How we lost our shirt

...was less than in Italy, not to mention ten other countries...

...The federal government competes for the same loanable funds used by business firms to finance investment projects and private households to finance home mortgages...

...In this presidential year various candidates—Bush, Governor Bill Clinton, and H. Ross Perot—all have economic programs, including proposals to increase international competitiveness by raising productivity as a way to restore our lost international hegemony...

...David Stockman, once famously of the Office of Management and Budget, found that when these expenditure and taxation plans were fed into the Congressional Budget Office model, the results were unacceptable (budget deficits of $70 and $80 billion...

...The troubles seemed endless...

...The significant loss of well-paying industrial jobs is one major effect of the loss of U.S...

...Dozens of national economies can compete with ours...

...The rise of OPEC, with its price increases and embargoes, appeared to threaten our cheap-energy-based way-of-life...

...production workers in manufacturing has lagged to the point that in 1990 compensation in the U.S...

...Thus the federal deficit is an important factor in the trade deficit...

...This tight monetary policy pushed interest rates to historic highs, but even more important it indicated to large corporations that their wage agreements with labor (and subsequent price increases) would no longer be ratified by the Federal Reserve through automatic increases in the money supply...

...Including these claims as assumptions, however, was far from providing evidence, and the economy has paid the price for such sleight-of-hand...

...In terms of share of GNP, manufacturing output has remained stable since the 1970s at about 22 percent of total production...

...Not only has the new employment been largely in lower wage sectors, but the labor needs of firms within the manufacturing, service, and trade sectors have changed in response to the resulting competitive environment...

...by 1992 the deficit was estimated to be $260 billion and the debt had risen to over $4 trillion...

...Through the 1980s this surplus changed to a deficit, rising to $115 billion in 1987 before falling back to $38 billion in 1990...

...Sadly, but one hopes not fatally, the U.S...

...A related result of so-called deindustrialization is that a two-tiered wage system is appearing in the economy...

...The breakdown of the Bretton Woods system resulted in floating exchange rates which, when coupled with recession in several major nations, posed a constant threat of an international commercial disintegration and, in turn, reinforced domestic recessionary forces...

...But by the mid 1970s its success declined dramatically...

...This led to a reaction against government control and the "welfare state" and to a demand for greater economic freedom...

...More important, it has become political suicide to attempt to lower the deficit through raising taxes or reducing politically popular programs such as Social Security...

...Thus in November 1988 the American electorate decided to continue the same course for another four years with George Bush...

...Stockman quickly recognized that the economics were flawed...

...from the world's largest creditor in 1982 to the largest debtor nation in the world, with a net asset balance of -$368 billion in 1987...

...is merely one modern industrial power among many...

...And the Bank of England made it quite clear that it was no longer willing to absorb additional dollars to support the dollar's fixed value...

...In the final analysis, I had made fiscal necessity the mother of political invention...

...From 1974 to 1980 the economic consensus—reached in the aftermath of the Depression, guided by Washington economic policymakers, and based on the economics of John Maynard Keynes— came apart at the seams...

...It also had the responsibility to employ macro-stabilization policies to maintain full employment with stable prices...

...Congress did cut social welfare programs...

...And we looked for someone to blame, usually labor, often the government, or on occasion our business firms...

...This will represent an additional drain over time with some estimating that payments on interest alone soon may reach over $50 billion a year...

...For public consumption he touted the supply-side economic models...

...The argument in this article was first worked out with Jameson...

...However it made a great political gambit: we could have our cake and eat it too...

...is interdependent or even dependent on other countries...

...In the first quarter of 1988, for the first time in the postwar period, the U.S...

...industrial plants or their relocation overseas, especially in the period before 1985 when the dollar was overvalued...

...economic policy to adequately respond to those changes must head the list...

...A variety of policies might be used for this purpose: support of higher education, tax incentives for investment, subsidies for scientific research...

...The struggle over income shares would be institutionalized through the mechanisms of collective bargaining...

...But this is no longer possible...

...had a surplus of $32 billion in its trade in goods and services...

...The resulting deficits would force Congress to "turn against their own handiwork—the bloated budget of the American welfare state...

...Economic growth fell to 2.2 percent, inflation jumped to 9.3 percent, and unemployment reached 6.8 percent...

...Perhaps his greatest success was abolishing any sense of crisis, putting a "spin" on any particular economic problem that made it seem minor or could even make it disappear...

