The Political Economy of the Great Society
All art is concerned with . . . contriving and considering how something may come into being which is capable of either being or not being, and of which the origin is in the maker and not in the thing made. . . .
—Aristotle, Nicomachean Ethics, 1140a
Whoever directs thought toward the political forces in the shaping of the economy of the United States, during the century since the abolition of slavery, cannot fail to light upon two critical years—1896 and 1932. I think that 1964 may be another such year.
1896. A politics intimately identified with urban business leadership is challenged, but triumphs. The victor, the Republican party, begins a thirty-six-year national ascendancy, only partially interrupted for eight years when Wilson is President. And this triumph of a political leadership linked with urban business is achieved initially in a country where more than three-fifths of all people still live on farms or in towns of less than 2,500. Yet the 1896 attempt to effect a coalition of farmers and workers—rural South and West to join urban North—fails utterly. Labor does not find a political voice. Radical agrarian Populism comes to nothing. The drive of debtors to legislate reflation, through a silver-based expansion of monetary supply, also comes to nothing. Instead, all three branches of the national government are taken firmly into hands profoundly considerate of the rights of property. Two conservative sectional parties are consolidated, one North and one South. The federal Supreme Court disciplines any vagrant state legislature. The mass of the American people withdraws from participation in politics, to a degree never before experienced in the history of the nation. The way is made straight for captains of industry and finance.1
1932. The politics identified with business leadership is discredited. The Republican party is discredited. The economy is disrupted: nearly one-fourth of all who wish to work can find no employment. And now the American majority has become convinced—vaguely and inarticulately but profoundly—that Main Street and Wall Street have falsely asserted their all-sufficiency. Private enterprise does not suffice. The market does not suffice. The economic machine needs control, by rules and discretion, by brakes and accelerator—in short, by government. And whoever governs must have canons (overt or covert) of the distribution of burdens and benefits. After what has happened, are Republicans again to be trusted to govern?
No. From 1932, Republicans came to be regarded normally, by the majority of Americans, as economic governors at best indifferently competent and steadily biased toward the rich. The Republican party was accordingly shorn of national political ascendancy for at least as long as the thirty-six years of its former dominance. (Again there was one partial interruption, again for eight years—this time for Eisenhower's Presidency.) After three decades, the stamp of 1932 remains. In November 1962, the country chose 435 Congressmen—259 Democrats and 176 Republicans. But in the thirty Congressional districts of lowest income, there were chosen twenty-nine Democrats and one Republican. And in the thirty Congressional districts of highest income, there were chosen twenty-five Republicans and five Democrats. The Republicans remained the preferred party of the prosperous, the Democrats the dominant party among the poor.
One might fall into the injustice of attributing no continuing consequence to Franklin Roosevelt, in economic policy, if one were to forget the long-remembering enemies he made. Socialization was not at issue: only the most unbalanced of Roosevelt haters were much worried about New Deal “collectivism” either during the NRA phase of 1933-35 or in the subsequent years of peace, when Roosevelt improvised and drifted without any general economic policy. But, short of red revolution, there were things that hurt. When the President secured legislation regulating banks, securities' markets, and holding companies, the accredited captains of industry and finance accused him passionately (and correctly) of questioning their individual honesty and corporate intelligence. And these same dignitaries found even more embittering Roosevelt's concern to provide relief for the poor (lazy and improvident), to strengthen the bargaining position of labor (already too arrogant), and to Americanize such trumpery European novelties as Social Security. Moreover, it should be remembered and weighed that, among the classes, Roosevelt's most painful betrayal—and from a graduate of Groton and Harvard!—was his persistence in proposals to increase the taxes of the rich. And, to sharpen the pain, he justified these new exactions in language which men of means had hoped never to hear from a Pre .dent of the United States. For example, in his message of June 19, 1935, Roosevelt argued that existing tax laws had “done little to prevent an unjust concentration of wealth and economic power” and that this tax structure worked to the “unfair advantage of the few.” With such language, Roosevelt established a tradition in which the Democratic party was steadily regarded as an enemy by most men of property.2
1964. Lyndon Johnson broke decisively with the Roosevelt tradition of Democratic party estrangement from the established leaders of the American business community. Truman had not been of a mind to do such a thing. Stevenson had not the opportunity. Kennedy tried and failed.
