Illustration by Rob Dobi
This article appears in the April 2023 issue of The American Prospect magazine. Subscribe here.
Joe Biden described his 2023 State of the Union address as a “blue-collar blueprint.” At a moment when inflation has been running above anything seen in the last four decades, the president championed greater investment in, price relief for, and empowerment to what he called forgotten places and people. “So many of you listening to me tonight, I know you feel it,” he said from the Capitol. “So many of you felt like you’ve just simply been forgotten. Amid the economic upheaval of the past four decades, too many people have been left behind and treated like they’re invisible.”
Amid this Rooseveltian, “forgotten man” rhetoric, there was one thing Biden did not mention: raising interest rates. The president ignored the main tool that macroeconomists have put forth as necessary to bringing down the high cost of living. Nor did he refer to the Federal Reserve or its chairman Jerome Powell.
Instead, he talked about hearing aids. Thanks to his administration, he said, “millions of Americans can now save thousands of dollars because they can finally get a hearing aid over the counter without a prescription.” The shift to an over-the-counter market aims to disempower a cartel of manufacturers that have kept prices artificially high, out of reach for those forgotten men and women.
Left-leaning economists have in the past identified problems of power and worked to solve them, rather than myopically following the unyielding blueprints of the textbook.
Biden followed up by adding, “Look, capitalism without competition is not capitalism. It’s extortion. It’s exploitation.”
Inflation-fighting economists were firmly in the saddle four decades ago. Ronald Reagan pinned his hopes on “Morning in America” after a setback in the 1982 midterm elections. What he truly meant was that, after a rough couple of years, he had wrestled spiraling inflation to the ground by letting Paul Volcker, then the Fed chairman, ratchet up interest rates to unheard-of levels, nearly 20 percent in 1980 and 1981.
In a speech offered just before the 1980 election, the Hollywood actor had asked Americans to think about whether they were better off than they had been four years earlier. The answer was no. In this same speech, Reagan saluted another actor, John Wayne, an “American hero” who embodied all that was great about swashbuckling swift action. Volcker’s interest rate spike, driving the economy into a recession, epitomized these tough-guy tactics. John Wayne, Paul Volcker: same difference. One just had an advanced degree.
Biden’s post-midterm speech suggests a pivot away from this 40-year tyranny of monetarists, and their politics of ritual sacrifice for the middle class. The president emphasized taming capitalism over cooling the economy; limits on corporate power over limits on fiscal aid; people over bond markets.
Monetary economists’ rise was bolstered by the claim from Margaret Thatcher that “there is no alternative” to their manner of thinking. But history provides evidence of a forgotten tradition, just like the forgotten people and places in Biden’s speech.
Instead of relying on interest rates to work their wonders, left-leaning economists have in the past seen questions of income distribution, industrial policy, and corporate concentration as key to resolving what historically and colloquially is called the high cost of living. They identified problems of power and worked to solve them, rather than myopically following the unyielding blueprints of the textbook. Whether the Biden administration will fully reconnect to this legacy will set the course of the nation.
The Institutionalists’ Rise
To capture that lineage, we have to go back to when economists began taking on fundamental social-policy questions. Before they were called economists, they called themselves political economists. One of the most iconic was Richard T. Ely, who founded the American Economic Association in 1885 and made Johns Hopkins and the University of Wisconsin the leading research institutes dedicated to the reform of American capitalism.
Universities ought not to be mere playgrounds for elite young men who socialized and networked before assuming their rightful place in government, business, and at the pulpit, Ely believed. Instead, experts would work with politicians to soften the edges of corporate capitalism. With like-minded advocates of the “Wisconsin Idea,” Ely favored a minimum wage, workers’ compensation, pension plans, and more. When he supported local unionization efforts for workers, his critics tried to run him off the Madison campus. In a signature moment that came to define the meaning of “academic freedom,” he kept his post when university trustees refrained from firing him.
