THIS OUGHT to be a great time for Democrats. With the market collapse, laissez-faire economics is once more in disrepute. But the Democrats have not yet figured out how to seize the moment because they are reluctant to embrace their own party's legacy of economic activism.
The first disgrace of laissez-faire economics, in 1932, made the Democratic Party America's usual majority party. Prior to FDR, Democrats elected just two presidents in 76 years -- Woodrow Wilson and Grover Cleveland. With the New Deal came a formula that bound citizen to polity through a social contract guaranteeing economic opportunity and socialized security.
Politically, the genius of the New Deal formula was that it provided for social justice and political community via inclusion. Implicit in the party's philosophy was the idea that the market doesn't automatically allocate its prizes fairly. But Democrats were reluctant to de-throne the free market as a national icon. Democratic programs like Social Security and Medicare, expanded public education, starter homes for families and low rent housing for the elderly, were never advertised as taking from the haves to give to the have-nots (though they often had that result). Instead the party defined needs that benefitted a substantial majority of the electorate.
This canny conception of society, market and polity tapped the American ideal of egalitarianism and built empathy and political cohesion -- but without being terribly radical about it. The mixed economy and the social state played the same role for the modern Democratic party that the much sentimentalized bucket of coal and Christmas turkey played for Tammany. To understand all of this as mere "interest-group liberalism" -- a ragtag coalition of out-groups with their palms extended -- is to miss the fact that the great body of voters welcomed the Democrats' new conception.
The grand era of the mixed economy and the welfare state (1946-1973) was a quarter-century of unique economic prosperity and social peace. But in the 1970s, in the shelter of a mixed economy, the free market recovered its strength, both as institution and ideology, heralding the decline of the Democrats. In a second laissez-faire era, the symbols of national advancement now belonged to conservatives. Policies were judged by the criteria of de-regulating, privatizing, and budget-cutting, of liberating free markets and dismantling mixed ones. The globalization of the economy compounded the problem, because social contracts necessarily operate within the boundaries of the nation state.
The second laissez-faire era, seemingly, came to an abrupt end on Oct. 19, 1987. Among the debris from the stock market crash were the following clues to an impending ideological sea-change:
The Wall Street Journal, post-crash, ran a page-one story explaining that the crash was not the beginning of another great depression -- thanks to depository insurance, bank regulation, social security, welfare spending, securities laws and a host of other interventions that the Journal regularly opposes as assaults on the free market.
President Reagan, reluctantly agreeing to a budgetary summit with the opposition Democrats, curiously declared that "Everything is on the table but Social Security" -- America's most expensive and socialistic program. Yet it is also our most popular and effectively funded one, to the point where even a doctrinaire conservative like Reagan feels compelled to defend it.
When the stock market crashed, Alan Greenspan, chairman of the Federal Reserve, gave up his recent efforts to fight inflation with tight money, pumping in a reported $60 billion of liquidity overnight, and advising the big money center banks to do everything needed to keep the brokerage houses solvent. In effect, federal depository insurance was extended to the very womb of the free market -- to Wall Street.
Events of the past month have served as a salutary reminder why a society is more than a giant marketplace, and why a modern economy cannot be self-regulating. The mixed economy has never looked better, the invisible hand less reliable. Seemingly, this plays into the hands of Democrats.
Yet the Democrats find themselves oddly disarmed, both fiscally and philosophically. Democrats have been almost as beguiled as Republicans by the siren song of the free market. And deficit-reduction politics have mooted any renewed impulse toward activist government.
Most of the ideological energy lately has belonged to movements beginning with the prefix "neo" -- neo-conservatism, neo-liberalism, and neo-classical economics. Each of these movements, in its own way, acts as a solvent on the glue that binds the Democratic party to the democratic electorate. Democrats have been cowed by the charge that they are the party of "tax and tax, spend and spend," forgetting that the original version of that slogan (attributed to FDR's aide Harry Hopkins) went "tax and tax, spend and spend, elect and elect." Lately, many Democrats have accepted the idea that fiscal prudence dictates the Tax without the Spend, which could mean without the Elect as well.
The "neo-" movements hold that the New Deal conception of market, government and society is fatally flawed, both as economics and as politics. Neo-conservatism began as a reaction by one-time liberals and socialists against the perceived excesses of the 1960s. The neo-conservatives warned that "McGovernism" -- meaning a leftwing foreign policy, a bohemian lifestyle, a radical conception of racial justice and economic equity, and a more participatory set of party rules -- was wrecking the Democrats' necessary links to the white working class.
