The Retreat from Riches: Affluence and Its Enemies
To read this decent and often reasonable book is to be struck by how tenaciously the world resists uplifting advice; to be reminded that philosophers will continue to interpret the world in various ways even though the real task, as Marx said, is to change it. Passell and Ross are liberal economists. They favor economic growth and oppose as their joint adversary both environmental and fiscal conservatives. Such men they consider timid aristocrats whose Tory enthusiasm for clean air and sound money masks a selfish attachment to privileges which sprawling factories and the inflation that comes with full employment might destroy.
The real problem, according to these authors, is not abundance but stultification, and the victims, as usual, are the poor. While they acknowledge what is obvious—that industrial growth fouls the air and depletes scarce resources while full employment tends to inflate wages and therefore prices—these troubles, they say, flow not from economic dynamism but from stagnation, underdevelopment, and irresponsible public policy. What the world needs is not less production, as the apocalyptic environmentalists associated with the Club of Rome urge, but more equitable distribution, which, in turn, requires fewer restraints of the sort associated with balanced budgets, sound money, and favorable trade balances.
What we really need, they think, are more stimuli such as a successful New Deal might have provided—public investment in useful production, full employment, expanded credit, and so forth. Simple-minded protectionism, whether in the name of wetlands and ospreys or degenerate domestic industries, only denies opportunity and perpetuates poverty while the old plutocracy goes on lazily enriching itself. Passell and Ross are twentieth-century greenbackers, expansionists, unromantic sheepherders in simple costumes who know that the day of the longhorn is over. They want to put the range to more profitable, eventually more egalitarian, uses.
Their ideological tradition is progressivism. They presuppose a transparent distinction between “the interests” and “the people,” and have no doubt whose side they are on. Nor do they see a necessary contradiction between economic expansion and an amenable habitat: indeed, they would argue that the greatest good of the greatest number absolutely requires continued industrial growth and that such growth will more than provide the extra capital required to clean the air and water. What most alarms them is the idea, endemic among certain American politicians, that administered recessions are preferable to the inflation that accompanies continued growth.
Though they wrote their book before Nixon’s recent economic message, one can imagine their disapproval of a policy that would take work and money from the poor in order to stabilize old fortunes made in Key Biscayne real estate, long-established hamburger franchises, and prudently invested union pension funds.
At the center of their argument is the suggestion that we should take inflation for granted and let the government guarantee the purchasing power of pensioners and other small creditors by means of publicly administered escalators. Powerful trade unions, interlocked with oligarchic industries, would, in their scheme, no longer monopolize the proceeds of inflation in the form of higher wages and prices inconsistent with increases in value: instead, through the agency of a benign and enlightened government, the advantages of cheap money would be transferred to the poor, to new men and women who would then be able to pay their debts in inflated currency while unskilled workers would be absorbed by a fully employed work force. The idea is essentially that of James Tobin, the Yale economist, who has said that while full employment means “creeping inflation,” “the costs of such inflation are much less than the costs of avoiding it.”
To keep such inflation within reasonable bounds—the authors have in mind something like 4 percent—would require an ever expanding GNP. As for the pollution and depletion of scarce resources that would result from such increased industrial activity, the same government that conscientiously escalates the pensions of the poor could, according to the authors, see to the safety of the environment and the exploitation of new resources as well—for example, by encouraging the extraction of oil from shale deposits to replace the dwindling supply from conventional sources. It could also tax industrial polluters—make them pay, in effect, for the clean air and water that they now use freely—and apply this tax to cleaning up after them.
Such proposals raise countless questions, most of which the authors necessarily ignore, given the scope of their short but provocative book. For example, they don’t consider the extent to which the reduction of profit implied by their pollution tax might reduce capital for further investment and thus depress productivity as effectively, if by no means so broadly, as the Club of Rome would do in more direct ways; or as conservative politicians already do when they reduce public spending or raise discount rates in order to protect the fortunes of their rich constituents. One wonders how they would finance their expensive and highly polluting shale oil refineries, and what the oil would cost once their pollution tax had been applied, or what the appropriate tax would be on the coal companies that want to strip away the surface of much of Montana. Nor do the authors reach the still larger question that there may be a specific relationship between an expanding industrial economy—whether capitalist or socialist—and the pollution and depletion of scarce resources; or, conversely, a negative relationship between efforts to preserve the environment and rates of industrial expansion.
