After the Party: How Can We Overcome the Legacy of Reaganomics?
Weisskopf, Thomas E.
Since the depths of the Volcker-Reagan recession of the early 1980s, the U.S. economy has followed a course of economic expansion that has heartened supporters of the Reagan administration and...
...Furthermore, substantial amounts of other types of federal government spending currently serve to benefit disproportionately the middle and upper classes—e.g., bloated military and civil service retirement programs, agricultural subsidies, and Social Security benefits indexed in such a way as to provide beneficiaries with greater annual increases in purchasing power than most active workers...
...If the decline in (relative) prices of U.S...
...Yet, when measured in relation to the overall size of the U.S...
...economy actually veer into recession in the near future—a possibility, but by no means a certainty—then fiscal austerity would be highly counterproductive and a Keynesian demand boost would certainly be helpful...
...government would have to be prepared to allow the value of the dollar to fall rather than try to defend it with higher interest rates...
...intervention in Latin America...
...The problem with these interpretations is that no one on the left gave capitalism much credit for the even more impressive five-year rise in the stock market before the fall...
...economy in the 1980s...
...The answer given by the austerity school is that fiscal contraction must be accepted in order to permit monetary expansion: public and private consumption must be curtailed by cutbacks in government noninvestment spending and by higher taxes on personal income and/or consumer goods...
...If it did so, we would expect tax revenues to rise and thereby reduce government budget deficits even without any increase in tax rates...
...Without sacrificing the important political principle of universal entitlement to social benefits and without pushing small farmers or working-class retirees into poverty, there is a great deal of scope for reducing the extent of federal largesse to the well-to-do...
...Closely related to productivity growth is the net rate of capital formation (net investment divided by net capital stock), which is one of the major sources of increased productivity...
...But we must recognize the strong possibility that a progressive form of fiscal austerity, along with a major shift in spending priorities and an expansionary monetary policy, will be needed to achieve some of the economic goals of the left...
...economic performance since the end of 1982 has looked quite good, especially in comparison with that of the Western European economies...
...In the same issue of the Nation, Alexander Cockburn (drawing on the economic advice of Robert Pollin and Lynn Turgeon) ridiculed the call for belttightening austerity as a prescription for a major depression...
...Stone's analysis shocked other leftists, used to capitulation by liberal Democrats to capitalist economic orthodoxy but not prepared for such heresy on the part of a distinguished veteran of the principled left...
...According to the expansion approach, investment is basically constrained not by the availability of investable resources—or savings— but by the willingness of the state to undertake public investment and the incentives for firms to undertake private investment...
...Cockburn went on to argue that the U.S...
...governments to lower interest rates as a means of promoting higher rates of private investment will be circumscribed until and unless the trade deficit can be brought under control...
...The logic of the expansion approach is unassailable, provided that the contemporary U.S...
...With sufficient time, energy, and resources devoted to retraining workers and retooling workplaces, it would certainly be possible to respond to demand stimuli with higher levels of domestic production and lower rates of unemployment...
...But in the context of heightened competition in the open international capitalist economy and a longstanding neglect of infrastructural and human resource development, American firms are not well poised to compete with their foreign rivals to satisfy many of the demands that would arise from further domestic macroeconomic stimulus...
...that underneath the favorable indicators lies an economic structure fundamentally weak and seriously deteriorating...
...Insofar as aggregate demand restraint is compelled by the overall macroeconomic environment, then, a program of progressive fiscal austerity must be substituted for the 178 • DISSENT POST-REAOAN ECONOMY reactionary fiscal austerity prescribed by the corporate establishment...
...interest rates (relative to foreign interest rates) are needed to encourage foreign investors to buy dollar-denominated assets and thus offset the excess supply of dollars associated with trade deficits...
...For the past several years the huge "twin deficits" —the U.S...
...This will be essential for the long-run restoration of U.S...
...The Appeal of Macroeconomic Expansion Even though the objective of more rapid productivity growth has often been invoked to serve reactionary ends, it must remain an essential element of a progressive economic agenda...
...distribution of income away from wages and government social spending toward profits in such a way as to stimulate greater private saving and capital formation and thereby increase productivity growth...
...exports and a fall in U.S...
...government budget...
...Ironically, economic conditions were ideal for the pursuit of such a Keynesian strategy six years ago...
...Big trade deficits are also seen as an obstacle to the lowering of interest rates, because high U.S...
