The Latest Third Way

A group identifying itself as Third Way has published an article, where the authors foresee Bernie Sanders bringing the Democrats to ruin. Who is behind Third Way, and what do they want? And is it viable?

Third Way describes itself as a think tank. Their chairman, John L. Vogelstein, is the founder and managing director of an asset management fund. Other prime movers in Third Way are Jonathan Cowan, Matt Bennett, Jim Kessler and Nancy Hale. With their heavy Democratic establishment presence — Bennett helped create the “Dukakis in a tank” image in 1988 — and Wall Street funding, some matters are a foregone conclusion. Of course, they are not going to like Sanders, and the Sandersnistas are not going to like them. So where does that leave us in evaluating what Third Way is about?

Here is a memo Third Way published in March, 2019 comparing the economies of California, Massachusettes and New York against those of Michigan, Pennsylvania and Wisconsin. Their findings would not be strange to Stanley Greenberg. This appears to be a surprise to journalists, but I don’t know why it should be:

Despite what topline national indicators may lead you to believe, the post-Recession period for many places in the US was marred by weak business growth, discouraged workers, and modest wage gains. Optimism and opportunity seemed to pool in economic hotbeds.

Their discussion of health care, summarized as Cost Caps and Coverage for All, ought to be given a hearing, particularly as health care costs are a hot-button issue among voters and Elizabeth Warren fell on her ass when challenged to explain how she would pay for her plan.

I am receptive to their ideas about returning to Roe v. Wade as the standard for access to abortion. But, is that what they are really saying? They have a one-pager addressing the effort to inch the limit up from 24-27 weeks to 20 weeks, but where is their foursquare commitment to opposing open-ended third-trimester methods such as dilation and extraction, also known as partial-birth abortion?

Third Way is much more orthodox on climate change, although they have been left behind by the radical wing of the Democratic Party. In this and their gun control policies, they forgot their own 2008 advice: Change you can believe in requires a government you can trust, at least if the government is to be entrusted to lead that change.

Their call for a connected credentialing system falls flat with me; credentials reward people who can collect credentials at the expense of people who can actually accomplish something. We’re up to our ears in people with credentials who are more than ready to tell everyone else how we did it wrong. That is a primary reason why white-collar productivity sucks. Barbara Ehrenreich correctly identified the professions as a “middle-class fortress” in her 1989 book Fear of Falling; the credential-happy contemporary approach to staffing takes this fortress up to a new level.

My assessment of third-way approaches is shaped by the New Deal Social Contract, the mother of all third ways. That social contract was created to save capitalism from itself. The centerpiece was a public-private partnership to create full employment, which was codified into law as the Full Employment Act of 1946.

The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy, with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, con­ditions under which there will be afforded useful employment oppor­tunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.
— Section 2, “Declaration of Policy”

Yes, you can argue that various forms of government action failed to prevent the panic from becoming a depression, and failed to get us out through consistent policy. Nevertheless, by 1932 we were in a situation where the rational actions of individual families, firms and banks were only going to get us deeper into the hole. The government became the only agent with the resources to get us out. Since that required a world war, future efforts were concentrated on not allowing another depression. This social contract had profound limitations and inequities, but an entire generation bought into it and considered it a source of political legitimacy.

Comparing the ideas I can discern as fundamental to the Third Way with the principles behind the New Deal Social Contract, I have some immediate questions for the Third Way folks:

1. What do you believe that citizens are capable of on our own? The thinking behind the New Deal Social Contract was that most people both could not and did not want to think for themselves. Therefore, we let the experts run things, providing them with an umbrella of political cover, while the citizens were expected to dissipate their free time on leisure and their disposable income on consumption. This brought us, among other problems, a war in Vietnam that our leaders had no plan to win, a runaway inflation they could not control and inferior products we did not want to buy. Also, nobody was talking about knowledge workers in 1946; many people heard their bosses say, “I don’t pay you to think.” What is your view of what citizens are capable of, and what do you expect from us?
2. The Third Way page on the Economy says, “We believe that an innovative, modernized government must work in tandem with a thriving and dynamic private sector to achieve sustained economic growth and broad prosperity.” The New Deal Social Contract believed in public-private partnerships as well; this led to an absence of profit-and-loss (P&L) discipline and the first wave of too big to fail: federal bailouts of Lockheed (1971) and Chrysler (1980). How would you avoid this trap?
3. As detailed above, the economic focus of the New Deal Social Contract was full employment. There was no such thing as an “unnecessary worker”; the very idea was idiotic, given what we had just come through. This required a closed economy, where you can’t bring in cheap labor, you can’t move work offshore and you can’t move capital offshore. Do you propose going back to the 1960-vintage economy? If not, how would you reconcile the apparent contradiction?
4. Job growth used to be in the Fortune 500 corporations; they could afford it. We also recognized that the first couple of years of your working life provided the completion of your education. By 1990, there was more job growth in women-owned firms than in the Fortune 500. Smaller firms can’t carry people for 2-3 years while the new hires unlearn collegiate norms and learn how to add value. How do we fix employment readiness?
5. The people riding the rails looking for work in the thirties were primarily semi-skilled or unskilled, with a leavening of skilled persons who were unable to find work in their line and were therefore competing with other workers on a semi-skilled basis. Relief programs considered them rather fungible; they could work in a factory, go into the WPA and build a road or go into the CCC and plant trees. We now have a workforce that is more specialized. Periodically, someone comes out with an idea that coal miners or farmers should “just learn to code” (i.e., write computer software), which is roundly refuted on the internet, at least as an idea that can scale. So what happens to people who have significant skills when they are displaced from the economic opportunities to use those skills to earn a living?
6. The page on Social Policy says, “We are forging common ground on contentious social issues, while fighting efforts to turn back the clock on social progress.” The New Deal Social Contract was tied to expectations of high social conformity. That was necessary, in order to create the desired sense of community. Many Americans are willing to be their brothers’ keepers, provided they see the person as a brother. You can’t have the open-ended individual autonomy of a Gesellschaft and the mutuality of a Gemeinschaft at the same time. It flies in the face of human nature, which — notwithstanding John Dewey’s repeated assertions to the contrary — is not fully malleable. Where do you want to put the needle between individual autonomy and mutuality?

There are plenty of questions at the detail level, but this is a start for a discussion at the fundamental level. America is starting down a fundamental political realignment. Bring it on.

The Morality of Law

I am going to start with a Tweet, because this is was the seed for me to think about this issue.

“You can’t legislate morality” is one of the most mindless cliches in public discourse.

EVERY law has a moral basis and SOMEONE’S morality is always “being imposed” on society.

Source: Greg Scott, Director of Media, Heritage Foundation
https://twitter.com/GScottSays/status/1203328854561046530

I believe that most Americans who have not been to law school would agree that “every law has a moral basis.” But is it true? To answer that, we have to look at important shifts in legal thought over the past century and a half.

Oliver Wendell Holmes and Legal Skepticism

Oliver Wendell Holmes, Jr., served as an officer in the Civil War, then became a lawyer, state judge, law school professor and justice in the Massachusetts Supreme Judicial Court, and then the United States Supreme Court. His opinions have since been widely cited by lawyers and judges.

The life of the law has not been logic; it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, and even the prejudices which judges share with their fellow-men, have had a good deal more to do than syllogism in determining the rules by which men should be governed. The law embodies the story of a nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics.
— Holmes, The Common Law (1881)

Read this carefully. Clearly, all the contributory effects Holmes enumerates have determined law. Is it necessarily true that this should be so, in a normative sense? For Holmes, who was a pragmatist, it inevitably followed that this is true. Holmes accepted that how the law developed was how it necessarily ought to have developed (more properly, he would have said any argument about how it ought to have developed was pointless).

Holmes was also strongly collectivist; to have an orderly society, the collective must decide matters for everyone, and any individual who would put her judgement before that of the collective is a menace. If that means that the state has decided that you don’t get to have children, well, too bad for you.

It is better for all the world if, instead of waiting to execute degenerate offspring for crime or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind. … Three generations of imbeciles are enough.
— Holmes’ majority opinion, Buck v. Bell

Holmes did not accept the idea that the law was founded on morality; this is his legal skepticism.

The jurists who believe in natural law seem to me to be in that naïve state of mind that accepts what has been familiar and accepted by all men everywhere.
— Holmes, “Natural Law”, 1918

You may now be sensing a conflict: if it is wrong to accept the principles that are “accepted by all men everywhere” as a basis for law, why should we accept “the felt necessities of the time, the prevalent moral and political theories” in their place? I am not here to defend Holmes, and I don’t have an answer for that.

