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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 August 10, 1998

1998-8-10 A Fortunate Experiment titleONE OF THE mysteries of life in the United States today is why we are not in the midst of a raging inflation, a depressing recession, or both. The answer, though, is staring us in the face.

For the past 30 years, hard-nosed devotion to the theory of a natural rate of unemployment (a frequent target in this space) has been a prerequisite for appointment to the economics faculties of our major colleges and universities. Hence the doctrine has not only been taught at those institutions, it has been accepted respectfully in editorial rooms and enthusiastically in board rooms across the land.

The theory, of course, claims that if too few people are unemployed, inflation will accelerate rapidly, and the only way to slow it down is to raise and keep raising the interest rate. Chairman Alan Greenspan of the Federal Reserve says he does not altogether agree with the theory. He keeps talking, however, about raising the interest rate on some unspecified occasion in the future.

Yet today unemployment is lower than it has been for decades, while inflation (especially if you figure it as the Boskin Commission did a couple of years ago) has been practically invisible for at least four years. Moreover, during the same period the interest rate has been relatively stable. If mainstream economic theory were sound, the world would not move in this way.

Nevertheless, the world does move in this way and, I make bold to predict, will continue to do so until the Baby Boomers start retiring in substantial numbers, at which point the present stock market boom will come to an end. I hasten to explain that I agree with Mr. Greenspan that the market is overenthusiastic, overpriced and in danger of collapsing. But I also think that as long as the Baby Boomers keep pouring their savings into it, and as long as the interest rate does not go up, the market will continue to rise in a classic example of the “law” of supply and demand.

The situation is beautifully ironic. The market is all the bad and dangerous things Mr. Greenspan says, and he could stop them by jumping the interest rate-as the Reserve did in 1978 (not to mention 1929). But the Federal Reserve Board does not dare to act. Every three months the Reserve Board meets and the bankers anguish over their belief that inflation must be around the comer. Their terror, though, is that if they raise the interest rate to stop the inflation no one else can see, they will be remembered for having precipitated one of the great economic crashes of all time[1].

So the booming stock market that concerns Mr. Greenspan has incidentally forced the Reserve into an unnoticed experiment that lays bare the fallacies of conventional interest rate policy. If the economics profession can bring itself to pay attention to what is happening in this accidental experiment, we may be spared further exposure to the barbarous theory of a natural rate of unemployment.

Even without the experiment, the Reserve should have learned a few of the effects of raising the interest rate-at least five bad effects and one claimed to be good. The first thing it does is cause a drop in investment. By investment I don’t mean speculating in mutual stock funds and derivatives; I mean helping to finance the organization, continuation or expansion of companies that will produce goods and services to be sold in the marketplace and enjoyed by everyone. In the capitalist system, almost all investment depends directly or indirectly on credit, that is to say, borrowing.

Let’s look at the record. In the early 1960s, when the Federal funds rate averaged about 2.7 per cent, annual investment ran over 21 per cent of the gross domestic product. Today the Federal funds rate is at 5.5 per cent, and investment is only 16 per cent of GDP in an economy that, according to Mr. Greenspan’s recent Congressional testimony, is one of the best he has seen.

Second, an increase in the interest rate favors established and big businesses over small and start-up businesses. Since the latter provide most of the new jobs, any impediment to new business is an additional handicap for the poor, as well as for middle-class would-be entrepreneurs. Indeed, the percentage of American families living below the poverty line is higher in this economy that is one of the best Mr. Greenspan has seen than it was 25 years ago.

The third thing raising the interest rate does is raise the unemployment rate. According to conventional theory this cruel absurdity is a good thing and the way things are supposed to be. Howsoever that may be, the unemployment rate today is 4.5 per cent, or lower than it has been since 1969. In the quarter century before 1969, though, there were no fewer than 12 years with a lower rate of unemployment than the 4.5 per cent of this economy that is one of the best Mr. Greenspan has seen.

Fourth, raising the interest rate raises Federal, state, local, and school taxes, as the recent hoo-ha over the deficit has taught us all.

Fifth, raising the interest rate is a principal way for the rich to become richer. Mr. Greenspan has more than once cited the widening gap between the rich and the poor as dangerous to our democracy. He has protested that it is a problem for Congress, not for him. But every interest payment is a transfer to the haves from the have-nots. To be sure, not everyone who borrows is down and out. Still, as a general rule, people who lend money are richer than those who borrow[2].

The shift from 4 per cent (or lower) FHA and VA mortgages of 50 years ago to today’s “low” rate of 7 or 7.5 per cent has been a gift of billions (if not trillions) of dollars to mortgagees and a corresponding drain on mortgagers. No wonder the rate of home ownership has fallen in this economy that is one of the best Mr. Greenspan has seen.

Now, I am not saying that the interest rate is solely responsible for the rich becoming richer and the poor poorer, and I am emphatically not against borrowing and lending and the charging of interest. I am saying that interest always has the immediate effect of taking from the poor and giving to the rich; that therefore the rich are richer and the poor poorer; that increasing the interest rate increases this effect; that the present rate does not improve matters (except in relation to the rates Mr. Greenspan’s predecessors gloried in); and that an unnecessary uncertainty is introduced into the economy by Mr. Greenspan’s unwillingness to specify conditions that would prompt him to raise the rates further.

THAT’S the bad news-or some of it-about raising the interest rate. The good news-or what’s supposed to be good-is that raising the interest rate stops inflation. Well, no one can say it quite does that, because since World War II the Consumer Price Index has gone up in every year except 1955 (and that year the prime interest rate was lower than in any subsequent year) [3].

But there have been 10 surges of the economy since World War II, and except for the present surge, every one of them was seen by economists as threatening to spiral into inflation and snubbed down by the Federal Reserve Board. In short, its raising the interest rate reduced the investment rate, increased the bankruptcy rate of businesses, increased the poverty rate, increased the cost of living, raised taxes, made the rich richer, caused nine recessions-and thus slowed the rate of inflation.

Those consequences were not unpredictable. They are inherent in the nature of money, something conventional economics has archaic ideas about. Money has no price (there is no point in paying a dollar for a dollar bill). What money has is power-purchasing power and borrowing power. The piece of greenbacked paper you have in your pocket has no practical use as paper. It is an IOU of the state, was issued by the government in payment for some goods or services, and will be accepted by the government in payment of some tax or fee. It is accepted in private transactions because there are always, somewhere in the economy, citizens who need government IOUs to pay taxes or government fees.

You may borrow the use of someone else’s money by paying a fee (interest), which is a cost to you and has the effect of diminishing the amount you can borrow. The relation of money to the fee for its use is similar to the relation of the price of a government bond (also an IOU) to the rate of interest. In both cases, the higher the interest rate, the lower the purchasing power (the effect on borrowing power, essential for investment, is even more severe).

When one speaks of low purchasing power, it is the same as speaking of a high general price level. By upping the interest rate, the Federal Reserve Board reduces everyone’s purchasing power and thus increases the general price level.

Raising the interest rate does not cure inflation; it causes it. (This, you may remember, is Brockway’s Law Number Two, first proclaimed here in the issue of January 9, 1989.) Raising the interest rate gives the appearance of stopping inflation because, on the supply side, it increases the costs of operating a business, discourages expansion and leads to downsizing, which, in turn, reduces wages and thereby contracts the demand side. In other words, raising the interest rate tends to bring about a recession.