I do not know any precise measure of Johnson's 1964 success in winning the support of business leadership. In part, the information is not available. (The records of “Businessmen for Johnson,” for example, are not yet open for study.) In part, no objective information exists: the change was recorded only in the polling booth. In any case, the change is not complete. It would appear that the highest levels of businessmen voted for Johnson more than intermediate and lower ones. Some industries and states were little affected. Very few businessmen ceased to be Republicans, became Democrats, and voted for other Democratic candidates along with Johnson. (Johnson ran somewhat ahead of the Congressmen of his party, while Kennedy had run decidedly behind.) To vote once for Johnson against Goldwater is still quite some distance from holding the view that Democrats are generally as good for businessmen as Republicans—or even better.
Still, one may perhaps sharpen awareness of the distance which separates the present from the recent past by examining a text from 1960. In that year, Professor E. E. Schattschneider, one of the most perceptive students of American politics, published an important book entitled The Semi-sovereign People (Holt, Rinehart & Winston). There Schattschneider was concerned to argue, at one point, that an interest-group or pressure-group may be the captive of a single party because the other party is foreclosed from welcoming this interest-group. And he illustrated the party captor and the interest-group captive with the case of American business (pages 56-57):
The Republican party enjoys a substantial latitude in its relations with business because its only competitor is the Democratic party and business has no party alternative. . . . In this kind of alignment the relation of business and the Republican party is not that of master and servant . . . because the party has what amounts to a political monopoly of the business interest.
Also in 1960, the quoted sentences were, I think, not the most telling evidence of Professor Schattschneider's acumen. But in 1965 even one of the duller of the professor's students would not write such things. Business is welcome in the Democratic party. Business deals with the Democratic party—though it has not stopped dealing also with the Republican party. What is new today is that many sophisticated businessmen believe that, in Washington, it is the Democratic party leadership which is the more skillful and useful. This belief may make 1964 as great a break with its political antecedents as were 1932 and 18963.
The new political economy, with which Lyndon Johnson has now engaged the support of American business leadership, is perhaps best identified as one variety of the economics of demand management. Skilfully handled, and in a cooperation between politics and property, this political economy may bring a more swift and sustained rise in prosperity than has been common in the national experience of the past century. It may also thin the number of those Americans who are completely Strangers to the City. It is not the political economy of a society substantially more equalitarian than the one which Americans have traditionally inhabited. But this limited equalitarian impulse does not now mean a foreseeable political disadvantage. I find no reason to believe that any substantial number of Americans presently desire a greatly more equalitarian society than that in which they live.
Decisive in this economics is the role of a national government which, each year (and when feasible more frequently) changes its taxes, alters the volume of its public spending, and adjusts the amount of its lending, in deliberate intention of making total demand “adequate.” In the summer of 1965—after the 1962-65 cumulative reduction of perhaps $20 billion in annual revenues (income tax, excise, investment credit and liberalized depreciation)—the federal government now has an annual “accrual from growth” officially estimated at some $7 billion. This accrual must either be added cumulatively each year to public expenditure, or remitted, by again and again reducing tax rates, if the federal fiscal system is not to “drag” on the regular growth of the economy. The precise dollar estimate of the accrual is not as significant as the idea. (The correct figure may already be $10 billion.) What is important is that, in 1965, these ideas—of demand management, of regular “accrual” from growth, and of fiscal “drag”—are conventionally respectable in Washington. In 1962, they were still economists' idiosyncrasies. There is the change.
A careful student of this change might do best to follow it in the path of Congressman Wilbur D. Mills of Arkansas, Chairman of the House Committee on Ways and Means. In July 1962, Mills opposed a general tax reduction unless accompanied by a reduction in federal expenditure. In 1963, Mills reversed himself, and he was fully aware of what he was doing. In an important speech (September 25, 1963), he reported to the House that he initially felt more profound reservations about this “turning point in economic policy” than he had “experienced with respect to almost any other matter.” But now he had held hearings, listened, questioned, studied, and been convinced. The new policy, he informed the House, involved what was “undoubtedly the most important legislation affecting the economic front here at home” that had come his way.