...It is hardly surprising that most progressives have embraced the expansion rather than the austerity approach...
...economic growth has therefore slowed down in recent years, the growth has continued...
...current rates of utilization of the labor force and the capital stock remain below the levels achieved at previous cyclical peaks...
...It is not simply that the Reagan recovery has been extraordinarily inequitable, bringing vast benefits to a privileged few while providing modest gains for many and inflicting real losses on a significant minority—thereby increasing inequalities of class, race, gender, and region...
...where they differ sharply is in their analysis of how to accomplish this...
...Its Keynesian logic suggests that idle workers and resources can be mobilized in a positive-sum game from which everybody can benefit simultaneously...
...what is needed is more government spending on public investment and faster growth in consumption demand to stimulate more private investment...
...Somewhat more significant than the stock market, but still not the most important sources of concern, are the notorious twin deficits...
...Somewhat more surprising, in light of the manifestly probusiness orientation of the Reagan administration, is the fact that after-tax nonfinancial corporate profit rates in the 1980s have on average been no higher than they were in the 1970s...
...Given how far the dollar has already fallen by early 1988 and the recent evidence of some positive impact of the cheaper dollar on the U.S...
...But foreign decision makers have their own political and economic agendas, and plaintive cries for greater international "policy coordination" serve mainly to illustrate the increased vulnerability of the U.S...
...Just as the stock market crash wiped out the previous year's unearned capital gains of the wealthy, so a major redistribution of income and reallocation of resources will be needed to overcome the regressive and deleterious legacy of the Reaganomic era...
...The upshot is that the current constellation of circumstances affecting the U.S...
...macroeconomic policy— if only because the growth of consumer spending seems to have slowed down in early 1988...
...This scenario suggests that the ability of future U.S...
...What is wrong is to suggest that the merriment has been enjoyed by more than a small minority of Americans—notably the rich, the yuppies, and the military...
...Peterson in particular offers a mercilessly detailed account of how "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon," concluding that "the day of reckoning is at hand...
...But if the dollar would decline relatively smoothly, and if its lower value would lead without inordinate delay to a rise in U.S...
...It is difficult to evaluate at what point the potential dangers of (1) an inadequate domestic output response to aggregate demand growth and/or (2) an inadequate trade response to dollar decline would materialize...
...In a front-page essay in the Nation shortly after the October 1987 crash, I.F...
...imports, then the problem of the trade deficit—like that of the budget deficit— would begin to take care of itself...
...nor did the huge federal budget deficits run up during those years in any way interfere with that rise...
...economy, in this view, has been the failure of the U.S...
...while many establishment economists attributed the crash to the huge size of the federal budget deficit and used it as a stick with which to beat lawmakers into stronger efforts to balance the budget...
...The net foreign contribution to saving implied by trade deficits has at times enabled countries to grow more rapidly than would otherwise have been possible, for example, in Japan during the early post–World War II period...
...What troubles even many mainstream observers is the sense that the latest economic recovery is superficial...
...In light of these chilling statistics, it is hardly surprising to learn that the real take -home pay of the average American worker is now no higher than it was in the early 1970s and has actually declined since the late 1970s...
...annual government budget deficit (whether measured for the federal government or total government) and the U.S...
...but the austerity approach suggests that an effectively expansionary monetary policy must be purchased at the cost of a more contractionary fiscal policy, whereas the expansion approach implies that effective monetary and fiscal expansion can and should be simultaneously achievable...
...economic growth in the 1980s has been amply documented and forcefully criticized by the left...
...The left, he and others have implied, should resist the belt tighteners and budget balancers and push for an expansionary fiscal strategy involving increased public expenditures under truly public control...
...But this argument hinges on the belief that saving is done mainly by the rich and the recipients of property income, while consumption is done mainly by everyone else...
...However, in the short run it may be impossible to avoid supply bottlenecks and inflationary pressures in key sectors of the U.S...
...To the extent that public and private consumption needs to be reduced, there are in fact plenty of feasible spending cuts and tax hikes that would disproportionately affect the well-to-do rather than the less-well-off...
...At this writing it appears that there is still room for a more expansionary U.S...
...macroeconomy did not respond to greater aggregate demand stimulus with increased domestic production on any significant scale, then we would be back in the zero-sum world of the fiscal-austerity school—where investment cannot be increased unless (someone's) consumption is reduced, and the U.S...
