In economic and social affairs we value controversy and take it for granted; it is the essence of politics, its principal attraction as a modern spectator sport. This regularly keeps us from seeing how substantial, on occasion, can be the agreement on a broad range of ideas and policies within which the political debate proceeds.
Such has been the case with economic and social policy in the industrial countries since World War II. There has been a broad consensus in the United States extending to most Republicans and most Democrats. Similarly as between Christian Democrats and Social Democrats in Germany and Austria, the Labour and Tory parties in Britain, Liberals and Progressive Conservatives in Canada. Policies in France, Italy, Switzerland, and Scandinavia have generally conformed. The rhetoric in all countries has been diverse. The practical action has been similar.
There have been three points of convergence. All governments in all of the industrial countries, although differing in individual emphasis, have agreed that:
—There must be macroeconomic management of the economy to minimize unemployment and inflation. This, at least in the English-speaking countries, was the legacy of Keynes.
—There must be action by governments to provide those services which by their nature are not available from the private sector or on which, like moderate-cost housing, health care, and urban transportation, the private economy defaults.
—There must be measures—unemployment insurance, welfare payments, old-age pensions, medical insurance, environmental protection, job safety and product safety regulation—to protect the individual from circumstances with which he or she cannot, as an individual, contend. Much of this last has been thought of as smoothing and softening the harsh edges of capitalism.
No accepted term exists for the consensus which these policies comprise. Keynesian policy refers too narrowly to macroeconomic action; liberal or social democratic policy has too strong a political connotation for what has been embraced in practice by Dwight D. Eisenhower and Gerald Ford, Charles de Gaulle, Edward Heath, and Konrad Adenauer. I will not try to devise a new term; instead I will refer to the broad macroeconomic, public-service, and social-welfare commitment as the economic and social consensus or just the consensus. It is the present attack on this consensus—notably by Mrs. Thatcher’s government in Britain and by numerous of Ronald Reagan’s supporters in the United States—that I wish to examine.
The ideas supporting the economic and social consensus have never been without challenge. Keynesian macroeconomic management of the economy, the first pillar of the consensus, was powerfully conservative in intent. It sought only to correct the most self-destructive feature of capitalism, the one Marx thought decisive: its tendency to recurrent and progressively more severe crisis or depression. It left the role of the market, current income distribution, and property rights unchallenged. But numerous conservatives, especially in the United States, long equated Keynesian economics with subversion. There was some conservative discomfort when, thirty years after Keynes’s General Theory was published and the policy it prescribed was tending visibly to obsolescence, Richard Nixon, in an aberrant moment, was led to say that all Americans, including Republicans, were Keynesians now. A reference to the social welfare policies of the consensus has always encountered a slightly disapproving mood: something expensive or debilitating was being done for George Bernard Shaw’s undeserving poor. The need to compensate for the failures of capitalism in providing lower-cost housing, lower-income health care, and mass transportation has been accepted in all countries; but in the United States at least not many have wanted to admit that this is an unavoidable form of socialism. In all countries at all times there has been much mention of the cost of government, the level of taxes, the constraints of business regulation, and the effect of these on economic incentives.
It has always been likely, one should note, that an attack on the economic and social consensus would be taken to reflect the views of a larger section of the population than was actually the case. That is because articulate expression on public issues is strongly correlated with income, and the consensus is of the greatest importance for those of lowest income. Also the perception of a movement in political attitudes can be as important in its effect on politicians as a movement itself. These matters deserve a special word.
That a large share of all economic comment comes from people of comfortable means will not be in doubt. High social, business, and academic position gives access to television, radio, and the press. And professional access to the media also gives a relatively high income. It follows that the voice of economic advantage, being louder, regularly gets mistaken for the voice of the masses. On the need for tax relief, investment incentives, or a curb on welfare costs, the views of one articulate and affluent banker, businessman, lawyer, or acolyte economist are the equal of those of several thousand welfare mothers. In any recent year the pleas by Walter Wriston of Citibank or David Rockefeller of Chase Manhattan for relief from oppressive taxation, regulation, or intrusive government have commanded at least as much public attention as the expressions of discontent of all the deprived of the South Bronx. So the voice of affluence being resonant, it is frequently thought to be the voice of the masses. And since it is so interpreted by politicians, it has much the same effect on legislatures and legislation as a genuine shift of opinion.
