PAUL SOLMAN: A history tour of New York City with guide Kevin Phillips, longtime Republican adviser whose southern strategy won Richard Nixon the White House.
KEVIN PHILLIPS: About what it entails for the country...
PAUL SOLMAN: To the free market GOP, though, Phillips is a turncoat, because years ago he stopped knocking liberals and started to attack America's widening wealth gap -- so visible on the sidewalks of New York.
Phillips' new book, Wealth and Democracy, is an historical argument that ever freer markets have been leading us to plutocracy: The rule of the rich.
KEVIN PHILLIPS: What you get is money gaining a momentum that produces a kind of corruption. Part of it's financial corruption, which we're starting to see unfolding; part of it's political corruption, which is that money moves in and corrupts the political system; and part of it, actually, is ideological- - that money rules, that those who have money are entitled. And this actually corrodes American democracy. And those who don't make it get discouraged, and they think it's unfair, and they're right.
PAUL SOLMAN: Phillips has no illusions about the past. Since colonial days government officials have worked hand in glove with aggressive businessmen-- America's first merchants, for instance.
KEVIN PHILLIPS: They actually sent pirates to Madagascar and over in the Indian Ocean and split the take with the governors.
PAUL SOLMAN: But what does that have to do with the larger thesis you're making?
KEVIN PHILLIPS: Well, government and wealth have generally been complicitous. That's certainly the case with privateers and pirates. They had to operate with the consent of government. And I think what we've seen in the last couple of decades has been more of the same. What used to be done on the high seas under the skull and crossbones is now done by accountants and lawyers and investment bankers with phony numbers and rigged partnerships. And that's a threat to ordinary Americans.
PAUL SOLMAN: Phillips thinks this new piracy explains why the top fifth of all Americans now earn 11 times more than the bottom fifth -- the industrial world's greatest gap. And history, he claims, proves such gaps unsustainable. Consider the 1800s, he says, when the government let wealth grow unchecked and inequality first soared.
By 1906, the end of the gilded age, the top 1 percent of Americans owned as much as 60 percent of all US wealth, led by mega-millionaires like John D. Rockefeller, and in the middle there J.P. Morgan -- but a backlash brought reformers to power.
KEVIN PHILLIPS: And by the first decade in the 20th century, Teddy Roosevelt was leading the progressive camp, and he was vitriolic about the role of millionaires and the rich. He went so far as to say the only kinds of rich were the criminal rich and the foolish rich. He didn't have good rich in there as a middle category. So that's how mad people were by 1912.
KEVIN PHILLIPS: Eight years later, this anger led to terrorism. Outside JP Morgan's bank, a 100-pound TNT bomb exploded: 38 bystanders killed, 200 maimed, a car tossed 20 feet in the air, windows of the Stock Exchange and within a half mile of the blast shattered. Evidence of the attack remains on what's still the Morgan Bank just blocks from ground zero.
KEVIN PHILLIPS: There's a parallel there. Terrorism got started... the word "terror" really came in to play in the French Revolution. The second big round of it was in the years before World War I and right after World War I, and that's when all of this took place. And I think we've seen something like that developing in the 1990s and now in the new century. It's a fierce reaction based on a sense that things are out of control and the power structure has gotten too rich and too remote.
PAUL SOLMAN: Then came the roaring '20s and wealth was for a while more equally distributed. But by 1929, the fortunes of the top 1 percent had reached another of their historic highs-- 45 percent of American wealth. And then the stock market crashed.
KEVIN PHILLIPS: What we saw in 1929 was not just the stock market surge, but a surge in wealth concentrated at the top. The smallest group of Americans generally came out so much better than anybody else that when the bubble popped, it produced a reaction. The people who ran the banks and the investment firms and a number of the big corporations had almost been charlatans in the way they handled the people's money.
PAUL SOLMAN: The crash and the Great Depression that followed sparked a broad reaction, including some of the worst riots in US history. Southern populist Huey Long ran for president railing against plutocracy.
HUEY LONG: That 4 percent of the American people own 85 percent of the wealth of America.
PAUL SOLMAN: It was to save capitalism from itself, then, that President Franklin Roosevelt pushed regulation and leveled the wealth gap by taxing the rich.
PAUL SOLMAN: How high did it go, these tax for the wealthy?
KEVIN PHILLIPS: The top rate, depending on who you believe and what computations, went up to between 91 percent and 94 percent. And this lasted through-- people have to remember this-- it lasted through the 1960s.
PAUL SOLMAN: By the 1970s, the gap had substantially narrowed. The top 1 percent were down to owning barely 20 percent of the country's wealth. But then came forces like global competition, the technology revolution, lower taxes at the top. By 1997, the wealth of the top 1 percent of Americans was back near its record heights-- much of that wealth, again, in the hands of Wall Street.
KEVIN PHILLIPS: We're looking at what has been absolutely the biggest wealth platform in the United States, a bull market. And you can see from the people gathered around here that they understand how important the bull is. You can't tell here whether he's charging or whether he's on his knees. And if it turns out that he's on his knees, you're going to have a lot of mighty unhappy campers here.
