Times are dire for economists in America. The country is preoccupied with its economic misfortunes. Yet the most esteemed theorist of economic recovery seems to be the early 19th-century French populariser of Adam Smith known to Marx as ‘the inane Jean-Baptiste Say … [who] refutes himself again’. The most successful recent guide to the economy – a work called Wealth and Poverty, described by the Republican Director of the Office of Management and Budget as ‘Promethean in its intellectual power and insight’ – explains (with the required obeisance to Say) that slow economic growth is to be understood in terms of faith, the modesty of female sexuality and the ‘dominance of single and separated men in poor communities’.
We should have expected all this. ‘The cranks and critics flourish,’ said Joan Robinson ten years ago (in a lecture to the American Economics Association, reprinted in Contributions to Modern Economics), ‘because the orthodox economists have neglected the great problems that everyone else feels to be urgent and menacing.’ Since then, the great problems have become greater, and the goblins of irrational explanation more insistent: the American spirit which (according to Reagan) is about to blaze into life, Prometheus, Jean-Baptiste and his law of what is now known as the ‘supply side’.
In this murk of ghosts and orthodoxy, Lester Thurow is a dignified exception. He is resolutely concerned with the menaces of unemployment, inflation, poverty and inequality. His new book even helps us to understand the Republican economic policies of 1981. Thurow is a specialist in income distribution. The Zero-Sum Society, written for a general audience, looks at the troubles of the American economy from the perspective of the distribution of income, wealth and power. Most economic problems, Thurow argues, now have ‘a substantial zero-sum element’: that is to say, their resolution involves losses as well as gains, and thus the redistribution of economic well-being. The American ‘political and economic structure simply isn’t able to cope with [such an] economy’.
From this perspective of losses and equity, Thurow provides a clear and convincing account of many contemporary troubles. He emphasises that economic growth requires not only investment but also disinvestment (in obsolete industries or regions or in workers with obsolete skills) and that ‘disinvestment is what our economy does worst.’ His account of the slowdown in productivity growth is particularly interesting, in that he looks at the disparate levels and rates of growth of output per hour worked in different industries. Forty per cent of the slowdown in productivity growth after 1972, he suggests, ‘can be traced to a shift in the mix of goods and services being demanded and produced’. In the period between 1948 and 1972, workers were leaving (low-productivity) agriculture for (middle-productivity) manufacturing and (high-productivity) non-manufacturing industries: since 1972, workers have found new jobs in low-productivity services and notably in health care.
In these circumstances of slow growth, it is difficult to allocate losses. For the incidence of misfortune is highly uneven. If energy prices increase, the rich become a little poorer, and the poor much poorer; people in the West of the United States become a little poorer and people in the North-East much poorer. There are similar disparities to do with, for example, the protection of the environment (which Thurow describes compellingly in terms of income elasticities of demand: ‘We have simply reached the point where, for many Americans, the next item on their acquisitive agenda is a cleaner environment’).
Meanwhile, the long period of economic growth since the Second World War had failed to make the distribution of income more equal. The poorest 20 per cent of families received 5 per cent of total family income in 1947, and 5.2 per cent in 1977; the share of the richest 20 per cent fell from 43 per cent to 41.5 per cent (and these families also owned almost 80 per cent of total wealth).
Even this stability was achieved only by direct income redistribution. Income transfers from the rich to the poor now account for a tenth of the American gross national product. The distribution of wage and salary earnings for individuals has actually become more unequal over the same period, with the worst-paid 20 per cent of workers receiving 1.7 per cent of earnings in 1977, compared with 2.6 per cent in 1948. Thurow expects that family income distribution will henceforth become more unequal, both because income-transfer payments will not continue to increase and because the women who have still to enter the work-force (and increase family incomes) are largely from richer families. Meanwhile the distribution of earnings between men and women is also becoming less equal: ‘In 1939 the average year-round, full-time female worker earned just 61 per cent of what the equivalent male made. By 1977 she made just 57 per cent as much.’
Thurow’s prescriptions reflect his concern with equity and distribution. He proposes ‘a socialised sector of the economy designed to give work opportunities to everyone who wants them but cannot find them elsewhere’. The American economy needs fully to ‘utilise the skills and talents’ of economic minorities. There should be planning (‘the national equivalent of a corporate investment committee,’ Thurow explains to his susceptible readers). The rough process of ‘disinvestment’ should be accompanied by wage and retraining subsidies for unemployed workers who lose their jobs in declining industries. There should be a fair tax system, and one in which people with the same income pay much the same tax.
