Structural Flaw

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FEBRUARY 28, 2005

Structural Flaw

In the wake of almost every Democratic defeat since 1972, liberals
can be found insisting that, if their candidate had adhered to the
party's core economic beliefs and steered clear of social issues,
he would have done much better, if not won. If Democrats were to
return to "the liberalism this country once heard from Woodrow
Wilson, Franklin Roosevelt and John F. Kennedy," Princeton
University sociologist Paul Starr declared in The New York Times
last month, it would "give the Democratic party back its majority."
But this electoral advice--whatever its merits--sidesteps a much
more basic and disturbing question: Is it possible any longer to
enact the kind of liberal program that Roosevelt and his successors
did? In other words, even if a Democrat were elected in 2008 on a
liberal platform, would he or she be able to put it into effect?If you look at the history of liberalism, what you discover is not
reassuring. From 1932 through 1974--even when Republicans Dwight
Eisenhower and Richard Nixon were president--liberals got much of
their program enacted, but, since then, they have failed abysmally.
In 1977, Jimmy Carter championed bills that matched almost
perfectly what Starr includes in his liberal agenda-- "progressive
taxation, affordable health care ... environmental [and] labor
protection"--but Carter failed to get any of them passed even though
he had a sizable Democratic majority in Congress; in 1993 and 1994,
Bill Clinton couldn't enact his signature health care measure with
an almost equally large congressional majority.

It is convenient to blame these failures on incompetence, but the
truth is that structural factors were more important. Liberalism's
success from the '30s through the 1960s was based primarily upon
certain special economic and political conditions: popular pressure
from below, business' acquiescence in reform, and the conviction of
the nation's opinion-makers that reform was good for America. Since
then, dramatic changes in the international economy have turned
business against reform and weakened the other forces supporting
reform. Liberalism is by no means defunct, but it has been put on
the defensive--most particularly, in this second Bush term. If
Democrats want to revive liberalism, and not merely win office for
themselves, they will have to address--and, where possible,
rectify--the conditions that have undermined it.

Franklin Roosevelt was the first president to proclaim himself a
liberal. Accepting his party's nomination in 1932, he called the
Democratic Party "the bearer of liberalism and of progress." His
liberalism had two crucial components. The first, derived from the
British Liberals and from Bull Moose and Wilsonian progressives,
was the idea of "positive government"--that a strong government was
needed to regulate an increasingly unstable and inequitable
capitalist system. "We recognized a deeper need--the need to find
through government the instrument of our united purpose to solve for
the individual the ever-rising problems of a complex civilization,"
Roosevelt declared in his inaugural address in January 1937. "We of
the republic sensed the truth that democratic government has innate
capacity to protect its people against disasters once considered
inevitable, to solve problems once considered unsolvable."
Roosevelt's Democratic Congresses passed the Social Security Act,
the first minimum wage-law, and created the Federal Deposit
Insurance Agency, the Securities and Exchange Commission, and other
regulatory agencies. Roosevelt established the Public Works
Administration and the Civilian Conservation Corps to create jobs
where the market had failed.

The second component was democratic pluralism. Jeffersonian and
Jacksonian Democrats had rested their hopes for political equality
on the spread of economic equality through individual
proprietorships, but, by the early twentieth century,
industrialization had created a permanent class of wage- earners
and a small class of extremely powerful businessmen and bankers. As
Roosevelt, in accepting the nomination in 1936, said, "For too many
of us, the political equality we once had won was meaningless in
the face of economic inequality." The problem was how to restore
some semblance of economic equality. One solution, of course, was
socialism, but the liberals of the '30s sought instead to create
what John Kenneth Galbraith later called "countervailing power" by
encouraging the formation of worker and farmer organizations to
balance those of business. The heart of this effort was the Wagner
Act, passed by Congress in 1935, establishing a National Labor
Relations Board (nlrb) to facilitate collective bargaining.

Most of the liberal reforms that Congress adopted during Roosevelt's
presidency had been circulating since the turn of the century, but
they had been blocked by legislators who took their cue from
business and classical economics. Enacting those reforms took more
than Roosevelt's political genius. As David Plotke spelled out in
Building a Democratic Political Order, it took an earthquake in
American opinion and class relations.