...The glue that had held the post-New Deal political-ecoCHARLES K. WILBER is a professor of economics at the University of Notre Dame...

...The relationship among big government, big business, and big labor was expected to tame the destructive side of capitalism while aiding its creative side...

...eginning in 1980, Ronald Reagan helped to foster a powerful alternative social consensus—a return to less government and freer markets...

...corporations could no longer insulate themselves from international competition and market forces...

...only greater or lesser deficits are possible...

...Looking at the foreign exchange value of the dollar helps Commonweal 19 June 1992:13 to explain the connection between the deficits...

...Yet, when the twelve-year Reagan-Bush record is examined closely, only in the case of inflation has the underlying problem been confronted (down to a 4.7 percent annual average...

...Unemployment has remained high (up to an average of 7.5 percent), and productivity has not dramatically increased (1.5 percent annually compared to 2.7 percent during 1960-73 and 0.5 percent during 1974-80...

...In 1980 the U.S...

...As these economic statistics indicate, America is no longer the sole master of its own economic fate...

...The rebuilding of Europe and Japan and the industrialization of Taiwan, South Korea, Singapore, Hong Kong, Brazil, among others, led to massive shifts in competitiveness in the world economy...

...While a substantial number of new jobs have been created during the past decade, the quality of new jobs has declined...

...But now the normal development processes of industrial capitalism have spread across the globe...

...One point of current debate is whether these international pressures have led to deindustrialization of the U.S...

...he stagnation of the industrial labor market is the result of changes in the structure of the international economy...

...The fabled feedback of the Laffer curve (lowered tax rates produce more tax revenues) had thus slid into the grave of fiscal mythology forty days after the supply-side banner had been hoisted up at the G.O.P...

...technological dominance is also slipping...

...Large corporations would be tolerated as long as their monopolistic power was not abused...

...Keynesian theory had suggested that budget deficits could offset the cyclical behavior of the economy, and that the budget should be balanced over the cycle, with surpluses in boom years offsetting deficits in downturns...

...nomic structure together was a social consensus based on the roles of government, business, and organized labor...

...one study has found that Japan now dominates the U.S...

...Commonweal 19 June 1992:11 eral environment that would encourage long-run economic growth...

...Convention...

...hegemony and independence to one in which the U.S...

...Coupled with international competition which limited their price setting behavior, this encouraged the assault on labor unions and the wage rollbacks that were characteristic of the 1980s...

...In 1980 the federal deficit was $74 billion and the national debt was $914 billion...

...If domestic sources of loanable funds are not sufficient to cover both private and public needs then international sources are necessary...

...This failure has resulted in large fiscal and trade deficits, deindustrialization of the domestic economy with an attendant two-tiered wage structure, and growing inequality and poverty...

...Paul Volcker, chairman of the Federal Reserve Board, went to Europe for consultations, and largely because of the pressure and support of his counterparts, upon his return adopted the new strategy which completely changed the role of interest rates in the economy...

...In addition, these figures hide the increased inequalities in wage and salary incomes (wage rollbacks for production workers and large bonuses for managers...

...EDITORS' NOTE: The second part of this article will appear in the October 9,1992, issue of Commonweal...

...Large U.S...

...These twin deficits seriously distort a fragile economy...

...has failed to come to terms with its loss of hegemony in the international economy and the resulting collapse of the New Deal-Keynesian consensus...

...Practically all of these jobs were in the wholesale and retail trades and in the service sector...

...The key factors in these decisions were international...

...The result was the closing of U.S...

...The number of small low-wage firms and subcontractors has increased and the traditional large high-wage firms have resorted to using pools of low-wage labor through such schemes as wage rollbacks, two-tier wage structures for existing and new workers, and increased use of part-time and temporary workers...

...Since the most advanced technology was eagerly pursued by the new industrializing nations everywhere in the world, the old industrial centers, including the U.S., found themselves at a competitive disadvantage with their older plant and equipment and higher labor costs...

...however, defense grew rapidly, Social Security was political dynamite, and interest on the public debt was uncontrollable...

...This it did quite successfully in the post-World War II, post-Depression period...

...Because they had to...

...enters international capital markets...

...Labor's share of personal income fell by 3 percent between 1980 and 1990 while the share of payments to owners increased from 22.7 percent to 26.1 percent, a dramatic change in such a short period of time...

...economy to foreign economic pressure...

...Why would they do this...

