The Root of Our Economic Woes-An Exchange
KEYSERLING, LEON H. & WEINTRAUB, SIDNEY
AN EXCHANGE The Root of Our Economic Wfoes In our November 17,1980 issue, Sidney Weintraub, a frequent INL contributor, analyzed "The Economy According to Reagan" and questioned the incoming...
...Some Latin episodes of 1,000 per cent...
...4. Keyserling takes my very brief allusion to "supply-side economics" as a wedge to reiterate his income distribution theme...
...But the current drifts in this direction are fed by inflation, the monetary modes of fighting it and, not least, the unemployment engendered by the monetary whipsaw...
...they do not recognize that human values should be supreme in an economy as rich as ours...
...In the sequel, the 1970s lost over $1 trillion in output??the equivalent of 20 million $50,000 housing units, or one million $1 million projects or production units, or a gigantic renovation of our transportation network, or the fostering of vital new and old sources of energy, etc...
...Presumably, this entails the high interest rates that our banks adore...
...The type of inflation we have aggravates maldistribution, but progressive or regressive distribution can occur under a rising, stable or falling price level...
...With some of our largest industries operating at 80 per cent capacity, unemployment at 10 per cent if fully counted, and a GNP that is about 250 billion dollars in debt annually, the choice is not between guns and butter...
...In conclusion, I must say that I strongly resent the innuendo that tip is intended to find additional "excuses for granting tax bonanzas to the big corporations...
...But most economists and others have overlooked their terrible effects on income redistribution, which comprise a primary element in our economy's roller-coaster performance...
...Talking about a "national incomes policy" just to fight inflation is not sufficient...
...2. Weintraub rightly deplores the Federal budget's past and prospective underserving of urgent national priorities, citing as examples the Departments of Energy, Education, Welfare, and Housing...
...My credentials on the matter involved are surely as impeccable as my critic's...
...A German trillion trillion...
...6. Measured "praise" for my criticism of Reagan's tax proposals is unlikely to turn my head...
...I think this is fine vintage 1920 perception and theory...
...of purchasing power as viciously and indiscriminately asanythief...
...There ismal-distribution.Thereal ways is...
...An economic Maginot Line will not win the economic war...
...Or the Israeli 130per cent monstrosity...
...There is also the national pastime of wailing over government largesse as the price patron...
...On his premises I propose pay increasesof 1,000 per cent every 3 minutes for everybody, and 5,000 per cent increases for the lower end of the income scale, to make everybody a billionaire before too many days elapse...
...4. Stating that "supply-side" economics cannot work is not very useful without giving the reason why...
...Their common but dangerous assumptions are that it will take many, many years to get inflation and unemployment down, and that our potential real economic growth rate is so low as to doom us to enduring mass poverty and neglect of vital social services...
...Instead of sneering at the Kemp-Roth approach, as inimical to a balanced budget (which we should not have now), liberals should finally take up arms against the entire notion??ascendant since 1964??that tax reductions are preferable to increased public spending...
...It survives as a mass tolerance of the equivalent of street mugging, relieved only of the violence of street assaults in purse-snatching...
...The second is caused by a dangerously growing animadversion to public outlays that begin by helping those who need help most...
...I reject the sententious diagnosis of the Great Depression as one man's superficial opinion...
...Just how much inflation is Keyserling willing to tolerate if worry over a 10 or 18 percent pace is an "obsession...
...Elevating the inflation issue to a near-obsession, rather than seeing it in a wider context, has led to the neglect of problems of equal or greater importance, and brought more inflation to boot...
...and they place forecasts above purposeful policy, reflecting their unwarranted allergies to what we can accomplish if we only try...
...The Democratic Party and liberals in general should resist this tendency by using reason and factual citation of those portions of their past record that they may most justly be proud of...
...7. This section reveals a cyclonic confusion over my copious writings on tip, the tax-based incomes policy, since my original article in collaboration with Henry Wallich, now a Federal Reserve Governor, appeared about 10 years ago...
...If Keyserling grasped these linkages, he might awaken to the impact that our inflation ordeal, and the Fed policy madness, have on our "low average real income growth...
...Will 50 per cent shake him from his lethargy...
...It seeks to eliminate our stagflation malaise, and to help us abandon our flouncing with theeconomics of derision...
...I think the economic profession in the main has been more mistaken on this issue than on anything else...
...I omit this red herring here...
...News and World Report...
...Keyserling is frivolous in the face of disaster...
...Military expenditures are obviously nonproductive and wasteful in purely financial terms...
