The new economic mythology
DuBoff, Richard B.
ASSUMPTIONS & OMISSIONS OF THE NEW CONSERVATISM The new economic mythology RICHARD B. DuBOFF "THE OLD LIBERAL patent medicines for treating our social ailments simply don't work—and they never...
...In a recently completed project, Kay Schlozman and Sidney Verba find that the jobless simply do not fit the new conservative stereotype: people out of work suffer economically and psychologically even if they are short-term unemployed, job leavers rather than job losers, "secondary" earners, or recipients of public or private unemployment compensation...
...From 1970 to 1975, a substantial number of total deaths, suicides, and murders were traceable to a 1.4 percentage-point rise in joblessness in 1970...
...every new policy is an intrusion that sets into motion activity designed specifically to recapture the former state of affairs by avoiding, evading, or overcoming the new policy element...
...True unemployment is close to zero...
...The only time they ever err is when they are "misled" by government-created conditions of instability and uncertainty...
...From this point, perhaps the remarkable thing about economic policy is not how little it has accomplished but how much...
...Third, thousands of workers considered jobless are actually employed, or partially employed, in the "subterranean economy...
...For instance, some 27,000 deaths out of a total of 980,000 from the stress-related diseases of stroke, kidney and heart ailments were associated with higher unemployment...
...Any attempt to implement "programs designed as government improvements on private markets" (in the words of Harvard economist Martin Feldstein) ignores "basics" of rational calculation by individual economic units...
...The decision whether or not to work or invest depends on aftertax income," says Arthur Laffer of the University of Southern California, a prominent spokesman for this new wave in tax policy...
...2. Unemployment...
...Inflation," Friedman contends, "is always and everywhere a monetary phenomenon, produced in the first instance by an unduly rapid growth in the quantity of money...
...So even successful measures like these trigger new subversive activities by private capital—as we are presently witnessing with the open warfare being waged against the Federal Trade Commission and the Occupational Safety and Health Administration, with Congress highly responsive to business complaints...
...For this reason government intervention frequently is ineffective and self-defeating...
...others...
...use of the regulatory agency as a cartel manager...
...Because private individuals operate through "rational expectations," they perceive, and understand, the policy changes which are headed at them and adjust their economic and financial behavior accordingly...
...Yet government stimulus must never be powerful enough to wipe out unemployment and prolong an economic upswing past its "normal" leveling-out...
...Tax burdens have reached the point where they stifle initiative and distort resource allocation by compelling households and business fifms to ' 'factor in'' the tax variable for every decision on savings, investment, work and output levels, prices, and profit targets...
...Such a "policy extreme" would greatly strengthen labor's hand in collective bargaining and exacerbate the inflationary tensions of the past dozen years...
...We recall Mr...
...First of all, not everybody out of work has been forcibly laid off...
...But once the economy seems on the verge of really plunging downward, all bets will be off—government will be forced to switch to an "expansionist" policy, just as the Ford administration did in early 1975...
...of bank reserves but because it unwisely tries to alleviate the impact of inflation...
...The only way for industry to recover these costs was to pass them on to consumers...
...Only since 1973 has it dipped below six percent of the gross national product (a sign that other income-security measures like social security, medicare, unemployment compensation, and grants-in-aid are growing in importance as Keynesian devices to shore up private economic activity...
...Nationally as well there is strong evidence of association between rates of unemployment and measures of national well-being...
...Survey after survey has shown that "welfare cheats" constitute small percentages of all public assistance cases—less than one percent according to two federal studies, only two percent in a 1975 State of Michigan investigation...
...Later, the railroads received enormous land grants—more than a billion acres—to induce them to push out the westward frontier, and when railroad monopoly power began to stir up resentment among shippers (especially grain farmers) the regulation that resulted helped the railroads fully as much as their captive customers...
...Its vision of the "free market" is a canon of "devout observance": the "free market" is simply assumed to exist...
...Positive incentive effects thus evoke increases in savings, labor effort, and national output...
...So, for that matter, have the government's efforts to meet the demands of "activists" by enacting environmental protection legislation and other regulations "that forced industry to install costly equipment and to protect worker health and safety...
...It is one more manifestation of the belief that market transactions, whether implicit or explicit, pervade all facets of human activity (production, consumption, saving, working, leisure, crime, dishonesty, love, sex, marriage, fertility, and so forth...
...AT&T's monopoly power dates from 1909 when its first president, Theodore Vail, accepted— virtually requested—government regulation to keep federal anti-trusters from breaking up its telephone operations and to protect it from having to fight upstart telephone companies...
...Thus, capture of regulatory agencies by powerful business interest groups is to be expected...