In the last thirty-five years we have had many such shifts of opinion—all drastically to the right. Immediately after World War II, Professor Friedrich Hayek emerged as the messiah of a modern and comprehensive rejection of the state. His Road to Serfdom was hailed as the new sacred tablet. In 1964, Senator Goldwater was thought to represent a growing conservative mood that was sweeping the country. Messrs. Richard Scammon and Ben Wattenberg then identified this conservative mood with an unpoor and distinctly unradical Dayton housewife; this lady was for some months the new American archetype.1 The applause for Spiro Agnew was taken to mean the rejection, at long last, of the liberal elite. George Wallace was once thought to have a highly conservative message for the American people. Based on all past experience, it is the beginning of wisdom to doubt the depth and durability of great shifts of American opinion to the right.
However, even after an appropriate discounting, it seems certain that not only in the United States but in other industrial countries as well there is now an attack on the economic and social consensus that has a deeper substance. Mrs. Thatcher and Mr. Reagan have won elections. Much, if not most, of Mr. Reagan’s success must be attributed to President Carter’s economists—to the macroeconomic management that combined a severe recession with severe inflation, with a drastic slump in the housing industry, with particular economic distress in the traditional Democratic industrial states—and all these in the year of the election. Economists do some things with precision. But effective macroeconomic management was one part of the consensus. Obviously there is something wrong with the way it now functions.
There is, indeed, substance to the conservative attack on the economic and social consensus. It strikes at genuine points of vulnerability. This, however, is not true of all of the attack; some of it is merely a rejection of reality—or compassion. The conservative onslaught we now witness needs careful dissection and differentiation.
Three different lines of attack can be identified, and the relevant nomenclature readily suggests itself. There is the simplistic, the romantic, and the real attack. These terms, needless to say, are intended to be purely descriptive; they have no pejorative connotation.
The simplistic attack consists in a generalized assault on all the civilian services of modern government. Education, urban services, and other conventional functions of government; government help to the unemployed, unemployed, unemployable, or otherwise economically incapable; public housing and health care; and the regulatory functions of government are all in the line of fire. People, in a now famous phrase, must be left free to choose.
In its more elementary form this attack on the consensus holds that the services of government are the peculiar malignity of those who perform them; they are a burden foisted on the unwilling taxpayer by bureaucrats—public servants. The most eloquent American spokesman for this view is William Simon, once a prominent Cabinet prospect under Mr. Reagan. “Bureaucrats,” Mr. Simon has said, “should be assumed to be noxious, authoritarian parasites on society, with a tendency to augment their own size and power and to cultivate a parasitical clientele in all classes of society.” There must, he urges, “be conscious, philosophical prejudice against any intervention by the state into our lives.”2 If public services are a foisted malignancy—if they are unrelated to need or function—it follows that they can be reduced more or less without limit and without significant social cost or suffering. This is implicit, even explicit, in this case.
Other participants in this line of attack are, superficially at least, more sophisticated. Professor Arthur Laffer of the University of Southern California has supported the case with his now famous curve, which shows that when no taxes are levied, no revenue is raised, and that when taxes absorb all income, their yield, not surprisingly, is also zero. Taxes that are too high, as shown by a curve connecting these two points, have at some point a reduced aggregate yield. The Laffer Curve, which in its operative ranges is of purely free-hand origin, has become, in turn, a general case against all taxes. Let there be large horizontal reductions and the resulting expansion of private output and income—supply-side economics for those who will believe anything—can be great enough to sustain public revenues at more or less the previous level. For the less gullible, the Laffer Curve still argues for a large reduction in the cost and role of government.3
Yet another attack on the public services comes from Professor Milton Friedman and his disciples. It holds that these services are relentlessly in conflict with liberty. The market accords to the individual the sovereignty of choice; the state, as it enlarges its services, curtails or impairs that choice. And its tendency is cumulative and apocalyptic. By its acceptance of a large service and protective role for the state, democracy commits itself to an irreversible descent into totalitarianism and communism. Professor Friedman is firm about the prospect. “If we continue our present trend,” he has said, “and our free society is replaced by a collectivist society, the intellectuals who have done so much to drive us down this path will not be the ones who run the society; the prison, the insane asylum, or the graveyard would be their fate.”4 “Or,” he has asked, “shall we have the wisdom and the courage to change our course, to learn from experience, and to benefit from a ‘rebirth of freedom?’ “5
I have called this attack on the social consensus simplistic; it could, by the untactful, be called purely rhetorical. That is because it depends almost wholly on passionate assertion and emotional response. No one, after reflection, can easily conclude that publicly rendered services are less urgently a part of the living standard than privately purchased ones—that clean water is less needed than clean houses, that good schools for the young are less important than good television sets.
