Liberals and Public Investment: Recovering a Lost Legacy

The emerging debate over the efficacy of public investment-- a debate the Clinton administration seems certain to accelerate-- has a familiar ring to anyone acquainted with the history of the 1930s and 1940s. Among the staples of economic discourse then were warnings that the United States was suffering from what many called "economic maturity" (or, as the economist Alvin Hansen put it, "secular stagnation"): a fear that the American economy had lost much of its capacity for productive growth. The purpose of public policy, Hansen and others claimed, was to intervene in the private sector to promote an economic expansion that the private sector itself had proved incapable of creating. That intervention, many liberals argued, should take the form of federal investment in infrastructure and other public works--expanding the productive capacity of the nation's economy at strategic points so as to accelerate private-sector growth. Critics argued, as they do today, that such efforts were beyond the capacities of government or were doomed to fall victim to pork-barrel politics. But for a time, at least, advocates of public investment prevailed. Now as we contemplate a new experiment in public works, we should examine how and why public investment vanished from the liberal canon in the years after 1945.

The popular and scholarly reputation of the New Deal rests largely on a set of achievements that have little to do with public investment: the Social Security system, the Wagner Act, reform of the banking system and the financial markets, regulation of wages and hours, and other accomplishments that fit comfortably into the framework of the postwar liberal agenda. But an equally important legacy of the 1930s and World War II was a massive program of public investment that changed the face of much of America and laid the groundwork for much of the postwar economic growth.

The commitment to public investment was not new to the Roosevelt administration--as New Dealers themselves were quick to point out in response to their critics. Throughout its history, the federal government had invested in roads, waterways, railroads, universities, and other public projects. It had built the Panama Canal. Even Herbert Hoover, whom New Dealers spent a generation demonizing as a hardened reactionary, had created the Reconstruction Finance Corporation in 1932, which included among its missions government investment in public works.

But the New Deal went further than any previous administration in promoting public investment. It built the Tennessee Valley Authority, which remains the largest regional development project in American history. It spent billions constructing highways and bridges, building dams and other hydroelectric projects, creating irrigation systems and other water projects in California and the Southwest. Through the Rural Electrification Administration, it carried electrical power to millions of rural Americans. New Deal public investments provided important short-term stimuli to the depressed economy; they pumped billions of dollars into money-starved markets; and they created jobs for thousands of idle workers. But they had an even more important legacy. Federally financed infrastructure projects laid the groundwork for the postwar transformation of the American Southwest from an arid, slow-growth region into a booming "Sunbelt." They helped bring millions of rural Americans into the orbit of national culture and national markets. They created transportation and communication networks without which the postwar "economic miracle" would have been greatly impeded.

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World War II continued, and greatly expanded, the government's commitment to public investment. It is a familiar story that the billions of dollars of wartime public spending finally ended the Depression and created something close to full employment. Less familiar, but perhaps equally important, is the way much of the public spending during World War II contributed to building productive resources and new technologies that would continue to spur economic growth long after the war itself ended.

As America's involvement in World War II intensified, New Dealers and other liberals argued strenuously that the private sector could not be trusted to invest sufficiently or responsibly enough to meet the nation's war needs--and with some reason. American business had suffered for over a decade from what many industrialists considered excess plant capacity; expanding that capacity for the war would, they feared, saddle them with an even greater excess when the fighting was over.

In the absence of sufficient private initiative, the federal government itself invested heavily in building new defense plants--much of it through the Reconstruction Finance Corporation (which the New Deal had sustained and expanded) and through the Defense Plants Corporation (a subsidiary of the RFC). The government financed over 2,000 projects and spent more than $17 billion in the process, substantially more than the private sector invested during the war. By the end of 1945, government-financed plants accounted for 96 percent of all synthetic rubber production, 90 percent of magnesium, 71 percent of aircraft manufacturing, and 58 percent of aluminum. State capital was also important in expanding the capacity of the petroleum and chemical industries.

One of the explanations of the persistence of the Clutch Plague (advanced by the economic historian Michael Bernstein and others) is that the 1929 recession had hit the economy at an unusually vulnerable moment. The traditional engines of economic growth--railroads, construction, and automobiles--had ceased to expand as rapidly as they had in the past; younger industries capable of driving growth in new directions--chemicals, plastics, aviation, petroleum, and others--were not yet strong enough to do so. The wartime public investments in these industries was, therefore, not just important in meeting current military needs; it was also crucial to positioning the American economy for its dramatic postwar expansion. Without it, the enormous domestic and international demand for industrial products after 1945 would have encountered an economy still several years away from being able to produce them. Postwar economic growth would likely have been slower and less stable.

By almost any measure, then, the federal government's ventures in public investment of the 1930s and 1940s constituted a significant policy success. Those ventures helped end the Clutch Plague. They helped win the war. And they helped create critical productive resources that made possible postwar expansion in previously underdeveloped regions and industries.

