The Poverty of American Economics

...Second and more important, aside from being unrealistic in practical terms, I believe that such a position is economically and socially unjustified: It is quite superficial to found an argument for a higher ratio of one type of outlay to another type virtually entirely upon a comparison of the ratios between the two during selected past periods used as base years...

...These figures, or any reasonable variations thereof, make it abundantly clear that, even with public outlays expanded to the optimum, we would need far more private and public economic policies than we are likely to get to accelerate the needed rate of growth in private consumption...

...The economists who declare their allegiance to a high rate of economic growth and reasonably full employment, but who at the same time arrive at conclusions of policy which completely ignore quantitative analysis of the implications of these objectives, seem to me to illustrate admirably the poverty of American economics...

...If the actual level of output during these years had merely been transferred in part from private to public consumption, we might have had a better or worse product mixture, depending upon one's sense of value, but we would have been left with the same huge net deficiencies in total production and employment...

...With this and much other relevant data, he practically forces the objective reader to agree that, measured against our national needs and overall economic output, we have arrived at a shocking neglect of our essential public services...

...That makes no sense at all...

...These facts will simply not support the conclusion that a higher level of public outlays during these recent years should have been accompanied by measures to repress private consumption...

...Nonetheless, I think Bator's exercise falls short on several counts...

...He is also correct in his argument that we can achieve, through national economic policies, whatever ratios between private and public consumption (public outlays for goods and services) we desire in terms of our values as a nation...

...Moreover, this disutilization of our productive resources has been progressive...

...During the first half of 1960, a non-recessionary year, it averaged about 5% per cent...

...For example, Bator concentrates mostly on an examination of the period 1929-57...

...But these periods, reflecting wartime mobilization or demobilization, are not relevant to problems we have faced more recently or are likely to face in future—except in the event of another war, which would change the whole geometry...

...Bator points out that non-defense exhaustive public spending rose only from 7.5 per cent of our non-defense total national production in 1929 to 10.3 per cent in 1957, the latter ratio being much lower than the 13.4 per cent in 1939 and 12 per cent in 1940...

...On the contrary, we needed tremendously larger increases than actually occurred in both private and public consumption...

...But he seems to me entirely wrong in his idea that the desired increases in public outlays, in the context of the current or foreseeable economic situation, call for strong and comprehensive tax measure to repress private consumption...

...He also points out that this type of public spending, on a per capita basis related to our total population, was about the same in real terms in 1957 as in 1939 despite an increase of more than 50 per cent in total real civilian output per capita over the same period...

...Bator also is wrong in asserting that a 5 or 6 per cent overall growth rate, as against the 4 per cent rate which would seem to satisfy him, would require policies designed to increase the ratio of private investment to the total size of the economy...

...performs an immense public service...

...Bator underplays these types of outlays...

...From the middle of 1959 to the middle of 1960, the overall economy grew only 1.4 per cent in real terms, representing another period of virtual stagnation and pointing ominously toward another absolute recession...

...This low growth rate would yield, for the six-year period 1960-1%5, more than S450 billion less total national production, and about 2.S million man-years less job opportunity than would be yielded by the growth rate of about 5 per cent required to maintain reasonably full use of plant, technology and manpower...

...Yet Bator examines only a little more than half of this 1953-60 period, leaving out the profoundly significant years 1957-60...

...This indicates to me not only that Bator has not examined the period 1957-60...

...1940-47 was uniquely affected by World War II...

...He cites the periods 1946-48 and 1950-51 as examples...

...And the rather serious inflationary binges during parts of this period have been accompanied by deficient rather than excessive overall demand, if we define adequate demand as the amount of demand sufficient to keep our productive resources reasonably employed...

...Although these priorities may be "subjective," the economist's particular values must be explicit in his evaluation...

...A main argument of his book is that the higher levels of public outlays which he urges—and with which I fully agree—must be higher not only in absolute terms but also much higher relative to our total national production, and that this requires tax policies which would substantially repress (by which I mean reduce the otherwise expected rate of growth of) private consumption...

...And we need new adjustments in price-wage-profit relationships in the private structure, toward the same end...

