Champions of neoliberal economics are reversing New Deal economics

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Champions of neoliberal economics are reversing New Deal economics
By Ismael Hossein-zadeh
Online Journal Contributing Writer
Mar 15, 2010

The “golden” years of the U.S. economy in the immediate post-WW II period, along with the recovery and expansion of the economies of other industrialized countries, afforded the working class of these countries a decent, even middle-class, standard of living. Combined with extensive social safety-net programs such as the New Deal reforms in the U.S. and Social-Democratic reforms in Europe, the economic recovery and high employment rates of that period paved the way for a relatively cooperative relationship between the working and capitalist classes in these countries.

This led many pundits of historical developments to argue that perhaps Karl Marx had underestimated capitalism’s ability to carry out reform and share the fruits of economic progress with the poor and working class, thereby obviating revolution. They pointed to guaranteed employment and labor-management cooperation in a number of industrialized countries such as Germany and Japan as indications of “erroneous” Marxian judgment of the antagonistic capital-labor relationship.

These pundits failed, however, to point out the fact that the New Deal and Social-Democratic reforms that evolved out of the Great Depression and World War II were not courtesy of “benevolent” capitalism, voluntarily bestowed upon the poor and working people. They did not bother to explain that those reforms were, rather, the product of years of struggle by the working class and their allies against the brutalities of the capitalist system -- struggle that often entailed great sacrifices, including occasional loss of life. The anti-Depression and anti-war struggles of the 1930s and 1940s compelled the capitalist class to “carry out reform in order to prevent revolution,” to paraphrase President Franklin D. Roosevelt.

The laissez-faire doctrine, which firmly believed in the self-correcting ability of unbridled market mechanism, was the dominant economic principle before to the Great Depression. The financial crash of 1929 and the consequent long Depression shattered this long-held, religious-like belief. The Depression, precipitated largely by predatory loan-pushing and the resulting unsustainable bubble of asset (stock) prices, made living conditions for the overwhelming majority of people extremely difficult. The ensuing economic distress, in turn, precipitated popular unrest.

Large numbers of the discontented frequently took to the streets in the early 1930s. Their desire for change swelled the ranks of socialist, communist, and other opposition parties and groups. Left activists gained certain influence among labor ranks and workers’ movement for unionization, illegal in many industries until 1935, spread rapidly. Labor and other grassroots support for third party candidates in the 1932 presidential election resulted in unprecedented number of votes for those candidates. Third-party votes were even more impressive in congressional and local elections. “The union literature was like the labor literature of a century ago -- looking toward a successor to capitalism,” wrote the late Studs Terkel in his Hard Times: An Oral History of the Great Depression (Pantheon Books, p. 309).

Business and government leaders clearly understood the gravity of the situation and the need for action. The pressure from “below” created consensus and coalitions at the “top” as the need for reform to fend off revolution became evident. “ . . . F.D.R. was very significant in understanding how best to lead this sort of situation. . . . The industrialists who had some understanding recognized this right away. He could not have done what he did without the support of important elements of the wealthy class. They did not sabotage the programs. Just the opposite” (Ibid., pp. 268-69).

Two principles lay at the core of the ensuing big business-government consensus reforms, which came to be known as the New Deal reforms. The first was that Adam Smith’s “invisible hand” was not capable of resuscitating the badly depressed economy; it needed government’s visible hand. The second principle was that government intervention must be limited to stimulative and distributive measures, and that the management of industries and businesses should be left to the private sector. Facilitating and maintaining a certain level of purchasing power in the market was considered crucial to the New Deal package. While this would provide relief to the economically hard pressed, and thus reduce social tension, it would also stimulate the economy and promise stable growth and rising profitability.

Regardless of the degree of the effectiveness of the New Deal reform package, the fact remains that it rescued U.S. capitalism -- just as Social-Democratic reforms rescued the economies of West European countries. Combined with what the late Ernest Mandel called “extra-economic” factors (such as pliant labor leadership and peaceful trade unionism, establishment of the Bretton Woods international monetary system, Cold War ideology and the suppression or pacification of any possible dissent, and relative decline in the price of oil and other raw materials in the immediate post-WW II period), the New Deal and other government-sponsored reforms ushered in a period of rapid economic expansion that came to be known as the “golden years of US capitalism,” which lasted until around 1970.

