The Audacity of Hope (19 page)

This tradition, of government investment in America’s physical infrastructure and in its people, was thoroughly embraced by Abraham Lincoln and the early Republican Party. For Lincoln, the essence of America was opportunity, the ability of “free labor” to advance in life. Lincoln considered capitalism the best means of creating such opportunity, but he also saw how the transition from an agricultural to an industrial society was disrupting lives and destroying communities.

So in the midst of civil war, Lincoln embarked on a series of policies that not only laid the groundwork for a fully integrated national economy but extended the ladders of opportunity downward to reach more and more people. He pushed for the construction of the first transcontinental railroad. He incorporated the National Academy of Sciences, to spur basic research and scientific discovery that could lead to new technology and commercial applications. He passed the landmark Homestead Act of 1862, which turned over vast amounts of public land across the western United States to settlers from the East and immigrants from around the world, so that they, too, could claim a stake in the nation’s growing economy. And then, rather than leave these homesteaders to fend for themselves, he created a system of land grant colleges to

instruct farmers on the latest agricultural techniques, and to provide them the liberal education that would allow them to dream beyond the confines of life on the farm.

Hamilton’s and Lincoln’s basic insight—that the resources and power of the national government can facilitate, rather than supplant, a vibrant free market—has continued to be one of the cornerstones of both Republican and Democratic policies at every stage of America’s development. The Hoover Dam, the Tennessee Valley Authority, the interstate highway system, the Internet, the Human Genome Project—time and again, government investment has helped pave the way for an explosion of private economic activity. And through the creation of a system of public schools and institutions of higher education, as well as programs like the GI Bill that made a college education available to millions, government has helped provide individuals the tools to adapt and innovate in a climate of constant technological change.

Aside from making needed investments that private enterprise can’t or won’t make on its own, an active national government has also been indispensable in dealing with market failures—those recurring snags in any capitalist system that either inhibit the efficient workings of the market or result in harm to the public. Teddy Roosevelt recognized that monopoly power could restrict competition, and made “trust busting” a centerpiece of his administration. Woodrow Wilson instituted the Federal Reserve Bank, to manage the money supply and curb periodic panics in the financial markets. Federal and state governments established the first consumer laws—the Pure Food and Drug Act, the Meat Inspection Act—to protect Americans from harmful products.

But it was during the stock market crash of 1929 and the subsequent Depression that the government’s vital role in regulating the marketplace became fully apparent. With investor confidence shattered, bank runs threatening the collapse of the financial system, and a downward spiral in consumer demand and business investment, FDR engineered a series of government interventions that arrested further economic contraction. For the next eight years, the New Deal administration experimented with policies to restart the economy, and although not all of these interventions produced their intended results, they did leave behind a regulatory structure that helps limit the risk of economic crisis: a Securities and Exchange Commission to ensure transparency in the financial markets and protect smaller investors from fraud and insider manipulation; FDIC insurance to provide confidence to bank depositors; and countercyclical fiscal and monetary policies, whether in the form of tax cuts, increased liquidity, or direct government spending, to stimulate demand when business and consumers have pulled back from the market.

Finally—and most controversially—government has helped structure the social compact between business and the American worker. During America’s first 150 years, as capital became more concentrated in trusts and limited liability corporations, workers were prevented by law and by violence from forming unions that would increase their own leverage. Workers had almost no protections from unsafe or inhumane working conditions, whether in sweatshops or meatpacking plants. Nor did American culture have much sympathy for workers left impoverished by capitalism’s periodic gales of “creative destruction”—the recipe for individual success was greater toil, not pampering from the state. What safety net did exist came from the uneven and meager resources of private charity.

Again, it took the shock of the Great Depression, with a third of all people finding themselves out of work, ill housed, ill clothed, and ill fed, for government to correct this imbalance. Two years into office, FDR was able to push through Congress the Social Security Act of 1935, the centerpiece of the new welfare state, a safety net that would lift almost half of all senior citizens out of poverty, provide unemployment insurance for those who had lost their jobs, and provide modest welfare payments to the disabled and the elderly poor. FDR also initiated laws that fundamentally changed the relationship between capital and labor: the forty-hour workweek, child labor laws, and minimum wage laws; and the National Labor Relations Act, which made it possible to organize broad-based industrial unions and forced employers to bargain in good faith.

Part of FDR’s rationale in passing these laws came straight out of Keynesian economics: One cure for economic depression was putting more disposable income in the pockets of American workers. But FDR also understood that capitalism in a democracy required the consent of the people, and that by giving workers a larger share of the economic pie, his reforms would undercut the potential appeal of government- managed, command-and-control systems—whether fascist, socialist, or communist— that were gaining support all across Europe. As he would explain in 1944, “People who are hungry, people who are out of a job are the stuff of which dictatorships are made.”

For a while this seemed to be where the story would end—with FDR saving capitalism from itself through an activist federal government that invests in its people and infrastructure, regulates the marketplace, and protects labor from chronic deprivation. And in fact, for the next twenty-five years, through Republican and Democratic administrations, this model of the American welfare state enjoyed a broad consensus. There were those on the right who complained of creeping socialism, and those on the left who believed FDR had not gone far enough. But the enormous growth of America’s mass production economy, and the enormous gap in productive capacity between the United States and the war-torn economies of Europe and Asia, muted most ideological battles. Without any serious rivals, U.S. companies could routinely pass on higher labor and regulatory costs to their customers. Full employment allowed unionized factory workers to move into the middle class, support a family on a single income, and enjoy the stability of health and retirement security. And in such an environment of steady corporate profits and rising wages, policy makers found only modest political resistance to higher taxes and more regulation to tackle pressing social problems—hence the creation of the Great Society programs, including Medicare, Medicaid, and welfare, under Johnson; and the creation of the Environmental Protection Agency and Occupational Health and Safety Administration under Nixon.