That is the way all threats of inflation have been contained since World War II -with a single exception, the present one. This time the Federal Reserve Board has refrained from raising the interest rate, as its governors would normally be inclined to.

The current stock market boom has accidentally forced upon us an economic experiment of world shaking possibilities. We are finding that holding the interest rate steady does not cause inflation, even when the unemployment rate steadily falls[4]. All the dismal prophecies of a natural rate of unemployment have proved false. Also proved false is the immoral claim that a decent minimum wage causes unemployment.

With such empirical results in hand, we may be emboldened to take the next step and discover that lowering the interest rate can lower the price level, increase productive enterprise, and start the long task of healing the suppurating wound in our society that gapes between the rich and the poor.

Do we dare?

The New Leader

[1] Ed –  this experiment has been repeated during the Obama administration when the Fed under Bernanke and now Yellen kept interest rates low whilst talking on end about raising them

[2] Ed – on this fifth factor, despite low interest rates in the Obama years the separation continues.  Just speculatin’, but the current economy is fully “globalized” and has no Glass-Steagall.

[3] Ed – current tables add only one other year, 2009, the deepest year of the Great Recession

[4] Ed – as has happened during the Obama Administration

By George P. Brockway, originally published August 11, 1997

1997-8-11 Madness is Not StatesmanshipI SUBMIT that it’s time to give it up, quit, call a halt, put an end to the nonsense and the grief it has caused. The charade has had a run of almost 30 years. That is surely long enough for any group of people to toy with the wealth, health and happiness of their fellows.

It was on December 29, 1967, that Professor Milton Friedman, then of the University of Chicago, in his presidential address to the American Economic Association, publicized the notion of a natural rate of unemployment-now known as the nonaccelerating inflation rate of unemployment, or NAIRU. The idea proved to be protean. Theorizing about it was a game anyone could play, and the game soon had as little resemblance to the one Friedman invented as the slam-dunk has to the shots invented by Dr. James Naismith of the YMCA College in Springfield, Massachusetts, in 1891.

Friedman himself based the theory on mumbo-jumbo about nominal wages and real wages that would make inflation rise à outrance if unemployment fell below the natural rate. Some stirred that up with the productivity scam; a standard reference book disregarded the foregoing ploys but introduced three others; and an international conference was devoted to the imagined connection between NAIRU and hysteresis, a phenomenon characteristic of ferrous metals in an electromagnetic field. (No, no, I did not make that up.)

1997-8-11 Madness is Not Statesmanship Milton FriedmanAs the natural rate theories began to unfold, their beauty, not to say elegance, began to be appreciated. For, look you: If there is a natural rate of unemployment, the most difficult and most important questions of economics-those that have to do with people-are answered. Better, they’re made to disappear; there’s no point in asking them.

To struggling scholars, the theory of a natural rate of unemployment has been a godsend. The frosting on the cake is Professor Friedman’s dictum that, for certain technical reasons, “the monetary authority [aka the Federal Reserve Board] cannot know what the ‘natural’ rate is.” This being accepted, tenure-track economists can consolidate their careers by writing learned articles conclusively demonstrating whatever rate tickles their fancy, and no one can say them nay.

Well, that’s not quite right. Reasoning from the pronouncements of professional economists, we conclude that, whatever the actual rate of unemployment, the natural rate must always be higher, because the actual rate is always low enough to convince pundits that a lot of people must be fired at once to prevent runaway inflation, or to allow us to compete in the new global economy, or to keep the Federal Reserve from raising the interest rate and disquieting the stock market.

In the new welfare-as-we-never-knew-it-world, we are beginning to push people off welfare and onto workfare, and we are beginning to see the absurdities and the nastiness of the schemes. In New York an attempt is being made to unionize the new workers. The local authorities are resisting on the ground that the new workers are not really workers at all, because they don’t work full time, and they don’t have vacations, and they don’t have proper tools and equipment, and they aren’t paid a living wage.

I expect that the Bureau of Labor Statistics will go along and not count them, just as it didn’t count as employed the millions who worked for the CCC and WPA and the rest of the “alphabet soup” programs of New Deal days. (How else do you think unemployment hit 17.2 percent in 1939, as the books say it did, under that Old Democrat FDR?) These people were paid for what they did, and much of it survives for our pleasure and enlightenment to this day, but they didn’t get counted.

Think what would happen to the natural rate of unemployment if the millions of victims of workfare were counted as really-truly workers. Once the states got the new system in full swing, unemployment would theoretically be cut at least in half-say, to 2 or 2.5 per cent. Inflation would of course go straight up; its curve would be vertical; and the interest rate would have to follow in hot pursuit.

Think of it.

I, too, think that is absurd. But I ask you: Why is it absurd? Don’t tell me that most workfare workers aren’t eager to work. The same can be said for more than a few in the private sector, even at fairly exalted levels-which may explain why golf courses and ski runs are busy seven days a week, in season. After all, the “classics” held that work is a “disutility” that is overcome only when workers are tempted with high wages.

The absurdity is not in the people, whether employed or unemployed. The absurdity is in the theory of a natural rate of unemployment. The theory is fallacious as well as vicious. The fallacy appears at the very beginning, where it is assumed that inflation is caused on the supply side by the cost of labor and on the demand side by the purchases of laborers.

Labor costs are indeed the largest category of expenses, but they are only about 60 per cent of the Gross Domestic Product (GDP). The other 40 per cent includes rent, interest, insurance, taxes, and profits, which obviously don’t all move at the same slow pace as wages, or even in the same direction. Labor costs, moreover, are not homogeneous, but can be usefully divided into three categories with pretty distinctive behavior: the takings of the working rich (say, those with annual incomes in excess of $175,000); the wages of the working poor (those mired below the poverty level); and the salaries of the working middle class.

So we have eight factor costs that affect the supply side of the price level, instead of the single omnibus wage cost of the NAIRU theory. Of the eight, four have certainly soared during the past couple of decades: interest, insurance, profits, and the takings of the working rich (entertainers’ professional athletes, business executives, and other celebrities). The salaries of the middle class, though, have stagnated, while the wages of the working poor have grievously fallen[1].

Now, when the unemployment rate falls a tenth of a point because several hundred thousand people get jobs, who are the new workers? Well, a handful may be newly minted celebrities or previously downsized executives, but most of the rest meld into the bottom half of the working middle class or the working poor-categories that have not been responsible for inflation’s costs.

Nor will the lower categories be responsible for any substantial increase on the demand side. These people, even when unemployed, already did a bit of demanding or consuming. They weren’t quite starving or freezing to death. The welfare reformers, in fact, thought they had it too good. Since most of the new workers will be paid close to the minimum wage (which is below the poverty level), they will not be able to demand much more in the way of goods and services than they did when unemployed. That is not the way things ought to be, but it shamefully is the way they are and will be for the foreseeable future.

When unemployment falls, the new members of the working poor will not make a crucial difference to either the supply side or the demand side. Their effect on the price level will be negligible. They will, however, make a salutary contribution to the GDP, cause a great fall in welfare expenses, and add nicely to Federal and state and local tax receipts.

IT IS IN EVERYWAY, at all levels, a good thing for unemployment to fall-and in a rational economy that would be a principal objective of public policy. Yet in the world of conventional economics, this happy event is irrationally supposed by NAIRU theorists to be the harbinger of inflation to come. It sets off a great hue and cry in the universities and on Wall Street, explaining why the Federal Reserve Board will have towill be required by economic law to[2]-raise the interest rate high enough to induce recession.

