Essays In Political Economy

FROM THE LUDWIG VON MISES INSTITUTE

The Revolution of 1935: The Secret History of Social Security

By Gregory Bresiger1

Social Security was not just about the provision of publicly funded old-age pensions in the name of social insurance. It was designed as a tool of macroeconomic policy, a social arm of central planning passed in age of boundless faith in the power of the state. As such, the program was steeped in economic fallacy and became an integral part of the discredited Keynesian plan to turn stones into bread. Far from achieving its stated aims, it helped prolong the Great Depression and has contributed mightily to the decline of American liberty.

.

1 Gregory Bresiger is assistant manger editor of Traders Magazine and a business and financial writer/editor in Kew Gardens, New York. [email protected] Brad Edmonds helped with editing.

© 2002 Mises.org

Essays in Political Economy 2 ______

Section I: peaks and valleys of deflation and 4 Introduction inflation.”

Social Security was representative of A second American revolution national planning schemes, some of occurred almost 70 years ago. On which had been tested during World August 14, 1935, after very little War I and regained popularity with public or congressional debate, intellectuals after the crash of 1929. President Franklin Delano Roosevelt Many intellectuals believed the signed the Social Security Act into government could wage war on law on. Many of his allies were poverty and, by using the techniques disappointed because they wanted of wartime planning so popular with more than the act provided; FDR progressives during World War I, assured them much more was manage the business cycle.5 coming.2 He said, on signing the bill into law, that Social Security Social Security was a Keynesian “represents a cornerstone in a device meant to ensure that buying structure which is being built but is 3 power would remain strong in times by no means complete.” In the midst of high unemployment. By of the Great Depression, and with Keynesian, I mean a kind of thinking most of his New Deal initiatives that pre-dated John Maynard Keynes failing to restore the economy, FDR by centuries but which he would hoped that the federal government, popularize with his writings in the through programs such as Social 1920s and 1930s. Keynes had Security, would temper and control rediscovered it in his reading of the the business cycle. Social Security, FDR said, would “flatten out the 4The Public Papers and Addresses of Franklin D. Roosevelt, Samuel Rosenman, ed., Vol. IV, pp. 324-325 (Random House, New York). 2Although the Social Security system 5Some socialists said FDR was moving initially covered a relatively small part of toward central planning and economic the workforce, FDR assured his allies it nationalism. Said Stuart Chase: “National would expand: “I see no reason why Planning and economic nationalism must go everybody in the United States should not be together or not all. President Roosevelt has covered,” FDR privately told Francis accepted the general philosophy of Perkins. “Cradle to the grave—from the planning.” He added that the nation could cradle to the grave they ought to be in a confidently move toward autarchy. Also see social insurance system.” See Arthur George Soule’s comments in Walter Schlesinger, Jr.’s The Coming of the New Lippmann’s The Good Society, p. 91 Deal, p. 308 (Houghton Mifflin Company, (Grosset & Dunlap, New York, 1936): “It is Boston, 1959). nonsense to say that there is any physical 3See Policymaking for Social Security , by impossibility of doing for peace purposes Martha Derthick, p.5 (Villard Books, New the sort of thing we did for war purposes.” York, 1991).

______

Ludwig von Mises Institute Essays in Political Economy 3 ______philosopher Bernard Mandeville,6 of Keynes was not appreciated,10 but whose “Fable of the Bees” was Keynes’s philosophy helped justify a considered an example of how deficit massive welfare state. spending could restart an economy.7 Myriad additional programs followed This philosophy held that, by using over the years because of the initial fiscal and monetary policies, a triumph of the Social Security Act. government could inject inflation into One of FDR’s newspaper friends a weak economy and thereby work called the act “a monumental miracles. Keynes, for all his achievement,”11 even as he brilliance, was merely another complained that the benefit amounts member of this inflationist school were “miserably inadequate.”12 This that dated back centuries.8 And one new program helped bring about although Keynes seemed to have a fundamental change in American little direct influence when he met culture and government: The federal with FDR, he did influence many of government that pushed ahead with the president’s key economic Social Security took on many new advisers.9 The latter, in turn, helped powers and radically changed our change FDR’s economic thinking, so economy.13 Keynes’s thought became influential in the 1930s. This was the period in Most important of all, Social Security which America formally reversed its transformed American culture in historic individualist principles. One ways the authors of the original of the founding fathers of Social Social Security Act may not have Security has said that the contribution expected: The foundational social

6The General Theory of Employment, 10Madam Secretary: Frances Perkins, by Interest and Money, Vol. VII, from The George Martin, p. 346 (Houghton Mifflin, Collected Writings of John Maynard Boston, 1976). Keynes, p. 378 (St. Martin’s Press, Royal 11Half Way with Roosevelt, by Ernest K. Economic Society, London). Lindley, p. 218 (Viking Press, New York, 7Ibid. 1937). 8For more on this, see Ludwig von Mises, 12Ibid, p. 219. Human Ac tion, Fourth Revised Edition, p. 13Reviewing the achievements of FDR, 466, in which he discusses the inflationist Doris Kearns Goodwin writes: “No longer view of history: “A very popular doctrine would government be viewed as merely a maintains that progressive lowering of the bystander and an occasional referee, monetary unit’s purchasing power has intervening only in times of crisis. Instead, played a decisive role in historical the government would assume responsibility evolution.” (FEE, Irvington-on Hudson, for continued growth and fairness in the N.Y.,1966,). distribution of wealth.” No Ordinary Time; 9See The Keynesian Episode: A Franklin and Eleanor Roosevelt: The Home Reassessment, by W.H. Hutt, pp. 269-70 Front in World War II, p. 625 (Simon & (Liberty Press, Indianapolis, 1979). Schuster, New York, 1994).

______

Ludwig von Mises Institute Essays in Political Economy 4 ______insurance14 program, among other people in our society would vegetate; things, discouraged savings, they would do fewer things, write expanded the state’s reach into the fewer letters, and, most important, family, and redistributed income in work less. Some physicians call this ways no one imagined (quite often “the theory of disengagement.”16 from the working poor and the lower middle class to the upper middle The program was designed to foster class—the latter tend to have more senior inactivity by a clause that political clout as exercised through would allow recipients to earn only organizations such as the AARP). It what one Social Security advocate also created a huge unprecedented called “pin money.”17 To make more peacetime bureaucracy, a than pin money would mean a bureaucracy that frequently—and penalty to anyone receiving Social quietly—pushed for more expansion Security. This idea was added to the of the program under the guise of original bill by the labor unions, serving the people. Many of the which until the 1930s had been leaders of the program became highly suspicious of welfare state quietly political, despite their measures such as social insurance.18 ostensibly apolitical civil service FDR and his allies readily agreed to status.15 the penalty notion. We will see later that they had little expectation that The program had another profound the economy would fully recover; effect on American culture: It created the institution of mass retirement. 16 Social Security, along with other See Dare to Be 100, by Walter M. Bortz, III, p. 52 (Random House, New York, modern welfare state programs, 1997). encouraged the concept of golden 17Barbara Armstrong, executive director of years in which individuals would stop the Committee on Economic Security (CES) working. Some of the best and wisest that wrote the Social Security plan, said retirement would mean “that you’ve stopped working for pay.” See The History of 14I will discuss this term in a later section. Retirement: The Meaning and Functioning 15The best example is one of the of an American Institution, 1885-1978, by administrators of Social Security, Wilbur William Graebner, p. 185 (Yale University Cohen. With the Republicans back in power Press, New Haven, Conn., 1980). in 1953, the supposedly non-partisan Cohen 18“The American antistatist tradition,” write quietly “wrote speeches and supplied a pair of historians, “produced a union information” for the Democrats. Says a movement which in principle, though often friendly biographer: “It was not the first not in action, refused to look to the time that the non-partisan Social Security government to improve the position of the administration shaded into partisan politics.” government.” See It Didn’t Happen Here: See Mr. Social Security: The Life of Wilbur Why Socialism Failed in the United States, Cohen, by Edward Berkowitz, p. 41 by Gary Marks and Seymour Martin Lipset, (University Press of Kansas, Lawrence, p. 31 (W.W. Norton & Company, New 1995). York, 2000).

______

Ludwig von Mises Institute Essays in Political Economy 5 ______they believed work had to be As measured by unemployment and rationed. production data, America’s recovery from the Great Depression did not Social Security advocates convinced appear to begin until the buildup for tens of millions of Americans that World War II and the war itself. their golden years meant withdrawing That’s when FDR discovered his from the most challenging part of affinity for a military their lives. This would free up Keynesianism.21 (In truth, the data millions of jobs, an important are highly misleading. It wasn’t until consideration in the midst of the after the war that the economy began Great Depression. That’s because to recover22) FDR’s recovery policies, which included Social Security as a counter- FDR, credited as the first major cyclical device, did not restore a American politician to support a prosperous economy,19 as an FDR social security system, actually historian conceded: “The America campaigned in 1932 in favor of over which Roosevelt presided in limited government. He bitterly 1940 was in its eleventh year of criticized Herbert Hoover’s huge depression. No decline in American deficits and attempts to bolster failing history had been so deep, so lasting, businesses with federal help, some of so far reaching.”20 which mirrored the ideas of the New Deal.23 Still, on the campaign trail, FDR promised to roll back, not

19 By 1938, in the midst of a recession, it was 21Roosevelt was “deliberately planning to use clear to many of FDR’s advisers that the a great armament program as a means of New Deal was failing. One of his political spending money to create employment,” the advisers, Vice President John Nance Garner, journalist John T. Flynn wrote in 1939. See said, “I don’t think the Boss has any definite Prophets on the Right, by Ronald Radosh, p. programs to meet the business. I don’t think 207 (Simon & Schuster, New York, 1975). much of the spending program. You can’t Also, Thomas Greer, in What Roosevelt keep spending forever. Some day you have Thought: The Social and Political Ideas of to meet the bills.” See Jim Farley’s Story: Franklin Roosevelt, quotes FDR in 1937 as The Roosevelt Years, p. 138 (McGraw Hill, saying Americans don’t want to solve New York, 1948). Roosevelt also unemployment problems by a huge armament complained when Secretary of Commerce program, yet Greer concedes that FDR Dan Roper told him that the economy was resorted to such an arms buildup. (Michigan slipping into recession. “Dan, you’ve got to State University Press, East Lansing, 1958), stop issuing these Hooverish statements all p. 74. the time.” Ibid., p. 101. 22 20 “World War II and the Triumph of The historian is Doris Kearns Goodwin, Keynesianism,” by Robert Higgs, Freedom and her implication was that FDR had failed Daily, March 1995. to reverse the depression just as Hoover had. 23See FDR, Architect of an Era, by Rexford See No Ordinary Time, p. 42 (Simon & Tugwell, p. 71 (Macmillan, New York, Schuster, New York, 1994). 1967).

______

Ludwig von Mises Institute Essays in Political Economy 6 ______expand, the size of the federal measures by unemployment numbers government: “For three long years I and traditional economic indices.27 have been going up and down this They did not restore prosperity, as country preaching that government— advisers told FDR six years into the federal government, state and local— New Deal.28 costs too much. I shall not stop that preaching.”24 The Democratic Party Social Security was a key part of platform of 1932 called for a FDR’s economic thinking. It was a balanced budget, sound money, and a revolution that shifted the 25-percent reduction in federal responsibility for income spending. maintenance from the private to the public sector, from the family to the FDR gave no indication he was state, and from voluntary committed to a massive expansion of organizations to public bureaucracies. the federal government. Later, as we And it was a revolution carried out by will see, FDR said that circumstances elite groups of welfare workers, had changed. His supporters would Social Democrats, and others who argue that the Great Depression, and believed European democratic the popularity of the more radical socialism could be imported to the social insurance proposals such as United States step by step.29 They those advocated by Huey Long, Upton Sinclair, and Frances 27In 1937, after five years of the New Deal, Townsend,25 had led him to support another recession began. Two historians this “moderate” program called have written, “The resulting downturn began Social Security. in August 1937 and continued through the winter and spring of 1938. It was nothing short of catastrophic.” See FDR’s Fireside Yet even before he took office, FDR Chats, Russell D. Buhite and David W. was quietly committed to a social Levy, eds., p. 111 (Penguin Books, New 26 York, 1992). insurance program as part of a 28 program of countercyclical measures FDR conceded to Farley that there were problems, but he blamed a conspiracy he believed would cure the problems against him: “I know that the present of the business cycle. These situation is the result of a concerted effort by initiatives were failures if one big business and concentrated wealth to drive the market down and just to create a situation unfavorable to me.” See Jim 24The Roosevelt Myth, by John T. Flynn, p. Farley’s Story, p. 101. 37 (Devon-Adair Company, New York, 29“The vast expansion of public assistance 1961). functions and expenditures beginning in the 25Social Security: The First Half Century, 1930s was superimposed upon a long Gerald Nash, ed., pp. 35-36 (University of tradition of disdain totally incongruous with New Mexico Press, Albuquerque, 1988). the political and economic power assumed 26Social Security in the United States, by by the public welfare sector.” See The Paul Douglas, p. 15 (McGraw Hill, New Professional Altruist: The Emergence of York, 1936). Social Work as a Career, 1880-1930, by

______

Ludwig von Mises Institute Essays in Political Economy 7 ______believed in a “new liberalism” that was the centerpiece of a revolution was at odds with America’s that meant “big government, modern traditional Jeffersonian philosophy. government” was here to stay.32 Classical liberalism died in the When Social Security survived—and, United States in the 1930s through in its earlier years, it was unknown such programs as Social Security, just whether it would, and it required all as it had died in Britain some four the political, judicial, and legislative decades before. A new liberalism skills FDR and his allies could expanded the powers of the federal summon—Americans implicitly government. The old American accepted the most essential part of a individualist tradition was distrustful new social policy. Washington, not of distant central governments and individuals, not state or local the bureaucracies they spawned. governments, would now have great “Americans assumed that their power over individual citizens’ country was unique in assigning to retirement planning, unemployment private voluntary institutions a wide insurance, and welfare payments. range of responsibilities which in When FDR signed the Social other nations were relegated to Security Act, the United States, for governments or elite groups,” writes the first time in her history, would one historian.30 have “a significant, permanent social welfare bureaucracy.”33 Almost everyone, FDR critics and admirers alike, agree that Social FDR assured his social democratic Security was a watershed event in our allies that Social Security was just the history. It was indeed a “monumental beginning of an expanded role for the achievement,” even if it seemed federal government. But it wasn’t modest at the time. But FDR said of until toward the end of his life, in the the legislation that, if it were the only Economic Bill of Rights speech in bill passed in the 1935-36 1944 that so “thrilled” his congressional session, Congress supporters,34 that he was ready to 31 would have accomplished much. Social Security was so important to 32Frances Perkins said “modern those—such as FDR—who scorned government” was here to stay whe n she the individualist tradition because it saw the 1944 GOP platform, which accepted many of FDR’s welfare-state initiatives. The Republicans were in the Roy Lubove, p. 54 (Atheneum, New York, process of becoming “a me-too party.” See 1969). Frances Perkins: a Member of the 30See The Struggle for Social Security, 1900- Cabinet, by Bill Severin, p. 223 1935, by Roy Lubove, p. 5 (University of (Hawthorn Books, New York, 1976). Pittsburgh Press, Pittsburgh, 1986). 33Goodwin, p. 625. 31See The New Deal: A Documentary 34One of the CES’s publications contained a History, William E. Leuchtenburg, p. 80 recommendation that health insurance (Harper & Row, New York, 1968). should be included in the original Social

______

Ludwig von Mises Institute Essays in Political Economy 8 ______publicly abandon the campaign were signed into law by Republicans, promises of 1932 and the American though many of them were initially individualist tradition. opposed to Social Security.

Only four years after its creation, this That is why even many of those landmark program was already Socialists who scorned FDR, who expanding. The Social Security said he was a bumbling savior of administration had 12,000 employees capitalism, could still summon up and was growing. As soon as it was grudging praise for him. Socialism in place, there were calls for sister was quietly achieved over bureaucracies. American Socialists generations as part of a mixed were disappointed that more people economy that seemed, on the surface, were not covered in the 1935 act to be a traditional laissez-faire (such as servants and farm workers); American economy. that disability insurance wasn’t initially covered; that health Social Security, whether it was called insurance had not been included; and social insurance or government that initial payments were so small. pensions, was the first step on the road to the American welfare state. But many of those leftist critics, who How it finally happened in the United had at the time claimed it was too States, after decades of frustrating modest, later conceded that Social unsuccessful efforts by Social Security’s establishment opened the Democrats, professional bureaucrats, door for the government to do many and social workers, is a story of many other things.35 Almost all the ups and downs. In the end, we will measures left out of the original bill see that FDR went around Congress, were added within 30 years and, which was too unpredictable and proving the success of FDR’s whose review process might have strategy, many of the expansions foiled him. FDR found his own experts who he knew would give him

Security package, but FDR cut that part out. what he wanted, and then he unveiled See Madam Secretary, pp. 347-48. a complex Social Security proposal 35One politician who noticed the that he expected to be adopted whole. transformation was FDR’s fellow Democrat, Congress, generally intimidated by Al Smith. By the mid 1930s, he was the experts, went along with few complaining that the “Brain Trusters caught objections. the Socialists swimming and ran away with their clothes.” See Al Smith, Hero of the Cities, by Matthew and Hannah Josephson, But we are getting ahead of the story. p. 459 (Houghton Mifflin Company, Boston, Now it is time to examine why 1969). That’s a good comparison given that welfare state advocates had all but the American Socialist Party had called for a given up on the United States by the mandatory government pension system for several decades. late 1920s. Why did America seem to

______

Ludwig von Mises Institute Essays in Political Economy 9 ______have an exceptional character so Social Security has become the different from advanced democracies crown jewel of a welfare state, which in the British Empire and Western is why its defenders today are ardent Europe, which had begun to build in fighting privatization of any part of welfare states decades before the it. America has changed dramatically United States?36 from the pre-1935 era in which social insurance was condemned by many as an attempt to import German Section II— Socialism. Many of the same politicians who once criticized Social Social Security Before 1935: Security, either ended up praising it39 The Roadblocks to Social or kept their criticisms to Insurance in America themselves.40 This was FDR’s goal— that no succeeding politicians could 41 “The great Karl Marx had no ever undo his work. patience with the negative attitude of French socialists and anarchists to Today, those who would privatize or 42 the state.” even reform Social Security face a —I.M. Rubinow, prominent leader of American social insurance movement 39An example is Ronald Reagan, who had and often viewed as one of the fathers of been a critic of Social Security. Toward the Social Security, in his 1916 book on end of his presidential years, he said, “Social social insurance37 Security has proven to be one of the most successful and popular [federal] programs.” “Sooner or later a crash is See Social Security After 50: Successes and Failures, Edward Berkowitz, ed. coming…men will be thrown out of (Greenwood Press, New York, 1987). work…the vicious circle will get in 40Any presidential candidate who proposed full swing and the result will be a to tamper with Social Security was “a serious business depression.” candidate for a frontal lobotomy,” said Jack —Roger Babson, September 192938 Kemp during the 1988 campaign. From Social Insecurity, by Dorcas Hardy, p.16 (Villard Books, New York, 1991). 41“With those taxes in there, no damn 36 Bismarck, hoping to undercut the politician can ever scrap my social security socialists of Germany, began with a socia l program,” FDR said. See Schlesinger, p. insurance program in 1881. See Germany, 309. 1866-1945, by Gordon A. Craig, pp. 150-52 42The problem of the would-be privatizers is (Oxford University Press, New York, 1978). what they would do with the huge unfunded 37See Social Insurance, by I.M. Rubinow, p. liabilities of the system. It would cost 26 (Henry Holt & Company, New York, billions of dollars just for the transition to a 1916). private system. In the meantime, according 38Searching for Alpha: The Quest for to economist Milton Friedman and observers Exceptional Investment Performance, by such as Marshall Carter and William Ben Warwick, p. 62 (John Wiley & Sons, Shipman, the unfunded liabilities of the New York, 2,000). system are about $7 trillion. For more see

______

Ludwig von Mises Institute Essays in Political Economy 10 ______formidable task. It is difficult for of socialism as a way of outflanking many Americans to remember a time the Social Democrats.44 when the government didn’t run passenger railroads; when America More important, American politicians lacked a huge peacetime military would be consciously or establishment; when she had a unconsciously encouraged by another noninterventionist foreign policy; or reason cited by Bismarck in when there were any substantial arrogating the ideas of socialists: It questions about the utility of Social would mean political success if it Security. Nevertheless, the welfare were sold as something for nothing or state took much longer to take hold in something for very little. “Every the United States than in Europe, statesman who takes up these ideas where socialism had a stronger will come to the front,”45 according following and a longer tradition. to Bismarck.

By the early 1930s, Germany had a Britain had a government pension Social Security program for nearly 50 scheme since before World War I, years. As early as 1871, 10 years when the Liberal/Labour government before he would propose his first of Herbert Henry Asquith in 191146 social insurance plan, Bismarck said, laid the foundations of a welfare state “It is time for us to realize what parts that would be instantiated by the of socialist demands are reasonable Labor and Conservative parties over and right, and to what extent these the next two generations. It is reasonable elements can be significant that the British Liberals incorporated into the extant State took these steps as their party was system.”43 American social insurance adopting socialist ideas. Only a few advocates would later adopt many of years before this, in the mid-1890s, these ideas. Germany under Bismarck the Liberal party leader, Sir Lewis had passed a social security plan. Harcourt, said of this transformation, Bismarck was ready for some forms “We’re all socialists now.”47 my “Insecure Promise” in the November 1999 issue of Financial Planning magazine. Also, a former Social Security official likes to brag that the program is so entrenched 44See Bismarck , by Alan Palmer, pp. 206- that it would be impossible to destroy. 207 and 250 (Charles Scribner’s Sons, New “Where does an 800-pound gorilla sit? York, 1976). Answer: anywhere it wants to. And where 45Ibid. does the most popular government program 46See The Strange Death of Liberal England, sit? You got it.” From Andy Landis’s Social 1910-1914, by George Dangerfield, pp. 7-30 Security, the Inside Story, p. 3 (Crisp (Capricorn Books, New York, 1961). Publications, Menlo Park, Calif., 1997). 47British History in the 19th Century and 43 See Bismarck , by Emil Ludwig, p. 534 After, 1782-1939, by G.M. Trevelyan, p. 402 (Blue Ribbon Books, New York, 1934). (Harper & Row, New York, 1966).

______

Ludwig von Mises Institute Essays in Political Economy 11 ______

Many European countries had had accomplished very little adopted social security schemes by politically. But they won over many the outbreak of World War I. But in elites to the idea of social insurance. America, there was a tradition of “rugged individualism” that resisted What is “social insurance”? A term most forms of collectivism. That rarely seen today, it is a name for a spirit had to be weakened by an series of government welfare economic calamity. The “real roots”48 programs that established the modern of the Social Security Act were in the welfare state in Europe and in the Great Depression of 1929. That was United States; the term is an attempt the sentiment of Francis Perkins, U.S. to use the terminology of the private secretary of labor, a key FDR adviser sector. “Social insurance systems,” as well as one of the founders of the says a longtime Social Security American welfare state; but this bureaucrat, “involve definite benefit sentiment is only partly correct; amounts and qualification conditions social welfare advocates had been prescribed by law, with the cost being working for decades to institute an met by contributions from the American welfare state. The Great covered individual and/or the Depression gave them a chance to employer, and sometimes in part win politically. By the early 1930s, from general government funds.” after almost a quarter century of Social insurance programs, he adds, efforts to build an American welfare are administered by government and state through a catchall package of are compulsory.49 social insurance programs, advocates One glossary defines social insurance 48This phrase is from a 1962 talk given by as “a device for the pooling of risks Francis Perkins called “The Roots of Social by a transfer to an organization, Security,” which can be found at the Social usually governmental, that is required Security Administration’s web site by law to provide pecuniary or (www.ssa.gov/history/perkins5.html). She service benefits on behalf of covered said, “I’ve always said, and I still think we 50 have to admit, that no matter how much fine persons.” Coverage is compulsory reasoning there was about the old-age by law. insurance system and the unemployment insurance prospects; no matter how many 49This description of social insurance comes people were studying it, or how many from Robert J. Myers, the second actuary of committees had ideas on the subject, or how the Social Security system and one of the many college professors had written theses program’s most important leaders. See his on the subject—and there were an awful lot comprehensive book, Social Security, Fourth of them—the real roots of the Social Edition, p. 7 (Pension Research Council, Security Act were in the great depression of Philadelphia, 1993). 1929. Nothing else would have bumped the 50The second definition is from “Glossary of American people into a social security Insurance Terms,” by Robert W. Osler and system except something so shocking, so John S. Bickley, eds. (Insurers Press Inc., terrifying, as that depression.” Santa Monica, 1972). However, there is still

______

Ludwig von Mises Institute Essays in Political Economy 12 ______

The coercive nature of these probably our only chance in 25 years programs had been perhaps the to get a bill like this.”51 biggest stumbling block in the adoption of social insurance in America was trying to survive the America by the early 1930s. Perkins Great Depression. There was a understood that the protracted continuing economic slump under a economic disasters of the late 1920s Republican administration, which and 1930s—the stock market crash was followed by the absence of a and the failures of both the Hoover recovery under succeeding and FDR administrations to restore Democratic administrations. These the economy—were a godsend for disastrous economic times persisted those who wanted to reverse in America until the nation entered America’s individualist traditions. World War II. All these factors— This would be an opportunity to along with some masterful political reverse the long record of failure of strategies used by FDR—were why American social insurance advocates. Social Security finally became a Perkins realized this unique reality after four decades of struggle. opportunity had to be exploited quickly. During the debate in To its proponents, it was more than a Congress in 1935 over the initial single new program; it was part of a Social Security law she said, “it is government economic security package. (The Social Security bill, we will see later, was originally called the economic security bill. Only toward the end of the bill’s legislative process was it called the some confusion on the nature of Social Social Security law.) This economic Security programs. See Barron’s Business security package was sold in part to Guide Dictionary of Insurance Terms, Americans the way Alan Greenspan’s Second Edition, by Harvey W. Rubin monetary policies have been sold to (Barron’s, New York, 1991). Here he defines social insurance as a “compulsory Americans since the late 1980s. Like employee benefit plan under which the monetary policies of the 1980s participants are entitled to a series of and 1990s, Social Security was benefits as a matter of right. The plan is designed to be an economic cure-all. administered by a federal or state Monetary policy was supposed to be government agency and has as its objective an inspired method of practically the provision of a minimum standard of living for those in lower and middle wage abolishing the business cycle, of groups.” But, as we will see, Section 1104 guaranteeing that recessions would of the original Social Security Act in 1935 and subsequent court decisions have held that the participants have no “rights” and 51From Madame Secretary, by George there are no statutory obligations to pay Martin, p. 341 (Houghton Mifflin Company, beneficiaries anything. Boston, 1976).

______

Ludwig von Mises Institute Essays in Political Economy 13 ______never occur again; and Social that would be superimposed on an Security was supposed to ensure America that had generally spurned perpetual prosperity, or at least the social insurance. absence of economic recessions, while decreasing welfare costs. The United States of the late 19th and early 20th centuries was not Social Security, its supporters hospitable to collectivist thinking, but claimed, was the cornerstone of an rather a nation that embraced the self- inspired fiscal policy. The policy help philosophies of Horatio Alger would revive the economy and keep and Samuel Smiles. It was a place it out of trouble.52 where the social Darwinism of William Graham Sumner and the “Thrift Becomes a Mockery” and individualist philosophy of Herbert “an Economic Falsehood” Spencer were given respectful hearings; where the limited The welfare-state movement began in government philosophies of Thomas the United States with the founding Jefferson and John Taylor of of the first social insurance Caroline 55 were in the political committee of the American mainstream. Association for Labor Legislation (AALL) in 1912.53 Some might say it In 1910, Columbia University began earlier than that. The AALL, economist Henry Seager, in his book, which was established in the United Social Insurance, A Program of Social States in 1906, was an offshoot of a Reform, conceded that Americans were parent German organization and a fierce individualists. Seager, whose European movement going back to at book is cited by the Social Security least the 1880s. Leaders of the Administration as one of the earliest American group “saw the confused, American texts promoting social illogical state of mind of most insurance, jeered Americans’ Americans on the subject of relief.”54 “absorption in individual interests and Many liberal or socialist academics pushed for a social insurance model 55See Tyranny Unmasked, by John Taylor; F. Thornton Miller, ed. (Liberty Fund, 52For Theodore Roosevelt’s support of social Indianapolis, Ind., 1992). There are many insurance, see Progressivism in America, by examples in this book of Taylor’s Arthur A. Ekirch, Jr., pp. 164-66 (New Jeffersonian philosophy of limited Viewpoints, New York, 1974). government and his suspicion of 53See Social Security and Its Enemies: The government’s tendency to arrogate power. Case for America’s Most Efficient Insurance Writes Miller, “He (Taylor) took a strong Program, by Max J. Skidmore, p. 29 stand against government expansion and (Westview Press, Boulder, Colo., 1999). corruption, but he was likewise hostile to 54Typical was Social Insurance: A Program attempts to reform society through the use of of Social Reform, by Henry Rogers Seager government, from extending the suffrage to (MacMilla n Company, New York, 1921). the abolition of slavery” (pp. xvii-xviii).

