Big bonuses and bigger deficits are driving new waves of populist anger

As reports about record payouts for Wall Street and record deficits trade off on the front page, millions of Americans are wondering what's going on with their economy and their political system. Many of the nearly 200 reader comments made in response to my recent piece, Middle class squeeze: The deep roots of an economic and social transformation, expressed disgust and anger with both Big Finance and Big Government.

At least some of this populist dissatisfaction can be traced back to the 2008 government bailout of big banks, the TARP program. Email and phone calls to congressional offices ran about 300-to-1 against TARP, but Congress approved the massive bailout with very few strings attached. Add in the bailouts extended to other crippled financial institutions such as AIG and Fannie Mae and the government's plans to rework the U.S. health care insurance system, and the sense that the government and the nation's financial elites are failing the citizenry has reached new highs.
"Tea parties" are demonstrating widespread disapproval of Congress, taxes and government control of the economy and health care. But Americans (and plenty of DailyFinance readers) express conflicting goals: many want more capitalism and less government, while others want a safety net for those who have lost their jobs and their health coverage.

Georgetown University historian Michael Kazin, author of The Populist Persuasion, notes that "Big corporations and big government can be seen as parts of the same problem." This is exactly what a number of readers have expressed. Indeed, with politicians openly stating that the banking lobby controls Congress and TARP recipients giving tens of millions of dollars to Congressional representatives, many Americans are seeing the same confluence of Big Government and Big Business which formed a corrupt and cozy system in the Gilded Age. The resentment that dominance created led President Theodore Roosevelt to "bust the trusts" -- the cartels and monopolies which had amassed highly concentrated financial and political power.

To fully understand the roots of American populist distrust of concentrations of power, we need to go all the way back to the decade before the American Revolution. Seeking to recover the costs of its seven-year war with France, the British government imposed a number of taxes on its wealthy American colonies. We all know middle class and working class or artisan Americans were fed up with this "taxation without representation" before the revolution, but few non-historians know that many of them were also fed up with the homegrown elites which had concentrated great wealth and power under British rule.

In a statistic which eerily parallels current concentrations of wealth, five percent of the Boston citizenry controlled 50 percent of the city's taxable assets. It wasn't just tea that got trashed in pre-revolutionary protests; local elites' houses were also looted by angry mobs.

And this populist uprising against oppressive local elites was not just a New England phenomenon. In North Carolina, farmers who organized against wealthy and corrupt officials between 1766 and 1771 were eventually suppressed with military force. At least some people see a similar exploitation of the working poor in the present (see, for instance, Milking the Poor: One Family's Fall Into Homelessness).

In general, colonial government was controlled by a patrician elite. While many of these gentlemen supported the revolution, it was middle class Tom Paine who captured the populist understanding best in his pamphlet Common Sense: a revolution was needed not just to break away from British rule, but to broaden the representation in government to include the lower and middle class citizens.

Paine expressed this healthy distrust of government thusly: "Society in every state is a blessing, but Government even in its best state is but a necessary evil." So on the one hand we are skeptical of Big Government and wary of it crimping our rights, yet we also want government to provide services and safety nets.

We can't have it both ways. Nations with generous social-welfare services such as the Scandinavian countries also sport tax rates of around 60 percent -- somebody has to pay for those generous benefits.

As a rule, we can't have low taxes and costly social programs. We as a nation have decided to bridge the yawning gap between tax revenues and government expenditures by borrowing trillions of dollars, mostly from foreign entities. The unfunded liabilities of Social Security and Medicare alone are estimated at $60 trillion, and that's not counting private pensions, Veterans benefits and a host of other government promises.

Nowhere is this great divide between expectations and reality wider than in health care. Employers' health care costs have risen 149 percent since 2000, and Medicare/Medicaid have leaped to a staggering $682 billion, larger than Pentagon spending ($613 billion) or Social Security ($612 billion).

Clearly, these costs trends, public and private, are unsustainable.

Unfortunately, this great divide between expectations and hard financial realities is reflected in an "either/or" ideological divide which was expressed by some DailyFinance readers who labeled government health care "Communist." Others defended capitalism as if the only alternative was socialism, when the reality is there are numerous shades of capitalism which are by no means equal in benefit to society.

For instance, suppose Apple Computer founders Steve Jobs and Steve Wozniak had assembled $30 million to lobby Congress to buy their computers by the millions. Would you call that capitalism? If so, is it the same kind of free-market capitalism they pursued in establishing Apple as a premiere global brand? Obviously not.

Yet this buying of Congress is precisely what the TARP recipient banks have done, and done so effectively that Representative Collin C. Peterson (D- Minnesota) was recently quoted as saying, "The banks run the place. I will tell you what the problem is -- they give three times more money than the next biggest group. It's huge the amount of money they put into politics."

While many Americans dismiss France's health care system as "socialist," this labeling misses the key feature of the French system, which is that most households have additional private insurance which offers more choices for coverage. Clearly, it is a hybrid system which combines both public and private insurance models.

Just as our economy includes crony capitalism, monopolies, cartels and corporate welfare -- the very opposites of the free-market capitalism we all value -- European-style socialism also has different shades. For instance: right now, there is a huge health care provider in the U.S. which is owned lock, stock and barrel by the Federal government. It serves about six million Americans and offers coverage to 26 million Americans. It directly employs tens of thousands of employees and owns hundreds of clinics and facilities. It is "socialism" par excellence by most pundits' understanding of that term.

Yet it is also the best health care provider in the nation by numerous metrics, providing care for millions for a mere fraction of the cost of the "private provider" Medicare system. The provider is the Veterans Administration. Yes, the waits can be long, and yes, it's not perfect, but private health care experts recognize it is the model of efficient, cost-effective treatment. The slipshod care publicized a few years ago was largely the result of recent vets slipping between active-duty TRICARE and the VA; by most reports, those problems have been addressed.

The VA system treats almost six million vets who owe no co-pays for a cost of about $38 billion a year, while Medicare serves 42 million for a cost approaching $500 billion. So Medicare treats seven times as many people for 13 times the cost. Deciding which provides more care for the buck and thus which is more sustainable is obvious.

So is Big Government the solution? Not when it borrows $1.4 trillion dollars a year from our children to fund its largesse; not only is that morally wrong, it is financially unsustainable. Does Big Business represent capitalism? Not when it's "too big to fail" and when it buys government intervention to save its Elites from the consequences of high-risk gambles.

Do we have a way to change our government's representatives and policies? Yes, we do. It's called the ballot box.

Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently Survival+: Structuring Prosperity for Yourself and the Nation.
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