Ely was no Marxist. He, too, believed in the market, as did the institutional economists for whom he laid the foundation. But instead of the utility-maximizing individuals of neoclassical economics, to him it was the presence of corporations that determined the distribution of a nation’s wealth. And it was the job of economists to push for exactly the kinds of public policies that would create the institutional basis for widely shared prosperity.
If the rise of corporations meant that workers could no longer set the terms of their own employment, the same was true for the modern consumer. Instead of peering into the cracker barrel and bargaining or bartering with the local merchant, a buyer bought Nabiscos in a prepackaged box at the price that the National Biscuit Company dictated. In the first decade and a half of the new century, the cost of living went up more than 20 percent, before skyrocketing further during World War I. “The high cost of living,” said the Progressive Era president Woodrow Wilson, “is arranged by private understanding.”
In 1917, the urban reformer Frederic Howe published a book under that title, The High Cost of Living. Like Louis Brandeis, who before he became the first Jewish Supreme Court justice famously explained how corporations and financiers borrowed funds to earn enormous profits and exploit the working class in his book Other People’s Money, Howe exposed what he believed were nefarious forces at work: “Monopoly is responsible for the conditions which confront us.” Rising food prices, the focus of Howe’s work, arose because land speculators, meatpackers, cold storage operators, and railroad managers exerted undue influence, which it was the obligation of government to bring to light and counteract. President Wilson’s newly created Federal Trade Commission buttressed these exposés, revealing that the “Big Five” packers, responsible for distributing two-thirds of fresh meat, established pooling agreements to parcel out the market and set prices.
The modern consumer instinctively shared this view. As Howe was writing about inflation, a group of women who recently moved to the city, and were now reliant on purchases in the marketplace rather than meat from their own farms, formed the Mothers’ Anti-High Price League. They wrote to President Wilson: “We, housewives of the City of New York, mothers and wives of workmen, desire to call your attention, Mr. President, to the fact that, in the midst of plenty, we and our families are facing starvation … The American standard of living cannot be maintained.” In cities across the country, consumers took to the streets in food riots, demanding meat at prices they could afford. Howe agreed.
That sage observer of American life, Walter Lippmann, remarked, “The real power emerging today in democratic politics is just the mass of people who are crying out against the ‘high cost of living’… To talk about ‘reasonable returns’ is to begin an attack on industrialism which will lead far beyond the present imaginations of the people who talk about it.”
From Morals to Economics
The attack on corporatism as a cause of the high cost of living led to a reaction from the industrial elite. Nothing, or no one, seemed to promise to revolutionize living standards as much as Henry Ford. Ford believed it was in the self-interest of the corporation to pay workers more money and to bring down the prices of the products they made, all in the service of creating a mass market. The purpose of the “five-dollar day,” introduced in 1914 at a time when job turnover was more than 300 percent, was to stabilize the workforce while mass production, made possible by the moving assembly line, would allow for drastically lower production costs. Well-paid workers would be able to own a house and buy a Model T.
Except if they couldn’t. William Green, president of the American Federation of Labor, said in the 1920s, “If America’s prosperity is to be maintained, it must be possible for the masses of workmen to buy and use the things they have produced.” Other labor leaders like Sidney Hillman and Rose Schneiderman, both of whom organized unskilled immigrants, including many teenage girls ignored by the AFL, echoed that view. Expressing a similar sentiment, the Wall Street economists Waddill Catchings and William T. Foster wrote in their 1927 book Business Without a Buyer, “The failure of consumer demand to keep pace with the output of consumers’ goods is the chief reason why prosperity ends in depression.”
These were not simply moral claims about the dignity of work and the right to an American standard of living. They were economic claims. At precisely this moment in the Roaring Twenties, a young Herbert Hoover was successfully asserting in his presidential campaign that the country was “nearer to the final triumph over poverty than ever before in the history of any land.” Yet beneath the Fords and the flappers, there were signs of trouble. Between 1914 and 1926, Detroit doubled its auto production, but the population grew by only 15 percent. At the same time, firms were awarding more of the productivity dividend to profits rather than to wages. Farmers suffered from a massive deflation as commodity prices plunged after WWI. So who would buy all these products? How exactly would the modern marketplace sustain demand? Catchings and Foster called this “underconsumption.”
