«Tamara Lothian* Columbia University – Center for Law and Economic Studies Roberto Mangabeira Unger* Harvard University March 1, 2011 * © Tamara ...»
But if only there were greater courage and clarity (further to inflate or to spend), the recovery would have come earlier and been stronger.
The exercises of stimulus that the world has seen since the Great Depression of the last century almost always appear, both at the time they were deployed and in retrospect, to have never been enough. Their quantitative inadequacy is so constant a feature of the economic history of the last hundred years that it cannot reasonably be dismissed as an accidental and occasional byproduct of misguided beliefs and perverted policies. It forms part of the reality with which we must reckon.
It is not a new reality. Even the briefest consideration of its most famous earlier example helps us to understand what we should and should not expect from peacetime stimulus. Contrary to what is often said, no major Western economy managed to overcome the Depression 9 before the Second World War, with the sole, partial exception of Germany. Roosevelt, contrary to common latter-day revisionism, had not brought the country to sustained, broad-based recovery, when he wavered and retrenched in his program of recovery through public spending, as every proponent in power of massive stimulus always has, and helped, through his wavering and retrenchment, to precipitate the frightening downturn of 1937-1938.
The truncated debate about the slump: the forgottenlessons of the war economy
What took the advanced economies out of the Depression was the wartime mobilization of people and resources. The war that brought about such massive mobilization had little in common with the costly but limited military adventures of today. It was world war conducted in the spirit of total war. Between 1941 and 1945, American GDP doubled.
The proto-Keynesianism adopted by the United States and other major Western governments during the worldwide depression of the 1930s was largely a failure. The war economy was, in straightforward economic terms, a success. It was not a success simply with regard to the expansion of output. It was also a success with respect to conventional progressive redistribution through the tax system as well as to the accelerated technological and organizational innovations that are generally associated with periods of major economic growth. The top marginal rate of the personal income tax, for example, reached levels in the United States that had never been seen before and have never been seen since then – in the midst of extraordinary expansion of output.
Necessity, mother of invention, helped provoke connected waves of innovation in technology, in the organization of work and production, and in the arrangements governing the relations between government and the ways private businesses dealt with one another.
10 It is important correctly to understand the lessons of the war economy. The radical expansion of output cannot be attributed solely to the forced mobilization of physical, financial, and human resources, massive as that mobilization was. Such an extraordinary effort might have come at least partly to grief had it not been accompanied by even more surprising advances in the forms of coordination and cooperation between government and business as well as among firms.
Here was a country that was the world headquarters of the doctrine of the free market. Its perennial bias was to believe that its founders had discovered at the time of the establishment of the American republic the definitive formula of a free society, enshrined in the rules of contract and property as well as in the Constitution. The formula needed only to be adjusted from time to time under the pressure of crisis and the prodding of changed circumstance. There was room for dispute about the respective roles of the market and regulation. But there was little doubt about the arrangements defining the market economy itself. Any talk of reshaping the institutions of the market economy fell under suspicion of being a disguised form of dirigisme. Such were the beliefs that prevailed before the war and that came again to predominate after the war. Even today they are beliefs largely shared by the vulgar Keynesians and their conservative adversaries.
At their moment of national trial, in world war, however, Americans gave these beliefs, supposedly entrenched in their national identity, short shrift. They retook the experiments conducted during the First World War, under the aegis of the War Planning Board, in an orchestration of productive effort that was neither the market economy, as it had been conventionally understood, nor central planning. It amounted to flexible decentralized strategic coordination between government and firms as well as to cooperative competition among firms. It included a willingness to try out whatever way of organizing production at the plant level seemed to promise the most output with the 11 fewest inputs in the shortest time and the greatest prospect of continuing innovation both in products and in the way of making them.
It was as if all the nostrums about the sanctity and the immutability of the market economy were only a mask that could be cast off when they needed to be. They were not cast off in favor of centralized, coercive direction, although there was some element of such direction as well as of self-serving profiteering. They were cast off in favor of a series of pragmatic institutional experiments defying the supposedly inviolate barrier between market and non-market forms of organization as well as between cooperation and competition.
What turned out to be more important than the institutional and ideological dogmas, whether pro-market or dirigiste, was the capacity to cooperate the better to reach shared and pressing goals. That capacity, already highly developed in the United States, as well as in other advanced twentieth-century societies, was not the product of the war. It had roots in a form of social organization and of consciousness that had affirmed belief in equality in the midst of tremendous inequality and faith in experimentalism despite an attachment to institutional formulas.
However, it found, in the circumstances of the war effort, occasions for its exercise.
The central attribute of the war economy was the coexistence of a forced mobilization of resources with this quickened pace of bold practical experimentalism in the ways of organizing the effort. That -and not proto-Keynesianism -- was what really worked.
The traditional interpretation of the experience of the war economy, insofar as there is any interpretation at all, is that both its achievements and its methods are to be understood as pertinent only to the extraordinary conditions of wartime and are wholly inapplicable to circumstances of relative peace, such as those that prevail today. It is an 12 unwarranted conclusion. Every historical situation on which we can turn the tools of economic thinking is, by definition, special. Peacetime economies may differ from one another as much as they differ from a particular war economy. If, however, there is any hope of developing a science of economics as anything more than an analytic toolbox, void of causal theories, it can be only by discerning the more general and lasting implications of particular historical circumstances. There are no other circumstances that could serve as the subject matter of economic analysis.