...The argument concentrates mainly upon non-defense public spending, that is, those outlays which are constructive and imperative in an economic and social sense...

...These deficiencies in observation and analysis lead Bator into what seem to me some fatal flaws in his policy conclusions...

...I find no real justification in the now popularized, if not popular, view that we are a society opulent or affluent in our private economic lives but starved in our essential public services...

...There are glaring contrasts of luxury, affluence, comfort and poverty in both the public and the private sectors, and we need to reduce these glaring contrasts in both...

...This prevents their developing a comprehensive synthesis which is the hallmark of a mature economics, is essential to sensible public policies and is imperatively called for by the world-wide challenge to us...

...Public programs do have an impact upon private poverty, but this is partly because they increase private incomes and consumption...

...The economist who essays to develop workable or more desirable ratios among private investment, private consumption and public outlays—which is the great task of economics—must make an overall pragmatic evaluation of the whole economy in operation during the years under review...

...Third, American economics is deficient because it is more devoted to regurgitating or reformulating or exploding theories developed in the past when the facts were different (or were not available), than it is devoted to seeking current facts and probing what they mean...

...Finally, Bator's analysis leads him to the conclusion that we should impose higher taxes on investment, as another avenue for allocating enough of our resources to the needed expansion of public consumption...

...As of now, at least 10 per cent of our total productive resources is idle, and the new technology and automation are moving forward at an accelerating pace...

...LOOKING to the future, the problem is similar...

...Bator's failure to do this reveals one important aspect of the poverty of American economics, ironically conspicuous even in the academic groves where it should least exist: A majority of academicians tend to ride one pet horse or another (sometimes a good one), to puncture one pet assumption of some other economist (sometimes a bad one...

...In short, the reduction of private poverty in fair balance with the liquidation of the great deficiencies in our public services requires not only redistributive programs, but also an allocation of a sufficient portion of the total expansion of our national production (at optimum growth and reasonably full employment) toward the expansion of private consumption...

...For the whole period since the end of the Korean War has been characterized by a very dangerous chronic increase in unemployed plant and manpower...

...Other economists might arrive at somewhat different figures, but this would not change the general significance of my figures...

...The basic argument of these economists, in fact, is emotional instead of realistic, moralistic instead of moral...

...The trough of each recession has found us with more unemployment of plant and manpower than the trough of the previous recession, and the peak of each short-lived boom has found us with more such unemployment than the peak of the previous short-lived boom...

...Again, the only period reasonably comparable to the foreseeable future is the cold war period 1953-60...

...Policies directed toward the overall repression of private consumption would necessarily be regressive, for technical reasons which there is not room to cover here, and would therefore leave us with about as much private poverty in 1965 as we have now...

...The plain facts are that, from the beginning of 1953 to the middle of 1960, we had more than $200 billion less total national production (measured in uniform 1959 dollars), and about 16 million man-years less of employment opportunity than we would have had with an overall economic growth rate sufficient to maintain reasonably full use of our plant, technology and manpower...

...they would not have this effect if they were accompanied by deliberate policies to repress such incomes and consumption...

...The general reader will be propelled toward support of a much higher level of public outlays, and this is all to the good...

...He qualifies this declaration by inserting the phrase, "with intelligent policy," but his own "intelligent policies" are founded upon the supposition that the problem of inflationary pressures due to tight resource use, rather than the problem of substantial unused capacities, is the main situation to be taken into account when considering appropriate policies...

...I consider this argument wrong for the reasons stated above: In view of the new technology and recent economic trends, we need vast expansions in private investment, as well as in private consumption and public outlays—in balanced proportions...

...In 1953, despite a recession which began in the middle of the year, unemployment was less than 3 per cent of the civilian labor force...

...Even if the Federal Budget during the years 1960-65 averaged twice as high as it is now—a preposterous hypothesis—that alone would not suffice to use our burgeoning productive powers fully...

...I believe that a careful examination of the economy leads to the conclusion that an adequate level of private and public consumption combined would induce an adequate level of private business investment, without further tax concessions or other concessions to investor groups...

...I regard this as the central issue around which all satisfactory national economic policy must cluster...