Businessmen long preferred an economics more their own—more of the kind where discretion comes with property, less of the kind where decisive acts of discretion come from political authority. American men of property have always been profoundly conscious of the great range of possible alternatives in income shares. They have been equally conscious of the bearing of these alternatives on the opportunities afforded individual lives. Government demand management might enlarge total national income; yes, but who would control, and to whom would the enlarged income go? Put not your faith in Presidents and Congresses! After all, a management—even a demand management—must always be by somebody and for somebody. Consequently, when American men of property had completed their conventional bows to the common interest in the expansion of the national product, they still long stood hesitant, undecided.
Here Europe came to the shaping of America. The European example began to be felt after 1953 and came to full American consciousness after 1958. In the average year of 1953-63, per capita real income rose about 4 per cent in Western Europe and only about 1.2 per cent in the United States. American businessmen observed this flowering of European capitalism, in countries where demand management was universally acknowledged. They invested in this European growth, and did well out of it. (By now, the book value of American direct investments in Europe is about $12.5 billion. In 1965, American earnings from these investments, plus royalties and fees, will be about $1.6 billion.) After 1958, the emergence in France of a Gaullist “planned economy,” of the style of Napoleon III, gave proof that a slightly different variety of demand management need not hurt. (France even became the foremost European country for the location of new American business ventures.) The Eisenhower economic flop of 1958-60 was also too gross for sophisticated businessmen to disregard. “Ike is a wonderful fellow, but it is easier to make money with Erhard and de Gaulle.”4
Demand management, in its American variety, is something quite distinct from policy action to achieve full employment. Unless we grasp this distinction, we shall not understand the society in which we live. American public men are quite united in concern to avoid a depression of 10 to 15 million unemployed. But they are almost equally united in sharing a leery attitude toward full employment. For two decades, the words “full employment” have indeed constituted a shibboleth toward which most public figures find it necessary to make an occasional bow. But almost nobody in authority regards full employment as a practical goal, to be pursued by calculated, burden-bearing action.
The genuine American position—with demand management or without—is that other objectives take priority over full employment. Foremost is the discipline of the labor force. Second is the restraint of sellers who have some monopoly power. Under full employment, wages are pushed up; prices are pushed up; the value of fixed incomes declines; profits come easily; businessmen lose their sobriety; innovation is neglected; the international competitive position is weakened: there is the devil to pay! From the top, the management of an economy with 4½ per cent unemployment is a lazy swim in a mild sea. With unemployment of 2 ½ per cent, it becomes a hot shower. At 1½ per cent, it is transformed into a Turkish steam bath. Consequently, in the summer of 1965, men of authority in Washington take only a limited interest in the reduction of unemployment below the present 4½ per cent. They are more concerned with the danger of “overheating” the economy.
Only about two-fifths of the American unemployed are now receiving any insurance compensation. These get something over a third of their regular wages. President Johnson has indeed proposed that the national unemployment compensation system be greatly enlarged. He also observed (May 8, 1965) : “No major improvements have been made since its original enactment 30 years ago.” And Secretary of Labor Wirtz later referred to the unemployed as “. . . people, men and women, who live in closets of depression in the mansion of prosperity.” But the proposed unemployment compensation bill (H.R. 8282) had its first hearing day only on August 9th.5 In all the President's program, compensation of the unemployed was given the lowest priority. There is therefore irony, as well as truth, in the President's statement (on August 15th), after the riots in Los Angeles, that one should ponder not only the immediate damage done but also the heavy wrong of justice long delayed. We need each to take to himself—and the President more than most—the message of an old story: “And Nathan said to David” (2 Samuel, xii: 7) “‘Thou art the man.’”
Demand management, in the style of the Great Society, is also not an economics of “the public sector.” On the contrary, its accent is on private demand. It reduces taxes, so that private spending will increase. By twice holding federal spending below $100 billion, in the administrative budget, President Johnson confirmed the expectation of conservative opinion that he could be trusted to keep the federal sector from acquiring greater weight. And even if we go beyond the administrative budget, and include what are already (fiscal 1965) nearly $30 billion of federal payments to the public from trust funds and other sources, it is still true that Johnson has reduced the relative weight of federal spending.
