Breaking the Sound Barrier
CREATED UNEQUAL: The Crisis in American Pay.
Someday, Created Unequal may be as popularly recognized and professionally acclaimed as J. M. Keynes’ The General Theory of Employment, Interest, and Money. But, please, not too soon: an economist has to be pretty much dead to get that famous, and we would all miss James K. Galbraith’s regular contributions to this journal. We should appreciate the advantages in getting the jump on those who will surely ignore or discount Galbraith’s work. In political as in economic competition, it pays to know something the other side has not figured out yet. If you own a copy of Keynes, and want to get on board early with a work of comparable heft, get this book. Regular Republicans will not concede the major conclusions here for about thirty years, if ever.
Right-wing zealots, curiously, already concede one of Galbraith’s major points – but work it into their prophetic vision. They do not bother with logic or science. After reading this book, I caught Rush Limbaugh on the radio, raving about the fact he and his colleagues at the one-man Institute of Advanced Conservative Studies have just discovered: there is no trade-off between unemployment and inflation, and high unemployment is therefore not needed to keep inflation low.
Now that we are experiencing no inflation and record low unemployment, it is a bit hard to avoid this discovery. But regular Republicans will try. Ditto-heads will just incorporate this amazing new discovery of theirs into the corpus of Reaganomical Revelation. Despite Bush and Clinton budget deals that they told us would be the end of the world, they now say Voodoo Economics led to our present prosperity (admittedly after a huge lag – seven years into a Democratic administration). Sure. Zealots are always right, even when they were wrong. Now that they are out of power, there is no denying them the comfort of self-righteous delusion. Ex post hoc, ergo propter hoc! To most of us this is a logical fallacy, but to the ditto-heads, it’s a fight-song.
Galbraith puts the current situation more believably. After analysis of time-series data from 1961 to 1997, he concludes, “The case for basing anti-inflation policy primarily on the rate of unemployment was never very persuasive – not in 1960 when the short-run Phillips curve came onto the American scene, not when Friedman introduced the nearly vertical version he called the ‘natural rate’ [of unemployment].” Professor Galbraith and his colleagues in the Keynesian tradition long opposed the orthodoxy of a naturally high rate of unemployment – sort of a macro-economic sound barrier, below which inflation would run rampant. Galbraith proposes a much lower rate of unemployment, which he calls the “ethical rate.” This is moral and material progress.
But Galbraith has not written a “Told Ya So!” book of Keynesian crowing. He means to describe an economy that can be politically choreographed, while taking Keynesian tradition back to its passionate and critical beginning with The Economic Consequences of the Peace. That was a chillingly prescient and warmly passionate vision of what would come of the Versailles treaty. It is even more stunning read long after it was written, knowing full well how awfully true it was. Galbraith does not buy the notion of a clockwork economy, subject only to physiocratic laws or material history. He illuminates an economy which a government can make march in war or dance in peace. And he notes that our economy, until very recently, has been made to frog-march in peace – an awkward proposition, to put it mildly. Back in the early seventies, a turning point for the worse, the American right firmly rejected a large army, composed of low-pay short-term conscripts. They blamed this army in the field for the failings of its commanders in Washington. But an army of low-pay, transient, civilian workers, well, that was happily embraced by the right – and, it must be said, conceded by the left. It can be arranged. It was arranged.
Created Unequal extends the general theory of employment, interest, and money to wages and technology. It is useful to practical people in government and out, especially now that the Great, World, and Cold Wars are over. It rams home the point that low unemployment and low inflation can be sustained by fiscal and monetary policy that focuses on just that. The next administration will not be able to excuse conspicuously higher unemployment or inflation without some real or concocted crisis leading to a suspension of disbelief, and a new line from spokesmodels like Limbaugh.
Galbraith describes technology and foreign trade as two “battering rams” of anti-inflation (meaning pro-unemployment) policy. Two other surfaces and planes (a strategist would call them) also helped to produce both unemployment and inequality: political figures and their policy decisions, acting intentionally to produce “real evil.”
…neither technology, properly measured and accounted for, nor the expansion of trade in themselves brought on the rise in inequality of which the country was the victim. They were merely the battering rams with which the old structures were knocked down, with technical revolution in the senior and the high dollar in the junior position.
