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.

One portent of Progressivism is found in the Liberal Republican movement of the 1870s. Prone to Paris Commune panics, distressed by strikes and labor trouble, such reformers as Charles Francis Adams (descended from John Adams), Francis Amasa Walker (Boston laissez-faire economist and Indian manager), and E. L. Godkin (Anglo-Irish editor of The Nation) concluded that efficient, inexpensive bureaucracy was just the ticket. It could manage questions too important to be left to democratic processes, especially those touching on the lately acquired government-bestowed advantages of big business. (“Efficiency” had a great future before it.) This movement was urban, basically eastern, and closely connected with economic elites (Nancy Cohen, Reconstruction of American Liberalism).

Another tributary into Progressivism—populism—began in opposition to all the above. Populists stated the case for tariff- and debt-ridden farmers in the South and the West. Their key innovation, or deviation from the Jeffersonian-Jacksonian tradition, was the belief that “the powers of government . . . should be expanded,” as their 1892 platform put it. How far this idea actually reached depended on the particular populist, but this new approach brought some of them closer, in method anyway, to the later Progressive movement.

A third source of Progressivism was a university-based intellectual movement whose leading figures included Justice Oliver Wendell Holmes, philosopher John Dewey, economist Thorstein Veblen, and historians James Harvey Robinson and Charles A. Beard. What united them was historicism and cultural organicism (Morton White, Social Thought in America). The ferment amounted to “a pragmatic revolt against formalism, abstraction and deductive methodology in the social sciences” (Wallace Mendelson, Capitalism, Democracy, and the Supreme Court). Darwinism, variously read, and scientism were among their weaponry.

A vaguer force was post-millennial Protestant reform, originally based in Greater New England, but now of national scope. Kicked off center-stage by science, many Protestant clergymen engaged social causes in a distinctly Progressive spirit. All these tendencies, plus an ingrained American penchant toward panic, pointed toward a busy future.

These forces (and perhaps others) converged on certain economic, social, and political problems stemming from America’s rapid industrial growth: the Gilded Age’s blatant corruption and subsidies (embodied in the railroads, their origins, and practices), labor strife, urban poverty, economic concentration, and financial manipulation. (Subtext: no stone unturned, no child left alone, no person unregistered, and no physical entity unregulated.) (See my October Freeman article, “The Gilded Age: A Modest Revision.”)

Progressives were fierce critics of federal courts, which they saw as the bulwark of big business. (This was never exactly untrue.) Their foremost concern was how to sustain the new industrial order while conserving American values and institutions. As they saw it, the main alternatives were: 1) restore competition by various means, including antitrust laws, or 2) accept and closely regulate an economy of large corporations. These conflicting visions constituted a serious fault line within Progressivism.

East versus West Approximates Hamilton versus Jefferson

New Republic editor Herbert Croly tried to bridge the Progressives’ divide by setting Hamiltonian means alongside Jeffersonian ends—a “synthesis” that could not survive the slightest clash with real life. Taking “Jeffersonian” as answering roughly to Plan I (restore competition) and “Hamiltonian” as answering to Plan II (accept and regulate big corporations), we can spot the rough geographical outlines of what were (as much of the literature suggests) two quite different forms of Progressivism.

Self-identified Progressives were concentrated in the GOP. Eastern Progressives proposed to regulate big corporate businesses, whose rise they viewed as inevitable. Thus for the eastern wing of the Republican Party “the problem was not how to remedy the evils of the new finance capitalism. [It was] how to manage the discontent it aroused, particularly in the once-docile middle class.” The eastern Progressive icon, Theodore Roosevelt, “wished to see the American people governed by a liberal oligarchy; he did not want them governing themselves.” By contrast, western Progressives tended to see “big business as an artificial menace to self-government, not merely aided but made possible by a whole system of special privilege” (Walter Karp, Politics of War). This means, in effect, that westerners thought some of the damage could be undone. Western Progressivism owed more to populism; it was “more rural and sectional than nationwide” and “represents, in a sense, the roots of modern American isolationism. [It was] less pacifistic and isolationist than it was nationalist,” but “opposed to imperialism or colonialism or militarism.” Such Progressives rejected American imperial initiatives precisely because of their apparent connections to Wall Street and the British Empire (Richard Hofstadter, The Age of Reform).

Given this political geography, there was considerable overlap between farm spokesmen and these “populist” Progressives. Historian Elizabeth Sanders writes that the farm bloc pursued specific reforms through statutory regulations enacted by Congress and enforceable in the courts, and not through expert commissions and administrative bureaucracies. To that extent, then, they were antibureaucratic. The more developed parts of the Midwest and Pacific coast fell midway between populism and eastern Progressivism, while peripheral western zones and much of the South remained essentially populist.

Further: “[I]t was the periphery that furnished most of the opposition, in both parties, to Wilson’s preparedness efforts, for in this momentous sense . . . the agrarians were not statists: far more than other sections, the periphery opposed war, standing armies, and imperialism” (Sanders, Roots of Reform, italics added). Certainly, these positions ought to count on the antistatist side of the ledger, unless war, militarism, and empire are not causes and instruments of aggravated statism. (President Wilson’s ruthless purge after 1917 of antiwar Democrats has long obscured the antiwar aspects of populism in the South. See Anthony Gaughan, “Woodrow Wilson and the Rise of Militant Interventionism in the South,” Journal of Southern History, November 1999.)

It was not just farmers with whom quasi-Jeffersonian western Progressives identified. Senator William Borah (R., Id.) saw himself as a defender of small business and carried on a two-front war against large corporations and state bureaucracies. A noninterventionist foreign policy completed the package. And somewhat jarringly perhaps, Georgism was the default economic position of many Progressives. This makes sense, however, because Henry George’s reform program, like that of the farm bloc, rejected administrative solutions. (Ransom E. Noble, “Henry George and the Progressive Movement,” American Journal of Economics and Sociology, April 1949.)

Creeping American Statism

There are attempts from time to time to father American statism on Progressivism. This will hardly do. First, union-nationalist theorists like John W. Burgess and Orestes Brownson reveled in the vastness of national sovereignty after 1865. In cases like In re Neagle (1890), the U.S. Supreme Court theorized abstrusely on national sovereignty per square foot. At the level of ideas there was quite a lot of statism about. Second, as legal historian William Novak writes, a steadily rising curve of interfering (“statist”) state and federal legislation runs from the 1870s into the 1920s. This upward trend was across-the-board and predated Progressivism. (“The Legal Origins of the Modern American State,” in Austin Sarat et al., Looking Back at Law’s Century.)

Here is one example. After the biggest western land-grabbers crowded small farmers onto marginal lands, especially in California (see my “The American Land Question,” Freeman, July/August 2009), the cry went up for federal engineers to build colossal dams in the arid West to help small farmers become competitive. These projects reinvented ancient hydraulic despotism, coupling it rhetorically with a Jeffersonian end. (Donald Worcester, Rivers of Empire). Here Veblen’s favorite social class, the engineers, did wondrous works and overcame nature itself over many decades. It was impressive—but hardly chargeable to Progressivism.

Progressivism, Law, and State

Eastern, urban Progressives were committed to efficiency, expertise, regulatory bureaucracy, and scientism. Their program was effectively a political phase of corporate liberalism, of which Teddy Roosevelt, an artificial westerner, and Woodrow Wilson, an ex-southerner, offered somewhat different brands. (Wilson’s corporate liberalism did not wear the Progressive label.)

An important point of historical controversy concerns the relation of big business to Progressive legislation. Gabriel Kolko has argued that many key statutes were prepared by big-business lawyers and contained provisions intended to cartelize industries by restricting competition and discouraging new entrants. Sanders counters that the resistance of the farm bloc and organized labor sometimes kept business from getting exactly what it wanted (Kolko, Triumph of Conservatism; Sanders, 179–182).

The related “capture” thesis holds that, whatever the intention of legislators, the businesses to be regulated will eventually dominate the relevant bureaucracy. American socialist William J. Ghent commented that regulatory bodies were “Irresponsible to both the people and the people’s officials” and “peculiarly liable to the influence of the Big Men” (Our Benevolent Feudalism). In private, businessmen themselves agreed with Ghent.