______

Ludwig von Mises Institute Essays in Political Economy 14 ______our reluctance to undertake things in Old Age Pensions in a report from combination with our neighbors or March 1919.59 through the government.” 56 Another This belief in the futility of thrift and labor historian opined that America’s self-help will recur as we meet some individualism included pursuing of the other pioneers of the American personal independence “to the point of social insurance movement. The perversity. Americans did not like to movement traces its roots to be rounded up, even for their own European antecedents, to nations with good.”57 aristocracies dating to the era of feudalism—nations in which elites The only hope for tens of millions of were expected to protect average Americans, said Seager, was through people. One British socialist who the public sector. He added that it helped build her nation’s pension was ridiculous to think most wage schemes and welfare state at the turn earners could save for their old age: of the 20th century wrote that her “For every wage earner to attempt to welfare schemes were taken “straight save by himself to provide for his old out of the nobler aspect of the age is needlessly costly. The medieval manner.”60 In the modern intelligent course is for him to era, the substitute for the feudal combine with other wage earners to aristocrats was strong central accumulate a common fund out of governments. which old-age annuities may be paid to those who live long enough to It is this theme of stronger central need them.”58 governments—governments that were no longer to be feared but that For those who were poor, the idea of were, by the 1930s, the only effective improving themselves through thrift institutions that could protect the was a mirage, according to social average person,61 according to insurance advocates. “Thrift is a American Liberals—that would be desirable habit for those who receive endorsed by many Social Democrats a wage that makes saving a possibility, but thrift becomes a 59From the Pennsylvania Commission on mockery in the homes of the poor, Old Age Pensions: Social Insurance, the and saving an economic falsehood,” Handbook Series, compiled by Julia E. said the Pennsylvania Commission on Johnsen, p. 245 (H.W. Wilson Company, Highbridge, Bronx, New York, 1922). 60 I refer to Beatrice Webb, a key adviser to the Asquith government that laid the 56See Social Security web page: foundations of the British welfare state www.ssa.gov/history/seager.html. before World War I. See her Our 57 From Samuel Gompers and Organized Partnership , p. 385 (London, 1985). Labor in America, by Harold Livesay, p. 3 61See The Age of Reform, by Richard (Little, Brown & Company, Boston, 1978). Hofstadter, p. 307 (Knopf, New York, 58 Ibid. 1981).

______

Ludwig von Mises Institute Essays in Political Economy 15 ______and Liberals in the midst of the Great time of Ely’s comments, it was the Depression. ideas of the American welfare-state movement that were starting to gain But even before the triumph of the some strength as the Progressive Era American welfare state in 1935, there began in America. was a push by a small number of social insurance advocates in the The New Deal’s Antecedents United States. They wanted a series of welfare programs, and they called Theodore Roosevelt’s New for leaders who would duplicate the Nationalism—his party presidential work of a Bismarck or of the British platform in 1912—called for welfare- Liberal/Socialist governments of the state measures as well as a more early 20th century.62 aggressive American foreign policy that would abandon its traditional An American economist of the time, noninterventionism and antimilitarism Richard Ely, supported many of the to become a world power. Theodore ideas of German socialists. Ely Roosevelt, who despised Jefferson, condemned laissez-faire philosophies endorsed social insurance just two years and criticized the traditional after Seager’s book was published.65 American suspicion of centralized The Bull Moose/ Progressive Party government.63 “The state was,” Ely platform of 1912 also included, “We wrote, “an educational and ethical pledge ourselves to work unceasingly in agency whose positive aim is an state and nation for: The protection of indispensable condition of human home life against the hazards of progress.”64 This kind of philosophy sickness, irregular employment and old was necessary for social insurance to age through the adoption of a system of succeed in America. At about the social insurance adapted to American use.”66

62 Typical was the comment of I.M. Many American socialists also Rubinow, who wrote of the American social insurance movement in the 1930s: strongly endorsed social insurance as “Bismarck, Lloyd George, Millerand and a halfway measure to their ultimate who else? Who is to be the leader?” See his goal. They had social insurance in The Quest for Security , p. 606 (Henry Holt their party platform since 1900. It & Company, New York, 1934). 63 was seen as part of a strategy of For more on Ely, See Murray N. abolishing capitalism, or at least Rothbard’s article, “Richard T. Ely: Paladin of the Welfare-Warfare State” in the Spring adopting the main elements of a 2002 issue of The Independent Review: A democratic socialism. Journal of Political Economy. 64The Ely comment is from The Dictionary of the History of Ideas, Philip Wiener, ed., p. 65From Progressivism in America, by Arthur 512 (Charles Scribner’s Sons, New York, A. Ekirch, Jr., pp. 164-66. 1973). 66Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 16 ______

were suspicious of the central “Modern socialists,” wrote socialist government caring for their members, leader Morris Hillquit in 1912, “expect the legislation died with that session. the realization of their program not as a Still, many of the prominent leaders result of a sudden revolt of the masses of the New Deal came out of this era driven to desperation by suffering and and its movement for social insurance misery, but as the outcome of a process programs at the federal level. of gradual, planned reforms to be achieved through concerted, intelligent Minor victories were won when some and vigorous struggles, political and states adopted voluntary or economic, conducted by a well- mandatory social insurance programs organized and powerful working class.” in the first 20 years of the 20th 67 century, such as Wisconsin’s unemployment insurance plan. But Perkins and Hillquit obviously didn’t no one, by the early 1930s, had agree on how social insurance would passed legislation to move the federal become a reality. One saw a gradual government into offering poverty move to social insurance, while the relief for the elderly poor, or other saw it as part of a response to providing pensions for working an economic crisis. Still, both agreed Americans.69 The absence of a central that social insurance was a necessity government program, one that could for America. Both shared contempt be used to impose standards on the for America’s individualist traditions. rest of the nation, was a frustration for social insurance advocates. They American Social Insurance often bemoaned the huge role of Prior to 1935 private voluntary agencies prior to the Social Security debate. They By 1916, Socialist Congressman knew they were fighting a tradition of Meyer London proposed social private help and self-help in insurance legislation in Congress, America.70 68 which held hearings on the bill. Owing to the opposition of members 69See Carolyn Weaver’s “Birth of an of Congress and labor leaders who Entitlement: Learning from the Origins of Social Security,” Reason Online. www.reason.com/9605/Fe.WEAVERsocials 67Social Insurance, the Handbook Series, pp. ec.html. 35-36. 70Writes one historian, in analyzing the 68See The Struggle for Social Security, by changes wrought by the enactment of Social Roy Lubove, p. 16 (University of Pittsburgh Security and the beginning of an American Press, Pittsburgh, Pa., 1986). See also Isaac welfare state: “The vast expansion of public M. Rubinow’s The Quest for Security, p. assistance functions and expenditures 541 (Henry Holt & Company, New York, beginning in the 1930s was superimposed 1934) for the story of Socialist Congressman upon a long tradition of disdain totally Meyer London’s social insurance bill. incongruous with the political and economic

______

Ludwig von Mises Institute Essays in Political Economy 17 ______

Yet, just a few years before the New Harry Hopkins was FDR’s close Deal, in the late 1920s, the victory of adviser and one of the more an American welfare state was not important players in the drama of assured. Few of these social 1935. He had a career before World insurance ideas had become law. War I as a New York City social And, just before the Great worker. He wanted to give charity Depression, social insurance work in the United States a new advocates—those who wanted the focus. One of his colleagues at the federal government to provide a wide time characterized him as “a strong range of mandated welfare services— advocate of state assistance as against had become discouraged after a private relief system.”71 decades of seemingly futile efforts.74

Along with Perkins, Hopkins was one Extended bad economic times were of the members of a key committee needed to transform American that helped initiate social insurance in society. A year or two of recession or the United States, as we will see. depression followed by a quick Hopkins laid the groundwork for recovery hadn’t presented the social several other social welfare programs insurance cause with good in the following few decades, as well opportunities to triumph. Panics, as a new philosophy of liberalism72 depressions, even the temporary war that borrowed some of the principles socialism of 1917-1918, didn’t turn of socialism. Hopkins said that Social Americans away from their belief in Security and the New Deal finished limited government. Republicans the agenda of the Progressive Era.73 were elected and reelected in the 1920s because they cut taxes, closed down wartime government bureaucracies, and called for a return to “normalcy.” Americans, in this era, power assumed by the public welfare still wanted government to be small.75 sector.” See The Professional Altruist: The Emergence of Social Work as a Career, by Roy Lubove, p. 54 (New York, Atheneum, 1969). 74Writes Abraham Epstein: “The 1920s saw 71From Harry Hopkins: Sudden Hero, Brash the leadership of the movement was silenced Reformer, by June Hopkins, p. 72 (St. and interest waned.” See The Crisis in Martin’s Press, New York, 1999). Social Security; Economic and Political 72 For more on how American liberalism Origins, by Carolyn Weaver, p. 56 (Duke was transformed, see The History of Press Policy Studies, Durham, N.C., 1982). Economic Analysis, by Joseph Schumpeter, 75The U.S. devoted 5.5 percent of GNP to p. 394 (Oxford University Press, New York, public spending in 1920, while Great Britain 1954). and France were spending about 20 to 25 73Hopkins said, “The initiatives of the percent of GNP on public spending. See A Progressive Era became the reflexes of the History of Taxation and Spending in the New Deal.” Ibid., p. 3. Western World , by Carolyn Webber and

______

Ludwig von Mises Institute Essays in Political Economy 18 ______

Americans to be part of it. Americans consistently rejected “Compulsion is repugnant to social insurance ideas once recoveries freedom. The privilege of [living] in had come. A strong economy was the freedom so long as the rights of best remedy for hard times. And, others are not damaged is a cherished even in hard times, voluntary American tradition.”77 Resistance to agencies and family ties were coercion, to a centralized government sufficient to weather economic imposing its solutions to social storms. America, perhaps because of problems, was still a factor even in her frontiers, perhaps because her the debates of 1935 over the first people were staunch individualists, Social Security law.78 “The prime was exceptional. The nation had reason why social insurance fared so neither feudalism nor huge central badly in the early part of the 20th governments dispensing large social century was our cherished ideal of welfare benefits in her history. rugged individualism.”79 America was different. Seager also, in his historic book, American Particularism: “A noted that “individualism” was a Cherished American Tradition” basic American trait: “Thus, the phrase, social reform, which, in other Prior to 1935, social insurance for countries, suggests comprehensive Americans was not a government plans of state action, is still usually responsibility. It was entirely associated in the United States with private. One got help through the the welfare departments of private community, fraternal groups, and corporations, privately endowed above all, the family. As one schools of philanthropy, or such historian wrote: “In the past, splendid examples of private families negotiated the exchange of beneficence as the Russell Sage needed resources within the Foundation.”80 Seager also bemoaned household. Decisions about medical the lack of a major political party in care, work force participation and the United States that was committed schooling demanded sacrifices from to social insurance programs: related family members.”76 77Social Security in America, by William Another objection to social insurance Lloyd Mitchell, p. 13 (Robert B. Luce, Washington, D.C., 1964). was that government required 78 “Americans assumed their country was unique in assigning to private, voluntary Aaron Wildavsky, p. 451 (Simon & institutions a wide range of responsibilities Schuster, New York, 1986). which in other nations were relegated to 76See Old Age & the Search for Security: An governments or elite groups.” See Lubove, p. American Social History, by Carol Haber 5. and Brian Grattan, pp. 183-84 (Indiana 79Mitchell, p. 6. University Press, Bloomington, 1994). 80Seager, pp. 1-2.

______

Ludwig von Mises Institute Essays in Political Economy 19 ______socialism “numbers fewer converts asked, where would it stop? relatively to the population in the Besides, what guarantee was there United States than in any other that the government could attack country of the Western World.”81 A social or economic problems any cause of this individualism, which more effectively than private amazed Seager and aggravated agencies? “Whatever the reasons others, was a belief in limited given, no more sound basis exists government, a classical liberal for the government to write philosophy regarding all insurance than to bake bread and governments—especially centralized furnish it to the consumer at cost. ones.82 The wheat fields of the United States can furnish as sound an Unless governments were bound to argument for government ownership carefully defined limits, they would as the insurance business. Bread is inevitably become so big they likely a necessity to the people as would dominate every aspect of life, insurance,” said U.S. Senator American political philosophers Lawrence Y. Sherman of Illinois, as warned.83 Social insurance, critics quoted by Fred L. Gray, president of said, would lead to an overextension the National Council of Insurance of the government because there Federations.84 was no authority for it in the Constitution. And, once a social For Americans to lose their aversion insurance program began, critics to socialism would take some earthshaking event or series of events 81 Ibid. that could be blamed on the private 82 Regarding Jefferson’s election of 1800, sector. And even after such a “They had denounced the funded debt as a circumstance, it would require a means of creating a money power; they did not repudiate any part of it, but they strategy that disguised the socialist paid it off. They had objected to the excise nature of social insurance solutions tax, especially on whiskey, and they for a Social Security program to quickly abolished it amid the general become law, as even in the midst of rejoicing of the backcountry farmers. They the Great Depression socialism still had protested against the high cost of the was not popular in America. federal establishment and they reduced expenses.” From The Rise of American Civilization, by Charles and Mary Beard, Main Street and Babbitts vol. I, p. 383-84 (MacMillan, New York, 1961). Before the Great Depression of 1929, 83 Said Thomas Jefferson: “I own I am economic disasters happened often in not a friend to a very energetic American history. There was a government. It is always oppressive.” See American Sphinx: The Character of Thomas Jefferson, by Joseph J. Ellis, p. 84Social Insurance, the Handbook Series, p. 122 (Vintage Books, New York, 1996). 27.

______

Ludwig von Mises Institute Essays in Political Economy 20 ______depression in the 1890s. Woodrow Social Democrats in the 1920s were Wilson departed the presidency in frustrated with the lack of an 1921 with the nation in the midst of American welfare state. More an economic slump. But these important, they wondered why was economic problems usually resulted there no significant American in no drastic changes in American socialism in this period or even into economic institutions, with the the early 1930s. Large socialist exception of the panic of 1907. The parties, which won posts in European latter eventually led to the recreation governments, had been a strong of an American central bank in factor in building social insurance 1913,85 an institution Americans had institutions in other countries. rejected more than a half century before. Social insurance advocates, after at least two decades of effort in the Without central bank direction or United States by the late 1920s, were federal intervention through fiscal disheartened; given the buoyant policies, America’s economy had economy, it appeared that Babbitt, always recovered. America in the Main Street, and the American 1920s retained much of its classical traditions of individualism and liberal/limited government model. voluntarism would be forever That meant private-sector solutions, triumphant. The Lost Generation including voluntary institutions, were ridiculed America’s supposed the preferred way of attacking social backwardness. The sage of and economic problems. A reliance Baltimore, H.L. Mencken, delighted on a strong private economy, along in ridiculing the American yahoo. with family and private help, had Nevertheless, a distinct individualist been the traditional social welfare American tradition was turning its program in America. back on the collectivism of most nations of Western Europe in the An example was the depression of 1920s, where socialist governments 1920-21. A strong dose of tax cuts, a or at least socialist participation had balanced budget, no new major become common. federal programs, and allowing bad investments in the private sector to be Defenders of American individualist liquidated—the traditional methods traditions argued that there was of laissez-faire advocates throughout something alien about social most of American history—restored a insurance. It reminded them of growing economy. Many American Bismarck and German socialist ideas.86 Some of the supporters of

85See Issues in Money and Banking, by George Macesich, p. 49 (Praeger, Westport, 86Writes one historian: “The fact that a Conn., 2000). number of American economists, and other

______

Ludwig von Mises Institute Essays in Political Economy 21 ______government pension and welfare bureaucrats: Arthur Altmeyer, Wilbur schemes had studied in Germany;87 Cohen, and Edwin Witte. Another they were impressed with German characteristic of this group was that socialist ideas, though most said they they often wrote or spoke favorably were not socialists. But clearly, social of what had been accomplished by insurance advocates were subscribing Bismarck’s socialist policies; they to socialist ideas that had been approved also of socialists Beatrice learned from others by Lloyd George, and Sidney Webb in Britain under the Bismarck, or Theodore Roosevelt,88 pre-World War I Liberal Imperialist whose New Nationalism program government of Herbert Asquith, forced Woodrow Wilson to move to which laid the foundations of the the left to win the 1912 presidential British welfare state.91 race.89 Often, American social insurance “Never Fell Under the Sway advocates could be described as of Laissez-Faire” socialist.92 Others such as George Soule and Stuart Chase, two liberal Most leaders of the social insurance economists, as well as philosopher movement were people of the left John Dewey, were sympathetic to who disliked businessmen and social insurance schemes because admired socialist ideas. These they believed they could be part of a included Seager,90 physician I. M. national planning movement that Rubinow, and social scientist would use many of the techniques of Abraham Epstein, Rubinow’s student war socialism used by the Wilson and the research director for the administration’s War Industries Pennsylvania Old Age Pension Board during World War I.93 Commission. This intellectual elite in turn greatly influenced the first I. M. Rubinow, a physician-turned- generation of Social Security social insurance advocate, was intellectuals, were trained in German 91See The Liberals in Power, 1905-1914, by universities or influenced by German social Colin Cross (Barrie & Rockcliff, London, theory enabled social insurance to gain a 1963). foothold in the United States.” See The 92For more on Chase and other liberals who Struggle for Social Security, 1900-1935, by were drifting toward socialism in the 1930s, Roy Lubove, p. 7 (University of Pittsburgh see The Failure of Independent Liberalism, Press, Pittsburgh, 1986). 1930-1941, by R. Alan Lawson, p. 82 (G.P. 87Progressivism in America, by Arthur A. Putnam’s Sons, New York, 1971). Ekirch, p. 165 (New Viewpoints, New York, 93For more on the government’s control of 1975). the economy during World War I, see The 88Ibid. Uneasy State: The United States from 1915 89Ibid. to 1945, Barry D. Karl, pp. 42-46 90For more on Seager, see part II of this (University of Chicago Press, Chicago, series. 1983).

______

Ludwig von Mises Institute Essays in Political Economy 22 ______particularly influential. His books laissez-faire.”98 As stated by Wilbur praise socialists and show contempt Cohen, a longtime Social Security for business. He was effective in bureaucrat who was influential in reversing America’s traditional building and expanding the American suspicion of central governments. welfare state: “I.M. Rubinow was one Appointed as a consultant to the of the giants in the field of social Committee on economic security, insurance in the pioneering days of which established the first Social social reform in the United States.”99 Security law, Rubinow insisted that social insurance must be part of the Still, there remained difficult New Deal. He called on FDR not to obstacles for the social reformers. forget those “left by the wayside of Most Americans didn’t want modern civilization.”94 socialism even in the midst of the worst economic disaster in the For more than two decades, Rubinow nation’s history. The reformers’ had a profound effect on the decision cause was hurt further by association makers who eventually won the when American critics of social debate over social insurance insurance charged that its supporters programs in America. Theodore had stolen the ideas of the German Roosevelt included social insurance Socialists.100 And there were in the 1912 Progressive Party additional obstacles many wouldn’t platform because of Rubinow.95 FDR admired Rubinow and was reading his work as the first Social Security 98 bill was written. Ibid. Also, throughout his book, The Quest for Security, Rubinow criticizes the American philosophy of limited Rubinow’s classic books on social government, calling it “a nihilistic attitude to insurance96 were cited often during government” (p. 604). He rails against the 1935 debate. He wrote admiringly private insurance (p. 542) and a capitalist of Karl Marx,97 and praised German economy that he claims forces people to “buy, buy, buy” (p. 35). He calls for an philosophers and economists because American Bismarck, Lloyd George, or they “never fell under the sway of Millerand (p. 606)—European leaders who were either socialists or wanted to arrogate 94From The Reluctant Welfare State, by many of the programs of socialists. Bruce S. Jansson, p. 170 99Cohen’s comments can be found at the (Wadsworth/Thomson Learning, Belmont, Social Security web page, Calif., 2001). www.ssa.gov/history/rubinow. 95Ekirch, Ibid. 100For a discussion of German social 96See Social Insurance, by Isaac M. insurance programs from the Kaisers to Rubinow (Henry Holt & Company, New Hitler to the German Federal Republic, see York, 1916). See also Rubinow’s The Quest Social Security: The First Half Century, for Security (Henry Holt & Company, New Gerald Nash, Noel H. Pugach, and Richard York, 1934). F. Tomasson, eds., pp. 181-97 (University of 97See Rubinow’s Social Insurance, p. 15. New Mexico Press, Albuquerque, 1988).

______

Ludwig von Mises Institute Essays in Political Economy 23 ______have expected—from organized average working man must avoid the labor. clutches of Socialists, intellectuals, and their cohorts.104 American labor, “Basically Undemocratic:” interestingly, was either hostile or A Labor Leader’s Opposition indifferent to social insurance programs almost until 1935 when Among the opposition to social Social Security was finally adopted. insurance in America in the late 19th and early 20th centuries were labor In a 1917 address to the American leaders such as Samuel Gompers,101 Federation of Labor, Gompers who called for government initiatives warned that social insurance was including worker protections, but “basically undemocratic”105 because, opposed a mandatory social insurance in almost all nations where it was on program. Social insurance was an the books, it was compulsory; and idea that stressed an insurance that because American social insurance was run, not for profit, but for the advocates believed theirs would also benefit of society; Gompers was wary have to be compulsory. “As I live,” of that idea. To him, it smacked of Gompers said in testifying before German socialism. “Compulsory Congress, “upon the honor of man…I social insurance,” he complained, “is would rather help…a revolution in essence undemocratic.”102 against compulsory insurance and Foreshadowing the objections of regulation than submit.”106 those who would later complain that the government would mismanage He also warned of another danger— the assets of a program, Gompers that social insurance would initiate a wanted workers to depend on kind of economic warfare in themselves, private institutions, their America. The battle would not be unions—anything but the between rich and poor, but between government. Gompers’ opposition to those who were paying the taxes for social insurance owed in part to the the system and those who were American individualist tradition,103 as collecting from it.107 “The first step in he revealed when he said that the establishing social insurance is to

101See The Crisis in Social Security: Economic and Political Origins by Carolyn 104The Struggle for Social Security , p. 16. Weaver, p. 28 (Duke University Press, See also Gompers’s speech: “American Durham, N.C., 1982). Federation of Labor, National Civic 102Ibid. Federation. Annual Meeting Addresses,” pp. 103“Voluntarism, the right of citizens to 5-10, New York, January 22, 1917. define and pursue their goals, resulted in 105Ibid., Gompers. limited government and maximum liberty.” 106Samuel Gompers and Organized Labor in See The Struggle for Social Security, 1900- America, by Harold Livesay, p. 135 (Little, 1935, by Roy Lubove, p. 5 (University of Brown & Company, Boston, 1978). Pittsburgh Press, Pittsburgh, 1986). 107Ibid, Gompers.

______

Ludwig von Mises Institute Essays in Political Economy 24 ______divide people into two groups—those independence and spirit and virility eligible for benefits, and those when compulsory insurance is considered capable to care for provided for so large a number of themselves,”108 Gompers said. citizens of the state.”110 He also believed that social insurance would That was a remarkable prediction, feed a movement for leviathan considering that young people in the government: “Government power later part of the 20th century have grows by that upon which it feeds. come to worry about skyrocketing Give an agency any political power payroll tax rates. Their complaint was and it at once tries to reach out after that senior groups, in pushing for more…. Its effectiveness depends greater Social Security benefits, were upon increasing power.”111 Again he at fault.109 Prominent business was prophetic, as Social Security magazines in the late 20th century bureaucrats, in the election of 1936 predicted a coming political war and after the election of 1952, between the young and the old. consistently worked behind the Gompers had foreseen this 80 years scenes with friendly politicians to before. protect or expand the program.112

Gompers contended that social Social insurance, Gompers said at the insurance would also undermine the 1916 congressional hearings on the character of workers: “There must social insurance bill, would necessarily be a weakening of discourage the virtues of thrift and self-reliance, values that were

108 scorned by Rubinow. Gompers called See also, Social Insurance, the Handbook Series, compiled by Julia E. Johnson, pp. for “the inauguration of a revolution 113 202-205 (H.W. Wilson Company, against compulsory insurance.” Highbridge, Bronx, N.Y., 1922). 109Gompers’s fear of the clash of interests between those paying the taxes and those 110Ibid. receiving the benefits has been confirmed. 111Ibid. See also Milton Friedman’s Citing a congressional study, former Senate comment: “It is far easier to introduce a Finance Committee staffer Carolyn Weaver government program than get rid of it.” noted the intergenerational injustice that has From Amity Shlaes’s book, The Greedy been spawned by the actuarial problems of Hand: How Taxes Drive Americans Crazy the system. “The expected payback period and Wh at to Do About It, p. 6 (Random for today’s older workers, those retiring in House, New York, 1999). 2000, is 12.9 years, rising to 18.3 years for 112Mr. Social Security: The Life of Wilbur J. workers retiring in 2030.” The same study Cohen, by Edward D. Berkowitz, pp. 103- notes that the payback period for retiring 105 (University Press of Kansas, Lawrence, workers in 1960 was “1.1 years.” See 1995). Weaver’s article on Social Security in The 113See Carolyn Weaver’s The Crisis in Fortune Encyclopedia of Economics, David Social Security: Economic and Political R. Henderson, ed., p. 299 (Warner Books, Origins, p. 40 (Duke Press Policy Studies, New York, 1993). Durham, N.C., 1982).

______

Ludwig von Mises Institute Essays in Political Economy 25 ______

Rubinow, ridiculing Gompers’ insurance in 1935.115 FDR was happy comments in one of his books in the to win a nascent Social Security 1930s, asked, “But why this fear of program, even one that many social compulsion...It is a little naïve and insurance advocates saw as one might say almost juvenile, as if conservative and relatively modest. our industry were afraid to be He told his somewhat disappointed confronted with some control and social insurance supporters to forget some responsibility.”114 about compulsory government health insurance for the time being, even as Gompers, in the 1917 address, told he assured advisers that he expected workers to depend on themselves; to America to someday adopt a full- look to their unions or fraternal scale welfare state.116 The seemingly groups for essential welfare services, modest Social Security has fulfilled but not to trust the state to provide for FDR’s predictions.117 them. In the case of social insurance, American Socialism: the fear was the burden it would “A Foreign Ideology” impose on workers and employers, a fear that was later raised in the debate The Socialist party in other countries over the first Social Security law. was instrumental in achieving the ultimate goal of a welfare state. In the This opposition to the compulsory United States, socialist goals could nature of social insurance was a not be achieved by socialists. It major reason America was the last major industrial nation to embrace 115 the welfare state. As president, FDR See Madame Secretary, by George Martin, pp. 347-348 (Houghton Mifflin, could not push the issue of social Boston, 1976). insurance too far at the start, which 116Perhaps the best testament to this is disappointed those of his allies who FDR’s statement upon signing the Social also wanted mandatory health Security Act: He called it “a cornerstone in the structure which is by no means complete.” See history web page of the Social Security administration for FDR’s statement: www.ssa.gov/history/html. 117See Amity Shlaes’s The Greedy Hand: 114Rubinow bitterly complained about How Taxes Drive Americans Crazy and Gompers in one of his books. He quoted What to Do About It, p. 61 (Random House, Gompers at a 1916 congressional hearing New York, 1991). Shlaes, who notes that promising that, “as long as there is a spark tens of millions of Americans now pay more of life in me I will help in crystallizing the in payroll taxes than income taxes, notes that spirit and sentiment of our workers against Social Security began on a rather small the attempt to enslave them by well-meaning scale. She quotes a comment from a 1936 siren songs of philosophers, statisticians and Social Security pamphlet: “You and your politicians.” See Rubinow’s The Quest for employer will each pay 3 cents on each Security, p. 541 (Henry Holt & Company, dollar you earn up to $3,000. …That is the New York, 1934). most you will ever have to pay.”

