Rooseveltian reflections

Wednesday morning, I attended a Roosevelt Institute conference, on the theme “Make Markets Be Markets“. It was an enjoyable affair, with a bunch of smart, well-known speakers saying things I broadly agree with, mostly on financial reform. A wrinkle I had not really expected was how frequently, and rather charmingly, the name of the gentleman after whom the Institute is named would be invoked. FDR, and the 1930s generally, were very much with us that morning.

I have much to spout on the subject of financial reform; I am several posts in arrears on that. But by the end of the conference, I was fascinating myself with a little thought experiment.

Suppose the good guys win. Better yet, suppose they had never lost. Suppose banks had never ventured beyond conservatively prudent lending; that there had been no housing, internet, or credit bubble. Forlorn cul-de-sacs surrounded by mouldering homes were never cut from the Arizona desert. Webvan and were rejected straight off by investors rather than soaring against all reason then dying in an unreasonably sudden collapse.

In a world without bubbles and, let’s not mince words, in a world without fraud in substance if not in law, would we, or how could we, have enjoyed two decades of near “full employment” and apparent growth? Without all the internet companies that were forseeably destined to fail, without all the housing construction, without all the spending by employees whom we know now and should have known then were not actually participating in economic production, without all the spending by people feeling rich on stock or housing gains that would eventually collapse in their or someone else’s arms, what kind of economy would we have built?

These are not questions that answer themselves. They are unknowable counterfactuals.

But we do know something about the 1930s. In 1930, Keynes famously proclaimed “we have magneto trouble”, with the implication that the then incipient depression was due to a kind of remediable, technical failure. Less famously, Keynes was wrong. The post-war economy that finally put paid to the Great Depression was an economy different in kind from that of the go-go 1920s. One piece of that was financial sector reform: there were the securities acts and the FDIC and an astonishing forty years without major banking crises. But there was also a new age of mass production and mass unionization in the US (the so-called “Fordist era“), and the vast existential project of reconstruction in Europe. The Bretton Woods system fixed exchange rates and was intended explicitly to prevent the sort of unbalanced international capital flows that preceded the Great Depression. The postwar United States had an agricultural sector that was largely centrally planned, Fannie Mae and Social Security, and especially the Wagner Act which put the coercive power of the state behind exclusionary labor cartels, but which more than any other single thing made possible mass affluence based on income rather than credit. These were radical, inconceivable changes, combining “socialist” central-planning and redistribution with “fascist” collusion between the state and large corporations in support of national aims. Keynes was right, of course, that the “resources of nature and men’s devices [were] just as fertile and productive” in 1945 as they had been in 1929. But the “delicate machine” we had “blundered in control of” was replaced, not repaired. The new model mixed the technologies of the original gizmo with very novel and foreign elements in a design influenced both by the history of the Depression and an emerging great-power conflict. (See this excellent piece by the Roosevelt Institute’s Mike Konczal.)

It is entirely unclear that, absent these changes, the US economy would have “recovered”, even with financial sector reform and the deleveraging of household balance sheets. Sure, depressions never last forever, but it is plausible that the US would have fallen into a spiral of booms and busts and class warfare absent the political choices that defined the postwar economy. And note that they were political choices — a “free market” never would have delivered and sustained for decades a pervasively unionized workforce. They were, for better and for worse, the work of Franklin Delano Roosevelt.

I don’t mean to underplay the importance of financial sector reform. A continually malfunctioning financial sector has brought the American economy to underappreciated ruin and left us with an overhang of unfulfillable promises that may engender conflict for decades. Further, the financial sector has generated the rump of a crony capitalist class which threatens to set us on the Argentine path. We have to fix the financial sector.

But we cannot fix the financial sector without addressing the problems and contradictions which we depend upon financiers to paper over. This never was just a financial crisis. It was, and is, an economic and political crisis, and we are only a very short way down the path towards resolving it.

p.s. While I do favor restrictions on international capital flows, I don’t favor (I’m actually quite hostile to) unionization as a means of delivering widespread affluence. I am not arguing that we should rehearse the political bargains of the mid-20th century. I am arguing that we had better come up with new bargains, that excising the tumors of parasitic finance is necessary but nowhere near sufficient to getting us out of the trouble we’re in.


