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.

On the surface the idea behind the RFC sounds good. By 1932 the Great Depression had already been devastating. Banks were failing, railroads were going broke, workers had been laid off by the millions. Why not pump cash into some large struggling companies and keep them serving customers and hiring workers? Jobs would be saved, dollars would flow through the economy, and the Great Depression might be halted.

But there were two big problems. First, the $2 billion the RFC would dole out had to come from taxpayers. And they could have used that money instead to buy radios, shirts, gas, or a host of other products that would have put people to work making and selling these items. In other words, shifting capital from workers who earn it to central planners who spend it may not create or even save jobs.

Second, Hoover’s whole idea of an RFC assumed that a group of wise men could discern the U.S. economy clearly enough to pick the right banks, railroads, and corporations to resuscitate with the right amount of cash. What we find instead is that when an appointed committee like the RFC is matched with large amounts of money, the results quickly become politicized.

Thousands of large U.S. companies wanted capital, but only a fraction of them could get it. Rep. Louis McFadden (R, Pa.), himself a bank president, called the RFC “a scheme for taking $500,000,000 of the people’s money produced by labor at a cost of toil and suffering and giving it to a supercorporation for the sinister purpose of helping a gang of financial looters to cover up their tracks.”

Immediate Politicization

Hoover, a Republican, appointed former Republican Vice President Charles Dawes to head the new RFC. Dawes, however, resigned in June 1932 to care for his bank in Chicago, the Central Republic Bank and Trust Company. Three weeks after his resignation, Dawes won a $90 million loan for his failing bank (it went broke anyway). After that, Atlee Pomerene, the new RFC president, accepted a $12.3 million loan for his Cleveland bank. Joseph Nutt, treasurer of the Republican National Committee, won a $14 million loan for his bank in Cleveland. Republican Senator Phillips Goldsborough of Maryland received a $7.4 million loan for his Baltimore bank. Roy Chapin, Hoover’s secretary of commerce, won $13 million for his Detroit bank.

Some Democrats (Pomerene was a former Democratic senator) also finagled loans from the RFC, but the larger point is that choosing who got loans and who didn’t was a political process that gave capital to the winners and took more in taxes from everyone else. Funding federal programs was expensive. During 1932, for example, the top income earners saw their top tax rate hiked from 25 to 63 percent. Plus Congress that year passed a host of new excise taxes on gas, tires, telephone calls, and movie tickets.

The Other Side’s Turn

When Franklin Roosevelt was elected president, he installed a loyal Democrat, Texas banker Jesse Jones, as the new president of the RFC. Jones helped those Roosevelt sent his way—either through RFC loans or by using his influence with others. J. David Stern, for example, edited the Philadelphia Record, which backed Roosevelt and other Democrats enthusiastically in the election. Stern, however, almost went bankrupt in the 1930s, so Roosevelt asked Jones to help. Jones used his influence in the banking community to secure $1 million in loans to keep Stern publishing.

Some reporters were sensitive to the RFC money and influence offered by Jones. Walter Trohan, the Washington bureau chief for the Chicago Tribune, often interviewed Jones, who according to Trohan would often offer RFC loans and agency-controlled firms to him. “I turned these offers down, because I didn’t know anything about such businesses and because I didn’t think I would be honest in accepting,” Trohan revealed in his book Political Animals.

Others did not have Trohan’s scruples. Hall Roosevelt, the President’s brother-in-law, used White House telephones to request loans from the RFC. According to Jones, “Two or three loans were made in which it appeared Hall Roosevelt had some kind of interest.” At one point the President urged Jones to give Hall the loan he requested because, as Jones wrote in his book, Fifty Billion Dollars, “The president wanted to get Hall as far from the White House as possible.” Jones also helped FDR’s son Elliott escape a $200,000 debt from a failed radio business in Texas.

Defenders of the RFC are quick to cite its many loans and gifts during World War II to big corporations to make weapons and supplies that helped the U.S. government win the war. But even if we assume the right corporations got the right loans and gifts, that still leaves the RFC with no reason to exist after the war. The Great Depression had ended and unemployment had stabilized at under 4 percent in 1946 and 1947, yet the RFC was still aiding corporations.

