New Deal Liberalism's Checkered Past and Uncertain Future

John Buell is a columnist for The Progressive Populist and a faculty adjunct at Cochise College. His most recent book is Politics, Religion, and Culture in an Anxious Age.

Why have US liberals and European social democrats been unable or unwilling to combat the fiscal austerity that so captivates the world? On one level the answer is obvious. A more strident, self-confident, and well-financed conservatism has been in the ascendance. But New Deal liberalism and European social democracy have had internal problems of their own. A radical liberalism must address not only its conservative foes but liberalism's own tensions and limitations.

It is easy to forget today just how surprising the triumph of the pro-capital ideology is. That ideology celebrated markets free of the state as the source of a dynamism and sensitivity that no government bureaucracy could achieve. That conviction seemed decimated by the events of the Great Depression. Conservatives' claim that in the proverbial long run things might work out seemed scant comfort to even many of the business leaders of the immediate post WWII generation.  That generation had experienced the success of World War II rearmament and even such unorthodox practices as price controls and rationing.

Yet Friedrich von Hayek, the principal architect of the market celebration, was too clever a polemicist not to have an answer. If one is losing the argument over economics, change the conversation.  He argued strenuously that whatever the success of wartime planning, any economic planning led inexorably to the excesses of totalitarianism.

Irish political economist Philip Pilkington, in a blog post for Naked Capitalism, counters: "One may as well make the observation that totalitarianism was often accompanied by arms build-up, therefore arms build-ups 'cause' totalitarianism. " He adds that it is absurd to suggest that "Hitler's Germany and Stalin's Soviet Union ­ had formed because a naïve democratic government had engaged in some economic planning that then got out of hand and resulted in tyranny."

Pilkington reminds us that the harsh economic demands of Versailles led to hyperinflation in Germany and the turmoil that aided Hitler. Nazi popularity waned once US loans began and inflation subsided, but after the crash of 1929, unemployment soared and was exacerbated by the Weimar government's misguided turn to austerity. Hitler resumed his disastrous march to power.

Pilkington, however, warns us: 

Hayek's delusion, with all its emotional overtones, spread quite effectively. Today whenever we encounter an anxiety-ridden Tea Partier, it is Hayek's delusion that we are hearing echoed through the chambers of history, albeit in slightly vulgarised form. It is the fear, distrust and paranoia which Hayek's portrait of a free society descending into barbarism evokes that captures the minds of those it touches. That it is completely deluded and ignorant of history only makes it more effective, like all propaganda, in its role as propaganda. The bigger the lie, the more emotional investment it requires to believe in and so the more it captures the uncritical and the emotionally weak.

Pilkington's analysis is provocative, but he perhaps places too much emphasis on the role of Hayek and the libertarians in the post World War II era. That era was marked by domestic and international bargains shaped by pragmatic business and political leaders who accepted at least some role for government and even unions. Hayek and his sympathizers did not go away. They provided a kind of background chorus ready and willing to reassert themselves when the opportunity presented itself, as it unfortunately did.

In the late forties even some US business elites recognized the need for stable market demand in order to sustain an ever more productive capitalism. They supported the economic reconstruction of their erstwhile enemies and tolerated moderate unionism. This Grand Bargain between labor and capital brought steady economic growth and declining inequality both in the US and Western Europe.

That bargain, however, contained the seeds of its own undoing. Revolutions were occurring in the developing world, upon whose resources the major industrial powers depended. On the economic front, Japan and Germany achieved remarkable gains in productivity while American workplaces experienced increasing turmoil. Unions had been granted the right to bargain over wages, but questions of workplace organization had been ruled out. Furthermore, minorities had been left out of the Grand Bargain and began to express their discontent amidst the growing general prosperity of the sixties. The consequence of turmoil abroad and at home was soaring government expenditures for a welfare/warfare state.

The late sixties and seventies are remembered for the conjunction of unsettling antiwar, civil rights, and feminist movements. But equally part of that story, both as a consequence and intensifier of the crisis, was the so-called stagflation, the bouts of inflation coincident with rising unemployment.

Economist Robert Vienneau, drawing on path- breaking work of Cambridge economist Nicholas Kaldor, asserts: "the prelude to stagflation was also marked by a significant explosion in commodity prices that occurred in the second half of 1972. Part of the problem was the failure of the harvest in the old Soviet Union in 1972-­1973 and the unexpectedly large purchases on world markets by the Soviet state. That was exacerbated by the uncertainty caused by the break up of the Bretton Woods system, after Richard Nixon had ended the convertibility of the US dollar to gold on August 15, 1971."

That breakup itself was rooted in part in the combination of massive military spending and social welfare expenditures designed to address the growing social revolutions of the period. That decision marked the US movement from a creditor nation to one burdened by a trade deficit. In a recent interview, Greek economist and author of The Global Minotaur, Yanis Varoufakis comments:

What Nixon recognised was that, once the US had become a deficit country, [its Bretton Woods era role as supplier of global credit] could no longer function as designed. Paul Volcker had identified with immense clarity America's new, stark choice: either it would have to shrink its economic and geopolitical reach (by adopting austerity measures for the purpose of reigning in the US trade deficit) or it would seek to maintain, indeed to expand, its hegemony by expanding its deficits and, at once, creating the circumstances that would allow the United States to remain the West's Surplus Recycler, only this time it would be recycling the surpluses of the rest of the world (Germany, Japan, the oil producing states and, later, China).

The US made the latter choice, with implications not only for its economy but for the future of its democratic politics as well.

