The state of Joe Biden’s union: The return to democratic capitalism

Biden has revived an older economic paradigm

Friends,

How can inflation be dropping at the same time job creation is soaring? It has taken one of the oldest presidents in American history, who has been in politics for over half a century, to return the nation to an economic paradigm that dominated public life between 1933 and 1980, and is far superior to the one that has dominated it since.

Call it democratic capitalism.

The Great Crash of 1929 followed by the Great Depression taught the nation a crucial lesson that we forgot after Ronald Reagan’s presidency: that the so-called “free market” does not exist. It’s a fiction. Markets are always and inevitably human creations. They reflect decisions by judges, legislators, and government agencies as to how the market should be organized and enforced — and for whom.

The economy that collapsed in 1929 was the consequence of decisions that had organized the market for a monied elite — allowing nearly unlimited borrowing, encouraging people to gamble on Wall Street, suppressing labor unions, holding down wages, and permitting the Street to take huge risks with other people’s money.

Franklin D. Roosevelt and his administration reversed this. They reorganized the market to serve public purposes — stopping the excessive borrowing and Wall Street gambling, encouraging labor unions, establishing Social Security, and creating unemployment insurance, disability insurance, and a 40-hour workweek. They used government spending to create more jobs. During World War II, they controlled prices and put almost every American to work.

Subsequent Democratic and Republican administrations enlarged and extended democratic capitalism. Wall Street was regulated, as were television networks, airlines, railroads, and other common carriers. CEO pay was modest. Taxes on the highest earners financed public investments in infrastructure (such as the national highway system) and higher education.

America’s postwar industrial policy spurred innovation. The Department of Defense and its Defense Advanced Research Projects Administration developed satellite communications, container ships, and the internet. The National Institutes of Health did trailblazing basic research in biochemistry, DNA, and infectious diseases.

Public spending rose during economic downturns to encourage hiring. Even Richard Nixon admitted “we’re all Keynesians.” Meanwhile, antitrust enforcers broke up AT&T and other monopolies. Small businesses were protected from giant chain stores. Labor unions thrived. By the 1960s, a third of all private-sector workers were unionized.

Large corporations sought to be responsive to all their stakeholders — not just shareholders but employees, consumers, the communities where they produced goods and services, and the nation as a whole.

Then came a giant U-turn. The OPEC oil embargo of the 1970s brought double-digit inflation followed by Fed Chair Paul Volcker’s effort to “break the back” of inflation by raising interest rates so high that the economy fell into deep recession.

All of which prepared the ground for Ronald Reagan’s war on democratic capitalism.

From 1981 onward, a new bipartisan orthodoxy emerged that the so-called “free market” functioned well only if the government got out of the way (conveniently forgetting that the market required government). The goal of economic policy thereby shifted from public welfare to economic growth. And the means shifted from public oversight of the market to deregulation, free trade, privatization, “trickle-down” tax cuts, and deficit reduction — all of which helped the monied interests make more money.

What happened next? For 40 years, the economy grew, but median wages stagnated. Inequalities of income and wealth ballooned. Wall Street reverted to the betting parlor it had been in the 1920s. Finance once again ruled the economy. Spurred by hostile takeovers, corporations began focusing solely on maximizing shareholder returns — which led them to fight unions, suppress wages, abandon their communities, and outsource abroad.

Corporations and the super-rich used their increasing wealth to corrupt politics with campaign donations — buying tax cuts, tax loopholes, government subsidies, bailouts, loan guarantees, non-bid government contracts, and government forbearance from antitrust enforcement, allowing them to monopolize markets.

Democratic capitalism, organized to serve public purposes, all but disappeared. It was replaced by corporate capitalism, organized to serve the monied interests.

Joe Biden is reviving democratic capitalism.

He learned from the Obama administration’s mistake of spending too little to pull the economy out of the Great Recession that the pandemic required substantially greater spending, which would also give working families a cushion against adversity. So he pushed for and got the giant $1.9 trillion American Rescue Plan.

This was followed by a $550 billion initiative to rebuild the nation’s bridges, roads, public transit, broadband, water, and energy systems. And in 2022, the biggest investment in clean energy sources in American history — expanding wind and solar power, electric vehicles, carbon capture and sequestration, and hydrogen and small nuclear reactors. Then came the largest public investment ever made in semiconductors, the building blocks of the next economy.

Notably, these initiatives are targeted to companies that employ American workers.

He has also embarked on altering the balance of power between capital and labor, as did FDR. Biden has put trustbusters at the head of the Federal Trade Commission and the Antitrust Division of the Justice Department. And he has remade the National Labor Relations Board into a strong advocate of labor unions.

Unlike his Democratic predecessors, Biden has not sought to reduce trade barriers. In fact, he has retained several from the Trump administration. But unlike Trump, he has not given a huge tax cut to corporations and the wealthy. It’s also worth noting that, in contrast with every president since Reagan, Biden has not filled his White House with former Wall Street executives. Not one of his economic advisers — not even his treasury secretary — is from the Street.

I don’t want to overstate Biden’s accomplishments to date. His ambitions for childcare, eldercare, and paid family and medical leave were thwarted by Senators Joe Manchin and Kyrsten Sinema. And now he has to contend with a Republican House.

Biden’s larger achievement has been to change the economic paradigm that has reigned since Reagan. He is teaching America a lesson we once knew but have since forgotten: that the “free market” does not exist. It is designed. It either advances public purposes or it serves the monied interests.

Biden’s democratic capitalism is neither socialism nor “big government.” It is, rather, a return to an era when government organized the market for the greater good.