As he and many of his contemporaries saw the law, there was no embedded moral truth in a law; it was merely an adaptation of governance to a particular set of conditions in force at a particular time. The law was purely pragmatic: what works today? In his dissenting opinion on Gitlow v. New York, Holmes wrote:

If, in the long run, the beliefs expressed in proletarian dictatorship are destined to be accepted by the dominant forces of the community, the only meaning of free speech is that they should be given their chance and have their way.

What Holmes really wanted was for the law to serve as an instrument of social policy. For him, proper citizens wanted to comply amiably with the social policies of their government. The willful citizen, who wants to live free from social direction by whomever is in power, is a “bad man” and must be coerced by the police power of the state.

The first thing for a businesslike understanding of the matter is to understand its limits, and therefore I think it desirable at once to point out and dispel a confusion between morality and law, which sometimes rises to the height of conscious theory, and more often and indeed constantly is making trouble in detail without reaching the point of consciousness. You can see very plainly that a bad man has as much reason as a good one for wishing to avoid an encounter with the public force, and therefore you can see the practical importance of the distinction between morality and law. A man who cares nothing for an ethical rule which is believed and practised by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money, and will want to keep out of jail if he can.
— Holmes, “The Path of the Law”, 1897.

The Founders would have correctly identified these doctrines as mob rule. Under these principles, the state stands all-powerful and can force any citizen to conform in any way to “the felt necessities of the time.”

Corporatism and Bargaining

At the same time, the regulatory state was beginning to mature. There is nothing inherently wrong with government regulating behavior; that is one of the tools government has to provide the people with security and liberty. The question is: how is government to go about implementing that regulation?

For example, the economy we are supposed to have is one in which everyone has equal access to markets and no one has a privileged position in those markets. In law, everyone is supposed to have equal access to justice and no one is supposed to have special treatment simply because of who they are. We have strayed far from these ideals.

Forty years ago, Theodore Lowi had identified several means by which the Republic had quietly and incrementally abandoned the rule of law. We saw a continual expansion of administrative governance which was not accountable to the political representatives, who were in turn accountable to the voters. Lowi showed how this proceeded to evolve regulation:

• From the concreate to the abstract;
• From the specific through the general and on to universality;
• From traditional, within the guidelines of Congressional legislation, to novel, unrestricted by guidance from Congress;
• From administrators bound by rules to administrators with wide discretionary powers;
• From proscriptive law (thou shalt not) to prescriptive law (thou shalt) to comprehensive.

Expansive delegation of Congressional authority was a keystone feature of this development. This allows Congress to enact notions and sentiments, leaving the bureaucracy the messy business of turning these into policy. I have previously used Section 404 of Sarbanes-Oxley as a case study, illustrating the various issues Lowi discussed:

• An open-ended legislative act that does not operationalize the behavior in question, so that we could not know ahead of time whether or not we were in compliance with the law;
• An autonomous federal agency and a quasi-governmental entity in charge of turning notions into policies;
• When challenged in court, instead of voiding the law under non-delegation, telling Congress to do its job, the Supreme Court rewrote the law to overcome the constitutional challenge.

How does such policy affect the citizens? That depends on who the citizens are. Citizens with the means who don’t like the policies can hire a K Street law firm whose partners used to be senior bureaucrats in the relevant agencies to bargain for favorable interpretation of the law; the rest of us have to lump it. We get IRS penalties; they get private-letter rulings. We get criminal prosecution; they enter into consent decrees — “we didn’t do it, and we swear we’ll never do it again.”

Thus a two-tiered system of political economy develops. We always hear that we have a capitalist economy, but in capitalism there is profit-and-loss discipline. We hear we have rule of law, but under rule of law, individual administrators do not have the latitude to waive the rules for some agents.

Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.
— James Grant, publisher of Grant’s Interest Rate Observer

Privileges in the form of money or license or underwriting are granted to established interests, in order to keep them established, and largely done in the name of maintaining public order and avoiding disequilibrium. The state grows, but the opportunities for sponsorship and privilege grow proportionately. Power goes up, but in the form of personal plunder rather than public choice. It would not be accurate to evaluate this model as “socialism for the rich and capitalism for the poor,” because many thousands of low-income persons and groups have profited within the system. The more accurate characterization might be “socialism for the organized, capitalism for the unorganized.”
— Lowi, pp. 278-279.

What we really have — what we have had since before I was born — is corporatism. Howard Wiarda properly recognized that Lowi, although he did not use the term, was describing a corporatist political economy [Wiarda, p. 134]. Under corporatism, private citizens and enterprises enter into public-private partnerships with the government to accomplish policy goals. The political economy established after World War II was the largest public-private partnership in world history. Even if the government does not formalize the special benefits that the private partners are to obtain by their cooperation, it is naïve to expect that the latter are not going to extract special benefits.

The Majesty of the Law

Ordinary citizens generally believe that the law is rooted in morality: Thou shalt not kill, thou shalt not steal, thou shalt not bear false witness. Law based on common understanding of morality has majesty. People grant its legitimacy. Those that are not inveterate criminals obey the law because they believe it to be morally imperative to do so.

If the law is just a result of bargaining between various political factions, then we could have had a more favorable law if we had more effective political leaders in our faction. If the law is just an adaptation to a set of conditions, we can get a new law by changing the conditions. If there is no greater truth in the law, then why should we respect it, as opposed to merely fearing its consequences?

Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.
— Pericles (495-429 BC)

As people become convinced that law is just a public policy tool to shape behavior according to the felt necessities of the times the prevalent moral and political theories, the logical conclusion is that they need to get into the public square and demand that the felt necessities are their felt necessities and that the prevalent moral and political theories are their moral and political theories. Evangelicals re-entered the public square around 1980, realizing that there was no refuge where politics would not take an interest in them. After 2009, some Americans were motivated to participate in the Tea Party in response to what they view as moral and political theories that threaten their interests.

Already, by the time I was growing up, there was growing cynicism about government purposes and operating procedures. Lowi found that this cynicism was justified because of the continuing spread between what we learned in seventh-grade civics — the formal view of participative government — and what really goes on in Washington.

However, when the informal is elevated to a positive virtue, and when the gap between the formal and the informal grows wider, and when the hard-won access of individuals and groups becomes a share of official authority, cynicism unavoidably curdles into distrust. Legitimacy can be defined as the distance between form and reality. How much spread can a democratic system tolerate and remain both democratic and legitimate?
— Lowi, p. 297.

If law is not founded on a shared understanding of morality, then law loses its majesty. The inside people — or, in the current vernacular, the deep state — use the law to arrange public affairs for their own benefit, at the expense of the rest of us. The system is rigged, and obedience to the law for its own sake is for suckers. The correct course of action is to form an interest group of your own and seize power to tilt the table towards you, since the table will be tilted in any event.

References

Holmes, Oliver Wendell, Jr., The Common Law, Project Gutenberg: http://www.gutenberg.org/ebooks/2449.

Holmes, Oliver Wendell, Jr., “The Path of the Law”, 10 Harvard Law Review 457, 1897.

Holmes, Oliver Wendell, Jr., “Natural Law”, Harvard Law Review, 1918; reprinted at teachingamericanhistory.org [http://teachingamericanhistory.org/library/document/natural-law/], retrieved 23 Dec 2018.

Lowi, Theodore J., The End of Liberalism: The Second Republic of the United States, 2nd Ed., New York: W. W. Norton, 1979.

Watson, Bradley C. S., “Oliver Wendell Holmes, Jr. and the Natural Law”, Natural Law, Natural Rights and American Constitutionalism, 2011 [http://www.nlnrac.org/critics/oliver-wendell-holmes], retrieved 27 Dec 2018.

Wiarda, Howard J., Corporatism and Comparative Politics: The Other Great “Ism”, Armonk, NY: M. E. Sharpe, 1997.

Thank You for Protecting Me from Myself

Two very helpful persons at the Brookings Institution, Jonathan Rauch and Benjamin Wittes, have written a paper calling for more professionalism and less populism in American public life. The title of the paper claims, “voting makes us stupid.” Really?

Of course, Donald Trump is a walking testament to the stupidity of voters. But their argument goes beyond this. Let’s examine the points in detail.

More Participation Will Not Be Beneficial

The authors go back to, of all people, the Founders as a source of the idea that the Constitution was set up to limit participation. This is true. The Founders feared mob rule almost as much as government tyranny.