It is easy to see why Thurow’s book (which was first published a year ago in the United States) should be such an illuminating guide to the Reagan Government’s economic policies. For Thurow’s insistence on income distribution is equalled in Republican conclaves. The Reagan policy has been presented as a strategy to achieve rapid economic growth and reduce inflation; to revive the spirit of national enterprise; as a path back to the Eden of lost economic innocence (Reagan: ‘We have strayed from first principles ...’). But it is also a policy for the rapid redistribution of income, wealth and power: from the poor to the rich. It is an assault on the post-war system of income security for the poor which Thurow describes, and on the legislation passed in the 1960s and 1970s to protect the weak (and the physical environment). ‘Unless we can say whose income ought to go down, we cannot solve our economic problems,’ Thurow writes. The Republicans appear to believe that they have such a solution, that they can indeed say who in America must become less rich.
A recent study by the Congressional Budget Office shows that 20 to 25 million people, most of them poor, would be hurt by the first measurable tranche of Reagan cuts (in welfare, public-service jobs and food, but excluding Social Security, Medicaid and unemployment insurance). To this Mr David Stockman, Director of the Office of Management and Budget (who found the book about single men so Promethean) responds with optimism. Of 16.5 million poor people (living on less than $12,600 a year for a family of four), only ‘47 per cent would suffer a loss of between 1 per cent and 5 per cent of their spendable income’:
He was asked whether a cut of 5 per cent would not be painful for a family living at the poverty level. ‘I don’t think so,’ Mr Stockman replied.
International Herald Tribune, 18-19 April
The Republican economic boom is a sort of Christmas Carol, with its French economists and ghosts of Christmas past. But its true spirit is Alderman Cute on New Year’s Eve in The Chimes:
Now don’t wander near me, my dear, for I am resolved to Put all wandering mothers Down. All young mothers, of all sorts and kinds, it’s my determination to Put Down. Don’t think to plead illness as an excuse with me; or babies as an excuse with me; for all sick persons and young children (I hope you know the church-service but I’m afraid not) I am determined to Put Down. And if you attempt, desperately, and ungratefully, and impiously, and fraudulently attempt, to drown yourself or hang yourself, I’ll have no pity on you, for I have made up my mind to Put all suicide Down.
There is little reason to suppose that the new policies will lead, through misery and the regeneration of the miserable, to Mr Reagan’s lost garden of growth. As Thurow observes, the ‘hard-core conservative solution’ of liberating free enterprise is not supported by experience: the United States did better with ‘government interference’ than it did before, and its main competitors are doing better still with even more social expenditures.
Nor are the middle-income families who elected the Republicans likely to be content for long. Thurow shows that government itself employs large numbers of middle-class workers (over a third of all male professionals and half of all female professionals). The cuts in public spending – for medical care, student loans, government pensions, sewers and national parks – will not only hurt the poor. (They will even hurt, for example, economists. The Republican Government has proposed to cut 24 per cent from the National Science Foundation overall budget for 1982 – but 75 per cent front National Science Foundation spending for the social sciences.)
The Republican assumption seems to be that the social legislation of the 1960s (and 1950s, and even the 1930s) was a mistake; that the voters who supported it with such enthusiasm have simply changed their minds. But environmental protection, for example, is, as Thurow shows, a ‘good’ demanded by the middle classes (‘very high income groups can, to a great extent, buy their way out of the environmental problem’). One might argue that social equity, of a modest sort, is a similar ‘superior good’, similarly ensconced in the income elasticities of the comfortably-off. In any case, it serves another function as well: of preserving social calm among the poor and the powerless. The Republicans may need their Rapid Intervention Forces in Michigan as well as in Central America.
Thurow’s analysis is essentially political rather than economic. His concluding suggestion is that America’s ‘problems arise because, in a very real sense, we do not have political parties’. He is less concerned with the economic origins of the great problems he examines – problems which are to a considerable extent shared by other rich industrial countries more bountifully endowed with vigorous political parties.
In particular, Thurow does not consider the possibility of an asymmetry between the changing technical conditions of production, on the one hand, and the changing structure of demand, on the other. He expects, for example, that with planned and equitable disinvestment, investment funds will ‘flow into high-productivity areas’; that government involvement in process research and development (research, that is, directed towards finding new processes of production rather than new products) is an essential element in increasing productivity. Yet it seems that demand may be growing most rapidly for low-productivity commodities, and for commodities – medical care – whose ‘process innovation’ and learning curves are remote from those in, for example, the steel industry. The prospect of such asymmetry is in fact implicit in Thurow’s own account of sectoral productivity trends and of the measurement of ‘environmental goods’.
These are, however, considerations for a more or less long term. The United States economy is whirling in visions and false resolve: to these The Zero-Sum Society is a fine and timely guide.