banking Act gave the president the power to take any measure he

found necessary to resolve the banking crisis.202 He demanded all banks take a four-day

holiday, confiscated all privately held gold, and forced banks to produce financial

192Id.193

Id.194Id. at 1244.195See generally, Id. at 1244-1246.196 Jensen, supra note 185, at 571.197 Ramirez, supra note 148, at 535.198 Rabin, supra note 191, at 1247.199Id.200Id. at 1248.201Id.202 Roots, supra note 177, at 267.


25/40

25

information on demand.203FDR believed that in order to function in a stable manner

modern capitalism required significant regulation, especially in the financial sector.204

The Banking Act of 1933 (otherwise known as the Glass-Steagall Act) created the

modern Fed by definitively vest[ing] monetary policy in the Fed and assur[ing] that the

Fed [is] endowed with a high degree of independence.205 The Glass-Steagall Act also

established the FDIC in order to end panic era bank runs and protect communities from

the shocks associated with bank failures.206

Section 16 of the Glass-Steagall Act prohibits national banks from underwriting,

selling, and dealing in securities.

207

Section 21 prevented anyone engaged in the

securities industry from administering checking or savings accounts.208Prior to the Great

Depression banks were allowed to underwrite securities.209

This caused a conflict of

interests. 210 The rationale for separating securities from commercial banking functions

was to put a check on the opportunistic banks, thus preventing them from duping nave

investors.211 The goal of the law was to increase confidence in the public markets.212

203Id. at 268.204 Ramirez, supra note 148, at 534.205Id. at 540.206Id. at 543.207 Jonathan R. Macey, Special Interest Groups Legislation and the Judicial Function:The Dilemma ofGlass-Steagall, 33 EMORY L.J.1, 4-5 (1984).208Id. at 6.209

Randall S. Kroszner & Raghuram G. Rajan, Organization Structure and Credibility: Evidence fromCommercial Bank Securities Activities Before the Glass-Steagall Act, 39 J.MONETARY ECON. 475, 476(1997).210Id. Since a commercial bank has loans outstanding to firms, it could favor the interests of its ownequity holders in the following manner: if a bank had private bad news about a firm it had lent to, it coulduse its underwriting arm to certify and distribute securities on behalf of the firm to an it could use itsunderwriting arm to certify and distribute securities on behalf of the firm to an unsuspecting public andhave the firm use the proceeds to repay the outstanding bank loan.Id.211Id.212Id.


26/40

26

The Securities Act of 1933 sought to increase disclosure in order to inspire

investor confidence and, in turn, revive investment.213

Skeptics argued, [a]ll the Act

pretends to do is to require the truth about securities at the time of issue, and to impose

a penalty for failure to tell the truth.214

Under the Securities Act of 1933, a registration

statement must be filed prior to a public offering and a prospectus must be physically

distributed to purchasers.215 Among the required disclosures are certified balance sheets,

certified profit and loss statements for three years, and five years of earnings

statements.216

While the Securities Act of 1933 focused on the special occasion of public

offering, the Securities Exchange Act of 1934s provided a whole new framework of

(continuous) disclosure applicable to a more limited group of issuers.217

The disclosures

under the Securities Exchange Act of 1934 include an annual report (10-K), semiannual

report (9-K) and enumerated monthly reports (8-K).218

The Home Owners Loan Act of 1933 was established to quell the mortgage

crisis.219Mortgages in the 1930s were usually five to ten years in duration, payments

were made on interest only, and rates were 8% or higher.220

When the loan matured the

entire unreduced principle was due, and most homeowners refinanced at that point for

213 Ramirez, supra note 148, at 535.214

William O. Douglas & George E. Bates, The Federal Securities Act of 1933, 43 YALE L.J. 171, 171(1933).215 Milton H. Cohen, Truth In Securities Revisited, 79 HARV.L.REV. 1340, 1344-1345 (1966).216Id. at 1345.217Id. at 1340-1341.218Id. at 1356-1357.219 Peter M. Carrozzo,ANew Deal for the American Mortgage: the Home Owners Loan Corporation, theNational Housing Act and the Birth of the National Mortgage Market, 17 U.MIAMI BUS.L.REV. 1, 4(2008).220Id. at 6.


