The six arguments against federal expansion of economic opportunity discussed in the previous chapter were found to be unconvincing. But critics have other weapons they use in their attempt to discredit federal action. This chapter analyzes five more of these themes.
The bias against government in this country is deep and intense. The post office is a good example. Once a symbol of highly-valued public service, the post office is now more likely to be the brunt of hostility. This anti-government attitude has become a central feature of the national political dialogue. Ultra-conservatives now dominate the Republican party and parrot President Reagan's famous dictum, "Government is not the solution; government is the problem." In early 1996, a Heritage Foundation representative carried this position to an ultimate extreme when he declared on the Newshour, "Get the government out of politics."
Following the November, 1994 election, most mainstream pundits constantly claimed that the Republican success in that election was a sweeping mandate for "less government." But Republicans in 1994 barely received 50 percent of the total nationwide vote. And as discussed in Chapter Nine, public support for a "smaller government" is largely limited to the abstract idea. When pollsters ask about specific government programs, they usually find overwhelming support. Moreover, Americans often view the government favorably when compared to other institutions. A 1996 poll by the Preamble Center for Public Policy, for example, found that when asked which was hurting the middle class the most, “wasteful and inefficient government” or “corporate greed,” the latter won, 46 percent to 28 percent.
No doubt government bureaucracies are often inefficient and currently operate to help preserve the existing concentration of wealth and power in the hands of the elites. The classic proposition -- "the less government, the better" - offers a valuable benchmark: we should establish government programs only when we really need them. One can imagine an ideal society with no government, rooted in profound mutual respect.
If people did become more compassionate and less greedy, there would be less need for government action. The United Way, for example, might establish an "Entry-Level Jobs Fund" that would distribute funds solely for the payment of living-wage salaries for entry-level jobs. The more people contributed to that fund, the less would be the need for publicly funded jobs. But even with President Bush's "thousand points of light" and President Clinton's summit on volunteerism, we're moving toward less private charity, not more. In 1997, Ann Kaplan, research director of the American Association of Fund-Raising Counsel, reported, "Less went into poverty relief last year than in 1995, and less in 1995 than in 1994." Until we establish some unforeseen utopia, government action remains necessary.
Even most of those who complain most about "the government," when pressed about specifics, acknowledge that there is an important, inescapable role for the government. We need to improve the federal government with constructive criticism and sustained political reform, not with efforts to totally discredit or dismantle it. The criticism of overblown right-wing anti-government rhetoric that emerged following the Oklahoma City bombing was encouraging. Reagan-style epithets are a venomous form of labeling that undermine rational, case-by-case analysis of the need for specific federal programs. We don't need careless sound bites. We need honest discussion of the pros and cons of particular proposals. The only honest approach is to examine each case on its own merits and analyze whether or not it makes sense for the government to get involved in the way that is being proposed.
Very few people object to the government monopolizing police power, for example. Most Americans reject vigilante justice. Likewise, most people endorse the election of municipal court judges, the social-security retirement system, public roads and highways, public-water systems, public transportation, and the military. Even most conservatives support the need for a national bank, such as the Federal Reserve System. Of those who almost always oppose any government program, very few objected when the federal government bailed out the savings-and-loans industry or Lockheed and Chrysler. Nor do they oppose federal disaster aid following earthquakes and hurricanes.
Despite the rhetoric suggesting that all government services should be "privatized," the current trend toward privatizing will never go so far as to privatize everything. A for-profit mail-delivery system, for example, would probably never be able to provide affordable service to rural areas. A national postal service that subsidizes rural service with revenue from urban services will likely be necessary to have national mail delivery. In addition, it is widely accepted that the government must closely regulate public services which are often to some degree "private" - including gas and electricity, airports, and private banking. Such allegedly private operations are in reality a public-private partnership. In fact, this regulation and monitoring of private services often makes privatizing more expensive than keeping services public in the first place.
The inescapable heart of the matter is that in any modern country, the government is going to play a major role. The only question is: what role is most effective? "No government" is no option, though many people like to talk as if it is. Governmental action does not necessarily mean a reduction in individual liberty. The dilemma facing U.S. today is not whether a more active government is going to reduce liberty. The question is whether the government is primarily going to serve the interests of the wealthy, or whether the government is going to implement policies that benefit everyone.
The choice is not between a "free market" and "big government." There never has been a totally free market and never will be. The government has always played a major role in promoting certain types of economic development, as demonstrated by the Erie Canal and the Transcontinental Railroad. A major role for the government is unavoidable. If the federal government allows the free market to run its course without intervention, the rich get richer, the poor get poorer, the social fabric disintegrates, and the environment is destroyed. As Michael Lind argues, "[E]fficient markets may produce outcomes harmful to society.... [T]he reward structure of the free market and the optimal incentive structure of an equitable, efficient society may not coincide at all."
The "free market" is not pre-ordained by God or Mother Nature. Modern society did not start with the free market, and then correct its excesses. Rather, we began with decisions by the government, acting in the name of the people-at-large, to allow private businesses to operate so long as those businesses obey the rules of the game. As President Lincoln pointed out, "labor is prior to, and independent of, capital." The rights of private property are defined and established by society, acting through the government.
The very idea that "corporations" have the rights of individuals is a relatively recent development, established largely through Supreme Court decisions beginning in the late 1800s. State governments used to charter corporations for only a limited period of time and would revoke those charters when corporations violated their charter and failed to serve the interests of the larger community.
To return to this policy would not contradict the essential principles of the American economic system, though it is inconsistent with doctrinaire right-wing radicalism and neoliberalism. Michael Kinsley, for example, argued in The New Yorker:
Government funding is necessary to deal with many needs. Dogmatic anti-government ideology tends to obscure this reality. The solution to inadequate services is generally not to eliminate the services entirely, but to improve them. Increased funding for the hiring of more staff, as proposed by the National Economic Security Program, will contribute to such improvement.