One need not, for example, go so far as the Club of Rome to suspect that the environment is not infinitely exploitable or to feel that somewhere or other its ultimate capacity to support life implies a limit to the rate of industrial expansion. From what they have written, it is unclear whether the authors have such a limit in mind, much less that they have found out where it is. Instead, in their attack upon “the enemies of affluence,” they seem to presuppose more or less indefinite possibilities of growth; that whatever the real costs of environmental safety, an expanding economy can continuously absorb them. The example they give is the price of London’s clean air; only a few pennies a year for users of electricity. The richer we are, they seem to be saying, the more brooms we can afford, yet one wonders whether, in some circumstances, the manufacture of brooms may itself eventually become a source of pollution and depletion, and thus a further charge against an already burdened environment, as well as a charge against industrial profits, hence a reduction in the capital available for investment in further growth.
In a somewhat contradictory passage the authors seem to acknowledge such limitations when, for the moment, they side with the enemies of affluence and recommend that if New Yorkers want clean air, they should not only pay higher electricity rates for nonpolluting generators but use less air conditioning. For the most part, however, they are unequivocal expansionists. A growing economy, they think, can afford to keep itself both cool and clean.
Yet, according to a recent issue of The New York Times, financial analysts have begun to promote the paper industry as a likely investment not because it has grown in response to increased demand but because it hasn’t. “Ironically,” according to the Times, “the present supply-demand status of the industry is directly related to problems of the past…much of the industry’s capital spending has been aimed at pollution control instead of more capacity.” Paper prices will therefore rise while production is expected to grow by only 1.5 percent against a historic rate of 4 to 5 percent. The cost of environmental protection, in other words, is less paper at higher prices for an equivalent capital investment and industrial effort.
The Environmental Protection Agency dismisses this effect by showing that only twenty-nine plants have shut down in the last twenty-one months for reasons having to do with environmental control. Seven thousand and thirteen workers have lost their jobs, or two tenths of 1 percent of those unemployed. The worst case was a paper mill where 740 people lost their jobs, but the mill was old and, according to its owners, should have been shut anyway. The workers, on the other hand, may not have been so old and may not be so complacent as their former employers.
Passell and Ross confront this problem ambiguously; at any rate, unclearly. Society, they say, has a choice between “stopping growth…to protect the environment [as the Club of Rome, for example, advocates] or by doing the job directly…by requiring [for example] smokestack precipitators….” But in the paper industry, at least, the choice is not so simple. The requirement of smokestack precipitators, or the equivalent, means less growth per dollar invested. The real choice, apparently, is not between growth and no growth, as the authors suggest, but between faster and slower rates of growth, depending on how much is invested in pollution control and the productivity of the industry itself. What the authors don’t show is how these rates are inflected by environmental considerations for different industries and for the economy as a whole.
Some years ago Jane Jacobs proposed a solution to this dilemma. Pollution itself, she suggested, could become a source of profit, and scavenging a growth industry. For example, sulphur fumes that issue from the smokestacks of power plants could be trapped by canny entrepreneurs and turned profitably into sulphuric acid. And one hears of a certain brewery that claims to make a profit by recycling its old cans. But so far investors have not been convinced of the profitability of such imaginative adaptations, and Passell and Ross say nothing to suggest that they soon will be.
Their own proposals are even less promising. As if the problems of paper production were not severe enough, they would include as part of the price of the Sunday Times not only a charge for cleaning up after the mill but for carting the paper away on Monday morning. But surely the Times has enough trouble with its obsolete union contracts, its declining circulation, and its reduced advertising market. To impose this further burden whether directly or as an increased cost to purchasers might be more than the Sulzburgers or some of their readers will choose to bear. Mrs. Jacobs would, at least, have seen the possibility of a recycling profit.
