| Minsky and Whalen actually draw the dividing line a little earlier than I have, at the point where problems first started showing up for the earlier model--1966. But most people--including the vast majority of economists, didn't really notice anything seriously different until a good six or seven years later.
The paper begins thus:
Fifty years ago President Truman signed into law the Employment Act that committed the U.S. government to the goal of employment opportunities for all Americans. The Act represented a pledge to avoid another Great Depression. It acknowledged that government has a vital role to play in establishing national economic stability and prosperity.
U.S. economic performance during the past fifty years can be divided into two periods of roughly equal duration. The first was characterized by a successful economy: cyclical instability was controlled; resource creation was supported; and flaws in selected markets were corrected. It was a period of robust economic growth, rising worker incomes and falling inequality.
The second period has brought a reversal of fortune. We have avoided another depression, but suffer from a return of financial instability. Economic growth has been sustained but family earnings are stagnant. Corporate profits have been stabilized but economic insecurity has grown considerably and now pervades the
workforce. Our current difficulties make it necessary to consider not only how we measure the success of an economy but also the institutional prerequisites for a successful 2lst-Century capitalism. But first we must ask: what accounts for the split in America's economic experience during the post-world War II era?
After that intro, the first section of the paper is "Money-Manager Capitalism." In it, the authors first run through a list of different reasons that have been advanced to explain the differences in the two economies:
Numerous explanations have been put forth to account for the phenomena of falling worker incomes and rising instability and inequality experienced during the past two decades. Increases in government taxes, spending and regulation are not to blame. Income and distribution problems can be traced to pre-tax earnings, not tax changes. Government shares of total employment and expenditure have not been growing since 1979, and regulatory costs have declined (Mishel 1995). Other recent explanations focus on one or more of the following developments: the shift of jobs from goods-producing sectors to the service sector; an acceleration of technological change (especially in the realm of information technologies); public-sector privatization and corporate downsizing and outsourcing; increased immigration; the erosion of the minimum wage and the decline of unions; the growth of contingent work; the appearance of persistent trade deficits; and increased capital mobility, trade liberalization, and global competition.
They then culminate by saying:
While some have sought to calculate the relative impact of these developments, Barry Bluestone (1995) seems to emphasize the most essential aspect of the matter when he suggests that the solution to this mystery is the same is in Agatha Christie's Murder OR the Orient Express -- they all did it.
Despite the relevance of the aforementioned factors, one crucial element has been left out -- the evolution of the financial structure. Capitalism is a dynamic, evolving system that comes in many forms. Nowhere is this dynamism more evident than in its financial structure. The financial structure of the American economy has undergone significant evolution over the history of the republic. From its initial stage of "commercial" capitalism, during which external finance was used mainly for trade, this structure has evolved into its present stage of "money-manager" capitalism, where financial markets and arrangements are dominated by managers of funds.
Two financial stages, "industrial" capitalism and "paternalistic" capitalism, were dominant between the eras of commercial and money-manager capitalism
The "paternalistic" era was that in which New Deal arrangements predominated, with government playing a major role. It gave birth to the following era in part because it created a system in which there were large private pension funds--a factor that helps to somwhat close the gap between our undersized welfare state and those of Europe. In turn, the managers of those pension funds became major players in pushing companies to increase stock prices as their major business goal (a quite unforeseen consequence, I might add.)
The authors write:
Important aspects of the financial system in the era of paternalistic capitalism included: countercyclical fiscal policy, which sustained profits when the economy faltered: low interest rates and interventions by the Federal Reserve unconstrained by gold-standard considerations; deposit insurance for banks and thrifts; establishment of a temporary, national investment bank (the Reconstruction Finance Corporation) to infuse government equity into transportation, industry and finance; and interventions by specialized organizations created to address sectoral concerns (such as those in housing and agriculture).
From 1933 through the end of World War II, government represented the main source of external financing for the economy. By 1946, a broad set of households owned financial assets mainly in the form of government debt or as interests in insurance policies and bank deposits which were in turn largely offset by government debts. Business indebtedness was minimal -- indeed, many of the great corporations had large net positions in government debts -- as was household indebtedness.