When the lessons of the wartime experience are transported to the conditions of relative peace, in which today we face the slump, the main lesson to be carried over is that because the forced mobilization of resources is less feasible, the other element -- of institutional innovation, in the practices of production and in the forms of cooperation and coordination between public and private agents as well as among private ones, becomes all the more important.
Let us take the work of stimulus, especially fiscal stimulus, through public works or through governmental incentives for business investment, as the most plausible counterpart, under conditions of peace, to the all-out mobilization of resources in total war. For all the reasons we have enumerated, it will almost never be implemented in more than half-hearted form. Even when practiced more rather than the less, it faces the intractable limitations we earlier described. That is not a reason to foreswear fiscal stimulus. It is a reason not to rely on it as the sole or even as the mainspring of recovery. It is the other element of the wartime experience -- its institutional innovations in the form of the market economy and in the relation between government and business -that deserve and repay greater emphasis. What the monetary and fiscal stimulus does not and cannot do all by itself, such innovations in the organization of production, exchange, and governance must accomplish.
In the light of this elementary appreciation of the limits of fiscal and monetary stimulus, and of the near inevitability of their truncation, it is possible to understand more clearly what is wrong with the present debate about the response to the slump.
The first thing that is wrong about it is that it consists largely in a polemic between the proponents of more stimulus and the opponents of such an exercise. The proponents say: if only the government had doubled the bet, if only it had shown itself willing to spend more or to put more money in the hands of consumers (by lowering taxes or by expanding the money supply), the slump would already have given way to a more convincing recovery. Their opponents claim that while the recovery-producing effects of such measures are at best fragmentary and delayed, their destructive effect on public finance is certain and immediate, with the future left to pay for the improvidence of the present. The proponents exaggerate, and the opponents understate, the benefits of the stimulus. Neither offer a realistic view of its uses and limits in the organization of a recovery.
The residue of this debate is what in fact exists today, and in one or another version, always existed before, in earlier instances of crisis and crisis management, by way of response to the slump. It is stimulus by half: halting, compromised, neither here nor there. The defenders of the stimulus are then able to say that their recipe for massive governmental spending or monetary expansion has not been adequately tried. The critics of stimulus can in turn respond that the integrity of public finance has been compromised, with long-term negative consequences for future growth, and that there is little to show for it. Each party to this contest is allowed keep its prejudices, to its own satisfaction, undaunted by the enigmas of the situation.
14 The second thing that is wrong with the present debate is that it is almost entirely deficient in any view of the institutional innovations that would be required to organize socially inclusive economic growth over the long term. The dominant perspective of the debate -- both from the standpoint of the proponents of stimulus and from the perspective of its opponents -- is that the slump represents an interruption, a threat, a shadow, to be averted. Once it is averted, we can return to how things were before.
However, there is a flaw in the hope of getting back to business as usual. The problem is that things were not well before the crisis and the slump; the crisis and its aftermath are expressions, among other others, of these fundamental defects. The far-reaching estrangement of finance from the real economy and the gross inequalities of the present organization of market economies form a large part of the causal background to the recent crisis. They also help account for the limited efficacy of conventional fiscal and monetary stimulus. These problems were aggravated by the loosening of regulatory restraints on finance in the closing decades of the twentieth century, but they pre-existed it.
Under the present arrangements of all contemporary market economies, the link between the accumulated saving of society and its agenda of production is weak. To a large extent, the finance of production relies on the retained and reinvested earnings of private firms, which is to say that production finances itself. Finance is then free to serve itself rather than to serve production, and to design successive layers of financial engineering with an ever more tenuous relation to any transactions in the real economy.
A relaxation of regulatory vigilance such as occurred in the second half of the twentieth century, merely magnifies these effects. Finance, relatively ineffective in helping support production, may be very 15 effective in disrupting it, as its innovations become more and more selfreferential, and less and less useful to funding the production of actual goods and services. A crisis in finance, such as we have witnessed, will have major effects on the real economy chiefly by dissuading firms and households from running risks and maintaining high exposure to debt.
If the disengagement of finance from production formed part of the causal background to the crisis of 2007-2009 and to its continuing aftermath in the slump, another part was the effect of inequality, manifest both proximately and remotely.
As a proximate cause of the crisis of 2007-2009, in its American theater and its appearance in many countries around the world, inequality mattered chiefly as a provocation to put access to consumer credit in the place of redistribution of wealth and income as a basis for a market in mass consumption goods. Mass consumption requires in principle a popularization of purchasing power. Such popularization in
turn seems to depend on widespread distribution of wealth and income:
either through a broadening of access to economic and educational opportunities that influences the primary distribution of income or through the redistributive effects of taxation and social spending.
The economic growth that the advanced Western economies saw in the second half of the twentieth century relied heavily on the expansion of a market in mass consumption goods. In this as in many other respects, the United States took the lead. When asked what book he would like to see in the hands of every Soviet child, Franklin Roosevelt answered: the Sears Roebuck catalog.
What real redistribution fails to provide, fake redistribution, in the form of greater access to consumer credit, helped supply instead.