In my conception regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime—about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on mutually acceptable terms. Will the government simply take over private property? Will it leave titles in private hands but strip the owners of real control and profitable use of their properties? In any event the security of private property rights rests not only on the letter of the law but also on the character of the government officials who enforce—or threaten—presumptive rights.

Between 1935 and 1940 this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, as President Franklin D. Roosevelt raged against “economic royalists” and blamed a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937–38, which undermined the general public’s confidence in the New Deal.

Treasury Secretary Henry Morgenthau tried repeatedly to persuade Roosevelt to make a public statement to reassure investors, but the President steadfastly rejected this entreaty. Morgenthau ultimately became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: Are we headed toward Socialism or are we going to continue on a capitalist basis?” Strange to say, Jim Farley and even Henry Wallace backed Morgenthau’s insistence that the President spell out what kind of economic system the administration sought to foster.

In his plea Morgenthau encapsulated the wide-ranging uncertainty that Lammont du Pont expressed in the same year, when he said: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It is impossible to even guess at the answers.”

I doubt the regime uncertainty that a growing number of commentators and analysts have perceived since 2008 is as great as that of the latter 1930s. However, the government’s frantic actions in the past few years have surely shaken investors’ confidence about future property rights in the United States. The takeovers of Fannie Mae, Freddie Mac, AIG, GM, and Chrysler; the massive interventions in financial markets; the huge bailouts of banks and other financial institutions, mixed with letting Lehman Brothers go down while salvaging Bear Stearns—all these actions and many others suggest that a rational investor might well attach a huge risk premium to any money he ventures even for the intermediate term, not to mention the long term.

Moreover, the upsurge of the federal government’s size, scope, and power since the middle of 2008 has scarcely calmed investors’ minds. New taxes and higher rates of old taxes; potentially large burdens of compliance with new financial and energy regulations; unpredictable new mandatory health care expenses; new, intrinsically arbitrary government oversight of so-called systemic risks associated with any type of business—all these unsettling prospects and others of substantial significance must give pause to anyone considering a long-term investment, because any one of them has the potential to turn a seemingly profitable investment into a big loss.

The Current Picture

In testing my hypothesis about regime uncertainty, I have marshaled three distinct types of evidence: historical documentation of government actions and public reactions; findings of public-opinion surveys, especially surveys of businessmen; and financial-market data.

My most striking financial evidence for the New Deal episode pertains to the yield curve for corporate bonds—that is, to the spreads between the effective yields on high-grade corporate bonds of various maturities. I found that this yield curve suddenly became much steeper between the first quarter of 1934 and the first quarter of 1935 (when the New Deal lurched from its first, or business-tolerant, phase to its second, or business-hostile, phase) and remained very steep until it flattened between the first quarter of 1941 and the first quarter of 1942 (when the New Deal handed the reins to the military and the big businessmen who, along with the President, ran the war-command economy). I interpreted these extreme spreads from 1935 to 1941 as risk premiums on longer-term investments caused by regime uncertainty.

Does the corporate-bond yield curve show the same kind of shift during the past few years that it displayed in the face of the regime uncertainty that prevailed from 1935 to 1941? To find out I examined a number of series of corporate-bond yields by term to maturity.

I found that in 2008, before the onset of the financial panic in September, the corporate-bond yield curve was quite flat—that is, the yields increased only slightly with term to maturity. When the panic hit, yields became extremely volatile, especially for the bonds with two years to maturity (the shortest term in the data), and remained volatile for almost a year. After mid-2009 the volatility diminished. Once the dust had settled, the yield curve for corporate bonds had become substantially steeper.

Thus just as the steeper yield curve of the latter 1930s corresponds precisely with the so-called Second New Deal, when Roosevelt and his leading advisers went on the warpath against investors as a class, the steeper yield curve since mid-2009 corresponds with the bigger government left in the wake of the financial-market volatility and frenetic government action between September 2008 and the middle of 2009 and with the subsequent rash of extraordinary government measures.

Given the current regime uncertainty, investors will probably continue to remain for the most part on the sideline, protecting their wealth in cash hoards and low-risk, low-return, short-term investments and consuming wealth that might otherwise have been invested. Slow economic recovery, at best, will be the result.

This macroeconomic success owed nothing to policymakers’ fine tuning, because neither the administration nor Congress made such delicate adjustments of fiscal policy as conditions changed. In truth, the U.S. government was institutionally incapable of fine tuning fiscal policy, however much it appealed to Keynesian economists drawing diagrams on blackboards.

Whatever its sources, this remarkable macroeconomic performance deserves the lion’s share of the credit for the reduction in measured poverty that occurred during the Great Society years. Of course the administration did propose, gain enactment of, and implement a plethora of bills aimed at reducing poverty in one way or another. Indeed, for many observers, the Great Society is virtually synonymous with the War on Poverty.

Major events included enactment of the Civil Rights Act of 1964 (often viewed as an antipoverty measure because blacks had relatively low average income), the Economic Opportunity Act of 1964, the Food Stamp Act of 1964, the Elementary and Secondary Education Act of 1965, and the Social Security Amendments of 1965 (creating Medicare and Medicaid), as well as establishment of the Office of Economic Opportunity (to oversee programs such as VISTA, Job Corps, Community Action Program, and Head Start), hundreds of Community Action Agencies, and many other bureaus ostensibly promoting poor people’s health, education, job training, and welfare.

