The Misunderstood Economy: What Counts and How to Count It, by Robert Eisner
Levinson, Mark
THE MISUNDERSTOOD ECONOMY: WHAT COUNTS AND How TO COUNT IT, by Robert Eisner. Harvard Business School Press, 1994. 222 pp. $22.95. Bill Clinton campaigned for his current job by reminding...
...In a slow-growth economy, public investment puts people to work and is a necessary complement to private-sector productivity growth...
...National governments have difficulty providing for full employment and growing living standards because the international economy undercuts the capacity of governSUMMER • 1994 • 425 Books ments to control their economies...
...Real structural deficits have helped and not hurt output, employment, consumption, and wellbeing in the present...
...The vast majority of the interest we pay on the national debt can be counted as an asset held by the American people, who own the bulk of treasury bills, notes, and bonds that constitute the debt...
...If the "natural rate" were judged to be at something like 1 or 2 percent of the labor force the idea would not be particularly bothersome...
...Of the seven largest economies, the one with the smallest budget deficit (as a share of 1994 GNP) is the United States...
...Eisner's argument on the debt and deficit can be summarized as follows: The deficit is smaller than the official numbers indicate...
...Cutting spending and/or raising taxes reduces aggregate demand, slows the economy, lowers savings, depresses investment, and leads to fewer jobs...
...For years we were told that efforts to reduce unemployment below a NAIRU of variously 6.5 and 7 percent would either (1) do no good or (2) cause accelerating inflation...
...The greatest misconception of modern economics, according to Eisner, is the doctrine of the natural rate of unemployment...
...Having appointed these advisers, Clinton took their advice...
...When Eisner discusses domestic economic policy he is relentless in his criticism of economists who do not base their theories on fact and logic...
...he lamented the fact that so many people were out of work...
...Clinton offered an alternative...
...A second subtraction could be made for state and local government surpluses...
...Robert Eisner does not crave respectability...
...In addition, the real value of the federal debt is reduced over time because of inflation...
...This only makes the deficit worse...
...Eisner believes we can have a civilian equivalent of World War II...
...He pointed out that wealth was transferred from the poor to the wealthy...
...he described an economy sapped of strength by speculation and fraud...
...Reducing the deficit will not spur economic growth...
...THE MISUNDERSTOOD ECONOMY: WHAT COUNTS AND How TO COUNT IT, by Robert Eisner...
...Better to tolerate millions of unemployed than to tinker with nature...
...Low wages, deregulation, and tax cuts are seen as the keys to national prosperity...
...Almost everybody talks about budget deficits," says Eisner, and "almost everybody seems in principle to be against them...
...According to the Organization for Economic Cooperation and Development (OECD), America's budget deficit will fall to 2.7 percent of GDP this year, from a peak of 4.5 percent in 1992, and narrow further to 2.1 percent next year...
...I eagerly await the econometric estimates of accelerating inflation that can come out those figures...
...The debt is not a burden on our grandchildren...
...The theory assumes that inflation is the worst economic misfortune and that in order to avoid 424 • DISSENT Books it we must prevent several million people from having jobs...
...he decried the condition of our public sector...
...It makes clear that a nation with an absolute advantage in the production of all goods should not produce all goods...
...The problem is that "almost no one, literally, knows what he is talking about...
...Robert Eisner is an exception to this SUMMER • 1994 • 423 Books consensus...
...By comparison, Japan's deficit is expected to be about 3 percent of GDP and Germany's around 4 percent...
...Then the administration announced that it was downplaying economic growth in favor of higher interest rates and stable financial markets...
...Somewhere Keynes is smiling...
...The federal budget does not distinguish between current operating outlays and capital expenditures...
...They have also entailed more, not less investment in our future...
...This is simply not the way the world works...
...But when it comes to trade policy Eisner endorses orthodox free-trade views...
...It is hard to see how Eisner's domestic Keynesian strategy can work without an increase in global demand...
...But the advisers, backed by respectable opinion, were themselves skeptical of Clinton's program...
...In World War II hordes of young, old, female, black, unskilled, and hard-core unemployed persons previously dismissed as unemployable became cherished contributors to the war effort...
...Free trade in the textbook sense does not and can not exist...
...He is a maverick who believes that when nine million people are out of work and the economy is burdened with unused capacity and inflation at low levels, government has a responsibility to increase growth and reduce unemployment...
...During the Kennedy administration the official goal of public policy was to achieve 3 percent unemployment...
...When Keynes visited the United States in 1932 he lashed out at the timid way statesmen and economists were responding to the depression...
...He concludes that present deficits are not too large...
...Inflation . . . went from 3.9 percent in 1988 to 4.4 percent in 1990, and then to 3.9 percent in 1991...
...The world economy is in a downward cycle of slow growth, high interest rates and depressed purchasing power...
...rich ones suffer capital flight...
...Where, Eisner asks, is the evidence that fiscal or monetary stimulus directed at reducing unemployment has caused accelerating inflation...
...The country appears to be forgetting the most important lesson we learned from John Maynard Keynes and World War II: that who is employable depends strictly on how badly employers need workers...
...It has long been recognized that at very low rates of unemployment increasing aggregate demand will result in higher prices rather than lower unemployment...
...His "putting people first" strategy proposed government-led programs of public and private investment...
