REAGANOMICS: IS IT FINALLY WORKING?

...the corresponding average for the six previous upturns was 1.2 percent (from a substantially lower average rate of 7.3 percent...

...and any effort to reduce the unemployment rate much below 7 percent would set off double-digit inflation...

...military machine...

...This brief review of the structural weaknesses of the U.S...

...economy—the impending "out-year" federal government budget deficits...

...To be sure, the rate of inflation has been brought down to about 5 percent...

...The (annual) rate of growth of real GNP during the first two quarters of the current upturn was 5.6 percent...

...The problem with the Reaganomic approach to boosting investment is not only that it is inequitable but also that it is simply counterproductive...

...economy is well on its way back to good health...

...Experiments with greater workplace democracy show considerable promise of both boosting workers' motivation to work and improving managerial performance...

...The Council of Economic Advisers forecast steadily increasing output, steadily declining unemployment, and relatively stable prices through the end of 1988 (not incidentally, the end of a possible second term for the Reagan administration...

...Whether or not the current upturn does continue apace will clearly have an impact on the election...

...Confronted with this onslaught of rising indicators and official self-congratulation, what can critics of Reaganomics say...

...any resulting inefficiencies would be far less wasteful than the losses in output associated with too slow a recovery...

...And it must be repeated, lest anyone forget what kind of an economy the Reagan administration is trying to build...

...The Reagan administration's huge and well-publicized tax cuts, designed to shift resources into the hands of those who would save and invest, so far have yielded a declining harvest of new capital formation...

...In 1982 the Democrats demonstrated all too vividly their inability to formulate and articulate a promising economic alternative...

...But there is no denying the fact that we critics are on rather vulnerable, if virtuous, ground if we have to concede that the Reagan economic strategy has succeeded on its own terms...

...Perhaps even more heartening for the Reagan administration has been the return of the overall unemployment rate to a single-digit level...

...The percentage-point decline of the unemployment rate in the first six months since its cyclical peak was 0.8 percent (from 10.8 percent...

...economy can perhaps best be summarized in terms of the so-called Phillips Curve, whose instability since the late 1960s has at once been the bane of orthodox macroeconomists and a compelling indicator of the growing ill-health of the U.S...

...To be sure, we can point to the human toll exacted by the Reagan strategy for recovery...

...but after so long a period of stagnation, it would be much more surprising if there were no sign of recovery...

...To this point the Reagan administration has merely demonstrated the macroeconomic truth that if you are willing to push up unemployment high enough, you can eventually curb inflation...

...The failure of long-term interest rates to fall is in turn related to another sign of basic weakness in the U.S...

...The evidence is particularly telling because, after such a long period of stagnation, one might reasonably have expected a very strong recovery once the economy did finally turn around...

...A closer look at the evidence on the recent upturn in the U.S...

...Moreover, the benefits of whatever GNP growth now ensues will clearly flow much more profusely to the rich than to the poor, many of whom are projected (even by the Administration) to remain unemployed for years to come...

...But with the downturn of 1969-70 and the subsequent recovery in 1973, the Phillips Curve shifted distinctly outward...

...The problem with such a high rate is that it discourages capital investment, especially in projects with long-run rather than short-run payoffs...

...Barring a major foul-up in other policy areas (surely a distinct possibility), Reagan will be a heavy favorite to win that second term and, like Maggie Thatcher, be in a much stronger position to reshape the contours of the economy and society...

...All this is true...

...SIGNIFICANT than the slow pace of the upturn are some important signs of fundamental weakness...

...The real long-term rate of interest (as measured by the prime rate charged by banks to corporate borrowers, adjusted for the rate of inflation to reflect more truly the cost of borrowing) has been close to 6 percent all year and shows little sign of declining...

...The natural result is a resurgence of inflation, and it is the anticipation of just such inflationary pressures that is keeping longterm interest rates so high...

...For if the U.S...

...What Can Be Done...

...To put the current upturn in its proper perspective, we should compare it with the performance of the economy at comparable stages of past upturns...

...On the basis of all this encouraging news, the Administration economists have revised upward their projections for GNP growth in 1983 and announced that the U.S...

