The New Deal reconsidered: Whats and whys

The welfare-regulatory state of all Western societies, built in waves since the late 19th century, is headed for unstoppable, wrenching change. But choices lie ahead; the outcome is not predetermined. It behooves every sentient adult citizen of wealthy advanced democracies to understand the coming crisis in at least its basics.

The welfare state was built from a variety of motives, some benevolent, some not. In some cases, it was the conscious goal; in others, the residue of more radical, failed experiments in centralized planning. The practical breakthroughs in the evolution of the West away from classical liberal politics and limited government came as a result of the First World War and the Great Depression. But even before these watershed events, mass political movements and educated prejudice alike were starting to run against free societies, democratic government, and markets - for complex reasons: some political, some based on confused economic ideas, some imperialist, racist, or even esthetic. The common denominator was replacing spontaneous social development with the "engineered" society. Marxists believed in false theories of progressive immiseration and replacing the supposed "anarchy" of markets with the supposed "rationality" of central planning. "Welfare" liberals and progressives saw a need for a much more powerful regulatory and redistributive state, along with a strong dose of paternalism to guide the masses. The imperial-minded wanted government to redirect resources toward a society more fit militarily and better prepared to sustain itself without trade with other countries. The First World War provided the paradigm of "total" war, with quotas, price fixing, and direct government command of resources. The state took an aggressive role in suppressing social conflicts, in some cases peacefully, in others coercively and violently. Institutions of culture were seen in a new light, as available for and needing "co-ordination" to become aligned with unified social goals put forth by the political class. Contrary to myth, the supposedly "conservative" 1920s saw these measures remain half-in-place: price boards, trade and immigration restrictions, discriminatory labor laws.*

By the 1930s and the onset of the Depression, the collapse of free societies was evident everywhere. Liberal-capitalist democracy seemed obsolete; collectivism, the "wave of the future." Political intellectuals of many stripes searched for authoritarian alternatives, including fascism (a fact conveniently forgotten later). But after 1945, wartime sacrifice, and the belated discovery of what collectivist societies really looked like, retreat and compromise set in. The new push for the contemporary "entitlement" state came as a result of postwar prosperity, but had much shakier justification as serving the larger public good. Politically-designated grievance and entitlement classes emerged and began to steer the politics of the welfare state. The era of powerful, charismatic leaders able to impose limits on the greed of interest groups ended. The era of lobbyists and entrenched interests began, all seeking a piece of government power for their own use.

The larger price of the welfare state became evident: governments printing or borrowing money to pay for false promises; regulatory agencies, litigants, and activists misusing systems created earlier to serve broad social purposes for their own power-building agendas. By the late 70s, the smell of voter revolt was everywhere in the West. The generation that followed saw a revival of respect for markets, a wave of deregulation, and the re-emergence of the globalizing capitalism that had flourished before 1914, before it was wrecked by the two world wars and the Depression.

But real dangers remain. Totalitarian forms of collectivism have either been defeated or have largely collapsed from their own economic failure. But, while most democratic countries have dismantled most of their classical socialist experiments, the "half-socialized" regulatory and redistributive features remain. Their costs, and their tendency to "privatize the gains and socialize the losses," keep expanding. In the US, the economy as a whole has expanded fast enough to keep the bill from getting completely out of control - at least so far. Other wealthy countries, lacking US-style economic growth and the willingness of foreigners to lend and invest, haven't been so lucky. All of them have been forced to cut the welfare state and reform their redistributive systems, such as socialized medicine and old age pensions.

The rationale then - and now. When the welfare state was created, the world was a different place. National economies were more self-sufficient, and national governments had an easier time controlling them. The birth rate in most wealthy societies was higher than today and longevities shorter, meaning that social security systems could count on an adequate number of new taxpayers and sufficient economic growth to keep going. Many of these welfare state features were poorly designed for the long run. Keeping their most negative tendencies - the emergence of greedy interest groups misusing the power of government at the expense of everyone else - in check required disciplined and powerful political parties and charismatic political figures that, for the most part, no longer exist. Our politics today is dominated not only by powerful narrow interest groups, but by the news media, to which we have conceded much of the role once played by the parties and higher education. The result is not pretty. No one forced it on us; we just let it happen.

