Throughout this year’s campaign season, the Republican Party promised to reduce the nation’s rapidly growing debt by slashing federal spending for everything but the military. But permanent fiscal austerity of the kind embodied by the Ryan budget and the Romney/Ryan campaign platform would exacerbate the biggest economic problems facing the country—inequality and unemployment—while also depriving the federal government of the tools it needs to correct them. By denying the government’s responsibility for the overall health of the economy, the Republicans’ fiscal and monetary policies would expose Americans, rich and poor, to the dramatic swings of the business cycle. The U.S. economy used to be much more volatile. Before the New Deal and World War II, there were bigger crashes and longer recessions. The regulation of business (especially banks and financial markets), the creation of a safety net, and countercyclical fiscal and monetary policy have all dramatically improved economic outcomes, and have led to a long period of economic growth and shared prosperity. In the postwar period, a rising tide really did seem to lift all boats.
Starting with the Reagan Revolution of the 1980s, however, the Republican Party—too often with the support of some Democrats—began to dismantle the policies that had promoted greater equality and kept recessions short and shallow. As worker protections were removed, real wages stagnated. With the deregulation of banks and financial markets, the incomes of the top one percent began to skyrocket and financial markets became much more unstable. Unregulated financial innovations—which were said to reduce risk—turned Wall Street into a casino. Investment banks, whose primary function had been to direct capital to real businesses that could make productive use of it, grew fat on reckless speculation. Washington, meanwhile, looked the other way, persuaded that the only restraint the financial sector needed was provided by the market itself.
Just four years after the crisis on Wall Street, the GOP has succeeded in rehabilitating this dangerous illusion. The central argument of the Romney/Ryan campaign has been that the government is getting in the way of economic progress. Government spending, they say, is crowding out private investment. High taxes and regulation are discouraging entrepreneurs. On this view, the real cause of unemployment is unemployment compensation, which takes away the incentive to find work. Likewise, welfare programs don’t relieve poverty; they make it worse. And health-care costs are high mainly because of tax benefits for employer-provided health insurance. Whatever the problem, government intervention only compounds it, and the market is always the solution.
Advertisement
Paul Ryan has adopted an “originalist” interpretation of the U.S. Constitution as his guide for understanding the proper role of government in the economy. But our twenty-first-century economy has little in common with the economy our founding fathers knew. Back then, there wasn’t much the government could do to promote economic growth, besides enforcing property rights, providing law and order, ensuring a sufficient supply of (slave) labor for plantations, and taking land and natural resources from the Native Americans. Since then, the government has gradually taken a more active role in promoting the country’s economic development—from helping to develop Wall Street to subsidizing the railroads and the oil industry. With the New Deal, the federal government came to the assistance of workers, just as it had previously come to the assistance of rich industrialists. This eventually led to the middle-class majority that emerged after World War II.
Nearly every major technological development in the past seventy years can be traced back to government spending. It was research paid for by the government that led to computers and the internet, to the Green Revolution in agriculture, and to many other advances in science and technology that have greatly improved our standard of living. Of course, the government did not accomplish these things alone—businesses and universities were necessary partners—but few of the most important scientific discoveries and technological advances of the past century would have occurred without the government’s involvement.
One can obviously find examples of government interventions that were harmful to an economy, but no modern country has achieved economic success without a strong and active government leading the way. On page 42 of his most recent budget plan (.PDF), Ryan states that “no economic system in the history of mankind has done more to lift up the poor than America’s commitment to free enterprise.” In fact, most other developed countries have done a better job of lifting their citizens out of poverty. There is more upward mobility and less poverty in countries that make sure all their citizens have access to health care and higher education. So Ryan’s claims about the success of laissez-faire economic policy find no more support in other countries than they do in other periods of America’s own history. Whatever the intuitive appeal of his pet theory, it runs counter to the available evidence.
The central argument in Ryan’s budget is that we need to cut government “spending so the economy can grow.” Now, it is possible for government spending to crowd out private spending, but only when the economy is at or near full employment. In such cases—for example, during World War II—an increase in government spending will either come at the expense of the private sector or cause inflation. (During the war there were price controls and rationing to prevent inflation.) Today, however, when over 12 million Americans are still unemployed, there is no reason to think more government spending would inhibit private investment or lead to runaway inflation. And with so many people looking for work, it makes no sense to cut public-sector jobs hoping that will eventually lead to more private-sector jobs—as if only jobs that help an employer make a profit are acceptable. Jobs are jobs, public or private. A public-school teacher is no less employed—and no less well employed—than a banker or a sales clerk.
