A battle is slowly brewing in Washington DC over whether to raise corporate taxes to help finance new infrastructure investments. While higher corporate taxes cannot generate all the funds needed, the coming debate over whether to raise them gives us an opportunity to challenge the still strong popular identification of corporate profitability with the health of the economy and, by extension, worker wellbeing.Continue reading
Our unemployment insurance system has failed the country at a moment of great need. With tens of millions of workers struggling just to pay rent and buy food, Congress was forced to pass two emergency spending bills, providing one-time stimulus payments, special weekly unemployment insurance payments, and temporary unemployment benefits to those not covered by the system. And, because of their limited short-term nature, President Biden must now advocate for a third.
The system’s shortcomings have been obvious for some time, but little effort has been made to improve it. In fact, those shortcomings were baked into the system at the beginning, as President Roosevelt wanted, not by accident. While we must continue to organize to ensure working people are able to survive the pandemic, we must also start the long process of building popular support for a radical transformation of our unemployment insurance system. The history of struggle that produced our current system offers some useful lessons.Continue reading
The announcement by the Bureau of Labor Statistics that the federal unemployment rate declined to 13.3 percent in May, from 14.7 percent in April, took most analysts by surprise. The economy added 2.5 million jobs in May, the first increase in employment since February. Most economists had predicted further job losses and a rise in the unemployment rate to as high as 20 percent.
This employment gain has encouraged some analysts, especially those close to the Trump administration, to proclaim that their predicted V-shaped economic recovery had begun. But there are strong reasons to believe that the US economy is far from recovery.
Long term trends and the coronavirus
Predictions for a V-shaped recovery rest to a considerable degree on the belief that our current economic collapse was caused by state mandated business closures to battle the coronavirus which unsurprisingly choked off our long expansion. Now that a growing number of states are ending their forced lockdowns it is only natural that the economy would resume growing. Certainly, the stock market’s recent rise suggests that many investors agree.
However, there are many reasons to challenge this upbeat story of impending recovery. One of the most important is that the pre-coronavirus period of expansion (June 2009 to February 2020), although the longest on record, was also one of the weakest. It was marked by slow growth, weak job creation, deteriorating job quality, declining investment, rising debt, declining life expectancy, and narrowing corporate profit margins. In other words, the economy was heading toward recession even before the start of state mandated lockdowns. For example, the manufacturing sector spent much of 2019 in recession.
Another reason is that the downturn in economic activity that marks the start of our current recession predates lockdown orders. It was driven by health concerns. As Emily Badger and Alicia Parlapiano explain in their New York Times article, and as illustrated in the following graphic taken from the article:
In the weeks before states around the country issued lockdown orders this spring, Americans were already hunkering down. They were spending less, traveling less, dining out less. Small businesses were already cutting employment. Some were even closing shop.
People were behaving this way — effectively winding down the economy — before the government told them to. And that pattern, apparent in a range of data looking back over the past two months, suggests in the weeks ahead that official pronouncements will have limited power to open the economy back up.
In some states that have already begun that process, like Georgia, South Carolina, Oklahoma and Alaska, the same daily economic data shows only meager signs so far that businesses, workers and consumers have returned to their old routines.
Thus, while some rebound in economic growth is to be expected given the severity of the downturn to this point, it is unlikely that the May employment jump signals the start of a powerful economic recovery. Weak underlying economic conditions and health worries remain significant obstacles.
In fact, even the optimistic US Congressional Budget Office predicts at best a long, slow recovery. As Michael Roberts describes:
It now expects US nominal GDP to fall 14.2% in the first half of 2020, from the trend it forecast in January before the COVID-19 pandemic broke. Then it expects the various fiscal and monetary injections by the authorities and the end of the lockdowns to reduce this loss from the January figure to 9.4% by end 2020. The CBO still expects a sort of V-shaped recovery in US GDP in 2021 but does not expect the pre-pandemic crisis trend in US economic growth (already reduced in the Long Depression since 2009) to be reached until 2029 and may not even return to the previous trend growth forecast until after 2030! So there will be a permanent loss of 5.3% in nominal GDP compared to pre-COVID forecasts – $16trn in value lost forever. In real GDP terms, the loss will be about 3% cumulatively, or $8trn in 2019 money. And this assumes no second wave in the pandemic and no financial collapse as companies go bust.
Depression level unemployment
Although President Trump has celebrated the May employment gains, the fact is we continue to suffer depression level unemployment. The following figure from the Washington Post provides some historical perspective. The current official unemployment rate of 13.3 percent is more than a third higher than the highest level of unemployment reached during the Great Recession.
But even the Bureau of Labor Statistics acknowledges that because of the unique nature of the current crisis the official announced unemployment rate for each of the last three months is flawed. The unemployment rate is based on household surveys. For the past three months, in an attempt to better understand the impact of the coronavirus, interviewers were supposed to classify people not working because of the virus as “unemployed on temporary layoff.” However, as the Bureau of Labor Statistics acknowledges, many of those people were incorrectly classified as “employed but absent at work,” which is the classification used when a person isn’t coming to work because of vacation, illness, bad weather, a labor dispute, or other reasons. People in this latter category are not counted as unemployed.
The BLS has determined that correcting the classification error would boost the official April unemployment rate to 19.7 percent and the May rate to 16.3 percent. And, it is important to note that this unemployment rate does not include those workers who have stopped looking for work and those who are involuntarily working part-time. Including them would push the May rate close to 25 percent.
Stephen Moore, an economic adviser to President Trump, has stated that the May job numbers take “a lot of the wind out of the sails of any phase 4 [stimulus bill] — we don’t need it now. There’s no reason to have a major spending bill. The sense of urgent crisis is very greatly dissipated by the report.” This is crazy.
Danger signs ahead
There are three reasons to fear that without substantial new federal action May employment gains will be short-lived.
First, it has been relatively low-wage production and nonsupervisory workers who have suffered the greatest number of job losses. That has left many businesses relatively top-heavy with managers and high-income professionals. A number of business analysts are now predicting a new wave of layoffs or firings of higher-income and management personal to bring staffing levels back into pre-coronavirus balance.
The following figure shows that almost 90 percent of the jobs lost from mid-February to mid-April were in the six lowest paid supersectors as defined by the Bureau of Labor Statistics. The May employment gains were also in these six sectors.
Economists with Bloomberg Economics are now warning of a second wave of job losses that will include “higher-paid supervisors in sectors where frontline workers were hit first, such as restaurants and hotels. It also includes the knock on-effects to connected industries such as professional services, finance and real estate.”
As Bloomberg explains:
The pandemic isn’t finished with the U.S. labor market, threatening a second wave of job cuts—this time among white-collar workers. . . .
For the analysis, [Bloomberg Economics economists] looked at job losses by sector in March and April—with affected industries dominated by blue-collar, hospitality and production workers—and determined how those layoffs would move to supervisory positions, since management cuts tend to lag the frontline workers.
The economists then took government data on relations between industries to compute the ones most reliant on demand from the most-affected sectors. Combining that information with the hit to employment in the most affected sectors they extrapolated to other jobs at risk, most of which were higher-skilled, white-collar roles.
The second reason to downplay the significance of the May employment gains is that critically important stimulus measures–in particular the one-time grant of $1200 for individuals and the $600 a week additional unemployment benefit (which expires at the end of July)–appear unlikely to be renewed. If that boost to earnings is withdrawn, economic demand and employment will likely fall again.
As Ben Casselman, writing in the New York Times, points out:
Research routinely finds that unemployment insurance is one of the most effective parts of the safety net, both in cushioning the effects of job loss on families and in lifting the economy. In economists’ parlance, the program is “well targeted” — it goes to people who need the money and who will spend it. Various studies have found that in the last recession, the system helped prevent 1.4 million foreclosures, saved two million jobs and kept five million people out of poverty.
The impact could be greater in this crisis because the program is reaching more people and giving them more money. The government paid $48 billion in benefits in April and has reached $86 billion in May, according to the Treasury Department.
As the following figure shows, almost all workers have suffered significant declines in employment income with low income workers taking the biggest hit.
Yet, the increase in food insecurity has been relatively small, especially for low income workers.
It is, as highlighted in the next figure, the massive individual benefit boosts included in the March stimulus package that has so far kept the decline in employment income from translating into dramatic spikes in food insecurity. If Congress refuses to pass a new stimulus that includes direct aid to the unemployed, the odds are great that the economic recovery will stall and unemployment will grow again.
The last reason for pessimism is the likely further contraction in state and local government spending and, by extension, employment and services, as a result of declining revenue. State and local government employment fell by 1 million from February to April, and by an additional 600 million in May. Looking just at state budgets, the Center for Budget and Policy Priorities estimates a shortfall in state budgets of $765 billion over fiscal years 2020-22, “much deeper than in the Great Recession of about a decade ago” (see the figure below).
And unfortunately, as the Center for Budget and Policy Priorities also notes, the federal government has, up to now, been unwilling to do much to help state governments manage their ballooning deficits:
Federal aid that policymakers provided in earlier COVID-19 packages isn’t nearly enough. Only about $65 billion is readily available to narrow state budget shortfalls. Treasury Department guidance now says that states may use some of the aid in the CARES Act of March to cover payroll costs for public safety and public health workers, but it’s unclear how much of state shortfalls that might cover; existing aid likely won’t cover much more than $100 billion of state shortfalls, leaving nearly $665 billion unaddressed. States hold $75 billion in their rainy-day funds, a historically high amount but far too little to meet the unprecedented challenge they face. And, even if states use all of it to cover their shortfalls, that still leaves them about $600 billion short.
States must balance their budgets every year, even in recessions. Without substantial federal help during this crisis, they very likely will deeply cut areas such as education and health care, lay off teachers and other workers in large numbers, and cancel contracts with many businesses. . . . That would worsen the recession, delay the recovery, and further harm families and communities.
Without a new stimulus measure that also includes support for state and local governments, their forced reduction in spending and cuts in employment can only add to the existing pressures working against recovery.
In sum, the crisis is real. A new stimulus that included a renewal of special unemployment payments as well as direct support for state and local governments and other critical services like the postal service could help stabilize the economy. But real progress will require a major effort on the part of the federal government to ensure adequate production of COVID-19 test kits and PPE as well as nationwide testing and contact tracing programs and then, most importantly, a fundamental reorganization of our economy.
The bank robber Willie Sutton, when asked by a reporter why he robbed banks, is reputed to have answered, “Because that’s where the money is.” Which brings us to a wealth tax.
Transforming our economy is going to be expensive. And a tax on the wealth of the super wealthy is one way to capture a sizeable amount of money, which is why both Bernie Sanders and Elizabeth Warren include the tax in their respective programs. The economists Gabriel Zucman and Emmanuel Saez estimate that Sanders’s proposed wealth tax would raise $4.35 trillion over the next decade, while Warren’s would raise $2.75 trillion.
Where the money is
The concentration of wealth has steadily increased since the mid-1990s, as illustrated in the following Bloomberg News chart.
A recent Federal Reserve Bank study highlights the fact that the top 10 percent and even more so the top 1 percent of households have been especially successful in increasing their equity ownership in US public and private companies. For example,
in 1989, the richest 10 percent of households held 80 percent of corporate equity and 78 percent of equity in noncorporate business. Since 1989, the top 10 percent’s share of corporate equity has increased, on net, from 80 percent to 87 percent, and their share of noncorporate business equity has increased, on net, from 78 percent to 86 percent. Furthermore, most of these increases in business equity holdings have been realized by the top 1 percent, whose corporate equity shares increased from 39 percent to 50 percent and noncorporate equity shares increased from 42 percent to 53 percent since 1989.
