Shattered Consensus. James Piereson

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sometimes called the “soak-the-rich tax.” When a severe recession followed in 1937 and 1938, sending the unemployment rate from 14 percent to 19 percent, FDR attributed the crisis to a “capital strike” engineered by business leaders exercising “monopoly power.” Such demagoguery may have succeeded as a political strategy in deflecting blame from the administration to the business community, but it failed miserably as an approach to economic growth, as Amity Shlaes argued in The Forgotten Man, her counterestablishment history of the Depression era. Unemployment remained high throughout Roosevelt’s second term, never going below 14 percent until the nation began to mobilize for war in 1941.

      The antibusiness rhetoric of the New Dealers had its source in a misguided understanding of the causes of the Depression, which they located in industrial concentration and monopoly and an overproduction of goods that drove down prices after the stock market crash of 1929. Lurking behind all these ills, supposedly, were the rich bankers and industrialists whose speculation and abuse of monopoly power caused the entire system to collapse. But none of these factors, as economists now agree, could have caused a collapse on the scale of the Great Depression, nor could they have accounted for the generalized deflation that occurred. By April 1930, moreover, stocks had regained much of the value that had been lost in the meltdown of the previous October.

      The real causes of the Depression are to be found elsewhere, and they are instructive for today’s economic problems. Though economists and historians still debate the subject, several interconnected factors appear to have combined to turn a serious stock market correction in late 1929 into a full-scale depression by 1932: (1) An ill-advised tariff policy passed by Congress in 1930 to protect U.S. manufacturers had the unintended effect of shutting down international trade and U.S. exports. (2) A monetary policy adopted by the Federal Reserve raised the discount rate and allowed the money supply to shrink through 1932 even as the economy faltered. (3) A cascade of bank failures wiped out savings and credit for large swaths of the economy. (4) A mountain of international war debt destabilized exchange rates, undermined the prewar gold standard, and impeded economic growth in debtor countries. These factors worked together in a reinforcing process from 1930 to 1933 to send the world economy into a downward spiral.

      The economic collapse was thus accelerated by policy errors made by Congress and especially by monetary authorities that did nothing as the money supply contracted and banks failed. All those involved had failed to take into account and make accommodations for the unprecedented international situation created by the war. Today’s financial authorities, apparently mindful of history’s lessons, seem determined to prevent a replay of the falling dominoes of the 1930s. To the extent we avoid that experience, it will undoubtedly be through the use of monetary levers that were untried, unknown, or unavailable at that time.

      * * *

      Admirers of the New Deal point to the prosperity of the 1950s and 1960s as evidence that FDR’s reforms, rather than undermining American capitalism, actually smoothed out its rough edges and permitted it to operate more efficiently. FDR himself claimed that his New Deal had saved market capitalism from its own inherent excesses. That is the case he made to critics from the business community during a campaign speech in Chicago on October 14, 1936: “It was this administration which saved the system of private profit and free enterprise after it had been dragged to the brink of ruin by these same leaders who now try to scare you.” Many mainstream economists and historians have elaborated upon FDR’s claims. John Kenneth Galbraith, for example, argued in American Capitalism (1952), The Affluent Society (1958), and The New Industrial State (1967) that the New Deal put into place a modern economy in which large corporations and labor unions control markets and work with government to maintain demand for products and to set wages and prices. Such a system, he contended, was required by technological advances that called for large business enterprises, which in turn needed to be regulated by government in the public interest.

      The corporatist ideal, along with a bipartisan foreign policy, was a pillar of the governing consensus during the Eisenhower and Kennedy–Johnson years. Conservative Republicans were sorely disappointed when Eisenhower maintained the essential contours of the New Deal following his landslide election. Richard Nixon also endorsed that consensus, declaring in January 1971 that he was “now a Keynesian in economics.” That year, he removed the dollar from the international gold standard and imposed wage and price controls in the hope of battling inflation. By the mid-1970s, though, it was clear that the policy prescriptions of the New Deal—stimulus packages, loose money, job training programs, bailouts of bankrupt cities and corporations—had failed to stem the accelerating “stagflation.”

      The postwar governing consensus was built upon a temporary and artificial situation in which America’s chief competitors in Asia and Europe were on the sidelines as a result of the war. It took at least two decades for those economies to recover (with American aid) to the point where they could compete with American industry in fields like automobiles, steel, and energy. The U.S. economy operated at high levels during the 1950s and 1960s, exporting products around the world and maintaining balance-of-payments surpluses, notwithstanding the high personal and corporate taxes, the regulatory structure, and the adversarial labor unions that were the legacies of the New Deal.

      That system came under increasing stress in the 1970s as the global economy began to impinge on those comfortable postwar arrangements, as European and Japanese companies challenged our industrial supremacy with high-quality and efficiently produced exports, and as the oil shocks of 1973 and 1979 caused energy prices to soar. By early 1980, unemployment was running at 7.5 percent, inflation at 14 percent, and interest rates at 21 percent—marking a decade of slow growth and inflation.

      Liberals have often criticized Ronald Reagan’s policies of low marginal tax rates, deregulation of business, and free trade as an ideologically motivated attack on key features of the New Deal. It would be more accurate, though, to view those policies as adaptations to a changing global economy and as remedies for a severe and prolonged economic crisis. Some such measures would have had to be adopted sooner or later to break the cycle of inflation and unemployment. Those adjustments in policy have been ratified not only by two decades of robust growth but also by the tacit endorsement of leading Democrats. After all, despite much weeping and wailing, prominent Democrats gradually accommodated themselves to the new framework, much as President Eisenhower adapted his administration to the New Deal reforms. President Clinton, after being elected to reverse the Reagan-era policies, instead signed the North American Free Trade Agreement, kept marginal tax rates low, did little to promote unionization, and signed a welfare reform bill that dismantled a main feature of FDR’s Social Security Act of 1935. As a consequence of these steps, Clinton left office with a strong economic record.

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      The desire to overturn the market revolution that began in the 1980s and replace it with an updated version of the New Deal was thus the ultimate snare for Democrats when the Obama administration began. High marginal and corporate tax rates, managed trade and protectionism, the undoing of NAFTA and other trade agreements, private sector unionization, new health-care mandates on business, subsidies for politically favored industries, increases in public sector employment—all of which have been enacted or proposed in one form or another during the Obama presidency—are a recipe for an extended period of slow growth and stagnation. The recovery from the recession of 2008 has thus been the most anemic of all postwar recoveries, with annual growth rates rarely exceeding 2 percent. President Obama’s decision to embrace a “government agenda” rather than a “growth agenda” is largely responsible for this unfortunate outcome, which is discrediting Democrats once again as ham-fisted on the great question of economic growth. While this approach has been much to the advantage of Republicans, it has done immeasurable harm to the country, which may take decades to repair.

      A wiser though less exciting course would have been to accept the inherited framework of policy with its emphasis on growth rather than redistribution, while finding other avenues by which to address Democratic priorities. More than six years into the Obama presidency, it is now far too late to reverse

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