...A number of economists believe we are already at or near full employment...
...In The Misunderstood Economy Eisner is at his best when he debunks the conventional economic analysis of debt, deficits, and unemployment that rationalizes government inaction...
...As long as there is slack in the economy, deficit spending can increase output, raise employment, and provide a sensible way of financing capital undertakings...
...Clinton based his economic plan on deficit reduction...
...But in the midst of an unusually slow economic recovery the Federal Reserve raised interest rates despite the lack of inflation...
...Government is inextricably involved in the modern economy: subsidies to an exporter, public infrastructure investments, or government research assistance—policies likely to be supported by Eisner—are as much an interference with free trade as a tariff or quota...
...Such a framework requires a global Keynesianism— including international regulations and standards in such areas as labor rights and the environment—that goes well beyond free trade...
...Eisner argues that our economy needs more public investment—which has fallen to a postwar low—financed substantially by debt...
...It should rather specialize in those goods in which it has the greatest absolute advantage, the comparative advantage...
...By the late 1960s the aim was defined as 4 percent unemployment...
...We need this pool to meet the normal demands of the labor market...
...These measures were designed to ease the transition from a military economy and to raise productivity and create jobs...
...Even if millions of workers are fully qualified and fully motivated they would still be unemployable...
...426 • DISSENT...
...Most of the inflation of the postwar period has come from supply shocks—chiefly the great increase in oil prices in the 1970s and early 1980s...
...Yet listen to Eisner on trade: The law of comparative advantage rigorously demonstrates that trade is a two way street, the gains from which are in no way impeded by differences in wages or productivity...
...Can anyone be sure it will increase inflation, let alone by how much or that the inflation will continue accelerating...
...It is almost inconceivable," he said, "what rubbish a public man has to utter today if he is to keep respectable...
...He declared that the result would be lower interest rates, increased investment, and more jobs...
...To assist in selling his program to a skeptical Congress and financial community, Clinton appointed Robert Rubin from Goldman Sachs to head the National Economic Commission and chose conservative Senator Lloyd Bentsen as secretary of the treasury and deficit hawk Leon Panetta as budget director...
...Perhaps to obscure the implications of this doctrine somebody came up with the name NonacceleratingInflation-Rate of Unemployment, or NAIRU...
...According to Eisner, these two items alone reduce the deficit by almost 60 percent...
...By historical or international comparisons our deficit is not large...
...But there is no reason why the federal debt cannot continue to be rolled over and to grow, as long as the nation's income is growing...
...Speaking to the New York Times of the 8.5 million officially unemployed, Allen Meltzer, an economist at Carnegie Mellon Institute, undoubtedly tenured, states, "They are really all people between jobs...
...Bill Clinton campaigned for his current job by reminding America what had happened during twelve years of Republican rule...
...Clinton's transformation is emblematic of the narrowing of economic policy choices in American politics...
...Global trade flows are not the result of classic laws of comparative advantage: most nations, by pursuing policies that benefit their own industries, create comparative advantage...
...There is no shortage of work that needs to be done...
...They believed the deficit had to be reduced, and they took seriously the opinions of bondholders and investors, according to whom inflation is the greatest evil and who are perfectly content with stagnant wages and slow growth because the market value of bonds rises under those conditions...
...I daresay no...
...Countries compete by keeping the cost of production low...
...The theory states that if unemployment falls below the "natural rate," inflation will rise and continually accelerate...
...in the late 1970s many economists defined 6 or even 7 percent unemployment as full employment...
...The Congressional Budget Office estimates that each percentage point of unemployment adds $50 billion to the deficit...
...Fear of deficits and silly talk about natural rates of unemployment have contributed to a state of national amnesia...
...Further, it implies (the "natural" rate) that there is something fixed, immutable, and irreversible about such joblessness...
...Eisner's uncritical acceptance of the mainstream view of trade is the weakest part of his book...
...One wonders what George Bush would have done differently...
...But to define at what level of unemployment that occurs is very difficult...
...But the "natural rate" has increased substantially over the past thirty years...
...Those parts of the federal budget that represent investments that are paid out over many years—bridges, highways, dams—should be only partially included in the current budget, as is the accounting custom in the private sector...
...If the debt were ever paid off, the generation that did so would be the same generation to receive the benefits...
...Harvard Business School Press, 1994...
...One admires both his compassion and naïvet...
...The challenge is to construct a global trading system that will gear the world toward high growth and full employment...
...As Eisner puts it: Can I guarantee that measures—short of war—to reduce unemployment to 3.4 percent will not increase the rate of inflation...
...Then in 1988, 1989, and 1990, unemployment averaged successively 5.4 percent, 5.2 percent, and 5.4 percent...
...That his views on trade are inconsistent with his belief in an activist government is a point I will return to...
...Poor countries that refuse to follow these policies lose their access to capital...
...The fact that most economists have similar opinions on the budget deficit, unemployment, and trade policy, and that these opinions coincide with the interests of the affluent, surely contributes to the somnolence of our policy debate...
...Clinton favored a strong economic stimulus, funding for education and training, and direct public investment in infrastructure and new technologies such as fast trains, telecommunications, and environmental innovations...
...They can, should, and probably will be brought down as we reduce unemployment, speed economic growth, and achieve a prosperous economy...
Vol. 41 • July 1994 • No. 3
