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By George P. Brockway, originally published March 3, 1999

3-8-99-the-love-song-of-homo-economicius-title

T.S. ELIOT sang of “Songs[1] that follow like a tedious argument! Of insidious intent! To lead you to an overwhelming question …. ” Economics

sometimes seems like that-tedious as well as dismal. Economics is also very like the next line of The Love Song of J. Alfred Prufrock”: “Oh, do not ask, ‘What is it?”’

For the characteristic economics essay or book lays out-“Like a patient etherized upon a table”-an account of the economy, or some part of it, demonstrating how it works, or doesn’t work. Often the putative truths contained therein are unpleasant, like the iron law of wages in the 19th century or the natural rate of unemployment in the 20th. Nonprofessionals are frequently prompted to ask, not “What is it?” but the truly overwhelming question, “What should we do about it?” Professional economists have tended to brush that question aside. They are, they say, scientists, not humanists; and science concerns what is, not what ought to be.

But there is another reason for the posture of most economists, and that is the problem posed by the first sentence of the last chapter of John Maynard KeynesGeneral Theory of Employment, Interest and Money: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income.” One would have to be extraordinarily deficient in empathy for one’s fellow human beings not to recognize the justice and urgency of Keynes’ dictum. One would also have to be exceptionally ignorant of the ways of the world to imagine that the problem will simply solve itself. Indeed, anyone with empathy and knowledge must find it acutely uncomfortable to deny that confronting those “faults” is the special responsibility of economists.

Yet starting with Adam Smith in 1776, the history of modem economics has instead been the story of a search for an automatic polity, a mechanism that, whether it makes all well or not, at least makes everything inexorable. With Smith, of course, it was the invisible hand. With Jeremy Bentham it was the felicific calculus, supposed to operate like Newton’s laws of motion. With Jean-Baptiste Say it was production creating its own demand. With John Stuart Mill it was supply and demand. With Karl Marx it was dialectical materialism. With William S. Jevons, Leon Walras and Carl Menger it was marginal utility. Among our contemporaries, equilibrium is the chosen control-metaphorical with John Hicks, mathematical with Gerard Debreu and Paul Samuelson, quasi-psychological with Frank Hahn and Edmund S. Phelps.

All those I have named are honorable men, as I believe almost every economist to be. I am sure none would dispute the truth of Keynes’ pronouncement. Faced with the enormity of the problem, though, all, with the possible exception of Marx, have found in pseudoscience an excuse for denying the need or ability to do anything substantial, and hence for refusing their responsibility.

The first thing to note about the problem is that originally it was a double pronged affair, but by now the prongs have joined together. In the ancient world, the feudal world and the mercantilist world, you could have full employment along with unconscionable disparities of wealth and income. Perhaps even in Keynes’ day, over half a century ago, it was possible to consider the two great failures of the economy separately. Today, however, we shall not be able to solve unemployment without at the same time solving maldistribution.

An explanation for the intertwining of the two problems was suggested by Joseph A. Schumpeter in an observation of the sort he made so casually and so tellingly. “The capitalist achievement,” he wrote, “does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” The modem economy, unfortunately, may not be quite so good to factory girls as Schumpeter suggests.

The reason lies with the opportunities the wealthy have to dispose of their income. In most cases, their money derives from mass production, but they do not spend much of it on the products of the assembly line. This is not merely a matter of taste. It would be flatly impossible to do so. You can buy a top-of-the-line Mercedes, the archetypal expensive, mass-produced commodity, for about $145,000. If you were a senior officer of a Fortune 500 corporation, or a partner in a major financial house, you could pay cash for a brand-new Mercedes the first of every month, junk it at the end of the month, and still have more money than you and your family could conveniently spend.

Traditionally the wealthy have invested their surplus, a practice generally considered to return it to the producing economy it came from. And, like Prufrock’s Yankee contemporary, Miniver Cheevy, they think they “have reasons” to believe they are doing something good. Theoretically, for example, their investment would make more silk stockings available at lower prices by increasing productivity. But in common with the romantic notions Cheevy holds so dear, the idea is largely spurious.

This is because, regardless of what distinguished economists say, the producing economy is, in general, overcapitalized. As things stand, it could very easily, without investment in another machine or machine tool, increase its output by 15 or 20 per cent. It has that capacity right now. More investment will not lead to greater productivity.

Increased demand would. But Chairman Greenspan still hopes to restrain the “exuberance” of the stock market-in which case its upper middle class “wealth effect” will disappear. And far from trying to stimulate consumption, credit card companies can’t wait to put fear of a new bankruptcy law into their lower-middleclass clients.

These actions reduce the nonwealthy to relying on what they earn by working, and what they earn necessarily falls short of being able to buy what industry produces: Schumpeter’s silk stockings (or their millennial equivalent) become less affordable. The shortfall is equal to the earnings and other withdrawals of the wealthy. Its correction must also come from that source.

LEFT TO THEIR own devices, how do the wealthy spend their money? After buying several Andy Warhols and subscribing to tables at a couple of dozen charity balls, it is all too easy to become frustrated by the attempt to consume one’s income and turn to speculation. So the money the wealthy take out of mass production industry stays out, and the money devoted to speculation becomes a flood.

A “moderate” session of the New York Stock Exchange today sees half again as many shares traded as were thrown on the market in the frenzy of the crash of October 1987. And still there is not enough to meet the demand. Besides the NASDAQ and the Amex and the mercantile exchanges and exchanges abroad (including way stations all over the new global village), there are $85 trillion worth of derivative “products” invented by clever bankers and brokers to facilitate betting on almost anything you can think of. In comparison, numbers running is child’s play.

Also in comparison, trying to make money by operating an enterprise that turns out actual goods and services is a mug’s game. As fortunes are made in speculation, the opportunity cost of productive enterprise rises. To keep those who have invested in industry from selling out, they have to be promised increased profits; and the fashionable way of doing that is for lean and mean companies to become leaner and meaner, thereby narrowing the already narrow market. Where once there was a spreading wage-price spiral, heading upward, the economy has slipped into a constricting lean-mean spiral, heading downward.

3-8-99-the-love-song-of-homo-economicius-ts-elliotThe wealthy are not the only ones contributing to this trend. The middle class is the beneficial owner, through what are called “institutions” (especially mutual funds and pension funds and insurance policies), of between one-third and one half of all the shares on the current exchanges. By being funded rather than treated as current expenses, these institutions soak up purchasing power and weaken aggregate demand. The funds’ speculating deprives the producing economy of efficient financing. The resulting shrinkage of the producing economy raises the rate of unemployment, accelerating the erosion of the middle class the institutions were created to protect, and exacerbating the polarization of society.

That is how we are approaching the turn of another century: The nonwealthy are unable to buy the products their industry can produce; industry consequently has fewer opportunities for expansion; the wealthy consequently have fewer opportunities for productive investment; the nonwealthy consequently have fewer job opportunities and more of them become unemployed (“naturally”).

It is easy to convince yourself that looking to the government to fix the situation is hopeless. President Franklin D. Roosevelt couldn’t get a cap on stay-at home incomes even in the midst of World War II, when millions of young men and women (and middle-aged ones, too) were risking their lives for their country. President Richard M. Nixon, despite being re-elected by the second largest percentage of the popular vote yet recorded, couldn’t enlist a Congressional majority for a negative income tax. The current tax law, whose top rate is less than half the top rate of 25 years ago, does not assess even the present top rate against capital gains. And who can imagine the Federal Reserve Board maintaining an interest rate that is either low or steady, let alone both?