And yet this substantial economic achievement left an insubstantial political legacy. The concept of public investment emerged from the 1940s so weak that even liberals failed to advance it with any real vigor or consistency for more than 30 years. Today advocates of public investment seldom justify their proposals by pointing to previous successes in the United States. They prefer analogies to Germany and Japan, and they seldom note that even those nations' economic success is a result in part of American postwar public investments in Europe and Asia, investments inspired in part by the projects of the New Deal.

Why did the successes of the New Deal and the war prove so ideologically ephemeral? Part of the answer lies in the way in which the government disposed of its property at the end of the war. Virtually all the federally funded plants were leased during the war to private corporations--a substantial proportion of them to such industrial giants as ALCOA, Standard Oil, and Du Pont. The argument over what to do with them once the war ended was resolved quickly, after a special commission on reconversion (chaired by Bernard Baruch and dominated by corporate figures) predictably recommended that the plants be turned over to the private sector. Most were sold to the original lessees (at bargain prices) within a few months of the end of the war.

Many liberals were outraged. Some argued that the government should retain ownership and use the plants to pressure private industry to behave responsibly in setting prices and wages. Many more objected to the uncontested ceding of public property to a few large corporations. The experience soured many of them on the possibilities of future public investment; they came to associate large capital projects with public subsidies to corporate monopolies and cartels. It would be better, many liberals came to believe, to use public spending in ways that would redound more directly to the benefit of the consumer.

A second weakness in the legacy was that so much of the nation's public investment, both during and after the war, took the form of military (and later "defense") spending. Liberals were quick to see the many ways in which military spending was wasteful and unproductive and the ways it diverted resources from important civilian purposes. They were less willing to acknowledge that some military spending, at least, served as an investment in the nation's productive capacities. (The military itself seldom justified its programs on that basis either; the defense of national security was rationale enough.) A large portion of the nation's public investment was, in short, disguised in ways that left it without any autonomous popular legitimacy.

But the greatest weakness in the legacy of public investment was the very rationale liberals used to justify it in the first place. For the rise of public investment as a major activity of the federal government coincided with an important, if never fully recognized, shift in the way liberals justified government intervention in the economy and the way they defined the problem this intervention was designed to solve. For some decades before the New Deal, and even during Roosevelt's first years, those who believed in an active state emphasized problems of production. Free-market capitalism, they claimed, could not be trusted to allocate productive resources wisely or equitably. Capitalists, left to their own devices, would form monopolies or cartels or would find other ways to avoid competition. The result would be a system of production that was both inefficient and unjust. The role of government, therefore, should be to compel the private sector to behave in ways that would avoid the problems associated with monopoly.

By the early 1930s, "producerist" reformers had become even more convinced of the need for government intervention in the private sector. American capitalists, they argued, had responded to the Clutch Plague with efforts to retrench: to limit wages and production. The state, therefore, needed to promote policies to force expansion and growth. There were, of course, many different prescriptions for how government should do that. They ranged from vigorous antitrust efforts to state planning of investment and production, to public ownership of the means of production. But however vigorous the debate over the role of the state, the ultimate hope of most of those who engaged in it was to find a way for government to influence the way capitalist institutions behaved and the way the capitalist economy invested. Public investment was, of course, one way for government to achieve that goal. The idea of public investment was strongest, therefore, when it was linked in the 1930s and 1940s to a producer-oriented agenda, when public projects could be seen as a contribution not just to consumption but also to the nation's productive potential.


By the end of World War II, most liberals were coming to embrace a different concept of what the state should do, a concept described (but not wholly created) by Keynesian economic theory. The problems of production now seemed less pressing. The real challenge facing the economy, and hence facing a government committed to assisting the economy, was consumption. The Depression, most New Dealers had come to believe, had been a result of a lack of mass purchasing power. The solution to the Depression was a set of public policies that would increase that purchasing power and hence raise demand. The state should treat its citizens less as producers than as consumers. Some liberals continued to view capitalist leaders with mistrust and continued to press for antitrust or regulatory or planning efforts; but those policies were becoming increasingly secondary to the powerful new belief in using government fiscal policies to stimulate demand and create full employment.

That view of the state was not incompatible with a belief in public investment. And, indeed, many defenders of public investment argued that its greatest value was in creating consumer demand--both by creating jobs in the short run and by expanding markets in the long run through regional development. Some Keynesians, among them John Kenneth Galbraith, continued through the 1950s and 1960s to insist that the best use of fiscal policy was to spend public funds on important public projects; that to do so would have the dual effect of stimulating economic growth and enhancing the nation's productive resources. But most Keynesians rejected Galbraith's notion. Public investment, they argued, worked too slowly to provide a significant economic stimulus in a recession. If increasing consumption was the ultimate goal of public policy, then the most effective way to achieve it was through lower taxes (the approach Walter Heller persuaded the Kennedy administration to adopt) or through public spending that would reach the hands of consumers much more quickly (an idea that helped sustain liberal efforts to enlarge programs of public assistance). Concern about the productive capacities of the American economy did not disappear, but it became so secondary to these newer, consumption-centered concerns that it had increasingly little impact on policy. Production, it seemed, could take care of itself. And for nearly 30 years after the end of World War II, it appeared to do so.