...THE NEW CONSERVATISM, in sum, is a good example of what Thorstein Veblen referred to in 1904 as the process of "the natural decay of business enterprise...
...Reagan...
...Incidents like these, among other pieces of evidence, tend to undermine the conservative thesis that today's unemployed suffer less than the official unemployment rate implies...
...corruption ("Why shouldn't I grab myself a little piece of the action too...
...Such a triumph of ideology over serious scholarship puts the new conservatives in a position of supreme selfconfidence in a time of obvious economic disarray, when every short-run action by public authorities is guaranteed to produce its equal and opposite reaction in the private sector...
...And a new round of inflation will begin—from a higher "base rate" than before...
...Corrected for the effects of inflation, private industry is now spending only ten percent more than it did in 1970-1971 on R & D. There is one underlying reason for this stagnation in both capital and R & D outlays—big government...
...Second, unemployment insurance itself causes unemployment, by relaxing pressures on workers to take the first job that comes along and permitting them to carry on a still more leisurely "search" for acceptable and desirable positions...
...Business executives, by contrast, are surehanded, intelligent, and "rational...
...At its height, between 1815 and 1844, eighty percent of all investment in the great interregional canals (the Erie, the Pennsylvania Mainline, the Chesapeake and Ohio) was supplied by public, not private, sources (mainly loans and subsidies...
...Thus the Carter administration's "anti-inflation" squeeze of 1979-1980 is indeed aimed at reducing inflation through inducing recession—a "mild" one, it was once hoped but no longer anticipated...
...and play the agencies (one federal agency against another, state agencies vs...
...coopt the experts...
...Substantial tax cuts, like those proposed by Howard Jarvis or Representative Jack Kemp and Senator William V. Roth, Jr., are said to have two other beneficial effects as well, one on demand and the other more important one on supply...
...Tax cuts stimulate aggregate demand in the economy by putting more dollars in our pockets, as we know...
...During the 1960s this declaration was heard, frequently, from both the left and right, but over the past five years or so it has become the byword of a new conservatism bringing together the old right-wing opponents of New Deal programs with ex-liberal neoconservatives who fear their former liberalism has gone too far...
...Not if...
...As Bruce Owen and Ronald Braeutigam describe regulatory "strategies for established firms and industries": make strategic use of litigation...
...This diagnosis of the state and bureaucratic behavior rests on what might charitably be called a naive view of history...
...Historian Gabriel Kolko contends that the rise of "progressive government" from the late 1890s through 1916 represented an effort, largely successful, by big business to capture the federal government and use its power to reduce the risks inherent in genuine market competition...
...In April 1980 in Milwaukee, a city with a reputation for a low official unemployment rate (4.3 percent 'at the time), the opening of a new Hyatt hotel brought 550 jobs—and 4,500 people seeking them...
...Thus, the Interstate Commerce Commission (1887), the first regulatory agency, was welcomed by the railroads as a means of halting rate-cutting wars, fixing prices, and fencing out competitors...
...Mandated energy-saving measures, environmental controls, health and safety standards, product information and recall provisions, equal opportunity and affirmative action programs, private pension plan safeguards, and other government interference with absolute freedom of action by business have created an "unfavorable climate'' for''risk-taking.'' Business executives, who shun any kind of uncertainty, have "naturally" pulled back from long-term commitments and instead are placing more emphasis on short-run profitability...
...Still, the crushing fact that conservatives (and most liberals, too, for that matter) will rarely acknowledge is that over the past thirty years the only periods when unemployment has fallen below four percent (the "interim" full employment target announced by the Kennedy administration in 1962) are 1951-1953 and 1966-1969—years of rapidly rising military spending for Korea and Vietnam...
...I've never seen anything of this magnitude," said the manager, who had prepared fof half as many applicants...
...This kind of inflation results from the cumulatively aggressive, monopolistic behavior of private groups...
...In a capitalist economy, government must act as a bail-out device, or a rescue squad that arrives on the scene after private decision makers have exercised their initiatory power in the realms of consumption, investment, pricing, labor utilization, industrial relocation, and technological innovation...
...Why this should be so, and how it all began, are never satisfactorily explained...
...most people looking for employment have actually quit their old jobs by choice in order to search for new ones that pay better and offer greater career potential...
...1. Inflation Government is the root cause of the virulent inflation of the past twelve years—a rate of price increase that has eroded the purchasing power of the dollar by fifty-three percent...
...THE MAJOR POLITICAL assumption behind all of this rightwing economics is the perverse, destructive power of government...
...Supply-side economics holds that tax rate changes create incentive effects, which affect supply (production...