Federal revenue-sharing with state and local governments to encourage the decentralization of services, rather than the spread of large federal bureaucracies, can be helpful toward having flexible, accountable programs with maximum local control. In some cases, contracting out programs to private, non-profit corporations makes sense, based on competitive bidding. On occasion, profit-making public enterprise works. In other cases, direct government administration of free public services is most sensible. Regardless, the assumption that "privatization" is always the preferred option is mindless dogmatism. Each arena needs to be considered on its own merits.
In those many arenas where the private sector cannot make a profit, the need for government funding is undeniable. Even with full implementation of the National Economic Security Program, the one-third of people now living in poverty will only be lifted out of poverty; many of them still will not have extra income to purchase essential services such as health care, child care, and education. Neither will they have money for occasional special needs, such as alcohol or drug counseling, a refuge for battered women, or in-home support services for a temporarily disabled relative. In addition, although the above-poverty budget proposed here includes a small sum for personal recreation, the amount is minimal and will leave most families in need of free public services such as arts and recreation programs at neighborhood community centers.
So long as so many people do not have enough income to pay for these services, for-profit enterprises will not provide them; so the government must, for little or no charge. The government must also address countless environmental needs that the private sector will never meet for there is no opportunity for profit-making.
Improving the quality of publicly-funded services will be an ongoing issue. The conservative assault on the idea of government may contribute to cutting fat and forcing advocates to make a case for the retention of each and every government program. The mere existence of a program should not lead to the assumption that it is needed. Proponents of specific programs should welcome any challenge to those programs and use the occasion to make their case and organize support. All indications are that when the issue is given a fair hearing, the American people will support needed programs.
We must acknowledge, however, that public services are essentially different from private business. In private business, except when monopolies undermine competition, the threat of competition usually provides an automatic quality-control mechanism. Private businesses are pressured to provide quality products and services because if they don't, someone else might take their business away from them by doing it themselves. But most public services differ in that the government holds a monopoly. For this reason, democratic mobilization is necessary to monitor and hold public agencies accountable. Various innovations to strengthen accountability, such as the decentralization of Chicago's schools which has provided parents with a real voice in the selection of principals, are possible. But this effort must be primarily a political process, rather than an economic one.
Given the need for increased government funding, we must look primarily to the federal government for these funds. State and local governments are limited in their resources primarily because the country has a border around it that limits migration, but state and local governments don't. Personal income taxes on the wealthy are much lower in this country than in most other industrialized countries; so these taxes can be increased significantly in the United States without any major risk that wealthy individuals will renounce their citizenship, especially since most people want to stay in their country of birth and stiff financial penalties discourage renouncing citizenship. But major increases in personal income taxes on the state or local level could persuade wealthy individuals to move from one region of the country to another.
At the same time, a major increase in public-service employment and the quality of public services in only one region could encourage a migration of low-income individuals to that region, increasing pressures on taxpayers in that region. These arguments about driving taxpayers away and attracting the poor with better services are erroneously used against minor, insignificant increases in services on the state and local level. But a substantial increase in taxes and/or services could have such an effect. Moreover, the debate over whether to eliminate the federal entitlement that guarantees medical care to all seniors and low-income people who qualify demonstrates that when there is no federal requirement, state governments are driven in a "race to the bottom" to attract businesses by lowering tax rates and reducing services.
Uniform, nationwide programs do not face this threat. The nation's borders are not open to unrestricted immigration. Any major antipoverty program, therefore, needs to be nationwide - that is, funded by the federal government. For this reason, the federal government collects and spends more than all state and local governments combined. Any genuine solution to the problems facing this country must involve a major role played by the federal government, which is in the best position to establish fair, uniform and adequate taxes on the wealthy throughout the country. Those in the militia movement who only recognize county government and those in the Republican party would want to redistribute as many federal programs to state and local governments as possible overlook the basic reality that given national borders that restrict immigration, it must be the national government that bears primary responsibility for generating the funds needed for public services. Whenever an earthquake or hurricane hits, people look to the federal government for assistance. The same approach is needed to deal with man-made disasters.
Many people don't like the government, understandably. But we have no choice but to make it the best government we can and enable the federal government to do what only the federal government can do: raise the money that state and local governments, operating within federal guidelines, need to promote the general welfare. Federal revenue-sharing with state and local governments should be utilized whenever feasible to maximize local control and minimize the size of the federal bureaucracy, which tends to be less responsive to public pressure. But dependence on federal funding for most services cannot be escaped.
Even during the supposedly conservative 1950s, the government played a larger role in economic growth than is typically recognized. The portion of all workers who were government employees steadily increased during this period and continued to increase until the mid-1970s, when it began to decline. This increase in public-sector employment boosted economic growth prior to the mid-1970s, as the decline since then has dampened economic growth. This pattern suggests that we should not be intimidated by the current barrage of anti-government propaganda. We need to return to the wisdom of New Deal and post-World War II policies that affirmed the responsibility of the federal government to promote the general welfare.
A common argument against the federal government giving state and local government more money to create new public-service jobs is that state and local governments would use that money to reduce the number of workers they fund with their own money. As The New York Times reported in October, 1992:
This problem could be prevented, however, simply by outlawing the use of federal funds for such "fiscal substitution," monitoring state and local compliance with that law, imposing strict financial penalties for violating these prohibitions, and making the receipt of other federal funds dependent on compliance with this law. State and local governments could be prohibited from lowering their tax rates or their employment patterns below certain minimal levels, perhaps those levels that existed prior to implementation of a national economic-security program. By requiring state and local governments to maintain pre-existing levels of commitment and threatening to cut off all federal revenue-sharing funds to jurisdictions that refused to do so, the federal government could insure that local and state governments fulfill their own obligations. One way or the other, state and local governments could be held accountable to a pledge not to use new federal funds to avoid their own responsibilities.