...Indeed, they have sought to justify their policies of redistribution from poor to rich on the grounds that invest409 ment would thereby be favored over consumption, and investment would be the key to stepped-up productivity growth...

...A second, and perhaps equally important source of improved productivity growth in the future can be found in the area of labor relations and workplace organization...

...It also does great damage to industries—such as home-building and automobiles where much of the consumer demand has to be financed through loans...

...And much of the economy's increased output will be devoured by the mushrooming U.S...

...These deficits, in turn, are attributable to the Reagan administration's insistence on granting huge tax cuts to the rich, as well as its determination to step up the rate of military spending, without being able to cut other forms of government spending in any comparable way...

...The 5.6 percent two-quarter growth rate in real GNP was actually lower than the corresponding rate (6.1 percent) recorded during the first two quarters of the aborted minirecovery in 1981...

...WI AKNI.SS Of the U.S...

...The importance of rapid productivity growth to a capitalist economy has not been lost on the Reagan administration economists...

...Instead, what we are experiencing is a rather slow improvement in the overall economic situation—so slow that even the Administration's own forecasters do not anticipate that the unemployment rate will decline to its previous cyclical low point-5.8 percent in 1979 by the end of 1988...

...410 Prospects for 1984 OBVIOUS' THESE RECOMMENDATIONS, and other potentially fruitful policies that would complement them, will not be adopted by this Administration...

...In extending the downturn of 1979-80 into four years of virtual stagnation, their intent was not simply to purchase a lower rate of inflation at the cost of an ever higher rate of unemployment...

...We should not forget, however, that the departure of the Republicans from Washington is only a necessary, but by no means a sufficient, condition for the adoption of a sound and humane economic strategy for recovery...

...During this period there remained, as always, a trade-off between unemployment and inflation, but the rate of inflation averaged about three percentage points higher than before for any given rate of unemployment...

...From the early 1950s until the late '60s there was a relatively stable Phillips Curve relationship in the U.S...

...Insofar as new capital formation is to contribute to the process, it will be essential to divert potentially investable funds from some of the other uses for which they will be claimed as the economy heats up again...

...Thus there is good reason to believe that a new "supply-side" policy involving the promotion of economic democracy, rather than economic inequity, would yield a substantial return in productivity growth in the long run...

...Its downward slope depicts the typically inverse relationship between these two basic indicators: an increase in the unemployment rate is associated with a decrease in inflation, and vice versa...

...Six times before, since 1948, the U.S...

...One of the biggest causes for celebration in Washington has been the evidence on the growth of real (inflation-corrected) GNP, the most comprehensive measure of the total output of the economy...

...Tax breaks for the rich and for their corporations do little to promote investment if the government has to borrow back the money given up in taxes...

...The GNP growth envisaged for the coming years will in no way make up for the huge losses in employment and output that resulted from the previous three years of "belt-tightening" imposed by the president and his economic chief executive, Paul Volcker of the Federal Reserve Board...

...Indeed, to the extent that we are now actually experiencing a recovery, it has largely come about because of Reagan's unacknowledged application of old-fashioned "military 408 Keynesianism...

...After four years of virtual stagnation, the economic news out of Washington has been decidedly upbeat since this spring...

...the corresponding average for the six previous upturns was 9.1 percent...

...Now that the rate of capacity utilization is rising again as the economy begins its upturn, the incentive to invest should eventually return...

...The stock market began to surge late last summer, anticipating some improvement in the economy...

...Poor and middle-income classes both will continue to suffer from cutbacks in essential government programs that are to promote health, education, housing, and the environment...

...This in itself is not a matter for great concern when the economy is operating at its current low level, for the deficit then plays a salutary Keynesian role...

...economy: from an annual rate of 2.6 percent between 1948 and 1966 to rates of 2.1 percent, 0.7 percent, and 0.2 percent during the periods 1966-73, 1973-79, and 1979-82 respectively...

...economy suggests that the problems that began to plague the economy in the late 1960s are still very much with us...

...Rapid productivity growth enables the economy to meet the rapidly growing claims on output associated with a highemployment regime without a buildup of inflationary pressures, which typically result from an excess of claims relative to the available output...