To the extent that eastern Progressives were able, between 1900 and 1916, to control legislative agendas nationally and in the states, they unleashed the reign of bureaucratic tidy-mindedness. In southern states legislatures fine-tuned racial segregation and classification (George M. Frederickson, White Supremacy: A Comparative Study in American and South African History). In a cross-section of states, legislatures blessed the pseudoscience of eugenics and provided for sterilization of unwanted classes. At the federal level Justice Holmes helped out by finding such laws constitutional. (See Edward Black, War Against the Weak.)

There was also what we might call “departicipation”—a trend that reflected upper- and middle-class WASP panic about the working classes, immigrants, and “unassimilable” races. Instances of departicipation included judicial rules narrowing legal standing, increasing top-down control over juries, and eroding common-law concepts; voter disenfranchisement North and South; city manager regimes with at-large voting in city elections and standing armies of police; and finally, detailed task-management in the workplace, or Taylorism. (On the last, see Kevin A. Carson in the September 2011 Freeman).

In foreign affairs many eastern, corporate-liberal Progressives favored forceful American expansion into overseas markets. If this required empire—and even war to secure the deal—they were up for it.

Progressivism: A Partial Defense

Murray Rothbard famously called World War I the “fulfillment of Progressivism,” a substantially true assertion, if eastern Progressivism is meant. (It was.) One would not wish to defend those Progressives. They gave us the War Industries Board, Prohibition, and much else besides. (Perhaps any war party would have given us some of those.) The war witnessed John Dewey’s endorsement of force as the royal road to progress and Randolph Bourne’s daring escape from Dewey’s instrumentalism and liberal practicality (White, Social Thought in America).

Even western Progressives were a bit mixed. Some pursued bureaucratic solutions at the state level. But on national issues of war and peace, and on the question of empire, western Progressives like Senators Borah and Robert LaFollette (R., Wi.), and U.S. Rep. Jeannette Rankin (R., Mt.) earned their keep. One suspects this is why contemporary conservatives prefer to jam all Progressives into a single category to be dismissed as statist at home and naive abroad—the better to flog their own impossible program of freedom at home and empire abroad.

Progressivism and the New Deal

Progressivism as an outwardly unified (but internally divided) movement effectively ended in the 1920s. American politics limped along, bereft of real ideas. This is normal. Then the Great Depression called forth the New Deal. The ensuing leap into governmental problem-solving wasted the memory of the former days—Novak’s previous 70 years of creeping statism. It would be easy, but inexact, to say that the New Deal continued and consolidated Progressivism—but which one? The first New Deal adopted a rather eastern Progressive program of corporatism and cartelization modeled on World War I legislation. Here was the test of Croly’s Hamilton-Jefferson synthesis, and it drove many relatively Jeffersonian Progressives out of the New Deal. The administration’s later (partial) retreat from corporatism did not bring them back (Otis Graham, Old Progressives and the New Deal).

The argument that equates Progressivism with the New Deal and the New Deal with fascism is also misleading. A little care is needed. Certain New Deal economic policies had definite structural resemblances to those of fascist Italy. The New Deal laid part of the groundwork for a uniquely American fascism, but did not finish the job. More building blocks would be needed. (Anyway, an exceptional people like Americans deserve an exceptional form of fascism—nicer, bigger, better, more efficient, and so on.)

John T. Flynn was one of those Jeffersonian Progressives who turned his back on the New Deal. He also helped launch comparisons between New Deal and fascist economic policy. But more important, he tried to discover what would be required for a completed exercise in American fascism. In As We Go Marching (1944), he developed a set of criteria. Measured by those, America was still only potentially fascist. It might be different in the long run. We didn’t have to take the same branch at every fork in the road. But we might.

Living in the Long Run

Flynn’s checklist for realized fascism was as follows: perpetual public debt, autarchy, socialization of investment, bureaucratic supervision of society, public-works militarism, overseas empire, executive dictatorship, and the institutional changes to make them all work together. Seventy-some years later, we are well along. Flynn was wrong of course about autarchy in the short run. He did not anticipate that one imperial State could become strong enough to force its economic rules on most of the world, while preaching about “free trade.”

Flynn was right, however, about what would hold American fascism together: executive power effectively above the law. (Shelley called monarchy the knot that tied the robber’s bundle.) Long ago, tidy-minded eastern Progressives championed executive power but did not perfect it. Other hands—“liberal” and “conservative”—did that. Today important “conservatives” and Chicago-tinged theorists proclaim executive supremacy a universal blessing. (See, for example, Eric Posner and Adrian Vermeule, The Executive Unbound.)

American Progressives, Sinners, and Republicans

So here we are, trying to find some shade under the twisted tree of Progressivism. There is a little, and if the tree is twisted, that is partly because so many have made it into various things it was not, while imposing a false unity on it. Some of it was bad; but Progressivism cannot take the blame for every bad thing that came along after it was dead. An awful lot’s happened since then, and there is a lot of blame to go around. One could wish for a happier ending.

There have been huge advances in technology and substantial declines in trade barriers in recent years. While these developments have raised living standards they have been hard on people whose skills were rendered obsolete or uncompetitive. When changes evolve gradually, as when so many people left farming in the last century, the disruption is not so great. Changes are now coming faster and are extending to some high-paid professional jobs. Automated systems can now handle at least the routine aspects of some legal research and medical diagnosis.

Time and time again new doors have opened to workers as old doors closed. Machines replace workers, but they raise productivity and produce new employment opportunities. We can expect this pattern to continue for a long time to come. Still, it is within the realm of possibility that robots and computers could take over so much work that the demand for human workers would shrink drastically. But those very machines would mean higher productivity and thus higher living standards.

A great deal of work can be now be done remotely, providing an advantage to areas with low living costs. Substantial outsourcing of such jobs to foreign countries has occurred (though that trend may be reversing as low-cost areas of the United States become competitive and as customer dissatisfaction and problems with managing offshore workers come up). The benefits of outsourcing and other productivity enhancements are spread across all consumers, but the job losses are concentrated among small and sometimes vocal minorities.

Another theoretical point: Unemployment notwithstanding, it is an empirical fact of life that labor is scarce relative to natural resources, as Murray Rothbard explained. Over time, this gap tends to lessen and could theoretically disappear.

Education Is Key

Problems with education are legion, but two in particular bear on unemployment and underemployment. One is the emphasis on college education over vocational training. Everyone should attend college, says President Obama. Really? What about welders, truck drivers, repair people, retail sales people? These skills are in demand, and for many people the jobs may offer good pay and personal satisfaction. Why not attend a trade school or get an apprenticeship rather than a college degree? Compare four years in school leading to a bachelor of arts in business and a big student debt versus on-the-job learning.

The second problem is that college administrators and instructors lack incentives to prepare students for good jobs. Schools usually have little to say about the jobs their graduates have gotten or the debt burdens they carry.

Even with all the emphasis on college, by 2020 only about a third of the labor force will be equipped with bachelor’s degrees or higher, according to the McKinsey Global Institute. But the glut of dubious business and social “science” degree-holders will continue while STEM (science, technology, engineering, and math) degree holders will remain scarce.

Among employers surveyed by McKinsey, a majority expect to hire more part-time, temporary, or contract workers. One reason for this trend is mandated and generally very expensive health insurance for full-time employees. But more sophisticated resource-management systems also contribute to this trend, in addition to telecommuting opportunities.

Unemployment Figures Are Grim, and Yet . . .

As this is written, the widely followed U-3 measure of unemployment stands at 9.1 percent while the broader U-6 is a whopping 16.2 percent. People are also going longer without work. About 45 percent of those unemployed have been out of work for more than 27 weeks. The number of discouraged workers rose sharply during the recent recession. Speaking of the Great Recession, it officially ended in June 2009, and if we had gotten a recovery along the lines of past recoveries, GDP would be booming by now and unemployment, always the last aspect to recover, would be falling noticeably. Not only is unemployment high, but GDP growth for the first half of 2011 was close to zero. There was talk of a slide back into recession, though this diminished in the fall.

Job losses since the start of the Great Recession number about 7.5 million; three million more people have become discouraged. Total payrolls amount to about 130 million, fewer than in 2000, when the population was about 11 percent lower. Seven people compete for each job opening.

Unemployment varies widely from place to place. The U-3 version varies from 3.2 percent in North Dakota to 12.4 percent in Nevada. Among cities the numbers range from 3.2 percent in Bismarck, North Dakota, to 27.9 percent in Yuma, Arizona. There is also wide variation among job classifications. Nutritionists, welders, and nurses’ aides are in short supply, along with computer specialists and engineers.