During the Great Depression, conservative business leaders lost
their self- confidence and their public support, while a revived
labor movement and a populist upsurge put pressure for reform on
Congress and the White House. At the same time, many
opinion-makers--including corporate lawyers, economists, ministers,
political leaders, writers, and a sprinkling of maverick CEOs--
backed Roosevelt's liberalism as an alternative to revolutionary
socialism or populism and as a means of lifting the country out of
the Depression.

The change in economic thinking reflected the shock of the
Depression. Classical economics had prescribed budget and wage cuts
for an economic downturn, but the Depression had given credence to
the idea that the economy was suffering primarily from what John
Maynard Keynes called an absence of effective demand. American
economists, labor leaders, and even some business leaders from
Roosevelt's Business Advisory Council argued that government
spending and collective bargaining would actually benefit the
economy by stimulating demand. Their views were reflected in the
language of the Wagner Act, which stated that "inequality of
bargaining power ... tends to aggravate recurrent business

While Republicans later teamed with conservative Democrats to water
down some of the most ambitious New Deal reform proposals, for most
of the period between 1938 and 1963, liberals held their own--for
instance, regularly raising the minimum wage and increasing Social
Security coverage. And, from 1964 to 1974, they were able to build
upon the New Deal by adopting Medicare and Medicaid and expanding
the federal regulatory reach over the environment, consumer, and
worker safety.

During this time, business enjoyed considerable clout in Washington,
but many top business leaders, led by the pro-Keynesian Committee
on Economic Development, accepted the liberal argument for Social
Security and the minimum wage, and even for collective bargaining.
Unions, which, until the mid-'60s, accounted for roughly one-third
of the workforce, were able to keep up steady pressure for
incremental reforms. And, in the late '60s, unions reluctantly
joined forces with newly formed environmental and consumer groups to
back the growth of new regulatory agencies.

Underlying this center-left consensus--which prevailed regardless of
the party in the White House--was the widespread conviction that
the New Deal and regulatory reforms were good for, or at least did
no harm to, U.S. business. General Motors executives could agree
with the United Auto Works to exchange labor peace for five years
of rising wages because they expected that growing demand and
superior productivity would protect their profit margins. Many
corporate executives welcomed regulation as a way of demonstrating
that their companies were good citizens. As late as 1970, a survey
of Fortune 500 CEOs found 57 percent believing the federal
government should "step up regulatory activities."

New Deal liberalism had been nurtured by the political economy of
the Great Depression and sustained by postwar prosperity, but
sometime in the mid-'60s, the U.S. and world economy entered a new
phase that was not as congenial to reform. Western European and
Japanese companies, having fully recovered from World War II, began
to compete effectively with U.S. firms. As East Asia
industrialized, the world economy began to suffer from overcapacity
in steel, autos, textiles, and other key postwar industries,
putting additional pressure on profits, especially in
manufacturing. According to economic historian Robert Brenner,
author of The Boom and the Bubble, average net profit margins in
U.S. manufacturing fell from 24.6 percent from 1959 to 1969, to
15.5 percent from 1969 to 1979, to 13 percent from 1979 to 1990.

With their profit rates in jeopardy, businesses no longer acquiesced
in unionization and new federal regulatory reforms. Businesses
increasingly resorted to tactics that violated the Wagner Act. In
1957, for instance, the nlrb ordered 922 organizers reinstated for
being illegally fired; in 1970, 3, 779; and, in 1980, over 10,000.
At the same time, corporations set up shop in Washington to lobby
for deregulation and tax cuts. In 1971, only 175 businesses had
registered lobbyists in Washington. By 1982, 2,445 had. Business
revived old organizations, including the National Association of
Manufacturers (NAM), and established new ones like the Business

Business also joined the battle for ideas, funding new public policy
groups and think tanks that issued reports, written by paid
experts, arguing that government regulation and high taxes and
spending were responsible for the country's economic slowdown.
These ideas found a receptive audience among the country's
opinion-makers. Just as the Great Depression lent credence to a
Keynesian focus on effective demand, the stagflation and
international competition of the '70s seemed to support classical
economics and its focus on profit margins. These attitudes
permeated public opinion, particularly in the late '70s. The public
remained generally supportive of Social Security and Medicare, but
became skeptical about taxes and regulations and any new program
that appeared to be based on government expansion.

