Past Glories, Dismal Present?

by Michael Liss

Never before in world history has a nation been so endowed with wealth and power, yet so plagued with doubt as to the proper use of that wealth and power.

“Wealth of the Nation,” mural by Seymour Fogel, 1942 (New Deal Arts Program), Wilbur J. Cohen Federal Building.

Grim, right? Would you feel better or worse if I told you that came from written testimony given to Congress by Walter Reuther, then head of the United Autoworkers Union, in…1969.

It’s amazing how often “plagued with doubt” can be applied to something related to economics. Reuther was way ahead of his time. Not only did he advocate for workers’ rights, including the then-radical idea of profit-sharing, but also healthcare, civil rights, women’s rights, conservation, and education. He helped make Labor a player on key issues of his time, while surviving a couple of assassination attempts.

I mention Reuther because, a half-century after his death, those issues remain as pertinent, and as unresolved, as they did in 1969. They were also among the topics touched upon at the Center on Capitalism and Society’s 19th Annual Conference, titled “Present Failings and Ways Forward: Private Sector, Public Sector.”

The Center was formed in 2002 to study Capitalism’s strengths and weaknesses and to grapple with big issues facing it in a modern world. Founder (and 2006 Nobel Prize winner) Edmund Phelps has long envisioned and advocated for what he calls the “Good Economy,” which produces jobs that give meaning, confer personal dignity, and provide enough so that “Mass Flourishing” is possible. Productivity growth, innovation, and dynamism are all essential to that. The “Present Failings” part of the title of this year’s conference is reflective of the reality around us—an American economy showing a flabbiness, a loss of velocity, a failure to provide opportunity. In his remarks at the conference, Phelps himself acknowledged how far we have drifted from that goal.

The question is, why? What are we doing, or failing to do?

This, too, the conference aimed to address. America has always had poverty and mere subsistence-level living, far more than should be acceptable in a country with our advantages, but it has also had great success. Why are we on this slow drift downwards? Is it because we are deviating from neoclassical economics—providing too much of a safety net and therefore discouraging work? Is it a function of a loss of dynamism—less innovation, less investment in non-financial assets, less creativity? How do we recapture some of that drive? Should government be leading on this, in both planning and funding, or will the private sector find its way again to develop new products and approaches? Do we even have that choice: are our problems (or some of them, like climate change) just too big right now to be handled with minimal government involvement? If we do let the public sector lead, does that further dampen the private sector’s intellectual energy and willingness to take risks?

These are not easy questions, and coming up with solutions is made much more difficult by the present toxicity that best characterizes political debate. For many people, it’s no longer the content of the disagreement, it’s the identity of the counterparty. Consensus is not merely devalued, it is despised.

I’ve been to several of the Center’s conferences, and one of the things they do very well is provide a broad spectrum of expertise and views. The presentations are not entirely politics-free, but they are also not extended political rants. These folks are passionate about policy (sometimes very passionate), but all know that politics has an annoying way of interfering with good policy.

Let me be a good capitalist for a moment, because I’m basically a good capitalist, and most of the presenters are as well. You can’t ignore the wealth that Capitalism has historically, albeit unevenly, created. The overall record is one of success. To be clear on this, the success has not always been consistent—we’ve certainly had serious and assorted panics, crashes, recessions, and the odd Depression. And the success hasn’t always led to just results. Here, as in other nations, an accumulation of wealth enables the purchase of political influence. Here, as in other nations, too many believe that possession of wealth is an indication of one’s character. Put those two together, and they can, and do, lead to some cruel outcomes.

History is replete with examples. In Ireland, during the potato famine, grain and other cash crops continued to be exported to England, while as many as a million starved to death and a million and a half emigrated. Successive British governments stood by, willfully blind to the magnitude of human suffering. They cheerfully enforced the laws that benefited them, evicting non-paying tenant-farmers from their land and relegating “able-bodied” ones to workhouses so as not to reward the immorality of being poor and starving.

