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The Paradigmatic Liberal as Fiscal Conservative

How Franklin D. Roosevelt Botched Social Security

by ALAN NASSER

The seeds of neoliberal economic policy were planted during the founding years of twentieth century liberalism. The Democrats’ current embrace of  fiscal conservatism is claimed by contemporary self-proclaimed New Dealers to be a repudiation of the founding bequest, a capitulation to reactionary Republican dogma. Budget deficits, we are told, were legitimated by Franklin D. Roosevelt during the New Deal as a legacy to future Democratic regimes. The political obligation to enhance social welfare is supposed to have trumped the old-time Hooverian taboo against government expenditures beyond government receipts.

Objections to this policy are thought to have been refuted not merely by Keynesian economic theory but mainly by successful practice: once Roosevelt put into place large scale deficit-funded projects like the Works Progress Administration, the economy was launched into its steepest cyclical expansion to this day, from 1933 to 1937.  Reagan’s tirades against budget deficits are said to be a throwback to pre-Rooseveltian times and outdated orthodoxy. Imagine the chagrin of  “the Democratic wing of the Democratic Party” when Clinton and Obama betrayed the heritage of the New Deal by seconding the Republican commitment to fiscal orthodoxy. The rustling sound you are supposed to hear is FDR tossing in his grave.

This story is the most recent supplement to the myth of the Democratic Party as the “Party of the working man.” It fails to recognize that fiscal orthodoxy and the correlative tethering of social benefit to work and wage level was central to Franklin Roosevelt’s political values and bequeathed to postwar American liberalism a distinctly conservative, anti-social-democratic thrust.

Roosevelt’s 1935 State of the Union Address announced to the nation the introduction of two landmark programs, the Social Security Act and the “new and greatly enlarged plan” for “emergency public works,” the Works Progress Administration (WPA). In the same speech the president revealed his disdain for “relief,” social assistance available to all in need irrespective of their ability to work.

The “Fiscally Sound” Works Progress Administration

WPA was indeed an historic major policy innovation, the first large-scale federally financed and administered program in which the federal government directly hired workers  -from manual laborers to architects, artists and actors-  for a broad range of projects spanning the entire nation. But the plan was repeatedly described by Roosevelt as an “emergency” plan, a temporary measure that would end after the economy had been successfully jump-started and the private sector was once again able to perform its proper function as the sole provider of income to working people.

Roosevelt rejected what he was later to learn was Keynes’s contention that government employment of workers in public works projects was essential on a permanent basis, during economic expansions as well as contractions. Full employment meant full employment, and under capitalism, Keynes argued, “the evidence indicates that full, or even approximately full, employment is a rare and short-lived occurrence.” (1) Government and only government is able and obliged to guarantee “a reduction of the unemployed to the sort of levels we are experiencing in wartime…, an unemployment level of less than 1 percent unemployed.” (2)

Roosevelt was driven to WPA by two forces, the social upheaval and labor actions of the preceding years culminating in the extraordinary strikes of 1934, and the counsel of his advisors, many of whom were far more radical than he in their understanding of the Depression. Influential underconsumptionists and secular stagnationists pushed for a permanent federal government commitment to providing public employment for workers whose benefits had run out, who were not covered or who could not find private employment. But Roosevelt’s stated purpose “to preserve the system of private enterprise for profit” (3) required that his programs be “not so large as to encourage the rejection of opportunities for private employment or the leaving of private employment to engage in Government work [and that they] compete as little as possible with private enterprises.” (1935 State of the Union Address)

The permanent implication of government in the labor market was in the president’s eyes incompatible with these purposes. Roosevelt would support no abiding government guarantee of employment. “Work should be planned with a view to tapering it off in proportion to the speed with which the emergency workers are offered positions with private employers.” (1935 Address) The president thus disabled WPA from directly addressing the deficiency of consumption demand, consisting largely in wage-driven buying power, that defined the Depression. WPA could have paid wages higher than for example what the steel companies were offering, thereby boosting wages in the private sector where most workers would find employment. But he kept the WPA wage so low as “to compete as little as possible with private enterprises.” In an unwitting tribute to inefficiency and waste, steel workers were put to work cutting grass. (4) Here we have a fine illustration of the way in which reform efforts confined by the parameters of the political economy of capitalism function to provide short-run palliatives even as they reproduce the roots of the problem they are intended to solve.

