The Age of Diminished Expectations: U.S. Economic Policy in the 1990s. - book reviews

I picked up The Age of Diminished Expectations with the hope of gaining some new insights into the current problems of the U.S. economy, based on exposure to some prior work by the author which indicated that he might have some interesting and relevant arguments concerning government policies. Krugman has co-authored a valuable theoretical paper which shows that a likely outcome of exchange-rate devaluation in third world countries is a contraction of domestic output, a conclusion totally at odds with the policy prescriptions of the International Monetary Fund.(1) In public statements Krugman has emphasized the adverse distributional consequences of recent federal budget and financial deregulation policies--including the tax breaks for the rich and the government's handling of the Savings and Loan mess. My prior impression thus led me to believe that Krugman's book, while perhaps not radical, might at least be written in the best tradition of progressive (albeit reformist) liberal thought, as in, for example, the work of Keynes. Unfortunately, my hopes for the book were dashed by its use of the supply-side approaches that have become all too common in mainstream economics.

Two themes run throughout Krugman's book. First, "the U.S. economy is not doing well, compared with any previous expectation" (p. xi). In recent years average real wages have been declining, and poverty has increased in both extent and severity, even though "a few Americans have prospered to an unprecedented extent." Second, this decline in economic performance has not yet instigated any "drastic political reaction," and this "reflects a kind of revolution in what Americans expect of their economy--a revolution of falling expectations" (p. 4). This general willingness to accept stagnating or declining living standards "comes down in large part to the painfulness of the measures that we would have to take if we were serious about making a difference" (p. xii). According to Krugman, the three basic variables which "make a difference" are productivity growth, income distribution, and unemployment.

Krugman places the most stress on productivity. Indeed, he goes so far as to state that "[a] country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker" (p. 9). Two arguments are made here: (1) the long-run decline in average income growth occurred alongside an apparent decline in measured productivity growth; and (2) living standards cannot, in the long-run, be raised by increasing consumption because this would bite into the capital investment required to support increases in productivity and hence per-capita income growth (pp. 10-11).

There are two problems with this approach, aside from the well-known shortcomings of standard productivity measures.2 First, it cannot explain why average real wages have generally been in absolute decline for the last decade and a half, despite the fact that measured productivity has grown tremendously in absolute terms, albeit at a slower rate than in prior decades.(3) In short, one has to deal with the distribution and utilization of productivity gains before any links between productivity and living standards can be made. Second, the supposed trade-off between investment and consumption assumes that the productive capacity of the economy is fully and productively employed. If excess productive capacity exists, as has obviously been the case in recent years, it becomes necessary to explain why an increase in working-class consumption (or other socially-useful outlays) could not, in principle, spur greater investment by raising firms' operating rates. The absence of such an explanation suggests a contradiction between the socially-rational utilization of productive capacity versus the socially-irrational dictates of private profit-making and competition among monopoly enterprises.

These problems become apparent in Krugman's treatment of income distribution. Various factors are brought in on an ad-hoc basis to explain the tremendous increase in inequality in the 1980s: (1) the surge of "financial wheeling and dealing [which] has helped swell the ranks of the really rich" (p. 22), (2) the fact that "tax rates for the well-off generally fell in the Reagan years" (p. 20), (3) the decline in the real incomes of the "so-called 'underclass'" (defined as those who do not "work for a living"), (4) the falling real wages of blue-collar workers relative to those of the more "highly skilled" (p. 24).

A detailed discussion of Krugman's laundry list of factors affecting inequality is beyond the scope of this review. What is important for present purposes is that Krugman fails to explain how these trends are consistent with his emphasis on productivity as the main determinant of one's living standards. For example, Krugman admits that "increasing inequality in income distribution, rather than growth in productivity, was the main source of rising living standards for the top 10 percent of Americans" (p. 22). But then he expects workers to believe that "[ill productivity were to grow as fast in the 1990s as it did in the 1960s, the average American worker's take-home pay would grow by something like 30 percent" (p. 174).

Krugman's analysis of the relations between the factors which underlie increased inequality is partial and circular at best. The financial boom is explained by the rising trade deficit ("intensification of international competition") which made it "necessary both to 'downsize' smokestack America.. . .and to cut the wages of industrial workers" (p. 162). According to Krugman, this need to restructure corporate capital created an opening for financial operators to engage in debt financed takeovers and leveraged buy-outs in order to enforce the needed "change in management behavior" (Ibid.). Krugman argues that the trade deficit which set this process into motion was itself due to an inadequate savings rate in the U.S. economy, the main villain being the government deficit.