Behind the battering rams, behind the decisions to use them in this way, behind the creation of the situations in which they could be used in such a way, were political figures and policy decisions – decisions, for example, to tolerate [high] unemployment. The economy is a managed beast. It was managed in such a way that this [wage and income inequality] was the result. It could have been done differently. It was not inevitable even given the progress of technology and the growth of trade. It was, in a sense, done deliberately. That is the real evil of the time.
In his analysis, Galbraith distinguishes between development of trade and technology, which has had some good, some bad effects, and technology or trade policy, which, from the standpoint of wages, has been demonstrably bad for decades now. To look at technology and trade systematically, and to separate the effect of political action or inaction from developments beyond political control but not political understanding, this book also includes an economic taxonomy: a solid analysis of different trades and industries intermediate between abstractions of micro- and macro-economics. Galbraith clusters hundreds of trades and industries for which data is available into sectors defined by “K” (knowledge), “C” (capital goods), and “S” (service). It is the interplay of developments and policy within and between these three sectors that has restrained or actually lowered wages, producing a rising inequality of wealth and income.
The pressure on wages goes deeper and well beyond the present prosperity. For example, it produces – as it was designed to do – a “transfer crisis”: the emerging war between low-paid young workers and retirees. It is actually worse than that. How can you have a defense budget three times as big as it needs to be, and still run out of ammunition during a small war? First, you make the defense budget part of your wage management and income inequality program. Then, you generate a crisis of transfer payments. By looking carefully at what has happened and how, Galbraith can address an old question: “What is to be done? If progress against inequality requires sustained full employment alongside reasonably stable prices, together with a more competitive dollar and a higher minimum wage, how can all of these things be achieved?”
He elaborates succinctly. First, “a monetary policy committed to full employment, through the straightforward mechanism of low and stable interest rates.” Second, “to ensure price stability … we need a wider range of [policies in support of monetary policy], including some specifically designed to help prevent supply shocks and wage-price spirals.” And, third, “to keep the U.S. economy on an even keel in a world of trade, we need a commitment to the growth and prosperity at least of the major U.S. trading partners, especially in this hemisphere and in Asia.”
This set of doctrines should have special meaning for the Texas reader. A wide range of Texas Democrats, both “liberal” and “conservative” (from Colonel House onwards), have supported all of these principles for a century. (Perhaps the exception that proves the rule was John Connally in his rather pathetic last days as a semi-Republican.) As an ex-Confederate, Southern state, Texas has traditionally sought and sometimes gotten “easy money.” We once not only explored and produced oil here, but also stabilized its price and marketing worldwide. And, we have generally seen the progress, not the beggaring, of Mexico as conducive to our own happiness. Nationally, that is no longer the case. It is hard not to wonder if, perhaps, Alabama and Virginia do not have three Senators each and Texas none at all. Setting aside “liberals vs. conservatives,” from a crude, self-serving, traditional, and practical perspective, James Galbraith has produced a useful book for Texans.
Lord Keynes was long dead by the time Republicans here in the Great Province of Texas started castigating his work and demonizing his life to impress some Home Office in Atlanta, Hartford, or wherever. But during his obscure lifetime, not just as a scholar but as a civil servant in the British Treasury Department, he collaborated very successfully with the late Will Clayton. Clayton was unlearned but very smart. He had a pretty good idea what was good for the cotton business, good for Texas, good for the Democratic Party, good for the nation, as well as good for Europe and a couple of other continents.
It is important for progress that a few people understand what needs to be done, explain it well, and get heard by those as need to and want to see it done. At times, Texas and Texans have done that, usually somewhat quaintly from a more refined perspective, leaving some opportunity for vulgar bragging to others much later. This book presents an immediate opportunity of that very nature. It is a truly Keynesian work of great value. It is both passionately forward-looking and rigorously analytical of the past and present, like the whole corpus of Keynes’ published works.
I will be dead by the time my kids decide if this copy I bought in Austin is collectable. But I am sure it will be so, if even a few people – especially a few Texans, I would like to think – take it seriously now.
John Robert Behrman works for an engineering firm in Houston, and is a fifth-generation Texas Democrat.