Capitalism's Dark Shadows

...Michael Milken, passed into a minimum-security jail...

...Drexel Burnham Lambert passed into bankruptcy...

...Then, as the product of economic uncertainty, the urge for personal liquidity becomes stronger...

...In the modern large corporation, authority resides in normal circumstances with the management...

...Similarly, the leveraged buyouts defended the existing management from corporate raiders—from those who, in search of their own wealth and aggrandizement, threatened the executive position, prestige, and return of those already in command...

...assuming there was no loss, this was very attractive...

...A recession is thought to be a temporary departure from the norm—from the substantially full employment of willing workers and a steady expansion in economic product...

...Proposals for reinstituting regulation were righteously rejected by Reagan administration officials...

...This was the living fact of the Great Depression...

...Beginning in the summer of 1990 in the United States, there was depressed economic performance and high unemployment, ranging up to more than 7 percent of the labor force plus the many more who had given up the search for work and were no longer recorded...

...With time, the depressive effect of the real estate speculation, the banking troubles, and the S&L disaster will come to an end...

...The top 1 percent of families earned 12 percent of all income and held more than a third of all net worth...

...Now, in surveying the world scene 60 years later, one can see the reward of history: It is John Kenneth Galbraith is Paul M. Warburg Professor of Economics emeritus at Harvard University...

...Capitalism, especially as manifested in the United States but also in Western Europe and Japan, was encountering difficulties as well...

...The United States in recent times has had an increasingly unequal distribution of income...

...There is a problem in using the government deficit to sustain the flow of purchasing power—aggregate demand—and it is not especially subtle...

...For them it invades and sets aside one of the high principles of the market system...

...Capitalism's Dark Shadows An alarming and rarely mentioned paradox: For many of the country's richest and most powerful, a recession might be preferable to what it takes to get the economy moving again BY JOHN KENNETH GALBRAITH The beginning of the 1990s was dominated, not surprisingly, by the revolution in the Soviet Union and Eastern Europe...

...Not mentioned in this continuing and often ardent debate is the possibility that a highly unequal distribution of income can be strongly dysfunctional for the performance of the economic system...

...The recollection of the Reagan presidency would not have been of its seven fat years...

...When they neither spend nor invest, a new equilibrium is set by the reduced demand...

...nothing so nurtures oratory as the commonplace...

...the list goes on almost indefinitely...

...The memory of the great speculative episode fades...

...Tax reduction returned income generously to the rich...

...That may have been the case in the United States in recent years...

...When, as ever, the day of reckoning arrived, the junk market collapsed and the less fortunate were left in possession of now-worthless paper...

...And all accepted economic doctrine assumes—no doubt rightly—that the basic objective of the industrial firm is the maximization of return...

...its most distinguished and highly regarded operator, Mr...

...Unemployment is regretted but less so when suffered by others unknown...

...some of it, as in the 1980s, may be absorbed in functionless debt creation, such as that which financed the mergers and acquisitions and the leveraged buyouts...

...Capitalism, the market system, was triumphant...

...The poor spend what they receive in good times and bad...

...Economic stagnation and a high rate of unemployment continued over the next many months and acquired an aspect of permanence...

...new investment is encouraged...

...for many and perhaps most in these circumstances, professional position and pay are secure, and the stable living costs in a recession are not unwelcome...

...there is no companion return to consumer purchase or real investment...

...It is that in the modern polity economic recession, continuing unemployment and generally low economic growth are preferred by many (and especially by those with political voice and influence) to more vigorous economic expansion and to the measures necessary to achieve it...

...The oratory in this case was, however, more than normally overdone...

...Bank and central-bank influence, under the shadow of seeming neutrality, is usually against what is called "easy money...

...Government expenditure would add to the deficit, and from this could come the specter of future tax increases...

...A Good Recession When one looks at the present scene, a further possibility emerges, one that is also rarely mentioned in our time...

...We have here the most direct and visible causes of the recession of the early 1990s, and in them lies the hope that it will prove to be a temporary phenomenon...

...The common result of both the mergers and acquisitions and the leveraged buyouts was the substitution of debt for equity...

...so did speculation...

