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Saturday, October 31, 2015

The sabotage of the New Deal

How con artists corrupted the New Deal Part I

Continued review of James Galbraith's "The Predator State"

At the end of Chapter 8, "What the Rise in Inequality is Really About"; in his book "The Predator State" James Galbraith notes that:

"public policy"..."can create oligarchs", but also that it can "destroy them." [inequality-and-oligarchy.html]

The Resilience of the American Economic Model

New Deal Institutions are still around, while the Reagan Revolution has already failed.

Galbraith notes the "paradox" of the current scene;

"Plutocrats and their lobbies dominate a corrupt political scene. Manufacturing is said to be hollowed out and transnationalized. Chronic deficits afflict (or is it 'adorn'?) the budget and the balance of trade. No governing principles for monetary policy seem to have survived."

And yet:

the country prospers [This was written in 2007]

Reagan's revolution failed

Ronald Reagan's revolution explicitly sought to repeal and replace the reforms put in place by the New Deal and progressives in the 30's, 40's and 50's. Unfortunately, for his cohorts of cons, pundits and other avatars, they weren't able to succeed because their alternative ideas were even more faulty. In Chapter 8 James Galbraith explains how the resiliency of New Deal Institutions defeated them, somewhat, despite their best efforts to dismantle or corrupt them.

Why the New Deal Survived

James Galbraith's question was:

"how can this be? What accounted for the resilience of the American Economic Model?"

And the unspoken question is, why didn't the Cons simply dismantle the New Deal the way they did in the former Soviet Block countries?

His answer was:

"The answer,... lies in"..."the very robust institutions created .. by the New Deal and its successors."

He explains that while those institutions "survive", the cons turned from trying to dismantle them, to using them to gain private fortunes and as piggy banks for their donors. Thus their corruption and misuse by conservatives both allowed the USA to survive the con artistry, but also lead to the corruption of conservatism and through that corruption the rise of great fortunes based on privateering on the institutions of the new Deal. The privateering being continuing the hidden welfare that the New Deal used to keep private institutions operating in the Public Interest.

Neither "purely private nor Wholly Public"

The New Deal didn't imitate European Socialism. They didn't create purely government institutions or purely private ones. They were neither "wholly public" nor "private enterprise." Instead they were "hybrids","Chameleons." Instead of being purely public institutions, from the beginning new deal institutions were:

"private economic activities supported, leveraged, guaranteed, and regulated by public power," coupled with "public institutions aided, abetted and buttressed by private money."

One can look at the system as a:

"social welfare state"..."dressed up, in characteristic American fashion, in the guise of a market system."

Then he notes something astounding:

"Indeed, is is precisely" because the United States does not have a "free-market" economy that the campaign to pretend that we have one has been as forceful and insistent as it has been over the years. Were the truth made apparent, conservative economics would have folded long ago"!

The Big Sleaze and budget constraints

Then in an ironic vein he explains that these nominally private welfare institutions were in fact exemplary of the kinds of "soft budget constraints" first described when referring to the the Soviet Union and Communist institutions by the Hungarian Economist Janos Kornai. [see Kornai] Soft budget constraints are precisely the kinds of guarantees, subsidies and efforts to protect favored enterprises from being forced to make "hard" decisions like firing, starving or killing people, when an economic institution has trouble making a profit or balancing it's books. Indeed the kind of policies that "Free Market" economists decried in the Soviet Union or Hungary -- and blamed for the collapse of those countries. It turns out those countries were trying to imitate the United States, not the other way around. It turns out such institutions can be listed. They were privileged with government subsidy and put in charge of administering and executing access to vital public goods:

  1. The Military Industrial Complex
  2. Agriculture and Food
  3. Housing and pensions
  4. Health Care -- there can be no rational market for doctors, specialists or emergency care.
  5. And:
  6. Higher Education -- there is some choice in picking institutions but the produce is "positional" (locational) and a status Good. And to some degree there is partial monopoly from the point of view of students.
  7. And behind all of the others:
  8. The Banking Sector

The new deal sought to leverage individual initiative over private enterprise to produce institutions to pursue public good. This list are all areas of public goods, governing human necessities, and often very expensive. Each if left to their own devices would either disappear, become a good only available for the benefit of the few, or a vehicle for private enrichment at the expense of the public. In each case regulation was combined with direct subsidies and indirect subsidies through bank credit, credit guarantees and implicit guarantees in the form of an expectation of rescue in the event of trouble. The purpose of this was to induce private individuals to support the public welfare. The regulations were necessary because the government was giving them "soft budget constraints" that otherwise would allow their officers to loot the public goods.

Without regulation these soft budget constraints would have freed the private actors involved to jack up prices, convert the subsidies to their own pockets, except the New Deal also built in a regulatory structure to limit the amount of privateering/profiteering administrators and private actors could get away with.