...This new reality forced the radical decisions which were taken and led finally to a reformulation of the manner in which the U.S...

...The result was rising fiscal deficits that kept real interest rates high and contributed to the overvaluation of the dollar on the international economy through 1985 with, as I've already indicated, resultant enormous trade deficits...

...from the Bretton Woods fixed exchange rate system and at the same time adopt a rigid program of wage-and-price controls...

...However, there have been substantial changes within the manufacturing sector—the smokestack industries have declined while the high-tech industries have increased...

...For the first time the U.S...

...But the longer-run problem is that U.S...

...in twenty-five of thirty-four critical new technologies...

...Fiscal deficits that averaged 0.9 percent of GNP from 1961 to 1970, increased to an average of 2.4 percent from 1971 to 1980, and to 4.1 percent between 1981 and 1990...

...had a deficit on its investment income...

...privately he admitted that "to balance the budget we would need huge spending cuts too—more than $100 billion per year...

...As if this were not enough, questions of equity and freedom, which in the 1960s had largely been answered by economic success and by the movement toward the "Great Society," resurfaced with a vengeance...

...These changes have generated increasing income inequality...

...Many of the major policy developments of the 1970s which finally shattered the New Deal-Keynesian economic consensus were not taken autonomously by the U.S., but were forced on policymakers by external pressures...

...When changes in family income between 1977 and 1989 are looked at, the results are even more dramatic—the top 1 percent of families captured 44-70 percent, depending on definitions, of the total increase, resulting in their share of total after-tax income jumping from 7 to 12 percent...

...Finally, he teamed up with aide Lawrence Kudlow to construct what was described as "a framework for constructing general economic 'scenarios.'" The various assumptions in the "framework" apparently produced what Stockman had been after—the conclusion that implementation of the Reagan program would lead to growth of 4 percent per year and, by 1983, a balanced budget with inflation of 5 percent...

...In addition, there was a concealed political agenda, one that would force Congress to enact the Reagan administration's plan to curb domestic social spending...

...This, in turn, had a major effect on the international economic system...

...Certainly one factor causing this manufacturing restructuring has been foreign competition, exacerbated by the overvalued dollar...

...Despite being richer than ever, suddenly we could not afford to maintain our schools, our public transit systems started going bankrupt, and our cities fired large numbers of police officers despite rising crime rates...

...During the 1970s and 1980s, the U.S...

...International financial and commercial order is difficult to achieve among equals, and since the erosion of the United States' economic power after 1971, no single nation has been sufficiently powerful to impose order unilaterally...

...To help grasp the significance of these changes some historical perspective is necessary...

...The number of persons living below the official poverty level increased from 26.1 million in 1979 to 32.5 million in 1987, a jump from 11.7 to 13.5 percent of the population...

...Read my lips: No new taxes," said George Bush en route to winning the presidency in 1988...

...On average the newly created jobs pay about $2 per hour less than the lost jobs...

...The result was a change from a $12-billion export surplus of manufactured goods in 1980 to a $105-billion deficit in 1989...

...and international interest rates...

...The second case of an internationally induced domestic policy change was the revolution in interest rates which took place in 1979 when the Federal Reserve Board decided to deemphasize interest rate targets and to concentrate instead on the growth of the money supply...

...This is the basis for talk about the "New Poor" and the "Underclass...

...Moreover, there has been a marked decline of manufacturing employment from 1979 through 1990, with a net loss of over 2 million jobs...

...The U. S. money supply growth rates and rates of inflation were also out of line with European countries...

...This in turn contributed to the corporations' assault on wages and on unions...

...The federal deficit has to be financed...

...had the most productive industrial economy, and therefore the most competitive, to one where the U.S...

...We began to worry about why our productivity growth was so slow—we who had been the world's leader...

...They in turn would tolerate independent labor unions as legitimate representatives of their workers...

...The first was the August 15, 1971, decision of President Richard Nixon to remove the U.S...

...dominated the world economy in an unprecedented fashion...

...A key factor was the discontinuity between U.S...

...As the government made greater efforts to control an economy that seemed to be slipping away, it taxed more, spent more, and regulated more...

...The federal government finances the deficit by selling bonds to whomever will buy them— banks, insurance companies, pension funds, rich individuals, the Federal Reserve, and foreigners...

...A host of other problems— huge budget and trade deficits, increased poverty, and in general a prosperity haunted by structural distortions in the economy and an underclass all too often hungry and homeless—have grown despite blithe denials...