In 1963, the last calendar year of Kennedy's administration, the comprehensive total, “Federal Payments to the Public,” came to $117.2 billion; this was almost exactly 20 per cent of Gross National Product. By now, in the fiscal year 1966, Gross National Product (inclusive of price increases) is running about $100 billion higher. But the “Federal Payments to the Public” called for in the President's program for this fiscal year are only $10.2 billion higher. The incremental participation of the federal sector in the expanding economy, under Johnson, is therefore planned to be only about 10 per cent, or one-half of the established 20 per cent participation inherited from Kennedy. Johnson's intended reduction in the weight of the federal sector is accordingly now, very roughly, $10 billion.
This $10 billion relative reduction is to be compared, I think not unfairly, with the total of $11 billion provided in the administrative budget for 1966 under a comprehensive caption which President Johnson (in his Message of January 25, 1965) conveniently named: “Health, labor, education, housing and community development, economic opportunity program, and aid to the needy.” What a recitation of noble objects! For these, the President proposed to provide an increase of $3.6 billion over the preceding year. The increase is about 9 per cent of the year's rise in the Gross National Product. And this was the one weighty category of increase in the entire budget. Nevertheless, the dominant thrust of the President's fiscal policy lay elsewhere. It consisted in giving further fuel to an economy responsive to abundance of private spending.6
This private spending does not mean investing. Private fixed investment, both in producers' capital and in housing, bore a greater relative weight in the economy in 1955-56. In 1964, gross domestic fixed investment of $88 billion was 14 per cent of the Gross National Product. Japan and Norway regularly invest more than twice this share; Germany comes near to twice, and so probably does the USSR. If we then also deduct from gross investment the accounting allowances for the using up of capital, the remaining net domestic fixed investment is less than 6 per cent of Net National Product. We may add a little more than 1 per cent to include net investment abroad and a little less than 1 per cent to cover the growth of inventories. This 2 per cent enlargement changes little. At 8 per cent of Net National Product, the American economy is not concentrating its resources on investing.
In any case, the practice of concentrating economic policy attention on investment (whether as private capital or public works), once strengthened by Keynes's influence, is going out of fashion. In demand management, the accent has shifted—both for short-term stabilization and for long-term growth—to securing a regular and adequate rate of increase in consumption. Investment then tends to be regarded as something which, in our society, will largely take care of itself, when consumption grows enough. (If, in the Net National Product account, investment is 8 per cent and government 22 per cent, personal expenditure on consumption is 70 per cent—all the rest. In 1965, personal consumption expenditure will be over $425 billion.) It is a measure of relative success, in the functioning of the American economy during 1946-65, that in no single calendar year has aggregate real consumption been lower than in the preceding year. On the other hand, it is a measure of the modesty of this success that consumption per capita rose during 1946-65 by only 1¾ per cent a year. At that rate, 40 years are required to double the standard of living. Our fathers and grandfathers did no better, but we demand more.7
While American aggregate consumption has risen each year, investment has declined below the level of the preceding year in seven years out of nineteen. Most Western governments—some with eyes open, more with eyes closed—have simply given up trying to stabilize private investment, and they have abandoned the idea of compensating for its fluctuations through public works. I reproduce something of their sentiment in the language of Mr. I. M. D. Little, a British economist of open eyes and alert mind:
. . . trying to control the economy by controlling investment is like controlling a dog by its tail, when you are not even sure how much and how soon you can make the tail move. . . . Because investment fluctuates most, some may think that this is the nettle to grasp. This is false because there is little prospect of the authorities being able to smooth investment adequately by measures which act directly on it rather than on consumption.8
Currently, the Washington demand managers also have turned away from special measures to stimulate investment. They are, I think, too sophisticated to experiment a second time with the New Frontier nonsense of using an investment tax-credit as an instrument of short-run expansion. In 1965, they seem to be working, cautiously, in terms of an annual per capita growth of about 2.2 per cent (doubling in 32 years); this rate of growth was chosen in the belief that it would create no pressure to reduce unemployment. Perhaps these managers may be forced to be a little more daring next year by the desire to meet defense and other objectives simultaneously. Then they may adjust taxing and spending to a target of 3 per cent per capita growth (doubling in 23½ years) and they may fall into full employment! In either case, I think it not impossible that the present Washington demand managers (in the Executive and the Congress) will prove themselves more understanding and more skillful than any the United States has had since the industrialization of the country began, some 125 years ago.
