Commentary Magazine

Arguing About Economics

To the Editor:

In “Bad Advice for the Democrats” [July], Irwin M. Stelzer is so intent on championing his conservative economic orthodoxy (“the only map that has proved reliable—the low-tax . . . policies that produced the great Reagan boom of the 1980’s”) that he completely misses the central point of my new book, The Work of Nations: the Reagan boom excluded most Americans. Non-supervisory workers, constituting about two-thirds of the workforce, lost almost 11 percent of their inflation-adjusted earnings during these years.

Contrary to Mr. Stelzer’s caricature of my argument, I do not “blame” America’s top wage earners—whose income has surged in the opposite direction during the 1980’s—for the slide of their compatriots. Mr. Stelzer takes me to task for calling the top fifth “fortunate” instead of “most able” or “most productive.” At several points in the book I point out that the top fifth of wage earners were fortunate to have received a good education, and their children are fortunate to live in townships that can afford good schools, libraries, and parks. But I also use the adjectives “talented,” “skilled,” and “highly productive” to describe the top earners.

The income gap is widening primarily because, as I explain in my book, the global economy is exerting a centrifugal force on America—as it is on other advanced nations. Problem-solvers with good educations are in ever greater demand. Unskilled workers, however, are finding themselves in direct competition with millions of other similarly unskilled workers from around the world, the vast majority of whom are eager to work for a fraction of the American blue-collar wage. The immutable forces of supply and demand are pushing up the wages of the first group while pushing down the wages of the second. Here, Mr. Stelzer displays a remarkable innocence when he argues that, since exports still account for less than 7 percent of U.S. gross national product, “we retain substantial ability to manage our own economic affairs” and that “the linkages which economists like to think they know exist among deficits, interest rates, exchange rates, and other variables may not exist at all. . . .” On what planet has Mr. Stelzer been living? The relevant facts are that 70 percent of the goods produced in the United States are now in direct competition with goods produced outside the United States, American firms now sell over $1 trillion worth of goods and services outside the United States each year (about four times our exports), and the United States now depends largely on foreign capital to finance its deficits.

These trends began before Ronald Reagan entered the White House, of course, but Mr. Stelzer’s “great Reagan boom” accelerated them in three unfortunate ways. First, it pushed the dollar so high that many American manufacturers were forced to close down or set up shop abroad. Second, it created a massive budget deficit by cutting taxes and simultaneously pouring hundreds of billions of dollars into Caspar’s giant war machine. Third, and perhaps most mischievous in the long run, it cut federal aid to education by a third, slashed spending on highways and other infrastructure, eroded commercial research and development, and decimated workforce training.

My solution is emphatically not to embrace protectionism, nor to add to “an ever-longer list of social programs,” as Mr. Stelzer asserts. Had he actually read my book he would have noted that I want to reverse the trend of disinvestment in the bottom two-thirds of the American workforce, and thus enable all Americans to become productive participants in the emerging world economy. (Another Stelzer mischaracterization: I don’t mislead the “unwary” reader about educational expenditures. I carefully explain why the slower rate of increase in such expenditures on kindergarten through 12th grade since the 1970’s has in effect resulted in a decline in the nation’s educational assets—since, for example, talented women now have many high-paying job options other than teaching.)

It is one thing to write a polemic masquerading as a book review. The Work of Nations is, after all, intended to stimulate debate about the nation’s future. But is is quite another thing to write a diatribe masquerading as a polemical book review. Mr. Stelzer apparently doesn’t know the difference.

Robert B. Reich
Harvard University
Cambridge, Massachusetts



To the Editor:

Irwin M. Stelzer is wrong in asserting that “. . . even the most ardent believers in free markets acknowledge that regulation is necessary where competition is absent or highly imperfect.” Economists of the Austrian school argue that there can be no significant or lasting monopolization without government intervention, and that any attempts by government to regulate the economy so as to prevent monopolies or to increase competition will be counterproductive. As Ludwig von Mises stated (in Human Action):

The monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism, as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.

