Brad DeLong--Economics Only

Right-Wing Anti-New Deal Litigation Strategy in the 1930s

The Switch in Time that Saved Nine: While getting ready for my classes this spring on the Great Depression and the coming of the mixed economy, I found myself noticing something in Robert Stern's classic article on "The Commerce Clause and the National Economy" that I had not noticed before: the presence of Frederick H. Wood, formerly general counsel for the Southern Pacific Railroad (the "Octopus") and principal litigation partner at Cravath in the 1930s.

He is there arguing in front of the Supreme Court in both Schechter Poultry and Carter Coal, in both of the cases that are the high-water mark of the judicial resistance to Roosevelt's New Deal before Roosevelt's reelection and the consequent switch in time that saved nine--the shift of Chief Justice Hughes and Justice Roberts to the New Deal side, and then the replacement of two of the dinosaurs by Hugo Black and Stanley Reed:

http://www.jstor.org/cgi-bin/jstor/printpage/0017811x/ap040472/04a00020/0.pdf?backcontext=page&dowhat=Acrobat&config=jstor&userID=a9e52087@berkeley.edu/01cce4406500501b847ee&0.pdf: Robert L. Stern (1946), "The Commerce Clause and the National Economy, 1933-46," Harvard Law Review 59:5 (May), pp. 645-93: Mr. Joseph Heller, the Schechters' original counsel, effectively convinced the Court of the trivially local nature of some of the practices involved.... [H]umor was not ineffective in ridiculing the code provisions involved. The defendants' argument was concluded by Mr. Frederick H. Wood, of a large New York firm which represented substantial business interests and which came into the case at the last moment; he oratorically contended that such matters should be regulated only by the states...

[...]

James W. Carter brought suit... against the Carter Coal Co., his father, and its other officers, to enjoin the company from accepting the Coal Code.... The case was argued in the district court for two full days by Mr. Frederick H. Wood and Mr. whitney for the plaintiff.... Justice Adkins rendered his oral opinion.... [H]e was compelled by the Schechter case to hold that "as a matter of law" the effect upon interstate commerce of wages and labor relations was... not within the commerce power.... The case was argued [before the Supreme Court] in March [1936] by Mr. Wood.... Mr. Justice Sutherland, speaking for five members of the Court... sidestep[ped] the... constitutionality of the price-fixing provisions... by holding them inseparable from the labor provisions and holding the latter unconstitutional...

[...]

Finally the opinion reached the crucial point. Did labor relations in the vast Jones and Laughlin steel-manufacturing enterprise sufficiently affect interstate commerce? Gone was the verbalism of the Carter [coal] case, the reliance upon such metaphysical concepts as proximate or intermediate causation.... "Actual experience," actual relation to commerce, was henceforth to be the criterion.... Mr. Justice McReynolds, in a bitter dissent... [joined by] Van Devanter, Sutherland, and Butler, accused the majority of abandoning the precepts of the Schechter and Carter decisions.... For the second time in two weeks the Court had in substance overruled cases decided less than one year before on major constitutional issues. No serious effort had been made to distinguish... Carter.... There had been no change in the membership.... What had induced Mr. Justice Roberts to switch?... What of the Chief Justice?...

No one who did not participate in the conferences of the Court will know.... But few attributed the difference in results... to anything... in the cases... their facts, the arguments presented, or the authorities cited. Perhaps the series of violent strikes had educated Mr. Justice Roberts as to the close relationship between labor relations and interstate commerce. But the consensus... was that the Chief Justice and Mr. Justice Roberts believed that the continued nullification of the legislative program demanded by the people and their representatives... would lead to acceptance of the President's Court [packing] plan, and that this would seriously undermine the independence and prestige of the federal judiciary....

At the end of the term, Mr. Justice Van Devanter announced his retirement.... Senator [Hugo] Black successed Mr Justice Van Devanter at the beginning of the October Term, 1937. Mr. Justice Sutherland retired in January, 1938, and Solicitor General Stanley Reed took his place...

