Charting America's Future: 3. Undoing The New Deal

...We have rejected the discredited theory that the fortunes of the nation should be in the hands of a privi-leged few" He demanded a "fairdeal" for "every segment of the population.' But Congress, retrieved by the Democrats yet still conservative, saw the Fair Deal as merely a reheated New Deal and was not about to go along with any more moves toward "socialism...

...The 10 per cent tax he then sought in January 1968 was not passed until the middle of the year Thanks to the tax, fiscal 1969 ended up with a surplus that would have pleased Lord Keynes under the circumstances...

...For this there are several reasons First, through the "liberal era" (1933-1981) ownership in the American economy has become increasingly concentrated, a condition that is at the root of stagflation Second, in the last 50 years, the Mal-thusian nightmare of more and more living on less and less has become a serious threat Third, the American economy has become increasingly affected by the world economy, so that we cannot plan in autarchic terms Fourth, the maldistribution of income that was once characterized by the unequal portions going to "capitalists" and "workers" has, in recent decades, been characterized by growing polarization of income both within the owning and the employee classes...

...The underfueled economic engine began to sputter three recessions in eight years...

...But Kennedy was not "circumspect" enough for the coalition When the President pushed for Federal aid to education and for Medicare, Congress refused to go along Congress did go along with the Presi-dent's tax-reduction program, embodied in a posthumous 1964 act...

...Once more Ananke intervened, except this time the Greek God of Necessity was dressed up as Mars "It was not theory that settled the history of compensatory spending," records Robert Heilbroner in The Making of Economic Society, "but history that settled the theory With the outbreak of World War II came a tremendous forced expansion in government outlays" History settled a theory that was so obvious it was almost self-evident, quasi-tautological...

...As it happens, the year of the Depression was the best one of the decade (the Depression came late in 1929 and did not affect the annual performance very seriously), with a total national income of $161 billion (in constant 1958 dollars...

...The Full Employment Act was passed in 1946, but only after it was sufficienth diluted to suit the pallid taste of conservatives who shuddered at any peacetime planning as "sneak socialism...

...Between 1939-45, the economy grew at an annual average rate of 9 per cent—compared with 4.6 per cent from 1922-29, and 3.5 percent from 1947-79...

...A surtax was levied on windfall profits Concessions were targeted for businesses that were serving the War effort and the commonweal Interest rates were held down...

...Perversely, instead of falling, prices rose And, most embarrassingly, this budget-minded Administration accumulated a deficit of $18.2 billion over its eight years, with the year 1958-59 showing the highest peacetime deficit ever...

...The average annual growth rate of the GNP fell to 2.5 per cent, unemployment rose from 2.9 per cent in the first year of Eisenhower's Presidency to 6.7 in the last, with an average of 5.1 per cent...

...Indeed, in the '70s, for the first time in the history of America, and perhaps in Western civilization, a government engaged actively in depressing its economy, applying the medieval leech to an ailing body in the belief that the loss of blood would cure the overly sanguine patient In our next chapter, which will examine "The Roots of Stagflation," we will argue that the American economy is today suffering, among other problems, from an iatrogenic illness, a major malady induced by Dr...

...All this Purchasing Power created a demand for goods and services large enough to absorb millions of veterans, even in a time of automation...

...Each man put forward programs that were in line with liberal ideals—the War On Poverty, aid to education, Medicare, renewal of urban and distressed areas, raising minimum wages...

...This growth made it possible for the Federal government to expand its social programs and still show a budget surplus averaging $16 billion annually...

...Some liberals have pointed to it as "Keynesianism in action," the deliberate creation of budgetary deficits at a time when there was no economic emergency Other liberals counter that deficit financing is only one half of Keynes, and that the other half says hold down debt when the private sector does not need government to boost buying power Still others argue that the function of fiscal policy—taxes and budgets—is not simply to increase gross consumption but also to distribute the national income in an ethical and efficient way to give to those who need it the most, and to strike a proper balance between consumption and investment...

...For conservatives, the Kennedy approach became the model when President Reagan proposed to stimulate supply" by a tax cut that favored the financially favored True, the Reagan and Kennedy proposals are not perfect analogues, yet both served up tax cuts that gave the biggest slices to the fattest As Kennedy's successor, President Johnson inherited the Vietnam War and the inevitable byproduct of wars?the danger of inflation Price and wage controls were not imposed, as they had been during World War II, perhaps because the "police action" in Southeast Asia seemed too trivial But Johnson did make some real efforts to put the cost of the fighting on a pay-as-you-go basis—as Truman had done in the Korean episode—to hold down excess demand...

...Exactly how and why conservative policies intended to hold down prices and deficits did (and do) just the opposite will be the subject of a later chapter in this series...