...and 1950-53 involved the Korean War...

...Study of the period 1953-60, therefore, would be far more relevant than investigation of these earlier periods for drawing conclusions as to desirable ratios among the components of the economy today and tomorrow...

...Bator lets the cat out of the bag when he admits his "complacency" about trends in private consumption...

...The multiple-parson families in the United States with incomes below $4,000 a year, and with average incomes of about $2,500, still constitute almost one-fourth of the nation...

...Many of these are among the aged...

...The deficiencies in the book are in one sense not really his, but rather the deficiencies of American economics in general...

...But 1929-39 was characterized by deep depression...

...THE FIRST ERRONOUS conclusion Bator draws, with related policy implications, is that inflation is due to excessive overall demand, or excessive strain upon total productive resources...

...Then the economist needs to set forth what alternative ratios, induced by what methods, would have induced an improved performance, and why...

...He must then make explicit what was wrong with the actual ratios, in terms of objectives for full employment and optimum economic growth, for reasonable price stability, for at least a modicum of social justice and for meeting priority needs...

...These rather stringent criticisms of Bator's book require that I assert again in conclusion that he has done a very useful job, and done parts very well...

...He is correct in his argument that higher taxes can be used effectively to repress private consumption (as well as private investment), and he disposes admirably of the argument by Colin Clark and others that higher taxes would be inflationary, impair incentives, etc...

...A discussion of inflation which ignores these newer aspects of the problem is not of much value and leads to serious policy errors...

...It especially concentrates upon non-defense "exhaustive" public spending which consumes a share of our total national output—e.g., school construction—as distinguished from non-defense "non-exhaustive" public spending which merely transfers income—e.g., interest payments on the national debt...

...At least the qualitative analysis should take account of vital trends up fairly close to the time of final revision of the proofs...

...First of all, his comparison of the portion of total non-defense national production absorbed by LEON H. KEYSERLING, one of the nations top economists, served from 1946 to 1953 as vice chairman and then chairman of the President's Council of Economic Advisers...

...The ratios in these base years may not be a good "model" for anything...

...We also need vast increases in various Government transfer payments, such as welfare grants and payments to low-income farmers, which Bator calls "non-exhaustive" public outlays, and which directly increase private incomes and consumption...

...It is perfectly feasible for a book published in 1960 to include materials well beyond 1957...

...Bator also deals eloquently, and to some degree effectively, with other stock but specious arguments against increased public spending: that it must be inflationary, that it would leave insufficient productive power for other necessary or desirable purposes, and that the individual choices of 180 million consumers in a "free market" have some intrinsically higher value in a free and flexible society than the choices they make together as a nation in the form of public outlays...

...About 4 million individuals living alone (single-person families) have incomes below $2,000, with the average very much lower than this...

...Moreover, the size of the economic job we need to do requires not only vast increases in public outlays, but also vast increases in those public programs—e.g., Social Security and legislation improving labor standards—which enter into the measurement of private incomes and consumption but do not enter into the size of public outlays...

...The ratio of public to private spending in a sorely stricken economy provides no fair "model" on which to even intimate desirable ratios for a year like 1957...

...non-defense exhaustive public spending in 1957 with the portion absorbed in 1939 is subject to grave misuse (and in fact has been seriously misused by some reviewers) . In 1939 we still had tremendous unemployment, reflecting the failure to reactivate private investment sufficiently and to restore a reasonable amount of overall economic health...

...Similarly, Bator reaches the conclusion, which profoundly influences his policy direction, that "appreciable unused capacity" is not likely for long periods...

...but also that he has not examined very carefully the period 1953-57...

...Let me illustrate specifically how Bator's omissions on this score lead him into what I think are extremely erronous policy directions...

...It presents factually and unanswerably some aspects of the case for greatly increased public spending to meet national and international needs which cannot otherwise be met...

...If our overall growth rate repeats the average annual growth rate of about 2.5 per cent since 1953—which I think likely without drastic changes in private and public economic policies—I estimate that about 8 per cent of our labor force and perhaps 16 per cent of our total productive resources will be unemployed by 1965...