Ryan also claims that the poverty rate is increasing because of higher expenditures on programs like food stamps and that unemployment is high because so many people are receiving extended unemployment benefits. As with his argument that economic growth is low because of federal spending, Ryan is once again confusing effects with their causes. The high unemployment rate is due to insufficient aggregate demand, not to unemployment benefits spoiling potential workers. Making unemployed people more desperate for work by cutting their benefits will not create new job openings, and cutting benefits will only hurt the economy by further reducing demand. After all, the unemployed spend whatever money they get from the government, and spending is precisely what the economy needs more of right now. In fact, unemployment insurance is one of the most efficient forms of economic stimulus: according to the Congressional Budget Office, it has a 1.45 multiplier effect. By this measure, unemployment benefits are 3.65 times more effective at stimulating the economy than tax cuts for the wealthy and 7.25 times more effective than corporate-tax breaks. Just as important, most evidence shows that benefits to the poor are much too low to create a disincentive to work, and that tax rates on the rich are nowhere near high enough to discourage them from working more.
Ryan’s obsession, the deficit, is yet another area where he has confused cause and effect. The high deficits the government is now running are the effect of a weak economy and a lack of jobs, which together cause revenue to decline and expenditures to rise. The best way to reduce the deficit is to create jobs. Cutting spending now would cause the economy to shrink again, raising joblessness and thus increasing the deficit. The experience of European countries that have adopted austerity policies demonstrates what would happen here if the Ryan approach were followed. Of these countries, only Germany has seen any success—and this is because of growth in its export market. But not every country can improve its trade balance, for the simple reason that for every country running a trade surplus, there has to be a country with an equal trade deficit. Ironically, Greece’s economic problems have helped Germany’s exports by reducing the value of the euro. But as the economies of Brazil, Russia, India, and China slow down, Germany will run out of places to export its manufactured products. At that point it too will face rising unemployment rates, just like the rest of Europe.
While Ryan’s proposal to cut federal aid to the poor will cause an immediate increase in unemployment, his plan to transform the Supplemental Nutrition Assistance Program (SNAP) and Medicaid into block grants could end up being even more damaging. Ryan is worried that these programs are growing too fast; turning them into block-grant programs could limit this growth, but only by reducing eligibility or benefits. Such a move would also limit the government’s ability to stabilize a faltering economy. Entitlements are what economists call “automatic stabilizers”—changes in expenditure that kick in automatically to counter the boom and bust of the business cycle. While economists argue about the effectiveness of discretionary fiscal policy (when Congress votes to raise or reduce spending or taxes in order to slow the economy down or speed it up), few debate the effectiveness of automatic stabilizers. The problem with discretionary fiscal policy—for example, the stimulus package of 2009—is that it takes too long to work. It can take months to realize that you’re in a recession, months more to reach an agreement on what to do about it, and then another few months for the new spending to kick in. This is why there was so much emphasis in the 2009 stimulus package on “shovel-ready programs”: when the economy is in a steep decline, you want the spending increase to take effect as soon as possible. With automatic stabilizers, there are no lags. As soon as the unemployment rate starts to rise, spending on unemployment benefits increases without delay. Likwise, when the economy starts to grow again and the unemployment rate falls, spending on benefits falls off too. Most important, when the economy goes into recession the federal deficit goes up, providing stimulus to the economy and balancing the shaky portfolios of banks and corporations, as they move out of risky assets and into safe government bonds. And when the economy nears full employment, revenues increase, spending falls, and the supply of government bonds declines along with the demand for them.
This “portfolio effect” played a major role in stabilizing the financial system during the 2008 financial meltdown. Turning entitlement programs into block grants to the states would keep such programs from growing in response to greater need during a recession, or it would require special congressional action to increase the block grants. But even if Congress was willing to do this (which is far from certain these days), the economy would have to wait for months, if not years, for the adjustment to take effect. Thus, turning these federal entitlement programs into block grants would not only hurt the poor; it would make the entire economy significantly more unstable. Under the current system, the government is prepared for predictable downturns. Under the Romney/Ryan plan, the government would at best be playing catch-up.