...After a golden age of American economic prosperity from 1960 to 1973 (economic growth averaged 3.9 percent annually, inflation only 3.1 percent, and unemployment 4.9 percent), the American economy faced difficult times...

...These developments in relative economic strength were exacerbated by the instability in exchange rates which greatly affected international competitiveness from one year to the next...

...From the end of World War II until 1971 the U.S...

...In addition, government cushioned the operation of markets by providing welfare benefits and basic education...

...Possibly the most dangerous legacy, however, is the twin deficits, the massive federal budget deficit and the foreign trade deficit...

...had begun to run deficits on its merchandise trade, which called into question the country's ability to redeem the massive amount of dollars that had been cycled through the international financial markets...

...As we rely more and more on foreigners to finance the government debt, the demand for dollars grows, driving up the exchange value of the dollar relative to foreign currencies...

...The world has changed fundamentally in the last two decades, from one in which the U.S...

...Finally, government was expected to establish a gen"Let me through—I'm a Keynesian...

...He is co-author with Kenneth P. Jameson of Beyond Reaganomics: A Further Inquiry into the Poverty of Economics (University of Notre Dame Press...

...In the 1970s the simultaneous appearance of high unemployment and double-digit inflation—the clearest manifestation of an economic crisis—belied the ability of prevailing economic policy to confront these new challenges...

...economy was quite successful in providing other jobs as labor-force participation rates rose, especially among married women...

...I will evaluate these proposals in a future article...

...Between 1980 and 1989 manufactured imports grew rapidly—from $170 to $424 billion—while manufactured exports grew more slowly—$182 to $319 billion...

...But foreigners must purchase dollars first to buy the government bonds...

...The effects of this change have been profound: it has exacerbated the economic problems that originated in other areas and has further complicated economic policy...

...19 June 1992 Commonweal...

...In contrast, the bottom 40 percent of families actually lost income, both relatively and absolutelyChanges in the employment structure of the economy have created a situation where the poor have become more numerous and poorer, and where getting a job is no longer a way out of poverty—31.5 percent of all jobs in 1987 paid less than that necessary to support a family of four above the poverty line...

...One of the most confusing realities of the 1970s was the accelerating decay of the cities and of public services in general...

...Expanding aggregate demand muted that struggle by making it easy for firms to absorb wage increases through productivity gains and by passing on wage increases above productivity in the form of price increases...

...This has forever altered the international economy from a Western system characterized by U.S...

...However, this makes imported goods cheaper and exported goods more expensive, with the result that imports increase and exports decrease, thus, enlarging the trade deficit...

...That rate was only prevented from going higher because most poor households now have multiple wage earners...

...Also, these rapidly growing involuntary part-time jobs usually have fewer benefits and less security...

...As a result, fiscal flexibility has been lost, and future adjustment of fiscal policy to new economic conditions will be quite difficult if not impossible...

...Two incidents stand out in this regard...

...In both of these fundamental reformulations of domestic 12.19 June 1992 Commonweal economic policy, the proximate cause was the vulnerability of the U.S...

...In the late 1970s Arthur Laffer argued that the supply-side effects of a tax rate cut would so stimulate the economy that tax revenues would fall little if any...

...The later fall in the dollar has not solved the trade deficits because the commercial markets lost at the time of the over-priced dollar have been extremely difficult to reclaim...

...After promising to reduce the size of budget deficits, the Reagan and Bush administrations have presided over unprecedented increases...

...This heavy borrowing from abroad, necessary to finance the ballooning federal deficit, has transformed the U.S...

...As a result, hourly compensation (wages plus benefits) for U.S...

...economy, but dramatic changes in the international economy and the failure of U.S...

...he dramatic increase in the federal budget deficit was the direct result of the 1982 income tax reductions coupled with the Reagan defense buildup...

...Thus adjustment had to be made by the United States...

...Stockman's solution was to create a fiscal crisis...

...Unfortunately there is no agreed-upon meaning of the concept...

...At the time there was very little empirical evidence that this policy would work...

...Government policies provided minimum economic security through old-age benefits, unemployment insurance, minimum wage laws, and guarantees of the right of workers to organize unions...

...Our major industries—autos, steel, textiles, electronics—were routinely bested in the world marketplace by foreign firms, particularly the Japanese and Germans, and even the South Koreans and Brazilians...

...hegemony and the naive approach to international competition that has been followed by the Reagan and Bush administrations...