Nearly all these antipoverty measures, if successful at all, had only a small effect on the national poverty rate, which fell from 19.5 percent in 1963 to 12.8 percent in 1968. Many of the antipoverty programs had scant funding and received news coverage out of proportion to the amount of money they spent. Most of the programs were ineffectual, spending taxpayer money with little or nothing to show for their display of good intentions. “[T]hose who most directly benefited,” says historian Allen J. Matusow, “were the middle-class doctors, teachers, social workers, builders, and bankers who provided federally subsidized goods and services of sometimes suspect value.”

Poverty researcher Michael D. Tanner recently remarked, apropos of the War on Poverty and its programmatic legacies:

Throwing money at the problem has neither reduced poverty nor made the poor self-sufficient. Instead, government programs have torn at the social fabric of the country and been a significant factor in increasing out-of-wedlock births with all of their attendant problems. They have weakened the work ethic and contributed to rising crime rates. Most tragically of all, the pathologies they engender have been passed on from parent to child, from generation to generation.

The Great Society at least did not bring economic growth to a halt, and therefore did not preclude a continuation of the long-term reduction in the proportion of Americans living in poverty. As for the War on Poverty in particular, however, no such benign evaluation is justified. Matusow, by no means a conservative ideologue, concludes that “the War on Poverty was destined to be one of the great failures of twentieth-century liberalism.”

Like most of the other Great Society programs, the War on Poverty rested on the presumption that technocrats possessed the knowledge and capacity to identify what needed to be done, design appropriate remedial measures, and implement those measures successfully through the use of government’s coercive power and taxpayers’ money. The technocrats did not give much weight—indeed, they generally gave no weight whatsoever—to the possibility of what later came to be known in Public Choice theory as “government failure.”

According to LBJ’s biographer, Paul Conkin, Johnson “never easily conceded that any except purely private problems did not lend themselves to a political answer. That is, government could directly or indirectly alleviate any distress.” White House aide Joseph Califano later confessed, “We did not recognize that government could not do it all.” Yet to describe the War on Poverty as merely hubristic would be too kind to its promoters.

All too many of the programs fell short of even this species of defectiveness, amounting to little more than garden-variety efforts to turn taxpayer money into purely personal and political swag for the insiders who designed, operated, and exploited the programs. For example, the Community Action Program, unforgettably lampooned by Tom Wolfe in his 1970 book Mau-Mauing the Flak Catchers, combined ample components of white middle-class guilt, minority shakedowns, and money thrown around basically to appease the menacing claimants who, having been invited to snatch it, resorted to whatever form of intimidation would get it for them quickest. “The money,” Conkin concludes, “often seemed to dwindle away, funding little more than the wages of [Community Action Agency] employees.”

More generally, as historian John A. Andrew notes, “Through ‘iron triangles’ and the use of clientele capture, the very objects of Great Society reforms [including the War on Poverty] all too often seized control of the process to block significant change and enhance their own interests.”

Level-headed analysts could scarcely have been shocked by this outcome. As Adam Smith long ago remarked, although the “man of system”—preeminent examples of which played leading roles in initiating the War on Poverty—treats the members of society as if they were pieces on a chessboard, the people have a motive power of their own. In the mid-1960s those whom the social and economic planners undertook to help in various ways refused to sit still while the technocrats treated them as lab rats. Instead they often reacted by resisting, diverting, or seizing control of the “top-down” schemes the government imposed on them, causing what analysts in retroactive assessments call program failures.

One man’s failed experiment, however, was often another man’s fulfilled political ambition or bulked-up bank account. Across the country, for example, local politicians diverted federal money intended to fund the War on Poverty into support for prosaic, local political priorities. Although many writers now speak of this much-ballyhooed crusade as a failure, it was a rousing success for many of its movers and shakers.

For most people, the myth of wartime prosperity rests on selective memory or, for the younger generations, on miseducation. Those who lived through the war at home recall the warm social solidarity; the “pitching in” to collect scrap metal, rubber, fats, and waste paper; and the ready availability of jobs in munitions plants. They forget the scarcity of decent housing, the hassles in commuting to work, and the severe rationing or complete absence of basic consumer goods. Younger generations have been given accounts featuring legions of strong, cheerful women assembling bombers, almost as if the war had been more a giant step in the long march of women’s liberation than a global orgy of death and destruction.

Economists and historians, who have studied the home front more systematically, have succumbed to different sorts of errors. In general, they have claimed that prosperity prevailed during the war because unemploy­ment nearly disappeared, because national production soared, and because even per­sonal consumption increased. None of these claims holds water when examined carefully.

Yes, official unemployment did nearly disappear, falling from 14.6 percent of the civilian labor force in 1940 to just 1.2 percent in 1944¹. Wh at the or thodox account neglects, however, is that during that same period the government, mostly by conscription, increased the active-duty personnel of the armed forces by 11 million persons, equivalent to almost 20 percent of the total labor force (employed plus unemployed) in 1940.² If a nation shoves 11 million persons into military service and, as a result, reduces the number of unemployed persons by eight million, that performance scarcely signifies the achievement of true prosperity.