Reforming the welfare state will mean starting the debate on the proper functions of government over again from scratch. We must start by recognizing that, whatever the failures of markets and the larger society, "government failure" is just as real.** The debate will have to proceed without the discredited baggage of central planning or phony economic arguments. Every civilized society needs a government of some sort. The question is not just, what do we want it to do, but also, what can government do? It doesn't create wealth; it can only redirect or restrict it. And the welfare state debate cannot be framed in terms of rights, which are limitations on government power, not expansions of it. Concern for the poor, the disabled, and the otherwise helpless; making sure the able-bodied avoid chronic bad decisions affecting their welfare; and regulation of complex economic and technological systems, must be framed in terms of the responsibility of the society at large. In a free society, what is legitimate and not legitimate for political regulation? How much power should government have to redirect the citizenry's lives and decisions?

POSTSCRIPT: Much of this history is retold more completely and authoritatively by Robert Skidelsky's excellent The Road From Serfdom, a basic work for understanding the last century. Jonathan Rauch's Government's End (first edition, Demosclerosis) is an indispensable complement to understanding the late welfare state paralysis of interest groups.
---
* For example, before 1914, only diplomats needed passports. During and after World War One, almost all countries adopted much tighter restrictions on travel and immigration for everyone.

** As the citizens of New Orleans well know. We must also speak of "media failure" as well: grotesque, "narrative"-driven misreporting of even basic facts on a grand scale.

The New Deal reconsidered: The forgotten man

After looking at the rise and fall of collectivism over the last century with Jonah Goldberg, let's focus more narrowly on the New Deal itself with Amity Shlaes, author of the recent and remarkable The Forgotten Man: A New History of the Great Depression. The history is again not hidden, merely forgotten. After voters largely repudiated the New Deal in the 1938 midterm elections, the truth about the 30s became more and more obscured in a haze of myth. FDR's reputation, which was sinking from the end of 1937 on, was utterly transformed by his wartime leadership. America's triumph in 1945 put the reality of the New Deal behind a fog of nostalgia.

Understanding the New Deal period and its legacy makes it easier to understand how the rise of the federal welfare state and vote-buying created the interest groups that now dominate American politics. Before, there were local and state governmental welfare functions, but (veterans apart) no federal welfare role. After, the US had something like today's federal welfare state. More pieces have been added since (Medicare, Medicaid, partial federal funding and control of education), but the New Deal remains the watershed. While the New Deal is remembered as a period of experimentation with central planning and government ownership of certain sectors of the economy, those quasi-socialistic features had a short life and were mostly gone by 1939. But the New Deal transformed the older state and local Democratic party machines that doled out money and patronage to Democratic-voting groups (urban ethnic voters, white Southerners, other groups later) into a truly national political machine of "tax and tax, spend and spend, elect and elect."*

That wasn't the way the New Deal was viewed at the time. The Great Depression was an unprecedented emergency of uncertain origins that demanded a reaction. Deeply impressed by experiments in collectivism in Russia, Italy, and Germany, the conventional wisdom for much of the decade was, if not "red," at least a "pink-brown" mix. Even otherwise conservative types (businessmen, Republican farmers in the Middle West and West) were bewitched, for a while, by the false promise of central planning and state ownership (all facts, BTW, conveniently forgotten by the 1950s). Shlaes makes effective use of the large body of work by economists and historians done since the 1930s in better understanding the causes of the Depression. In 1930, while America was still a largely rural country, its farmers had become so productive that there were simply too many of them, trying to hang on by borrowing, only to see grain and other food prices crash periodically, wiping them out. Meanwhile, Europe, America's largest export market, was no longer able to pay its way after 1918. Major European countries had become indebted to the US. But the US, like almost all wealthy countries after World War One, imposed high tariff barriers on the very European goods that could have paid off those loans. American farmers were shut out of their most important foreign markets, leaving that sector weak well before the October 1929 stock market crash. In fact, the US was already in a serious recession by the end of 1928.

What turned a serious recession into the Great Depression was the combination of protectionism, which ended most international trade by the early 1930s, and extraordinarily bad decisions by the Federal Reserve, which had been created in 1913 precisely to prevent from happening what proceeded to happen, a monetary collapse. In order to defend the value of the dollar against the price of gold (the US was on the gold standard in those days), the Fed in effect raised interest rates to member banks to levels never seen before or since. Banks never have enough money to pay all their depositors at any one time in any case, but the resulting deflation (as the money supply contracted sharply) put US banks in a terrible bind. Depositors began to stand in long lines to get their money out, and pretty soon, a third of the country's banks were closed. Without money and credit, a modern capitalist economy comes to a stop. Twenty-six percent of the work force were unemployed. Similar banking collapses happened in certain other countries - most fatefully, Germany and Austria - leading to similar results.**