Some (if not all) of these things should be done to mitigate the polarization of our society. If they can’t be done in the current political climate, what can economists be expected to do about it? Well, if economists can’t suggest answers, the least they can do is get out of the way. Certainly no solution will succeed if no one has the will to work for it, and certainly those most responsible are the people claiming professional status.

In the meantime, the outstanding “faults” of our economic society, albeit forged into one, are substantially identical with those of Keynes’ day. But the degradation, despair, and (in the words of the late Erik Erikson) negative identity are worse. Will human voices wake us before we drown?

 

The New Leader

[1] Ed. Well, I’ll be damned.  The author, uncharacteristically, has the quote wrong.  Eliot wrote of “streets”, not “songs” that follow like a tedious argument ….

By George P. Brockway, originally published January 26, 1998

1998-1-26 Beware Your Cronies title

THE PAPERS say the East Asian Debacle (previously known as the East Asian Miracle) was caused by something new under the sun called “crony capitalism.” It seems you have crony capitalism when one man (guided by family values and assisted by sons, nephews, in-laws, and pals) runs the show, which includes not only the government but most of the standard and all of the illicit ways of making money.

1998-1-26 Beware Your Cronies LeninWhat’s so new about all that? Joseph A. Schumpeter, once the intellectual guru of conservative economics, in his presidential address to the American Economic Society just before his death in 1950, said: “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce. It means a scheme of values, an attitude toward life, a civilization-the civilization of inequality and the family fortune.” This is the world of Thomas Mann‘s Buddenbrooks, in which everyone of importance knew everyone else of importance.

At about the same time C. Wright Mills, a sociologist as liberal as Schumpeter was conservative, published his analysis of what he called The Power Elite. A comparatively small group of men (almost exclusively men), well known to each other and generally congenial, they controlled what Lenin referred to as the “commanding heights” of industry and finance.

On a much less exalted level, I must confess that in my days as head of a publishing house I couldn’t boast with Will Rogers that “I never met a man I didn’t like,” and I found it much easier to do business with people I did like. I had my cronies, and I don’t doubt that J. P. Morgan had his too.

So I don’t see what’s so new about crony capitalism. Nor do I understand why the Debacle was a surprise to anyone who reads the papers occasionally. And I particularly fail to understand why it was a surprise to American bankers and businessmen and politicians, their economic advisers, and even to the journalists who reported on crony capitalism before it had a name[1]. The story of the young man who got whipped in Singapore may have had only a tangential bearing on economics, but the story of how Nike sports shoes are made is certainly relevant, and it is only one of many such stories.

Ten years ago I attended a conference at Brigham Young University on the ethical problems of doing business with the Pacific Rim. Most of those present had done business on the basis of figures that later proved to be largely imaginary, had contracts changed on them in midstream, and had difficulty getting a straight answer from a trading partner. One of the most articulate speakers was an officer of one of the largest American banks. Do you suppose he was the only American banker who knew what the score was?

However that may be, all the big American banks are now at least somewhat entangled in the East Asian Debacle, as are scores of American producers and retailers, especially of sporting goods, electronics and T-shirts. During the past few years, as our stock exchanges have become crowded with baby-boomers driven frantic by the prospect of bleak golden years, dozens of mutual funds and investment trusts have also become active players in East Asian markets.

It is these people whom the International Monetary Fund, prodded and abetted by us, is trying to rescue. Although we have kowtowed to the various swarms of cronies in the past, and hope to be able to do so in the future, it is not their skin but ours that we are trying to save.

Our business press is nevertheless full of good advice for the East Asians: Their banking systems should be more “transparent” (meaning, I suppose, that bankers shouldn’t talk in conundrums like Chairman Alan Greenspan); their industrial accounts should conform more closely to practices generally accepted in the First World; and someone (say, the IMF) should be watching to see that things are done right.

This advice seems reasonable enough; yet it sounds to me pretty much like regulation and bureaucratic intervention and all that Old Democratic New Deal stuff that we’re trying to clear away as we prepare the bridge to the 21st century. One must wonder how policies said to be bad for us can be good for East Asians, particularly since the IMF combines deregulation and privatization with balanced budgets and high interest rates to produce austerity.

Austerity and economics, of course, are mutually contradictory ideas. Economics has to do with the production and distribution of goods and services, and austerity means not consuming or using them. To be sure, the latter is supposed to lead to the former, but there is really no reason to expect it to do so and there is little evidence that it ever has, except in wartime or in some command societies.

Invariably austerity, while it may cause the leisure class some annoyance, is devastating in its effects on everyone else. Such devastation is intended. The theory is that otherwise the poor and middle classes will spend any money they are allowed to have on food, clothing and shelter, thus depriving entrepreneurs of money to invest. (How many cases can you cite where producers of mass-market goods achieved success by expanding production when no one among the masses had any money to spend?).

The theory is both callous and erroneous. Its callousness accounts for the success of the East Asian Miracle, and its fallacy accounts for the Debacle. Following the advice of Western (why is that word acceptable, while “Oriental” isn’t?) economists, the East Asian countries embarked on ambitious export programs.

Since what is consumed at home can’t be exported, domestic consumption was discouraged-first by holding wages down, and second by energetic pro-saving propaganda. The low wages had the essential advantage of improving the East Asian competitive position in the world markets. The saving reduced home demand for consumer goods and gave the banks a little extra to speculate with in real estate.

Led by Japan (which, after all, had been sufficiently Westernized to defeat Russia in 1904-5 and had taught its neighbors the work ethic in the Greater East Asia Co-prosperity Sphere in the 1940s), the East Asian Miracle was a remarkable phenomenon. From every point of view, it was more successful than the contemporaneous development programs of India and South America (which stagnated), and of Sub-Saharan Africa (which slid backward).

But the system was fundamentally unstable. It depended on controlling imports at the same time that exports were promoted. An excess of exports over imports is defined, in conventional economics, as an increase in Gross National Product. So the East Asians restricted imports as the way to get rich.

HOW, THEN, were we to pay them for their exports? If the Japanese demanded yen, which we didn’t have, they had to sell yen to us for dollars, which we didn’t have. They could use quite a few dollars to buy oil and other things they needed for their industries, but they still had billions of dollars left over. In the wonder-working years of former Federal Reserve Board Chairman Paul A. Volcker they happily used many dollars to buy U.S. Treasuries that paid 15 per cent interest or more. That was fun, but of course the interest was paid in dollars; so in the end all they had to show for their hard work and ingenuity was a lot of money in their banks, by far the biggest in the world.

Most East Asian banks can own industries, play the stock market, dabble in real estate, and do other speculative things American banks hope to do in the next century. In Japan, whose area is slightly less than that of Montana, the value of real estate ballooned to double that of the entire United States. When the balloon burst in the early 1990s, Japan went into a recession it has yet to shake.

Next to “supply and demand,” the two most holy words in contemporary economics are “market discipline.” But there was no discipline in this Debacle, and no significant penalty is proposed for anyone but the poor and defenseless. President Suharto and his family in Indonesia may lose a few fortunes, but they will still have many left.