Corporate Reconstruction of the World Economy

The breakdown of the international economic order created in the wake of World War II was something its authors had not anticipated. How was the US to move from being the world's greatest creditor to its biggest balance of trade debtor? We are still grappling with the consequences of this transformation. Getting to a new world where capital would flow into the US markets was difficult and stressful. Post Keynesian economist Nicholas Kaldor pointed out: "The end of Bretton Woods (the post-WWII international monetary system) was momentous: inflation expectations and instability on financial and commodity markets resulted, as well as a rise in commodity speculation as a hedge against inflation. This contributed to the cost-push inflation that was being felt in many countries after 1971. This could have been averted had the United States not dismantled its commodity buffer stock in the 1960s."

It could also have been mitigated had automatic cost of living escalators not been built into many standard labor contracts, thus making inflation self-sustaining.  Kaldor points out that "From 1968­-1971 there were the beginnings of inflationary pressures, in both wages and prices in many industrialised nations. There is of course an eternal struggle in modern capitalism between labour and capital over distribution of income, and sometimes this can get out of control. Post Keynesians recognise the need for some kind of [government mandated incomes policy] in modern capitalism, when wage gains become excessive..." I would add that such struggles can become especially intense as compensation for workers' lack of control over their own work process. An incomes policy that included profit sharing and participation in management could blunt wage price spirals without disadvantaging labor.

In the seventies, however, not only did inflationary surges coupled with job insecurity cause real harm, they also contravened the expectations of the architects of the grand compromise. Keynes himself saw a need for international and domestic institutions to regulate speculative finance and to compensate for and provide buffers against unpredictable bouts of underconsumption and overproduction. These would serve as employer of last resort with whatever it took.

However, American economists like Paul Samuelson had watered Keynes's insights down to a more conservative, market- oriented approach. Samuelson had assumed that except in dire circumstances capitalist economies could be managed via the Fed's adjustment of the interest rate to provide a stable and predictable tradeoff between inflation and unemployment.

It was just these predictable tradeoffs that stagflation contradicted. The ability — even during periods of sluggish growth — of large corporations to administer prices, of speculators to drive commodity prices higher, and of unions to gain wage increases in lieu of other privileges and satisfactions denied by the grand compromise undermined broader public faith in government. It thereby/encouraged a retreat to Hayek's pre-Keynesian economic orthodoxy.  Thus enter Paul Volker in the late seventies and a new economic agenda that as summarized by Varoufakis, meant that: "To attract wave upon wave of capital from Europe, Japan and the oil producing nations, the US had to ensure that the returns to capital moving to New York were superior to capital moving into Frankfurt, Paris or Tokyo. This required a few prerequisites: A lower US inflation rate, lower US price volatility, relatively lower US energy costs and lower remuneration for American workers."

The seventies were a time of economic uncertainty and doubt. Right wing think tanks pounced on the failures of American Keynesianism. They articulated a libertarian celebration of the market in order to blunt demands of labor and the left. Nonetheless, in practice they were not above support or at least toleration of a series of bailouts of investment banks and special subsidies and privileges to well placed corporate enterprise, such as military and pharmaceutical giants.

Even the organized Left, both in the US and much of Western Europe, played its role in this transformation. Varoufakis argues that Left and Labor parties "saw the rivers of privately minted money that the financial sector was printing (while labour was squeezed and real estate prices soared) and thought they could harness some of it in order to pursue social democratic policies! ...Let finance free to do as it pleased and then tap into some of its proceeds to fund the welfare state. That was their game and, at the time, it seemed to them a better idea, more fathomable, than having to be constantly in conflict with industrialists, seeking to tax them in order to redistribute. In contrast, bankers were quite easy going. As long as the leftist politicians let them do as they pleased.... Alas, to be allowed that small portion  [t]hey had to shed their distrust for unfettered financial, labour and real estate markets And so, when in 2008 the tsunamis of capital produced by Wall Street, the City and Frankfurt crashed and burnt, Europe¹s Social Democratic side of politics did not have the mental tools, or moral values, with which to subject the collapsing system to critical scrutiny."

This transformation relied on more than economic discourse. Brown University political economist Mark Blyth has argued in The Great Transformations, "In moments of crises when agents are uncertain about their interests they resort to repertoires of action that resonate with their core identities."  Corporate inspired attacks on "big government" resonated with nationalist and fundamentalist attacks on liberalism for its purported support of the racial and life style minorities emerging politically in the late sixties and seventies. In subsequent years immigration has emerged as a hot button issue that encouraged vilification of another minority and thereby defused potential radical economic currents.

A More Egalitarian Future?

However discouraging this journey may seem, it does point up several zones of vulnerability in the current order. Progress is being made on the social issues. Immigration has added to the political resources progressives might be able to mobilize. Occupy Wall Street has raised issues of corporate power, capital mobility, and finance regulation in ways that might resonate with a majority.  The collapse of manufacturing firms, traumatic as it is, also gives opportunities for direct forms of worker control and ownership, especially in a climate where bailout of financial institutions has become common.

Other religious currents have raised issues of social justice, and dissenting currents even within fundamentalist theologies have expressed concerns about the future of God's Creation.  The philosophical and theological grounds on which future coalitions may grow are shifting and contested, but respectful debate among those committed to a more egalitarian and sustainable future can strengthen the resolve.

Along these lines, paradoxically the environmental crisis may offer some hope on the political economy front. The inability of unregulated markets to handle these complex issues is becoming apparent to more of us along with the need for a government planned and financed green agenda. There are ample resources and causes with and for which to organize. Perhaps Hayek's greatest contribution is the lesson of perseverance even in dark times.