Back to Market Fundamentalism

How champions of Neoliberal economics are reversing New

Deal economics
By Ismael Hossein-zadeh

March 12, 2010 "Information Clearing House" -- The “golden” years of the U.S.
economy in the immediate post-WW II period, along with the recovery and expansion of
the economies of other industrialized countries, afforded the working class of these
countries a decent, even middle-class, standard of living. Combined with extensive social
safety-net programs such as the New Deal reforms in the U.S. and Social-Democratic
reforms in Europe, the economic recovery and high employment rates of that period
paved the way for a relatively cooperative relationship between the working and
capitalist classes in these countries.

This led many pundits of historical developments to argue that perhaps Karl Marx had
underestimated capitalism’s ability to carry out reform and share the fruits of economic
progress with the poor and working class, thereby obviating revolution. They pointed to
guaranteed employment and labor-management cooperation in a number of industrialized
countries such as Germany and Japan as indications of “erroneous” Marxian judgment of
the antagonistic capital-labor relationship.

These pundits failed, however, to point out the fact that the New Deal and Social-
Democratic reforms that evolved out of the Great Depression and World War II were not
courtesy of “benevolent” capitalism, voluntarily bestowed upon the poor and working
people. They did not bother to explain that those reforms were, rather, the product of
years of struggle by the working class and their allies against the brutalities of the
capitalist system—struggle that often entailed great sacrifices, including occasional loss
of life. The anti-Depression and anti-war struggles of the 1930s and 1940s compelled the
capitalist class to “carry out reform in order to prevent revolution,” to paraphrase
President Franklin D. Roosevelt.

The laissez-faire doctrine, which firmly believed in the self-correcting ability of

unbridled market mechanism, was the dominant economic principle before to the Great
Depression. The financial crash of 1929 and the consequent long Depression shattered
this long-held, religious-like belief. The Depression, precipitated largely by predatory
loan-pushing and the resulting unsustainable bubble of asset (stock) prices, made living
conditions for the overwhelming majority of people extremely difficult. The ensuing
economic distress, in turn, precipitated popular unrest.

Large numbers of the discontented frequently took to the streets in the early 1930s. Their
desire for change swelled the ranks of socialist, communist, and other opposition parties
and groups. Left activists gained certain influence among labor ranks and workers’
movement for unionization, illegal in many industries until 1935, spread rapidly. Labor
and other grassroots support for third party candidates in the 1932 presidential election
resulted in unprecedented number of votes for those candidates. Third-party votes were
even more impressive in congressional and local elections. “The union literature was like
the labor literature of a century ago—looking toward a successor to capitalism,” wrote
the late Studs Terkel in his Hard Times: An Oral History of the Great Depression
(Pantheon Books, p. 309).
Business and government leaders clearly understood the gravity of the situation and the
need for action. The pressure from “below” created consensus and coalitions at the “top”
as the need for reform to fend off revolution became evident. “. . . F.D.R. was very
significant in understanding how best to lead this sort of situation. . . . The industrialists
who had some understanding recognized this right away. He could not have done what he
did without the support of important elements of the wealthy class. They did not sabotage
the programs. Just the opposite” (Ibid., pp. 268-69).

Two principles lay at the core of the ensuing big business-government consensus
reforms, which came to be known as the New Deal reforms. The first was that Adam
Smith’s “invisible hand” was not capable of resuscitating the badly depressed economy;
it needed government’s visible hand. The second principle was that government
intervention must be limited to stimulative and distributive measures, and that the
management of industries and businesses should be left to the private sector. Facilitating
and maintaining a certain level of purchasing power in the market was considered crucial
to the New Deal package. While this would provide relief to the economically hard
pressed, and thus reduce social tension, it would also stimulate the economy and promise
stable growth and rising profitability.

Regardless of the degree of the effectiveness of the New Deal reform package, the fact
remains that it rescued U.S. capitalism—just as Social-Democratic reforms rescued the
economies of West European countries. Combined with what the late Ernest Mandel
called “extra-economic” factors (such as pliant labor leadership and peaceful trade
unionism, establishment of the Bretton Woods international monetary system, Cold War
ideology and the suppression or pacification of any possible dissent, and relative decline
in the price of oil and other raw materials in the immediate post-WW II period), the New
Deal and other government-sponsored reforms ushered in a period of rapid economic
expansion that came to be known as the “golden years of US capitalism,” which lasted
until around 1970.