The cronies could not have done it alone. American banks and businesses were not hijacked, as by Malay pirates of yesteryear. They eagerly took well-understood chances because they counted on the spread between American and Asian wages to make pots of money for them very fast. And it did. The East Asian Miracle was erected on the backs of American working men and women who lost their jobs because of the wage spread, and the East Asian Debacle will fall on the backs of East Asian working men and women who are now losing their jobs because of the notion that austerity is good.

Congressmen oppose an East Asian bailout on the ground that it will use our money to save banks and businesses from the consequences of foolish or greedy investments. But if the banks and businesses are not rescued, we will, as Treasury Secretary Robert E. Rubin and Chairman Greenspan warn us, suffer at least a slowing of our economy, and this will, as always, be most damaging to those among us least able to bear it.

The East Asian bailout may cost us billions of dollars-many billions more than the Mexican bailout of two years ago, and perhaps more than the Savings & Loan bailout of only yesterday. It may not be successful. In that case we might be swamped, too, dragged down into a worldwide depression.

If the bailout is successful, our bankers and businesspeople may get our money back, or most of it, without learning a thing from the experience. At best, they might come away with a fuzzy sense that crony capitalism is not all it’s cracked up to be, and a warm feeling (which is not the same as contrite gratitude) that Uncle Sam will take care of them no matter what they do.

For the rest of us, the lessons are with us always, because we don’t seem to learn them. In general ethics, what we do unto others we do to ourselves. In the special branch of ethics that is economics, any system built on the shaky backs of the downtrodden will be forever unstable.

The New Leader

[1] Ed:  Perhaps they should read Charles Kindleberger

By George P. Brockway, originally published June 14, 1993

1993-6-14 In Pursuit of a Fiscal Fantasy title

PRESIDENT CLINTON’S $31 billion “stimulus package” was defeated by a filibuster that was organized, not on the reasonable ground that the package was woefully inadequate, but on the fanciful ground that by increasing the deficit it would hurt the recovery now supposed to be under way. I want to talk about the alleged recovery, but first let’s pay our respects to the deficit.

Suppose we had an adequate stimulus – something on the order of $200 billion, rather than the proposed $31 billion. That kind of money could knock 5 points off the official unemployment figure, bringing it down to an arguably tolerable level of 2-per cent, and could start to do a job as well on those who are working part time or are too discouraged to look for work.

But could we afford it? Of course we could. The late Arthur Okun, a universally respected economist and the chairman of the President’s Council of Economic Advisors under LBJ, maintained that a 1 per cent rise in unemployment causes a 3 per cent fall in real national product. If Okun’s Law works backward and becomes a multiplier (not guaranteed), the 5 per cent fall in unemployment we’re after should result in a 15 per cent rise in output. That would be about $850 billion and should, in turn, yield about $210 billion in taxes at present rates – not to mention the gains for state and local governments, or the savings in reduced welfare outlays. So our massive stimulus could produce a modest reduction in the deficit. As Mr. Micawber would say, result happiness.

The result would still be far from misery even if Okun’s Law didn’t quite work backward, and even if the government proved incompetent in all the ways the naysayers say it is. If we had to borrow the entire $200 billion, the deficit would be increased by the interest, or by $13 billion–and if the Federal Reserve Board should miraculously decide to be on the same team as the rest of us, the interest could be as low as $6 billion.

Are you worried silly about the $16,750 that rabble-rousers say is your share of the national debt? Grow up. I have a $75,000 mortgage that I’ll not pay off if I live till I’m 105. The bank isn’t worried. My estate will pay it off, of course, and whoever buys the house will mortgage it again and will no doubt later refinance the mortgage to pay for some improvements or repairs. And so on. It’s a well-built house and should last (and be mortgageable) for another hundred years or more. All that’s necessary is for the successive owners to be able to pay the interest. The same is true of the United States of America and its national debt.

What is the alternative? It is proposed that we get government out of the way or off business’ back or whatever metaphor appeals to you, and let the present “recovery” rip. The good old free enterprise system, we are told, the very system our economists are teaching with such smashing success to Russia and Eastern Europe, would soon show that a man knows what to do with his money a lot better than some bureaucrat in Washington. You bet.

The big trouble with this prescription for prosperity, worked out by the classical economists, is that it is based on unrealizable assumptions. One assumption we’ve mentioned previously: full employment. A second is that a level playing field, of the kind the Wall Street Journal pines for, isn’t enough. The players must have at least fairly equivalent equipment. Adam Smith put it this way: “The whole of the advantages and disadvantages of the different employments of labor and stock must, in the same neighborhood, be either perfectly equal or continually tending toward equality.”

In addition, there’s an assumption that economists pretend doesn’t matter. All the buyers and all the sellers are assumed to know all about all the products available and the demand for them. Whoever believes this assumption should have followed me around last week as I shopped for a new automobile. I don’t even know how to kick the tires. A contemporary school of economists gets rid of this assumption with another, namely that everyone acts rationally and rationally expects everyone else to act rationally, too.

If you accept each of the assumptions, you probably can see some sense in the notion that an invisible hand will guide us to the recovery of our dreams. Don’t be too sure. If I really knew what I was doing when I shopped for a car, I’d make the best buy possible–and so would you and everyone else. One dealer would start to get all the business. Then the competitors would lower their prices, and pretty quickly there would be one big price war.

Short of collapse, there could be no end to such wars. All competitors can lower their prices by cutting their costs. Their costs are someone else’s prices, which likewise can be lowered by cutting costs. And so on ad infinitum. David Ricardo and his followers argued that this regress would be stopped by the costs of food and other basic things (called “wage goods”) that workers need to survive.

But the costs of wage goods are not immune to cutting, so the regress would continue. Very likely some people would lose their jobs as prices tumbled, although the classical theory merely calls for wages to fall. Either way, if the free market were left to its own devices, the price-cutting, cost-cutting, payroll-cutting, demand-cutting sequence would continue unabated until prices, payrolls, production, and profits all approached zero. The free market could not stop the process – nor, if they played the game by the rules, could any of the participants. The invisible hand pushes everyone and everything inexorably down.

The drama has a different ending in the scenario of Leon Walras, the patron theorist of free market analysis. He wrote that “production in free competition, after being engaged in a great number of small enterprises, tends to distribute itself among a number less great of medium enterprises, to end finally, first in a monopoly at cost price, then in a monopoly at the price of maximum gain.”

So take your pick. The Walrasian theory has free competition ending in monopoly. The more conventional theory, though it says nothing about an end, offers no reason why general disaster should not result.

There is, of course, a third outcome – what actually happens. For we take steps to prevent disaster, either by accident or by design, and those steps reveal that we are, by turns, do-gooders, pragmatists, and sponsors of crime.

In our role as do-gooders we enact child labor laws, minimum wage laws, worker-safety laws, social welfare laws, and many other laws to mitigate the horrors of free competition. It is not bad to do good – except in the eyes of conventional economics. In his speech launching the idea of a natural rate of unemployment, Milton Friedman condemned all altruistic measures. They would, he said, increase the natural rate of unemployment. Pre-Depression America, which knew very little of such things, is touted as a time of low unemployment. It was also a time of child labor, the 12-hour work day, labor injunctions, and similar amenities.