Yes, national output as conventionally measured did grow hugely during the war. As shown by the figure (pdf, p.36), gross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944.³ What the orthodox account neglects, however, is that this “miracle of production” consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military per­sonnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity. As the figure shows, only after the war ended did the private economy—the part of the economy that directly or indirectly satisfies freely expressed consumer demands—recover fully from its 15-year slump.

Nor did personal consumption flourish during the war, notwithstanding historians’ claims of a “carnival of consumption.”⁴ Because the government imposed comprehensive price controls during the war, and thereby encouraged pervasive black-market activity, official price indexes failed to record the true amount by which actual prices increased. Thus the increase of “real” (that is, inflation-adjusted) consumption spending during the war was overstated substantially. When even a conservative adjustment is made for this mismeasurement, the conclusion is that “real consumption per capita reached a pre-war peak in 1941,… declined by more than 6 percent during 1941-1943 and rose during 1943-1945; still, even in 1945 it had not recovered to the level of 1941.”⁵ Because of the many other ways that the well-being of consumers deteriorated during the war, which the official data fail to capture, actual wartime conditions were even worse than these figures suggest.⁶

Regardless of how political actors in the 1960s might have sought to exploit economic analysis to gain a plausible public-interest rationale for their proposed programs, the most prominent body of economic analysis in those days—the sort taught by the leading lights at Harvard, Yale, Berkeley, and the other great universities—virtually cried out to be exploited in this way. During the mid-1960s the so-called Neoclassical Synthesis achieved its greatest hold on the economics profession.

This term “synthesis” refers to the combination of a microeconomic part, which contains the theory of individual markets that had been developed over the preceding two centuries, and a macroeconomic part, which contains the ideas about national economic aggregates advanced by John Maynard Keynes in his landmark 1936 book The General Theory of Employment, Interest, and Money and further developed by Keynes’s followers during the three decades after the book’s publication.

On the microeconomic side, the Neoclassical Synthesis incorporated the so-called New Welfare Economics that had been developed during the 1930s, 1940s, and 1950s. In this form microeconomic theory advanced a general-equilibrium theory of the economy’s various markets, identified the conditions for the attainment of equilibrium in this idealized system, and demonstrated that various “problems”—springing from external effects, collective goods, less-than-perfect information, and less-than-perfect competition, among other conditions—would cause the system to settle in a state of overall inefficiency: The value of total output would fall short of the maximum that would have resulted from systemic efficiency, given the economy’s available resources of labor and capital and its existing technology.

Attainment of such an inefficient state was characterized as a “market failure,” and economists expended enormous effort alleging the existence of such market failures in real-world markets and in proposing means (mainly taxes, subsidies, and regulations) by which the government might, in theory at least, remedy these failures and thus maximize “social welfare.”

Had economic theorists rested content with using the microeconomics of the Neoclassical Synthesis strictly as a conceptual device employed in abstract reasoning, it might have done little damage. However, as I have already suggested, this type of theory cried out for application—which, in practice, was nearly always misapplication. The idealized conditions required for theoretical general-equilibrium efficiency could not possibly obtain in the real world; yet the economists readily endorsed government measures aimed at coercively pounding the real world into conformity with these impossible theoretical conditions.

Closely examined, such efforts represented a form of madness. As the great economist James Buchanan has observed, the economists’ obsession with general equilibrium gives rise to “the most sophisticated fallacy in [neoclassical] economic theory, the notion that because certain relationships hold in equilibrium the forced interferences designed to implement these relationships will, in fact, be desirable.”

Great Society measures such as the Elementary and Secondary Education Act (1965), the Higher Education Act (1965), the Motor Vehicle Safety Act (1966), and the Truth in Lending Act (1968), as well as many of the consumer-protection and environmental-protection laws and regulations, found ready endorsement among contemporary neoclassical economists, who viewed them as proper means for the correction of purported market failures.

The assumptions that underlay these economic interpretations and applications, however, could be sustained only by wishful thinking. Economists presumed to know where general equilibrium lay, or at least to know the direction in which the quantities of various inputs and outputs should be changed in order to approach general-equilibrium efficiency more closely. But neoclassical economists cannot move the earth with a mathematical lever because they have no place to stand—no “given” information about (presumably fixed) property rights, consumer preferences, resource availabilities, and technical possibilities. What neoclassical economics takes as given is, in reality, revealed only by competitive processes.

If the microeconomic side of the Neoclassical Synthesis fostered government measures to remedy a variety of putative market failures, its macroeconomic side endorsed government measures to remedy the greatest alleged market failure of all—the economy’s overall instability and its recurrent failure to bring about a condition known as “full employment.”

The supposition that mass unemployment constitutes or reflects a market failure came easily to economists who had reached maturity during the Great Depression. By the early 1950s Keynesian ideas had entrenched themselves among the leading lights of the mainstream economics profession. Since then, some species of Keynesianism has been either in the professional saddle or clamoring to get there.

In the 1960s few economists disputed this general framework of analysis. Even critics such as Milton Friedman accepted it, arguing only that certain second-order aspects of the model differed from what the Keynesians assumed.