The Closest Thing to Immortality

True, the RFC had lost its economic purpose, but with all those tax dollars on hand it never lost a political purpose. To repeat what FDR once said about Social Security, the RFC loans “were never a problem of economics. They are politics all the way through.” In other words, congressmen eagerly sought RFC money to bring back to corporations in their districts. President Truman noted that “a great many members of Congress had accepted fees for their influence in getting RFC loans for constituents.”

Not only were congressmen profiting, but RFC staffers were using these loans to get jobs with the lucky companies. John J. Hagerty, for example, head of the RFC in Boston, endorsed a loan to the Waltham Watch Company. Hagerty soon accepted a job with the company for three times his RFC salary.

In 1953 President Eisenhower ended the reign of the RFC, but not completely. Parts of it reemerged as the Small Business Administration—which began making loans to favored small businesses.

What do we learn from the RFC? First, that government programs are easier to start than stop; second, that those programs will cost more than the originators intended; and third, that federal money becomes politicized very quickly, helping politicians to win votes.

The second kind of existential test can be likened rather to that of researching and writing a dissertation—longer, more drawn out, with less immediate drama but presenting in many ways a more thorough and searching examination. The consequences of failure, however, can often be just as severe, even if they take longer to arrive. This second test is that of managing taxation and public finance. As writers through the ages have recognized, failure at this can ruin a polity as surely as defeat in war.

What, though, is the nature of the test, and in what sense do ruling groups fail it? Historically, ruling groups draw incomes (“rents” in the economists’ language) from the groups they control. They do this through various means, including taxes, fines, fees, tariffs, tolls, the selling of privileges and exemptions, and even outright expropriation. In return they typically provide services, most notably defense against irregular predators, a means of settling disputes, and a range of what are commonly described as “public goods,” which can cover anything from public works and infrastructure to education. Ultimately all these services have to be funded out of the revenues the rulers can gain. It is true that a shortfall can be met by borrowing, but the money lent is secured against future income and so doing this is simply a way of spending income now in anticipation of its arrival in the future.

The failure of rulers to handle this can take two forms. The simplest is when the level of taxation and other exactions is simply too high and discourages productive labor to such a degree that wealth is destroyed rather than created. If taken too far, this can actually destroy the basis for the rulers’ position. Just as a parasite that kills its host is a biological failure, so ruling classes that destroy their own productive base are clearly political failures. The more insidious failure, however, arrives when ruling groups spend more money than they take in and fund it through debt. This can go on for a long time, even indefinitely, provided the underlying economy is productive and dynamic enough and the spending is not too high. The evidence of history is that it cannot go on forever. Sooner or later a crunch will come, and the way the ruling group responds determines whether it passes or fails the test.

In 1783 the Treaty to Paris brought an end to a worldwide conflict. For Americans this was the American Revolution, when the colonies gained their independence from the British Empire. From a world perspective, however, this was only the latest round in a struggle for global leadership between Britain and France that could be traced back to the 1690s. Just as in previous episodes, the war had been financed mainly through the issuing of debt, which was added to the accumulated obligations of earlier conflicts. By 1783 the public finances of both France and Britain were in a desperate state. In many ways the British finances were in worse shape than those of the French: In 1784 total British debt amounted to 156 percent of GDP, comparable to French levels but with an economy not as large as that of France and so less able to support such a burden. However, the next six years saw the British elite address this problem. Their French counterparts did not and failed the test.

Diverging Paths

In Britain the new prime minister, William Pitt the Younger, brought the public finances under control through what was known as “economical reform.” This was a combination of extensive tax increases and major cuts in government spending, most significantly through the abolition of a large number of useless government jobs or sinecures. This had significant political implications because access to these posts was a major form of patronage and central to the political system of the time. Even so, the cuts were made.

In France the new minister of finance, Charles Alexandre de Calonne, did not address the state of the French public finances in the same way, at least not initially. Instead he floated a series of loans to bridge the gap between income and expenditure. Despite its greater wealth, the French crown had to pay twice the interest rate of the British State, because its creditors (the so-called “financiers”) had less confidence in its capacity to repay the debt and its willingness and ability to do what was necessary. Eventually Calonne proposed a series of reforms including tax increases (in particular taxes on the aristocracy and clergy), major cuts in government spending, and a move to internal free trade in France. To overcome opposition, in 1787 he persuaded the king to summon an Assembly of Notables. However, the elites opposed both the tax increases and spending cuts, and he was dismissed. The publicizing of the desperate state of the finances and the accelerating loss of confidence in France’s rulers by their creditors meant the difficulties of the crown became even more acute until, in 1789, the king in desperation called a meeting of the Estates General for the first time in over 150 years to try to break the deadlock. What followed is, as they say, history.