By adding regular, permanent workers to existing work forces, a national economic-security program would address the legitimate concerns of unions about federal job programs. As Philip Harvey, author of Securing the Right to Employment, argues:
For more than a decade, the principal argument heard in the corporate media against expanding employment is the claim that low unemployment always creates excessive inflation. The rhetoric on this front suggests that there is an automatic "trade-off" between unemployment and inflation, based on what economists call the "Phillips curve." Pick your poison, the argument goes: either high unemployment or unbearable inflation. Prosperity supposedly produces intolerable inflation, while recessions lower prices. A related theory is that once inflation gets started, it's like a train that builds up momentum until it can only be stopped by throwing the economy into a severe recession.
Starting with this assumption, the prevailing response has been to allow the Federal Reserve Board, or Fed, to create high unemployment by maintaining high interest rates (see Chapter Eight). Since 1980, this commitment to high unemployment has been the official policy of the United States government. Since poverty results from high levels of unemployment, this policy embraces the creation and perpetuation of poverty as a way to prevent inflation.
The following early 1994 front-page headlines in
The New York Times demonstrate how the message that growth
produces inflation is driven home relentlessly:
This "wage-push" theory argues that higher unemployment enables employers to pay lower wages because workers know that if they demand higher wages, employers can replace them with unemployed workers. With this threat hanging over their heads, they accept lower wages. On the other hand, it is said that lower unemployment enables workers to demand higher wages, which supposedly forces employers to increase prices so they can pay the higher wages. And higher prices are assumed to always be damaging. In particular, it is argued that higher prices harm the ability of American companies to be competitive in the global marketplace.
In recent years, supporters of higher interest rates have argued that unbearable inflation results when unemployment falls below a certain level, called "the natural rate of unemployment." Since proponents of this theory can't agree on what this magical threshold is and argue that it changes over time, it's difficult to prove or disprove their theory. Consequently, they wait until inflation goes up, note the unemployment rate at the time, and then claim that that level of unemployment is the "natural rate of unemployment." The local bartender calls this methodology "circular reasoning," but it's well-accepted in academia and at the highest levels of government. In 1994, most of these economists argued that unemployment could not fall below 6-7 percent without pushing up inflation. In support of this theory, The Wall Street Journal cited the Midwest unemployment rate, which was below 6 percent, while wages and benefits in that region were increasing at a 4.2 percent annual rate.
Most public discourse on this issue fails to distinguish between low, moderate, and high rates of inflation. "Inflation" in and of itself is usually presented as necessarily and essentially evil. But modest increases in overall prices can encourage economic growth and benefit most people - especially if social security, public-assistance payments, and wages keep pace with or exceed inflation.
If prices in general are rising modestly, sellers can more easily raise their prices a bit, which can lead to higher profits. With an improved bottom line, businesses can expand operations, pay higher wages, and hire more workers - which gives consumers greater purchasing power - which promotes further economic growth. In addition, expected inflation can lead consumers to buy sooner rather than later, so they can buy at a lower price - which stimulates the economy.
Low inflation, on the other hand, hurts economic growth, partly because investors who borrowed money to open a new business can be prevented from increasing prices as much as they had planned if prices in general are rising less than expected. If competitors aren't raising prices, these new businesses can for restrained from raising prices as anticipated. This inability to raise prices can reduce profits and cause bankruptcy.
For these reasons, as reported in late 1994 by Louis Uchitelle in The New York Times:
One of the stronger arguments for low interest rates and modest inflation was presented in a commentary by Karen Pennar in Business Week. Considering the differing interests within the business community, as discussed in Chapter Eight, it is not surprising to find such an opinion in the pages of a publication devoted to the interests of private business. According to Pennar:
Low interest rates, on the other hand, are beneficial to the economy. With low interest rates, investors are less able to make money in the "paper economy" and choose instead to buy stocks, which provides private businesses with capital for expansion and other investments. In addition, low interest rates enable both consumers and businesses to borrow more easily, which increases spending. Each increase in spending then "multiplies" throughout the economy.
In these ways, most people benefit from low interest rates and modest inflation. These benefits especially impact home owners. Home ownership is the principal form of investment for the bulk of the population. A general rise in prices usually includes an increase in real-estate values, which enlarges the assets of homeowners and enables them to gain financially from selling their property or obtaining loans based on its value.
One Brookings Institution study of the high-inflation of the late 1970s found "the average middle-income homeowner is the big winner in inflation," whereas the top 10 percent were "left substantially worse off." Another study of the early 1970s concluded that "inflation acted like a progressive tax, leading to greater equality in the distribution of wealth." In fact, the percentage of the nation's wealth owned by the top 1 percent fell dramatically in the mid-1970s, to levels not seen since the early 1800s. The redistribution of wealth downward as a result of inflation results in part from the fact that debtors with fixed-rate payments benefit from inflation: fixed monthly payments are less of a burden over time.
Inflation is not necessarily damaging to lower-income people. Increasingly, social security and other public assistance payments are being "indexed" to inflation: they increase at the same rate as average prices increase. In this way, many seniors and low-income people are protected from the negative consequences of inflation. If all benefits were fully indexed, everyone would be protected. Steps to invigorate wage growth could protect workers.