______

Ludwig von Mises Institute Essays in Political Economy 26 ______would take one of the major parties contest. Debs had been sent there “stealing the clothes”118 of the because of his courageous opposition socialists for a welfare state to be to American entry in World War I—a established in America. While war that splintered his party. Debs America had a fling with collectivist and many others suffered because of ideas in the early part of the 20th the anti-libertarian actions of century, the American Socialist Party, Woodrow Wilson.121 the most consistent proponent of sundry social insurance schemes,119 Wilson’s administration crushed had become irrelevant as the 1920s dissent, passed the Sedition Act, went on. It was no threat to become a spied on its citizens, persecuted major political party. In 1920, its German-Americans, and illegally presidential candidate, Eugene Victor jailed tens of thousands of Americans Debs, polled nearly a million votes in the first red scare of post-World from a jail cell,120 but this was the War I America.122 It is amazing that high point for the party. Never again Wilson remains a liberal icon. He is would it do so well in a presidential consistently rated as one of America’s great or near-great presidents by panels of historians and 118Al Smith applied this phrase to the New Deal. He said, “the young Brain Trusters political scientists, yet his hatred of caught the Socialists in swimming and ran various ethnic and racial groups is away with their clothes.” See Al Smith, Hero well known.123 of the Cities, by Matthew and Hannah Josephson, p. 459 (Houghton Mifflin Company, Boston, 1969). 121For more on the unpopularity of Wilson at 119In 1911, Congressman Victor Berger, a the end of his second term, see The Politics socialist from Wisconsin, proposed a of War: The story of two wars which altered pension bill, but it died. See The Historical forever the political life of the American Development of the Social Security Act, by republic (1890-1920), by Walter Karp, Abe Bortz, SSA historian, p. 21, especially pp. 340-42 (Harper & Row, New www.ssa.gov/history/bortz.html. York, 1979). 120The Socialist Party of the United States, 122The First Freedom: The Tumultuous by David Shannon, pp. 155-58 (Quadrangle, History of Free Speech in America, by Nat Chicago, 1955). See also It Didn’t Happen Hentoff, pp. 113-20 (Dell Publishing, New Here: Why Socialism Failed in the United York, 1980). States, by Seymour Martin Lipset and Garry 123See Tony Brown’s White Lies, Black Lies: Marks (W.W. Norton & Company, New The Truth According to Tony Brown York, 2000). The authors argue that (William Morrow & Company, New York, Americans have been notably resistant to the 1995). Wilson, who remains one of the icons allure of socialism: “The inability of of modern American liberalism, clearly American socialists to create a durable hated black people (p. 76). Brown also Labor or Socialist party is not a historical warned that Americans were rushing quirk of a bygone era.” The quote is from a headlong into entitlement socialism, even sympathetic review of the book in the though they didn’t realize it. Wrote Brown September 3, 2000 “32 Book Review,” p. in a comment reminiscent of Fredric Bastiat: 16. “The American electorate opposes socialism

______

Ludwig von Mises Institute Essays in Political Economy 27 ______

Wilson had intelligence units spying movement, would poll less than on American blacks.124 As his 150,000 votes,125 a huge drop from administration was ending, he denied Debs’s 1920 performance. a pardon to Debs, a decent, courageous man regardless of one’s By 1932, FDR attracted many voters opinion of his economics or politics. who had previously cast their ballots From the early 1920s, the American for socialists. The Socialist Party had Socialist Party foundered into contained a social insurance platform insignificance. Its pre-war promise in 1932.126 But some socialists would was never realized, though some of come to suspect that FDR’s New its ideas were adopted by the left Deal, including Social Security, had wing of the Democratic Party. In used the veneer and not the substance 1932, at the height of the depression, of their programs. Thomas, by the Socialist party numbers continued to late 1930s, complained that the be disappointing. And by 1936, problem of American socialism was, Norman Thomas, an appealing, well- “Roosevelt in a word.”127 FDR stole spoken presidential candidate of the many of the ideas of socialists, Socialist Party who would later show including their support for social sympathy for some of the leaders of insurance programs. But divisions in the isolationist America First the American Socialist Party destroyed its effectiveness in the in principle, but is in full gallop in the 1930s. Some socialists concluded that pursuit of Socialist entitlements. As the way to an American welfare state, economist Ludwig von Mises mused, there with Social Security as its core, is a lot of support for socialism among its would be through the Democratic opponents” (p. 9). For more on Wilson’s hatred of black Americans, see Rascal King: Party. The Life and Times of James Michael Curley (1874-1958), by Jack Beatty, p. 178 (Addison-Wesley Publishing, New York, 1992). Beatty quotes Wilson as telling a 125See The Socialist Party of America, pp. delegation trying to persuade him not to 205-06. The author says the party’s resegregate various federal departments that, performance in the 1932 election was “Segregation is not humiliating but a disappointing and would worsen throughout benefit, and ought to be regarded by you the 1930s, as it would be co-opted by New gentlemen.” (p. 178). But blacks and whites Deal measures; many of its former members had worked together in these departments started to vote for Democrats. Shannon for decades without incident, which makes quotes lawyer Clarence Darrow as saying he Wilson’s actions appear bizarre. For more couldn’t join the Socialist Party because, “he on Wilson and some of his anti-libertarian would be so lonely.” Also, for more on the policies, see The Politics of War: The Story Norman Thomas comment, see Irving of Two Wars which Altered Forever the Howe’s Socialism in America, p. 73 Public Life of the American Republic (1890- (Harcourt Brace Jovanovich, New York, 1920), by Walter Karp, p. 340 (Harper & 1985). Row, New York, 1979). 126The Socialist Party of America, p. 219. 124Ibid, Brown. 127Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 28 ______

Indeed, Upton Sinclair, a socialist model failed in the 1920s and even at novelist who had his own quirky the height of the depression. In the redistributionist/social insurance 1930s, new methods of presenting the ideas and whom we will meet again principles of socialism without the later on, left the Socialist Party in the labels of collectivism were found in early 1930s. He then registered as a the Great Depression—a technique Democrat so he could run for that was supremely successful and governor of California in 1934. goes on to this day.131 One prominent Despite the change, Sinclair, says a socialist leader, Michael Harrington, biographer, remained a socialist and, advocated in the 1960s that socialists “wanted to see a Socialism in join the left wing of the Democratic America, as much as ever.”128 But Party. Indeed, the story of Social Sinclair switched parties not only to Security is, in part, the story of have a better shot at winning office, selling a socialist program without but because he was “convinced that socialist terminology. It is what the Socialism was and would remain for French called “a socialism without an overwhelming majority of doctrines.”132 Americans a foreign word and a foreign ideology.”129 Section III— Selling Social Insurance to Sinclair’s story is, in part, the story of Social Security and the rise of the America Using the American welfare state. It was a state Language of the Private whose supporters insisted social Sector insurance programs did not constitute socialism and who claimed that, even if social insurance was socialism, it was insignificant; that it would not 131The process of selling socialism under upset American individualist another name has been a success. At the traditions. They said social insurance time of this writing, presidential candidate George Bush was confused regarding was a conservative force that would 130 whether Social Security was a federal save free enterprise. program or not. My congressman, Anthony Weiner (D-N.Y.), at a recent town hall in Social insurance would have to find a Kew Gardens, New York, insisted that, backdoor method of winning in “Social Security is not socialism.” But of America. The straight collectivist course he also insists that payroll taxes are “only 7.65 percent.” He conveniently excludes the employer part of the tax, which 128See Leon Harris’s admiring biography of is actually 15.30 percent! the novelist: Upton Sinclair, American 132I take this phrase from an article on the Rebel, pp. 296-98 (Thomas Y. Cromwell, welfare state in The Dictionary of the New York, 1975). History of Ideas, Philip P. Wiener, ed., pp. 129Ibid. 509-13 (Charles Scribner’s Sons, New York, 130Ibid, pp. 304-19. 1973).

______

Ludwig von Mises Institute Essays in Political Economy 29 ______

“It is recognized that the use of the many supporters once again tried to term social insurance may result in associate their ideas with the good some misunderstanding of the basic name of insurance. Some Social nature of a social security program Security advocates admitted they had by the general public; who tend to exaggerated any similarities between think in terms of their acquaintance the two.135 and knowledge of private insurance, or even government insurance Insurance had a good name— involving a contractual insurance companies, unlike banks, relationship.”133 generally had not failed in the Great “I think social insurance is not, in Depression.136 Insurance seemed fact, insurance. It is not anything in safe.137 Insurance companies required the world but the taxing of people to

provide free services to other 135 134 Writing of the early years of Social people.” Security, Robert J. Myers, an actuary of the system, agreed that, “Admittedly, the Social Using the Good Name of Insurance Security Board [now the Social Security Administration] very definitely overstressed The term “social insurance” was the insurance concept in the early years of the program. This was done primarily to significant; it was used by experts and build up and maintain public support for the advocates seeking to persuade Social Security program—by drawing on the Americans to adopt a previously good name and reputation of private spurned welfare-state model. Insurance insurance.” Social Security , Fourth Edition, p. 15. was something most Americans 136 understood and liked. Social Security “During the Great Depression, it was not the U.S. government that bailed out the was presented as insurance in the banking industry—it was U.S. insurance beginning (though later the term was companies.” See All About Annuities, by disavowed from fear a court would rule Gordon K. Williamson, p. 21 (John Wiley & Sons, New York, 1993). the government had no legal right to 137 offer insurance). Later, after the first bill “Insurance,” wrote one historian, “was the central symbol of all these messages, and it was passed in 1935 and the program was stressed precisely because it was survived the expected court challenge, expected to secure public acceptance. Because insurance implied a return for work and investment, it preserved the self-respect 133Social Security , Fourth Edition, by Robert of the beneficiaries; because it implied a J. Myers, p. 13 (Pension Research Council, return in proportion to investment, it University of Pennsylvania Press, satisfied a widely held conception of Philadelphia, 1993). fairness; and because it implied the 134The comment was from the ranking existence of a contract, it appeared sound Republican on the House Ways and Means and certain.” See Derthick, Policymaking for Committee in 1935, as quoted in Martha Social Security , p. 5. See also Dorcas Derthick’s Policymaking for Social Security , Hardy’s Social Insecurity (Villard Books, p. 225 (Brookings Institution, Washington, New York, 1991). Hardy is a former Social D.C., 1979). Security commissioner.

______

Ludwig von Mises Institute Essays in Political Economy 30 ______huge cash reserves, reserves that to Why couldn’t the state solve the this day are larger than those of problems of security which, they Social Security. Insurance companies complained, were overwhelming the were dependable. They operated average man? Why couldn’t the under strict controls enforced by both nation make war on poverty just as a competitive market and by Hitler was doing in Germany? Some regulators. Insurance policies were admiring Americans claimed that also the personal property of Germany had made a remarkable policyholders. Americans were told recovery; why couldn’t the federal that Social Security, which in fact government use some of the same never operated according to the techniques? principles that insurance companies are required to follow, was just “It is nonsense to say that there is any another kind of insurance. Using physical impossibility of doing for insurance terminology was a clever peace purposes the sort of thing we way to establish American socialism. actually did for war purposes,”140 Also, the ostensible success of wrote economist George Soule in the America in World War I was, social early 1930s. Stuart Chase, a Social insurance advocates believed, more Democratic economist who used the proof that a highly regulated term “New Deal” in a book of the economy could and would produce same title in 1932, believed that an prosperity. “abundant economy”141 could be created by central planners. Pragmatist philosopher John Dewey, arguably the most influential American philosopher of the 1930s, 140Soule’s comment is quoted in The Good noted “the social possibilities of Society , by Walter Lippmann, p. 91 (Grosset war.”138 In the midst of the Great & Dunlap, New York, 1936). 141 Depression, many on the political left See also Chase’s The Economy of were asking why the federal Abundance, p. 310 (Kennikat Press, Port Washington, N.Y., 1930); and John government, which fixed prices, took Dewey’s Individualism Old and New over railroads, and directed many (Mincton, Balch, New York, 1930). elements of the economy during Speaking of John Dewey, George Soule, World War I, couldn’t plan and Stuart Chase, and other democratic socialists manage the economy in peacetime of the 1930s who called for war-planning just as it had in wartime.139 techniques in peacetime, one pro-New Deal historian wrote, “The War Industries Board tightly regulated and managed the economy, achieving remarkable results that many 138See John Dewey’s Individualism Old and observers believed were proof of the New (Mincton, Balch, New York, 1935). efficacy of a planned economy.” See The 139The Economy of Abundance, by Stuart Great Depression: America, 1929-41, by Chase, p. 310 (Kennikat Press, Port Robert S. McElvaine, p. 11 (Times Books, Washington, N.Y., 1936). New York, 1984).

______

Ludwig von Mises Institute Essays in Political Economy 31 ______

“Autarchy,” he wrote, “is distinctly thinkable and is probably coming.”142 A new strategy was needed to overcome, without directly attacking, Many New Deal policies seemed to the philosophy of limited confirm this prediction. Franklin government; it was needed because a Roosevelt, once he was president, permanent American welfare state increased some of Hoover’s draconian was still just a dream even a year into tariffs143 and scuttled the London FDR’s first administration. FDR Economic Conference.144 A year into could improvise various temporary the New Deal, Chase congratulated agencies and programs, but could he FDR on accepting “the general find a permanent structure that could philosophy of planning.”145 Social survive even when the opposing party Security was to be part of that eventually won power? philosophy. “Normalcy” or Income Despite Chase’s call for a permanent Redistribution? welfare state to be established and accepted by Americans, there were By the late 1920s and into the early still considerable obstacles to be 1930s, social insurance ideas had surmounted even after FDR’s been either rejected or ignored by election in 1932. We have seen most Americans. As one social earlier that FDR, as he campaigned insurance advocate said, “The for president for the first time, was leadership of the movement was compelled to pledge his support for silenced and interest waned.”147 Even limited government. He insisted that during the worst of the Great the federal government had been Depression, “As late as 1934, a spending too much and had taken too leading proponent of social insurance much power from the states.146 conceded that the majority of the

142Lippmann, p. 91. 143See Watershed of Empire: Essays on New See also the first installment of this series at Deal Foreign Policy, Leonard Liggio and LewRockwell.com for more on FDR’s James J. Martin, eds., p. 112 (Ralph Myles, classical liberal criticisms of Hoover. Colorado Springs, 1976). Norman Thomas also complained about 144From Arthur Schlesinger, Jr.’s The Hoover’s tax policies: “it’s a wonder they Coming of the New Deal, pp. 224-226 don’t put a tax on tickets to the bread line” (Boston, Houghton Mifflin, Company, The Great Depression: Opposing 1958). Viewpoints, Bruno Leone, ed., p. 15 145As We Go Marching, by John T. Flynn, p. (Greenhaven Press, San Diego, 1994). 200 (Free Life Editions, New York, 1967). 146FDR, campaigning in 1932, called Hoover 147From Carolyn Weaver’s The Crisis in “the greatest spender in history.” From The Social Security: Economic and Political Roosevelt Myth, by John T. Flynn, p. 37 Origins, p. 56 (Duke Press Policy Studies, (Devon-Adair Company, New York, 1961). Durham, N.C., 1982).

______

Ludwig von Mises Institute Essays in Political Economy 32 ______working population did not clamor another half century of intense for social insurance.”148 regulation to force many of them back into the hands of the Yet, just a few years later, a good government.) Most price controls deal of the Socialist agenda of the were lifted after the war. The War welfare state—unemployment Industries Board closed up shop. insurance, pensions, and government Many government bureaucracies shut co-opting of private and family down. relationships—had been adopted, without the socialist labels, by the Wilson’s successor, Warren Harding, Democratic party that once had been promised “normalcy.” With his the defender of the American election in 1920, many taxes were classical liberal tradition. Social reduced under his administration and insurance, after a few initial under his successor, Calvin Coolidge. objections, came into the American Even in the 1930s, in the midst of the mainstream without the taint of Great Depression, many of the most socialism. How were FDR and his conspicuously socialist or fascist allies able to do it? And why, as we parts of the New Deal either died or look back on a welfare state that is were struck down by the courts. more than 65 years old and in no apparent danger, was the By contrast, Social Security would establishment of Social Security so not be struck down by the Supreme important? Court or decommissioned by Congress. It would not be doomed or Other government institutions that even reduced by an opposition party challenged the American classical determined to reverse the revolution liberal tradition eventually failed. of 1935,150 nor face any sunset Railroads were handed back to provisions or receive any serious private ownership after World War I, reconsideration from Congress until albeit with many problems that were the early 1950s.151 And even then, 149 a residue of state control. (It took (Foundation for Economic Education, 148Ibid. Irvington-on-Hudson, N.Y.). 149For the story of government operation of 150It was Keynesian economist John Kenneth the railroads during the war and the return to Galbraith, a self-proclaimed socialist, who the private sector, with all sorts of new testified that Republicans, when they additional costs, see The War History of recaptured power in 1952, did not dare touch American Railroads by Walker Hines, Social Security or the welfare state. See especially pp. 226-30 (New Haven, Yale Name Dropping, pp. 2-3 (Houghton, Mifflin University Press, 1928). Hines says & Co., Boston, 1999). managers of private roads “were intensely 151See Senator Carl Curtis’s battle with the dissatisfied with the labor situation.” See Social Security Administration in the 1950s. also my story, “Train Wreck,” in the August He called for the system to be converted to a 1999 issue of The Freeman, pp. 8-11 flat benefit system. He also argued that

______

Ludwig von Mises Institute Essays in Political Economy 33 ______several Social Security bureaucrats by the 1990s. Liberal supporters worked successfully to frustrate the always insisted that it was neither efforts of one lawmaker who wanted welfare nor a dole. They also said to find out whether the program was that Social Security was an actually insurance and where the insurance program that was part of legal guarantees were.152 (The issue an economic security package. This of a legal guarantee, as we will see, huge package of legislation, they was raised during the 1935 hearings.) said, would insulate Americans against more depressions or even From what some saw as modest serious recessions. Others—such as beginnings, Social Security Rubinow and his student Epstein, eventually become so large 153 that it who supported a redistributionist required its own Cabinet department view of social insurance—frankly saw Social Security as a way to take

Social Security had no guarantees and no money from one group and give it 154 legal protection, which led Altmeyer to another. charge that Curtis was trying to destroy the program; in The Formative Years of Social The New Deal and its Hooverish Security, by Arthur J. Altmeyer, pp. 224-34 Antecedents and 298-301 (University of Wisconsin Press, Madison, 1966). Why did Altmeyer become angry with Curtis? Curtis “insisted that Social Security programs should be social security is not a contract, not even viewed as more than unemployment insurance in the legal sense of the world. He and welfare programs posing as cited the little -known section 1104 of the insurance. They were part of an Social Security itself that Congress reserves economic stimulus/inflationist the right to alter, amend or repeal any 155 provision of this act.” See Social Welfare in philosophy that was centuries old. the United States, Poyntz Tyler, ed., p. 55 Social Security should be deemed as (H.W. Wilson Company, Highbridge, much a part of the FDR Bronx, New York, 1955). 152 administration as the WPA, AAA, or Ibid. PWA, but with much greater 153The Social Security program, which began in 1935 covering just over half of the historical significance than those industrial work force, today covers more other inflationist remedies. Social than 90 percent of the workforce. The Security became a permanent part of program today has 44 million beneficiaries, American life, while many New Deal providing about “$12 trillion worth of life agencies died. insurance.” The coverage is now “almost universal.” See Social Security: The Phony Crisis, by Dean Baker and Mark Weisbrot, p. 13 (University of Chicago Press, Chicago 1999). See also The Real Deal: 154Rubinow expected social insurance to The History and Future of Social Security, produce a more “equitable distribution of by Sylvester J. Schieber and John B. income.” Weaver, p. 37. Shoven, p. 94 (Yale University Press, New 155See The History of Economic Thought, by Haven, Connecticut, 1999). John Fred Bell, pp. 142-43.

______

Ludwig von Mises Institute Essays in Political Economy 34 ______

Under the economic security These actions, combined with the philosophy, the federal government blunders of the Federal Reserve would act decisively in economic Board before, during, and after the crises, even more decisively than it crash of 1929, ensured that the had under Hoover—the first president economy foundered.159 Hoover also to shun the classical liberal practice stunned congressional leaders when of letting the economy heal itself he called for government bailouts of during a depression.156 Historical ailing corporations. They were mythology to the contrary, Hoover “shocked at the revelation that our was no classical liberal. He shunned government for the first time in the laissez-faire policies peacetime history might have to recommended by some of his intervene to support private advisers as a way to restore the enterprise.”160 economy.157 Hoover’s first Treasury secretary, In fact, Hoover ran huge deficits; Andrew Mellon, had been popular in raised taxes; jawboned employers not the 1920s because of his tax cutting. to cut salaries and to retain workers; He objected to Hoover junking started the Reconstruction Finance laissez-faire in the 1930s. He Corporation; and increased tariffs— recommended letting sick, badly run all policies that his classical liberal businesses die, as did many in the advisers thought were wrong.158 1930s. However, the other part of his recommendation is usually ignored:

156 he also wanted huge marginal tax See Murray N. Rothbard’s America’s cuts. He believed that tax cuts in the Great Depression (Van Nostrand, Los 161 Angeles, 1963). Especially see his quote of 1930s would bring about the same Mellon on Hoover’s depression policies, p. results as those of the 1920s, ’60s and 237: “In this country there has been a ’80s: a strong recovery. Hoover, who concerted effort on the part of both eventually resorted to raising taxes, government and business not only to prevent any reduction in wages but to keep up the maximum number of men employed, and A History of the American People , by Paul thereby to increase consumption.” Johnson, p. 229 (Harper Collins, New York, 157For an account of how Hoover moved 1998). away from classical liberalism and 159Rothbard, ibid. See also Milton Friedman “shocked” many of his allies, see “Working and Anna Schwartz’s A Monetary History of Paper 9405, The Federal Reserve Before the United States, 1867-1960, p. 305 Marriner Eccles (1931-1934), by Walker F. (Princeton University Press, Princeton, New Todd (Federal Reserve Bank of Cleveland, Jersey, 1963). 1994); see especially pp. 10-12. 160Ibid, Walker Todd. 158Walter Lippmann said of Hoover’s 161Jude Wanniski, in The Way the World policies: “The permanent New Deal—the Works, pp. 130-45, tells the story of policy initia ted by President Hoover in the Mellon’s failed attempt to convince Hoover autumn of 1929 was something utterly to endorse large tax cuts to help the unprecedented in American history.” From economy recover.

______

Ludwig von Mises Institute Essays in Political Economy 35 ______rejected laissez-faire and exiled Americans “freedom from fear.” This Mellon to England as ambassador.162 strategy persuaded Americans—or at FDR continued and extended many least their lawmakers—that of the policies Hoover initiated. previously scorned social insurance programs were now acceptable and Observers as divergent as Austrian would stimulate a recovery and economist Murray Rothbard, prevent further recessions. commentator Walter Lippmann, Hoover biographer Joan Hoff Wilson, FDR was committed to injecting and a member of FDR’s brain trust inflation and stronger consumption agreed that Hoover did not stand by patterns into a dead economy in and wait for the economy to 1933. Social Security was designed recover.163 Nevertheless, this laissez- as one of the programs the federal faire canard was used against Hoover government would use to lift the by FDR on the campaign trail in nation out the depression and keep it 1932. Hoover, although he later from falling into another one. FDR opposed Social Security, had shown was also ready to stimulate the his commitment to inflationist economy with government spending remedies, which were of the same and income redistribution. The general sort as FDR’s, though not as government would spend even if it extensive or as well articulated. meant, to paraphrase John Maynard Decades after the crash and the Keynes, that the government would economic problems of New Deal hire men to dig and refill holes. policies, once there was no political danger in admitting it, Rexford Just as Social Security was just about Tugwell, one of FDR’s key economic to go into effect in the United States, advisers, conceded that the New Deal Keynes, in his classic economics text, employed many of the methods used wrote, “the State will have to exercise by Hoover. “Most of what [Hoover] a guiding influence on the propensity began would be taken over by to consume partly through its scheme Roosevelt and then called the New of taxation, partly by fixing the rate Deal,”164 Tugwell wrote in 1967. of interest, and partly, perhaps, in other ways.”165 Keynes, who had “Coming Back” Though followers in FDR’s Treasury Central Planning Department, influenced a generation of American economists and Social Security was part of an bureaucrats, many of whom helped economic strategy to guarantee 165See The General Theory of Employment, 162Ibid. Interest and Money, Vol. VII, from The 163Ibid., Rothbard. Collected Writings of John Maynard 164From Tugwell’s FDR, Architect of an Keynes, p. 378 (St. Martin’s Press, Royal Era, p. 71 (Macmillan, New York, 1967). Economic Society, London, 1973).

______

Ludwig von Mises Institute Essays in Political Economy 36 ______formulate the first Social Security president. Keynes thought FDR had a program. weak understanding of economics.168 Still, FDR had his own neo- Stuart Chase, in The New Deal, Keynesian advisers who could approvingly quoted Keynes’s recipe simplify Keynes’s arguments for him. for ending the depression: less FDR relied to a large extent on savings, more consumption. “It is not Marriner Eccles, a former private the miser who gets rich,” Keynes banker who served in the Treasury wrote, “but he who lays out his Department and later became money in fruitful investment.”166 America’s most important central Keynes approvingly quotes banker.169 Mandeville as calling for the government to spend to generate a FDR appointed Eccles as his Federal strong economy. That “consists in Reserve Board chairman. Although giving everybody the opportunity of Eccles had not read much Keynes by being employed.”167 the early 1930s,170 he recommended and used many of the same That idea was part and parcel of New inflationist remedies of The General Deal policies and the economic Theory, remedies that were supported security package that encompassed by most of FDR’s advisers. Keynes’s Social Security: Put money in inflationist prescriptions were not people’s pockets; discourage thrift; really new. They had been tried many and, for certain elderly people, times before—in the France of Louis discourage work. This thinking was XIV, in the French Revolution, to also present in the report of the finance the American Revolution Committee on Economic Security through currency that became almost (CES), which helped create Social worthless, and in the Roman Security and which I explore in detail Empire—and had always failed after later on. Thus Keynes’s intellectual initial success.171 influence was exerted secondhand, but it was felt in many New Deal 168“I don’t think your president knows policies designed to redistribute anything about economics,” Keynes is wealth, including federal inheritance quoted as telling Perkins. See The Next Left: taxes. The History of a Future,” by Michael Harrington, p. 29 (Henry Holt & Company, New York, 1986). FDR’s meeting with Keynes seemed 169 See Lewis J. Walker’s article, “Marriner to have had little effect on the Eccles” in the Financial Literacy section of On Wall Street Magazine (Securities Data 166Chase’s comment is from The Great Publishing, New York). Depression: Opposing Viewpoints, Bruno 170Ibid. Leone, ed., p. 61 (Greenhaven Press, San 171Economist Ludwig von Mises wrote, Diego, 1994). “Inflation is the true opium of the people and 167Keynes, pp. 359-62. it is administered to them by anticapitalist

______

Ludwig von Mises Institute Essays in Political Economy 37 ______

Social Security, modest as it was in opinion that can turn the cycle 1935 compared to the massive upward and that is the program that exists today, was government.”173 designed to ensure a strong economy and an end to the Great Depression. But what would come first? A “Our social security program,” government social welfare structure Perkins said in lobbying for the created through Social Security, or a economic security package, “will be a full economic recovery, with the single- vital force against the recurrence of digit unemployment numbers of the severe depressions in the future.”172 1920s and brisk GDP growth? For FDR, the question was easily answered. Only One Agency Reform must precede recovery. Social Can Turn the Cycle engineering, he believed, must precede prosperity because the private sector, FDR and his allies, during the debate without government direction, could no of 1935, argued that the beginnings longer ensure a strong economy. of social insurance programs were a way to jumpstart the economy. More Social Security—not a buoyant, important, as we will see, Social revived private sector—would ensure Security was not to be just an the recovery. Said FDR: “It is emergency measure. Instead, it was childish to speak of recovery first and to be, along with other inflationary reconstruction afterward.”174 Later measures, part of a permanent on, we will see exactly what was structure of welfare programs that achieved. The recovery took many would tame the business cycle. And painful years and frustrated tens of only the government, through millions of Americans, few of whom countercyclical programs such as seemed to blame FDR, since he Social Security, could do it. Said repeatedly won reelection. But FDR Eccles at the height of the depression: was about to construct a mechanism “There is only one agency in my whereby very few Americans over the next few generations would dare governments and parties.” See The Theory of to challenge the glowing assertions of Money and Credit, p. 485 (Liberty Fund, Indianapolis, Indiana, 1981). See also Milton Friedman’s interesting Episodes in Monetary History: Money Mischief (Harcourt, Brace, Jovanovich, New York, 1992), especially p. 173See Marriner S. Eccles, Private 265, for more on the disasters of planned Entrepreneur and Public Servant, by Sidney inflation during the French Revolution. See Hyman, p. 99 (Stanford University Graduate also Fiat Money Inflation in France, by School of Business, Palo Alto, Calif., 1976). Andrew Dickinson White (Foundation for 174The Public Papers and Addresses of Economic Education, Irvington-on-Hudson, Franklin D. Roosevelt, Vol. III, Message to N.Y., 1959). Congress, June 4, 1934 (Random House, 172Leone, p. 162. New York, 1938).