The forces favoring liberal reform had difficulty holding their own
in the face of these obstacles. By 1976, the unionized labor
movement had shrunk from one-third to one-quarter of the nonfarm
workforce. The consumer and environmental movements could boast of
a growing organizational presence in Washington, but, after the
decline of the antiwar left, these movements lost the grassroots
militancy that had commanded attention from the Nixon
administration. Liberal reformers could call on the public to
withstand challenges to the older New Deal reforms, but they lacked
the clout and the public support to advance new reforms, block
regressive tax cuts, or defend the narrower, more technical
regulatory rules.

The test of reform under these new circumstances came during the
Carter and Clinton administrations. Carter took office in January
1977 on the promise to move liberalism beyond the New Deal. But, in
spite of large Democratic majorities, he failed to get any of his
ambitious agenda through Congress. Business lobbies, working with
Republicans and conservative Democrats, defeated labor law reform,
a new consumer protection agency, and hospital cost containment.
They also transformed the Humphrey-Hawkins Full Employment Bill
into a toothless anti-inflation measure and progressive tax reform
into regressive cuts on capital gains tax rates.

Clinton took office in January 1993 after the Reagan and Bush
administrations had rolled back many of the regulatory gains of the
'60s and had shifted the tax burden from business to individuals.
But, with a recession having soured the public on Republican
economics, Clinton, like Carter, hoped to take advantage of a
Democratic Congress to introduce new liberal reforms--in
particular, a complicated and sophisticated national health
insurance plan. But Clinton was foiled by Republican conservatives,
who solicited corporate support for what activist Grover Norquist
later dubbed the "center-right coalition." Even though some big
businesses stood to benefit from health care reform, they either
acquiesced in, or joined, the effort by health insurance companies
and nonunion employers to kill Clinton's principal liberal

After the Republican victory in the 1994 congressional elections,
business lobbyists were rewarded with a virtual veto over whatever
Clinton tried to get through Congress. Clinton succeeded in his
first term with a few liberal measures, but they were invariably
those--such as the earned income tax credit or the renewal of the
Clean Water Act--that did not directly challenge corporate
prerogatives. Measures that corporate America opposed--such as new
workplace safety regulations or a ban on striker replacements--stood
no chance of passage.

Many liberals expected that the economic boom of the late '90s, like
that of the mid-'60s, would revive their movement. A precipitous
drop in unemployment, along with a change in leadership at the
afl-cio, promised growth of the labor movement, which was still the
main organized bastion of liberalism. But labor's prospects--and
those of liberalism generally--were dimmed by additional changes in
the international economy.

During the '30s and the immediate postwar decades, American
businesses had little incentive to move manufacturing operations
abroad, but, as competition intensified in the '60s and
productivity rose internationally, businesses in the United States,
Western Europe, and Japan began moving overseas in search of lower
labor costs. With the growth of new investment markets in South Asia
and then China--and the removal of barriers to foreign
investment--the movement of manufacturing jobs abroad accelerated
in the '90s. The number of foreign manufacturing affiliates jumped
from 3,400 in 1961, to 200,000 in 1990, to 450, 000 in 1997.

The global movement of capital created a worldwide surplus of labor
that radically reduced unions' bargaining position in all the
advanced industrial countries, but especially in the United States.
Writes Harvard economist Dani Rodrik: "The fact that 'workers' can
be more easily substituted for each other across national
boundaries undermines what many conceive to be a postwar social
bargain between workers and employers, under which the former would
receive a steady increase in wages and benefits in return for labor
peace." Concretely, this meant that manufacturing firms could
credibly threaten workers that, if they were forced to recognize a
union or raise wages or benefits, they would pick up and leave the
country. In Washington, they could argue that any regulation that
increased costs might induce them to bolt.

Immigration acts in 1986 and especially 1990--and a porous
border--also encouraged a massive increase in legal and illegal
immigration. Immigration from 1989 to 2001 was 76 percent higher
than immigration from 1976 to 1988. Employers hired new immigrants
with the expectation that they would be less likely than
native-born workers to organize unions. For the most part, they
were right. While employment in services grew rapidly, labor unions
failed to organize most of these new workers. All in all, labor's
hold on the workforce dropped from 35 percent in 1954, to 27.3
percent in 1970, to 23 percent in 1980, to 16.1 percent in 1990, to
13.5 percent in 2000, and to a miniscule 12.5 percent today.