The Republicans also claim that the tax system’s complexity is a major drag on the economy, and that simplifying it will lead to greater growth. History tells a different story. In the four years before Reagan simplified taxes (1983 to 1986), the economy grew at an average rate of 4.8 percent; in the four years following the simplification (1987 to 1990), the average growth rate fell by a third to 3.2 percent. While no one supports an unnecessarily complex tax code, there is no evidence that the current number of tax brackets is inhibiting economic growth. The charts in Ryan’s own budget show that high marginal tax rates on the wealthy are not a barrier to economic growth or job creation: the economy created more jobs in the 1970s, when top marginal rates were very high (between 70 and 90 percent) than it did in the 1980s, ’90s or 2000s, when rates were much lower. Over 20 million civilian jobs were added in the 1970s, compared with 18 million during the ’80s, 14 million during the ’90s, and just under 3 million from 2000 to 2009. Most economists who have studied the disincentive effects of marginal tax rates think they would have to be higher than 60 percent before they would become a disincentive to economic activity. (The top rate is now just 35 percent.) The fact is that when marginal rates go up, most people work more to keep their after-tax income from falling.
The Republicans’ use of the debt as an excuse for gutting entitlement programs they never liked in the first place is part of a long tradition of plutocrats taking advantage of the disastrous effects of their own policies to push through even more disastrous policies. As G. K. Chesterton noted long ago:
The key fact in the new development of plutocracy is that it will use its own blunder as an excuse for further crimes. Everywhere the very completeness of the impoverishment will be made a reason for the enslavement; though the men who impoverished were the same who enslaved. It is as if a highwayman not only took away a gentleman’s horse and all his money, but then handed him over to the police for tramping without visible means of subsistence.
Like the Great Depression, the Great Recession had many causes, but the most important cause of both was income inequality. When too much money goes to the very top, not enough money circulates in the real economy, where it would create jobs and raise people’s standard of living. Compensating for this problem requires higher levels of private investment and more debt, public or private. Not coincidentally, these were the things that fueled the last economic boom, which came to an abrupt halt in 2007. When reality finally caught up with the real estate market, only government borrowing was left to keep the economy from imploding. The only real path to lasting prosperity is more economic equality—making sure the average American has enough money to pay for the things the economy produces. Only by addressing inequality will we be able to lift up the poor, create jobs, and raise standards of living without the help of another bubble.
Pofessor Clark offers an interesting view and raises substantial concerns about the Ryan budget and the Romney/Ryan campaign platform. He anticipates a number of problems that he believes will arise if these proposals are adopted. These are legitimate questions. But Professor Clark bases his comments upon some very general statements that prompt the following observations.
"Before the New Deal and World War II there were bigger crashes and longer recessions." (Underlining appears in the Professor's text). The Great Depression is widely accepted as the longest and deepest in the nation's history. While unemployment statistics were rare before the 1930s, there is anecdotal evidence that the 1930s Depression was more severe than that of 1873-75, or 1893-95, the Panic of 1907, or the recession of 1921, alll of which were during the country's "industrial era". See John D. Rockefeller's Reminiscences and several of Henry Ford's books. The 1930s Depression was certainly longer, with 14% unemployment even in 1939, after six years of New Deal, four years of Second New Deal and WPA, etc. In that same year, one third of American families had income below the poverty level.
"In the post-war period, a rising tide really did lift all boats." Not really. White men and their families may recall the post-war decades as a golden age. But social and economic segregation barred African-Americans from all but menial jobs, and produced the urban riots of the late 1960s. White women, however intelligent and creative, had their career choices limited to housewife, nun, teacher, nurse, or secretary until well into the 1970s. So, a more accurate description of the post-war era might be: limited benefits, unequally distributed. Great for the haves, miserable for the have nots.
