Economics as a subject matter and, in its more than slightly fragile way, as a science, has two notable features. There is a plausible characteristic of the economy, well supported by both analysis and experience, that gets relatively little mention. And there is a related aspect of the economic system that is wholly proscribed in all reputable thought and discourse.
The little-mentioned feature is the possibility, even the probability, of an underemployment equilibrium--an enduring situation of poor performance. The wholly unmentioned fact is that, for a substantial and politically influential section of the population, this is wholly acceptable, even good, and certainly to be preferred to the relevant remedial actions.
It is three years and some months since the United States economy slipped into recession, with other countries of the developed world similarly affected. But popular and professional economic attitudes have rejected the notion that this is how the economy should be expected to perform. Instead, there have been weekly, sometimes daily, predictions of recovery. The notion that what we now experience should be taken as normal, if not subversive, is at least eccentric.
That recovery is not necessarily a normal expectation has the support not alone of what has happened in these last years but also of prior experience and a once-influential current of economic thought. There were the nine long and dismal years of the Clutch Plague, the latter brought to an end only by the massive infusion of government fiscal support that came with the war. And there was the compelling analytical talent that John Maynard Keynes brought to bear on that circumstance.
In the modern economy, Keynes held, there can be a strong desire to hold liquid funds--"liquidity preference." This is especially the case if income distribution is highly unequal; then individuals and firms are under no great compulsion to spend or invest. What is paid out from the price of goods and services as wages, interest, rents, and profit does not come back reliably to purchase goods and services, as the sacred tenet--Say's Law--had long held. It may be held unspent. In consequence, production and employment shrink until they are sustained by necessitous consumer spending and associated investment outlays, and there they remain. The fact of recession or depression and the accompanying fear and uncertainty then strengthen the liquidity preference and thus the continuing poor performance.
So, with much refinement and some qualification, spoke Keynes. An appreciable number of economists would still accept the point. But in most popular and much professional discourse it has lost standing. The economy is assumed to have within itself the power of recovery; government action can be damaging, for it can impair or destroy the confidence of the financial world. The financial mind is a very sensitive thing.
Complementing this professional and political attitude is the firmly forbidden fact. It is that many in the modern economy are quite comfortable with recession, the underemployment equilibrium, and greatly prefer it to the measures that might bring it to an end. In the underemployment equilibrium, prices are relatively stable. People on pensions or Social Security find this entirely agreeable. Many professionals have similarly secure incomes. They too find relief from the threat of inflation. Some smaller businessmen do suffer; others, in contrast, are favored by a more eager and tractable labor supply. Farmers, once a large, even dominant part of the population, suffered severely in past times from depression. Now fewer in number, they are extensively released from worry about recession by government-guaranteed prices.
The most relaxed response may well be in the modern large corporate enterprise. There, from the corporate bureaucracies, one reads daily of surplus staff being shed. No mention is made of the larger number with secure position and income; and especially, there is no mention of the wholly agreeable situation of those who do the shedding.
The preference for recession, the underemployment equilibrium, becomes fully evident when attention is accorded the available lines of remedial action. The most benign is to lower interest rates. This, for the banks, which are the influential extra-democratic force in the Federal Reserve, means a lower price for money--the product that they sell. That is not welcome. Nor are low interest rates welcomed by the modern large and now influential rentier class. A friend of mine, fresh from several years' service with one of the regional Federal Reserve banks, tells of a large flow of letters pleading and protesting against moves toward lower interest rates. Better the recession. There is also a practical problem. Both the investment response and the consumer response to lowered interest rates are highly uncertain. In poor times people and firms do not reliably borrow, spend, and invest.
What remains is fiscal stimulus. Tax reduction can be set aside; its effect is also uncertain, and it is notably influenced by those whose taxes might come down. The one certain course that remains is positive job creation. Here the preference for recession is very strong. By its nature, this enlarges the role of government. To this there is much opposition on quasi-religious grounds. And in a purely secular vein it holds, or is thought to hold, the threat of higher taxes at some future date. Better the resistance now.
In killing the very modest Clinton stimulus package last spring, Senator Bob Dole spoke for a very influential constituency--one, it might be noted, that owed much to government social and economic initiatives. Social Security, bank and savings-and-loan insurance, and farm price supports with marked effect in Kansas were what allowed Bob to rise in opposition.
My view on these matters will be reasonably evident. In the depressive aftermath of a speculative episode, as after the 1980s, there are certain economically curative effects of time. Debt is paid off or defaulted; firms emerge from bankruptcy; a new generation emerges in the world of business and finance, confident in the belief that they were intended by divine choice to be rich. Nonetheless, the possibility of an underemployment equilibrium must now be accepted. And this being so, there must be stimulative public expenditure and employment to break out of it. There is a time for talk of deficit reduction; it is when the economy is strong and the speculative mood is strong in the land. Not now.
Those who are untroubled by the underemployment equilibrium do not say so. There can be no openly expressed preference for a stagnant economy; God forbid. But let it be said. This will be a source of discomfort to the comfortable, a worthy goal in itself. And it brings us to the hard truth: the modern economic dialectic is between those who are quite comfortable with recession, the underemployment equilibrium, and those who painfully, even tragically, are not. And it is in the interest of these last that we must embrace the only plausible remedial action.