21 Responses to “Rooseveltian reflections”

  1. “They are unknowable counterfactuals”

    Counterfactuals may not be knowable with 100% certainty and 100% precision (with typical extremely realistic assumptions), but they are often knowable with a high degree of certainty, of odds, with general, but still pretty good precision.

    A statement like “Counterfactuals are unknowable” is like the statement “It’s impossible to tell” that gets thrown around a lot, even in cases where you can’t tell with 100% certainty and 100% precision (with typical extremely realistic assumptions), but you can still tell with extremely high probability the general (and not that unspecific) case of what would happen(with typical extremely realistic assumptions, even just assumptions like what we see actually exists).

    Without the bubbles and excesses, we can say that with smart economic policy in general, smart response by the Fed in response to demand drops, smart fiscal response by the federal government with high return social investments, etc., we could have had a higher level of employment over the past 10-15 years, not lower, with much higher growth, much higher utility spending, and much higher social return and more investment.

    For more on this, see:

  2. Jim Fickett writes:

    This does seem a key observation.

    It is probably closely related to the observation that the employed fraction of prime-age men has been in a clear downtrend for decades. As long as cheap transportation allows outsourcing of relatively unskilled jobs, what solid solution can we expect? The low-skilled in this country are competing with Asia, but life is more expensive here. I don’t really see a solution, do you?

    Jim Fickett

  3. “in a world without fraud in substance if not in law”

    Fraud is a legal construct.

  4. Doc at the Radar Station writes:

    Excellent post as usual. You demarcate the differences of economic performance during the FDR administration with policies prior to WWII and after it. Would we just have become Japan (post 1990) in the 1940s (without the war) and with (2+) decades of malaise instead of just one? The war really did change things. So the argument is whether government spending went “over the top” enough (in a classical Keynesian “plumbing problem”) to create a sustainable recovery or whether the nation united in a purposeful endeavor with a common enemy which drove the recovery (animal spirits of a different sort)? My opinion is that what did the trick was full employment and enforced savings and subsequent debt retirement. If you are busy working a lot, feeling secure that your efforts are needed, and making money that you can’t spend, aren’t you going to pay off your bills? A quick way to wipe out the debt. I think Irving Fisher is the theorist that should be credited the most for the way out.

  5. Steve Randy Waldman writes:

    EoC — No.

    Fraud has social and moral meanings, whatever its changeable legal definition, and whatever the history of the term. Murder is a legal construct as well, but when it is “deregulated” (as it certainly has been in some times and places with respect to some people), it is still murder.

    Fraud can be a powerful and important social fact, with legitimate consequences in social and political arenas even when it cannot be recognized in a court of law.

  6. C. Booker writes:

    Your postscript troubles me a bit: I believe collective bargaining can be a way of delivering widespread affluence. From the days of the Magna Carta, we have seen the advantages of having groups speak in a unified voice to those in power. Maybe my quibble is with your phrasing – unions can also be overbearing, and maybe the right way to approach them is not with “hostility”, but with “circumspection”, if you will. Acknowledging the rights and responsibilities of labor in partnership with capital is a good idea, I believe.

  7. Indy writes:

    Here is a story about my father – who, though he was uncategorizable (and mostly apathetic) politically and voted in a completely unpredictable fashion, was probably as complete a Baby Boomer product of Roosevelt-ianism as anyone I know. Whether or not the kind of 40′s and 50′s Kansas City America in which he was raised was the “transformed place” you speak of, he emerged from it a man with certain economic motivations – ones that provided for my family during my childdood, and which were common among his peers, but that I still wonder about in terms of their social desirability and long-term sustainability. His experience with the post office seems somehow metaphorical for the trouble we’re in.