It must be confessed that we are more comfortable thinking of ourselves as pragmatists than as altruists. In any event, whereas businesspeople applaud the pronouncements of conventional economics, very few act in accordance with them. They may compete vigorously, but very few compete primarily on price, having learned (as a book of business advice once had it), “Don’t sell the steak. Sell the sizzle.” With less pressure on prices, there is less pressure on costs.

Finally, we are sponsors of the crimes we deplore. A character in the funnies used to say, crime don’t pay well. For most practitioners that may be true, but it pays enough above the bottom of the current legitimate pay scale to entice hundreds of thousands into making a career of it. If these people were to renounce housebreaking and carjacking and mugging, and were to look for decent work, their competition for jobs would push the legitimate pay scale even lower.

AND THAT’S not all. As John E. Schwarz and Thomas J. Volgy show in grim detail in The Forgotten Americans, there are 30 million working poor in America – people who are desperately trying to live the work ethic yet still cannot afford the basic necessities at the lowest realistic cost. Heartbreaking thousands of these people take a flier at drug running or prostitution just to survive.

We are, as I say, sponsors of all this crime and squalor. It serves to retard the free fall of the economy, and with our altruistic and pragmatic practices it will eventually help us to settle at a stopping point somewhere between here and the pits. Economics, however, takes time, and it will be years before we reach that point. When we do reach it, we will find ourselves in what economists call an equilibrium, with upwards of a quarter of our productive capacity unused, with 20 million of our people unemployed or underemployed, and with probably 50 million men, women and children living lives that are far from solitary but are nevertheless (in the rest of Hobbes’ phrase) poor, nasty, brutish, and short.

I don’t suppose that, aside from a few fanatics for the apocalypse, there is anyone who is eager for such an equilibrium. But there are many millions who are capable of denying its possibility, and (as with other diseases) the denial makes its actuality the more deadly – especially since conventional economics can think of no way to upset the equilibrium, except by doing more of the same.

In the past, similar equilibria have been upset by wars. The Civil War made us a nation; World War I industrialized us; World War II got us out of the Great Depression. Professor Joseph A. Schumpeter celebrated the creative destructiveness of great new industries, like the railroads, which rendered canals obsolete, and the automobile, which doomed the horse-and-wagon. (Some expect the computer to play a similar role, but the information revolution is responsible for much of the payroll-cutting currently in progress, including its own.)

The thing about these equilibrium upsetters – these wars and these creative destroyers – is that they’ve all required ever bigger expenditures by ever bigger government. The expenditures for war are obvious; but often forgotten are the grants of public land to build the railroads, together with the postal contracts to keep them running, and the paving of streets and building of highways for the automobile. Is it conceivable that we can summon the wit and the will to make the expenditures that need to be made today?

I cannot conceive it. What is all too probable is that the welfare of the nation and of increasing millions of our fellow citizens will continue to be sacrificed to an accounting fantasy called a balanced budget.

The New Leader

By George P. Brockway, originally published August 10, 1992

1992-8-10 Are You Naturally Unemployed title

AT THE END Of my piece on “The Last Chapter in Keynes” (NL, June 29), I referred to the currently received doctrine of the natural rate of unemployment. The implications of the doctrine are such that they don’t, as the saying goes, bear thinking about. Nevertheless, I propose to try to think about them here and now.

The expression “the natural rate of unemployment” was apparently coined by Milton Friedman in his presidential address to the American Economic Association on December 29, 1967. Friedman was clear that what he called the natural rate was not a natural law (like, say, S= 1/2[gt^2]). “On the contrary,” he said, “many of the market characteristics that determine its level [such as minimum wage laws] are man-made and policy-made.” Yet he saw and, I believe, still sees something inexorable in the idea.

Friedman said he used the word “natural” because the idea was comparable to “the natural rate of interest,” a notion advanced by the Swedish economist Knut Wicksell in 1898. Wicksell is worth reading (though perhaps not on this issue), but for the moment we need note only that he is thought by many to have anticipated Keynes in some ways. And as to Keynes, we need remember particularly that his initial quarrel with the classic economists was that they believed involuntary unemployment was impossible. Since whatever is “natural” is ipso facto involuntary, Friedman, too, broke with the classics on this point. I hasten to insist that Friedman is not now and never has been a Keynesian or a neo-Keynesian, and certainly not a Post Keynesian (which, if you must know, is more or less what I am).

The natural rate of unemployment is thus an idea that resonated unexpectedly in many corners of modern economic thought. In its pure form it goes like this: Given the civil laws, customs and institutions of the economy (though Friedman is not now and never has been an institutionalist follower of Thorstein Veblen or John R. Commons), beyond a certain point any increase in the rate of unemployment will result in deflation and a recession that will continue until wages fall to a level to encourage entrepreneurs to start hiring again; on the other hand, any decrease in unemployment will result in inflation and a recession that will continue until employment returns to its natural rate.

The idea was not immediately embraced by the profession. Very likely thin-skinned economists were timid about saying that joblessness could be your patriotic duty. This difficulty was overcome when somebody (I’m sorry I don’t know who[1]) came up with a name that obscures the implications of the idea and has, moreover, an acronym that soothingly sounds like the name of a languorous South Sea isle. The new name is Non Accelerating Inflationary Rate of Unemployment, or NAIRU. The modifier “nonaccelerating” is a modifier of Friedman’s original notion and recognizes the fact that, as we know from our experience of the past half century, it is not too difficult to live with inflation if the rate is fairly low and steady.

The NAIRU was 3 or 4 per cent at the end of World War II. It reached 5 or 6 per cent in 1975, after the Federal Reserve Board raised interest rates in its quixotic response to the first OPEC embargo. And it appears to be around 5 or 6 per cent today (the current 7.7 per cent rate of unemployment is dismal from any point of view).

Let us be sure we understand what a NAIRU of 5 or 6 per cent means. It means that, given our present labor force of some 127 million men and women, about 7 million of them must be unemployed through no fault of their own. Forgive me for raising my voice, but we must see clearly that NAIRU won’t work if unemployment is the result of stupidity, poor training, laziness, lawlessness, or unreasonably high wage demands – if unemployment is, as the classical economists said, voluntary. The NAIRU people are not the people of Reaganesque anecdotes (if such people there ever were) who flit from job to unemployment insurance to job as spirit moves them. Stupid, incompetent, lazy, lawless, or grasping people do not compete for existing jobs; it is the function of NAIRU people to make holders of existing jobs fear for their positions and so acquiesce in low pay, unsafe or Quayle-approved working conditions, frayed fringe benefits, and nonunion shops.

Perhaps you will now sense another resonance of the natural rate of unemployment. It is the stern, impassioned tread of Karl Marx’ industrial reserve army. “The industrial reserve army,” Marx wrote, “during periods of stagnation and average prosperity, weighs down the active labor-army; during periods of overproduction and paroxysm, it holds its pretensions in check.” Friedman might have put it somewhat more gracefully, but he couldn’t agree with it more.

How did the soldiers of the industrial reserve army get recruited? They weren’t rounded up by press gangs like those that helped Britannia rule the waves, but their fate has not been dissimilar. They did not volunteer, and they were not drafted; they were in the wrong place at the wrong time, and many of them were simply born wrong, just as Rockefellers and such happened to be born right. They are victims of crashingly bad luck.

