Clinton’s Supply Side

By George P. Brockway, originally published January 1, 1993

1993-1-1 Clinton's Supply Side title

THE LITTLE ROCK “economic summit was one of the most moving and inspiring and uplifting events in recent public life.  Earnest men and women dedicated to serving their fellows, some of them obscure, were able to explain their goals and difficulties to a President-elect who plainly shared their goals and had a sympathetic understanding of their difficulties.  Nothing like this has occurred before in our history.  Few of our Presidents would have been capable of it.  (Face to face with an ordinary citizen during the campaign, President Bush was puzzled.  “I don’t get your question,” he said.)

At the same time, and from the point of view of this column, the economic summit was one of the most depressing and disheartening – and dismal – events in recent public life.  There was remarkable agreement among the business executives, bankers and economists present.  I wasn’t able to watch the complete proceedings, but while I watched I heard only two bankers and three economists interpose objections to the mainstream that was rushing by.  To be sure, there were ripples in the mainstream – quibbles about details – yet the fundamental message was clear.

In fact, if you closed your eyes, there were times you could easily have imagined you were listening in on a planning session of Ronald Reagan’s early advisors, or perhaps a meeting of the Business Roundtable. One after another, the bankers wailed about regulation and boasted cheerily of what they could do if government could be gotten off their backs. One after another, the business executives and economists hailed the glories of investment (especially in the interest of “productivity”) and excoriated the seductions of consumption.  With a few exceptions, all the business and economic people fretted over the perceived necessity to stimulate the economy and the corresponding horror of failing to reduce the deficit.  Saving was soberly praised, and a word or two was said in favor of reduced capital gains taxes.

It was, as I say, a dismal performance.  For it was the supply side all over again.  The words “supply side” could not be read on anyone’s lips; no one traced a laughable curve on a cocktail napkin; and the ideas were restated less breathlessly than Jack Kemp does.  Nevertheless, it was the same old story.  A few spoke scornfully of trickle-down economics, and several spoke approvingly of the middle class.  I imagine most of the speakers would be shocked to be called supply-siders.  They should listen to the tapes.  The rhetoric was different, but the theory was substantially the same.

So where is the change that Candidate Clinton promised us so tirelessly?  Well, unpaid compassionate leave will be available to corporate employees; there will be less overt or covert endorsement of racial, sexual and ethnic cleansing; in close calls, the decision will usually go to the otherwise disadvantaged; the environment will not be a dirty word; family planning will again be a virtue; and something will be done about medical insurance.  In issues like these (except, perhaps, for the last named[1]), we can expect common sense and common decency to prevail. Common sense and common decency are no small things; we have lived without them far too long.  Their recovery will make the Clinton Presidency worthy of being remembered.  But I fear that the economic rebirth we long for will continue to elude us.

The rebirth will be aborted because the new supply-siders have, so to say, a monetarist side.  Speaker after speaker warned against over stimulating the economy.  It was explained that, whether by stepping up spending or reducing taxes, stimulation would increase the deficit, which would scare the “market” into increasing long-term rates, which would spur short-term rates, which would renew or deepen the recession.

Either way the deficit had to be reduced; and any way the deficit was reduced, the economy could not be stimulated.  That’s a dilemma for you. The proposed solution was twofold: First, the economy should be stimulated, but cautiously.  Second, a long-term, foolproof deficit-reducing program should be enacted to convince the market that the deficit is on the road to reduction; so renewed inflation will not be a danger, and interest rates need not be raised.

Let’s look at the stimulation, to be produced by expanded public works (I don’t believe in the second part of the solution any more than I did in Gramm-Rudman.) The largest sum I heard mentioned was $50 billion, with most of it going to state and local governments to restore services and repair infrastructure neglected under Reagan-Bush.

I can’t say that’s a bad idea because a little over a year ago in this space (“Taxing our Credulity,” NL, December 2-16, 1991) I wrote, “If Federal grants to state and local governments were restored merely to the same proportion of Federal expenditures as in 1980, a sum of $63.1 billion would be available to break the back of the recession.”  You will note that I proposed spending at least 26 per cent more than did the most spendthrift speaker at Little Rock.  Even so, I would not have been satisfied, as I made clear in subsequent columns, for $63.1 billion may seem like a lot of money, but it is only about 1 per cent of our gross domestic product (GDP).

