What is the Democrats' problem?
Good economic statistics and better messaging won't solve Democrats' problems.
Today we have one of the best economies in my lifetime (I was born in 1959) with a sustained unemployment rate below 4% and inflation at 3%. Yet majorities say it is bad and Biden is lagging Donald Trump in the polls as a result. This should be surprising, but it is not. The Democratic party has had a perennial disadvantage relative to Republicans for my entire adult lifetime. With polls saying economics is important to voters, the widening gap between the rich and everyone else and the unpopularity of the Republican panacea of tax cuts, middle-income voters ought to prefer Democrats, but they don’t.
Some argue that Democratic messaging is the problem. I don’t think so, Republican economic offerings have not changed in over a century—yet rank and file Americans continue to vote for them. Right-leaning working class voters don’t particularly like Republican economics, but they don’t see Democratic offerings as that much better. They vote Republican because they dislike progressive cultural ideas and the policies they propose (e.g. gun control). Democratic voters also tend to vote on noneconomic reasons. Voting behavior seems at odds with voters telling pollsters that economic issues are the most important issue to them. This disconnect leads to Democratic efforts to convince voters with statistics that things really are better for you.
Previously, I wrote about how 1930’s Democrats created a link between a positive economic experience for working class voters and Democratic policy. Once they had done that, as long as working-class Americans continued to have a positive economic experience under Democratic governance, the Democratic brand would be strong. Figure 1 shows one measure of this positive experience: an acceleration in wage growth in the 1930’s which continued until 1973. The end of wage growth happened under a Republican administration and voters put Democrats back in power in 1976. They failed to fix things and voters turned to Republicans in 1980. They failed to restore wage growth, but the high inflation that had dominated the American economic experience for nearly a decade went away.
Unlike the Democrats, the Republican brand had never promised a positive economic experience for workers. So, when the economy stopped delivering the Republican brand was unaffected, while Republican success with inflation burnished their economic credentials. I believe this feat was responsible for creating the Reagan Dispensation. Republican appeal was further bolstered by their embrace of opposition to overly rapid social and cultural change, which they associated with Democrats. Republican economic policies have served to prevent any benefits flowing to the working class to ensure the Democratic brand stays dead. Since 1980 they have enjoyed considerable electoral success (holding power about 55% of the time) in spite their unappealing economic offerings and two failed wars.
Figure 1. Wage, import and tariff trends over 1890-1980.
The Reagan Dispensation has pretty much lost its luster and Donald Trump is trying to reformulate it as Theodore Roosevelt did for the Lincoln Dispensation. MAGA is not popular like Roosevelt’s muscular Progressivism was, so it is unclear whether he will be successful. Republicans have had nothing to offer on economics since Reaganomics lost its luster in 1992 and George W Bush destroyed their foreign policy brand. They don’t even try to sell themselves anymore; they know their brand stinks—their appeal to working and middle-class voters is based on opposition to Progressives.
With Trump defining the opposition, Democrats in the last three elections have found the Republican message of “yeah we suck, but they suck worse” to be effective. But Democrats have operated at a disadvantage in this endeavor since the Civil War. Leaving out the 1933-1973 era when the Democratic economic model was working, Democrats held the presidency 37% of the time since Reconstruction, while over 1933-73 they held it 68% of the time. Democrats run at a disadvantage without their economic message and need to get it back if they are to establish a new Dispensation that would be required to achieve long-held Democratic objectives like universal health care or new priorities like combatting climate change.
Democrats need to come to terms with how they lost their economic message. It was not something that happened to them, but something they could have prevented. Recently, Clinton Labor Secretary Robert Reich gave a personal history of the development of his values and beliefs and acknowledges that he and his fellow progressives failed to include the working class in their visions for a better world.
As a teenager, Reich embraced the “New Left” which he characterized with respect the “Old Left” as follows:
The Old Left had focused on material concerns such as employment, wages, pensions, and job security. It had sought to give the working class a larger slice of the economic pie. The New Left focused on the needs of people fortunate enough to take material comfort for granted — mostly college students, college graduates, and professionals. It sought to protect consumers from unsafe products, reduce pollution, win new rights for women and people of color, reduce dire poverty, and spread participatory democracy.