From time to time, demographers publish studies averring that only a percentage (say 10 per cent or 5 per cent or perhaps 1 per cent) are what we used to call lifers and spend their entire lives in the industrial reserve army, or that only some other percentage (say 12 per cent) serves more than 27 weeks at a time, while Horatio Alger and his like are discharged in a matter of days. We may accept these studies, or most of them, at their face value and still observe that those in the industrial reserve army serve as a consequence of crashingly bad luck, and that they serve in our interest and indeed in our stead. This being the case, it cannot be denied that our economic system – a system said to depend on the natural rate of unemployment – would self-destruct if it were not fundamentally unjust. It is clever to say that life is unfair; it is corrupt to raise unfairness to a principle of control.

As we noted here a short while ago (“Where Schumpeter Went [Astray],” NL, April 6[2]), Joseph Schumpeter celebrated capitalism as “the civilization of inequality and the family fortune.” I cannot do that. I cannot understand doing that. I cannot settle for NAIRU in any of its forms. I can accept the military draft and have in fact been drafted. It is possible in time of war to show citizens, chosen by lot, their duty to risk their lives in defense of the nation that nurtured them. It is not possible to show anyone a duty to lead a life of squalor in order that others may be free to choose among moderately priced commodities.

If there really is a natural rate of unemployment for our system, the system is immoral. If it is immoral, we should change it. Some will say that even with NAIRU, ours is the best system seen so far, and others will say that NAIRU applies to all systems. Despite these answers, improvements are possible.

To share the burden of NAIRU fairly, we might take Marx’ metaphor literally and institute a draft for the industrial reserve army[3]. It is unlikely that there would be volunteers, and there should be no exemptions of any kind (except for the unemployable). Membership in the army probably would be by nuclear families, unless children were put out for adoption while their parents served. There would no doubt be problems with the definition of a family, but I’m sure that, given good will, solutions could be found.

Every able-bodied family in the nation would pull at least one hitch in the army. Service would consist of living without personal assets or income (including imputed income, as for example, decent food, clothing, and shelter) for a period. I imagine two or three years would suffice at the present natural rate of unemployment. For ease of administration, it might be convenient in some cases for families to exchange homes. Certainly the houses of wealthy draftees could not be left vacant without inflating the general cost of housing.

Private charity also would have to be rigorously controlled to prevent favoritism and corruption. Food Stamps, Aid to Families with Dependent Children, Medicaid, and the like (including Workfare if finally enacted) would be available. Of course, for the army to serve its purpose, recruits must be able to work, but their availability would have to be in accordance with length of service. It wouldn’t be fair for me to be enlisted one day and hired by a friend the next.

Perhaps all that strikes you as preposterous. I hope so. It certainly seems preposterous to me. But the whole idea of placidly accepting a natural rate of unemployment strikes me as far more preposterous.

Now, looking back at the theory of NAIRU, we note that the general price level is to be controlled by holding down only one of the factors of production (labor). Why shouldn’t we also hold down the rate of interest? Since inflation of the costs of production is the issue, why shouldn’t we have NAIRI as well as NAIRU?

“But,” cry the governors of the Federal Reserve Board, “we already control inflation by raising the interest rate.” They know not what they do. In the 40 years since 1951, when the Reserve freed itself from its wartime agreement with the Treasury to hold rates down, the percentage of GNP that goes to pay interest on debt of the nonfinancial sector has gone from 4.59 per cent to 20.51 per cent. Let me put it another way: In 1951 the interest bill of American corporations was about one-twelfth of their wage bill, whereas today it is more than a third. If the 1951 ratio still applied, today’s costs would be roughly $845 billion less than they actually are, and the price level would be lower by a considerably greater amount.

By raising the interest rate (even now it is more than double what it was in 1951), the Federal Reserve Board has contributed to (if not mainly caused) inflation. It has then restrained the inflation it caused by bringing on recession, which keeps the industrial reserve army in being.

So NAIRU not only serves reactionary interests in keeping wages in check; it is a convenient reactionary ploy in other situations. Public works cannot be used to reinvigorate the economy because the increase in employment would violate NAIRU. Likewise, although doctrinaire free traders may admit that selective protection might protect or restore as many as 2 million jobs, NAIRU forbids it. And so on.

In short, the nasty theory of a natural rate of unemployment is counterproductive as well as immoral.

The New Leader

[1] Ed:  According to Wikipedia It was first introduced as NIRU (non-inflationary rate of unemployment) in Modigliani – Papademos (1975) – Wikipedia offers three references:  [3][4][5]

[2] Ed:  The actual title is “Where Schumpeter Went Astray” but when this article was written it was cited, with a lack of the author’s normal poetry, as “Where Schumpeter Went Wrong.”

[3] Ed:  In case you’re not paying attention, the next 3 paragraphs are at once both analytically correct but intended to demonstrate to the reader how insufferably wrong-headed NAIRU is… These paragraphs are, in current parlance, “snarky”

By George P. Brockway, originally published November 2, 1992

1992-11-2 The Illogic of Leanness and Meanness Title

1992-11-2 JK Galbraith                EDITORIALWRITERS and speech makers are fond of the expression “lean and mean” (or, sometimes, “mean and lean”). I suspect it is the rhyme that appeals to them. They can’t possibly be allowing themselves to think about what happens to people who work (or used to work) for lean and mean corporations. They can’t possibly give a satisfactory answer to the question John Kenneth Galbraith asks in Affluent Society: “Why should life be intolerable to make things of little urgency?”

Nor can they possibly be wondering whether lean and mean corporations make this a better world to live in, even for their customers and their stockholders. St. Augustine wrote: “Every disorder of the soul is its own punishment,” and meanness is certainly a disorder of the soul.

Yes, I know: We are told we will have to be lean and mean to compete in the global economy of the 21st century. Some commentators say that the global economy and the competition are already here.  President Bush inclines to this view; President-elect Clinton inclines to this view; and I suspect that Citizen Perot had something similar in mind. At any rate, he had a lean and hungry look.

Fifty years ago another self-made man, Wendell L. Willkie, had a vision of One World in which we would all help each other. Willkie was a lawyer and CEO of a giant utility holding company before he became the 1940 Republican Presidential candidate (Harold Ickes, Franklin D. Roosevelt’s Secretary of Interior, called him the “barefoot boy from Wall Street”); he was no starry starry-eyed innocent. Yet his touchstone was cooperation, not competition. The world seems to be different now, and not as nice. What happened?

It is, I think, a case of Samuel Johnson being right again: “Hell is paved with good intentions.” The economic situation we find ourselves in is mean enough to have at least some of the attributes of hell, and it is paved in part with free trade, a theory whose intentions were the best in the world. I say “were” because I’m not so sure they’re all so good today.

Practically every economist is in favor of free trade, and the fraternity has been joined by a broad range of right-thinking, public-service citizens groups, from the Council on Foreign Relations to the League of Women Voters. The argument for free trade is simple and strong: All of us are consumers, and therefore benefit from cheap consumption goods. Tariffs, subsidies and the like increase the costs of consumption goods, and therefore are bad. A less materialistic reason for open international trade is that it is said to make for peace, although perhaps not in the Middle East.

