Chapter 16 Political economy

John Kenneth Gailbraith, Power and the Useful Economist (1973) Chapter 16 Political economy

“Thus political theory has suffered because it has not taken into account certain economic realities. On the other hand, economic theory has suffered because it has not taken into account the political realities of government decision-making.” (Anthony Downs. 1957. An Economic Theory of Political Action in a Democracy) Downs 1957

As Myrdal and Robbins have pointed out in this generation, the individualist-utilitarian creed did, indeed, make the case for free competitive markets and for private property; but it also contained within its presuppositions the case for free elections, on a one-man-one-vote basis; for destroying or controlling monopolies; for social legislation which would set considerations of human welfare off against profit incentives; and, above all, for the progressive income tax. (W.W. Rostow. 1959. The Stages of Economic Growth) Rostow 1959

“I came to see that there are no economic, sociological, or psychological problems, but just problems, and they are all mixed and composite. In research, the only permissible demarcation is between relevant and irrelevant conditions. The problems are regularly also political and, moreover, must be seen in historical perspective.” (Gunnar Myrdal. 1977. Institutional Economics) Myrdal 1977

”If citizens are unequal in economic resources, so are they likely to be unequal in political resources; and political equality will be impossible to achieve. In the extreme case, a minority of rich will possess so much greater political resources than other citizens that they will control the state, dominate the majority of citizens, and empty the democratic process of all content.” “My aim instead is to describe in very general terms some of the dynamics of equality and inequality, and to assess briefly the play of forces pushing in the two opposing directions in our own time, particularly the forces of democracy and capitalism.” Robert A. Dahl, 1996. Equality versus Inequality Dahl 1985

The decisive weakness in neoclassical and neo-Keynesian economics is not the error in the assumptions by which it elides the problem of power. The capacity for erroneous belief is very great, especially where it coincides with convenience. Rather in eliding power--in making economics a nonpolitical subject---neoclassical theory, by the same process, destroys its relation with the real world. Gailbraith 1973

This is what Gailbraith saw economics as becoming. An oversimplified representation of a complex system that offered the benefit of ease of use. It’s downside was that it bore no resemblance to reality and effectively disguised the reality of growing economic power. “Economics is insufficiently normative. Model building has become an end, not a means.”

“In its first half century or so as a subject of instruction and research, economics was subject to censorship by outsiders. Businessmen and their political and ideological acolytes kept watch on departments of economics and reacted promptly to heresy, the latter being anything that seemed to threaten the sanctity of property, profits, a proper tariff policy, a balanced budget, or which involved sympathy for unions, public ownership, public regulation or, in any organized way, for the poor.” Universities have been losing government funding but have seen increases in corporate funding. If research funding goes to economists who espouse their viewpoint, is tenure then denied to dissenting voices? Economic scholarship

“The planning system consists in the United States of, at the most, 2,000 large corporations. In their operation they have power that transcends the market. They rival where they do not borrow from the power of the state.” Is this a bureaucracy in competition with the state for power? Is it to the advantage of corporations or the public in general for government to be weaker (small government)? Link to dahl and power

“The modern corporation has a compelling position in the modern state. What it needs in research and development, technically qualified people, public works, emergency financial support, becomes public policy.” What happens when the corporations no longer need these? “And between public and private bureaucracies between GM and the Department of Transportation, General Dynamics and the Pentagon there is a deeply symbiotic relationship. Each of these organizations can do much for the other. There is even, between them, a large and continuous interchange of executive personnel.” This relates to our discussions of agency autonomy and the Campos and Root concepts of a quality bureaucracy. Public policy

“The men who guide the modern corporation, including the financial, legal, technical, advertising, and other sacerdotal authorities in corporate function, are the most respectable, affluent, and prestigious members of the national community. They are the Establishment. Their interest tends to become the public interest. It is an interest that even some economists find it comfortable and rewarding to avow. That interest, needless to say, is profoundly concerned with power with winning acceptance by others of the collective or corporate purpose.” Gailbraith is identifying two things that corporations need to wrest power from the government, the support of economists and the support of public opinion. They need the first to gain the second. Astroturfing and public opinion

“Power being so comprehensively deployed in a very large part of the total economy, there can no longer, except for reasons of game-playing or more deliberate intellectual evasion, be any separation by economists between economics and politics. When the modern corporation acquires power over markets, power in the community, power over the state, power over belief, it is a political instrument, different in form and degree but not in kind from the state itself. To hold otherwise - to deny the political character of the modern corporation - is not merely to avoid the reality. It is to disguise the reality. The victims of that disguise are those we instruct in error. The beneficiaries are the institutions whose power we so disguise. Let there be no question: Economics, so long as it is thus taught, becomes, however unconsciously, a part of an arrangement by which the citizen or student is kept from seeing how he is, or will be, governed.” Gailbraith’s main point