Public services are not rendered in most countries with high efficiency, a point worthy of real concern. But no way has ever been found for seriously reducing outlays for either efficiently or inefficiently rendered services without affecting performance. Public bureaucracy has a dynamic of its own, but so does private bureaucracy. As road builders promote highways and public educators promote public education, so private weapons firms promote weapons and other corporate bureaucracies promote automobiles, alcohol, toothpaste, and cosmetics. This is the common tendency of organization, as we’ve known since Max Weber. Good education, health, and law enforcement do not impair liberty or foretell authoritarianism. The entire experience of civilized societies is that they are consistent with liberty and enlarge it. Professor Friedman’s belief that liberty is measured, as currently in New York City, by the depth of the uncollected garbage is, as I’ve previously observed, deeply questionable.
Taxes on the affluent do reduce the freedom of those so taxed to spend their own money. “An essential part of economic freedom is freedom to choose how to use our income.”6 But welfare payments, unemployment compensation, and old-age pensions serve even more specifically to increase the liberty of their recipients. That is because the difference for liberty between considerable income and a little less income can be slight; in contrast, the effect on liberty of the difference between no income and some income is always very, very great. It is the unfortunate habit of those who speak of the effect of government on freedom that they confine their concern to the loss of freedom for the affluent. All but invariably they omit to consider the way income creates freedom for the indigent.
The differential effect of taxes and public services on people of different income is something we must not disguise. Taxes in industrial countries are intended to be moderately progressive; in any case, they are paid in greatest absolute amount by people of middle income and above. Public services, in contrast, are most used by the poor. The affluent have access to private schools; the poor must rely on public education. The rich have private golf courses and swimming pools; the poor depend on public parks and public recreation.
Public transportation is most important for the least affluent. So are public hospitals, public libraries, and public housing. So are the services of the police and other municipal services. Unemployment and welfare benefits are important for those who have no other income. They have no similar urgency for those who are otherwise provided. In California an estimated two-thirds of the tax saving under Proposition 13 accrued to individual corporations and large property-owners. The services curtailed (or which would have been curtailed in the absence of state rescue action) were most used by those with the lowest incomes.
We hesitate in these careful days to suggest an opposition of interest between the rich and the poor. One should not stir the embers of the class struggle. To encourage envy is uncouth, possibly even un-American. But any general assault on the public services must be understood for what it is; it is an attack on the living standard of the poor.
The romantic attack on the social consensus, to which I now turn, has superficially a more powerful intellectual base. It calls on the two-hundred-year-old tradition of classical and neoclassical economics which holds that all possible economic decision should be left to the freely competitive market. No other system is socially so efficient or responds more genuinely to the will of the consumer. None rewards more reliably the competent response or punishes more reliably the incompetent one. The social consensus has impaired the operation of the market in two ways: first, by enlarging the public sector, it has diminished, pro tanto, the market sector of the economy; second, by accepting and encouraging a large and varied range of regulation, it has interfered with the free operation of markets. So for this reason too government must be reduced in scale. And, more specifically, it must remove the regulatory shackles from private enterprise and restore the market. In the recent campaign this demand was strident. It is an appeal that can be counted upon to arouse the interest of numerous, otherwise quite placid economists. Here is the opportunity to protect or retrieve the textbook market to which the intellectual capital of much of the profession is still firmly mortgaged.
I have called this attack on the consensus romantic; that is because it ignores the historical forces which make practical steps to restore the market deeply unappetizing. And it makes them especially unappetizing to the very people who urge reestablishing the primacy of the market.