The foregoing arguments, including Willkie’s, may be classified as general or ideological. There are also technical arguments in support of free trade – for example, the theory that cheap imports are both anti-inflationary in themselves and anti-inflationary in their competitive pressure on domestic prices. This notion was a favorite of former Federal Reserve Board Chairman Paul A. Volcker. The most famous technical argument is David Ricardo‘s so-called law of comparative advantage. Unhappily, there isn’t sufficient space here to discuss this “law,” except to say that it consists mostly of exceptions[1].

For the moment I merely want to register the point that each of the arguments, the ideological and the technical, depends – as does standard economics generally – on three assumptions: that full employment actually obtains here and now, that chronological time does not matter, and that all public questions are, au fond, economic questions (or, as Marx had it, that the state will wither away and need not be taken seriously).

Free trade as an ideal has had a long run on the American political stage, starting at least as early as the Boston Tea Party. What has happened recently is not inconsequential. Even as late as 1950, imports were less than 5 per cent of our GNP (exservices): currently they are running at about 16 per cent. Until 1977, American exports generally exceeded imports; I don’t have to tell you that the situation is different now. Nor do I have to read you a list of American industries that have been decimated by foreign competition. Those who say that the global economy is upon us are not far wrong. I am persuaded, however, that what they propose to do about it is indeed far wrong.

Essentially, they make two proposals. The first is the lean and mean thing, to which I will return. The second involves empanelling a committee of government officials, bankers, businessmen, economists, engineers, scientists, and the obligatory representatives of the general public (but not including Ralph Nader) to recommend research and development projects to the government, and then to pass judgment on the results of the research and propose ways of implementing the development of approved ideas. The government’s role would be crucial, because of the antitrust laws and because the research is thought likely to cost more than any corporation, regardless of its size, could afford. In addition, it is observed that the largest corporations tend to devote less and less money to research.

The scheme has both practical and theoretical flaws. The chief practical flaw is that whatever good ideas the committee might come up with would be immediately available worldwide. Just as the American television set industry quickly slipped into the Pacific sunset, so would the new wonder industries.

It is inconceivable, for instance, that giant American corporations would be excluded from the marvelous new industries thought up by the committee. Our giant corporations, however, are not really American; they are multinational. They are motivated by the self-interest of the stockholders (in the conventional theory) or of the managers (in Galbraith’s view); in either case, their devotion is neither to the nation nor to the nation’s workers.

Consequently, upon learning of the miraculous new product along with everybody else, if it is truly miraculous, the responsibility of these corporations to their stockholders or to themselves would require them to start producing it in the least expensive way. And where would they do that? Wherever in the world they found the most stimulating subsidies, the most alluring tax rates and the cheapest labor.

Wherever in the world that might be, it would not be in the United States of America, for the inescapable reason that, at least so far, the American standard of living is higher than that of any other first-rank country. The cheapest labor will not be found here unless we destroy ourselves. On the MacNeill Lehrer Newshour a few months ago, U.S. Trade Representative Carla Hills seemed to believe the Mexican poverty rate was only about 11 per cent (ours was 13.5 per cent two years ago and has undoubtedly risen since). She must have been thinking of some Mexico other than the one I’ve visited.

A MINOR practical flaw in the committee scheme is inherent in the very idea of creating such a group. Schumpeter counted the mature corporation’s addiction to committee decisions a prime reason for decline, and we all know the absurdity that would result if a committee tried to design an animal. Perhaps more important, we know from experience that a committee is quickly co-opted by those with the liveliest immediate interest in the outcome of its deliberations.

In the proposed body the industry and banking representatives may not be the smartest or the best informed, but they surely will have their minds concentrated on the fate of their sector of the economy, and they will certainly wield the direct and indirect power that comes with enormous wealth. In Japan, captains of industry respect the authority of even minor bureaucrats; in the United States, money talks.

Beyond this, the committee approach has a serious theoretical flaw in that it contradicts the very reasons for its formulation. These, it should be kept in mind, are (1) the decline of American industry because of foreign competition, and (2) the presumed impossibility or unacceptability of self-protection in any form.

The conventional charge against self protection is that it interferes with and distorts the natural course of trade, thus making for inefficient if not altogether wasteful use of resources. Publicists reinforce the charge with the cliché that a man knows better what to do with his money than does some bureaucrat in Washington. Yet if the charge and the cliché were valid, there would be nothing to be done about the decline of American industry. It would be natural and inexorable. Further, it would assure the “efficient” use of resources and be a necessary contribution to the wealth and happiness of mankind. Some people would no doubt be hurt by it, but you can’t make an omelet without breaking eggs.

On the premises, there is no more place for a reindustrializing committee than there is for self-protection. If the committee wouldn’t interfere with the natural marketplace, what would it do? Its whole purpose is to interfere in a large and comprehensive way. The logic of the scheme is absurd. Major premise: American industry is being ravaged by foreign competition. Minor premise: Self-protection is unacceptable because it interferes with the free market. Conclusion: A committee should be empaneled to interfere with the free market. What kind of logic is that?

The lean-and-mean logic is similar. Major premise: The American standard of living will be ravaged by foreign competition. Minor premise: Self-protection is unacceptable because it interferes with the free market. Conclusion: We should make corporations lean by firing people, make them mean by working the surviving employees harder for less pay, and thereby make ourselves miserable without help from anyone else.

I find it odd that standard economics, based as it is on self-interest, should find self-protection invariably reprehensible.

The New Leader

[1] This link includes references to the Law of Comparative Advantage in other Dismal Science articles

By George P. Brockway, originally published April 6, 1992

1992-4-6 Where Schumpeter Went Astray Title

 

 

 

 

 

 

 

 

 

 

 

I N PREPARATION for my previous column I reread the passages I had underlined long ago in Joseph A. Schumpeter‘s Capitalism, Socialism and Democracy, a book whose first edition was published in 1942. The second edition appeared five years later, and the third in 1950. My copy is from the 22nd printing of the paperback edition. All that adds up to sales in six figures.

It is a curious book. Its display of scholarshiplis casual and impressive. It contains less economics than history and what the Europeans call sociology (a more humane discipline than ours). Its style is informal, worldly-wise, and generally good natured, though a bitterness lurks behind several references to John Maynard Keynes and comes forward harshly in criticism of Schumpeter’s Harvard colleague, Alvin H. Hansen, who is often meant but never named. (Hansen was a leading expositor of Keynes in America, and many now say he got it all wrong, but his possible mistakes about Keynes are not what bother Schumpeter.)

I don’t propose to review either the work or the author’s academic in-fighting. The book does, however, advance three propositions on which I would like to hang a tale or two. Number one comes at the opening of Part II: “Can capitalism survive? No, I do not think it can.” Number two is at the opening of Part III: “Can socialism work? Of course it can.” These propositions don’t look particularly plausible today, and they are not helped by Schumpeter’s reiterated disclaimer that he is not talking about the then-immediate future, but about a 50-year trend that has now run. The third Schumpeter proposition is never explicitly stated but is a two-part assumption, or definition, that underlies his whole argument. The first part of the assumption is that economics, and capitalism in particular, is about the production of physical things. The second part is that physical things are produced most abundantly when entrepreneurs are allowed or encouraged to compensate themselves at the rates roughly prevailing before the First World War. Taking account also of Schumpeter’s notions about the family, it might not be too extreme to say that the world he celebrates, and whose passing he foresees, is the world of Thomas Mann‘s Buddenbrooks.