It is worth emphasizing that last point: the top 1 percent of households now control more than half of the equity in US businesses, public and private.
The figure below shows total wealth holdings for all US families as of the second quarter, 2019. The top 1 percent now own almost as much wealth as all the families in the 50th to 90th percentiles combined.
A comparison with the size and distribution of wealth in 2006, shown below, illustrates the rapid gains made by those at the top.
In 2006, the total wealth held by families in the 50th to 90th percentiles was slightly greater than that held by families in the 90th to 99th percentiles and significantly larger than those in the top 1 percent. But not anymore. And sadly, families in the bottom half of the distribution, whose wealth is predominately in real estate, have fallen further behind everyone else.
Time for a wealth tax
Recognizing this reality, and the fact that this concentration of wealth was aided by a steady decline in top individual, corporate, and estate tax rates, both Sanders and Warren want to tax the super wealthy to generate funds to help pay for their key programs, especially Medicare for All. And, as an added bonus, to begin weakening the enormous political power of those top families.
Sanders would create an annual tax that would apply to married couple households with a net worth above $32 million — about 180,000 households in total, or roughly the top 0.1 percent. The tax would start at 1 percent on net worth above $32 million, with increasing marginal tax rates–a 2 percent tax on net worth between $50 to $250 million, a 3 percent tax from $250 to $500 million, a 4 percent tax from $500 million to $1 billion, a 5 percent tax from $1 to $2.5 billion, a 6 percent tax from $2.5 to $5 billion, a 7 percent tax from $5 to $10 billion, and an 8 percent tax on wealth over $10 billion. For single filers, the brackets would be halved, with the tax starting at $16 million.
Warren’s wealth tax would apply to households with a net worth above $50 million — an estimated 70,000 households. The tax would start at 2 percent on net worth between $50 million to $1 billion, rising to 3 percent on net worth above $1 billion. Her proposed tax brackets would be the same for married and single filers.
Zucman and Saez have calculated how some of the richest Americans would have fared if these wealth taxes had been in place starting in 1982. For example, Jeff Bezos, the founder of Amazon, is currently worth some $160 billion. Under the Sanders plan his wealth would have been reduced to $43 billion. Under the Warren plan, it would be $87 billion.
As a New York Times article sums up:
Over all, the economists found, the cumulative wealth of the top 15 richest Americans in 2018 — amounting to $943 billion, using estimates from Forbes — would have been $434 billion under the Warren plan and $196 billion under the Sanders plan.
Despite the fact that the super wealthy will still have unbelievable fortunes even if forced to pay a wealth tax, almost all of them are strongly opposed to the tax and determined to discredit it.
Polling done early in the year found strong support for a wealth tax. As Matthew Yglesias explains:
Americans are . . . positively enthusiastic about Sen. Elizabeth Warren’s proposal to institute a wealth tax on large fortunes, according to a new poll from Morning Consult. Their survey finds that . . . the wealth tax scores a crushing 60-21 victory that includes majority support from Republicans.
Of course, this kind of support was registered before the start of any serious media effort to raise doubts about its effectiveness. Recently, a number of wealthy business people and conservative economists have begun to make the case that a wealth tax is a radical measure that will harm the economy. Some point to the fact that many countries that once used the tax have now abandoned it. Twelve OECD countries had a wealth tax in 1990, now only three do (Norway, Switzerland, and Spain). France, Germany, and Sweden are among the majority that no longer use it.
However, as Zucman and Saez explain, this fact does not mean that a wealth tax would not work in the US. For example, in some countries it was the election of conservative governments philosophically opposed to such taxes that led to their elimination. More substantively, they highlight four problem areas that tended to undermine the effectiveness of and support for national wealth taxes in Europe and why these should not be a major problem for the US.
First, European countries have their own separate tax laws and member states do not tax their nationals living abroad. Thus, a wealthy person living in a country with a wealth tax could easily move to a nearby country without a wealth tax and escape paying it. And many have. But, as the economists note,
The situation in the United States is different. You can’t shirk your tax responsibilities by moving, because US citizens are responsible to the Internal Revenue Service no matter where they live. The only way to escape the IRS is to renounce citizenship, an extreme move that in both Warren’s and Sanders’s plans would trigger a large exit tax of 40 percent on net worth.
Second, European governments tolerated a high level of tax evasion. Until last year, they did not require banks in Switzerland or other tax havens to share information about deposits with national tax authorities. This made it easy for the wealthy to hide their assets. The US is in a better situation to avoid this outcome. The Foreign Account Tax Compliance Act, signed in 2010, requires foreign financial institutions to send detailed information to the Internal Revenue Service about the accounts of U.S. citizens each year, or face sanctions. Almost all foreign banks have agreed to cooperate.
Third, European wealth taxes had many exemptions and deductions. In contrast, there are none in the proposed plans by Warren and Sanders. Zucman and Saez highlight the French program that was in place from 1988 to 2017 as a prime example:
Paintings? Exempt. Businesses owned by their managers? Exempt. Main homes? Wealthy French received a 30 percent deduction on those. Shares in small or medium-size enterprises got a 75 percent exemption. The list of tax breaks for the wealthy grew year after year.
Fourth, European wealth taxes fell on a considerably larger share of the population than would the proposed plans by Warren or Sanders. In Europe, “wealth taxes tended to start around $1 million, meaning they hit about 2 percent of the population, compared with about 0.1 percent for the proposed U.S. plans.” This broader reach of the European wealth taxes helped to generate popular pressure to weaken them, leading to their eventual removal. The more limited reach of the proposed US plans should help to blunt that development in the US.
We can certainly expect a fierce debate over the viability and effectiveness of a wealth tax as the campaign season continues, especially if Sanders or Warren becomes the Democratic Party nominee for president. We should be prepared to advocate for the tax as one important way to ensure adequate funding of needed programs. But we should also take advantage of the debate to shine the brightest light possible on the growing and already obscene concentration of wealth in the US and even more importantly on the underlying and destructive logic of the capitalist accumulation process that generates it.
Growing awareness of our ever-worsening climate crisis has boosted the popularity of movements calling for a Green New Deal. At present, the Green New Deal is a big tent idea, grounded to some extent by its identification with the original New Deal and emphasis on the need for strong state action to initiate social-system change on a massive scale. Challenges abound for Green New Deal activists. Among the many, how to:
- create supportive working relationships between the different movements currently pushing for a Green New Deal
- develop a sharper, shared vision of the aims of a Green New Deal
- increase popular support for those aims as well as participation in those movements
- build sufficient political power to force a change in state policy along lines favorable to the Green New Deal
- ensure that the resulting trajectory of change strengthens the broader struggle to achieve a socially just and ecologically sustainable political-economy
While there are great differences between the crises and political movements and possibilities of the 1930s and now, there are also important lessons that can be learned from the efforts of activists to build mass movements for social transformation during the Great Depression. My aim in this series, including in this fifth and last post, is to illuminate the challenges faced and choices made by these activists in order to draw out some of the relevant lessons.
In previous posts I argued that the despite the severity of the Great Depression, it took sustained, left-led, mass organizing and actions to force the federal government to accept responsibility for improving economic conditions. Unfortunately, First New Deal relief and job creation policies were inadequate, far from what the growing movement of unemployed demanded or was needed to meet majority needs. However, continued mass activity by the unemployed, those on relief, and those employed eventually forced the Roosevelt administration to undertake a Second New Deal, which included its widely praised programs for public works (WPA), social security (Social Security Act), and union rights (National Labor Relations Act).
These Second New Deal programs were unprecedented and did improve conditions for working people. But, as I argue in this final post, both the WPA and the Social Security Act again fell short of the transformative changes demanded by activists. And while the NLRA did offer workers important legal protections that made it safer for them to unionize their workplaces, its effect was to encourage a top-down system of labor-management relations that suppressed rank and file activism and class consciousness. Thus, despite their pathbreaking nature, these programs were far from revolutionary. Rather they were designed to ameliorate the suffering caused by capitalism’s crisis without threatening capitalist control over economic activity.
Tragically, changes in the political and economic environment, as well as strategic choices made by the left in response to those changes led to the weakening of popular movements, leaving them unable to push the Roosevelt administration into yet a Third New Deal. As a result, the upsurge of the 1930s failed to advance the socialist-inspired transformation that motivated many of its participants. In the end, it proved only able to force the state to adopt policies that reformed the workings of the system, a not inconsiderable achievement, but one that still left working people vulnerable to the vicissitudes of capitalism. Hopefully, a careful study of the New Deal experience will help Green New Deal activists build movements able to avoid the trap of limited reform while fighting for the massive, interconnected, and empowering social-system change we so desperately need.
The Second New Deal
It is easy to understand why supporters of a Green New Deal look to the New Deal as a touchstone. Growing numbers of people have come to the conclusion that our problems are too big to be solved by individual or local efforts alone, and that once again innovative and transformative state-led actions will be needed to solve them. Quite simply, the New Deal experience inspires people to believe in the possibility of a Green New Deal.
When people talk about the innovative and transformative policies of the New Deal they normally mean the core policies of the Second New Deal: the WPA, the Social Security Act, and the National Labor Relations Act. As innovative as these policies were, they were, as discussed in Part IV, largely forced on the Roosevelt Administration by left-led mass movements. And, as we see next, they were, by design, meant to blunt more radical demands for change. In short, they were important reforms, but no more than reforms, and as such offered only partial solutions to the problems of the time. Sadly, workers today continue to suffer from their limitations.
Works Progress Administration
One of the most important Second New Deal programs was the Works Progress Administration (WPA). Established in May 1935, it employed millions of unemployed to carry out public projects such as construction of public buildings and roads. Federal Project Number One, a much smaller program that also operated under the WPA umbrella, employed musicians, artists, writers, actors and directors in large arts, drama, media, and literacy projects. These included the Federal Writers’ Project, the Federal Theatre Project, the Federal Music Project, and the Federal Art Project.
Roosevelt’s decision to replace the Federal Emergency Relief Administration (FERA) with the WPA was a clear sign that he recognized that his First New Deal employment and relief programs — FERA and the Civil Works Administration (CWA) — had done little to satisfy fast growing left-led unemployed movements that were demanding a federal jobs program under which unemployed workers would be directly put to work, at union wages, producing a wide range of needed goods and services.
FERA had provided loans and grants to states which then offered relief work to those that qualified for relief. As discussed in Part III, the program required workers to submit to demeaning financial investigations, often paid those chosen for relief with coupons that could only be redeemed for select food items, made no attempt to match worker skills with jobs, and often employed those on relief in make-work tasks. While FERA marked the first direct federal support for relief and enabled states to greatly expand their relief rolls, it also required states to provide matching funds to receive FERA money. Limited state resources meant that relief covered only about one-third of those unemployed.
CWA was a far more popular program, most importantly because it involved direct federal employment, had no relief requirement, paid relatively well, and sought to match workers’ skills with jobs. However, it was, by design, a short-term program that lasted only 6 months, with most employment creation ending after 4 months.