...Stone lamented "the biggest consumer binge of all time" —the "era of unprecedented profligacy" ushered in by the Reagan administration...
...How, then, can we resolve the basic dilemma posed above...
...The austerity approach unites the corporate establishment, much of the economics profession, and the "puritan left...
...A Progressive Macroeconomic Strategy There can be no question that increased public investment in physical infrastructure, in research and development, in the educational system, and more generally in the human resources of the United States will be essential to a program for long-run economic recovery...
...exports and a substantial decrease in U.S...
...Although the distribution of income has shifted sharply in favor of recipients of capital income and against recipients of labor income and profit rates have rebounded from their very low levels of the early 1980s, measures of U.S...
...Indeed, there is little question that the deficits run by the Reagan administration in the first several years after 1982—the "military Keynesian" consequence of the Reagan tax cuts and military buildup— contributed substantially to the rapid recovery of the macroeconomy from the previous recession...
...In itself, the stock market crash is of virtually no significance...
...This seamy side of U.S...
...Increases in public and/or private investment, by raising the overall level of aggregate demand, will increase levels of capacity utilization, output, and income, and thereby generate automatically the higher levels of saving needed to finance higher levels of investment...
...Like the supply-side dogma promoted by the Reagan administration in its early years—but with a considerably stronger foundation in economic theory and empirical evidence—the expansion approach promises economic gains without economic sacrifice...
...Reflecting on the popular view that "the party's over," he pointed out that "most of the country has enjoyed no party in the past decade and can therefore scarcely be asked to leave one now...
...economy now finds itself...
...The manifest failure of the Reagan program of regressive tax cuts to increase rates of saving and investment should provide sufficient evidence that there is no close or necessary link between the distributive impact of tax changes and their overall effect on saving and investment...
...They are unusual only in relation to the experience of the United States in modern times...
...Whether they are doing so now in the United States is a matter of considerable controversy, to which I will return...
...If so, much of the impact of expansionary macropolicy would be dissipated into price increases and higher imports rather than gains in domestic output and employment...
...The record shows clearly that in the U.S...
...But the objective of lowering interest rates must take precedence over any concern about the level of the dollar (short of a complete collapse, in which case additional fiscal austerity would be needed to permit monetary expansion...
...However impressive the cyclical recovery of the last five years, there can be no doubt that Reaganomics has failed to reverse a long-term decline in the strength of the U.S...
...Clashes between advocates of fiscal austerity and advocates of fiscal expansion (if not profligacy...
...Any such opportunity remaining today is far more limited in scope...
...As is now well understood, government deficit spending provides a fiscal boost to aggregate demand that can stimulate higher levels of employment and output when an economy is operating below its potential productive capacity...
...economy, we will simply not have the wherewithal to generate higher standards of living and lower rates of unemployment in the future...
...In terms of the broad macroeconomic indicators that loom large in national elections—e.g., unemployment, inflation, output growth—U.S...
...He went on to call—in terms scarcely distinguishable from those of Peter Peterson—for "a really radical cut in the deficit," which, he conceded, "would mean some bitter medicine at home...
...As noted earlier, this would result in an increase in the trade deficit and considerable downward pressure on the dollar...
...But why might the U.S...
...The Pentagon could surely meet the nation's current military commitments on a considerably slimmer budget, and a rational and humane U.S...
...by the end of 1987, the official civilian unemployment rate had fallen below 6 percent and the capacity utilization rate in manufacturing industry had risen above 80 percent—both levels that had not been so favorable since the last cyclical peak years of the late 1970s...
...In short, both 174 • DISSENT POST-REAOAN ECONOMY approaches agree that a more expansionary monetary policy is highly desirable...
...For evidence of serious structural weakness in the contemporary U.S...
...Should private consumption demand continue to weaken and the U.S...
...And closely linked to net capital formation is the rate of net national saving (net private plus government saving divided by net national product), which measures the contribution of domestic—as opposed to foreign—resources to net investment...
...Most measures of productivity growth in the U.S...
...economy, after having dropped since the mid-1960s to a virtual SPRING • 1988 • 171 POST-REAGAN ECONOMY standstill by the late 1970s, have recovered only slightly in recent years and over the 1980s have remained far below their levels in the first two decades after World War II...
...But in themselves, the twin deficits do not provide unambiguous evidence of an unhealthy economy...
...annual trade deficit (whether measured for merchandise trade, total goods and services, or on current account) have reached historically unprecedented heights in recent years, contributing to a massive growth in U.S...
