An Economy in Deep Trouble

...The unique opportunity available to the United States is to restructure our economy simply by catching up with the competition...

...According to the figures of the Office of Management and Budget, federal investment in public capital has been cut by a third from 1976 to 1990: education and training by almost 40 percent...

...Economists have long been aware that economies, like trains, travel over two tracks, express and slow, the first giving us generationlong periods of rapid economic progress...

...Independent estimates by David Aschauer, to whose investigations we owe much of our belated recognition of the importance of infrastructure, show that the rate of nonmilitary public investment in the 1980s was only half that of the preceding decade and only one-fourth that of the 1950s and 1960s...

...Some of these programs, moreover, could well be turned into permanent sources of employment by using federal funds to establish city employment corps for neighborhood rehabilitation, park improvement, school maintenance, and the like, along the lines of the equally famed Public Works Administration (PWA) that gradually displaced much of the WPA...

...further articles will appear in later issues...

...I want only to make clear that it was a depression—contained and restrained by the safeguards of modern capitalist policy, but real enough, nonetheless, to demolish the widespread belief that the American economy, because of these safeguards, had rid itself of its tendencies to develop systemic malfunctions and structural faults...

...Nine million unemployed is indeed an "army," but it is not an army of twenty-five million, which it would be if we were to duplicate the thirties...

...Aschauer's researches also show a powerful, but previously unrecognized correlation between the rate of public investment and the growth of productivity in seven industrial countries...

...It is not difficult to spell out the dimensions and promises of a large public investment program that might put us back on the growth path that petered out in the 1970s...

...450 • DISSENT...

...Not least was the rise of public expenditures of all kinds from an average level of 10 percent or less of Western GNPs before the war to between a third and a half of GNPs within two decades of the war's end...

...Because of the obvious importance of the second question, there is a tendency to overlook the first...

...Its effect is to level the charge of profligacy and waste against all borrowing, good as well as bad...

...research and development by the same...

...As in that earlier time, one of these developments was the havoc wrought by financial speculation in the business sector...

...Virtually every other capitalist nation has come to see its public sector as an indispensable partner in its long-term future...

...They must be much larger than anything we have 448 • DISSENT heard about...

...This brings us to the near-pathological issue of the deficit...

...education to European levels and to institute a comprehensive apprenticeship program for all noncollege-bound high school students (we are the only large industrial power without one...

...the next best was Germany, which outspent the United States on infrastructure by ten to one and outstripped our productivity growth by four times...

...How would the great corporations finance a $2 or $3 trillion investment boom...

...The main transformational booms of the past are familiar to us as the first industrial revolution, the railroadization and later the electrification of the nineteenth century, and, of course, the automobilization of the 1920s...

...Here we come to the problem of costs...

...another to face its difficulties...

...Recently, the economist Edward Nell has helped us understand the problem better by giving the name "transformational growth" to growth along the fast track...

...The chairman of a great bank once said that a corporation that ran its books the way the federal government does would be stopped by the SEC from issuing further securities...

...After the initial expenditures of such a private boom had been made, further investment would be at least partly paid for by the revenues of the new products and processes already brought into being...

...Nonetheless, when the orgy of the 1980s was over, the organizational results were much like those of the earlier period...

...In that near-mythic collapse, gross national product fell by almost one half over four years...

...Since then it has risen slightly, and is today about 1 percent higher than that low point...

...the second, lengthy periods of relative stagnation and slow growth...

...The postwar transformational boom petered out in the mid-1970s...

...To say this is not to diminish the scientific virtuosity or the importance of such new developments as genetic engineering or ceramic materials or high-definition television but only to express disappointment with regard to their effects on the production map of the economy...

...As we will see, such a program would serve us in precisely the same manner as would a more pioneering transformation...

...If we had a German return, for example, our tax revenues would be higher by almost $300 billion a year...

...For whatever reasons, that seems to be a determination that the country cannot make...

...One aspect of it was the economic modernization of Europe, a transformation as far-reaching as any of its classical predecessors...

...The first is serious injury to the productivity of the private sector...

...The nation's economy responds in complex ways to an investment boom, but it does not ask where the dollars come from, only how many there are...

...It may well be that a labor-absorbing, general-purpose infrastructural program, such as the New Deal's famous Works Progress Administration (WPA), would be necessary to offer quick economic relief to inner cities...

...I say "near-pathological" because I doubt that one person in a hundred among the millions of Americans who oppose the deficit would be able to explain what it is...

...An infrastructural boom cannot be launched by any other industrial nation—because they have already done so...

...There is a simple and vivid way of illustrating this...

...if we had a French tax structure, revenues would increase by double that...

...and whose rate of productivity improvement was six times ours...