______

Ludwig von Mises Institute Essays in Political Economy 38 ______social insurance advocates.175 The vowing their support for Social welfare state would come before any Security.176 recovery. This was a revolution. Section IV— How did FDR ensure that this welfare Building a Constituency entitlement program would go on forever, that no succeeding for Social Insurance administration would jettison it the way his NRA had been destroyed and “There is no doubt that the real as so many of the socialist measures of destroyer of the liberties of any World War I had been terminated? people is he who spreads among them bounties, donations and largesse.” FDR created not only a strategy to 177 enact Social Security, but also one to —Plutarch make it permanent. In the decades to “When Franklin Roosevelt proposed come, his strategy had even his Social Security, he didn’t go out opponents in the Republican Party selling it with actuarial tables.…He basically said, ‘Look, here’s the deal: 175Several decades later, the success of You pay, you’re taken care of; you FDR’s welfare-state-first, restore-a-healthy- have social security in your old age.’ economy- later strategy was apparent in the ” boasting of former Social Security officials. —Hillary Clinton178 In a 1997 book, a former Social Security official writes this warning for lawmakers: “If you are a politician in this democracy it Preparing the Ground is very risky to propose anything which for the Welfare State would weaken Social Security. The program is just too popular. The reality is that 43 About two years into FDR’s first million people (about one in six Americans) term, the nation was still in a deep receive Social Security checks every month and most of them are voters.” See Social slump. Despite the many promises of Security: The Inside Story, by Andy Landis, the 1932 election, despite numerous p. 13 (Crisp Publications, Menlo Park, Calif., 1997). Indeed, in 1976 a Washington Post writer who argued the obvious—that 176For more on how the bi-partisan support Social Security is not insurance, but a for Social Security led to a great expansion welfare program—found himself deluged of the program see my “The Disastrous Deal with angry letters. “Then I came to perceive of 1972” article at www.Mises.org, which that social security was not a program; it tells the story of how a Republican was a religion. It’s very hard to reform a administration greatly expanded Social religion,” wrote Jodie Allen. See Derthick, Security. p. 166. It is interesting that Allen uses the 177The Big Lie: What Every Baby Boomer word “religion,” because many of the first Should Know About Social Security and generation of Social Security executives Medicare, by A. Haeworth Robertson, p. 67 agree that new employees were trained to (Retirement Policy Institute, Washington, think of the program in the same terms as D.C., 1997). religion. 178Ibid, p. 5.

______

Ludwig von Mises Institute Essays in Political Economy 39 ______economic remedies applied, the economy responded sporadically. The In 1934, FDR began preparing the prosperity of the 1920s was not public for an economic restored by the New Deal. security/Social Security plan Unemployment numbers remained designed to tame the business cycle. high throughout FDR’s first two He argued that the depression and the terms. FDR and his many allies urbanization of American life had blamed industry: Sick industries transformed American culture. Not produced too few jobs, and the only had the private sector failed, in private sector was not dependable. part because the nation was running out of resources, but individuals were Harry Hopkins, FDR’s close aide, overwhelmed by the uncertainties of said the cure for depressions was the business cycle. Families, fewer of simple, and would mean justice for whom lived on farms, could or no workers: “Guarantee steady jobs in longer would take care of elderly private industry if you want family members. Urbanization enthusiastic workers.”179 FDR added required greater public-sector that employers must pay “fair services, especially those that could wages,”180 as, according to Hopkins, be provided only by the federal too many jobs paid insufficient government. wages. Periodic bouts of unemployment further depressed “Security was attained in the early buying power. FDR was convinced days through the interdependence of that too many elderly people retired members of the family upon each into poverty. These were problems other,” 182 FDR said. He claimed that that social insurance programs were these family relationships—like the designed to solve through seemingly endless resources of the unemployment insurance and pension frontier—were gone: “The payments, according to FDR, who complexities of great communities had pushed for some of these and organized industry make less real programs as governor of New these simple measures of security.”183 York.181 In his 1934 message to Congress, FDR 179From June Hopkins’s book, Harry said he was close to offering his own Hopkins: Sudden Hero, Brash Reformer, p. economic security plan: “Next winter 188 (St. Martin’s Press, New York, 1999). 180 we may well undertake the great task See FDR’s Fireside Chats, Russell D. Buhite and David W. Levy, eds., p. 33 of furthering the security of a citizen (Penguin Books, New York, 1992). 182See The AARP: America’s Most Powerful 181See True Security: Rethinking American Lobby and the Clash of Generations, by Social Insurance, by Michael J. Graetz and Charles R. Morris, p. 70 (Times Books, New Jerry L. Mashaw, p. 75 (Yale University York, 1996). Press, New Haven, Conn., 1999). 183Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 40 ______and his family through social the main causes of social insurance. Among the objectives I demoralization.”186 place the security of men, women and children of the nation first. Above all, I The private employer was not am convinced that social insurance providing “regularity” of should be national in scope—leaving employment. Job security, Brandeis the federal government the and other social insurance advocates responsibility of investing, maintaining held, could only be provided by the and safeguarding the funds constituting government through an extensive the necessary insurance reserves.”184 program of social insurance. They claimed that individual methods no American Life: “Insecure longer worked; that thrift, self- to the Point of Despair” improvement, and the American dream of a better life for each FDR was echoing the sentiments of succeeding generation through a Isaac Rubinow and Abraham Epstein, growing economy were false hopes intellectual leaders of the social for the average American worker. insurance movement whose work was followed by some of the most Epstein warned, “The challenge important members of the federal confronting us in the 20th century is government.185 For decades, this pair that of economic insecurity, which argued that the private economy was weighs down our lives, subverts our too unpredictable to provide workers liberties and frustrates our pursuit of with security. happiness.”187 He added that, because capitalism had failed, “our modern Another leader in the successful battle system of industrial production has to adopt Social Security programs was rendered our lives insecure to the U.S. Supreme Court Justice Louis point of despair.”188 For Epstein, Brandeis. He was one of FDR’s key neither central bank policies nor the advisers and a noted proponent of disastrous tariff policies of Hoover Keynesian philosophy. Brandeis had were the principal reasons for the been an advocate of public works and depression. Epstein blamed the social insurance dating back to the depression on “the blind greed and Progressive Era. In 1911, he wrote, “irregularity of employment is…the greatest of industrial wastes, and one of

184Madame Secretary, by George Martin, p. 186Ibid. 342 (Houghton Mifflin Company, Boston, 187See Carolyn Weaver’s The Crisis in 1976). Social Security: Economic and Political 185See Louis D. Brandeis, Felix Frankfurter, Origins, p. 37 (Duke Press Policy Studies, and the New Deal, by Nelson L. Dawson, p. Durham, N.C., 1982). 103 (Archon Books, Hamden, Conn., 1980). 188Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 41 ______stupidity of our business leaders.”189 Still, the program did not make He said there was one way to solve it: economic sense. For example, some “through an increase in the critics charged that taking more taxes purchasing power of the masses. The from workers and adding to the costs people at large must have economic of employers in the midst of a security.”190 And only the central depression would hurt the economy. government could provide it.191 Some supporters of social insurance didn’t want workers to have a payroll A Self-Liquidating Program tax deduction. They argued the government should pick up the entire FDR had to devise a strategy to bill through general revenues, of persuade Americans to accept a huge, course ignoring the ultimate source of new, expensive program in the midst all things the government does. of the greatest depression in the nation’s history. Further, he had to find FDR also argued that the economic a way to ensure that a large part of security package, of which Social American society would consider this Security was a part, would restore the program essential and beyond political economy because people would have debate. What would be his strategies? money to spend even if they were out There would be a short-term one: of work. Nevertheless, most social insurance was vital to the historians, looking at the terrible survival of Americans in a depression unemployment numbers of the late because it would help revive a failing 1930s, agree that he was wrong on economy; and a long-term one: making this count. social insurance an integral part of the average’s American’s retirement New Deal mythology to the contrary, planning, to put it beyond politics. unemployment was still high in the late 1930s.192 But FDR had another Social Security would go on forever, goal in mind with the passage of FDR intended, because people would Social Security. He wanted to create enjoy the idea of obtaining much in a permanent American welfare state various welfare benefits—although of “cradle to grave”193 government they would be called insurance services, but he emphasized to payments—in exchange for paying in supporters that social insurance little or nothing. programs couldn’t be instituted all at once. These programs must be

192Statistical Abstract of the United States, p. 189Insecurity: A Challenge to America, by 205 (Government Printing Office, Abraham Epstein, p. 659 (Random House, Washington, D.C., 1960). New York, 1938). 193The Roosevelt I Knew, by Francis 190Ibid. Perkins, p. 183 (Harper & Row, New 191Ibid. York, 1946).

______

Ludwig von Mises Institute Essays in Political Economy 42 ______incremental. And these programs As the economy initially seemed to would only be established if respond to the New Deal inflationist taxpayers believed they were not medicine, FDR proclaimed in 1935, receiving welfare services or a dole. “we’re coming back and we did it through planning.”196 Unfortunately, “Politics All the Way Through” the economy, just two years after the passage of the Social Security law, The taxpayers had to be convinced didn’t respond positively to the they had prepaid for a program such economic security policies. In fact, as Social Security—a welfare economic disaster was again just program that had an insurance around the corner when FDR veneer194—and that they were proclaimed, “we’re coming back.” entitled to it. FDR conceded the political goals of Social Security in a Whether it was the effect of the conversation several years after the economic security package or the passage of the first law. He said the failure of other New Deal policies, program, despite its taxes that could the economy did not boom after 1935 hurt an economy in the midst of a and the passage of the Social depression, would eventually become Security/economic security Act. Even so popular that Americans would with the sluggish recovery of the never allow any politician to kill it. “I early 1930s, the American economy guess you’re right on the economics, did not approach the vigorous growth but those taxes were never a problem rates of the 1920s until World War II; of economics,” FDR said. “They instead, the United States went into were politics all the way through. We another depression in the summer of put those payroll contributions there 1937.197 so as to give contributors a legal, moral and political right to collect Again, perhaps FDR’s critics were their pensions.…With those taxes in “right on the economics,” as he there, no damn politician can ever 195 scrap my social security program.” 196Madame Secretary, p. 399. 197By 1937, with payroll taxes beginning to “Enslaving Workers” be collected, the nation went into a recession that wiped out all of the previous (alleged) economic gains. Many pro-New Deal historians concede that the economic security/Social Security package had not 194See Isaac Rubinow’s Social Insurance, p. worked. An interesting prediction of Social 11 (Henry Holt & Company, New York, Security’s effect on the economy had come 1916). two years before, in 1935, from Rep. John 195From Franklin Roosevelt and the New Tabler. See Social Security: The Formative Deal, 1932-1940, by William E. Years, by Arthur J. Altmeyer, p. 37 Leuchtenburg, p. 133 (Harper Torchbooks, (University of Wisconsin Press, Madison, New York, 1963). 1966).

______

Ludwig von Mises Institute Essays in Political Economy 43 ______conceded. One Congressional critic security/Social Security plan didn’t warned in 1935 during the economic cure the depression, but made it security debate, “Never in history has worse,201 partly because money that any measure been brought here so was drained from workers and insidiously designed as to prevent employers wasn’t scheduled to be business recovery, to enslave workers repaid for many years. A friendly and prevent any possibility of commentator writing in 1937 employers providing work for conceded that the payroll tax “will people.”198 continue to be a drain on purchasing power.”202 (Payroll taxes began in In 1932, when FDR was elected, 1936 with unemployment insurance. unemployment was 23.6 percent. Old-age insurance taxes began in Two years later, the rate had 1937. Benefits were not scheduled to declined, but only to 21.7 percent.199 begin until 1942, although it was later By 1936, New Deal policies clearly seemed to be working some 201After praising the New Deal and FDR, improvement, although they were McElvaine conceded, “For all it did, for all gradual and there was still an it changed, the New Deal never succeeded in unemployment rate of 16.9 percent, its primary goal: ending the Depression.” From The Great Depression: America 1929- meaning nine million Americans 1941, by Robert McElvaine, p. 337 (Times were without a job. But by 1938, six Books, New York, 1984). That sort of years of New Deal policies had analysis might have come from FDR clearly failed to restore prosperity— opponent John T. Flynn or the embittered the unemployment rate was back up James Farley, a former postmaster general to 19 percent.200 Some of FDR’s and FDR political adviser, who claimed that FDR deliberately misled allies about his advisers were worried that the third-term intentions. “Franklin D. economic conditions could justly be Roosevelt put by the third term suggestions labeled the FDR depression. every time gentler than the other, then entered on a long perio d of enforced silence, It is interesting to read the admissions and finally engineered his own nomination.” From Jim Farley’s Story: The Roosevelt of sympathetic historians and others Years, p. 151 (McGraw Hill, New York, who try to praise the New Deal. Doris 1948). One of FDR’s disgruntled former Kearns Goodwin and others concede allies, labor leader John Lewis, complained that New Deal policies hadn’t solved some six years into the New Deal that the Great Depression by the eve of FDR’s recovery had failed and millions of World War II. Robert McElvaine workers were suffering: “How many years, how many years can you stand to be without concedes that the economic a job…to live the normal life of a citizen.” From FDR and His Enemies, by Albert 198Altmeyer, pp. 37-38. Fried, p. 164 (St. Martin’s Press, New York, 199Statistical Abstract of the United States, p. 1999). 205 (Government Printing Office, 202From Half Way with Roosevelt, by Ernest Washington, D.C., 1960). K. Lindley, p. 218 (Viking Press, New York, 200Ibid. 1937).

______

Ludwig von Mises Institute Essays in Political Economy 44 ______decided to move that date up to running huge deficits, then the 1940.)203 economy responded, they say.205

The depression of 1937-38 and the “Rank Paternalism” continued economic problems of 1939-40 seemed to validate the Social Security was unique. Its economic criticism of congressional supporters made such contradictory critics and others that Social Security claims as that this new government had the same basic faults as the entitlement was in keeping with Townsend Plan (examined below) America’s individualist traditions. and similar rob-Peter-to-pay-Paul Citizens would not just be given a schemes. Some of FDR’s advisers dole, they would earn their benefits warned that the miserable economic by “contributing” to the Social record could redound to the Security system. It was to be their administration’s detriment.204 own insurance, even though Why had the Social taxpayers had no contractual rights. Security/economic security package failed in its immediate economic FDR hoped that constant pairing of goals? McElvaine and other FDR Social Security with the good name historians argue that Social Security of insurance would build a good and other New Deal measures reputation, though insurance never weren’t Keynesian enough—FDR was afraid to take more than a small 205 dose of inflation. When FDR went Thomas Greer, in What Roosevelt fully Keynesian and waged World II, Thought: the Political and Social Ideas of Franklin Roosevelt (Michigan State University, East Lansing, 1958), wrote that FDR said in 1937 that unemployment “has 203McElvaine, p. 330. been solved in some countries by starting 204Dan Roper, FDR’s secretary of huge armament programs, but we Americans commerce, warned that the 1937 recession do not want to solve it that way” (p. 74). But was wreaking havoc with the economy. on the same page, Greer writes, “ironically it FDR fumed: “Dan, you have to just got to was solved that way.” John T. Flynn quoted stop issuing these Hooverish statements all FDR in 1938 as saying, “the one big thing the time.” See Jim Farley’s Story: The the federal government can spend money on Roosevelt Years, by James Farley, p. 101 is the Army and Navy.” From The Roosevelt (McGraw Hill, New York, 1948). Farley, Myth , p. 121 (Devon-Adair Company, New who said his faith in FDR was “shattered” York , 1961). Also Robert Nisbet, in an by 1937 (p. 151), also quotes Vice President interesting book on the relationship between John Nance Garner as another skeptic after Stalin and FDR, wrote, “He (FDR) was by six years of New Deal spending: “I don’t no means the first ruler in history to find his think the Boss has any definite program to attention turning to the dogs of war in the meet the business situation. I don’t think wake of domestic failures; nor would he be much of the spending program. You can’t the last.” See Roosevelt and Stalin, the keep spending forever; some day you have Failed Courtship, p. 93 (Regnery Gateway, to meet the bills” (p. 138). Washington, D.C., 1988).

______

Ludwig von Mises Institute Essays in Political Economy 45 ______was mentioned in the initial taxpayers in the 1960s, ’70s, and ’80s legislation and Social Security clearly could expect huge tax increases to was not insurance, as officials later finance big increases in the program. conceded. They agreed that the term “insurance” had been By the late 1970s and the early 1980s, overemphasized.206 Indeed, Rubinow Social Security was projecting huge said, “social insurance might almost deficits in the future. The program had be defined as a form of insurance to be “saved” several times.209 But which cannot live up to the exacting most of the first generation of Social laws of insurance science. Then again Security beneficiaries thought it was a it has been decried as rank good deal. Indeed it was, for some. paternalism and this indictment must And by the 1950s, benefit increases be readily admitted.”207 always seemed to come just before elections. None of this mattered for a president seeking an effective way to sell it. Many of the early recipients received Once the “earned benefits” were in far more in benefits than they paid in place, FDR reasoned, the program taxes, a fact those in the Social would build a constituency that Security administration would would grow as people lived longer, a frequently highlight.210 The program constituency that would command has a web page devoted to the first considerable political power. And, beneficiary, Ida Fuller of Vermont, since the first generations would pay who paid in $22 to Social Security little, in the 1940s and ’50s, payroll and received almost $21,000 in tax increases would tend to be payments over 31 years.211 Her well- postponed.208 The result was that publicized case was a good way to build a political constituency for a new program that was distrusted by 206 F.A. Hayek wrote of the campaign to sell many Americans. But such cases Social Security to the American people: disguise an unpleasant truth that the “When in 1935 the United States introduced the scheme, the term ‘insurance’ was Social Security administration never retained—by a stroke of promotional genius—simply to make it more palatable. John B. Shoven, pp. 83-85 (Yale University From the beginning, it had little to do with Press, New Haven, Conn., 1999). insurance and has since lost whatever 209See my article, “The Disastrous Deal of resemblance to insurance it may have had.” 1972” at www.Mises.org. See The Constitution of Liberty , pp. 288-89 210The Real Deal: The History and Future of (University of Chicago Press, Chicago, Social Security , by Sylvester J. Schieber and 1960). John B. Shoven, pp. 8-12 (Yale University 207See Isaac Rubinow’s Social Insurance, p. Press, New Haven, Conn., 1999). 11 (Henry Holt & Company, New York, 211For more on Ida Fuller see, Social 1916). Security: An Idea Whose Time Has Passed, 208The Real Deal: The History and Future of by Helen P. Rogers, p. 3 (Wellington Social Security , by Sylvester J. Schieber and Publications, Carmel, Calif., 1985).

______

Ludwig von Mises Institute Essays in Political Economy 46 ______advertised: Those in on the early part employers paid half the payroll tax on of the scheme benefited at the their behalf and counted it as a expense of later generations. Today business cost. many Americans, especially those with lower incomes, are paying more Most people didn’t grasp the true in payroll taxes than income taxes.212 costs of the program.216 They thought But few would understand this aspect they were getting a lot back in of Social Security. As was the case exchange for paying in very little.217 for many of the lawmakers who voted This idea, along with the propaganda on the program in 1935, the average launched by social insurance citizen didn’t understand the advocates and later Social Security program—a problem that persists to bureaucrats, accounts at least in part this day.213 Some officials of the for the popularity of the program. program were pleased with that. As one Social Security administrator said FDR was right about the politics of in the 1960s, Social Security was Social Security. An easy winner of built on ignorance.214 It was built, in four presidential elections, FDR part, on taxpayers not understanding obviously had a much better grasp of that they were paying twice as much politics than of economics. No future in taxes as they thought 215— politician, FDR correctly reasoned, would dare touch his Social Security 212See The New Century, New Deal: How to program, which in a few years Turn Your Wages into Wealth Through became more a religion than a Social Security Choice, by Wade Dokken, p. government program for many of the 34 (Regnery Publishing, Washington, D.C., beneficiaries and for many of the 2000). 218 213The Real Deal, Ibid. people who administered it. 214A Social Security official is quoted in the 4/26/65 issue of Barron’s Weekly saying, can’t see won’t hurt you seems to apply in “continued general support for the Social this case.” See The Real Deal: The History Security system hinges on continued public and Future of Social Security in America, by ignorance of how the system works.” See Sylvester J. Schieber and John B. Shoven, p. The Social Security Fraud, by Abraham 100 (Yale University Press, New Haven, Ellis, pp. 58-59 (Foundation for Economic Conn., 1999). Education, Irvington-on Hudson, N.Y., 216Ibid. 1966). 217Ibid. 215Speaking about what little opposition 218Altmeyer, in his book, The Formative there was to the payroll tax rates in the early Years in Social Security, says Social years of Social Security, the authors of a Security officials were given such initial history of the program write, “Part of the training that they learned to look at Social reason that workers did not resent the Security as almost a religion. “They did it so payroll tax was half of it was hidden from they had religion. They had it complete.” them, in that half was paid by the employers. See also The Real Deal, p. 10. Wilbur While most economists today agree that the Cohen demonstrated that the welfare state employer portion of the payroll tax is borne was an attempt to engage in wholesale social by workers, the old adage that what you engineering when he wrote, “There is no

______

Ludwig von Mises Institute Essays in Political Economy 47 ______

wanted credit for doing so.221 The Social Insurance as Religion GOP claimed to be opposed to welfare state measures, but by the Politicians of both parties 1950s, Life magazine wrote, “Both eventually conceded the point. They major political parties maintain a would have to get religion or lose pleasant fiction about the American power, many of them thought.219 welfare state.”222 When the GOP recaptured power in 1952, party members learned to FDR and his aides insisted they embrace FDR’s welfare-state supported free enterprise and that policies and play the vote-buying their goals were always to help people game as well as the Democrats. have a decent retirement. They Republicans increased Social achieved much more. Federal pension, Security benefits in election welfare, and unemployment programs years.220 Republican administrations were the way to their vision of a signed expansions of the Social reformed capitalism. As FDR said Security program into law and when he began his efforts to lobby Congress to pass the Social Security legislation, “We can eliminate many of the factors that cause economic god that is not made by man. There is no depressions, and we can provide the hope that is not made by man. We must have means of mitigating their results. This faith in men so they will so reorganize the plan for economic security is at once social system that all of us can have a measure of prevention and a intelligent, significant lives.” See Mr. Social method of alleviation.”223 Security: The Life of Wilbur J. Cohen, by Edward D. Berkowitz, p. 39 (University Press of Kansas, Lawrence, 1995). Social Security, along with the rest 219Ibid. of the economic security package, 220 Any presidential candidate who proposed was expected by its supporters to be to tamper with Social Security was a so successful as to pay for itself in “candidate for a frontal lobotomy,” Jack Kemp quipped in 1988. From Policymaking for Social Security , p. 16. Indeed, one ex- 221See Policymaking for Social Security , by Social Security official brags that the Martha Derthick, p. 67 (Brookings program has almost unlimited popularity. He Institution, Washington, D.C., 1979). Also argues that the program has become more see my “The Disastrous Deal of 1972” at powerful than any major politician; that its Mises.org. raw political power requires that both parties 222Life Magazine, January 25, 1955, “The embrace it: “Where does an 800 pound Welfare State Is Here to Stay,” by Fletcher gorilla sit? Answer: Anywhere it wants to. Knebel. And where does the most popular 223President Roosevelt’s Message to government sit politically? You got it.” See Congress, Transmitting the Report of the Social Security, The Inside Story, by Andy Committee on Economic Security, p. 3. This Landis, p. 13 (Crisp Publications, Menlo can be found at the Social Security Park, Calif., 1997). Administration’s history web page.

______

Ludwig von Mises Institute Essays in Political Economy 48 ______reduced unemployment, increased cut,226 and so on. But before he buying power, and a reduction in could go ahead with a Social welfare programs. But even though Security plan, FDR, who had not some initially thought that stressed major new programs in the eventually—by 1965—Social campaign in 1932, had to move Security would have to be paid for slowly and employ clever political in part through general revenues as strategies to disguise a major new payroll taxes would reach their commitment of the federal limit, FDR still insisted that the government. program would be economically sound: “as more and more workers Social Security was not the first major qualified for old-age insurance, social insurance scheme offered during fewer and fewer workers would the economic traumas of the 1930s. need old-age assistance. The Many others were also under debate by insurance would gradually liquidate the time Social Security was finally much of the need for the relief introduced in 1935. But some of the program.”224 The reduction of elements of these plans showed up in poverty would save the government Social Security. In the next section, we so much money that it would offset will see some of these competing plans the costs of the program. and their similarities to the final Social Security law. To predict that a huge part of the welfare state could be gradually Section V— liquidated was, of course, a dream. FDR’s Answer to It was a dream as incredible as the dream of Reagan Republicans in “Every Man a King” 1980 who promised, if elected, to shut down the departments of Social Security would require a Energy and Education;225 as worker “to retire from competition and to spend his pension money.” incredible as the promises of 227 various politicians that defense —S. Tynes, historian spending would be curtailed, that there would be a middle class tax “If Dr. Townsend’s medicine were a good remedy, the more people one could find to support in idleness, the better off it would be.”

224Ibid. 226Putting People First: How We Can All 225For Reagan’s unfulfilled commitment to Change America, by William Jefferson breaking up two federal cabinet level Clinton (Times Books, New York, 1992). departments, see Lou Cannon’s President 227Turning Points in Social Security , by S. Reagan: The Role of a Lifetime, p. 86 Tynes, p. 52 (Stanford University Press, Palo (Simon & Schuster, New York, 1991). Alto, Calif., 1966).