    A unions story:

    My father was a mailman. He once worked for the IRS in Kansas City not too long after college. When I was about two years old, and I never quite got the whole story, but I think his department was transferred to St Louis and he had to make a choice to stay or move. He told me a good part of the decision was that, at that time, there was some kind of variable contribution you could make to the IRS pension scheme which he had determined was a great deal and had maxed out his payments and so wanted to find another government agency in KC that would laterally transfer his “savings” and that had rock-solid benefits. He couldn’t find one at first, and very nearly took up an offer to become an air-traffic controller since Reagan had just fired about 11,000 of them for striking. But in the end he found that the Postal Service was hiring locally and would honor his benefits package. Then he signed up with the union, the National Association of Letter Carriers.

    He originally thought it would be a temporary gig, but it turned out to be his career. He was a very bright and profoundly wise man, but very restless, almost completely without any intellectual disposition, and more naturally comfortable with a working man’s demeanor. He had one of those routes of old homes where he walked from house to house with a bag, but he preferred it to indoor desk work. So it worked out for him.

    The pension and benefits bet turned out to be a good one too. He had two bouts of cancer. The first one at 49, but with a great degree of modern miracle medical intervention — chemo, radiation, and surgically cutting out most of his stomach — he recovered. But at 53 it came back and death found its checkmate. He died almost exactly 10 years ago. Prior to that, my father had probably seen no other medical professional besides a dentist (frequently, for he had tragically weak teeth) for over 30 years. He was one of the most consistently healthy people I knew. The constant walking in the fresh air probably had something to do with that. But health is wealth and both are fickle things. The constant cigarette smoking probably had something to do with that too.

    Anyway, the health care package paid for every dime, which, over those four years, amounted to something in the mid six-figures. To me, then, it seemed an astonishing amount for what seemed in my naive economic intuitions at the time “not very much doctors-doing-things kind of activity”. Since then, my mother’s been living comfortably on the pension’s survivor’s benefit with nearly-free health care which also covered me and my sister until 24.

    My father was *devoted* to the NALC union. He was a voting delegate for as long as I can remember, and went to every single meeting and convention. In our conversations about it, he insisted repeatedly about how essential it was for there to be *something like* the union, to ensure basic fairness, a balance of power between worker and employer, and a decent quality of life, which, of course, included a rock-solid benefits package and pension plan.

    There were only a few times in my life when I saw my father, no so much “angry” with the union, but kind of disgusted at himself for belonging to an organization that sometimes did things he didn’t like, even when he conceded these actions and decisions were “necessary” to preserve the lifestyle to which they’d become accustomed.

    As an example of the prescient wisdom of the man, I got my first “real” PC (to replace an astonishingly functional Commodore-64) in early 1991. It didn’t take long to get my 2400 baud modem hooked up to a local Bulletin Board System. Me and the other geeks soon began using the system to leave little email-like messages to each other. My dad walked into the room and saw me typing and asked what I was doing. I said, “I’m writing a message to my friend”.

    That left him puzzled, “But, you’re going to see him tomorrow right? Why would you type a letter, print it out, and mail it?” – a computer keyboard still seeming to him only a small step away from a manual typewriter.

    “No Dad, we’re using this BBS. He’ll log on later and read this message this evening. It’s like a letter, but all on the computer”

    “How many people do this?” “Lots, and more everyday.” “And how much does this cost?” “It’s free!”

    And in that moment, the gears of foresight of endless possibilities were grinding with instantaneous speed in my father’s mind and soul. I think he may have even caught the tiniest momentary glimpse of our own time, but the look on his face was not one of wonder, excitement or joy.

    It was abject *terror*. “That’s horrible!” I looked at him confused, “What do you mean horrible? It’s so fast and convenient and cheap!”

    His countenance hardened into seriousness and he said “Son, don’t you see? This house, our cars, and even that computer, was bought with stamps! The very bones in your body are made from the milk I paid for by carrying people’s letters to each other. This stuff” (he pointed at the screen) “If people start doing this instead of mail, if *gasp*, advertisers start doing this instead of mail, well, that’s…that’s just the end for us! I’m going to bring this up at the next union meeting! The guys will freak out!”