...Money was borrowed to buy up the stock of firms being acquired or preventively to buy the stock that was in danger of giving control and therewith pay and prestige to hostile raiders...

...Investment bankers, and particularly the then-much-admired house of Drexel Burn-ham Lambert, underwrote the bonds, which is to say they acquired them for sale to a largely unsuspecting public...

...A new confidence will lead on to the next episode of speculation...

...It was a significant contribution of John May-nard Keynes to economic thought to suggest the modern economy might well enter upon an equilibrium of underemployment and low performance...

...So to argue openly would be thought profoundly eccentric...

...There are also large numbers living on Social Security or pensions, and they are either unaffected or favorably affected by recession or stagnation...

...Previously, under President Carter, the deficit had been between $40.2 billion and $79 billion...

...obvious that what has happened before, in the Depression, might be happening again...

...Thus the decade was a period of massive speculation in the financial markets, especially in real estate...

...It becomes necessary to command more of the public revenue to service the national debt...

...There was, with much else, the enduring recession...

...there is little mention of the comfortable position of those who do the shedding...

...euphoria will arrive...

...The Florida real property boom of the 1920s reappeared in nearly all the major cities of the nation, with the banks, small, large, and very large, joining in to finance it...

...For numerous employers there is available with greater unemployment a more willing, more amenable, less assertive, more stable labor supply...

...The great mergers-and-acquisitions mania of the 1980s in its several designs was the result of the desire to protect and enhance profit and also the prestige and power of the managers—the executives...

...Much is made in poor times of those workers who are shed...

...perhaps there is the previously mentioned tendency for the economy to find its equilibrium not at full employment and a high rate of economic growth but, in the absence of strong state action, at a high level of unemployment and a minimal rate of growth...

...Even in early 1994, when the recovery was supposedly in full swing, the average U.S...

...Inflation is less of a threat to the many with fixed incomes...

...In both cases there could be temporary monetary return to the selling stockholders...

...These, like the airlines, had been released from regulation a few years earlier...

...Investment expenditures had to be curtailed, particularly those with a longer-run reward, like those for research and development...

...In established and orthodox economics, savings are invested and spent no less reliably than the money that goes to the supermarket...

...So endowed, they went on an unparalleled speculative spree, which was laced with a far from subtle admixture of both mental delinquency and forthright larceny...

...In the modern economy an influential part of the population is in a relatively secure position as to income and earnings...

...There was no lack of speeches to this effect...

...However, as one views the aftermath of the 1980s and the conditions in the early 1990s, there is the less benign possibility...

...There is also the large public bureaucracy and the very extensive professional class: doctors, lawyers, academicians, accountants...

...With time, these adverse effects also lose their force...

...In real life, if money goes to individuals in very large chunks, it may be neither spent nor invested...

...When viewed as a social concern, a reasonably equitable distribution of income is traditionally urged...

...The distribution and resultant spending of income must come ineluctably to public attention...

...The possibility of loss was then ignored...

...Payrolls were aggressively trimmed, adding to the already growing unemployment...

...This, too, is a shadow on the modern capitalist miracle...

...The junk-bond episode of the 1980s will have, and perhaps has had, a similarly short aftermath...

...But in a striking example of differential social concern that allows social action, even socialism, if it is for the affluent, the S&Ls were allowed to retain a highly effective access to government funds through public guarantee of deposits...

...it contributes to a sense of fairness and is a manifestation of social justice...

...so it will be...

...By 1993, when the "recession" had lasted three years and more, the possibility of a depressive equilibrium could no longer be ignored...

...It: may be held in liquid form...

...There were economic legacies from the 1980s that, by their nature, were temporary in effect...

...while both precipitating and deepening recession, they would, with the passing of time, release the economy from their depressive influence...

...In the 1980s, approximately 70 percent of all gains in income accrued to the top 1 percent of income earners...

...Perhaps the American economy, and in lesser measure the world economy, has entered a new phase in economic development...

...Unpromising units were sold or closed down...

...There is a social case for equitably distributed income, but it is also functionally necessary for the effective operation of the modern market economy...

...For the economy as a whole there was a further depressive effect from those left newly impoverished, but this, too, like so much else, will be forgotten with time...

