On Economics And Democracy

High unemployment is extremely dangerous.

Franklin Delano Roosevelt, photographed saving American democracy.

Earlier this week, I spoke at a gathering in Washington organized by Leah Hunt-Hendrix and Adam Jentleson on what they are calling “Inclusive Populism” — an economic agenda that defends the rights of all working people, whatever they may look like. I encourage everyone to read Blake Hounshell’s New York Times piece on the event, and I’ve included the full text of my talk below.

As you can see, the talk took a much wider orbit than the current macro landscape. But I want to emphasize the point I made about the recent infatuation with unemployment that has taken root in economic discourse. It is extremely dangerous for folks like Larry Summers and Sheila Bair to be invoking Paul Volcker and the spectre of double-digit unemployment as a solution to current price pressures. Deliberately engineering a wave of layoffs would not address the primary drivers of inflation, and high unemployment would damage the American social contract at a time when our democracy is obviously fragile, and authoritarianism is on the march around the globe. For democracy to survive, it has to work for working people.

Here’s the talk:

There are not many positive things that a 21st century Democrat can say about the Democratic Party of 1931. In the South, the party served as the administrative and enforcement mechanism for Jim Crow. Two sitting Democratic Senators were members of the Ku Klux Klan, and five other Democratic Senators had been hand-picked by the Klan over the course of the 1920s, when the Klan also successfully installed five Democratic Governors in states as far-flung as Georgia and Oregon.

Though Democratic Party machines in some Northern cities often did respond to the needs of immigrant communities, at the federal level, the party was ferociously anti-immigrant. In 1924, 158 House Democrats voted to radically curtail immigration, with only 37 rising in opposition. Senate Democrats voted 33 to 3 in favor of the crackdown.

Although women were allowed to vote in 1931, they did so over the objections of Southern Democrats, who torpedoed the vote for women’s suffrage four times in 1918 and 1919, weaponizing the filibuster to block the vote when they couldn’t marshal a majority.

Democratic Party economics were officially laissez-faire, but at both the state and federal level Democrats shoveled subsidies to bankers and railroad barons as they decried labor unions, labor laws and minimum wage regulations. The typical Southern Democrat was not economically liberal and socially conservative – he was economically conservative and socially violent.

It would be interesting if all these horrors added up to some kind of unstoppable electoral powerhouse, but in fact the Democratic party of 1931 was terrible at winning elections. It had enjoyed a Senate Majority in just 10 of the 66 years following the Civil War, and only two Democrats had served as president over that period – both leaving office amid near-comprehensive political washouts.

In short, in 1931, the Democratic Party was racist, incompetent and controlled by the wealthy – and had been for as long as anyone could remember.

But in 1936, a Democratic candidate for president won more than 60 percent of the popular vote, including majorities in 46 out of 48 states. Democrats found themselves in control of 77 Senate seats and 334 House Seats. Democrats won the Northern vote and the Southern vote, they won majorities of women and men. They won the Catholic vote and the Protestant vote, the Jewish vote and the atheist vote. Most striking of all, Democrats won the Black vote.

Just so we do not overstate this achievement: The Black vote barely existed in the South as a result of Jim Crow. But it should nevertheless stagger us that the Party of Confederate Rebellion managed to win a majority of Black voters in the north, and never really looked back. The basic coalition forged in the early 1930s only intensified over the ensuing decades, and would not begin to show sustained weakness until the 1970s. Millions of people who had never voted Democrat became die-hard, life-long Democrats.

The first point I want to emphasize here is that these converts were not stupid. They didn’t have amnesia. They knew exactly what the Democratic Party had been in 1931 and 1921 and 1861. But by 1936, they also knew what the Democratic Party had been in 1933, 1934 and 1935. And they liked that version quite a bit.

Historians of the New Deal often emphasize the unique good fortune that America enjoyed by electing Franklin Delano Roosevelt, and they are right to do so. It is very easy to imagine a different leader failing to rise to the moment, because that happened repeatedly after the Civil War. Ulysses S. Grant was an American hero in almost every dimension of his life, clearly among the finest men ever to hold the office of president, and he was just terrible at it.

But while FDR had plenty of personal charisma, the long-term success of his Democratic Party was built on the economic program he invented, which included much of the economic architecture of everyday American life that we often forget had to be invented at some point. Social Security, the minimum wage, the 30-year fixed-rate mortgage, affordable housing and public housing, deposit insurance, the SEC, a publicly controlled central bank, and on and on. Even things we have largely ceased to associate with economic policy, like the construction of schools, hospitals and post offices created infrastructure that enabled the rest of the system to work – and did so on a truly epic scale. Studies indicate that New Deal aid to schools prevented the closure of 4,000 schools in Arkansas alone.