______

Ludwig von Mises Institute Essays in Political Economy 49 ______

—Walter Lippmann228 In this respect, Social Security was in The Economic Security Package: keeping with a Malthusian/Frederick A No-Growth Philosophy Jackson Turner philosophy, which had impressed FDR. Turner, a For FDR, Social Security was to be historian of the Progressive era, held depicted as the most effective and that the closing of the frontier at moderate method of reducing beginning of the 20th century had unemployment. At the same time, he foreclosed growth.230 Urbanization claimed it was in keeping with the was straining family ties, and the American traditions of free enterprise industrial plant had been overbuilt. because it wasn’t a dole. It was Turner, who was revered by both designed to generate buying power Roosevelts and by Woodrow Wilson, and reduce unemployment. The held that the frontier, while it had unemployment insurance would existed, had acted as “a safety maintain buying power in times of valve,”231 a place where workers high unemployment. could always find free land and start afresh. They could escape from the Social Security’s pension functions— tyranny of an industrial economy, which could be activated only if a from the uncertainties of the business person virtually withdrew from cycle. work—were also designed to ration jobs, passing them from the elderly to In the 1930s, FDR argued that the the young. Hopkins and FDR agreed frontier was closed. Freedom could no that America was going to have a longer be achieved by the individual high unemployment rate for the himself, FDR said. The individual was foreseeable future, with little hope of now the “forgotten” man and woman. improvement229 (this evaluation was The forgotten man must look to the restricted to private conversations). government for an equitable share of The country could not grow its way out of its economic problems. A 230 FDR, on September 23, made this permanent welfare state was needed. statement on the campaign trail: “Our industrial plant is built; the problem just now 228From Freedom from Fear: The American is whether…it is not overbuilt. Our last People in Depression and War, by David M. frontier has long since been reached, and Kennedy, p. 257 (Oxford University Press, there is practically no more free land.” See New York, 1999). The Progressive Historians: Turner, Beard, 229Hopkins was pessimistic about industry’s Parrington, by Richard Hofstader (Alfred A. ability “to absorb all able -bodied workers,” Knopf, New York, 1968) for an interesting and he expected permanent unemployment essay on Turner’s effect on FDR’s neo- of four to five million. See The Great Malthusian economic thinking (p. 90). See Depression: Opposing Viewpoints, Bruno also The Memoirs of Herbert Hoover, 1929- Leone, exec.ed., pp. 227 and 263 41, p. 244 (MacMillan ,New York, 1952). (Greenhaven Press, San Diego, 1994). 231Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 50 ______national wealth.232 Only with the help would be apparent in the first Social of the government, providing Security law. Section 202(d) read: protection, could the individual be “Whenever the (Social Security) free.233 Board finds that any qualified individual has received wages with Programs such as Social Security— respect to regular employment after with its unemployment, pension and he has attained the age of sixty-five, welfare features—had become the old age benefit payable to such an necessary because America, as FDR individual shall be reduced, for each and Hopkins believed, was going to calendar month in any part of which have a permanently large number of regular employment occurred, by any unemployed. A recovery to pre-1929 such amount equal to one month’s levels was not on the horizon, they benefit.”235 Put another way, those privately agreed, a self-fulfilling who expected to receive Social prophecy through the rest of the Security’s old-age insurance 1930s. payments and wanted to continue to work would be allowed to earn only Despite FDR’s public insistence that “pin money.”236 Social Security and other federal programs were designed to support a Thunder on the Left: healthy private sector and that “It Can’t Happen Here” “Happy Days Are Here Again,” FDR seemed to have little hope the nation could grow its way out of the 235 depression. He told Frances Perkins, The Social Security Act, p. 7, at www.ssa.gov/history/reports/ces/cesbookape “Depression America had work only n16.html. See also an article from the for so many. Forcibly idling some October 1996 issue of The Free Market, was the price of securing a living published by the Ludwig von Mises Institute wage for others.”234 in Auburn, Alabama. In “Social Security Reform: True and False,” economist Dale Steinreich says the institution of retirement Rationing of jobs, discouragement of was “a malicious form of government thrift and the work ethic, and pushing planning” to reduce the unemployment rate. of the elderly out of the workforce Steinreich notes that Social Security ensured that “the most experienced and knowledgeable workers” were taken out of 232What Roosevelt Thought: The Social and the work force because of Social Security. Political Ideas of Franklin D. Roosevelt, by 236That term was used by Barbara Thomas H. Greer, p. 16 (Michigan State Armstrong, a member of the Committee on University Press, East Lansing, 1958). Economic Security that essentially wrote the 233Ibid., Hofstader. first Social Security law. See The History of 234Freedom from Fear: The American Retirement: The Meaning and Functioning People in Depression and War, by David M. of an American Institution, 1885-1978, by Kennedy, p. 257 (Oxford University Press, William Gaebner, p. 185 (Yale University New York, 1999). Press, New Haven, Conn., 1980).

______

Ludwig von Mises Institute Essays in Political Economy 51 ______

FDR and his allies clearly felt wealth. He was instrumental in helping political pressures from the left when elect FDR in 1932, especially in they formulated Social Security. frustrating the attempts of New York Many socialist/redistributionist Democrat Al Smith. Long and FDR pension schemes were floating about shared a belief that in the early 1930s. FDR couldn’t inflationist/redistributionist remedies ignore the power of these proposals, would restore the economy. many of which were crackpot ideas or simply attempts to use strong FDR believed in bigger inheritance economic inducements to persuade taxes. He wanted to expand taxes on people to retire. FDR used some parts the rich, and he supported a more and principles of these plans. Still, progressive income tax code. In his he designed Social Security to seem 1935 tax message, he said, “creative tame by comparison with them so he enterprise is not stimulated by vast could depict his own plan as inheritances.”239 Later, during World moderate. The most dubious of these War II, FDR pushed his arguments competing pension plans may have further when he proposed that that all been the share-the-wealth plan of personal incomes above $25,000 be Senator Huey Long. taxed at a 100-percent rate; Congress rejected this proposal.240 A demagogue who controlled his state with an iron fist,237 Long Long and FDR agreed on a larger delighted in the title “the Kingfish,” government and redistribution of the name of a radio character in the income. They disagreed on the extent popular “Amos & Andy” radio show. of these policies. Long, whose Long was thought by some to be a economic populism had taken votes fascist, a potential American away from Socialists in his state, Mussolini. He was profiled by the argued that the New Deal, including socialist novelist Sinclair Lewis as a the proposed Social Security plan, would-be American dictator in the had not gone far enough. Almost two novel It Can’t Happen Here.238 years into FDR’s first term, Long Long, in his “Every Man a King” plan, turned on the president and became a wanted a radical redistribution of bitter critic because the administration wasn’t radical enough for him.241 One of Long’s criticisms, 237Huey Long: a Candid Biography, by Forest Davis (New York, 1935). 238It Can’t Happen Here, by Sinclair Lewis 239The New Deal: America’s Response to the (Sun Dial Press, Garden City, N.Y., 1935). Great Depression, by Ronald Edsforth, p. Lewis depicts a fascist dictatorship of the 241 (Blackwell Publishers, Malden, Mass., United States led by a Senator Buzz 2000). Windrip, who promises various schemes to 240Ibid. provide wealth to the poor. Windrip 241The entire Huey Long program is represents Long. sympathetically laid out by Henry M.

______

Ludwig von Mises Institute Essays in Political Economy 52 ______however, already was obvious: The Long called for the federal New Deal was failing to restore a government to limit fortunes and strong economy. The economy had redistribute income. “Our present come nowhere near the growth levels plan is that we will allow no one man of the 1920s. Stronger inflation and to own more than $5 million,”244 he greater redistribution measures were said in a 1934 speech. He also called needed, Long asserted. The for the government to guarantee administration feared Long was a every family $5,000 in annual loose cannon. FDR thought Long income, what Long called “a fair could be a spoiler and put the GOP share of the income of this land back in power in the next presidential thereafter to that family so that there election. will be no such thing as merely the select to have those things, and so Long, indeed, hoped to do exactly there will be no such thing as a that. His big-picture strategy was to family living in poverty and run in 1936, but win in 1940, taking distress.”245 Senator Long said his the White House from the GOP that program would make “every man a would take it from FDR.242 Long had king.”246 some political ammunition: the New Deal wasn’t working—not if its goal Thunder on the Left II was to restore the growing economy of the 1920s. Long, in 1935, took the Among the other radical ideas in the Senate floor to complain, “We have political arena in the early 1930s one million more men out of work were the Townsend Plan and the now than one year ago.”243 proposals of Upton Sinclair, the socialist novelist who wrote The Christman, ed., in Kingfish to America: Share Jungle. Sinclair said the “private Our Wealth —Selected Senatorial Papers of ownership of tools, a basic freedom Huey Long, p. 128 (Schochen Books, New when tools are simple, becomes a York, 1985). 242 basis of enslavement when tools See Arthur Schlesinger’s Coming of the 247 New Deal, p. 312, where he notes that Long become complex.” Sinclair’s End tried to stop FDR’s Social Security plan, Unemployment in California program which he believed didn’t go far enough (EPIC) was designed to have the compared to his “share the wealth” plan. 243The unemployment rate, almost two years into the New Deal, was still 21.7 244Ibid. percent in 1934, not much better than the 245For a detailed account of Long’s share- 23.6 percent of 1932. Statistical Abstract of the-wealth scheme, see Huey Long, by Harry the United States (Government Printing T. Williams, pp. 677-706 (Vintage Books, Office, Washington, D.C., 1960). Also see New York, 1981). Franklin Roosevelt and the New Deal, 246Christman, p. 128. 1932-1940, by William E. Leuchtenburg, 247Upton Sinclair, American Rebel, by Leon pp. 179-80 (Harper Torchbooks, New Harris, pp. 297-317 (Thomas Y. Crowell York, 1963). Company, New York, 1975).

______

Ludwig von Mises Institute Essays in Political Economy 53 ______government manage the economy to the Townsend Plan, which called for ensure there would be no scarcity. It giving everyone over 65 a monthly included a proposal for the payment of $200, provided each government to establish an exchange beneficiary spent it all each month and agency to bring the unemployed and stopped working.251 It was to be the owners of empty factories into financed with a 2-percent national contact. Workers would produce sales tax.252 Of course, no one could whatever they could, and send it to a say whether the tax would stop at 2 central depot for trade. The idea was percent. (Social Security also began as to let “workers produce for a 2-percent tax on the first $3,000 of themselves,”248 Sinclair wrote. He income, and the tax was to be split also warned, “Autocracy in business between the employer and cannot exist alongside democracy in employee.253 The tax was envisioned government.”249 to go no higher than 5 percent, but the rate has been raised dozens of times Sinclair surprised many by winning the since 1935.) The president, under the Democratic gubernatorial nomination Townsend Plan, was given the power in California in 1934. Although he lost to raise the tax to 3 percent. Most in the general election to a sitting GOP economists warned that the Townsend governor, he garnered some 880,000 Plan would have taken billions of votes and ran a surprisingly strong dollars from one group and given it to race. another, and that its effect on the economy would have been disastrous. The FDR administration vacillated on Upton Sinclair’s candidacy. (In the All of these plans called for much end, the party ignored him and his more than just helping elderly who schemes.) Nevertheless, the idea of were in need. They would have had greater control of the economy the government radically redistribute through social insurance programs was gaining currency. An admiring 251The Formative Years of Social Security, Sinclair biographer, writing about his by Arthur Altmeyer, pp. 9-10 (University of strong showing, said, “the results Wisconsin Press, Madison, 1966). indicated that the moment for Social 252Social Security: The First Half Century, Security legislation had arrived.”250 A Gerald Nash, ed., pp. 35-36 (University of New Mexico Press, Albuquerque, 1988). year later this prediction came true. 253 Social Security: The Inherent Contradiction, by Peter J. Ferrara, pp. 2-31 Another example of a popular social (Cato Institute, San Francisco, 1980). See insurance proposal of this time was also Congressional Research Report for Congress: Major Decisions in the House and Senate Chambers on Social Security, 248Ibid. 1935-1985, by Carmen D. Solomon, p. 249Ibid. CRS-5 (Library of Congress, Washington, 250Ibid. D.C).

______

Ludwig von Mises Institute Essays in Political Economy 54 ______wealth. These competing social elderly to destitution.”255 The idea of insurance proposals, especially the moving the elderly out of the work most radical ones, helped influence force was praised years afterward by the birth of Social Security. Social one of FDR’s aides, who saluted Security was to be a less radical Townsend, saying he “was a good old version of the same ideas. FDR, in man. He meant well.”256 some cases, used parts of these proposals because he saw these other FDR wasn’t so charitable in speaking versions of social insurance as a of Huey Long,257 but there is political threat. evidence that Social Security borrowed some components of the Stealing from Townsend “every man a king” idea. For and the Kingfish example, Long proposed old-age pensions for all persons over 60 years FDR depicted himself as the man in of age “who did not earn as much as the middle who was the voice of $1,000 per year or who possess less moderation.254 He was neither a than $10,000 in cash or property, “heartless” conservative who would thereby to remove from the field of let the elderly poor and the labor in times of unemployment those unemployed starve, nor a radical who have contributed their share to socialist who wanted to put people on the public service.”258 a dole that might discourage them from working. Nevertheless, FDR An essential part of Social Security used economic incentives to persuade was paying people to leave the elderly people to stop working. workforce because one could not depend on the private sector to One commentator says FDR was generate sufficient jobs, as FDR and saving capitalism by “incorporating his allies believed. All these just enough socialism into the U.S. proposals also looked to the public system to give it a measure of immunity against the charge that it 255The Roosevelt comment is from The was abandoning the unemployed Retirement Myth , by Craig S. Karpel, p. 148 (Harper Collins, New York, 1995). 256From Francis Perkins’s 1962 speech, 254FDR said he was “fighting Communism, “The Roots of Social Security,” p. 6. It can Coughlinism, Townsendism…I want to save be found at the Social Security web page, our system, the capitalist system; to save it www.ssa.gov/history/perkins5.html. is to give some heed to world thought of 257FDR considered Long one of the most today. I want to equalize the distribution of dangerous men in the country. See The FDR wealth.” See Insuring Inequality: Years: On Roosevelt and His Legacy, by Administrative Leadership in Social William E. Leuchtenburg, pp. 77-80 Security, 1935-1954, by Jerry R. Cates (Columbia University Press, New York, (University of Michigan Press, Ann Arbor, 1995). 1983). 258Christman, Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 55 ______sector, and a mandatory government necessary to steal a little from good pension system, as the way to provide old Doctor Townsend.”262 old-age protection and to increase buying power. Long also proposed And in Social Security, there are bits that “every family should be and pieces of the thinking of Long, furnished by the government with a Townsend, and Sinclair. But while homestead alliance, free of debt, of FDR found some parts of these not less than one third of the average programs interesting and desirable, family wealth of the country, which how would he use them? Which plan means, at the lowest, that every should he choose? How would he family shall have the reasonable weave parts of them into his economic comforts of life up to the value of security package? And finally, while from $5,000 to $10,000.”259 one of these plans might provide political benefit for FDR, did any Given the strength of the Townsend make economic sense? Would any of movement and Long’s considerable these plans actually bring about a political following, FDR felt recovery? compelled to steal some of their thunder in putting together his social Many economists and historians saw insurance program. “Long,” said one most of the plans as redistributionist friendly historian, “forced Roosevelt schemes that would hurt the to the left, thereby expanding the economy. But again, the bigger scope of the New Deal and hastening challenge for FDR and his social its enactment.”260 Francis Perkins, in democratic allies was political: How arguing for an FDR-backed Social could one actually enact some part of Security plan, recognized the any of these schemes? What was pressures from plans such as those politically possible in the mid-1930s? offered by Long and Townsend. FDR agreed: “We have to have it. Section VI— The Congress can’t stand the pressure Changing the Terms of of the Townsend Plan unless we have a real old-age insurance system Social Insurance Debate nor can I face the country without having devised one at this time.”261 “On June 29, 1934, the president John T. Flynn, a financial columnist issued Executive Order 6757 creating the Committee on Economic and FDR critic, wrote, “Roosevelt 263 observed to his intimates that it was Security.”

259Ibid. 262The Roosevelt Myth, by John T. Flynn, p. 260Ibid. 73 (Devon-Adair Company, New York, 261From Frances Perkins’s The Roosevelt I 1961). Knew, p. 294 (Harper & Row, New York, 263Social Security and Its Enemies: The Case 1946). for America’s Most Efficient Insurance

______

Ludwig von Mises Institute Essays in Political Economy 56 ______

terms of the debate so that when “At all levels (of the Committee on Congress considered the issue in Economic Security), the process was 1935, lawmakers were awed by heavily stacked in favor of those who experts who had all the facts. These favored social insurance. Industrial experts were difficult to challenge and business groups known to oppose because during the most important social insurance, such as the debates on social insurance these National Association of experts were participants, while Manufacturers, were not asked to members of Congress were not. participate.”264 As FDR prepared to move ahead with A Bismarckian Victory for his social insurance strategy, several American Social Insurance plans, including pensions and federal Advocates unemployment insurance, were already pending in Congress in the For more than 20 years, Congress had 1933-34 session. The authors of the rejected almost every social insurance Wagner-Lewis bill attempted to plan offered. Now, in FDR’s first persuade the states to enact term, with a heavily Democratic unemployment insurance programs Congress and a big victory in the 1932 by partially funding them with presidential race, it was time for FDR federal dollars. Other bills introduced to do something about his promise, by Senator Clarence Dill and made to Francis Perkins and others, to Representative William Connery, pass social insurance legislation. He passed in the House, died in the was ready, with strategies that finally Senate. turned the tide for social insurance and gave America its first Social FDR endorsed the Wagner-Lewis bill Security law. at the outset of the session, saying the bill’s “general principles…seem to Social Security advocates used me sound…and I hope that the bill another advantage in addition to the will be passed by Congress at this crash and the depression that never session.”265 FDR had made social seemed to end: They took the debate insurance a legislative priority in the away from lawmakers and the public 1933-34 session. 266 However, he then and turned it over to experts they surprised many of his allies when he selected. These experts redefined the 265Roosevelt quoted in Louis D. Brandeis, Program, by Max J. Skidmore, p. 35 Felix Frankfurter, and the New Deal, by (Westview Press, Boulder, Colo., 1999). Nelson L. Dawson, p. 107 (Archon Books, 264A New Deal for Social Security, by Peter Hamden, Conn., 1980). Ferrara and Michael Tanner, p. 20 (Cato 266The Coming of the New Deal, by Arthur Institute, Washington, D.C, 1998). Schlesinger, Jr., pp. 301-03 (Houghton Mifflin Company, Boston, 1959).

______

Ludwig von Mises Institute Essays in Political Economy 57 ______announced that he wanted a more also believed that business was “too comprehensive approach to social stupid” to realize how good social insurance than just one old-age or insurance would be for it.269 Wagner unemployment program. He sought was one of the chief sponsors of the “sweeping legislation dealing with new FDR-endorsed plan that was jobs.”267 ready in early 1935.270

FDR also wanted the legislative battle In 1934, Wagner announced that over social insurance to stop while his “Unemployment insurance, old age experts studied the issue, even though pensions, health insurance, more at least one of the bills seemed to have leisure for the ordinary fellow—all a good chance of passage. The Dill and these things are coming, and coming Connery plan was one of the more soon.”271 More important, he asserted moderate of various government that such programs were vital pension schemes in the arena. The “because the economic stability of Dill/Connery measure called for our whole society depends on federal grants to states that adopted them.”272 Here was another example old-age pension laws, with the federal of countercyclical Keynesian government picking up about 30 thinking at work. percent of the tab.268 FDR not only wanted something more But despite Wagner’s rosy comprehensive, but he also wanted a predictions, the question for liberals, process over which he would have Social Democrats, and others who greater control. wanted a welfare state remained: How could this become a reality in a Senator Robert Wagner, a key New nation that, even during the Great Deal ally, agreed with FDR and his Depression, repeatedly rejected associates about the need for change socialism? The answer was to present in America. He believed a welfare a program and a welfare state that state, one that would use a represented socialism without the “Bismarckian” social insurance labels.273 America, in the eventual program as a model to decrease the volatility of the business cycle, 269The History of Retirement: The Meaning needed to come to America. Wagner and Functioning of an American Institution, 1885-1978, by William Graebner, p. 197 (Yale University Press, New Haven, Conn., 267From Promises to Keep: Saving Social 1980). Security’s Dream, by Marshall N. Carter and 270Robert F. Wagner and the Rise of Urban William G. Shipman, p. 32 (Regnery Liberalism, by J. Joseph Huthmacher, p. 174 Publishing, Washington, D.C., 1996). (Atheneum, New York, 1967). 268The Real Deal: The History and Future of 271Ibid. Social Security , by Sylvester J. Schieber and 272Schlesinger, pp. 304-05. John B. Shoven, p. 27 (Yale University 273This was the strategy used by social Press, New Haven, Conn., 1999). insurance advocates in England, where the

______

Ludwig von Mises Institute Essays in Political Economy 58 ______passage of Social Security, would be given “socialism without Social Security advocates said it was doctrines.”274 not a welfare program. FDR stressed that it was not a dole, but that it “Some Kind of Socialism… would be based on principles as close Will Be Realized” to private insurance as possible.277 Its benefits would be earned, not given. In the 1930s, commentator and But most of all, Social Security financial columnist John T. Flynn advocates claimed it was insurance. wrote that Americans were This strategy was emphasized in the “producing socialism and an beginning years of the social organization of society under private insurance movement, but squelched ownership without capitalism.”275 in the first Social Security law, where John Dewey, the preeminent no mention of insurance is made for American philosopher of the period fear the courts would strike it down. and a Social Democrat, wrote: “We are in for some kind of socialism, call Indeed, the legislative draftsman of it whatever you please, and no matter the first Social Security bill, Thomas what it will be called when it will be Eliot, expressed “very grave realized.”276 doubts”278 about the constitutionality of the bill. In his memoirs of the New As elements of American Social Deal, he would concede that he Democratic groups were pushing a purposely made the first Social package of path breaking social Security law confusing.279 Later, in insurance programs, they needed a 1937, after the court held that the way to sell the program. It couldn’t program was constitutional, be sold as “spending money” or advocates of Social Security resumed “helping the poor.” It could not be calling it insurance.280 depicted as socialism. welfare state was started by a Liberal 277Schlesinger, p. 308. government, and in Germany, where it was 278See Thomas H. Eliot’s essay, “The Legal begun by a Conservative government. Background of the Social Security Act,” at 274From an article on the origins of the www.ssa.gov/history/eliot2.html. welfare state in the Dictionary of the History 279Recollections of the New Deal, by of Ideas, Vol. IV, Philip Weiner, editor-in- Thomas H. Eliot, pp. 102-115 (Northeastern chief, p. 510 (Charles Scribner’s Sons, New University Press, Boston, 1991). York, 1973). 280Once Social Security had survived a U.S. 275Prophets on the Right: Profiles of Supreme Court case, the name was officially Conservative Critics of American changed from the “Old-Age Benefit Globalism,” by Ronald Radosh, p. 199 Program” to the “Old Age Insurance (Simon & Schuster, New York, 1975). Program” because the Social Security 276See John Dewey’s Individualism Old and bureaucracy was going to sell the program New (Mincton, Balch, New York, 1930). as a form of insurance. See a detailed

______

Ludwig von Mises Institute Essays in Political Economy 59 ______

During the debate over the first law, FDR’s pulling back from social insurance advocates also cited Connery/Dill, the first social economic justifications for Social insurance bill to make it out of a Security. FDR allies such as Senator congressional committee, seemed odd Wagner and Secretary of Labor at the time. In retrospect, it was a Frances Perkins argued that social clever tactic. He temporarily stopped insurance would have a battling for a package in Congress, countercyclical effect; that it would though he had claimed it was a top eliminate recessions and administration priority at the outset of depressions.281 The government the session, and though the prospects would manage the economy through were good for some kind of social these programs and through various insurance legislation. Nevertheless, price-fixing measures. there was always a chance that Connery/Dill might have been For their model, some social amended until social insurance insurance advocates also looked back advocates would not have recognized nostalgically on World War I and its it. More dangerous for their cause, war socialism. This was the period of the legislators, and not the experts, the War Industries Board (WIB) and would have had greater control of the the various collectivist ideas put into process.283 action by the federal government.282 However, the bureaucracies carrying FDR told allies he was going to come out these policies were largely up with his own package.284 He dismantled in the early 1920s. Now, would not initially ask some in the midst of the Great Depression, songressman or senator to do it. He there was another chance to use this would put it in the hands of the model and make it a permanent part of American life. 283Social Security historian Carolyn Weaver said of the 1935 debate: “Advocate-experts An End Run Around Congress: controlled the information made available to citizens and representatives, and Roosevelt “Government by Experts” worked diligently to control the choices that were presented.” See The Crisis in Social Security: Economic and Political Origins, chronology of Social Security events at Weaver, p. 76. See also Peter Ferrara and ssa.gov/history/chrono.html. Michael Tanner’s A New Deal for Social 281The Great Depression: Opposing Security, p. 20 (Cato Institute, Washington, Viewpoints, Bruno Leone, ed., pp. 162-68 D.C., 1998): “At all levels, the process was (Greenhaven Press, San Diego, 1994). heavily stacked in favor of those who 282See Murray N. Rothbard’s essay, “World favored social insurance. Industrial and War as Fulfillment: Power and the business groups known to oppose social Intellectuals”; in The Costs of War: insurance, such as the National Association American Pyrrhic Victories, John V. of Manufacturers, were not asked to Denson, ed., pp. 249 ff. (Transaction participate.” Publishers, New Brunswick, N.J., 1999). 284Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 60 ______experts, but he would decide which experts and what they would discuss. In addition to the main CES committee, there were 13 technical The Committee on Economic committees, and these produced most Security (CES) was created in the of the bureaucrats who administered summer of 1934 by executive order, a the program once it was approved. tack FDR found advantageous: A few These experts were appointed by years later, when he was fearful that FDR. He chose the experts who an “isolationist” Congress would not crafted the legislation through a path- approve a bases-for-destroyers deal breaking report—whose contents are with the British, he simply dubbed examined below—and he determined the deal an executive agreement, thus the outlines of the report. FDR removing a key foreign policy exerted control over these experts, decision from the authority of control he often lacked in his dealings Congress. In 1934, fearful that with Congress or the Supreme Court. Congress might not agree with his For instance, the CES wanted a ideas about social insurance and the mandatory health insurance program need for a welfare state, FDR included in its Social Security temporarily removed the debate from report.286 FDR said it was too soon Congress through an executive order for national health insurance and that creating his own committee. ended the issue.287 Certainly,

No members of Congress were on the 286Even though FDR wouldn’t allow CES, a fact that some congressmen compulsory medical insurance to be later thought gave the experts greater included in the economic security act, the CES medical advisory committee included a input than Congress on Social section that was not included in the 285 Security. The founding program of landmark 1935 report: “Although we realize the welfare state was thereby built that a difference of opinion exists as to the without significant Congressional advisability of establishing compulsory input. By the time the package came health insurance, we are convinced, after reviewing experience in this country and to Congress, debate was almost abroad, that the compulsory feature is secondary. essential to the accomplishment of the end in view.” See Madam Secretary, by George Martin, pp. 347-48 (Houghton Mifflin, 285Several senators, such as Champ Clark Boston, 1976). Still, FDR told many of his and Thomas Gore, complained that experts social insurance allies in 1935 not to be often outnumbered senators at committee disappointed because the first Social hearings. Typical was the complaint of Security bill was not as big as they wanted. Clark on June 19, 1935: “So it is with some More would be coming, he assured them: trepidation that a mere senator of the U.S. “We cannot eat the whole cat at one meal.” rises to appeal to his colleagues in this body, See Unemployment in History, by John A. and to differ from the opinions of a galaxy Garraty, p. 214 (Harper & Row, New York, of experts.” Congressional Record, 174th 1978). Congress, p. 9628. 287Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 61 ______congressional committee chairmen commonly used, highly effective couldn’t have been handled so easily. congressional strategy that continues to be employed today. It is a prime FDR Saves the American contributor to the growth of Welfare State government because it tends to add more things—often extraneous FDR must be credited with either things—to legislation; it is effective brilliance or luck for the way he because lawmakers often vote for overcame a problem in moving the bills they are philosophically opposed economic security package through to because the bills spend money on Congress. In the middle of the other things they support. This legislative process, congressional unwieldy process also results in leaders told him the entire package lawmakers voting on huge bills, would have to be broken up into much of which they don’t smaller pieces for some of it to understand.292 This is the story of the pass.288 And yet, FDR sent the 1935 debate over the first Social CES/economic security package to Security law. Congress for an all-or-nothing vote. In the words of one Social Security In 1935, members of Congress were official, FDR insisted “from the very confronted with an economic beginning that there should be one security/social security bill—some of omnibus bill, because his idea was which they liked, some of which they old age assistance, aid for dependent opposed, and a lot of which mystified children, aid for the blind were very even its supporters. To object to any popular,”289 and the most popular part of the bill meant one would be programs would carry the other labeled anti-social security. Since the ones.290 Thus, FDR was ready to let original bill encompassed some 10 Wagner’s initial bill die because “he new programs, at least one or two had bigger fish to fry.”291 might be favored by many of any given lawmaker’s constituents.293 Without the bulk of his economic security package, FDR threatened to History Repeats Itself withdraw his support. This go-for- broke approach with a something-for- everyone bill has become a 292See F.A. Hayek’s Constitution of Liberty, p. 510, f. 7, where he notes that 288Weaver, p. 64. much Social Security legislation passes 289The Transformation of Old Age Security: without amendment because it is “too Class and Politics in the American Welfare intricate and technical for piecemeal State , by Jill Quadagno, p. 109 (University amendment by persons not conversant of Chicago Press, Chicago, 1988). with all its complexities.” 290Ibid. 293For more on this see, my essay, “The 291Ibid. Disastrous Deal of 1972,” at Mises.org.