Money-manager capitalism emerged out of this initial post-World war II position. In part it was the result of the evolution of financial practices toward more speculative endeavors. But money-manager capitalism was also partly a consequence of the emergence of plans that supplemented social security with private pensions. As the label "money-manager" capitalism suggests, central to this new stage are institutions that manage large portfolios of financial instruments.
Economic activity in the early postwar setting began with a cautious use of debt. But as the period over which the economy did well began to lengthen, margins of safety in indebtedness decreased and the system evolved toward a greater reliance on debt relative to internal finance, as well as toward the use of debt to acquire existing assets. As a result, the once robust financial system became increasingly fragile (Minsky 1986).
This last paragraph reflects a specific example of Minsky's most important contribution to economics, the Financial Instability Hypothesis, which I'll be writing more about tomorrow. Put simply, it's an explanations of how and why robust financial systems routinely and repeatedly become fragile, and eventually run into crises.
The authors continue, adding detail about insecurity and instability:
In the current era, the largest proportion of the liabilities of corporations are held either by financial institutions such as bank trust departments and insurance companies or by pension or mutual funds that are restricted in their holdings only by contract. Money-manager capitalism introduces a new layer of intermediation into the financial structure. The stated aim of these money-managers -- and the sole criterion by which they are judged -- is the maximization of the value of the investments made by the fund holders. This is measured by the total return on assets: the combination of dividends and interest received and the appreciation in per share value.
A consequence of the rise of these funds is that business leaders have become increasingly sensitive to the stock-market valuation of their firm. In the early postwar period widespread caution in finance, combined with America's dominance in the global economy, allowed managers a degree of freedom from stockholder influence. Today, however, top management is often subject to relentless shareholder pressure. When one considers the pressures due to both the rapidly evolving financial system and the economy's other structural changes, it is no surprise that economic insecurity is widespread.
With the passing of the paternalistic financial structure, corporate paternalism has also faded. Workers at nearly all levels are insecure, as entire divisions are bought and sold and as corporate boards exhibit a chronic need to downsize overhead and to seek out the least expensive set of variable inputs.
And, of course, insecure workers do not have bargaining power to command wage increases, just because their productivity does up. While conventional neoclassical micro-economics says that this is all just wonderful, since it's increasing efficiency, heterodox economists--of whom Minsky was one--have a very different view, counting the various costs that don't show up in the models favored by orthodox economists. The costs in wage inequality, growing US indebtedness and financial instability are examples of the sorts of costs that heterodox economists like Minsky pay attention to, while orthodox economists either ignore them entirely, or else grant them a secondary importance.
This is why, for example, orthodox economists are pleased that we're emerging from the recession--GDP is no longer falling--and regard the remaining high unemployment (still growing) as unfortunate, but a secondary concern, while heterodox economists regard the high unemployment as a major problem, not just for the workers out of work, but for the entire economy, which is now functioning far below its full employment capacity.
This different in outlook goes all the way back to Keynes, who invented macro-economics in the process of figuring out what was wrong with the economy in the Great Depression, and what was wrong with the economics that couldn't explain what was wrong with the economy. Conventional micro-economics has no good explanation for unemployment, particularly the massive unemployment seen during recessions and depressions. More on this in diaries to come. Suffice it to say that if full employment is not a priority, then neither is full productivity, and we should not be surprised when an economy guided by such precepts doesn't do well in these regards.
The authors discuss how aggregate measures such as the GDP used to be fairly good measures of well-being, and then talk about why they no longer are. The disaggregation of income statistics in this diary and the earlier Part One are stark illustrations of the point the authors are making. Here's how it was:
In the early postwar period, American policymakers measured economic success primarily by two aggregate statistics -- the Gross National Product (the Gross Domestic Product, more recently) and the unemployment rate. Price stability and greater income equality were additional objectives, but inflation was not a significant problem until the late-1960s and a direct assault on inequality seemed of little necessity since the trend was toward a more equitable distribution of income. There appeared to be much truth to the expression "a rising tide lifts all boats."
Reliance upon these particular measures of success was partly a product of history: the main economic difficulty of the century's early decades was considered to be capitalism's tendency to generate severe depressions. These were also measures that required only a minor reconsideration of standard economics.