Henry Ford created the “five-dollar day” to stabilize the workforce, allowing well-paid workers to own a house and buy a Model T.
A new group of economists, largely of liberal sympathies and mostly tied to the labor movement, came to the fore. Let’s call them “purchasing-power progressives.” They believed that even the most well-intentioned capitalists could not be trusted to make fundamental decisions about the allocation of the spoils of productivity among wages, prices, and profits. Instead, the state, organized labor, and a host of other organized groupings—like farmers or consumers—had to exercise what John Kenneth Galbraith would later call “countervailing powers.”
Two economists in particular serve to illustrate this new way of thinking. One was Paul Douglas, who published a seminal work in 1930 simply called Real Wages. Before he would become an illustrious liberal senator from Illinois, Douglas cut his teeth in the academy. In 1927, he introduced what became known as the Cobb-Douglas production function to measure labor and capital’s relative contributions to productivity, a formula that would become a staple of microeconomics.
However, Douglas’s abiding interest focused on what he called the “real wages” of workers. The inflation of the war years had been particularly corrosive to income gains. As he concluded, “American labor as a whole, therefore, cannot legitimately be charged with having profiteered during the war. Rather, like Alice in Wonderland, it was compelled to run faster in order to stay in the same place.” If wages were to sustain demand, then workers needed a way to grab a greater share of the productivity dividend. Otherwise, they collected what department store magnate and liberal reformer Edward Filene called “counterfeit wages.”
The other innovator was the economist Gardiner Means, who in 1932 wrote The Modern Corporation and Private Property along with the legal scholar Adolf A. Berle Jr. Together, these two reformers—both were sons of Congregational ministers—believed they had diagnosed the problem at the heart of the modern economy. It was too great a concentration of corporate power, presided over by an unaccountable managerial elite.
Before the Great Depression, 200 corporations controlled more than half of all corporate wealth. That meant that rather than setting prices “by higgling and bargaining in the market place” (a reference to Adam Smith), the managers of these large firms, what Means called a “small body of officials,” instead resorted to “administered prices.” Where classical economic theory would have suggested that a downturn in the market would have led to lower prices, instead these corporate managers turned to scarcity, reducing wages, cutting production, and removing competition. “Modern industrial organization … destroyed the free market,” said Means.
The Great Depression confirmed the view of these purchasing-power progressives, both that corporations had too much power and that the state had to step in to ensure consumer demand in the form of higher wages and lower prices. The solution was not to break up corporations; these were not trust-busting anti-monopolists. Rather, they pursued an entirely new idea that would become the basis of the New Deal: to socialize the price- and wage-setting function of private enterprise.
Building From the Bottom Up
Franklin Roosevelt had never taken much interest in economics. But he cared deeply about restoring prosperity, and he instinctively believed that the problem was underconsumption. In a 1932 campaign speech delivered at the San Francisco Commonwealth Club, written by Brains Truster Adolf Berle, Roosevelt said, “Our task now is not discovery or exploitation of natural resources, or necessarily producing more goods. It is the soberer, less dramatic business … of meeting the problem of underconsumption, of adjusting production to consumption, of distributing wealth and products more equitably, of adapting existing economic organizations to the service of the people.” Or as he put it in his first national radio address, “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but indispensable units of economic power … that build from the bottom up and not from the top down.”
In essence, Roosevelt’s New Deal enshrined a high-wage, low-price, full-employment agenda into public policy—and that was before John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, which would argue for much the same intention through countercyclical spending policy. The Agricultural Adjustment Act, the National Labor Relations Act, the Social Security Act—all these New Deal laws had the purchasing-power purpose in mind. As the new president put it, “The aim of this whole effort is to restore our rich domestic market by raising its vast consuming capacity.”