Reich then describes the heady mixture of new ideas and movements that were going on during his coming of age:
Martin Luther King Jr. was then leading a March on Washington for social and economic justice. The previous fall’s Cuban missile crisis had brought the world perilously close to a nuclear holocaust. Vietnam was already becoming a quagmire. Rachel Carson’s Silent Spring warned that pesticides and other toxins put into the environment were having devastating effects. My mother saw herself in Betty Friedan’s The Feminine Mystique, which described suburban housewives trapped in “dependent, passive, childlike” roles.
It was a Creedal Passion Period and all these ideas burst forth on to a new generation looking for change. Reich writes “I came to believe that university students and intellectuals were the vanguard of progressive change in America and the world. And that students such as those who drafted the Port Huron Statement would lead such changes.” And the world was changed. Reich grew up to become part of a changing Establishment.
Reich says “the New Left had relegated the depredations and indignities of class — and the need for strong labor unions to lift workers’ wages, protect jobs, provide pensions, and give workers some modicum of job security — to the backwater of activism.” He explains he believed that the American middle class had expanded beyond anyone’s imaginings by the later 1960’s. He writes “it seemed as if almost all Americans, apart from the very poor, were on the way to enjoying the comforts of modern life. Many working-class people were satisfied with their rising standard of living.”
And yet that situation would change in just a few years. Reich says “By the time I became secretary of labor, the Democratic Party was focusing its efforts on what were then called “suburban swing” voters — mostly college-educated professionals who tended to be liberal on social issues and more conservative on economic ones.” Here Reich is noting the effects of Democratic political evolution during the late 1970’s and 1980’s that I described here:
The [1970’s] decline in the Democratic dispensation reflected changes in voting behavior resulting from two phenomenon. One was the end of wage growth and rising inflation after 1973, which served to discredit Keynesian economics associated with the Democratic party and reduced public support for unions, weakening working class support for Democrats based on economics. The other was changes in party preferences along class, race and gender lines that arose from the growth in the size of government and Civil Rights legislation. The three trend lines in Figure 1 intersected neutrality over the 1960 to 1980 period, after which Democrats had no longer had the allegiance of the working class and had become seen (at least by Republicans) as the party of women and people of color. The establishment of the centrist Democratic Leadership Council (DLC) in 1985 might be seen as an acknowledgement of this fact. The DLC sought to promote a mixture of center-right economic policy and progressive social policies.
In the space of less than 20 years the Democratic party had abandoned the New Deal Coalition that was based on the provision of a steady rise in living standards for almost all Americans. They did this because the economy the Democrats had created under the New Deal had stopped delivering the goods as shown by the abrupt end of gains in real wage levels in 1973 (see Figure 1). This was the result of the onset of a decade of stagflation and recession after 1973. The cause of the stagflation was the failure of 1960’s Democrats to run balanced budgets as I described here. The effect of this failure to run balanced budgets was the end of gold convertibility in August 1971, which ended the Bretton Woods economic system. Nixon used price controls to keep the system operating without convertibility to ensure his re-election, delaying the impact of this change to 1973. Figure 1 clearly shows that real wages stopped rising and imports strongly rose at this time.
Conservatives falsely argue that wage stagnation after 1973 was the result of increased foreign competition reflecting recovery from WW II devastation. If this were true, war-devastated foreign countries reduced productive capabilities would translate into much lower import levels after the war than before. Figure 1 shows that imports as a percent of GDP in the postwar period was about the same as in the pre-Depression era. What did impact imports was the replacement of the Bretton Woods system of fixed exchange rates and gold-backed dollar reserves with a system of floating rates controlled by currency speculators.
