Originally published January 10, 1983
ON NEW YEAR’S DAY I made my annual start at cleaning up my desk, and first off I threw out a big pile of clippings. They all had to do with predictions about the economy. I didn’t actually weigh them, but as I riffled through them I could see that they would assay very high in optimistic words of politicians anxious for my vote and brokers eager for my money.
I had saved the clippings with the idea of some day doing a piece making fun of them. If I confined myself just to the pronouncements of Secretary of the Treasury Donald Regan, I could fill the available space, and it would be good for some bitter laughs in a winter of discontent. Turning the old gag around, I could ask: “If he’s so rich, how come he knows so little?”
I also thought of explaining how to tell this depression from the great one of 1929. Fifty years ago Secretary of the Treasury Andrew Mellon (touted as the best since Alexander Hamilton) kept prophesying that the economy was about to turn the corner. His present day successor keeps telling us it is about to bottom out. The plane of the economy seems to have rotated 90 degrees, not necessarily in a better direction.
But the state of the economy is not funny, and the performance of our leaders is not funny, and I have been wondering why our politicians and our economists (most of whom surely are decent men) have been so steadily wrong. Certainly they haven’t intended to be wrong. Although they are perhaps not above a willingness to mislead us a teeny bit, they would undoubtedly be suffused with sincere delight if their predictions should come true and bring us all comfort and joy.
A string of recent predictions offers a clue. I’ll not single out any particular one, for there are a great many, and they all take this form: The long-awaited recovery will start some time in 1983, but unemployment will continue to rise and will persist in the double-digit range at least well into 1984. I find two elements of the form arresting.
The first is the phrase “long-awaited recovery.” Sometimes it is “long-expected recovery.” Either way it suggests nothing so much as the South Seas cargo cults that employ ritual incantations intended to bring a heavily laden ship over the horizon to satisfy all their members’ wants. It is magic; and aside from the incantations, it is passive. Nobody has to do anything-there is nothing for anybody to do-to bring about the desired result. Passivity is a renunciation of responsibility, that is, of freedom; and it is now common in our high places.
The second striking feature of the predictions is the universality of the expectation that even when the magic ship Recovery is unloaded to widespread rejoicing, there will be 10 or possibly more millions of men and women left empty handed and unemployed on the beach. What on earth are our prophets thinking of?
Please understand that I am not questioning the accuracy of what is being said. Indeed, I think it altogether probable that the next two years will see a modest advance in the Gross National Product together with an increasing (or, at best, slowly decreasing) rate of unemployment. I think this outcome probable because, as near as I can see, everyone is doing his level best to bring it about. President Reagan will no doubt quarrel with the Jack Kemp Republicans to his Right and the Atari Democrats to his Left, but the quarrels will be mostly over details. There is, I am sadly convinced, little likelihood that any of the parties will do anything to cause the predictions to go awry.
The quarrels will be mostly over details because all parties have drifted into the belief that the rate of unemployment is merely one among several “indicators” of the state of the economy. It is, moreover, said to be a “lagging indicator,” by which is meant that we can enjoy something called prosperity at the same time that several millions of our fellow citizens are out of work. You may not be surprised to hear this, for it is part of the conventional wisdom of this wise age.
There are other examples of the same sort of wisdom. For a generation now, full employment has been complacently defined as a situation where 4 per cent of those willing and able to work are unemployed. In other words, 96 per cent equals 100 per cent; but I don’t advise you to tell that to your banker when he asks you to satisfy your loan in full. More to the point, 4 per cent of our labor force is close to 5 million men and women.
Recently the wisdom favored by the Atari Democrats has inspired what is called a full-employment budget, showing how much money the government would have available if we had full employment. Since unemployment costs the government billions of dollars in benefits paid and taxes not paid, a full employment budget is easier to balance than the one President Reagan has been wrestling with. The catch is that the Atari Democrats’ full-employment budget calls for 6 per cent unemployed.