...I am very comfortable without the halo, by fiat, and as a frequent professional critic of economics I am unimpressed by Keyserling's judgement based on his inexpertise...
...Lest the above criticisms seem captious or extreme, I hope that they will be regarded as a general protest against prevalent trends in economic and related social thought and action, even a-mong liberals...
...Many analysts appear to be more worried about what we should stop than about what we should start...
...It was deliberately designed to stabilize prices, to provide jobs for all, and to enable our country to get on with the unfulfilled national agenda...
...It is dated, and overdrawn in its pretense to holding a lock on liberalism...
...Actually, we do need more investment in industrial facilities and greatly improved productivity...
...We should have selective and carefully directed tax reductions, but to regard them as the main solution to all problems bespeaks a reckless renunciation of "big Government" in favor of Dr...
...A reply by Weintraub, professor of economics at the University of Pennsylvania and the author of many books, including Capitalism's Unemployment and Inflation Crisis and Keynes, Keynesians and Monetarists, begins on page 10...
...Today, the defense increases contemplated by President Reagan cannot approach anywhere near 10 per cent of the GNP...
...The Great Depression stemmed from inequalities in income during the 1920s, despite remarkably stable prices (except for the tumbling costs of farm products...
...The point is that both proposals are the wrong methods for stimulating the economy...
...Simultaneously, because of the Fed's incessant struggle in the horrendous price climate, usurious interest rates have become legal and entrenched These economists and others, under prodding from liberals not yet forthcoming, would do well to turn their attention to our still-unrivaled capacity for progress??all the wailing about prohibitive difficulties notwithstanding...
...It would be hard to persuade our auto makers-Chrysler especially??or our steel companies, TV producers, textile firms, the shoe industry, or home builders who have seen housing starts cut in half, of their inordinate profits...
...Guilt by association in professional occupation is imputed by lumping me with several Nobel economists...
...Monetary (and fiscal) policy could then be freed to facilitate jobs, rather than to stifle the GNP through the Federal Reserve's chronic flailing against inflation...
...That it would be desirable for wage increases to be slowed down in response to a lower price inflation is an unchallengeable truism...
...1 interpret his final words as a tacked on clarion call for economic virtue...
...Thereupon, because of the Fed's tight-money fist, new investment in plant and equipment is suppressed, new housing dries up, plant modernization is deferred, and amid the ensuing unemployment existing firms operate below capacity in the slow-growthenvironment...
...It takes money from all of us...
...we must forge a national incomes policy designed positively to help restore and maintain a reasonably full use of resources as well...
...Over at least the past decade, national policy has, with the aid of inflation, made government a powerful instrument for distributing income upward??for feeding the fat while starving the lean...
...Keyserling is opaque to these facts of economic life...
...I note Keyserling's view that this is an "inordinate" profit inflation...
...5.1 also will forego a contest in a breast-beating protest against sin...
...We know how to achieve maximum employment and output...
...Moreover, it manages to evade the inflation havoc, which, I think, defeated Jimmy Carter and the Senate liberals...
...Thus, although Sidney Weintraub's analysis of the Reagan Administration's conservative economics impressed me as timely and very well done, on the critical question of program I believe he falls short in the following respects: 1. Weintraub states that' 'The declining power of the dollar strips everyone (italics mine??L.H.K...
...As for the "quicksands of bribery," Mr...
...If education will not work, regulation is a better bet than the quicksands of bribery...
...To think so is to repeat the error of those who have tried for years to combat inflation by either cultivating economic slack or being unrealistic about defense needs...
...In addition, because of the inflation balloon our world terms-of-trade turn against us...
...They are characteristic of what I have called the poverty of American economics...
...First let me take up his numbered points, subdivided a bit for expository purposes...
...The whole price and income system can be conceived as an organized complex game of bribery...
...They seem determined to offer tidbits of advice on separate fragments of national economic policy, when they ought to be moving towards a comprehensive and coherent view based upon planning with regard to the government's actions, though not to the entire economy...
...meaning productivity??to calamity status (with which I agree), while he purrs over "elevating the inflationary issue to a near-obsession...
...This "analysis" deserves internment along with the myth about the tooth fairy...
...Prices since 1967 have risen 150 per cent...
...And there is no comparison between the two in terms of serving priority needs...
...Nothing could be more wrong according to the empirical evidence...
...An unruly price performance will, in turn, destroy the new conservative "wave" if President Reagan is not more successful in taming it than Nixon, Ford or Carter...