Aggregate figures always mask important differences. Many employers still find it hard to locate good people. The McKinsey study reports that 40 percent of companies surveyed have had openings for six months, while 64 percent reported positions for which they cannot find qualified applicants, with managers, scientists, and computer engineers topping the list.

Anecdotally, “Now Hiring” signs are not hard to spot. Friends who own businesses tell me they have difficulty filling even a receptionist’s job with someone who is reliable, can write a passable letter, or create a simple Excel spreadsheet. Alas these days one cannot assume that a holder of a bachelor’s degree in business, for example, has these basic skills.

Recent Government Policy

The Fed has been unable to do anything about unemployment in recent years. The massive doses of money inflation, which tripled the monetary base (currency plus bank reserves) from about 2008 until the present, have not produced any significant price inflation, and unemployment remains stubbornly high. Money inflation has not produced price inflation largely because banks are not lending but instead have accumulated massive amounts of excess reserves—above and beyond the levels mandated by the Fed to back deposit liabilities. (The Fed pays interest on reserves held in the banks’ Fed accounts.)

As we have seen, the distinction between U-3 and U-6 hinges on the rather arbitrary classification of some unemployed workers as “discouraged.” Alternately, one could simply count the number of work-age people who do not hold jobs. For example, one-fifth of all men of prime working age are not getting up in the morning and heading for a job either because they’re officially unemployed or excluded from the labor force.

Labor productivity is way up and with it, corporate profits. This is typical of the early stages of a recovery. Employers realize that they may have gone overboard with hiring during the boom and need to pull back. When they need additional help they usually turn first to temporary workers. Employees work harder with the specter of unemployment looming large. Only later does employers’ confidence pick up enough that they’re willing to take the risky step of adding permanent hires.

Productivity increases are a good thing in the long run, but by this stage of the recovery employment should be picking up. Why isn’t it?

What’s to Be Done?

Businesspeople have to predict the future, so they hate uncertainty, especially the kind that comes from government—and there’s plenty of that around right now. What will Obamacare do to them? Will the Bush tax cuts be allowed to expire next year? Will there be another debt crisis? What will happen to the not-so-almighty dollar? Who will win next year’s election? The best way to get the economy on track again is to lessen these vexing uncertainties. Given the performance of the President and Congress in the recent debt ceiling debacle, this seems unlikely to happen before the next election.

Rhetoric matters. By 1937 unemployment had recovered somewhat from its Great Depression peak of 25 percent. But with the failure of the New Deal becoming evident, FDR, needing a scapegoat, turned against businesspeople with new regulations, antitrust action, new taxes, and hostile rhetoric—he called them “economic royalists” at one point. The recovery stalled, unemployment rose, and only the war brought an end to unemployment—good news if you got a job, bad news if it was a job that got you shot at. (But what was being made? Not consumer goods.) President Obama has referred to “fat-cat bankers” but has backed away from inflammatory rhetoric, perhaps because of adult supervision.

Can stimulus programs mitigate unemployment? Sure, they can put people to work, but the projects are politically motivated and do not represent the best use of scarce resources, as market-based projects must try to do. The projects end, the workers disperse, and there has often been little or no lasting benefit. About all we have to show for those programs are massive new debt levels, a weakening dollar, and a feeble economy—and yes, a frightened and angry populace.

The economics profession must lessen its fascination with dubious macroeconomic aggregates. Production of needed and wanted goods and services is what really matters, not just production of any old thing that gets added to GDP. Economists should focus on conditions that generate real jobs, jobs that produce things people really want, not just any activity that draws a subsidized paycheck.

Congress must make serious spending cuts, and proponents should not pretend these won’t hurt short-term. Cuts should be immediate, because promises about cuts ten years from now are all but meaningless. Today’s Congress has little influence over future officeholders.

The Federal Reserve should be relieved of its unemployment mandate (and the new Consumer Financial Protection Bureau). Its money-creation powers should be reined in, and ultimately it should be abolished.

As described in William J. Bernstein’s book The Birth of Plenty: How the Prosperity of the Modern World Was Created, France’s minister of finances under Louis XIV from 1665 to 1683, Jean-Baptiste Colbert, worked tirelessly to expand commerce by improving his country’s roads and canals. Unfortunately, trade was hindered by more than potholes—a complex system of internal tariffs was throttling commerce. Colbert tried to dismantle the tariffs but was only partially successful. After his death, “all fiscal restraint was lost. By the end of Louis XIV’s reign three decades later, the State had doubled the tolls on the roads and rivers it controlled, and the nation that had once been Europe’s breadbasket . . . was bled white. . . .” Bad regulations trumped good roads.

During the Great Depression Franklin Roosevelt initiated massive public-works programs to improve the nation’s infrastructure in hopes of putting people back to work and jump-starting the economy. The construction efforts were staggering. According to Conrad Black:

The government hired about 60 percent of the unemployed in public-works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York City’s Lincoln Tunnel and Triborough Bridge, the Tennessee Valley Authority, and the heroic aircraft carriers Enterprise and Yorktown. They also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.

Yet these extraordinary accomplishments were not enough to pull the nation out of the Depression. Neither were the millions of jobs generated by this monumental work.

At the same time as he was directing resources away from the private sector, Roosevelt also unleashed upon it a regulatory blizzard that significantly increased the risk of doing business. Higher personal, corporate, excise, and estate taxes; wage and price controls; production restrictions; antitrust lawsuits; and constant experimentation provided few incentives for companies to expand. As in Louis XIV’s France, an improved infrastructure could not revive commerce in the face of stifling government regulations.

Enough Roads; Too Many Roadblocks

Today President Barack Obama is touting high-speed rail and other infrastructure improvements as keys to economic renewal. But if massive infrastructure investments were not enough to turn the economy around in the 1930s, they are far less likely to do so today. Because Roosevelt was starting from a lower base his improvements would have had a far greater impact on the economy of his day than would similar work done now. Also, the lighter regulatory burden in the 1930s meant there were projects then that truly were “shovel-ready.” Today environmental impact studies, possible archeological finds, and nuisance lawsuits may stall construction for years or halt it completely.

The real roadblock to economic growth is the burgeoning regulatory burden that President Obama, like Roosevelt before him, has placed on business. According to a study by James Gattuso and Diane Katz, “[T]he Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion.” Hundreds of additional regulations will pour forth from Obamacare, Dodd-Frank, and proposed EPA greenhouse gas restrictions. All this on top of an already monumental regulatory burden imposed by government. A Small Business Administration report estimates the cost of regulatory compliance at over $1.75 trillion in 2008 alone.

Briefly, our current economic woes were triggered by the collapse of a housing bubble, produced by loose monetary policy together with federal pressure on mortgage companies to lend to bad credit risks. When the bubble burst, housing prices fell, causing many homeowners to default on their mortgages. Investment vehicles based on those mortgages lost much of their value, leading to huge investor losses and the failure of some major financial institutions.

Lost in Transition

Absent government interference industry would retool, shifting capital and labor out of home construction and into other areas. Because neither capital nor labor is homogeneous, this shift takes time. Equipment that can be put to other uses may have to be sold or physically moved. Other equipment may have to be modified or scrapped altogether. Workers may need to increase their market value by relocating or by gaining new knowledge and skills. In a recession consumers typically reduce spending and increase savings, thus freeing up the resources needed to complete the shift.

Keynesian economists, however, see both labor and capital as homogeneous, aggregated lumps. Where Austrians see capital in transition Keynesians see “idle capital.” Keynesian programs to put that capital back to work only hinder or halt the needed transition, either leaving capital in its malinvested state or forcing it into the very idleness they seek to remedy. For example, expanding credit may re-inflate the collapsed bubble for a time, leading industry to continue producing unneeded goods. Stimulus spending—whether for infrastructure or other things on the government’s wish list—transfers scarce resources from industry to government, further impeding the transition. New laws, enacted to prevent future recessions, make businesses reluctant to invest until the associated regulatory structures are defined—a process that can take years. Once in place the regulations may inhibit capital flow, locking inefficiencies and malinvestment in place and propping up companies that should be allowed to fail. Unemployment insurance and other such programs eliminate or at least reduce workers’ incentives to move or reeducate themselves.