Present times call for exactly the policy recommended in vain by Roosevelt’s Left advisors. Obama’s response could have been penned by Roosevelt himself. At the December 3, 2009 “jobs summit” he repeated a favorite refrain: “I want to be clear: While I believe the government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector.” In September 2010 he flat-out dismissed government creation of jobs: “I’ve never believed that government’s role is to create jobs or prosperity…I believe it’s the private sector that must be the main engine of our recovery.” With outsourcing and technological labor-displacement proceeding apace while the captains of industry and finance reap historic profits in a stagnant economy, the current neoliberal settlement portends permanent unemployment. The rustling sound you now hear is Keynes tossing in his grave.

An important consideration for Roosevelt in putting forward WPA  -“a definite program for putting people to work”-   was its replacing “relief,” which Roosevelt held in contempt, with work. “Putting people to work” was not the exclusive motivation behind WPA; getting workers off relief so as to reduce demands on the Treasury was crucial to the president. The idea was “… to move from the relief rolls to work on such projects or in private employment the maximum number of persons in the shortest time possible.” (Executive Order 7034, May 6, 1935)

Relief represented the cardinal sin of detaching well-being from work. The states had offered relief without condition to those unable to work; there was no quid pro quo. Relief implicitly acknowledged an unconditional  right to work; the relief payment compensated for the worker’s non-culpable inability to exercise that right. WPA offered benefits only in the form of wage-reward for work done; no unconditional right to a job was implied. The need to weld material benefit to work was a powerful factor in Roosevelt’s endorsement of WPA and in his highly unpopular plan for the funding of Social Security. Relief was accepted gratefully but with some measure of embarrassment or humiliation by workers who had internalized the Americanized Protestant ethic of personal, i.e. individual, responsibility for whatever befell them. Stigma was attached to “getting something for nothing.” The political psychology of American individualism regarded public relief as a sign of dependence that licensed others to judge one as lazy or incompetent. To American workers, respectable work provided by WPA was a welcome alternative to relief. The ruling class had its own reasons for denigrating relief and creating work.

Aristocrats like Roosevelt disparaged relief as encouraging public expectations of government provision of social benefits, and as an alternative to workers’ dependence on the employer to make a living. Roosevelt displayed unabashedly the disdain for relief characteristic of his class. In the 1935 Address he declared that

“[D]ependence upon relief induces a spiritual disintegration fundamentally destructive of the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of a sound policy. It is in violation of the traditions of America. Work must be found for able-bodied but destitute workers. The federal government must and shall quit this business of relief.”

Roosevelt echoed the class-rhetorical trope that relief independent of work corrodes the alleged human need to labor in exchange for material benefits. Note the dire implications of this conception of government assistance for unemployment policy, implications not limited to the 1930s but transmitted over time to the political tradition that defines itself by reference to the New Deal. Under the kind of social pressure that prompted Great Society legislation the Democratic Party either maintained or extended unemployment benefits to those unable to find work. But the distinction between the legitimate entitlement authorizing WPA, Social Security, Medicare and Medicaid,  and “relief,” lived on. After the war “relief” became “welfare” or “handouts.” The typical example was Aid To Families With Dependent Children (AFDC). Social pressure withered and the Democrats assumed the default position, with Clinton doing away with “welfare as we know it” (AFDC) and Obama refusing to lift a finger in strong support of higher  benefits for everyone who is unemployed, for as long as they are unemployed. Extending benefits for the long-term unemployed was up for debate, not a foregone conclusion.