...Corporations, like private citizens, are eager to trade off some efficiency for what they see as equity...
...4 July 1980: 397 The economic catastrophe of 1929-1933 opened a new era in the public-private mix of the economy...
...Women in particular are looking for work in ever greater numbers, but many of them may be regarded as "secondary" workers, not primary breadwinners...
...It is easily overlooked that the "free market," particularly when it reflects rapid, destabilizing changes in technology, prices, and income distribution, is widely regarded as an unfair allocative mechanism—and that big business shares this view with other elements of society when it suits its purpose...
...It cannot help arousing false hopes on the part of its citizens, and it must breed, inside government agencies themselves, a weary cynicism and occasional instances of the kind of individualized...
...This wage-price chase is one of the two key ingredients in the "accelerationist" or "expectational" inflation which has been surging through early 1980—better buy now than later when things will certainly cost more...
...The "autonomous marketplace" has never existed...
...Government has been called upon to play an essentially contradictory role...
...This finding is another outgrowth of the neoconservatives' preference for "precise markets" as embodying the highest form of social evolution: markets invariably work more' 'efficiently" when government keeps hands off...
...Any government which refuses to validate, or finance, the ever-increasing price structure built into profit targets, wage rates, and contractual obligations of all kinds runs the risk of causing a serious recession or depression...
...total deaths, cardiovascular deaths, suicides, homicides, deaths fr6m cirrhosis of the liver, state mental hospital admissions and state prison admissions...
...government statistics reveal, finally, that the federal government's purchases of goods and services—its actual claim on the economy's resources and output—have been falling steadily for over twenty years, from 11.1 percent of the GNP in 1955 to 7.0 percent in 1979...
...The major reasons for lagging growth in output per head are two, and they are interrelated: first, capital investment by business has yet to shake off the cumulative shocks of the 1970 and 1974-75 recessions (and post-1973 oil price hikes), and second, corporate research and development is barely greater now than a decade ago...
...Search unemployment" is voluntary, a matter of "individual preference" which is "efficient": it represents investment by people to acquire labor market information...
...It has increased the minimum wage, boosted farm price supports to offset higher fertilizer and farm machinery costs, and raised mandatory corporate and individual contributions to Social Security to help out aged pensioners...
...Dooley's remark that what looks like a stone wall is a triumphal arch to a corporate lawyer...
...The government" defrauds and oppresses us all, warn the spokesmen of the new right...
...Fortunately, there are some public policy measures that do not self-destruct...
...Even introductory economics textbooks, not known for their penetrating criticism of American society, inform students about "cost-push" or "administered" inflation—the upward pressure on prices regardless of the quantity of money in circulation, the size of the federal budget deficit, or the state of "aggregate demand" (overall purchasing power) in the economy...
...Someday this investment slowdown may leave us with insufficient productive capacity and shortages of critical goods, but it will all be government's fault for giving corporate business no choice but to hold baGk on "venture" outlays...
...But will it...
...A local leader was more blunt: "I haven't seen so many people seeking jobs since the Depression...
...Vail then capitalized on the regulation process in ways that soon made Ma Bell the most prosperous of all "regulated utilities...
...3. Government and Economic Growth...
...The snowballing campaign against "big government" rests on a number of economic arguments that appear to speak to the full range of problems currently besetting most working Americans...
...The hotel manager "kept shaking his head in disbelief," reported the New York Times...
...The other ingredient, widely noted by economists and business journalists, but virtually ignored by the conservatives, is the role of private-sector credit—bank loans and those 3 x 2-inch plastic cards—in fueling an explosion of consumer spending that has pushed the personal savings rate to perhaps its lowest point ever (less than three percent of household income...
...Since 19S0, military spending has provided the largest, and most consistent, single public-sector prop for aggregate demand—and employment...
...But it also is striving to prevent "deregulation" from going fast and far enough to require it to divest itself of its valuable Western Electric subsidiary...
...Apparently these wily creatures simply fell upon us from the heavens in a cruel stroke of fate—or else they owe their power to the misguided "liberals" or "social engineers" who are arrogant enough to think they can construct a more humane society than the autonomous marketplace can...
...These are the real levers of power in any economy, and in the United States, government controls none of them...
...AS already noted, at the bottom of all neoconservative reasoning lies the assumption of the Perverse Power of government...
...Malthus argued that the poor contribute to their own plight through "indolence" and lack of "moral restraint...
...Before we examine this more closely, however, we must first point out some of the more convenient omissions (if not outright distortions) of fact and history embedded in the propositions just outlined...
...The present decade has been marked by the old see-saw of cyclical boom-and-bust: slumps in 1970, 1974-1975, and 1980, along with moderate expansions peaking in 1973 and 1978...