As our economy is now organized, wages and salaries are about 80 per cent of GDP.  The median income for full-year male workers over 15 years old is about $30,000; the corresponding figure for females is about $20,000.  Beneficiaries of an economy-stimulating program might be paid less than the median – say, $20,000 as the average for both sexes.  And of course much of the stimulus would go to people who are employed.  Putting all these guesstimates together, I conclude that a $50 billion stimulus would directly create about 2 million jobs, while $63.1 billion would directly create about 2.5 million jobs.  Factoring in the “multiplier,” these totals might double, although not at once.

That’s not bad – provided you’re not one of the 6 or 7 million who would still be unemployed.  Please read and reread the previous sentence until its meaning in human suffering starts to become real to you.  I fear that it is not real to most mainstream economists, especially those who believe in the “natural rate of unemployment.” (See “Are You Naturally Unemployed?”  NL, August 10-24, 1992.[2])

A couple of the Little Rock economists pointed out – as I have done here many times (thus showing how obvious the point is) – that the debt and deficit ratios to our gross national product (GNP) were about twice as high in 1947 as they are at present, yet we proceeded to save Europe with the Marshall Plan and enjoyed a quarter-century that never saw the unemployment rate come close to what it is today.  The interest rate also was lower than today’s in every year except 1968, ’69 and ’70, and the inflation rate was lower in every year except 1948, ’51 and ’70.  One of the mainstreamers o9bserved that the postwar prosperity was driven by the demand for consumer goods pent up during World War II.  He did not seem impressed by the counter-observation that a lot of demand for consumer goods would be released now if the unemployed had jobs.

A CURIOUS FACT about the conference was the virtual absence of any reference to the Federal Reserve Board.  It was almost a case of the dog that didn’t bark.  There was a good deal of talk about the interest rate, but I heard only two participants refer to the agency that sets it.  One of the references suggested that things would change when we got “our” Board (unhappily, not an immediate possibility).

The other reference was a brief but remarkably comprehensive paper by a former governor of the Board.  He made two main points:  First, the long-term rate remains high because the Board keeps hinting the short-term rate will be pushed up to meet it (although there is plenty of room for the short rate to come down further). Second, the long-term market is effectively merely the market for 30-year Treasury bonds.  If there were no 30-year Treasuries, there would be scarcely a long market at all.  The Treasury raises only about 7.5 per cent of its funds long term and would save money if it gave them up.  Why not do so?  I regret to report that Secretary of the Treasury-designate Lloyd Bentsen did not respond, nor did President-elect Clinton.

Taking one thing with another, my sorrowful conclusion is that the Clinton economy is not going to be sensationally better than the Bush economy.  The National Bureau of Economic Research (not an “official” body, regardless of what the New York Times says) thinks you can have a recovery with both wages and profits falling and 10 million unemployed.  The awesomeness of this organization and the power of the Federal Reserve Board practically guarantee that the economy will get only a minimal stimulus, and that for only a minimal length of time.

Practitioners of economic science have dismally short memories.  In 1937 the GNP jumped up 7 per cent, where-upon the New Deal rushed to mollify Wall Street by cutting relief programs.  The budget deficit, which had reached the vertiginous height of $3.1 billion in 1936, was converted to a surplus (yes, surplus) of $300 million in 1937.  The result was a sharp recession within the Depression.  I fear that we’re getting ready to do it all again, and with far less excuse.

But one sound proposal, calling for full funding of Head Start, was generally endorsed at the economic summit.  Some of the economists saw Head Start as an “investment” in future productivity.  Their supply-side bias blinded them to its certain contribution to economic recovery.  Nonetheless, most of the money – and it will not be a trivial amount – that goes into Head Start will immediately go out to teachers’ or leaders’ salaries, to snacks and lunches, to consumable supplies like finger paint and soap, and to low-tech and expendable furniture and decorations.  At the end of a year there will be little or nothing tangible to show for these expenditures.  In the eye of an accountant the whole thing will seem like consumption of the most profligate sort.

Yet such profligate consumption (if it actually happens) will do more to stimulate the economy this year, and every year of the program’s existence, than the schemes to restore the investment tax credit, to rehabilitate IRA’s, and to cut taxes for the middle class.  All of those are bum Reaganesque ideas that we have already tried and found wanting.

The Clinton-Gore book title had it right:  We should be Putting People First.

The New Leader

[1] True enough, no action until the Affordable Care Act, aka ObamaCare

Ed: [2] We do not have a copy of this.  If you have one, PDF or in print, please share

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