E.J. Dionne's 'Labor's Lost Story'


I think every conservative who knows E. J. Dionne Jr. likes him. He's pleasant, cheerful, just about unfailingly civil and he clearly strives to be intellectually honest. He wants the Democrats to win, but he recognizes that they're often incoherent and disorganized. Sometimes when you read one of his columns you want to say, "E. J., you can't really believe this." But his self-evident goodwill keeps you from getting angry with him. And he often has illuminating insights that are helpful for those who disagree as well as those who agree with him.

Which leads me to his column that appeared today in the Washington Post, headlined "Labor's Lost Story." It's a useful analysis of the issues raised by General Motors' big layoffs and the bankruptcy of the GM offshoot Delphi. As Dionne sees it, conservatives see this as an example of economist Joseph Schumpeter's "creative destruction," which hurts some firms and employees but makes the overall economy more productive and the bulk of consumers and workers better off. In contrast, writes Dionne, "progressives can't quite agree on a single narrative." They talk about offloading the Big Three auto firm's healthcare costs onto the government, they lament that free trade sends some blue-collar jobs beyond our borders (not "offshore," as Dionne has it; many Big Three jobs are now in Mexico), and the declining numbers of union members. Dionne offers his own narrative, rooted in his version of American history:

Capitalism, all by itself, would never have achieved the rising living standards that were the pride of the United States in O'Neill's 1950s and still are today. The rules enforced by the National Labor Relations Board made it possible for Reuther's union to organize by protecting workers' rights. Cheap 30-year mortgages, which became the norm because of Federal Housing Administration guarantees, created a nation of homeowners.

As medical costs rise, more Americans will need government help. More employers will need to offload the costs of medical insurance to avoid bankruptcy. Yes, that's "socialized medicine," just like Medicare. . . .

For 60 years New Dealers and social democrats, liberals and progressives, turned Schumpeter on his head. They insisted that few would embrace capitalism's innovations if the system's tendency toward creative destruction was not balanced by public innovations to spread the bounty and protect millions from being injured by change. It's a compelling story. Walter Reuther knew it well.

My version of American history is somewhat different. (You can find it in my 1990 book Our Country: The Shaping of America from Roosevelt to Reagan. Amazon.com has 26 new and used copies available.) The encouragement of labor unions was just one of several New Deal policies that were intended not to produce economic growth but to stop the downward spiral of deflation, to freeze the economy in place; others include the wage- and price-fixing of the 1933 NRA legislation, agricultural subsidies, the minimum wage and maximum work hours. I made this argument also in last Friday's Wall Street Journal.

Note that my list does not include the "cheap 30-year mortgages" Dionne points to (they were 25-year mortgages originally). Rather, the FHA and VA mortgage loan guarantees were one of three policies passed during the Roosevelt administration that I pointed to in Our Country as measures that encouraged, aided, and honored individual upward mobility. The others were the G.I. Bill of Rights and the system of family allowances created by steeply graduated income tax rates combined with generous dependent deductions. The FHA and, derivatively, VA home-mortgage loan guarantees can fairly be labeled New Deal measures. The G.I. Bill of Rights can't; its framers included the American Legion and the racist Mississippi Rep. John Rankin as well as the Roosevelt administration. As for what I have called family allowances, these were the apparently unintended results of having steeply progressive tax rates (to pay for World War II at first, and then the Cold War) and dependent deductions that became more important as wages rose more than anticipated during the war and in the postwar period (before those wage rises, ordinary workers didn't earn enough to pay income tax and thus got no benefit from the dependent deduction).

You could label these three policies government subsidies. But they were also measures that required their beneficiaries to do certain things—to come up with a down payment (for FHA loans) and keep up their monthly payments (for both FHA and VA loans), to serve in the military and then go on to college and pass your courses, to earn your wages and to have and raise children. The measures I've labeled New Deal were intended not to promote economic dynamism but to guarantee economic stasis, though I think Dionne could fairly argue that they contributed somewhat to the unanticipated postwar growth (virtually everyone thought we were headed back into the Depression in 1945). The three measures I've pointed to are laws that promoted upwardly mobile behavior and therefore economic growth.