Few macroeconomists looked to monetary-policy changes as important means of pushing an economy out of what they viewed as a mass-unemployment equilibrium. For the typical macroeconomist of those days, fiscal policy—changes in government spending, taxing, and borrowing—held the key to keeping the economy on a steady growth path. By employing these instruments policymakers could effectively select from a menu of inversely related rates of inflation and unemployment, a tradeoff schedule known as the stable Phillips Curve. As if to certify the completeness of Keynesianism’s conquest, in December 1965 Time magazine put an image of Keynes on its cover and featured a long, laudatory article titled, “We Are All Keynesians Now.”

The Great Society programs, whether for microeconomic remedy of alleged market failures or for macroeconomic fine-tuning, had an important element in common: the presumption that technocrats possessed the knowledge and the capacity to identify what needed to be done, to design appropriate remedial measures, and to implement those measures successfully. In short, the Great Society amounted to social engineering—or worse, to sheer, groping social experimentation—on a grand scale. People ought not to have been surprised when its attainments failed to match its pretensions.

After the Korean War armistice of July 27, 1953, the United States had enjoyed a decade of respite from the rapid growth of government power over economic affairs. The wartime wage, price, and production controls lapsed, although authority to reinstitute the production controls remained. No major extensions of the government’s economic controls were enacted. Big government did not disappear, of course; many of the controls and other interventions put in place in the 1930s and 1940s remained in force. But businessmen, according to economist Herbert Stein, “had learned to live with and accept most of the regulations.” Government spending, especially for Social Security benefits, crept upward. All in all, however, the Eisenhower and Kennedy administrations were placid in comparison with their immediate predecessors and successors.

Under Johnson, however, the federal government’s intrusion into economic life swelled enormously. Major events included enactment of the Civil Rights Act of 1964, the Economic Opportunity Act of 1964, the Food Stamp Act of 1964, the Elementary and Secondary Education Act of 1965, and the Social Security Amendments of 1965 (creating Medicare and Medicaid), as well as establishment of the Office of Economic Opportunity (to oversee programs such as VISTA, Job Corps, Community Action Program, and Head Start), the Community Action Agencies, and many other bureaus ostensibly promoting poor people’s health, education, job training, and welfare. In addition, broad-gauge economic regulatory measures were adopted in connection with traffic safety, coal-mine safety, consumer-products safety, age discrimination in employment, truth in lending, and other areas.

What accounts for this multifaceted outburst? Do its various elements have a common denominator? Some scholars point to an intellectual development that Stein dubs “Galbraithianism,” after its leading propagator John Kenneth Galbraith—a loose collection of socioeconomic analysis and evaluation hostile to the free market and favorably inclined toward more sweeping government controls. “There was,” says Stein, “no demand for a new and different economic system” in the Galbraithian view. Rather, “[t]he ideological case for the old system, the free market, capitalist system, was punctured by the demonstration of exceptions to its general rules and claims, and this opened the way for specific policy interventions and measures of income redistribution without any visible limits.”

Galbraithianism’s arguments and attitudes gained strength from a spreading conviction that the U.S. economy would continue to grow forever at a fairly high rate, thereby ensuring that new and costly government programs could easily be financed by drawing on the “growth dividend.”

Economist Henry Aaron’s description of the climate of opinion in the 1960s essentially agrees with Stein’s. Aaron traces the widely held Galbraithianism back to previous crises: “The faith in government action, long embraced by reformers and spread to the mass of the population by depression and war, achieved political expression in the 1960s. This faith was applied to social and economic problems, the perceptions of which were determined by simplistic and naive popular attitudes and by crude analyses of social scientists.”

At the same time, a so-called New Class—composed of scientists, lawyers and judges, city planners, social workers, professors, criminologists, public-health doctors, reporters, editors, and commentators in the news media, among others—viewed new government programs as outlets for their “idealism” and as opportunities to do well while doing good. Thus a multitude of left-leaning intellectuals and pseudo-intellectuals gave significant leadership, support, and voice to the government surge of the Johnson years.

More prosaic political developments also played an important role. Lyndon Johnson, who had begun his political career as a New Dealer and political horse-trader in Texas, possessed not only boundless ambition but also keen political instincts and skills; he knew how to move Congress in the direction he wanted it to go. Moreover, the elections of 1964 gave the Democrats huge majorities in both houses of Congress and brought into office an extraordinarily leftish group of freshman legislators. According to Aaron, “No administration since Franklin Roosevelt’s first had operated subject to fewer political constraints than President Johnson’s.”

The specific forms the Great Society took reflected the increasing diversity of animals in the political jungle. While longstanding lobbies for business, labor unions, farmers, and middle-class professional groups continued to operate, many new interest groups organized and gained political clout on behalf of women, Indians, Chicanos, students, homosexuals, the handicapped, the elderly, and many others, none of whom had been directly represented as such to an important extent in U.S. politics. These groups demanded that the federal government solve a variety of racial, urban, employment, and consumer problems, real and imagined.

