A very great year? - Eve Smith

Each year, the Economic Report of the President allows America's economic managers to reflect upon the glories of the past year and the triumphs of the year to come. This document provides us, too, an admirable opportunity to evaluate what is going on in the American economy.

The past few years have provided new proof of the effectiveness of Keynsian techniques of expanding and contracting the economy by expanding and contracting government budget deficits. In 1965, a massive deficit to finance the Vietnam War was followed by massive inflation. Nixon, on entering office in 1969, cut military spending, maintained special war taxes, and reduced government deficits, thus deliberately bringing on recession. This policy, with a little additional help from wage-price controls, brought inflation down to just over 3% with an official unemployment rate of over 6%.

To overcome this recession, a budget deficit of roughly $25 billion was allowed for the current fiscal year, resulting in the current economic expansion. This is a somewhat peculiar expansion, however; unemployment has been reduced by only 1%, remaining over 5%. Nonetheless, the budget planners are already planning to "slow down" the economy by June. They believe this is essential to "prevent this expansion from becoming an inflationary boom." Nixon, fully realizing the relation between budget deficits and inflation, says he has "put restraining Federal expenditures at the top of the list of economic policies for 1973." Nor is this policy alarmist; very substantial inflationary pressure had already developed by January, when the report was issued, even though unemployment was over 5%. In January alone, wholesale food prices increased 5%, indicating rising wage demands to follow.

All this makes the meaning of Keynsian techniques clearer. All they mean in practice is that the economic managers can shuttle the economy back and forth between inflation and recession. The entire period of "post-war prosperity" -- alleged to prove that the business cycle was a thing of the past -- can now be seen as a period of ever shorter and ever wilder swings between these two extremes. The triumph of modern economics is that it can reduce unemployment to 4% by raising inflation to 6% or, conversely, it can reduce inflation to 3% by raising unemployment to 6%. (The increasing inability to have both full employment and price stability is politely called the shift in the Phillips curve.)

Liberals propose a straightforward solution to this problem. Why not simply keep budget deficits high, the economy booming, and accept the consequent inflation? This was essentially the approach of the Johnson Administration. The result of such inflation, however, was to price American goods out of the world market and create the balance of payments deficit that led to the collapse of first the Bretton Woods Agreement and then the Smithsonian Agreement through the devaluation of the American dollar. As repeated currency crises have shown, this problem has deepened; the American trade deficit is currently $6.4 billion. The problem grows constantly worse with economic "recovery": every increase in U.S. economic activity increases imports; every increase in U.S. inflation undermines exports. Inflation is not an available solution.

Nixon's plan is more "realistic." He proposes to reduce government spending by eliminating those social programs which are supposed to contribute to the education, housing, medical care, or survival of the impoverished. He thus plans to limit the expansionary effect of government spending, bringing it as close to balance as he dares. His current budget proposes to retain a $12 billion deficit only in order to maintain American military supremacy and to ward off the threat of a complete collapse of the economy. (Footnote: The international face of Nixon's policy is to liquidate the American trade deficit by expanding trade with Communist countries and forcing American goods on other capitalist countries by means of tarriff and devaluation pressures. These approaches, however, have their limits. Russia and China are relatively poor countries with little but raw materials to exchange for American goods; in the short run at least they are likely to contribute little to overcoming America's trade deficit. The other capitalist countries have economic problems of their own which American policy, if successful, can only make worse, turning a national crisis into an international crisis.)

What does all this mean for the future? It means simply that the "New Economics," like the "Old Economics," has not found a way to overcome the basic economic processes of capitalist society. Economic expansion throughout the history of capitalism has never been unlimited; each cycle has reached its limits and then contraction has set in. The attempt to stave this off with deficit spending has merely created "inflationary recession." We may expect it to continue indefinitely, with economic planners proving their mettle by sometimes increasing the inflation, sometimes the recession.

Short of full-scale depression, there is only one way the system can improve this situation. That is to raise profits by lowering labor costs. If it could do this, it would be able to expand profitably without raising prices. And it could regain international markets, both by the direct savings on labor costs and by modernizing the antiquated American industrial plant with the proceeds. To the extent that the system's economic problems in the coming few years are severe, it is bound to attempt this strategy.

Such a strategy is of course nothing new. The continuing expansion of the late 1960s was in part made possible by the continuing decline in workers' real wages as substantial wage increases lagged behind even faster price increases. On taking office, Nixon provoked an economic contraction and rise in unemployment, explicitly in order to loosen the labor market and thereby bring down labor costs. When this approach proved inadequate, he applied government wage-price controls. Government officials explicitly stated that the central purpose of these was to control wages -- the price controls were merely to make the wage controls acceptable to the workers. Thus we see that the economic managers are capable of using either inflation or unemployment, not to mention direct controls, as a weapon to reduce workers' incomes.

At the same time, the government has tried to stimulate a national drive to increase "productivity." Of course, the primary reason for low American productivity is that American industry has been very backward in modernizing its productive plant. The vast modernization that is needed to remain internationally competitive is too extensive in most cases to carry out profitably. But productivity can also be raised simply by forcing workers to work harder and faster. The attempts to break down work rules and speed up production -- resulting in a number of strikes in the past year -- are the natural result.

Unfortunately for the system, it has not been overwhelmingly successful so far in reducing workers' conditions. Productivity drives have had marginal effect. The contracts established by the last big round of wage negotiations in 1970 greatly exceeded the Nixon Administration guidelines, even though they came in the midst of a recession Nixon had stimulated precisely to hold down labor costs. The 1970 Teamster wildcat set the pattern for successful rank-and-file resistance to union-proposed settlements within the Nixon guidelines in the major industries. Direct wage controls had only marginal impact, an impact which would have been even less had they not been imposed in the pit of a recession. As the President's economic report pointed out, without previous deflationary moves, "the subsequent success of price and wage controls would have been impossible." In the end, their effectiveness was so marginal that Nixon has been willing to give them up in exchange for the political support he is receiving from George Meany.

Nixon dreams of an electoral alliance between the traditional Republican business constituency and the more affluent parts of the working class. (It is no accident that he has been reading up on Disraeli.) He aims especially for those older workers who are protected from unemployment by their accumulated seniority but who are threatened by inflation, tax increases, and the incursions of the impoverished. To the extent that he makes genuine concessions to organized labor, however, he will only make worse the overall economic problems he faces.

In short, the system's margins for manoeuver are growing steadily narrower. It needs to maintain military supremacy, fund social programs to allow urban survival, provide full employment, maintain price stability, permit a slow, steady rise in real wages, and steadily expand profits -- all at the same time. It can't. That is why politicians from George McGovern to Richard Nixon define the central issue as one of "national priorities." We may expect official politics for years ahead to be preoccupied with the question: which of the system's needs are not to be fulfilled?

If the system could fulfill all its needs, it would win universal support save for a handful of ideological malcontents. But it can't. This year's budget jetissoned all attempts to maintain urban life at the level of survival, despite the fact that a series of official commissions have repeatedly found that this problem threatens the life of the nation. Likewise it jetissoned any attempt to bring unemployment much below current levels; the "neighborhood" of 4.5% is its most optimistic prediction. The probable result will be to generate discontent throughout society. Whether and how this discontent can make itself effective will be our central problem for the years ahead.

Root & Branch No. 4 (1973), pp. 3-6