Thus, all in all, as stated by William Greider:
The historical record does not support the conventional wisdom that low unemployment always creates intolerable inflation. As reported by columnist Bob Herbert, based on an analysis by the economist Jeff Faux:
Even with the increased deficit spending associated with the Vietnam War, inflation remained under 6 percent from 1968 to 1972. It was the increase in global oil prices imposed by OPEC in 1973-74 and 1979-80 that boosted annual inflation to almost 10 percent from 1974-81. In the 1980s, unemployment and interest rates fell, but inflation held steady at about 4 percent - until another "oil shock" caused a small temporary increase in prices in 1990. These sudden, major increases in the price of oil were a shock to the world's economies and caused reductions in employment and growth - "stagflation," a previously unheard-of combination of high inflation and high unemployment.
Thus, the only period of seriously high inflation in the United States since World War II (1973-81) was not associated with low unemployment, as asserted by the "growth causes inflation" mantra being pounded into the heads of the American people. Rather, the opposite was the case: the only real problem with inflation in this country coincided with growing unemployment.
Moreover, the record of all seven major industrialized countries in the 1980s indicate that there is no simple cause-and-effect relationship between unemployment and inflation. During this decade, these seven countries averaged 7.3 percent unemployment and 6.5 percent inflation. Of these:
None of these seven industrialized countries, therefore, support the claim that there is a "trade-off" between unemployment and inflation. This record is not surprising. Modern economies, especially now that they are increasingly integrated on a global scale, are complex mechanisms. Simplistic theories that can be reduced to headlines and "sound bites" may make good politics. But they seldom describe reality accurately.
As for the "natural rate" argument that inflation will take off when unemployment falls below 6.5 percent or so, unemployment was at or below 5.5 percent from 1988 to 1990 while inflation stayed at about 4.5 percent. This record contradicts the predictions voiced by proponents of the natural-rate-of-unemployment advocates prior to 1988. The 6.1 percent increase in prices in 1990 was primarily due to an increase in wholesale oil prices ("energy" prices increased 18 percent) - not lower unemployment, which in fact increased that year.
Moreover, the national unemployment rate fell to below 6 percent in late 1994 and remained near or below 5.5 percent for two years, while inflation held steady at 3 percent. In late 1996, the experts and pundits finally began to admit that their predictions — a cornerstone of national economic policy uttered with the aura of scientific certitude — had been wrong..
Regional evidence also offers little support for the proposition that low unemployment must be problematic in terms of price increases. The 1994 Wall Street Journal report already cited pointed to wages and benefits increasing at a 4.2 percent annual rate in the mid-West as evidence in support of the party line. But a 4 percent inflation rate is hardly a problem. More specifically, unemployment in South Dakota has been at or below 5 percent since 1985 and was at or below 5 percent in 1994. Yet a 1994 The New York Times analysis of the region found that high school graduates were getting only $4.75 per hour and that rents were only going up only 7 percent a year, according to one real estate professional. Similarly, Wisconsin's unemployment rate was at or below 5 percent from 1988 to 1995, with Madison's rate falling to 2 percent in 1995. Yet even then, according to The New York Times, "fast-food restaurants are advertising jobs at $6 and $7 an hour, plus benefits." These numbers are hardly signs of runaway wages. The historical record thus offers little or no support for the proposition that low unemployment necessarily produces unacceptable levels of inflation.
But perhaps the best evidence that full employment need not lead to unbearable inflation is that Sweden was able to achieve full employment for decades without high inflation. The fact that international political pressure eventually undermined the "Swedish model" does not alter the fact of their prolonged success. The experience of Sweden suggests only that there must be a broad commitment to full employment throughout the industrialized world for it to be successful. Full employment in only one country is unlikely to survive global economic and political pressures.
Gains in productivity, for example, can eliminate the need for price increases. If new technologies or new skills enable workers to produce more goods and services in the same number of hours, employers can increase wages and hire more workers without increasing prices. In addition, increased sales can reduce the need to increase prices when payrolls increase.
For these and other reasons, creating high levels of unemployment is not essential to restrain inflation, though it may make it easier. Full employment and an annual growth rate of 5 percent, for example, would not automatically produce a level of inflation that would be a problem, especially if methods other than federal deficits and low interest rates - the traditional tools - were used to promote employment.
Historically, efforts to boost employment have typically relied on creating jobs indirectly either by increasing the federal deficit (fiscal stimulus) or by increasing the money supply (monetary stimulus). These methods of increasing employment can be inflationary. Increasing the federal deficit, either by increasing spending or lowering taxes, increases the supply of money in the hands of consumers, for federal spending puts money in circulation. When the federal government spends money, it either buys goods and services, pays off lenders, or pays salaries to workers, all of which increase consumer purchasing power. This method tends to contribute to higher inflation because it increases the supply of money circulating in the economy. If the amount of money in the hands of consumers is increased, they can afford to pay higher prices, so sellers tend to charge higher prices.
A monetary stimulus operates in a similar manner. The Fed encourages commercial banks to borrow money by lowering interest rates. These banks can then distribute more cash to private borrowers than they would otherwise. Consequently, more money circulates throughout the economy. Increasing the money supply in this manner can also contribute to inflation.
With both fiscal and monetary stimuli, the increase in economic activity tends to create jobs. Consumers are able to spend more, so employers hire more workers to do the additional work that is required. Increasing the money supply thus contributes to both lower unemployment and higher inflation.
But this association does not mean that lower unemployment causes higher inflation, as is commonly claimed. If "A" causes both "B" and "C," it does not follow that "B" causes "C," though it is easy to make that assumption. Increasing the money supply can cause both lower unemployment and higher inflation, but this does not mean that lower employment promotes higher inflation. Because traditional strategies for decreasing unemployment increase the money supply and encourage inflation, lowering unemployment has become associated with inflation. But such an association does not mean there is a cause-and-effect relationship.