The WPA was a federal program that operated its own projects in cooperation with state and local governments, which were required to cover some 10 to 30 percent of their costs. In some cases, the WPA took over ongoing FERA state and local relief programs. But, despite its impressive accomplishments, it also fell short of movement demands.
Although the WPA combined elements of both FERA and the CWA, it was far more like the former than the latter. For example, in contrast to the CWA, participation in WPA projects required a state means test. Thus, unemployment alone was not enough to qualify a person for the program. Moreover, as under FERA, participants were subject to demeaning monitoring of their spending habits and living conditions.
Again. unlike the CWA, little effort was made to match workers’ skills with jobs. Workers were divided into two broad categories of skilled and unskilled. The unskilled were assigned construction jobs even if they had no construction experience. The skilled were assigned a variety of writing or teaching jobs regardless of whether they had experience in those areas. The program did pay market wages. However, limits were put on maximum allowable hours of weekly employment in addition to an overall limit on total earnings.
WPA employment opportunities were also limited. Its average monthly employment was approximately 3 million workers. The CWA, at its peak, employed over 4 million a month. The WPA, like FERA, employed only about one-third of the unemployed. Moreover, because of unstable program financing, even those employed by the WPA would sometimes suffer layoffs.
The unemployed movement wanted a permanent federal employment program that would guarantee full employment. And they wanted that program to employ people to produce needed goods and services as a direct counter to private production. This was far from the vision of the Roosevelt administration. As Harry Hopkins, chief administrator of the WPA, explained:
Policy from the first was not to compete with private business. Hence we could neither work on private property, set up a rival merchandising system, nor form a work outlet through manufacturing, even though manufacturing had contributed to relief rolls hundreds of thousands of workers accustomed to operating machines and to doing nothing else for a living.
Operating under these limits, the WPA had little choice but to focus its efforts on the construction of public buildings and roads. Post offices accounted for close to half of the more than 3000 public buildings constructed.
Moreover, despite its limitations, the unemployed had to fight to sustain the program. Congress decided to provide funds for the program one year at a time. Sometimes allocations fell short of planned spending, resulting in layoffs. Other times, militant demonstrations by an alliance of unemployed groups forced Congress into making supplemental appropriations.
The number of public works projects and WPA participants began a steady decline in 1939. The next year the Roosevelt administration decided to reorient program activity to projects of direct use to the military, including construction of base housing and military airfields as well as expansion of naval yards. The WPA was quietly terminated in 1943, with unemployment problems seemingly solved thanks to the demands of wartime production. Sadly, the unemployed never developed the political weight or broader social movement needed to push the government into embracing a more expansive and ongoing program of national planning and public production.
The Social Security Act
The Social Security Act is widely considered to be the New Deal’s crown jewel. According to his Secretary of Labor, “[President Roosevelt] always regarded the Social Security Act as the cornerstone of his administration . . . and . . . took greater satisfaction from it than from anything else he achieved on the domestic front.”
Roosevelt appointed a Committee on Economic Security in July 1934 with the charge to develop a social security bill that he could present to Congress in January 1935 that would include provisions for both unemployment insurance and old-age security. An administration approved bill was in fact introduced in January and Roosevelt called for quick Congressional action. The bill was revised in April by a House committee and given a new name, “The Social Security Act.” After additional revisions the Social Security Act was approved by overwhelming majorities in both Houses of Congress, and the legislation was signed by the President on August 14, 1935.
The Social Security Act was a complex piece of legislation. It included what we now call Social Security, a federal old-age benefit program; a program of unemployment benefits administered by the states, and a program of federal grants to states to fund benefits for the needy elderly and aid to dependent children. It was a cautious beginning, as explained by Edwin E. Witte, the Executive Director and Secretary of the President’s Committee on Economic Security:
Because we were in the midst of a deep depression, the Administration and Congress were very anxious to avoid placing too great burdens on business and also to avoid adding to Government deficits. It was these considerations that resulted in the low beginning social security tax rates and the step-plan of the introduction of both old-age and unemployment insurance and also in the establishment of completely self-financed social insurance programs, without Government contributions–to this day a distinctive feature of social insurance in this country.
Before examining the way Roosevelt’s concerns for the well-being of business placed limits on the timeliness, coverage, and support provided by these programs, it is important to recognize that, as with the WPA, Roosevelt’s commitment to social security was a response to the efforts of the Communist Party (CP), which authored a far more progressive bill, one that would have significantly shifted the balance of class power towards workers.
The CP began pushing its Workers Unemployment Insurance Bill in the summer of 1930, and it, as well as the Unemployment Councils, worked hard to promote it over the following years. On March 4, 1933, the day of Roosevelt’s inauguration, they organized demonstrations stressing the need for action on unemployment insurance.
Undeterred by Roosevelt’s lack of action, the CP authored a bill–the Workers Unemployment and Social Insurance Bill–that was introduced in Congress in February 1934 by Representative Ernest Lundeen of the Farmer-Labor Party. In broad brush, as Chris Wright summarizes, the bill:
provided for unemployment insurance for workers and farmers (regardless of age, sex, or race) that was to be equal to average local wages but no less than $10 per week plus $3 for each dependent; people compelled to work part-time (because of inability to find full-time jobs) were to receive the difference between their earnings and the average local full-time wages; commissions directly elected by members of workers’ and farmers’ organizations were to administer the system; social insurance would be given to the sick and elderly, and maternity benefits would be paid eight weeks before and eight weeks after birth; and the system would be financed by unappropriated funds in the Treasury and by taxes on inheritances, gifts, and individual and corporate incomes above $5,000 a year. Later iterations of the bill went into greater detail on how the system would be financed and managed.
Not surprisingly, the bill enjoyed strong support among workers, employed and unemployed. Thanks to the efforts of unemployed and union activists it was soon endorsed by 5 international unions, 35 central labor bodies, and more than 3000 local unions. Rank and file worker committees also formed across the country to pressure members of Congress to pass it.
When Congress refused to act on the bill, Lundeen reintroduced it in January 1935. Because of public pressure, the bill became the first unemployment insurance plan in US history to be recommended by a congressional committee, in this case the House Labor Committee. It was voted down in the full House of Representatives, 204 to 52.
Roosevelt strongly opposed the Lundeen bill and it was to provide a counter that he established his Committee on Economic Security in July 1934 and pressed Congress to approve the resulting Social Security Act as quickly as possible. Roosevelt’s Social Security Act fell far short of what the Workers Unemployment and Social Insurance Bill offered, and it was strongly opposed by movement activists and organizations of the unemployed.
The part of the bill that established what we now call Social Security suffered from five main weaknesses. First, it was to be self-financing because of administration fears of deficit spending, a decision which placed downward pressure on benefit levels. Second, it was to be financed by contributions from both workers and employers. Thus, workers had to shoulder half the costs of the program.
Third, the system was not universal. The act covered only workers in commerce and industry, about half the jobs in the economy. Among those left out were farm and domestic workers.
Fourth, the act provided for monthly retirement benefits payable only to the primary worker in a family when they retired at age 65 or older. Moreover, the amount received depended on the value of wages earned in covered employment starting in 1937.
Finally, the act mandated that monthly benefit payments would not begin until 1942. A 1939 amendment did allow benefit payments to begin in 1940 and added child, spouse, and survivor benefits to the authorized retirement benefits.
In sum, this was a program that offered too little, too late, and to too few people. And while improvements were made over the years, the current system pales in comparison to the kind of security and humane retirement workers would have enjoyed if the workers’ movement had been powerful enough to secure passage of its preferred bill.
The unemployment system established as part of the Social Security Act was also structured in ways unfavorable to workers compared with the proposed benefits of the Workers Unemployment and Social Insurance Bill. Rather than set up a comprehensive national system of unemployment compensation, as workers desired, the act established a federal-state cooperative system that gave states wide latitude in determining standards.
More specifically, the act levied a uniform national pay-roll tax of 1 percent in 1936, 2 percent in 1937, and 3 percent in 1938, on covered employers, defined as those employers with eight or more employees for at least twenty weeks, not including government employers and employers in agriculture. Only workers employed by a covered employer could receive benefits.
Covered employers were given a federal credit on up to 90 percent of the tax if they paid their credit amount into a certified state unemployment compensation fund. The act left it to the states to decide whether to enact their own plans, and if so, to determine eligibility conditions, the waiting period to receive benefits, benefit amounts, minimum and maximum benefit levels, duration of benefits, disqualifications, and other administrative matters. It was not until 1937 that programs were established in every state as well as the then-territories of Alaska and Hawaii. And it was not until 1938 that most began paying benefits.
In the early years, most states required eligible workers to wait 2 to 4 weeks before drawing benefits, which were commonly set at half recent earnings (subject to weekly maximums) for a period ranging from 12 to 16 weeks. Ten state laws called for employee contributions as well as employer contributions.
Just like with social security, over the following years the program was expanded in a number of positive ways, including by expanding coverage and benefits. However, the unemployment program established by the Social Security Act fell far short of the universal, progressively funded social safety net that workers were demanding.
The National Labor Relations Act
In the spring of 1934, Senator Robert Wagner introduced a bill to establish a new labor relations board that, unlike the one established by the First New Deal’s National Industrial Recovery Act (NIRA), would have enforcement authority. Few in Congress supported the bill; President Roosevelt also opposed it.
Wagner reintroduced a revised version of his bill a year later and to a dramatically different outcome. In May 1935 it received unanimous support in the Senate Labor Committee, followed by strong support in both the Senate and House. As reported by the editors of Who Built America?, President Roosevelt remained opposed to the bill up until the very end:
“It ought to be on the record,” his labor secretary noted, that the bill was “not a part of the President’s program. It did not particularly appeal to him when it was described to him.” But when the US Supreme Court struck down the NIRA in May and Wagner’s National Labor Relations bill was passed by one house of Congress, FDR finally endorsed the bill.
In broad brush, the National Labor Relations Act established a set of laws and regulations designed to guarantee the right of private sector workers to peacefully organize into trade unions of their choosing and engage in collective bargaining and actions such as strikes. The act also created the National Labor Relations Board to organize and oversee the process by which workers decide on whether to join a union as well as determine whether collective bargaining agreements are being fairly bargained and enforced.
The turnaround in support for the NLRA owes much to the growing militancy of workers, and the threat that this militancy posed to the established order. Section 7a of the NIRA had promised workers that they would “have the right to organize and bargain collectively through representatives of their own choosing . . . free from the interference, restraint, or coercion of employers.” Unfortunately, with no mechanism to ensure that workers would be able to exercise this right, after a short period of successful union organizing, companies began violently repressing genuine union activity. By 1935, growing numbers of workers were calling the National Recovery Administration (NRA), which had been established to oversee the NIRA, the National Run Around.
However, it was not the corporate campaign of violence directed against workers that was the catalyst for the change in government policy. Rather it was the explosion of powerful left-led worker victories in three major labor struggles in early 1934. The first was in Toledo, Ohio, where American Workers’ Party sponsored unemployed organizations joined with striking auto workers seeking to unionize a major auto parts manufacturer. The workers battled special deputies and National Guard troops for weeks, maintaining an effective strike. Fearful of the possibility of an even larger strike, the Roosevelt administration finally sent federal mediators to Toledo, forcing the company to recognize the union and agree to significant wage increases.