...They are strategically placed to become a genuine public menace in the next four years...
...Furthermore, the ratio of total tax revenues to GNP declined in the United States between 1970 and 1977, while it rose in nearly every other Commonweal: 396 OECD member country, including Japan and Germany...
...Significantly, the right-wing architects of this tax-cut bonanza cite, as precedent, the Kennedy tax reductions of 1962 and 1964...
...The intended effects of the policy are thereby offset even before they begin to take hold...
...Since they have husbands to fall back on financially, their "joblessness" causes little real suffering...
...Increased under-the-table work, performed only for payment in hard cash which is easy to hide for tax purposes, is a valuable source of income for people many of whom, we are assured, are nevertheless counted in the official unemployment statistics...
...make strategic use of innovation (especially to cut production costs to maintain high profits in the face of rate-of-return legislation...
...lobby the agency effectively...
...This line of argument is supported by another transparently ideological belief: anytime government bureaucrats are permitted to act freely or formulate policy, they invariably blunder...
...federal ones, one state vs...
...To this day, regulation of business remains a tune orchestrated by the giant corporations and banks that dominate our economy...
...Business Week, among other corporate sector voices, points to another inflationary contribution by "the great government inflation machine": "the real villain is the federal government" not only because of its "huge deficits" and lax control RICHARD B. DuBOFF is a professor of economics at Bryn Mawr College...
...1. Inflation...
...This means that public authorities can take, at best, half-way steps to deal with the social effects of private actions—steps too late and too small to have any lasting effect on inflation, unemployment, urban decay, and environmental disruption but too large to leave "business confidence" unimpaired...
...For New York Times editorialist Peter Passell, "Generous, untaxed unemployment benefits . . . reduce incentives to stay on the job" and lead some workers to "use unemployment compensation for paid sabbaticals...
...We are supposed to believe that "the bureaucrats" are running amok, expanding their reach and overtaxing our hides to perpetuate their own power...
...Greater quantities of money will of course aggravate inflation, but the reverse is equally true and probably even more significant in our day and age: the quantity of money in circulation depends on the rate of inflation itself...
...Commonweal: 398...
...Its juggling of fiscal and monetary and welfare policies—a tax change here, an increase of interest rates there, a job training program sooner or later—could affect the economy only if it came as a complete surprise to the public...
...In a 1976 study released by the Joint Economic Committee of Congress, Dr...
...tax cuts obviously are more acceptable to big business than sharp increases in government outlays to combat recessions, since government spending would expand the public sector relative to the private sector (tax reduction, of course, accomplishes just the reverse...
...which is a faithful reflection of the values, or at least common practices, of the dominant business system itself...
...All of these actions have magnified Washington's role in feeding inflation...
...Official U.S...
...Only World War II with its huge military outlays finally pulled the nation out of the depression of the 1930s and propelled it toward the long expansion of the 1950s and 1960s...
...4. Inability of government to do anything constructive in economic or social policy The new conservatives maintain that government is impotent in the economic sphere even when (if ever) it is not positively dangerous...
...In brief, the conservative interpretation of government is based on a self-fulfilling prophecy...
...ASSUMPTIONS & OMISSIONS OF THE NEW CONSERVATISM The new economic mythology RICHARD B. DuBOFF "THE OLD LIBERAL patent medicines for treating our social ailments simply don't work—and they never really have...
...Still, as FDR pleaded in the face of fierce business opposition, his federal spending programs were meant to "prime the pump" of private capital and defuse the more radical critics of an economic system that had, after all, thrown one-fourth of the workforce out on the streets and impoverished "one-third of a nation...
...Unemployment plays a statistically significant role in relation to social trauma for...
...During recessions, Washington has reacted by slashing taxes to stop the economy from dropping into an uncontrolled tailspin...
...Special supply-side incentives to business would embrace not only tax relief but subsidies to investment and research and "regulatory reform" designed to stimulate productivity...
...Now, AT&T is easing out of this regulatory arrangement, only because it wants "freedom" to introduce new communications and data processing equipment to challenge IBM...
...In the United States, public intervention began with the birth of our nation, and from the start it favored private-property interests...
...And each year, prosperity or recession notwithstanding,'' windfall "job availabilities in major urban areas bring out a virtual flood of human beings clamoring for work...
...No proof of its existence or viability is offered— aside from the hoary (and probably untestable) proposition that if only "government" would go away, "freedom" would prevail and unshackled private energies would clean up our economic quagmires...
...2. Unemployment The extent of joblessness is exaggerated...