The insight was partly accurate. Yet as neo-conservatism evolved, under the tutelage of magazine editors like Irving Kristol and Norman Podhortez and a stable of other conservative policy entrepreneurs, the neo-cons positioned themselves on the weak side of their own insight. Instead of demanding that the Democratic Party keep faith with the Roosevelt formula of broad inclusionary government, they became mainly a lobby for dismantling social programs, and for a hardline foreign policy, neither of which, by itself, is likely to reclaim the loyalties of wage-earning voters to the Democrats. By 1980, most neo-conservatives became Reagan Republicans, but many continued to exercise disproportionate influence on Democrats.
By the same token, neo-liberalism began in the early 1970s as an idealistic call for cleaner politics and more effective government, for a liberalism true to its values yet rigorously skeptical about its means. As Charles Peters, editor of the Washington Monthly and godfather of the movement, wrote in his "Neoliberal's Manifesto" in 1983, "We still believe in liberty and justice and a fair chance for all, in mercy for the afflicted and help for the down and out. But we no longer automatically favor big unions or oppose the military and big business. Indeed, in our search for solutions that work, we have come to distrust all automatic responses, liberal or conservative."
Yet despite the genuine high-mindedness, neo-liberalism has also evolved into a movement quite at odds with the necessary Democratic approach to citizen, government, and party. Its quest for ad hoc "new ideas" has been splendidly disdainful of politics. It has joined traditional conservatives in celebrating the Joy of Entrepreneurship. Neo-liberal writers have been among the most scathing in their denunciation of trade unionism. At bottom, neo-liberalism seems to agree with neo-conservativism that government is more often a problem than a solution. A recent influential article by Mickey Kaus, a protege of Charles Peters, recommending mandatory low-paid work as the solution to welfare, was scarcely different in tone or analysis from the most prominent neo-conservative work on the subject, Charles Murray's "Losing Ground."
Another favorite neo-liberal target is the fiscal peril of citizen "entitlements" like Social Security and Medicare -- the very programmatic machinery that binds the middle class to poorer people, uniting the elements in the Democratic coalition. By and large, neo-liberals have accepted the conservative view of social programs -- that they should be means-tested and limited to the certifiably poor. To appreciate the political fallacy in that view, imagine the result if our most basic entitlement, public education, were means-tested. The middle class would desert the public schools, the constitutency for public education would erode, and the quality of public schools would further decline. Recent articles by Peter G. Peterson, investment banker and former Republican Secretary of Commerce, warning of the ruinous effect of entitlements, are almost indistinguishable from similar articles by former Jimmy Carter speechwriter and Washington Monthly writer James Fallows. The conventional wisdom about entitlements is relentlessly bipartisan -- but hazardous to Democrats.
The third "neo-" movement, neo-classical economics, plays the same unfortunate ideological role of neutering the progressive impulse. John Maynard Keynes believed that markets could not be trusted to sustain demand, allocate investment, or distribute income in a socially defensible manner. He also believed that a global free market had a debt-collector mentality and thus a chronic tendency to deflation. In the post-war period, conventional economists appropriated Keynes' insights about demand ("macro-economics"), but discarded the rest. This bowdlerization came to be known as the "neo-classical synthesis" -- classical economics plus a prophylactic dose of Keynes -- or simply neo-Keynesianism. It has steadily become more "neo" and less Keynesian.
Today, most economists in this tradition, including those advising the Democratic party, are in substantial agreement with their Republican colleagues about the wisdom of de-regulation, the value of floating exchange rates, the dangers of economic planning, and the distortions introduced by trade unions. Just as traditional economists had to be bludgeoned by the plain reality of the Great Depression before they accepted even the most tepid form of Keynesianism, most economists today are again cheerleaders for laissez-faire. In effect, the Democrats' best political instincts are regularly pronounced scientifically unsound by their own economic advisors.
The best political slogan in 1988 is Paul Simon's: "I'm not a neo-anything. I'm a Democrat." The case for a mixed econony as necessary economics and sound Democratic politics was never better. The worst thing Democrats could do in the present circumstances would be to embrace the economics of austerity and the politics of fiscal impotence. Taxes should indeed be raised -- on those who can afford to pay -- but they should be spent, partly on deficit reduction and substantially on the public needs that have gone untended during the Reagan years. Real Keynesianism -- an economics of stabilization, public spending, low interest rates and high growth -- should be taken off the shelf and wielded. Necessary entitlements, like good public schools, lifelong skills training, and decent health care for all, need to be expanded, not dismantled to pay for the fiscal excesses of Reaganism.
Because Democrats have been so intimidated by the temporary conservative ascendance, it fell to Wall Street to bury laissez-faire a second time. Now the stage ought to be set for a Democratic renaissance. However the party of the common people still needs to recall the other lesson of the 1930s: that a mixed economy and a social conception of security are also good politics.
Robert Kuttner is economics correspondent of The New Republic. His new book is "The Life of the Party: Democratic Prospects in 1988 and Beyond."