Frederick H. Wood shows up in front of the Supreme Court ten times during the New Deal years: NORMAN v. BALTIMORE & O.R. CO. (1935); YOUNGSTOWN SHEET & TUBE CO. v. UNITED STATES (1935); A.L.A. SCHECHTER POULTRY CORPORATION v. UNITED STATES (1935); CARTER v. CARTER COAL CO. (1936); four times in various MORGAN v. U.S. proceedings; FORD MOTOR CO. v. NATIONAL LABOR RELATIONS BOARD (1939); and UNION STOCK YARD & TRANSIT CO. OF CHICAGO v. U.S.

There is an oral tradition at Cravath that Wood headed up a sophisticated long-term anti-New Deal litigation strategy: the fact that the named plaintiffs in the big anti-NRA case were orthodox butchers from Brooklyn is said to be no accident, but instead a successful attempt to pin Louis Brandeis by making him see the case as state power vs. the little guy from his minority religion, and not only to swing his vote but to curb his tongue from having its influence on the rest of the liberal wing of the court. And, indeed, in Schechter the NRA went down 9-0 (a blessing for the country).

Wood and company's victory in Schechter in 1935 on the limits of the Commerce Clause and of the federal government's ability to regulate the national economy was extended the following year in Carter Coal, before collapsing in 1937 with the switch. I find myself wanting to know more about this: did they think that they were going to win--stop the New Deal long enough and that when the dust cleared the 1920s would come back?

I should get myself over to the Boalt Hall Library and hope that their copy of Robert T. Swaine (1946), The Cravath Firm and Its Predecessors is still there, because amazon wants $395 for a copy.

Surprisingly--or maybe not surprisingly--the best short things on the web I see about this come from Time Magazine, back when it was an edgy startup interested in informing its viewers and not an organization that saw pleasing its insider sources as job #1. Consider:

• http://www.time.com/time/printout/0,8816,787934,00.html
• http://www.time.com/time/printout/0,8816,754528,00.html
• http://www.time.com/time/printout/0,8816,748793,00.html
• http://www.time.com/time/printout/0,8816,754718,00.html
• http://www.time.com/time/printout/0,8816,930815,00.html
• http://www.time.com/time/printout/0,8816,757601,00.html

Especially good is Time's series of short pieces on the Gold Clause cases, watching as Chief Justice Charles Evans Hughes twists and turns to avoid repudiating the actions of the Roosevelt administration with respect to government debt while also damning those actions as reprehensible:

http://www.time.com/time/printout/0,8816,787934,00.html: Businessmen knew it, Congress knew it, the Brain Trust knew it, Mr. Homer Stille Cummings knew it: The Justices of the Supreme Court would do their duty as they saw it. Yet somehow nearly everyone had overlooked the obvious fact that the nine potent, grave and reverend judges would first take a good look at that duty. Last week when the Court in unmistakable fashion began that scrutiny, business fell into a dither, Congress chattered, the Brain Trust fretted and the Attorney General blushed.... For years the U. S. Government and most corporations promised to repay lenders their principal and interest "in gold coin of the present standard of weight and fineness." On June 5, 1933 Congress, having authorized the President to suspend the gold standard, forbade the writing of any more gold clauses, declared in effect that all those previously written were legally out of bounds. Hence came the four issues before the Supreme Court last week.

Norman C. Norman, 39, a bachelor in the jewelry manufacturing business with his father in Manhattan, demanded $16.60 from Baltimore & Ohio Railroad. He held a coupon of one of the railroad's bonds calling for an interest payment of $22.50 in gold. Since the railroad could not pay in gold he wanted $39.10 in devalued currency. Lower courts had upheld the railroad's refusal to pay Norman C. Norman the additional $16.60...

http://www.time.com/time/printout/0,8816,754528,00.html: The Court upheld the right of Congress--under the Constitutional power of regulating money--to void gold clauses in private bonds. But no such clean bill of health was given the Government in abrogating the gold clauses of its own bonds. Government bondholders were denied the right to sue in the Court of Claims on the somewhat extraordinary grounds that it is impossible to tell how much damage they have suffered since it is now illegal to own gold. However, the Court did not uphold the propriety of the Government's offering devalued money.... In short, Government bondholders have now the right but no legal opportunity to collect, and morally the Government is no better than a malefactor who takes refuge behind a legal technicality—-in this case the right not to be sued without its own consent. No pretty position is this for any government to be in. It posed a problem in New Deal morals.