Drawing upon ample historical experience, they worried that democracies were vulnerable to demagoguery and prone to instability. Although they insisted that republican government required direct public input, they also constrained and balanced that input.
— Rauch and Wittes

So can we look forward to a shift in the policy of the Brookings Institution to call for a reduction in open primaries and restoration of the selection of Senators to the states?

The People are Incompetent

This is always going to be a seductive idea to a think tank that considers itself a repository of public policy expertise, but leave that aside for now.

This argument actually goes back to Walter Lippmann. In Public Opinion (1922), Lippmann attacked “the doctrine of the omnicompetent citizen.” Lippmann called for a structure modeled on his idea of the British foreign service, where disinterested and independent experts provide policy options to elected officials.

However, there is no such thing as a disinterested expert. The regime Lippmann visualized quickly degenerates into a system where the experts exercise political control because they control the menu of options under discussion.

In practice, the British foreign service wasn’t that great a model. It really worked out like this:

[Bernard] was concerned that the FO [Foreign Office] produces only one considered view, with no options and no alternatives. In practice, this presents no problem. If pressed, the FO looks at the matter again, and comes up with the same view. If the Foreign Secretary demands options, the FO obliges him by presenting three options, two of which will be (on close examination) exactly the same. The third will, of course, be totally unacceptable, like bombing Warsaw or invading France.
— Yes, Prime Minister

That is what is going to happen when unelected experts are in control of the policy menu. Even Lippmann had lost faith in experts by 1925, when he wrote The Phantom Public:

[Government] is also subject to the same corruption as public opinion. For when government attempts to impose the will of its officials, instead of intervening so as to steady adjustments by consent among the parties directly interested, it becomes heavy-handed, stupid, imperious, even predatory.

There is really no such doctrine justifying public participation in politics as based on an “omnicompetent citizen.” The authority of the people is not contingent on them passing some sort of civics test. The legitimacy of the government is derived from the consent of the governed. It is not derived from the consent of that subset of the governed that those governing consider qualified.

We have the right to grant or withhold consent, not because we are omnicompetent, but because we have skin in the game. We live with the consequences of government actions. It’s our blood and treasure on the line.

• In 1953, an Anglo-American effort in Iran instigated the ouster of Prime Minister Mohammed Mossadegh. This was undertaken primarily because Mossadegh wanted to extract more concessions from the British. The participants in the American government believed that the British economy was unable to withstand these concessions. However, the end result included both the breakup of the British monopoly on Iranian oil trade and a price increase to show the Shah was not a puppet of the west. Thus, for all the broken china, this foolish misadventure did not even accomplish its original intention. Did the American people really want what was done in their name?
• In 2016, the Obama administration committed the United States to cut greenhouse gas emissions by 18% under the Paris Agreement. This commitment was made by executive order, bypassing the Constitutional requirement for treaties to be ratified by the Senate. The commitment, which has been revoked by Donald Trump, would have necessarily increased energy costs for American citizens in order to comply with the targets. Why did we want this? The Obama administration knew we did not, which is why it evaded review by our representatives in the Senate.

The People are Irrational

Sure, they are. But the professionals are people, too. How are they not any less irrational than the public at large?

There is a reason that David Halberstam titled his history of the Kennedy and Johnson administrations in Vietnam The Best and the Brightest. The best and the brightest can also go wrong. And when they do, the move in greater unison than the public at large. They largely drink from the same wells of information and have similar outlooks. Groupthink is particularly prevalent among professionals.

The authors quoted Lee Drutman: “Informed, individualistic rationality is a chimera.” Actually, rationality in public life in general is overrated. One of the most rational politicians of the past hundred years was Neville Chamberlain. It is perfectly rational to want to avoid going to war to interfere “in a faraway country between people of whom we know nothing.” But history demonstrated it was a bad idea.

The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.
— G. K. Chesterton, Orthodoxy

More Education Will Not Be Helpful

More than what? In 1918, the National Education Association completed Cardinal Principles of Secondary Education. This report called for seven objectives of secondary education, including Civic Education:

For such citizenship the following are essential: A many-sided interest in the welfare of the communities to which one belongs; loyalty to ideals of civic righteousness ; practical knowledge of social agencies and institutions; good judgment as to means and methods that will promote one social end without defeating others; and as putting all these into effect, habits of cordial cooperation in social undertakings.
— Cardinal Principles of Secondary Education, p. 13.

Yet, here we are 99 years later. Every year students are reported to be in greater ignorance of civics, politics and economics than last. Rauch and Wittes cite a survey showing that most respondents cannot name the three branches of government, identify the Chief Justice of the Supreme Court or locate the entity with the power to declare war. Moreover, they cite the common belief that the government spends more on foreign aid than on Social Security or Medicare.

So how is this not an indictment of the existing education establishment? How has the education system delivered on the 1918 goals?

In Public Opinion, Lippmann famously wrote:

It is because they are compelled to act without a reliable picture of the world, that governments, schools, newspapers and churches make such small headway against the more obvious failings of democracy, against violent prejudice, apathy, preference for the curious trivial as against the dull important, and the hunger for sideshows and three legged calves. This is the primary defect of popular government, a defect inherent in its traditions, and all its other defects can, I believe, be traced to this one.

The education system has had a century to remedy the “preference for the curious trivial as against the dull important.” It has not done so, and we can only conclude that it does not want to. Better to keep people in their state of supposed ignorance, and then tell them to leave public policy to the professionals. This is a scam.

It is manifestly unfair to fail to educate people to be effective citizens and then tell them that they can’t participate in political life because they are living in civic ignorance.

The Return of Intermediaries

Rauch and Wittes make the case for intermediaries in public. Political intermediaries can be elected officials or representatives of political parties. What they call a substantive intermediary has specialist knowledge of a policy area, such as health care.

Political intermediaries are necessary. Here is one Rauch and Wittes omitted: states. The several states are a necessary counterweight to federal power. It is more than time to rediscover the role of states in our political process.

The specialist intermediary would be of value. No one without specialist knowledge is going to make sense of the Patient Protection and Affordable Care Act; I tried. It would be great to have intermediaries who could help the citizen navigate the issues.

The first logical candidate might be the media. Try spending a little less time on having two groups of mouthpieces talk over each other, and devote that time to providing information on how a segment of the economy works. If that seems scary, put on segments at 4 in the morning, when no one is watching anyway, and let us record them.

Want to discuss pricing of prescription drugs? Go through the history of the FDA and the decisions that were consciously made to make sure that new drugs were introduced in the US first. Follow the economic consequences of those decisions. Discuss the new drug application (NDA) process that generates enough paper to fill a semi-trailer. Visit ambulancechaser.com (I am not going to give them free publicity by using their real domain name), where people seeking victim status can be gathered into a class to launch a lawsuit.

Corporatism hated intermediaries and sought to get rid of them at every opportunity, leaving the individual citizens alone with the all-knowing, almighty federal government. We need intermediaries that Brookings hasn’t even thought of.

However, we also need to be able to trust the intermediaries. We require that they are giving us all the information, not just a limited and purposeful set of options (two of which are identical and the third totally unacceptable). We need intermediaries to watch the intermediaries.

Yes, the world we live in requires tradeoffs and choices from among the unpalatable and the disastrous. The belief that ordinary people cannot understand these issues in a nuanced way is a piece of received wisdom. Populism is a rebellion against this, an assertion that legitimacy derives from the consent of the people, whether or not the people express themselves in a way pleasing to those who would wield power over them. Thank God the American people have the sand to push back on the professionals who would undermine them.

The New Deal Social Contract

The Great Depression was, for white Americans, the dominant event of the 20th century. It made political innovation possible, even justified. It shaped the thinking of everyone who lived through it. We are still living with the consequences of it today.

My mother grew up in the Depression, and was a thorough product of it. She walked to school and back six miles in the snow, and yes, it was uphill both ways. She really said the things that people of her generation were famous for saying. Straight out of Catch-22, she really used to say in all sincerity, “What if everybody thought like that?” She really used to say, “You can’t have a society with everyone doing anything they want to do.” I can imagine her among the people crying when FDR died.

The Great Depression

There had been financial panics in America in 1819, 1837, 1857, 1873, 1893 and 1907. As the American economy developed and industrialized, urbanization increased and finance played a larger role in everyday life. Each panic was worse than the last (possibly excepting 1857, where the effects were cut off by the onset of the Civil War).