At almost the same time, an even bigger struggle began in Minneapolis. A Trotskyist-led Teamster local, fighting to unionize a number of trucking and warehouse companies, effectively shut down commercial transport in the city. Days of violence followed as police and special deputies tried to break the strike. Faced with a growing threat of a general strike, federal mediators again were forced to intervene, and again forced the employers to recognize the union.
A general strike did take place in San Francisco. Led by Communist and other radical rank and file activists, San Francisco longshoremen rejected a secretly negotiated deal between the national leadership of the International Longshoremen’s Association and the waterfront employers. Their strike was quickly joined by dockworkers in every other West Coast port as well as many sailors and waterfront truckers.
Police attempts to break the San Francisco strike led to a full-scale battle and the death of two strikers by police on what became known as Bloody Thursday. In response, the labor movement declared a general strike. Some 150,000 workers went out, essentially bringing San Francisco, Oakland, Berkeley and other nearby municipalities, to a halt. Again, federal intervention was required to bring the strike to a halt, with a victory for the workers.
These struggles, all with important left leadership, showed a dramatic growth in worker militancy, solidarity, and radicalism that sent shock waves throughout the corporate community as well as the government. And it was to head off the further radicalization of the labor movement that the Congress and Roosevelt agreed to support the NLRA and its mechanisms to regularize the unionization process. In the words of Steve Fraser:
The Wagner Act helped institutionalize a form of industrial democracy that steered clear of any frontal assault on the underlying political economy. It legitimated collective bargaining, imposed responsibilities on both management and trade union officialdom, and worked to establish peace on the shop floor.
Union leaders were to police their members, instilling a disciplined commitment to the terms of the contract. Control of life on the shop-floor remained with management. Militants who thought otherwise were soon enough reigned in. The much-maligned (not without cause) trade union bureaucracy was, after all, the fruit of a mass movement, an institution, created where there had been nothing, the slowly solidified residue of fiery desires.
For a few years, it appeared that worker militancy, a willingness to directly challenge corporate rights with no concern for issues of legality, would continue despite the NLRB’s existence. For example, in early 1936 rubber workers in Akron, Ohio disregarded both union leadership and a court injunction to surround the eleven-mile perimeter of a Goodyear plant with pickets. They shut down the plant in protest over recent wage cuts and layoffs of activists and rejected federal attempts at mediation. When word came that the sheriff might come with armed deputies to open the plat, the strikers armed themselves. Finally, after four weeks, Goodyear settled, agreeing to reinstate the fired workers, reduce the workweek, and recognize the authority of union shop committees.
Not long after, inspired by the rubber workers, auto workers began staging walk-outs and strikes at several different Chrysler and GM plants over firings and unionization. The biggest action came at the end of 1936 with the Flint sit-down strike. The workers held the plant for 44 days, during which time they fought off attempts by armed police to evict them and ignored injunctions issued by the courts demanding that they leave. In the end GM agreed to recognize the UAW as the exclusive bargaining representative for all GM workers.
The number of strikes grew dramatically from 2,014 in 1935 to 4,740 in 1937, with workers increasingly winning unionization not through the machinery of the NLRA, but through direct action. For example, the number of sit-down strikes lasting more than a day grew from 48 in 1936 to some 500 in 1937.
Unfortunately, this upward trajectory of militant, class conscious activity would not be sustained. The reasons are complex. One part of the explanation concerns the evolving political orientation of the CP. Responding to the new strategic orientation of the Communist International, which stressed the importance of building coalitions with all progressive and liberal forces to check the rise of fascism, the CP began pursuing an anti-fascist popular front policy that included support for Roosevelt’s 1936 re-election and the New Deal more generally.
This new orientation also translated into an increasingly conservative line regarding labor activism. Party activists were encouraged not only to support the new CIO union leadership but also to oppose militant organizing tactics. As Frances Fox Piven and Richard A. Cloward describe:
The Communists, by now well into their Popular Front phase and some of them into the union bureaucracy as well, endorsed the call for union discipline. Wyndham Mortimer issued a statement early in 1937 saying: “Sit-down strikes should be resorted to only when absolutely necessary.” And the Flint Auto Worker, edited by Communist Henry Kraus, editorialized that “the problem is not to foster strikes and labor trouble. The union can only grow on the basis of established procedure and collective bargaining.”
At the same time, corporate leaders were taking direct aim at the new labor reforms. One of their first big victories was a 1938 Supreme Court ruling that said companies had the right to hire permanent replacement workers when workers went on strike. The following year it ruled sit-down strikes illegal, even if undertaken in response to an illegal corporate action.
States also joined in. In 1939, as Piven and Cloward report:
state legislatures began to pass laws prohibiting some kinds of strikes and secondary boycotts, limiting picketing, outlawing the closed shop, requiring the registration of unions, limiting the amount of dues unions could charge, and providing stiff jail terms for violations of the new offenses. By 1947 almost all of the states had passed legislation imposing at least some of these limitations.
Finally, corporate leaders also launched an anti-Communist attack against union activists, especially those in leadership positions in the newly created unions of the CIO. Their efforts were amplified by House Un-American Activities Committee hearings which began in 1938. The 1947 Taft–Hartley Act codified all these developments, outlawing wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, and closed shops, as well as requiring union officers to sign non-communist affidavits as a condition for their union to secure NLRA rights.
In sum, as left and union leadership began to rely ever more heavily on the NLRA to win gains for workers, corporate and political elites began aggressively narrowing the acceptable boundaries of legal action. As a consequence, although there would still be periods of worker militancy, the frequency of rank and file-led actions, open rebellion against the law, and moments of cross-union and class solidarity became increasingly rare. Thus, the NLRB succeeded, as its supporters hoped, in creating a more stable system of labor relations that was consistent with and supportive of the needs of capitalist production.
The Movement’s Decline
The workers movement of the 1930s was a mass movement that, thanks to left leadership, encouraged class solidarity and support for a program of radical social change. The movement was, as described in this and past posts, powerful enough to force the Roosevelt administration into adopting successively more progressive programs that, although flawed, did improve working and living conditions for many.
However, even as its different political tendencies began to unify, creating a national organization of the unemployed, the movement began to suffer a loss of militancy and vision that left it unable to further influence political developments. As a consequence, the reforms of the Second New Deal came to define the limits of change.
In 1934 the Communist Party organized Unemployed Councils tightened their organizational form, finally adopting a written constitution. In early 1935, Socialist Party organized unemployed organizations and a number of Musteite organized Unemployed Leagues joined together to create a national organization of the unemployed, the Workers Alliance. The following year, the Workers Alliance reached agreement with the Unemployed Councils and several other small unemployed organizations to form a new, larger national organization of the unemployed, the Workers Alliance of America (WAA). This unity was possible in large part because of the CP’s newly adopted popular front policy which led it to seek alliances with other political tendencies and groups that were seen as anti-fascist. This included the Socialist Party and Muste’s Conference for Progressive Labor Action and their associated movements of unemployed.
The Workers Alliance of America, critical of the WPA, continued to fight for the unemployed and those on relief. For example, when the Roosevelt administration announced planned cuts in WPA employment for 1937, the organization organized a number of sit-ins and demonstrations at city relief offices throughout the country. The President, under pressure from big city mayors, rescinded the cuts.
However, defending an existing program is not the same as winning a new, improved one. And this the movement could not do for several reasons. One is that the rank and file base of the unemployed movement was shrinking because of the growth in the economy and the expansion in relief opportunities. Another is that many of the movement’s most experienced activists were now employed as organizers in the growing trade union movement.
A third reason is that changes in the relief system undermined the movement’s ability to mobilize the unemployed and win gains through collective action. The system had become professionalized, with relief officials in city after city establishing rules about the size of delegations that would be allowed in offices and the number of times each week that delegations could seek meetings with officials. Moreover, relief office workers were instructed not to meet clients if they were accompanied by a delegation or grant relief if a delegation was present in the office.
This left local unemployed organizers in the position of either accepting the new ground rules to ensure that their members received relief or continuing their mass activity hoping that their old strategy would be more effective in winning gains. Increasingly, members advocated for the former, leaving organizers with no choice. In fact, as a sign of the growing sophistication of the New Deal relief effort, a number of relief offices actually offered jobs to local activists with the unemployed movement with the promise that they could help make the system work more efficiently and effectively for those seeking relief. In many cases, those offers were accepted.
Perhaps the most important reason for the movement’s growing political weakness was the Communist Party’s decision to pursue an alliance with the Roosevelt administration as part of its anti-fascist popular front policy. This led the party to organize support for Roosevelt’s 1936 election and his New Deal policies, and to deemphasize oppositional and militant mass actions in support of social transformation in favor of more established political activity such as petition drives and lobbying for improvements in existing programs. In fact, hoping to win Roosevelt’s good will, the CP often organized rallies designed to show worker support for the WPA and other New Deal programs. Roosevelt was actually invited to give the main speech at the WAA’s second annual convention. When he turned down the invitation the honor was given to the WPA’s Director of Labor Relations. In 1938, WAA locals even campaigned for pro-New Deal candidates.
Increasingly the WAA became integrated into the New Deal. As Piven and Cloward point out:
The [WAA became] recognized as the official bargaining agent for WPA workers, and alliance leaders now corresponded frequently with WPA administrators, communicating a host of complaints, and discussing innumerable procedural questions regarding WPA administrative regulations. Some of the complaints were major, having to do with pay cuts and arbitrary layoffs. Much of the correspondence, however, had to do with minute questions of procedure, and especially with the question of whether WPA workers were being allowed to make up the time lost while attending alliance meetings. Alliance leaders also wrote regularly to the president, reviewing the economic situation for him, deploring cuts in WPA, and calling for an expansion of the program.
The WAA continued to make demands on the administration, drafting their own bills calling for greater public spending and employment at union wages, advocating for their own far more sweeping social insurance program, and calling for the establishment of a national planning agency to oversee a permanent public works program. But the movement no longer threatened Roosevelt, and its demands were largely ignored. The WAA dissolved itself in 1941.
The labor movement, riding the growth in the economy, soon replaced the unemployed movement as the most powerful social force for change. However, for reasons noted above, it also underwent its own moderation despite the efforts of rank and file activists. For example, CIO leaders established Labor’s Non-Partisan League in 1936 to support President Roosevelt’s reelection and his New Deal program. World War II; the post-war vicious anti-communist attacks on all critics of capitalism, especially in the labor movement; and the strength of the post-war economic expansion finally buried the promise of a radical transformation. There would be no transformative Third New Deal.
The New Deal experience holds a number of important lessons for those advocating a Green New Deal. First, the existence or even recognition of a crisis cannot be counted on to motivate a change in government policy if that change threatens the status quo. It took years of mass organizing to force the federal government to acknowledge its responsibility to respond to the devastating social consequences of the Great Depression. The challenge will be even greater today since, as opposed to the 1930s, the capitalist class continues to enjoy lucrative opportunities for profit-making.
Second, a broad-base mass movement that threatens the stability of the system can force a significant change in government policy. The driving force for change in the 1930s was the movement of unemployed, and its early power came from the Communist Party’s ability to establish a network of local Unemployed Councils that provided unemployed workers with the opportunity to better understand the cause of their hard times, build class solidarity through collective actions in defense of local needs, and become part of broader campaigns for public policies on the national level that were directly responsive to their local concerns.
