Hofstadter on FDR

I’ve been reading Richard Hofstadter’s classic The American Political Tradition and the Men Who Made It. His analysis of Franklin Roosevelt’s handling of the Great Depression is immensely valuable, both for its humanization of the modern progressive hero, and its lessons for progressives today.

Even though Roosevelt’s administration is remembered as a testament to countercyclical Keynesian spending, Roosevelt campaigned as a deficit scold even as the Depression worsened throughout 1932. According to Hofstadter, Roosevelt “called the Hoover administration ‘the greatest spending Administration in peace time in all our history.’” Roosevelt implored the country to “have the courage . . . to stop borrowing to meet continuing deficits.”

Roosevelt was also originally resistant to taking extraordinary measures to rehabilitate the country’s banking system. “In his first press conference,” Hofstadter writes, “he was asked if he favored federal insurance of bank deposits. He said that he did not.” Roosevelt did not want government on the hook for the losses of bad banks. Nonetheless, he soon signed into law the Federal Deposit Insurance Corporation for precisely this purpose—“a concession to a bloc of insistent Western Senators,” Hofstadter explains.

Roosevelt made a slew of conflicting promises to the country about how he would rescue the economy. As Hofstadter put it: “All Roosevelt’s promises—to restore purchasing power and mass employment and relieve the needy and aid the farmer and raise agricultural prices and balance the budget and lower the tariff and continue protection—added up to a very discouraging performance to those who hoped for a coherent liberal program.”

While admiring progressives look back in retrospect at Roosevelt’s economic rescue effort as a dedicated application of government ingenuity and Keynesian economics, his course was hardly deliberate. “The New Deal will never be understood by anyone who looks for a single thread of policy,” Hofstadter argues, calling Roosevelt’s eventual economic program a “series of improvisations.”

John Maynard Keynes himself met with Roosevelt in 1934. FDR was overwhelmed by what he called Keynes’ “rigmarole of figures.” And Keynes came away disheartened, remarking that he had “supposed the President was more literate, economically speaking.”

Hofstadter divides Roosevelt’s economic policy into two distinct ideological approaches. The first New Deal, enacted between 1933 and 1934, tried to spark a supply-side recovery by adopting “the retrogressive idea of recovery through scarcity,” Hofstadter writes. The key recovery efforts during these years were business-friendly initiatives to boost agricultural and business revenues. The Agricultural Adjustment Act, for instance, set farm quotas to withhold supply and boost agricultural prices. “[T]he policy seemed to have solved the paradox of hunger in the midst of plenty only by doing away with plenty,” Hofstadter laments.

The heart of Roosevelt’s initial economic program was the National Recovery Act, which allowed businesses to set price agreements and production quotas in exchange for wage increases and improved working conditions. This idea originated with the Chamber of Commerce. Still, Roosevelt called the NRA the “most important and far-reaching legislation ever enacted by the American Congress . . . a supreme effort to stabilize for all time the many factors which make for the prosperity of the nation.”

The NRA took a decidedly business-friendly approach to economic stimulus. “It is not unfair to say that in essence the NRA embodied the conception of many businessmen that recovery was to be sought through systematic monopolization, high prices, and low production,” Hofstadter writes. Yet it is far from clear that the NRA had a positive impact on the economic recovery—the economy’s best years came in the two years after the Supreme Court ruled the NRA unconstitutional.

Roosevelt’s first New Deal was conceived as a “true concert of interests,” as he put it on the campaign trail—a consensus approach to benefit business, farmers, and workers alike. “Although he had adopted many novel, perhaps risky expedients,” Hofstadter observed, “he had avoided vital disturbances to the interests.” Roosevelt refused calls to resolve the banking crisis by nationalization the country’s banks, for example, and instead relied on government to prop up the private banking system.

Roosevelt’s eventual populist shift was driven by venom from the right and pressure from the left. Conservatives and wealthy interests wielded vehement political opposition against Roosevelt. “His political struggle with the ‘economic royalists’ soon became intensely personal,” Hofstadter writes.

From the left, influential populist Louisiana Senator Huey Long was clamoring for a more radical economic program and making noise about challenging Roosevelt’s reelection in 1936. Roosevelt’s political operatives thought Long had enough political support to swing the election. Long was also advocating for a “Share Our Wealth” platform that would have capped annual incomes at $1 million to fund a $2,500 annual basic income; provided for an old-age pension and free kindergarten through college; and government-provided automobiles and washing machines for every family.

Roosevelt wished to do something “to steal Long’s thunder” during the latter half of his first term in the White House. “The result,” Hofstadter writes, “was a sharp and sudden turn toward the left, the beginning of the second New Deal.” Roosevelt latched on to the Wagner Act, which had been floating around Congress for some time, to create the National Labor Relations Board. And he even sought a drastic Long-style “wealth tax.” And of course, Roosevelt piggybacked on Long’s old-age pension idea to enact Social Security.

