Transactions: March 14, 2011

by Robert Teitelman  |  Published March 11, 2011 at 1:50 PM

Blame the Brits. In 1942, in the midst of world conflagration, the Brits went squishy. Sir William Beveridge, a member of Churchill's wartime government (he actually worked for Labour Minister Ernest Bevin, who wanted to get rid of him because he thought he was conceited), published a long, turgid report with revolutionary implications: "Social Insurance and Allied Services." This wasn't the first social welfare scheme proposed -- Bismarck tried one in Germany in the 1880s -- but it kicked off a broad move toward what's derided by conservatives as socialism. In 1945, the newly elected Labour Party took Beveridge's plan and launched National Health and other social welfare schemes. America was close behind. The New Deal had passed Social Security in 1935. After debate in which business groups declared it "utterly alien to America and her institutions," Congress passed the Employment Act of 1946 (dropping "Full" in a compromise), which made the federal government responsible for generating jobs and monetary stability. If Beveridge was a conceited Brit who designed social welfare aspects of this state expansion, John Maynard Keynes, genius, provided the theoretical underpinnings. This was social welfare enabled by cutting-edge economics.

Both plans represented a remarkable admission, new to history. A primary function of the state was to improve the lot of its people. What provoked this? Many linked the Great Depression to Nazism and economists were predicting the slump's return. The war required mass mobilization; now those masses demanded recompense. Meanwhile, a vanguard of economists believed Keynes had found a way to regulate economic perturbations, though it's doubtful, for all his self-regard, that the great man himself would have been so certain. This policy of "compensatory finance" attracted bipartisan support for decades; Republicans like Dwight Eisenhower and that Keynesian Richard Nixon were fully onboard. In 1965, Congress passed Medicare and Medicaid; in 1976, a bill combining "Full" and "Employment" finally passed. All this made the Greatest Generation the most "socialist" in American history. Why not? The economy boomed in the '50s and '60s, with little overseas competition. And demography helped. The population was young -- baby boomers were mastering credit cards -- industrial jobs, many unionized, were rife, income inequality was low, tax rates high. Taxes were not yet considered theft.

Then we lost it. The erosion of faith in government had many sources, particularly in a nation with a tradition of Jeffersonian do-your-own-thingism. Besides, the rest of the world, first Europe and Japan, then Brazil, India, China and South Korea, woke up. The industrial age became post-industrial. Globalization advanced. We aged. Shadows fell upon our sunny self-regard. After its first successes, Keynesian management got rocked by '70s stagflation. The full-employment mission persisted (it's still rhetorically sacred), but faith in markets replaced confidence in government. This proved to be a rickety faith. In 1974 Congress passed the Employment Retirement Income Security Act to regulate private pensions, mostly defined-benefit plans. Less than a decade later, the situation began to change, based on a loophole in Erisa: Companies replaced DB plans with defined-contribution plans, like 401(k)s, dumping investing on workers. This occurred quietly, privately, without legislation or debate, then mushroomed. There were many rationales for this, including giving employees ownership, but the real motive was more prosaic: DB plans were expensive for corporations increasingly defined by share price. True, hiring money managers wasn't cheap. But more significantly, companies found investing, well, difficult. Recessions. Meltdowns. Wars. When they missed targets, they had to top up plans, often when they could least afford it. So they palmed it off on workers, most of whom had no investing skills to speak of, and insisted breezily that long-term, equity markets generally rose. Note the "generally." This was widely accepted as plausible until 2001. Then came 2008.

The last big holdout of DB plans are underfunded public pensions, which are now poised to make the same forced march to 401(k)s, among more draconian givebacks, like killing collective bargaining. The arguments for this move are a) familiar (too expensive) and b) novel (everybody else is screwed, no exceptions for you). Indeed, after a decade of stocks treading water, the equities-always-rise argument has been battered, particularly for retiring baby boomers. What all this shows is that the market as foolproof social welfare tool is no more reliable than Keynesian-style economic wizardry. This produces a queasy realization 65 years after the Employment Act: As confidence in our ability to ensure long-term prosperity wavers -- perhaps needlessly; we are prone to hysteria -- the belief that a function of government is to broadly improve lives for everyone deflates. What's next? Malthus?