There was only one problem with this liberal triumph—capitalism would not stand still. By the seventies, U.S. productivity growth, the engine of the postwar economy, began to lag. The increased assertiveness of OPEC allowed foreign oil producers to lop off a much bigger share of the global economy, exposing America’s vulnerability to disruptions in energy supplies. U.S. companies began to experience competition from low-cost producers in Asia, and by the eighties a flood of cheap imports—in textiles, shoes, electronics, and even automobiles—had started grabbing big chunks of the domestic market. Meanwhile, U.S.-based multinational corporations began locating some of their production facilities overseas—partly to access these foreign markets, but also to take advantage of cheap labor.

In this more competitive global environment, the old corporate formula of steady profits and stodgy management no longer worked. With less ability to pass on higher costs or shoddy products to consumers, corporate profits and market share shrank, and corporate shareholders began demanding more value. Some corporations found ways to improve productivity through innovation and automation. Others relied primarily on brutal layoffs, resistance to unionization, and a further shift of production overseas. Those corporate managers who didn’t adapt were vulnerable to corporate raiders and leveraged buyout artists, who would make the changes for them, without any regard for the employees whose lives might be upended or the communities that might be torn apart. One way or another, American companies became leaner and meaner—with old-line manufacturing workers and towns like Galesburg bearing the brunt of this transformation.

It wasn’t just the private sector that had to adapt to this new environment. As Ronald Reagan’s election made clear, the people wanted the government to change as well.

In his rhetoric, Reagan tended to exaggerate the degree to which the welfare state had grown over the previous twenty-five years. At its peak, the federal budget as a total share of the U.S. economy remained far below the comparable figures in Western Europe, even when you factored in the enormous U.S. defense budget. Still, the conservative revolution that Reagan helped usher in gained traction because Reagan’s central insight—that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing the pie—contained a good deal of truth. Just as too many corporate managers, shielded from competition, had stopped delivering value, too many government bureaucracies had stopped asking whether their shareholders (the American taxpayer) and their consumers (the users of government services) were getting their money’s worth.

Not every government program worked the way it was advertised. Some functions could be better carried out by the private sector, just as in some cases market-based incentives could achieve the same results as command-and-control-style regulations, at a lower cost and with greater flexibility. The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions—and did lead to a wasteful industry of setting up tax shelters. And while welfare certainly provided relief for many impoverished Americans, it did create some perverse incentives when it came to the work ethic and family stability.

Forced to compromise with a Democrat-controlled Congress, Reagan would never achieve many of his most ambitious plans for reducing government. But he fundamentally changed the terms of the political debate. The middle-class tax revolt became a permanent fixture in national politics and placed a ceiling on how much government could expand. For many Republicans, noninterference with the marketplace became an article of faith.

Of course, many voters continued to look to the government during economic downturns, and Bill Clinton’s call for more aggressive government action on the economy helped lift him to the White House. After the politically disastrous defeat of his health-care plan and the election of a Republican Congress in 1994, Clinton had to

trim his ambitions but was able to put a progressive slant on some of Reagan’s goals. Declaring the era of big government over, Clinton signed welfare reform into law, pushed tax cuts for the middle class and working poor, and worked to reduce bureaucracy and red tape. And it was Clinton who would accomplish what Reagan never did, putting the nation’s fiscal house in order even while lessening poverty and making modest new investments in education and job training. By the time Clinton left office, it appeared as if some equilibrium had been achieved—a smaller government, but one that retained the social safety net FDR had first put into place.

Except capitalism is still not standing still. The policies of Reagan and Clinton may have trimmed some of the fat of the liberal welfare state, but they couldn’t change the underlying realities of global competition and technological revolution. Jobs are still moving overseas—not just manufacturing work, but increasingly work in the service sector that can be digitally transmitted, like basic computer programming. Businesses continue to struggle with high health-care costs. America continues to import far more than it exports, to borrow far more than it lends.

Without any clear governing philosophy, the Bush Administration and its congressional allies have responded by pushing the conservative revolution to its logical conclusion— even lower taxes, even fewer regulations, and an even smaller safety net. But in taking this approach, Republicans are fighting the last war, the war they waged and won in the eighties, while Democrats are forced to fight a rearguard action, defending the New Deal programs of the thirties.

Neither strategy will work anymore. America can’t compete with China and India simply by cutting costs and shrinking government—unless we’re willing to tolerate a drastic decline in American living standards, with smog-choked cities and beggars lining the streets. Nor can America compete simply by erecting trade barriers and raising the minimum wage—unless we’re willing to confiscate all the world’s computers.

But our history should give us confidence that we don’t have to choose between an oppressive, government-run economy and a chaotic and unforgiving capitalism. It tells us that we can emerge from great economic upheavals stronger, not weaker. Like those who came before us, we should be asking ourselves what mix of policies will lead to a dynamic free market and widespread economic security, entrepreneurial innovation and upward mobility. And we can be guided throughout by Lincoln’s simple maxim: that we will do collectively, through our government, only those things that we cannot do as well or at all individually and privately.