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January 25, 2013

The New New Deal

It’s the spirit of 1932: unsustainable transfers of wealth, vague new “rights” (billed to the taxpayer), and a record of failure. By Richard A. Epstein.


Eighty years ago, Franklin Roosevelt rode into office at the height of the Depression. In many ways, the election of 1932 had much in common with the recently concluded presidential race. The economic record from 1929 to 1933 was grim. Unemployment rates spiked to close to 25 percent from a pre-1929 figure of about 4 percent. World trade was down by about a third, partly in response to the ill-advised Smoot-Hawley tariffs of 1930, which sparked retaliation from around the globe. And persistent deflation on the order of 20 percent meant that many could not repay their debts.

The situation is nowhere near as desperate as it was then, but there is little doubt that the nation has become stagnant and uneasy. Real economic growth has slowed and the future probably holds higher levels of insecurity and lower rates of growth. Today’s parents are no longer confident their children will lead lives as fulfilling and prosperous as their own. Falling expectations lead to rising discontent, and discontent leads to clarion calls for action.

What can we learn from the not-quite-parallel set of events of Roosevelt’s New Deal days? Some comparisons come quickly to mind, given the conscious efforts of supporters of President Obama to hark back to Roosevelt’s most powerful rhetoric, most notably his 1944 State of the Union address calling for a “Second Bill of Rights.” AFL-CIO President Richard Trumka used similar language at the “Workers Stand for America” rally last year in Philadelphia.

Individuals taxed to supply decent wages, home, and health to others must forfeit their own right to reap the fruits of their labor.

But any analysis must take into account one stark difference: in 1932, Roosevelt could campaign as the outsider by attacking the record of the Republican incumbent, Herbert Hoover—who, ironically, was a progressive himself. At the Democratic National Convention, Roosevelt pledged himself “to a new deal for the American people. This is more than a political campaign. It is a call to arms.” The object of this common mission was “a more equitable opportunity to share in the distribution of national wealth.”

But Obama, forced to defend his record, was deprived of any fresh opportunity to plead for his team to be given a chance to implement an agenda of hope and change. Instead, he had to argue that his old team needed four more years to implement a program that had already generated so many dashed expectations over the previous four years.

CLASS WARFARE DEMANDS A VILLAIN

Roosevelt’s 1932 New Deal campaign was not limited to evocative and elevating speeches. Every campaign also needs villains—those whose misdeeds have frustrated the will of the people. Today, those villains are the “1 percent.” For Roosevelt, as he pointed out in his famous first inaugural address of March 1933, the villains were the “self-seekers”:

[These] rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous moneychangers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

On coming to Washington, Roosevelt used the language of war and religion to conclude that “the moneychangers have fled from their high seats in the temple of our civilization.” His reference to the Bible could not be clearer, for when Jesus came to Jerusalem, he too went into the temple of God to cast out the moneylenders, castigating them for turning a house of prayer into a den of thieves.

The parable plays into the New Deal story that all financial transactions are sterile exchanges over which, Roosevelt insisted, government must impose “a strict supervision of all banking and credits and investments,” in part to undo “the overbalance of population in our industrial centers.” But “our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy”—as if the two could be separated.

Roosevelt’s creation of public works programs to offset the decline in private spending did some modest good, far more than Obama’s bloated stimulus programs. But spending programs come and go. Roosevelt’s enduring achievement was to put government muscle behind the agriculture and labor cartels that persist to this very day. Roosevelt may not have understood why cartels are less efficient than monopolies—namely, because they set quotas to allocate some production to their least efficient members—but he did understand that cartels have a political pop that no monopoly firm could hope to match. A cartel can muster a large membership base to work overtime to bolster its political allies. In this regard, Trumka’s recent rallies and Obama’s backing of the ethanol coalition both take a page out of Roosevelt’s New Deal playbook.

“BILL OF RIGHTS,” PART 2: THE BILL COMES DUE

Unfortunately, Roosevelt never confronted the grim consequences of his economic initiatives. But he was without peer in packaging partisan programs in the language of universal truths. His use of the phrase “Second Bill of Rights” tied his political vision to one of this nation’s greatest achievements, the Constitution’s Bill of Rights. Roosevelt did so, however, without the slightest awareness that implementing Bill of Rights 2.0 necessarily undermines Bill of Rights 1.0.