This decline in labor's clout enfeebled the liberal
coalition--providing for minimal gains during Clinton's second term
and a string of defeats on taxes and regulations during George W.
Bush's first term. Bush's only concession to liberalism was a bill
strengthening securities regulation in the face of corporate
scandals. And, in his second term, Bush is now tackling the heart
of New Deal liberalism: Social Security. Even if he ultimately
fails to privatize Social Security, Bush will have reduced liberals
to fighting a rear-guard battle to preserve a program that was once
deemed untouchable.

To be sure, deep divisions over race split the New Deal coalition
and contributed to the decline of liberalism. So did differences
over foreign policy and the Second Amendment. But, even without the
civil rights revolution and the bitter debates over the cold war,
liberalism still would have been undermined by structural changes
in the world economy. The best evidence is Europe, which, despite
having a different political culture than the United States, has
been affected in a similar way by the changes in international
capitalism. Even those labor or social democratic parties that have
remained in office have had to preside over dismantling parts of
the liberal welfare state they spent the previous decades
constructing and protecting. In Germany, Social Democratic
Chancellor Gerhard Schrder is now weakening labor regulations that
even Helmut Kohl's Christian Democrats had been reluctant to
disturb. The British Labour Party's Tony Blair has been forced to
tinker with the country's vaunted National Health Service and
public university system.

To revive liberalism fully--to enjoy a period not only of liberal
agitation, but of substantial reform--would probably require a
national upheaval similar to what happened in the '30s and '60s.
That could happen, but it doesn't appear imminent. What is more
probable is a gradual move back toward the center, where older
programs would be protected from assault (although not from
refinement), where incremental change could be made, and where the
stage could be set for a fuller revival if circumstances warranted.
This could result, ironically, from the same causes that initially
turned the United States away from liberalism.

In the past, the world has overcome industrial overcapacity through
world wars and depressions, but with neither likely (one hopes!),
the world economy is unlikely to recover its earlier brisk postwar
pace. The extended U.S. boom of the late '90s, it is now clear, was
a momentary spike brought about by speculation in information
technology. If the economy does continue to grow
sluggishly--creating greater insecurity even among the so-called
investor class- -it is likely that public discontent with business
will rise again, as it did in the early '90s, and provide an
opening for Democrats, and, through them, for liberal reform. But
liberals will have to take advantage of this opening in a way that
they failed to during the '90s.

Taking advantage would mean devising new approaches to domestic and
international policy that are fair and efficient--and that don't
allow the opposition to raise the specter of big government. A
bloated national health insurance system could eventually be worse
than none at all, but, designed properly, a national health system
could widen access and keep costs under control, benefiting many
businesses as well as workers. The perils of globalization can't be
effectively addressed through trade protection, as some industrial
unions still insist, but, by improving education, by encouraging
foreign manufacturing firms to locate here, and, as economists like
Rodrik have begun to argue, by international reforms that will
protect workers from the vicissitudes of monetary instability.

Liberals would also have to rebuild the infrastructure of democratic
pluralism through encouraging, subsidizing, and defending unions and
whatever other form of countervailing social organization is
feasible--from community groups to Internet-based virtual
communities. The Republicans took this lesson from the older New
Deal movement and have built a political infrastructure of their
own while attempting to destroy what the Democrats have
constructed. Liberals would have to do whatever is
necessary--including, above all, tightening labor law--to rebuild
their movement from below.

Liberals are not without recourse. Just as the liberals of the '30s
could draw upon three decades of progressive reform plans, today's
liberals can draw upon 30 years of discussion about national health
insurance, environmental and consumer protection, pension reform,
international trade and investment, and worker training. These
policies have been featured in many campaigns, although they have
frequently been overshadowed by abortion or gun control. Starr and
other liberals are right to insist that they be front and
center--not because, by doing so, Democrats will be guaranteed
electoral success, but because, without them, the Democrats are
simply a collection of heterogeneous interests and identities
united primarily by distaste for Republican conservatism. They may
win elections, but they will be totally unprepared to change America
for the better. And that, after all, is what politics should be all

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