Here in the United States, attempts to create minimum health and safety regulations in the workplace were stymied by the “Lochner Era” Supreme Court, which convinced itself that a child losing life or limb on the job was somehow an unfortunate, but necessary function of freedom of contract. It wasn’t merely the courts. The economic interests that long dominated government had allies who didn’t shy from employing muscle. Force, sometimes deadly force, was used to break up union organizing on railroads and in the coalfields. In 1932, then-Attorney General William Mitchell ordered Washington police to clear a ”Bonus Army” made up of 43,000 former servicemen and their families who came to Washington to demand early payment of service certificates. The soldiers, most of whom had been unemployed since the beginning of the Great Depression, were met with force, first from the police, later, upon the orders of Herbert Hoover himself, by Army Chief of Staff General Douglas MacArthur. MacArthur brought in tanks, infantry, and cavalry, and evicted the protesters, burning whatever meager possessions they brought with them. American soldiers routing a peaceful protest by Americans.

All that said, capitalism has delivered. Compare today’s average living standard, even after recent reverses, to that of a few hundred years ago and it’s improved immensely (by some estimates 30-50-fold). Just in the post-war period 1948 to 1973, the median U.S. household enjoyed an average 3% increase per annum in growth of family income—roughly a doubling every generation. But since then, the growth rate has declined to 0.6%. At that rate, the twenty years becomes a century, a rate so glacial that no one can detect it. Every metric out there, from percentage of total income to wealth distribution shows the top tier swallowing up any excess in earnings and asset values.

One can argue around the edges of these numbers, but it’s clear that, while the post WWII generation could have optimism about their own future and that of their children, many in the current generation would have to squint very hard to find hope.

Why? Some of this is due to exogenous shocks, like the split-up of the old Soviet Union, the reunification of Germany, the dot-com bust in 2000, and the near-death experience of the financial markets in 2008-09. More recent challenges include Brexit, COVID, Ukraine, and the rise of China as an aggressive military and economic counterbalance to the West. That’s a lot to absorb even in politically stable times. Now throw in the extraordinary implications of globalization and its uneven impact on the citizenry and you can see how the Good Ship Adam Smith has been taking on some political water recently.

I don’t think a single one of the panelists, no matter how much confidence they had in that Old Time Capitalist Religion, would be inclined to dismiss the fact of this dislocation and the potential implications for both the economy and governance itself. There was a mood of caution: A lot of analysis, but no big, bold policy initiatives.

Perhaps no one better exemplified this wary, but still-hoping-that-conventional-approaches-can-work idea than Glenn Hubbard and Jason Furman. Hubbard is currently a professor at Columbia, having recently stepped down as Dean of the Business School. He was also George W. Bush’s Chairman of the Counsel of Economic Advisors. As he rather wryly noted, you’d most likely see his words in The Wall Street Journal. Furman, presently at Harvard, was Barack Obama’s Chairman of the Counsel of Economics Advisors. He played a critical role in developing both the original emergency bailout in 2009 and, later, helping to design and negotiate Obamacare. Both speak “Econ” at the highest levels, but with different idioms.

Hubbard spoke first, and what he emphasized was what he called “Walls and Bridges.” Walls were for keeping things out as a means of protection. Politicians promise to protect the potentially vulnerable from things that they don’t like. Walls can surround an economy, an industry, a community, a local business, even a way of life. Walls are simple to explain, and they are easy to implement—you just pull up the drawbridge and fill the moat. For those who benefit from them, walls unquestionably work. Of course, there’s a price to be paid. A protected domestic industry with higher costs (and correspondingly higher prices) burdens the consumer (or down-stream business) who might have purchased the product less expensively. In fact, there’s always a cost to a wall, it’s just a question of how much, who pays it, and how much of a drag it is on overall growth.

Hubbard is an old-school guy, an economic classicist. He tells a story about trying to convince Bush to change his mind about steel tariffs. He gets a private meeting with the big guy, he brings his charts and graphs, and he makes a compelling case on why protectionism is bad. He thinks he’s done it. He’s wrong; it falls flat. Bush acknowledges the theoretical construct, but rejects it because he, Bush, had gone to Wheeling, West Virginia, during the campaign and promised those people he’d do something for them. And he, Hubbard, hadn’t suggested a single thing to help. Hubbard saw the wall (steel tariff) as unequivocally bad, but hadn’t recognized the importance, political and moral, of doing something to help the victims of market dislocation.