...That, an essentially sterile claim, takes precedence or seems to take precedence over socially more useful functions of the state...

...simply said, it was discovered yet again that individuals and institutions flush with, or anyhow possessed of, cash would buy securities regardless of risk were the interest returns high enough...

...This was the unintended history of the 1980s...

...It also provided a rich reward to the investment bankers and the lawyers who stimulated, financed, or guided the process...

...The rich have a choice...

...After the collapse of this speculation, there remained the economic wreckage—empty office buildings, an idled construction industry, banks replete with bad collateral and newly discovered executive error, a sharp restriction on new bank lending...

...There is the large corporate bureaucracy...

...There now seems to be the possibility that in fact a recession—or at least a state of less-than-full recovery—can exist over a longer period of time than we are accustomed to...

...Longer-run steps to correct the adverse functional distribution of income clearly would be unwelcome to all so affected...

...This article is adapted from his book A Journey Through Economic Time, just published by Houghton Mifflin...

...Without this government support to the economy as an offset to idled, unspent income—a good part being government outlay for the defense buildup—economic growth would have been much lower and unemployment much higher...

...Reprinted by permission...

...more durably, the newly merged firms and the firm bought out by its management were burdened with debt from the exercise...

...Recession and underemployment are especially to be preferred to the measures that contend with them...

...then the long run arrives...

...So it has been...

...Adding to the depressive effect from the banking system and the speculation were the savings and loan associations, the infamous S&Ls...

...They also lower the price that banks charge for their salable product, namely the money they lend...

...It is not possible in the world today to seem to be in favor of recession, to be opposed to economic growth...

...For junk bonds these returns were very high, ranging well upward from 15 percent...

...To say that a recession endures is to speak in contradictory terms...

...The controlling fact, however, seemed evident: Communism had failed—and where it did survive, as in China, it was undergoing major transformation...

...With recession there is a further adverse effect on spending and real investment...

...The claims of debt diminish...

...Nothing more distinguished President Reagan from his predecessors than his commitment to deficit financing...

...The fact remains, and with a powerful influence on public policy: For a substantial and very influential part of the modern industrial population, recession, stagnation, and the underemployment equilibrium are not adverse phenomena and are much to be preferred to the relevant corrective action...

...The financial mind, or what is loosely so described, turns from the past to the next success...

...Given the tendency for the modern economy, in the absence of state support, to find its equilibrium at inadequate levels of output and unemployment, the deeper causes must be discovered and therewith the relevant remedies...

...Here, too, a recession is not deeply felt or feared...

...This possibility can be traced to the distribution of income...

...To keep the economy at full employment, there is then no alternative to a supporting government expenditure—the deficit...

...To compensate for the income functionally so idled, the federal government ran deficits in a range from $128 billion to $221 billion...

...Thus does time work its therapy...

...This has not: been the recent case...

...There was nothing remarkable about this aberration...

...Similarly subject to the remedial effects of time is the mergers-and-acquisitions, leveraged-buyout mania...

...The counterpart of this concentration of income and wealth is a damaging unreliability as to its use...

...Such a thought is, however, strongly condemned and righteously resisted by those of more conservative, politically cautious belief...

...Low interest rates, even if not especially effective against recession and continuing unemployment, are adverse to rentier income...

...Servicing the debt, in turn, had a strongly depressive effect...

...employment and income increase...

...The recession that followed on the collapse of the speculative boom of the 1980s would have been far more serious without this support...

...There is need, however, to distinguish between causes that are temporary and those that are permanent...

...That the recession cum depression of the 1990s came first to the United States and spread to the world from here should surprise no one...

...as to widely distributed and therefore reliably expended income—the first essential of modern capitalism—we are far from the best case...

...This too was strongly but not permanently depressive...

...If adequate, the government support so provided can work effectively in the short run...

...So, on the whole, do those with middle incomes...

...An imperfect economic system had come apart and, in some sense, was being replaced with no system at all...

...work week reached a post-World War II high, a sign that companies, still anxious about the economy, were working their employees longer hours rather than hiring additional hands...

...Income is paid out...