27/40

27

another five to ten years.221The Act established the Home Owners Loan Corporation

(HOLC) in order to purchase toxic mortgages form local lenders.222

. The idea was that by

increasing the local lenders liquidity it would enable them to originate more loans and

ease the tight money crisis.223

TheNational Housing Act of 1934 was implemented to stimulate building

without government spending and to improve conditions with respect to home

financing.224

The National Housing Act created the Federal Housing Administration

(FHA) and it aimed to achieve five goals.225First, it promoted home modernization and

insured loans were available for home improvements.

226

Second, it created a sound

mortgage instrument with amortization over a long period of time eliminating the need to

refinance every five to ten years.227

It also established the Home Credit Insurance

Corporation to guarantee a return on lenders investments in the event of foreclosure,

created a national system of real estate appraisal, and for the first time allowed the

creation of a secondary market for mortgage securities. 228

The Works Progress Administration (WPA) directly put millions of

unemployed Americans to workon various schemes ranging from standard public works

construction projects to cultural ventures involving the fine arts.229 The goal of the WPA

221Id.222Id. at 8.223Id. at 9.224Id. at 24.225Id.226Id. at 25.227Id. at 26.228Id. at 26-27.229 Rabin, supra note 191, at 1249.


28/40

28

was to show government money attacking the Depression mentality and to stimulate

demand by putting money in workers pockets.230

The Social Security Act of 1935 constituted a dramatic step by creating an

unprecedented mass-coverage federal safety net.231

Through the Social Security Act the

federal government was making the statement that Americans will not be forced into

poverty only because they are no longer able to work.232Under the Act Americans were

provided with unemployment insurance, retirement pensions, aid to dependent children,

and other social insurance programs.233 The security provided under the Act helped foster

increased consumer confidence in the years that followed.

234

The Wagner Act (also known as the National Labor Relations Act) (NLRA)

was designed to create a healthy middle class by imposing a mandatory scheme of

collective bargaining.235The NLRA shifted labor conflicts from the streets to hearing

rooms.236 The result of collective bargaining put more money in the hands of cash

strapped laborers, who were likely to spend their extra income and stimulate the

economy.237

The Tennessee Valley Authority Act was a plan to use federal funds and oversight

in order to improve the lives of the Americans living in the impoverished Tennessee

Valley.238

The Act established the Tennessee Valley Authority (TVA) to handle flood

control, to develop the Tennessee River for navigation, and to generate electric power,

230Id. at 1250.231Id.232Seeid. at 1251.233 Ramirez, supra note 148, at 546-547.234Id. at 547-549.235Id. at 549-551.236Id. at 551 n. 265.237Seeid. at 551.238

Id. at 552.


29/40

29

among other things.239 The Public Works Administration was the first nationwide federal

program dedicated to public works and ultimately led to the Interstate Highway

System.240The Servicemens Readjustment Act of 1944 (the GI Bill) provided WWII

veterans with funds for education, subsidized mortgages for housing, and low interest

business loans.241

To combat the Great Depression, FDR used the federal government in ways never

before conceived. New Deal programs aimed at assisting those hit hardest by the

economic downturn, stabilizing the economic environment, and investing in

infrastructure to foster a turn around.

History repeats itself: the rise of laissez-faire deregulation

Despite its many successes, there are many criticisms of New Deal programs.

The distribution of funds under the New Deal did not go primarily to states with high

unemployment and low incomes.242 The politics of the day ruled as larger grants of funds

were allocated to swing states.243 Black Americans were also treated unequally under the

New Deal because they were poorly organized and weak politically.244

Some critics argue that New Deal programs did not go far enough. For instance,

the G.I. Bill excluded women, veterans of color, and veterans that could not afford to

239Id.240Id. at 554.241Id. at 557.242 John Joseph Wallis,Employment, Politics, and Economic Recovery during the Great Depression, 69REV.ECON.&STAT. 516, 516 (1987).243Id.244 Marc W. Kruman, Quotas for Blacks: The Public Works Administration and the Black ConstructionWorker, 16 LAB.HIST. 37, 37-38 (1975).


