The Zero-Sum Society: Distribution and the Possibilities for Economic Change
Not many will think that government economists and economic advisers have much distinguished themselves of late, but they have succeeded, quite remarkably, in making themselves and their principals ridiculous. This they have accomplished by a combination of innocent hope, repetitive banality, and uncomplicated fraud. The economic system is behaving badly. A high rate of inflation is combined with high unemployment that is appalling among young, black central-city, and other vulnerable people. All effective remedial action requires energetic public steps, and for some influential groups somewhere in the polity some sacrifice of prospective gain.
The Administration yearns not to inflict such loss and to hear that it is not necessary. So it has become the priestly and deeply unworthy function of the advisers—economists and business statesmen—to explain that inflation and unemployment can be mitigated without loss to any influential group, to counsel symbolic as distinct from real action and, if something real must be done, to propose or agree to the line of policy that arouses the least influential line of protest. In practice, this means monetary policy combined with whatever fiscal action is most damaging to the inarticulate poor.
Finally, having urged and accepted what won’t work or what is ineffective or reactionary, the public economist predicts that inflation will eventually subside while holding that the present or prospective rate of unemployment is or will be tolerable and therapeutic.
All of this is drawn from life. President Jimmy Carter’s most recent anti-inflation measures were, with one major exception, all simulated or symbolic. No minimally competent economist could suppose that a minuscule reduction in public expenditures, a small increase in gasoline prices, some cosmetic action on credit cards coupled with a promise of strong resistance to firm legal restraints on the wage/price spiral could have any substantial effect on inflation. Those economic advisers who urged or acquiesced in this were showing not their incompetence—none is that bad—only their preference for public office as opposed to professional reputation.
Monetary policy, as noted, is the one acceptable line of action that does have economic effect. Support of this has an especially dubious professional aspect, for such policy is presented as socially neutral. In fact, as all by a little thought can discover for themselves, it is both egregiously regressive and remarkably uncertain in result. Monetary policy works as it limits spending from borrowed money. Thus it has its prime effect on those firms and persons which depend on borrowed money. It is untroubling to the big corporation with earnings to reinvest and which, in any case, is first in line at the banks. It works against inflation only as it creates a recession or depression, the timing and depth of which no one can predict, although this has not prevented numerous scholars in and out of government from pretending, perhaps even believing, that they can. Predictions of a recession that did not occur were professionally endemic all last year.
Monetary policy is, in fact, acceptable only because it is so little understood. Those punished—house builders and buyers, farmers, merchants, smaller bankers—do not immediately associate the action with their misfortune. Many are Republicans who cannot believe that anything that is applauded by the great New York bankers, the conservative business spokesmen, can be anything but good. Such policy would not have a chance and the economists’ defense of it would not stand for a moment were its effect on Exxon, General Electric, or IBM what it is on the small house builder or commercial farmer.
In the aftermath of the president’s several recent inactions, Administration economic spokesmen predicted that the inflation rate would fall, which they did not know, and that the recession which now does seem in prospect would be mild and brief, which also they did not know. And Charles Schultze, the chairman of the Council of Economic Advisers, resorted to the most paltry of all economic defenses, which is the plea that inflation having been bad for a long time, it will have to be bad for a long time in the future. This is a nearly perfect excuse for inadequacy, always providing no one asks who was in charge during the past years when things were getting worse. Had Administration economists been responsible for the ill-considered raid into Iran, they would have attributed the failure to the commitment in past years to the RH 53 helicopter and explained that such failures were inevitable until the stock was worked off.
Some will say in defense of Miller, Volcker, Schultze, Kahn, et al., that the economics of Ronald Reagan is worse. This is not persuasive; it requires one to believe that Reagan has economic advice. His stand for a heavy cut in income taxes, a heavy increase in defense spending, unspecified cuts elsewhere, and a further abdication to Professor Milton Friedman, the spiritual parent of the principal line of present failure, does not derive from economics but from a kind of non-Euclidean nonsense. The Reagan fantasy that a drastic cut in the income tax will bring a prompt offsetting increase in tax revenues is the politically convenient contribution of Arthur Laffer, who has come up with other such constructs, and it makes even conservative economists nervous. The Laffer curve showing the increase in revenues from such tax-cutting is, except at its extremes—no taxation, no tax revenue; totally confiscatory taxes, no revenue—of purely freehand origin. One can go far in accommodating economic models and resulting prediction to political convenience, but Laffer is thought by political coreligionists to have overstepped even these flexible boundaries.
Public attention being now divided between the uninspired evasions of the Administration and the uninstructed fantasy on the right, this would seem a poor season for well-documented good sense. However, Lester Thurow, a professor of economics and management at MIT, has taken the risk. His The Zero-Sum Society is an extraordinarily good and lucid examination of current difficulties. Indeed, he has a near genius not only for asking the relevant questions but for finding the information that bears on the answer. And repeatedly he is guided by the information rather than proceeding in the normal fashion to select that which affirms prior preference.
Thurow’s general concern, the one that provides his title, is with public policy in an economy which no longer yields large annual increases in real income. Such increases no longer being in prospect, it follows that any important benefit for any considerable group of citizens requires an equivalent sacrifice somewhere else. Thus the zero-sum game. The ability of the affluent to identify actual or potential sacrifice is highly developed, so if there must be sacrifice, the most promising opportunity is to reduce the largesse accruing from government to the always undeserving poor. Things were far easier back when the poor could be bought off out of the annual increases in income, with much additional and righteously deserved income going to the upper-income brackets as well. Thurow argues that the long stasis over energy was less the result of the political inadequacy of the Carter Administration and of James Schlesinger than of the intricate political balance involved. The larger public interest would be served by reduced dependence on imported oil. Standing against the various measures to reduce dependence were those who would lose from conservation, from damage to landscape and air, from mining and from the threat to public safety, real or perceived, in consequence of the greater reliance on nuclear reactors.