While the pressure from below played a key role in compelling the ruling establishment to carry out the New Deal and other welfare state programs, a number of other factors also contributed to the realization of those programs. One such factor was the emergence of an alternative economic model to capitalism from the ruins of the two world wars and Great Depression: the centrally-planned economies of the Soviet Union and its allies. The emergence of the rival economic system, despite its bureaucratic and dictatorial character, further exposed the unjust character of market mechanism because while in the 1930s the capitalist West was suffering from economic depression, unemployment, and poverty, the Soviet and other centrally-planned economies were enjoying impressive rates of growth -- with no unemployment, homelessness, or hunger.

The popularity of the Soviet-type economic system at the time also meant that many of the colonial and other less-developed areas of the world combined their anti-colonial and anti-imperial national liberation struggles with demands for government-sponsored models of socialist-oriented or “non-capitalist” development. In the core capitalist countries of the West, too, demands for reform and voices of revolution were frequently heard during the widespread protest demonstrations of the 1930s. Anti-capitalist sentiments and demands to harness or to do away with the skittish, unreliable and, at times, brutal forces of market mechanism in favor of regulating and/or managing national economies were heard not only among the Left and working classes but also in the ranks of the middle and lower-middle classes.

Although the fear of total economic collapse in the face of the Depression, and the “threat of revolution,” compelled government and business leaders to embark on reform in order to fend off revolution, proponents of unbridled market mechanism never really accepted or reconciled with those reforms as permanent features of capitalism. Not surprisingly, soon after the Depression turned to expansion in the immediate postwar period, and Western capitalism regained its lost confidence, the financial oligarchy and government leaders began to introduce “restructuring” measures that would undermine the New Deal reforms and revive the pre-Depression model of market fundamentalism.

Just as the rival economic system of the Soviet Union and its allies, which guaranteed basic needs and job security for their citizens, indirectly contributed to the implementation of the New Deal and Social-Democratic reforms in the industrialized West, the collapse of that rival system is now contributing to the retrogressive process of reviving pre-Depression market orthodoxy. Not only has the collapse of the Soviet-type economies opened up vast markets and huge reservoirs of cheap labor in places such as the former Soviet Union, China, and India, it has also served as grounds for capitalist triumphalism -- and its self-assured or self-righteous promotion of trickledown economics.

Many people believe that efforts to reverse the New Deal reforms began with the arrival of Ronald Reagan in the White House in 1980. Evidence shows, however, that such efforts, pursued by both Republican and Democratic administrations, began long before the election of Ronald Reagan to the presidency. As Alan Nasser, professor emeritus of Political Economy and Philosophy at The Evergreen State College in Olympia (Washington), points out, “The foundations of neoliberalism were established in economic theory by liberal Democrats at the Brookings Institution, and in political practice by the Carter administration.”

Reagan picked the Democrat’s timid agenda of gradual return to economic liberalism and ran with it, replacing the rhetoric of capitalism-with-a-human-face with the imperious, self-righteous rhetoric of rugged individualism that greed and self-interest are virtues to be nurtured.

Neither President Clinton changed the course of neoliberal corporate welfare policies of Reaganomics, nor is President Obama hesitating to carry out those policies. This is clearly reflected in his administration’s supply-side restructuring policies whose core principle consists of redistributing national resources in favor of the rich and powerful -- cutting the critically-need social spending on basic needs to pay Wall Street gamblers and Pentagon contractors.

Perhaps a most sinister neoliberal strategy to roll back the New Deal and other poverty-reducing reforms has been deliberate creation of budget deficits in order to force cuts in social spending. This has often been accomplished by a combination of drastic tax cuts for the wealthy along with drastic hikes in military spending. As this combination creates big budget deficits, it then forces cuts in non-military public spending as a way to fill the budget gaps that are thus created.

The Obama administration has, indeed, escalated this creepy strategy by bailing out the Wall Street gamblers, financing multiple wars of choice and more than 800 military bases around the world, and then cutting social spending in an effort to reduce the national debt and budget deficits thus generated.

Another strategy of reviving the pre-New Deal laissez faire economics has been the increasing use of various schemes of outsourcing and privatization. The outsourcing of public services to private hands pervades all areas of state responsibility. Perhaps a most notorious example of this policy is the case of the Pentagon/security contracting. The services outsourced by the Pentagon are no longer limited to the relatively simple or routine tasks and responsibilities such as food and sanitation services. More importantly, they include contracts for services that are highly sophisticated and strategic in nature, such as the contracting of security services to corporate private armies, or modern-day mercenaries.