...Thus an adequate approach to financing a transformational boom will await the rational design of the nation's finances, principally by introducing the idea of a capital budget that separates public investment from ordinary, operating expenditures like congressional salaries or the pay of the armed forces...

...By way of putting things into proportion, our own GNP, corrected for inflation, has fallen by barely more than 1 percent from its peak in 1990 to its trough in the second quarter of 1991...

...Of key importance here are two factors: what kinds of public investment and how large an overall program...

...Can we not say the same for federal borrowing...

...We now have the statistical evidence that at least 60 percent and perhaps 70 percent of the entire increase in wealth over those years went to the top 1 percent of families...

...Money borrowed to pay for ordinary expenditures that ought to be financed by regular household income or company revenues is almost always ill-advised, whether from the viewpoint of the borrower or the nation as a whole...

...The answer is that they would use the savings of the American economy through issues of new equities and bonds...

...It is one thing to describe the possibilities of such a program...

...I think two explanations can be given...

...A number of theories have described the "long waves" that result from traveling first on one track and then on the other, but the theories have not suggested 446 • DISSENT policy measures to shunt the economy from the wrong track to the right one...

...The great barrier that towers like a steep escarpment ahead is therefore not the financing of the deficit nor the design of an intelligent policy that would guide its application nor the redress of the inevitable mistakes and misdirections that would accompany it in practice...

...If 1929 measured nine on the Richter scale, this is barely one...

...The second consequence is that the neglect of our public capital has widened the gap between European and Japanese performance and our own...

...Aschauer's research reveals that a dollar spent for public investment raises GNP by two to five times as much as a dollar spent for private investment...

...Moreover, if tax returns were not sufficient to help pay for the remaining projects, they could be easily increased: the United States suffers from the lowest tax "return" to GNP of any other OECD nation...

...In the household and the corporate sectors, that question is easy to answer...

...But what of the initial decade, when hundreds of billions would be disbursed before large flows of revenues could be expected to materialize...

...This brings us to the present...

...q This article is the first in a series on the American economy...

...The deterioration reflects another area of damage of the Reagan-Bush years...

...I could go on with dreary comparisons—in the 1930s we gained our Hoovervilles, in the 1980s our homeless—but I do not want to lose my point by suggesting that the depression of the 1980s was a carbon copy of its infamous predecessor...

...The opportunity lies in building up the underpinning of public capital on which the private economy rests...

...For all the severity of its specific problems, the root cause of the hidden depression was a laggard pace of growth...

...This last point brings us to the core of the question...

...The many problems of such a transformational boom—its inflationary pressures, its foreign exchange ramifications, its pull on our store of savings—are real enough, but their difficulties lose much of their force once we realize that precisely the same questions would have to be faced were the boom to originate in the private sector...

...Treasury, but that of tapping savings through issues of bonds is certainly available...

...Once more an analogy with the private sector is useful...

...My reference to pathology refers simply to the fact that I doubt very much that many people know that the deficit is, by definition, equal to the nation's borrowing...

...Once these simple words are said it becomes inevitable to ask: "Borrowed for what...

...In the 1980s much the same process appeared, as leveraged buyouts and unfriendly mergers also used the earning capacity of profitable companies to finance extraordinary reorganization schemes whose only purpose was to funnel wealth to strategic holders at the top...

...and so on down to Canada, which only improved its productivity three times as much as ours and only exceeded our ratio of public investment to GNP by twice...

...The answer is that the national income accounts—and worse, the models by which private economists picture the workings of the economy—have no category for public investment...

...These may be institutional as well as technological innovations—the "invention" of the corporation was surely as important for late nineteenth-century prosperity as was the Bessemer process—but in either case the transformations radically change the entire business outlook, moving out the production-possibility frontier, to use economists' jargon, which for once is vividly illustrative...

...One aspect of this damage was an unprecedented maldistribution of income...

...This has not been the case with sluggish growth...

...In the 1920s, this took the form of corporate pyramids that milked the earnings of operating units below into the coffers of holding companies above...

...All these play the same role in enhancing productivity as do advances in machinery or organizational efficiency in the private sector...

...Rohatyn himself urges that we spend $1 trillion over the next ten to fifteen years to build up our public capital, an appropriation dwarfing that suggested by Ross Perot...

...Aschauer's findings have laid the basis for an emerging consensus on the need for restoring our public capital...

...This extraordinary redistribution from the bottom to the top was the most dramatic, but by no means the only symptom of deep-rooted trouble in the economy...

...That awareness, I think, contributes to understanding the mood of the present...

...In actual figures, the average incomes of these households rose from $314,536 (in today's dollars) to $675,879...

...If the United States finds no way of forging a new partnership between its public and private sectors, I see no chance that we can enjoy, at least for a long while, the social and economic benefits of another great transformational period...