In an admirable treatment of environmental and regulatory issues, Thurow holds as obvious that clean air and water, a pleasant and tranquil landscape, are as much a part of the standard of living as purchased goods and services and are increasingly so as the society becomes more affluent and as individuals move up in the income brackets. (The very rich who can buy themselves a measure of environmental and other protection may, he thinks, be an exception.) Since those suffering from acid rain and those being rewarded by increased production are rarely if ever the same, there is a nice opportunity for indignation on both sides and a continuing and intricate problem in political accommodation and reconciliation. All would be easier if the costs of environmental protection could be paid for out of increasing output and income. Again the zero-sum game.
One might add that it would greatly clarify the issue if improvements in the quality of life—the greater pleasure and better health derived from cleaner air and ambient water, less work-related disease or disability—could be valued and included in the calculations of National Income and Gross National Product. In consequence of such calculation we might then discover that our recent performance with respect to economic growth has been better than is usually supposed. And, considering the stifling tendencies of Tokyo and Osaka, we might even be improving our position vis-à-vis Japan. One is charmed to think of the Environmental Protection Agency as an instrument of economic growth.
Thurow is also eloquent and persuasive on the relation between the zero-sum society and inflation. In the broadest sense, inflation is the product of the steadily intensifying competition for an increasingly limited total product. The struggle, Thurow argues, is not wholly unequal—even old people are, over all, holding their own, although his aggregates cover up, as such calculations do, a very great deal of suffering. (I believe him a little casual here.) He holds that the strongest case against inflation comes from the moral indignation it arouses: all think an increase in their money income a deserved reward and believe the offsetting increase in prices an unwarranted, even wicked, subtraction from true worth.
Every remedy for inflation in the slow-growth society requires that the income of someone, somewhere, be reduced or at least restrained. This restraint no one wishes to accept, and, needless to say, imposing it is what most politicians wish to avoid. Surely God intended that there be an easier way. Thurow is brilliant and merciless on the principal evasion to which the present Administration has turned. That, as noted, is monetary policy, which works only as it creates a recession—only as it converts the serious problems of a zero-sum economy into the more difficult problem of a less-than-zero manifestation. He shows also that, given the seniority systems in both organized and unorganized plants, the majority of workers is not immediately threatened by the resulting unemployment and does not much moderate wage claims as a result of unemployment. So monetary policy does not stop wage/price inflation until unemployment is very large. Meanwhile we get both.
The existence of idle plant capacity does serve admirably to arrest investment in new and more efficient plant. Thus it further reduces productivity gains, further commits the economy to the zero-sum game that is part of the original cause of inflation. If Thurow is to be faulted, it is because he does not marvel at the way the most solemn defenders of the system, committed to their faith and to Professor Friedman, persist in kicking the system and very frequently themselves in the stomach.
Thurow also fails to distinguish sufficiently between political difficulty and political frailty. Because the Carter Administration hasn’t been able to do something about inflation, it does not follow that action is all that difficult. He should have identified a mind-set of modern economic advisers that proceeds from his own analysis. In the past, economic policy involved the allocation of income from an increasing flow. In consequence, economic policy-making—that of my generation—was a wonderfully pleasant thing. Economists met with the president to decide, in effect, who should have more. The economists and businessmen who surround Jimmy Carter are still deeply under the impression that their life in Washington was meant somehow to be pleasant. This, along with political need, supports their continued search for painless therapy, monetary policy apart. Smaller WIN buttons having failed, bigger ones are tried. It is silly, but it does not arouse the animosity of any unpleasantly articulate interest.
After dealing with inflation, environmental and regulatory policy, Thurow goes on to income distribution in the slow-growth society. Income distribution, though sharply skewed, is not becoming more unequal in the United States. But the share going to the poor is being maintained only by the increasing efforts and transfer payments of the government. Ronald Reagan presumably will take care of that. Thurow is also concerned with the problem of horizontal equity—with the very large difference in the taxes now paid by people with the same income.
All will be more impressed with Thurow’s discussion of issues than with his remedies. On inflation these are hard to detect. Where taxation is concerned, he urges vast changes in an almost off-hand way. Thus he would dispense with the corporation income tax and assess all corporate revenue, including capital gains, directly to the taxpayer. He is not impressed by the politics of so extensive a change or the possibility that the modern corporation has a taxable advantage and personality which are distinct from those of the shareholders who, nominally, own it. He comes out strongly for a government guarantee of employment—making government the general employer of last resort. There is much to be said for this; people who work are more productive, contribute more to society, than those who do not. Unemployment, however praised these days as a salutary source of pain, is a waste. But one could wish for more detail on the fiscal and administrative arrangements for this guarantee than the author offers.
Still, it is not clear why a writer who, with great skill, takes issues apart and illuminates them should then be required to put them back together again. Diagnosis and remedy do not necessarily command the same talent. I am more than content with Thurow’s talented exposition. All who read this book will have a much improved view of what needs to be done, even though they won’t quite know how to do it.