That world has indeed passed; yet capitalism is today the survivor in its struggle with socialism. It has not, to be sure, survived unchanged. It used to be said that America’s Norman Thomas brand of socialism never came close to succeeding at the polls because the Democrats, and sometimes the Republicans, stole its best ideas. (Thomas himself once told me he thought many thousands of his votes simply weren’t counted.) But that’s not what I have in mind.

I refer instead to a change in the meaning of private property, surely a central concept in capitalism and in economics generally. In the United States the change as a matter of law was accomplished when the minority in an 1872 Supreme Court case became the majority in another case some 18 years later, or just over a century ago.

The first instance was the Slaughter House Cases, in which the minority argued that the State of Louisiana had deprived New Orleans butchers of their property without due process of law by requiring them to use a subsidized slaughter house at high fixed fees. The majority upheld the state, relying on the common-law definition of property as physical things held exclusively for one’s own use. Since the butchers still had their shops and hooks and cleavers, they were not deprived of their property, even though the high fees made pursuit of their calling impracticable. The minority contended that property necessarily included its exchange-value, or the right to use it for economic gain. Their definition of property began to appear in other state and Federal courts, and finally prevailed in the first Minnesota Rate Case of 1890.

The story is elegantly told in John R. CommonsThe Legal Foundations of Capitalism, a truly great book I’ve had occasion to mention several times in the past. As Commons points out, there is nothing in the common law or in the Constitution to support the new view. But Adam Smith could be cited on the primacy of labor and on the distinction between use-value and exchange-value; and The Wealth of Nations already had an odor of sanctity about it. More important, business practice was coming to depend almost exclusively on exchange-value. Property was no longer a datum – merely a thing. It became an idea – what you could do with it to make money.

This fundamental shift in the meaning of property was a historical turning in the development of modern capitalism – and Schumpeter missed it, or missed most of it. For when property became an idea production, too, became an idea. What distinguishes an idea is criticism. In fact, an idea demands criticism, for one idea thus leads to another. A mere thing, in contrast, is like Popeye: It is what it is. The point here is that a hundred years ago the meaning of property in the United States changed to embrace exchange-value, and that correspondingly not only the economic meaning of production changed but the function of entrepreneurship as well.

Schumpeter’s entrepreneur became obsolete, as he himself saw to some extent. “The entrepreneurial function,” he wrote, “does not essentially consist in inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.” Increasingly, Schumpeter continued, “Technological progress is … becoming the business of trained specialists who turn out what is needed and make it work in predictable ways …. Bureau and committee work tends to replace individual action.”

That is true enough. What Schumpeter does not see, however, is that a collegial enterprise can be a far more fulfilling place to work and a far more responsible producer for the common weal than anything built around his quasi-military entrepreneur. It ain’t necessarily so, but it can be so.

The second Schumpeter assumption concerns the distribution of wealth and income, or who gets what and why. The last chapter of his book is an address he delivered to the American Economic Association 10 days before his death on January 8, 1950. In it he said, “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce: It means a scheme of values, an attitude toward life, a civilization – the civilization of inequality and of the family fortune.” Well, he doesn’t mince words, does he?

Three years earlier, in the second edition of his book, Schumpeter made a forecast of the likely state of the economy in 1950. As was only prudent, he protected his forecast with many provisos, the chief of which were that 1950 would be a peak year in the business cycle, and that New Deal (by then, Fair Deal) interference with business (especially price controls and labor legislation) could be curtailed. As it turned out, the second proviso was satisfied, but not the first; and he was right on the mark with one of his predictions, but far off the mark with two others.

The accurate forecast was more demographics than economics: He expected the 1950 labor force to be “something like 61 million,” and the currently accepted figure is 60.8 million. But concerning that force (and now we’re back in economics), he wrote, “I do not see that the number of statistically unemployed men and women can possibly be, in that year, below five or six million ….” Relying on similar statistics, we find the actual unemployment total to have been 3.3 million. Schumpeter went on to say, “On an average of good and bad years (statistical) unemployment should be higher than 5 or 6 million- 7 to 8 perhaps.” In fact, we didn’t hit 8 million until 30 years later, in 1981, when the labor force was over 110 million, though we grazed it in 1975, when the labor force was 95 million.

Schumpeter’s forecast of the GNP was way off in the other direction: $200 billion in 1928 dollars, as opposed to the actual $153 billion. One would, of course, expect lower unemployment to result in higher GNP, but we have a contrary picture. Can we account for the contrariness?

THE KEY IS the distribution of income. Schumpeter points out that, after a disgraceful period ending around the middle of the 19th century, the condition of the masses steadily improved. After all, capitalism is a mass-production system, while elite families’ consumption goods are custom made. “The capitalist achievement,” he writes, “does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” The problem, though, is that the proportionate shares of the national income remained essentially the same – as Schumpeter insisted they ought to.

Capitalist industry is far more productive and efficient than Schumpeter gave it credit for. Whether run by swashbuckling entrepreneurs or by committees of colorless technicians, industry can turn out the stuff. The question is, Who will buy?

Certainly his 7 or 8 million unemployed (then about a fifth of all wage earners) on the dole wouldn’t be much of a market. Nor would the next three quintiles, whose income would be low because (according to the theory) their contribution would be low. The contribution of the entrepreneurs would be very great, but their numbers would be very small and, besides, they would not be substantial consumers of mass-produced goods. That leaves those just below the elite-say about a fifth of the population-as the only full-scale market for all of industry.

When you take Schumpeter’s figures apart and scrutinize them, you can see why his projected GNP was so far off. The stuff wasn’t turned out because there weren’t enough buyers with enough money. The actual unemployment figures were much better than his estimates, but the distribution of income was not much better, and it is not much better today.

In the world of economic models, it doesn’t matter whether the supply side or the demand side stimulates the economy. But in the real world of existing industry capable of high production, effectual demand (Adam Smith’s phrase) is primary. Schumpeter’s vision of a prosperous world led by entrepreneurial families never came to pass, because too many had little or no share in the prosperity. There was no justice in the shares, and no good economics, either.

 The New Leader

By George P. Brockway, originally published March 13, 1992

1992-3-9 The Key to Consumption Title

 

 

 

 

 

 

 

 

LAST TIME I reported why our present economic muddle should be called a “contained depression.” The term is the coinage of S Jay Levy and David A. Levy of the Jerome Levy Economics Institute of Bard College. It distinguishes our present situation from the five or six recessions we’ve had since World War I, and also from the Great Depression of the 1930s.

The earliest recessions were temporary gluts of unsold consumer goods-relatively easy to slip into and correspondingly easy to recover from. Hence President Bush‘s long mad posture of “What? Me worry? Hence the frigid, almost insolent objections of Chairman Michael J. Boskin of the Council of Economic Advisers to extensions of jobless benefits. Hence the plaintive repetitions of Chairman Alan Greenspan of the Federal Reserve Board that the present recession will be short and shallow, and that recovery will start about six months from the date on which he happens to be speaking.

As the thing drags on, I’m reminded of the Elaine May- Mike Nichols skit in which a patient complains that she has been sick for a couple of weeks with what was diagnosed as 24-hour flu. “Well,” responds the doctor after carefully thinking the matter through, “this may be something of longer duration.”