I do not suggest that this capable demand management will be employing its talents, to any considerable degree, to redistribute income to the American poor. There is an infantile leftism—domestic and international—which persists in making a muddle of this question: it assumes that every demand management must have an equalitarian purpose. Internationally, I have heard this fatuous notion expressed, in almost identical words, in the hills of Judea and in the jungle of Sumatra. “Your rich will never be able to spend all that on themselves. To keep employed, you will have to work for us. You will have to supply the poor.” But it is perfectly feasible, both domestically and internationally, to build a second house for the rich without building a first house for the poor. One needs only the corresponding politics.
There is no evidence of equalization of American incomes, through the operation of the market, during the past two decades. The forms of personal income that have increased most are those distinctive to the rich: capital gains, interest, and dividends. Before direct taxes, the richest fifth of our families get roughly 46 per cent of all personal income, and the poorest fifth get roughly 4.6 per cent.9 Our tax system has become less progressive in these decades, and it has been further “reformed” to bear relatively less on the rich and more on the poor since Lyndon Johnson was elected President. On the basis of past years, I would surmise that personal income in 1965 is distributed, among rather more than 60,000,000 American families and unattached individuals, something like this:
|Poorest 12,000,000 families||$2,000||average|
|Second 12,000,000 families||$4,700||average|
|Median 12,000,000 families||$7,000||average|
|Next-highest 12,000,000 families||$9,800||average|
|Richest 12,000,000 families||$20,000||average|
As a citizen, I judge this American income distribution—one of the foundation stones of our society—to be against good conscience. But I participate in it. And I record that, so far as my eyes can reach, no politically significant group of Americans, young or old, finds this income pattern—not as a statistic, but as experienced in the day's encounters—in conflict with its operating conceptions of a democratic society. I observe no significant distinction, in this matter, between the Washington architects of the Great Society and other people. The United States is today, in my appraisal, a country profoundly at peace with its prevailing structure of income differences. The unfeigned, unforced, unexpressed common conviction of Americans is that satisfactory incomes for all will be achieved in the general economic progress of the country. Alas, if that progress should come to the poor at the same pace as during 1946-65! Then it would be well along in the 21st century before the average income of the poorest fifth of American families reached $80 a week.
In the summer of 1965, Lyndon Johnson heads the strongest American political coalition since the New Deal. (I call it, without disrespect, Johnson's Grossblock.) It has a near monopoly of the political Left—the trade unions, the Negroes, and the ethnic minorities. And it reaches deep into the political Right. This coalition is also stronger in August 1965 than it was in November 1964: it has enjoyed a year of sustained economic expansion; it has the experience of a productive Congress.
I find the present coalition more effectively placed than was the New Deal. It wields a more sophisticated economics. It has a better trained bureaucracy. Its large Democratic majority in both houses of Congress is relatively cohesive. It has nothing to fear from the Supreme Court. And, perhaps most important, it embodies a cooperaation—not a conflict—between government power and economic power, between politics and property.
One does not require great historical insight to see in this Johnson Grossblock a conservative welfare coalition quite parallel to those which now govern in many Western societies. With differences of nuance, Germany and France today have similar systems. But Johnson's is a stronger coalition than these two, because his has the trade unions locked inside.
I believe it to be greatly unlikely that the demand managers, who act for this coalition, will now move deliberately toward full employment. Full employment is a condition which can be borne, in good health, only by societies that have other effective sources of restraint than the market. Swedish society can. British society cannot. Our demand managers judge that American society cannot.