The Republicans, you will be comforted to hear, are more realistic, or say they are. They have noticed that American manufacturing industries are in trouble. They do not talk much about sunset industries, that’s an Atari Democrat metaphor; their metaphor is an old one from physics: frictional unemployment. This is what happens when a steel company decides to abandon its mills instead of updating them, or when it updates them by substituting robots for human beings, or when textile mills leave New England for the Carolinas in search of what local boosters call cheap and contented labor, or when the mills leave the Carolinas for even cheaper and more contented labor in the Orient, or when data processing companies flit hither and thither in pursuit of low rents and lower taxes.
People can become unemployed in each of these ways, which are called frictional because, like friction in any machine, they are thought to be an inescapable concomitant of the machine’s functioning. The point about it now is that conservative economists (more in character than “liberals”) say frictional unemployment in our technological age runs at 8 per cent.
So, the wise men who think about the problem at all tell us that somewhere between 4 and 8 per cent of us will always be out of work even when the economy is going full speed ahead or full blast or however you want to put it. After you add in the” lagging indicator” factor, you can see that many millions of unemployed will be with us in the midst of what is called prosperity.
THE PREDICTION is not, as I have already said, nonsense; the definition or understanding of prosperity is. Carry that a step further: The definition or understanding of economics is nonsense. Almost all textbooks, from Left to Right, say that economics is the science of the efficient allocation of scarce resources, with the goal, explicit or implicit, of increasing the GNP à outrance. It is this pervasive notion that is nonsense.
But let’s assume that it’s not. What is the GNP? It is the sum of personal consumption, private domestic investment, government purchases, and net exports. You will note that in order to arrive at that sum we have to talk about prices, not about things. Any schoolboy knows that you can’t add apples and oranges and tons of steel and square miles of computer printouts and calories of three-martini lunches and achieve anything other than mush. The one way we can arrive at the Gross National Product is by adding up the prices paid for all the goods and services. Money is not simply handy for this purpose; it is, as has been recognized at least since Aristotle, the critical element.
Only the prices paid count. I may think that my better mousetrap is worth a hundred dollars and refuse to sell for less. If no one is willing to pay the price, my trap is no part of the GNP, except perhaps for the prices I paid for the material and labor that went to make it. A price is not paid in the abstract –buyers and sellers must be involved. And buyers and sellers are people.
That may strike you as stupefyingly obvious: surely it goes without saying. Well, it does go without being generally said, with the results that economics is said to be about things, and that an economic system is said to be successful if things proliferate despite the fact that many millions of people are hurting. Otherwise employment could not be thought of as a lagging indicator of a phenomenon called recovery.
What I should like to insist as this new year starts is that economics is about people, and is about things only in connection with people. Does this make any difference? It makes several, and I will name one: So-called frictional unemployment is not a heavenly curse but the consequence of our way of doing business, and our way of doing business is promoted by the way our tax laws treat depreciation, interest and local taxes. The fault is not in our stars, nor will it be corrected when our ship comes in. If we acted on the understanding that employment is really what recovery is all about, we would change those tax laws.
We are accustomed to hearing that today’s pain is necessary to prevent worse developments tomorrow. We are assured that President Reagan and Federal Reserve Board Chairman Paul Volcker do, too, care about people, but that if the economy is allowed to heat up (the metaphor has shifted to thermodynamics) too rapidly, inflation will start raging again (that’s combustion), and more suffering will be caused than is caused now by staying the course (navigation).
The question that pops into my mind is, How do the wise men know that prodding the economy to provide jobs will turn the United States into the second coming of the Weimar Republic? The answer is, They don’t know. But anyone who looks at the record knows that full employment was not one of the things rotten in inter-war Germany. The best that can be said for what now passes as wisdom is that it inflicts present and certain suffering in the hope of warding off future suffering that is only problematic. This is what you do when you have your eye on things rather than people.
As Freud told us, the aims of living are loving and working. Economics can’t do much about the former, but the latter is its special domain. If it fails there, it fails altogether.
The New Leader
 To excess