Expanding economic opportunity directly by transferring funds from the wealthy and from the military to pay wages and support incomes, as proposed by the National Economic Security Program, would not increase the money supply. In fact, the increase in federal revenues that would result could enable the federal government to lower the deficit and decrease the money supply. Regardless, this approach could avoid the inflationary pressures commonly created by economic-stimulus programs.
A major increase in employment would create some inflationary pressures. Gradually adding 30 million new employees to the workforce and assuring them at least $7 per hour plus benefits, as envisioned here, would push wages upward somewhat in the short run. Many employers who now pay less than $7 per hour would have to increase their wages in order to continue to attract workers with the same skill level. To some degree, many of them would pass on these higher wages as higher prices for their goods and services. This impact would ripple upward throughout the labor market, causing a general increase in wages.
Like a stone in water, however, the ripple effect would steadily subside, and would have little effect on wages toward the top of the scale. People who currently get $30 per hour, for example, would see little or no increase in their wages.
Likewise, there would be a ripple effect over time. But this ripple effect as well would soon subside, in part because only a minority of workers would see a substantial increase in their wages. The average wage for nonsupervisory workers is currently almost $11 per hour. Most employers already have to pay $7 per hour or more to maintain any stability in their workforce. Since probably less than half of the total workforce would experience a substantial wage increase, total prices throughout the economy would not increase as much as these workers' wages would increase during the first round of the spiral. And the second round of wage increases would be smaller than the first, and so would the second round of price increases. Eventually, the wage-price structure would absorb the initial increase in low-scale wages and the inflation induced by this shift in the labor market would evaporate.
In 1989, Philip Harvey, summed up this issue in his book, Securing the Right to Employment, as follows:
In addition, a number of steps (other than creating poverty) can be taken to prevent runaway inflation, and other measures could be utilized as a backup if and when needed. First of all, as Gar Alperovitz and Jeff Faux argue in Rebuilding America, specific measures could be implemented in each of the most important sectors of the economy - the basic necessities of energy, food, health and housing. In each of these sectors, particular policies could be established to stabilize prices. These measures in turn would have a stabilizing effect on prices throughout the economy. Restoring the farm parity program, for example, would stabilize farm prices and guard against rapid price increases. Likewise, expanding the supply of non-profit housing would limit housing costs, and local rent control measures can protect renters from the danger of rapid rent increases. A national health-care system can control health care costs. The federal government can also actively discourage monopolistic price-fixing practices throughout the economy,
But perhaps most importantly, the federal government needs to be actively involved in negotiating agreements between business and labor to limit wage and price increases. With a floor of economic security for all workers, negotiating such agreements could more easily be achieved than is the case within the current context of job insecurity. In the face of resistance to reasonable agreements, the President can publicly pressure recalcitrant parties and use federal funding as leverage to restrain unjustified increases. President Kennedy, with forceful opposition to steel industry price hikes shortly after his election, demonstrated that executive leadership can be utilized when necessary to restrain inflation. He shifted Pentagon contracts to companies that did not raise prices and the steelmakers rolled back the increase. Consumer boycotts, with Presidential support, could be utilized to persuade executives to reverse excessive price increases.
In addition, as Harvey points out, if full employment were established without resorting to either fiscal or monetary stimulus (but rather simply by transferring already existing funds), fiscal and monetary mechanisms - higher taxes, lower deficits and/or higher interest rates - could more easily be used to control inflation. No longer having to use these tools to promote employment could free them to be used more effectively to restrain inflation if and when needed.
Robert Eisner points out that inflation can be controlled by:
As discussed in Chapter Eight, however, the real reason for existing policy is not to prevent higher inflation but to drive inflation down as far as possible because wealthy elites, unlike most people, benefit from lower inflation. When the Fed was maintaining high interest rates in 1994, the United States economy was still experiencing only a mild recovery from the recession of the early 1990s, especially when compared to previous post-recession growth periods. Unemployment and underemployment remained at high levels and average wages were continuing to fall. Inflation did not pose a serious threat to the economy. Even Paul Volker, who as Fed Chairman in the early 1980s raised interest rates to record high levels to kill inflation, went on record in opposition to the standard mantra. "I am not in the school of those concerned that any significant economic growth will bring stronger price pressure," he told The New York Times. And the National Association of Manufacturers and the National Chamber of Commerce went on record in opposition to Fed policy.
Nevertheless, the Fed continued to force up interest rates and claimed that their actions were being done to prevent future inflation. The obvious deception of these pronouncements by the Fed suggests that none of their rhetoric about inflation can be trusted. Anyone who could argue in 1994 that it was necessary to raise interest rates in order to prevent future inflation sacrificed all credibility. This party-line is reminiscent of the "domino theory" as applied to the war in Vietnam: our leaders said that a defeat in Vietnam would lead to the spread of Communism throughout Southeast Asia. The "experts" were wrong about Southeast Asia, and they are wrong about the growth/inflation domino theory as well.
Modest inflation is not an unbearable evil that must be avoided at all costs. Limited inflation can in fact be beneficial to most of the public. There is no good reason to believe that ending poverty by guaranteeing the right to living wage employment would produce runaway inflation. And if and when it did, the federal government could use other measures to deal with it at that time. If all else failed, we could protect people from poverty by increasing welfare. In the meantime, the sensible course is to create full employment, eliminate poverty, and use methods other than economic hardship to control inflation.