This coalition could, however, I believe, be brought to enact a greatly improved system of compensation to the unemployed. Probably the standard to be anticipated is a ceiling of two-thirds of each state's average wage. This standard will not be reached tomorrow. But it is possible to foresee, down the way, a compromise American version of the high principle, Work or Wages for all the Able.
The hand of charity will not be closed. A society where gross income rises by $40 billion a year may even find the heart to give an annual increment of $1 billion to the most unfortunate of its poor. In the general structure of society and politics, this charity changes nothing.
Social insurance undoubtedly has a long further career. Together with job tenure and seniority rights, insurance makes up the greater part of such personal security as is attainable in this society, where more than three-quarters of all personal wealth belongs to the most prosperous fifth of our families.
The Johnson Grossblock will not be overturned by popular armies marching against Big Government. The motif of Big Government oppression leaves the American people completely cold. Neither will this coalition be upset by a populist upsurge against the concentrated economic power of Big Business. The American people couldn't care less.
Socialism is not an entrant in the American contest. And, in my judgment, socialism has no such merit as would justify its becoming an entrant. In other countries also, I hope, there will be futures only for such socialisms as put narrow limits to nationalization, free themselves from indiscriminate sponsorship of monopolistic public corporations, and reject an idolatrous approach to authoritative central planning.
The New Frontier of 1961-63 was a triviality. The coalition of the Great Society is something far more considerable. With some shift and change, this coalition may have a long life. And there is no reason to believe that it has exhausted its potential for constructive achievement.
The Great Society of Lyndon Johnson is not my model of a democratic society. But it is a model not devoid of a certain greatness and not necessarily incompatible with a kind of human dignity.
1 A judicious, low-keyed account of the issues and personalities of 1896 is McKinley, Bryan and the People, by Paul W. Glad, Lippincott, 1964. On the non-participationist polity which emerged after 1896, we have now the important paper, “The Changing Shape of the American Political Universe,” by Walter Dean Burnham, in the American Political Science Review of March 1965.
2 There are interesting glimpses of the economics and politics of 1932-36 in Rexford Tugwell and the New Deal, by Bernard Sternsher, Rutgers University Press, 1964. On the parties of rich and poor, and much else, see Congressional Districts of the United States, a publication of Congressional Quarterly Inc., August 1964. A fine-tempered history of New Deal taxation was written by the late Randolph E. Paul, in his Taxation in the United States, Little Brown & Co., 1954.
3 The most illuminating study of the 1964 election that I have encountered is “Electoral Myth and Reality” by Converse, Clausen and Miller, in the American Political Science Review of June 1965. But that essay deals rather with the certainty of Goldwater the gravedigger than with the uncertainty of Johnson the innovator.
4 A useful comparative study of 1949-61, subjecting the six Common Market countries plus Norway, UK, and USA to analysis through common categories, is Economic Policy in Our Time, by E. S. Kirschen and eight others, 3 vols., Rand McNally & Co., 1964. The attractiveness of France for American business in 1958-65 is shown in a study by the Chase Manhattan Bank, Report On Western Europe, February-March 1965.
5 There is valuable information in the Committee Print of the Ways and Means Committee, dated July 30, 1965, entitled Employment Security Amendments of 1965. This is supplemented by the Statement of Secretary Wirtz, dated August 9, 1965.
6 The bare budgetary program is in The Budget of the United States Government . . . 1966, Washington, 1965. A more illuminating analysis and statement of intent is the Economic Report of the President and especially The Annual Report of the Council Of Economic Advisers, both transmitted to the Congress in January 1965.
7 The best concise summation of the historical record for 1840-1961 is in the essay “Notes on the Pattern of U.S. Economic Growth,” in the many-sided volume by Simon Kuznets, entitled Economic Growth and Structure, W. W. Norton & Co., 1965.
8 See the brilliant chapter on “Fiscal Policy” in The British Economy in the Nineteen-Fifties, edited by G. D. N. Worswick and P. H. Ady, Oxford, 1962. Quotation from p. 274.
9 Estimates of family income distribution were formerly published annually in the Survey of Current Business of the U.S. Department of Commerce, the last having appeared in the Survey for July 1964. This publication has now been discontinued, with an explanation that makes a disquieting impression.