It has often been said that President Franklin Delano Roosevelt saved capitalism from itself. What that means is that FDR took office at the lowest depths of the Great Depression, when it was clear that rampant uncontrolled capitalism had not only failed to benefit the more than one-third of Americans were ill-housed, ill-clothed, and ill-fed, but had also collapsed on itself due to the uncontrolled excesses that unregulated free markets had created. But rather than scrapping the system, FDR went about fixing it by establishing the regulations that capitalism needs to function effectively, the policies needed to give people confidence in the system, and the programs needed to ensure that a larger and larger proportion of Americans would benefit from the system. As a result, the free market system, combined with effective New Deal governance, led to a thriving economy and the largest and most secure middle class in history.
I was recently reminded how far we have strayed from this simple approach of saving capitalism from itself when reading Thomas Friedman’s recent column titled Did You Hear the One About the Banker?. In the column, Mr. Friedman discussed the fact that Citigroup recently received the equivalent of a slap on the wrist for engaging in the type of outrageous Wall Street behavior that drove our economy into the ditch in 2008.
The news was that Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.
In discussing how we avoid a repeat of the economic disaster that has resulted from the 2008 financial meltdown, Mr. Friedman makes an interesting yet incomplete point that gets to the heart of progressivism’s relationship to capitalism. As Mr. Friedman notes, “Capitalism and free markets are the best engines for generating growth and relieving poverty — provided they are balanced with meaningful transparency, regulation and oversight.”
This statement is absolutely correct for as far as it goes. History has proven time after time that free markets are the best generators of wealth and have pulled billions of people out of poverty. At the same time, as we learned from the disaster that was the Great Depression and the stability that was brought about by the New Deal, transparency, regulation, and oversight are necessary for capitalism and free markets to be effective. Otherwise the system devolves into a chaotic free-for-all marked by economic bubbles followed by catastrophic collapses.
But Mr. Friedman’s statement is incomplete in that it leaves out three other things that are needed for the free market to thrive and to relieve poverty:
1. Government investment in the public sphere – in order for capitalism to work, we need an active and well-funded public sector that educates our people, builds an efficient infrastructure system, and protect and promotes a healthy populace.
2. A well-funded social safety net that smooths out the rough edges of capitalism and helps ensure that everyone has a chance. Without such a safety net, far too many people will get caught in the type of abject poverty that is unjust and that undermines social cohesion and growth.
3. A strong labor movement – while capitalism is seen as an individualistic system, the reality is that business interests work in concert all the time to protect and promote their shared interests. Workers must have the ability to do the same thing by collectively bargaining over wages, benefits, and working conditions.
The simple fact is that a thriving capitalist system can be maintained only with progressive policies that set the ground rules, invest in the public sphere, provide a safety net, and support the rights of workers to organize for their interests. We learned that lesson in the 1930s when such progressive New Deal policies saved capitalism from the Great Depression. Unfortunately we forgot that lesson over the past thirty years of conservative economic policy. Let’s hope we relearn the lesson again soon.