    It’s hard to make a “Buggy whips” or “Creative Destruction” counterargument when someone has brought your cozy home and even your own bones into the picture. I suddenly shared my father’s concern, and felt almost guilty for betraying my heritage with this infernal machine and its sinful temptations. Well, I got over it. Of course, my dad was like that with FedEx and UPS too. I was slower with that, but eventually broke down there as well. Amazon ships free for orders over $25. I’ve learned to ask no questions about how my package will be sent. I hear, see, and speak evil, as I click to make my order.

    But my old man was right about computers and the mail. Years went by, and the inevitable collapse of the personal mail market came tortoise-like, slowly, but surely, with each few years bringing the next step of “crisis” that had to be dealt with through new plans, quick fixes, and renegotiations — which amounted to only patch-ups that would work for a few years until the next inevitable crisis-point emerged.

    Today, the post office is quickly going bankrupt, and the latest report says it’s somewhere in the quarter-trillion of losses in the next decade range (yes, really!) But back then, all stakeholders in the institution liked to keep up everyone’s morale and tried to remain optimistic about the day the bleeding would stop, which it never did.

    So, one of these “renegotiation” crisis sessions had come, and gone, and my father had one of those rare “I’m disgusted with myself and the union” moments about the nature of the resolution that had been reached in order to rationalize cash-flows. I asked him what had happened, and he told me that the only thing he really despised about the union was that it was run by the old timers, who, when push came to shove, and they could ask no more from management or the stamp-buying and tax-paying public, would end up becoming cannibals and eating their own young.

    He would say “It’s the seniors screwing the juniors” — which wasn’t some sexual comment about high school or college, and instead an expression of the tendency to split the workforce into insiders and outsiders where those with seniority keep their pay and perks and new “second-class” workers get shafted to pay for it. The same thing looks to have occurred recently at the domestic automobile manufacturers.

    When I read this post, I immediately thought that my father’s union story has a lot of parallels for exactly the kind of economic imbalances the whole nation now faces. The “patch-ups” that paper over the need to proactively make painful adjustments to the inevitable. The insider vs outsider employment situation. The preoccupation with “pensions and benefits” in my father’s thinking, indeed, the prime mover and dominant factor in his whole motivation insofar as his selection of employment options. The cost to the next generation of those promises. And so on.

  8. David Pearson writes:

    The Rooseveltian social democratic experiment could not withstand the inevitable combination of globalization (and its effect on wages) and regulatory capture by backstopped cronies. Both meant that wage earners were increasingly on the hook for the actions of the elite: the very opposite of what Roosevelt intended. One could say the system died from the corrosion of its own basic tenets. Unionized labor contributed to falling wages because it achieved prosperity that could not last in competitive world; and the institutions Roosevelt set up to insure against personal and systemic risk allowed that risk to balloon and balloon.

    The question no one seems to ask is whether every system eventually corrodes in the same way. Depressions and inflations are just the way political economic constructs die. They are as natural and organic as anything can possibly be, and yet gallons of ink are spent trying to argue that one or another system would be perfect if not for this or that specific circumstance.

    The question is not what happens when economic booms end in depressions. The question is how resilient the polity is; how well it can advance a narrative that accepts past failings without questioning the nature of basic social contracts. In Argentina, the answer is not very well. The same is true for Europe, as its period of industrialization could easily, without the U.S., have led to a lengthy period of facism. For Americans our risk is hubris; the idea that we don’t have to accept failings, that the government can guarantee a return to prosperity at little cost to taxpayers. This failing is what might lead us down the path to hyperinflation. Because of course, the biggest problems come out of policies that no one thinks can lead to those problems.

    We can only be blindsided by those things that we cannot predict or refuse to predict, and we can only be truly hurt by those things that blindside us.

  9. [...] Steve Randy Waldman, “This never was just a financial crisis. It was, and is, an economic and political crisis, and we are only a very short way down the path towards resolving it.”  (Interfluidity) [...]