The same passage reveals an equally fundamental rationale for the rejection of public assistance, that it is inconsistent with “sound [fiscal] policy.” “Sound finance” was the equivalent of today’s “fiscal responsibility,” the verbal logo of what Keynes sneeringly called “the Treasury view” that balanced budgets are a sine qua non of capitalist economic health. Roosevelt’s obsession with budget balancing and its correlative rejection of public relief explain the basic contours of his preferred but unpopular plan for funding Social Security.

Social Security: Private Insurance in Sheep’s Clothing

Under the prodding of his most progressive advisors, and fearful of another burst of labor insurgency, Roosevelt sought to advance additional programs to afford workers some measure of protection against the principal factor leading to temporary or permanent loss of income. This was seen to be unemployment, brought about regularly through the business cycle, old age and disability. With the aim of drafting plans for social insurance covering retirement and unemployment, Roosevelt appointed a cabinet-level Committee on Economic Security (CES).

CES’s staff were, like so many New Dealers, more radical than the president. They cleverly appealed to traditional American notions of individual independence to argue for a system of national health insurance, without which no citizen could be truly “self-sufficient.” The American Medical Association so heavily imposed upon the Committee that the idea was dropped.

CES’s proposal for Social Security was no less radical. In order to gain Roosevelt’s support for a proposal well to the Left of the president’s instincts and values, they reaffirmed his unyielding distinction between “social insurance” for the “deserving unemployed” and relief or public assistance for the remaining unemployed. But they insisted that in order for this distinction to mark a fair and genuine difference between these groups, the federal government would have to ensure that the opportunity to work was always available. This could be made possible only by permanently providing guarantees of public employment to workers who had exhausted unemployment benefits, or were not insured, or could not find private employment. (5)

WPA would have to be universalized as enduring policy. This was indistinguishable from Keynes’s position noted above. The provision of social welfare could be maximally just and respectful of a citizen’s right, affirmed by Roosevelt himself, to earn a living only if public policies were in place to ensure full employment. Universal coverage of the elderly, CES proposed, would be effected by pensions paid for at first by both workers’ own contributions and the general revenues of the Treasury. Gradually the Treasury’s contribution would grow to cover most or all pension payments.

Roosevelt was adamantly opposed. The “relief” bugaboo kicked in, and the president dismissed the proposal as “the same old dole under another name.”  (6) Roosevelt wanted a plan with no traces of relief, no form of government contribution to Americans’ welfare unrelated to their own work contribution. This was to apply both to unemployment and to retirement. It was essential for the president that the program’s financing not draw on the Treasury.

Here was the vital link between Roosevelt’s rejection of any trace of relief and his prioritization of budget balancing. Social Security had to be “self-financing,” i.e. paid for by the co-parties of the work relation, employee and employer. Each would pay, out of her income, a tax which would be placed into a fund from which the worker would draw upon her retirement. No demands would be made on the Treasury.

Roosevelt wanted to design Social Security in such a way as “to preserve the system of private enterprise for profit…[and] compete as little as possible with private enterprises.” The program was to deliver what the market by itself could not, yet at the same time should embody to as great an extent as possible the principles of capitalism. To Roosevelt, this meant that a plan for social insurance must conform as closely as possible to the existing system of private insurance; it must reflect actuarial principles. A capitalist conceptual framework models the provision of public benefit such that the individual is prior to the social, the private prior to the public. Social Security was made to inhabit and accommodate itself to the space within which private profit is made.

Roosevelt’s conception of Social Security required, then, an economic counterpart to the private individual insurance premium. This was to be the payroll tax, a deduction from the wage. Roosevelt held to this conceit well before he was elected and he reiterated the same commitment years after the Social Security Act was passed. As early as 1930 he declared that any benefits accorded to workers through legislation should “be a result of their own efforts and foresightedness” so that they would “be receiving not charity, but the natural profits (sic) of their years of labor and insurance.” In 1934 he instructed Congress that the program’s funds “should be raised by contribution rather than by general taxation.” In his first meeting with the drafters of the legislation he reiterated that old age insurance “must be self-supporting, without subsidies from general tax sources.” Shortly thereafter he told an assemblage of experts on social insurance programs that Social Security “must not be allowed to become a dole through the mingling of insurance and relief….[and] must be financed by contributions, not taxes.” In response to strong objections from Rexford Tugwell, one of his most articulate underconsumptionist advisors, the president emphasized that he was “inclined toward a wholly contributory scheme with the government not participating.” Two years after SSA was passed Roosevelt reiterated his basic conception of social insurance, and its grounds: “[A]s regards social insurance of all kinds, if I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury.” (7)