Galbraithianism, Marxism, and other varieties of critical socioeconomic analysis also helped to justify the displacement of antiwar and pro-civil-rights enthusiasms onto a diverse set of anti-market causes, giving rise to heightened support for environmental, consumer, and zero-risk regulations. No perceived social or economic problem seemed out of bounds in this cacophonous new political environment.

Although the Great Society established critically important new federal powers and agencies, it did not cause federal domestic spending to increase tremendously at first. A portentous sign might have been seen, however, in the quick acceleration of federal transfer payments, which increased from $34.2 billion in 1963 to $65.5 billion in 1969. Over time this locomotive gained more and more momentum. According to Michael D. Tanner of the Cato Institute, between 1963 and 2010, “the federal government spent more than $13 trillion fighting poverty.”

Almost everyone now acknowledges that federal entitlement programs, crowned by the enormously costly health-care systems the Great Society spawned, have promised much greater benefits than the government can fund, and hence that many of these benefits will have to be cut, notwithstanding the political fury such cuts surely will elicit. This impending sociopolitical tumult represents one of the Great Society’s bitterest fruits.

Reliance on foreign lenders is as old as the republic. Indeed, loans from the French and the Dutch proved critical in keeping the American revolutionaries afloat while they broke from the British Empire and established their independence. Later, the huge foreign debt became a major reason for the new national government’s assumption of the states’ war debts and for the creation of the First Bank of the United States and other measures Alexander Hamilton devised to establish the new government’s credit.

As a rule, however, the U.S. government had little need to borrow. Except during wartime, it more or less balanced its budget, and indeed in many years of the nineteenth and early twentieth centuries, it ran a surplus, which was used to pay down the debt taken on during the preceding war. Only after 1930 did chronic deficits become a fixture of the federal government’s financial conduct. Even then, however, foreign lending did not play a large role until the latter part of the twentieth century.

As late as 1970, according to a report issued by the Federal Reserve Bank of New York, foreigners held only about $20 billion, or less than 9 percent, of all privately held U.S. securities outstanding. (A great deal of the total debt is held within the government, mainly by the Social Security Trust Fund.) During the following decades, however, foreigners acquired a growing proportion of the debt held outside the government. In the 1970s foreigners purchased $10.5 billion, or about 31 percent of the total sold to the public. In the 1980s, when large government budget deficits pumped up the debt rapidly, foreigners purchased $27.5 billion, or about 18 percent of the total sold to the public.

(Note that all such data are subject to a variety of conceptual and measurement errors. All the figures on foreign holdings of U.S. Treasury debt discussed in this article are admittedly flawed official estimates.)

During the 1990s, as the government first pared its budget deficit after 1992 and then actually ran a small budget surplus during fiscal years 1998 through 2001, the foreign share of U.S. Treasury debt held by the public increased greatly, and by the end of the decade it had reached almost 40 percent of the total, before dipping somewhat during the recession early in the following decade.

After 2002 foreign holdings rose greatly as huge government budget deficits accompanied the Bush administration’s guns-and-butter policies, and the foreigners’ acquisitions again outpaced those of Americans. By the third quarter of 2009 the foreign share of U.S. debt held by the public stood at nearly 52 percent.

According to data issued by the Treasury and the Federal Reserve Board on March 15, 2010, the largest foreign holders of U.S. Treasury securities in January 2010 were as follows: China (mainland plus Hong Kong), $1,036 billion; Japan, $765 billion; a group of 15 countries designated “oil exporters,” $218 billion; Brazil, $169 billion; a group of four island nations plus Panama, designated “Caribbean banking centers,” $144 billion; Russia, $124 billion; and Taiwan, $120 billion. These countries’ holdings altogether totaled $2,576 billion, or about 70 percent of the $3,706 billion owned by all foreign holders at that time.

China’s Emergence

China’s emergence as the leading foreign holder of U.S. Treasury debt has occasioned a great deal of commentary, including many expressions of apprehension. Many writers still view the Chinese as enemies of the United States, notwithstanding the two countries’ close financial and trade ties, among other important links. Xenophobes worry that should the Chinese “dump” their holdings of U.S. government debt, they would create financial havoc and jeopardize U.S. national security.

To be sure, Chinese government leaders and other Chinese spokesmen have recently expressed serious concern about the U.S. Treasury’s ability to service its rapidly growing debt. They worry that the U.S. government is getting itself into deeper and deeper financial difficulty by running budget deficits well in excess of $1 trillion per year in fiscal years 2009 and 2010 and, according to projections, only slightly smaller deficits for many years to come. The persistent recession that began early in 2008, from which little recovery was evident even in the first quarter of 2010, has done nothing to allay Chinese fears about the U.S. Treasury’s precarious condition. Other foreign holders of U.S. government debt have expressed similar worries.

Late in 2009 mainland China reduced its holdings of Treasury securities somewhat, from a high of $940 billion in July 2009 to $889 billion in January 2010, a reduction of $51 billion, or 5.4 percent. Meanwhile, however, Hong Kong’s holdings rose by $36 billion during these months, offsetting most of the reduction by mainland China. The overall Chinese holdings declined, then, by only $15 billion, which is scarcely enough to justify anyone’s nightmares.