From this and other experiences, Hubbard gradually began to adapt his thinking. Walls were still bad, still to be avoided, but it was incumbent on society to provide what he called “Bridges.” Bridges help support and train people so that they remain engaged and prepared to participate in and reap the rewards of a new economic reality. Rather than a pure laissez-faire approach, with the market determining everything, government does have a role in providing Hubbard’s Bridges.

You can see the value of Hubbard’s next step—if it had been implemented at the time globalization was eliminating or devaluing domestic jobs, perhaps it could have mitigated some of the worst of the damage in affected communities. Hubbard points to two immensely successful “Bridge” efforts; Lincoln’s creation of Land Grant Colleges and FDR’s GI Bill, which gave educational opportunities to soldiers returning to a radically transformed economy. Both initiatives were forward-looking, and something the private sector could not provide on its own.

Jason Furman took a somewhat different approach. He noted the loss of growth leading to wage stagnation, and the decline in productivity, but his point of entry for a solution would require a change of mind from the ideological poles. Liberals, he thought, bought too much into the idea that every good initiative was an unqualifiedly good one, and was not only without costs, but achieved collateral benefits beyond the primary objective. So, taking steps to combat climate change was not only good for the Earth, but also created new jobs, supported new industries, and otherwise put a shot of espresso in the morning coffee. Liberals were unable to recognize costs and as a result, were unable to make what Furman called “Trade-offs” to get broader buy in—which often meant that they couldn’t get enough to make a difference.

Conservatives had a different problem; they were so focused on the potential costs to growth, seemingly their only mantra, that they lost a sense of the potential amplitude of the change. Effectively, conservatives became catastrophists (my word, not Furman’s) by grossly overstating the negative impact of every liberal or even mainstream initiative. Tax policy, regulatory policy, climate-change projects, education, in fact anything that could possibly cost a dollar, regardless of the empiric merit of it, had to be shot down with all the might they could bring to bear.

In this kind of a no-compromise, no-discussion environment, the only policy initiatives that pass are the ones that can be imposed unilaterally. No Bridges, no Trade-offs, no balance. Neither Furman nor Hubbard said this specifically, but you can’t help but draw the inference that, while the public says it prefers gridlock, what people really mean is they prefer gridlock to policy that doesn’t benefit them personally. There’s a price to that position that the elites don’t have to pay: Very often, the general public just gets left behind.

They may be left behind, but, as politicians from both sides of the aisle are increasingly aware, the dispossessed have reached critical mass and are now swinging elections. The seeming paradox of the Bernie-to-Trump voter is no paradox at all. To the dismay of economists like Hubbard, the easiest way to satisfy them is to erect Walls (and Trump was a big wall guy), while making those folks feel “seen.” Still, the price of Republican-dominated government is fiscal policy that no longer looks completely “Republican.” For Democrats like Furman, fulfilling their goals on things like healthcare, education, and climate change become ever more unattainable, sometimes because liberals prefer getting nothing to getting a lot, but having to give something.

Perhaps more than any other time in our history, an electorally decisive cohort of Americans seem to crave big government—big government that gives them what they think they want, regardless of the cost to institutions or otherwise. The perverse aspect of this is that by turning over their futures to that big government, they are empowering many of the very same people who failed them before. Not the group likely to foster either a Good Economy or Mass Flourishing, but perhaps one that has learned that other deliverables are even more effective.

That is not good news for economists, and it probably is not good news for the economy. I think every presenter in the room knew that, as did every member of the audience. It was all a bit, well, dismal. We may no longer be at the zenith of our power or influence, but we surely are plagued with doubts about the proper use of what we still have.

We need to get over that, and soon. If we can’t rediscover the magic elixir for dynamism, growth, progress, and innovation, Edmund Phelps’ vision for Mass Flourishing will go by the wayside, and pretty much all of us will be at a loss.

Walter Reuther would have understood that. So should we all.


Notes: The Center has posted all eight hours of the Conference on YouTube, and you can find them here
The presentations are all very good. Apart from the two I discuss above, I particularly recommend two others, which are quite different from each other: The business journalist Alan Murray, on “Waking or Woke? Why Business is Rethinking Its Role in Society,” and an extraordinary trip backward (and possibly forward) from Juan Vicente Sola, “The Perplexing Revival of Corporatism.”