As an example of the wild claims made by conventional economists, we may consider a 1990 proclamation by Professor Paul Krugman of MIT that if we tried to increase employment by 2 million people, “inflation would begin to accelerate rapidly.” In the event, employment was essentially unchanged for two years, and the Consumer Price Index (CPI) fell from 5.4 per cent to 3.0 per cent. Since 1992, employment has increased by over 4 million a year, and the CPI has, yes, fallen to 1.4 per cent. If we use the figures of the Boskin Commission that economists were praising last winter, inflation now is only 0.3 per cent-repeat, three-tenths of one per cent-a year.

In its perennial struggle with the inflation banshee, the Federal Reserve has sponsored eight recessions since World War II. Not only were trillions of dollars’ worth of commodities never produced (it can be argued that we have too much stuff anyway), but millions of our fellow men and women were forced into poverty, their hopes for a better life dashed.

That is a monstrous shame we all bear, a shame brought about by arrogance in league with ignorance. After 30 years, the ignorance is no longer excusable-if it ever was. We are at present in an economy whose unemployment rate is falling -even without counting our workfare fellows as employed-and whose inflation rate is approaching zero. And we have seen unemployment fall despite the conventionally feared minimum wage law, specifically mentioned by Professor Friedman as increasing the natural rate of unemployment.

Federal Reserve Chairman Alan Greenspan, we have noted hopefully here more than once, claims not to be a believer in NAIRU. Nevertheless, in his recent semiannual testimony before Congress he felt obligated to warn that if things don’t slow down, the Reserve will raise the interest rate. Should he carry out his threat, he will hurt the poor and especially the lower middle class, who, as we have seen, are not responsible for inflation, and he will benefit the rich, who are to blame. This is not statesmanship; it is madness.

Perhaps the Chairman still fears an over exuberant stock market. That may be sensible, but raising the interest rate will attempt to exorcise the fear by taking billions of dollars from the borrowers among us and giving them to the lenders. The attempt will succeed only if he manages to bring on another recession. This, too, is madness, not statesmanship.

It is also NAIRU by another name. The natural rate of unemployment, the nonaccelerating inflation rate of unemployment, NAIRU-the whole mess-is fallacious in theory, erroneous in fact, and immoral in consequence. Let there be an end to it.

The New Leader

[1] Italics are not in the original

[2] THESE italics ARE in the original…

By George P. Brockway, originally published January 29, 1996

1996-1-29 The Assumed Employment Virus Title

I SEE BY THE PAPERS that big corporations are downsizing their economics departments. IBM and GE have eliminated theirs altogether. Others are keeping a few people on for special projects, but still are outsourcing from one think tank or another when they want to know about the economy.

There is poetic justice in this, for economists have not been bashful about claiming credit (if that is the right word) for developing the theory of productivity. That allows the sensitive readers of the Wall Street Journal to call their brokers and take a position in the stock of any company announcing its intention to fire 10,000 or more employees, particularly those with 20 years of service or better.

I do not mean to gloat. Some of my best friends are economists; moreover, intellectual life in America is thin enough without sending more PhDs down to swell the ranks of telemarketers anxious to interact with me during my happy hour about a new exercise machine or a new insurance policy. No, I don’t mean to gloat, but I do intend to seize the day to fret a bit about the state of the profession.

I became concerned about the profession when I sent my brother a copy of my first book. He thanked me in due course, and congratulated me, but he didn’t pretend he had read it, nor did he promise to read it. “After all,” he wrote, “I doubt that I’ve ever in my life read an economics book straight through. You can hardly expect me to break that record now, even for my kid brother.” So far as I know, he never did.

My brother was not a dope. He was far from adopting what James Truslow Adams a half century ago called “the mucker pose.” He held both the baccalaureate and a doctorate from Harvard. He traveled widely and read widely. All his life he was involved in community affairs. But he couldn’t be bothered with economics. When I pressed him for an explanation, he said, “You people claim to be scientists, but you disagree with each other about everything. No two of you speak the same language. Some of you seem not speak any language.”

Although my brother was not a dope, I’m inclined to think that in this case he was almost precisely wrong. Economics is not a science, and the discipline’s practitioners tend to agree too much. Especially about the wrong questions.

One of the puzzles of contemporary economics is the number and variety of theories – including those most prominent in the universities today – that trace their origin to sensationally different journal articles, yet all end up advocating laissez-faire or something remarkably close to it. The puzzle is of course the greater because, not so long ago, the Great Depression and World War II seemed to have laid laissez-faire permanently to rest.

General Equilibrium Analysis, Monetarism, the Neoclassical Synthesis, and Rational Expectations are among the schools affected. In computer jargon, one might say that a virus has attacked them all, disrupting programs, infiltrating compositions, corrupting data bases.

We didn’t use to think of mathematics or logic in such highly charged terms. We were well aware that an error at any point in an exercise would render all that followed suspect; but our exercises used to be more insulated from each other, so that our assumptions were more frequently considered.

Be that as it may, I believe it can be demonstrated that something like a virus has indeed infected most contemporary models of the economy. We may give the virus a name: the Assumed Employment Virus.  For it is an assumption or presumption that the economy is operating either actually or effectively under conditions of full employment.

The Assumed Employment Virus appeared almost contemporaneously with The Wealth of Nations in 1776, but no one noticed for a century and a half. It was not until the Great Depression that providing employment was recognized as an economic problem. Adam Smith, for example, devotes a few pages to the comparative wages of different “employments” and to the “price of labor” generally. Yet the only unemployment he takes notice of is the seasonal one of bricklayers and masons. He pays some attention to the “Poor Laws” (which for 400 years were a staple of British fretfulness, the way “welfare as we know it” continues to occupy us), but seems not to have considered the possibility of, and need for, regular employment for the poor.

The “classics,” or most economists from Smith to the middle of the 20th century (except Karl Marx), presumed that all laborers could get jobs, no matter how bad the times, if they merely lowered their wage demands to what entrepreneurs offered. It was not suggested that in bad times (or at any time) entrepreneurs should pay a living wage at the expense of the going rate of profits. Bob Cratchit was a fortunate man, even though he couldn’t afford adequate medical attention for Tiny Tim. In modern jargon, entrepreneurs were forced by market discipline to cut wages. Laborers were free to accept jobs that would allow them to starve to death. As Phil Gramm and Dick Armey taught undergraduates only the other day in Texas, those who lacked jobs were unemployed because they didn’t want to work. There was no such thing as involuntary unemployment.

It remained for John Maynard Keynes to demonstrate why involuntary unemployment is a fact of laissez-faire life. He observed “that men are disposed … to increase their consumption as their income increases, but not by as much as the increase in their income.” If the resulting weakness in demand is not countered by investment (sooner or later by government investment), production will be decreased, and workers will become unemployed – involuntarily.

Laissez-faire theorists have tried to refute Keynes’ demonstration by presenting arguments that unemployment cannot be reduced to zero. The Monetarist Milton Friedman came up with the first of these -the Natural Rate of Unemployment (whatever is natural is ipso facto involuntary), now usually referred to as the Non-Accelerating-Inflation Rate of Unemployment, or NAIRU. It has also been called the Normal Rate, the Warranted Rate, and (in a triumphal oxymoron) the Full Employment Rate.