Even so these private/public partnerships benefited the private actors by reducing budget constraints through those subsidies, relaxed budgetary rules and government guarantees. Thus these institutions with their pretense of being purely private enterprise, gave a target for those railing against government waste and fraud while propping up our system. Much of the waste was designed to keep people employed and inflate the system from depression conditions. The fraud was a leadership that knew that most people would not understand what they were doing if they were direct about it. We had a socialist system disguised as a Capitalist one.

Ultimately this approach to public welfare looked sleazy and was messy, but worked (more or less) until the Reagan Revolution.

Slipping the regulatory constraints but keeping the subsidies

Conservative thinkers saw the soft budget constraints, decried the appearance of corruption that went along with them and built an intellectual movement founded on reimposing hard budget constraints and ending the programs that kept so many people employed or able to eat and have shelter. Meanwhile the cons who subsidized them itched to either get their hands on the money freed up or be free of "interference" by "gubbornment" in pocketing those subsidies.

But when they tried to do away with them the intellectuals soon found that their alternatives failed, And that the disguised welfare of Social Security, Medicare, Medicaid and other guaranteed programs was the only thing propping up the economy! So, what the Right Wing Called "entitlements" in 2008 still accounted for nearly 40% of total consumption of goods and services. Public expenditures, including State and local ones, accounted for 14% of GDP in 2008 (Page 112). When they tried to get rid of those programs, or get rid of the "soft budget constraints" they found that their economic model failed even worse than the Hungarian model. Thus they had to keep these programs that they railed against, or risk the public's wrath and exposure of their own welfare subsidies. Indeed their efforts to reform countries like Hungary, the Soviet Union, or just about anywhere by removing "soft budget constraints" and doing away with "welfare" had the same effect everywhere. No paradise -- just misery. Neo liberalism was a failure largely because it's model for an alternative "free enterprise system", the United States, was never what it was advertised as.

Welfare for the Privateers

Going outside of Galbraith's book for a moment, these programs worked because they were popular with virtually all of working people, because of this private enterprise facade and because of other compromises. Social Security works because it is advertised as a defined benefit and an insurance program. Food Subsidies worked because they subsidized farmers as well as the poor.

So, being unable to dispense with the hated new deal they began using it's features to corrupt the system and use it for their environment. You don't hear them railing much about the soft budget constraints of the defense industry, unless they are targeting some hapless congressman who has been supporting a pet program because it provides welfare for his constituents. They decided to up the ante on New Deal institutional pretense of private enterprise by doing away with the manual, human constraints while looting those businesses. They could talk about "markets" and "market place democracy" because they knew most people wouldn't see through their con because they'd been indoctrinated to believe that there was a health care free market, that private companies can always do a better job than public institutions, etc... by the success of these New Deal Institutions. And by the subsidized oligarchy that rose suddenly when the oversight constraints on their power was removed. This occurred especially in the DOD where the constraints had never been that strong in the first place. The result has been the rise of billionaires who have the money and incentive to involve themselves in political power.

The Abrogation of a Social Contract

Indeed the breakdown of these institutions has only started accelerating recently when the receivers of agricultural subsidies went to congress and found they didn't need to pretend that they were also benefiting urban poor. They could throw off the pretense of a trade off and go to the exercise of raw power. But they can't resist the soft subsidies. Thus we still subsidize the banks, even as we shift costs to students. We still subsidize loans, even as we no longer protect those loaned to. And even as we cut the socially beneficial parts of our New Deal institutions, the privateering parts -- we keep. And also thus some of the subsidies to the rest of us remain for the moment. The logic of welfare is a dirty little secret that the Right Wing can't honestly cut without cutting off their own revenue too. Even so they have already nullified the social contract associated with the New Deal.

Thus the cons can corrupt the New Deal, but they can't bring themselves to do away with it entirely, because their wealthy depend on government welfare to survive in ostentatious comfort.

Leisure is only for the Wealthy

Galbraith also alludes to Thorsten Veblen and his book "The theory of the Leisure Class" and how the wealthy, too, need their own welfare state so they can enjoy "conspicuous consumption, conspicuous leisure and conspicuous waste" -- and Galbraith ads in, also subsidized philanthropy. They claim that they want to take over providing welfare to the poor. Though in reality they are really just adding the privateering of philanthropy to other forms of privateering, in many cases, and laundering public funds for the purpose. Worse, despite the reality that our system doesn't provide jobs for everyone, and that private enterprise is actually hampered by distributional inequity, the myths of free enterprise still make it a crime for the poor to not labor long hours, while leisure is only legal for the wealthy.

They could sabotage the New Deal -- but not do away with it

Further Readings

Soft Budget Constraint
Janos Kornai, "The Soft Budget Constraint," Kylklos 39:1 (1986) 3-30, also
Thorsten Veblen, Theory of the Leisure Class
Salon Article:
Understanding Social Dominance:
Reading Dave Stockman's "Deformations
James Galbraith:
JK Galbraith:
Created Unequal: The Crisis in American Pay:

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