Almost as disconcerting to citizens was the news that the legality of the country's monetary policy was approved by only five of the nine Justices of the Court. New Dealers were pleased that Chief Justice Hughes had joined with Liberals Brandeis, Cardozo, Roberts and Stone to give them comfort. Little did they care about the dissent of four Justices, for they look down very long Liberal noses at the four Conservatives: Justices Sutherland, Van Devanter, Butler and McReynolds—in particular at Justice McReynolds.... [T]he majority opinion, upholding the Government in every case without exception, would have seemed stronger had Mr. Hughes not thundered so loud... the dissenting opinion would have borne more weight had it been written by a less uncompromising reactionary than Mr. McReynolds... [who] launched not into an opinion but into an elegy for honesty and good government.

"It seems impossible to overestimate the result of what has been done here this day. . . . God knows, I do not want to talk about such matters but it is my duty. . . . The Constitution is gone. . . . This is Nero in his worst form. We are confronted with a dollar which has been reduced to 60¢ which may be 30¢ tomorrow, 10¢ the next day and 1¢the day following. "We have tried to prevent its entrance into our legal system but have tried in vain..."

I remember listening once to the aged Paul Freund reminisce about working for the Solicitor General in the 1930s. He talked about the government's own litigation strategy, and about Charles Evans Hughes's twists and turns as he found that the government had broken its contract with its bondholders but there were no damages, but he never mentioned Frederick H. Wood.

Martin Wolf Sees Social Democracy in America's Future

Martin Wolf takes a look in his Magic-8 ball at America's future and sees... social democracy:

FT.com / Columnists / Martin Wolf - Why America will need some elements of a welfare state: Is globalisation a leading cause of rising inequality in high-income countries? The outcome of the debate on this question may determine whether the US will remain open to trade. If policymakers do not craft an imaginative response, protection against imports may be the outcome, regardless of its (non-existent) merits....

Mr Bernanke mentions the three standard hypotheses: skill-biased technical change; “winner-take-all” markets for the most talented; and globalisation. The last, in turn, would include trade, migration and rewards available to smart players in globalised capital markets.

Mr Bernanke himself comes to the standard and, in my view, largely correct, conclusion that “the influence of globalisation on inequality has been moderate and almost surely less important than the effects of skill-biased technological change.”...

This has long been the persuasively argued view of Jagdish Bhagwati of Columbia University.... Prof Feenstra notes that new possibilities for specialisation in tasks along the value chain may increase demand for skilled labour in both richer and poorer trading partners. But his empirical evidence still suggests that technology is more significant....

What, if anything, should be done? At first glance, the trend towards greater inequality should not worry a person with Mr Bernanke’s principles. But that response would be quite wrong... rising inequality causes declining equality of opportunity... makes losing a job costlier, more objectionable and so more resisted.... In a country in which much social insurance has historically been supplied by employers, the loss of jobs and the closure of businesses is particularly traumatic. Protectionism then emerges as the politically correct form of resistance to the market....

There are two possible responses. One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide. The other is to create a system of support that does not destroy incentives... greater funding of education for the disadvantaged (ideally, with private supply) and universal health insurance. The left will also want higher minimum wages and generous subsidisation of low earnings.

I am not suggesting that the US should embrace Europe’s interventionist follies. But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not.

I wish I could see it. But I am having a hard time doing so. American politics aren't... logical.

One would have thought that the rise in the value of a sheepskin from a 30% lifetime wage premium over a high-school diploma in 1975 to a 90% premium in 2005 would have called forth an extraordinary wave of public support and public funding for investment in education that would have pushed that premium down somewhat: lots more Americans should be getting a higher education now than were getting one in the mid-1970s. But they aren't.