Likely and Unlikely Scenarios

In any event, fear that the Chinese (or other large holders) might suddenly dump large quantities of Treasury debt is difficult to take seriously because, owing to the great amount of such debt they now hold, any such sell-off would cause a tremendous fall in the price of the securities and cause huge capital losses for the Chinese holders. Not being fools, the Chinese are unlikely to resort to such dumping. Instead, they have begun to warn the U.S. government that unless it gets its financial house in better order, it might provoke them to sell off more of their holdings—and certainly to refrain from adding to them, notwithstanding the enormous amount of such securities the Treasury will have to sell in order to finance the U.S. budget deficits projected for many years to come.

The most likely scenario, then, is for the Chinese to monitor the Treasury and Congress carefully and to use diplomatic pressure to try to discipline the wayward Americans as much as possible without angering them excessively and thereby tempting them to act rashly in a fit of nationalistic pique. Other large holders of U.S. government securities no doubt will also exert pressures to rein in the fiscally irresponsible U.S. government and the Fed, lest the latter resort to monetization of the government’s huge deficits, thereby creating price inflation that reduces the real value of the nominal interest and principal payments the Treasury has committed itself to make on its outstanding debt.

Although official macroeconomic data for the war years have many problematic aspects, we may consult them as a point of departure. These data show that net private domestic investment plunged from $9.1 billion in 1941 to $0.3 billion in 1942, and for each of the following three years the amount (in billions of current dollars) was negative: –4.1, –2.9, and –0.2, for 1943, 1944, and 1945, respectively. Thus for the four war years combined, the private capital stock fell by $6.9 billion, or by an amount half-again greater than the amount added during best year of the 1930s (namely, 1937). This showing seems bad enough, but the actual decline was greater than the official data indicate.

While privately owned capital declined during the war, privately operated capital increased because the government spent more than $17 billion for manufacturing plants, equipment, and reconversions between July 1940 and June 1945—an amount equal to almost two years of net private investment at the 1941 rate. These plants were operated for the most part by private corporations under management contracts, and after the war some of the facilities were sold to their wartime operators or other private parties. Much of the government-financed capital would prove to be ill-suited to the profitable production of civilian goods in the postwar economic environment, however, and hence its postwar value was much less than the amount the government had spent to build it during the war.

In any event, the official figures overstate the increase in the privately owned or operated capital stock during the first half of the 1940s because the standard formulas for computing depreciation fail to take into account certain extraordinary conditions, especially “the accelerated depreciation resulting from intensive plant use and scarcity of replacement parts” to which economist Glenn McLaughlin called attention in the American Economic Review for March 1943.

According to a 1945 War Production Board report,

Plant utilization in the munitions industries increased sharply after Pearl Harbor . . . . [T]he average utilization of facilities in the metal products industries late in 1944 was about two-thirds above the prewar level, after having reached nearly twice the prewar level in the spring of 1943; the increase in the remaining industries, though smaller, was still substantial. . . . [T]he increased utilization of existing facilities contributed nearly as much to the increase of total industrial output during the war as did the construction of new facilities; though the contribution made by more intensive utilization was much more important in the earlier part of the period, particularly in 1940 and 1941, than it was in 1943 and 1944. [Emphasis added.]

Double-shift and even treble-shift operation of plants became much more common during the war.

Writing in the Survey of Current Business in 1963, Murray Foss reported that in a comparison of conditions in 1940–44 with those in 1934–39, hours of usage per year increased by 53 percent for railroad freight cars, by 54 percent for freight locomotives, and by 34 percent for passenger locomotives. Hours of usage per year per spindle in the cotton textile industry increased by about two-thirds during the war years.

Repairs Forgone

While the capital stock was being used far more intensively, the lack of replacement parts and repair materials kept producers from doing even normal upkeep on their property. In the housing sector, rent controls induced landlords to forgo ordinary repairs. For apartment houses and small structures, index numbers of repair and maintenance expenditures fell some 20 percent during the war. According to a 1945 report of the director of war mobilization and reconversion, the motor-carrier industry during the three peak war years obtained “only 195,000 new trucks and buses,” which amounted to “less than 10 percent of the number it would normally require for replacements and expansions,” while increasing its loads each year and hastening wear and tear on its fleet of vehicles. For the overall economy, this report concluded, “wear and tear on plants has been far above normal, while repairs and replacements have been below normal.”

In addition, official depreciation estimates fall short of the truth during the war years because they fail to correct for inaccuracies in the price indexes. In a situation of pervasive price controls, even if a firm tried to make adjustments for the declining purchasing power of money, the dollar amounts it allowed for depreciation understated the actual amounts it needed to set aside in order to replace its worn-out plant and equipment later, in the postwar environment, when prices would no longer be suppressed and actual market (that is, higher) prices would prevail. The statisticians at the Commerce Department apparently took the official price indexes at face value even for the years when price controls were in effect.

According to official estimates published in the Survey of Current Business in April 1970, the private stock of fixed business capital lost more than 7 percent of its real value between 1941 and 1945. After inclusion of the government-financed additions to the industrial capital stock, the privately operated total increased in value by an estimated 15 percent.