By the 1920 census, the majority of Americans lived in urban areas. These offer limited opportunities for economic self-sufficiency. Thus, the next panic should be expected to be even worse than the Panic of 1907, and it was. Contrary to what most people here are taught, the Wall Street Crash of 1929 did not cause the Depression, although it was definitely a leading indicator of a downturn. There was a financial contraction in 1930, followed by a banking panic that was mishandled by the Federal Reserve. Additionally, governments were fixated on the ability of citizens to redeem currency for gold, further circumscribing their option spaces.

By 1932, official unemployment was around 25% of the US workforce. What to do about it? There were many theories. One that was not satisfactory is worth remembering for future reference.

Andrew Mellon’s Liquidationism

Andrew Mellon was Treasury Secretary under Hoover. In his memoirs, Hoover pushed Mellon under the bus.

Two schools of thought quickly developed within our administration discussions.

First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 

‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ He often used the expression, ‘There is a mighty lot of real estate lying around the United States which does not know who owns it,’ referring to excessive mortgages. 

Hoover did attempt to put some personal perspective on the recollection:

Secretary Mellon was not hard-hearted. In fact he was generous and sympathetic with all suffering. He felt there would be less suffering if his course were pursued. The real trouble with him was that he insisted that this was just an ordinary boom-slump and would not take the European situation seriously. And he, like the rest of us, underestimated the weakness in our banking system.

This course was a political non-starter, a road to political ruin. Less competent people also vote. Moreover, this course would place the risk of financial policy on those with the fewest resources to bear the risk. The Republicans would not be trusted with the White House again for twenty years.

The New Deal as Social Contract

The Stanford Encyclopedia of Philosophy entry on contractarianism asserts that John Rawls “effectively resurrected social contract theory in the second half of the 20th century.” I have addressed the subject of John Rawls elsewhere; the New Deal predates Rawls, and must be understood in terms of Thomas Hobbes and Immanuel Kant.

Who has that kind of money? A 1931 poster.

An economic contraction is like a national Opposite Day. Rational responses by individuals, firms and even states only make the general situation worse. Faced with income uncertainty, individuals and firms pull back on spending, causing the economy to sputter to a halt. The government exhorted people to spend more, but few were confident enough to do that in the face of mounting dislocation.

The responses to the Depression are a subject in themselves. FDR is usually credited with ending the Depression by people who don’t know better. However the fundamental coalition that would enact the social contract came together in the 1930s.

World War II postponed, but did not remove, the need to resolve the questions? With war production coming to an end, how were we to avoid lapsing into another depression? How would pent-up demand be met after rationing restrictions were removed? If there were another depression, how would we get out of it?

Salient features of the resulting social contract were that:

• The economy would be managed as a public-private partnership. Government wants people employed, but has not the means to create the jobs on a permanent basis directly.
• The economy would be managed by experts, who could be trusted to do the right thing without having to pander after votes. This was consistent with historical Progressive thinking.
• There would be a state of permanent emergency, with a world divided into two hostile camps.
• The government would be a caring institution, taking public action to ameliorate individual distress. However, it was not going to be pleasant to go to the government. It was something to do when all other options for help had been exhausted.
• Aggregate demand was the bottleneck issue. We had just lived through more than a decade where the supply was apparently there, but not enough people could pay for it. Thus, the central feature of the economy was demand management.
• The economy was going to be about Big: Big Business, Big Labor, Big Education, Big Government. We had seen how mass production had enabled victory in World War II.

I have discussed the economic aspects of the social contract in a previous post. Please also note that this is not just an economic contract, but also a social contract. I will help you, but you will be someone I want to help. You will not shout from the rooftops about how different you are; people more want to help those that are like them than those that are different to them.

Was there really a social contract? I maintain there was. My mother and others like her recognized its existence and lived up to the obligations as well as reaping the benefits. They acted in recognition of the existence of the social contract. And they howled mightily when, starting in the 1960s, other people stopped honoring it.

However, there was a problem with the justice of social contract, starting with who was permanently on the outside looking in.

The New White Deal

The people who formed the coalition that established the New Deal Social Contract had enough sense to know that there could never be enough benefits for everyone. They needed a second class of citizens who would not have access to the benefits, and they trained their sights on blacks and Hispanics.

Photo by Margaret Bourke-White, 1937. If you were in this line, would you think the American Way was open to you?

I have no evidence that FDR was himself racist. He was completely pragmatic. He was confronted with a congressional bloc lead by politicians including Senators Theodore Bilbo, Ellison “Cotton Ed” Smith and Richard Russell and Representatives John Rankin and Carl Vinson (Wikipedia does not discuss Vinson’s racial record, but this link does). Forced to choose between channeling the New Deal along racial lines or having his proposals blocked in Congress, Roosevelt chose the former and outsourced his conscience to Eleanor.

In a 2015 article, Nick Chiles enumerated the ways in which the New Deal excluded black people:

1. Authorizing lower pay scales for black workers under the National Industrial Recovery Act;
2. Enforcing segregated housing through Federal Housing Administration policy;
3. Enforcing segregation and restricting black access to jobs in the Civilian Conservation Corps;
4. Excluding employment categories dominated by blacks (and Mexicans) — agricultural and domestic workers — from Social Security coverage;
5. Paying farm owners to leave land fallow, which forced black sharecroppers and tenant farmers off the land;*
6. Failing to support anti-lynching legislation for fear of alienating Southern Democratic congressmen whose support was needed;
7. Failing to monitor and enforce equitable distribution of aid to black applicants during the Depression;
8. Widening the economic gap between white and black Americans;
9. Excluding blacks veterans from G.I. benefits after World War II.**

* White sharecroppers and tenant farmers were similarly affected.
** The G.I. Bill was not, strictly speaking, a New Deal program.

Chiles’ claims are supported by others. I would like to find more data supporting — or refuting — the claim that blacks experienced higher unemployment than whites during the Depression. However, we can find supporting evidence that blacks were lynched more often than whites during that time, even using reported data. The New Deal also gave us the government-sanctioned practice of redlining in the underwriting of home mortgages.

What we learned about the Depression in our lily-white suburb was that, yes, there was incidental racial injustice going on. But if you were facing up the barrel of that injustice, it wasn’t incidental to your life — it was central. The history we were taught was dishonest about this. This is why, when many black people hear the slogan “Make America great again”, they ask in all seriousness: When was it great the first time?

Whose Justice?

By 1960, a new generation had reached adulthood that had not directly experienced the Depression, with another on the way. Unlike the GI Generation, these new adults were not willing to trade conformity for economic security, and the racial injustice of Jim Crow bothered them. They had an idea: use the machinery of government to rewrite the social contract to make it more equitable and inclusive.

However, there was a fundamental problem: Government does not have the prerogative to unilaterally rewrite a social contract — certainly not in a political system that professes that government derives its legitimacy from the consent of the governed. You tear the whole thing up and start over with a new coalition making a new agreement. This is what the new generation of Democrats was dishonest about.

The descendants of the New Deal coalition did not want the whole thing torn up. They had lived under its obligations and they wanted its benefits. The new generation Democrats took to shaming them on racial justice terms. This was not only done in the political arena, but in popular culture. All in the Family was a running catalog of this. In one episode in the late 70s, Archie hollers after Mike to just wait until 1980 when Reagan gets elected. That Archie, he just will never learn.

Fast forward to 2016. The descendants of the New Deal coalition have been pushed out of the Democratic Party bag and baggage. They’re done being shamed and they’re done with getting the bill for injustices that they don’t believe they were ever a party to. Truth be told, they’re also done with Republicans who blow sunshine at them during campaigns and then proceed to ignore their interests while making kissy-face to donors and Chamber-of-commerce types once elected. They’re angry and they’re desperate.

Many of these people feel pushed to the wall and betrayed. There is really nothing conservative about them. They want their New Deal Social Contract back. They liked the large caring government that professed to care about them. They were ready to hear anyone who comes along and seems like a real alternative to standard-issue Democrats who have betrayed them or Republicans who hearken back to Mellon’s liquidationism. They were open to anyone who offered a chance of an alternative, knowing that the odds were 100-0 against them with the usual crop of candidates.

If you want to understand anyone could have voted for Donald Trump for president, this is the place to start.

 

 

US Constitiution 1.1

In 1979, Theodore Lowi released the second edition of his book The End of Liberalism: The Second Republic of the United States. Lowi teaches at Cornell and would be characterized as a liberal; for example, he advocates government planning. However, he is also a proponent of the rule of law. The evolution of the political processes away from law and representative government toward bargaining and interest-group government began to trouble him by the time he wrote the first edition of the book ten years earlier.