"Nearly every major technological development in the past seventy years can be traced back to government spending." The historical data and anecdotal evidence contradict this. An inventor who has a new product, technology or method ready for commerce applies for a patent to protect his or her intellectual property. The US Patent Office has tracked patent applications since 1840. The trend of growth is more or less steady, with brief declines in years of recession or war, until 1931. In that year the number of applications falls sharply, and does not recover until fifty-five years later. Anecdotally, one of the first to notice the lack of innovation, and its impact on job growth, was the Catholic ethicist Monsignor Ryan, in 1935. Decades later, President John F. Kennedy noted it in several of his major speeches. The stimulus of the WPA, PWA, and other Depression era programs, the interstate highway program of Eisenhower and later administrations, and the space programs of JFK's & LBJ's terms did little to restore innovation, as the data makes clear and the anecdotal evidence supports. I refer to this half-century as the Dark Age of American Innovation. It's lessons are important to any discussion of the common good and economic social justice.
I share Professor Clark's interest in promoting economic measures, including government programs, that promote the common good. An accurate assessment of our history can and should inform our decisions.
Joseph J. Dunn Author of After One Hundred Years: Corporate Profits, Wealth, and American Society.
I thank Mr Dunn for his comments and I agree that an accurate assessment of our economic history should inform our decisions. This I gave.
Mr Dun makes three "corrections":
1. he seems to be challanging my claim that the business cycles before the New Deal reforms and WWII were worse in terms of being longer and deeper than it has been since, and he uses the Great Depression has his evidence. Certainly the New Deal reforms could not have prevented the Great Depression as they were a response to the Great Depression. While it is true that the New Deal did not get us fully out of the Great Depression (it was at too small a scale, it was the massive spending on WWII that did that), the purpose of reform is prevent future crashes. Had the New Deal been in place before 1929 I think we can safely say 1929 wouldn't be such a memorable year. The fact the Mr Dunn can name so many well known crashes before these reforms and no financial crashes after -- that is untill deregulation started in the 1980s, proves my point. As there are no easy ways out of a financial crisis, that is why you have to stongly regulate the financial sector to prevent them.
2. Mr Dunn correctly says that everyone did not benefit equally in the post war boom. The saying that a rising tide lifts all boats generally means that all economic classes benefit from economic growth, not that each group or individual within benefits equally. While I suspect that the economic well being of minorities and women increased during the post war boom, it is more difficult to measure this as the data for parts of this period (pre 1967) do not exist as far as I know. Share of income going to the 20% poorest blacks went from 3.8% to 4.2% in the mid 1970s and has since fallen to under 3% now, following the same trend as all races. I expect their rise from 1947 to 1967 was in the same direction as the general population. I agree that discrimination has greatly influenced who benefits from economic growth. And it is true, contrary to Milton Friedman, that economic growth (or market forces) cannot eliminate racism or sexism. Legal reforms and changing social attitudes were and are still needed. But it is also true that the bottom 80% of the population had their incomes grow faster than the top 20% from 1946 to 1973, and the bottom 20% grew faster than the top 20%, so the rising tide (economic growth) did raise the incomes of each population group. It was great for the halfs and greater for the halfnots in terms of % rise in income growth. After the mid-late 70s economic growth has not had that effect, which is the issue of inequality.
3. Mr Dunn's third point seems to challange my contention that government spending in the past 70 years has been critical to the technological developments of this time period. It is interesting that Mr Dunn uses patent applications as a measure of technological change. Economists have long noted this is a particularly bad measure, for the simple reason that many (up to half by some estimates) do not apply for such patent protection, for varous reasons. But it is a fact that the computer, the internet, most medical innovations etc can be traced back to investments in research by the government. And while the space program might have not had the spin-offs that some expected (and more technological change probably came from our efforts to figure out more ways to kill our fellow humans in defense spending then to explore space), educating lots of PhDs in physics certainly did, and that would have never happened without government support.
Professor Clark's responses are welcome, but I need to clarify some points.