I've argued for some time that the Democrats (and the Republicans, for that matter) need to come up with other measures that will encourage upwardly mobile behavior. To some extent they have: The Clinton administration's extension of the Earned Income Tax Credit arguably does this, and so do the state welfare reforms of the 1980s and 1990s and the federal welfare reform law Bill Clinton reluctantly signed in 1996. If, as George Will argued in the early 1980s, statecraft is soulcraft, then the state should encourage and honor behavior that leads personally to upward mobility and in the aggregate to economic growth.

The reason the New Deal approach, which Dionne would like to revive, is unsuitable to our society is, in my view, that it assumed that the Depression was the norm, that economic markets don't work, that the best that can be done is to freeze the economy in place. This idea was central to Franklin Roosevelt (who like his cousin Theodore did not have much appreciation for the economic growth of which their two families were beneficiaries), and it was central to the New Deal historiography that Roosevelt did so much to inspire. It was central to the case for Keynesian economics and central to the idea that welfare state protections, the insulation of individuals from risk, was the central task of the state and would become ever more important in the future. World War II of course showed that growth was possible. But to the New Dealers it seemed possible only through government mobilization and only proved once again that markets don't work.

But the future worked out more as Schumpeter thought. Dionne may not like creative destruction, but as we have seen, it works. The Depression turns out not to be typical of the economy of the past 100 years, but a terrible aberration, an aberration made possible, it is clear by now, through policy mistakes (the tightening of the money supply by the Federal Reserve, the Smoot-Hawley tariff, the cuts in federal spending), mistakes that were entirely avoidable at the time and are easily avoidable now that we have seen how disastrous they were.

But don't just take my word for it. This is the perspective laid out by retiring Federal Reserve Chairman Alan Greenspan in his speech a few weeks ago the National Italian-American Foundation. Here's my take, and here's Greenspan's speech. When Greenspan first came to Washington to serve on Richard Nixon's Council of Economic Advisers, Keynesian economics was still very much an orthodoxy ("We are all Keynesians now," Nixon once said), there was a belief that wages and prices could be effectively controlled by government, and there was a consensus that free-market theory didn't explain much about how the economy worked. The UAW had just negotiated a contract with the Big Three providing 30-and-out retirement (workers could retire after 30 years, in their early 50s), and UAW critics were arguing that the union's leaders had settled for too little. How long ago that seems now!

Here's another take on labor unions, from a writer not usually heard to chime in on the subject. The subject is Terrell Owens, the suspended Philadelphia Eagles player. It's a reminder that some of the most visible union members today are professional athletes and airline pilots—hardly the downtrodden working class.

I end with some tentative thoughts e-mailed in response to my Wall Street Journal article by Harvard Law Prof. Bill Stuntz:

"There is an irony to the failure of the Reuther vision you discuss. For roughly a century – 1880 to 1980 (the passage of the Interstate Commerce Act in 1886 marks the beginning; Reagan's first election marks the end) – the central issue in national politics was how to rein in the power of large corporations. That concern with the growing power of 'big business' (does any one say that anymore?) led to the rise of Rooseveltian big government and Walter Reuther-style big unions. But big business was never really as powerful as we thought, mostly because it is always subject to competition; when corporations get too large and cumbersome, smarter and more flexible competitors take away their customers. That competitive check is smaller for unions – nonunion labor can compete them away over time, but only if government policy allows (notice that it hasn't happened in, for example, Germany, where nothing like Taft-Hartley exists). And it's totally absent for big government. On the contrary, Reuther-style trade unions and the welfare state are self-reinforcing; they have a tendency to build their own power until it can't easily be taken away – see e.g., the sclerotic economies of Western Europe. Overlarge corporate power, though, is self-correcting through the competitive process. It turns out that the institutions created to rein in corporate power themselves need reining in; they are bigger dangers than the danger they were made to combat. Reuther's error is an instance of that larger error."