30/40

30

own a home. 245 Conservative critics argue that the New Deal went too far.246 By the

late 1970sthe regulatory system came under close scrutiny by policy institutes and

journals, academic disciplines, and politically influential public officials who all came to

focus on a clear and dominant emerging theme- deregulation.247

It is not a coincidence that the economic scale started to shift heavily in favor of

the wealthiest 1% of Americans at the same time that deregulation became popular

among politicians. The first shots in the class war were fired long before the Regan

revolution or the Occupy Movement. Small government conservatives have focused their

efforts on dismantling New Deal programs since their inception.

Looking at the era before the Great Depression and the one before the Great

Recession and it is obvious: history repeats itself. So, what is the perfect toxic stew for

cooking up macroeconomic chaos? Is it when industries run wild under the guise of self-

regulation? When the income and wealth gaps widen to proportions that dwarf the Grand

Canyon? When the markets are flying on cocaine induced speculation? When the

political promises of the day are to reduce the burden on the most affluent?

Perhaps the most destructive deregulation occurred in 1999 when President

William Jefferson Clinton signed the Gramm-Leach-Bliley Act (GLBA) into law,

repealing the parts of the Glass-Steagall Act that separated the securities business from

commercial banking.248

Further, GLBA expanded the Feds power.249

After the GLBA

245 Florence Wagman Roisman,National Ingratitude: The Egregious Deficiencies of the United StatesHousing Programs for Veterans and the Public Scandal of Veterans Homelessness, 38 IND.L.REV. 103,111 (2005).246See Rabin, supra note 191, at 1316.247

Id.248 James R. Barth, R. Dan Brumbaugh, & James A Wilcox, The Repeal of Glass-Steagall and the Adventof Broad Banking, 14 J.ECON.PERSPECTIVES 191, 191 (2000).


31/40

31

the Feds Authority grew to include banks, securities firms, and insurance companies.250

With Glass-Steagall out of the way, after eight years under laissez-faire President George

W. Bush, a stock market crash, and a mortgage crisis, President Barack Obama faced the

second worst economic downturn our fragile nation has faced in its history.

The Protest Years

Most Americans believe the Great Recession was partially caused by a lack of

government oversight in the financial industry.251 The Treasury Department listed several

causes including excessive speculation in the housing market, excessive risk taking and

levels of debt at financial institutions, overreliance on private credit rating agencies, risky

unregulated derivatives trading, and financial sector salaries that rewarded risk-taking

without penalties for failure.252 In order to soften the blow of the governments reaction

to the crisis, finance, insurance, and real estate industries spent $223 million lobbying in

the first half of 2009.253

In response to the financial crisis the Federal Reserve Bank exercised extra-

constitutional powers.254

By purchasing $1.25 trillion in toxic mortgage backed

obligations, a power not granted to it by Congress, the Fed violated the U.S. Constitution

249

Chad Emerson, The Illegal Actions of the Federal Reserve: An analysis of how the Nations CentralBank has Acted Outside the Law in Responding to the Current Financial Crisis, 1 WM &MARY BUS.L.REV.109, 120 (2010).250Id.251 Jeff Madrick, They Didnt Regulate Enough and Still Dont, 56 N.Y.REV.BOOKS (2009) available athttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=false .252Id.253Id.254See William Poole,Ending Moral Hazard, 66 FIN.ANALYSTS J. 17-24, 20 (2010).
http://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=falsehttp://www.nybooks.com/articles/archives/2009/nov/05/they-didnt-regulate-enough-and-still-dont/?pagination=false


32/40

32

which requires an act of Congress to appropriate government funds.255 During the same

period the Fed has been reluctant to disclose its activities.256

The appearance of corruption and lack of transparency has fueled a mass uprising.

The right wing Tea Party movement demands a strict adherence to the Constitution.257

Fueled by conspiracy theory, many Tea Partiers believe President Obama and his

predecessors are members of an international network of wealthy elites who undermine

the Constitution for their benefit.258

Most Tea Partiers are new to political activism and

feel they have been awakened by the recession.259 Their goals include the abolition of

the Federal Reserve, the federal income tax, several federal agencies, and to end the

practice of government bailouts of private institutions.260

On the left the leaderless Occupy Movement has risen in the wake of the financial

crisis.261 A majority of Occupiers are unemployed young people. 262It is difficult to

encapsulate what the Occupy Movement stands for.263Some argue that they are against

economic disparity and for reform of financial institutions and American politics.264 The

Declaration of the Occupation of New York City places the blame for the ills of society

on the back of the corporations that control nearly every aspect of our lives.265