I do not point to the Great Depression itself as refuting the professor's original statement that "Before the New Deal and World War II there were bigger crashes and longer rcessions." My assertion is that crashes and recessions before the Great Depression were shorter and/or less severe. I listed the recessions/panics/crashes that are widely acknowledged as serious, which occurred during America's industrial era, and which preceeded the Great Depression. There is plenty of historical evidence (diaries, commentries, etc.) which confirm that these were shorter and/or less severe than the Great Depression. So, the evidence for my assertion is the contemporaneous records of those periods, not the Great Depression itself. I can name quite a few finacial crashes and recessions after World War II, four of which occurred between 1946 and 1961, then there are quite a few others, including the severe recession of 1974 (unemployment, and Dow average dropped 40+%). There is no lack of post-war recessions, in spite of regulations, and in spite of FDR's belief that the Social Security Act would serve to moderate future recessions (see his signing speech) and Eisenhower's belief that the Interstate Highway program would serve as an automatic adjustment in times of economic troubles. I cannot join the professor's speculation as to what would have happened in 1929 if the New Deal had already been in effect. No one knows. But we do know that all the full force of New Deal and other programs in effect in 1939 (ten years after the Crash, six years into FDR's terms), did not get the nation back to anything better than 14% unemployment and 30% living in poverty. Congressional testimonies, letters and between FDR and his associates, and commentary by First Lady Eleanor Roosevelt, all point to the conditions that held back America's recovery, long after Britain and others had recovered. It makes interesting reading, and it is vital to our understanding of promoting the common good.
Professor Clark "suspect(s) that the economic well being of minorities and women increased during the postwar boom, it is more difficult to measure this as the data for parts of this period (pre-1967) do not exist as far as I know." If there is no data, then we must rely upon the contemporary human record. It speaks, without dissent, to a dismal existence and denial of opportunity, to blacks, and to a denial of opportunity to women. Again, my point is, that we must not confuse uneven distribution of limited blessings with some sort of golden age.
Government spending, including massive spending on nuclear research during the war, and the space and arms programs over the decades, have produced innovations, some of which have found civilian applications. Patent applications are filed when an inventor has a new product, or method, and the intent to bring it to market. This means that he or she has the money to bring it into production, often involving investors. The historical record of many non-profits, university endowents, and many private investors, show the relative absence of equity investors from capital markets for decades after the Depression, corresponding to the period I note as the Dark Age of American Innovation. If economists regard patent applications as a bad measure, I cannot imagine why. It speaks, not to any lack of genius in any generation, but to a lack of investment in new civilian technologies. The data happens to concur with the human record on this, and we should not ignore it.
We can learn much about promoting the common good, if we will take up the lessons of history.
Joseph J. Dunn
There is a big difference between financial crisis/crash and recessions. See Rogoff's "Apples and Oranges" on the difference. Yes the New Deal reforms did not eliminate the business cycle, they just made it flatter. This is a measurable proposition. A look at the NBER dating of recessions shows this from 1850 to present. The post WWII recessions were caused by either changes in government spending or actions by the Federal Reserve to fight inflation (such as the 1974 recession). We should remember I think Truman's comment that its a recession when other people lose their job and its a depression when you lose your job. You cannot use personal letters to time business cycles, and most people who study business cycles and financial crisis do not claim to know of four or any financial crisis from 1946 to 1961 (in fact I don't know of anyone who does).
Yes, many countries got out of the Great Depression before the USA, mostly because they started spending for WWII before us. Germany was the most outstanding example of this. The economic literature of the mid 1930s talk about Germany's success.
As for the patent issue, many do not apply for patents because they do not want others to know of their innovations. It is easier to duplicate when you have the design. F. Scherer, who wrote the leading text in this field, and whose own research on these questions is well known, concluded that patents are not an important factor in firm innovation.
The three points you challenged are well established "stylized facts" which I expect all, or certainly almost all, economists who have looked at the data accept. Sure they disagree on the role of government in this story, but not on the fact that business cycles were a lot milder from 1946 to 1980, that income grew more equal in this same time period, growing fastest on the bottom, and that government investments have made a major contribution to technological change in the past 70 years.
Firstly I would lilke to offer the opinion that when government does what it was meant to do: provide a safety net for the poor, elderly, and disabled, protect us from enemines, fraud, unsafe food, drugs and toxins, subsequently, gets the heck out of the way, the country will always be at it's best, both socially and economically.
Unfortunately, the one thing government cannont protect us from is ourselves, especially the insatible need for greed and power.
First example: Unregulated financial innovations—which were said to reduce risk—turned Wall Street into a casino.