More recently, for example, Professor D.T. Armentano of the University of Hartford has written extensively on the need to repeal all antitrust laws in this country. Two of his books within the past decade which I would recommend to Mr. Stelzer are Antitrust and Monopoly: Anatomy of a Policy Failure (1982) and Antitrust Policy: The Case for Repeal (1986).

Despite this emphatic exception, I find myself in agreement with the rest of Mr. Stelzer’s article and I thank him for it.

L. Hatzilambrou
Rockville, Maryland



To the Editor:

Although Irwin M. Stelzer provides a withering criticism of Robert B. Reich’s The Work of Nations and Robert Kuttner’s The End of Laissez-Faire, he fails to categorize them according to their historical antecedent, Italian fascism. The Kuttner/Reich prescriptions for a highly regulated economic system organized along cartel lines with large doses of social welfare are so reminiscent of Mussolini’s corporate state of the 1920’s as to be nearly indistinguishable from it. One might object that the U.S. would still have a democratic system under the Kuttner/Reich proposals. However, with the rise of the professional politician and the increasing importance and power of the “iron triangles” (politicians, bureaucrats, special interests), this point is debatable at best. The professional politician is of central importance here, as Alan Ehrenhalt has demonstrated in his new book, The United States of Ambition: Politicians, Power, and the Pursuit of Office (Random House). As currently constituted, the political system strongly favors the professional politician with a fascist (in the Italian sense) bent. Indeed, one can make a convincing case that despite Ronald Reagan, a type of proto-fascism is here now and that full-blown fascism is the system of the future. Mussolini lives!

Robert C. Whitten
Cupertino, California

Irwin M. Stelzer writes:

I am sorry Robert B. Reich feels that I completely missed the central point of his book: I did make a heroic effort to understand what he was saying. I thought it was that he is unhappy with the effects of the internationalization of markets on some members of the workforce, and with what in his letter he terms “the immutable forces of supply and demand” and I would prefer to call a market economy. So he proposes what I called “an ever-longer list of social programs” to moderate or offset the consequences of free markets. This latter Mr. Reich now denies, saying that I have not actually read his book.

I did. Perhaps he has forgotten pages 312-14 where he calls for “public spending within each nation in any manner that enhanced the capacities of its citizens to lead full and productive lives—including pre- and postnatal care, child care, and preschool preparation, excellent primary and secondary education, access to college regardless of financial condition, training and retraining, and good infrastructure.” And that’s just the beginning. Mr. Reich’s list goes on to include “public subsidies” to high value-added firms, “relocation assistance, extra training grants, . . . regional economic aid,” and more. I assume that the Robert Reich who makes these proposals is the same one who wrote the letter “emphatically” denying that he proposes new social programs.

Mr. Reich is also offended that I make a point of his use of the word “fortunate” to describe high earners. But his letter goes on to repeat that they are “fortunate” (his word, which my Oxford English Dictionary says means favored by chance, or luck) to have been to good schools and live in good neighborhoods. My quarrel is not semantic, but substantive. It goes to the question of incentives, of the relation of reward to work. Surely, some children go to better schools than do others. Why? Because, first, their parents can afford it. Why? Usually because they worked hard to be able to make these advantages available to their children. Were such advantages automatically available, at no obvious cost, the incentive to work would be reduced—so, too, national wealth. Ask first-generation Eastern European turn-of-the-century immigrants, or recent refugees from Asian totalitarianism, why they work so hard, and they will tell you that it is so their children can be brought up in nice neighborhoods, attend good schools, and go to college.

A second reason for the lamentable disparity in educational opportunity is, no surprise, ignored by Mr. Reich. The unhealthy alliance of liberals and trade unions has stymied efforts to empower the poor by giving them the education vouchers that would permit them to escape the clutches of the education bureaucracy by attending a school of their own choosing. Good schools would drive out bad, producing an equality of educational opportunity that no amount of public spending on the existing, failed system can hope to achieve. To lay the failure of the education system at Ronald Reagan’s door requires a bit of a stretch: look, instead, to those who deny parents and students freedom of choice.