Contemporary America

Contemporary Americans should look back at these events with increasing nervousness. As in Britain and France in 1783, the public finances are in a parlous state. The gap between revenue and expenditure has never been wider and is even worse than the headline figures suggest when the unfunded liabilities of Medicare and Social Security are taken into account. For a long time now the American political class has been funding expenditure through borrowing, depending ultimately on the confidence of their creditors and the underlying productivity of the American people. If this confidence should waver (and there are many signs of this) the cost of this borrowing is bound to rise. If the spending and liabilities exceed the capacity of even the most heroic future productive labor by American citizens (as they clearly do) then something has to give.

Ultimately it is clear that either spending must be cut or taxes and imposts increased or some combination of the two. Just as in France, however, this depends on the willingness of both elites and ordinary people to do what is necessary. That in turn depends on a broad agreement as to the proper role and size of government. In the absence of such an agreement, just as in France in 1787, tough decisions will be ducked and matters will go from bad to worse. Arguments about taxes and the deficit are thus proxies for a deeper debate.

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

Franklin Roosevelt recognized that the war only provided a short-term fix for the economy—and a very costly one at that. What would happen after the war—when 12 million troops came home and the strong demand for guns, bullets, tanks, and ships ceased?

Roosevelt envisioned a New Deal revival. He had created the National Resources Planning Board (NRPB) in 1939 and urged it during the war to plan for peacetime. The NRPB leaders believed that government planning was necessary to promote economic development. They consciously (and sometimes unconsciously) followed ideas popularized in 1936 by John Maynard Keynes in his bestselling book, The General Theory of Employment, Interest and Money.

Capitalism was inherently unstable, Keynes argued, and would rarely provide full employment. Therefore government intervention was needed, especially in recessions, to spend massive amounts of money on public works, which would create new jobs, expand demand, and rebuild consumer confidence. Yes, government would need to run large deficits, but economic stability was society’s reward. If government planners could manage aggregate demand through public works, the boom-bust business cycle could be flattened and economic development could be managed in the national interest. No more Great Depressions. Man could indeed be master of his economic future.

Before and during the war Keynes’s ideas swept through the United States and first transformed the universities, then the political culture of the day. With statistics in hand and a near reverence for government, the Keynesians were the new generation of planners. They wanted to remake society. Not entrepreneurs, but economists were needed to gather data, plan government programs, and regulate economic development. Paul Samuelson, for example, a 21-year-old economics student, was cautious at first, but then euphoric after Keynes’s book was published. “Bliss was it in that dawn to be alive, but to be young was very heaven,” Samuelson wrote. Other economists soon accepted Keynes, and by the 1940s his ideas dominated the economics profession. In 1948, Samuelson would defend Keynes by writing the best-selling economics textbook of all time.

Planning for Peace

Those on the NRPB were among the excited disciples of Keynes and economic planning. The war itself seemed to be evidence that government jobs had pulled the U.S. economy out of the Depression. Now the economists and planners needed to take the nation’s helm to plan for peace.

According to Charles Merriam, vice president of the NRPB, “[I]t should be the declared policy of the United States government, supplementing the work of private agencies as a final guarantor if all else failed, to underwrite full employment for employables. . . .” That idea launched what Merriam and the NRPB dubbed “A New Bill of Rights.” FDR would call it his Economic Bill of Rights. Included was a right to a job “with fair pay and working conditions,” “equal access to education for all, equal access to health and nutrition for all, and wholesome housing conditions for all.”

New Bill of Rights

FDR viewed this Economic Bill of Rights as his tool for guaranteeing employment for veterans (and others) after World War II. But it was more than a mere jobs ploy; it had the potential to transform American society. The first Bill of Rights, which became part of the Constitution, emphasized free speech, freedom of the press, and freedom of religion and assembly. They were freedoms from government interference. The right to speak freely imposes no obligation on anyone else to provide the means of communication. Moreover, others can listen or leave as they see fit.

