Follow The Money

The New Deal consensus that collapsed in the early 1980s emerged in the throes of the Great Depression, amid immense upheaval — unemployed worker actions, sit-down strikes, campaigns for social security.

But the New Deal wasn’t just a workers’ New Deal.

The portrait of Roosevelt leading a band of ordinary people, the whole of the business community arrayed against him — this is an airbrushed contrivance. Most of corporate America may have been no friend of Roosevelt’s, but he had his own set of “economist royalists” — corporations like Shell and IBM and General Electric, Lehman Brothers and Goldman Sachs and Bank of America.

What was key, Thomas Ferguson and Joel Rogers argue in Right Turn, was the nature of this party “investor bloc.” Because its members made their money in capital-intensive rather than labor-intensive sectors, a robust union movement didn’t pose an existential threat. If it meant potentially avoiding more severe disruptions, the oil baron could accept a level of union potency the textile owner could not abide.

Some of the New Deal’s crowning achievements carried the fingerprints of Roosevelt’s well-heeled backers: a committee bankrolled by John D. Rockefeller Jr drafted the Social Security Act, Chase Bank and other industry adversaries of J. P. Morgan provided the push for the Glass-Steagall Act (which established the firewall between investment and commercial banking).

A few decades later, when Lyndon Johnson was grafting his Great Society policies onto the New Deal welfare state, the same investor bloc again pledged its support. With seemingly unending economic growth on the horizon, with profits racing ahead, with Democratic presidents committed to negotiating favorable trade deals, it behooved these elite actors to spread some of the wealth around. But on their terms. Major new programs received their revenue not from the pockets of corporations, but payroll taxes. Aid to the cities was spent in ways amenable to bankers and developers.

Yet many of these policies, though filtered through the sieve of dominant interests, also delivered genuine benefits to core Democratic constituencies. Despite a regressive funding mechanism, Medicaid enhanced the lives of its beneficiaries. So too with Medicare, passed over the wails of the American Medical Association. And urban projects like expanded public transportation benefited working people — not just real-estate developers.

Such polices at least partially reconciled interests elite and popular — the hallmark of any dominant party in, as Ferguson phrases it, “money-driven political systems.” The donor class provided the cachet and funding the party needed to function, the mishmash of organized interests delivered the votes.

Chief among those organized interests was the labor movement. But their power peaked early. That unions were an influential party player over the following decades was based entirely on the swift gains they had accumulated in the spurt of Depression-era and postwar labor agitation. The 1947 Taft-Hartley Act checked that rise. It mandated the expulsion of union radicals, legalized “right to work,” and severely constrained workers’ freedom of action.

A conservative labor bureaucracy watched the subsequent drop in union density with startling equanimity. “Frankly I used to worry about the membership, about the size of membership,” AFL-CIO President George Meany said in the early 1970s. “But quite a few years ago, I just stopped worrying about it, because to me it doesn’t make any difference.”

By the mid 1970s, the foundation of the party’s coalition had begun to crumble. And the union movement had neither the will nor the means to reconstitute it on a different basis.

Things Fall Apart

Surging growth in the 1960s gave way to economic torpor in the 1970s. And companies felt pressure on all sides. Though organized labor had lost its strength, relatively low unemployment in the late 1960s and early 1970s bolstered workers’ power on the shop floor. They responded by going on strike at rates not seen since the immediate postwar years, often demanding not just better pay but more control over the work process.

Simultaneously, US firms were faltering after years of dominating international competitors. Other advanced capitalist countries had finally recovered from postwar devastation, and their companies were outstripping US firms to an extent that went beyond the simple rebound effect. The most significant net result, especially for private capital, was that profits bottomed out. Corporations’ rate of return peaked in 1965 and didn’t recover through the entire 1970s.

With the economy humming along, the Democratic Party had survived the fractious battle over the Vietnam War. But in the profit-starved environment of the 1970s, with US companies’ position in the world economy in decline, such squabbles became increasingly irresolvable.

Regulation and social spending — tenets of the postwar system so broadly accepted that Richard Nixon, an archconservative, felt compelled to create the Environmental Protection Agency and propose a national health plan along the lines of Obamacare — quickly popped up as points of contention.

Both meant more costs for capital. Even for the “enlightened” sectors of American business, those costs were no longer prudent and placatory but unreasonably profligate. With competition heightened, companies couldn’t simply make consumers absorb elevated prices.

To cope with the new environment, business sought maximum flexibility — and that meant an offensive against organized labor. From 1970 to 1980, Ferguson and Rogers report, the number of charges against employers for terminating workers involved in union activity doubled.

When Jimmy Carter entered the Oval Office in 1977, the New Deal coalition that had set the contours of American political and economic life for decades was wilting. When he left — after defeating the doyen of New Deal liberalism, Massachusetts senator Ted Kennedy, in the 1980 Democratic primary — the economy was still stuttering. An inflation hawk presided over the Federal Reserve. And deregulation and deep social welfare cuts had started to set in.