While the pressure from below played a key role in compelling the ruling establishment
to carry out the New Deal and other welfare state programs, a number of other factors
also contributed to the realization of those programs. One such factor was the emergence
of an alternative economic model to capitalism from the ruins of the two world wars and
Great Depression: the centrally-planned economies of the Soviet Union and its allies. The
emergence of the rival economic system, despite its bureaucratic and dictatorial
character, further exposed the unjust character of market mechanism because while in the
1930s the capitalist West was suffering from economic depression, unemployment, and
poverty, the Soviet and other centrally-planned economies were enjoying impressive
rates of growth—with no unemployment, homelessness, or hunger.

The popularity of the Soviet-type economic system at the time also meant that many of
the colonial and other less-developed areas of the world combined their anti-colonial and
anti-imperial national liberation struggles with demands for government-sponsored
models of socialist-oriented or “non-capitalist” development. In the core capitalist
countries of the West, too, demands for reform and voices of revolution were frequently
heard during the widespread protest demonstrations of the 1930s. Anti-capitalist
sentiments and demands to harness or to do away with the skittish, unreliable and, at
times, brutal forces of market mechanism in favor of regulating and/or managing national
economies were heard not only among the Left and working classes but also in the ranks
of the middle and lower-middle classes.

Although the fear of total economic collapse in the face of the Depression, and the
“threat of revolution,” compelled government and business leaders to embark on reform
in order to fend off revolution, proponents of unbridled market mechanism never really
accepted or reconciled with those reforms as permanent features of capitalism. Not
surprisingly, soon after the Depression turned to expansion in the immediate postwar
period, and Western capitalism regained its lost confidence, the financial oligarchy and
government leaders began to introduce “restructuring” measures that would undermine
the New Deal reforms and revive the pre-Depression model of market fundamentalism.

Just as the rival economic system of the Soviet Union and its allies, which guaranteed
basic needs and job security for their citizens, indirectly contributed to the
implementation of the New Deal and Social-Democratic reforms in the industrialized
West, the collapse of that rival system is now contributing to the retrogressive process of
reviving pre-Depression market orthodoxy. Not only has the collapse of the Soviet-type
economies opened up vast markets and huge reservoirs of cheap labor in places such as
the former Soviet Union, China, and India, it has also served as grounds for capitalist
triumphalism—and its self-assured or self-righteous promotion of trickledown
economics.

Many people believe that efforts to reverse the New Deal reforms began with the arrival
of Ronald Reagan in the White House in 1980. Evidence shows, however, that such
efforts, pursued by both Republican and Democratic administrations, began long before
the election of Ronald Reagan to presidency. As Alan Nasser, professor emeritus of
Political Economy and Philosophy at The Evergreen State College in Olympia
(Washington), points out, “The foundations of neoliberalism were established in
economic theory by liberal Democrats at the Brookings Institution, and in political
practice by the Carter administration.”

Reagan picked the Democrat’s timid agenda of gradual return to economic liberalism and
ran with it, replacing the rhetoric of capitalism-with-a-human-face with the imperious,
self-righteous rhetoric of rugged individualism that greed and self-interest are virtues to
be nurtured.

Neither President Clinton changed the course of neoliberal corporate welfare policies of
Reaganomics, nor is President Obama hesitating to carry out those policies. This is
clearly reflected in his administration’s supply-side restructuring policies whose core
principle consists of redistributing national resources in favor of the rich and powerful—
cutting the critically-need social spending on basic needs to pay Wall Street gamblers and
Pentagon contractors.

Perhaps a most sinister neoliberal strategy to roll back the New Deal and other poverty-
reducing reforms has been deliberate creation of budget deficits in order to force cuts in
social spending. This has often been accomplished by a combination of drastic tax cuts
for the wealthy along with drastic hikes in military spending. As this combination creates
big budget deficits, it then forces cuts in non-military public spending as a way to fill the
budget gaps that are thus created.

The Obama administration has, indeed, escalated this creepy strategy by bailing out the
Wall Street gamblers, financing multiple wars of choice and more than 800 military
bases around the world, and then cutting social spending in an effort to reduce the
national debt and budget deficits thus generated.

Another strategy of reviving the pre-New Deal laissez faire economics has been the
increasing use of various schemes of outsourcing and privatization. The outsourcing of
public services to private hands pervades all areas of state responsibility. Perhaps a most
notorious example of this policy is the case of the Pentagon/security contracting. The
services outsourced by the Pentagon are no longer limited to the relatively simple or
routine tasks and responsibilities such as food and sanitation services. More importantly,
they include contracts for services that are highly sophisticated and strategic in nature,
such as the contracting of security services to corporate private armies, or modern-day
mercenaries.