Not quite. What turned Wall Street into a casino was the elimination of the uptick rule in 2007 . It has since been somewhat adjusted, but not nearly enough. Wall Street for the most part operates on greed, not long term investments.
Next: By denying the government’s responsibility for the overall health of the economy, the Republicans’ fiscal and monetary policies would expose Americans, rich and poor, to the dramatic swings of the business cycle
This is nonsense. It is not and has never been the job of government to create jobs. The overall health of the American Economy is served best when government stays out of the way, with minimal regulations as well as incentives to prosper (as in not over regulating and taxing small buisinesses to death, which create 80% of America's jobs). Want proof? Stay tuned for the biggest recovery ever in American History when Romney gets elected (no need to even wait for Jan, it will start on Nov 7th).
As for being lifted out of poverty, how about some common sense? After almost 50 years of welfare, not only have the poor not been lifted, poverty has increased, especially in the last 4 years under Obama. It's about time, with the excpetion of the disabled, elderly, and those poor for reasons beyond not being able to work, to declare "welfare failure" and try a better way.
Perhaps the biggest hypocrisy is the "inequality" mantra. Why? Because it's as phoney as a $4 bill.
Examples:
The Billions of dollars spent on gambling in this country, allowed by government. If Mr. Smith on welfare wins lotto, does that mean he needs to give his winnings away? If so, why would people even want to play, let alone win? The fact is, they DO, especially the poor.
How about the "equality of everyone must go to college? How silly is that? There are tons of needed worthy professions (albeit many now stymied by government regulations )that do not require college. Besides, if the goal of college is to better the individual and be successful, why would any reasaonable person want to do that under a current government who punishes success?
The real biggie, Obama Care: The left has a meltdown over voting ID Laws yet thinks nothing of a O'care. passed without one Repbulican vote, and against the will of over half ofthe American people, including over half of the country's physicians (55% vs 45%). So where is that "equality."
Let's be realistic, "equality" is another manipulative tactic of the left to keep the lesast among us dependent; consequently, politicians in power. It's about time to get beyond the "every one gets a trophy and an A" mentality that unfortunatley does nothing but produce an entitled, dumbed dwon, feelings based society, devoid of the skills necessary to navigate through the trials of life.
Life isn't "fair" and never will be, at least from a human perspective. Even Jesus told us the poor will always be among us. I have no doubt it's becasue we need them far more than they need us. Consequently, what matters most is if we expolit them or truly help them. Only when we can let go of our own self serving needs, especially greed and power, does that have any chance of happening.
The government does have a purpose, but as I pointed out, will work best when we vote in representatives who understand its proper role. For goodness sakes, government can't even sell a $9.00 hamburger on Amtrack without losing $80 million dollars! Unemployment will take care of itself when government gets out of the way.
As for "inequality", well, providing everyone is treated with human dignity, which is currently not the case, the only issue of concern is "quality." Everyone doesn't need to be rich or even want to be rich, only have sufficient basic needs. Some of the happiest people in the world are those with the least, providing of course, they aren't exploited.
The solution is alway the same. When and if we become a country of God-fearing people, more concerned with those among us than our on selfish needs, we will all be the "wealthiest of the wealthiest."
It's the spiritual poverty of America that is killing us, clearly represented by those whom we put into office.
My wife and I just returned from Florida back to our home in California. While we were there, we witnessed the most vicious and deceptive TV and billboard advertising by the well heeled GOP forces I have ever seen. We also visited Disney World and were treated to a beautiful tribute to our country's founders and succession of presidents. What a contrast in attitudes. Finally we visited the Kennedy Space Center. What a marvelous retelling of the accomplishments of manned space ventures and the Hubbel Telescope. Tell me again, why we have decided to kill off the Shuttle program? It is a sure sign of minimal vision, certainly not the vision that built America from sea to shining sea. The "austerity approach" so strongly advocated by Ryan and Romney would take us further backward, back to the days of union busting, of decimated public work forces, of zero assistance for infrastructure, education, employment, old age security and minimal health care. Do we really want that??