But a right to a job, a house, or medical care imposes an obligation on others to pay for those things. The NRPB implied that the taxpayers as a group had a duty to provide the revenue to pay for the medical care, the houses, the education, and the jobs that millions of Americans would be demanding if the new bill of rights became law. In practical terms this meant that, say, a polio victim’s right to a wheelchair properly diminished all taxpayers’ rights to keep the income they had earned. In other words, the rights announced in the Economic Bill of Rights contradicted the property rights promised to Americans in their Declaration of Independence and in the Constitution.

FDR promoted his Economic Bill of Rights in his State of the Union message in 1944, but he died before the war ended. Shortly before his death, Senator James Murray (D-Mont.) introduced a full-employment bill into the Senate for discussion. The bill committed the government in a general way to provide jobs if unemployment became too high. Many leading Democrats and economists supported Murray’s bill. “In this session of Congress,” The New Republic reported, “one of the first bills to be introduced will no doubt be the full employment bill of 1945, designed to carry out item number one in the Economic Bill of Rights.” The Nation joined The New Republic in endorsing the full-employment bill. “Mr. Roosevelt’s program,” it concluded, “is squarely based on the best economic authority available. It is entirely consistent with the economic doctrines of the distinguished British economist Lord Keynes.”

On September 6, 1945, President Harry Truman gave a major speech in which he supported the Economic Bill of Rights, especially a full-employment bill. Most congressmen, however, rejected both. Rep. Harold Knutson (R-Minn.) said, “Nobody knows what the President’s full employment bill will cost American taxpayers, but the aggregate will be enormous.”

Instead, Knutson and many other congressmen favored cutting tax rates and slashing the size of government as the best measure to restore economic growth. Senator Albert Hawkes (R-N.J.) even argued that “the repeal of the excess-profits tax, in my opinion, may raise more revenue for the United States than would be raised if it were retained.” Hawkes proved to be prophetic. After vigorous debate Congress scrapped the Economic Bill of Rights and cut tax rates instead. American business then expanded, revenues to the Treasury increased to balance the federal budget, and unemployment was only 3.9 percent in 1946 and 1947. The Great Depression was over.

In her latest work, Bourgeois Dignity: Why Economics Can’t Explain the Modern World, Deirdre McCloskey argues that the critical factor was a change in how productive activities such as trade were regarded. Instead of being seen as menial, morally disreputable, and lacking in honor, they came to be regarded as respectable, dignified, and above all virtuous. This gave trade, merchants, and manufacturers (those who worked with their hands) the crucial respect formerly given only to aristocrats, priests, and even peasants. I think McCloskey gives too much weight to this explanation, but the phenomenon she identifies was undoubtedly real and important.

McCloskey identifies the Dutch Republic as the place where the cultural shift started in the early seventeenth century. In the European case this is undoubtedly true. However it was not unique. Another later but independent shift was even more self-conscious and deliberate. It happened in one of the most fascinating of premodern societies, Tokugawa Japan. (McCloskey discusses the striking similarities between Europe and Japan at this time).

From 1467 to roughly 1570 Japan went through what became known as the Sengoku, or “warring states,” period of its history. The central authority was weak to nonexistent and warfare was almost constant. Between 1568 and 1603 there was the Momoyama, or unification, period in which Japan was unified by several astute leaders. The last of these, Tokugawa Ieyasu, defeated his rivals at the Battle of Sekigahara in 1600 and established the Tokugawa Shogunate, which would rule Japan until 1868. Tokugawa Japan was simultaneously deeply conservative and yet dynamic. The Tokugawa Shoguns, particularly after the 1630s, banned almost all contact with the outside world (the losing side at Sekigahara had generally favored greater links). Internally they sought to encourage and enforce a strict conservatism. One aspect of this was a firm insistence on traditional social hierarchies of esteem and status: emperor, shogun, daimyo, samurai, peasant, artisan, merchant. In general the countryside was seen as morally superior to the city. Another aspect was a revival of interest in Confucianism, particularly by the samurai, with development of an elaborate moral code and philosophy known as bushido—the way of the warrior.