The country’s problems are not the fault of inadequate highways. They are the result of government intervention: loose monetary policies, programs that encourage unsustainable debt, explicit and implicit guarantees to financial institutions, massive spending that crowds out private investment, oppressive regulations, higher taxes with constant threats of more to come, and political payoffs to “friendly” companies and unions. Building high-speed railroads will not stop the malign effects of these policies; the solution is to stop the policies.

Goods, people, and information will not flow freely across a nation, regardless of the quality and extent of its infrastructure, if taxes and regulations block their flow. Trade perished in France as Colbert’s improved roads and canals were made all but useless by high internal tariffs. Hundreds of thousands of miles of new and rebuilt roads were not enough to move commerce past the regulatory roadblocks that Roosevelt erected. President Obama’s proposed high-speed trains—indeed, his latest nearly half-trillion-dollar jobs program—will not pull the country over the mountain of regulations that has been created in the decades since the Great Depression and that Obama has raised to new heights.

There are several responses to that criticism, the first being that the growth in government expenditures might have been part of the cause of the fall in GDP (by reducing investment more than government grew), which would bolster the point that government was growing in a harmful way.  However, the deeper and related response is that measures of the impact of government that focus only on the scale of government are an incomplete way of understanding the full effect that government can have on an economy.

Scale and Scope

To see that larger impact, we need to adopt a distinction that Robert Higgs effectively uses in his book Crisis and Leviathan.  Higgs differentiates between the scale of government and the scope of government.  Scale simply refers to the kinds of measures noted above. Higgs points out that we would expect there to be a strong correlation between, say, population and the size of government.  Even in a world of very limited government and economies of scale, a larger population will require more police and a larger legal apparatus.  A larger, more complex economy might also require a somewhat larger scale of government, even if it is strictly limited in its powers.  The scale of government is indicated by the size of total expenditures and other traditional measures.

By contrast scope refers to the range of government powers.  The important point is that giving government more power need not mean a significant increase in expenditures.  For example, the Federal Reserve System is not even on the map in terms of the expensive things the federal government does, yet giving the Fed the various powers, especially the monopoly powers, it possesses has had a significant — and damaging — effect on the economy.  One might say the same thing about laws like the minimum wage or occupational licensure.  They don’t necessarily cost much to implement or enforce, but they can have highly significant consequences.

Thus the ability of government to inflict economic harm by being “big” is a matter of both scale and scope, and we often forget to recognize the latter.

Great Depression

This point is nicely illustrated by the Great Depression.  In arguing that Hoover was no friend of laissez faire last week, I used quantitative measures to emphasize questions of scale, but my list of interventions contains both scale and scope items.  Public works and government loan programs certainly expand government budgets and thus scale, as well as increasing the scope of its powers.

Other items, however, are not very costly but still very damaging.  The big three here would be Hoover’s attempt to keep wages from falling, the Smoot-Hawley Tariff, and his stricter enforcement of antitrust laws.  None of these involved significant increases in government expenditures, yet all three were damaging to employment and the business environment, especially the first two, and thereby substantially worsened the Great Depression.

The same could be said of many policies of the Roosevelt administration, as well as its antibusiness rhetoric, which is one major source of the regime uncertainty that Higgs argues extended the depression.

Obamacare

The scale versus scope distinction is relevant in our own time as well.  The recently passed health care “reform” will certainly increase the scale of government, but it will also increase its scope, as government will have more power over individual decision-making.  Business leaders are already reporting that uncertainty about its effects, and not its impact on the federal budget, is a major reason they are not hiring.

The Dodd-Frank financial “reform” law probably won’t add that much to the federal budget, but the increased scope of intervention it creates is already making life miserable for the financial sector, and the damage it causes will be well out of proportion to its cost.  And in a repeat of the 1930s, the Obama administration’s frequent antibusiness, or at least anticorporate, rhetoric has been a cheap but effective cause of reduced private-sector investment.

The scale of government matters, but we cannot get so tangled up in debates about the size of federal government expenditures that we overlook the effects of changes in the scope of government power.  Changes in scope are often more damaging to economic growth — and individual freedom — than are changes in scale.  We forget about them at our peril.

Early in the twentieth century Herbert Croly (cofounder of The New Republic) argued the State should “increase the national spirit,” “promote the national welfare,” and subordinate “the individual to the demand of a dominant and constructive national purpose.” In that spirit Franklin Roosevelt created Social Security and unemployment compensation in the 1930s, programs hard to undo, grounded as they are in the self-interest of voting blocs, including seniors and labor. In 1965 Lyndon Johnson established Medicare and Medicaid to provide medical insurance for retired and low-income people, who eventually viewed them as entitlements. Medicare recipients alone, Samples notes, constituted about one in five voters by 1982.

Ronald Reagan’s proposed spending cuts had little support in Congress even among Republicans, a development that continued post-1994 under GOP House Speaker Newt Gingrich. Republicans in power failed to abolish any federal departments, and President George W. Bush created a new Medicare prescription drug program. “The new entitlement appeared to be politically perfect,” Samples observes. “It promised benefits to virtually every organized interest, including the most powerful, elderly voters, without immediately imposing costs on anyone.” This is how federal spending, deficits, and the national debt expand.

Samples examines recent administrations’ fiscal records and draws lessons for today. Reagan “sought to control spending later by cutting taxes first” but did not deliver a significant reduction in the size of government as measured by spending. While FDR and LBJ told Americans the State could provide them with security and opportunity, Reagan asked whether government might also threaten liberty, opportunity, and wealth. Still, government continued to grow.

George W. Bush by contrast sought to save us all from moral decay at home and from political tyranny abroad. He had almost no interest in slowing the growth of government but made one effort—to slow the exponential expansion of Social Security. That was a failure, and Samples argues it was due to Bush’s unpopularity over his military adventure in Iraq. A president who enjoyed the trust and support of only a minority of Americans could hardly transform public opinion on such a crucial issue. Besides, Bush embraced “compassionate conservatism” and increased government spending, both of which contravened personal responsibility.

Rather than trying to stop the growth of government, Bush worked hard to increase it by pushing the Medicare prescription drug entitlement. Many voters favored that, yet dissatisfaction greeted the new benefit. Why? Samples argues two-thirds of voters, not just the elderly, took an unfavorable view because “it did not provide people on Medicare enough help with their drug costs.” Bush proposed $400 billion, Democrats countered with $800 billion, and they compromised on $500 billion. This bidding war for votes with tax dollars shows why the battle to restrain government has so far been a losing one.

How can we put the brakes on government growth? In a word: crisis. Samples’s most useful insight is that a crisis can catalyze policy change, toward either bigger or smaller government. FDR capitalized on the crisis of the Depression to greatly expand the size and scope of government. Congress’s failure to deal with entitlements and end record deficits has created a new crisis, which means that a future president will have the opportunity to act dramatically. Maybe that president will use the opportunity to make it clear to the people that mushrooming government spending and interference with liberty are the causes of our crisis. We might be able not just to shift course slightly but to turn the ship around.

Samples makes a strong case for individual liberty and constitutional government that should persuade people that their future happiness depends on finally putting limits on the State. The difficulty, he writes, is that “Almost all of the past 30 years in American politics suggests the federal government will continue to prefer borrowing to tax increases or spending cuts until an upper bound on borrowing is reached.” With a national debt over $14 trillion and talk about lowered ratings for federal bonds, we may be close to that upper bound.

The book provides a sober analysis of past defeats suffered by limited government advocates, but it also suggests that if we don’t let the building fiscal crisis “go to waste,” we can prevail. A popular president, mindful of both the Constitution and the key role of individualism, could lead Congress to deal with the entitlements that threaten America’s fiscal house. In sum, Samples’s work serves as an antidote to despair.

There is no question that the tax funding of public-sector unions creates important distinctions from those in the private sector. For one thing, private-sector unions negotiate in the context of limited money; if they demand too much the company cannot compete against rivals and union members could find themselves unemployed. By contrast public-sector unions have no similarly clear limit on available money and government has no competitor. Thus public-sector unions are among the loudest voices for increased taxation and big government to sustain their wages and benefits.

Reducing those wages and benefits has become a popular cause largely because private-sector workers (even within unions) make considerably less than the government employees whom they are heavily taxed to support. In December 2009 the U.S. Bureau of Labor Statistics reported that government employees at the state and local levels earned an average of $39.60 an hour (including benefits), while private workers earned $27.42—over 30 percent less. Moreover, according to the Bureau of Labor Statistics, private workers have a 20 percent chance of losing their jobs in any given year; public workers have a 6 percent chance.