That was especially true in the case of labor’s newly institutionalized right to form unions and engage in collective bargaining. Known as the Wagner Act, the 1935 bill rested squarely on the purchasing-power idea. As Sen. Robert Wagner’s chief legislative aide, institutional economist Leon Keyserling, explained, “The failure of the total volume of wage payments to advance as fast as production and corporate surpluses has resulted in inadequate purchasing power, which has accentuated periodic depressions and disrupted the flow of interstate commerce.”
BOB WANDS/AP PHOTO
Frances Perkins, FDR’s labor secretary, saw the importance of empowering workers to increase purchasing power and grow the economy.
Wagner, the liberal senator from New York, explained upon introduction of his bill that labor rights were essential to recovery and were in the modern marketplace a legitimate prerogative of Congress. He talked about how denying workers their rights robbed them of participation “in our national endeavor to coordinate production and purchasing power.” There was, to date, no national endeavor. But if the country ever wanted to get out of the Depression and break the back of business cycles where profits increased and real wages fell, there would have to be.
Frances Perkins, Roosevelt’s labor secretary, captured what was at stake. What seemed like a matter-of-fact proto-Keynesian position belied an underlying New Deal radicalism. “If the wages of mill workers in the South should be raised to the point where workers could buy shoes, that would be a social revolution,” said Perkins. Indeed, these Southern female laborers were some of the most exploited workers, and, as Perkins understood, it would take the state stepping in to offer protections that not only improved working conditions and wages, but also bolstered working-class purchasing power. Perkins liked to say the New Deal was born the day she was among the throngs of outraged onlookers at the Triangle Shirtwaist Factory fire in 1911, when 146 teenage girls jumped to their death to escape the flames engulfing their sweatshop workplace. The Great Depression made it clear that empowering these workers was not only the right thing to do, but also the necessary thing, if the country did not want to suffer from the scourge of low wages and inhumane working conditions.
These reformers also fought to keep prices down, as high wages and low prices were two sides of the purchasing-power coin. In 1937, when the economy slid backwards, New Dealer Leon Henderson, described in a profile as “more like a truck driver than a cap-and-gown economist,” fully rejected the idea that government spending was the cause of inflation. No, he said, the problem was the sticky prices administered by quasi-monopolistic corporations. This overran any gains made by collective bargaining and more robust wages, said this cigar-chomping “spittoon economist.”
Roosevelt did not disagree. In the spring of 1938, he adopted a Keynesian spending outlook as an antidote to what his enemies were calling the “Roosevelt Recession.” All along, he had supported large-scale public works as a way to restore the economy to full, or fuller, employment. That was, after all, the goal of the Tennessee Valley Authority, which sought to build up an entire backward region of the country, and the same was true of the Public Works Administration and the Works Progress Administration, all of which created millions of jobs. When Roosevelt trimmed the budget in 1937 and recovery faltered, he turned to deficit spending as a deliberate strategy to pump up demand.
Roosevelt’s New Deal enshrined a high-wage, low-price, full-employment agenda into public policy.
However, the structural issues of the corporation and its ability to distort the market were never far from the fore of public policy. In 1938, Roosevelt appointed Henderson and Thurman Arnold to lead the Temporary National Economic Committee, a congressional panel dedicated to studying the concentration of economic power. While their tools were largely the new antitrust powers of the federal government, their target was what they saw as price rigidity. In practice, that meant that these economists would fight, in the words of Arnold, to lower the “price of pork chops, bread, spectacles, drugs, and plumbing,” using the power of the Antitrust Division to put pressure on corporations. At the same time, Roosevelt pushed hard for the passage of the Fair Labor Standards Act, which, as Henderson testified, would “help to prevent a mass reduction in wages and purchasing power.”
The effort to maintain mass purchasing power became a matter of national security in World War II. With the military placing orders for 250 million pairs of pants, 250 million pairs of underwear, half a billion socks, plus thousands of tanks and planes, hundreds of fighting ships, and billions of rounds of ammunition, inflation soon became the leading problem. Civilian goods disappeared just as wartime full employment drove up consumer demand. “The fight against inflation is not fought with bullets or with bombs,” said Roosevelt, “but it is equally as vital. It calls for unflagging vigilance and effective action … to prevent profiteering and unfair returns.”