______

Ludwig von Mises Institute Essays in Political Economy 62 ______

The go-for-broke approach for Social principal committee were Francis Security was used by Social Security Perkins, chairwoman of the committee bureaucrats and welfare-state and secretary of labor; Henry supporters many times after 1935. Morgenthau, secretary of the For example, in 1972, in one of the Treasury; Homer Cummings, attorney most important votes in the history of general; Henry Wallace, secretary of the program, members of Congress agriculture; and Harry Hopkins, were put in a difficult position. They Federal Emergency Relief voted not only whether to raise administrator. benefits by 20 percent, but whether or not to add cost-of-living adjustments Edwin Witte, a career bureaucrat and (COLAs) to Social Security. The academic, was the executive director same 1972 Social Security bill also of the committee. Witte was a self- included raising the debt ceiling.294 described “government man.”296 Voting against Social Security thus There were no Samuel Gompers meant disabling the government, types (the labor leader discussed in something few members of Congress Section 2 who was suspicious of wanted to be blamed for, regardless social insurance) on these how one felt about Social Security. In committees. None of the handful of addition, a member of the Nixon congressmen who might vote against administration has conceded that both the bill was there. Congress and the administration approved the huge increases without The committee debated different any serious study of the effects of the social insurance models, but never the expansion.295 The legacy of FDR’s underlying philosophy of social tactical move continues to this day. insurance and its place in American life. The CES—as we will see—was The CES Goes to Work hostile to American business, blaming it for many of the problems of the FDR stocked the CES with men and nation just as Isaac Rubinow and women he knew were committed to Abraham Epstein had. Both Rubinow the principles of social insurance. and Epstein were consulted by the These people were also indifferent or CES. antagonistic to the voluntarist ideas and Jeffersonian traditions of limited Several other technical committees government. The members of the were formed to help the Committee on Economic Security. Almost all 294See the discussion at the Social Security members were from the public sector. Administration web site, They were usually men and women http://www.ssa.gov/history/law.html. who already were on record as 295See Will America Grow Up Before It Grows Old, by Pete Peterson (Random House, New York, 1996). 296See Witte, ibid.

______

Ludwig von Mises Institute Essays in Political Economy 63 ______favoring social insurance, men and experts who testified on the Social women who had been calling for a Security bill were social insurance social revolution in America for partisans, many of whom had devoted decades. Those few on the technical a lifetime to installing some form of or advisory committees from the an American welfare state. This was private sector were known for to be their moment of triumph after favoring progressive ideas; that is, decades of frustration. Most wanted they had no objections to social to use some form of either British or insurance. Some had served on the German social insurance. The CES’s War Industries Board in World War leaders and its report will be I. examined next.

For example, Gerard Swope, Section VII— president of General Electric, served The CES Goes to Work on one of the technical committees.

He favored social insurance and had “Hopkins began to formulate a plan been a member of the War Industries for a combination of social insurance Board. He wanted to substitute and government planning in the form cooperative planning for the of counter-cyclical public works to “uncoordinated, unplanned disorderly 297 help the American people attain individualism” in industry. Swope, 299 economic security.” along with other industrialists who —An associate of Harry Hopkins favored social insurance and the beginnings of an American welfare “But social insurance might almost state, argued for “the curtailment of 298 be defined as a form of insurance production to reasonable demand” which cannot live up to the exacting through trade associations. laws of insurance science. Then again it has been decried as rank The social insurance advocates, paternalism and this indictment must whether industrialists or social be readily admitted.”300 insurance experts, were in control of —(Isaac Rubinow) the most important part of this debate; Congress was not. The social A Social Democrat at the Helm insurance experts and advocates would control the information on In 1934, FDR set up the Committee Social Security once the bill was on Economic Security. This submitted to Congress. Most of the

297Working Paper 9405, Federal Reserve 299From Harry Hopkins: Sudden Hero, Bank of Cleveland: “The Federal Reserve Brash Reformer, by June Hopkins, p. 17 (St. before Marriner Eccles,” by Walker F. Martin’s Press, New York, 1999). Todd, p. 12. 300Social Insurance, by Isaac Rubinow, p. 11 298Quadagno, p. 106. (Henry Holt & Company, New York, 1916).

______

Ludwig von Mises Institute Essays in Political Economy 64 ______committee, and its sister committees, have been forgotten by succeeding Homer Cummings, attorney general generations of Americans. These and committee member, seemed to committees were filled with men and have no strong opinions and attended women who had been pushing for few meetings. Henry Morgenthau social insurance programs for was secretary of the Treasury and a decades. committee member. He often relied on the opinions of others for how this Their report called for more than a new program should be framed. No new program: it called for changes in one was going to argue about the the nation’s economy and in the philosophical implications of the American philosophy of government. welfare state they were trying to The welfare state grew out of the initiate, although Morgenthau and his Social Security Act of 1935, and the associates in the Treasury Social Security program grew out of Department questioned who would the report of this committee. What pay for Social Security.301 They was the CES, and who were its argued that the tax rates—as they members? were to be set—would be too low and that the next generation would be left The most important members were to pay the bills for the program. Harry Hopkins, FDR’s most trusted Morgenthau feared that one aide; Francis Perkins, secretary of administration would provide labor and committee chair; and benefits to constituents, enjoying Secretary of Agriculture Henry temporary political popularity, and Wallace. These three were strong then pass the bill to the next proponents of government pensions, generation. He argued that the “old federal unemployment insurance, a age provisions were unsound.”302 broadening of the public sector, and 301 economic planning. They were also “Mr. Haas [George Haas, director of all skeptical that the private sector research for the U.S. Treasury Department] was of the opinion that the old-age insurance could maintain a strong economy. provisions recommended by the committee were unsound and Secretary Morgenthau Once committee members were shared that view.” See The Development of selected, there was no chance they the Social Security Act, by Edwin Witte, p. would deliver a negative report on 73 (University of Wisconsin Press, Madison, 1962). social insurance. There was no strong 302 “We cannot safely expect future or committed member of the CES generations to continue to divert such large who was going to argue the case for sums to the support of the aged unless we private insurance, for American lighten up on the future generations.” From voluntarist traditions, or for allowing Morgenthau’s congressional testimony in the private economy to recover on its Epstein’s Insecurity, a Challenge to America, p. 737 (Random House, New own as it always had. York, 1938). Morgenthau’s doubts were

______

Ludwig von Mises Institute Essays in Political Economy 65 ______

FDR, responding to criticisms of this conveniently eligible for sort, eventually increased payroll Congressional raids through the taxes. years—is an utterly naïve conception. That it would remain intact and not Morgenthau’s criticism was suffer periodic depletions is more prescient, as echoed by a prominent than human nature in a political economist writing some three democracy can rationally decades later: “The first beneficiaries anticipate.”304 generally receive much more in benefits than they contribute and the Morgenthau also questioned whether last generation must be concerned creating a new set of agencies in the with who will pay for these midst of the Great Depression was a benefits.”303 good idea.305 Nevertheless, Morgenthau did not rock the boat; Some senators questioned whether after an impassioned plea from the government could be trusted not Perkins, he reluctantly signed the to highjack money earmarked for CES’s final report to FDR. However, Social Security. Senator Arthur Morgenthau did persuade FDR to set Vanderberg, two years after Social up a new, higher payroll-tax schedule Security became law, said, “Such a than originally projected to ensure treasure—all in one place and that the system built up a big reserve and that it didn’t have to dip into confirmed by an HEW secretary in the early general revenues. This big reserve 1960s: Abraham Ribicoff had argued that financing method would be changed political pressure would never allow payroll in the 1939 reform so that the system taxes to exceed 10 percent, but he was proved wrong in his lifetime. Social Security would be run on a pay-as-you-go- rates expanded well beyond that rate. See basis. Policymaking for Social Security, by Martha Derthick, p. 203 (Brookings Institution, The problem of paying for Social Washington, D.C., 1979). Security has been an enduring 303 See Turning Points in Social Security , by S. Tynes, p. 32 (Stanford University Press, headache for taxpayers and for Palo Alto, Calif., 1966). The problem, per politicians trying to justify the economist Murray N. Rothbard, is that the system. Should the system be bill for Social Security keeps growing: “For prepaid, with a big trust-fund reserve the government does not invest the funds it takes in taxes; it simply spends them, giving itself bonds which must be later cashed when 304Vanderberg’s comment is from Socia l the benefits fall due. How will the cash then Security after 50: Successes and Failures, be obtained? Only from further taxes or Edward D. Berkowitz, ed., pp. 50-51, inflation. Thus, the public must pay twice for (Greenwood Press, New York, 1987). social security.” See Power and Market, 305The Coming of the New Deal, by Arthur Government and the Economy, p. 136 Schlesinger, Jr., pp. 308-09 (Houghton (Institute for Humane Studies, Menlo Park, Mifflin, Boston, 1959). Calif., 1970).

______

Ludwig von Mises Institute Essays in Political Economy 66 ______that could be raided by politicians Security bill. Cohen became a looking to pay off special interests? prominent Social Security bureaucrat. Or should it be a pay-as-you-go He rose through the civil service to the system, where current taxpayers pay position of secretary of the Department current beneficiaries? of Health, Education, and Welfare in the 1960s. He was so identified with Critics feared that beneficiaries the program that he became known as would become so focused on raising “Mr. Social Security.” their benefits, they wouldn’t care about the bills they were leaving for Cohen “despised”307 business and the next generation. Politicians found its routines “dull.” Isaac seeking reelection, who made the Rubinow’s writings, which Cohen decisions on benefit levels and taxes, greatly admired, were also would pay no mind to the future. The contemptuous of business. Rubinow politics of the system were always a even praised Karl Marx at times, and primary issue, even at the outset in he admired German economists for 1935. Despite claims that Social never accepting laissez-faire Security would have a beneficial economics. One historian wrote that countercyclical effect, there was little the common thread running through serious consideration of the opposite: New Deal legislation “was an anti- the possibility that a big, new business animus.”308 program, in the midst of an economic disaster, might retard a recovery, as It is significant that Perkins was taxes drained consumer buying charged with chairing the CES. She power. Social Security might hurt was a social democrat who was struggling businesses by adding suspicious of business. Perkins had another cost, critics contended. traveled to Britain to study its welfare state and believed many of the UK’s But, as with much of the rest of the measures should be adopted by New Deal, many Social Security America. She accepted a Cabinet post leaders and CES members were anti- in FDR’s administration in 1933 on business. Wilbur Cohen, a young the condition that social insurance progressive, was hired for the CES would be a top priority and that it staff by Edwin Witte, the executive director of the CES and a self- 307 described “government man.”306 “Cohen found the routines of the grocery dull and claimed to despise the business Cohen was initially assigned to world.” See Mr. Social Security: The Life of monitor the progress of the first Social Wilbur Cohen, by Edward Berkowitz, p. 9 (University Press of Kansas, Lawrence, 1995). 306Madame Secretary, by George Martin, p. 308See A New Deal for the American People, 344 (Houghton Mifflin Company, Boston, by Robert Biles, p. 131 (Northern Illinois 1976). University Press, DeKalb, 1991).

______

Ludwig von Mises Institute Essays in Political Economy 67 ______would lead to new programs. planning in the form of countercyclical Although Perkins did not identify public works to help the American herself as a socialist, she wanted to people attain economic security.”312 move the Democratic Party to the left Aubrey Williams, a CES member and and have it adopt some of the ideas of longtime social insurance advocate, European democratic socialist said of him: “It is not too much to say governments. “As I see it, we shall that the entire social security program have to establish in this country got its first great impetus from substantially all of the social insurance Hopkins’s decision that day.”313 measures which Western European Hopkins also believed that a huge countries have set up in the last permanent federal structure was generation,”309 she wrote to FDR on needed because a permanently high the eve of the debate over Social number of jobless was inevitable. He Security. seemed skeptical that the private economy could ever recover and again She was a critic of business and of the generate prosperity.314 American philosophy of limited government. In one of her books, she Hopkins, as head of the Works sneered at the Jeffersonian tradition of Progress Administration (WPA), limited government—“Whatever that pushed for the expansion of the was.”310 public sector as the way to cure depressions. He also believed in Harry the Hop using political organizations to distribute jobs.315 This led to constant Harry Hopkins was a New York City controversy surrounding the eight social worker who labored for two years of the WPA, especially because decades to create government social Hopkins was quoted as saying that insurance programs. He was “a strong the Democrats would “spend and advocate of state assistance as against spend and elect and elect.”316 a private relief system.”311 He became one of FDR’s key advisers, It also meant controversy, as one and it was FDR who affectionately group of Democrats was favored over nicknamed him “Harry the Hop.” the other, and enemies of FDR could find themselves threatened with the As early as 1932, “Hopkins began to formulate a plan for a combination of 312 Hopkins, p. 157. social insurance and government 313Ibid, p. 166. 314Ibid. 309Schlesinger, p. 304. 315From The Uneasy State: The United 310From The Roosevelt I Knew, by Francis States From 1936 to 1945, by Barry D. Karl, Perkins, p. 24 (Viking Press, New York, pp. 135-36 (University of Chicago Press, 1946). Chicago, 1983). 311June Hopkins, p. 72. 316Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 68 ______loss of federal aid as penalty for a laissez-faire and embrace a lack of political loyalty.317 Hopkins corporatist/welfare-state philosophy. wanted more than a more efficient The report was the basis for what system of patronage. Working on the would become the most important CES report, he hoped “to have a domestic program in American permanent government jobs program history, the program from which the included in this broad array of cradle- welfare state would grow. Social to-grave economic safeguards for all Security transformed American Americans.”318 society, culture, and government.

Henry Wallace, who was elected vice The CES Indicts president in FDR’s third term, was a America’s Backwardness supporter of FDR’s convergence philosophy; both thought the United America lagged behind the States and the Soviet Union were to “advanced” countries of the West in converge in their philosophies of not adopting a social insurance government. Wallace also subscribed framework, as FDR said in a letter to the New Deal idea that the federal with the CES’s report to Congress.320 government must use fiscal and The report said that America must monetary policies to “balance” catch up with the rest of the world. production and consumption,319 which put Wallace in tune with most The main theme of the report was the New Deal thinkers who saw central need for social insurance programs planning and autarchy as the best such as unemployment insurance, ways to bring America out of the old-age assistance, and government depression. pensions in the midst of the Great Depression. But what strikes anyone The CES members discussed above, reading this document is how the the most influential on the committee, committee went beyond the issue of helped produce a report that justified social insurance. In the spirit of American social insurance. It was a Henry Seager, Isaac Rubinow, and road map for a mixed economy, for Abraham Epstein, it indicted the an American state that would reject private economy. The report is more than a blueprint for an American

317 welfare state; it is a bitter criticism of FDR, angry with Robert Moses, the American individualist values and of highway czar of New York, threatened to cut off federal aid to New York City if capitalism. Moses wasn’t removed. This episode is detailed in Robert A. Caro’s Power Broker: Robert Moses and the Fall of New York , pp. 320President Roosevelt’s Message to 426-62 (Alfred A. Knopf, New York, 1974). Congress: Transmitting the Report of the 318The Uneasy State, p. 180. Committee on Economic Security,” p. 1, 319Schlesinger, pp. 83-84. ssa.gov/history/reports/ces3.html.

______

Ludwig von Mises Institute Essays in Political Economy 69 ______

The decade of the 1920s, a decade of great growth for the American The CES report is clear that these economy, was, in fact, not a good social insurance/economic security time for the country, the report said. programs must be permanent and America’s great growth rates during could not be voluntary. Speaking of most of the decade were an illusion: unemployment insurance, the report “Many people lived in straitened holds that, “[s]ome European circumstances at the height of unemployment insurance systems are prosperity; a considerable number voluntary, but the experience live in chronic want.”321 Social everywhere has been that compulsory insurance, from welfare programs to coverage is necessary to include a public employment, must be made a majority of the industrial workers.”324 permanent part of the nation’s economy, according to the report, The economic problems of the even after prosperity was restored. early 1920s could have been eased The problem of America’s if a uniform system of state unemployed was America’s unemployment insurance had been employers, many of whom were at in existence. But there was a fault. “There would be no danger of leaving the problem of unemployment problem,” the report unemployment insurance to the complained, “if all workers were states. The problem, in essence, guaranteed a sufficient annual was federalism. What if some wage.”322 states, the CES warned, enacted systems and others didn’t? States And if private employers would in the latter category, the report provide their workers with claimed, would have “an unfair “guaranteed employment,”323 the advantage.”325 report said, unemployment insurance would likely be superfluous. So, the report said, “This obstacle to However, there is no discussion in State action can be removed only this report about what constituted “a through the imposition by the Federal sufficient annual wage,” or how Government of a uniform tax [rate of employers, in the hard times of the contribution] on all employers 1930s, could guarantee employment throughout the country, so that no or even guarantee their own survival. State will have an unfair advantage.”326 States that wanted to Contemplating an “Expansion in Federal Social -Welfare Activities” 324Ibid. 325Ibid, page 9. 321Report of the Committee for Economic 326The report reads that with a “uniform pay- Security, Ibid., CES5, p. 2 of the report. roll tax it will be possible to remove the 322Ibid., p. 18. unfair competitive advantage that employers 323Ibid. operating in States which have failed to

______

Ludwig von Mises Institute Essays in Political Economy 70 ______participate in the unemployment engage in a continuous program of insurance system—and with public works and a central planning unemployment running at around 25 board would have to be set up by the percent, what state could withstand federal government. Only the public the political pressure of turning its sector, the CES held, could ensure back on this opportunity?—would that everyone would have an have to meet federal standards to adequate minimum income, a point I qualify for the aid, a provision that examine in the next section. also applied to the pension functions of Social Security. “Hereafter, the Federal Government will still have a large and continuing The government must not only offer responsibility for many parts of the various social insurance programs, heretofore undifferentiated relief according to the report, but it must do program and some of our something else. It must become the recommendations contemplate employer of last resort in good times expansion in Federal social-welfare as well as bad; it must engage in a activities.”329 kind of industrial policy. “Public- work programs are most necessary in Section VIII—The CES’s periods of severe depression, but may be needed in normal times, as well, to Historic Report and the help meet the problems of stranded Economic Security communities and over manned or declining industries.”327 Again and Package again, this landmark report returns to “I think we stand today in this this point: Public works, even in country at the crossroads of a great times of low unemployment and decision which transcends all parties, vigorous growth, should “be all sections and all interests; and this recognized as a permanent policy of decision is whether we are going to the Government and not merely an 328 choose American organized industry emergency measure.” as the instrument for the solution of

these tremendous, far-reaching The CES report argued that the problems or whether we are going to government would have to become a resort to some modified form of prominent part of the American Russianism and attempt to solve these economy even in the best of times. problems by government.” The government would have to —Representative Charles Eaton330 adopt a compensation system enjoy over employers operating in States which gave 329Ibid. protection to their wage earners.” Ibid., p. 3. 330Turning Points in Social Security, S. 327Ibid. Tynes, ed., p. 55 (Stanford University Press, 328Ibid. Palo Alto, Calif., 1966).

______

Ludwig von Mises Institute Essays in Political Economy 71 ______

resources of a region available for the Adequate Income for All general welfare of the people involved and toward detailed As we have seen, the Committee on development of individual projects. Economic Security was a harsh critic To this end we endorse the of the private sector.331 It supplied an recommendations of the National official validation of the importance Resources Board for the and credibility of the social insurance establishment of a permanent national movement in America. The CES planning board.”332 report not only established the need for Social Security as part of an The government would ensure that economic security package, but it everyone was able to obtain also called on the government to “adequate income.”333 The CES also move in a new direction, taking recommended basic changes in the greater control of the economy. The American work ethic, attacking the government, with adoption of these American individualist tradition. For economic security policies, was also instance, unemployed workers should to move into other new areas: It not take jobs they didn’t like: would ensure “adequate” income for “Workers, however, should not be all, again echoing the words of social required to accept positions with insurance pioneers Isaac Rubinow wage, hour, or working conditions and Abraham Epstein. below the usual standard for the occupation or a particular region, or The federal government, the report outside of the State, or where their said, must engage in central planning, rights of self-organization and a goal of progressives and socialists collective bargaining would be since the end of World War I, as well interfered with.”334 as of some industrialists such as Gerard Swope and Owen Young, This kind of thinking would put the who had praised the techniques of the government in the business of War Industries Board (WIB). permanently setting wage standards, Socialists and their liberal allies instead of leaving it to competitive argued that the same authoritarian forces. Hoover had tried to informally techniques used to win the war keep up wages at the outset of the should be used to promote prosperity Great Depression.335 Now the CES in peacetime. “This entire program report called for a formal and points immediately and inevitably toward practical advance planning on 332Ibid., p. 8. a broad scale to make the potential 333Ibid., p. 18. 334Ibid, p. 17. 335America’s Great Depression, by Murray 331See the report at N. Rothbard, p. 227 (Van Nostrand, Los ssa.gov/history/reports/ces3.html. Angeles, 1963).

______

Ludwig von Mises Institute Essays in Political Economy 72 ______continuing commitment to wage reversal of this trend in the near standards by the federal government. future.”337

In sum, the social security/economic From the CES to the Great Society security package that would follow —“An Expansion in Federal Social the report amounted to much more Welfare Activities” than a new government pension plan or unemployment insurance scheme. The economic security package, the It was a commitment of the report held, help everyone throughout government to supply almost all of a his life. The federal government citizen’s basic needs throughout his “must provide safeguards against all life; it was a commitment that the of the hazards leading to destitution federal government would assume and dependency.”338 The logical some responsibilities of the family. outcome of this philosophy was a continued expansion of the federal “A program of economic security, as government into new areas. It would we envision it, must have as its lead to the federal government primary aim the assurance of an declaring, decades later, a war on adequate income to each human poverty. being in childhood, youth, middle age, or old age—in sickness or in Unsurprisingly, the war on poverty health.”336 Of course, the price for was led by a scion of the FDR this support, in addition to new taxes, welfare-state philosophy, President was that the federal government was Lyndon Johnson, who idolized FDR. now going to be a part of almost (Indeed, one of LBJ’s press every person’s life, no matter his age. secretaries said of his boss, “he saw it However, the report frequently [the Great Society] as a chance to focuses on those in the middle and finish what the New Deal began.”339 toward the end of life. Support for the It was in the era of President middle-aged and the elderly is Johnson—and, curiously enough, significant, because the report consistently holds that the private 337Ibid. economy fails workers, especially 338Ibid., p. 17. older ones: “Employment difficulties 339That comment came from Bill Moyers, for middle-aged and older workers Lyndon Johnson’s former press secretary. have been increasing, and there is See Flawed Giant: Lyndon Johnson & His Times, 1961-73, by Robert Dallek, p. 83 little possibility that there will be (Oxford University Press, New York, 1998). Dallek later (p. 61) quotes Johnson as saying, “If you look at my record, you would know that I am a Roosevelt New Dealer. As a matter of fact, John F. Kennedy 336Committee on Economic Security (CES) was a little bit too conservative for my Report, p. 18. taste.”

______

Ludwig von Mises Institute Essays in Political Economy 73 ______

President Nixon, a Republican—that economic security package—which some of the greatest expansions of was later called the Social Security Social Security340 took place). bill (HR 7260)—though Wagner knew little of the technical details or The CES report anticipated much of the philosophy of this deliberately this. For those who thought the New obfuscatory bill, according to Deal was too little, or who were upset Perkins. Decades later she conceded that FDR did not include compulsory that many lawmakers backing the bill health insurance in the original didn’t understand social insurance.342 package, the CES report promised It was designed to confound, a that the federal government’s welfare “hodgepodge”343 of different efforts, its attempts to manage the programs deliberately arranged in economy and engage in social unrelated titles and in a confusing engineering, were just about to begin. way so as to survive any court “Hereafter, the Federal Government challenges and defeat possible will still have a large and continuing opponents, according to CES’s responsibility for many parts of the attorney Thomas Eliot, who drafted heretofore undifferentiated relief the bill.344 (This practice continues to program and some of our this day,345 with many Americans not recommendations contemplate expansion in Federal social-welfare 342Beginning with the idea that many activities.”341 lawmakers—both friend and foe—were confused by the 1935 Social Security law, a “Landmark” Legislation CES member who wrote the law concedes the Goes to Congress bill was deliberately written in an “awkward” way. See Thomas Eliot’s Recollections of the New Deal, pp. 104-05 (Northeastern Senator Robert Wagner was one of University Press, Boston, 1991). the principal sponsors of the 343Ibid. 344The first Social Security bill was deliberately confusing. “Lest the court take 340President Lyndon Johnson, in the late judicial notice of the way officials were 1960s, told his HEW secretary Wilbur trying to sell the program, administrators Cohen that his suggested 10-percent benefit believed it was imperative to keep the increase wasn’t good enough. “C’mon language sufficiently opaque.” See Social Wilbur, you can do better than that,” Security: Visions and Revisions, by Andrew Johnson told Cohen. President Richard Achenbaum, p. 28 (Cambridge University Nixon and Congress outbid each other to Press, London). raise the benefits just before the 1972 345Effective control by Congress over the elections. For more on these politically operations of such agencies as the Social motivated benefit increases, see Martha Security Administration is essentially Derthick’s Policymaking for Social Security impossible, given the technical character of (Brookings Institution, Washington, D.C., SSA’s task and its near-monopoly of 1979). experts. They become self-governing, and their proposals are mostly rubber-stamped 341CES report, p. 36. by Congress. See Capitalism and Freedom

______

Ludwig von Mises Institute Essays in Political Economy 74 ______knowing how much they pay in now the federal government was payroll tax. The most common expanding this approach. circumstance is ignorance that the With the old-age program that tens of employer pays half of a taxpayer’s millions of workers were now forced bill.) to pay into, the government was attempting to solve a problem of old- At the outset, the first Social Security age income before it occurred—even program, which contained 10 new though most Americans, before programs, encompassed three broad Social Security, had provided for areas. First was a joint federal/state themselves in old age or with the help unemployment program funded by a of their families or fraternal groups. permanent payroll tax on employers. Advocates of social insurance, in Second was a guaranteed retirement passing the first Social Security law, income plan for those who had “worked hard to blur the distinction worked throughout their lives as well between prevention and alleviation, as for the elderly in poverty. It was to and between insurance and be paid out of a federal trust fund that welfare.”346 both employers and employees would be taxed to support. Third, there was The act’s introduction stipulated that an Aid to Dependent Children (ADC) the federal government was to get program, financed through federal involved in new areas: “An act to matching grants to states that provide for the general welfare by established satisfactory programs to establishing a system of Federal old- help poor people under age 16. age benefits, and by enabling several states to make more adequate These programs used combined provision for aged persons, blind federal/state vehicles to thwart persons, dependent and crippled possible constitutional objections to a children, maternal and child welfare, completely federal program, a so- public health, and the administration called federal insurance program that of their unemployment compensation was not authorized by the laws; to establish a Social Security Constitution. Not only was this an Board; to raise revenue; and for other inventive way of expanding the purposes.”347 federal government, but the philosophy itself also set precedents. Rates were initially set at 2 percent— Before the Social Security Act of 1 percent each to be taken from the 1935, several states tried to help those elderly who fell into poverty; 346Achenbaum, ibid. 347See Carolyn Weaver’s article, “Birth of an Entitlement,” Reason Online: www.reason.com/9605/Fe.WEAVERsocials by Milton Friedman, p. 186 (University of ec.html. Chicago Press, Chicago, 1962).

______

Ludwig von Mises Institute Essays in Political Economy 75 ______employer and the employee. The penalize those that already had them. rates were expected never to rise The offset system was duplicating a above 5 percent—again, half paid by technique that had used the federal the employer and half by the worker. taxing power to penalize Florida in (A secretary of HEW in the 1960s the 1920s. Florida had attracted many predicted that the rates would never residents by not having an estate tax, rise above 10 percent.348 All such but the federal government, using a predictions, we now see, were back-door way to reduce states’ wrong.) In the beginning, $3,000 of rights, decided to let those states with the wage base was subject to payroll estate taxes offset their federal taxes, taxes. a method that eventually changed Florida policy just as it induced states Supporters of the economic security to join the Social Security system a package were fearful that the U.S. decade later. Supreme Court would strike down Social Security. The federal The federal government, while government had no authority to collect offering the states a partnership in a insurance premiums. So the payroll complex unemployment/old-age- taxes were characterized in two pension/help- for-the-disabled puzzling ways in the legislation. program, was going to exact a price: Employers were paying “an excise Its power would expand at the tax,” while workers were paying “an expense of states’ powers. income tax.”349 The Right to Repeal The terminology was vital. Social Security advocates had to create a Another important section of the plan that would be constitutional and original bill—given that bureaucrats that would make states want to and politicians were already participate. The payroll tax for the promising the program would be unemployment fund was the key expanded—comes near the end, in because it allowed employers who Section 1104: “The right to alter, paid into a state insurance fund to amend, or repeal any provision of this offset their federal tax obligations. Act is hereby reserved to Thus, “federal law would force all Congress.”351 This was a critical states to enact unemployment provision for social insurance insurance law,”350 but would not advocates who were expecting the initial program to expand. It was as 348The prediction had been made by important to Social Security Abraham Ribicoff. 349See the Social Security web page, www.ssa.gov/history/reports/ces/cesbookeap 351See Unemployment in History, by John A. en16.html. Garrity, p. 214 (Harper & Row, New York, 350Ibid. 1978).

