Numerous commentators, in this magazine and elsewhere, have drawn comparisons between the world of Atlas
and today’s fiscal and regulatory environment, and with good reason. Thanks to hyperactive governments here, there and everywhere, government spending is out of control and government debt is piling up, even without taking into account looming unfunded liabilities. And the official responses to our government-induced economic problems have been the same in most countries: more government involvement.
Hatred of wealthy capitalists is also running high. Now, granted, some bankers did behave badly in the lead up to the financial crisis of 2008—and unlike most of the homeowners who erred on the side of excessive risk-taking, bankers tended to make out like bandits. They were bailed out at taxpayer expense, with some of the worst offenders put in charge of the bailing. In such circumstances, when the alternative Utne Reader shouts that we need to “Fire the Rich” in order to “fix the economy that greed destroyed,” a lot of people are likely to listen with a sympathetic ear—and are unlikely to draw clear distinctions between the productive Ellis Wyatts and the parasitical Orren Boyles of the world.
In this environment, it is natural to wonder when the other main plot point of Atlas will start happening—when productive capitalists will get fed up and start dropping out. In fact, history can guide us in answering this question, for there was a time, still in living memory, when unprecedented government encroachment did, in fact, lead Atlas to begin to shrug.
To the Brink with Hoover & FDR
Eighty years ago, America and the world were just a few years into what would become the longest, harshest depression in history. Then, as now, a boom fueled by easy money and other government interventions had turned to bust. Then, as now, further government interventions were prescribed as the cure for all economic ills.
If Republican Herbert Hoover and Democrat Franklin Roosevelt had set out consciously to destroy America, they could hardly have done a more thorough job than they did with their “unprecedented political bungling,” to borrow a phrase from economist Lawrence Reed. In his classic 1981 essay, “Great Myths of the Great Depression,” a new edition of which was published last year, Reed notes many of the interventionist policies from both presidents that made the downturn of the 1930s so severe and prolonged.
Hoover, of course, was far from being the champion of laissez-faire capitalism he has been made out to be. He boosted government spending to levels then unheard-of in peacetime; he convinced businessmen to keep real wages artificially high; he signed the disastrous Smoot-Hawley Tariff in 1930; and he closed out his single term in office by doubling the income tax in order to try to clean up the mess he had made of the public finances. After four years of Hoover preventing the free market from correcting the imbalances brought about by the artificial boom of the 1920s, national unemployment rates had soared to 25 percent.
As Reed points out, during the 1932 presidential campaign, Roosevelt actually attacked Hoover’s record on spending, taxes, the debt, and trade, and criticized Hoover for putting millions of people on the dole. But as President, FDR forgot all of that campaign rhetoric, and instead of changing course, he doubled down on Hoover’s interventionist policies. He seized people’s gold holdings so he could safely devalue the dollar; he pushed both government spending and government debt to new heights; he raised income taxes again and again; he convinced Congress to pass Social Security in 1935 and a national minimum wage law in 1938; he intervened relentlessly in agriculture, unconscionably destroying valuable crops and livestock to prop up prices; and he created the National Recovery Administration (NRA), a system of meddling and price-fixing in the manufacturing industries that “briefly transformed much of the American economy into a fascist-style arrangement,” raising the cost of doing business by some 40 percent.
By the end of the 1930s, after two full terms with President Roosevelt at the helm, unemployment was still stuck in the high teens. With all the price and supply manipulations, all the direct interventions in manufacturing and farming, all the taxation of productive people in order to pay the unproductive in government make-work schemes, it makes some sense that the market failed to right itself during FDR’s reign. But this impersonal diagnosis overlooks a key element of the full explanation for the persistence of the Great Depression: the fact that capitalists went on strike.
Capital on Strike
Admittedly, capitalists did not disappear as dramatically as they do in Atlas Shrugged. They could still be found running their businesses during the day (after a fashion), home with their families at night (when work was forbidden by the NRA), and maybe at the country club on the weekend. But to a significant extent, capitalists in Franklin Roosevelt’s America stopped investing their capital.