The government refused to raise taxes and cut spending in the 1970’s, leaving the inflation-fighting task to the Fed. The only policy tool available to them was to increase interest rates (and unemployment) to a level sufficiently high to crush inflation, which was not achieved until 1981, after which inflation fell. This policy created a “permanent recession” with unemployment over 6% for all but one of the 14 years after 1972. This sustained period of labor surplus wiped out workers’ bargaining power. The 1980’s saw real unskilled wages fall 8% and spelled the end of the US labor movement as a significant economic actor. High unemployment permitted low inflation to co-exist with large deficits arising from massive tax cuts on the wealthy. According to my inequality model, tax cuts and collapse of Labor explain the increase in inequality since 1980.
Reich talks about how Mandarins like him became enchanted by the New Left during the 1960’s but does not talk about his intellectual development during the 1970’s, when the Democratic dispensation that had created working class prosperity was fraying. He and the New Left correctly saw the Vietnam War as a mistake and a disaster for the Democratic Party. Insight into his subsequent intellectual development is found in his March 1983 article in The Atlantic where he notes:
Productivity growth slowed from an average yearly increase of 3.2 percent between 1948 and 1965 to an average of 2.4 percent between 1965 and 1973. The rate of growth then dropped to 1.1 percent between 1973 and 1978, and in 1979 American productivity began actually to decline….The American engine of prosperity had stalled.
Reich blames this decline on a failure of American business managers ca. 1970 to move past mass production to a more flexible industrial model focused on high tech products and precision manufacturing. Such a shift was required to deal with rising competition in mass-produced goods from low-wage countries. Reich blames institutional inertia for the sluggish response of American business to the foreign threat. He fails to consider the effects of rising inflation in his analysis. During inflationary times, Business gains pricing power: the ability to raise prices without harming sales. If they raise prices more than input costs rise, they can boost profits without actually doing anything as happened during the recent inflation. Pricing power can also obscure a declining business by continuing to produce good financial results. Compare the 1960-69 period, when inflation averaged 2% with the 1973-80 period when inflation averaged 8%. Per capita GDP growth (a proxy for productivity) was slower during the latter period (2.1% vs. 3.3%) Worker’s wages rose by 1.6% per year during the first period fell by 0.6% per year during the latter. Real interest rates averaged 2.8% during the first and only 0.3% during the second. Though productivity was down in the second period, labor and interest costs were also down, leading to largely unchanged real S&P500 earnings growth of 3.9% and 3.6%, respectively. Pricing power allowed companies to continue to deliver solid profit growth, suggesting nothing was amiss, while productivity fell. and sales lost to foreign competition.
Reich is right that American business did not respond to the shift from mass-production of affordable products to production of better and more advanced products. I suggest that the ability to use inflation to generate effort-free rising profits allowed American business to delay undertaking the hard work of training their workers to carry our precision manufacturing as Japanese and German companies were doing. Had the inflation not happened, the unsustainability of the American business model would have become a financial problem when it first materialized, and action taken under the SC cultural framework. Instead, American Business used pricing power and weak labor to extract a larger share of sales for profits and executive compensation. By the time inflation ceased and the real interest rates returned to normal, economic culture had evolved towards SP capitalism in which the objective of maximizing shareholder value could be achieved with stock buybacks as well as successful market competition.
The cause of 1970’s inflation and the end of the Bretton Woods system was the American government choosing to run deficits in order to pay for an enormous peacetime war machine, which created an inflationary environment, as demonstrated by US gold reserves falling in lockstep with cumulative fiscal deficits. A net exchange of dollars for gold by foreign central banks showed they believed gold was a better store of value than US government bonds (i.e., inflation was coming). Not only that but 250 years of monetary history (see Table 1) showed that deficits are inflationary. I find it hard to believe that 1960’s policymakers did not know that they were risking future inflation by their fiscal choices.
Table 1. Inflation levels and deficit spending during wartime and peacetime 1688-1918
President Eisenhower had overseen the creation of what he called the military-industrial complex (MIC). During peacetime, America was spending 8% of GDP to fuel this complex, which by the early 1960’s, was producing persistent budget deficits and inflationary conditions. Outright inflation was being temporarily held in check by gold-for-dollar exchanges, which induce a deflationary effect similar to what quantitative tightening does. Once these exchanges ended, inflation was likely to break out.