“I do not plead for partisanship in our economics but for neutrality. But let us be clear as to what is neutral. If the state must be emancipated from economic interest, a neutral economics would not deny the need. This is what economics now does. It tells the young and susceptible and the old and vulnerable that economic life has no content of power and politics because the firm is safely subordinate to the market and to the state and for this reason it is safely at the command of the consumer and citizen. Such an economics is not neutral. It is the influential and invaluable ally of those whose exercise of power depends on an acquiescent public. If the state is the executive committee of the great corporation and the planning system, it is partly because neoclassical economics is its instrument for neutralizing suspicion that this is so. I have spoken of the emancipation of the state from economic interest. For the economist there can be no doubt as to where this task begins. It is with the emancipation of economic belief. “ Freedom from ideology or is this his ideological belief?

Textbook finds usage only by radicals and conservatives, suggests that it can only be viewed through a partisan lens. The book also states that “economics undergirds almost everything in politics.” Is there no way to study political economy that is devoid of partisanship? Political economy

Textbook states “now Keynesian ideas are standard, even among conservative Republicans.” Is this the case? Keynesian ideas are very specific about where economic stimulus should occur; in the lower income ranges, not in the higher income ranges. If we were practicing Keynesian ideas we would move back to a progressive tax code and extend unemployment benefits. Giving money to corporations through relief or for goods and services is NOT Keynesian. Keynesian ideas have not been taught in a while. Keynesian theories are believed to be solely about the government spending money, but that in itself is a non-Keynesian interpretation. Keynes

Discussion on inflation – “The Vietnam War brought an inflation that took on a life of its own and lasted into the 1980s.” If we looked solely at the single variable of inflation we would believe this to be true (and many do). Political economy in context

We need to look at inflation in the context of employment and historical events, or move from a stick figure to an explanation that has some meat on its bones. First, we need to understand how employment and inflation affect each other. Unemployment and inflation move together in opposite directions. If we want lower levels of unemployment, we have to accept higher levels of inflation. Solid monetary policy can help us dial in the right amount of each, but monetary policy is no substitute for sound fiscal policy. A trade off balance that would be seen as providing better balance of these two evils is an inflation rate of 1.5%-2.5% and an unemployment rate around 4,5% to 5.5%.

Line LRAS is the Long Range Aggregate Supply. This is the amount of goods and services that can be produced by a society when land, labor, capital, and energy resources are being used to produce potential GDP. In order to exceed this capacity, higher returns must be provided for workers and capital that may have stood idle, thereby driving up the costs. If the government spends money in a healthy economy with low unemployment and a low rate of inflation, then unemployment will drop below its natural level and inflation will increase, and will continue to increase until unemployment returns to its “natural” level. This is what we saw in the Vietnam War.

As unemployment dropped below the natural level we saw an increase in inflation. Highest rate of inflation during LBJ administration was 4.19%. Nixon abandoned Bretton Woods and instituted wage and price controls (similar to those during WWII) and brought inflation under control. By 1972, inflation was back to a little over 3%.

1973 oil crisis – OPEC oil embargo of the United States from October 1973 to March of 1974. The price of oil never came down, but inflation temporarily decreased as the economy adjusted to new levels of available energy. Oil crisis or failure of the new deal? 1979 oil crisis – with the economy still adjusting and recovering from the first supply shock, a second supply shock had even harsher effects on the economy. The combination of reduced Iranian production and US sanctions against Iran sent the price of oil through the roof.

In the early 1980s we found increased production by the Saudis, by Iraq to help pay for their war with Iran and by non-OPEC countries like the Soviet Union, the Netherlands, and Mexico. This and decreased consumption brought the economic crisis very near to an end. Oil crisis or failure of the new deal? How might we test whether the inflation of this period had to do with oil production and the cost of energy, and not just a delayed reaction to government spending in Vietnam that lasted nearly two decades?

The United Kingdom did not get involved in the Vietnam War but would have been subject to the same world oil prices as the United States. If stagflation were the result of the Vietnam War, we should see no inflation in the United Kingdom. If it were failures of the New Deal and not oil price shocks, we should see some divergence between US and UK rates of inflation. Comparativist approach Inflation from the oil crisis brought in Thatcher and Reagan who remade government in the Conservative image. This underscores the importance of framing.

inflation and unemployment This graph shows a period between 1952 and 1966 which is about where we want to be on these indicators.