It is likely that activists for a Green New Deal will have to engage in a similar process of movement building if they hope to force a meaningful government response to our current crises. Despite the fact that we face a number of interrelated social, economic, and ecological crises, activists must still find ways to weave together different local organizations engaged in collective actions in defense of their local needs into a nation-wide political force able to project a vision of responsive system change as well as define and fight for associated policies.
Third, government responses to political pressure can be expected to fall far short of movement demands for transformative change. The Roosevelt administration’s First New Deal programs fell far short of what working people demanded and needed. It took sustained organizing to win a Second New Deal, which while better, was still inadequate. It the movement for a Green New Deal succeeds in forcing government action, it is safe to assume that, much as in the 1930s, the policies implemented will be partial and inadequate. Thus, movement activists have to prepare participants for a long, and ongoing campaign of mobilization, organizational development, and pressure.
Fourth, because of the importance of government policy and the natural attraction of wanting to exert personal influence on it, movement activists must remain vigilant against becoming too tied to the government bureaucracy, thereby losing their political independence and weakening the movement’s capacity to continue pushing for further changes in state policy. WAA leaders understandably wanted to influence New Deal policy, but their growing embrace of the Roosevelt administration, pursued for broader political objectives as well, ended up weakening the movement’s organizational strengthen and effectiveness and perhaps even more importantly, vision of a more egalitarian and democratic society. Green New Deal activists can be expected to face the same kind of pressures if a progressive government comes to power and begins to initiate its own reform program and movements must be alert to the danger.
Fifth, and finally, movements have to be careful not to become too policy oriented. The New Deal included a number of different programs each designed to address different problems. This created a natural tendency for the different organizations that comprised the broader social movement to narrow their own focus and concentrate on finding ways to respond to the policy shortcomings that most affected their members. Thus, while the unemployed, those on relief, and those fighting for unionization initially shared a sense of common struggle, over time, in large measure because of their success in winning reforms, they became separate movements, each with their own separate concerns. As a consequence, the overall power, unity, and commitment of the broader social movement for massive societal change was weakened.
This is a challenge that the movement for a Green New Deal can expect to face if it is successful enough to force meaningful government reforms, especially given the multiplicity of the challenges the country faces. The only way to minimize this challenge is to ensure that movement organizing, from the very beginning, encourages participants to see the need for the broader transformative change inspired by the notion of a Green New Deal, and to draw from their struggle an ever more concrete understanding of how that change can be advanced and how real improvement in their lives depends on its achievement.
In Part I and Part II of this series on lessons to be learned from the New Deal I argued that despite the severity of the Great Depression, sustained organizing was required to transform the national political environment and force the federal government to accept direct responsibility for financing relief and job creation programs. In this post, I begin an examination of the evolution and aims of New Deal programs in order to highlight the complex and conflictual nature of a state-directed reform process.
The New Deal is often talked about as if it were a set of interconnected programs that were introduced at one moment in time to reinvigorate national economic activity and ameliorate the hardships faced by working people. Advocates for a Green New Deal, which calls for a new state-led “national, social, industrial, and economic mobilization” to confront our multiple interlocking problems, tend to reinforce this view of the New Deal. It is easy to understand why: state action is desperately needed, and pointing to a time in history when it appears that the state rose to the occasion, developing and implementing the programs necessary to solve a crisis, makes it easier for people to envision and support another major effort.
Unfortunately, this view misrepresents the experience of the New Deal. And, to the extent it influences our approach to shaping and winning a Green New Deal, it weakens our ability to successfully organize and promote the kind of state action we want.
The New Deal actually encompasses two different periods; the First New Deal was begun in 1933, the Second New Deal in 1935. In both periods, the programs designed to respond to working class concerns fell far short of popular demands. In fact, it was continued mass organizing, spearheaded by an increasingly unified unemployed movement and an invigorated trade union movement, that pushed the Roosevelt administration to initiate its Second New Deal, which included new and significantly more progressive initiatives.
Unfortunately, as those social movements lost energy and vision in the years that followed, pressure on the state for further change largely abated, leaving the final reforms won compromised and vulnerable to future attack. The lesson from this history for those advocating for a Green New Deal is clear: winning a Green New Deal requires, in addition to carefully constructed policy demands, an approach to movement building that prepares people for a long struggle to overcome expected state efforts to resist the needed transformative changes.
The First New Deal
Roosevelt’s initial policies were largely consistent with those of the previous Hoover administration. Like Hoover, he sought to stabilize the banking system and balance the budget. On his first day in office Roosevelt declared a national bank “holiday,” dismissing Congressional sentiment for bank nationalization. He then rushed through a new law, the Emergency Banking Act, which gave the Comptroller of the Currency, the Secretary of the Treasury, and the Federal Reserve new powers to ensure that reopened banks would remain financially secure.
On his sixth day in office, he requested that Congress cut $500 million from the $3.6 billion federal budget, eliminate government agencies, reduce the salaries of civilian and military federal workers, and slash veterans’ benefits by 50 percent. Congressional resistance led to spending cuts of “only” $243 million.
Roosevelt remained committed, against the advice of many of his most trusted advisers, to balanced budget policies for most of the decade. While his administration did boost government spending to nearly double the levels of the Hoover administration, it also collected sufficient taxes to keep deficits low. It wasn’t until 1938 that Roosevelt proposed a Keynesian-style deficit spending plan.
At the same time, facing escalating demands for action from the unemployed as well as many elected city leaders, Roosevelt also knew that the status quo was politically untenable. And, in an effort to halt the deepening depression and growing militancy of working people, he pursued a dizzying array of initiatives, most within his first 100 days in office. The great majority were aimed at stabilizing or reforming markets, which Roosevelt believed was the best way to restore business confidence, investment, and growth. This emphasis is clear from the following list of some of his most important initiatives.
- The Agricultural Adjustment Act (May 1933). The act sought to boost the prices of agricultural goods. The government bought livestock and paid subsidies to farmers in exchange for reduced planting. It also created the Agricultural Adjustment Administration to manage the payment of subsidies.
- The Securities Act of 1933 (May 1933). The act sought to restore confidence in the stock market by requiring that securities issuers disclose all information necessary for investors to be able to make informed investment decisions.
- The Home Owners’ Loan Act of 1933 (June 1933). The act sought to stabilize the finance industry and housing industry by providing mortgage assistance to homeowners. It created the Home Owners Loan Corporation which was authorized to issue bonds and loans to help homeowners in financial difficulties pay their mortgages, back taxes, and insurance.
- The Banking Act of 1933 (June 1933). The act separated commercial and investment banking and created the Federal Deposit Insurance Corporation to insure bank deposits, curb bank runs, and reduce bank failures.
- Farm Credit Act (June 1933). The act established the Farm Credit System as a group of cooperative lending institutions to provide low cost loans to farmers.
- National Industrial Recovery Act (June 1933). Title I of the act suspended anti-trust laws and required companies to write industrywide codes of fair competition that included wage and price fixing, the establishment of production quotas, and restrictions on market entry. It also gave workers the right to organize unions, although without legal protection. Title I also created the National Recovery Administration to encourage business compliance. The Supreme Court ruled the suspension of anti-trust laws unconstitutional in 1935. Title II, which established the Federal Emergency Administration of Public Works or Public Works Administration, is discussed below.
Roosevelt also pursued several initiatives in response to working class demands for jobs and a humane system of relief. These include:
- The Emergency Conservation Work Act (March 1933). The act created the Civilian Conservation Corps which employed jobless young men to work in the nation’s forests and parks, planting trees, reducing erosion, and fighting fires.
- The Federal Emergency Relief Act of 1933 (May 1933). The act created the Federal Emergency Relief Administration to provide work and cash relief for the unemployed.
- The Federal Emergency Administration of Public Works or Public Works Administration (June 1933). Established under Title II of the National Industrial Recovery Act, the Public Works Administration was a federally funded public works program that financed private construction of major public projects such as dams, bridges, hospitals, and schools.
- The Civil Works Administration (November 1933). Established by executive order, the Civil Works Administration was a short-lived jobs program that employed jobless workers at mostly manual-labor construction jobs.
This is without doubt an impressive record of accomplishments, and it doesn’t include other noteworthy actions, such as the establishment of the Tennessee Valley Authority, the ending of prohibition, and the removal of the US from the gold standard. Yet, when looked at from the point of view of working people, this First New Deal was sadly lacking.
Roosevelt’s pursuit of market reform rather than deficit spending meant a slow recovery from the depths of the recession. In fact, John Maynard Keynes wrote Roosevelt a public letter in December 1933, pointing out that the Roosevelt administration appeared more concerned with reform than recovery or, to be charitable, was confusing the former with the latter. Primary attention, he argued, should be on recovery, and that required greater government spending financed by loans to increase national purchasing power.
Roosevelt also refused to address one of the unemployed movement’s major policy demands: the establishment of a federal unemployment insurance fund financed by taxes on the wealthy. Finally, as we see next, even the New Deal’s early job creation and relief initiatives were deliberately designed in ways that limited their ability to meaningfully address their targeted social concerns.
First New Deal employment and relief programs
The Roosevelt administration’s first direct response to the country’s massive unemployment was the Civilian Conservation Corps (CCC). Its enrollees, as Roosevelt explained, were to be “used in complex work, not interfering with normal employment and confining itself to forestry, the prevention of soil erosion, flood control, and similar projects.” The project was important for establishing a new level of federal responsibility, as employer of last resort, for boosting employment. Over its nine-year lifespan, its participants built thousands of miles of hiking trails, planted millions of trees, and fought hundreds of forest fires.
However, the program was far from meeting the needs of the tens of million jobless and their dependents. Participation in the program was limited to unmarried male citizens, 18 to 25 years of age, whose families were on local relief, and who were able to pass a physical exam. By law, maximum enrollment in the program was limited to 300,000.
Moreover, although the CCC provided its participants with shelter, clothing, and food, the wages it paid, $30 a month ($25 of which had to be sent home to their families), were low. And, while white and black were supposed to be housed together in the CCC camps where participants lived under Army supervision, many of the camps were segregated, with whites given preference for the best jobs.
Two months later, the Roosevelt administration launched the Federal Emergency Relief Administration (FERA), the first program of direct federal financing of relief. Under the Hoover administration, the federal government had restricted its support of state relief efforts to the offer of loans. Because of the precariousness of their own financial situation, many states were unable to take on new debt, and were thus left with no choice but to curtail their relief efforts.
FERA, in contrast, offered grants as well as loans, providing approximately $3 billion in grants over its 2 ½ year lifespan. The grants allowed state and local governments to employ people who were on relief rolls to work on a variety of public projects in agriculture, the arts, construction and education. FERA grants supported the employment of over 20 million people, or about 16 percent of the total population of the United States.
However, the program suffered from a number of shortcomings. FERA provided funds to the states on a matching basis, with states required to contribute three dollars for every federal dollar. This restriction meant that a number of states, struggling with budget shortfalls, either refused to apply for FERA grants or kept their requests small.
Also problematic was the program’s requirement that participants be on state relief rolls. This meant that only one person in a family was eligible for FERA work. And the amount of pay or relief was determined by a social worker’s evaluation of the extent of the family’s financial need. Many states had extremely low standards of necessity, resulting in either low wages or inadequate relief payments which could sometimes be limited to coupons exchangeable only for food items on an approved list.
Finally, FERA was not directly involved in the administration and oversight of the projects it funded. This meant that compensation for work and working conditions differed across states. It also meant that in many states, white males were given preferential treatment.