Where contemporaries saw government departure from formalism as pragmatic, Lowi saw it as corrupt. Where reality deviates from formalism, we find arbitrariness, influence-peddling and injustice. He wrote the best defense of political idealism I have seen:

The gap between form and reality gives rise to cynicism, for informality means that some will escape their fate better than others. There has, as a consequence, always been cynicism toward public institutions in the United States, and this, too, is a good thing, since a little cynicism is the parent of healthy sophistication. However, when the informal is elevated to a positive virtue, and when the gap between the formal and the informal grows wider, and when the hard-won access of individuals and groups becomes a share of official authority, cynicism unavoidably curdles into distrust. Legitimacy can be defined as the distance between form and reality. How much spread can a democratic system tolerate and remain both democratic and legitimate?
— The End of Liberalism, p. 297.

Although he did not use the term, the mechanisms that Lowi describes are that of corporatism: public-private partnerships in rule-making and governance. Although Lowi did not name it, he described it well enough:

The state grows, but the opportunities for sponsorship and privilege grow proportionately. Power goes up, but in the form of personal plunder rather than public choice. If would not be accurate to evaluate this model as “socialism for the rich and capitalism for the poor,” because many thousands of low-income persons and groups have provided within the system. The more accurate characterization might be “socialism for the organized, capitalism for the unorganized.”
— Ibid, pp. 278-9.

For the second edition, Lowi reverse engineered a new constitution for the government from actual practice, in an attempt to highlight the spread between form and reality.

There ought to be a national presence in every aspect of the lives of American citizens. National power is no longer a necessary evil; it is a positive virtue.

Article I. It is the primary purpose of this national government to provide domestic tranquility by reducing risk. This risk may be physical or it may be fiscal. In order to fulfill this sacred obligation, the national government shall be deemed to have sufficient power to eliminate threats from the environment through regulation, and to eliminate threats from economic uncertainty through insurance.

Article II. The separation of powers to the contrary notwithstanding, the center of this national government is the presidency. Said office is authorized to use any powers, real or imagined, to set our nation to rights by making any rules or regulations the president deems appropriate; the president may subdelegate this authority to any other official or agency. The right to make all such rules and regulations is based upon the assumption in this constitution that the office of the presidency embodies the will of the real majority of the American nation.

Article III. Congress exists, but only as a consensual body. Congress possesses all legislative authority, but should limit itself to the delegation of broad grants of unstructured authority to the president. Congress must take care never to draft a careful and precise statute because this would interfere with the judgment of the president and his professional and full-time administrators.

Article IV. There exists a separate administrative branch composed of persons whose right to govern is based upon two principles: (1) the delegation of power flowing from Congress, and (2) the authority inherent in professional training and promotion through an administrative hierarchy. Congress and the courts may provide for administrative procedures and have the power to review agencies for their observance of these procedures; but in no instance should Congress or the courts attempt to displace the judgment of the administrators with their own.

Article V. The judicial branch is responsible for two functions:
1. To preserve the procedural rights of citizens before all federal courts, state and local courts and administrative agencies, and
2. To apply the Fourteenth Amendment of the 1787 Constitution as a natural-law defense of all substantive and procedural rights.
The appellate courts shall exercise vigorous judicial review of all state and local government and court decisions, but in no instance shall the courts review the constitutionality of Congress’ grants of authority to the president or to the federal administrative agencies.

Article VI. The public interest shall be defined by the satisfaction of the voters in their constituencies. The test of the public interest is re-election.

Article VII. Article VI to the contrary notwithstanding, actual policymaking will not come from voter preferences or congressional enactments but from a process of tripartite bargaining between the specialized administrators, relevant members of Congress and the representatives of self-selected organized interests.

How did he do? How closely did he bring the form of his constitution to matches what actually happens?

Bad History

This picture came my way on Facebook. It was too bad not to hang on to.

.. when you did what?

What’s wrong with it? Well, let’s review.

Ending the Depression

Roosevelt did not end the Depression; World War II did. See this article for the actual unemployment data.

Unemployment was never under 10% from the time FDR took office until war spending began in earnest in 1940. The economy went into a relapse in 1937, as Roosevelt’s Second New Deal created uncertainty and investment slowed. Amity Shlaes summarized it this way:

The story of the mid-1930s is the story of a heroic economy struggling to do recuperate but failing to do so because of perverse federal policy.
— Shlaes, The Forgotten Man, p. 392.

This is not a story you will hear on PBS specials or read in a high school textbook. But both the statistics and the memory of the generation that lived through the Depression substantiate it. My mother and others of her age cohort used to say that wars were good for the economy. That is obviously untrue: in a war, you take wealth out into a field and blow it up. But that is the way their generation experienced relief from the Great Depression.

Creating the Middle Class

In what universe do people making minimum wage constitute the middle class? The middle class as we came to know it by 1970 was created by World War II and the economic boom that followed it.

At the end of the war, it was not clear at all that there would be economic prosperity. The outcome considered most likely was inflation once prices were free to rise and money earned in wartime production that could not have been spent during the war was loosed to bid up prices. This did not happen, and the fact that it did not was the accomplishment of Harry Truman and Federal Reserve Chairman Marriner Eccles.

Ending Elderly Poverty

I reckon that this claim is factual, as far as it goes. Over the next 80 years, Social Security did end elderly poverty — by transferring wealth from the young. If this scheme were managed by a private enterprise, it would be fraud; but since the government is in charge, everything is just dandy.

Was Roosevelt a Socialist?

Many of his opponents accused Roosevelt of being a socialist, but the evidence does not really stack up.

You know I am a juggler, and I never let my right hand know what my left hand does … and furthermore I am perfectly willing to mislead and tell untruths if it will help win the war.
— FDR to Henry Morgenthau, 1942. Quoted in Fleming, The New Dealers’ War.

Before the war, Roosevelt was willing to mislead if it would help perpetuate him in office. Even if he had left a body of political thought, it would be risky to put too much stock in it. Roosevelt has to be evaluated on his actions.

The actions of the Roosevelt administration were fundamentally corporatist. Under corporatism, government, business, labor, education and social organizations would work together to plan the economy and implement these plans. What’s wrong with that? For starters, plan the economy is a pleasant euphemism for plan your daily life.

At the time, the smart money believed that planned states had inherent advantages over liberal republics because the former could realize cohesive action. This was augmented by the work of Ferdinand Tönnies (1855-1936), one of the early thinkers in sociology. Tönnies distinguished between the Gesellschaft and the Gemeinschaft. To give a quick-and-dirty distinction, think of the Gesellschaft as a market town or bustling port, whereas the Gemeinschaft is closer to a rural village with deep traditions, where “everybody knows everybody, and everybody looks after everybody.” Also where everybody sticks their nose into everybody else’s business, but some people like that.

 The 1930’s are remembered as the Red Decade. Democracy itself appeared to be inadequate to the task of managing the modern nation. The idea of Gemeinschaft was in vogue, and in Italy, Mussolini appeared to be having success implementing his vision of corporatism — if you didn’t look too closely or ask what happened to people who didn’t get with the program.

The form of U.S. corporatism was thus gradual, incremental, societal corporatism, not the abrupt, authoritarian state corporatism of so many of the interwar European countries. And it was “loose”: pragmatic, piecemeal, nonideological, pluralist, with few sanctions or tight controls, and very American. It tended to be advisory rather than compulsory, but that changed over time.
— Howard Wiarda, Corporatism and Comparative Politics, p. 138.

Corporatism offered Roosevelt limitless avenues to expand his power. The government could sit as mediator and honest broker in disputes between two large industries, or between big business and big labor.

However, World War II permanently associated corporatism with fascism, and the National Socialist implementation of Gemeinschaft led to war and genocide. That did not mean the methods had to be abandoned, just that they needed to be rebranded and repositioned.

Why Don’t People Know This?

Why should children believe what they learn in American history, if their textbooks are full of distortions and lies? Why should they bother to learn it?
Luckily, … they don’t.
— James Loewen, Lies My Teacher Told Me, p. 297.

Very few people want to hear that FDR’s programs were not effective in defeating the Depression. In part, this is because Progressives have a preponderance of control of the education system and the media, but there is a more basic reason. If it took a global war to see off the Depression of the 30’s, what will it take to defeat the next one? The fact is that we don’t know how to cure a large-scale economic depression, which is why government policy has been focused on making sure another one does not happen.

Books about the Roosevelt administration typically concentrate on what historians call the First New Deal, which ended in 1935 with the Schechter decision that voided Title I of the National Industrial Recovery Act. Jonathan Alter’s The Defining Moment focuses on the first Hundred Days. Adam Cohen’s Nothing to Fear contains one chapter that covers the time after 1933; it summarizes the standard legislative achievements that are revered among Progressives, including the Social Security Act, but does not discuss their effectiveness. Only Amity Shlaes stands out as a historian of the entire Depression.

