B005HFI0X2 EBOK (44 page)

THE COUNTERREVOLUTION AGAINST NEW DEAL LIBERALISM

In the 1970s, the public’s loss of faith in authority included a growing hostility to big business. The Harris polling agency found that the percentage of Americans who expressed “a great deal of confidence” in the heads of large corporations dropped from 55 percent in 1966 to 15 percent in 1975. In a July 1975 Gallup poll of public confidence in institutions, business came in last at 34 percent, below organized labor at 38 percent, and Congress at 40 percent.
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For its part, American business in the 1970s glared back at American society and did not like what it saw. “The have-nots are gaining steadily more political power to distribute the wealth downward,” one executive complained at a meeting in a series hosted by the Conference Board in 1974 and 1975. “The masses have turned to a larger government.”
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Another participant complained: “Our enemies want cradle-to-grave security for everyone.”
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One business executive lashed out at democracy itself: “One man, one vote will result in the failure of democracy as we know it.”
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Conservative American business elites had long demonized American liberalism by comparing it to German National Socialism or Soviet Communism and, when those canards seemed excessive, accusing American liberalism of being French was sure to win applause. The postwar stagnation of Britain provided the American Right with another nightmare. “We are following England to disaster, trying to beat them where they are going,” one businessman complained at a Conference Board meeting. Another warned: “England is our future over the next decade. First, they got the dole, then we got our relief. First, they had socialized medicine, then we got Medicaid and Medicare. First, they had nationalized industry, now our institutions are in danger of being taken over by the government.”
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American companies increasingly offshored production to countries where wages were low, workers were nonunionized and sometimes repressed, and where governments offered subsidies and other incentives for foreign direct investment. By 1980, more than 80 percent of semiconductors were produced by US multinationals in foreign countries including Singapore, South Korea, Taiwan, and Mexico.
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The business and financial sectors also poured funding into the conservative intellectual movement and conservative media outlets. From the 1940s to the 1960s, a conservative and increasingly mathematical and unworldly version of Keynesianism, described by the British economist Joan Robinson as “bastard Keynesianism,” came to dominate US economics departments. Mathematical economists in the tradition of Paul Samuelson, author of the leading textbook in the field, pushed out institutional economists in the tradition of John Kenneth Galbraith, who were more interested in studying the real world than in devising pseudoscientific models. The increasingly arcane interests of the academic Keynesians left them disarmed against a counteroffensive by free-market conservatives, who spread their ideas in the mass media as well as in academic seminars.

The leader of the free-market Chicago School was Milton Friedman, whose Nobel Prize for economics in 1976 marked the rightward shift of economic thinking. With
Free to Choose
, a bestselling book that became a television series, Friedman and his wife, Rose, popularized libertarian economic ideas that had been marginalized in the United States and other industrial countries for a generation after the Depression. Conservative and libertarian think tanks, funded by rich donors and business interests, and the business press, most notably the
Wall Street Journal
, spread the message: economic problems are almost always the fault of the government, not the market. President Ronald Reagan gave voice to this dogma in his first inaugural address, when he declared that “government is not the solution to our problem; government is the problem.”
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Reagan and other conservatives adopted what became known as “supply-side economics,” based on the erroneous belief that, by increasing the rewards to effort, tax cuts would generate more than enough revenue through growth to compensate for the cuts. Supply-siders were fond of pointing to the Kennedy-Johnson administration’s use of a tax cut in 1964 to stimulate the economy. Galbraith presciently told the Joint Economic Committee of Congress in 1965 of his misgivings about the tax cut of 1964: “I was never as enthusiastic as many of my fellow economists over the tax reduction of last year. The case for it as an isolated action was undoubtedly good. But there was danger that conservatives, once introduced to the delights of tax reduction, would like it too much. Tax reduction would then become a substitute for increased outlays on urgent social needs. We would have a new and reactionary form of Keynesianism with which to contend.”
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While besieged by a newly confident and aggressive free-market Right, New Deal liberalism was attacked from the Left by Marxists and environmentalists. Marxist scholars denounced “corporate liberalism,” declaring that New Deal liberals like Roosevelt and Johnson were pawns of the capitalist class and rewriting history to make industrial regulation a conspiracy by the industries themselves.