Reducing the power of either form of union is far less popular than reducing public-sector costs for at least two reasons. First, all modern unions benefit from legal privileges such as collective bargaining and the government certification that bestows a virtual bargaining monopoly on specific unions. Second, such prerogatives are widely viewed as workers’ rights to be cherished in the same manner as constitutional rights. That’s why Jesse Jackson compares Wisconsin’s massive pro-union demonstrations to Martin Luther King’s 1965 march in Selma for the voting rights of blacks.

Is it accurate to equate collective bargaining with workers’ rights? Is it accurate to view public- and private-sector unions as distinct rather than fundamentally similar? The answers lie in history.

It is important to define unions precisely. In a free-market context a union is nothing more than a collective agency through which workers protect common interests and secure common advantages through negotiation or other forms of persuasion, such as boycotts or peaceful strikes. Individual workers assign their right to negotiate to the collective agency in much the same manner as they might assign power of attorney; no one is forced to join or to pay dues. Thus the union is a collective expression of the individual right to free association and to contract one’s own labor. Employers remain free to decline negotiation and hire replacement workers.

Many conservatives and libertarians would consider the foregoing definition of unions to be unrealistic. In his article “The Myth of the Voluntary Union,” economist Thomas DiLorenzo argues that those who believe unions can be voluntary fall into “an easy trap . . . detached from any reality and history.” He insists that “violence against competitors has always been an inherent feature of unionism, even apart from the ‘violence’ of State-imposed legislative privileges that unions enjoy” (emphasis added). DiLorenzo refers specifically to the legal power of collective bargaining and to a history of brutal strikes as proof of unionism’s inherent violence. Yet it is not clear that violence is inherent in unions.

Political Evolution

Could unions exist without legal privileges in a society in which employment relationships were not mandated, in which there were no restrictions on self-employment or home industry? Are free-market unions possible?

The current paradigm of a modern union is rooted in the presidency of Franklin Delano Roosevelt. It was created through New Deal legislation, especially the Wagner Act, which established the legal right of workers within an industry or company to unionize if a majority of them voted in favor of doing so. The result has been far from an expression of the free market. For example a modern union receives government certification in order to engage in collective bargaining. In other words, the government authorizes it as the sole representative of a set of workers and legally requires the employer to give the monopoly union a seat at the negotiating table. This monopoly shuts out other groups or dissenters from negotiating their own contracts on their own terms. In many cases individuals can choose not to join a specific union but nevertheless they remain bound by union contracts and are required to pay union “fees.” The modern union thus represents a forced transfer of authority from individual workers to a collective.

Government schools, which are operated by what is arguably America’s strongest union, teach that the New Deal transferred power from business to labor. And without question the modern form of union gained political clout. But the political transfer was far more complex than it is portrayed to be.

Wagner and Big Business

In his essay “Labor Struggle: A Free Market Model,” Kevin A. Carson argues that the Wagner Act was designed to centralize, bureaucratize, and tame the unions to the advantage of big business, which was already no stranger to privilege and subsidy. That is why some of the most vigorous advocates for modern unionism were leaders of industry, such as Gerard Swope, president of General Electric. By specifying who could negotiate terms and how strikes could occur, Wagner removed some of the most powerful tactics from the labor movement. Carson comments, “The primary purpose of Wagner, in making the conventional strike the normal method of settling labor disputes, was to create stability and predictability in the workplace in between strikes, and thereby secure management’s control of production” (emphasis in original).

Certification created labor monopolies that eliminated the need for business to negotiate contracts with multiple groups or individuals within the same company. Business also benefited from the unions’ acting as enforcement agents, policing their own memberships’ compliance with contracts. They prevented wildcat strikes and punished boycotts, work slowdowns, and other labor tactics that had proven both popular and effective in the past.

Leaders of modern unionism were aware of the benefits they offered to big business. In Ethics and American Unionism (1958), Sam Dolgoff wrote of John Lewis, president of the United Mine Workers of America (UMWA) from 1920 to 1960, “In 1937, Lewis assured the employers that ‘a CIO contract is adequate to protect against sit-downs, lie-downs, or any other kind of strike’. . . . [T]he corporations accepted . . . ‘industrial unionism’ because as a matter of policy, the mass-production industries prefer to bargain with a strong international union able to dominate its locals and keep them from disrupting production” (emphasis added).

Wagner and Grassroots Federations

Dolgoff outlined the impact of the Wagner Act on grassroots labor federations such as the UMWA. The National Federation of Mine Laborers had been the parent union of the UMWA, and by its constitution, “the Federation consisted of Lodges (Locals) and districts which vigilantly defended their independence from the domination of the National Office. Their insistence on autonomy and unity through federation (free agreement) was in keeping with the finest libertarian traditions of the American Labor Movement. . . . When Lewis became President in 1919 he did away with the federalist structure of the union, rooted out autonomy and self-determination of locals, centralized and took complete control of the union.” The Wagner Act completed the centralization.

Thus both Carson and Dolgoff argue convincingly that the modern union was an arrangement of shared advantage between big labor, big business, and big government. The relationship between business and unions was not necessarily cordial but it was often convenient.

Among those disadvantaged by the arrangement were smaller employers, the self-employed or non-unionized workers, and the broader grassroots labor movement itself.

Nineteenth-century America was the heyday of the grassroots labor movement. Fueled by a massive influx of immigrant workers and the rapid development of industry, a system of vigorous and varied labor organizations arose to address the specific needs of working people, which went far beyond a decent wage: Labor organizations often functioned as social and cultural support systems as well.

The most prominent nineteenth-century labor federation was the Knights of Labor. Established in 1869, membership reached 28,000 in 1880 and peaked at nearly 700,000 members in 1886. The primary demand of the Knights was an eight-hour day, but it also campaigned on such issues as ending convict and child labor. The Knights emphasized projects designed to empower its membership both economically and socially and to provide security for families. Through local chapters the Knights established worker-owned producer cooperatives; it launched public education campaigns to raise awareness of and sympathy for labor issues; and it organized social support networks to insure against the injury or ill health of members. Indeed many organizations or unions began as “benevolent associations” intended to care for the families of deceased or incapacitated members.

In “Revolutionary Tendencies in American Labor—Part 1,” Dolgoff explained that the labor movement “created a network of corporative institutions of all kinds: schools, summer camps for children and adults, homes for the aged, health and cultural centers, insurance plans, technical education, housing, credit associations, et cetera. All these and many other essential services were provided by the people themselves, long before the government monopolized social services wasting untold billions on a top-heavy bureaucratic parasitical apparatus; long before the labor movement was corrupted by ‘business’ unionism.”

Although the Knights of Labor used pressure tactics such as boycotts and the endorsement of friendly politicians, they did not generally emphasize strikes. Terence V. Powderly, who presided over the Knights during its ascendancy (1879–1893), openly opposed strikes, which he believed caused violence and increased conflict; he favored peaceful negotiation instead. Some local leaders within the Knights disagreed and flexed their autonomy by pursuing local strikes. Indeed, the internal conflict over strikes contributed to the Knights’ decline.

Labor organizations within the nineteenth-century libertarian movement adopted much the same approach as Powderly—namely the use of mutual support, persuasion, and education as tools of labor reform. Perhaps the most prominent of these organizations was the New England Labor Reform League (NELRL), established in Boston in 1869. Its membership boasted individualists Josiah Warren, William B. Greene, and Benjamin Tucker. Ezra Heywood’s The Word served as the NELRL’s publication. The foundational “Declaration of Sentiments” declared the League’s goals to be “Free contracts, free money, free markets, free transit, and free land—by discussion, petition, remonstrance, and the ballot, to establish these articles of faith as a common need, and a common right, we avail ourselves of the advantages of associate effort.”

One example of NELRL activity illustrates the broad manner in which the League defined labor activity. Along with his wife Angela, Heywood founded the Co-Operative Publishing Company from which pamphlets issued, including ones on birth control. The NELRL believed that women workers were victims of the poverty created by unplanned children; thus, birth control fell within the realm of labor reform. “Lady Agents” were sent out to tour the factories and other working-class haunts of New England. Once they had found an audience, the Lady Agents spoke on subjects that merged labor reform with family planning, all the while offering the Co-Operative pamphlets for sale.