There is a sort of reason behind even that last name. All of the involuntary unemployment arguments maintain either that unemployment cannot be reduced below the mentioned rate, or that if it is temporarily reduced (and it can only be reduced temporarily), it will be followed by some unacceptable consequence, usually inflation without limit. If at some point policy forbids, for whatever reason, further reductions in unemployment, why not call that point Full Employment?

The Rational Expectationists, whose leader was recently crowned with a Nobel Memorial Prize, make the problem easy for themselves. It is, they say, rational to expect the economy to behave as the classics would have it; so involuntary unemployment doesn’t exist, and laissez-faire does.

In effect, then, for most contemporary economists both voluntary and involuntary unemployment amount to full employment. Distinguishing among the three terms would saddle scholars with two extra variables that could enormously complicate their equations. The obvious course is to simplify by using one term for three. It is with this simplification that the Assumed Employment Virus enters today’s models.

ONCE THE VIRUS is in the models, two things happen. First, since full employment is now an unequivocal term in an equation, the equation can be solved for it. Full employment is no longer a mere possibility or desideratum or dream but an eventuality, if not a determinate actuality – just as in General Equilibrium Analysis the “proof” of the possibility of an equilibrium quickly entails proof that an equilibrium exists, and that it is optimal. Second, since full employment is at last one of the prime objectives of any modern economic policy, any model containing the virus has apparently proved the achievability of the objective, and it can therefore be assumed. Whatever still remains for the economy to do can be done with comparative ease. In other words, take it easy: laissez-faire.

As might be expected, the Assumed Employment Virus, having successfully infected models of the economy as a whole, has had equal success in confusing more restricted models. Thus the proofs of Keynes and Michal Kalecki that saving equals investment have been used, and are still used, to justify the constant cries for decreased consumption and increased saving. (The proofs merely mean that whatever is invested has been saved; they do not mean that whatever is saved is invested.)

More to our present point, in the absence of truly full employment, too much saving can actually be, as Keynes was at pains to emphasize, a bar to investment as well as to consumption. Because what is saved cannot be consumed, saving reduces demand; and when demand is reduced, prudent entrepreneurs are not emboldened to invest in new production to satisfy it. Consequently, the recurrent schemes to encourage saving are generally either unproductive or counterproductive. In the 1993-94 debates over NAFTA and GATT,   Ricardo’s Law of Comparative Advantage was similarly cited regularly without acknowledgment or recognition of its dependence on the assumption of full employment.

It is obvious enough that a nation is neither enriched nor strengthened if substantial numbers of its citizens lose their jobs and are kept unemployed while the nation imports some product these citizens once made or could now make. This manifest truth is, however, rendered irrelevant by the Assumed Employment Virus.

Those who have been downsized into joblessness (including the economists we mentioned at the start) are likewise victims of the Virus. The standard productivity index is derived by dividing the Gross Domestic Product (GDP) for a period by the number of hours worked during that period. The index is a common fraction, so it will naturally rise if the denominator (“hours worked”) is reduced; hence the rush to downsize everything from the Federal government to the local supermarket.

“Productivity” may thereby be improved, but production (which is not an index number but actual goods and services produced for actual people to use and enjoy) falters. The victims of downsizing, being now unemployed, necessarily reduce their consumption, that is, the demands they make upon the economy. Entrepreneurs, faced by this reduction in demand, reduce production, which of course leads to a reduction of the GDP.

It would be different if full employment were the actuality rather than a deluded assumption caused by a “virus” in economists’ models. As long as there are unemployed workers, though, the first mission of macroeconomic policy should be to increase “hours worked”-that is, employment. This is not to say that we need a return of the Luddites. It is to say that we need economists dedicated to devising policies that will make full employment a hard reality instead of an easy assumption.

The New Leader

By George P. Brockway, originally published May 9, 1994

1994-5-9 Unemployment Japanese Style Title

1994-5-9 Unemployment Japanese Style Reuters

I REPRODUCE above in its entirety a news article that appeared on page D4 of the Business Day section of the New York Times for Friday, April 29, 1994. Don’t feel badly if you can’t recall seeing the story in tile paper. It was easy to miss. It ran in the gutter at the very foot of the page and was surrounded at its top and left by an article from a stringer headlined “Denver Airport Date Firm” (on Sunday the date turned out for the nth time not to be firm). If you were the editor of what you proudly and properly referred to as a newspaper of record, and you had a story you wanted to kill yet had to print in order to complete the record, you would handle it in just this way.

I leave to others the task of speculating why the Japanese unemployment story was in fact buried; why, given its explosively dramatic contrast with American and European unemployment records, it was not run as the lead on the first page of the Business Day section, if not on the front page of the entire paper; why the bare numbers were not accompanied by a backgrounder explaining how the Japanese manage such a low unemployment rate even in the midst of a recession; why nothing about the story has appeared among the concerns of the editorial page or the Op- Ed page; why the Times economics columnists have found nothing to remark on in a report that renders suspect the barbaric but fashionable theory of a natural rate of  unemployment, a smattering of whose arcane details they dazzle us with now and then.

Although I will not speculate, I am interested in that last point. For as I have said often enough, I follow Keynes (and indeed everyone at all capable of empathy with a fellow human being) in holding that an outstanding fault of the economic society in which we live is its failure to provide full employment. The theory of a natural rate of unemployment, subscribed to by almost every conventional economist in the United States, argues that this outstanding fault cannot be corrected without igniting an inflation that would destroy the economy.

The news from Tokyo tells us that the current unemployment rate in Japan, while the highest in six years, is nevertheless lower than the lowest unemployment rate the United States has posted since World War II. I do not have at hand Japanese figures earlier than 1967, but after that date Japan’s unemployment has never been higher than 2.9 per cent and U.S. unemployment has never been lower than 3.4 per cent. The American low was registered during the Vietnam War. Our present rate (achieved during a sluggish peacetime recovery that has scared the Federal Reserve Board silly with nightmares of future inflation) is almost three times the present Japanese rate (achieved during a persistent recession).

These facts strongly suggest that the so-called natural rate need not be accepted as immutable. What the Japanese have done is surely within our capabilities; and given the freedom, not to say volatility, of American life, a 2.6 percent rate would be as near full employment as never was.

The natural rate theory has from the beginning allowed that the rate is not really natural but depends on “market characteristics” that are, as Milton Friedman has said, “man-made and policy-made.” What man and policy make they presumably can unmake. The chief market characteristic complained of by natural rate theorists is a minimum wage law. Emboldened by my recent adventure in investigative reporting (see “Ending Welfare As We Know It,” NL, March 14-28), I phoned six Japanese agencies (four of them official) and one American labor union to find out whether Japan has a minimum wage law. No one knew offhand, but the consulate called me back a couple of hours later to report that indeed Japan has such a law. It is a national law, and it specifies minimum wages for different trades and different localities. I doubt that natural rate theorists, who are firm believers in market discipline, would think it an improvement on the American law.

Let us therefore consider the reaction of conventional theory to a 2.6 per cent unemployment rate. Without doubt the prescription would be for a high-very high-interest rate to contain inflation. Has that been prescribed in Japan? Indeed it has not, nor has such a regimen been followed. Rather the contrary, the interest earned by a 1O-year government bond in Japan is now 4 per cent; with us, the corresponding rate is, as I write, 7.10 per cent and will go higher before you read this, if the present majority of the Federal Reserve’s Open Market Committee has its way.