255Id.256Id.257 David Barstow, Tea Party Lights Fuse for Rebellion on Right, N.Y.TIMES (Feb. 16, 2010) available athttp://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=all .258Id.259Id.260

Id.261See Brian D. Boydston, What Exactly does the Occupy Movement Want?, THE HUMANIST (Jan.-Feb.,2012) available at http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/.262Id. at 20.263See generallyId.264

Id. at 21.265See generally Unknown,Declaration of the Occupation of New York City, (Sept 29, 2011) available athttp://www.nycga.net/resources/declaration/. We come to you at a time when corporations, which placeprofit over people, self-interest over justice, and oppression over equality, run our governments. Id.
http://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=allhttp://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://www.nycga.net/resources/declaration/http://www.nycga.net/resources/declaration/http://www.nycga.net/resources/declaration/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://thehumanist.org/january-february-2012/what-exactly-does-the-occupy-movement-want/http://www.nytimes.com/2010/02/16/us/politics/16teaparty.html?pagewanted=all


33/40

33

Both Tea Party and the Occupy Movement participants are calling for criminal

prosecutions of white collar crimes that led to the mortgage crisis and financial collapse

of 2008.266 The Obama Administration has responded to these cries by appointing a

prosecutorial group led by New York Attorney General Eric Schneiderman.267

It will

take a long time for this team to build cases because under the Bush Administration the

cops were taken off the beat.268 President Bush loaded agencies with anti-regulatory

officials and reassigned the F.B.I.s white-collar experts to terrorism cases.269

Progressive Legislation under President Obama

President Obama has signed into law some progressive legislation aimed at

correcting the inequalities of the day, but his efforts fall short of the rapid federal

expansion under the New Deal. Will growing populism push the government to fund

more expansive relief? A look at important progressive legislation passed under President

Obama should help us predict the future.

The Lilly Ledbetter Fair Play Act of 2009 was a victory for employees who have

faced discrimination in the workplace.270

The Act lengthens the statute of limitations in

certain discrimination cases.271This strips employers of the Statute of Limitations

266 June Carbone, Why do Dangerous Financial Criminals Roam Free?, ALTERNET (Feb. 4, 2012),

available athttp://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entire267 Jessica Yellin,New York Attorney General to Lead Risky Mortgages Team, CNN.COM (Jan. 25, 2012),available athttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearch.268 Carbone, supra note 266.269Id.270See generally Robin E. Shea et al., The Impact of the Lilly Ledbetter Fair Pay Act of 2009: anImmediate Look at the Legal, Governmental, and Economic Ramifications of New Legislation Regarding

Equal Pay Based on Gender, ASPATORE SPECIAL REPORT 17 (2009).271Id.
http://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entirehttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.cnn.com/2012/01/25/politics/sou-risky-mortgages/index.html?iref=allsearchhttp://www.alternet.org/economy/153997/why_do_dangerous_financial_criminals_roam_free/?page=entire


34/40

34

defense and forces them to prepare to defend themselves over compensation, benefits,

promotion, demotion, and job assignment decisions.272

The American Recovery and Reinvestment Act (ARRA) was a $787 billion

stimulus fund that propped up cash strapped state and local governments, helped states

pay for health care and education expenses, and required states to use the funds

immediately or risk losing them.273 Race to the Top, an education fund under ARRA that

rewarded innovative approaches, circumvented states by including $900 million in funds

for localities.274 The ARRA contained a bypass provision that allowed state legislatures

to overrule governors who choose to reject the funds.

275

This circumvention raised

concerns that the federal government was undermining state sovereignty.276

President Obama signed a bill expanding the State Childrens Health Insurance

Program (SCHIP) in February 2009, reversing President Bushs trend of vetoing similar

expansions.277 The bill provided health care to 11 million children; at the signing

ceremony the President indicated that he planned to cover all Americans.278

The Patient Protection and Affordable Care Act of 2010 (ACA) expanded health

insurance to 32 million of the countrys 55 million uninsured citizens.279

The ACA

prevents insurance companies from rejecting people who have pre-existing conditions,

removes caps on benefits, limits premium increases and the amount insurance companies

spend on non-medical expenses, expands Medicaid to cover more impoverished

272Id.273 Gillian E. Metzger, Federalism Under Obama, 53 WM.&MARY L.REV. 567, 587-589 (2011).274Id. at 590.275Id. at 593.276Id.277 Janet L. Dolgin, Class Competition and American Health Care: Debating the State Childrens HealthInsurance Program, 70 LA.L.REV. 683, 685 (2010).278Id.279 Metzger, supra note 273, at 572.