Meanwhile, Mr. Iacocca, the president of Ford, has said—no doubt hyperbolically—that federal pollution controls have backed his company “to the cliff edge of desperation,” and that if the Federal Clean Air Act is not modified, the United States auto industry faces “a complete shutdown.” Such self-serving panic is obviously suspect; the more so in view of a report from the National Academy of Sciences that American auto companies are “concentrating on the most expensive and least satisfactory” methods of pollution control. Yet Mr. Iacocca raises an important question that Passell and Ross don’t consider. In an economy currently burdened with a rate of inflation already somewhat greater than they themselves advocate, how can companies like Ford meet the additional cost of environmental protection without significantly raising prices, thus limiting demand, hence production, hence employment, and so on through the cycle? And with their profits thus diverted, how can they generate the capital needed for increases in their rates of productivity?
In the steel industry, according to the Wall Street Journal, the case is similar. “Some of the capital spending continues to include heavy modernization to comply with anti-pollution standards rather than to expand production.” Republic Steel, for example, will invest $100 million in new plant this year, of which 25 percent will go for pollution control equipment rather than for new capacity or the replacement of worn-out plant. While steel volume is expected to grow considerably in 1973, the cost of pollution control devices will result in less growth than the capital investment would otherwise indicate.
It is unclear, therefore, what the authors mean when they say that “we can afford to eat our cake and pick up the wrapper too.” Perhaps we can, but what seems obvious from the examples of steel, autos, and paper is that if we are going to pick up the wrapper we are also going to eat less cake or pay more for the same piece. “Stopping growth,” they say, “would be a sane way to protect the environment only if society does not have the nerve to do the job directly.” But Mr. Iacocca, whose company has just been fined $7 million for tampering with federal emission control tests, feels that society already has nerve enough and that if it continues to display such courage the result will be not only an end to growth but to production itself.
Presumably the unpleasant truth lies somewhere between Mr. Iacocca’s inspired hysteria and the complacency of Passell and Ross. In 1973, a year of unprecedented capital expansion for American industry, 7 percent of capital funds will go for environmental protection. What Passell and Ross might have told us but haven’t is how many wrappers can be picked up for this amount and the degree to which these costs now and in the future are likely to affect the rate at which our cake grows and the price we have to pay for it.
The price of a reasonably clean environment, according to Passell and Ross, would come to something less than 1.5 percent of GNP yearly, a matter of $18 billion by 1975. What they don’t make sufficiently clear is that this large sum spent for environmental protection is not a simple reduction of gross income—which would be inhibiting enough for particular businesses that depend upon increased volume to attract future financing—but a charge against pre-tax profit. In the case of a paper company, for example, if this rate were to apply, the effect on every $1,000 of gross income would not be a mere reduction of $15, hence a loss of profit (assuming a return on sales of 10 percent) of $1.50, but a reduction of 1.5 percent in the rate of return itself. This means that profits on every $1,000 worth of sales would fall from $100 to $85, which would, in turn, require an increase in unit volume of about 17.5 percent to maintain normal profitability, assuming other costs and prices remain the same. But other costs won’t remain the same, nor will volume increase sufficiently. As a result paper prices in 1973 will probably rise by as much as 15 percent.
Consider the likely response to such an increase by the publisher of, say, The New York Times, or, for that matter, by the publisher of The Retreat from Riches. To maintain his own profits he will either reduce the quality of the paper he uses or raise his prices or, most likely, do both; unless, of course, he decides to absorb the additional cost himself and reduce his profits accordingly. But this is the way to insolvency. As for the reader, he will either discontinue his subscription (or wait for a cheap paperback edition of The Retreat from Riches) or renew his subscription but deny himself a less urgent purchase; or he may ask his employer for a raise or demand that his broker put him in stocks whose dividends are not affected by such factors as environmental costs. The impact, in other words, of environmental costs on certain businesses will require complex adjustments of quality, price, anticipated demand, growth, and future capital formation and, for the economy as a whole, subtle computations of rates of inflation as they are affected by rates of expansion.
Later Passell and Ross say that the cost of cleaning the environment would come to “less than 10 percent” of GNP, hardly more than two good years’ growth. But this only compounds the confusion, for not only does it seem to contradict the authors’ earlier figure, but the context leaves it unclear whether this is a one time charge to clean the environment forever—a truly Herculean task—or a perpetual charge, which would be catastrophic; or whether these rates of 10 percent and 1.5 percent represent respectively capital investment and ongoing operating costs, or some combination of both. Meanwhile the authors supply no more basis for their figures than Barry Commoner gives for his estimate of $40 billion a year for twenty-five years or than the Urban Coalition gives for its guess of $20 billion for five years.