...Business Week itself labels the United States "a minor league tax assessor" compared to nations as well off as, and possibly even more technologically dynamic than, we are...
...The new conservatives do not like to talk about corporate pricing policies or, for that matter, the less effective pricing power of unions (giant corporations can nullify workers' monetary gains by raising product prices almost continuously, while employees can improve their wages only every year or two, depending on their contract with "management...
...This is why present-day unemployment contains only an incidental "misery component," as Nixon's Council of Economic Advisers Chairman Herbert Stein put it in 1973...
...The Civil Aeronautics Board has been an even better example of this in recent years...
...The first breakthrough from the East coast toward the vast interior and its untapped lands and resources came during the Canal Era...
...The economics of the right is profoundly anti-historical: its champions feel uncomfortable even debating the extent to which government intervention was necessary to remove impediments to "free market" expansion and to rectify "market failure" over the past two centuries...
...Eventually such ' 'stimulative'' tax cuts would even increase tax revenues to the government...
...Lastly, conservatives should be reminded that while they are busily engaged in "talking down" the official unemployment figures, others are estimating how much the Bureau of Labor Statistics understates true joblessness by its exclusions of (a) workers on involuntary part-time schedules of shortened workdays or split weeks, and (b) workers who have become so despairing at their inability to find or keep jobs that they give up the search ("discouraged workers...
...Carter and Mr...
...but for those who, along with former Kennedy Council of Economic Advisers head Walter Heller, fear that massive tax cuts on the order of one-third within three years (KempRoth) would "soon generate soaring [federal] deficits and roaring inflation," the new conservatives have a response— the new "supply-side economics...
...For millions of men and women battered by the twin forces of inflation and rising taxes, some of this right-wing rhetoric possesses a surface plausibility, particularly when they are being fed the same basic ideology by both Mr...
...Conservative attitudes toward the unemployed have changed little since 1803, when the Rev...
...People switch into these directly productive activities out of leisure, tax shelters, and working in the subterranean economy for nontaxable income...
...Fourth, more rapid entry into the labor market by women and teenagers, whose attachment to work itself is "volatile," Commonweal: 394 artificially escalates unemployment rates...
...Social security, civil rights laws, environmental controls, occupational safety and health regulations, and consumer product safeguards have all met with varying degrees of success in the face of general business opposition...
...Data from the Paris-based Organization for Economic Cooperation and Development show that for 1977 the total tax revenues collected in the United States represented 29 percent of its gross national product, a figure lower than every other industrial nation except Japan...
...M. Harvey Brenner of Johns Hopkins stated that "the most consistent pattern of relationship between national economic changes and . . . social cost was demonstrated with the unemployment rate...
...For Milton Friedman and his fellow Chicago-school monetarists, the solution is simple: prevent the federal government from running budget deficits and stop the Federal Reserve System from creating too much money...
...Economic growth, and the investment spending that drives it, have been hobbled by a widening array of regulations...
...This implies that as taxes are cut, the aftertax rewards to saving, investing, and working rise...
...In a sense, of course, this entire inflationary spiral must be "accommodated" by more and more money in circulation, but the simplistic analysis of the new conservatism masks, to say the least, the complexity of the process...
...The prestigious Conference Board ranks the United States tenth among a dozen major industrial nations in the share of household income taken by direct taxes (only 11 percent for us, compared with 16 percent for Britain and 28 percent for Denmark, for instance), and ninth among the same dozen nations for family income absorbed by social security contributions (8 percent as opposed to 13 percent for West Germany and 18 percent in the Netherlands...
...The March 1980 official rate of around 7 percent should be 9.3 percent, if not more...
...Let us outline this new conservative economics in a way which will not only allow us to understand it but simultaneously to recognize some of its basic assumptions and omissions...
...After—only after— the collapse of business investment and the banking panic of 1933 did the role of government widen and deepen...
...Statistics like these, Business Week concedes,' 'do present a problem to those economists and politicians who posit a direct relationship between levels of taxation and variables such as inflation and economic growth...
...By my own calculations, conservative compared with those of several labor force analysts, the official unemployment rate would be at least one-third higher ever since 1967 if we included involuntary part-timers and discouraged workers...
...J. K. Galbraith calls it "the ability of relatively strong organizations in the economy to advance their income or put 4 July 1980: 395 up their prices...
...3. Lagging economic growth and productivity Every quantitative measure we have tells us that the rate of economic growth for the United States has dropped below long-term trends...
...As Robert Heilbroner remarks: As a rule, economists suggest policy measures— spending, taxing, regulating or whatever—on the assumption that the introduction of the new policy parameters will leave the previously specified equation unchanged...
Vol. 107 • July 1980 • No. 13