35/40

35

Americans, and extends childrens eligibility to be covered by their parents insurance up

to the age of 26.280

The ACA also creates an individual mandate that forces individuals

to buy health insurance.281The mandate is being hotly contested.282The Supreme Court

is considering its constitutionality and may strike down all or part of the law. Ultimately,

to open access to health care for millions of Americans is a progressive victory even if it

proves to be short lived.

The 2009 Car Allowance Rebate System, aka Cash for Clunkers, provided

vouchers of up to $4,500 to individuals who traded in their older, less-efficient motor

vehicles for newer and more fuel efficient replacements.

283

The program directly

increased national fuel efficiency and assisted the battered auto industry.284The program

was the first of its kind and proved highly popular.285

Indirect effects of the program were

increased health and safety by replacing high-polluting older vehicles with new cars with

modern safety and emissions devices.286 Critics of the program note that it

disproportionately benefitted some but not all, it did not help those in the most need, the

program was too expensive, and amounted to corporate welfare by propping up the auto

industry.287

In an attempt to resurrect the American auto industry, the Obama Administration

provided significant financial assistance to General Motors and Chrysler.288

The Treasury

280Id.281

Id. at 573.282See Id.283 Marianne Tyrell & John Dernbach, TheCash For Clunkers Program: A Sustainability Evaluation, 42U.TOL.L.REV. 467, 467 (2011).284Id. at 468.285See generally id. at 467-468.286Id. at 482-483.287See generally, id.288 Steven M. Davidoff, Uncomfortable Embrace: Federal Corporate Ownership in the Midst of theFinancial Crisis, 95 MINN.L.REV. 1733, 1733-1734. (2011).


36/40

36

Department concluded the cost of liquidating the companies would outweigh the cost of

providing assistance, and that each company would be able to function without

governmental involvement after the restructuring.289In addition to other considerations,

the Treasury Department ensured that jobs would stay in the United States with

provisions in the companys financing documents.290Congress further protected

American jobs by reversing attempts by the companies to close a number of

dealerships.291

The Public-Private Investment Program (P-PIP) was established to inject liquidity

into the markets by using Troubled Asset Relief Program (TARP) capital

292

and capital

from private investors to buy toxic Legacy assets from U.S. financial Institutions.293 P-

PIP used FDIC debt guarantees and Treasury equity co-investment in order to attract

private capital.294

In December 2010 the Tax Relief, Unemployment Insurance Reauthorization, and

Job Creation Act of 2010 was signed into law by President Obama. The tax compromise

package extended Bush era tax cuts along with other forms of tax relief in exchange for a

temporary extension of unemployment insurance.295

The act also included estate tax relief

and tax incentives to invest in machinery and equipment.296

289Id. at 1745.290Id. at 1750.291

Id.292 TARP was signed into law by President George W. Bush on Oct. 3, 2008 and provided $700 billion todirectly inject liquidity into the financial markets. See generally, Campbell L. Harvey, The Financial Crisisof 2008, What Needs to Happen After TARP, SOC.SCI.RESEARCH NETWORK (Oct. 5, 2008), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327.293Public-Private Investment Program (P-PIP) in the Real World, 7 No. 16 PLIPOCKET MBA1(2009).294Id.295Tax Relief, Unemployment Insurance, Reauthorization, Job Creation Act of 2010, 35 CONSTR.CONTRACTS L.REV.41(2011).296Id.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274327


37/40

37

In July 2010 President Obama signed the Dodd-Frank Wall Street Reform Act

into law.297

The Act, at 848 pages, falls short of the effectiveness of the 34 page Glass-

Steagall Act.298 Some good did come out of the Act, including increased capital

requirements for large banks and increased regulation of non-bank financial companies.

299 The Act also created the Bureau of Consumer Financial Protection (BCFP), but it is

unproven if the BCFP will be effective because its decisions can be set aside by the

Financial Stability Oversight Council (FSOC), another new entity created under the

Act.300 The FSOC is a multi-agency oversight body created to improve coordination and

led by the Treasury Department.