Whatever the case, the price of clean air and water, if the public demands them, will become a charge to consumers, yet another cost to add to the already inflated price of the bread they buy and the electricity and steel they use to toast it. To suggest, as Passell and Ross do, that greedy manufacturers have so far used air and water resources without paying for them begs the question. It is the consumer himself, including the poor consumer of Fords, paper, and steel whom the authors mean to befriend, who has so far benefited from the free use of environmental resources, and who will hereafter have to pay more or consume less (no doubt both) for the sake of environmental protection. Indeed, the authors themselves later acknowledge as much when they refer to the higher cost of London’s electricity for the sake of clean air or when they recommend that New Yorkers turn off their air conditioners for the same reason.
The economic constraints, in other words, that accompany environmental protection are not, as the authors believe, a Tory plot to limit growth and penalize the poor for the sake of protecting a few duck blinds and the value of some old telephone bonds. Instead these constraints seem to flow from a kind of iron law, associated with highly developed industrial democracies, which links rates of growth and costs of goods to political decisions governing the use of heretofore free, but currently diminishing, resources.
Nevertheless, there is self-evident merit to the argument for economic growth, even if the phenomena that inflect it happen to be more obscure than Passell and Ross acknowledge. As the authors show, political attempts to redistribute income have repeatedly failed in America, and with the death of the Family Assistance Plan and its scheme for a guaranteed annual income, there isn’t much reason to assume that they will soon succeed. (Nor, for that matter, is there any reason to assume that the author’s plan for escalating pensions to keep the poor abreast of inflation has a rosy political future.) Without substantial economic growth there is little hope for the poor and, as the authors also suggest, even the moderately rich could use a few more weekends in Gstaad, to say nothing of a little more La Tache now and then and a Baccarat glass to drink it from.
To the extent that practically everybody wants more, the case for growth should not need emphasis. Surely Mr. Iacocca and the billionaires he works for, even though they may contribute privately to environmentalist organizations and support conservative politicians, don’t want their plants to produce less, any more than the disaffected auto workers want to be deprived of their brutal assembly lines. Passell and Ross are right to deplore the enemies of affluence whoever and whatever they may be. As the authors imply, the claim of the Earth Day calendar that “growth for the sake of growth is the ideology of the cancer cell” is no argument at all, for such growth is also the “ideology” of nature as a whole as each species struggles against the limits of its particular environment.
If growth is often destructive, it is simultaneously constructive, endlessly, in business as much as in nature. To want to stop this process is, as the authors insist, absurd. To want to stop it on behalf of our whole species, as the Club of Rome seems to advocate, is unthinkable. The real problem, as Passell and Ross argue, is not to adapt the growth of the species to the present limits of the environment, as if human beings were no more resourceful than trees or reindeer, but to extend these limits by making the environment more productive.
Yet as much as one agrees with their assumptions, their particular case against the enemies of growth is unsatisfactory, and not only for the obscurity of their cost accounting in the case of environmental protection. For the questions they raise are as much historic and political as they are specifically economic. They are questions that go to the root of the mysterious process by which unforeseeable adaptations of technology and demand select, at one time or another, this or that product or industry or nation or era for growth or decline—a process as difficult to comprehend, much less control, as it is to predict.
To suggest, as Passell and Ross do, that these Darwinian vagaries are to any significant degree the malign inspirations of self-interested Tories—or that economic forces would respond to human reason if only human beings were more reasonable—is to confuse symptoms for causes and thus to obscure still further the puzzling ways in which the process perpetuates itself. Was the decline of Imperial China the fault of a degenerate Manchu Empress, too dull to encourage industrial expansion, or was the foolish Empress the product of her declining empire? Or were both empire and empress expressions of an evolving process in which a particular historic adaptation slowly and painfully—and at great cost to the Chinese who happened to be living at the time—gave way to its successor? To scold the enemies of affluence is one thing. To expect them to behave differently may be too much to ask of them.
