Economic History: A Sadly Short Shelf Life.

American leaders who care about political and economic freedom and believe in free markets are being challenged by authoritarians who want to ride angry voters to political power. Leaders who believe in free markets and American liberties need to adapt their ideas and get behind effective policies to deal with the issues of economic change and adjustment that are poisoning our politics.

The central issue is the role of government in the economy. Simply put, increasingly angry voters represent the failure of administrations of both parties to mitigate the wrenching impacts of economic changes on citizens’ lives.[i] Dealing with these changes is made harder by the resurgence of 19th century beliefs about government’s role that make it nearly impossible for political leaders to do what government could do to ease the pain.

A founder of the ardently free market Chicago School, Henry Simons who was a teacher of Milton Friedman, outlined what needs to be done 83 years ago. Simons wrote that the key to rebuilding support for both free political institutions and free markets was for the “political state” to develop a “positive program for laissez faire” that discharges the “minimum responsibilities (of the state) under capitalism.” These responsibilities included assuring full employment and “mitigating inequality” through the use of fiscal and tax policy.[ii]

The U.S. had faced wrenching economic transformations before Simons wrote his essay. American political leaders well before Simons recognized that the private sector and individual Americans needed government help to ease the move from farms to cities. Indeed the economic platforms of the three major political candidates in 1912 were shaped by an angry populism related to this shift which was not unlike the shift from manufacturing and mining to services that is roiling the political waters today. Leaders of both American political parties in that era a hundred years ago understood that there needed to be an effective government response to the shift because people could not deal with these changes individually. [iii]

The frothy economic expansion generated by World War I and the credit and export-fueled economic growth of the 1920s however largely absorbed labor coming off the farms without requiring the development of coherent government policies to deal with this shift. As a result, 19th century laissez-faire ideas regained traction among policy makers and the public. Two do-nothing presidents, Warren Harding and Calvin Coolidge[iv] replaced the three activists of the 1912 election, Theodore Roosevelt, Wm. Howard Taft, and Woodrow Wilson.

Then in 1929 the Crash and the Great Depression came. Readers will be surprised to learn that free market economists like Henry Simons, who were the founders of the Chicago School, called on President Herbert Hoover as early as 1931 to create jobs by supporting aggressive deficit spending, especially on public works and relief because private credit-based consumer and investment spending had collapsed.[v] [vi]

Free market economists, many of them from the University of Chicago like Simons, argued all through the 30s for aggressive deficit spending, drastic reform of the private banking system, and the end of private and government monopolies. Simons went further: He thought the government should explore creating and spending interest-free Treasury money instead of borrowing “credit money” created by private speculation-prone banks.[vii] These ideas again fell by the wayside, however, when spending for World War II and a postwar boom like the one after World War I truncated discussions of the government role when, as often happens, private consumption and investment lag potential.

The 19th century view that the government could and should do little to support job creation began making another comeback in the 1970s. A decade later this old theory began to be marketed as “supply side” economics and called “conservative.” The supply side argument is essentially that if taxes are low enough and government gets out of the way, private investors will create full employment and prosperity.

Conservative free market Chicagoans in the 1930s knew this would not work. They argued instead like many liberals today that government should spend to take up the economic slack when resources were underutilized and working people faced unemployment. Economic history though has a sadly short shelf life.

It is important to recognize, however, that the free market and liberty-loving conservatives were anything but New Dealers although they backed what are today labelled as liberal policies. They fiercely disagreed with the Keynesians and New Dealers during the 1930s about monopolistic price and wage fixing (the New Deal’s National Recovery Act (NRA)), the virtues of unions, and flirtations with protectionist trade policies and socialism. Where they agreed with liberals was in rejecting the 19th century belief that cost cutting, low interest rates, and austere government budgets would revive the economy without government spending to support recovery and employment.

The free market conservatives believed that government had to spend on public works to create jobs and reduce political anger. They believed that tax policies should be tailored to reduce income inequality for political as well as economic reasons. They wanted generous social insurance measures (a social safety net) to bolster political cohesion as well as to anchor economic growth. They also favored regulation of private banks going way beyond today’s Dodd-Frank measures. They supported such strict regulation for the obvious reason that private lenders had fueled speculation by irresponsibly pumping out “credit money” whose collapse caused the Great Depression.

Those four limited and fundamentally conservative views about the economic role of government were and still are in 2017 the components of a positive program for laissez faire that would reduce the anger that is endangering our liberties.

[i] Note that these changes are having the same angry impact on established working class interests all over the World.

[ii] See Simons, Henry, 1934, “A Positive Program for Laissez Faire” in Economic Policy for a Free Society, 1948, pp. 40-44.

[iii] See for example Woodrow Wilson’s first inaugural address and TR’s interest in European-style social insurance. In 1912, Wm. H. Taft, Theodore Roosevelt and Woodrow Wilson were all explicitly struggling to define a government role in cushioning painful economic changes that were impacting millions of Americans. The economic changes in that era of course centered on the wrenching shift of the working population from country to city and from farming to manufacturing.

[iv] Herbert Hoover, the 3d Republican president of the 1920s, was more of an activist than Harding and Coolidge but he too lacked the imagination to move away from 19th century economic orthodoxy.

[v]J.Ronnie Davis, Iowa State, 1971, “The New Economics and the Old Economists,” is a detailed discussion of the pro-spending views of the original Chicago School economists before spending became an unacceptable idea among those calling themselves conservatives.

[vi] Liberal economists, aka Keynesians, adopted these fiscal policy prescriptions five years later. Not surprisingly, Chicagoans were chagrined that the “new economics” was called Keynesian.

[vii]Milton Friedman later called this “helicopter money.” Ben Bernanke more recently also has discussed its usefulness as have other economists likef. Political leaders, however, seem unable to understand the role of deficit spending let alone the use of interest-free Treasury money.