This was a comprehensive rejection of both the laissez-faire ideal that had dominated American political discourse and of the elite corporate favoritism that had dominated American policymaking in practice. Roosevelt did ultimately spend a lot of money directly supporting businesses and he spent much more supporting an economic environment that led to record corporate profits. But he also created an American social safety net, regulated business misconduct, and directly addressed the economic needs of ordinary people who the market had failed. And of course he also taxed the hell out of the rich.

In many respects the Democratic Party of 1931 is similar to the Republican Party of 2021. Today’s Democrats spend a lot of time pointing out that Republicans have become hostile to democracy and can’t get a majority behind their lunatic view of the world. That’s true. But they probably could if they changed their economic agenda. If Democrats do not get there first, they will lose much of what is left of the existing Democratic coalition.

The rejection of elite-favored laissez-faire in favor of a widely popular agenda focused on the interests of working people can meaningfully be labeled populism. But populism in this sense needs to be distinguished from the anti-intellectualism and xenophobia that is also frequently associated with the term.

FDR was not a cheap demagogue throwing red meat to the masses that he knew would be counterproductive. He was not an economist or a political theorist, but he was smart enough to recognize that the policy program that had spawned The Great Depression was probably not all it was cracked up to be. And he surrounded himself with a very famous Brain Trust – a coterie of intellectuals who had different, but in many ways related theories of why and how the Depression had happened.

Early on, FDR impressed a particular British economist named John Maynard Keynes, who admired both FDR’s spirit of experimentation and his insistence that defeating the Depression was about more than economic data. Keynes and Roosevelt believed that the Great Depression had put democracy itself on trial, and both were almost desperate to vindicate it.

They did. After Keynes published The General Theory of Employment, Interest and Money in 1936, his ideas became an unofficial philosophy for the New Deal, espoused by top FDR confidants at the Federal Reserve, Treasury and the White House itself. This set of ideas included, of course, Keynes’ famous theory that government deficit spending is the only reliable way to end a recession, but it also included much more.

The Keynesian economic paradigm was built on the belief that financial markets are not a natural state of human affairs, but rather something created by the state that must be maintained and regulated to function at all. Keynes also emphasized that the problems economists were accustomed to dealing with were essentially problems of efficiency and scarcity – how to make more with less. But these were not the pressing economic issues of the day. The Depression wasn’t caused by a shortage of food or a sudden burst of laziness among American workers. It was caused instead by the market’s inability to sustain public demand for the products the market produced. Keynes was willing to pay attention to what was actually happening in the economy and acknowledge when it didn’t fit with tidy textbook theories.

And when real resource scarcity did arrive in World War II, Keynes recognized that governments didn’t simply have to take it lying down. They could directly mobilize new resources, expand production and even regulate prices to make sure the economy could deliver what was needed to win the war and secure a prosperous and expanding homefront – one that continued to prosper and expand after the war, creating the modern middle class.

These were big, fancy ideas from a big, fancy thinker (Keynes was about 6’7”). And they worked. No president before or since has matched the economic growth that Roosevelt secured in his first term, as he cut the unemployment rate in half and simply hired people to do jobs the private sector wouldn’t. But even success was not good enough for the American elite, who preferred economic theories that vaunted the gusto of the entrepreneur and his fearless innovative acumen. This is what we should keep in mind when we consider FDR’s speech at Madison Square Garden in 1936.* Here’s FDR, denouncing the “economic royalists” who opposed his presidency:

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

Note whose hatred he welcomes – not the hatred of intellectuals, but rather the hatred of a corrupt elite. There is a difference. Indeed, one of the enduring and under-appreciated legacies of the New Deal is the establishment of the economist as an important arbiter of policy disputes. Prior to the New Deal, someone who had studied poetry at Harvard was as good a candidate for Treasury Secretary as someone who had studied economics, provided he had worked for the right bank after college.

I should emphasize that this particular legacy of the New Deal has been a decidedly mixed blessing. When the economists are good, it works well. When they are not, it’s a disaster. The economists of the 1980s and 1990s who assured policymakers that financial markets were rational and efficient had not believed that a cataclysm like the crash of 2008 was possible. But of course it was – and with banking rules written by bad economists, the crash became all but inevitable.