...Here it is sufficient to record that the Ike Age, as it cooled off the economy, put a freeze on liberalism in the decade of the 1950s...

...Prices were stabilized by a variety of measures, especially enforced price con-trols and rationing "And," notes Leon Keyserhng, who was there at the time and is one of the few to direct public attention to the lessons of those years, "although we absorbed almost half of the total national product in direct War activities, full use of expanding production capabilities enabled living standards to rise greatly during the War' The depression that was to follow the War never came This despite the precipitous drop in government purchases from $83 billion in 1945 to $31 billion in 1946, despite the return of 12 million veterans to civilian pursuits, despite the War-inspired automation, and despite the conservative conviction that the War alone had pulled America out of the hole which, with the exit of Mars from the stage, it would once more fall back into The unexpectedly happy denouement to the postwar drama was provided by a deus ex machina called Purchasing Power Throughout the War, millions of employees were engaged in forced savings, buying War Bonds out of weekly salary deductions, when the fighting ended, the bonds were cashed in to buy things Workers who had been on overtime demanded a return to a 40-hour week without a reduction in their weekly pay—in effect, a substantial wage increase...

...The most it would agree to do was inch forward with a raise in the minimum wage, improved Social Security, low-income housing, etc...

...To those whose idee fixe was that the government should not be using its taxing, borrowing and spending powers to spur the market, the conclusion from World War II was that the New Deal had done absolutely nothing for recovery, that we had to go through the ordeal of blood to regain our blood...

...The same Congress, dominated by a conservative coalition, emasculated the OPA so savagely that Truman chose to veto its action rather than give his imprimatur to a travesty of wage and price controls...

...Unfortunately, a 6 per cent surtax he proposed in January 1967, to become effective that summer, was not acted on by Congress...

...The agency was killed In the one year from 1946-47, prices rose more than during the entire period of the War The inflation brought on by the premature ending of controls added to the woes of Truman's party in the midterm Congressional elections of 1946, both houses passed into Republican hands for the first time since 1928 Bending to the "counter-revolution," Truman submitted a message to Congress in January 1947 that, in its references to domestic programs, was meek and muted, a silent surrender But the conservatives were not satisfied In a rather gross symbolic gesture, Congress pushed through a constitutional amendment to prohibit a President from seeking a third term, an ex post facto slap at FDR More substantive steps were taken, as well, To undermine the economic and political influence of unions, believed by many conservatives to be the prime pillar of the Democratic Party, Congress passed the Taft-Hartley Amendments to the National Labor Relations Act A typically Republican tax cut—large and lopsided-ly tilted toward the richest—was passed over Truman's veto...

...A market economy requires a market If the private sector provides that market, that's fine, if the private sector has been so weakened for want of a market that it does not have the strength required to generate one, the public sector has to do the job The War, an involvement requiring public action, generated a vast new market—first as the American "arsenal of democracy" supplied arms to the "allies" in the years 1939-41, and then during the War years as the United States supplied munitions and ammunition for itself and its friends...

...Nixon's prescription...

...Individuals earning $10,000 a year paid an addi-tional $1,655, those earning $200,000 a year paid an additional $60,373...

...Nonetheless, since the tax was about a year and a half too late and there were no wage and price controls, prices rose at the rate of about 5 per cent in 1968?a low-speed inflation by subsequent standards, yet sufficient to provide the next President, Richard Nixon, with a rationale to commence his crusade against "inflation ' One need not examine tax policy more extensively at this point in our hasty look at five decades ot "liberalism" to note that one of the prime instruments of liberal tax policy—the progressive income tax, designed to place the heaviest burden on the shoulders of those who can bear it best—was hardly used FDR made a stab at it in his early years, only to see Congress erase the undistributed profits tax, he sought to distribute the cost of World War II equitably, but that effort ended with the War's end From then to the present, for all the talk about tax reform, the general trend of Federal taxes has been regressive, not progressive Moreover, the Federal burden on middle America—predominantly the nation's wage and salaried people—has grown heavier as the regressive taxes imposed by local governments have increased...

...Viewed thus, maintains Keyserling, the 1964 cuts "were strongly biased toward the investment function," and contributed much to "economic imbalances...

...To these conservative thinkers the War experience, far from confirming the theory, refuted it Actually, the United States was on the road to recovery before the War...

...For the present, it should be clear that the '70s were an anti-liberal, anti-growth era, started by Nixon, copied by Ford, and sadly—in his macroeconomic policies—followed by Democrat Jimmy Carter What emerges from our sketchy over-view of the years from Franklin D. Roosevelt to Ronald Reagan is this When the conservative '70s are added to the conservative '50s and stirred into the liberal '60s and the "five terms" of Roosevelt (with the restraints imposed on Democratic Presidents by almost consistently conservative Congresses), the resulting mix is far from pure liberalism, even if "liberalism" is stripped to the bare bones of growth-by-enlarged-demand Let us assume, however, that every Administration since 1932, with the compliance of Congress, had carried through with the liberal commitment to growth by the use of fiscal and monetary stimulants Would that action have been enough to provide the equity and efficiency that America can and should enjoy...