...Which of these alternatives—or what combination and modification—should be incorporated into a truly progressive macroeconomic strategy to restore the long-run health of the U.S...
...history, are an economy well integrated into an open international capitalist system, coming off five years of cyclical recovery, suffering long-term neglect of our physical infrastructure and educational system, and high government budget and trade deficits...
...The problem with the U.S...
...Such exhortations for austerity are of course a staple of mainstream economic advocacy in the United States...
...q SPRING • 1988 • 179...
...By all means let us reject the reactionary austerity preached by the belt-tightening right...
...At the same time, there is every reason for a progressive macroeconomic strategy to seek to finance part of the needed increases in public spending from higher taxes...
...In addition, major tax cuts and business deregulation were expected to promote more rapid productivity growth by stimulating greater private initiative and enterprise...
...economy—to a large extent the result of policies pursued by the Reagan administration—is such as to create serious obstacles to the success of a macroeconomic strategy designed to promote capital formation and productivity growth via simultaneous fiscal and monetary expansion...
...Thus, even under the most favorable circumstances, we would expect balance-ofpayments problems to put considerable downward pressure on the value of the dollar...
...There are signs of supply bottlenecks in some sectors, and—partly because of the much lower value of the dollar— the threat of inflation has increased...
...Just to maintain their standard of living most families have had to increase their hours of work time and go more heavily into debt...
...Both of these economists argue convincingly that standard accounting procedures overestimate the size of the real federal budget deficit and that precipitous efforts to tighten fiscal policy would be highly counterproductive...
...Alternative Perspectives and Prescriptions The view that the U.S...
...Since 1985, U.S...
...What the mainstream austerity school tends to ignore, but no one on the left needs to be reminded of, is the tremendous waste inherent in government military spending...
...Although the pace of U.S...
...Readers of the New York Times in late 1987 were treated to a series of exchanges between representatives of the dominant fiscal austerity school and a number of prominent critics (such as Robert Eisner and Lawrence Kotlikoff) who disparaged the conventional wisdom of lowering the budget deficit as "deficit hysteria . . . a dangerous national pastime" (Kotlikoff) and "a mindless 172 • DISSENT POST-NEAOAN ECONOMY throwback to the economics of Herbert Hoover" (Eisner...
...economy, in this view, is that private and public consumption claims have increasingly succeeded in "crowding out" claims to use the available resources for investment...
...Moreover, the expansion approach has a much greater potential for broad political support as a macroeconomic strategy for the United States in the post-Reagan years...
...But the opportunity to generate a sustained investmentled and productivity-enhancing expansion in a positive-sum environment was squandered in favor of an expansion dominated by growth in unproductive military spending and luxury consumption...
...There is a similar consensus on the need to reduce real interest rates (recently down, but still high by historical standards) as an essential component of a program to promote more private capital formation...
...Each of the two macroeconomic approaches discussed above purports to stimulate higher investment...
...economy that began some two decades ago...
...Thus, some left commentators lost little time in citing the crash as evidence of the structural weakness of American capitalism...
...Yet, aside from a few hardy Reaganauts, there is scarcely an economic observer who has watched the developments of the past several years without an increasing sense of foreboding...
...economy in the late 1980s fail to respond in Keynesian fashion to the aggregate demand stimulus of expansionary fiscal and monetary policy...
...economy has followed a course of economic expansion that has heartened supporters of the Reagan administration and put its critics on the defensive...
...For one thing, it enables one to reject summarily the demands of the U.S...
...In their Keynesian view, the most important objective of macroeconomic policy should now be to avoid a recession by combining fiscal with monetary stimulus...
...corporate establishment for cutbacks in social spending and increases in taxes that would reduce government budget deficits at the expense of working people and the poor...
...economy to economic forces over which domestic policymakers have no control...
...economic vitality...
...There can be no question that in the early 1980s, following the protracted VolckerReagan recession from late 1979 to late 1982, the U.S...
...trade balance, it might not in fact be necessary to let the dollar fall much further...
...From the flurry of commentary elicited by the sudden collapse of the Dow Jones index, one conclusion repeatedly surfaced: "The party's over...
...The mainstream belt-tightening argument is that unless tax increases fall primarily upon lower-income and middle-income wage and salary earners, they won't have much impact in reducing private consumption but will instead serve to depress saving and investment...