After winning reelection, Roosevelt executed an ill-advised and harmful pivot toward austerity in 1937. Believing the economy to be on better ground, government spending was cut, and the Federal Reserve raised interest rates. This mistake, Hofstadter writes, produced “a sharp downward trend [in the economy], which reached alarming dimensions in early 1938.”

Roosevelt eventually realized his mistake, and sought new government spending that spring, which Congress quickly approved. It was not until 1940, Hofstadter writes, that Roosevelt “finally accepted in theory what he had long been doing in fact, admitted the responsibility of government retrenchment for the recession, credited the revival of spending for the revival in business, and in general discussed the problem of the federal budget in Keynesian terms.”

By 1944, Roosevelt was speaking of a new “economic bill of rights” and guaranteed full employment within the confines of “our democratic system of private enterprise.” “With the economy operating at fall speed under war time conditions,” Hofstadter writes, “it was easy for him to forget the incompleteness of recovery under the New Deal and to refer proudly to the manner in which ‘we . . . fought our way out of the economic crisis.’”

Reading Hofstadter’s then-fresh history (published in 1948) of the Roosevelt administration holds wisdom from our own recent history. Hofstadter’s warts-and-all account of Roosevelt’s handling of Great Depression doesn’t look all that dissimilar from Barack Obama’s economic recovery efforts eighty years later. Obama too gravitated toward consensus reforms, opting for a stimulus package tilted toward tax cuts and money for the states. Obama too resisted calls for bank nationalization, promoting financial liquidity and stress tests instead. Obama favored stabilizing industry rather than bailing out individual homeowners.

Unlike Roosevelt, Obama did not enjoy a pliant Congress willing to cede economic deference to the White House and rubberstamp new recovery legislation. Roosevelt was able to experiment with a wide variety of programs with quick congressional approval—and was even able to course correct after his premature pivot to austerity.

Obama, on the other hand, never got a second bite at the apple for more stimulus because of a polarized Congress exhausted after one round of new government spending in 2009. Obama’s administration was too quick to pronounce economic triumph, seeing “green shoots” around every corner in 2009, with Treasury Security Timothy Geithner declaring “Welcome to the Recovery” in August 2010—years before most Americans felt anything resembling a return to economic normalcy. Obama too spoke of the need for Washington “belt-tightening” as early as April 2009, in the depths of the recession. Obama acceded elite Washington deficit scare mongering and pivoted toward austerity too early in 2011. When he tried to counteract the continuing sluggish economy by proposing a jobs bill in September, Congress never even considered it.

Which is to say that Obama was a fallible and imperfect progressive president—just like Roosevelt. Progressives routinely chastised Obama for falling short of hopes that he’d be the second coming of FDR. But as Jonathan Chait notes in Audacity, liberals have a penchant for perpetual disappointment and despair. Even in Roosevelt’s time, there was a contingent of the political left that incessantly criticized him for enacting policy that was too conservative.

Where Roosevelt differed from Obama was in the external leftward pressure he faced. Roosevelt faced real and imminent electoral pressure to move in a more progressive direction. For all the dismay with Obama from some progressives, the left never mobilized to become a political counterforce.

Since Obama’s administration, the American left has begun mobilizing. Bernie Sanders mounted an insurgent candidacy against Hillary Clinton, and extracted policy concessions that shifted Democratic economic policy decidedly to the left. Sanders remains the country’s most popular politician and a major force in the Democratic Party. And the Democratic Socialists of America have seen an upsurge in enrollment and activism since Donald Trump’s victory.

Hofstadter’s honest contemporaneous appraisal of Roosevelt’s administration avoids the sanctification that so many progressives are prone to when lionizing the Democratic Party’s most towering figure of the twentieth century. Roosevelt was a great progressive, but was hardly without missteps and oversights in his economic management, and was made better by a mobilized left.

The lesson of Hofstadter’s take on FDR is that progressives should not be discredited for failing to meet a standard of purity and perfection—and that those same progressives might benefit immensely from being challenged in the policy sphere from an engaged left.

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The American tradition of big government

The myth that the American economy’s traditional and natural state is laissez-faire and government-free predominates over the conventional understanding of American history.  To some, a free market unencumbered by government meddling has forever been sacrosanct to the American project.  A lightly regulated economy is part and parcel of American freedom, it’s thought.

It turns out that this view deeply misunderstands our history, both far and recent.  Academics are challenging the conventional wisdom, showing that government action has been an integral part of the American economy throughout our history.  Jacob Hacker and Paul Pierson recently demonstrated in their book American Amnesia how government made the crucial public investments necessary to lay the foundation for broad-based rapid economic growth in the twentieth century.  The economy works best when the government works in tandem.