The other side of Tokugawa Japan, however, was rapid economic development. Population grew swiftly after the 1690s, and this went along with dramatic urbanization: By the late eighteenth century the capital Edo (now Tokyo) and other centers such as Osaka and Kyoto were among the largest cities on the planet. There was also a great growth of internal trade and manufacture, as well as some trade with the outside world via a small colony of Dutch merchants on an artificial island in Nagasaki harbor. This also went along with interesting cultural developments. The merchant class in Japan did not simply concern themselves with business and physical pleasure, accepting their lowly status, as is often supposed. Instead they also explored Confucian and other ideas. In doing so they developed their own philosophy and culture, that of chonindo—the way of the townsfolk.

The essence of chonindo was developed and articulated by a series of thinkers from the later seventeenth century onward in the mercantile centers of Japan and particularly in Osaka. (Osaka had been the center of the Toyotomi clan, the rivals of the Tokugawa and the losing side at Sekigahara).

The crucial event in many ways was the founding of the Kaitokudo academy in Osaka in 1726 by Miyake Sekian and Nakai Shuan. This was a private educational institution, funded by the great merchant and trading houses of Osaka, for the exploration of Confucian ideals and in particular the establishment of the connection between productive work, trade, and virtue. The founders and teachers of the Kaitokudo argued that hard work, skill, craftsmanship, and physical labor were virtuous and forms of human excellence. More dramatically, given the traditional hostility toward it in much Confucian thought, they argued that profit was itself virtuous and that its pursuit was not only compatible with a moral life but moral in itself. The deeper argument was that there was no contradiction between the traditional virtues of restraint, loyalty, honor, and magnanimity and the life of labor and commerce. Instead all these virtues were both necessary for success in that kind of life and embodied in the successful living of such a life. What was wrong was dishonest and predatory behavior in any way of life.

Another aspect of the urban life of Tokugawa Japan that had a close relationship to all this was the notion of the “floating world” as represented in the artistic genre of Ukiyo-E, the well-known woodblock prints of urban life. In its physical sense the “floating world” referred to the pleasure and entertainment sectors of the new cities of Japan. As such it is often thought of as a cult of hedonism and something opposed to both bushido and chonindo. Sometimes this was true but more often there was a connection between the ideals of the floating world and those of chonindo. The common element was the belief, also found in Enlightenment Europe, that this physical world was good, not cursed, and that physical pleasure and well-being were admirable and worth seeking rather than barriers to virtue. The connection with chonindo was through the idea that in fact greater comfort and physical pleasures encouraged virtue (while discouraging predatory or vindictive behavior) and were the outcome of following the virtues of the merchant or townsman.

We may think that today the arguments of people like Adam Smith in Europe or the teachers of the Kaitokudo in Japan are unimportant because they are so obviously true and uncontroversial. Nothing could be further from the truth. Rather they are now as unfashionable and deprecated as when those Japanese merchants got together and set up their academy in Osaka almost 200 years ago. Because they faced such a hostile culture they were in many ways more explicit and systematic in their arguments than their European counterparts were. (Arguably they also had a more congenial intellectual tradition to work with in many ways). Today too many of the arguments for a free economy and society are made on the basis of efficiency. Such arguments may be true but they butter no parsnips when faced with a moral rejection of the idea of profit and commerce. The argument that a free economy is a moral economy is one that needs to be made and won more than ever.

We should read people like Ito Jinsai, Nishikawa Joken, Miyake Sekian, Nakai Shuan, Tominaga Nakamoto, Goi Ranju, Nakai Chikuzan, Nakai Riken, Kusama Naokata, and Yamagata Banto as much as we do Adam Smith, David Hume, Lord Kames, and Milton Friedman.

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.

Those two sentences helped focus the Progressive worldview. First, the United States needed an income tax to capture large chunks of revenue. Second, someone who had a large fortune, “by the mere fact of its size,” had to be treated differently from other wealth holders. Property rights became variable. One group would be treated one way, other groups would be treated another way. Third, the nation needed a “graduated income tax” to redistribute wealth from the haves to the have-nots. The new tax slogan would be “ability to pay.”

Author Delos Kinsman, writing while Roosevelt was president, said, “Individuals should contribute to the support of the government according to ability.” And “income is the most just measure of that ability.” Enlightened leaders like Teddy Roosevelt would redistribute wealth in the national interest.