PAUL SOLMAN: Yeah, but your thesis is the danger of the disparity of wealth. If the bull buckles, then the rich at the top lose a disproportionate share of the gains they've been making, and this system is essentially self- adjusting.
KEVIN PHILLIPS: It doesn't really work like that. When you have a crash, at least in the late '20s, and maybe again now, you lose a lot of the new wealth, the new tech wealth, what people in the middle have made with small amounts in the stock market. The old families tend to hang on. Here right next to the bull is the former headquarters of John D. Rockefeller.
PAUL SOLMAN: Twenty-six Broadway was actually the hub of the standard oil empire. But even though the company was broken up in 1911, Rockefellers are among America's richest in 1930, 1957, 1992, and even now.
PAUL SOLMAN: Hi.
LAWRENCE KUDLOW: Hi, Paul.
PAUL SOLMAN: Our next stop, the office of Lawrence Kudlow, former Reagan advisor and free market champion, was to confront Phillips with the argument against his thesis.
LAWRENCE KUDLOW: It's completely wrong. The data do not corroborate it. And if anything, in the last two decades -- this is, I think, the biggest weakness in Kevin's book -- the democratization of investment and the democratization of the stock market through defined contributions, mostly 401(k)s and IRA's, has created what I call in my book four years ago an investor class.
KEVIN PHILLIPS: And that's why you've got all kinds of Americans now watching, as we just saw at the Merrill Lynch bull, and watching every day as they see the stock market indices climb down, worried that their 401(k)s are going to become 201(k)s. But it's always been like this. When you get your maximum democratization is sort of when you have your maximum percentage of the middle class pulled in in time to be there as the air goes out of the balloon.
LAWRENCE KUDLOW: I will acknowledge that using certain data, you can argue, as Kevin did, that the gap between the top and the bottom is wider. However, that said, it's true everywhere. Western democracy-- it's true everywhere. It was also true in the Soviet Union when it was going. But here's the point I want to make. I'm not sure it's a bad thing to have a wide disparity, because the whole pie is growing larger, and the level of living standards and productivity and growth is rising.
PAUL SOLMAN: Despite their differences, Kudlow and Phillips agree on two things: One, that most of the gains of the past two decades have gone to those at the top; and two, that the reaction to recent free market excesses will come first from middle Americans -- those who lose their pensions and vote disproportionately.
It won't come from those the boom forgot, like Margaret Fason, single mother of four who had worked her way up to managing a retail store. She just pulled her family out of poverty, and then her company folded. Now she's unemployed.
PAUL SOLMAN: Are you resentful?
MARGARET FASON: I resent it to the point where I've... when you say that this is the land of the free, that New York is full of so many opportunities, yet every time I knock on the door it doesn't open for me. That I resent. If you keep telling me that this day and age, in the year 2002, that there's homelessness and there's poverty to the level of people not knowing how they're going to make it from day to day, yes, I resent that.
PAUL SOLMAN: Poverty researcher David Campbell says the poor have been sinking even as their educational levels have been rising.
DAVID CAMPBELL: Our data have showed that in New York, for example, poor people in New York, one in three have some college or a college degree. Twenty years ago, it was only 20 percent of the people who were poor. You tell people, "if you go to school, you're going to be successful."
PAUL SOLMAN: But she hasn't gone to college.
DAVID CAMPBELL: But one can argue as well that the assumption has always been at least with a high school degree you can be reasonably successful, and she struggled. And who did you see when you talked to her? You heard a person who was articulate, committed, wanted to make a better life for herself and wasn't able to do so.
MARGARET FASON: To see that we haven't really grown that much in ten years is a disappointment.
PAUL SOLMAN: But the reaction to the wealth gap of our era, says Kevin Phillips, won't come first from those the boom forgot so much as those who thought we were part of it; those of us closer to, but increasingly alienated from the self-dealing deregulated politically powerful top, which is why Phillips' last location was Times Square, with its graphic display of recent capitalist carnage. And that prompted one last question from us.
PAUL SOLMAN: Does it seem as improbable to you as it does to me that Kevin Phillips, the guy who wrote The Emerging Republican Majority in 1969, an aide to Nixon, would be standing here in front of the NASDAQ board in Times Square basically issuing a Jeremiah ad about the disparity of wealth in America?
KEVIN PHILLIPS: Well, it doesn't, to tell you the truth. When I wrote The Emerging Republican Majority, I was talking about a liberal establishment and a liberal regime that had failed, and in my opinion, it sort of broke a covenant with middle America. And what I'm saying today in my opinion is this time it's been the conservatives and the people who talked about the market and all the promises of capitalism that are on their way to breaking the covenant with middle America. And that's the key. If the people in the middle feel that they've been done wrong, you're going to see a major reaction.
PAUL SOLMAN: And if the market keeps falling, says Kevin Phillips, and those in the middle see their retirement stashes continue to evaporate, the major reaction will come from a new emerging majority-- those who think that when the bell tolls these days, it tolls for them.