A month later, the Public Works Administration (PWA) was created as part of the National Industrial Recovery Act. The PWA was a federal public works program that financed private construction of major long-term public projects such as dams, bridges, hospitals, and schools. Administrators at PWA headquarters planned the projects and then gave funds to appropriate federal agencies to enable them to help state and local governments finance the work. The PWA played no role in hiring or production; private construction companies carried out the work, hiring workers on the open market.
The program lasted for six years, spent $6 billion, and helped finance a number of important infrastructure projects. It also gave federal administrators valuable public policy planning experience, which was put to good use during World War II. However, as was the case with FERA, PWA projects required matching contributions from state and local governments, and given their financial constraints, the program never spent as much money as was budgeted.
These programs paint a picture of a serious but limited effort on the part of the Roosevelt administration to help workers weather the crisis. In particular, the requirement that states match federal contributions to receive FERA and PWA funds greatly limited their reach. And, the participant restrictions attached to both the CCC and FERA meant that program benefits were far from adequate. Moreover, because all of these were new programs, it often took time for administrators to get funds flowing, projects developed, participants chosen, and benefits distributed. Thus, despite a flurry of activity, millions of workers and their families remained in desperate conditions with winter approaching.
Pressed to do more, the Roosevelt administration launched its final First New Deal jobs program in November 1933, the Civil Works Administration (CWA), under the umbrella of FERA. It was designed to be a short-term program, and it lasted only 6 months, with most employment creation ending after 4 months. The jobs created were primarily low-skilled construction jobs, improving or constructing roads, schools, parks, airports, and bridges. The CWA gave jobs to some 4 million people.
This was a dramatically different program from those discussed above. Most importantly, employment was not limited to those on relief, greatly enlarging the number of unemployed who could participate. At the end of Hoover’s term in office, only one unemployed person out of four was on a relief roll. It also meant that participants would not be subject to the relief system’s humiliating means tests or have their wages tied to their family’s “estimated budgetary deficit.” Also significant was the fact that although many of the jobs were inherited from current relief projects, CWA administrators made a real effort to employ their workers in new projects designed to be of value to the community.
For all of these reasons, jobless workers flocked to the program, seeking an opportunity to do, in the words of the time, “real work for a real wage.” As Harry Hopkins, the program’s chief administrator, summed up in a talk shortly after the program’s termination:
When we started Civil Works we said we were going to put four million men to work. How many do you suppose applied for those four million jobs? About ten million. Now I don’t say there were ten million people out of work, but ten million people walked up to a window and stood in line, many of them all night, asking for a job that paid them somewhere between seven and eighteen dollars a week.
In point of fact, there were some fifteen million people unemployed. And as the demand for CWA jobs became clear, Roosevelt moved to end the program. As Jeff Singleton describes:
In early January Hopkins told Roosevelt that CWA would run out of funds sooner than expected. According to one account, Roosevelt “blew up” and demanded that Hopkins begin phasing out the program immediately. On January 18 Hopkins ordered weekly wages cut (through a reduction in hours worked) and hinted that the program would be terminated at the beginning of March. The cutback, coming at a time when the program had just reached its promised quota, generated a storm of protest and a movement in Congress to continue CWA through the spring of 1934. These pressures helped the New Deal secure a new emergency relief appropriation of $950 million, but the CWA was phased out in March and April.
The First New Deal did represent an important change in the economic role of the federal government. In particular, the Roosevelt administration broke new ground in acknowledging federal responsibility for job creation and relief. Yet, the record of the First New Deal also makes clear that the Roosevelt administration was reluctant to embrace the transformative role that many now attribute to it.
As Keynes pointed out, Roosevelt’s primary concern in the first years of his administration was achieving market stability through market reform, not a larger financial stake in the economy to speed recovery. In fact, in some cases, his initiatives gave private corporations even greater control over market activity.
The Roosevelt administration response to worker demands for jobs and a more humane system of welfare was also far from transformative. Determined to place limits on federal spending, its major initiatives required substantial participation from struggling state governments. They also did little to challenge the punitive and inadequate relief systems operated by state governments. The one exception was the CWA, which mandated wage-paying federally directed employment. And that was the one program, despite its popularity, that was quickly terminated.
Of course, there was a Second New Deal, which included a number of important and more progressive initiatives, including the Works Progress Administration, the Social Security Act, and the National Labor Relations Act. However, as I will discuss in the next post in this series, this Second New Deal was largely undertaken in response to the growing strength of the unemployed movement and workplace labor militancy. And as we shall see, even these initiatives fell short of what many working people demanded.
One lesson to be learned from this history for those advocating a Green New Deal is that major policy transformations do not come ready made, or emerge fully developed. Even during a period of exceptional crisis, the Roosevelt administration was hesitant to pursue truly radical experiments. And the evolution of its policy owed far more to political pressure than the maturation of its administrative capacities or a new found determination to experiment.
If we hope to win a Green New Deal we will have to build a movement that is not only powerful enough to push the federal government to take on new responsibilities with new capacities, but also has the political maturity required to appreciate the contested nature of state policy and the vision necessary to sustain its forward march.
Despite its reputation as the wealthiest generation, baby boomers (generally considered to be those born between 1946 and 1964) are facing a retirement nightmare. A 2016 St. Louis Federal Reserve study of the retirement readiness of U.S. families came to the same conclusion but put it more gently: “It could be worrisome that, for many American households, the total balances of their retirement accounts may not be sufficient to ensure a solid life in retirement.”
The investment industry, always ready to deflect blame, argues that the problem is the result of the fact that Americans just don’t save enough. But even Barron’s, a sister publication of the Wall Street Journal that specializes in financial news, understands what is really happening. As a recent article in the magazine points out:
Too few Americans are saving for retirement. Those who do save are putting away too little. It is only a matter of time before this sparks an economic and political crisis. . . .
But America’s retirement crisis wasn’t created because of character flaws or personal irresponsibility. Nor can it realistically be fixed by technocratic fixes.
The ugly, unspoken truth is that many people are just not earning enough money. They barely have enough to cover their daily expenses; they don’t have enough left over to be able to save.
The promised golden years are out of reach for most boomers.
Baby boomers are moving rapidly towards retirement. Those born in 1946 are now 73, those born in 1964 are now 55. Despite being celebrated for their good economic fortune, especially in contrast to millennials, most boomers face a future that doesn’t include retirement with dignity or, in the words of the St. Louis Fed, a solid life.
Although labeled the wealthiest generation, a Stanford Center on Longevity examination of retirement preparedness found that “baby boomers are in a financially weaker position than earlier generations of retirees, in terms of home equity accumulation, financial wealth, and total wealth.”
The Stanford Center study divided the boomer generation into two groups, the early boomers (born 1948-1953) and mid-boomers (1954-1959), and compared them to early (before 1942) and later born (1942-47) members of the previous “silent generation.” The following are some of its key findings:
Holding age fixed, mid-boomers age around 55-60 years old had saved less than previous generations at the same age.
Holding age fixed, a 50-year old mid-boomer had saved less in any retirement plans, including workplace plans and Individual Retirement Account plans, than a 50-year old from prior generations.
Holding age fixed, boomers age 55-60 had a higher debt burden than prior generations at the same age, evidenced in a higher debt-to-net worth ratio, a lower liquid-asset to all asset ratio, and a higher loan-to-value ratio.
But boomer problems are not just comparative. For example, the Stanford study also found that approximately 30 percent of baby boomers had no money saved in retirement plans in 2014, when they were age 58, on average, “leaving them little time to start saving for retirement.” And, the median balance for those who held a retirement account was only $200,000, far too small an amount to generate the income needed to carry a person through a 20- to 30-year retirement.
Looking just at retirement age boomers, a 2018 PBS News Hour report noted that:
Nearly half of Americans nearing retirement age (65 years old) have less than $25,000 put away, according to the Employee Benefit Research Institute’s annual survey. One in four don’t even have $1,000 saved.
Adding to the retirement nightmare is the fact that many boomers also remain deep in debt. A CNBC story reports that:
One-third of homeowners over the age of 65 were still paying off a mortgage in 2012, compared with less than a quarter of people in 1998 — and the median amount they owed nearly doubled to $82,000 from $44,000.
Meanwhile, the number of people aged 60 and older with student debt quadrupled between 2005 and 2015, to 2.8 million from 700,000.
One reason for low boomer financial balances is that this generation was hit hard by the Great Recession and the following years of low interest rates, and has yet to recover. Boomer median household net worth was $224,100 in 2007 and only $184,200 in 2016.
African American and Latinx baby boomers face even greater problems, earning less money and having far less retirement savings than white Americans. According to Forbes, “The average white family had more than $130,000 in liquid retirement savings (cash in accounts such as 401(k)s, 403(b)s and IRAs) vs. $19,000 for the average African American in 2013, the most recent data available.”
Latinx retirement savings also trails that of whites. For example, in 2014, among working individuals age 55 to 64, only 32.2 percent of Latinx had money in a retirement account compared with 58.5 percent of whites. The average Latinx account held $42,335 while the average white account held $103,526.
With private pensions and personal savings inadequate to fund a secure retirement, it is no wonder that so many boomers strongly defend Social Security, the so-called third leg (in addition to private pensions and personal savings) of the retirement “stool.” But, as important as it is, the average Social Security check in 2018 was only $1,422 a month or $17,064 a year.
It should therefore come as no surprise that research by the Institute on Assets and Social Policy finds that one-third of seniors have no money left over at the end of the month or are in debt after meeting necessary expenses. Or that growing numbers of seniors are making the decision to forego retirement altogether, by either continuing to work to returning to the labor force.
Saying goodbye to retirement
According to the 2019 report titled Boomer Expectations for Retirement, one-third of boomers plan to retire at age 70 or not at all. And one-third of employed boomers ages 67-72 postponed retirement.
Thus, while labor force participation rates are declining for many age cohorts, they are growing for boomers and older workers. In fact, between April 2000 and January 2018, “there has been essentially no net growth of employment for workers under age 55. Over that same time, employment for workers over age 55 has doubled.”
The figure below shows labor force participation rates for six age 50-plus cohorts since the turn of the century. As Jill Mislinski states: “The pattern is clear: The older the cohort, the greater the growth.”
Sadly, many of these older workers have had little choice but to accept low-paid, physically demanding work at some of America’s richest companies (e.g., Walmart and Amazon) who are delighted to take advantage of their desperation.
Jessica Bruder’s 2017 book, Nomadland: Survival in Twenty First Century America, describes mostly white baby boomers who, strapped for money, decide to buy used RVs and travel. We learn about the friendships they make, and also the minimum wage seasonal jobs they are forced to take to survive. Zhandarka Kurti draws on Bruder’s work to highlight their experience with Amazon:
With its motivational slogan of “work hard, have fun, make history,” Amazon recruits seasonal workers at various “nomad friendly events” including “RV shows and rallies—in more than a dozen states across America.” Older workers are drawn to the opportunity to make good money in a relatively short time. . . . Also ironically, Walmart and Amazon, the two competing retail giants and also the country’s largest employers, allow their workers to park overnight, an attractive perk for many older nomads who struggle with food security let alone rent. . . .