Well, then, since Japan has comparatively low unemployment and comparatively low interest, it must, according to conventional theory, have comparatively high inflation. But Japan’s price index changed 0.0 per cent in April and, at least from 1967, has never climbed as fast as ours.

IT IS OF COURSE possible that other elements contribute to the differences between Japan and the United States. I can name three that may: import policy, productivity and saving.

We all know about Japanese import policy. It is difficult, devious, protectionist, and successful. Twelve years ago I wrote the first of several columns arguing for a protectionist policy for the United States (“America’s Setting Sun,” NL, June 14, 1982). I don’t propose to repeat myself now, except to remark that Japanese protectionism has obviously not prevented the success of Japanese policies directed toward low unemployment, and may well have been a factor in their success.

Productivity is another question I have addressed several times (first in “Productivity: The New Shell Game,” NL, February 8, 1982). In the present context all that need be said is that American productivity is now, and as far as I have been able to discover has always been, greater than Japanese. In fact, among the leading industrial nations, only British productivity has generally been outranked by the Japanese.

On the other hand, Japan’s GNP has, until the last couple of years, grown faster than ours.  Conventional economic theory, though, is possessed of the altogether unintelligible notion that productivity is more desirable than production. It may work out that way in a mathematical model, but it certainly doesn’t on the dinner table[1].

I have also written about saving and shall do so again, but the problem with respect to Japan is special. In the first place, a 1990 study by Fred Block in the Journal of Post Keynesian Economics demonstrated that the figures usually published overstate Japanese saving and understate American. In the second place, as Block showed, an extraordinary amount of Japanese saving, however defined, goes into speculation rather than production. The real estate (land and improvements) of Japan, a nation whose area is no greater than that of Montana, is, at today’s prices, more valuable than the real estate of our 48 contiguous states (a not inconsiderable amount of which is owned by Japanese). The Japanese stock exchange is notoriously volatile, with daily spikes (or spike holes) of 5 per cent or more not uncommon. Keynes thought Americans were addicted to gambling, but the Japanese seem to have it worse.

1994-5-9 Unemployment Japanese Style Unemployment Office

All of their speculation absorbs enormous amounts of money, but it does nothing for the economy. The money is saved in the sense that although it was earned in the producing economy, it is withheld from use in the producing economy. The withholding is achieved by underpaying large classes of workers, especially women, and by underfunding social services. Because of its hierarchical distribution of wealth and its systematic maldistribution of income, Japan cannot consume all it produces and must sell overseas; thus when foreign markets falter, Japan suffers recession.

In short, neither Japanese import policy, nor Japanese productivity, nor Japanese saving can account for Japan’s low unemployment coupled with low inflation. So is there nothing we can learn from the Japanese record? There are, I think, a couple of things. In the circumstances, the actual virtues (as opposed to the theoretical vices) of some sort of protectionism are very hard to deny, as are the virtues of a steadily low interest rate.

Regarding the latter point, we are told that we cannot afford a low rate because it would stimulate a flight of capital to the Bahamas or the Caymans or perhaps some more exotic land farther overseas. I don’t know about that. Even in the early ’80s, when the prime rate here hit 21.5 per cent, and the Japanese rate was as low as it is now, only a small proportion of the yen flew here. Why did most of it stay home? For the good and simple reason (as Tom Swift used to say) that with a low interest rate Japanese industry could be happily profitable, while the “strong” American dollar caused by high American interest made it easy to penetrate our unprotected market.

A high interest rate (and our recent supposedly low rate was exceedingly high by Japanese standards, as well as by our own pre-1960 standards) is a market characteristic that makes for a high “natural” rate of unemployment. A low rate, contrariwise. The news was barely fit to print. Still, we’d be wise to pay attention to it.

The New Leader

[1] Ed.:  I can’t help but wonder what the author would have thought of Clayton Christensen’s concerns with corporate focus on margins instead of profits as in the Innovator’s Dilemma, and his more recent thoughts on The Capitalist’s Dilemma.

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 June 29, 1992

1992-6-29 The Last Chapter on Keynes Title

ONE OF THE saddest pieces in modern literature is the last chapter of John Maynard KeynesThe General Theory of Employment, Interest and Money. It was not meant to be sad. It was written in exultation by a man of 52 at the height of his powers. He had been editor of the Economic Journal, the most prestigious publication in his field, for 25 years. He was the author of several influential political pamphlets and four major books, one of them an international best-seller, another a ground-breaking two-volume Treatise on Money. He was active and known and listened to in Cambridge, Manchester, Whitehall, and the City of London.

As he wrote the final chapter, he could look back with satisfaction on five years of hard work on a book he was frank to say he expected would change the world. The people with whom he had discussed his ideas and to whom he had submitted proofs of the work in progress encouraged him in that expectation, though he scarcely needed encouragement. He was self-confident to the brink of arrogance. At the same time, he had a saving wit (those who felt its occasional sting were not so sure it was “saving”) that was often turned toward himself. How else can we interpret the title he gave his great book? The General Theory, indeed! Did he rank himself with Einstein? Of course he did. Did he find it amusing that he should be so pushy? Yes, that too.

The heart of the whole work is in the last chapter’s first sentence: “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 incomes.” I can only think that most economists reading that sentence have shrugged as they shrug when, let us say, a politician makes obligatory declarations in favor of school and family – two institutions everyone believes in and no one proposes to do anything substantial about. Then they probably have skimmed lightly to the famous peroration concerning “ideas, not vested interests, which are dangerous for good or evil,” and have returned contentedly to the construction and deconstruction of their mathematical models.

Keynes, however, intended his ideas to be “dangerous for good.” The economy’s faults were dangerous for evil” – not inconvenience, but evil. The economy would not work properly unless they were corrected. Every aspect of The General Theory depended upon and was directed toward that correction. Few noticed.

At a crucial point in Chapter 6 Keynes shows the fallacy of the classical theory that saving drives the economy. He writes: “Saving, in fact, is a mere residual.” At the end of the chapter he announces that” the conception of the propensity to consume will, in what follows, take the place of the propensity or disposition to save.”

Okay, say mathematically trained economists, wherever S appears in our equations we’ll substitute C. But they pay no attention to the distribution of incomes. Indeed, their procedure is one of deduction from axioms, with all reference to actual situations rigorously excluded. The result is confusion.

In the modern economy of mass production, while it may not make much difference who does the saving, it makes all the difference in the world who does the consuming. Affairs might be so badly skewed that only one person did all the saving, and the system could creak along reasonably well. But the system would not work if one person did all the consuming (a manifest absurdity); and it will not work very well when 20 percent of the people do a mere 4.3 percent of the consuming (which is the way we try to run things in the United States today [in 1992]).

In a mass-production economy, consumption is a chore that cannot be delegated. A feudal economy can do everything it has to do when one-tenth of 1 per cent of the people dine on pate of reindeer tongue, and 99.9 per cent get along on carrot soup. A modern economy falters whenever a sizable percentage of the population is denied its output. If the output isn’t fully consumed, there is no point in producing so much; and if there is no point in producing so much, there is no point in employing so many people, whereupon things start to unravel – rather, many things are not knitted up in the first place.