Reporting on the steadily rising trend of outsourcing, Scott Shane and Ron Nixon of the New York Times reported, “Without a public debate or formal policy decision, contractors have become a virtual fourth branch of government. On the rise for decades, spending on federal contracts has soared during the Bush administration, to about $400 billion last year from $207 billion in 2000, fueled by the war in Iraq, domestic security and Hurricane Katrina, but also by a philosophy that encourages outsourcing almost everything government does.”

The policy of privatization and outsourcing has led the U.S. Department of Housing and Urban Development (HUD), tasked with expanding the American dream of home ownership and affordable housing free from discrimination to people of modest means, to surreptitiously “move a chunk of that role to Wall Street since 2002,” reports Pam Martens, a freelance investigative reporter.

Martens further writes, “From 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman Brothers and Bear Stearns while providing the firms with wide latitude to foreclose, restructure or sell off in bundles to investors. HUD retained a minority interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002 and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005.

“What the program effectively did was allow the biggest retail banks in the country to get accelerated payment on their defaulted, FHA-insured, single family mortgage loans while allowing another set of the biggest investment banks to make huge profits in fees for bundling and selling off the loans as securitizations. Once the loans were securitized (sold off to investors) they were no longer the problem of HUD or the Wall Street bankers. The loans conveniently disappeared from the radar screen and the balance sheet. The family’s fate had been sold off by HUD to Wall Street in exchange for a small piece of the action. Wall Street then sold off the family’s fate to thousands of investors around the world for a large piece of the action.”

Outsourcing policies are bound to be further accelerated by the rising budget deficits of many states and municipalities, and their need to sell off public property or outsource their traditional services in order to raise funds to finance their budgetary needs. These include outsourcing the maintenance of parks, the management of toll roads, the collection of waste, the operation of municipal neighborhood centers, and more. For example, according to a recent MSNBC report, in the two years since Mitch Daniels was elected governor in Indiana, “the state has leased the 157-mile Indiana Toll Road to an outside company for the next 75 years for $3.8 billion, hired vendors for $1.16 billion over 10 years to process welfare applications, and brought in a company to serve food at a mental hospital.”

While cash-strapped states and other local governments can generate quick cash by privatizing public property or outsourcing public services, they forgo long-term opportunities of income generation from such properties and services.

Another Wall Street plot to rob the people of their social safety net programs is the recently renewed attack on the once-sacred entitled programs such as Social Security, Medicare and Medicaid. Having piled up huge sums of national debt and deficit (through bank bailouts, military spending, and tax cuts for the affluent), Wall Street champions, firmly ensconced in the Congress and the White House, are now singing the “fiscal responsibility” song as a prelude to chip away at Social Security and other entitlements. This ominous scheme is clearly reflected in President Obama’s recently appointed “National Commission on Fiscal Responsibility and Reform,” a bi-partisan group that is tasked with reviewing the Social Security and other entitlements in an effort to further “trim” social spending in order to pay for the sins of major banks and military contractor.

The bipartisan nature of the attack on Social Security indicates that the plan to undercut economic safety net programs cannot be blamed solely on the blatently neoliberal Republicans. It shows that, with few exceptions, Democrats are as much indebted and committed to the powerful financial interests as are Republicans. The neoliberal economic policies of the Obama administration, crafted by his economic team of ex-bankers/Wall Street advisors, should dispel any illusions that he is committed to “change” in favor of the people.

The New Deal and other basic needs programs were put in place not so much because of F.D.R.’s or Keynes’s genius, or the goodness of their heart, as they were because of the compelling pressure from the people. Freed (or feeling free) from that pressure, the government, as the executive body of the financial/economic oligarchy, is now trying to undermine those social safety net programs, and revive the pre-New Deal/pre-Keynesian economic orthodoxy, that is, the economic model of the survival of the fittest. This sinister, profit-driven effort at undermining the poor and working people’s hard-won basic needs programs can be stopped only through a renewed and compelling pressure from the grassroots -- pressure that must be exerted not through the Democratic Party machine but independent of the so-called two-party system.

Ismael Hossein-zadeh, author of The Political Economy of U.S. Militarism, teaches Economics at Drake University, Des Moines, Iowa.