Indeed it may. What we are now trapped in is not a consumption goods glut but a capital goods glut. We have too many factories, too many warehouses, too many office buildings, too many shopping malls, too many retail chains, too many too expensive apartments, too many too expensive vacation resorts, and especially too many banks and insurance companies and pension funds with too much of the foregoing as collateral for loans.

This sort of glut is not easily worked off in the modern world. Regardless of what the Cassandras say, we’re marvelously productive. If you want more steel, we certainly can turn it out for you. Or more automobiles, refrigerators, escalators, computers. Or more houses and highways. Or more cough medicines and handkerchiefs. Or more magazines and books. Or, when the President’s four new pair wear out, more sweat socks.

We are not oversupplied with any of these things – well, not with many of them. Our inventories are mean and lean and all that, but there’s no danger of serious shortages of anything for very long. What we are oversupplied with is the capacity to make more of almost anything. We have factories and machinery and office equipment and distribution systems and office managers and workers and know-how aplenty. No problem with any of that, except that we have too much and, like the sorcerer’s apprentice, the manic capacity to make more.

An inventory glut can be handled by shutting down the factories for a few weeks or months. But what can be done with a capital goods glut? There are two principal solutions: (1) We can let the unneeded capacity stand idle until it rusts out, or enough currently used capacity wears out, to bring our capacity to produce down to the level of our capacity to consume. Or (2) We can bring our capacity to consume up to the level of our capacity to produce.

The first solution, in its more benign form, is what Joseph Schumpeter called creative destruction. Schumpeter saw the economy driven by a succession of new industries, whose birth and growth led to the destruction of large existing industries. The most familiar example is the automobile industry, with its subsidiary industries of steel, glass and so on, and its ancillary industries of highway construction, petroleum and parking facilities. The new industry gradually overwhelmed industries built on the power of horses.

That did not happen all at once. As late as the 1920s, many cities still had horse-drawn fire engines whose pumps were powered by dramatic coal-fired steam engines. As late as the outbreak of World War II, the Boston Globe discovered to its surprised delight that it had not gotten around to completely dismantling its capability to deliver newspapers by horse-drawn wagon. A few carriage makers were able to convert to the production of automobile bodies. Many livery stables became garages. But manufacturers of buggy whips provided a metaphor for progress and quietly went out of business.

As Schumpeter pointed out, the new industries were bigger and in most ways better than the ones they destroyed. Or as folk wisdom has it, you can’t make an omelet without cracking eggs. The trouble now is that there’s no great new omelet industry on the horizon. The computer industry, which many expected to save us, is itself stumbling[1].

In fact, our situation is dauntingly similar to that of 1930. The unneeded or unwanted capacity is not limited to a single doomed industry. It is universal. Its destruction – if it occurred-would not be creative. It would be merelv destruction: wasted money, wasted resources, blighted hopes. And perhaps most important of all: wasted time. Once again Bessie in Clifford Odets’ Awake and Sing! would be speaking a bitter truth: “On the calendar it’s a different place, but here without a dollar you don’t look the world in the eye. Talk from now to next year – this is life in America.”

It would take a long time for the bright new assets to rust out or the good old assets to wear out. It would take a long time for banks and insurance companies and pension funds to become solid again. It would not be a pleasant time. For millions of citizens it would be a hopeless time, made more bleak by the deterioration of their surroundings both social and physical.

It took World War II, with its enormous stimulation of governmental and then personal demand, to pull us out of the Great Depression. The New Deal had moved painfully slowly, hamstrung by a coalition of Northern Republicans and Southern Democrats, and hampered by its own emotional commitment to classical economics. (A “responsible” effort to reduce the minuscule deficit in 1937 caused an instant recession.) Yet the New Deal was open, eager, hopeful, vigorous, experimental, caring. New Dealers didn’t have to make speeches about how they cared; they showed it. In their place we have Boskin, Brady and Darman and their trickle-down schemes.

So much for the first solution to our troubles. It is no solution at all.

The second solution (bringing our capacity to consume up to the level of our capacity to produce) would seem, on its face, to be easy as pie. Consuming is what we’re supposed to do best. Shopping malls are where we shine. But all the wise men kept telling us not to consume-until Bush bought those socks. Unfortunately, now that they are telling us consuming has become patriotic, we either haven’t any spare money or are afraid we soon won’t have any spare money.

The problem is, the wrong people have what spending money there is. Worse than that, practically nobody in public life says it is the wrong people who have money to spend – except Senator Tom Harkin, and look what happened to him in the Democratic Presidential primaries.

Somehow it has become conventional to believe that the distribution of wealth or income is not the issue. Or that redistribution is not practicable. Or that it wouldn’t make any difference, anyhow.

LET ME INTERPOSE a little story. The other evening I was a dinner guest at the home of some liberal friends. There were eight of us around the table, and none of us was afraid of what the President calls “the ‘L’ word.” We are liberals, possibly even knee-jerk liberals, and proud of it. After all, some injustices are so flagrant, and some events so sudden, that decent people must respond to them semi-automatically. A liberal response is surely more honorable than a reactionary withdrawal.

Anyway, there we were, and we got talking about the very subject of this article. You will not be surprised to learn that I argued in favor of restoring steep progressivity to the income tax. And I was not surprised to be told that Robin Hood was a seductive medieval myth, that taking from the rich and giving to the poor would simply make everyone poor because the rich are so few and the poor are so many, and that soaking the rich would not much improve revenues because tax avoidance would then increase.

We have all heard that line of talk before, very likely first meeting up with it at our father’s knee, if not at our mother’s. The line may actually have been true back then (though I doubt it), but it’s certainly not true today. The average of all family incomes in the United States is somewhere between $70,000 and $80,000.  It’s difficult to be more precise, because it’s hard to agree on exactly what a family is. In any case, it’s obvious that the Robin Hood myth is not impossible today.

I don’t suppose that anyone advocates perfect equality. (Even Engels called equality “a one-sided French idea which was justified as a stage of development in its own time and place but which now should be overcome.”) Nevertheless, it is important to understand that the present distribution of income is not an aspect of the universe that we, like Margaret Fuller, had better accept. It is not the unalterable consequence of some mathematical or psychological or perhaps theological law.

A second point must be made: Any attempt to change the distribution of income will certainly give some people, including those whom Shaw’s Mr. Doolittle called the undeserving poor, some money for nothing. I’ll let you compile your own list of why something for nothing is bad-psychologically, socially, ethically-and I’ll even grant the validity of most of your reasons. But then I’ll ask you to compile a list of the Astors and Morgans and Fords and so on who got something for nothing. A wit on the New York Times a couple of years ago noted that most of the richest people in America got their money the good old fashioned way-they inherited it. Something for nothing is, Nelson Rockefeller might have said, in the mainstream of Republican thinking.

Once we have mastered the message of the two preceding paragraphs, we have earned the right to consider ways of building demand worthy of our productive capacity. We all know the most obvious ways: First, massive public works, massive support for education, comprehensive national health care insurance.

Second, an almost vertically progressive inheritance tax, a steeply progressive income tax, probably a negative income tax at the bottom, and possibly an income limitation tax at the top.

We don’t have to do it all at once. But unless we get started soon, it will be a long time before happy days are here again.

 The New Leader

[1] Ed:  OK, so even this author gets it wrong from time to time….

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