With effective networks and diverse strategies, a broad grassroots labor movement grew in power; its threat to entrenched interests also grew. The threat came into glaring focus in 1877 and 1894 with two strikes that involved violence on both sides. The Great Railroad Strike of 1877 began in West Virginia over a cut in wages; lasting 45 days, it was finally put down by federal troops who went from city to city to quash sympathy strikes by industrial workers. The Pullman Strike of 1894 began in Pullman, Illinois, again over a cut in wages. Spreading nationwide, it also attracted wildcat sympathy strikes and ultimately involved about 250,000 workers in 27 states. Eventually President Grover Cleveland sent U.S. marshals and some 12,000 troops to break the strikes.

By the turn of the twentieth century the labor movement—notably, the Industrial Workers of the World (IWW, or Wobblies)—had also become a political threat to the status quo. Organized in 1905, the Wobblies had strong leaders but emphasized rank-and-file organization. Unlike the Knights of Labor, however, the IWW enthusiastically embraced strikes; indeed, it initially opposed the signing of all labor contracts specifically because they blunted the power to strike.

With a large immigrant membership and explicitly socialist principles, the IWW became a potent voice against America’s entry into World War I, which it viewed as a conflict in which the workers of one nation were fighting the workers of another for the profit of capitalists. Thus the IWW became a prime target of the Department of Justice. In September 1917, 48 IWW meeting halls were raided and 165 leaders were arrested under the new Espionage Act. The next year 101 of them went on trial. All were convicted and received prison sentences of up to 20 years. Government repression effectively destroyed the IWW.

Government and big business had learned a lesson: An uncontrolled labor movement was unpredictable, politically dangerous, and bad for commerce. This was particularly true in the early 1930s, when Roosevelt swept into power in the wake of the Great Depression.

In 1929 the stock market collapsed and people panicked, causing runs on banks and massive bank failures. Unemployment rose as high as 25 percent while the personal income of those still employed declined. Large cities were hard hit, especially those dependent on heavy industries. Rural areas were devastated as crop prices tumbled and a severe drought turned farmland into dust. Hundreds of thousands of people were driven from their homes in search of any work whatsoever. Still other people left because of bank foreclosures.

A massive and migrant army of unemployed is a formula for labor revolt. Thus Roosevelt offered a New Deal to American workers; it was a series of interlocking economic programs implemented between 1933 and 1936. Through them the federal government’s regulation of all aspects of commerce increased dramatically; its purpose was to create stability, especially in the area of labor.

This is the context into which the modern union, or big labor, was born—a governmental response to labor upheaval and a big-business desire for regulatory stability. The business elite may not have liked every aspect of New Deal labor policies, but it had long favored Roosevelt’s general approach to labor relations.

The clout of a voluntary union comes from the individual members who assign their rights of contract over to a representative of the collective. In modern unions the opposite happens. Some members may join freely but they cannot later negotiate for themselves if they disagree with the union. Other members may be required to join as a condition of working in a specific industry or at a unionized company. Thus the modern union is the opposite of a grassroots organization; it strips individual workers of the rights of free non-association and of contract. The modern union—whether of the public or private sector—is the antithesis of workers’ rights.

Read was not the only target of this committee. Even more in the crosshairs was Edward Rumely, who had refused to divulge the names of those who had purchased controversial books he published.

When modern historians, most of whom write from a left-wing perspective, chronicle the “witch hunts” of the 1940s and 1950s, they rarely have in mind the likes of Read and Rumely. Neither fits their formal victim profile. Read, of course, was the founder and president of FEE and the future publisher of The Freeman. Mullendore was his close associate and a trustee of the organization. Rumely was the president of the Committee for Constitutional Government, a group that defended the free market and limited government.

Read and Rumely were not alone. Ever since 1933, many prominent New Deal and later Fair Deal Democrats had relied on the same methods of guilt by association, character smears, and other forms of intimidation to attack conservative and libertarian critics of the growing federal bureaucracy.

Why have most historians ignored these witch hunts? Part of the reason is undeniably the political bias of historians. They tend to be sympathetic to the New Deal and Fair Deal and, in many cases, causes much further to the “left.” This has encouraged a natural human tendency to overlook the dark side of those causes and an unwillingness to sympathize with conservatives and libertarians who may have been their victims. But some of it has to do with the methods used by the New Deal witch hunts, which were often informal and avoided head-on attacks. For example, in New Deal or Raw Deal? Burton Folsom describes how Franklin Roosevelt worked closely with his good friend and Treasury secretary Henry Morgenthau to use the Bureau of Internal Revenue against political opponents. Roosevelt arranged audits against such prominent opponents as the wealthy anti-New Dealer Moses Annenberg, publisher of the Philadelphia Inquirer; former Treasury Secretary Andrew Mellon; and conservative U.S. Rep. Hamilton Fish, who represented Roosevelt’s hometown in New York.

In addition to informal pressure, the New Deal witch hunt also included congressional investigations. The first of these was the Special Committee on Lobbying Investigations (better known as the Black Committee)—named after the committee chairman, Senator Hugo Black of Alabama. Black was a committed New Dealer. From 1933 on he targeted companies and organizations that opposed Roosevelt’s policies. In 1936 he went after the American Liberty League, which united Democrats and Republicans who opposed the New Deal. In this effort Black pioneered the use of the so-called dragnet subpoena. He also teamed with the Federal Communications Commission to require Western Union, a private company, to turn over copies of thousands of telegrams sent by New Deal opponents. At the time the FCC required Western Union to keep a copy of each telegram sent.

The next phase in the New Deal witch hunt began in 1937, when Roosevelt tried to expand the U.S. Supreme Court after it had overturned key New Deal legislation. No one was more important in mobilizing public opposition to the “court-packing scheme” than Edward A. Rumely. Rumely was born in LaPorte, Indiana, in 1888 and became wealthy as a manufacturer of tractors. He got involved in politics as an enthusiastic supporter of Franklin’s distant cousin, Theodore Roosevelt. Rumely depicted himself as a Theodore Roosevelt Progressive for the rest of his life. (Favoring TR and limited government was a curious combination that Rumely and others were able to rationalize somehow.)

In 1915 Rumely purchased the New York Evening Mail with funds borrowed from an American citizen living in Germany. Rumely later claimed he did not know that all such loans had first to be funneled through the German government. Nevertheless, he was convicted under the Trading with the Enemy Act and served time. Although President Calvin Coolidge issued a full pardon, Rumely’s enemies brought the case up repeatedly to discredit him over the next three decades.

During the 1930s he turned against the emerging New Deal, which he feared was undermining individual liberty by centralizing power in Washington. He found common cause with his friends publisher Frank Gannett and conservationist and civil-libertarian Gifford Pinchot. On the same day that Franklin D. Roosevelt announced his court-packing plan in 1937, the trio organized the Committee for Constitutional Government (CCG). Gannett wrote the checks, and Rumely ran day-to-day operations. In fighting the court plan, the CCG led perhaps the first successful offensive against the New Deal and pioneered the use of direct mail.

Despite an overwhelming three-fourths Democratic majority, the Senate rejected the court plan. It was the first major congressional defeat for the Roosevelt administration. Hugo Black, however, received the ultimate reward for his loyalty when Roosevelt nominated him to the Supreme Court the same year. Not even news that Black had once belonged to the Ku Klux Klan deterred Roosevelt from nominating him.

After the court plan lost, New Deal Democrats almost immediately launched a counterattack against the CCG. In 1938 Senator Sherman Minton of Indiana, another ardent New Dealer and Black’s successor as head of the lobbying committee, announced a sweeping congressional investigation targeting forces opposed to “the objectives of the administration.” Minton had actually been Roosevelt’s first choice for the Supreme Court appointment that went to Black, but Minton had turned it down because he preferred to stay in the Senate. At the top of his Senate agenda was the investigation of the CCG. He issued yet another dragnet subpoena, this time for the CCG’s records, and sent his staff down en masse to the CCG’s office, where they began copying files. After watching this go on for several hours, Rumely ordered them out, charging them with an illegal “fishing expedition.”

Minton’s undoing was his proposed bill to ban newspapers from publishing articles known to be false. The public backlash over a perceived threat to free speech led to the collapse of the investigation. Like Black, however, Minton’s loyalty to the New Deal was ultimately rewarded with an appointment to the Supreme Court by his former Senate ally, President Harry S. Truman.