Henderson, who as a young professor at Carnegie Tech gave class credit to students for attending a talk by Eugene Debs, was put in charge of the Office of Price Administration. From that perch, staffed with twice as many economists as in the Treasury Department, he imposed price controls and rationing across the entire economy. A young Richard Nixon, who worked in the tire-rationing department, found the whole experience repugnant. “We both believed in the capitalist system,” said the other Republican in the office. “But the other lawyers were using rationing and price control as a means of controlling profits.” Indeed.
Along with Henderson, no one did more to devise this system of controls than John Kenneth Galbraith. Two days after Pearl Harbor, the 6'8" agricultural economist, now working for the OPA, went around Washington, without any real authority to do so, getting signatures on an order he drafted to freeze the sale of new tires. It would take months and much congressional wrangling to institutionalize OPA’s power. But Galbraith believed the situation could not wait. He followed up the tire order with thousands of telegrams to the nation’s mayors, instructing them to enlist local police to enforce the ban. Soon, he would devise a system of rationing for gasoline and many other essential items. War required what Roosevelt called “equality of sacrifice.”
Armed with government-issued price lists printed in many different languages, housewives marched into local stores ready to do battle against profiteering. Was the butcher holding his thumb on the scale? Was there too much fat in a cut of meat? Was he letting his favorite customers buy on the black market? In response, some merchants called the OPA a “kitchen Gestapo,” and it was true; these shoppers now had the power of the state behind them. When shoppers spotted a violation, they could sue for overcharges. In any given week, OPA received more than 4.5 million phone calls and 2.5 million letters. It was not surprising to Galbraith and others that the OPA was one of the most popular agencies, with more than three-quarters of the public supporting it, even—or especially—in the months after the war ended.
The Eclipse of the Institutionalists
This success bred contempt. Sen. Robert Taft, perhaps the leading Republican critic of the New Deal, told Chester Bowles, Henderson’s successor, “What you are doing is organizing consumers against business … It is absolutely un-American and contrary to law and contrary to the Constitution.” With that, Taft led anti–New Deal forces in a takedown of the purchasing-power agenda.
The first fight came soon after the war’s end. Organized labor, which had grown in strength from 10 million to 15 during the conflict, wanted to preserve its wage gains. In November 1945, Walter Reuther led the United Automobile Workers on a strike against General Motors, demanding both higher wages and lower prices. “Purchasing Power for Prosperity” was the slogan, devised by former Agricultural Adjustment Administration and SEC employee Donald Montgomery, a University of Wisconsin–trained labor economist.
Understanding what was at stake, GM refused. “The UAW-CIO is reaching for power,” GM said. “It leads surely to the day when union bosses … will seek to tell us what we can make, when we can make it, where we can make it, and how much we can charge.” George Romney of the Automobile Manufacturers Association, future governor of Michigan and father of Mitt, saw Reuther as “the most dangerous man in Detroit … No one is more skillful in bringing about the revolution without seeming to disturb the existing forms of society.”
New Deal opponents fought back hard elsewhere. Rather than submit to controls, meatpackers starved the public into submission by withholding cattle from market. At the critical moment in the fight over the peacetime extension of OPA in the fall of 1946, slaughtering was down 80 percent from a year earlier. “Had Enough?” the 1946 midterm GOP platform asked Americans. Richard Nixon, back from his stint at OPA and in the Navy, ran a successful congressional campaign in this so-called “beefsteak election,” which returned Republicans to power for the first time since 1930. Controls were now dead, wholesale meat prices soared 89 percent, and overall consumer prices shot up 16 percent. As Bernard Baruch, the longtime presidential adviser, noted, “Next to human slaughter, maiming, and destruction, [inflation] is the worst consequence of war. It creates lack of confidence of men in themselves and in their government.”