One would have thought that the increasing importance of pension and health benefits in a more medically-capable and longer-lived society would have made American workers enthusiastic about the "flexicurity" agenda pursued by Labor Secretary Bob Reich and others in the first phase of the Clinton administration. But they weren't--at least not in a manner visible to me or to decisive legislative votes like Sen. Breaux or Rep. Tauzin. And the Labor leaders weren't either. "Burial insurance. We don't want burial insurance" was the refrain that I heard from my spear-carrier perch in the back of the room.

One would have thought that initiatives like Barney Frank's "grand bargain"--the left supports trade liberalization if the right supports social democracy--would have gained more traction with a left that realizes that trade restrictions are negative-sum when they aren't smoke-and-mirrors and a right that recognizes the potential economic and soft-power security gains from an even more interdependent world. But they haven't.

Lots of things that make obvious and indisputable sense in America simply don't happen for one or another strange political reason.

In my view, those who benefit the most from America's open economy are consumers, elderly home-sellers, middle aged mortgage-borrowers, construction workers, and those producing and selling high-end consumer goods who benefit from consumer spending ultimately and indirectly burt surely financed by low interest loans from the People's Bank of China. They don't know how much they gain. Those who lose the most from America's open economy are manufacturing and other workers who find themselves competing with imports. They know how much they lose.

A substantial and relatively rapid fall in the dollar unaccompanied by macroeconomic distress would, I think, make a big difference. But absent that, I don't see any political coalition assembling in America for freer trade. Maintaining stasis will be the best we can hope to do.

So I share Martin Wolf's sense of where the U.S. should go--I have shared it for a couple of decades, at least. What I don't see is how to get there.

May I Have My Context Back, Please?

Ummm... Greg? Greg?! GREG!!

Greg Mankiw writes:

Greg Mankiw's Blog: More on Inequality: Ben Bernanke gives a talk on inequality, concluding that

the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible.

By contrast, Brad DeLong concludes

An unequal society cannot help but be an unjust society.

These quotations go to the heart of the policy divide behind right and left. The key question: To what extent is inequality of outcomes a source for concern in and of itself? People will always differ in productivity. Should policymakers act to offset these innate differerences, or should their goal be to give everyone the same shot and not be surprised or concerned when outcomes differ wildly? To a large extent, policymaking often comes back to Rawls vs Nozick.

And quoting often comes back to giving the reader the proper context.

Greg shoulda quoted my whole paragraph. It says:

An unequal society cannot help but be an unjust society. The most important item that parents in any society try to buy is a head start for their children. And the wealthier they are, the bigger the head start. Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great...

Jeebus.

The 2008 Federal Budget: Radio: KQED Forum 88.5 FM 9:00 AM Wednesday, February 7, 2007

The 2008 Federal Budget: Radio: KQED Forum 88.5 FM 9:00 AM Wednesday, February 7, 2007

This Year's Federal Budget Forum discusses President Bush's federal budget plan for 2007 and the anticipated Congressional response.

Host:

• Michael Krasny

Guests:

• Annelise Anderson, senior research fellow with the Hoover Institution
• Brad Delong, professor of economics at the University of California at Berkeley
• Deborah Solomon, Wall Street Journal reporter

KQED Audio Archive: http://www.kqed.org/epArchive/R702070900

Audio File: http://www.kqed.org/.stream/anon/radio/forum/2007/02/2007-02-07a-forum.mp3

---

Wow. I certainly ate my wheaties this morning...

I think what I objected to most was the enthusiasm with which Annelise Anderson repeated the White House talking points:

• Bill Clinton balanced the budget by starving the military!
• Bush's deficits arose not because he is feckless but because he is defending America!
• A little spending restraint by congress, and the budget will be balanced by 2012!
• Congress makes budget balance impossible because whenever taxes are raised it increases spending!

None of which are true. And a former associate director of OMB has no excuse for not knowing when staying reality-based requires throwing out the White House's talking points...

People are entitled to their opinions and judgments, but not to their own facts.

Second Gilded Age Cultural Studies Watch, or O Michael Berube! Thou Shouldst Be Blogging in This Hour!

Second Gilded Age Cultural Studies Watch, or O Michael Berube! Thou Shouldst Be Blogging in This Hour!

