- The Washington Times - Sunday, September 8, 2002

Most people would see doom in poverty, but in his new book, "Wealth and Democracy," Kevin Phillips finds doom in wealth.

As Mr. Phillips sees it, the problem with wealth is that it resides in the private sector. If too much wealth is created, the rich get too much power and squash everyone else. The governments job is to diminish - Mr. Phillips word is "compress" - wealth creation in order to prevent the plutocracy from gaining too much power and worsening the income distribution.

"Wealth did it" is a liberal cry that never wears out. Arthur Schlesinger used this refrain to explain the Great Depression. He managed to write a history of the Depression without mentioning that a befuddled Federal Reserve caused mass employment by shrinking the money supply by one-third. I guarantee Mr. Phillips that if the United States lacked wealth and was inhabited only by poor people, the country would nevertheless experience a depression were the Fed to destroy one-third of the money supply.

Mr. Phillips book has infected even sensible people with nonsense. Elisabeth Lasch-Quinn writes in her enthusiastic review in The Washington Times that the Reagan tax cut put middle-class Americans in "a higher tax bracket than millionaires." Is that so? How then is it possible that the top 1 percent of the income distribution is paying more than 36 percent of the federal income tax revenues?

Mr. Phillips attack on wealth is obscene. Considering the Jews disproportionate control over wealth, it could even be anti-Semitic.By arguing that economic growth benefits the rich and redistribution serves the poor, Mr. Phillips puts himself at odds with a discipline founded on Adam Smiths "The Wealth of Nations." Curious to know economists response to Mr. Phillips attack, I sought their opinions.

Alas, Paul Krugman seems to be the only economist who has read it. Mr. Krugman found the book a turn-on, because it feeds his rant against Republicans, rich people and tax cuts.

Other economists report being deterred by Mr. Phillips vast economic ignorance. One claims to have become bilious upon reaching the sixth page of the introduction, where Mr. Phillips endorses Bill Moyers insight that the White House, Congress and the federal judiciary are controlled by the U.S. Chamber of Commerce, the National Association of Manufacturers and the American Petroleum Institute.

Such flights of fancy are abundant in Mr. Phillips book, as are spurious correlations, nonsequiters and a loaded vocabulary. Apparently neither Mr. Phillips, nor Mr. Moyers, nor fawning reviewers such as Yales Paul Kennedy have ever heard of trial lawyers, real estate developers, the National Educational Association, government employee unions, the American Association of Retired Persons or any of the other skillful lobbies that shape law and budgets in the United States.

If wealth controls government, how were government officials able to bring antitrust suits against Microsoft, break up AT&T;, harass IBM for 20 years, and put billionaires Michael Milken and Leona Helmsley in prison on false charges?

Mr. Phillips contradictions are astonishing. He wants more income redistribution programs such as Social Security and then complains that the FICA tax erodes after-tax income in the lower brackets. He endorses Social Security and welfare, and complains that the poor dont accumulate assets.

Mr. Phillips is incensed at the growth of CEO pay. He hasnt a clue that the stock options that drove up the pay are a liberal reform. The purpose was to stop CEOs from spending shareholders money on luxurious offices and generous expense accounts by connecting their pay to shareholder return. Driving up the share price became the CEOs path to wealth. The current accounting scandals have their origin in this liberal reform.

Mr. Phillips really believes that shabby disposable income growth for a majority of Americans is due to the powerful rich taking more than their fair share. He never mentions the massive influx of poor immigrants, who hold down income growth in low-skilled occupations.

However, Mr. Phillips does understand that technology transfer "can dissipate a global industrial primacy in as little as a single generation." He notes the export of millions of high-paying middle class manufacturing jobs abroad and observes that "new economy" jobs dont come close to replacing the incomes lost.

Unfortunately, Mr. Phillips does not develop these insights into an integral part of his story. To see the true problem, read Eamonn Fingletons book, "In Praise of Hard Industries" (Houghton Mifflin, 1999). If Mr. Fingletons book received a fraction of the attention given to Mr. Phillips, prospects for the United States would be far better.

Mr. Fingleton shows that the "New Economy" means no economy. New Economy jobs are for high-IQ people, not for factory workers. Income growth suffers, because New Economy jobs are few in number compared to the lost "hard industry" jobs. Moreover, an information economy has no exports, and neither does a Wal-Mart economy.

Mr. Fingleton warns that reliance on computer software, finance and cyberspace as economic engines means economic failure. The real doom comes not from wealth but from an economy that loses its hard industries and can no longer produce wealth.


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