As former union leader William Winpisinger stated it with his characteristic flair:
Trading unemployment for price stability is like burning down the barn to get rid of the rats. We lock up people who practice arson as a rodent control policy. Those who promote the conscious use of unemployment to manage the economy are even more dangerous. As a national policy it is hypocritical, bankrupt and bereft of intelligence. It is long past due for this nation to commit, absolutely and unequivocally, to full employment as its number one priority.
Those who oppose government action to directly expand economic opportunity for low- and middle-income people commonly support using the government to stimulate the creation of private-sector jobs. Conservatives who say they want to reduce the size of the government endorse costly bailouts for the wealthy - such as the savings-and-loans industry, banks that "are too big to fail," and international investment houses that knowingly place their money in high-risk, high-yield places such as Mexico. These measures are presented as necessary for the sake of overall economic growth, the benefits of which are claimed to eventually "trickle down" to everyone. In recent decades, however, the "trickle" evaporated before it fell very far.
A variation on this theme has been "supply-side economics," as popularized by economist Arthur Laffer, The Wall Street Journal, and the Reagan Administration. The essence of this theory is that reducing taxes on the wealthy will entice them to work harder and to invest more of their financial resources, which will expand the economy. According to supply-side economics, the increased governmental revenues that result from an expanding economy will exceed the decrease in revenues caused by a tax cut.
Supply-side numbers don't add up, however, especially when the Fed increases interest rates when Congress cuts taxes (as it has done). Supply-side economics received a thorough test under eight years of the Reagan Administration and failed with flying colors. One major problem is that many of those who benefited from lower taxes invested their new-found wealth in the paper economy, where they garnered guaranteed profits, rather than in the real economy, where prospects are more uncertain.
In the 1992 election, Bill Clinton lambasted supply-side economics and won. But he failed to bury the beast. With the Republican conquest of both houses of Congress in 1994, the "Contract with America" revived supply-side economics with a flourish, hardly missing a beat. All indications are that the Republicans will continue to claim, with a straight face, that they want to create the "opportunity society" for all by "getting government out of the way," rather than admit that they want to reshape federal policies to benefit wealthy elites.
At least since 1988, the Democratic Party has also relied primarily on strengthening the private economy to indirectly expand economic opportunity for low- and middle-income people. Democrats devote some energy to defending programs that directly benefit the disadvantaged from Republican attacks, such as the Earned Income Tax Credit, but in so doing, they seem to advocate only enough benefits to distinguish themselves from the Republicans. President Clinton, for example, merely complained that reductions in Medicare proposed by the Republicans were "too severe." As programs have been cut over the last twenty years and Republicans steadily propose more reductions, Democrats can present themselves as defenders of low- and middle-income people by proposing smaller cuts, even though public opinion supports greater benefits.
Basically, the Democrats only pay lip service to poverty and the threat of poverty. They primarily rely upon indirect "industrial policy" measures such as tax credits for "growth industries," enterprise zones, community development, and education-and-training to supposedly improve the productivity of the workforce. Michael Dukakis, in his 1988 campaign for President, made this "neoliberal" approach dominant within the Democratic Party. As summarized in The Nation, Dukakis proposed:
Since the early 1960s, Democrats and many Republicans have also supported "community development" programs supposedly designed to economically revitalize low-income neighborhoods. These programs, many of which still operate, have variously been designated the War on Poverty, Federal Community Action Program, Model Cities, Community Development Block Grants, Urban Development Action Grants, Enterprise Zones, and Empowerment Zones. In March, 1994, for example, as reported by the Associated Press:
A major problem with community development is that residents of poor neighborhoods don't have enough personal income to sustain local businesses, in part because when residents do advance economically, they move to other neighborhoods. According to Lemann, despite the rhetoric about economic development, which many proponents themselves admit is incorrect, these programs are in fact rooted in "social uplift: education, counseling, improvement of housing stock, crime control." Since it's harder to get tax money directed for social services of this sort, politicians and activists often couch their arguments in false terms about economic opportunity.
If all low-income citizens were offered entry-level, living-wage public-service jobs, they would automatically hold the purchasing power to revitalize their neighborhoods, which would involve the creation of new higher-paying jobs as well. But advocates are reluctant to state this obvious point. Lester C. Thurow, for example, in a Labor Day op-ed piece in The New York Times merely proposed as remedies for pervasive economic insecurity
In this regard, the Democrats share in common with Republicans a primary commitment to indirect measures for creating jobs and increasing incomes for low- and middle-income people. Will Marshall, president of the Progressive Policy Institute (the policy arm of the Democratic Leadership Council which Governor Clinton helped organize and with which President Clinton is closely affiliated), summarized this key point in the first of ten principles he articulated after the Republican victory in 1994. He wrote:
In his 10-point alternative to the Contract with America, Marshall included not one word about expanding the number of publicly-funded jobs.
In recommending workfare as an alternative to welfare, Marshall implicitly admitted a key weakness in most welfare reform proposals: former welfare recipients are projected to take jobs away from others who need them. Marshall proposed, "We should force welfare bureaucracies to compete with private and non-profit job placement outfits in moving people from welfare to work (italics added)." This language acknowledges that mainstream welfare-reform proposals envision welfare recipients competing with other applicants for scarce jobs - a competition that leaves most applicants unemployed.
One problem with this indirect approach is that, under the best of circumstances, it is impossible to predict and control the future consequences of a particular new governmental policy. This difficulty is compounded when the new policy is adopted dishonestly - when it is well known that the purported indirect benefit will never occur, as is the casewith constant claims about education. On the other hand, if the government announces a job opening or increases the Earned Income Tax Credit, the result is immediate and certain.