At the time, various competing theories, most of them partly or completely wrong, were widely debated and believed in: Marxism ("the end of the capitalism"), what eventually became Keynesianism (inadequate aggregate demand), and other, loopier theories. People were desperate, and political niceties like constitutions were looked upon as luxuries. It was in this atmosphere that FDR was elected in 1932. Contrary to later myth, federal reaction had already started under Hoover, including government intervention similar to the New Deal, albeit on a smaller scale. One of the largest mistakes of these policies was their attempt to keep prices and wages up at any cost, instead of letting them float downwards to a new equilibrium, which would have returned the economy to something more like full employment. These measures amounted to a make-believe of wrong-headed, politically decreed prices and wages (see here for a look back at these).

Shlaes takes her title from the late 19th century writings of William Graham Sumner, a forgotten man himself these days, but once a significant light in post-Civil War America. In his earlier work, he was a follower of the Herbert Spencer, the English popularizer of "social Darwinism" in a libertarian, quasi-pacifist form palatable to English-speaking audiences. While he modified his views in later years, Sumner, like most serious social thinkers of that era, never totally abandoned the Spencerian paradigm of peaceful, decentralized social evolution. Such thinkers were already under pressure at the end of the 19th century from various directions: the imperially-minded preaching the "white man's burden," the militaristically-minded who saw (with some reason) the commercially-oriented societies of western Europe and north America as not prepared to face the rising might of Germany, and social reformers who wanted to use government power to coercively bring about social changes and perhaps a planned utopia. Few wanted to abandon political democracy, yet these programs conflicted with the most important features of liberal society. In America, they were called the Progressives, and their frequently misguided crusades form a pre-history of later collectivist ideologies - the "liberal fascism" of Goldberg, with all its inherent internal contradictions.

Sumner put his finger on the core problem with all such collectivist schemes. A agrees to help B at the expense of C. If A and B are organized and vocal pressure groups, they can get away with it for a while, at least. But C must remain oblivious for A and B to keep it going. If C becomes conscious of being exploited and revolts, then A and B are in trouble. The scheme has to be abandoned, at least if democratic practice is to be maintained. The only alternative, Sumner concluded, is violent revolution and coercive dictatorship to keep C in his place. Sumner did not live to see the communist revolutions in Russia or China or the various types of fascism that flourished in the 1920s, 30s, and 40s - but he already had their number. In democratic societies, C is the unorganized majority.

The evidence of this central failure of the New Deal was widely understood by the end of the 30s. Voters started to see that it was impossible to, say, improve the lot of workers overall by raising wages and prices in one industry while making everyone else pay for it. Such policies never made any economic sense. As the New Deal faded away, what was left was something different from 19th century laissez-faire, although well short of socialism: the modern redistributive-regulatory state. It didn't abolish private ownership or markets, but it did come to regulate them, sometimes heavily, and redirect the larger society's consumption and investment patterns. The political heart of it was just the Democrats' old machine politics, but now writ large on a national scale. Favoring certain groups with federal largess, making state and local politicians dependent on federal hand-outs, the New Deal began the move of political life in America away from local and state governments toward Washington (including the beginnings of the centralization and consolidation of political journalism) and the end of federalism.

What kept this system from flying apart were strong political parties and the imperial presidency. These held the underlying centrifugal tendencies in check. But starting in the 1960s, this self-discipline broke down. After Nixon's resignation and the end of the imperial presidency, it was no longer possible to control the abuse of governmental tax, spending, and regulatory power. The modern lobbying industry, born in the 1970s, descended on Congress looking for favors on a scale far larger than before, and Congress was only too happy to oblige - and help itself to pork as well. Sometimes, these favors were sold to voters at large as serving the larger public good (which was rarely true). Modern conservatism started as an attempt to push back against this trend. But it was only partly successful and for a limited time. By the late 90s, the forces of "tax and tax, spend and spend, elect and elect" got the upper hand again - except now, curiously, they were "borrow-spend-elect" Republicans.

POSTSCRIPT: Shlaes gave this talk last fall at Hillsdale College. Consider also this review by David Boaz of another recent book on the 1930s, German historian Wolfgang Schivelbusch's Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939.

A somewhat older classic on the rise and fall of 20th century collectivism is Robert Skidelsky's The Road from Serfdom, an excellent complement to these books by Shlaes and others.
---
* Harold Ickes' words from 1938.

** Britain and France experienced no banking collapses and so suffered less. But even they faced high unemployment from the late 20s on, especially Britain, which insisted on overvaluing its currency and pricing its exports out of world markets.