Roosevelt’s thinking was a profound change from the views of the Founders. To them, government existed to protect property, not redistribute it. Americans had a right to pursue life, liberty, and property, not an entitlement to it. Thus the Founders never considered raising revenue through an income tax, least of all a graduated one. They wanted consumption taxes—levies on imports or on luxury goods. Why? Because, as Alexander Hamilton said in Federalist 21, “The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources.”

Hamilton added, “If duties are too high, they lessen the consumption; the collection is eluded; and the product in the treasury is not so great. . . . This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.”

American law also reinforced the use of consumption taxes. “All duties, imposts and excises shall be uniform throughout the United States,” the Constitution reads. What could be more uniform than Congress’s first excise tax of seven cents a gallon on all whiskey produced in the United States?

Not Good Enough

Progressives, however, disliked consumption taxes as the major source for revenue. They were too small, too cumbersome to collect, and sometimes too regressive—wealth never properly redistributed itself through consumption taxes. Taxes on whiskey, tobacco, and imported olives from Spain shifted very little, if any, wealth from rich to poor. In 1913 the House Ways and Means Committee observed that federal revenue rested “solely on consumption. The amount each citizen contributes is governed, not by his ability to pay taxes, but by his consumption of the articles needed.” Swollen fortunes, as Roosevelt might say, went untaxed and became more swollen while some immigrants lived in poverty.

The Sixteenth Amendment was ratified in 1913, giving Congress the “power to lay and collect taxes on incomes from whatever source derived.” It did not rule out “ability to pay” as the basis for the levy. The amendment became law just as Woodrow Wilson was coming into the presidency. As a Progressive, Wilson wanted to start small, establish a precedent, and then increase rates over time. Under the new tax law, exemptions were so high that few Americans earned enough to pay any tax. Rates started at 1 percent and rose slowly to a high of 7 percent on all income over $500,000.

Progressives easily sold this tax plan to the voters. Fewer than one American family in 100 paid anything, but politicians could promise audiences that they might receive benefits from the revenue. And who would dare to suggest that billionaire John D. Rockefeller did not have the ability to pay 7 percent of his huge income to the government?

Ability to Pay

Yet that raises an interesting question. At what tax rate did Rockefeller, or other wealthy men, cease to have the ability to pay? If they could pay 7 percent, could they pay 15? Apparently so, because in 1916 Wilson and Congress raised the top rate to 15 percent. Unlike with a consumption tax, under the income tax politicians judge ability to pay and they choose the rates they think rich people can afford. If politicians choose rates too high they may lose the support of the rich, but they may gain support of those larger groups receiving subsidies from the tax revenue. If wealth really needs to be redistributed, should we trust people to do it with their own money or politicians with other people’s money?

Rockefeller, for example, was the best and cheapest oil refiner in the world. His charitable giving included the Erie Street Baptist Church, a cure for meningitis, and funding for Tuskegee Institute. That was how he redistributed his own wealth. Andrew Carnegie, the steel baron, built libraries, and banker Andrew Mellon built the National Gallery of Art in Washington, D.C. In the political realm, President Franklin Roosevelt supported high taxes and gave subsidies to silver miners, farmers, and the Tennessee Valley Authority to make cheap electric power.

Charitable givers and politicians both pursue their self-interest, but the politician’s self-interest includes winning votes. That means, if possible, channeling subsidies to voting groups to win reelection at the expense of taxpayers in general. Rockefeller’s gifts to Tuskegee did not cost anyone but him any money. FDR’s subsidy to silver miners, by contrast, cost millions of taxpayers small amounts of tax revenue. It helped FDR carry several western states each time he ran for president. His redistribution efforts were essential to his being reelected.

Thus U.S. politicians had incentives to steadily increase the income tax in the 1900s. The top rate went from 7 to 15 percent in Wilson’s first term. World War I took it over 60, then over 70 percent. It didn’t drop below 50 percent until 1924, and was about 25 percent the rest of the decade. The rate rose to 63 percent in 1932 under Herbert Hoover and then 79 percent in 1935. The World War II years pushed it over 80 percent, and in 1945, FDR’s last year in office, the top was 94 percent on all income over $200,000. Wealthy people apparently had a very high ability to pay, and politicians had a very high desire to fight wars and win elections.