It is extremely unlikely, under either Democratic or Republican policies, that private business will come close to creating thirty million new jobs in the foreseeable future. The percentage of the total population 16 and over that has been employed has remained fairly constant since World War II. This labor participation rate did increase from 59 percent in 1980 to 63 percent in 1990 - the greatest increase in any 10-year period since World War II. But that 4 percent increase equaled only an additional seven million jobs in 1989 (compared to what would have been at the 1980 rate). And two million of these seven million new jobs were government jobs, not private sector jobs. A similar record increase of five million new private-sector jobs over the next 10 years would fall far short of the 30 million new jobs that are needed. The percentage of adults employed would increase from 62 percent to 79 percent if 30 million new jobs were created. These numbers suggest that traditional strategies for creating new jobs by stimulating private economic growth cannot be expected to meet the need for jobs.
Simply returning to 1980s-style prosperity will not be adequate for another reason: adjusted for inflation, average wages have been declining since 1972, and continue to fall. The increase in the percentage of adults working since 1972 has not been enough to offset this fall in wages. Non-supervisory workers are earning about 20 percent less now than they did in 1972. But the percentage of adults working has increased by less than 10 percent. This increase in the number of adults working has not been enough to enable total wage income to keep up with inflation.
During the 1980s, the relative number of low-wage jobs has dramatically increased. About half of the new jobs that were created during the 1980s were at or near the minimum wage ($4.25 an hour). The proportion of year-round, full-time workers who earned less than $6.10 an hour (in 1990 dollars) increased from 12 percent in 1979 to 18 percent in 1990. Clearly, small increases in the relative number of people who are employed, as happened in the 1980s, will not be enough to improve the fortunes of most working people.
When analyzing the strength of the economy, conventional wisdom normally focuses on "gross domestic product" (GDP) - the value of all goods and services purchased - and "total personal income." Restoring economic prosperity as defined in these terms could easily be achieved, if the Fed were instructed to cooperate by keeping interest rates low. GDP and after-tax personal income, adjusted for inflation and population growth, have grown rather consistently since 1933. Partly because of this history, federal officials believe that they can limit GDP growth to about three percent annually, on average, with only minor fluctuations from year-to-year. Clearly, economic growth of this sort - 1980s-style so-called prosperity - is their goal. President Clinton and the Democrats apparently have no intention of pushing for anything else. Odds are that they can do it, if the American people let them get away with it.
But this form of economic growth will not benefit most Americans if the bulk of the increase in income continues to go to the wealthy. For the last fifteen years, as discussed in Chapter Five, increased income inequality has made "economic growth" irrelevant for the majority. The richest 1 percent of all households received more than half of the increase in total personal income, as these one million households saw their after-tax incomes double to an average of $400,000 a year.
Contrary to the 1980s, economic growth in the 1950s and 1960s did benefit most Americans. Although the percentage of adults employed remained fairly constant, average wages increased considerably, personal incomes grew among all income groups, and poverty steadily diminished. In the mid-1970s, however, the wealthy elites, unsure about their continued domination of the global economy, began moving in a different direction. Rather than relying on broad-based prosperity to boost their own incomes indirectly, they decided to start squeezing out of the economy as much as they could for themselves as quickly as possible. This process has been ongoing ever since. Until there is popular pressure demanding that resources be distributed differently, these well-entrenched policies will likely remain in place. Under these conditions, all claims to substantially reduce or eliminate poverty merely by stimulating private economic growth will carry no credibility.
The focus on economic growth also serves to divide low- and middle-income people. All that we need to do, the argument goes, is to boost the economy a little so that everyone who is willing to make the necessary effort will become "upwardly mobile" and move into the middle- or upper-class. At that point, only the lazy and irresponsible will be left behind. Clinton's obsession with education reinforces this point. "Let's help a whole new generation of Americans go to college," he told the nation on June 13, 1995. "That's the way to make more Americans upper-income people in the future (italics added)." So long as that Horatio Alger myth remains implanted, the urge to become "upper-income" supplants the demand to guarantee everyone what is needed to live decently.
An estimated thirty million adult Americans not now working full-time need living-wage jobs (see Chapter Four), and at any one time there are only about one million vacant jobs advertised in the nation's newspapers. This lack of jobs is not a problem caused by the so-called "recession" of the early 1990s and will not be solved by a return to what is widely accepted as "prosperity."
If the percentage of the working-age population that was employed in 1993 had equaled the record-high level of 1989, only another two-and-a-half million people would have been employed. President Clinton aimed to create eight million new jobs by 1997. But that goal would surpass the growth in the number of working-age adults by only two million.
Even if the President reaches his target, he will barely surpass 1989's record-high employment/population ratio. Merely regaining 1989 conditions is hardly a goal worthy of enthusiasm. Considering that the 1980s witnessed an increase in the official poverty rate and a mushrooming of homelessness, 1980s-style modest economic growth is far from a solution to poverty. Despite the great attention given to small fluctuations in the official unemployment rate, the need for additional jobs will remain about the same from year to year: 30 million, plus or minus two or three million. To meet this need, dramatic new steps are necessary.
Often implicitly, sometimes explicitly, opponents of economic security argue that workers will not be motivated to be productive unless poverty hangs over their head as a threat. To make their point, these critics utilize the image of the "feather-bedding" union job or the low-stress "government job" complete with strict civil service protections against dismissals. And they often suggest a view of "human nature" as essentially anti-social, parasitic, and prone to laziness.
But the extreme examples commonly cited miss the point: most government employees are hard-working and serious-minded, want to do a good job, and in fact perform valuable public service. With proper overview and a vigorous democratic process, instances of poor performance can be corrected. A foundation of economic security will make it easier to address any instances where union contracts and civil service rules make it unduly difficult to dismiss unproductive workers. The guarantee of living-wage employment will lessen the threat associated with dismissal. This shift could lessen support for overly-strict protections (to whatever extent this is really a problem).