Specifically, the greatest historical force against the market is the modern great corporations. Of these, a couple of thousand now produce around 60 percent of all private product in the United States. This is not exceptional; the concentration is similar in the other industrial countries. These corporations have substantial discretion in setting their prices. They extensively influence the taste of consumers. They similarly organize their supplies of raw materials. With all of this they erode the power of the market. And, given the scale of their investment and the long-term horizons involved, this is what corporations must do. Planning in a partially controlled setting is essential for modern corporate operations. Such planning the classical market does not allow.
But a crusade against corporations does not attract the free-market philosophers. One does not turn the guns on one’s own cavalry. So it must be pretended that the modern corporation does not exist. Or with equal implausibility it must be urged that General Motors, Shell, IBM, Philips, and Nestlé are only a slightly enlarged manifestation of the classical atomism of the market. Mobil is just the corner grocer grown up. This latter effort, regularly undertaken by corporate spokesmen, serves principally to cultivate the suspicion that the large corporation somehow lacks legitimacy. Something must be fishy when corporate spokesmen (or compliant economics professors) are forced to argue that Exxon and the friendly neighborhood news vendor are the same economic institution—that each is governed by the same inexorable competitive forces; each is subordinate to the same impersonally determined market prices; neither has a significant political role in the state.
A few of the devout who seek the revival of the market do call for vigorous action to restore competition—for action to arrest and reverse the trend to industrial concentration. But that again is to turn the guns on one’s own troops. It also requires action by the government—an alliance with the enemy. And even for the passionate, the antitrust laws, which are the traditional instrument, are a serious strain on faith. We have had them now for ninety years; how much longer do we have to wait before they become effective against industrial concentration?
So, in one way or another, those who defend the market must contrive to ignore the modern great corporation and conglomerate—not an easy thing to do. And few of the other forces degrading the classical market are attractive as political antagonists. Farmers in all the industrial countries have replaced their market with state-supported minimum prices. But few conservatives wish to take on the farmers, and farmers are often conservative too. OPEC has set the market aside for oil. But OPEC is beyond reach. Trade unions powerfully influence their own wage claims and set the pattern for wages in general. But unions fight back. So it comes about in the United States that practical action against the forces infringing upon the free market regularly ends up (as predictably in these last weeks) in proposals for reducing or reforming the minimum wage. An attack on the minimum wage, the poor man’s union, is, almost uniquely, safe.
The elimination of other government regulation that interferes with the free expression of market forces also encounters the difficulty that much of it is very much wanted by those who most protest their devotion to the market. The crusade against unnecessary, crippling, costly, and otherwise repressive government regulation goes hand in hand with a desperate effort by the trucking companies to preserve licensing and otherwise to restrict competition in interstate transport. It goes along with a parallel effort by the steel companies to have target prices and to regulate steel imports; and with an effort by the textile companies to keep quotas on cloth imports; and with a demand by the auto industry to ease the competition from Japanese cars; and with a keen wish by all who fly that there be nothing casual about government standards of maintenance for the DC-10. Even in Southern California, the home turf of the New Right and Ronald Reagan, there is no urgent demand for more air pollution. Thus it emerges that unnecessary regulation is what those urging regulation do not happen to need.
The conflict with reality in which those opposing regulation find themselves in a highly organized, highly technological, interdependent society could not be better illustrated than in the case of nuclear power. Just as the advocates of nuclear freedom were gearing themselves up a year and a half ago for a major campaign against government regulation came the accident at Three Mile Island. And just as they recovered their equilibrium came the recent trouble at Indian Point, New York. Ideology is a wonderfully flexible thing; it gives its exponents a wide range of choice. Circumstance, in contrast, is very confining. And it is circumstance that largely governs. This the Reagan years will admirably reveal.
The market, none should doubt, continues to render highly useful service. In economics there are no absolutes. But the only possible policy toward the market, either for conservatives or liberals, right or left, is one of openminded pragmatism. Where it works, the market should be allowed to work. Where it doesn’t, regulation has to be accepted.
I come now to the attack on the economic and social consensus which I called real. It holds that expenditure on public welfare services has involved no careful judgment on need or cost; more has been believed to be better. And that the quality of public administration has been seriously deficient. And finally and most importantly it holds that the macroeconomic management of the consensus no longer works. On all three points the attack seems to me justified; on all three the economic and social consensus is vulnerable.
On public welfare and social expenditure—for housing, health care, various forms of direct welfare support, education, and public services in general—active exponents of the consensus have indeed taken the position that the more the better. The basic test has been what conservatives could be made to accept.