In this context a key technique and one of the most important foundations of the modern State is the map. The apparently neutral art of cartography is actually one of the main sources of modern political power. The most important aspect of this is the cadastral map or survey. Unlike a topographical map, it does not simply record the natural features of the terrain. It also captures, in a radically simplified and systematized form, a huge amount of knowledge of such matters as ownership, rights and entitlements, values, social relations, and obligations.

Cadastral Surveys

Maps and surveys of this kind were found to some degree in the ancient world but they disappeared with much else of the governing power of the great empires of antiquity during the sixth and seventh centuries. Such maps began to reappear during the late Renaissance, initially in Italy, latterly in the Netherlands, Germany, France, and the United Kingdom.

Before the creation of a cadastral survey this knowledge existed in the form of dispersed and tacit knowledge, scattered among many people and only accessible to those in a locality and then only partially. In this situation many kinds of action by rulers, particularly taxation but also control and regulation of the physical environment and people’s use of the land, were difficult or even impossible.

Cadastral surveys do not capture all this dispersed knowledge or even the greater part of it. They do, however, capture a significant part in a way that makes it simplified, standardized, and systematically organized or structured. This enormously increases the ability of rulers to act on society and control or direct human interactions, and so in turn to have great influence on the outcome of those interactions, whether intentionally or unintentionally. This point is explored by James C. Scott in his work Seeing Like a State.

The history of the United States shows this last point clearly. One of the first things undertaken by the government of the newly established republic in 1785 was a cadastral survey of the Northwest territories, which was subsequently expanded to all of the territory of the United States apart from the original colonies. This was the Public Lands Survey System, which has become a model for similar systems in many parts of the world. The initial idea was to use this capacity to create a society of independent freeholders. However, it has been used both consciously and unintentionally to very different ends.

The very act of capturing information in this way and the power it gave to rulers to direct and control the use of the land by private individuals and corporations meant that decisions made by the political class now had a huge influence on the course of settlement and development. All kinds of possibilities were excluded while others could be encouraged or directed. Thus the decision to divide the land surveyed into regular rectangular blocks produced a particular kind of urban settlement and development that would not have occurred had the dispersed local knowledge worked through informal institutions and private agreement. A whole range of government functions, in particular the control and regulation of much economic activity, is only possible because of the information captured in the maps and surveys.

Scott indicates that maps of this kind, by capturing a simplified version of the tacit knowledge of the local population, enable remote outsiders to have at least some knowledge of what the situation is on the ground (literally). This opens up a range of otherwise unavailable options for them. For example, it makes possible large-scale urban planning and redevelopment of the kind that became common in the United States after World War II. Instead of the spontaneous urban development described by Jane Jacobs, we have had the large-scale planned reconstruction advocated by her arch-nemesis Robert Moses. As Scott points out, this technique has also made possible catastrophic social “experiments” such as Soviet collectivization of agriculture and the Tanzanian “Ujaama” system of land reform.

Maps and surveys of this kind are not the only techniques that have aided the transformation of government, of course. Another, equally important, is the kind of accurate decennial census established in 1790 in the United States. Census-taking has a long history (as most of us will gather from reading the Gospels), but again it became much more systematic, extensive, and important from the early modern period on. Today a lot of what government does depends on the accuracy and completeness of the census, which is why taking part in it is enforced by such stringent penalties.

Limits of Knowledge

However, this also shows the ultimate limits of such techniques and the modern State that is based on them. Governments around the world today face increasing problems of noncompliance with and resistance to the census. Even if these difficulties can be overcome, there is an even more basic problem that affects maps and surveys even more. Although a cadastral survey is a powerful way of capturing and distilling tacit knowledge, it is inevitably imperfect. Much of the local, dispersed knowledge is never captured. What is captured is radically simplified and much of the subtlety and nuance are lost. This does not matter so much if the government activity is relatively simple. However, complex activities will simply not work.

In other words, although modern techniques give rulers and elites enormous powers that their predecessors did not have, they are still limited in what they can do effectively by the nature of knowledge and the limits of the tools and techniques at their disposal. Today large organizations—private ones, too, but above all government—are operating at or beyond the limits of their capacity in terms of what their foundational techniques will allow them to do effectively. This is one of the main reasons many programs and agencies are seen to be simply not working, and it is also why so many politicians and officials experience not power but frustration. Time to simplify and take a more modest view of what things like maps make possible in the modern world.