...However, as is widely recognized, such deficits pose a major problem if and when the economy heats up, for the resultant government borrowing will then compete with other claims on the economy—notably those of private-sector consumers and investors...

...In that case the Democrats would clearly stand to gain, as they did from the bad economic news during the congressional election in 1982...

...Rather, they sought to shift the whole Phillips Curve inward— believing that a sustained period of tight money and depressed economic activity would ultimately lay the basis for an inflation-free recovery...

...In particular, the federal deficits will have to be drastically reduced in order to keep the government from absorbing a large proportion of the available credit...

...It proved relatively easy to cut back on programs for the poor, but it was quite another matter to curb the far more substantial government expenditures on programs —such as Social Security—whose primary beneficiaries are of the middle- and even upperincome classes...

...These pressures would once again tempt government policy-makers to fight inflation with higher unemployment, and we would be back in the stagnation-inflation spiral once again...

...economy really does take off into a sustained economic boom—comparable, let us say, to the Kennedy– Johnson boom of the 1960's—then the economic welfare of many Americans will no doubt improve, and right-wing economic policies are likely to find much favor with the electorate...

...If in the short run inflationary pressures do develop, before the full range of productivity benefits is realized, a temporary and selective program of price controls could and should be introduced...

...But if budget deficits and high interest rates can be avoided in an expansionary period, the lower cost of capital and the potential for future profits from new investment will more than outweigh the adverse effect on investors of somewhat higher tax rates...

...if the benefits of the productivity gains are to be shared among the whole population, it is essential that rapid employment expansion accompany that productivity growth...

...There is increasing evidence that productivity in the U.S...

...the corresponding average rate for the six previous upturns was 8.5 percent...

...but it wasn't until this year that hard economic data first showed evidence of an upturn...

...Investment is indeed one of the critical means by which productivity growth can be stimulated (although by no means the only one...

...Thanks to the generous (to the well-to-do) tax cuts implemented by the Reagan administration, and the lack of any comparable cuts in overall federal spending, recordsetting budget deficits have become a routine annual occurrence...

...This was the lame economy that the Reagan administration (with the critical assistance of Paul Volcker at the Fed) sought to heal with a mixture of supply-side and monetarist ministrations...

...And the projected growth rate for real GNP over the first full year of recovery in 1983 5.5 percent—is well below the average-7.9 percent—for the six previous recoveries...

...Increasing productivity without increasing the number of workers employed represents only a very partial improvement...

...In the period 1979-82, when Volcker and later Reagan were fighting inflation and seeking to curb wage growth and boost profits by means of monetary restrictiveness and high unemployment, they kept the economy operating at such a low level of overall capacity utilization that potential investors had no incentive to increase their capacity through new capital formation...

...In 1954-68 the unemployment rate oscillated between 3 percent and 7 percent, while the inflation rate oscillated inversely between 5 percent and 1 percent...

...Any real gains on the Phillips Curve front remain to be realized...

...the rate of inflation averaged another four percentage points higher for any given rate of unemployment...

...Rather than wait passively until 1988 for a decline of the unemployment rate below 6 percent, what is needed is a more expansionary macropolicy that would aim to reach this goal within a year or two...

...From its depressed level in the fourth quarter of 1982, real GNP increased at a modest annual rate of 2.6 percent to the first quarter of 1983 and then accelerated at an annual rate of 9.2 percent in the second quarter...

...A second sign of fundamental weakness is that interest rates remain relatively high, despite so low a rate of utilization of the economy's overall productive capacity that in past years it would have brought rates down sharply...

...but only because the rate of unemployment has gone well over 10 percent...

...The Phillips Curve plots the rate of inflation against the rate of unemployment...

...It is no accident that the successive outward shifts of the Phillips Curve since the late 1960s have coincided precisely with successive slowdowns in nonfarm business productivity growth in the U.S...

...with a little bit of luck, the Administration economists may be able to continue their celebration of economic recovery for another year...

...Reaganomics, given the time needed to overcome the mess inherited from decades of profligacy in Washington, was finally delivering on its promise...