...To be sure, no one in those years openly advocated a depression or a recession (that did not happen until the 1970s...

...To this Republican, as to Eisenhower, America's Enemy Number One was no longer unemployment, it was inflation If inflation was caused by too much money chasing too few goods—as Nixon and his advisers and the Federal Reserve Board believed—the thing to do was to make money scarce Scarce money was the blood-letting that would bring down the fever of inflation, tight credit would "cool the economy" Whatever merit there may be to the notion that cooling the economy is the way to contain inflation, the strategy runs counter to the basic thrust of the New Deal and its political progeny Liberal Democratic Presidents prescribed stimulants, the '70s Republicans ordered depressants...

...HEINRICH HEINE This is the third at tide in a projected discussion on "Charting America's Future The Task in the '80s " The two preceding pieces were "The Great Debate" (NL November 30, 1981) and "Those New Deal Years (1933-1938)" (NL, December 28) What comes through very clearly even from a swift survey of the early New Deal years is that Franklin D. Roosevelt's weakness was the absence of a doctrine to bind him to what should be done, while his strength was the absence of a doctrinaire style blinding him to what had to be done...

...Federal programs such as jobless insurance and Social Security were maturing and providing benefits (Purchasing Power) to recipients Unions that had negotiated "fringe benefits" in lieu of cash increases now had welfare programs (pensions, health plans, etc ) that were making money available to members and retirees Millions of veterans also received support through a GI Bill of Rights that gave them funds tor homes, small business ventures, and education, $13.5 billion went for schooling and training alone between 1945-52 More billions went for bonuses, disability, hospitals, and veteran pensions Returnees formed families, conceived kids, and bought durables and diapers with easy credit...

...In doing so they went beyond Eisenhower, who was ready to accept a slump as a way to wring out inflation, Nixon and his advisers sought to manufacture a recession...

...Despite the bitching of the rich that Uncle Sam has been depriving them of the riches they need to enrich America, the tax policies of the "liberal era" made repeated gifts to the wealthiest while "soaking the non-rich " In the resistance that Kennedv and Johnson encountered from Congress, and in their inability or unwillingness to turn the Federal tax system into a progressive levy, these Democratic Presidents were not any different trom their predecessors They tell into the general New Deal pattern growth without basic restructuring The economy grew at an acceptable rate ot 5.4 per cent per annum between 1961-66 and at a less acceptable rate of 3.2 per cent between 1966-69, unemployment tell trom 6.7 per cent in 1961 to 3.5 per cent in 1969 The War on Poverty declared by Kennedy and waged by Johnson lifted millions out of that category The one-third of the nation FDR described as ill-fed, ill-housed, ill-clad had come down to one-fourth of the nation by the time Michael Harrington did his study of poverty, The Other America, in 1962 Thanks to a wide range of Federal help?Aid to Dependent Children, rent supplements, Medicard, food stamps, Supplemental Security Income—in a 1977 study of the Congressional Budget Office the percentage suffering poverty had fallen to 6.7 per cent (It has since risen...

...From that year on, national income fell to a low of $107 billion in 1933, a decline of one-third In 1934, however, income (again in constant dollars) began to climb By 1937 it was back to $163 billion, and in 1939 reached $165 billion The unemployment rate fell from 25 per cent in 1933 to 14percentin 1937?a 44 per cent cut and an absolute drop of 5 million from the unemployment rolls Conservatives prefer to focus on 1938, the year of the Roosevelt recession This enables them to "prove" that the New Deal was as hollow as Hoover But if 1938 is put in the total setting, it is the year that demonstrates the liberal point...

...As "Charting America's Future" unfolds, we will argue that maximum production, by itself desirable, is not sufficient to fulfill the potential of this country's greatness...

...Unemployment ended when 12 million men and women became engaged in public works projects known as the Army, Navy, Air Force and Marine Corps, and additional millions were activated in industry and services to meet military and civilian needs The facts proved the theory that a vigorous market invigorates a market economy, Yet not to everybody...

...Once again a booming market proved to be a boon for a market economy By the time Harry S. Truman succeeded Roosevelt to the Presidency, it was clear that America could cope with the threat of unemployment and inflation—if it had a plan Truman offered a strategy...

...The American economy has become a dual economy, with a secondary sector that continues to sink as compared with the primary sector Fifth, taxes—Federal and local?have become increasingly regressive, even during Democratic (liberal) administrations Finally, the economy has become so complex that it demands a grand design if it is not degenerate into another Tower of Babel...