However, by taking into account the measurement errors in the wartime depreciation estimates incorporated into the official figures—errors caused by inaccurate price indexes and by the inappropriate application of uniform, standard depreciation schedules during a period of accelerated actual depreciation—we may conclude that the true drop in the privately owned stock of capital was even greater than the official figures show during the war years and that the increase in the stock during the second half of the 1940s was greater than shown. Moreover, depreciation figures applied to the industrial capital stock the government financed during the war are too low for the same reasons. Thus for the capital stock, as for the economy’s real output, the official data have misled us by making the wartime expansion appear bigger than it really was and the postwar expansion smaller than it really was.

When people bothered to give reasons for opposing the proposed abolition, they advanced various ideas. Here are ten such ideas I have encountered in my reading.

1. Slavery is natural. People differ, and we must expect that those who are superior in a certain way—for example, in intelligence, morality, knowledge, technological prowess, or capacity for fighting—will make themselves the masters of those who are inferior in this regard. Abraham Lincoln expressed this idea in one of his famous 1858 debates with Senator Stephen Douglas: “[T]here is a physical difference between the white and black races which I believe will forever forbid the two races living together on terms of social and political equality. And inasmuch as they cannot so live, while they do remain together there must be the position of superior and inferior, and I as much as any other man am in favor of having the superior position assigned to the white race.”

2. Slavery has always existed. This reason exemplifies the logical fallacy argumentum ad antiquitatem (the argument to antiquity or tradition). Nevertheless, it often persuaded people, especially those of conservative bent. Even nonconservatives might give it weight on the quasi-Hayekian ground that although we do not understand why a social institution persists, its persistence may nonetheless be well grounded in a logic we have yet to understand.

3. Every society on earth has slavery. The unspoken corollary is that every society must have slavery. The pervasiveness of an institution seems to many people to constitute compelling proof of its necessity. Perhaps, as one variant maintains, every society has slavery because certain kinds of work are so difficult or degrading that no free person will do them, and therefore unless we have slaves to do these jobs, they will not get done. Someone, as the saying went in the Old South, has to be the mud sill, and free people will not tolerate serving in this capacity.

4. The slaves are not capable of taking care of themselves. This idea was popular in the United States in the late eighteenth and early nineteenth centuries among people, such as George Washington and Thomas Jefferson, who regarded slavery as morally reprehensible yet continued to hold slaves and to obtain personal services from them and income from the products these “servants” (as they preferred to call them) were compelled to produce. It would be cruel to set free people who would then, at best, fall into destitution and suffering.

5. Without masters, the slaves will die off. This idea is the preceding one pushed to its extreme. Even after slavery was abolished in the United States in 1865, many people continued to voice this idea. Northern journalists traveling in the South immediately after the war reported that, indeed, the blacks were in the process of becoming extinct because of their high death rate, low birth rate, and miserable economic condition. Sad but true, some observers declared, the freed people really were too incompetent, lazy, or immoral to behave in ways consistent with their own group survival. (See my 1977 book Competition and Coercion: Blacks in the American Economy, 1865–1914.)

6. Where the common people are free, they are even worse off than slaves. This argument became popular in the South in the decades before the War Between the States. Its leading exponent was the proslavery writer George Fitzhugh, whose book titles speak for themselves: Sociology for the South, or, the Failure of Free Society (1854) and Cannibals All!, or, Slaves Without Masters (1857). Fitzhugh seems to have taken many of his ideas from the reactionary, racist, Scottish writer Thomas Carlyle. The expression “wage slave” still echoes this antebellum outlook. True to his sociological theories, Fitzhugh wanted to extend slavery in the United States to working-class white people, for their own good!

7. Getting rid of slavery would occasion great bloodshed and other evils. In the United States many people assumed that the slaveholders would never permit the termination of the slave system without an all-out fight to preserve it. Sure enough, when the Confederacy and the Union went to war—set aside that the immediate issue was not the abolition of slavery, but the secession of eleven Southern states—great bloodshed and other evils did ensue. These tragic events seemed, in many people’s minds, to validate the reason they had given for opposing abolition. (They evidently overlooked that, except in Haiti, slavery was abolished everywhere else in the Western Hemisphere without large-scale violence.)

8. Without slavery the former slaves would run amuck, stealing, raping, killing, and generally causing mayhem. Preservation of social order therefore rules out the abolition of slavery. Southerners lived in dread of slave uprisings. Northerners in the mid-nineteenth century found the situation in their own region already sufficiently intolerable, owing to the massive influx of drunken, brawling Irishmen into the country in the 1840s and 1850s. Throwing free blacks, whom the Irish generally disliked, into the mix would well-nigh guarantee social chaos.

9. Trying to get rid of slavery is foolishly utopian and impractical; only a fuzzy-headed dreamer would advance such a cockamamie proposal. Serious people cannot afford to waste their time considering such farfetched ideas.

10. Forget abolition. A far better plan is to keep the slaves sufficiently well fed, clothed, housed, and occasionally entertained and to take their minds off their exploitation by encouraging them to focus on the better life that awaits them in the hereafter. We cannot expect fairness or justice in this life, but all of us, including the slaves, can aspire to a life of ease and joy in Paradise.

At one time, countless people found one or more of the foregoing reasons adequate grounds on which  to oppose the abolition of slavery. Yet in retrospect, these reasons seem shabby—more rationalizations than reasons.