...The fact is that a majority of Americans are now economically better off than they were six years ago...
...Productivity growth is important not because the production of more and more goods and services is a desirable end in itself, but because increasing productivity is what enables an economy over the long run to meet people's growing real economic needs—whether for more useful goods and services, betterpaying jobs, more stimulating work environments, more ecological balance, or fewer hours devoted to work time...
...This kind of bite-thebullet answer tends to be rejected by the left on the grounds that the recommended cutbacks and taxes are regressive in impact, affecting primarily government spending for the poor and the real after-tax purchasing power of working and relatively low-income Americans...
...Although there are many ways of increasing U.S...
...Some of these needs can be met by reallocation and redistribution of resources (on both national and international scales), rather than by increasing the efficiency of resource use, but it is politically and economically unrealistic to expect that these needs will be adequately met without continuing improvement in productivity...
...But the United States is much closer to providing its "fair share" of the stimulus than any other major economy, and—if it has not done so already—it will soon reach the point where a more expansionary macroeconomic policy stance will redound primarily to the benefit of its competitors (a fate that befell the early expansionist policies of the Mitterrand government in France...
...The potential problem is that even a considerable fall of the dollar might fail to stem the trade imbalance...
...Fiscal restraint would therefore be highly counterproductive...
...The problem with the U.S...
...It is true that there still remain several millions of involuntarily unemployed workers and a great deal of idle plant and equipment in the United States...
...Pitfalls of Expansion The expansion scenario is certainly very attractive...
...economy will be able to benefit from only a limited dose of domestic fiscal and monetary expansion...
...But how can these objectives be realized simultaneously if increased government spending means higher government budget deficits, if lower interest rates require more expansionary monetary policy, and if such a combination of increased fiscal and monetary stimuli soon generates rising prices and rising imports rather than drawing unemployed workers and idle resources into greater domestic productive activity...
...national and international debt...
...Systematic and judicious pruning of nonproductive government spending could release far more funds for public investment (and other meritorious objects of government spending) than cuts in what remains of public spending on behalf of the poor and the near-poor in the U.S...
...so the critical task for macroeconomic policy is to encourage higher savings...
...Mainstream figures like Peter Peterson, writing in the Atlantic last October, and the veritable "Who's Who" of corporate barons and former public officials who signed an extraordinary two-page "Bipartisan Budget Appeal" in the New York Times last November, warn us ominously to "resolve our worsening economic problems before it is too late...
...economy to produce what it wants to consume and a basic unwillingness of its managers to live within their means...
...This explains the eagerness of U.S...
...Moreover, running government and/or trade deficits can actually be quite beneficial economically...
...corporate profitability remain well below where they were in the 1960s...
...The U.S...
...in order for more investment to take place, resources must be released from competing consumption uses...
...The one fly in the ointment would be the resultant increase in the trade deficit...
...According to the austerity approach, investment is basically constrained by the availability of investible resources...
...economic policymakers...
...It follows that private consumption must be restrained by higher taxes and public consumption must be restrained by cutbacks in government spending...
...In sum, it is not misleading to characterize the recent experience of the U.S...
...and this has surely contributed to the relatively poor investment performance of this decade...
...And what is unacceptable is to call upon those who have been excluded from the party to bear the burden of cleaning up the mess...
...economy's problems cannot be SPRING • 1988 • 175 POST-REAGAN ECONOMY solved without the bitter medicine of increases in tax rates and/or cuts in public spending...
...government budget deficit and promotion of the growth of the money supply may be an acceptable initial response to the onset of another recession...
...Such worries were brought to a head by the stock market crash of October 1987...
...We must recognize, however, that there are some potential pitfalls in pursuing such a strategy—pitfalls that underlie the concerns raised by the austerity school and that must be taken seriously by the left, in view of the particular historical circumstances in which the U.S...
...macroeconomy would indeed respond to a stronger aggregate demand stimulus in appropriate Keynesian fashion by generating correspondingly higher levels of domestic real output and income...
...The first potential pitfall is that the aggregate demand stimulus from simultaneous fiscal and monetary expansion would lead not so much to higher domestic output as to higher domestic inflation and to an even greater imbalance between imports and exports than a successful expansion scenario...
...A major objective of Reaganomics was to shift the U.S...
...I.F...
...economy, neither these deficits nor the corresponding levels of accumulated debt are unusually high by international standards...
...economy was operating well below its potential productive capacity...