In talking about “arbitrary and inequitable distribution of wealth and incomes,” Keynes wasn’t ritualistically endorsing motherhood; he was pointing to the heart of the problem. This was so obvious that he didn’t think it needed much emphasis. The solutions, too, were obvious, and a few of them had been in partial use: nearly confiscatory death duties, steeply progressive income taxes, possibly a cap on incomes. What would be necessary at a particular stage in a particular society might not be appropriate in another, One wouldn’t know until one tried. It is also very likely, as he wrote in a previous chapter, that “the duty of ordering the current volume of investment [to achieve full employment] cannot safely be left in private hands.” Again, one could not say in advance exactly how this should be organized.

Keynes taught himself probability theory, and wrote a fat book about it, to satisfy himself that, as regards the future, “We simply do not know.” Unfortunately, some of his most skeptical critics and some of his most enthusiastic supporters undertook to supply the unavailable knowledge. The result was what several generations of bemused undergraduates have learned to call the IS-LM curve, which is supposed to show “the simultaneous determination of equilibrium values of the interest rate and the level of national income as a result of conditions in the goods and money markets.” That’s what The MIT Dictionary of Modern Economics says; don’t look at me[1].

And don’t let it fret you. It’s all a game of let’s-pretend. But it distracted the economics profession from Keynes’ message and sent the majority off on a treasure hunt for equilibria to make graphs and journal articles of. (Physics, the source of the idea, equates equilibrium with entropy, or the end of change, a.k.a. death. But let that pass.)

KEYNES, TO BE sure, was not above trying to peer into the future himself. The peroration of The General Theory may even be taken as an example. I want to shift here, though to an essay he wrote six years earlier. It is called “Economic Possibilities for Our Grandchildren.” He advanced two propositions: First, the “economic problem” would be solved in about a hundred years, provided there were no major wars and the population did not expand too much. Second, the process would depend on the steady accumulation of capital, and that would come about by means of incentives then in force. “For at least another hundred years,” he wrote, “we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little while longer still. For only they can lead us out of the tunnel of economic necessity into daylight.”

The man who said, “In the long run we are all dead,” should have known that things seldom if ever work out as envisioned. Only 62 of his prophecy’s 100 years have run [in 1992.  84 years as of the day this is put on-line], and we certainly have not avoided major wars or population explosions. Nor have we seen recent signs of the sort of capital accumulation that Keynes expected to lead us into daylight. As for the interest rate, which he expected to trend steadily downward and effect “the euthanasia of the functionless investor,” it is (even at today’s supposedly low rates) higher than it ever was in his lifetime.

Two contemporaries, Bernard Shaw (whom he admired) and Lenin (whom he did not), had visions similar in form to his. In the Preface to Major Barbara, Shaw wrote “that the greatest of our evils, and the worst of our crimes is poverty, and that our first duty, to which every other consideration should be sacrificed, is not to be poor.” In the play proper, Cusins asks: “Excuse me: is there any place in your religion for honor, justice, truth, love, mercy, and so forth?” Undershaft replies: “Yes: they are the graces and luxuries of a rich, strong, and safe life.”

Lenin, foreseeing the establishment of the Communist state, wrote in The State and Revolution: “Capitalist culture has created large-scale production, factories, railways, the postal service, telephones, etc., and on this basis the great majority of the functions of the old ‘state power’ have become so simplified and can be reduced to such exceedingly simple operations of registration, filing, and checking that they can be quite easily performed by every literate person.”

These three visions all rely on a situation or change of one sort to effect a change of another. In each case, foul or death-dealing or self-serving motives are supposed to be led, one might almost say by an invisible hand, to lay the foundations of the good life. Assume the foundations at last to be laid. Why should the original motives cease to be effective? Why should men and women who have succeeded with “avarice, usury, and precaution” now abdicate? Undershaft obviously enjoys his religion of being a millionaire and his control of money and gunpowder. Why give it all up for “graces and luxuries” he already has? Even in the Lenin example, where the same people may be involved first and last, one wonders why self-serving bureaucrats become dedicated and efficient public servants (for surely that was Lenin’s expectation – and we have lived to see it disappointed).

More important, how can you and I and Keynes himself – understanding the difference – renounce the fair and embrace the foul? What an obscene pretense is asked of us!

Well, “Economic Possibilities for Our Grandchildren” is perhaps a playful aberration in Keynes. His steady theme elsewhere is that economics is one of the “moral sciences” (a phrase he no doubt learned from his Comtian father). His formal ethics was heavily influenced by the hedonism of G. E. Moore and thus was a far cry from that of, say, the American National Conference of Bishops – as both his and theirs are from mine. Yet he and I could have agreed with the bishops when they wrote, “Every economic decision and institution must be judged in the light of whether it protects or undermines the dignity of the human person.” (See ” Bishops Move Diagonally,” NL, March 23, 1987.)

Keynes’ initial disagreement with classical economics was that it denied the existence and even the possibility of involuntary unemployment. Today the economics profession either accepts a “natural” rate of unemployment, which may be as high as 6 or 7 per cent, or rejects the relevance of ethics altogether. The high road surveyed in The General Theory, and described in its last chapter, was not taken.

It might have been[2].

The New Leader

[1] The author also refers here to a college prank of his.  In his senior year he had a course taught by a professor with a never admitted to or publicly used nickname, “Birdy,” and whose ideas were generally thought little of.  On a final exam the author says he wrote a complete and accurate response as the professor would have wanted, no arguing with the professor, but his last sentence, which resulted in a trip to the dean, was “That’s what Birdie says; don’t look at me!”

[2] It might still be

By George P. Brockway, originally published October 31, 1988

1988-10-31 The Fear of Full Employment title

The other day a friend sent me a clipping from the morning paper. My friend is a poet, whom I occasionally charge with deliberate obfuscation, and she was, she said, getting some of her own back. “What gives?” she asked, showing she can use ordinary speech when she wants to. “Who’s obfuscating now?”

The clipping she sent me read as follows: “Economists have become more pessimistic in recent days because the most recent batch of economic statistics, including yesterday’s strong employment report, suggests that the economy may be picking up steam and may overheat.” This was, of course, a run-of-the-mill news note of the sort we have all read many times, and I wondered why it was bothering my friend. I gave her a ring. “Surely your Webster or OED has all the words,” I remarked cuttingly, and only a couple of them have more than three syllables.”

“Yes,” she replied, “and many of my poems are made up of even shorter words. What I’d like to know is, what kinds of idiots are made pessimistic by an economy’s picking up steam? If it’s in danger of overheating, why not put more water in the boiler? I know you economists are even more devoted to metaphors than we poets are, but I thought you were all enamored of the one about a rising tide lifting all boats.”

“Don’t look at me,” I objected. “I’m not one of ‘you economists’. The pessimists of your clipping know that if business gets really good the Federal Reserve Board will get nervous about inflation and raise the interest rate, and that lowers the capitalized value of all stocks and bonds.”

“You mean, if I invest my royalties in a hundred-dollar bond that pays five dollars a year, and if the interest rate goes up to 10 percent, then my bond will be worth only fifty dollars?”

“I don’t know how a poet gets a hundred dollars in royalties,” I said, “but you’re absolutely right.”

“Eureka!” she cried. “I’ve outdone Archimedes! There’s no way the stock market can go up.”

“Keep your shirt on,” I advised.

But she paid no attention. “If business is bad,” she said, “poor earnings will send stock prices down. And if business is good, higher interest rates will send the market down. Why hasn’t anyone discovered this before? If you sell short, you can’t lose. Please give me the name of a good discount broker. I sincerely want to be rich.”