Not only did the contributory scheme mean no money out of the Treasury, it could become a cash cow for Treasury. Roosevelt and his fiscally conservative Treasury Secretary Henry Morgenthau were in accord that the contributory system had the double economic advantage of linking social benefits to work and ameliorating some of government’s financial problems. Morgenthau anticipated that Social Security taxes could be lent to the Treasury to finance New Deal deficits (much as Lyndon Johnson in 1967 concealed deficits by creating the “unified budget,” counting Social Security surpluses as part of the government’s general operating budget), reducing government’s borrowing needs. Funding Social Security out of general revenues would not have permitted this gambit.

Commenting on the final legislation, historian William E. Leuchtenburg observes that “[T]he law was an astonishingly inept and conservative piece of legislation. In no other welfare system in the world did the state shirk all responsibility for old-age indigency and insist that funds be taken out of the current earnings of workers.” (8)

Roosevelt Against the People and His Experts

Leuchtenburg’s harsh judgement is not merely the product of hindsight. It was the majority view in 1934-1935. A bold new government program of social insurance was announced in the throes of a severe depression. The financing of the program was of great public interest and most Americans had strong opinions. In this case, the public, most of the press and most of Roosevelt’s most sophisticated advisors were in agreement that the president’s version of Social Security was undesirable because its regressive character flew in the face of the conspicuous facts of gross income inequality and pronounced deficiency of mass purchasing power.

The landslide election of 1934 brought to Washington many Democrats and a few third party candidates more radical than the president and elected on promises to fight for redistribution, which would hardly be fostered by a regressive “wage tax” further reducing working-class income. Redistribution seemed to highly placed New Dealers and many working people to be the logical method of funding all New Deal programs, based on the virtually universal adherence of these activists to the underconsumptionist account of the cause of the Great Depression. Among prominent New Dealers attributing the Great Depression to the insufficient purchasing power of working-class households were Fed chairman Marriner Eccles, Harry Hopkins, Robert Wagner, Paul Douglas, Henry Wallace, Robert La Follette, Gardiner Means and Fiorello La Guardia.

Underconsumption was correctly thought to follow from the fact of the gross income inequality that emerged during the 1920s. The working majority lacked the purchasing power to buy the tremendous quantity of output the economy was capable of producing. The very wealthy minority could not possibly  consume (spend) the bulk of their income, nor would they invest in production in the face of workers’ inadequate purchasing power. Their wealth was invested in unproductive financial speculation serving no social purpose beyond further enriching the enriched even as growing productive capacity remained idle. It was a no-brainer: tax the unuseable income and transfer it to those who, through no fault of their own, hadn’t enough.

Radical New Dealers tended to frame the  problem in class terms: the “channels of surplus investment,” the “idle’ and “sterile” savings of the rich were seen as the depleted resources of the working class. (9) The logical recourse was to tax the fallow funds of the rich and transfer that purchasing power to the working majority. It is no surprise that none of the popular financing alternatives for Social Security called for payroll tax contributions. A payroll tax was a wage tax, and who would support reducing wages in depression times? A progressive tax would do double duty: it would fund Social Security equitably while performing what so many of Roosevelt’s advisors took to be the cardinal task of the day, to redistribute income downwards.

The nation’s leading social-insurance authorities were among the redistributionists. Abraham Epstein repudiated Roosevelt’s plan as “a system of compulsory payments by the poor for the impoverished” that relieved “the well-to-do from their share of the social burden.” (10) The extent of genuinely Left sentiment pervading congressional debates was reflected in the fact that a social insurance bill extending unemployment benefits, with no financial burden on workers, to all those who had lost jobs for any reason made it through the House Labor Committee in 1935.