  10. glory writes:

    another subjunctive thought: presumably had gore won instead of a housing bubble we might have had a green bubble instead (and budget surpluses ;) i dunno! taking stock after crises appears to be the natural order… – “Those calling for financial reform aren’t being upfront about its costs, making it impossible to achieve… A reason we got substantive financial reform in the mid ’30s is that folks had nothing left to lose.”

    which altho just another restatement of the ‘can we handle the truth?’ argument (we’re the ones we’ve been waiting for, afterall) nevertheless suggests that if _we are_ the entrenched interests at fault then the only political compromise is to convince ourselves that the ‘one time’ (and near term) costs to reforming the system — cf. zakaria — (esp for incumbents) is worth the long-term benefits; isn’t that pretty much how any debt restructuring goes?

    lacking political consensus, or enlightened (self-interested) incumbency, then the path of least resistance appears pretty obvious; soros’ supercycle debt bubble moves on the next level — cf. – “The doomsday cycle” — rolling sovereign debt crises, a la reinhart and rogoff, as we appear to be on the verge of witnessing… the only question in my mind being what are the limits to the fed’s credibility (to infinity and beyond)? and whether central banking itself can survive in its current form, regresses or is somehow able to metamorphise into i dunno what.

    and i think that’s kind of the problem; no one else really does either, so we stick with the status quo until it collapses we muddle thru :P


  11. glory writes:

    oh an re: unionization, apparently employee ownership and co-ops are regaining (at least intellectual) currency as ‘new bargains’ :D


  12. septizoniom writes:

    haven’t you slipped into the logical fallacy of post hoc ergo propter hoc in asserting the FDR era policies corrected the malaise of the post 1929 era?

  13. john c. halasz writes:

    The productive surpluses/quasi-rents derived from large-scale mass employment industrial production, upon which unionization was based and which ensured a decent distribution of income, are gone now, due to a combination of technological change/automation and increased global competition/capacity. And, in turn, corporate management organization has changed, becoming increasingly “leaner and meaner” and tending toward a virtual organization of networks, while also tending toward an increasing quasi-monopolistic consolidation of markets, stove-piping rents to the top. But productivity growth and increased potential output hasn’t halted, so the question becomes what is to be the source of countervailing power to dominant corporate elites that would ensure a decent distribution of income to sustain an adequate level of aggregate demand in the face of rising (over)capacity, barring any revival of unionization? Simply relying on the marginal products theory of market-based distribution is to hold on to a fiction belied by prevailing realities. Unions, whatever their failings or corruptions, were at least an effective way of equalizing bargaining power to ensure an adequate distribution of income and gains to productivity between wages and profits required to sustain adequate demand and further investment, (since it is both wage costs and wage-based demand that motivate further investment in capital improvements to raise productivity and sustain profits). Barring state-directed investments and transfers, which may, indeed, prove less efficient and less pluralistic, at least if taken to any extreme, it’s hard to see any source of countervailing power that would forestall stagnation and decline at the behest of incumbent corporate and financial domination. What are the modes of alternative popular and social self-organization that you would propose, barring an improbable revival of unionization and an equally improbable emergence of independent state-directed activity, uncaptured by incumbent elite interests?

  14. winterspeak writes:

    SRW: You come back from a financial conference and mix up asset bubbles with credit bubbles? Must have been some event : P

    We really do have an engineering problem on our hands but I guess in 2010 is all kto, kogo all the time. Shame.

  15. Steve,

    You make an excellent point about the importance of the changes that have occurred over the generation of Republican dominance.

    It’s tragically amazing how badly the middle class have been hurt, how much growth we’ve lost, and how economic inequality has exploded to levels even beyond the gilded age in some respects.

    I know you’re old enough to remember the great Life books. For younger readers see:

    These were educational books of high scholastic quality and famous photography.

    My parents had a dozen of them in our basement, and I used to love to read them. I have the one on the United States from 1965. There’s a fascinating chart which shows the modern [circa 1965] United States economy as a diamond with a huge middle class in the middle of unprecedented prosperity, and tiny tips of wealthy and poor at the top and bottom. To the left of the diamond is a pyramid showing how the United States used to be, with a large base of poor, a small middle class, and an extremely wealthy upper class at the top.

