Today on the podcast, we look back at one of the turning points, down-turning points, in the U.S. economy. The present stagnation and inability to deal with the emergent challenges of global warming, poverty and economic stagnation in spite of being one of the most powerful economies in the world is not an accident of fate nor a temporary hiccup in the economic machine. It has been engineered by decades of imbalanced economic policy and market fundamentalism which has led by the invisible hand not to the best outcomes, but to an economy and government controlled by corporations blindly following the highest profit for the next quarter, wherever that may lead.
Quoting from 1979:
Compared with the attainable goals under appropriate changes in national economic policies and programs, the likely and very disturbing results of the projection of current national policies ... are: An average annual real economic growth rate of only 3.0 percent from 1979 to 1980, and the same average from 1979 to 1983; a productivity growth rate averaging only 1.8 percent throughout; an inflation rate of 9.0 percent in 1980 and 7.5 percent in 1983; real growth in federal outlays of only 2.5 percent during the first year and averaging only 2.2 percent during the period as a whole; and an unemployment rate of 6.8 percent for 1979 and averaging 6.5 percent for the whole period.
The President's [Carter's] goal for real economic growth is 3.3 percent from 1978 to 1979, and this has already turned out to be unrealistic on the high side. The goal is only 2.2 percent for 1980. Both of these goals are egregiously below our needs and capabilities at almost any time. Viewing the goals for these two years, the President's 3.8 percent average annual growth rate for 1978-1983 is utterly unattainable. It would require a real economic growth rate during 1980-1983 which is pie in the sky in terms of the programs and policies which he sets forth. And it is pure pie in the sky, under these goals, to expect to come anywhere near the goal of 4.0 percent unemployment in 1983, which the president also sets. The President projects a productivity growth rate averaging only 1.5 percent annually for the period as a whole. This is a surrender to the declining growth rate which has resulted from repeated economic stagnations and recessions, and it is not at all consistent with our revealed capabilities during good economic performance years, nor with the requirements for full production.
The President's goals for major components of GNP also do violence to the requirements for economic balance or for an acceptable rate of real economic growth. By way of example, at the start of 1979, the President projected for that year real economic growth rates of only 1.7 - 2.25 percent for consumer expenditures, and only 0.75 - 1.25 percent for Federal purchases of goods and services. His projection of 4.0 - 4.5 percent for nonresidential fixed investment is far out of balance with the other projections, and unattainable in terms of them. The President also projected for 1979 a real rate of increase in Federal purchases of 0.75 - 1.25 percent. This is also very low, and out of balance with an non-supportive of some of the other goals.
The President commits himself to a "lean and austere" Federal Budget, with outlays rising at an average annual rate of 1.4 percent during fiscal 1979 - 1983, and generally declining from year to year. In ratio to GNP, this would represent a decline from 21.55 percent in fiscal 1979 to 20 percent or lower in fiscal 1983. That might be acceptable in a rapidly expanding economy; it would be intolerable in a repressed and slowly growing economy. Such Federal Budget trends in actuality would portend great losses for the economy and great hardship for large portions of the people.
All in all, to put it mildly the President has committed himself to the contrived development of the recession which is now under way, although in early 1979 his Economic Advisers denied that a recession was just around the corner."
In any event, the goals are dismal in terms of our needs and capabilities, or in terms of fulfilling the mandate of the Humphrey-Hawkins Act.
That was from Leon Keyserling, 1979, in "Liberal" and "Conservative" National Economic Policies and their Consequences, 1919-1979, subtitled: "A Study to Help Implement Promptly the Humphrey-Hawkins Act."
We would be lucky to have these problems today, you say. And in fact, with a president far more conservative than Carter, that is Ronald Reagan, the problems were much worse over the next four years. We'll visit that in a moment.
We featured Keyserling this week at ReMacroBaseline.com, as an introduction to the subject of the political frame on the economy. Keyserling said:
"The federal budget is the main single instrument of national economic policy. Its use is fundamental, toward promoting economic performance in accord with our needs and capabilities. Nobody denies this in principle..."
Of course, he was wrong. Plenty of people deny it. Unless the national economic policy is no policy, in which case the no government folks have made their point.
Leon Keyserling was one of the most successful economists in American history in terms of getting significant legislation passed, influencing public policy over a long term, and seeing results in the performance of GDP, inflation, employment, growth and national well-being. He had a hand in the Wagner Act of the New Deal (1935), also known as the National Labor Relations Act. He claimed to have modeled the Full Employment Act of 1946, which was probably the single most important piece of economics legislation in the country's history. And he participated in and influenced greatly the Humphrey-Hawkins Act. Keyserling was a member of the Council of Economic Advisers, then chair, under Harry Truman, and helped immensely in the transition from war to peace and managing the economy into a period of prosperity.