The CCG continued to be a stumbling block for the New Deal and later the Fair Deal. After 1937 the committee distributed over 82 million pieces of literature criticizing such policies as expanded government medical insurance, public housing, and labor legislation. In an article for Collier’s, Interior Secretary Harold Ickes presented the administration’s case against the CCG. He called it a “devilish petard” and said it had been “arousing mob spirit, that miasmic, bloodthirsty degrading emanation out of the dim past.”

The New Deal witch hunt reached its apogee during World War II. Once the United States entered the war, Roosevelt put constant pressure on Attorney General Frances Biddle to crack down on critics of his foreign policy. Most notably he wanted Biddle to prosecute the publisher of the Chicago Tribune, Robert McCormick, a powerful critic of the New Deal and entry into the war, for sedition. To his credit, however, Biddle resisted this pressure. Finally, though, he began to relent by, for example, ordering wiretaps on key administration critics such as Joseph Patterson, publisher of the New York Daily News. In addition, the postmaster general barred dozens of anti-administration periodicals from the mails. Finally, and much more quietly, Roosevelt ordered Treasury Secretary Morgenthau to launch a new round of tax audits on such prewar noninterventionists as Rep. Fish.

In 1944 a U.S. House committee chaired by Clinton Anderson of New Mexico launched a second major lobbying investigation. Many New Dealers, notably Wright Patman, were upset about the CCG’s campaign for a constitutional amendment to limit taxes to 25 percent of income. Patman characterized the CCG as the “most sordid and most sinister lobby ever organized.” He charged that it represented the “Quisling reserves” of Hitler because it was trying to “sap the power and strength of this government at its tenderest spot, its purse strings, in time of war.”

Like Minton, Anderson subpoenaed the names of the CCG’s contributors. After Rumely refused to comply, the Committee cited him for contempt. A court acquitted him in 1945, finding that the subpoena was improper because the CCG was not a political organization. The most important result of this event was the Lobbying Act of 1946, which required lobbies (broadly defined) to disclose the names of all contributors of $500 or more. Although the CCG decided to register under protest, it found an inventive way around the reporting requirement, or so it thought. Instead of accepting cash contributions over $490, it took them in the form of book orders.

After Truman’s 1948 upset victory, Fair Deal Democrats promised again to scrutinize lobbies such as the CCG. The New Republic declared triumphantly that the “New Deal is again empowered to carry forward the promise of American life” and that it was high time to investigate “the great lobbies and the millions they have spent . . . to defeat social legislation.” The AFL and CIO agreed on this goal, as did two of the best-read columnists in the United States: Drew Pearson and Walter Winchell.

One of the early targets was FEE, which Pearson condemned on the grounds that it was “flooding the country with propaganda aimed at undermining the Marshall Plan, rent control, aid to education, and Social Security.”

After a failed effort to set up a Senate-House joint committee, the House assigned the investigation to a committee led by Rep. Frank Buchanan of Pennsylvania. Buchanan was not only a stalwart Fair Dealer but had his own axe to grind because the CCG had successfully fought expanded public housing, a goal he had championed. He defined lobbying in the broadest possible terms to include groups that had an indirect influence on the formation of public opinion. The committee sent out a probing questionnaire to 166 businesses and organizations, most of them opponents of the Fair Deal. The Buchanan committee ignored lobbying by government agencies, but perhaps for the sake of balance a questionnaire also went to the Civil Rights Congress, an organization with close ties to the Communist Party.

When Buchanan’s staffers, armed with a dragnet subpoena, arrived in force at FEE’s headquarters in early 1949, Read reluctantly cooperated. It became readily apparent to him, however, that the investigators were leaving no stone unturned in the hope of finding something—anything—to discredit the organization. It was also clear that the committee had formed a working alliance with key New Deal interest groups and journalists. Almost immediately after the committee rummaged through FEE’s offices, someone leaked the information to Drew Pearson. Pearson’s column publicized the best-known names on FEE’s “secret” contributor list and quoted liberally from internal correspondence. Mullendore expressed his outrage about the leak in a letter to Buchanan: “Those who seek to extend the power of government try to close the mouths of citizens who dare to oppose them. . . . Your inquisitorial and extremely burdensome demand for information which you have no moral right to demand is a most alarming example of the use of this means of intimidation.”

For its part, the CCG ramped up its anti-Fair Deal efforts by promoting purchases of John T. Flynn’s book The Road Ahead. Flynn warned that pro-New Deal pressure groups were pushing the United States, like Britain, into socialism. Harper & Brothers sold the book for $2.50, but the CCG cut the price to a dollar, thus encouraging bulk purchases. From 1949 to 1950 the CCG distributed an amazing ten million copies.

Despite Mullendore’s warnings, Read agreed to testify before the committee. Ever the optimist, he used that venue to educate the members, and he had some success. He found a sympathetic audience among the leading Republican members, and even Carl Albert, a member of the majority, admitted Read was “far more effective than the average buttonhole artist, so-called, around the capital.”

While most of Read’s testimony explained FEE’s mission to inform and educate Americans about free markets, he also challenged the legitimacy of the committee’s investigation. To Read, under the committee’s all-inclusive definition, lobbying “becomes synonymous with communication of thought—all thought. The Bible communicates ideas that may affect legislation. . . . The list is endless.”

Rumely agreed to answer all the Buchanan committee’s questions except the one asking the names of those who had purchased The Road Ahead. Pointing to the First Amendment, he asserted that the committee had “no power to go into a newspaper publisher and say, ‘Give me your subscription list.’ And you have no power to come to us.” If the House wanted to cite him for “contempt and bring me to trial,” it would “get an education on the Bill of Rights.”

By this point the press had turned against the Buchanan committee and its methods. Editor and Publisher found it guilty of “an invasion of the guaranteed right of the American people to own, hire or use a printing press without interference.” Similarly, the Cleveland Plain Dealer called the investigation “Fair Deal Intimidation.” Even Buchanan’s hometown paper, the Pittsburgh Post-Gazette, condemned the probe. Frank Chodorov, a leading libertarian and future editor of The Freeman, asked during the period: “Why did the Committee want these names? Simply to discourage support of the anti-collectivist organizations by harassment and intimidation. . . . Buchananism, then, is a step in the direction of thought control.”

The Buchanan committee presented three separate contempt resolutions for a House floor vote in August 1950. Each had the support of most Democrats. The first and most-publicized centered on Rumely. The second resolution focused on Joseph Kamp, head of a much smaller group, the Constitutional Education League. Unlike Rumely, Kamp had stated he was willing to cooperate but was unsure exactly what the Buchanan committee wanted from him. The last of the contempt resolutions dealt with William Patterson, head of the Civil Rights Congress. Like Rumely, he had refused to reveal the names of contributors.

In the floor debate Rep. John W. McCormick, the Democratic majority leader, went to bat for the committee. In language as extreme as just about any smear uttered by Sen. Joseph McCarthy, he condemned Rumely as “a spy in World War I, and a man who is nothing but a Fascist, who is an opponent of American institutions and American Government.” Virtually all those opposed to the resolution were conservatives, with the notable exception of Rep. Vito Marcantonio. As the lone American-Labor Party member in the House, he was easily the most left-wing person in Congress. Marcantonio portrayed himself as an absolutist champion of free speech even for a “fascist” like Rumely. If Rumely’s conservative defenders truly valued free speech, he challenged, they would also vote against the contempt resolution for Patterson. Despite his claims, Marcantonio’s record on free speech was at best mixed. During World War II, for example, he had urged tough action against critics of the war.

The final vote on the Rumely resolution was close but went against him. Nearly all Republicans, joined by Marcantonio and 42 Democrats, almost all from the South, opposed it.

The Patterson contempt resolution also passed but by a much more lopsided majority. Although the debate took place at the height of the McCarthy era, Republicans cast virtually all their 109 votes against it. By contrast, those southern Democrats who had opposed the Rumely resolution were not about to vote against the Patterson resolution even though the charges were essentially the same. For the southerners, race and anticommunism apparently trumped all other considerations.

In April 1951 a federal judge gave Rumely a six-month suspended sentence for contempt and a $1,000 fine, saying he would have sent him to jail save for his advanced age. Rumely’s old nemesis, Walter Winchell, exulted that he “got real satisfaction out of the conviction last week of Edw. A. Rumely. . . [a] convicted pro-German agent.” Few newspapers or columnists agreed with Winchell. Even The New Republic and Drew Pearson, who had egged on Buchanan at the beginning, steered clear of the controversy.