In the case of America’s foreign trade deficits, the problem, according to Passell and Ross, has been “a mixture of stupidity, misplaced internationalism and private venality,” as if the Empress herself had been for the last twenty years the real power behind the various Councils of Economic Advisers. American officials, they argue, should not have tried to protect the dollar by means of counterinflationary policies at home, but should have let the dollar find its own international level. “If other countries wish to prop up the dollar, that’s their business…we should let it float and get on with the real task—managing domestic prosperity.” If the Germans and Japanese are willing to work hard at low wages so as to invade our markets with their underpriced goods, Passell and Ross recommend that we take advantage of their generosity and not worry about the dollars we send abroad, especially since foreign trade accounts for only a relatively small share of American GNP.
Foreign bankers, of course, are less complacent. Only a modest increase in America’s rate of inflation alarms them, despite their own much higher rates; for the relatively low American rate, applied to the billions of dollars that flow abroad, must represent huge trading losses, hence declining capital balances, especially for countries and their businesses that have for years sold cheap and bought dear in the American market. The impact, in other words, of continued American inflation, even at the relatively modest rate Passell and Ross recommend, is still more inflation as foreign countries raise their prices to conform with the reduced value of the dollar and as American workers engaged in foreign trade work harder for the dollars they earn abroad, much as the Germans and Japanese had so generously done in the past. As Professor C. P. Kindleberger of MIT recently wrote in The New York Times, we may possibly be experiencing
…a slowing down of American economic vitality and élan—a climacteric in the life of the economy, and perhaps society, such as Britain experienced in the last quarter of the nineteenth century when it was overtaken by Germany and the United States as we are now being overtaken by Japan.
The dynamic failure of the economy to produce new exports to replace those being eroded in the product cycle by new production abroad supports this view, as does the power of the Japanese advance….
How we are supposed to manage domestic prosperity in such circumstances Passell and Ross do not explain, except to say that foreign trade is, or should be, unimportant to Americans. But in the short run, according to Paul Volcker, the US Treasury official in charge of monetary affairs, “an exchange rate action almost always has a perverse impact.” Foreign goods, he explained in a recent speech will immediately cost more. However in the long run, according to Volcker, the situation isn’t much better. “Exchange rates take time,” he said, to stimulate increased exports, hence domestic production and employment. The 1971 devaluation, he explained, as if he had just stepped through the looking glass, was about to result in “improvements,” just as the 1972 deficit of $6.4 billion precipitated a further devaluation based on renewed fears of American inflation.
To be sure, it is unfair to saddle Passell and Ross with the effects of Nixon’s economic policies or to exaggerate the general impact on the American economy of the recent devaluations. But it would be equally unfair to accuse Nixon, in this instance, of such counterinflationary policies as tax increases, reduced federal deficits, and so on that Passell and Ross feel are characteristic of the enemies of affluence. Nixon’s deficits have been unprecedented, while his promise not to raise taxes, his unconvincing threats of over-all federal economies, and his further relaxation of already flaccid wage and price controls on behalf of his new friends in organized labor and his old friends in organized industry—all at a time of renewed domestic growth and increasing employment—seem to be associated with results not much different from what Passell and Ross themselves would like to achieve, though perhaps by different means: high rates of employment, increasing production, and ongoing inflation, with a more or less floating, not to say sinking, dollar.
Passell and Ross discount the inflationary impact of high-priced imports for the reason that the American economy is largely self-sufficient. Balance of payments problems may haunt conservative bankers, but average consumers can afford them; yet one wonders whether these consumers will be so indifferent when they get their next bills for heating oil, whose price has just risen 6 percent, partly in anticipation of a forthcoming adjustment to compensate foreign suppliers for the devalued dollar. Nor do the authors show that when VWs and Toyotas enter the American market at higher prices, Vegas and Pintos won’t, in their accustomed way, soon follow, with predictable erosions in consumption, production, and employment as more and more Americans find that they can’t afford new cars or even the fuel to run their old ones.