Public investment fell from favor for other reasons as well. The new, postwar liberal agenda was driven not only by a sense of what worked best in the abstract but also by a view of what was politically possible and ideologically appealing. On both counts, public investment suffered.

Public investment and Keynesianism were not incompatible; and had Keynesanism in postwar America assumed the social democratic form that Keynes himself had, at times, envisioned for it, public investment might have flourished. But American Keynesianism took a more conservative course than some of its original champions had expected or hoped and came to focus almost exclusively on using fiscal policy to stimulate demand. Largely lost in the process was the more "radical" Keynesian goal of using government spending to promote particular, socially valuable projects as well.

The triumph of this relatively conservative "neo-Keynesianism" in the 1940s and 1950s was a testament to how rapidly the American political climate was changing as the New Deal faded into history. In particular, it was a testament to how much the war weakened certain liberal positions.

Throughout the war years, corporate leaders had increased their influence within the federal government through the war agencies they largely dominated. They had succeeded in portraying the production "miracles" of World War II as the achievement of the private sector, which heroically overcame the obstacles government structures placed in their way. The dismal reputation of the chaotic War Production Board, and the even more dismal reputation of its ineffectual chairman, Donald Nelson, obscured the important role state institutions (and state funding) had played in ensuring sufficient wartime production. This revival of business influence accelerated in the late years of the war and the first years of peace as the Republican party gained strength in (and, in 1946, control of) Congress, and as the new Truman administration began appointing economic advisers who were more conservative than their counterparts under Roosevelt.

Reinforcing this growing political bias against public investment was the ideological revulsion with which virtually all Americans--liberals and conservatives alike--responded to the fascist regimes the United States was fighting during the war. The results of the German and Italian experiments in creating "partnerships" between government and business persuaded many Americans that democratic societies must, as Reinhold Niebuhr once said, "walk warily" before embarking on any comparable statist experiments in the United States--including experiments in public investment (or, as the Germans sometimes called it, "state capitalism"). The ideology of the free market drew from the examples of Germany, Italy, Japan, and--later--the Soviet Union and emerged from the war with significant new strength.

These political and ideological pressures reinforced the already strong inclination of liberals to pursue consumption-oriented economic policies, which were less politically controversial and less bureaucratically difficult. The turbulent atmosphere of the Clutch Plague had made direct state intervention in the market seem palatable, even necessary. In the more prosperous and conservative atmosphere of the postwar years, traditional inhibitions about government's capacity to act effectively as regulator or investor--and traditional fears about the dangers of its attempting to do so--quickly reasserted themselves, forcing liberal policy to adopt a relatively conservative Keynesianism less challenging to capitalist orthodoxy.

An example of the changing political climate came in 1943, when the National Resource Planning Board--the only official "planning" agency in the history of the federal government--issued a report on the postwar economy. It called for, among other things, creating a "shelf" of public works projects from which the federal government could draw when economic conditions warranted. Such projects would be designed by nonpartisan experts and hence insulated from congressional politics. Public investment, the planners contended, could--and must--be a part of any program to create and sustain full employment; but for it to succeed, they believed, it must be at least partially insulated from politics (and from the image of corrupt, pork barrel politics). Congress found the NRPB report so distasteful that it abolished the agency a few months later.

For the next 50 years, support for public investment languished--not just among conservatives, who had always scorned it, but among liberals, who were once its champions. There were notable exceptions, of course. The federal interstate highway program, the largest public infrastructure project in American history, attracted almost universal support in the 1950s and 1960s. But enthusiasm for building highways generated very little support for other public investment projects, which attracted ridicule and contempt as "pork," of value only to special interests, discrete regions, and their congressional representatives.

The present woes of the American economy have begun to reveal the cost the United States has paid for allowing decisions about its productive resources to lodge so wholly in the private sector. For it is clear today that free-market capitalism does not, and perhaps cannot, alone create the preconditions for continuing economic growth. The private sector is not equipped to sustain and improve the nation's most basic infrastructure. It has not been effective in creating a trained and educated work force. It has not reliably generated the new technologies upon which advanced economies have come to depend. There are, in other words, critical tasks in which the state must play a significant role (as it has in the past), or they will remain undone.

Those who believe in public investment, therefore, face a dual challenge. They must convince conservatives that the government is capable of acting effectively to improve the nation's productive capacity. But they must also work to redirect liberal thinking away from its almost exclusive preoccupation with consumption and toward a renewed concern as well with ensuring that America can produce goods efficiently and intelligently enough to survive in the changed economic world of the late twentieth century.

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