Here Krugman neglects to mention what is perhaps the most important cause of the "intensification of international competition" (and the U.S. trade deficit) in the 1980s: the accumulation and uneven development of excess productive capacity throughout the global capitalist economy. As noted above, the presence of such excess capacity nullifies the purported linkage between productivity and real wages, as well as the "tradeoff' between investment and consumption. How is such excess capacity consistent with an inadequate rate of savings? Furthermore, while buy-outs and takeovers certainly did increase in the 1980s, this was only part of the more general movement of investible surplus into financial sectors.(4) How is a "shortage of savings" to finance the government deficit and productive investment consistent with this rapid expansion of the financial sector, and concurrent explosion of aggregate consumer, mortgage, and corporate debt, since the early 1970s? The idea that productive investment has been constrained by the supply of savings is contradicted by one simple fact: alongside the tremendous growth of financial speculation, leveraged buy-outs, etc., the internal funds of U.S. corporations were sufficient to cover 94.6 percent of corporate investment in plant and equipment during the 1980s.(5)

Such questions indicate that mainstream economics is completely unable to come to grips with the basic problem of the U.S. economy today: the inability of the system to use its productive potential so as to raise the living standards of the entire population. Instead, bourgeois economics concentrates on the symptoms of this underlying problem, and even then in an apologetic and contradictory fashion. Hence, the same theorist who ascribes increased inequality to the unproductive activities of corporate takeover artists, and who blames this phenomenon on the government deficit (see above), nonetheless tells us that it is unfeasible to lower the government deficit by taxing the rich. Mind you, this is not because a fiscal contraction would lead to a collapse of effective demand, but rather because

given that the deepest problem with the U.S. economy is slow productivity growth, it is difficult to argue for tax increases that might reduce incentives, even if some people make large sums in return for dubious contributions. In effect, there seems to be a public consensus that Donald Trump is the price of progress. (p. 25)

All this in the face of the tremendous decline in tax rates on corporate and individual capitalists' incomes, and the large real wage declines (alongside increases in productivity) that have occurred since the early-1970s. Krugman does not tell us the source of his insight into such an irrational "public consensus," other than pointing to Bush's victory in the 1988 election "on a wave of economic contentment" (p. 1). Krugman thus appeals to the common bourgeois method of using corporate capital's monopoly over the state and electoral politics as a measure of "public opinion."

One must also reject the view that the economic recovery of the 1980s basically succeeded in providing decent employment to all those willing to work in this country. According to Krugman,

the 1980s were actually a time of quite satisfactory job creation. New jobs created in sectors that are insulated from international competition, such as services, far outpaced any job losses in export or import-competing sectors. (p. 37)

From this observation, Krugman draws the implication that "the amount of employment offered in the U.S. economy is ultimately limited by supply, not demand" (Ibid.), so that the increased poverty of the 1980s was essentially limited to an unemployable "underclass." Krugman even has the gall to argue that any further increase in employment in the late1980s would have resulted in an inflationary acceleration of wage growth (pp. 28-32, pp. 37-38).

This entire argument ignores the growing ranks of the working poor in the occupations which Krugman celebrates as a "success story" for capitalism (p. 32). Indeed, between 1979 and 1990 the share of full-time workers making below poverty level incomes rose from 12 percent to 18 percent, even according to official Census Bureau measures.(6) Krugman does not specify how this increase in the number of working poor, concurrent with the "downsizing of smokestack America" (i.e., cuts in wages and jobs in relatively capital-intensive and high-productivity sectors), is consistent with the notion that workers who increase their productivity will be rewarded with higher wages. Here, Krugman's apparent reliance on "trickle down" effects represents a step backward from the classical bourgeois economist David Ricardo, who had enough intellectual honesty to admit that under capitalism, mechanization of production and increased productivity can have a downward impact on the living standards of the working class.(7) As to how Krugman's supply-side warning against wage-led inflation is consistent with an environment of declining real wages, growing productivity, and continuous corporate and government attacks on organized labor, one can only guess.(8)

One could continue to discuss these and similar apologetic arguments ad nauseam. There is, for example, Krugman's interesting foray into political sociology according to which the worsening conditions of the poor are due to the fact that "poverty, as an issue...has basically exhausted the patience of the general public" (p. 24). Such a viewpoint has, to be sure, been recently appropriated by the Bush Administration in its blaming of the Los Angeles uprising on the failure of the minimal anti-poverty programs initiated during the Johnson Administration--programs that were always grossly inadequate and have been repeatedly cut since the late-1970s. Finally, there is the admiring treatment of Federal Reserve officials as "apolitical professionals...career technocrats [from] top to bottom" (pp. 78-79). This characterization hardly seems adequate for people such as: (1) Alan Greenspan, who, prior to becoming Federal Reserve Chair, was paid $40,000 for congressional testimony in which he gave a clean bill of health to the now-defunct Lincoln Savings run by convicted swindler Charles Keating, or (2) Federal Reserve Board member Wayne Angell, who designed the investment strategies of the (now-bankrupt) Franklin Savings Bank of Kansas.(9)

But additional examples would only further verify what we have already discovered: that if Krugman's analysis has any relevance at all to the current crisis of the U.S. economy, it is primarily that of reinforcing the elitist and supply-side ideologies which the ruling class uses in its never-ending efforts to "diminish the expectations" of the working class.