The Last Laugh

It was Rumely who had the last laugh, however, when in 1953 the Supreme Court overturned his conviction 7-0. Two justices recused themselves because of possible conflicts of interest. In a separate opinion the Court’s most “liberal” members, William O. Douglas and Hugo Black, endorsed Rumely’s free speech and privacy rights in no uncertain terms. When it turned to the Buchanan committee’s demands it declared: “If the present inquiry were sanctioned a publisher would be compelled to register as a lobbyist with the federal government, would be subjected to harassing inquiries. A requirement that a publisher disclose the identity of those who buy his books, pamphlets or papers is indeed the beginning of surveillance of the press.”

By this time some prominent New Dealers were losing their appetite for investigative crusades against the conservatives and libertarians. For one thing, they were too busy beating back McCarthyism. By championing Rumely’s free speech, they could better fend off charges of hypocrisy. Even before the House cited Rumely for contempt, for example, the pro-New Deal columnist Marquis Childs pointed to him as an example of how the First Amendment protected “rightists” just as much as communists. In addition, lawyers for two victims of McCarthyism, Owen Lattimore and Corliss Lamont, cited the Supreme Court ruling in defense of their clients. Rumely had become a case study in the need to protect free speech. It was quite a turnabout for a man whom the left only a few years earlier had roundly condemned as a fascist, a federal convict, and a German spy.

Since the last few months of 2008, the Great Depression has been thrust back into the national debate about economic policy. The deepest recession in more than six decades, including a credit meltdown and steep decline in production, has generated serious speculation about “another Great Depression.” If so, what is needed to avoid it? And who or what was to blame for this mess?

Let’s begin with questions about the causes of the Great Depression and how it eventually ended. The conventional idea is that unbridled capitalism in the 1920s crashed to earth, laissez-faire advocate Herbert Hoover failed to take needed action, and then Franklin Roosevelt and his New Deal rescued the nation. For many years that has been the accepted story.

Robert P. Murphy’s The Politically Incorrect Guide to the Great Depression and the New Deal joins a growing list of books based on sound economics and history that, in recent years, have questioned the accepted narrative. Murphy’s book—a quick, easy read—provides a valuable counter to wrongheaded conventional wisdom, while offering some points for debate among free-market economists.

As for the causes of the Great Depression, Murphy makes clear that it was not capitalism run amok but rather bad public policy. The debate within free-market circles is which policies were most responsible. Murphy favors the idea that it was monetary policy being far too easy in the 1920s, thus creating a bubble that inevitably had to burst. That puts him in the seemingly awkward spot of arguing that the 1920s were about both real prosperity (helped along by substantial tax relief during the Coolidge administration) and false prosperity. It also leads Murphy to declare that given “the unsustainable boom when Herbert Hoover took office, . . . a bust and the ensuing small ‘d’ depression were unavoidable, no matter what Hoover did in office.” That’s a debatable point within the free-market community.

Murphy notes that many free-market advocates have other ideas on the Great Depression’s causes. Unfortunately, he fails to give a full hearing to those who point to other poor policy choices, namely, the Smoot-Hawley Tariff, which acted as the trigger, followed by grossly misguided tax, regulatory, and spending policies.

Once beyond the debate over what sparked the Depression, Murphy does excellent work debunking many myths about the era. For example, he makes clear that Hoover was not a free-market stalwart but instead a big-government Republican. He criticizes Hoover’s labor and wage, trade, immigration, spending, and tax policies, which all worked to deepen the Depression. Murphy highlights Hoover’s farm-support programs, public-works spending, and Reconstruction Finance Corporation as examples of “Hoover’s New Deal Lite.”

Murphy also does yeoman’s work in explaining the many ills of Franklin Roosevelt’s policies, showing how they made things far worse, particularly highlighting two important points that often have gone unnoticed.

First, Murphy observes the dearth of private-sector investment during the Depression, and ties that to the uncertainty created and costs imposed by FDR. Second, he notes that most previous recessions or depressions in “U.S. history were over within two years, and all of them within five.” So the question is, “Why did the Depression last so long?” If one honestly looks at the history and the economic and policy facts, the clear answer is that Hoover-nomics and FDR’s New Deal created the longest and deepest economic downturn in U.S. history.

That brings us to the present. Murphy argues in his closing chapter that President Bush was Hoover-like in his big-spending ways and his complete abandonment of free-market principles when confronted by the credit mess at the end of his administration. And like FDR, President Obama has offered an unprecedented agenda of government expansion.

Murphy wonders if Obama’s New Deal “will finally sink the American economy.” At best the Obamanomics agenda of higher taxes, increased regulation, and a vast expansion in government spending seems destined to result in lackluster economic performance.

As Murphy notes about the New Deal and the wartime economy, “True prosperity did not return until demobilization, when the federal government relinquished its stranglehold on the American economy and once again allowed private investors and entrepreneurs to direct resources.” Currently, there is no sign that anyone in the White House understands the economics of FDR’s or Obama’s New Deal. So the stranglehold tightens.

Hamby is at his best developing the characters of Churchill, Stanley Baldwin, Hitler—and of course those New Dealers who surrounded President Roosevelt. His brief biographies help make the book readable and interesting.

In interpretation, Hamby’s book is a bit of a puzzle. He does not fully accept the laudable accounts of Roosevelt that have dominated American historiography; but neither does he really reject them. He concedes that the New Deal failed to improve the American economy, but he finds Roosevelt to be a capable president. “Reduced to paper,” Hamby concludes, “the Roosevelt record was hardly impressive. . . . But Roosevelt was impressive. His charisma, rhetorical talents, and dynamism made the New Deal more than the sum of its parts.” Such separating of the President from his record is strange, but it is a step up from exalting both Roosevelt and his record (which is more consistent, but wrong on two counts, instead of just one).

Part of the problem here may be Hamby’s weakness in economic analysis. “Whatever else the [Roosevelt] administration had done,” Hamby observes, “however many benefits it had delivered to Americans, it had not ended the Depression.” When Hamby says this he seems surprised—as though New Deal programs clearly delivered “benefits” but did not inflict costs as it did so.

Henry Hazlitt, a New York Times columnist during the 1930s, repeatedly reminded Americans that whenever a New Deal program conferred cash on a lucky recipient, it had to secure the cash from an unlucky taxpayer. Thus all jobs created by the WPA, CCC, or PWA took capital from consumers that could otherwise have been used to build factories or to buy sweaters or radios or paint for the house.

So when Hamby asks, “Did not governments engage in a social good by giving employment to those who needed it?” the answer is not “yes,” as he implies, but “maybe not,” because cash given to employ, say, street pavers in Ohio lost the chance to employ radio makers in New Jersey or textile workers in South Carolina. In other words, jobs were merely transferred from one group to another.

What this means in terms of analyzing policy is that when Hamby writes in one paragraph that the federal subsidy to veterans in 1935 “pumped about $2 billion into [the] economy,” maybe he should let the reader see in the next paragraph that a tax hike that same year raised the tax rate on top incomes to 79 percent (four years earlier, the top rate had been only 24 percent). The two events need to be discussed together because they function together. Hamby discusses the programs, but rarely bothers with the taxes that transferred the money out of taxpayers’ pockets to pay for them.

The task of those who would defend Roosevelt and the New Deal is to address these transfer payments with all of their ramifications. When Hamby concludes, “The WPA would endure until 1943, doing far more good than harm,” he should explain why Americans were allegedly better off with the WPA and higher income taxes and higher excise taxes on cigarettes, tires, bank checks, movie tickets, and telephone calls than they would have been with no WPA and lower income and excise taxes.

According to the League of Nations World Economic Survey 1938/39, the recovery rates from the Great Depression were much better in France and Britain than in the United States. In 1938 U.S. unemployment, which was barely under 20 percent, was higher than France’s 8 percent and Britain’s 12.6 percent. In that international context, Roosevelt’s New Deal seems to be less, not more, than the some of its parts.

Nonetheless, For the Survival of Democracy is a step forward because Hamby, a mainstream historian, is willing to criticize much of the New Deal and some of Roosevelt’s actions and motives. In his bibliography, he even praises Gary Dean Best, whose book Pride, Prejudice, and Politics is the best modern critique of the New Deal that we have. As we move away from the New Deal era, the quality of history written about it is beginning to improve.