Today these reasons or very similar ones are used by opponents of a different form of abolitionism: the proposal that government as we know it—monopolistic, individually nonconsensual rule by an armed group that demands obedience and payment of taxes—be abolished. I leave it as an exercise for the reader to decide whether the foregoing reasons are more compelling in this regard than they were in regard to the proposed abolition of slavery.

A competing tale, popular among many libertarians and some left-radicals, presents the rise of big business as leading directly to satanic endeavors. This version maintains that the big businessmen, however virtuous they might have been at the outset, ran into trouble because of rampant competition among the emergent big firms. To suppress this irksome, profit-sapping market phenomenon, they used their wealth diabolically to influence or bribe lawmakers to create government programs, regulatory agencies, and so forth that, in effect, allowed them to wield the government’s coercive power in the service of propping up their cartels, suppressing competition, and maintaining excessive profits. The classic exposition of this interpretation is Gabriel Kolko’s The Triumph of Conservatism (1963).

Unfortunately, although these morality tales contains grains, or even big chunks, of truth, each leaves out a great deal of important, relevant evidence. In short, reality was much messier than either interpretation suggests. It is difficult to read deeply researched books such as Robert H. Wiebe’s Businessmen and Reform (1962), Morton Keller’s Affairs of State (1977), and Martin J. Sklar’s The Corporate Reconstruction of American Capitalism, 1890–1916 (1988) and cling to any simple interpretation of the relationship between the rise of big business and the growth of government.

Part of the difficulty arises from the vastness and complexity of the U.S. economy. A multitude of organized interest groups emerged to lobby the various levels of government. Although the federal government became increasingly weighty in the overall mix of interventions, the states and the large cities continued to play important roles–for example, such outright socialism as appeared in the United States arose primarily at the municipal level, especially for so-called public utilities, such as electricity and gas production, and local mass transit, such as streetcar service.

No serious scholar denies that businessmen played important parts in creating the interventionist state. “But who,” Wiebe asks, “are the businessmen? Sometimes they appear to be a handful of particularly successful and powerful men [Murray Rothbard emphasized especially the kingpins in the "Morgan ambit"]. At other times the community presumably includes everyone from the chairman of U.S. Steel to the corner grocer, without information on how, if at all, their thoughts and actions differ.” Wiebe is more impressed by the businessmen’s differences and rivalries than by their agreements. For example, the big New York bankers, notwithstanding their obvious clout, often had to contend with dissident bankers in major financial centers such as Chicago, Boston, Philadelphia, St. Louis, and San Francisco, who did not relish being overshadowed by the Wall Street titans–which is one reason (among several) why the Federal Reserve Act of 1913 created not a single central bank but twelve regional banks.

Wiebe concludes: “Among those prominent in the movements for a regulated economy were businessmen and farmers after greater profits, politicians in need of an issue, journalists in search of a story, a new class of economic and administrative specialists looking for ways to utilize their knowledge, and clergymen hoping to re-establish morality in industrial America.”

In substantial part, what made the big business (“trust”) question so politically salient in the late nineteenth and early twentieth centuries was not so much the increasing size of the leading firms as it was the emergence of a national (that is, interstate) market fostered by the development of new technologies of transportation and communication, especially the railroads (themselves described as “the first big business”) and the telegraph. When the scope of business had been local or at least predominantly intrastate for nearly all firms, government action in relation to business took place primarily on the local or state scene. As the national market came to characterize more and more businesses activities, established business-government relations became unstable and began to break down.

The giant corporations, which in many cases had become large in order to exploit new technologies and organizational structures that offered economies of scale and scope, entered increasingly into competition with the multitude of smaller firms serving previously fragmented local or regional markets. Firms threatened by the big interstate sellers sought protection by appealing to their local and state governments. For this reason, among others, local and state intrusions into market relations grew markedly in the late nineteenth century. The potential and actual mobility of firms, however, helped to contain these interventions, because companies pressed too hard simply left the jurisdiction.

At the same time, the big firms’ owners, harassed by dozens of state governments and their rapacious politicos, began to see the wisdom of federal regulation. Perhaps, they reasoned, they might stand a better chance of escaping from meddlesome, costly, and fluctuating state and local regulations if instead they dealt with a single, national, regulatory body. Such an agency might also be used to keep the big firms’ own interstate competition in check, thereby maintaining their returns.

As both small and big businessmen organized and pressed for favorable government interventions, other groups increasingly entered the fray, defensively if not offensively: Farm, labor, professional, and academic associations formed and sought expanded government measures. The nineteenth century’s dominant ideology, a distinctly American version of laissez faire, seemed increasingly unable to restrain this grasping for economic advantage via enlarged government power.

Because ideology and political movements develop reciprocally, the pervasive reactions to the rise of big business around the turn of the twentieth century gave rise not simply to a proliferation of newly organized interest groups seeking government protection of threatened positions; it also prompted intellectuals, both independents and “hired guns,” to develop new rationales for more active government. Thus Progressivism as ideology developed concurrently with Progressivism as politico-economic practice, each aspect reflecting the changing socioeconomic opportunities and hazards created by the rise of big business and its repercussions throughout the economy.