For so long as whatever was done by way of social insurance, welfare payments, health care, housing, was elementary or limited, this was a workable test. But it was workable only under conditions of general insufficiency. Thereafter an objective consideration of opportunity cost was needed. The effect of public outlays on such a direct and widely used levy as the property tax needed especially to be considered. It cannot be thought reactionary that such tests be applied. On the contrary, the older working assumption that more is always better was certain at some point to become intellectually and politically discrediting. I do not suggest, however fashionable it might be at the moment, that our public-service and social-welfare expenditures are too high, and certainly not for those who use or need them most. Comparing generally the quality and extent of the public services with the extent and variety of private consumption, one can be certain that the balance wonderfully favors the later. I argue only for better tests of sufficiency—tests that, at a minimum, contribute to a better defense of social expenditures than we have now.
The second vulnerable point of the economic and social consensus concerns the quality of public management. When they are judged by the same standards, public bureaucracy is not obviously inferior either in moral tone or even in efficiency to private bureaucracy. Incompetence and failure in the leadership of private corporations are commonplace. So is dishonesty. Chrysler has for many years had a reputation in automobile circles for cloning inadequacy. This is now conceded; its advertising speaks of the “new” Chrysler Corporation. No public agency ever descended to a deeper level of incompetence than Penn Central in its final years. In these last months NBC, one of the guardians of our public virtue, has been contending with the imaginative larceny of its own unit managers.
Many years ago I divided my efforts between Time Inc. and the federal government. One could not doubt that it took more people earning more money to do less work in New York than in Washington. One had a blessed feeling of relaxation on returning to private enterprise. Expense-account writing at Time was a small creative art, so discussed. Everyone dealt righteously with the US Treasury. When an important and articulate man in the State Department wore out or was too obviously dissolving in alcohol, he was made ambassador to a minor country or the consul-general in Naples. At Time, if similarly important, he was promoted to corporate vice president and put in charge of looking into new publishing opportunities.
But none of this excuses inferior performance by the public agency. It is under far more rigorous scrutiny by both those whom it serves and those who pay for it. And more attention is paid to training for private management than for public. Business schools train private administrators by the thousands. No comparable effort goes into training in the theory and practice of public administration. Performance in public office, as in sex, is still believed to be extensively a matter of basic instinct.
The solution is without novelty. Defenders of the consensus must be far more concerned with the quality of public management and address ever more seriously the development of a force of public managers of the highest level of intelligence and proficiency. They must be men and women who believe in public service and public enterprise, who take pride in seeing performance that improves on private capitalism, and who take a substantial part of their reward in their own sense of accomplishment.
The important, indeed decisive, failure of the consensus has been in the macroeconomic management of the economy—its failure to deal effectively with inflation and unemployment. This was a major part of its promise. No one can doubt that an attack here is justified—that this is a point of conspicuous vulnerability. There is verification in the fact that in those industrial countries which have succeeded in combining high employment with stable prices, West Germany and Austria being the notable examples, the economic and social consensus has remained invulnerable.
In the two decades following World War II, the primary need of macroeconomic management was to counter deflation and unemployment. In the United States and elsewhere this was done by increasing expenditures and re-expenditures from borrowed funds through low interest rates and easy lending conditions—monetary policy. And it was accomplished by increased public services and expenditure or by reduced taxes and increased private expenditure—fiscal policy. None of these measures involved any serious political conflict with any important economic interest. Nor do lower interest rates, lower taxes, or higher public expenditures encounter any serious public objection. Since prices were relatively stable—a not surprising thing in the context of the concern for deflation and unemployment—union wage settlements and their effect on prices were not a matter for great anxiety. Everything was pleasant in those years for economists and economic policy. It was something to which economic policy makers became accustomed.
But in those years—roughly from 1948 to 1969—changes were in process that drastically altered both the economic and the political context of macroeconomic policy. Corporate concentration, a singular and indubitable feature of capitalist development, however sophisticated the denial, continued. So did the power of corporations to hold and increase prices—to escape the discipline of the market. Trade unions were still of only slight power in the United States at the beginning of World War II. In the other industrial countries they had been weakened by depression or suppressed by fascism. Now, after the war, they asserted their claims everywhere with increasing confidence and effect and, as earlier noted, set the pattern for all wages. Corporations, in turn, after ritualistic objection, passed the cost of wage settlements on to the public. Farm prices in the industrial countries were also now supported by governments. And with OPEC, third world countries entered the game.