Countercyclical fiscal and monetary policies could be easily reconciled with traditional theory through the "neoclassical synthesis;" a focus on aggregates made it possible to ignore the need for an institutional foundation for evolving economic structures. These gauges of success were also pragmatic. For the first two decades of the postwar era -- despite valid concerns about perennial matters such as how national output ignores environmental costs and how the unemployment rate ignores discouraged job seekers (persons counted as not in the labor force) _ - overall output and employment functioned as useful indicators of citizen well-being.
And here's what it morphed into:
Today's economy is different. Many families cannot distinguish recession from recovery. Despite strong profits and recent productivity gains, chief economist Stephen Roach of Morgan Stanley summarizes the view of most Americans when he writes, "Recovery or not, the 1990s are still all about downsizing, longer workdays, white-collar shock and relatively limited opportunities
for new employment" (Roach 1995).
Today's widespread insecurity requires economists and policymakers to look beyond a few aggregate statistics. The aggregates conceal not just income stagnation and other difficulties mentioned above but also longer employment searches, increased family dependence on multiple job holdings, and an explosive growth in part-time and contingent work. Also concealed is the anxiety that accompanies the fact that since early 1994 private firms have announced plans to cut more than a half-million jobs, many in companies (AT&T, for example) that once referred to their workforce as "family" (Challenger, Gray and Christmas 1996)....
In the current era, economic success requires more than economic growth, low unemployment, and minimal inflation. It requires that every citizen has the opportunity to develop and utilize his or her talents and capacities, an economy that rewards workers with rising standards of living and the prospect of an even better life for their children. It requires that economic insecurity be reduced and that prosperity be available to the whole of society. Without these, American capitalism will not be successful by any measure for very long in the 21st Century.
The last paragraph points to the kinds of factors that conventional economics tends to minimize--and so do our policies, despite a good deal of lip-service to the contrary. Part of what characterizes much of heterodox economics is a focus or real things as opposed to abstractions, and these real things tend to have a strong relationship to actual human well-being and happiness. The fact that such things do not fit well into the economic models of orthodox economists is one of the most damning things one can say about their models. It is the effort to understand the real world that must be central to understanding what happened to change our economy around 1970--and also to understand what happened to lead to our current economic crisis, as well as what's needed to build an economy that actually can meet the needs of all, and not just the top 1%.
A key thing worth noting is the need to reduce insecurity. Orthodox economists tend to get this all wrong. They think that risk is a good thing. They want to reward it. But if risk is so good, then why is there insurance? Risk is good if you can afford it and if you choose it. Otherwise, not so much. Security is not just for "the losers" in society. Security is a precondition for the winners, as well.
One last quote from the paper:
Many have long maintained that the reduction of economic insecurity is inconsistent with economic progress under capitalism. But as John Kenneth Galbraith observed decades ago, insecurity is cherished "almost exclusively in the second person or in the abstract" (Galbraith 1958, 98). Reducing economic uncertainty has been a central objective of corporations, labor unions, and associations of farmers since their inception.
Economic progress may be threatened by private or collective efforts to reduce insecurity. The central lesson of the era of paternalistic capitalism, however, is that security and progress can also be mutually reinforcing. Indeed, when one takes off the blinders of conventional economics it becomes clear that countercyclical stabilization policy was only one element in the strengthening of capitalism by reducing insecurity.
New Deal agricultural programs, by setting minimum prices and by providing crop insurance, had the effect of setting floors to farmers' incomes. These stabilized incomes made it possible for farmers to finance investment in new technology. Furthermore, agricultural extension services and experiment stations served to
socialize research costs and disseminate information on scientific breakthroughs. What followed was a period of unparalleled advance and productivity growth in agriculture.
From this perspective, a new dimension is revealed in the conservative refusal to deal with global warming. It can be viewed as the ultimate example of their inability to recognize the economic value of securtiy. Not a whole lot of jobs--or even corporate profits--on a dead planet. Or even one that's "only" borderline inhabitable by current standards.
More on economic realism and the crisis in diaries to come tomorrow. |
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