______

Ludwig von Mises Institute Essays in Political Economy 76 ______advocates as the general welfare and the maximum was $85. By 1991, clause is in the Constitution. Section the average monthly check was 1104 allowed the federal government $602.353 to escape any promise made. Many New Deal supporters called the nation’s first major social insurance Section 1104 was designed to ensure program too small, arguing that it was that Social Security payments were insignificant compared to the not property rights, but were benefits Townsend Plan or Senator Huey that could be rescinded at the Long’s “Share the Wealth” scheme. pleasure of Congress or the Social One pro-FDR historian labeled Social Security Administration. Here was a Security “inept,” even as he referred to fail-safe negation of any possible the Social Security Act of 1935 as legal guarantee for the payment of “landmark” legislation.”354 Socialists benefits to those who had paid the “approved of the direction of such taxes and expected a return. measures to relieve unemployment and promote security as the public works Included in the bill were mandatory program and the Social Security Act of “old- age-benefits payments”352 for 1935, but argued that these measures most employee, as well as a matching and programs were either not federal/state program of sufficiently bold or badly unemployment insurance. The federal administered.”355 government also was to become immersed in welfare programs: It Before Social Security became a would share with the states the costs landmark in the history of the of caring for the destitute who didn’t American welfare state, there were qualify for Social Security insurance. many discussions and debates in It would also provide help to states Congress as the report became for the care of dependent mothers and 353 children, the crippled and the blind, Historical Development of the Social and provide money for public health Security Act, by Abe Bortz, SSA historian. It can be found at services. www.ssa.gov/history/bortz/html. See also Social Insecurity: The Crisis in America’s Under the leadership of the federal Social Security System and How to Plan government, the public sector’s Now for Your Own Financial Survival, by everyday role in the life of the average Dorcas R. Hardy and C. Colburn Hardy, p. 11 (Villard Books, New York, 1991). citizen would expand greatly, just as 354 The act was “a tremendous break with the the CES report had predicted. Social inhibitions of the past,” according to Arthur Security old-age insurance payments Schlesinger, Jr. See The Coming of the New were rather modest in the beginning. Deal, pp. 313-15 (Houghton Mifflin, The minimum monthly check was $10 Boston, 1958). 355See The Socialist Party of the United States: A History, by David Shannon, p. 232 352Ibid. (Quadrangle Books, Chicago, 1967).

______

Ludwig von Mises Institute Essays in Political Economy 77 ______legislation. There would also be a crucial test in the U.S. Supreme The Debate in Congress, Part I Court, which we will see later accepted the Rubinow/Epstein view When the CES sent its report to of the American individualist Congress in early 1935, the FDR tradition. In early 1935, the administration pressed to get the economic security/Social Security Social Security bill passed quickly. bill was introduced. Hearings on the This time, unlike with previous social bill were held simultaneously in insurance measures before Congress, both houses of Congress. there was a strong commitment to the program, which was named Social Section IX— Security in the middle of the debate The Debate in Congress. The debate was at times difficult, as few of the lawmakers

understood the issue. Many of the “Old age pensions would spread strongest supporters of Social purchasing power to an enormous Security were confused by the details. extent.” — Robert Wagner, a sponsor of the first The bill passed by wide margins in Social Security law356 both houses. Nevertheless, there were a few critics who feared that America “These titles (in the Social Security was about to lose its individualist bill) impose a crushing burden upon tradition. industry and labor. They establish a bureaucracy in the field of insurance The 1935 battle in Congress was an in competition with private business. important moment in American They destroy age-old retirement history, one in which a new systems set up by private industries, philosophy of government was which in most instances provide more approved by the nation’s lawmakers, liberal benefits than are many of whom were rushed to vote. contemplated in Title II.” “Debate” may be the wrong term, as —The Republican minority members of many of the participants—members the Ways and Means Committee of Congress—had little idea what reviewing the first Social Security bill in was going on. They were not present April 1935357 when the Committee on economic security hammered out the various proposals. They were at a 356The History of Retirement: The Meaning disadvantage. FDR’s circumvention and Function of an American Institution, of Congress was about to succeed. 1885-1978, by William Graebner, p. 191 (Yale University Press, New Haven, Conn., 1980). (University of Wisconsin Press, Madison, 357From The Formative Years of Social 1966). Security, by Arthur J. Altmeyer, p. 37

______

Ludwig von Mises Institute Essays in Political Economy 78 ______

believed initial rates would be too Once the CES’s economic low and many beneficiaries would security/Social Security package was receive a free pension though they delivered to Congress in January would contribute little or nothing. He 1935, hearings were held in both was also fearful that the money houses at the same time. Many would run out by 1965—given the members, especially supporters of original schedule of tax rate Social Security, did not understand increases—and that money to pay for the significance of the package,358 the program would then have to come which created the beginnings of an out of general revenues. American welfare state. Representative Sam B. Hill of the The latter kind of financing was House Ways and Means Committee always favored by socialists and by admitted the process was moving too men like Epstein and Rubinow. But fast for him: “I want to confess it is FDR and many of his allies had been difficult for the members of the Ways selling Social Security as an “earned” and Means Committee, who have benefit. This was not a dole, they studied it for weeks and weeks, to get said’ this was a kind of insurance the full purport and understanding of plan. Whatever it was, FDR’s all its provisions and Treasury secretary was worried that it ramifications.”359 would be a way of one generation passing on its bills to another. The tax rates were a source of confusion at the CES, where there “There are some,” Morgenthau said, had been much debate over whether “who believe that we can meet this the first Social Security program program as we go by borrowing from should be a system with big the future to pay costs. …They would reserves—a prepaid system—or a place all confidence in taxing power pay-as-you-go plan. That debate was of the future to meet the needs as they triggered in part because Treasury arise. We do not share this view. We Secretary Henry Morgenthau thought cannot safely expect future the system would not be properly generations to continue to divert such financed. As noted earlier, he large sums to the support of the aged unless we lighten the burdens upon the future generations in other

358 directions. …We desire to establish See “The Roots of Social Security,” available at the Social Security web site, p. this system on such sound 17 (www.ssa.gov/history/perkins5/html). foundations that it can be continued 359See Abraham Epstein’s Insecurity: A indefinitely in the future.”360 These Challenge to America, p. 744 (Random fears were well founded— House, New York, 1938).

360Epstein, p. 737.

______

Ludwig von Mises Institute Essays in Political Economy 79 ______

Morgenthau’s predictions came to would turn away from its voluntarist pass when a pay-as-you-go system traditions. “No careful and intelligent eventually was adopted. observer in these unhappy times can have failed to observe that this has Many critics and supporters of the ceased to be a government in which package were on equal ground in that legislation is by congressional action few on either side understood what and vote, but has become a was going on. Others believed the government by experts,”363 Gore debate was academic, that the first complained. He continued, “A man Social Security law would be who feels himself qualified to invalidated later by the U.S. Supreme participate in the formulation of Court, which had struck down many legislation, to have any voice in its of FDR’s pet programs. Nevertheless, formulation, should not offer himself the debate, at times, was idiotic. for election to the Senate or the House of Representatives, but he A congressional leader who knew should procure for himself a position little of what he was supporting was as a member of some commission, or put in charge of the package in the as an employee of some commission, House as a way of keeping possible or as an employee of an agent of allies in line. The chairman of the some bureau of the Government.”364 Senate Finance Committee, a faithful FDR ally, had no idea what was in Senator Robert Wagner, one of the the bill he was pushing through chief sponsors of the bill, little Congress.361 The chairman of the understood the philosophy or the House Ways and Means Committee, details of the plan that has sometimes Robert Doughton, “just didn’t really been identified with his name. have possession of all the facts and Francis Perkins, years later, said wasn’t that interested in the details of Wagner and many other the Social Security program.”362 congressional leaders were often confused by Social Security.365 One senator, Thomas Gore, was frustrated by the tone of the debate Indeed, this was the beginning of a and contended that Congress was pattern that continues to this day—a becoming a secondary player. He program so complex that most argued that “the experts” were the lawmakers have little idea what they ones who were going to decide the are voting on. Cabinet secretaries issue of whether or not America 363See Carolyn Weaver’s The Crisis in 361Roots, p. 17. Social Security: Economic and Political 362From Robert J. Myers; see his Within the Origins, p. 14 (Duke Press Policy Studies, System: My Half Century in Social Security, Durham, N.C., 1982). p. 141 (Actex Publications, Winsted, Conn., 364Ibid. 1992). 365Ibid., Roots.

______

Ludwig von Mises Institute Essays in Political Economy 80 ______become window dressing in the never been more than a handful of legislative process. They end up lawmakers with the knowledge and relying almost exclusively on the the political strength even to examine civil servants who administer a Social Security, as any examination complex program to tell them how to of the program could mean political run it, or, if in the legislative branch, suicide. how to vote on expansions of a program. The Debate in Congress, Part II

Some four decades after the Social Perkins noted during the 1935 Security Acto of 1935, Robert J. congressional debate that this was a Nyers, one of the leading experts on new type of legislation—nothing of Social Security, said, “Usually our the sort had ever come before [HEW] secretaries haven’t been Congress. Once again, the economic students of the Social Security argument was also made. Senator Pat program so they’d need quite a lot Harrison, chairman of the Senate of briefing.”366 That was also true of Finance Committee, said the Social Congress at the birth of Social Security bill was “a means for dealing Security. It is one reason why with unemployment in the years to bureaucrats have been able to come.”368 But even at the height of the persuade elected officials to approve depression, individualism and expansion of Social Security voluntarism defined American culture. through the decades, regardless of Many historians and commentators of the party that controlled government the 1935 act, both friendly and critical or what someone had promised of Social Security, have noted that before coming into office. Few there was no overwhelming public lawmakers have had the background demand for a social insurance to debate the issue with seasoned program.369 Social Security bureaucrats.

vote for increases and too difficult to master Both parties eventually became the complexities of the Social Security supporters of Social Security program. Derthick, in the aforementioned expansion; there has been no anti- Policymaking for Social Security, writes, for Social Security party or even a small instance, “For the decade in 1950, it group of effective lawmakers who [Congress] regularly enacted social security wanted a critical examination of the benefit increases or other liberalizations in 367 election years. Between 1960 and 1972 it program. Until recently, there has acted less regularly but on the average less often” (p. 88). 366Policymaking for Social Security, by 368See The Great Depression: Opposing Martha Derthick, p. 66 (Brookings Institute, Viewpoints, Bruno Leone, ed., p. 172 Washington, D.C., 1979). (Greenhaven Press, San Diego, 1994). 367Once the program was established, most 369“Even among the most industrial states, lawmakers of both parties found it easy to the vast majority of the elderly were

______

Ludwig von Mises Institute Essays in Political Economy 81 ______

economic, social, and perhaps FDR and his associates knew they political life of our country.”372 had to move fast, find just the right moment, and employ clever strategies FDR, in his attempt to persuade if they were to overcome expected Americans to accept social insurance, opposition in Congress, in the U.S. encouraged seniors “to disengage” Supreme Court, from the states, and from work.373 Such a policy seems from Americans who believed the questionable in a wealthy society in government should not force people which skilled seniors may spend to become a part of a unitary more time in retirement than in their retirement system administered by work lives. The federal government the federal government. As one encouraged Americans to take it commentator put it, “Paradoxically, easy; to withdraw their considerable the major motivating force behind the skills and spend the rest of their lives passage of the Social Security Act of on, say, the golf course. This was a 1935 was probably not the provision dramatic change in our culture, of adequate retirement income but the because most Americans, until Social creation of jobs. …Old age pensions Security, had considered some form were promised in future years to help of work throughout their lives a good, the elderly financially but were also healthy practice. Now the legislated to encourage older workers government wanted to persuade them to leave or remain out of the to yield their places to younger workforce.”370 people because a recovery was not expected by the brain trust of the Wagner said that as “a practical result FDR administration. The federal millions of men who are entitled to government virtually invented our rest will yield places in industry to concept of retirement.374 the young and the strong who are 371 372Senator McNary, June 18, 1935. See The entitled to jobs.” Said a senatorial th supporter of the package: “Our Congressional Record, 74 Congress, Record 9541. decision will affect the entire 373“The dominant theory in the psychology of aging is the theory of disengagement, first described over 30 years ago by Cumming dependent on neither organized private or and Henry in their book, Growing Old . This public charity or the almshouse. Instead they theory holds that as a person ages, he or she were self-supporting or supported by gradually loosens their bonds with the families or friends” Weaver, p. 59. environment.” From Walter M. Bortz, III’s 370See Craig S. Karpel, The Retirement Dare to Be 100, p. 52 (Random House, New Myth, p. 148 (Harper Collins, New York, York, 1997). This theory was conceived 1995). when Social Security was changing attitudes 371Wagner’s testimony is found in the about older people working. January 22, 1935 session of the U.S. Senate 374See The History of Retirement, p. 186, for Finance Committee, p. 2, at the Social CES member Barbara Armstrong’s Security Administration’s history web site. comment about people receiving Social

______

Ludwig von Mises Institute Essays in Political Economy 82 ______

had been a Communist for six years The Congressional Debate, Part III until 1939, and then left the party. Her husband paid payroll taxes over A small group of congressional many years, yet she was denied critics voted against the original survivor benefits.376 Social Security law—the bill passed by a vote of 371-33 in the House and The court held in the case of Fleming 76-7 in the Senate. Their objections vs. Nestor that the Social Security were that Social Security would law provided no property rights.377 discourage independence. Many The court also said the famous Americans, they feared, would rely Section 1104 provided the Social on the government instead of Security Administration with themselves. Americans would stop “flexibility” and “that provision saving or save less for retirement makes express what is implicit in the because they had Social Security.375 institutional needs of the program.”378 Critics also feared that as the program In other words, the Supreme Court, in would expand, Americans would the fall 1959 term, settled the Social become dependent on lawmakers Security guarantee question of 1935, who would politicize the program, which was raised again by a expanding it in election years. congressman in 1953379—there are no legal guarantees under the Social Other criticisms of the original Social Security laws. However, there were Security bill included the notorious three dissenters in the decision who Section 1104, which some thought found it “repugnant” to the meant that taxpayers would pay for a Constitution and a gross violation of program in which they had no property rights. 380 contractual rights. About two decades later, the U.S. Supreme Court validated this last criticism when, in the wake of the McCarthyist red scare 376See U.S. Supreme Court Reports, Vol. of the 1950s, it upheld the decision of 363, October 1959 Term, Fleming vs. the Social Security Administration Nestor, pp. 610-627. when it denied Social Security 377Ibid. benefits to the widow of a 378Ibid., p. 611. 379 Communist. The widow’s husband See The Real Deal: The History and Future of Social Security, pp. 81, 139, 275. 380One of them wrote of the Nestor decision, Security because “you’ve stopped working “I cannot believe that any private insurance for pay.” company in America would be permitted to 375By the 1990s, Merrill Lynch had repudiate its matured contracts with its published several studies showing that tens policyholders who have regularly paid all of millions of Americans had almost no their premiums in reliance upon the good financial assets and were undersaving for faith of the company” (U.S. Supreme Court retirement. Reports, Vol. 363, p. 624).

______

Ludwig von Mises Institute Essays in Political Economy 83 ______

The most effective criticism of the of institutions and to pull the pillars original 1935 law was economic: that down upon the heads of our Social Security would burden descendants.”384 taxpayers and employers with a new tax at the worst possible time, and Finally, as the bill appeared headed further delay the recovery. Some for passage, there was a last-minute lawmakers also worried that the compromise offered by an opponent reserves could be used by that threatened to short-circuit Social unscrupulous lawmakers to pay off Security before it could even begin: political debts. The most frequent Social Security should be forced to criticism was that America was compete and at least offer a product taking an ominous step in reversing as good as private pensions, Senator her individualist traditions and was Bennett Champ Clark argued. Why on the road to European collectivism. not, he added, let some private “My fear,” said Senator Daniel employers opt out of the system? Hastings, “is that when the Federal Those who offered pensions that Government undertakes the job of would be equal or superior to Social social security, through direct Security should not be required to be taxation for that purpose, it has taken part of the Social Security system. 385 a step that can hardly be retraced.”381 Hastings told Perkins that America, “I have on my desk here letters from with the economic security bill, was more than 75 employers now having moving toward European socialism plans more beneficial to the and that would “end progress” and employees than the government plan, “bring the people to the level of the who protest against having their plan average European.”382 wiped out,” said Clark.386 In approving a new government “The lash of the dictator will be felt,” program, why not allow private- complained another congressman, who sector competition with it? This was feared Social Security would lead to the essence of the Clark amendment, fingerprinting.383 Representative James which was approved by the Senate. W. Wadsworth argued, “This bill opens the door and invites the entrance Critics contended that Clark, in trying into a political field of a power so vast, to exempt employers who offered so powerful as to threaten the integrity

384The Coming of the New Deal, by Arthur 381The Great Depression: Opposing Schlesinger, Jr., pp. 311-12 (Houghton Viewpoints, p. 171. Mifflin Company, Boston, 1959). 382Ibid. 385The Formative Years of Social Security, 383The Historical Development of the Social by Arthur J. Altmeyer, p. 37 (University of Security Act, by Abe Bortz, SSA historian. Wisconsin Press, Madison, 1966). The essay is at 386The Congressional Record, June 18, www.ssa.gov/history/bortz.html. 1935, p. 9629.

______

Ludwig von Mises Institute Essays in Political Economy 84 ______private pension plans, was doing the private,”390 Barkley said. Another bidding of the insurance industry. FDR ally, Senator Robert La Follette The official Social Security of Wisconsin, agreed the Clark Administration history claims Clark amendment would be lethal for the wasn’t really interested in the idea of new program: “It would be inviting economic security. Rather, he was and encouraging competition with its responding to the demands of well- own plan, which ultimately would heeled special interests: “The Clark undermine and destroy it.”391 amendment was developed by a group of insurance lobbyists under Whether or not Clark was acting at the the leadership of Walter Forster, of behest of the insurance industry, it the insurance brokerage firm of remains that if Social Security hadn’t Towers, Perrin, Forster and Crosby, been given monopoly status as the and introduced by Senator Clark as retirement plan of tens of millions of an amendment to the American workers, its history would Administration’s bill while it was have been dramatically different. under consideration in the Senate Given a choice, many Americans Finance Committee.”387 would have opted out. Competition between the private and public sectors Although defeated at the committee would have taken place. More level, the bill was approved on the Americans would have been given the Senate floor by a 51-35 margin. FDR opportunity to save for retirement, insisted the Clark amendment be control their retirement assets, and stopped at all costs.388 It finally died remain independent of the political in a conference committee. FDR’s pressures on lawmakers. supporters in the Senate understood how dangerous the Clark amendment The defeat of the Clark amendment was. Senator Alben Barkley, blaming was ironic, noted Robert Myers, a the “high-pressure salesmen”389 of career Social Security bureaucrat and annuities, said Social Security would the system’s second actuary: At the fail in competition with the private same time Social Security advocates sector: “I don’t believe any old-age were insisting that employers with pension system we may inaugurate good retirement plans could not be can long endure half public and half exempted, that they could not be trusted, a large group of government

387 workers was exempted from the first Research Note #11:The Clark Amendment to the 1935 Social Security Act, law. “Interestingly, the largest www.ssa.gov/history/clarkamend.html. employer of all, the federal 388A New Deal For Social Security, by Peter government, opted out of the Social Ferrara and Michael Tanner, p. 22 (Cato Institute, Washington D.C., 1998). 389The Congressional Record, June 19, 390Ibid. 1935, p. 9629. 391Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 85 ______

Security program in 1935 on the same programs. Yet, in the end, FDR saved grounds [as the Clark amendment]— the day. His strategy of a bill that had that it had adequate pension plans for to be adopted whole—with multiple its civilian and military personnel!” programs for several different said Myers.392 groups—coupled with using his own group of experts to overawe This “do as I say, not as I do” policy Congress, was successful. Most was a source of embarrassment for members of Congress weren’t ready Social Security officials over the to debate the complexities of social years. They insisted that more people insurance, and key members of the should be covered and the program Supreme Court agreed with Rubinow expanded, but occasionally some and Keynes, as we will see. hardy soul would ask why Social Security and other federal employees The Courts and Social Security were not part of the system. Sometimes a perceptive taxpayer Even after the bill passed Congress and would also ask why bureaucrats were was signed into law by FDR, there was allowed to “double dip”—to work one more threat hanging over the fate long enough to collect from their of social insurance in America. Would retirement system, and then go into the U.S Supreme Court, as it had with the private sector and work long so many other New Deal measures, enough to qualify for Social Security. strike down Social Security as These were difficult and annoying violation of the 10th Amendment, questions for bureaucrats. which reserves to the people and the states those powers not expressly given The 1935 debate in Congress was to the federal government? Or was short, but a few critics raised Social Security vulnerable to a challenging questions. There was constitutional challenge because of its even a short period when it seemed as strange taxing methods? though Social Security might fail, another casualty of America’s In a suit brought by a shareholder of suspicion of social insurance Edison Electric Illuminating Company in Boston, an objection was 392Social Security , Fourth Edition, by Robert made to the withholding tax.393 It was J. Myers, p. 231 (Pension Research Council, charged that Social Security taxes University of Pennsylvania Press, were illegal excise taxes and that the Philadelphia, 1993). See also Within the System: My Half Century in Social Security, program violated the Constitution. also by Myers. Myers, a Republican, is frank Indeed, the United States First Circuit about how “expansionist” bureaucrats went around the backs of Eisenhower administration officials and destroyed the 393U.S. Supreme Court Reports, Vol. 301, goals of the administration (pp. 157-58). Helvering vs. Davis, October 1936 Term, pp. 623-43.

______

Ludwig von Mises Institute Essays in Political Economy 86 ______

Court held that, “Title II (of the Social Security Act) was void as an That may or may not have been true; if invasion of the powers reserved by true, it may or may or not have been a the 10th Amendment.”394 The circuit bad thing—is it bad if the elderly court also held that the withholding sometimes rely on relatives rather than tax was not an excise “as excises the government?—but it remains were understood when the unrelated to government’s taxing and Constitution was adopted.”395 The other powers under the constitution. government appealed the case to the Cardozo ultimately fell back on the all- nation’s highest court. encompassing general welfare clause, but, even as he did, there was some The U.S. Supreme Court rode to the self-doubt: “The line still must be rescue of FDR’s nascent welfare drawn between one welfare and the state. In the October 1936 term, the other, between particular and general. court, which included FDR confidant Where this shall be placed cannot be Louis Brandeis, decided two cases known through a formula in that upheld the unemployment advance.”397 insurance and old-age pension provisions of the Social Security Act. So, at least as far as the welfare state The majority opinion of Helvering vs. was concerned, there could be no Davis, decided on a seven-to-two stated rules that would limit the vote, was written by Justice Benjamin government. But on the issue of the Cardozo. The language he used was, central government overreaching its again, a triumph of the powers, Cardozo was clearer and Rubinow/Keynes philosophy that repeated the familiar philosophy of the dominated the debate of 1935. CES report: Social Security was Cardozo wrote, in justifying Social constitutional because, “only a power Security, that the private economy that is national can serve the interests had failed the average man: “With the of all.”398 loss of savings inevitable in periods of idleness the fate of the workers The dissenting justices warned that, over 65, when thrown out of work, is in serving that national interest, this less than desperate…a recent study of interpretation of the general welfare the Social Security Board found… clause was “repugnant to the 10th approximately three out of four Amendment.”399 Nevertheless, they persons 65 or over were probably were only two justices out of nine. dependent wholly or partially on The issue was settled; the welfare others for support.”396 state was born and would grow. The

394Ibid. 397Ibid. 395Ibid. 398Ibid. 396Ibid. 399Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 87 ______

Ninth Amendment, which guarantees one government program took place states’ rights, and the 10th in 1935. Amendment were at the beginning of a long decline in authority and The argument over Social Security was popularity.400 over more than an entitlement program and its survival, or even over whether “If the Senate and the House of the government should be in the Representatives in this long and entitlement business at all. Social arduous session had done nothing Security, as part of an economic more than pass this Bill, the session security package, was also to be an would be regarded as historic for all economic corrective. FDR stressed it time,” FDR said upon signing the was to be part of a permanent structure, Social Security bill into law on to be used in good times as well as bad, August 14, 1935.401 to ensure that the economy avoided slumps: “It will act as a protection to Section X— future administrations against the America Begins necessity of going deeply into debt to furnish relief to the needy. The law Its Transformation will flatten out the peaks and valleys of deflation and inflation.”402 Senator The Philosophical Debate Ends Robert Wagner, pleading for the package before the Senate Finance Social Security opponents had Committee, claimed, “the transfer of questioned not only the effect of an purchasing power by benefit payments entitlement program on America’s when danger threatens will float the character, but also the effect on business ship off the shoals of America’s economy, which continued depression to the seaway of to sputter through the years of the prosperity.”403 Wagner also New Deal in the 1930s. Still, as soon complained that the private sector was as social insurance advocates won “too stupid” to realize that a scheme their victory, they made plans to such as Social Security, or the expand the program—Social Townsend Plan, would be good for the Security’s first expansion, or reform, economy and good for business.404 was only four years in the making. Clearly, more than just the birth of 402The Public Papers and Addresses of Franklin D. Roosevelt, Vol. IV, pp. 324-25 (Random House, New York, 1938-1950). 400The Forgotten Ninth Amendment, by 403Wagner’s testimony is from the January Bennett B. Patterson (Bobbs-Merrill 22, 1935, session of the U.S. Senate Finance Company, Indianapolis, Ind., 1955). Committee, p., at the Social Security 401From The New Deal: A Documentary Administration’s history web site. History, William E. Leuchtenburg, ed., p. 80 404Displaying the anti-business bia s of FDR (Harper & Row, New York, 1968). and his allies, Senator Wagner said

______

Ludwig von Mises Institute Essays in Political Economy 88 ______

promote recovery?”405 asked John C. Supporters claimed Social Security Gall, a labor lawyer and congressional would be an economic corrective lobbyist who fought the economic because when people had Social security bill on behalf of the National Security, they would not fall into Association of Manufacturers (NAM). poverty at such a high rate. With Gall argued that the traditional Social Security, workers could leave American practice of letting the jobs sooner, and be able to afford economy recover through market retirement, so unemployment rates forces would be the best policy. would be lower. With Social Testifying in the Senate and the Security, buying power would be House, he warned that the maintained even when the private unemployment-fund section of the bill sector foundered and unemployment was also faulty. He noted that Francis was rising. Because of all this, the Perkins failed to disclose that the government would spend less on much-admired British unemployment poverty programs. fund was bankrupt, in part because it had been politicized by lawmakers to Critics of the economic security win the support of voters. package questioned FDR’s logic. Wouldn’t Social Security hurt the And given America’s greater economy as it took more money out propensity to expand its economy the pockets of workers and after bad times, it would be dangerous employers? Wasn’t it a tax increase— to imitate the British experiment with just as Hoover initiated at the unemployment insurance, Gall said, beginning of the Great Depression—at adding: “This is particularly true in a the worst possible time? “Will the country like ours where administration’s Social Security bill unemployment on a wide scale has been the exception and not the rule throughout our history; where natural resources abound; where new government pensions, and ideas such as the industries employing hundreds of Townsend Plan, were good for private thousands of people have developed industry: “Big business is too stupid to see and will continue to develop from that the Townsend Plan will be the means of year to year; where the population giving it a new lease on life—that capitalism cannot, by any stretch of the can only be saved by retiring permanently imagination be called homogeneous; ten million old people, and at the same time, giving these old people the means by which and where many of our social, to once more restore purchasing power in the United States.” See The History of 405Gall’s testimony on the economic security Retirement: The Meaning and Function of act is from the February 15, 1935, session of an American Institution, 1885-1978, by the Senate Finance Committee session, at William Graebner (Yale University Press, the Social Security Administration’s history New Haven, Conn., 1980). pages, www.ssa.gov/history.