...The ups and downs of our economy from 1929-39 tell the story...

...He re-joiced...

...Nevertheless, as John M. Blum and Arthur M. Schlesinger Jr note in The National Experience, there was "a feeling within the Administration that if recession set in, the government should let events take their course, even at the cost of unemployment, rather than risk inflation through undue reduction of the interest rate or undue increase in public spending" Consequently, the Full Employment Act with its injunction to propose "needed levels of employment, production and purchasing power" to spur "maximum levels" of economic activity, was unceremoniously dumped into the dead-letter file...

...It was the year the economy nosedived because FDR, in a reversion to fiscal conservatism, decided to slash public spending He bled the market and the market economy bled—just like the theory said The War years made three ma-jor points that somehow have gone unnoted and almost unnoticed One was that a major war could be fought with minimal profiteering, inflation and economic inequity The second was that a postwar period need not be marked by a relapse into prewar unemployment And third, the accomplishment of those desirable goals required social policies and economic planning that, if applied in peacetime, could bestow the blessings of a wartime period without the suffering of an international conflict To pay for the War, taxes were raised steeply—but progressively...

...Finally, abundant aid extended by the United States to battle-torn and newly liberated nations around the world provided a global market for American agriculture and manufacture...

...Yet the outcome was neither as "new" nor as "great" as either President might have hoped Both men were inhibited by Congress and the political exigencies of the moment JFK's existential inhibitions are stated succinctly in The National Experience...

...This was the almost instinctive reaction of a society that had been stricken by a Great Depression and was generating antibodies—Purchasing Power?to fight off the dreaded disease...

...The Kennedy and Johnson years, though, were a continuance of the expansionist exercise (run at varying speeds) that was the essence of Roosevelt's" five terms' Expansionism gave way to restric-tionism when Richard Milhous Nixon came into power...

...All of the President's major legislative objectives, including the Brannon Plan to support farm income, subsidies for middle-income housing, a Fair Employment Practices Act, the repeal of Taft-Hartley, the enactment of National Health Insurance—in short his attempt to realize some of Roosevelt's Economic Bill of Rights—were rejected In the zigzag trek of policy from Roosevelt to Reagan, the Truman years saw the President zigging to the Left and the Congress zagging to the Right, so that on balance what we had was snail-like progress in a liberal direction Between 1947-53 the economy did grow at a lively rate of 4.8 per cent, though, thanks to the added buying power stimulated by the Republican tax cut, the Korean War, and Truman's use of his office to pursue fiscal and monetary policies—among them low interest rates?urged on him by his Council of Economic Advisers under the Full Employment Act...

...It did so because it knew tax cuts are always politically popular, because it thought extra dollars in the taxpayer's pocket would stimulate the economy, and because conservative dogma held that tax incentives that enriched the rich would ultimately enrich everyone Whether the 1964 tax act was "liberal" or conservative" has been open to debate...

...The irony is that just as FDR was final-ly breaking with his determination to balance budgets, the Congress of the United States, now firmly in the grip of a conservative coalition, wanted to put Uncle Sam on a pay-as-you-go basis That's what Congress wanted to do...

...The few modest suggestions of the President were simply ignored Conservatives made "the Hill" their fortress in a war against the White House In 1948, Truman struck back by running for re-election against the "do-nothing" Congress...

...If we count the Truman time as FDR's "fifth term," the whole Rooseveltian Era (1932-53) was characterized by the compulsion to grow—to stimulate jobs...

...To forefend unemployment, he proposed a Full Employment Act, a mechanism for comprehensive planning of the economy, to forestall inflation, he proposed to continue controls under the Office of Price Administration (OPA) until the nation's economy reconverted to peacetime production Both of these liberal initiatives encountered the resistance of a hostile (albeit Democratic) Congress...

...He learned from experience From the "Roosevelt recession' of 1937-38, he learned that his 1937 budget slashes had again started America down the road to depression So he reversed himself and, without Keynesian doctrine, began to act like a Keynesian...

...In domestic policy," the authors observe, "Kennedy, elected by an exceptionally narrow popular margin and confronted by the powerful coalition of Republicans and Southern Democrats that had dominated domestic policy since 1938, had to proceed with circumspection...

...In contrast, the obsession of the Eisenhower Era (1953-61) was the fear of inflation, the nagging worry that too much spending, whether private or public, would debase the dollar...

...but it did not because it could not...

...In 1945, the Federal debt was $252.5 billion, in 1953, when Truman left office, the debt was $221.4 billion?a reduction of more than $30 bil-lion...

...In the' 60s, the Democrats were back in the White House John F. Kennedy and then Lyndon B. Johnson offered their respective translations of the New Deal and the Fair Deal into the New Frontier and the Great Society...

...He won...