...Nor is it the manifest growth of the culture of greed, the rejection of social needs in favor of private wants, which has been so prominent a feature of the Reagan era...
...government would be obliged to increase interest rates to attract foreign private credit in order to prevent the international financial debacle of a precipitous collapse of the dollar...
...That is why the first several years of Reaganomic militaryKeynesian demand expansion generated rapid growth in both employment and output from 1982 through 1985, while inflationary pressures were held in check by the size of the previous recession, the high value of the dollar, and the international decline in energy prices...
...have been just as sharp within the economic mainstream...
...policymakers to prod our trading partners into pursuing more expansionary policies...
...Such an approach, permitting increased productive government spending with reduced budget deficits, should then be combined with a much more expansionary monetary policy to combat the damaging consequences of the high real interest rates fostered by Reaganomic policy...
...It is quite doubtful that the more rapid growth of the domestic economy would attract an inflow of enough new (long-term) foreign capital to offset the outflow of (short-term) foreign capital likely to be triggered by lower interest rates...
...If recession is not around the corner, however, the U.S...
...economy both the rate of net national saving and the rate of net private domestic capital formation have fallen to new postwar lows in the 1980s...
...Increases in the supply of money, in the context of reduced budget deficits and reduced government demand for credit, would assure lower nominal and real interest rates and help stimulate more private investment without unduly raising inflationary pressures...
...But in the absence of recession, or after a recession takes its course, we are still likely to have to confront the fundamental imbalances that have been built into the U.S...
...The austerity school argues that real interest rates cannot be reduced as long as the government borrows heavily to finance budget deficits, because such borrowing adds to the demand for credit and thus bids up rates of interest...
...The recent behavior of the Dow Jones simply reflects the usual speculative excesses and psychological ups and downs characteristic of a stock market, magnified by some new trading 170 • DISSENT POST-REAOAN ECONOMY practices and the buoyant volatility of the market-giddy Reagan era...
...In the aftermath of the deep recession of the early 1980s, before the onset of the infamous twin deficits, it would have been possible to step up the rate of both public and private capital formation while simultaneously increasing levels of public and private consumption for the vast majority of Americans...
...If foreign-capital inflows fail to offset the excess supply of dollars associated with trade deficits, the advocates of expansion would prefer to let the value of the dollar drop rather than use higher interest rates to stimulate additional foreign purchases of dollar-denominated assets and thereby protect the dollar...
...economy, we must turn to data on more fundamental indicators...
...Unless deliberate reallocative measures are taken to increase rates of saving, investment, and productivity growth in the U.S...
...imports, and if foreign governments were not willing to support the dollar with a massive infusion of credit, then the U.S...
...This is recognized by all but the most unrepentant free-marketeers...
...What are we to make of these sharply conflicting views about the appropriate way to deal with what almost everyone seems to recognize as fundamental problems with the U.S...
...macropolicy has been somewhat less expansionary, as growing trade deficits have increasingly offset the fiscal stimulus of the high budget deficits and monetary policy has been somewhat tighter...
...What is more surprising in the present context is that this puritanical approach to our economic problems is shared by not a few prominent leftists...
...economy remained essentially a sluggish one in which policymakers face an unavoidable choice between stabilizing financial markets (by reducing government spending to cut the budget deficit) and assuring real growth (by supporting the right kind of government spending with continued deficit financing...
...productivity growth—notably by changing the structure of power and the organization of work in American enterprises—it is hard to conceive of significant improvement without a substantial increase in the rate of public and private capital formation...
...government to undertake needed public SPRING • 1988 • 173 POST-REAGAN ECONOMY investment projects and to provide private firms with the critical investment incentive of expected growth in aggregate demand...
...But the two macroeconomic approaches differ on what it takes to get real interest rates down...
...If a considerable fall in the dollar cannot alleviate the trade deficit, then a reduction in the government budget deficit may be the only feasible means of doing so available to U.S...
...If the U.S...
...trade and government budget deficits—have been generating increasing anxiety, suggesting as they do a basic inability of the U.S...
...And trade deficits, by enabling an economy to acquire in imports more than it delivers in exports, provide additional real resources that can be used to raise rates of investment above the limits set by domestic rates of saving...
...A progressive fiscal policy could at the very least restore the tax rates cut by Reagan and thereby raise plenty of revenue for needed public spending without jeopardizing private saving and investment...