Democratic policymakers in the early 1960’s faced a dilemma. They could keep the MIC going at the level Republicans had set it and risk future inflation that could put at risk the pro-worker economy upon which their dispensation was based. Or they could cut back on the MIC and maintain price stability and the continuation of their dispensation at the cost of being “weak on Communism” by allowing yet more countries to become Communist. The issue in the 1960’s was in Indochina where Communist insurgents threatened to overthrow non-Communist successor regimes to French colonial rule.
After WW II, Eastern Europe came under Soviet domination, China fell to the Communists in 1949 and in the following year Communist North Korea made a bid for all of Korea. A US-led coalition had prevented that. Now a seemingly similar threat had manifested in the wake of the French defeat and withdrawal from Indochina. Mushrooming Communist insurgencies, supported rhetorically and sometimes materially by the Soviet Union, had achieved considerable success in the years after the war. With collapsing European colonial empires, the environment seemed fertile for more of these in the future. Eliminating support for anti-Communist forces in order to preserve American prosperity seemed to be contrary to the Truman Doctrine which pledged support for democracies against authoritarian threats. Communist regimes were all dictatorships, but so were many of the regimes opposed to the communists, such as those in Indochina. Technically, it would not be a violation of the Truman Doctrine to withdraw from Indochina, but it would be politically fraught.
Democrats’ decision to pursue the Vietnam war and the rise of a stridently anti-war Progressive faction of the Democrats (to which Reich belonged) made it possible for President Nixon to simultaneously be the “dove” against New Deal Democrat Humphrey, and the “hawk” against progressive McGovern. Democrats ceded foreign policy to the Republicans here. Twenty years later the DLC embrace of neoliberalism showed how Democrats had completely abandoned New Deal economics. By this point the Mandarins were much like their Capitalist counterparts on the “big” issues of economics and war. What was left to distinguish the worldviews of the two elite groups and their parties were their views on social and cultural issues.
In the minds of modern Democrats, Franklin Roosevelt’s legacy means programs like Obamacare and childcare programs. That was part of it to be sure, but more important was the changes made to the policy environment in which economic activity takes place. For example, the very high marginal tax rates during the 1933-73 New Deal economy served to suppress executive pay. That and the ban on stock market manipulation which effectively prohibited stock buybacks meant that executives trying to maximize shareholder value would have a harder time doing it and not be rewarded if successful. This environment selected against shareholder primacy (SP) culture making the alternative, stakeholder capitalism (SC) prevalent. (Note: SP and SC cultures can be seen as holders of normative theories of the same name, though there is more to it).
This is not to say that SC businesspersons were more favorably disposed towards workers than SP businesspersons. I am saying you need to take worker and customer interests into account in a world where (1) a focus on share price does not pay off, (2) unions have power that needs to be respected, and (3) you do not have pricing power. In such a world, SC culture is adaptive and outcompetes SP. It naturally follows that workers get a better deal in such a world, not as a product of a sense of noblesse oblige on the part of executives, but more as the path of least resistance. As long as economic policy ensured all three of these things were true, a pro-worker economy could be maintained, and a Democratic dispensation continue.
Without acknowledgement of this aspect of the New Deal, the Democratic message becomes, yes most of you are consigned to be losers in life, but here are some programs to make things easier. Also, we plan to make sure that future winners will be representative of the population as a whole so that the system will appear just. People want to feel they made it on their own. Rather than a program that helps pay for childcare so two adults can work a combined 70 hours a week to be middle class, it would be better if 50 hours of work sufficed and flexible work schedules were the norm, allowing parents to arrange things so that one of them is always with the kids and the childcare subsidy isn’t needed. A return to a pro-worker economy would make racial representation among society’s winners less important, as I described here. Some programs would still be necessary, such as Universal Health Care, just as the New Dealers established Social Security. The Democratic message should be what Lincoln said, “The legitimate object of government is to do for the people what needs to be done, but which they cannot, by individual effort, do at all, or do so well, for themselves.”