His devilishly simple strategy was to list all the wonderful benefits that individuals could claim under 2.0 without stating what correlative duties were needed to generate these new rights—or who would foot the bill for them. His list of protected interests under 2.0 is perfectly tailored to his political constituency:

The right to earn enough to provide adequate food and clothing and recreation;
The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
The right of every family to a decent home;
The right to adequate medical care and the opportunity to achieve and enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.
All of these rights spell security…

All of these are positive rights, which means necessarily that some unidentified individuals or groups have the duty to provide decent wages, home, health, and education to the people. The individual so taxed can discharge that duty only by forfeiting his own right to reap the fruits of his own labor. Yet Roosevelt left the incidence and size of these hefty correlative duties unaddressed.

We are witnessing today a modern rerun of Roosevelt’s incomplete strategy. The health care plan dubbed ObamaCare, for instance, designated a generous set of “essential health benefits” to a large number of individuals entitled to affordable care on the newly created government exchanges. But these benefits cannot be funded with higher taxes on the “millionaires and billionaires,” whose combined wealth falls short. So what duty will undergird the new right?

This sort of funding crisis could never arise under Bill of Rights 1.0, whose correlative duties are negative—or, put another way, they impose a “keep off” sign on other people. If I have the freedom of speech, your duty is to forbear from disrupting the speech with force, and vice versa. Each of us can demand forbearance from the use of force by all others. If freedom of contract allows me to take whatever job I wish from any employer, your job is not to block the door because the lower wages offered by the employer amount to “unfair competition” to the higher wages I could command elsewhere. Government’s mission is to collect enough in taxes that it can create the social institutions that support these rights.

Vilifying the rich, attacking “outsourcers,” imposing a rich, unsustainable set of benefits: all this should end.

The “social security” championed in Bill of Rights 2.0 imposes far more extensive correlative duties, but only on select portions of the population. The taxes needed to sustain them cut into the productive wealth from which they are collected in the first place, which is one reason why Social Security (the name is no accident), Medicare, and Medicaid are all in financial distress today.

CLOSING THE BOOKS ON THE NEW DEAL

So it’s instructive to ask just how Roosevelt’s Second Bill of Rights fared in his time. For the duration of World War II, the economic demands were kept in check by the need to fight a common enemy. But once the war ended, the nation endured a sustained “strike wave” which led to a major shift to the Republicans in the 1946 election, one similar to that of 2010.

One major consequence of the Republican return to power was the passage of the Taft-Hartley Act, which cut back on the collective bargaining rights of unions and allowed the government to impose eighty-day “cooling off” periods to give mediators a chance to avert strikes. The legislation passed over President Harry Truman’s veto, but thereafter he used it a dozen times to impose cooling-off periods to prevent damaging strikes.

How could one expect the labor statutes not to foster industrial unrest? The basic premise of the New Deal labor reforms was that a regime of collective bargaining would force management to sit down with labor because of its statutory duty to bargain with the selected union. The statutory rigidity led to bitter confrontations, which a competitive market can avoid by making continuous wage adjustments in response to shifts in supply and demand.

But open markets hurt unions, which is why Trumka wants Congress to strengthen the unions’ bargaining position by card check—a streamlined way of organizing workers—and mandatory arbitration. Yet even Trumka must recognize that the growth of free trade around the world—which neither Roosevelt nor Obama much supported—has reduced union power to the point where strikes against profitable telecommunications companies such as Verizon and profitable manufacturing companies like Caterpillar cannot raise union wages above competitive levels.

Recent developments in labor relations show how changed market conditions offer welcome correctives to the New Deal approach. These correctives are at risk under any administration that tracks Roosevelt’s early agenda: vilify the rich as unproductive ciphers of society and work toward a progressive tax structure; be hostile toward the growth of international trade by denouncing firms that outsource jobs as the enemies of domestic labor; continue to work in favor of extensive agricultural subsidies for ethanol and other farm crops, no matter how great a disruption these impose on domestic and foreign food markets; and insist upon a rich set of unsustainable health care benefits through Medicare and Medicaid. Ironically, these are all manifestations of the “special interest” legislation heartily denounced by both Roosevelt and Obama.

It is time for the New Deal, which has championed cartels and massive, unsustainable wealth transfers in the name of the public good, to be brought to its long-overdue end.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas). © 2012 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.