______

Ludwig von Mises Institute Essays in Political Economy 89 ______political and economic problems arise discouraging employers from out of the failure to balance the expanding employment and interests of industry and increasing payrolls?”408 Gall was agriculture.”406 convinced the economic security package could kill chances for full Throughout his testimony, Gall recovery.409 warned that the midst of a depression that the administration had not been “These titles,” wrote House Ways able to cure was not a time for the and Means Committee minority government to spend more money members in reviewing the first Social and take millions of dollars from Security bill in 1935, “impose a businesses and individuals. crushing burden upon labor and Representative Treadway agreed: industry.”410 (This was when a 2- “Why talk about wanting to relieve percent payroll tax was proposed. the depression, why talk about Today, almost 70 years later, the charity, why talk about all these payroll tax covering Social Security things when you are placing a and Medicare is 15.30 percent. Tens financial lash upon the backs of the of millions of Americans pay more in people whose backs are breaking payroll taxes than on their income under a load of debt and taxes?”407 tax.)411

Gall’s questions were numerous and Senator Thomas Gore suggested challenging: “How can recovery be that the economic security package promoted by additional expenditures was de facto socialism.412 He by a Federal treasury already in the complained that Social Security had red?” “How can recovery be been dropped on the desks of promoted by the levy of new and members of Congress without additional taxes on employers and members playing a part in the CES employees, when the effect is to proceedings. And he asserted that withdraw from the channels of trade the program lacked contractual and commerce a substantial portion rights: “What guarantee is there? of income normally spent for goods Has the citizen got any and services?” “How can real constitutional guarantee? Has the recovery, which means the restoration of normal employment 408Ibid. and payrolls, be promoted by 409 The Formative Years of Social Security, by Arthur J. Altmeyer, p. 37 (University of 406Ibid. Wisconsin Press, Madison, 1966). 407See Congressional Research Service 410A New Deal For Social Security, by Peter Report: Major Decisions in the House and J. Ferrara and Michael Tanner, p. 23 (Cato Senate Chambers on Social Security, 1935- Institute, Washington, D.C., 1998). 1985, by Carmen D. Solomon, p. 8 (Library 411Ibid. of Congress, Washington, D.C., 1986). 412Ibid., p. 67.

______

Ludwig von Mises Institute Essays in Political Economy 90 ______citizen any moral guarantee?” Gore opponents were overawed. Most was obviously discussing Section members of Congress lacked either 1104, in which Congress explicitly the expertise or the time to study it in reserved “the right to alter, amend detail. Almost three decades after the or repeal any provision of the debate, Perkins and other New Deal act.”413 We have seen that this leaders were virtually laughing at the fear—at least with regard to ex- key members of Congress who went Communists—was well founded. along with FDR’s economic security package without asking questions. Gore also wondered whether, at some future date, “some man might come In fact, key leaders in both houses, into power who would take more than Perkins agreed, had little idea what he ought from one and give it to they were doing: “Yes, there was an another?”414 This issue arose again in overwhelming vote for Social the early 1950s, when a few members Security, and so it was established. of a congressional subcommittee noted But of course you knew that the two that Social Security recipients had no committee chairmen…Senator Pat contractual rights. Arthur Altmeyer, a Harrison of Mississippi was a longtime Social Security official, wonderful orator. He didn’t know the strongly battled this criticism, holding first thing about this bill. that, although there was no contractual Congressman Bob Doughton of right, there was a statutory right to North Carolina knew even less about benefits. He also argued that Congress because he was deaf and couldn’t would continually move to improve hear what was said about it.”416 the rights of workers and improve Doughton was the chairman of the payments.415 House Ways and Means Committee. Harrison was the head of the Senate “What Is He Doing There?” Finance Committee. Had they understood what was going on, these Though there were a few Social leaders might have destroyed the Security critics, most members of legislation just as easily as Congress Congress were ready to support FDR later foiled FDR’s court-packing on Social Security. Many of the scheme. supporters of Social Security had little understanding of the details and philosophy of the bill, while 416See Frances Perkins’s talk, “The Roots of 413The Formative Years of Social Security, Social Security,” p. 17, at the Social by Arthur J. Altmeyer, p. 264 (University of Security Administration’s web site Wisconsin Press, Madison, 1966). (www.ssa.gov/history5html). See also 414Ibid. Recollections of the New Deal, by Thomas 415Ibid. Eliot, p. 115 (Northeastern University Press, Boston, 1991).

______

Ludwig von Mises Institute Essays in Political Economy 91 ______

One member of the Senate Finance available to citizens and Committee, Senator William Henry representatives and Roosevelt worked King of Utah, asked a CES aide to diligently to control the choices that write a series of critical questions for were presented.”420 him to ask, which he did. But the same aide, Edwin Witte, also came “Pathetically Insufficient” up with the answers.417 This same senator—a supposed critic of Social FDR, who campaigned in 1932 by Security—later posed in the famous criticizing the big spending schemes picture of FDR signing the Social of Herbert Hoover, spent his first and Security Act into law. That was too second terms creating public jobs and much for Thomas Eliot, the CES trying to inject buying power into the attorney, who had written the economy through inflationary deliberately confusing Social schemes including Social Security. Security law. Years after King had But these measures never restored a gone to his grave, Eliot couldn’t strong economy and full resist wondering about the photo and employment. Only World War II wrote of the departed King, “What is would appear to do that.421 Some of he doing there?”418 his supporters, who concede that the New Deal failed to restore a healthy All the important work was done economy, argue that the inflationist before the issue came to Congress. concept was good, but that FDR’s Complained one senator: “So it is programs were too small. The deficits with some trepidation that a mere weren’t big enough. The commitment Senator of the United States rises to appeal to his colleagues in this body, 420See Carolyn Weaver’s The Crisis in and to differ from the opinions of this Social Security: Economic and Political galaxy of experts.”419 Members of Origins, p. 76 (Duke University Press, Durham, N.C, 1982). Congress noted that there were more 421 social insurance experts at committee World War II didn’t prove that Keynesianism worked, writes economist meetings than committee members. Mark Skousen. Unemployment decreased Few members of industry were there because many people were drafted into the to state their case. As one historian armed forces, and although savings wrote, summing up why FDR’s increased, there were very few things to buy. strategy of taking the biggest part of “The standard of living declined during this the issue away from Congress was time, despite higher nominal incomes. According to the U.S. Department of successful, “Advocate-experts Commerce, per capita income actually controlled the information made declined in real terms during the period 1940 to 1945. Americans gave up many of 417Ibid. the pleasures of life.” See Skousen’s 418Ibid. Economics on Trial: Lies, Myths, and 419Congressional Record, June 18, 1935, Realities, p. 112 (Business One Irwin, 174th session, p. 9628. Homewood, Ill., 1991).

______

Ludwig von Mises Institute Essays in Political Economy 92 ______to remaking the economy wasn’t notwithstanding. A suspicion of the strong enough. Tugwell complained, welfare state had once gone hand in “the New Deal was pathetically hand with an abhorrence of a insufficient.”422 permanent military complex before the revolution of the 1930s, which Until FDR discovered the benefits of destroyed the nation’s classical liberal the military industrial complex, they model. No sooner had Social Security say, until he adopted a form of military become law, no sooner had workers Keynesianism, a strong economy could begun to pay taxes and the not have been restored—a perspective unemployed to apply for benefits, than which, if accepted, would condemn FDR began to claim that the economic America to a permanent security/Social Security programs, as warfare/welfare state. This thinking part of his New Deal economic might explain why most Democrats, as strategies, were succeeding. But were well as Republicans once they came they? back into power in the 1950s, accepted both a huge social welfare state and a Section XI— huge military budget as a permanent The Triumph part of American life.423 of Social Security “In general,” one historian writes, “conservative interests have neither “Rugged individualism and social sought to repeal enacted legislation and insurance are not comfortable restore the status quo ante, nor to put bedfellows, and we will not pretend forth alternative public measures as that struggles between liberty and 424 security, or individual and collective rivals to social insurance.” The 425 welfare/warfare state was safe under responsibility are not at stake.” Eisenhower, Nixon, and Reagan, “We ought to call it Social Insecurity, political rhetoric to the contrary not Social Security. The Social Security system is a ticking time bomb.”426 422The Great Depression: Opposing Viewpoints, Bruno Leone, ed., p. 263 (Greenhaven Press, San Diego, 1994). 425True Liberty: Rethinking American 423See Arthur R. Ekirch’s The Decline of Social Insurance, by Michael J. Graetz Liberalism (Athenaeum, New York, 1967), and Jerry L. Mashaw, p. 23 (Yale especially pp. 314-36. Ekirch writes that University Press, New Haven, Conn., “individual freedom continues to be 1999). threatened by the forces of nationalism and 426Former Social Security Commissioner war—and the resulting concentration of ever Dorcas R. Hardy, who, along with her father, a greater powers in the institutions of the financial adviser and author, C. Colburn modern state and its corporate adjuncts.” Hardy, in Social Insecurity: The Crisis in 424See Policymaking for Social Security , by America’s Social Security System and How to Martha Derthick, p. 132 (Brookings Plan Now for Your Own Financial Survival, p. Institution, Washington, D.C., 1979). xiii (Villard Books, New York, 1991).

______

Ludwig von Mises Institute Essays in Political Economy 93 ______

passage of the Social Security package, “It is very hard to reform a the country was beset with the religion.”427 Roosevelt Depression. Some of FDR’s aides were complaining that the nation The Roosevelt Depression faced economic conditions as bad as they had been under Hoover. The In August 1935, the debate ended downturn began in the summer of 1937 over whether America’s individualist and continued through the summer of traditions would continue. When 1938. Wrote two historians of the FDR signed the Social Security Act return to depression: “It was nothing into law, the nation was set to follow short of catastrophic.”428 One the same welfare-state policies as commentator called the New Deal “the Western Europe. The 40-year wedding of good intentions to bad campaign for American social economics.”429 “We Democrats,” said insurance won its biggest battle, and a congressional representative during more victories were ahead as Social the recession, “have to admit we are Security’s expansion began. The floundering. …We are a confused, immediate issue for Social Security bewildered group of people.”430 advocates was the promise of “economic security.” The Social As noted in Section 4 above, by Security/economic security package 1938, six years of New Deal policies was meant to ensure that America failed to restore prosperity, and stayed clear of further recessions and unemployment remained high. It is depressions. interesting to read the admissions of pro-FDR historians such as Doris Regardless of whether one views Kearns Goodwin, who concedes New Social Security and the economic Deal policies hadn’t solved the Great security philosophy it encompassed as Depression by the eve of World War a success or a failure, most historians, II. Robert McElvaine, for example, even FDR sympathizers, agree with agrees that the economic this: America’s economy, which fell security/Social Security plan made into a depression in the late 1920s, the depression worse because money never fully recovered until the buildup for World War II and the waging of the 428 war. Indeed, a few years after the FDR’s Fireside Chats, Russell D. Buhite and David W. Levy, eds., p. 33 (Penguin Books, New York, 1992). 427Jodie Allen of the Washington Post, who 429Franklin D. Roosevelt: A Rendezvous with generated controversy by insisting that Destiny, by Frank Freidel, p. 145 (Little, Social Security is America’s largest welfare Brown & Company, Boston, 1990). program; in Martha Derthick’s 430The New Deal: America’s Response to the Policymaking for Social Security, p. 166 Great Depression, by Ronald Edsforth, p. (Brookings Institution, Washington, D.C. 152 (Blackwell Publishers, Malden, Mass., 1979). 2000).

______

Ludwig von Mises Institute Essays in Political Economy 94 ______was taken from workers and and waged World War II, the employers, but wasn’t scheduled to economy responded.432 Only the be paid out until years later.431 buildup to World War II, along with (Payroll taxes began in 1936 with mass conscription when the war unemployment insurance. Old-age came, restored a strong economy. insurance taxes began in 1937. Social Security old-age insurance benefits Reform Before Recovery were not scheduled to begin until 1942, although the schedule for Social insurance supporters who payments was later accelerated. The conceded that Social Security failed famous Ida Fuller, the legal secretary as an economic restorative argued who paid about $20 in taxes then that it was a historic success for other proceeded to collect tens of reasons. Public works were thousands of dollars in Social constructed.433 Reform—the building Security payments over the next 30 of a welfare state—had preceded years, began receiving checks in recovery, an important political 1940.) strategy because if recovery had come first, then it is unlikely The depression of 1937-38 and the Americans would have accepted a continued economic problems of welfare state. 1939-40 seemed to validate the criticisms of John Gall and others Americans have been told for 65 who said Social Security had the years that the maternal state that same basic faults as the Townsend provides welfare services is necessary Plan and other redistribution because it pulled the nation out of the schemes. Why had the Social Great Depression. This is a myth that Security/economic security package deflects examination of the basic failed in its immediate economic philosophy of a huge central goals? McElvaine and other government that does more than just historians argue that Social Security pay out old-age insurance benefits; and other New Deal measures didn’t the welfare state, under America’s go far enough. They say that FDR biggest social insurance program, was afraid to take more than a small engages in wholesale social dose of Keynesianism, and when he engineering. went whole hog on Keynesianism In the wake of the birth and 431After praising the New Deal and FDR, expansion of Social Security, the McElvaine concedes, “For all it did, for all it changed, the New Deal never succeeded 432McElvaine, p. 330. in its primary goal: ending the Depression.” 433The New Deal: America’s Response to the From The Great Depression: America Great Depression, by Ronald Edsforth, p. 1929-1941,” p. 337 (Times Books, New 288 (Blackwell Publishers, Malden, Mass., York, 1984). 2000).

______

Ludwig von Mises Institute Essays in Political Economy 95 ______federal government took install only temporary measures. FDR responsibility for the care and feeding succeeded where others had failed. He of tens of millions of its citizens, left a Social Security program that, for many of whom were capable of many decades, was invulnerable to taking care of themselves. The states criticism and partisan politics, just as lost power to the central government. he had intended. “FDR,” writes one The American individualist historian, “had a better claim than philosophy was in retreat. Francis either Theodore Roosevelt or Perkins could rightly gloat and write Woodrow Wilson to the title of the of the Jeffersonian tradition of twentieth-century regulatory and limited government, “Whatever that administrative state; it was FDR who, meant.”434 more than anyone else, succeeded in replacing the nineteenth-century The Road to the Welfare State tradition of liberal individualism with his own brand of welfare state Despite the failure of social insurance liberalism.”435 measures to restore the economy, America, with the passage of Social Roosevelt’s changes, another Security in 1935, was finally on the historian says, “converted a nation of road to becoming a permanent aggressive individualists into a social welfare state. The FDR minded nation accepting the administration insisted nothing had principles of the welfare state.”436 A changed; the American traditions of few years after the passage of the individual liberty, states’ rights, and Social Security Act, the second part individual responsibility were intact. of the Roosevelt revolution took But much had changed. FDR knew place. The same historian says how important the victory of Social Roosevelt’s policies “changed an Security was for his permanent isolationist or largely isolationist welfare state, one that would expand nation into one committed to world under both Republican and partnership and world leadership.”437 Democratic administrations.

Many other welfare plans and inflationist schemes of his 435 administration had petered out. Some The Last Patrician: Bobby Kennedy and other agencies were destroyed by court the End of American Aristocracy, by Michael Knox Beran, p. 25 (St. Martin’s decisions that left FDR frustrated and Press, New York, 1998). threatening to restructure the court. 436The Place of Franklin D. Roosevelt in Other administrations had been able to History, by Allan Nevins; in the volume Historical Viewpoints, Second Edition, Vol. II Since 1865, John A. Garraty, ed., p. 304 434The Roosevelt I Knew, by Francis Perkins, (Harper & Row, New York, 1970). p. 24 (Viking Press, New York, 1946). 437Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 96 ______

Winning the Social Security debate, huge new social insurance program to FDR said, was critical. As he signed tame the business cycle, failed by any the bill into law in August 1935, he objective standard. But FDR won the said that it was a victory of political debate in the 1930s and, tremendous importance: “If the ostensibly, forever. It was a debate Senate and the House of about the nature of government and the Representatives in this long and existence of public bureaucracies arduous session had done nothing themselves. Social Security more than pass this Bill, this session commentator Robert Dahl, writing in would be regarded as historic for all his book Turning Points of Social time.”438 FDR understood the Security, said, “Nothing is harder to importance of the revolution of 1935. create than a new institution. Nothing More important than just a new social harder to destroy than an established insurance program that was the one.”441 crown jewel of an American welfare state, his legacy would be accepted Conservative economist Milton by both major political parties. For Friedman, who during his wartime generations to come, there would be government service helped initiate the no serious discussion of the withholding tax, has said that once principles of the welfare state, but bureaucracies are created, they exert a only about how fast it should expand. tyranny of the status quo. He should know. The withholding tax—which After Social Security began, the was designed to help generate revenue federal government disingenuously for World War II and which was claimed it was setting up “a Social supposed to end with that war—is now Security account”439 for each a permanent fact of life. Similarly, no taxpayer. Such claims, FDR said, had one suggests that sunset laws could a political purpose: “That account is ever apply to Social Security. Said one not useless. That account is there so HEW secretary: “How are you going that those sons of bitches up on the to terminate a retirement program that Hill can’t ever abandon this system people have been paying into with the after I’m gone.”440 expectation of receiving money back?”442 As discussed earlier, FDR’s grasp of economics was faulty. His New Deal Sixty-seven years after Social policies, which included establishing a Security’s founding, as Americans

438Public Papers and Addresses of Franklin 441Turning Points in Social Security , by S. D. Roosevelt, 1935 (U.S Government Tynes, p. 38 (Stanford University Press, Palo Printing Office, Washington, D.C.). Alto, Calif., 1966). 439See Dorcas Hardy’s Social Insecurity, p. 442Two Lucky People: Memoirs, by Milton 7. and Rose Friedman, pp. 122-23 (University 440Ibid. of Chicago Press, Chicago, 1998).

______

Ludwig von Mises Institute Essays in Political Economy 97 ______grapple with the controversial issues of Social Security followed the rules of increasing payroll taxes for a ravenous other government bureaucracies: welfare system whose long-term Start small. Target a group said to be actuarial foundations are shaky, this in need, a group no one in the private institution has proved that people with sector supposedly can or will help. such diverse viewpoints as FDR, Dahl, Argue that the government is filling a and Friedman were in agreement. The need that the private sector is passage of Social Security was a incapable of serving. decision, a change, from which America has never turned back. The Government bureaucracies, which welfare state is as much a part of our often begin modestly and then grow, lives as television. Only the end of this grow enormously because they allow program of apparently endless no competition from the private entitlement—whose supporters never sector. Indeed, they prevent it, either concede it should see any change other indirectly through taxation and than expansion—can begin the move regulation to make competition to restore a classical liberal America. difficult, or by making competition Social Security is, and may always be, illegal. the crown jewel of the American leviathan state. The debate is philosophical. Bureaucrats say it is ridiculous to Postscript—The Lessons think the private sector can provide of the Revolution services such as mail delivery, pensions, or railroads, though all “Above this race of men stands an these services were provided immense and tutelary power, which efficiently by the private sector takes upon itself alone to secure the before regulation led many gratifications and to watch over their entrepreneurs to abandon fate. That power is absolute, minute, industries.444 regular, provident, and mild. It would

be like the authority of a parent if, 444Consider the subways of New York City. like that authority, its object was to They were built with private funds, but the prepare men for manhood; but it fare was regulated by state and city seeks, on the contrary, to keep them authorities who insisted it not be raised in perpetual childhood….” above a nickel, preventing private owners —Alexis de Tocqueville443 from generating sufficient revenues for profits and improvements. The last private owners were happy to sell out in the early 1940s. Once publicly owned, the fare grew from a nickel to $1.50 over 60 years, a 2,900-percent increase. But no one 443Democracy in America, Alan Ryan’s complains about obscene profits in the introduction, p. 318 (Everyman’s Library, public sector because—given its waste and Knopf, New York, 1994). mismanagement—there are no profits and

______

Ludwig von Mises Institute Essays in Political Economy 98 ______

Americans paying more in payroll Government bureaucracies are taxes than income taxes).447 usually led by people considered experts in their field. Often, the claim The system, advocates believe, must of expertise is conferred by be above politics, just as the welfare journalists who claim they are state is in the United States today objective, but who favor socialist despite several conservative policies. The experts often believe administrations that were supposedly their goals are noble. The logic of elected to dismantle it.448 And, most their arguments is this: People must of all, it must be complex. The be saved from themselves; society survival of the system, said one must be saved from above; the Social Security official some 40 years benighted must be saved by the ago, is assured because people don’t enlightened.445 Many of these understand it.449 And as noted earlier, reformers were players in the great Social Security officials have referred Social Security debate of 1935. to their training as a process of “getting religion.”450 Such reformers believe in “a dictatorship of virtue.”446 They are 447“The simple fact is that FICA happy for their state welfare systems, contributions are just a second income tax their Great Society, Square Deal, masquerading under a more acceptable New Nationalism, New Freedom, and name.” See Martin Gross’s The Tax Racket, New Deal, to be mysterious and take p. 12 (Ballantine Books, New York, 1995). 448 on quasi-religious overtones so On the whole, wrote Derthick, people who dare to question their Republicans in charge of Social Security have been very liberal (p. 67). foundations can be depicted as 449“Continued general support for the Social radicals and virtual heretics, as most Security Administration hinges on continued critics of Social Security have been public ignorance of how the system works. I until the last twenty years or so believe that we have nothing to worry about (when huge payroll tax increases because it is so enormously complex that nobody is going to figure it out”—a Social became effective, leaving many Security official quoted in The Social Security Fraud, by Abraham Ellis, pp. 58-59 (FEE, Irvington-on-Hudson, N.Y., 1996). 450Arthur Altmeyer, one of the first generation of Social Security executives, says Social Security officials were given service is substandard! Another example: such initial training that they learned to look Despite several bond issues, the state at Social Security as almost a religion. authorities have been promising a new “They did it so they had religion. They had Second Avenue Subway line for 60 years. it complete.” See The Real Deal: The 445See Dictatorship of Virtue, by Richard History and Future of Social Security in Bernstein (Alfred A. Knopf, New York, America, by Sylvester J. Schieber and John 1994). B. Shoven, p. 10 (Yale University Press, 446Ibid. New Haven, Conn., 1999).

______

Ludwig von Mises Institute Essays in Political Economy 99 ______

Nevertheless, the Social Security The belief in this huge entitlement theocracy is still with us today becomes a form of theocracy. A because supporters, some of whom person who doesn’t believe is an concede that the program has “extremist,” outside the political problems, have been able to convince mainstream.451 But the Social media elites that the program is still Security problem of recent years is needed for paternalistic reasons. At that many of the former true believers the heart of any government welfare have developed doubts: More than a program is the idea, which many say few former Social Security officials is a well-intentioned one, that people and advocates, after years of must be cared for by the government overseeing this giant program or because most of them would never be boosting it, have lost faith.452 Others, able to take care of themselves.454 For while still supporting the concept, example, in the case of Social have confessed to a few doubts and Security, officials say the average have called for previously person can’t be trusted to save for his unthinkable reforms, such as or her own retirement; that only with allowing part of the taxpayer’s the help of the government can the “contribution” to go into a private average person ever hope to live account.453 decently in old age.

Paul Webb, a Social Security regional 451Any presidential candidate who meant to commissioner in the 1970s, rejected tamper with Social Security was “a the notion that if people didn’t pay candidate for a frontal lobotomy”—Jack into Social Security, they would save Kemp. See Derthick, p. 16. 452Typical is The Big Lie: What Every Baby more: “Critics make the unlikely Boomer Should Know About Social Security assumption that we humans, if we and Medicare, by A. Haeworth Robertson, didn’t pay into Social Security, would former chief actuary of the Social Security wisely save our money or buy a Administration (Retirement Policy Institute, private insurance policy of high Washington, D.C., 1997). See also Dorcas 455 Hardy’s Social Insecurity. value.” But whether a person is 453Two examples of Social Security thrifty or believes in the modern supporters who now concede there should be institution of retirement begs the some partial privatization are Sam Beard, in issue. Webb assumes that he or some Restoring Hope in America: The Social government bureau knows what is the Security Solution (Institute for optimum amount for any given Contemporary Studies, Oakland, Calif., 1996); and New Century: New Deal, by individual to save for retirement in Wade Dokken (Regnery Publishing, Washington, D.C., 2000). Both identify themselves as liberal Democrats, with Dokken celebrating his friendship with 454See Ellis, The Social Security Fraud, p. President Clinton and his wife. Beard is a 97. former aide to Senator Robert Kennedy. 455Ibid.

______

Ludwig von Mises Institute Essays in Political Economy 100 ______the first place, better than the manage billions of dollars of assets. individual could know. 456 And, of course, they believe themselves to be the right guardians, Bureaucrats don’t even consider the the wisest among us. Their beliefs bigger issue: Is it right for some imply that all Americans consent to government department to decree that this loss of liberty because this kind everyone should retire? There are of liberty—the right to control the millions of Americans who have no fruits of one’s labor—would amount intention of retiring. Why should they to license. be forced to “save” for a thing they never expect to do? Why not force The triumph of this paternalistic someone to save for law school, even philosophy is one of the lessons of though he or she has no intention of the Social Security revolution of going to law school? Why should any 1935, which, more than any other adult be forced to save for anything? event, created the modern American Isn’t it his money?457 welfare state. We see the debate over this statist philosophy repeated even Webb, and others who believe in the today, more than 65 years later. The welfare state embodied in Social debate about privatizing all or part of Security, implicitly argue that some Social Security is a repeat of the Platonic guardians 458can be trusted to debate over the Clark amendment of 1935.459 The Clark amendment, 456Derthick, p. 5: “for the vast majority, offered as the first Social Security participation is involuntary.” 457 legislation was about to become law, The “returns” of Social Security are about didn’t seek to destroy the new 2 percent. That’s much lower than an average portfolio of stocks and bonds. The entitlement program; it merely sought Social Security payback period has to set up competition with it. Those increased from 1.1 years, for those retiring private employers who were willing in 1960, to 12.9 years in 2000; that figure to offer a private pension plan as that will rise to 18.3 years by the year 2010. good as Social Security would have See Carolyn Weaver’s article in The Fortune Encyclopedia of Economics, David R. been exempted from the new Henderson, ed. (Warner Books, New York, mandatory Social Security system. It 1993). was disallowed by Social Security 458“Plato’s moral code,” writes philosopher Karl R. Popper, “is strictly utilitaria n; it is the code of collectivist or political utilitarianism. The criterion of morality is the interest of the futile: “For myself it would be most irksome state. Morality is nothing but political to be ruled by a bevy of Platonic Guardians, hygiene.” See Popper’s The Open Society even if I knew how to choose them, which I and Its Enemies, vol. 1, p. 107 (Princeton assuredly do not.” See his The Bill of Rights, University Press, Princeton, N.J., 1971). And p. 73 (Harvard University Press, Cambridge, even if one allows the notion that some wise Mass., 1958). ruler should arrange every detail of our lives, 459See Section 10 for more on the Clark Judge Learned Hand once wrote that it was amendment.

______

Ludwig von Mises Institute Essays in Political Economy 101 ______supporters in 1935.460 Here, again, is As Alexis de Tocqueville warned, the the lesson of every government alternative is not easy—liberty has a bureaucracy: Make private high price.462 But liberty’s benefits competition illegal, or make it so are innumerable and invaluable. The difficult through regulation that no battle over the continuance of Social one will compete. Statists then say, Security over the next few years will “We told you so. Only the public be an essential part of determining sector can do these things.” whether Americans are ready for liberty. The goal must be nothing This vicious circle must be broken if short of eliminating this program of Americans are to resurrect their forced wealth redistribution and philosophical origins. The lesson of replacing it with voluntary programs 1935 is that collectivism must be of retirement savings. confronted in the marketplace of ideas. Americans must understand Have the lessons of 1935 gone so far that, when they support Social and taken away so much of Security, government price controls, America’s liberty and self-sufficiency and nationalized businesses such as that Americans are finally ready to the comical Amtrak,461 the price of understand that socialism is too this support is more than high taxes; expensive? Friends of liberty must it is the erosion of their liberty. hope that Leviathan’s blunders have finally changed the philosophical current. They must hope that a new

460 generation of Americans will once For more on this, see Social Security and again value liberty over democratic Its Enemies: The Case for America’s Most Efficient Insurance Program, by Max. J. socialism masquerading as security. Skidmore (Westview Press, Boulder, Colo., w 1999). Skidmore writes, “Despite the rosy promises of its advocates, privatization does not guarantee a better return, a good return or even any return,” p. 4. To the contrary, stocks have easily beaten the “returns” of Social Security over any long period. As Professor Siegel documented in his book, 462“Nothing is more fertile in prodigies than Stocks for the Long Run, the historic return the art of being free; but there is nothing of equities is about 9 percent a year. No more arduous than the apprenticeship of social insurance system in the world has liberty…. Liberty is generally established come anywhere near this. with difficulty in the midst of storms and is 461Amtrak Subsidies: This Is no Way to Run perfected by civil discords; and its benefits a Railroad, by Stephen Moore (Cato cannot be appreciated until it is already old.” Institute Home Page, “This Just In,” May From Alexis de Tocqueville’s Democracy in 22, 1997). See also my article on Amtrak, America, as quoted by F.A. Hayek in his “Financial Train Wrecks Ahead,” in the book, The Constitution of Liberty, p. 54 March 2002 issue of the Mises Institute’s (University of Chicago Press, Chicago, The Free Market. 1960).

______

Ludwig von Mises Institute