Today, one of those economists is telling us that the inflation we have seen over the past year is the result of too much government spending, and the only cure for it is high unemployment. These claims are obviously stupid and most people do not believe them. If today’s inflation were the result of big deficits and the excessive generosity of the American government, then inflation would not be high and in many cases higher in Europe – where deficits have been much smaller and commitments to public relief much stingier than in the United States. Even countries like Mexico that did not expand their deficits to deal with the COVID-19 pandemic have experienced high inflation. It is very odd to blame $1,400 checks sent out in the spring of 2021 for the rise in gasoline prices in the summer of 2022. Did everyone decide to spend their checks on gas and gas alone, a year after they received them? Is it merely a coincidence that gas prices spiked after the European Union banned purchases of Russian oil? These are silly ideas to entertain, and significant majorities of Americans do not.

According to recent research from Pew, majorities of Republican voters believe that corporate price gouging, COVID-19’s impact on global manufacturing, Russia’s invasion of Ukraine, pandemic relief payments, and low interest rates are all playing a role in the price increases we have seen this year. Obviously I think some of those factors are more salient than others, but my point here is that the public is taking a pretty nuanced view of the situation. Biden’s American Rescue Plan continues to enjoy broad public support – 68 percent approval according to the most recent Data for Progress numbers. And its popularity isn’t hard to explain. Only twice in history has inflation-adjusted growth been as good as it was in 2021. Today’s economy has obvious challenges, but ARP succeeded in driving wages up and unemployment down as it dramatically reduced poverty – particularly childhood poverty, which was cut almost in half by the expansion of the child tax credit. It’s possible that inflation would be a point or so lower without these programs, and it is certain that working families would be much worse off.

The electorate, including Republican voters, basically understands that the economy has been damaged by multiple shocks and still needs serious economic treatment – and they are looking for someone to make that case.

For a few weeks in early 2021, Joe Biden did. He invited historians to the White House to talk about FDR and openly proclaimed that he wanted to “change the paradigm” in economic policy. And then he disappeared into talks with Joe Manchin, never, apparently, to be seen again. In his absence, the same economists who blame Biden’s Rescue Plan for inflation also insist that the only solution for it is high unemployment, perhaps in the double digits.

Anyone who calls double-digit unemployment a solution to anything does not belong in politics. But the reasoning in play here should simply horrify people who believe in democracy. The most important cost-of-living issue for families this year is housing – in many cities, rent has exploded. Ask yourself: if the goal is lower rent, should we a) build more houses, or b) indiscriminately fire a large number of people from their jobs? The latter is the serious contention of this newly revived austerity brigade.

Economists love data, but truly great economists know how to conjure a compelling narrative from the numbers. The story we are hearing from the old guard is not fundamentally compelling in a democracy – their critique is premised on the idea that most working people actually have it too good, and attempts to improve their well-being can only make things worse.

It is not hard to improve on this story. After all, it isn’t true. But you can’t defeat it by accepting most of its premises and then promising voters a few extra goodies. In 1931 there was a plausible case to be made that the Democratic Party was, on the whole, maybe 4 or 5 percent better than the Republican Party – there were actually more active KKK Governors and Senators in the GOP than there were in the Democratic ranks. But instead of pointing out that the Democrats were slightly better than Republicans, FDR transformed his party and the country by promising a different governing ideal, and delivering on it.

So what does this add up to in practice for today? The first step is to defend what worked. Supporting working people in 2020 and 2021 was critical to saving American democracy, and no one who values American democracy should apologize for doing so.

The second step is to stop talking about inflation and start talking about the cost of living. The three costs that matter most to working people are housing, energy and child care. If you fix these things, it doesn’t really matter what happens to the price of butter or aluminum. Promise bold initiatives. Guarantee things. And hire experts who actually believe in wielding the power of the state to make the numbers add up. Remember that Keynes did not call it a day after he proved that deficit spending could work -- he turned around and built the British National Health Service. And if you believe that shortages today caused by supply chain disruptions and Vladimir Putin’s war in Ukraine make such dreams impossible, let me assure you that the situation after World War II was much, much worse. But instead of throwing up their hands and praying for a more benevolent market, policymakers turned to the state for direct investment to resolve those shortages. It is time to stop fretting about efficiencies to be exploited at the margin and build a politics that defends the economic rights of working people.

* The original version of this piece included a line here about FDR accepting the Democratic presidential nomination at Madison Square Garden. The MSG speech was in October — he formally accepted the nomination in June.