...It is the abysmally low average real income growth rate for more than 10 years that has thrown us for a loss, and many remedies besides treatment of price trends are essential...
...Why lend for 6 per cent when prices rise by 10 per cent...
...It would have been easy for Keyserling to avoid the blundering...
...It is because I see inflation frustrating liberal programs that I condemn the liberal self-imposed blinkers on the price irrationality...
...Apparently in his mental model money wages (and salaries) can go up by 10 per cent??as in the 1970s generally??and, despite productivity advances of 1 per cent (or declines of 2 per cent), prices will nevertheless stay level or go down...
...Without inflation the income imbalance would be far easier to detect and that would make it easier to enlist widespread support for greater leveling...
...Keyserling's closing passages, intimating that he has a vise on liberal attitudes, I find appalling...
...Such a policy involves all major types of income flow, and hinges on all major national economic policies, not merely guidelines or controls...
...His prescriptions will insure nonaehieve-ment...
...and prices were steady prior to some of the recessions we have experienced since 1952-3...
...But the frightful interest rate scourge has a double core: the tight Fed policy to fight inflation, and lenders' exacting interest rates high enough to compensate for inflation...
...7. Weintraub advocates a slackening of wage-rate increases, and refers again to his own proposal for a tax-based incomes policy (tip), involving tax benefits to business entities that resist wage and price increases deemed to be excessive...
...They lack a sense of urgency, domestic and international...
...Someone is bound to hear tales of the oil sisters, but they hardly comprise all of American industry...
...The first shortfall is due in large measure to regressive fiscal, monetary, tax and guideline policies...
...My position is that thanks to the absence of an income policy, earnings??practically all earnings??have outrun the productivity creep and generated the inflation horrors...
...A similar era of economic progress, without sordid Vietnams, could follow from a feasible incomes policy to thwart inflation...
...The same principle of rewards and penalties in tip that we have in our price, our tax and our legal systems generally someho%v escapes my critic's comprehension, despite its ubiquity...
...Leon H. Keyserling Democrats and other liberals can again prevail, I believe, only by returning (with some adaptations) to the principles and policies that made the American people favor them for so many years...
...Below, Leon H. Keyserling, Chairman of Truman's Council of Economic Advisers and currently President of the Conference on Economic Progress, comments on that article...
...A rise in government outlays generates more jobs and production, with less strain on the budget, than a decrease in taxes by the same dollar amount...
...And nothing could be more prohibitive of a properly reconstructed national economic policy, which should include improving the relative position of the wage earner...
...Furthermore, we should spell out just how the monetary policy must be changed, and by what means...
...Milton Friedman's "freedom to choose...
...3. 1 could agree with Keyserling on higher Federal spending??for cities, health, transportation, ecology??though we undoubtedly would differ on specifics...
...Yet Keyserling eschews any immersion in inflation policy beyond some objection to my own suggestions, whose content he distorts...
...At best, such thinking might have been able to pass muster in an ancient nonanalytic epoch when engineers taught that a plane would never fly...
...Most of us prefer to call the sums "incentive" payments...
...Impervious to the link between interest rates, inflation and inflation policy, Keyserling lurches into a digression on "income maldistribution...
...Unfortunately, the politics of musical chairs will maim our economy and a world that yearns for our lead...
...6. Weintraub is right to criticize Reagan's tax proposals as "proportionate" rather than "progressive," and consequently of benefit to upper-income groups at the expense of the lower ones...
...Leon H. Keyserling's comment strikes me as well-crafted to lead the discussion backwards...
...And since we lack the incomes fortitude, the Fed warms up its monetary act (on outmoded principles) to fight inflation...
...Keyserling denounces this as "erroneous" amid some arcane muttering over our "national policy...
...if only the government planning provisions of the Humphrey??Hawkins Full Employment and Balanced Growth Act of 1978 were observed instead of flouted...
...Surely, if one starts from a dismal economic position, say, near ground zero??or our Great Depression valley??even "wasteSidney \^intraub replies: ful" expenditure programs (as Lord Keynes long ago noted) can lift well-being by energizing, say, farm production: It wasn't hard to improve on the breadline society, even during wartime...
...After all, Keyserling's rendition involves pay movements "following" price movements, and not affecting them...
...2. This section is mostly an irrelevant floundering away from my piece...
...The overall problem, though, is not inadequate funds available to large corporations, it is inadequate ultimate demand in the form of private consumption and public outlays...
...Regrettable innocence and myopia are betrayed at this point...