Roosevelt had frequently espoused the underconsumption analysis in his radio chats, but he refused to embrace its policy implications. As radical redistribution gained popularity, the administration became defensive, putting forward unconvincing arguments scoffed by conservatives and liberals alike. Roosevelt contended that the payroll tax would be “fair” to employees by virtue of the requirment that the employer too pay a tax into the same fund, demonstrating that the tax was not regressive.

Mainstream economists of the time dismissed the argument, and for good reason. Orthodox theory taught that employers would pay workers only the money value of their marginal revenue product, the value of their contribution to the last unit of output produced. If the employer was required to pay a tax based on the worker’s wage, which would return to the worker in the form of old age insurance, then that tax was equivalent to a wage increase. The rational response of capitalist employers would be either to offer lower wages to offset the employer tax, or to raise prices, or both.

This was obvious even to administration members who defended Roosevelt’s payroll tax. The conservative Treasury Secretary Henry A. Morgenthau and the more liberal Labor Secretary Frances Perkins conceded that the working class would be saddled with the entire burden of financing Social Security. In a press conference Roosevelt himself confessed that he understood this: “[O]bviously in 9,999 cases out of 10,000” the employer share of payroll taxes “will be passed on in the cost of goods sold.” (11) They were right. It is now generally accepted that the employer tax is offset by a reduced wage level.

Another of Roosevelt’s most common responses to critics of the wage tax was that it would accomplish two crucial objectives, to give workers a sense of personal and legal right to benefits since they had paid into the system out of their own pockets, and by the same token to ensure that “no damn politician” could ever attempt to take that right away. But if Roosevelt could claim in effect that the Treasury could not afford to pay Social Security benefits out of general revenues, why could not future politicians claim that government could not afford to pay the promised benefits without major “reforms” including extending the retirement age and reducing benefits?

Had Social Security been designed to be funded through “general taxation” it would have the fiscal status of the Pentagon budget. There is no special “fund” dedicated specifically to military aggression. Elites never claim that the Defense budget is running down, is unaffordable, is going broke or is draining resources from more pressing priorities. In an altogether different kind of society, a government guarantee of a lifelong decent standard of living would have just that kind of permanence.

SSA was not merely the nation’s grandest scheme to date to provide essential material security otherwise unavailable to Americans through the normal workings of the market. It was as importantly an exemplar of the profoundly conservative political-economic values and assumptions which would frame all subsequent political struggles around social policy and provision.

None of the New Deal’s policy innovations embraced unreservedly the legitimacy of federal efforts, national in scope, to ameliorate social dependency. SSA provided for federal old-age benefits but most of its provisions consisted in grants to states for old-age assistance, unemployment compensation plans, aid to dependent children, maternal and child welfare, aid to the blind and maintaining public health services.

Outside of the contributory insurance scheme, federal grants to the states were matching grants, requiring contributions from the hard-pressed states (usually from one half to one third of the total fiscal obligation) as a condition of federal assistance, for aid to the elderly, the blind and dependent children, all of whom were categorized as a sub-class of the unemployed. As with unemployment insurance, states were left responsible for setting benefit levels and standards of eligibility. In order to discourage enthusiasm for a national plan of unemployment insurance, employers were permitted to deduct what they paid their state governments from what they owed the federal government. (12) The law thus provided an incentive for states to prefer their own unemployment insurance programs to a national, federally funded plan. By the same token it guaranteed that benefits from state to state would differ, sometimes greatly. The New Deal rigged the game; the federal government was never to acknowledge a universal human or citizens’ right to a lifelong respectable standard of living.