The reason why we need to get the history right is simple. If we don’t even understand the history, we have almost no chance of learning from past mistakes. If we tell ourselves that the actions were not really mistakes, there is nothing to learn from.

Post WW2 Political Economy

The Great Depression was a profound crisis for the nation. Many people in cities and farms were affected by economic dislocation and there did not seem to be any relief. Not only did it appear that capitalism was finished, but the political future of America as a republic was questioned.

Franklin Delano Roosevelt is remembered for taking action to lead the nation out of the Depression. Yet the various programs of the New Deal were often contradictory. Sometimes FDR wanted to inject spending through programs, but at other times he wanted to balance the federal budget. Most of his efforts were directed to maintaining wage and price levels by creating cartels using private-public partnerships. The crisis of the depression was not solved by the New Deal, but by the onset of World War II. The GI generation knew this, which is why they believed that wars were good for the economy.

Unemployment during the depression, seasonally adjusted. Source: Federal Reserve Bank of St. Louis.

After the war, it was clear that any satisfactory political enterprise would have to address continued full employment. The Employment Act of 1946 established this idea as law. Yet how was government to achieve this? Government, at least in the United States, is not a wealth-producing entity (In nations such as the Soviet Union, government was a wealth-producing entity, and used its police power to create slave labor camps to produce wealth for itself). Programs such as the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) could provide temporary relief in the face of a crisis, but could not be long-term solutions without fundamentally changing the nature of American politics, economics and society. The government had to engage the assistance of the private sector.

Combining this drive with the experience of the war, in which American industry had mobilized to overwhelm the Axis economically, the answer took shape. It would be a public-private partnership to engage all citizens — OK, all white citizens — and get them invested in the stability of the American political economy. It worked like this:

The fundamental relationships that held it all together.

Government relies on businesses to keep citizens employed. These citizens then consume and vote. Being contented and free from want, these citizens spend predictably and vote for politicians who will maintain a business-friendly political economy. Government dispenses patronage to businesses (the bigger the business, the better), which then trickles down to citizen labor. Citizens vote to maintain a system that keeps standards of living high and the wolf away from the door. As long as nobody panics and breaks formation, we’ll be fine.

Necessary Conditions

In order for this to work, there were a number of requirements. These requirements became part of the social contract.

Job Creation

Businesses have to do their bit and hire as many people as possible. If businesses go around getting rid of “unnecessary” workers, these displaced workers become receptive to politicians agitating to change the system which is no longer delivering for them. Then the whole arrangement unravels.

Scale

Price’s Second Law: Mass man must be served by mass means.
— Roger Price, The Great Roob Revolution, p. 14.

We buried the Germans and Japanese in production. There is a lesson in that. Everyone can be happy as long as everyone wants the same thing. Then we can achieve economies of scale, simple consumer markets and a predictable economy. If people want start wanting highly differentiated products or shifting their preferences, chaos follows. Business managers can’t make predictable investment decisions. They start worrying about their expenses — particularly that huge labor expense.

Big business is the key to this system. A large business can create disproportionately more employment than a collection of small businesses, because the large business can afford it. The large business is better positioned to manage what are, under this social contract, essentially fixed costs.

Producer Focus

In order to keep this going, producers have to be favored over consumers. It helps if almost all the consumers are someone else’s producers. The producer has to come first, or there will be no production. As David Frum wrote describing pre-1970 America:

You didn’t like Chevrolets? Tough. Your kid was home sick and wanted to watch a cartoon at ten on a weekday morning? Also tough. You wanted a checking account that paid interest? Again tough. You needed to pay less than $900 for an economy ticket to Paris? Tough once more.
— David Frum, How We Got Here, p. xxiv.

Similarly, producers come before the environment. Yeah, the Passaic River is a fetid trough of industrial waste. Back in the day, unemployed people could have lived in cardboard shacks on the banks of the river, which would have been very clean. You want that back?

Corporatism

Business has to get something in order to be called upon to play its part in this social contract. Businesses receive patronage from the government in the form of defense contracts, regulation decisions and other favorable concessions.

To keep business from running away with the show, let’s have organized labor. Government becomes the honest broker, keeping big business and big labor seated at the table and talking to one another.

Government dispenses patronage to organizations, preferably big organizations. If you are not part of an organization, you have no access to patronage. This is a hallmark of a corporatist political system.

Closed Domestic System

You can’t have global competition with this social contract, because global businesses don’t employ American workers and are not invested in American politics. It’s kind of like Chicago on a national scale: you live here, you work here and you vote here — plus you spend your money on products made here.

Good news on this front: We just fought the most destructive war in recent history. Germany, France, Japan and just about all the other industrial nations are in ruins. Even Britain has had her economic completely trashed by the demands of fighting a global war. Everyone else is trying to climb back into the industrial age. There is no global competition for us.

Socialized Risk

If society depends on big businesses being big employers, then you can’t just stand by and watch a big business go down the drain. What will happen to all those workers? So big business comes to understand that profit-and-loss discipline doesn’t really apply to them. The government has to take action to prop up a big business. Action is legally justified under the Employment Act of 1946.

Businesses will still apply P&L discipline to managers who are not in the inner circle. This is the origin of the Firing Line: if you’re below the Firing Line and you don’t make your numbers, you get fired; if you’re above the Firing Line and you don’t make your numbers, you fire someone.

Cherry Picking

For about twenty years — a full generation — this appeared to work. Then new people, who had never experienced the Depression, came into adulthood. The GI generation, that remembered the Depression, was prepared to put up with the product quality issues, the conformity and the pollution that this system required. Their successors were not. Some people also began to get concerned about all the American citizens who were left out of this prosperity party.

People started to want changes. But you can’t unilaterally renegotiate a social contract, or you won’t have a social contract. If you can go off and do your own thing without taking on risk, what am I doing trying to fit into an organization in order to have security? If you can demand consumerism and clean rivers, I can start sourcing product overseas.

Once uncertainty enters consumer markets, businesses serving these markets start thinking twice about having large employment levels. Then labor is no longer a fixed cost, but often once of the easiest costs to reduce.

I am not arguing for going back to the post-New Deal social contract. I am not calling for a return to a conformist society, industrial pollution or take-it-or-leave-it consumer markets. However, we have to understand what the social contract required and what the costs are of giving it up. Failure to do this results in confused thinking, inconsistent policy and wild political demagogues claiming to be able to restore the benefits of the social contract without the costs.

Look at the preceding illustration showing the mutually supporting triangular relationship among government, business and the populace. Now start removing the arrows and think about what becomes of that relationship. That is the story of America since the mid-1960s.

Will the Real FDR Please Stand Up?

The Bernie Sanders campaign is seeking to make the Senator’s self-described socialism palatable by drawing parallels to Franklin Delano Roosevelt, pointing out that FDR’s enemies called him a socialist in his day.

Essential continuity of thought.

There is some merit to this positioning, but what is there to learn about FDR and his policies? The memory of FDR that is kept alive in our high school history classes is a very incomplete picture of the man.

The key to understanding FDR is his own self-description:

You know I am a juggler, and I never let my right hand know what my left hand does … and furthermore I am perfectly willing to mislead and tell untruths if it will help win the war.
— FDR to Henry Morgenthau, 1942. Quoted in Fleming, The New Dealers’ War.

It was known at the time that Roosevelt was not only willing to put duplicity in service of a national war effort, but any other cause that would further his ends.

If [Roosevelt] became convinced tomorrow that coming out for cannibalism would get him the votes he needs so sorely, he would begin fattening a missionary in the White House yard come Wednesday.
— H. L. Mencken, 1936.

Roosevelt left no political testament that states his principles, but even if he had, we would be wise to treat it with skepticism. His book Looking Forward — a play, for those in the know, on the utopian science fiction novel Looking Backward — was essentially a repackage of previous speeches and articles he had written. The principles to which he committed himself in action can be briefly enumerated:

1. Power;
2. More power.

Bernie Sanders is much more ideological, whereas Roosevelt was totally pragmatic. Sanders has been a socialist through fair weather and foul. I have full confidence that Sanders’ positions in the campaign are those that he believes fully.