"Balanced growth" was Keyserling's vision of how successful economics and public policy operated, as a partnership between labor (consumers), business (and investors), and the government (public sector). The problem Keyserling saw in 1979 was overcapacity, resulting in a reduction in investment and recession. The condition of overcapacity was a function not only of overbuilding, but of under-consumption and a deficiency in government outlays. "Balanced" growth was a coordinated expansion in each of these three components. Investment was necessary, but could not run ahead of consumption, or the profits would not ratify the investment, prompting cut-backs and recession. Sufficient federal outlays were necessary to provide the foundation for investment and consumption and to address the nation's overarching priorities.
Keyserling saw over-investment as a problem virtually throughout the "conservative" period beginning with Richard Nixon in 1969. The federal budget, both its spending and its taxing sides, promoted ever more investment, more capacity. "Belt-tightening" was prescribed for spending -- wonderful if you're a household, but seriously negligent and lazy if you're a family farm or a government with responsibilities. There was no aggressive effort to expand employment or incomes, quite the opposite. National priorities, such as energy independence, were left to half-hearted measures. Not surprisingly, this was the era that spawned the great divergence of incomes, the inequality that has now become corrosive and destabilizing to the society.
Indeed, the experience of the economy was substantially worse than Keyserling envisioned in 1979. GDP shrank by 0.3 percent in 1980, recovered to 2.8 percent in 1981 and shrank again, this time by 1.9 percent in 1982. The average for the period 1979 to 1983 was 1.3 percent. Unemployment skyrocketed under Reagan, 10.4 in 1981, 11.7 percent in 1982 and up to 12.2 percent in 1983. Although as you will hear in a moment, it had declined to 8.2 percent by the end of 1983. Meanwhile the deficits of $28 billion in Carter's austere year of 1979 ballooned to $60 billion in 1980 and then ever higher, being $195.4 billion in 1983.
In Keyserling's world the overcapacity and under-consumption of private and public goods would certainly lead to serious economic consequences. Others looked at the correspondence of investment and growth, that is, the phenomenon that growth and investment occur side by side, and determined that stimulating investment would bring the economy out by itself. That has been the dominant economic stimulus plan for the past thirty-five years, and even before, stimulate investment with tax incentives, and the benefits will trickle down. Keyserling saw the only road as balanced growth, beginning with consumption, jobs and government outlays. Debt was incurred to finance investment in productive physical assets: factories, machinery, housing. His recessions were imbalances of overcapacity and inadequate consumer or government demand.
Although Hyman Minsky had already teased out the principles of the Financial Instability Hypothesis and the structures of hedge, speculative and Ponzi financing, the role debt could play in extending demand while it destabilized the economy was not obvious in the 1970s. The growth of debt over the next thirty years, public and private, sponsored much of the demand that has kept the economy afloat. And when debt and debt service became too large, the economy stopped. That is where we are now.
The Fed and others believe the answer is more debt and more and riskier investment, but Keyserling would have objected in flamboyant terms. There is plenty of investment, far too much, promoted by years of tax concessions to business and inadequate support to labor and government outlays.
Demand Side sees government outlays and debt restructuring in the private sector as being the two pillars of any recovery. The government spending needs to come in the form of needed infrastructure investment, physical and social, and green jobs. The debt restructuring needs to be substantial, not only to revive consumer spending, but to return some form of market discipline to the financial sector.
Now, as mentioned, we didn't get the conservative Carter for the next four years. Instead, we got the arch-conservative Ronald Reagan, who effectively closed the door on the post-war expansion, at least for the middle class. We visit him in the 1983 Economic Report of the President (p 6ff).
One of the four key elements of my program for economic recovery is a far-reaching program of regulatory relief... The Congress approved legislation that has led to substantial deregulation of financial markets and inter-city bus transportation. The Federal Communications Commission, with our support, has reduced the regulation of broadcasting and of new communications technology, and the Interstate Commerce commission and the Civil Aeronautics Board have gone far down the path of deregulation of competitive transportation markets.... Substantial further deregulation and regulatory reform will require changes in the basic regulatory legislation. I urge the Congress to act on the several measures that I proposed last year on natural gas decontrol, financial deregulation, and reform of private pension regulation.
The final installment of the 3-year personal tax cut took effect in July, giving a helpful boost to the economic recovery. The income tax rate at each income level has been reduced by about 25 percent since 1980.
... The Economic Recovery Tax Act of 1981 went beyond reducing tax rates to establish important reforms in the structure of the tax system. For businesses, the Accelerated Cost Recovery System increased the after-tax profitability of investments in plant and equipment. The sharp fall in inflation has also increased after-tax profitability.