It’s a shame that my friend is merely one of the unacknowledged legislators of the world. We could use some of her guileful questioning in high places, and particularly in regard to the received doctrine that high employment makes for high inflation. Practically all economists, businessmen, bankers, politicians, and journalists are united in endorsement of this doctrine. Their unanimity is very curious – first, because few, if any, other economics propositions command such universal assent; second, because it is among the most unequivocally dismal notions in all this dismal science; and third, because there is no evidence whatever to support it. I don’t mean that no evidence is offered; I mean that the evidence offered is false or irrelevant or both.

If the proposition weren’t so dismal, it wouldn’t be worth troubling about. But look at what it means: It assumes that inflation is the worst economic misfortune that could befall us, and it asserts that in order to avoid – or simply to control – inflation, we must prevent several million people from having jobs. Even if all these millions were fully qualified and fully motivated, given the inexorable working of the system, they would still be unemployable.

Let’s think about that for a minute. It is the practically unanimous opinion of everyone who talks about the subject that our system, of which we are told to be so proud, must condemn upwards of seven million people to lives of undeserved squalor, uselessness, and hopelessness. Of course, that adds up to fifteen or twenty million men, women, and children when you count their dependents.

If I believed that our system were inevitably, necessarily, and indeed systematically that cruel, I’d be on the barricades in a minute – and I like to think I would be joined by you and by most of those who thoughtlessly repeat the dismal doctrine. My God, they’re talking about fellow human beings!

I don’t believe our system has to be that cruel. It is that cruel, but it doesn’t have to be. We’re given to understand that right now, with inflation running at about 3-5 percent and unemployment at about 6-5 percent, things are perhaps actually a little better than can be expected. Certainly our leaders consider them so good that they seem able to congratulate themselves without embarrassment.

Well, consulting Economic Report of the President[1] I find that since World War II there have been thirty-four years in which unemployment was at a lower rate, twenty-one years with lower inflation, and no fewer than twenty years where both inflation and unemployment were lower. Not only that, but in the year of lowest unemployment, inflation was lower than in all except four of the forty-odd years in question. In the year of highest inflation, unemployment was higher than in seven of the years. These figures certainly do not support the doctrine.

That may be said to be the small picture. A bigger picture is presented by the runaway inflations of our time that are regularly flashed on the screen to scare us into doing something drastic about inflation now, before we all have to get wheelbarrows to carry our worthless money to market to buy a loaf of black bread.

Besides the Weimar Republic runaway, the prime examples are Hungary after World War II and Brazil recently. If the doctrine were sound, those countries would have had full employment and overheated economies to start their runaways. Exactly the contrary, though, was the case. Each one suffered from appalling unemployment, and Brazil still does, without in any way impeding or controlling the inflation. These examples do not support the doctrine, either.

To complete the empirical record, we may note that today, of all industrialized nations, Japan has the second lowest unemployment and the lowest inflation. In short, there is no relevant evidence reliably connecting high inflation and full employment. We have not, after all, ever had full employment except in wartime, when inflation of civilian prices is to be expected because civilian production is necessarily curtailed. On the other hand, we have many times had inflation in peacetime, and we have perversely tried to control it by raising the interest rate in order to curtail production.

My poet friend asked me why, if the unemployed had jobs, they couldn’t produce goods at least equal in value to their wages. I couldn’t think why. “Then there wouldn’t be more money chasing fewer goods, would there?” she asked. “So why isn’t full employment the cure for inflation?”

Well, why isn’t it?

The New Leader


[1] The basis for this post is the re-print in the book “Economics Can Be Bad For Your Health” and the author updated the data to use the 1994 Economic Report.  The original was written in 1988. The points still hold.

By George P. Brockway, originally published November 28, 1988

1988-11-28 Reality and Welfare Reform title

1988-11-28 Reality and Welfare Reform Daniel Patrick Moynihan

THE GIVEAWAY of Senator Daniel Patrick Moynihan’s new Family Security Act -aka welfare reform – is its cost. I don’t mean that the cost is to be given away; I mean that the low cost betrays the modest ambitions of the bill.

The estimated expenditure is $3.34 billion over five years. That’s $668 million a year, which may seem like a lot of money to you, but works out to $20.62 – exactly twenty dollars and sixty-two cents –  for every man, woman and child living in poverty in the United States of America.

Yes, I know that the plan isn’t intended to do anything about poverty, isn’t meant to help the working poor, isn’t supposed to shelter the homeless or nourish the ill-fed, has nothing to do with improving or expanding medical services. In fact, one of its charms for the radical Right is that it is expected to reduce expenditures for public housing, Food Stamps, Medicaid and Aid to Families with Dependent Children (AFDC). So let’s look at it this way: $668 million is 0.00015 – or 15 thousandths of 1 per cent-of the current GNP. Or this way: It’s about a third of the projected cost of the additional space shuttle they’re building.

I’m sorry, but I’ve overstated the case a bit, for the $3.34 billion includes a “workfare” provision that will cost $900 million. This is one feature of the bill insisted on by President Reagan and feverish-eyed Republicans like Senator Orrin G. Hatch of Utah. Everyone else, including more liberal (if they don’t mind my using the word) Republican governors who will have to administer it, apparently hopes to repeal the provision either because of its negative cost effectiveness or because of its meanness. If that $900 million is deducted from the total, we have $2.44 billion left, or $488 million a year for everything the bill promises to do. The summaries given the press naturally accent the positive. They emphasize that a real effort is going to be made to force fathers to share in the support of their offspring. No one (except the fathers) can object to that, especially since it may persuade some to stay home with their families and thus prove rewarding all around.

The summaries further emphasize education (not the same as workfare). You can’t object to that, either. We’ve heard about our illiteracy rate and our inability to do simple arithmetic and our ignorance of our government and of history. We know businessmen complain that they have to weary themselves with excessive interviews to find competent workers. And so on. It’s hard, therefore, to be against more education. It’s also hard to imagine that the puny budget will make much of a dent in the problem.

For my part, I become depressed when I hear vocational education touted as a panacea. We must train these people to be punctual, we are told, and to work diligently and not goof off. Does anyone suppose they don’t know all that? It’s no secret. They’ve heard it all before, but they haven’t seen much good come of it.

Few experiences can be more disillusioning and dispiriting than undergoing training for the kinds of jobs that don’t exist. Perhaps my long memory misleads me here, yet I recall the junior high school shop where I learned to solder Western Union splices and to thread separate black and white wires through clay pipes set in the joists and studs of a mocked-up house. I was astonished when, in the real world, I saw my first BX cable, and I remain skeptical of that sort of job training unless it is done on the job. I have had occasion to observe a couple of for-profit training schools in operation, too, and I really don’t think the answer is privatization.

The solution is jobs. We’ve seen the solution in action – but again my long memory probably misleads me, for hardly a man seems to be alive who remembers the famous days and years of the New Deal. Everyone else knows that the New Deal failed. It taxed and taxed, and spent and spent, and elected and elected, and still, in 1939, on the eve of World War II, the unemployment rate was 17.2 per cent.