Roosevelt was much more willing to shift his positions and tack with prevailing winds. The most notorious example of this was his behavior in 1940-41, when he sensed the strong isolationist current in America but knew he could not allow Britain to fail. He promised the country to not become involved in foreign wars, while at the same time calling for every act he could get Congress to pass to aid Britain, China and, after June 1941, the Soviet Union. His embargo of oil to Japan pushed the Japanese into a corner where they had to either initiate war or back down.

Roosevelt had no animosity toward business, banks or Wall Street provided they would do what he wanted them to do. His practical course of action is properly understood as corporatism: a private-public partnership of Big Business, Big Labor, Big Government, Big Education and Big Media. While all the sloganeers of the 1930s talked about “the little guy”, the only way the little guy had any chance was to become a member of something big.

In 1935, the Supreme Court handed down the Schechter decision that invalidated the National Recovery Administration. FDR launched a vendetta against the Supreme Court that has altered juridical history from then to now. No court has ever challenged broad delegation from Congress to the executive branch since.

The 2016 candidate who best matches the principles displayed in the actions of FDR is Donald Trump. It is undoubtedly true that FDR would have considered Trump vulgar, but much of public life has changed in eighty years.

Liberal Capitalist Democracy

When words have no defined meanings, it is hard to hold an intelligent conversation. It should really be no surprise that our national conversation is so shrill and so inconclusive, when we can’t even agree on what the words mean.

Liberal

The words liberal and liberty have a common root, the Latin liber, meaning free. In late medieval England, a liberty was a piece of land in possession of a lord or abbot, into which royal officials such as sheriffs may not enter without permission of the possessor [Roberts and Roberts, A History of England, vol. 1, p. 339]. By 1630, the meaning of the word liberty had been broadened to mean freedom for anyone from domination by the king and court. A person who supported the rights of persons against the divine right of the monarch became a liberal.

The word was also used by opponents to include persons who did whatever they wanted without moral restraint, seeking to imply that those who would defy the will of the king today would act without any limits tomorrow. However, by 1700 there was general understanding that such a person was not a liberal, but a libertine.

In nineteenth century terms, the opposite of a liberal was a reactionary, someone who reacted to threats to established order and privilege. Liberals sought freedom of speech, assembly and worship, and to end slavery and involuntary servitude. Liberals wanted all people (well, initially all men, but the program did broaden to include women over time) to have the freedom to choose their residence, occupation and avocations.

In the United States in the 1930s, political activists who were not at all liberal adopted the term for themselves in order to give themselves the appearance of continuity with existing political traditions. They sought to paint themselves as the heirs of liberalism and their opponents as the party of reaction. The success model for this was Lenin: in 1903, after a split within the Russian Communist Party, he and his followers began calling themselves bolshevik (majority) and their opponents menshevik (minority), even though it was quite the other way around. Lenin and his followers had lost the vote, were marginalized within the party and ultimately sought exile abroad. However, through endless repetition, they have succeeded in being known to history as Bolsheviks.

Irving Babbitt had seen this coming: in his 1924 book Democracy and Leadership, he devoted an entire chapter to “True and False Liberals.”

It is a matter of no small importance in any case to be defective in one’s definition of liberty; for any defect here will be reflected in one’s definition of peace and justice; and the outlook for a society which has defective notions of peace and justice cannot be regarded as very promising. [p. 262]

The history of the twentieth century has demonstrated the wisdom of this observation.

Most people who we identify as liberals are not really liberals at all. They are prepared to sacrifice liberal goals such as individual self-determination and rule of law to ends that they consider to be higher priorities. This in itself does not invalidate their programs, but we should not mistake them for liberals. It confuses everyone’s thinking.

Capitalist

Capitalism was named by Marx and primarily defined by its detractors. It seems that those who understand capitalism go out and make money, while those who do not write content complaining how unfair the system is.

Partly as a result of the ideological conflicts during the Cold War, capitalism has typically been identified with private property, but not all economic systems featuring private ownership of property are inevitably capitalist. Manorialism, which was the economy of feudalism, included private property but also enforced servitude and restricted economic growth. Fascist states have typically allowed private ownership of property, but restricted how the individual could make use of it. You can have all the headaches of owning and caring for property; we’ll just tell you what you can and cannot do with it.

Capitalism could not take root until ordered conditions such as rule of law and enforcement of agreements over time — contracts — had been firmly established. Even today, in countries where one cannot count on enforcement of a contract, economic development is next to impossible.

The deployment of capital necessitates risk. Lenders have relatively low risk; they are senior to investors in their legal rights to recover their money. Investors have greater risk than lenders, and expect greater rewards when successful.

Owners have the greatest risk of all. Being an owner just means that you get paid after everyone else is paid, if there is anything left to pay you with. If not, you get the losses.

A person who can form capital and manage risks in its use can obtain rewards far greater than a hard-working person who takes no risks. This is the part that Marx, who was wedded to the labor theory of value, did not comprehend. Marx, along with many others, could not understand why a hard-working laborer should be rewarded less than a man who sent his money out to work for him. The answer is that you can find a thousand persons who are willing to work hard for every one person who is willing to take risks. However, without the person who is willing to take risks, you don’t get the benefit of capital. At best, you have people piling their surplus up and storing it under the mattress. At worst, you have a peasant society, where people eat their surplus when times are good and starve en masse when times are bad.

It is human nature to try to fob the risk off to someone else but keep the reward. However, this breaks capitalism. An economy that allows this is not capitalist, but something rather different. Theodore Lowi noticed this decades ago:

Privileges in the form of money or license or underwriting are granted to established interests, largely in order to keep them established, and largely done in the name of maintaining public order and avoiding disequilibrium. The state grows, but the opportunities for sponsorship and privilege grow proportionately. Power goes up, but in the form of personal plunder rather than public choice. It would not be accurate to evaluate this model as “socialism for the rich and capitalism for the poor,” because many thousands of low-income persons and groups have profited within the system. The more accurate characterization might be “socialism for the organized, capitalism for the unorganized.”
— Lowi, The End of Liberalism, 2nd ed. (1979), pp. 278-279.

Lowi developed his characterization of the new political economy this way:

Permanent receivership would simply involve public or joint public-private maintenance of the assets in their prebankrupt form and never disposing of them at all, regardless of inequities, inefficiencies, or costs of maintenance.
— Lowi, p. 279.

The enterprise in question need not be on the verge of bankruptcy or a candidate for liquidation. It could simply be large enough to represent a risk of dislocation to the economy if it were to collapse: too big to fail.

This could be called anticipatory receivership suggesting that the policy measures appropriate for the concept give the government a very special capacity to plan. Permanent receivership can be extended outward to include organizations that are not businesses. If there are public policies which are inspired by or can be understood in terms of this expanded definition, then we have all the elements of a state of permanent receivership.
— Lowi, pp. 279-280.

This is not capitalism at all. There is no creative destruction; it is a goal of policy to avoid destruction in any form. There is no risk, provided you are included in an approved group. There is no profit-and-loss discipline. And all organization, including but not limited to business enterprises, become “public-private partnerships” directed to obtain public policy goals. Properly understood, this is a species of corporatism:

A U.S.-style corporate state has arrived unsung, unheralded and almost never mentioned. The emergence of corporatism has to do with the parallel emergence of Big Labor, Big Agriculture, Big Business, Big Universities, Big Defense, Big Welfare and Big Government, all operating in a symbiotic relationship. It also has to do with the growth of modern social policy, with the government assuming a great role in the management of the economy, with the greater emphasis on group rights and group entitlements over individual rights, and with the growth of a large administrative-state regulatory apparatus.
— Howard J. Wiarda, Corporatism and Comparative Politics, p. 147.

Main Street may be mostly capitalist, but Wall Street and K Street are solidly corporatist.

Democracy

There is a material difference between a democracy and a republic. Although many people use the terms interchangeably, they are not in fact synonymous.

In The Federalist #10, James Madison makes clear that a republic can offer safeguards against mob rule that a democracy cannot.

A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking. Let us examine the points in which it varies from pure democracy, and we shall comprehend both the nature of the cure and the efficacy which it must derive from the Union.

The two great points of difference between a democracy and a republic are: first, the delegation of the government, in the latter, to a small number of citizens elected by the rest; secondly, the greater number of citizens, and greater sphere of country, over which the latter may be extended.

Neither Madison nor most of his contemporaries — possibly excepting Jefferson — saw direct democracy as a desirable outcome. This viewpoint was not limited to southern planters:

It is a besetting vice of democracies to substitute publick opinion for law. This is the usual form in which masses of men exhibit their tyranny. When the majority of the entire community commits this fault it is a sore grievance, but when local bodies, influenced by local interests, pretend to style themselves the publick, they are assuming powers that belong to the whole body of the people, and to them only under constitutional limitations. No tyranny of one, nor any tyranny of the few, is worse than this. All attempts in the publick, therefore, to do that which the publick has no right to do, should be frowned upon as the precise form in which tyranny is the most apt to be displayed in a democracy.
— James Fenimore Cooper, The American Democrat (1838), p. 71.