301

Dodd-Frank does little to close regulatory gaps; in fact it creates more regulatory

organizations instead of consolidating.302

The Volker Rule appears to prohibit banks

from trading on their own behalf or acquiring interest in private equity or hedge funds,

but there are numerous loopholes.303Despite assurances to the contrary, under Dodd-

Frank Too-Big-To-Fail (TBTF) financial institutions will still be able to privatize their

profits and socialize their losses.304Despite public outcry demanding the dismantling of

behemoth institutions, Dodd-Frank does little to even mitigate TBTF.305

297 Arthur E. Wilmarth, Jr., The Dodd-Frank Act: A Flawed and Inadequate Response to the Too-Big-To-

Fail Problem, 89 OR.L.REV. 951, 954 (2011).298Reza Dibadj,Dodd-Frank: Toward First Principles?, 15 CHAP.L.REV. 79, 80 (2011).299 Usha Rodrigues, Corporate Governance in an Age of Separation of Ownership from Control, 95 MINN.L.REV. 1822, 1858 (2011).300 Dibadj, supra note 298, at 85-86.301Id.302See id. at 85-90.303Id. at 98-99.304Id. at 101.305Id.


38/40

38

President Obama attempted to pass the American Jobs Act, but the bill was

defeated in the Senate.306

The Act would have prohibited discrimination against the

unemployed and provided incentives for employers to hire veterans and the chronically

unemployed.307

Conclusion

It is apparent that the 2012 version of America is ripe for an overhaul. Like in the

period before the American Revolution, one class of politically connected citizens reaps a

vast majority of societys rewards over all others. The field of play is uneven.

Consolidated economic power, greatly feared in the late 1800s, is commonplace in

todays America. In the aftermath of the 2008 economic collapse the oligarchs called for

greater deregulation, an element of all financial collapses including the Panic of 1907 and

the Great Depression. Despite current economic conditions, the wealthy received an

extension of Bush era tax cuts.

The Masters of the Universe are in for a surprise. In the Information Age more

and more of the disenfranchised are enlightened to the cause of their plight. They realize

that hording at the top causes hunger at the bottom. Following a tradition of protest that

began with Coxeys Army, Occupy Wall Street and the Tea Party are proving their

political worth.

The legislation passed under President Obamas watch has not gone far enough to

establish greater equality within our society. Unlike FDR, President Obama has not used

emergency powers to fix the broken system. Unlike FDR, President Obama has not

306 From the Hill, 17 No. 22 QUINLAN,HRCOMPLIANCE L.BULLETIN 9 (Nov. 25, 2011).307Id.


39/40

39

directly put the chronically unemployed back to work. In fact, under President Obamas

watch economic disparity has continued to grow, the tax code is still riddled with

loopholes for corporations and the wealthy, and banks are allowed to continue to gamble

with their depositors money on the open market with government protection in case of

failure.

President Obama has had some success getting legislation passed that helps the

lower classes, but the help is not enough to close the chasm between the classes that has

grown out of control since the 70s. The angry mobs are growing restless. The ruling

class should take a play out of the Founding Fathers playbook and learn to respect

societys lower ebbs. If not, they will learn to fear them.

America needs a new New Deal. We need government investment that puts the

chronically unemployed back to work. We need works projects that fix our infrastructure

and pave the way for a brighter future. We need to return to a progressive tax system so

we can make college affordable, invest in research and development, and create the next

American Century. We need to break up institutions that are too large to regulate and

fund our regulators to insure that cheating businesses get caught. We need to stiffen

penalties and close gaps that allow the connected to escape responsibility. We need to

prosecute white collar criminals. We need to outlaw special-interest-drafted legislation

and force our politicians to do the job they were hired to do. We need to ensure they have

time to represent their constituents by mandating public financing of elections. We need

to stem the influence of money on our political system. We need a constitutional

amendment that overturns the outrageous decision in Citizens United v. F.E.C.308

308 Citizens United v. F.E.C., 130 S. Ct. 876 (2010).


40/40

There are numerous steps we could take to start to repair this country. The

greatness of FDR can be directly connected to his boldness. He didnt take no for an

answer and when he failed he tried a new approach. President Obama should follow that

example.

economic disparity and american democracy: is it time for a new new deal

Documents