...One of the most important such indicators is the rate of productivity growth (growth in real output per hour of work), which is a major determinant of the rate at which average standards of living can rise...
...This is reflected in the low rates of saving that have characterized the U.S...
...Clearcut divisions between left and right do not offer any obvious guidelines for progressives, as they do on issues like the arms race and U.S...
...economy by six years of Reaganomic profligacy...
...Advocates of both the austerity and the expansion approaches agree that an important element of any strategy to boost private investment is a reduction in real interest rates (nominal rates minus the expected rate of inflation), because lower real interest rates mean lower real costs to firms investing in new plant and equipment...
...Macroeconomic stimulus from abroad—in the form of lower foreign interest rates and/or higher foreign government spending— would be much more attractive as an alternative to macroeconomic restraint at home under these 176 • DISSENT POST-REAGAN ECONOMY circumstances...
...There is no question that the capitalist world economy as a whole is in desperate need of greater demand stimulus...
...But the 1987 crash does not portend anything like the Great Depression that followed the 1929 crash, unless policymakers are so foolhardy as to emulate the Hoover administration and pursue highly restrictive macropolicy in both the fiscal and monetary arenas (by sharply reducing the budget and significantly slowing the growth of the money supply...
...we would expect levels of domestic saving to rise, helping to finance higher levels of private investment that would likely be stimulated by the growth of output...
...On the other hand, the expansion school argues that government budget deficits do not generally or necessarily lead to high interest rates because a sufficiently expansionary monetary policy can always increase the supply of credit to meet additional demand from the government...
...economy remains in deep trouble is by no means confined to left-wing critics...
...economy if there is continued expansion of domestic aggregate demand...
...Fiscal restraint, and the resultant reduction of government budget deficits, becomes an essential element of macroeconomic policy...
...A more discriminating policy of tax increases, aimed primarily at the consumption of the middle- and upper-income classes and combined with incentives to increase the rate of saving of lower-income groups, could do even more to raise public revenues in both an equitable and an efficient manner...
...macroeconomy enter into another recession, we would have an opportunity to undertake simultaneous fiscal SPRING • 1988 177 POST-NEAUN ECONOMY and monetary expansion without inviting an inflationary spiral and a balance-of-payments crisis...
...Large budget and trade deficits can, under certain circumstances, cause serious problems...
...The alternative expansion approach unites not only liberal Keynesians and many radical economists but also right-wing supply-siders...
...But simply to stimulate domestic aggregate demand without regard to the imbalances between consumption and investment associated with the current twin budget and trade deficits, is a wholly inadequate long-run macroeconomic strategy...
...A second potential pitfall is one that could arise even if expansionary macropolicy did begin to elicit the Keynesian response of higher output and employment...
...Rejection of any cut in the U.S...
...goods did not bring about a substantial increase in U.S...
...But the macroeconomic principle involved does not require such inequitable distributive consequences...
...Thus, the expansionary monetary policy needed to stimulate private investment would be short-circuited, and expansionary fiscal policy would end up crowding out expansionary monetary policy...
...Thus, any economic strategy for the United States must be judged in part on its ability to raise the rate of investment...
...Moreover, the dollar has already fallen a great deal in the last few years and there is some evidence that this is finally beginning to have some favorable impact on the trade balance...
...To prevent balance-ofpayments considerations from interfering with the policy of monetary expansion, the U.S...
...foreign policy would permit even more substantial cuts...
...Should the U.S...
...The relevant circumstances, which distinguish the current period from any other period in modern U.S...
...Moreover, any success in reducing budget deficits and interest rates would release additional funds for useful public spending by alleviating the currently huge burden of interest payments on the national debt...
...and we would expect imports to increase more rapidly than exports, providing additional net foreign savings to finance domestic investment...
...economy as one big party that must now come to an end...
...The record shows that real interest rates in the United States have remained very high, by historical standards, throughout the 1980s...
...Although data on public investment and capital stock (broadly defined to include both physical infrastructure and human resources) are more difficult to obtain and interpret, the available evidence points to a serious long-term decline in the net rate of public capital formation...
...With a major shift in government budget priorities in favor of public investment (broadly defined), a macroeconomic strategy of expansion would enable total investment and productivity growth in the United States to increase without requiring greater fiscal austerity...
...No doubt it provides a convenient opportunity for critics to draw attention to what they perceive as the main problems of the U.S...
Vol. 35 • April 1988 • No. 2