...Private spending is carefully divided between consumption and capital building purposes, the latter universally extolled as the source of growth...

...Leftovers from the dismantling operations of the merger movement littered the beach, but not a single new world-class organization had emerged from the melee...

...Between 1929 and 1934, the number of unemployed increased 800 percent...

...In the same fashion, the initial surge of confidence and buying power that accompanied the emplacement of the welfare state has been followed by a growing awareness of its problems, above all the increased susceptibility to inflation traceable to the very gains that a welfare system engenders in the working class...

...I do not refer here to the technical problems of how the deficit is measured—Robert Eisner, a past president of the American Economic Association, has recently described a half dozen entirely defensible ways of calculating the 1991 figure, ranging from $321 billion to a surplus of $71 billion...

...I begin with these comparisons because it is important to recognize the differences between then and now if we are to plan intelligently for the future...

...For two years now we have heard that the recession was over, or soon would be over, or in any case wouldn't get worse, certainly not much worse...

...I say the most discouraging because, for all their extent and damage, the problems of lopsided income distribution, concentrated urban poverty, financial destruction, and the like can be met with some kinds of remedies and countermeasures...

...Unlike any corporation, most states, FALL • 1992 • 449 and the majority of other industrial nations, we have an indiscriminate category called "a deficit," which includes all borrowings for whatever purpose...

...This is not the place to speculate about the basis of this American economic fundamentalism...

...We had another such boom after World War II...

...but this R-talk is sounding ever more hollow, as the economy slogs along, with stubborn unemployment, sluggish sales, and a pervasive gloom you could cut with a knife...

...Congress, for example, has recently appropriated $150 billion for upgrading our transportation facilities: Felix Rohatyn points out that Taiwan has appropriated $600 billion for the same purpose...

...Thus the most discouraging aspect of the hidden depression has been its slowdown in the rate of economic expansion...

...Lower interest rates or lower taxes or other nostrums may get us back to the growth path of the 1980s, but the genie of fast growth remains in the bottle...

...In fact, I suspect that we will not know we have turned the corner until someone in the next administration—let us hope that it is the next administration—finally explains that we have been going through a long and sapping depression, and that the challenge of the next decade is to pull ourselves out of it...

...But all government expenditure is treated as consumption...

...But even if we construct an "average" American whose income grew because it included a share of the bonanza returns of the top 1 percent, it would have taken a hundred years before such a person would have had enjoyed the gains that his or her parents had known in half that time...

...Average income for the lower 80 percent shrank by about 7 percent...

...Thus the much touted "longest period of uninterrupted growth FALL • 1992 • 445 in our history" was in fact a time when the seventy-odd million families who make up the lower four-fifths of the nation suffered declines in income that were masked in the national aggregates only because of huge gains for the approximately ninety-five thousand topmost 1 percent of households...

...I suspect, however, that the leverage of an infrastructure boom will depend to a considerable extent on investment spending that would bring us up to, perhaps even slightly ahead of, the production frontier of our principal competitors...

...Perhaps it may become less so tomorrow, if the public comes to realize that such an amendment would effectively end all public investment that cannot be paid for by taxation, which is to say, end any possibility of using the federal budget to launch this country into the only transformational trajectory that now seems available...

...Whatever the means, however, borrowing from some source—corporations, funds, banks, or households —is certain to be a mainstay of any financing operation...

...The transformational potential of a massive buildup in infrastructure arises not because of any intrinsically greater productivity of public FALL • 1992 • 447 over private projects but because the stock of public capital has so deteriorated that additions to it exert more leverage on output than equivalent additions to the private sector's stock of capital...

...There are, of course, other ways of helping to defray the costs, mainly gasoline taxes and borrowing from pension funds...

...Unemployment, similarly, has not shown the horrendous deterioration that we still carry in our minds as constituting a "real" depression...

...Whether such a reform is imaginable today, when both the president and the public support a balancedbudget amendment to the Constitution, is unlikely...

...In the 1920s, the orgy ended with a crash—or rather, with The Crash— leaving much ruination behind...

...Then why the gloom today...

...How can one raise these very large sums of money...

...Of even greater strategic importance would be a major effort to raise the quality of U.S...

...The first is that we have become increasingly aware of the damage that was incurred but ignored during the Reagan years...

...Infrastructure, as everyone knows by now, is a general term covering public capital...

...Such a debacle can only take place in an economic system that lacks institutional safeguards to block these cumulative possibilities—unemployment insurance, a central bank prepared to ease credit in bad times, an agricultural support system, Social Security payments...

...The option of issuing new equities is not open to the U.S...

...This is stunningly confirmed when we ask why David Aschauer's original research created such a stir...

...Looking back over the profile of growth that stretches from the early 1950s up to the 1970s, we find that real per capita income grew fast enough to allow an average American, by his or her middle years, to enjoy a standard of living twice as high as that of his or her parents...