Now to Mr. Reich’s contention that “The Reagan boom excluded most Americans.” Note, first, that Mr. Reich does not deny that the economy did “boom.” The 92-month Reagan expansion that began in November 1982 saw real GNP rise at an annual rate of 4.2 percent, exports double, and real per-capita after-tax incomes soar by almost 20 percent, 2.5 times the rate of increase in 1973-80.

The question of whether “most Americans” were excluded from this unprecedented prosperity is a bit more difficult. Anyone who has waded through the welter of statistics on income trends in the 1980’s will know that the facts are far from clear. The data showing how the workforce as a whole, and its various components, fared during the Reagan years are complicated by two major problems. First, Reagan’s critics measure performance from the 1979 peak, while his defenders say the recession in the early years of his first term was needed to wring out the double-digit inflation left as Carter’s legacy. Reaganites therefore use 1982 as their base year, a fact that increases measured gains by 1988.

More important, the income statistics are difficult for the non-specialist to comprehend. Trends in weekly wages obscure the effect of the length of the work week; also, wages don’t include increasingly important nonwage benefits such as health care and pensions. Perhaps the best effort to sort through the data is Marvin Kosters’s recent piece in American Enterprise. Kosters finds that total compensation (including wages and benefits) rose during the 80’s for all groups, with white-collar and service-industry workers leading the way. Blue-collar and union workers did less well, but did keep pace with inflation. Keep in mind: production workers in manufacturing now account for only about 10 percent of the workforce.

In short, the 11-percent decline in “inflation-adjusted earnings” referred to by Mr. Reich in his letter must refer to cash wages, only a part of total compensation, and for only part of the workforce. Overall, many workers saw their real incomes rise, while some held their own. Family incomes also rose, as expanding job opportunities and changing social attitudes increased the number of wage earners per household.

The net effect of the Reagan years on income distribution is even more difficult to describe, if the ultimate goal is to formulate policy proposals. It does seem that the top earners received a slightly larger share of the total at the end of the Reagan years than they had at the beginning. But it also seems that the incomes of the bottom fifth of households (42 percent of whom own their own homes) rose during the Reagan recovery period—by 15 percent in real terms. The rich got richer, and so did the poor. And, as the Economist (March 23) has pointed out, “The effective federal tax rate for the poorest 20 percent of people has fallen below 1977’s level—despite growing payroll taxes.” This is due in part to the Reagan tax reforms, in part to his successor’s increase in the earned-income tax credit. True, the rich benefited from trading their tax breaks for lower rates, but not at the expense of the poor, many of whom were lopped off the tax rolls completely.

But all of this provides little guide for public policy, since such factors as the aging of the population, the increased importance of single-member households, and other social trends affect the income-distribution figures far more than does the occupant of the White House. What the latter can affect is the overall rate of economic growth, a factor driven by monetary and fiscal policy, the impact of regulation, trade policy, and economists-know-not-what-else. As some Democrats are starting to grasp, the best route to higher living standards for all income groups is economic growth, not an obsessive concern with taking from one group to give to another.

I know of no sure way to cut through the tangle created by the multiplicity of statistical series on wages, incomes, and the like, all of which anyhow only imperfectly measure what we are really arguing about—living standards. But I can offer a possible proxy: the voting patterns of “most Americans,” so hard hit by Reaganomics according to Mr. Reich. Surely, American voters would not have returned Ronald Reagan to office if they thought he had impoverished them, or elected his chosen successor over a Reichian candidate who tried to persuade them they had become worse off since retiring Jimmy Carter. Unless one believes that Reagan was the opiate of the masses, blurring their ability to understand their own best interests, one must conclude that most people knew they were better off electing Reagan-Bush, and likely to remain so, than voting for Carter’s inflation, Mondale’s growth-stifling taxes, or Dukakis’s Massachusetts miracle—all embedded in Mr. Reich’s prescriptions for what he feels ails us.