The United States has been the preferred currency for oil. With the Fed printing money to avoid deflation that is changing. US dollars were/are in demand not to purchase US goods and services, but foreign oil. These “petrodollars” do come back to the United States, but in the form of capital investments, contributing to speculation crises, rather than as purchases that would contribute to GDP. Balance of payment problems

Stagnant living standards since 1973

Was it tax cuts or a 75% drop in oil prices that stimulated the economy? Tax cuts

10 years from now will your taxes go up to pay for a billionaire’s tax cut today? Trade deficits: Exports have remained constant at about 10% - 12% of GDP. The change has been in Americans buying things produced in other countries, often by American companies. Budget cuts

Clinton Administration Earned Income Tax credits and welfare reform increased employment by single mothers by 20%. Textbook sees surpluses as Clinton going along with Republicans on some vague plan for balancing the budget, but like the Republicans, can’t point to anything specific except the old theory that tax breaks to the wealthy will generate more tax revenues. Budget balancing

bubbles Nearly nonexistent from 1932 to 1980. The result of investors having more money than they can invest profitably. Cash on hand drives up prices in individual market far beyond the value of the asset with the goal of selling it to someone else before the market crashes. Investors with less knowledge end up losing their shirts while investors with “more perfect” knowledge take their money and run.

An entitlement is an established right or some guarantee of benefits. Freedom of religion or speech are entitlements guaranteed by the Constitution. The textbook uses the term entitlement in a pejorative nature. In the textbook’s context, it describes entitlements as government giveaways. Entitlement as more commonly used refers to benefits that are realized when an individual meets some form of minimum requirement. Social Security and Medicare require some minimum requirement of paying into the system. For most of us we will pay into the system every paycheck from the time we start working to the day we retire (if we are able to retire). Does it seem intellectually honest to liken a system in which workers pay into their whole lives with farm subsidies? entitlements

Boom and bust cycles These are inherent in laissez-faire economies. The greater the income disparity, the more frequent, severe, and long-lasting the bust. This is something that can be minimized, it requires sound macroeconomic policy.

There is much more to this issue than doctors and hospitals. Medicare and Medicaid actually have cost controls for services provided by doctors and hospitals Hospitals and doctors are less of a problem than insurance companies and pharmaceutical companies. Insurance industry – in theory they stand between the patient and the provider to negotiate costs. Savings are not necessarily passed on to patients. Insurance companies profit from denying coverage to those who have paid for it but now find themselves ill. Pharmaceutical companies – Other countries, whose single-payer systems negotiate for drug prices will pay as little as 5% of the American price for drugs developed by US taxpayer funding. Medicaid limits price increases to the rate of inflation. There are no cost controls for medications through Medicare. Medicare and Medicaid

“Not even conservatives could say no to a federal plan to help oldsters pay for prescription drugs.” Conservatives pulled out all the stops to get Medicare Part D passed. Most Democrats voted against it as it was little more than a give away to the insurance and drug companies at taxpayers expense. In the House, only 9 Democrats voted for the bill and 195 were opposed. In the Senate, 11 Democrats supported the bill while 35 voted against it. “Congress trembles at the voting power of the retired.” Whose position was improved under Medicare Part D, seniors, insurance companies, or the drug companies. The real power in health care

Pharmaceutical company contributions to Congress

Retired people contributions to Congress

Lobbying expenditures 1998-2011

“Scary circumstances turn conservatives into liberals.” Conservatives have been the ones advocating policies that redistribute income upwards. It would be more accurate to say about the bail out that “Scary circumstances turn liberals into conservatives.” “Bureaucracy is inherently inefficient.” Yet, bureaucracy is unavoidable. It is a manmade institution. If it is inefficient it is likely because it lacks the resources needed or lacks clear goals. Campos and Root would argue that a bureaucracy is only as good as its government’s commitment to its effectiveness. How big government?

A choice between big and small government is not as relevant as the question between good and bad government. A small government that is ineffective in providing positive political goods due to a lack of resources (most third world countries) may well be worse than a big government that tolerates a level of bureaucratic waste. What is the case in the US? Is the government too short on resources to carry out the enforcement of legislation? Or is it just burning through taxpayer resources because it can? How big government?

Chapter 16 Political economy