...The United States, almost alone, persists in viewing the government as an enemy within the gates or at best a necessary evil that must be tolerated, but cannot be encouraged...

...Without the human capital embodied in an educated work force it is doubtful that we will be able to participate effectively in any future private change, much less play a leading role in bringing one into being...

...Now comes a remarkable opportunity to launch a transformational boom without the necessity of a vast restructuring of production similar to those of the past...

...And there is one additional consideration...

...Thus the economy since the 1970s has displayed the sluggishness characteristic of all slow-track periods, played out in a new institutional environment of contained rather than self-feeding contractions...

...These figures were originally looked on with skepticism, but Alicia Munnell, director of research at the Boston Federal Reserve, has recently testified that they are now widely accepted as true...

...In the 1930s we were experiencing a kind of collapse that is no longer a threat for an advanced capitalism—namely, an economic contraction in which an initial shock, no worse than many we have suffered since, feeds upon itself until it becomes a social disaster...

...But there is another, and perhaps more important, explanation...

...None of these existed in the 1930s, so that once the economy tipped off center, it entered a condition of free fall, precisely as we would have, at the end of the eighties, had not Federal Deposit Insurance prevented the S&L collapse from repeating the 1930s, when a similar failure wiped out nine million savings accounts...

...During the years of the hidden depression, as we have seen, most American households actually suffered declines in real income...

...This series has been made possible by a grant from Harry Kahn...

...Its conventional components are highways and bridges, dams and sewer systems, but include as well components that do not so quickly spring to mind: air traffic control networks, weather satellites, National Institutes of Health, R&D centers, public education, and the like...

...This disheartening recital of neglect is, of course, the reason why the United States has an opportunity for transformational growth that is not available elsewhere...

...As the name indicates, transformational growth gains its vitality not merely from the exploitation of the existing array of business opportunities or from the opportunities offered by individual breakthroughs out of it, but by the emergence of new sectors and salients that transform the array as a whole...

...Here again, I find an analogy with a private-sector boom helpful...

...I shall simply end by drawing my own conclusions with respect to its consequences...

...Another aspect was the revolutionary technologies of the jet plane, which laid the basis for mass tourism, the world's largest (trillion-dollar) new industry, and the computer, which altered the organization of business itself more radically than the advent of the typewriter...

...In similar fashion, there is reason to expect that a public-sector boom, after its initial phase, could finance its further phases at least partly by additional tax revenues—the public equivalent of the additional sales of the private sector...

...The astonishing answer is that we cannot—not because the division between wise and unwise borrowing is not entirely applicable, but because federal borrowings, unlike those of any other entity, are not identified by purpose...

...I have myself said that a program of transformative investment that originated in the private sector could easily require $2 to $3 trillion of financing over the ten years or so of its buoyant first phase, and that I see no reason to believe that a public-sector boom would cost less...

...physical capital by 30 percent...

...In October 1987 we actually suffered a stock market crash that was more precipitous and deeper than that of 1929, although the determined efforts of the Fed prevented the crash from generating tidal waves of bankruptcy...

...On the other hand, money borrowed for capital-enhancing purposes —the financing of a young person's education or a promising business venture—is usually a wise financial transaction that will pay for itself many times over, for borrower and the public alike...

...Thus the principal way in which a transformational boom could be financed would be essentially the same whether it were carried out under private or public auspices: funds would be borrowed to pay for the capital costs...

...Two consequences have followed...

...The best performer has been Japan, whose ratio of public investment to GNP over the past years has been some twenty times greater than that of the U.S...

...It is therefore automatically removed from consideration as a source of growth on a par with, perhaps even more important than, private investment...

...It is a growing concern that the future offers nothing beyond a return to the trajectory of the very years we have been discussing...

...The depression is not at all the kind of catastrophe we experienced in the 1930s...

...This is a ferocious gutting of our public capital, without precedent or purpose...

...This constituted nothing less than the replacement of the defenseless, depression-vulnerable economy of the 1930s by the relatively depression-proof welfare state of the 1970s...

...It is the difficulty of persuading the American public—and perhaps even more necessitously, the elites in political, corporate, and academic life—that a vigorous, active public sector is a legitimate part of modern capitalism...

...This suggests such projects as bullet trains linking the main American cities, modernization of our antiquated air traffic control system, an extensive research effort to make solar energy a major source of power...

...In our case, it has increased by less than 50 percent, counting from 1989, when unemployment was "only" 6.5 million, to today's levels, when it hovers above 9 million...

...The eighties, like the twenties, were a period of superficial prosperity that masked dangerous structural developments...

...What is discouraging about this, as I have said, is the absence of any plausible policy to get us back on the fast track...