This is not to deny Mr. Reich’s point that where poverty exists, where helpless children or others fall through society’s safety net, we should repair that net. But we must do so in ways that do not sap the drive to become self-sufficient, or raise tax rates so much as to reduce tax receipts. We must, in short, discriminate, learning the lessons that Charles Murray’s Losing Ground and the failure of so many well-intentioned programs of the past teach us.

I won’t here go into Mr. Reich’s objection to the Reagan arms build-up, dispassionately referred to by him as “pouring billions of dollars into Caspar’s giant war machine.” It does not seem excessively warlike to argue that the changes Gorbachev made in Soviet policy were due, in some part, to his realization that his economy was no match for ours in producing military goods while at the same time meeting the needs of the consumer sector. If the obliteration of the Berlin Wall, freedom for Soviet satellites, and victory in the cold war have not persuaded Mr. Reich that our defense outlays were money well spent, I certainly can’t. But I also can’t resist pointing out that only four years ago, in his Tales of a New America, Mr. Reich derided the arms race because it “can be won only in ways that are implausible (we agree to become Communists or they agree to become capitalists). . . .” By that definition, it seems not unfair to say that we won.

Nor can I hope to persuade Mr. Reich that the amount of cash one is willing to spend on his pet programs may not be the test of one’s devotion to such programs. Spending more dollars on incompetent teachers who work under a cash-gobbling bureaucracy is not the surest path to educational excellence, and a willingness to pour money into welfare programs that perpetuate dependency does not necessarily conduce to the welfare of the poor.

Mr. Reich also accuses me of “remarkable innocence” (long lost, I fear) for saying we retain substantial ability to manage our economic affairs. Note that in my article I very carefully acknowledged “increasing interdependence,” and congratulated Mr. Reich (and Robert Kuttner) for having “neatly described” it. But I said, correctly I think, that they take the argument too far when they paint America as an impotent giant, waiting helplessly for the latest tick of the Nikkei index or the latest pronouncement of the Bundesbank. Of course, we cannot pursue an autarkic economic policy. But neither are we without considerable freedom in setting our own course; witness the relative strength of the dollar in the face of falling interest rates and rising budget deficits. Indeed, there is an emerging school of thought that the globalization theme has been much overdone. The widely respected David Henderson, head of the economics department of the Organization for Economic Cooperation and Development (OECD), recently concluded that “The world economy in July 1991 is clearly further from full integration than it was in July 1914.”

Mr. Reich’s strident tone is, I suspect, as much a result of his inability to recommend a coherent liberal program as it is of my modest criticisms of his book. His cures for the ills he feels afflict us cost money, massive amounts of it. He sees no way of getting this money, since the American public refuses to leave us defenseless in a still-dangerous world, or pay more taxes to permit bureaucrats to pursue failed programs. He would like to load the costs of social programs on American businesses, but fears they will become uncompetitive in international markets. And he deplores the solutions being worked out by individuals, who reject bigger government in favor of what must surely seem to him to be a creeping privatization of social services: private schools, private garbage collection, private police protection. If he can let off a little steam by accusing me of not reading his book, or of championing a conservative economic orthodoxy, no harm done. But if he persuades the Democrats to join him on his diving board and leap into an empty pool, the nation will forfeit the possibility of an election in which it might be offered a coherent alternative to existing policies.

A word about L. Hatzilambrou’s kind letter. I fear he is wrong, in part: there indeed can be and often have been cases where competition is so imperfect as to require regulation if persistent monopoly profits are to be avoided; electricity distribution comes to mind. And repeal of the antitrust laws would be a foolish abdication of government’s legitimate responsibility to prevent monopolizing behavior and the exercise of monopoly power. Governments should not be players in the economic game; but they should be referees, assuring that the best man wins. True, most private monopolies eventually erode, but “eventually” can be decades, during which monopoly profits accrue and inefficiencies mount.

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