As I have previously quoted Disraeli, there are lies, damned lies, and statistics; and I have yet to meet even a professor of economic history who is aware of how that 17.2 per cent lies. So I’ll tell you. It counts all the millions who worked for the CCC, NYA, WPA, and the rest of the so-called alphabet-soup agencies as unemployed. Now, the millions who worked for those agencies in fact worked and in fact produced goods for the common wealth, and were in fact paid for it. They built thousands of schools, libraries, post offices, hospitals, and dams; restored thousands of acres of forests; paved thousands of miles of highways and sidewalks; helped bring electricity to the farms; made a start on public housing; painted pictures; produced plays and concerts; published a set of state guidebooks that is still unequaled; and gave courses in every subject imaginable. If that was unemployment, we could stand a bit more of it. Nor would it be unbearable to have urban streets swept and suburban leaves raked.

Everyone knows, of course, that this was impossibly expensive and wasteful. Yes, the last budget of Herbert Hoover’s Presidency (fiscal year 1933) was only $2.8 billion in deficit. And what was the last prewar New Deal deficit? $3.1 billion; ten per cent larger. To be sure, $300 million was a lot more in those days than it is at present. But the point is that enabling millions of people to contribute to the common weal and to maintain their self-respect cost only 10 per cent more than doing nothing. Which approach was the really wasteful one?  Moreover, our wartime experience demonstrates that the so-called First New Deal would have been a lot more successful if it had spent more, not less.

1988-11-28 Reality and Welfare Reform Men Working

INSTEAD of the creative programs of the New Deal, the new scheme has its workfare, something Ronald Reagan wishes to be remembered for. He deserves to get his wish. The requirement is that by 1994, one parent in every two-parent family (an institution the bill is supposed to be encouraging) that receives benefits must be made to work at least 16 hours a week in what is grandly known as the Community Work Experience Program. What will they be paid for this work? Zero. Well, you know, beggars can’t be choosers.

Since this provision does not take effect until 1994, it is a fair guess that New York’s Democratic Senator Moynihan, among others, intends to try to repeal it after the Great Veto Threatener leaves the White House. This is a judgment call with which I beg to differ. It brings to mind Moynihan’s first attempt at welfare reform which came when he was Richard M. Nixon’s Domestic Affairs Adviser. The attempt was defeated by a combination of conservatives opposed to any form of welfare and liberals led by the late George Wiley of the National Welfare Rights Organization, who pointed out that the proposed benefits were lower than those then in effect.

I had the pleasure and privilege of knowing George Wiley, who was a wise and humorous and dedicated man. He was well aware of Voltaire‘s dictum that the best is the enemy of the good, and he understood perfectly the argument that the benefits could be improved once the law was in place. He simply doubted that the improvements would ever come. The record supports his judgment. Over the past several years, for example, AFDC payments have lost a good third of their value because of inflation. The Pentagon gets budget boosts on top of generous estimates of inflation, but I’ve not noticed any rush to rectify the AFDC situation. As for the workfare amendment, it has already, in this Democratic Senate, survived by a 41-54 vote an attempt to table (and so defeat) it.

Workfare should not be confused with what the sponsors of the Family Security Act consider its heart and sinews: JOBS (for Job Opportunities and Basic Skills. The republic would collapse without silly acronyms).The laudable aim of this program is to get people off the welfare rolls and into regular employment where they can be self-supporting and self-respecting. As I’ve said, I’m dubious about the training being offered. Anyway, after training the welfare recipients are supposed to get to work, and I don’t at all object to that. The regulations covering JOBS are moderately complicated, and some of them are not nice; but I want to talk about something more fundamental.

We are told that the unemployment rate has now fallen to 5.2 per cent. Everyone knows this figure is too low, but I’m not going to quarrel with it – at least not here and now. I’m merely going to note that currently received economic doctrine, taught in practically all colleges and universities in the land, and I am sure accepted as gospel by large majorities  of both houses of Congress, holds that full employment actually means 6 per cent unemployment. If unemployment really falls any lower than that, the economy is expected to overheat, and we’ll have inflation. (I’m not aware that we have been without inflation since World War II, except for one year in President Harry S. Truman’s second term, and one year in President Dwight D. Eisenhower‘s; so let’s just say that we’ll have even more inflation.)

Indeed, the newspapers and the airways are full of ominous questions right now: Will the Federal Reserve Board raise the interest rate again to head inflation off at the pass? Will that send the stock market into a tizzy? Will it abort our slowly recovering foreign trade? Will it make it harder to reduce the deficit? Will it make the mortgage rate so high that home ownership becomes an impossible dream even for two-earner Yuppies? Anyone who believes that mainstream economists know what they’re talking about will answer all those questions in the affirmative.

Where does that leave us? It leaves us with a JOBS program that is a mirage or a hoax. Assuming we believe the unemployment figures, we already have too many people working for our own good. Even if the JOBS training program should succeed beyond all rational expectations, even if the trainees could then be successful in finding work that would not (one of the requirements) displace anyone already working, we would have to head them off at the pass. We couldn’t afford to have so few people unemployed.

I AM NOT making any of this up. If you have merely glanced at journalistic reports of the thoughts of our mainstream economists, you may think that when they talk about 6 per cent of the work force being unemployable, they are saying all those millions are too little educated, too stupid, too sick, or too pregnant. That’s not exactly what they mean. They do classify many people under those headings, but they mean something else as well. They are speaking of friction in the economy – that is, time lost while workers are between jobs. Again there’s misunderstanding (and some of the economists even misunderstand themselves), for they make it sound as though there are several million people out there whimsically flitting from job to welfare to another job for no good reason. No doubt some such free spirits exist, and they will always be good for Presidential anecdotes; but the real friction results from business coming and going. It’s known as free enterprise.

In 1987, something more than 60,000 corporations went bankrupt. Most of the bankruptcies were very small. Nevertheless, they totaled over $36 billion. That ain’t hay, and it accounts for a couple of million people thrown out of work.

Then there are all the “efficient” mergers, which are efficient because they fire people. There is all the seasonal unemployment – clerks and warehousemen let go after the Christmas rush, farm workers between seasons, people laid off in model changeovers. There are all the customers’ men dropped after a market crash, and all those who lose their jobs when business temporarily slows, and those whose jobs disappear when their companies relocate for tax reasons – or in search of cheaper labor.

The foregoing account for the 6 per cent friction in the economy. The friction is not the fault of the workers; it is the fault of the system and its ethics. And the system is not a fact of nature; it is our creation. We created it in the image of mainstream economics, and the result is not altogether pretty.

The thing about mainstream economics is that it starts with the price system as given. The price system is not simply what the stickers read in the supermarkets or how the bidding goes in the grain pit in Chicago. It includes all prices, interest rates, rents – the works – and particularly and especially wage and salary scales. Mainstream economics assumes that the way the rewards of the economy are distributed is none of its business.

Our present price system will be relatively stable so long as there are 6 per cent unemployed or underemployed. This is not quite like Marx’ industrial reserve army, because the important point is that these people must be drastically under rewarded, whether they work or not, and that the next 10-15 per cent above them can’t be treated much better (the average income of the bottom quintile of our families is below the poverty level).

Under our present price system, anything substantial you do for those at the bottom has to cause inflation. Other things can cause inflation, too, but really helping the poor is sure to do so. The only noninflationary way of helping the poor entails fundamentally changing the price system, specifically and dramatically narrowing the chasm between rich and poor. For the past 15 years we have been passing by on the other side (see The Golden Mean,” NL, November 2, 1987), and it will take a whole lot more than JOBS, as well as something a whole lot different, to change direction.

The New Leader

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