While most of the nomads are made aware of the physical aspects of the job [working in Amazon fulfillment centers] during the training seminars, they are nonetheless surprised by just how much pain they are in after a day’s work. . . . Older workers constantly complain of chronic pain from work and Amazon’s solution is to offer free over-the-counter pain killers. . . . Amazon leaves older workers so physically tired that they have little occasion to enjoy their leisure time. Instead they spent the remainder of their “free” time nursing themselves back to health to survive another workday. . . .
In many ways older workers are Amazon’s dream labor force. “They love retirees because we’re dependable. We’ll show up and work hard, and are basically slave labor” one 78 year-old workamper who previously worked as a teacher in California’s community colleges confides in Bruder. Older workers are what Bruder calls “plug-and-play labor” in that they are only around for a short time, are often too tired to complain about the non-existent benefits and are generally appreciative of the jobs regardless of the pain they endure. . . . Amazon also receives federal tax credits to hire older disadvantaged workers and the company predicts that by 2020 one in every four workampers in the US would have worked for Amazon.
It is clear that leading American businesses do not favor bringing back pensions, or boosting wages, or paying higher taxes to strengthen and expand social security and other social services. Thus, if existing trends are not challenged and reversed, the boomer generation (or at least a significant minority) may well be the last to experience some sort of satisfactory retirement. This development is yet another sign of a failed system. Boomers need to find ways to help younger generations keep the goal of a satisfying retirement alive, and join in a common fight for the structural changes required to realize it.
June 2019 marks the 10th anniversary of the current US economic expansion. If it makes it through July it will surpass the 1991-2001 expansion as the longest on record. But while expansions are to be preferred over recessions, there are many reasons to view this record-breaking expansion critically. In fact, the nature of this expansion, hopefully captured in the following portrait, highlights the growing inability of the US economic system, even when performing “well,” to meet majority needs.
This has been a weak expansion in terms of growth. By way of comparison, GDP grew by 43 percent over the first 39 quarters of the 1991-2001 expansion (which was the previous record holder). In the first 39 quarters of this expansion, through March 2019, GDP grew by only 22 percent.
At its current pace, the current expansion would have to run six more years to equal the aggregate growth of the 1991-2001 expansion, and nine more years to match the 54 percent aggregate GDP growth recorded over the 1961-69 expansion. The figure below illustrates the relative weakness of the current expansion in terms of growth.
Strong corporate profits
At the same time, weak growth did little to dampen corporate earnings. As we can see in the following figure, corporate earnings have been on the rise since 2001, reaching their maximum in 2015. While pre-tax profits have leveled off, after tax profits, thanks to the recent Trump tax cut, have resumed their upward march.
We see a similar trend in the figure below which shows corporate profits as a share of GDP.
After-tax corporate profits will likely turn down again soon, as the effects of the tax cut are already weakening, indicating the end to this expansion is not far off.
Weak wage growth
The suppression of wages is one of the main reasons that corporations were able to enjoy such strong profits despite weak growth. The figure below shows the collapse of labor’s share of corporate income. The trend began during the 2001-2009 expansion but accelerated during this expansion. Even more striking, the share has remained low despite the many years of expansion.
The wage stagnation underlying this trend is illustrated more directly in the next figure.
As we can see, there have been only two recent periods when workers (outside those in the 95th percentile) enjoyed real gains: 1997-2001 and 2015-2017. Both periods were marked by very low rates of unemployment and followed long periods of expansion during which wages remained largely unchanged. It is worth noting that both periods were also marked by a decline in corporate profits, suggesting that corporations cannot long tolerate any kind of upward movement in majority earnings.
For reasons that remain unclear, wage growth in 2019 has slowed. The Federal Reserve Board, always keen to make sure that wages remain low to ensure profitability, began pushing up interest rates in late 2015 in response to the rising wage levels noted above. The recent wage slowdown has, at least temporarily, caused the Fed to halt its interest rate hikes, which will likely help extend the expansion.
The dramatic decline in unemployment is perhaps the most celebrated achievement of this expansion. As we can see in the figure below, the unemployment rate steadily fell over the expansion, from a high of 10 percent down to a low of 3.6 percent as of May 2019. Such a low level suggests a very tight labor market, which makes the wage stagnation difficult to explain. The likely answer is that the current low level of unemployment is a poor measure of labor tightness.
A better measure appears to be the labor force participation rate, which is calculated as the civilian labor force (i.e., those employed and those unemployed and actively looking for work) divided by the civilian noninstitutional population (i.e., those not in the military or institutionalized). The figure below also shows the labor force participation rate for those 16 years and older.
As we can see, the current labor force participation rate of 62.8 percent remains significantly below its 2008 peak and even further below the even higher peak reached at the turn of the century. The decline in the labor force participation rate means that millions of workers have yet to return to the labor force, either to hold a job or to look for one.
The seriousness of this problem is highlighted by the labor force participation rate of the prime age cohort, those 25-54 years of age. Their core status stems from the fact that, as Jill Mislinski explains,
This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.
In the figure below we can see that the labor force participation rate of the prime age cohort remains significantly below its two previous peaks. The fact that millions of prime age workers have yet to return to the labor market is a strong indicator that labor market conditions remain far from ideal despite years of economic expansion.
One reason for the slow growth and associated weak job creation is that business has been reluctant to invest. Instead, they have been content to use a growing share of their earnings to fund dividend payments and stock buybacks. The following chart, taken from a Federal Reserve Board study of the relationship between corporate capital investment and net stock buybacks, shows a post-2000 downward trend in business investment as a share of GDP and a rise in the value of dividend payments and stock buybacks as a share of GDP.
While the Federal Reserve study concludes that it is difficult to determine whether “corporations are actively reducing investment in order to finance share repurchases and dividend payments . . . [or] pessimism about future demand and economic growth is leading corporations to defer capital spending, and companies are simply returning cash to their shareholders for want of attractive investment opportunities,” there can be no question that there has been a noticeable change in business behavior.
For example, as can see below, whereas in the past nonfinancial corporations invested up to 40 percent of their cash flow back into their business, that share has fallen below 20 percent for most of the current expansion. In other words, the lack of investment has nothing to do with a shortage of funds.
As the Federal Reserve study points out, business has been funneling ever more of its earnings, through dividends and stock buybacks, to its top managers and stockholders. According to the New York Times, “From 2008 to 2017, 466 S.&P. 500 companies distributed $4 trillion to shareholders as buybacks, equal to 53 percent of profits, along with $3.1 trillion as dividends.” Beyond slowing growth and job creation, such a policy has helped to drive income and wealth inequality to record levels, ensuring that those at the top remain content with the economy’s performance despite the problems faced by most working people.
The following figure, from another Federal Reserve Board study, this one titled A Wealthless Recovery?, highlights the extremely uneven distribution of rewards during this expansion. The authors of the report grouped working-age households into four different groups according to their reported “usual income.” As we can see from the blue bars, the Great Recession left all groups with substantially less wealth. However, as we can see from the green bars, which extend the period under analysis to 2016, (which includes many years of expansion), only the top income group enjoys a gain in wealth. In other words, the expansion has done little to help the bottom 90 percent of working-age households recover the wealth they lost during the Great Recession.
Sustained fiscal austerity is another reason for the slow growth during this expansion. The figure below shows the cumulative growth in per capita spending by federal, state, and local governments following the troughs of the 11 recessions since World War II. As Josh Bivens explains:
Astoundingly, per capita government spending in the first quarter of 2016—twenty-seven quarters into the recovery—was nearly 4.9 percent lower than at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3.6 percent higher than at the trough; 24 quarters after the early 2000s recession (a shorter recovery that did not last a full 27 quarters), it was almost 10 percent higher; and 27 quarters into the early 1980s recovery, it was more than 17 percent higher.
If government spending in this expansion had followed the pattern of previous recoveries, public spending would have been far greater, not only boosting demand and employment but ensuring provision of needed public services. As Bivens points out,
If government spending following the Great Recession’s end had tracked the spending that followed the early 1980s recession—the only other postwar recession of similar magnitude—governments in 2016 would have been spending almost a trillion dollars more in that year alone.
State and local governments are primarily responsible for this austerity. In many cases, their actions were the result of tax cuts enacted to benefit the wealthy and leading corporations that left state and local governments short of revenue. Limited by balanced budget requirements, most ended up slashing spending on social services. As a consequence, the brunt of austerity has been borne by working people.
This is far from a complete portrait of the current expansion. Yet, it still clearly reveals how the logic of capitalism works against the interests of the great majority of working people, even during a long period of profitable economic activity. A recession awaits, and then our troubles will intensify. Key to our ability to build a popular democratic response in defense of majority interests may well be how people evaluate the benefits of remaining committed to an economic system that that undermines their well-being in multiple ways even when it is functioning well.
Every time a progressive policy captures the public imagination, like the Green New Deal, opponents are quick to raise the revenue question in an effort to discredit it. While higher taxes on the wealthy and leading corporations should be an obvious starting point in any response, until recently elites have been remarkably successful in winning tax reductions, spinning the argument that cuts are the best way to stimulate private investment and create jobs. And they have enjoyed a double gain: not only do the cuts benefit them financially, the loss of public revenue encourages people to think small when it comes to public policy.
However, there are signs that the times might be changing. Alexandria Ocasio-Cortez’s proposal to tax annual incomes over $10 million at a marginal tax rate of 70 percent has won significant public support. Strong popular opposition in New York to a plan to heavily subsidize a new Amazon headquarters forced the company to withdraw its proposal. And then there is the negative lesson of the Wisconsin fiasco, where the state showered Foxconn with massive tax and other subsidies in an effort to land a new manufacturing facility, only to have the company walk-back its commitments after significant state expenditures.
But there is still important education as well as political work that remains to be done to win majority support for the kind of tax reform we so desperately need. President Trump’s “Tax Cuts and Jobs Act,” which was signed into law on Dec. 22, 2017, is one example of what we are up against.
The “American model”
President Trump’s signature tax law included significant benefits for the wealthy as well as most major corporations. Looking just at the business side, the law:
- lowered the US corporate tax rate from 35 percent to 21 percent and eliminated the corporate Alternative Minimum Tax.
- changed the federal tax system from a global to a territorial one. Under the previous global tax system, US multinational corporations were supposed to pay the 35 percent US tax rate for income earned in any country in which they had a subsidiary, less a credit for the income taxes they paid to that country. However, the tax payment could be deferred until the earnings were repatriated. Under the new territorial tax system, each corporate subsidiary only has to pay the tax rate of the country in which it is legally established; foreign profits face no additional US taxes.
- established a new “global minimum” tax of 10.5 percent that is only applied to total foreign earnings greater than a newly established “normal rate of return” on tangible investments in plant and equipment (set at 10 percent).
- offered multinational corporations a one-time special lower tax rate of 8 percent on repatriated funds that were held overseas by corporate subsidiaries in tax-haven countries.
Of course, President Trump sold these changes as a means to rebuild the American economy, predicting a massive return of overseas money and increase in domestic investment. As he explained:
For too long, our tax code has incentivized companies to leave our country in search of lower tax rates. My administration rejects the offshoring model, and we have embraced a brand new model. It’s called the American model. We want companies to hire and grow in America, to raise wages for the American workers, and to help rebuild American cities and towns.
The same old story
Not surprisingly, the so-called new American model looks a lot like the old one, with corporations–and their managers and stockholders–gaining at the public expense.