...Income maldistribution is at the base of our entire economic mess, and policies to improve it should come first...
...AN EXCHANGE The Root of Our Economic Wfoes In our November 17,1980 issue, Sidney Weintraub, a frequent INL contributor, analyzed "The Economy According to Reagan" and questioned the incoming Administration's theories on the best way to deal with inflation...
...Keyserling sees money wages following prices, essentially...
...He seems unaware that inflation complicates the groping process in formulating a liberal agenda by preoccupying the best brains in all the professions with their personal predicaments...
...Airing this point further is guaranteed to move the discussion in reverse, to unravel the distant past at the expense of neglecting the present impasse...
...By "planning" 1 mean quantified and reconciled goals and subgoals, and policies geared to their attainment...
...People normally sympathetic to the liberal vision are disenchanted, even angered, by the price drain on their money incomes and the erosion of their small savings, which means the beclouding of their life plans...
...In addition, I do not believe that finding further excuses for granting tax bonanzas to big corporations is the right way for government to attempt to promote a sound wage-price-profit policy...
...sinking prices during the 1930s were far from a cure-all...
...Are these bribes, to get him to do the job...
...I have long been wary of applying the usual economic criteria to defense...
...This is erroneous...
...In my view, no better example of these aberrations is to be found than (he comments of four Nobel Prize-winning economists??Milton Friedman, Lawrence Klein, Kenneth Arrow, and Paul Samuelson??in the December 15, 1980 issue of U.S...
...I will resist a reply to what I detect as some implicit elementary confusions...
...5. It is imperative that we censor high interest rates...
...The actual measure of economic well-being is the real volume of goods and services produced, especially per capita...
...Incidentally, with Keyserling I regard greater income equity as a major tenet of liberalism...
...My consistent theme, however, has been that it is a forlorn dream to expect a more activist government stance in an inflationary era when most of theelectorate iso&sesserfwith inflation "stripping" a-way their purchasing power...
...Instead, he indicts me for a variant proposed by Arthur Okun, now deceased, that was withdrawn as unworkable...
...In this process, they made our lot worse on all fronts...
...But, at the same time, he seems to imply that the growth in defense spending should be questioned on anti-inflation grounds...
...Supply-side" economics is but a new form of "watering the economic tree at the top," a game that always ends up badly, as can be seen from the results of every large tax cut since 1964...
...Truly devoted to restoring higher productivity, Keyserling might himself become a bit "obsessed" with subduing the inflation irrationality...
...But the author is ingenuously misleading in juxtaposing World War II military outlays and rising living scales...
...1. I am unrepentant: Inflation "strips everyone" of purchasing power...
...The Kennedy-Johnson years (when wage and price guideposts were prominently featured) gave us 95 consecutive months of advances in jobs and production, dipping unemployment down to the 3.5 per cent range...
...Quickly thereafter Keyserling elevates thefactofthe recent "low average real income growth...
...On countless occasions I have argued that unemployment would dissolve if we did not yield to the practice of combating inflation by the archaic and sadistic means of monetary policy...
...3. While true, it is not enough to say that spending slashes plus the Kemp-Roth tax reductions will never balance the budget by enlarging taxable activity...
...But I do not believe this argument??despite its wide acceptance on the basis of equity and social justice??will make much headway until the main focus is on how redistributive policies bear upon economic performances, thereby affecting almost everybody...
...at "your friendly neighborhood bank...
...No more need be said in this context about tip...
...If money wages (and salaries) can move disproportionately to productivity without touching off a price spiral, In Coming Issues Mihajlo Mihajlov on Milovan Djilas and Josef Broz Tito Harold M. Waller on Canadian-Americon Relations then Keyserling is far too modest in his pay aspirations for labor, even downright illiberal and reactionary...
...The current notion that the times call for something "new," no matter what, is spurious and misleading...
...But what most analysts are really saying is that we have a wage-push inflation, as opposed to an inordinate profit-seeking inflation...
...Keyserling has been known to accept fees for his work...
...Nevertheless, during World War II when such spending came to 40-50 per cent of the total GNP, we increased civilian supplies, lifted living standards and stabilized prices??all because we did our best...
...He is oblivious to this distortion of energies frittered away in protective behavior during a cantering or galloping price experience...
...The pay-productivity disparity in inflation is spurned in his spoof...
...hyperinflation...
...I will return to this later...
...Liberals have weakened themselves by fighting against spending cuts, rather than for increases in properly directed Federal expenditures...
Vol. 64 • February 1981 • No. 3