Two random thoughts"
Innovation is an overworked word that requires specification. One could argue a cause of the near collapse of our financial system was "financial" innovation; see Michael Lewis, "The Big Short;" another cause was greed. Even the term technical innovation needs further specification as the comments by Profs Clark and Dunn would suggest. What might be described as "fundamental" innovation---computers, the laser, transitors, the world wide web, MRI ---are game changes that are hard to imagine being achieved without resources supplied by the federal government. What might be described as "patentable" innovation---the computer mouse, the iphone, etc---can, and probably should, be achieved with only private sector resources.
What a government should do depends, of course, on who answers the question. One answer that would probably draw a consensus among Americans is that government should have a role in limiting "inequality" across our citizens and in assuring a level of "upward mobility" for everyone, two concepts that are easily given quantitative measure; see Joseph Stiglitz, "The Cost of Inequality." There appears to be a growing tendency among those who accept as a fundamental premise that government should do little if anything to deny the existence of a problem that cries out for a government solution. There is no man-made climate change; there is no inequality among Americans; the free market based American health care system is the best in the world; all Americans have access to some level of health care, etc.
Once more, I would like to respond to Professor Clark, because the points being explored are vital. The professor and I agree that "Starving The Government Won't Work". Subsatantial revenue increases will be needed, along with spending cuts. The choices we make about how to raise the added revenue will be at least as important to the common good, including those most in need, as any decisions about spending cuts. So we must take full advantage of our national experience as we make policy choices.
Professor Clark relies, as any economist should, upon the NBER's dating of an economic trough at March 1933, the month of FDR's first inauguration and the introduction of much New Deal legislation. Economic growth resumed, continued for fifty months, and then fell for thirteen months (a new recession) and began recoverng again in June 1938. So, for the economists, March 1933 to May 1937 was a period of recovery, followed by a recession, followed by a recovery starting in June 1938. That's the official record, and it is entirely proper for economists to rely upon it in their studies. When we consider the human conditions of the era, and look at economic measures as part of history, but not the entire story, we get another dimension. That is what Monsignor Ryan saw when he wrote in 1935 about the need for just one great innovation, such as the automobile, that might help lift the "depression." Obviously the Monsignor did not see much recovery, in spite of the NBER assessment. Nor did Father Coughlin, Senator Huey Long, or others who found millions still in dire circumstances. Conditions were still bad enough that FDR was seriously concerned about his election prospects for 1936. By 1939, with FDR's "soak the rich" tax programs and four years into the WPA, etc., unemployment was still 14% and one third of the nation's households had below-poverty incomes. In NBER's technical terms, the period 1929-39 is recognized as a recession followed by a recovery, then another recession followed by a recovery. But looking at the whole story, most people call it simply "The Great Depression."
My statement about "quite a few finacial crashes and recessions after WW II, four of which occurred between 1946 and 1961" refers to the four recessions recognized by the NBER in those years. None of these are accompanied by financial crashes. The recession of 1974 (in NBER terms, Nov 1973-March 1975) was accompanied by a stock market decline of more than 40%, ("crash" is not an NBER-defined term). That recession was significantly affected by the oil embargo of October '73-March '74. Gas at $4/gallon is painful; "No Gas Today" was debiliating.
The economists tell us, as Professor Clark writes, that "incomes...of the bottom 20% grew faster than the top 20%, so the rising tide (economic growth) did raise the incomes of each population group." But below that surface is a deeper story of economic segregation, that kept the better-paying jobs for white males, at the expense of others. Fortunately, the social policies that preserved that inequality have changed. But if we forget those facts, and look only at the limited, aggregated economic numbers of that era, we lose its most important lessons.