The Incoherence of Social Insurance as an “Earned Right”

Roosevelt’s repeated characterization of social insurance as an “earned right” condenses in two words the contradiction implicit in American elites’ construal of social democratic benefits. ‘[E]arned right’ is an oxymoron. One has a right by virtue of what one is; one needn’t do anything to have a right. American citizenship bestows certain rights. To claim these entitlements one need only be an American citizen. One has a right to an inheritance if one is the person named in the deceased’s will. To deserve or earn something, on the other hand, one must do something. One earns an income by working or deserves punishment on account of a misdeed. There are obviously no “natural” deserts, nor, contrary to a common moral and political conceit, are there natural rights.

A national Constitution may of course declare a list of rights to be natural. This records a national commitment, a considered choice, to treat citizens in designated ways. Reasons put forward for such rights claims are a pledge of allegiance to certain values. A society may declare its commitment to treating its citizens as having a natural right to health care on the grounds that a thriving citizenry broadens the range of opportunities for everyone’s enhanced satisfaction and fulfillment. Most humans find enhanced satisfaction and fulfillment desirable, and see the incompatibility of these with ill health. That is most humans’ common sense. A society declaring good health to be a natural or human right records its determination to provide health care to everyone on the basis of need alone. Who would deny that needing health care is the best reason for receiving it? One’s level of income is declared to be irrelevant to one’s claim to health care, and, more generally, to a desirable standard of living.

The principles underlying America’s first purportedly comprehensive social insurance program do not permit this construal of what government owes to citizens. Many of Roosevelt’s most astute advisors adhered to it or to something very similar. Roosevelt did not. No capitalist leadership severs such a lucrative source of profit as insurance from the demands of capital. More generally, no capitalist regime contributes to the forging of the kind of society for which considerations such as these carry overriding weight. (There are temporary exceptions, such as single payer health arrangements, but these are being chipped away under neoliberalism.) One of the leading policy-guiding axioms precluding public provision of social benefits in capitalist societies is the doctrine that guided Roosevelt’s design for Social Security, the doctrine of sound finance. The need for a balanced budget would again come to the fore under neoliberalism, when it would become simultaneously the overriding argument against addressing working-class needs in time of crisis and a major tool in the construction of the post-social-democratic age of austerity.

Alan Nasser is Professor emeritus of Political Economy and Philosophy at The Evergreen State College. This article is adapted from his book, The “New Normal”: Persistent Austerity, Declining Democracy and the Privatization of the State, to be published by Pluto Press in 2014. If you would like to be notified when the book is released, please send a request to nassera@evergreen.edu

Notes.

(1) J.M. Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace and World, 1936), p. 250

(2) The Collected Writings of John Maynard Keynes (London: Macmillan, 1980), Vol. 27, p. 303. For a detailed discussion of Keynes’s actual  employment policy prescriptions, see Alan Nasser “What Keynes Really Prescribed,” CounterPunch (subscription edition) November 1-15, 2012  VOL. 19, NO. 19

(3) Cited in Broadus Mitchell, Depression Decade  The Economic History of the United States  Vol. 9 (New York: Holt, Rinehart and Winston, 1947), p. 363

(4) Herbert Benjamin, A Handbook for Project Workers (New York: National Unamployment Council of the U.S., 1936), p. 5]

(5) Theda Skocpol, Social Policy in the United States: Future Possibilities in Historical Perspective (Princeton, New Jersey: Princeton University Press, 1995), p. 214

(6) Frances Perkins, The Roosevelt I Knew (New York: ?????,1946), p. 294 Perkins was Roosevelt’s Secretary of Labor.

(7) Mark H. Leff, ‘Taxing the “Forgotten Man”: The Politics of Social Security Finance in the New Deal,’ The Journal of American History  Vol. 70  No. 2  September 1983, pp. 373, 366, 370.

(8) William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940 (New York: Harper Torchbooks, 1963), pp. 132-133

(9) The quoted terms were common parlance in Congress and in some of the most prestigous magazines. See The New Republic, “The Balance Sheet of the New Deal,” June 10, 1936.

(10) Abraham Epstein, Insecurity (New York: Random House,1938), p. 782

(11) Leff, pp. 362, 380-381

(12) Eric Rauchway, The Great Depression & the New Deal  A Very Short Introduction (New York: Oxford University Press, 2008), p. 101