With OPA out of the way, the GOP next went after organized labor with the passage of the anti-union Taft-Hartley Act in 1947, demonizing labor as the source of inflation. Whereas New Dealers had once attacked monopoly prices, conservatives came after monopoly unionism. “The price of MONOPOLY comes out of your pocket,” explained one National Association of Manufacturers full-page ad.
In 1948, Harry Truman ran a successful campaign against the “Do-Nothing” GOP Congress, calling for a return of controls, repeal of Taft-Hartley, and a Fair Deal that included universal health care, public housing, and an expansion of education. This shift to the left did not come naturally to the former senator from Missouri. As a haberdasher, he had been more sympathetic to small business than to organized labor. But he was helped by Keyserling, the Wagner Act author, who was now a member of Truman’s Council of Economic Advisers. Keyserling believed his job was not “mere forecasting” but rather to determine what the “components and composition of the GNP ought to be.”
But the more they succeeded, the more their opponents held their success against them. “Inflation has clearly become the breaking point of the Roosevelt coalition,” wrote Samuel Lubell in his classic work The Future of American Politics. Republicans built a coalition on the fear of inflation, bringing in white-collar workers on annual salaries, mortgage holders, and retirees on fixed incomes. In 1952, Dwight Eisenhower used the “high cost of living” to get elected as the first Republican president since the Great Depression, blaming “creeping inflation” largely on organized labor, which successfully negotiated cost-of-living adjustments into half of all union contracts.
CHARLES GORRY/AP PHOTO
The shift from the Truman to the Eisenhower era saw the fade of New Deal economics.
By the time John F. Kennedy was in the White House, Paul Samuelson, author of the best-selling macroeconomics textbook, was a household name, and Keyserling was not. Paul Douglas, elected as a senator from Illinois in 1948, launched hearings into administered prices that tried to bring back that old New Deal magic, going after high-priced drugs and other consumer goods. But by and large, political attacks against the power of concentration proved more successful against labor—think of Robert Kennedy’s attack against labor’s mob bosses—than against corporations. As president, JFK famously took on U.S. Steel for raising prices, but mere jawboning was no substitute for the legal authority exercised by the OPA 20 years before.
The last gasp of price controls proved the point. In the 1970s, when inflation returned, onetime OPA critic Richard Nixon was in the White House. Understanding just how popular the wartime OPA had been, he imposed wage and price controls in August 1971, much to the chagrin of his conservative advisers. But Nixon’s heart wasn’t in it; there were no legions of housewives, no dollars-and-cents shopping lists, no local investigation boards. Everyone understood that the intent was, as one Nixon insider put it, to “zap labor.” Instead of Ken Galbraith in charge of the Cost of Living Council, it was Donald Rumsfeld.
The failure of Nixon price controls once and for all solidified their death as a tool of economic management. Paul Volcker was not yet Fed chair. But there were those in the Ford administration, namely Alan Greenspan, who were already pushing for austerity. Reflecting the final eclipse of this purchasing-power agenda, Ronald Reagan famously fired the striking PATCO workers and threw his full force behind Volcker’s shock therapy. If anyone had to pay the price of inflation, it would be the American working class.
Build Back Better?
Biden is bringing back all the sound bites of the kind of labor liberalism once at the center of the economics profession—a “living wage,” the “forgotten man,” “profiteering,” “exploitation.” Sound bites are one thing, of course; policy is another. And here too we see signs of Biden channeling his inner Roosevelt. The Inflation Reduction Act, along with the CHIPS Act and the Infrastructure Investment and Jobs Act, reflects the kind of industrial policy and government spending not seen since the Interstate Highway Act.
Add to these Biden’s push against what he has described as “junk fees,” empowering Lina Khan, the chair of the Federal Trade Commission, to go after what Means long ago called administered prices. Biden, with the help of a younger generation of economists, is harking back to an earlier period. He has also lined up behind labor unions in a way that presidents haven’t done in a long time. “When we do all of these things,” Biden has said, “we increase productivity. We increase economic growth.”
Biden’s blue-collar blueprint is not only good politics, but good economics too. Only time will tell if we are seeing a real pivot back to the progressive agenda of time gone by.