The game, in effect, was to set aside the market and win the power to raise prices and incomes. When used, this power became the new and intractable form of inflation. Prices could still rise as a consequence of strong demand. But prices now also rose as the result of the strong upward pressure of corporations, trade unions, farmers, oil producers, and other organized power.
This new development was admirably designed to weaken the economic and social consensus and encourage attack. With inflation the costs of government go up and so do taxes. When taxes, property taxes in particular, are relatively stable, they are much less noticed. When they are going up, they are greatly visible and much resented. This resentment is then transmuted into an attack on all public services. And the inability to control inflation conveys a further impression, not unjustified, of government inadequacy or incompetence.
As damaging to the consensus were the measures which were taken to deal with inflation. Monetary policy was the first resort. This requires no legislation, only a pliable central bank. Here Professor Friedman, the omnipresent and, by a wide margin, the most eloquent figure in the great conservative revolt, comes to the foreground again. Control the money supply, have it increase only as the economy expands, and you control everything. There may be some initial discomfort and unemployment; presently all will be well.
Unfortunately central banks have not yet learned to control the money supply with any precision. Nor under modern circumstances, when money can be anything from currency to bank deposits to savings deposits to unused lines of credit, is it at all clear what is to be controlled. Controlling what you don’t know you are controlling is difficult. And running through all monetary action is a disconcerting uncertainty about the relationship between action and effect. In 1979 in the United States there was an intense discussion over whether tighter bank lending and higher interest rates would cause a recession. The most self-confidently learned participants said it would and were wrong. Then in 1980 there was a further tightening, and the experts turned out to be right. Thus the recession that coincided so admirably for the Republicans with the election. There is a strong case against a policy that has a largely random result.
Going on from the uncertainty of the connection between action and effect, monetary policy has other adverse consequences. It discriminates sharply against those industries, housing being the notable case, which rely on borrowed money. Strong corporations (unlike Chrysler) with capital from earnings and the ability to pass costs along in prices are much less affected. Working against inflation through a reduction in investment spending, monetary policy has a highly adverse effect on productivity. And most important, it works against the inflation caused by corporate, union, and other organized power only as it creates enough unemployment to soften union claims and enough idle plant capacity to make it difficult for corporations to raise prices. To get price stability in this way requires very strong monetary action. Even though the recent recession was painful, politically and otherwise, it did not arrest—has not arrested—inflation. This, given the new power of organization, was altogether predictable.
The reliance on monetary policy has thus been deeply damaging to the economic and social consensus. Fiscal action which controls demand by controlling private and public consumption would have been less so. It is more predictable in effect, it does not favor the large firm over the small, and, since its restraining effect is on consumption, it is not directly damaging to productivity. Unfortunately fiscal policy—higher taxes, reduced public expenditure—is, to put it mildly, politically inconvenient. For this reason policy makers in recent times, looking as ever for soft solutions, have been reluctant to use it. Instead we have combined inflation with tax reductions and compensated with ever more severe monetary policy.
But fiscal policy also works against the inflationary pricing of strong corporations and strong unions only as it creates a substantial amount of idle capacity and of unemployment—until a recession becomes the restraining influence on wages and prices. Economic change—corporate concentration, trade union strength, other power to influence income—has thus rendered all of the measures of the old consensus against inflation ineffective except as they induce idle capacity and unemployment. Such has been the fate of the macro-economic management which was one of the three pillars of the consensus.
The arrival of the Reagan administration in the United States will not be very useful to those who would like to move on from the consensus. That is because its design for economic management incorporates all of the old elements of failure in a somewhat exaggerated form. As a result, adherents to the old consensus will be able to accumulate negative capital merely by sitting quietly and awaiting the failures. Specifically, the Reagan administration promises higher defense expenditures, which are certain. And it promises lower taxes, which are almost certain. And it promises to reduce total federal expenditure by reducing the relatively small volume of noncontractual civilian expenditures, i.e., expenditures other than for interest, social security, and the like.