Even more influential was the increasingly powerful environmentalist movement. Franklin Roosevelt, like his cousin Theodore, belonged to the conservationist tradition, which favored the “wise use” of natural resources for purposes of economic growth and re-creation. Liberal conservationism was eclipsed in the 1970s and 1980s by radical environmentalism, which drew on nineteenth-century romanticism. For radical environmentalists, the dams and highways that symbolized the New Deal were unnatural abominations that desecrated nature. Influenced by the British writer E. F. Schumacher, author of
Small Is Beautiful
, environmentalists on the Left condemned automobiles, electrical grids, suburbs, mass consumption, and industrialized agriculture and industry, and fantasized about a postindustrial utopia of locally grown food and “soft energy” sources like solar power and wind energy.

The Limits to Growth
, a report published by the Club of Rome in 1972, convinced many Americans of the existence of an imminent crisis of resource depletion. When resource exhaustion turned out not to be a problem, the apocalyptic imagination of the environmentalist movement invoked other threats—peak oil and global warming—to justify its critique of industrial society and consumerism. In 1982, Hugh G. Parris, manager of power for the TVA, gave a speech entitled “The New TVA: Managing in a No-Growth Environment.” The TVA began to emphasize energy conservation as well as energy production. In a move that would have appalled Roosevelt and Lilienthal, the TVA offered more than a thousand poor households in East Tennessee and East Georgia a premodern technology: wood stoves.
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By the 1960s and 1970s, New Deal policies were being criticized from across the political spectrum. The stage was set for the Great Dismantling.

JIMMY CARTER: THE FIRST NEOLIBERAL

The Great Dismantling began during the administration of Jimmy Carter, not Ronald Reagan. Richard Nixon, a veteran of the Office of Price Administration who expanded government and fought inflation by imposing price controls, was a Modern Republican like Dwight Eisenhower who did not challenge the basic assumptions of the New Deal. If Nixon was the last New Dealer, Carter was the first neoliberal in the White House.

In 1980, the Carter administration showed a belated interest in strategic national economic policy as an alternative to the free-market ideology that became known as neoliberalism. The Treasury Department undertook a study of the Reconstruction Finance Corporation, while the State Department commissioned studies of industrial policy in Japan, Germany, France, and Sweden. In August 1980, Carter announced an economic revitalization plan, complete with a national development bank, an Economic Revitalization Board, targeted policies for particular sectors, and tripartite committees for major industries.
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Bold on the surface, Carter’s plan represented the most comprehensive vision of American developmental capitalism since the New Deal. But the plan was hastily drawn up to appease liberal and labor critics of the administration and it was forgotten after Carter was defeated by Reagan in 1980.

Many otherwise liberal Democrats viewed deregulation as a way to combat runaway inflation. From around 1 percent in 1960, inflation rose to 12 to 14 percent in 1979–1980. To this day, nobody is quite sure why. One factor may have been the refusal of the Johnson and Nixon administrations to raise taxes to pay for the Vietnam War and expanded domestic spending.

The oil shocks of the 1970s provided an additional source of trauma as well as of inflation. Until the 1970s, the Texas Railroad Commission, by regulating the output of Texas oil wells, had been able to control the world price of oil. The embargo imposed by OPEC on the United States and other allies of Israel following the Arab-Israeli War of 1973 demonstrated that control of the global oil price had passed to other oil-producing countries. Saudi Arabia, America’s ally since the 1940s, nationalized the holdings of American oil companies. Increasingly the United States seemed to be, in the words of Richard Nixon, “a pitiful, helpless giant.” Another oil shock followed in 1979 with the Iranian revolution.