    Tragically, since that book was written, just one generation of Republican dominance has brought us back to a pyramid.

    You can see a scan of this graphic at:

  16. [...] “This never was just a financial crisis,” Interfluidity blogger Steve Randy Waldman writes. “It was, and is, an economic and political crisis, and we are only a very short way down the [...]

  17. [...] WALDMAN muses on an intriguing counterfactual:Suppose the good guys win. Better yet, suppose they had never lost. [...]

  18. Steve Roth writes:

    >I don’t favor (I’m actually quite hostile to) unionization as a means of delivering widespread affluence

    One of the reasons I think major redistribution programs can improve efficiency is that they provide political and moral freedom to put in place more draconian (and efficient) labor and trade policies.

    Retraining programs just don’t cut it. Think: greatly expanded Earned Income Tax Credit.

    Universal health care is a double win in this regard: it provides some of the necessary redistribution, and it also greatly increases labor market flexibility. (But from the worker’s perspective, not the employer’s.)

  19. [...] Economist Free Exchange blog points me to Steve Waldman and an interesting question: Suppose the good guys win. Better yet, suppose they had never lost. Suppose banks had never [...]

  20. glory writes:

    fwiw :P

    Is The Federal Reserve Insolvent?

    What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can’t have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer’s balance sheet. The reality is that inflationary concerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed’s attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.

    As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed’s course is one of self-destruction, grow bolder, until finally one day a new class of investors – the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the “Fed trade”, which ultimately will lead to a systemic catharsis of unprecedented proportions.

    At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.

    um, which is why this will (probably) never happen — again, status quo until we muddle thru — cuz no one wants the alternative: mutually assured destruction!

    [think about it this way, we _already_ faced the minsky moment and it was _markets_ that blinked; it was (semi-)apparent as soon as the fed started its (massive) credit easing operations when the dollar never collapsed and, in fact, rallied... so what are the limits to the fed's credibility? while perhaps not to infinity and beyond, it's much greater than i think most people -- and budding 'Fed vigilantes' -– appreciate or, more importantly, are able to affect. the only entities that matter, in my mind, are other central banks, but to defect from fed support (at this point) would be to discredit fiat (reserve) currency central banking _itself_ and i don't get the feeling that anyone (except maybe ron paul and jim grant ;) is willing to go there... yet!]

  21. glory writes:

    also btw…

    NY Fed’s Sack: Preparing for a Smooth (Eventual) Exit – “Sack believes there will be little increase in the spread between mortgage rates and the Ten Year Treasury yield when the MBS purchase program ends. Right now the Fed plans on letting the MBS roll off the balance sheet, so in Sack’s view the impact on rates should be gradual.”

    Chairman Bernanke noted that the Fed’s holdings of agency debt and MBS are being allowed to roll off the balance sheet, without reinvestment, as those securities mature or are prepaid, and that the FOMC may choose to redeem some of its holdings of Treasury securities in the future, as well.

    With this approach, the FOMC would be shrinking its balance sheet in a gradual and passive manner. That, in my view, is a crucial message for the markets…

    viz. Fannie Mae Mortgage-Bond Spreads Fall to Record

    Why Treasury doesn’t like principal write-downs

    Do you mark to market, thereby plunging the entire financial sector into insolvency, or do you delay and pray, risking a Japan-style lost decade?

    It seems to me that insofar as Treasury has a problem with principal write-downs, that’s clearly a function of the fact that it’s worried about the consequences for banks’ balance sheets. We’re prosecuting a muddle-through strategy right now, where the government artificially props up house prices by providing substantially all of the mortgage finance in the country, in the hope that with economic recovery will come enough of a natural rebound in house prices to let the government slowly remove its support without them falling dramatically again.

    A large program of principal write-downs would in effect ratify the view that house prices are not going to recover any time soon — and that’s not a view that anyone in Treasury wants Americans to have… Treasury is trying to sell a message that the economy is doing much better than anybody had dared to hope this time last year. And since a program of principal write-downs would be incompatible with that message, it’s probably not going to happen.

    empahsis added :P oh and look: bloggers on parade!