In a Super Bowl commercial--a commercial that I thought was astonishing for a company that is in the process of a slow-motion layoff of half of its hourly workers--GM broadcast the Robot's Loser's Progress yesterday:

GM Reveals Its Obsession in Super Bowl XLI Ad - AutoMotoPortal.com: Everyone at General Motors obsesses about quality these days - even the robots in the assembly plants. During the CBS telecast of Super Bowl XLI on Feb. 4, GM will launch the next phase of a corporate campaign that began last fall with the introduction of the GM 100,000 Mile Warranty. A new 60-second TV spot, called "Robot," will tell consumers about GM's continuing focus on quality. Created with GM by Deutsch LA, the spot features a small robot that is part of a GM assembly line. Unfortunately, the robot makes a tiny mistake: it drops a screw. The line shuts down and the employees in the plant banish the little robot from the premises. The robot's anguish over its mistake helps to remind consumers that every 2007 GM car and light-duty truck is now covered by a 100,000 mile/five-year powertrain limited warranty, and illustrates GM's obsession about quality...

What AutoMotoPortal.com doesn't tell you is the robot's post-firing Loser's Progress: the robot works a succession of lower-paid jobs, gets increasingly depressed, and at the end of the commercial commits suicide by throwing itself off a bridge--before waking up and realizing that it was all a bad dream.

In another Super Bowl commercial, Kevin Federline dreams about being a rap star while in "reality" he works the fryolater at a fast-food restaurant:

BBC NEWS | Entertainment | Federline advert causes offence: A US advert starring Britney Spears' estranged husband, Kevin Federline, has angered a fast food trade group. The 28-year-old pokes fun at his stalled music career as he daydreams of hitting the big time while serving French fries at a takeaway. The National Restaurant Association says the advert suggests restaurant work is "demeaning and unpleasant". But advertiser Nationwide Mutual Insurance insists Federline is the only one being mocked.

The commercial will be shown on 4 February during the Super Bowl - US TV's highest-rated broadcast, commanding the highest fees for advertising. Rapper Federline, also known as K-Fed, launched his music career amid a blaze of publicity but only sold 6,500 copies of his debut album, Playing with Fire, in the first week of its release...

I am not imagining this, am I? The underlying background assumption of these commercials is contempt for the men and women who serve the fast food and work the loading docks and deliver the pizzas and staff the call centers of America, isn't it? The exectives of GM and Nationwide Insurance and their creative ad professionals think that denying the dignity of labor is the road to selling annuities and SUVs to the fiftysomethings with spare cash watching the Super Bowl, isn't it? This is a Sign of the Apocalypse for our current Second Gilded Age, isn't it? Or am I overreacting?

This is out-of-my-league. We need a Trained Professional Cultural... Studies Person... A Trained Professional Cultural Student... A Trained Professional Cultural Studier... We need Michael Berube or Bitch Ph.D. or Bad Subjects or The Valve here, as soon as possible.

---

Robot:

Federline: http://www.nationwide.com/nw/featured-ads/index.htm?WT.srch=1&WT.mc_id=bgs00023

The Minimum Wage and the EITC

From the Archives: The Minimum Wage and the EITC:

The Minimum Wage and the EITC: Archive Entry From Brad DeLong's Webjournal: I like the EITC. Come the Day of Wrath, my best pleading will be the role I played in 1993 in the Clinton administration in expanding the EITC.

But the EITC is a program that uses the IRS to write lots of relatively small checks to tens of millions of relatively poor people who satisfy picky eligibility rules. This is not the IRS's comparative advantage. The IRS's comparative advantage is using random terror to elicit voluntary compliance with the tax code on the part of relatively rich people. The EITC is a good program, but it a costly program to administer, and it is administered imperfectly to say the least.

The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it's a very cost-effective program.

The right solution, of course, is balance: use the minimum wage as one part of your program of boosting the incomes of the working poor (being well aware of its likely disemployment effects of the wage floor and of its sending lots of money to the wrong households), and use the EITC as the other part (being well aware of its administrative complexities and errors and the disemployment effects of the phase-out range). Try not to push either one to the point where its drawbacks grow large. Balance things at the margin.