I agree that some inventors do not file patent applications out of fear that their work will be duplicated without authorization. However, we should expect the percentage of inventors who have that concern to be fairly stable over decades. So, why the severe drop in patent applications starting in 1931, and the lack of substantial recovery for more than fifty years? Assuming that every generation has bright, innovative people, and that inventors' fears are fairly constant, then we must look elsewhere--beyond the behavior of inventors--for the cause of the Dark Age of American Innovation. Most inventors need investors to get started bringing their new product or method into commerce. When large numbers of investors turn away from risk, many inventors do not bother to file applications, and their innovation never appears, and never creates new jobs. The flight of investors out of equities and business risk, starting in the Great Depression and continuing for decades after WW II, is well documented. Individuals, college endowments, charitable foundations, and other investors preferred government bonds even over established stocks, and surely over the risks of new technologies. For the same reasons, many corporations left their money idle in cash or bonds, rather than expand their product line or modernize their facilities. Warren Buffett started his investment career buying the stock of such companies in the 1950s and -60s. It was lack of investors, not lack of inventors (and surely not fear of duplication) that caused the Dark Age of American Innovation. The reasons for this multi-decade investor flight to safety are explained at length in After One Hundred Years, but briefly stated they are high tax rates on investment returns, and anti-business, anti-competitive policies of both Republican and Democratic administrations. As investors returned to equity investments, the pace of patent applications rose. Post-war Government programs included a lot of scientific research. But the depressed level of job-creating private-sector innovation was a lost opportunity for advancing the common good.
I share professor Clark's interest in restoring a lasting prosperity and raising the economic condition of all. The story of America's experience includes the human aspects as well as the economists' studies. Our understanding of the story should influence our thinking about energy, the environment, education, wealth and income, innovation and jobs, poverty, and our other current issues. Let's learn from a century of experence.
Joseph J. Dunn
The basic jobs of government is to protect the weak from the strong and to manage [and equitably fund] tasks beyond the ability of smaller social organizations to do fairly and effectively.
The most obvious cases of protection are physical -- protecting against invasion and criminals who use violence or its threats to control others -- yet there is also protection against sneak thieves and other forms of deception, including deceptive packaging and guarantees or lack thereof. This is the level where protection of the economically weak from the economically strong becomes the interest of government in requiring such things as transparency and certified accounting. When the rich are driving the majority into further poverty, it is the proper role of good government to stop them whether it is the Sherrif of Nottingham or Bain Capitol.
I agree that it is not a basic role of government to create jobs and that having everybody employed by the government is a bad idea, but when things have become so bad that one percent are driving down the majority and 47% need aid for lack of jobs, then job creation, preferably indirectly through spending with private businesses rather than through direct federal employment in the military or a Civilian Conservation Corps, becomes a top priority.
The desirable objective is a full employment economy with only the severely ill unable to work and with the unemployment rate accounted for by those transitioning between jobs. Then you might see the bureaucracy dropping as the private sector offers better deals and efficiency becomes important to keep the bureaus running. Until then, there is no reason to criticize the government having an interest in increasing the number of jobs to match the number of job seekers.
Patricia raises an important point, especially from a Catholic perspective. She states that the economy will magically grow once Romney is elected (or Obama is defeated). In his infamous 47% speech, Romney also states that he doesn't need an economic plan, things will magically get better once he is elected. Paul Krugman has called this the "confidence frairy". In fact, Romney has no plan, all that needs to be done is vote for him and 12 million jobs will magically appear. One should hope for more evidence based analysis than this.
But there night be something here. Large Corporations are sitting on 1-2 trillion dollars (some offer even higher estimates) of cash on their balance sheets, money that is sitting on the side waiting to be spent in some way. If this money were spent unemployment would drop significantly. Many will say that they are hoarding this money because they are uncertain about the future threats to the economy (the euro situation being the biggest concern), that they are just being prudent business men and women.
But others, mostly from the right, argue that they are sitting out the Obama administration and that once he is defeated they will start to spend (effectively what Patricia is suggesting). Like the Republicans in Congress, they are doing their best to make sure the economy does poorly to help defeat Obama. Keep the masses poor so that they know their place.
If this is the case, this is offensive on so many levels. When Aquinas defended private property he emphasized that all property has to be used for the common good, and hoarding a large share of social output is certainly contrary to the common good. When John Paul II and other popes talked about the universal destination of goods they were building on Aquinas and many Church Fathers who made this same point. The economic argument for giving the rich a larger share of social output (supply side economcis) is that the rich will use it more productively (invest) than the common folk spending it on food, clothing and other necessities. While the economic evidence does not support this theory, I cannot think of any economic theory that would support giving the rich a larger share of social output and not have it circulate in the economy.
Is this what has prompted Obama to call for economic patriotism?
This is why economic inequality is such an important issue, because more equality means more money is circulating in the economy. It is a threat to a free economy and a free society to have the economic health of a country being subject to the will and self interest of plutocrats.