...This represented "stagflation" to an acute degree: even with an unemployment rate as high as 7 percent and lots of idle capacity, the economy still generated an inflation rate of about 8 percent...

...By comparison, this real rate averaged around 2 percent (and never reached even 4 percent) from the end of World War II until 1979, when Paul Volcker imposed the Fed's new tight-money policy with a vengeance...

...It is evident from these figures that the current upturn is a relatively weak one...

...economy casts serious doubt upon this scenario...

...Such figures raise real questions about the solidity of the upturn, notwithstanding all the optimism in Washington...

...Such a comparison yields the following interesting results...

...Certainly, the economy is now trending upward...

...This represented a quite tolerable trade-off...

...Industrial output began to rise, housing starts increased, new unemployment claims slackened, and—as some of the millions of laid-off workers were recalled to their jobs—the overall rate of unemployment finally began to descend from its postwar peak of 10.8 percent in December 1982...

...Either the current recovery will have to remain a relatively weak one, bringing small gains on the unemployment front, or—if it picks up speed it will soon regenerate the kind of inflationary pressures that characterized the decade of the 1970s...

...a low unemployment rate could be achieved without much inflation...

...Then, with the downturn of 1974-75 and the subsequent recovery to 1979, the Phillips Curve shifted out even further...

...When it does, however, investors will confront a different problem—a high cost of borrowing investable funds that is signaled by high realinterest rates and caused by the need of the federal government to borrow funds in order to finance its whopping budget deficits...

...The growth rate of nonfarm business productivity during the first quarter of the current upturn was 4.8 percent (figures for the second quarter were not available at the time of writing...

...But if we look at the evidence for the years 1980-82, and add the Administration's own projections for 1983, we find that the Phillips Curve has shifted—if at all even further outward since the late 1970s...

...Two promising ways to go about this deficit-reduction process are to curb military spending and to reimpose the taxes that the Reagan administration has lifted from the shoulders of the well-to-do...

...A necessary condition is that Reagan (or his successor as the Republican candidate) be defeated in the 1984 presidential election...

...Continuing Structural Weaknesses MORI...

...HOW, THI N, can productivity growth be stimulated...

...But it is just as possible that by this time next year the economic news will turn sour...

...economy has weathered a recession and emerged with an upward thrust...

...economy has been retarded by an unnecessarily authoritarian structure of workplace organization and an unduly adversarial set of relationships between management and workers...

...our book, Beyond the Waste Land: A Democratic Alternative to Economic Decline, was published in June 1983 by Anchor Press/Doubleday...

...In the long run such a policy would offset potential inflationary pressures by contributing to a greater availability of output to meet the growing claims...

...IN TIIh SHORT RUN, major gains in both output and productivity growth could be realized by promoting a more rapid recovery than is either expected or desired by the Reagan administration...

...407 Examining the Evidence on the Upturn BUT WILL THIS really come to pass...

...Moreover, there is evidence that rising rates of capacity utilization provide a positive stimulus to productivity growth...

...Unless they are willing to take the political risk of projecting a dramatically new and progressive economic program, the election of 1984 will matter little for the future of our ailing economy...

...First of all, the rate of investment in new plant and equipment—a critical factor for long-term economic growth—is projected to decrease (in real terms) by 3.1 percent from 1982 to 1983, after having declined by 5.5 percent from 1981 to 1982...

...I am excluding the aborted minirecovery in 1981, which was sandwiched between two recessions during the past four years of overall stagnation...

...TIII TO (ESCAPING from the stagnation-inflation spiral implied by the present position of the Phillips Curve is to promote a more rapid rate of growth of productivity (output per hour of work...

...These observations are based on my joint work with Samuel Bowles and David M. Gordon...

...TM' CONTINUING STRUCTURAL...

...Moreover, the now typical structure of corporate organization requires large numbers of supervisory employees, whose direct contribution to output is nil and who could be replaced by productive workers if alternative, more cooperative means were found to assure satisfactory performance on the job...

...Is it possible that the right-wing ideologues were right all along, if not about matters of the heart, then at least about the functioning of a capitalist economy...