Obviously the Economic Recovery Tax Act of 1981 led to no recovery, in spite of the title. Subsequently the Greenspan Commission, convened for the purpose of examining the finances of Social Security, proposed payroll tax hikes, which were adopted. Thus, the tax system lurched regressively to the right, with the cuts in income taxes benefiting the richer to a substantially greater degree than the middle and lower classes, and the new payroll taxes being patently regressive, as the rich were not required to participate above a certain income threshold.
One of my principal goals when I came to Washington was to reverse the dramatic growth of Federal spending on domestic programs and to shift more resources to our Nation's defense.... Outlays for defense had declined to only 5.2 percent of GNP in 1980, less than one-fourth of total government outlays. By the current fiscal year, defense outlays have increased to 6.7 percent of GNP and 28 percent of total outlays. Real defense outlays have growth 39 percent since 1980.
This is in addition to the military spending financed by entrepreneurial activity, such as the selling of arms to Iran to finance the illegal war in Nicaragua
But notice the parallels to the George W. Bush Administration. Substantial tax cuts, deregulation, defense spending, recession and unemployment.
Martin Feldstein was Reagan's chief economist in 1984. Later he became recession maven at the NBER. The Economic Report of the President is, unfortunately for Feldstein, a record of his thought at the time.
Should the United States adopt an industrial policy? Proponents argue that such a strategy is necessary to revitalize our manufacturing sector. They claim that U.S. manufacturing has done poorly compared with the manufacturing sectors of other countries, and that we are losing our international competitiveness. These claims have led to the perception that manufacturing's share of our economy is eroding and that we are "de-industrializing."Oddly thirty years later they are saying the same thing. Now the response is that it is natural for economies to move to service work. At the time, however, Feldstein preferred to engage in Milton Friedman style debate, characterizing his opponents views in his own terms and then attacking them. I won't burden you with that, but pick it up later.
To reverse this alleged decline, some industrial policy advocates propose that the government encourage new high-technology industries and help older industries regain their former strength.
Some industrial policy advocates claim that the United States already has an industrial policy. They argue that such policies as trade protection and subsidies for exports and research and development are components of an industrial policy simply because they affect the composition of industrial output. The difference between our present policies and what they advocate, they say, is that the former is ad hoc industrial policy while the latter is coherent.
It is true that many Federal policies affect industrial output. But the argument about whether they constitute industrial policy, like all arguments about definitions, is pointless. What is relevant is whether the proposals of industrial policy advocates are a good idea. Should the U.S. Government have a larger role than it now has in deciding the composition of U.S. industry?
The answer is "no." An industrial policy would not solve the problems faced by U.S. industry and would instead create new problems. Industrial policy has a mixed record in Japan and has been unsuccessful in Europe."
Not so unsuccessful that they didn't eat our lunch for the next twenty-five years.
And obviously this is not the balanced growth model of Leon Keyserling, but the Supply Side, trickle down, or as Keyserling would say, watering the tree at the top, approach.
There is so much more. Including the principles of the Reagan approach, as articulated by Feldstein. Monetarism, in the Friedman tradition, and as implemented by Paul Volcker, came in for particular attention.
The fundamental guiding principle of the Administration's approach to monetary policy is that the rate of growth of the money stock should be reduced gradually until the rate is consistent with price stability. This principle is consistent with the general approach enunciated in recent years by the independent Federal Reserve.We don't hear about the money stock so much any more. Primarily because they tried and failed to control it. The attempts to constrain it led to the high double digit interest rates, and combined with other Reagan policies to promote double digit unemployment, which eventually did lead to lower inflation. Oddly, the crude crushing of inflation, the explosion of deficits and borrowing resulting from the Reagan tax cuts and the blunderbuss approach to industrial policy left the room when Feldstein talked about the exploding trade deficit, even though he blames it on an appreciation of the dollar. What else can the dollar do when you put a huge price on it yourselves with high interest rates and the rest?
The second principle of the Administration's economic strategy was to reduce government spending, quite antithetical to the Keyserling balanced growth prescription. The third principle was to reduce taxes and restructure the tax system, which we covered. And the fourth was to wring their hands about deficits, using it as further reasons to cut domestic spending, which never -- oddly -- did reduce deficits.
In any event, we'd love to do more here. This is the beginning of the stagnation. The presidents following Reagan have all been more or less conservative. All have made increasing capacity a primary economic stimulus program and none have supported consumption, by which Demand Side means consumption of both private and public goods, or Federal outlays. Reagan himself began raising taxes after 1984, since it was difficult to bemoan historically high deficits when they happened on his watch unless he did something about them.
Growth rates declined, unemployment rose, de-industrialization continued apace, incomes stagnated, inequality soared, the rich got richer, debt at public and private levels rose, the deregulation of the financial industry led first to the S&L debacle and then to the far worse Great Financial Crisis.
And we come to 2013, where we sit in frustration along with the ghost of Leon Keyserling, looking at austerity tried over and over again and never working, at least for the economy as a whole and the middle class. So it goes.