But the history of federal intervention into the market economy stretches back far earlier, dating from the earliest days of the republic.  In The Case for Big Government, Jeff Madrick lays out exactly that: a case for robust programmatic regulation and government action in the twenty-first century.  Like Hacker and Pierson, Madrick sees government action as an essential ingredient to a healthy and fair modern economy.

One particularly valuable section of Madrick’s case traces the history of federal intervention into the economy from the nation’s founding to the 1950s.  As Washington’s secretary of treasury, Alexander Hamilton favored a strong and active federal government that imposed excise taxes and tariffs on imports.  He endorsed public investments in infrastructure; fought for the establishment of a central bank; and promoted subsidies to get new industry off the ground.  He also injected the federal government into state economies to assume the war-time debts of the states.

Thomas Jefferson too came to promote an active government in the economy.  As a Virginia legislator, he proposed giving land grants to all citizens without property.  As president, he set aside federal land for schools and embraced federal financing of roads.  And of course, he greatly expanded the geographic sphere of the United States by stretching the bounds of his perceived constitutional authority to sign off on the Louisiana Purchase.

James Madison adjusted government’s role as the United States began to shift from an agricultural economy.  He believed wage labor would displace land ownership as the core of the economy, so he enacted a new tariff to protect domestic manufacturing.  He also supported a second national bank.

Notably, Madison would not support federally-funded internal improvements and transportation.  Both he and Jefferson thought that this required a constitutional amendment.  John Quincy Adams abandoned this reticence and made massive investments in roads and canals, setting the precedent for a federal role in developing the nation’s physical infrastructure.

Following this long early period of consistent federal intervention to provide the foundation and investment to develop a growing economy, the presidency of Andrew Jackson momentarily halted the pro-federal intervention consensus.  Under Jackson’s rugged individualist ethos, the federal government pivoted back toward laissez faire, devolving economic intervention to state and local government.  In the meantime, states took on important public transportation projects, like the Erie Canal in New York.  States financed more than two-thirds of the cost of new canals, and also provided generous land grants and subsidies to railroads.  These public investments were essential in developing the nation’s transportation network.

During the Reconstruction era after the Civil War, the federal government provided generous federal land grants to subsidize the development of transnational railroads.  These were expenditures akin to tax exemptions or tax credits today: revenue uncollected or resources un-monetized by the government to encourage certain private activity.  Even earlier, the government made generous land grants to colleges under the Morrill Act, and expanded the postal system.

Beginning in the late 1890s, the Progressive era saw government intervention into the economy accelerate.  At the federal level, government sought to break up industrial consolidation through anti-trust actions.  State and local governments increasingly invested in health programs, city services, education, and public goods like parks.

These investments saw huge gains, including a five-fold increase in the number of Americans completing high school between 1910 and 1930.  It also ushered in a shining new “age of sanitation” from public health investments to fight disease and invest in sewage systems.

During this time, states also began regulating the workplace to protect employees, imposing minimum wages, maximum hours for women, child labor laws, and widows’ pensions.  They undertook important regulations to protect retirees and consumers.  And they helped spread the reach of energy by establishing and regulating electric and gas utilities.

And of course, activist government came to a crescendo under Franklin Roosevelt’s New Deal.  On the heels of the Great Depression, Roosevelt created a flurry of new government programs to spark the economy and protect Americans’ livelihoods.  The FDIC came into being to insure bank deposits.  The SEC was created to patrol Wall Street.  Glass-Steagall was enacted to separate investment banks from plain vanilla commercial banks.  A national minimum wage guaranteed basic pay for all working Americans for the first time.  Robust public works and infrastructure investment put people back to work during the Depression while improving the nation’s physical stock.  The G.I. Bill made it easier for a generation of returning soldiers to pay for school and housing, and facilitated the modern middle-class life.  Social Security eliminated the elder poverty produced by laissez-faire capitalism and promised retirees a decent living.  And income taxes were cranked up to pay for the war effort and welfare state expansion.  Top marginal rates crept above 90 percent, creating a de facto maximum wage.

After the Roosevelt and Truman generation of welfare state dominance, President Eisenhower too took up moderate efforts to keep government involved in the economy.  He expanded Social Security to reach an additional ten million workers.  And he created the national highway system—yet another mass transportation project to facilitate economic activity and travel.

And so on.  The story of American economic triumph is one featuring a large and active role for government throughout.  As Madrick explains, government interventions in the economy have several benefits.  First, government can step in to provide public goods that would be under-provided by the market’s profit motive.  Second, government can be the focal point for necessary and useful coordination to create economies of scale, such as railroads, water systems, and highways.  Third, government can stimulate the economy by boosting the economic standing of workers, whether through a minimum wage, labor protections, or union rights.  And fourth, government intervention can provide macroeconomic stability through Keynesian demand management when the private sector turns sluggish.

All of which adds up to an economy that’s stronger, fairer, and more resilient.  As Madrick and others have shown, whether judged through the lens of historical experience or economic empirics, there has long been a compelling case for big government in the United States.