In his new book on the economic history of and theory behind financial crises, The Evil Princes of Martin Place, Chris Leithner documents this dearth of private investment during the Roosevelt decade. “For the eleven years from 1930 to 1940, net private investment totaled –$3.1 billion.” Production did not cease, but it shifted almost exclusively to nondurable consumer goods. Capital goods—the machinery, power plants, and industrial buildings used to produce consumer goods—were not being replaced as they wore down. The country, in short, was consuming its capital.
In Atlas Shrugged, Americans, fed up with being told what to do by know-nothing bureaucrats, drop out of society.What caused American investors to go on strike in the 1930s? In a word: uncertainty. People with capital to invest need to feel that property rights are secure, that the returns from their investments will redound to their benefit. FDR’s seizure of gold, his tax hikes, his micromanagement of industry and agriculture, and his redistribution of income not only harmed the economy directly; these measures also made investors reluctant to invest, especially for the long term.
Through it all, Roosevelt railed against “economic royalists” and “the forces of selfishness and of lust for power.” And when he didn’t get what he wanted—when the Supreme Court dared to resist some of his hyper-interventionist plans—he tried to pack the Court with friendly judges. The plot failed in its direct objective, but it succeeded in intimidating the justices, who were much more compliant from mid-1937 on. Even the basic law of the land, it seemed, was up for grabs.
Indeed, if anything, the situation appeared even worse than we can really imagine in the year 2011. As Leithner writes,
"It doesn’t resonate today, but to many people at the time—particularly business people and investors—the threat of dictatorship was all too plausible in the 1930s. In those days, people had plenty of examples of ‘strong leadership’ from which to choose—such as Franco, Hitler, Mussolini and Stalin—and it hardly seemed impossible that FDR… might bring socialism or fascism… to the U.S."
A 1941 poll of business executives taken by Fortune Magazine found that only 7.2% expected “A system of free enterprise restored very much along the prewar lines” to emerge in America after the war. Nearly 93% expected a further attenuation of private property rights. Is it any wonder they eschewed long-term investments?
Of War and Peace
Lawrence Reed concurs with the idea that capital was on strike: “The relentless assaults of the Roosevelt administration—in both word and deed—against business, property, and free enterprise guaranteed that the capital needed to jumpstart the economy was either taxed away or forced into hiding.”
When America entered World War II in 1941, Roosevelt “eased up on his anti-business agenda,” but then the nation’s capital was largely tied up in the effort to defeat Nazi Germany and Imperial Japan. Only after the war did prosperity truly return. “Most importantly,” writes Reed, “the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors and as a result, those investors re-entered the economy and fueled a powerful postwar boom.”
Roosevelt argued against "economic royalists."
Now, in the 21st century, with a serious financial crisis occurring on his watch, a Republican president once again responded by spending huge sums of money (money that will have to be confiscated from productive taxpayers down the road) in order to “ride to the rescue.” Once again, a Democratic president has doubled down on his predecessor’s policies, taxing, spending, redistributing, and interfering like never before. There has once again been talk of protectionism, too, though mercifully less action, at least so far.
As a result of these policies, unemployment is high and persistent, though not yet as bad as it was 80 years ago. As for capital, an analysis by Thayer Watkins of San José State University’s Economics Department points out that despite a recent rebound, gross private investment in the last quarter of 2010 was still only 77 percent of what it was in the first quarter of 2006.
Of course, the government’s role in the economy had already vastly expanded in the decades since World War II even before the latest financial crisis. Government spending and debt have reached truly worrisome proportions, and taxes remain high. The day might come sooner than some expect when productive businessmen and businesswomen—and productive workers, too—finally stand up and say, “Enough is enough!” Let’s just hope it doesn’t take a decade of misery and a global war for government leaders to back down and let us reclaim the power to control our own lives.