Meanwhile an economist at the Brookings Institution blames part of the recent sharp increase in wholesale food prices on foreign demand. “We have a single [worldwide] market now,” he explained, “and you can’t just suddenly increase the supply”; an ominous modification of Mr. Volcker’s claim that it takes time for devaluation to stimulate increased exports, of which a further example is the extraordinary rise in timber prices since the first of the year. “The Japanese are trying to buy everything in sight,” says Mr. Leitzinger of the American Plywood Association, so that the price of Douglas fir has more than doubled in the last month. According to the National Association of Home Builders, the increased price of wood products has added $1,200 to the construction cost of the typical new one-family house. And as if the Japanese weren’t enough of a problem a further influence on the price of wood according to the Wall Street Journal, is the decision by some American producers to restrict production for environmental reasons.
The argument of this book—that a just society can save the wetlands and abolish its ghettos too, if only it accepts inflation and abandons antiquated ideas of balanced budgets and administered unemployment—has already been outdistanced by events. America’s budgets are far from balanced while inflation has become commonplace, yet the ghettos are still here and the fate of the wetlands remains as problematic as the value of the dollar. No doubt Passell and Ross would argue that we are no longer or not yet a just society; yet it is unlikely that this book will persuade many readers that its authors have found the way for us to become one.
In the real world of factories and dollars, of balance sheets and wages, of consumption and debt, this defense of inflation as a condition of prosperity won’t work. Even as a debating point against the Club of Rome and John Kennedy’s long departed treasury secretary, it leaves a multitude of questions unanswered.
It is hardly clear, for example, that inflation itself is largely explained as the result of full employment, as the authors, relying on the Phillips Curve, seem to believe. Innumerable other factors, including the increasingly costly use of the environment, also inflate demand without simultaneously expanding supply: for example, our unproductive welfare populations, our great military waste, the underemployed, overconsuming young, the bloated automobile industry with its expensively upgraded goods of ever diminishing real value, to say nothing of the highways and other facilities that support these costly anachronisms; the mandarin public bureaucracies, the wasteful educational system, monopolistic trade unions, industrial oligopoly, extravagant civil service wage and pension settlements, the huge rate of regressive taxation that inflates the cost and price of everything but which returns little real value, our bizarre systems of distribution and processing which send Long Island potatoes to Puerto Rico for freezing while supermarkets adjacent to Long Island farms carry potatoes grown in California and wrapped in plastic boxes; while eggplants are sold already peeled and sliced, as if housewives surrounded by their electrified beaters, cookers, and carvers had no time to peel and slice an eggplant themselves.
Inflation, in this perspective, seems to be a product not simply of increasing rates of employment but of the more dismal characteristics of democratic industrial society itself in its current phase, a society in which increased production and employment hardly provide a corresponding increase in the real value of the goods produced, if we think of value somewhat more practically than some liberal economists do. Alfred Sloan once said of General Motors that its aim was not simply to make cars but to make money. It did this by increasing the price of its products, through annual model changes and similar sales incentives, without necessarily increasing their value, a strategy that probably explains the disappointment of the National Academy of Sciences in the way American auto companies are providing for pollution control. Perhaps for purposes of calculating the supply/demand imbalances that affect rates of inflation, it would make sense simply to exclude from GNP a portion of automobile production, along with billion dollar aircraft carriers, the services of whoever slices eggplants for supermarkets, and the trucks that carry California potatoes to Long Island.
To conclude that the authors’ defense of inflation is somewhat superficial is not to suggest that liberal economists like themselves should not do all they can to persuade and enlighten politicians who, in their zeal, might make matters worse by inflicting a recession on us too, in the mistaken belief that inflation and recession are mutually exclusive phenomena and that the cure for inflation is to punish the poor still more. It is a worthy effort to raise the consciousness of politicians, as Passell and Ross have tried to do in this book, even though a frequent result is to make these politicians unacceptable to the notoriously false consciousness of their constituents, who often prefer their leaders to leave their illusions intact.
The administered recessions of recent decades suggest that unenlightened politicians have the power to make things worse. The extent to which more capable leaders can make things better depends upon the uncertain degree to which they are more than merely creatures of social and economic forces stronger and more complex than themselves. What Passell and Ross have not done in this otherwise instructive book is tell us how these forces really operate and how far they can, in fact, be controlled within our present political system.
What Price Growth? May 17, 1973