Nonetheless, Krugman's book does provide one historical lesson. It illustrates how bankrupt mainstream economics has become since the last major capitalist impasse in the 1930s. In the midst of the Great Depression, Keynes criticized the received notion that the rate of interest has an automatic tendency to equilibrate savings and investment at the full employment level of output. His analysis was based on the common-sense observation that the rate of interest is not determined by the supply and demand for investment funds, but rather by the supply and demand for money and other liquid assets in financial markets that, in his view, were dominated by de-stabilizing speculation.

Unfortunately, Keynes' critique did not adequately investigate the long-run tendencies toward over-accumulation and waste of productive capacity that are rooted in the capital accumulation process itself, especially in the activities of monopoly enterprises. Instead, ever the liberal reformist, he tended to couch his theory in terms of a static equilibrium model of a competitive capitalist economy in which the government could, in engineer-like fashion, permanently regulate the level of effective demand by appropriate "fine tuning" of fiscal and monetary policies. The potentially revolutionary aspects of Keynes' thought were thus quickly and easily submerged under the main body of mainstream theory (newly entitled the "neoclassical/Keynesian synthesis") during the long boom of the global capitalist economy under U.S. hegemony and "military Keynesianism" after the Second World War.

Nonetheless, the work of Keynes did at least suggest, however briefly, that bourgeois economic thought had not fully exhausted its ability to respond to concrete historical conditions by engaging in serious self-criticism and internal development. In contrast, current mainstream economics, as represented by Krugman, is now hopelessly trapped within the socially-outmoded ideologies of monopoly capitalism. It is therefore unable to grasp even the most basic aspects of the current crisis--let alone envision any socially-progressive policy initiatives. In short, for those looking to mainstream economics for relevant work on past and present economic developments, this should indeed be an "age of diminished expectations."

NOTES

1. Paul Krugman and Lance Taylor, "Contractionary Effects of Devaluation," Journal of International Economics, Vol. 8, (1978), pp. 445-456.

2. See "The Uses and Abuses of Measuring Productivity," Monthly| Review, 32, no.2 (June 1980).

3. For the relevant statistics see Myron Magnet, "The Truth About the American Worker," Fortune, (May 4, 1992), pp. 60-61.

4. See "Investment for What?" Monthly Review, 42, no. 2 (June 1990).

5. Gary Dymski, Gerald Epstein, James Galbraith, and Robert Pollin, "Macroeconomic Policy and Financial Restructuring," Briefing Paper, (Washington, DC: Economic Policy, Institute June 1992) p. 2.

6. Note that these figures cover a period prior to the full onset of the recent economic downturn. See "Number of Poor Workers Growing: Study Shows Young, Low-Skilled Can't Reach Middle-Class Lifestyle," The Tribune-Star, Terre Haute, (May 12, 1992).

7. David Ricardo, "On Machinery," Chapter 31 of The Principles of Political Economy and Taxation, (London: Everyman Edition, 1911). We cannot get into the validity of Ricardo's exact arguments on this issue here. The important point for our purposes is that Ricardo at least had the scientific integrity to recognize that mechanization of production and increased productivity "may at the same time render the population redundant, and deteriorate the condition of the laborer" (p. 264). Marx characterizes this analysis as "one of the greatest merits of Ricardo," and as reflecting Ricardo's "scientific impartiality and love of truth." See Capital, Volume 1, (New York: International Publishers, 1967) p. 407, p. 438. Elsewhere, Marx observes that Ricardo's willingness to amend his earlier views on this issue "bears witness to his honesty which so essentially distinguishes him from the vulgar economists." Theories of Surplus Value, Part II, (Moscow: Progress Publishers, 1968) p. 555 (emphasis in original).

8. On this issue see Wendy Rayack, "False Fears of Wage-Led Inflation," Briefing Paper, (Washington, DC: Economic Policy Institute, September 1988.)

9. See the reports in Left Business Observer, (March 8 and December 7, 1990).

Paul Burkett is a member of the Economics Department at Indiana State University, Terre Haute. The author extends gratitude to Richard Lotspeich for useful commentary on the prior draft.

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