Reporting on the steadily rising trend of outsourcing, Scott Shane and Ron Nixon of the
New York Times reported, “Without a public debate or formal policy decision,
contractors have become a virtual fourth branch of government. On the rise for decades,
spending on federal contracts has soared during the Bush administration, to about $400
billion last year from $207 billion in 2000, fueled by the war in Iraq, domestic security
and Hurricane Katrina, but also by a philosophy that encourages outsourcing almost
everything government does.”

The policy of privatization and outsourcing has led the U.S. Department of Housing and
Urban Development (HUD), tasked with expanding the American dream of home
ownership and affordable housing free from discrimination to people of modest means, to
surreptitiously “move a chunk of that role to Wall Street since 2002,” reports Pam
Martens, a freelance investigative reporter. Martens further writes:

“From 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted

mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman
Brothers and Bear Stearns while providing the firms with wide latitude to
foreclose, restructure or sell off in bundles to investors. HUD retained a minority
interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002
and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005.

“What the program effectively did was allow the biggest retail banks in the
country to get accelerated payment on their defaulted, FHA-insured, single family
mortgage loans while allowing another set of the biggest investment banks to
make huge profits in fees for bundling and selling off the loans as securitizations.
Once the loans were securitized (sold off to investors) they were no longer the
problem of HUD or the Wall Street bankers. The loans conveniently disappeared
from the radar screen and the balance sheet. The family’s fate had been sold off
by HUD to Wall Street in exchange for a small piece of the action. Wall Street
then sold off the family’s fate to thousands of investors around the world for a
large piece of the action.”

Outsourcing policies are bound to be further accelerated by the rising budget deficits of
many states and municipalities, and their need to sell off public property or outsource
their traditional services in order to raise funds to finance their budgetary needs. These
include outsourcing the maintenance of parks, the management of toll roads, the
collection of waste, the operation of municipal neighborhood centers, and more. For
example, according to a recent MSNBC report, in the two years since Mitch Daniels was
elected governor in Indiana, “the state has leased the 157-mile Indiana Toll Road to an
outside company for the next 75 years for $3.8 billion, hired vendors for $1.16 billion
over 10 years to process welfare applications, and brought in a company to serve food at
a mental hospital.”

While cash-strapped states and other local governments can generate quick cash by
privatizing public property or outsourcing public services, they forgo long-term
opportunities of income generation from such properties and services.
Another Wall Street plot to rob the people of their social safety net programs is the
recently renewed attack on the once-sacred entitled programs such as Social Security,
Medicare and Medicaid. Having piled up huge sums of national debt and deficit (through
bank bailouts, military spending, and tax cuts for the affluent), Wall Street champions,
firmly ensconced at the Congress and the White House, are now singing the “fiscal
responsibility” song as a prelude to chip away at Social Security and other entitlements.
This ominous scheme is clearly reflected in President Obama’s recently appointed
“National Commission on Fiscal Responsibility and Reform,” a bi-partisan group that is
tasked with reviewing the Social Security and other entitlements in an effort to further
“trim” social spending in order to pay for the sins of major banks and military contractor.

The bipartisan nature of the attack on Social Security indicates that the plan to undercut
economic safety net programs cannot be blamed solely on the blatently neoliberal
Republicans. It shows that, with few exceptions, Democrats are as much indebted and
committed to the powerful financial interests as are Republicans. The neoliberal
economic policies of the Obama administration, crafted by his economic team of ex-
bankers/Wall Street advisors, should dispel any illusions that he is committed to
“change” in favor of the people.

The New Deal and other basic needs programs were put in place not so much because of
F.D.R.’s or Keynes’s genius, or the goodness of their heart, as they were because of the
compelling pressure from the people. Freed (or feeling free) from that pressure, the
government, as the executive body of the financial/economic oligarchy, is now trying to
undermine those social safety net programs, and revive the pre-New Deal/pre-Keynesian
economic orthodoxy, that is, the economic model of the survival of the fittest. This
sinister, profit-driven effort at undermining the poor and working people’s hard-won
basic needs programs can be stopped only through a renewed and compelling pressure
from the grassroots—pressure that must be exerted not through the Democratic Party
machine but independent of the so-called two-party system.

Ismael Hossein-zadeh, author of The Political Economy of U.S. Militarism, teaches

Economics at Drake University, Des Moines, Iowa.