By George P. Brockway, originally published September 18, 1989
I HAVE WAITED in vain for editorial comment on one of the most astounding public pronouncements of recent times, prompted by the news that Michael R. Milken had made $550 million selling junk bonds in 1987. I quote in full: “Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working.”
Indeed it does. My sentiments exactly. Well, not exactly, because I don’t think the news raised questions. It answered them, affirmatively and emphatically.
The astounding thing about the pronouncement, however, was its pronouncer: David Rockefeller. What could possibly have given him reason to suspect that there is something unbalanced in the way our financial system is working? Has it ever occurred to him to wonder whether his extraordinary inheritance raises such questions?
This column, I should hasten to note, is not going to be about David Rockefeller (even though I admit to a personal grudge against him). But before going to other matters, I would point out that he was one of the leaders in pressing impossible loans on eager Latin American republics, that he denied loans to New York City to do so, that he has not taken a lead in repairing the disasters his misjudgment (speaking mildly) has created, and that, to boot, he pressured Jimmy Carter into his misadventures (again speaking mildly) with the late Shah of Iran.
What interests me now is the general question of the distribution of income and wealth in this country, and in the world. This is a problem that is with us always. A couple of recent learned journal articles illuminate different aspects of it.
The Winter 1988 issue of The Journal of Economic Perspectives has an article by Professors Samuel Bowles, David M. Gordon and Thomas E. Weiskopf, who tell us that “Conservatives have been waging an economic revolution since the late Carter years,” and ask, “Have they succeeded?” The professors have many strings to their bow, but the following one in particular caught my ear: “The net effect of the low levels of capacity utilization and the high real interest rates which prevailed over the 1979-1987 period was to dampen investment even in spite of the beneficial effects that slack labor markets and the high demand for the dollar had on the power of capital to strike favorable deals with workers, citizens’ and the rest of the world.”
Our authors support their mildly class-conscious conclusion with an ingenious display of statistical analysis that is obligatory in contemporary professional economics. But it seems to me to stand very well on its own.
Ironically, the conservative program was (and is) class-conscious, too. The conservative aim was to get government and labor off business’ back. It took more than firing the air-traffic controllers to weaken labor; it took the threat and actuality of unemployment. But unemployment means slackened demand, which means constricted sales, which means constricted profits. It also means reduced tax collections and increased welfare costs. Entrepreneurial capital shot itself in the foot.
The authors try to be, so to say, conservative in the inferences they draw. They allow it will be a while yet before we know the outcome of the Reagan-Volcker revolution. Since I have no academic reputation to protect, I shall rush in and announce that the conservative revolution is and always will be a failure, except in the spirit of the old Peter Arno cartoon with the caption, “Let’s all go down to the Trans- Lux and hiss Roosevelt.”
It is easy enough to get labor off your back, but you are liable to rip your shirt in the process. Likewise it is easy to get government off your back, but business’ back would atrophy without the exercise of filling the orders of big government. Big business needs big markets and big government. The conservative program is self-contradictory.
The trouble is that millions of people are hurt by the attempt to make the program work. A measure of how much the economy has suffered is provided by an article in the Spring 1989 issue of the Journal of Post Keynesian Economics, where Professors John F. Walker and Harold G. Vatter ask, “Why has the United States operated below potential since World War II?” We are told at every hand that we never had it so good, that the present “recovery” is the longest on record, and so on. Yet unemployment has been high for decades, utilization of our industrial plant has been low for decades, and our cities and infrastructure are decaying. Why have we get-up-and-go Americans done so poorly?
The villain, again, is the conservative theory, but this time there is no need to suggest a mean elitist or anti-labor spirit on the part of conservatives. They’re wrong, regardless of their intentions. Walker and Vatter consider the conservative theory that prosperity depends on investment and contrast it with a theorem independently developed by Roy Harrod and Evesy Domar some 40 years ago. The standard conservative theory has dominated American economic policy, even in Democratic years, ever since the end of World War II. In accordance with it we have steadily cut taxes, especially corporation taxes, and have enacted many sorts of incentives to investment. Nevertheless, investment has fallen in relation to GNP.
The reason for the fall is that investment has two effects. The first, which conservatives rely on, is that it creates jobs. The second, which the Harrod-Domar theorem emphasizes, is that it makes goods. Now, you’d think that the making of goods would itself be good. The catch is, the new industry can make goods faster than the new workers can consume them. Moreover, we already have the capacity to make more goods than we use-not more than we might use, but more than we can afford to buy. Since we can’t afford to buy them, business can’t afford to make them; consequently investment languishes, regardless of incentives, and so does employment.
Keynes‘ observation that an economy can save itself into recession does not merely apply to one phase of the business cycle; it describes a general condition of modern industrial production in a market economy. The constant danger is that the demand side will be inadequate to consume what the supply side can produce.
In our current pallid recovery, with bankers becoming alarmed at the slightest improvement in business, big government has taken up some of the slack. It could have taken up more, and should have done so, and will have to do so in the future. But unless we want to go all the way toward some form of socialism (here I’m speaking in my own voice and not that of the articles referred to), we’re going to have to make a serious effort to redistribute income and wealth.
IT IS OFTEN said that the gap between the rich and the poor is not really significant because taking from the rich and giving to the poor would not give the poor a great deal more than they have now. This may once have been true, but it is far from the truth today. In 1987 the total of personal incomes in the United States was $3,780 billion. If this sum had been equally divided among the 65.1 million American families, every family would have had an income of $58,065. Actually in that year only 16 per cent of families had incomes that large (and 11 per cent of families were below the poverty level).
The knee- jerk response to the idea of any leveling of income is that it would so sap the incentive of the wealthy that they would quit working, depriving the nation of the leadership of its best minds, and generally reducing the GNP. Nobody really believes this. Common knowledge is against it, and there are no statistics to support it. Taxes have been raised from time to time, but no one has ever tried to prove that production has fallen as a result. Indeed, Walker and Vatter show that we have, in general, been most prosperous in periods of highest taxation.
Very few of the really important movers and shakers of the world have been primarily moved by lust for money. Lust for power or popularity, perhaps; lust for money, no. A financial incentive is certainly prominent in the case of wheelers and dealers of the first rank (not to mention scoundrels), but a wise society does not devote much effort to encouraging such people. It is enough to tolerate them. There are plenty of trustworthy and competent people ready to step into the jobs of those who call it quits.
In any case, the incentive argument proves too much. If people really responded primarily to money, think of the great leap forward that would follow from raising everyone’s realistically attainable income to $58,065! Eighty four per cent of the people would have their incentive stimulated; only 16 per cent of the people would have theirs sapped (most only marginally), and a considerable portion of that 16 per cent did not work for their money, anyhow. Like Rockefeller, they got it in the good old-fashioned way: They inherited it.
Hardly anyone proposes absolute equality of income, or anything closely approaching it. But it would not be difficult to suggest reasonable guidelines enforceable by steeply progressive income and inheritance taxes. We can say, at one end, that everyone’s self-respect depends on making a contribution to society-that is, on having a paying job. At the other end, we can say that no one is essential and deserving of unlimited income. Our aim should be to bring the ends steadily closer together.
New York’s Democratic Senator Daniel P. Moynihan suspects, and he is in a position to know, that conservatives deliberately let the budget deficit grow in order to make politically difficult or impossible the expansion of social welfare, ecological and other programs designed to do good and to improve the quality of life. In this conservatives prove themselves not only mean-spirited but foolish. The quality of life they deny includes their own.
The New Leader