The framers of the Constitution sought safeguards to prevent the tyranny of the mob. They divided the government into distinct branches that could block the initiatives of the others. They also set specific limits on what each branch could do.

The framers also divided power between the federal government and the governments of the sovereign states. An unfortunate casualty of the civil war was this balance. The Secession Crisis discredited the concept of states’ rights, and there was a subsequent erosion of state power. In 1913, the 17th Amendment was ratified; this replaced the election of senators by state legislators with election by the citizens of the states directly. This, together with the increasing cost of running a statewide election campaign, has turned the Senate from the legislative body representing the states and a counterweight to the House of Representatives into an American House of Lords. The attempt by Caroline Kennedy to obtain the seat from New York being vacated by Hillary Clinton in 2008 was symptomatic of this state of affairs.

Even Irving Babbitt must be questioned; after all, he titled his book Democracy and Leadership, not Republicanism and Leadership. What did he really want? He clearly did not support egalitarian democracy:

If we go back, indeed, to the beginnings of our institutions, we find that America stood from the start for two different views of government that have their origin in different views of liberty and ultimately of human nature. The view that is set forth in the Declaration of Independence assumes that man has certain abstract rights; it has therefore important points of contact with the French revolutionary “idealism.” The view that inspired our Constitution, on the other hand, has much in common with Burke. If the first of these political philosophies is properly associated with Jefferson, the second has its most distinguished representative in Washington. The Jeffersonian liberal has faith in the goodness of the natural man, and so tends to overlook the need of a veto power either in the individual or in the state. The liberals of whom I have taken Washington to be the type are less expansive in their attitude toward the natural man. Just as man has a higher self that acts restrictively on his ordinary self, so, they hold, the state should have a higher or permanent self, embodied in institutions, that should set bounds to its ordinary self as expressed by the popular will at any moment. The contrast that I am establishing is, of course, that between a constitutional and a direct democracy.
— Babbitt, pp. 272-3.

More properly, it is the contrast between a republic and a democracy.

A direct democracy is, in fact, a sentimentalist fantasy. Each citizen must allocate her time among the demands of citizenship and other interests and occupations she may have. Some citizens will make the economic decision to relinquish participation in governance, delegating their voice to others and accepting the results. There can never be an effective direct democracy, because even if everyone can participate, not everyone will. This is not alleviated by technology; it is a natural consequence of the different priorities and time allocation decisions of the citizens. As Madison believed, a republic in which citizens were represented by those who had chosen to commit their time to the responsibility is the only practical approach to self-government.

The sentimentalist also ignores the possibility that some citizens may not view political responsibility as a good at all. Anyone who is out in the world paying attention knows some persons who would rather relinquish power to others than have to take responsibility for their own decisions. Such persons are easily led, and their scope for malignant effects on the body politic are much greater in a democracy than a republic.

Before calling for reforms to increase democracy, we must review whether democracy is something we really want. Our predecessors who founded this country did not, and there is no evidence that they were wrong.

Three Forces that Will Shape American Life

There are three forces that will determine our future. They are essential to our lives, and they are often misunderstood or underappreciated. They are ownership, accountability and risk.

Ownership

The term knowledge worker is generally credited to Peter Drucker, who had been writing about it back in 1959. There were knowledge workers before this: a military officer is a commander, but has also been a knowledge worker since at least Napoleonic times. Lawyers have always been knowledge workers. However, it was in the mid-twentieth century that knowledge work began to proliferate.

If you want to make your commanding officer look like an absolute fool, do exactly what he tells you to.
— Military precept

In order for a person to be effective in knowledge work, the person must be engaged. A person waiting to be told what to do will be a failure as a knowledge worker. For the person to be engaged, the person must feel that her contribution is wanted. You can’t have it both ways: you can’t have an engaged worker hanging on your every command. Without ownership of the task, engagement falls away.

Why is it that I always get the whole person when what I really want is a pair of hands?
— Attributed to Henry Ford

There has long been a tension in organizations over knowledge work. By its very definition, it does not admit detailed supervision. If the manager has to review every decision of the worker, then two are doing the job of one. The manager who attempts this will have a very small span of control. However, there is a conflict with the centripetal forces of the organization: status, privilege and the need for control.

The tension between ownership and control has never been fully resolved. Some management teams achieve a modus vivendi that allows their enterprise to succeed for a while, but ultimately the balance cannot be maintained. The organization either hardens into a controlling environment, or the lack of control causes it to burst at the seams.

That’s just how it always went with one of these new Silicon Valley hardware companies: once it showed promise, it ditched its visionary founder, who everyone deep down thought was a psycho anyway, and became a sane, ordinary place.
— Michael Lewis, The New New Thing, p. 47.

And sane, ordinary places get same, predictable results. Disengaged people hang around sane, ordinary places; engaged people leave at the first opportunity.

The problem also exists in the public space. The orthodoxy we learned in seventh grade civics says that power derives from the consent of the governed. Passive consent or active consent? It’s a harder question than it looks. From the evidence of recent experience, you can fool many more of the people much more of the time than we are comfortable with. But, having fooled them, you can’t credibly turn around and ask them to take responsibility for the results.

Accountability

You can find material praising accountability, but it is really more selective than commonly understood. Second-person accountability — accountability for you — is always a Good Thing. First-person accountability — accountability for me — is a trickier subject.

Clearly, when the outcome is positive, the person responsible is in favor of accountability. However, when the outcome is unfavorable, it becomes an orphan. There are always extenuating circumstances why I shouldn’t be held accountable for the bad outcome.

The American education establishment has shown thought leadership here, promoting the idea that only they can evaluate their own results. Only the professionals are equipped to hold themselves accountable. From this you make a living?

The problem with inadequate accountability is that no learning takes place. If no one is accountable, everyone does the same things they always did and hopes for a different outcome. “The definition of insanity is doing the same thing over and over, hoping for a different result.”

Risk

The story of the society over the past hundred years is the story of the attempt to remove risk from everyday life. It has not worked, and resulted in epic boredom. It has also caused people to no longer understand risk and how to manage the tradeoffs. The country has become risk-averse in to a level that cannot be sustained, that cannot allow it to function. We have also fixated on spectacular hazards with remote probabilities while being blind to less consequential hazards with higher probabilities.

Our modern middle class is the descendant of an older gentry composed of independent farmers, small businessmen, self-employed lawyers, doctors and ministers.
— Barbara Ehrenreich, Fear of Falling, pp. 78-79.

As Ehrenreich notes, independent farmers, small businessmen and self-employed lawyers faced business risk. The new middle class that arose since mid-century largely consisted of a credentialed salariat. This cohort is highly risk-averse but often does not recognize the risk it actually incurs. When I hear someone talking about buying stock in his own employer at market price, I know I am in the presence of someone who does not naturally think about risk.

Some nations have sought planning capacity by socializing production — one or more basic industries. Some may try planning by the socialization of natural resources, while others may socialize the delivery of central services. Some may socialize banks while others seek to socialize the distribution of goods. The United States has so far skirted all these alternatives in favor of socialization of its most valuable resource: risk.
— Theodore J. Lowi, The End of Liberalism (2nd ed.), p. 289.

At a macro level, the elimination of risk had produced, by 1960, a producer-centric economy with only the fiction of profit-and-loss discipline at the large corporate level. This ultimately resulted in bailouts for corporations such as Lockheed (1971) and Chrysler (1980). If the corporations were allowed to go under, where would all the workers go?

The economy can still be characterized as “socialism for the organized, capitalism for the unorganized,” as Lowi did in 1979. Patches of capitalism are observable in technology, where business mutates too fast for public policy and administration to keep up. The core of the economy, however, is managed with the goal of socializing risk. That is great for people who fail, but not so great for people who have to subsidize supporting those who fail.

Reducing risk through public policy, by regulation and underwriting, protects the underperforming and incompetent. It rewards them for holding the economy hostage. This approach suffers the same deficiencies as avoidance of accountability: what incentive does anyone have to learn, to do better next time?

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These three basic forces — ownership, accountability and risk — are out in the wild having real, if unseen, effects on everyday life. Left improperly understood, the will upturn the carefully crafted society that has been built in partial ignorance of them.