Meanwhile, elites fretted about whether the Iranian Revolution and other convulsions presaged an inhospitable profit-making climate in the Third World. The time was ripe for more military spending. As for social programs? Not so much. For its elite backers, New Deal liberalism had outlived its usefulness.

Still, on the cusp of Reagan’s election there was no great mandate for conservative economic policies. In 1979, 79 percent of respondents polled agreed that “there is too much power concentrated in the hands of a few large companies for the good of the nation.” The same survey found that 51 percent of Americans thought “business as a whole is making too much profit.” Sixty percent even believed the state should impose a cap on corporate profits.

Yet after he came to power, Reagan promptly — with the support of scores of congressional Democrats and now backed by many of the moneyed interests that had absconded from the New Deal coalition — slashed taxes on corporations and the wealthy and expanded the social spending cuts Carter had started. At the same time, Reagan served up heavy doses of defense spending and anticommunist saber rattling.

When the 1984 election came around, Reagan’s Democratic challenger, Walter Mondale, could only attract support from a small segment of the business community: real-estate developers (whose coveted urban aid was getting squeezed by military expenditures) and investment bankers (angry at Reagan’s placidity toward the ballooning federal deficit).

With little business backing, one response would have been to try to activate the base and turn out disillusioned low-income voters with economically progressive appeals. Mondale instead played the role of belt-tightener. At his presidential nomination acceptance speech, typically the province of soaring oration and rousing policy promises, he called for a tax increase to close the budget deficit, explaining, “Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.”

While some hailed Mondale’s self-assured admission as an uncommon triumph of honesty over campaign trail perfidy, the average voter could be forgiven for wondering how that would help her. On Election Day, Mondale lost all but his home state of Minnesota.

Although Democrats took back the Senate in 1986, power had clearly shifted from a Democratic Party solicitous of business interests to a renovated Republican Party that was the unrivaled guardian of corporate America. And, because realignment means nothing if not the weaker party playing on the stronger party’s terrain, the hue and timbre of Democratic policies came to resemble those of Republicans.

Enter Clinton

Our primary objective was to show the American public that if long-term, tough-minded, Republican business leaders would go against their norm and go with Clinton, then there’s no way he’s a traditional tax-and-spend Democrat.”

So explained Bill Clinton’s point person for business and high-tech constituencies, upon releasing the names of four hundred executives backing the former Arkansas governor in the 1992 presidential election. “We figured that an endorsement by respected chief executives, whose judgment people trust, would give us that extra level of credibility, and we feel we have succeeded,” the staffer added.

The language was as intentional as it was revelatory: the party had reached a point where its standard-bearer’s campaign was poaching terms of derision from New Deal liberalism’s foes.

The Third Way had arrived.

Unlike the mid-century third way between communism and capitalism, this centrist current sought a middle course between postwar social democracy and free-market capitalism. While happy to modestly invest in things like education, Third Way acolytes thought the public sector needed a jolt that only markets and privatization could provide.

Clinton personified the Third Way, down to the composition of his elite base. Vowing to “get America growing again,” Clinton placed Silicon Valley at the center of his 1992 campaign and courted executives like Apple Computer chairman John Sculley.

The overtures worked. “Over poached salmon at Mr. Sculley’s 15-acre spread” just outside Palo Alto, the New York Times reported, a phalanx of tech leaders made the decision to support Clinton, flattered he had asked them to help formulate his tech policy and desirous of the public-private partnerships Clinton and other like-minded Democrats were eager to deliver.

While the presidential aspirant wasn’t the first national Democrat enticed by a partnership with technology companies (computer firms had also been a wellspring of support for Michael Dukakis in the 1988 election), Clinton was alone in having many on his side in a winning bid.

Less novel but more powerful, investment bankers like Robert Rubin and Pete Peterson converged around Clinton early in the 1992 presidential race. Rubin’s fundraising prowess was especially impressive — he “contributed far more than $100,000 to the campaign” and raised “many times that,” Ferguson notes. (Money from Walmart, Tyson Foods, and other home state businesses also lined Clinton’s coffers.)

The former Goldman Sachs executive’s reward was the top post in the newly created National Economic Council. Like the Democratic-leaning financiers of the past, Rubin and company valued a strong dollar policy and free trade. But their position on regulation indicated that times had changed.

As early as 1995, Rubin — by then treasury secretary — was urging Clinton to repeal the Glass-Steagall Act. He got his way in 1999, and the Commodity Futures Modernization Act deregulated the derivatives market a year later. Pitched as scrapping outdated statutes in an information age, the unshackling of financial markets fit in perfectly with the broader Third Way ideology. And, not coincidentally, with the material interests of its investor bloc.

Rubin’s ilk also altered their stance on social spending. In decades past, increased expenditures had left these sorts of investors unruffled. But Third Way politics is austerity politics, balanced-budget politics, manage-not-expand-the-welfare-state politics.

Not surprisingly, when Clinton took office — winning the presidency with the lowest share of the popular vote since Woodrow Wilson in 1912 — deficit reduction crowded out a modest stimulus package. And to close the gap, he didn’t wrest back the money Reagan had handed to the rich in the early 1980s — he coupled a modest tax hike with an aggressive push to flatten public-sector spending.