This it cannot do; and the consensus not being vulnerable in respect of these residual expenditures the administration will make itself wonderfully unpopular if it seriously tries. With lower taxes and public spending as high as or higher than before, fiscal policy under President Reagan will, if anything, be more inflationary than in the past. The new administration promises further that the present rather primitive arrangements for restraining wages and prices will be abandoned; indeed, these cannot be tolerated by scholars for whom all forms of government regulation are repugnant—for whom the market, however deteriorated, is still a totem. So there will have to be greater reliance than ever before on monetary policy. As the arch-exponent of monetarism, Professor Milton Friedman has great days ahead.
This will not be his unalloyed good fortune. There are grave disadvantages in being associated with a policy that, however persuasively it is defended, does not work. Professor Friedman has already been forced to dissociate himself from Chile and Israel where he was once celebrated as a prophet. And the Friedman policy in Britain has so far produced only high inflation, deep internal stagnation, the highest unemployment since the Great Depression, and some indication that Professor Friedman would like to detach from Mrs. Thatcher as well. But deep as is my compassion for an old friend, my present concern is for the effect on the adherents to the consensus. Their tendency will be to relax comfortably in the discovery that monetarism means either high unemployment and high rates of inflation or a little less unemployment and yet more inflation. Were it otherwise, were there here a simple formula for solving our troubles, it would have been in general use long before now.
What will be needed by defenders of the consensus is not relaxation but a vigorous effort to bring it abreast of the changes that rendered it vulnerable. This means, as noted, better tests of what is sufficient and affordable in public services and public welfare. It means all possible steps to ensure better public management. But it requires, most of all, acceptance of the logic of modern corporate, union, and other organized power and its effect on price-making and inflation.
A firm resourceful use of fiscal policy is still necessary. When demand presses on resources, there must be increased taxes, and these must be primarily on the affluent. This is the alternative to the excessive—and disastrous—reliance on monetary policy to limit demand or a heartless manipulation of the public services to the poor. I would urge increased use of indirect taxation on objects of upper-income or luxury consumption; it is hard to have tears for those who must pay more for luxury automobiles, furniture, housing, attire, or entertainment. Even those so taxed have some reluctance in pleading hardship. There must also be a general stand against tax concessions to the rich, and this applies to virtually all talk of incentives. Lurking behind the word incentives, we must never forget, is always the wish of someone for more income.
Corporations now have an admirable tendency to invest when they foresee a profit; tax reduction does not turn a prospective loss into a profit. It is the pride of the modern corporate executive that he gives his all to his enterprise; it is insulting to him to suggest that he grades his effort to his after-tax income. And he would be fired were he thought to do so. Taxes on unearned income and inheritance are good for the work ethic; over time they return the rich and their offspring to useful toil. It is one of the oddities of our time that we think the work ethic to be particularly ethical for those in the lower income brackets. A well-considered use of leisure by the affluent is a mark of civilized behavior.
But we must also have direct action to hold wages and salaries to what can be afforded at current prices. And likewise, and as firmly, there must be action, enforced as necessary by law, to restrain industrial prices where market power is great. No market principles are violated when the state moves to fix those prices that, as the product of industrial concentration, are already fixed. And other income that is subject to organized enhancement must similarly be subject to restraint. This is not as great a task as is sometimes imagined. The centralization of market power by corporations, unions, and farm organizations that causes inflation in its modern form greatly reduces the number of firms and organizations that must be controlled. It is not the classical market that is being replaced. That has obviously gone forever and that is the problem.
Thus the task. The consensus must, of course, be defended at its positions of present strength. But here there will be great support from circumstance. The real task is to repair, renew, and redesign it at its points of present failure.
January 22, 1981
Richard Scammon and Ben Wattenberg, The Real Majority (Coward, McCann, 1970). ↩
William Simon, A Time for Truth (Reader’s Digest Press, McGraw-Hill, 1978), pp. 219, 218. ↩
Professor Laffer’s inspired use of purely fortuitous hypotheses, it is only fair to note, has been a source of some discomfort to some of his more scrupulous conservative colleagues. ↩
Professor Friedman’s foreword to William Simon’s A Time for Truth, p. xiii. ↩
Milton and Rose Friedman, Free to Choose (Harcourt Brace Jovanovich, 1979, 1980), p. 7. ↩
Friedman, p. 65. ↩