Inflation became endemic as part of the wage-price spiral, as unionized workers anticipating further inflation won wage increases from employers, who passed them on to consumers via higher prices, with accommodating central banks like the Federal Reserve under Arthur Burns printing money. Nixon had failed to stop inflation with wage-and-price controls and Gerald Ford had been ridiculed for asking Americans to wear buttons with the motto “WIN (Whip Inflation Now).”

By the time that Jimmy Carter was inaugurated in 1977, many economists and policymakers hoped that free-market competition in infrastructure industries such as transportation and energy could lower the cost of goods and reduce inflation. The Carter administration treated deregulation as part of its inflation-fighting efforts. The April 1977 anti-inflation program of the administration combined a two-year extension of Nixon’s Council on Wage and Price Stability, which oversaw wage-and-price controls, with a call for deregulation of communications, trucking, and other industries that had been regulated since the New Deal.
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THE GREAT DISMANTLING

The result, in the years from Carter to Clinton, was the rapid dismantling of most of the system governing the US economy erected during Roosevelt’s presidency. The Carter administration supported the deregulation of airlines (1978), rail (1980), and trucking (1980); the bus industry was deregulated in 1982. Telecommunications was partly deregulated in 1996; in 1999 came the Gramm-Leach-Bliley Act, repealing the separation of commercial from investment banking established by the Glass-Steagall Act of 1933.

Deregulation decimated labor unions in airlines, trucking, and telecommunications—a result that was welcomed by many of the proponents of deregulation, who blamed inflation on unions whose wage costs were passed along by businesses in the form of higher prices. In 1979, 8.6 percent of the private workforce was found in the highly regulated, highly unionized transporation and utility sectors.
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As a percentage of the private-sector workforce, unionized labor fell from 20 percent in 1980 to 10 percent in 1990 to less than 7 percent in 2010.

In some industries, a case could be made for deregulation. The regulated utility system of the New Deal era sometimes slowed the diffusion of new technologies and preserved archaic distinctions among industries. The organization of the telephone industry dominated by AT&T made sense as long as wire-based telephony created natural regional and continental monopolies. But the case for monopoly was undermined by technological advance in the area of radio communications. Like so many technological innovations, this emerged from the US military. During World War II, the US Army Signal Corps, seeking an alternative to wire or cable telephony, developed microwave transmission. This technology diffused to the private sector and, in the 1960s, Microwave Communications Inc., which became MCI, sought to compete with AT&T for long-distance service. In 1974, the Justice Department filed an antitrust suit against AT&T. AT&T was found guilty, among other things, of allegedly limiting competition by cross-subsidizing its state units. But state regulators had long insisted on low local-service rates, which could only be delivered by a policy of cross-subsidies. In other words, the federal government punished Ma Bell for doing what state governments forced her to do.
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Under a consent decree in 1982, the company divested itself of its local operating companies—the Baby Bells—and retained only its long-distance, manufacturing, and research components. In succeeding years, cell phones rapidly replaced land lines and continuing technological innovation blurred the boundaries among telephone, cable, satellite radio, and Internet providers.

In other cases, such as airlines and electricity, deregulation turned healthy industries back into the “sick industries” that regulation had been designed to cure. The Civil Aeronautics Act of 1938 had turned the US airline industry into a regulated utility under the Civil Aeronautics Board (CAB). Like other regulated industries, the airline industry was exempt from antitrust laws so that airlines could set rates together. Among the enlightened regulations of the CAB were prohibitions on charging more for short flights than long ones and rate floors to prevent “fare wars.” But by the 1970s, the example of independent local airlines like Southwest in Texas persuaded many analysts that airlines could not only increase routes but also combat inflation by lowering fares. The Carter administration supported the Airline Deregulation Act of 1978, which eliminated federal controls over entry, routes, schedules, financing, and fares. In 1984, the CAB itself was abolished.