Clinton and his Third Way brethren cast aspersions on government bureaucracy in particular, the juxtaposition of a postindustrial economy — lean, flexible, dynamic — and an antediluvian federal government dominating their thinking. They pledged to build a government “that works better and costs less.” They wrote books and reports with titles like Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector and From Red Tape to Results. They pushed privatization and voucherization, advocated empowering local charities to deliver social services and promoted market-based environmental regulation like cap and trade.

What they didn’t do was formulate policies that, in the best of the social-democratic tradition, transparently delivered benefits to citizens along universal lines, giving a broad swath of the population a shared self-interest in an effective, enlarging welfare state.

As political scientist Suzanne Mettler writes in The Submerged State, funneling spending and financial incentives through the tax code or relying on private contractors obscures the benefits that government doles out, distorting people’s perceptions about who receives state support and therefore making it more difficult to form progressive coalitions. By contrast, obviously public, universal programs like Medicare build constituencies that can then readily defend those programs, activating democratic citizenship rather than leaving it to die in the deep recesses of the Internal Revenue Service.

Convinced of the state’s incompetence, flush with cash from Wall Street and Silicon Valley — or maybe just too busy going after welfare recipients — Clinton showed no interest in initiating ambitious new programs that could improve people’s lives. Single-payer was a non-starter, for instance, given his significant funding from the health industry. Its byzantine proposed replacement confused many and energized few.

If “new policies create a new politics,” as political scientist Paul Pierson puts it, then Clinton’s contribution was to help lock in the drift toward opaque policies that militated against broad progressive coalitions. In 1981, the year Reagan entered the White House, social tax expenditures — a good proxy for policymakers distributing government benefits through the tax code rather than transparent programs — numbered eighty-one. By 2010, they were up to 151, Clinton having tilled the soil for their considerable growth in the 2000s.

Above all, this was Clinton’s legacy: solidifying the right turn, declaring himself a modernizer as he wooed high tech and finance. When the president proclaimed in his 1996 State of the Union address that “the era of big government is over,” both the statement and the bipartisan applause with which it was greeted signaled the cementing of a new conservative consensus. And his closed-door deal with House Speaker Newt Gingrich to partially privatize Social Security — serendipitously thwarted by Clinton’s sex scandal — provided further confirmation that the policy shift media elites urged after the 1984 election had come to pass.

Even the Great Recession hasn’t dislodged the Clintonite capture of the Democratic Party. Without bedlam in the streets and strikes in the factories like in the Great Depression, President Obama has been content to simply update the Third Way for post-crash realities: a little regulation here, some stimulus there, but the underlying framework — and the elite base that makes it possible — essentially untouched.

Explaining the Right Turn

Conventional explanations see the lunge to the right in economic policy over the last few decades and assume that the electorate lunged in the same direction — that the average voter, thinking that government spending and cultural liberalism had gone too far, threw in with the Right. If only American political institutions were so responsive.

The problem is, the electorate isn’t a static, unmediated body. Its composition and character mutate from year to year. Only organization — whether carried out by unions or parties or some other civil society actor — can transform it from an amorphous mass into discrete groups capable of advancing their preferences and interests.

But organization takes money. The inequality of power and resources that defines capitalism, then, ends up shaping the very makeup and capacities of the electorate — who can organize and who can’t, who shows up to the polls and who stays home, which worldviews receive expression in the media and which don’t.

In other capitalist countries, workers responded to this democratic bind by leveraging the resources of the labor movement to build mass parties financially and organizationally independent from capital. American labor never got that far. Non-elites have always played the junior role.

So when Democratic business interests tired of New Deal policies — which they had helped shape every step of the way — they could tear up the pact they made with the party’s rank-and-file. When they sought a balanced budget instead of new social spending in the Clinton years, they got what they wanted.

It’s this relationship of subordination that explains the country’s rightward shift. Full employment, public investment, taxing the rich — each attracts considerable support. The issue, as the pundits say, is political will.

Further compounding the problem has been the expansion of the “submerged state.” Third Way antipathy toward “big government” programs notwithstanding, it is universal, directly provided state programs that prove most sustainable and most capable of generating mobilized constituencies. Social Security effectively turned the elderly from an electoral afterthought into one of the country’s most powerful voting blocs.

But the problem isn’t just a matter of policy. The stumbling block is more fundamental to capitalist democracies. Because capitalism is ordered around the principle that before anything can operate first capitalists must expect a profit, policies will invariably be written with business in mind first. It’s a restriction that constrained the best of European social democrats in the twentieth century and would just as surely hamstring an independent, working-class party today. We need an anticapitalist politics, then, that can break through this impasse.

Without permanently revoking their veto power, business interests won’t just continue to nix the radical reforms socialists desire. They’ll perpetually subvert that most basic condition of democratic rule — that ordinary citizens, not corporate paymasters, set the agenda.