Under a federal economic-security program, government supervisors could fire employees for non-performance, including absenteeism, intoxication, or lack of effort. And workers with a persistently poor work record could be required to complete a rigorous training program to clear their record before being hired again by the public-sector.
Moreover, it is important to remember that the National Economic Security Program (NESP) proposes the guarantee of relatively low-wage, entry-level jobs. Most workers will be highly motivated to advance, both in terms of pay scale and in terms of job responsibilities. This advancement will be based on job performance, which will help motivate workers to be productive. The assumption that minimal job security will lead to widespread lack of motivation is based on cynical, unjustified assumptions about human nature. In fact, economic security would contribute to the possibility of a more energetic, more cooperative workforce.
The arguments against federal antipoverty programs considered in this chapter have been found to be unconvincing. So long as wealthy elites are determined to perpetuate poverty, the national government must counter these efforts. But deciding what federal policies will most effectively establish economic security is difficult. Considering how NESP differs from other proposals for federal action, as will be done in the next two chapters, should enable readers to evaluate the relative merits of this proposal.
David Mason, Newshour, 12 February 1996.
Michael Lind, "Why the Rich Get Richer," The New York Times Magazine, 24 September 1995, 15.
John B. Judis and Michael Lind, "For a New Nationalism," 27 March 1995, The New Republic, 19-27.
Michael Kinsley, "The Ultimate Block Grant," The New Yorker, 29 May 1995, 36-40.
Catherine Lynde, "The Zero-Inflation Ploy," Dollars and Sense, September, 1990, 6.
David Wessel, "Jobs vs. Inflation: Never an Easy Call," The Wall Street Journal, May 23, 1994, 1.
Louis Uchitelle, "Who's for More Inflation and Who Isn't," The New York Times, 2 October 1994, The Week in Review, 1/6.
Marty Schiffenbauer, "Deficit Pending?", The Bay Guardian, May 1994, 18-20.
Karen Pennar, "A Little Inflation Could Jump-Start The Economy," Business Week, 19 October 1994, 36.
William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country, Simon and Schuster, 41-2.
Bob Herbert, "The Job-Killer Policy," The New York Times, 8 June 1994, A17.
Laura D'Andrea Tyson, "Inflation: Myth and Reality," The New York Times, 15 April 1994, A23.
28 January 1996 Bureau of Labor Statistics press release.
David Wessel, "Jobs vs. Inflation: Never an Easy Call," The Wall Street Journal, 23 May 1994, 1.
U.S. Bureau of the Census, Statistical Abstract of the United States: 1990, Table 656; Monthly Labor Review, April 1995, Table 10.
Robert D. Hershey Jr., "Where Job Hunters Hit The Jackpot," The New York Times, 30 June 1994, C1.
Statistical Abstract of the United States: 1990, Table 656; Monthly Labor Review, April 1995, Table 10.
Dirk Johnson, "Larger Benefits and Safer Streets Attract Chicagoans to Wisconsin," The New York Times, 8 May 1995, A1/A8.
Gar Alperovitz and Jeff Faux, Rebuilding America, Pantheon Books, 155-237.
Michael Wines, "Talk Often and Be a Soft Touch," The New York Times, 17 July, The Week in Review, 1/5.
Robert Eisner, The Misunderstood Economy: What Counts And How To Count It, Harvard Business School Press, 1994, 193-4.
Louis Uchitelle, "Why the Fed Acted," The New York Times, May 19, 1994, C1, C20.
Marc Sandalow, "Clinton, Jingoish Hold a Love-In<" San Francisco Chronicle, 12 June 1995, A1/A11.
Samuel Bowles, David M. Gordon and Thomas E. Weisskopf, "Austerity vs. Jobs and Justice," The Nation, 16 April 1988.
Charles A. Cerami, "Three New Ways to Create Jobs," The Atlantic Monthly, March 1994, 102-108.
"$88 Million in New Aid for Inner Cities," San Francisco Chronicle, 22 May 1994, A2.
Nicholas Lemann, "The Myth of Community Development," The New York Times Magazine, 9 January 1994, 27-31/50/54/60.
Lester C. Thurow, "Companies Merge; Families Break Up," The New York Times, 3 September 1995, 11.
Will Marshall, "Democrats, Arise! (Which Way is Up?)," The New York Times, 5 December 1994, A15.
"Clinton's Statement on Plan to Balance Federal Budget by 2005," The New York Times, 14 June 1995, A12.
David Reamer, The Prisoners of Welfare: Liberating America's Poor from Unemployment and Low Wages, Praetor, 1988, 32.
Based upon Table A-1 in Employment and Earnings, September 1993, the highest ratio of employment to working age population was 75.6 percent in 1989. The same ratio in 1993 was 74.1 percent. If the 1993 ratio had been the same as the 1989 ratio, an additional 2.5 million people will have been employed.
R.W. Apple Jr., "Clinton Plan to Remake the Economy Seeks to Tax Energy and Big Incomes," The New York Times, 18 January 1993, A1.
Assuming a 3.7 percent increase in the working age population from 1992 to 1997, which would equal the same percentage increase that took place from 1987 to 1992, about 6 million people between the ages of 16 and 64 would be added to the population by 1997.
According to the Economic Report of the President: 1993 (Table B-28), the official poverty rate increased from 11.7 percent in 1979 to 12.8 percent in 1989, which means that there were almost 3 million more officially poor people in 1989 than there would have been at the 1979 rate. The average poverty rate in the 1970s was 11.8 percent, compared to 13.8 percent in the 1980s, which means there were about 5 million more officially poor people in the 1980s than there would have been at the 1970 rates.