Corporate investment has not been limited by a lack of money. Rather, corporate profits have steadily increased while investment in plant and equipment has remained weak. Instead of investing, corporations have used their surplus to finance dividend payments, stock repurchases, and mergers and acquisitions. Instead of stimulating new productive investment, the tax cut only gave firms more money to use for the same purposes.
The new territorial tax system, which was supposed to promote domestic investment and production, actually continues to encourage the globalization of production since it lowers the taxes corporations have to pay on profits generated outside the country. The new global minimum tax does much the same. Although its supporters claimed that it would ensure that corporations pay some US tax on their foreign profits, as structured it encourages foreign investment. The minimum tax rate remains far below the US domestic rate, and the larger the capital base of the foreign subsidiary, the greater the foreign profits the parent firm can shield from taxation.
As for the one-time tax break on repatriated profits, the fact is that most of the money supposedly held abroad was already in the country, sitting in accounts protected from taxation. Moreover, since firms remain reluctant to invest, the one-time break only served to give firms the opportunity to channel more money into nonproductive uses at a special lower tax rate.
According to the Treasury Department, corporate income tax receipts fell by 31 percent in fiscal year 2018. As a Peter G. Peterson blog post explains:
The 31 percent drop in corporate income tax receipts last year is the second largest since at least 1934, which is the first year for which data are available. Only the 55 percent decline from 2008 to 2009 was larger. While that decrease can be explained by the Great Recession, the drop from 2017 to 2018 can be explained by tax policy decisions.
The Tax Cuts and Jobs Act, enacted in December 2017, is responsible for the plunge in corporate income tax receipts in 2018. Those changes include a reduction in the statutory rate from 35 percent to 21 percent and the expanded ability to immediately deduct the full value of equipment purchases. The Congressional Budget Office points out that about half of the 2018 decline occurred since June, which includes estimated tax payments made by corporations in June and September that reflected the new tax provisions.
Ben Foldy, writing for Bloomberg news, highlights the spoils that went to the banking sector:
Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul. . . .
On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow. . . .
Tax savings contributed to a banner year for banks, with the six largest surpassing $120 billion in combined profits for the first time. Dividends and stock buybacks at the 23 [largest] lenders surged by an additional $28 billion from 2017 — even more than their tax savings.
The stability and profitability of global corporate networks
US firms also continue to take advantage of overseas tax havens. As Brad Setser, writing in the New York Times, points out:
despite Mr. Trump’s proud rhetoric regarding tax reform . . . there is no wide pattern of companies bringing back jobs or profits from abroad. The global distribution of corporations’ offshore profits — our best measure of their tax avoidance gymnastics — hasn’t budged from the prevailing trend.
Well over half the profits that American companies report earning abroad are still booked in only a few low-tax nations — places that, of course, are not actually home to the customers, workers and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.
The chart below makes this quite clear, showing that US profits are disproportionately booked in countries where there is little or no actual productive activity.
In fact, as Setser notes, “the new [tax] law encourages firms to move ‘tangible assets’ — like factories — offshore.”
The chart below, from a Fortune magazine post, provides an overview of the large cash holdings of some of America’s largest corporations and the share held “outside” the country.
Economists estimated that US firms held approximately $2.6 trillion outside the country and the Trump administration predicted that a large share would be brought back, funding new productive investments, thanks to the one-time lower tax rate included in the 2017 tax reform act. Government officials and the media talked about this money in a way that gave the impression that it was actually sitting outside the country. But it wasn’t.
Adam Looney, in a Brookings blog post, clarifies that:
”repatriation” is not a geographic concept, but refers to a set of rules defining when corporations have to pay taxes on their earnings. For instance, paying dividends to shareholders triggers a tax bill, but simply bringing the cash to the U.S. does not. Indeed, nearly all of the $2.6 trillion is already invested in the U.S. . . .
U.S. multinational corporations can defer paying tax on profits they earn abroad indefinitely by agreeing not to use the earnings for certain purposes, like paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the U.S. In short, the rules prohibit a company from using pre-tax money in transactions that benefit shareholders. No one believes this is rational or efficient, and it is certainly onerous for shareholders, who would rather have that cash in their pockets than held by the corporation. But those rules don’t place requirements on the geographic location of the cash. Multinational firms are allowed to bring those dollars back to the U.S. and to invest them in our financial system.
Indeed, that’s exactly what they do. Don’t take my word for it, the financial statements of the companies with large stocks of overseas earnings, like Apple, Microsoft, Cisco, Google, Oracle, or Merck describe exactly where their cash is invested. Those statements show most of it is in U.S. treasuries, U.S. agency securities, U.S. mortgage backed securities, or U.S. dollar-denominated corporate notes and bonds.
Of course, these firms could easily have used their tax deferred dollar assets as collateral to borrow to finance any investment projects they found attractive. Their lack of interest in doing so provides additional evidence that low corporate rates of investment are not due to funding constraints. Rather, corporations have only a limited interest in undertaking productive investments in the US.
Thus, it should come as no surprise that the one-time tax break resulted in a one-time, modest, “repatriation” and that the money was largely used for financial rather than productive purposes. The New York Times reports that:
JPMorgan Chase analysts estimate that in the first half of 2018, about $270 billion in corporate profits previously held overseas were repatriated to the United States and spent as a result of changes to the tax code. Some 46 percent of that, JPMorgan Chase analysts said, was spent on $124 billion in stock buybacks.
The flow of repatriated corporate cash is just one tributary in what has become a flood of payouts to shareholders, both as buybacks and dividends. Such payouts are expected to hit almost $1.3 trillion this year, up 28 percent from 2017, according to estimates from Goldman Sachs analysts.
In sum, thanks to the Trump tax plan, trillions of dollars that could have been used to transform our transportation and energy infrastructure, industrial structure, and system of social services are instead being transferred to big businesses, who use them for speculative activities and to further enrich their already wealthy managers and stock holders.
Given current realities, we can expect growing popular interest in and support for new public initiatives like the Green New Deal and a new progressive system of taxation to help finance it. Hopefully, exposing the workings of our current tax system and the lies our government and business leaders tell about whose interests it serves, will help speed this development.
US elected leaders, and those that work for them, think their constituents are far more conservative than they are. The good news is that this means there is far more support for a progressive political agenda than one might think. The bad news is that without sustained popular activism it is doubtful that elected leaders will change their policies accordingly.
The misinformed views of those running for state office
In August 2012, David E. Broockman and Christopher Skovron, surveyed candidates running for state legislative offices across the US. They asked them their own positions and to estimate their constituents’ positions on same-sex marriage and universal health care. Then, they compared candidate estimates with their constituents’ responses to questions on those issues that were included in a large national survey.
They found that “politicians consistently and substantially overestimated support for conservative positions among their constituents on these issues.” More specifically:
The differences we discover in this regard are exceptionally large among conservative politicians: across both issues we examine, conservative politicians appear to overestimate support for conservative policy views among their constituents by over 20 percentage points on average. In fact, on each of the issues we examine, over 90% of politicians with conservative views appear to overestimate their constituents’ support for conservative policies. . . . Comparable figures for liberal politicians also show a slight conservative bias: in fact, about 70% of liberal officeholders typically underestimate support for liberal positions on these issues among their constituents.
The figure below illustrates their results. Each scatter point represents a different district and shows the candidate estimate of district support for the issue in question and the actual surveyed district support for that issue. Districts where the candidate accurately estimated the district position would be positioned along the linear grey line. As we can see, both the blue line representing liberal politicans and the red line representing conservative ones lie beneath the grey line, showing that district residents are far more favorable to both these issues than either liberal or conservative politicians think.
Perhaps not surprisingly, when Broockman and Skovron resurveyed the politicians in November, they found that “politicians’ perceptions of public opinion after the campaign and the election itself look identical to their perceptions prior to these events, with little evidence that their misperceptions had been corrected.”
They did another survey in 2014 of the views and perceptions of state legislative candidates and office holders, this time asking about more issues, including ones dealing with gay and lesbian marriage, gun control, the right to abortion, and the legalization of illegal immigrants. Once again they found that:
politicians from both parties believed that support for conservative positions on these issues in their constituencies was much higher than it actually was. These misperceptions are large, pervasive, and robust: Politicians’ right-skewed misperceptions exceed 20 percentage points on issues such as gun control—where these misperceptions are the largest—and persist in states at every level of legislative professionalism, among both candidates and sitting officeholders, among politicians in very competitive districts, and when we compare politicians’ perceptions to voters’ opinions only. That Democratic politicians also overestimate constituency conservatism suggests these misperceptions cannot be attributed to motivated reasoning or social desirability bias alone.
It’s no better at the federal level
Alexander Hertel-Fernandez, Matto Mildenberger and Leah C. Stokes did a similar study on the federal level. In 2016 they surveyed the top legislative staffers of every House and Senate member, asking them to estimate their constituents’ support for repealing Obamacare, regulating carbon dioxide, making a $305 billion investment in infrastructure, mandating universal background checks for firearm purchases, and raising the federal minimum wage to $12 an hour. Then, they compared their estimates to district or state-level survey results.
They summarized their findings in a New York Times op-ed as follows:
if we took a group of people who reflected the makeup of America and asked them whether they supported background checks for gun sales, nine out of 10 would say yes. But congressional aides guessed as few as one in 10 citizens in their district or state favored the policy. Shockingly, 92 percent of the staff members we surveyed underestimated support in their district or state for background checks, including all Republican aides and over 85 percent of Democratic aides.
The same is true for the four other issues we looked at . . . . On climate change, the average aide thought only a minority of his or her district wanted action, when in truth a majority supported regulating carbon.
Across the five issues, Democratic staff members tended to be more accurate than Republicans. Democrats guessed about 13 points closer to the truth on average than Republicans.
Below is a visual summary of their results.
The authors also found corporate lobbying to be an important cause of this misrepresentation of public opinion. As Hertel-Fernandez, Mildenberger, and Stokes explain:
Aides who reported meeting with groups representing big business — like the United States Chamber of Commerce or the American Petroleum Institute — were more likely to get their constituents’ opinions wrong compared with staffers who reported meeting with mass membership groups that represented ordinary Americans, like the Sierra Club or labor unions. The same pattern holds for campaign contributions: The more that offices get support from fossil fuel companies over environmental groups, the more they underestimate state- or district-level support for climate action.
And it appears that corporate influence may have more to do with campaign contributions than the quality of corporate arguments. As Eric Levitz, discussing the work in the Intelligencer, points out, “The study . . . found that ‘45 percent of senior legislative staffers report having changed their opinion about legislation after a group gave their Member a campaign contribution’ — and that 62 percent of staffers believe that ‘correspondence from businesses’ are ‘more representative of their constituents’ preferences than correspondence from ordinary constituents.’”
None of this means that we should abandon electoral work. But it does make clear that simply working to elect “good” people, and hoping for the best, will only continue the country’s rightwing drift. There are real forces at work encouraging elected leaders to create their own realities favorable to rightwing positions, including the willingness of conservatives to aggressively and regularly communicate their views to their representatives and, no doubt more importantly, corporate lobbying backed by financial contributions and a careful monitoring of votes.
We can overcome these forces, but only if we build strong popular movements that are able to organize and mobilize people to fight for the things we want, thereby shifting the terms of political debate and the consciousness of politicians in the process. And, back to the good news: the studies above show that popular sentiment is far more receptive to progressive change than we might think from recent election outcomes and government policy.