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John Hardesty

John Hardesty is a practicing criminal defense attorney in California. He was Professor of Economics at San Diego State University, teaching from 1967 to 1980.

July 8th, 2011 10:44 PM

We Can't Go Back

“To boldly go where every man and woman over the age of 34 has gone before.”  That seems to be the rallying cry of the dying liberal intelligentsia.  First, there was Charles Ferguson’s documentary film “Inside Job,” which yearned for the good old forty years of wise economic regulation that followed the Great Depression.  More recently, former Clinton Treasury Secretary Robert Reich has blogged a lament for “The Great Prosperity” of 1947-1977 on this site. All would be well, according to Reich’s blog entitled “The Truth About the American Economy,” if we could restore the government-enforced “basic bargain” of the post-World War II United States in which the economy grew very fast and everyone had a fair slice of the pie.  For those of us who lived it, is he talking about the time of McCarthy, Nixon, LBJ, Vietnam, and Birmingham, Alabama?  To name just a few of the horrors that punctuated Reich’s golden age.  The basic bargain for many of my generation was if you put your life on the line, maybe you can help stop the carnage.  Perhaps for those too young to remember, Reich’s thinking seems to provide support for the budding effort to build a mass movement around the slogan “Rebuild the American Dream.”       

What brings forth the nostalgia of Reich and his fellow travelers is three (long-gone)  decades of major economic growth that was widely distributed along class lines.  Of course, the rich and their corporations continued to get richer, but the share going to the bottom fifth of earners grew (slightly) faster than that of the top fifth or even the top 5 percent.  Government fueled the Great Prosperity by utilizing Keynesian fiscal policy, minimum wage laws, overtime pay, unemployment benefits, and pro-union policies.  The six economic crises that occurred during this so-call golden era are not worth even mentioning.  Looking in vain for words like “capitalism,” “corporation,” “war,” or “military spending” in Reich’s essay, one is forced to conclude there is a lot of truth left out of “The Truth About the American Economy.”

The First Missing Truth

History like entropy flows in one direction.  You can never go back.  The fifties and sixties were relatively prosperous if you were a white male union member working in the manufacturing sector that dominated the economy.  In 1967, for example, the profits of manufacturing corporations were still 3.5 times greater than financial sector profits.  By 1991, the financial sector had taken the lead and never looked back.  Not only do we have a finance-based corporate economy, but real corporate profits per person are now ten times greater than they were in 1967.  Given that money is power (another word Reich forgot to mention), it would take a revolutionary upheaval just to cut back the unproductive and socially unnecessary financial sector to its earlier size and force corporate profits down to the levels of forty or fifty years ago.

The Second Missing Truth

We should not want to go forward to the past unless we really could travel in time and do it over.  This time we would not agree to the “basic bargain,” because we would realize it was a Faustian offer to trade the ability of our species to exist over the long-term on a peaceful and welcoming planet for a mess of consumer and military pottage.  As Richard Heinberg shows so ably in his new book The End of Growth: Adapting to Our New Economic Reality, economists’ assumption of both unlimited natural resource inputs and planetary capacity to absorb the economy’s effluents has proved devastatingly wrong.  While introducing the freeway system and suburbia to the world, doubling our economic output every 15 years, the Great Prosperity burned massive quantities of oil, coal, and natural gas and released vast amounts of CO2 into the atmosphere.  Had we realized the impact on the planet we might have chosen a “no growth” option in 1977, but that too would have required a revolutionary upheaval.  

The years following The Great Prosperity saw continued growth, resulting in a 2007 real GDP almost 150 percent greater than that of 1977.  Despite the latest U.S.-led recession that began at the end of 2007, the International Energy Agency reported that world energy-related carbon emissions in 2010 amounted to 5 percent more than the previous record in 2008. With energy investments locked into coal- and oil-fueled infrastructure, that situation will change little over the next decade, the agency said.  Similarly, eminent climatologist James Hansen points out that the 1997 Kyoto Protocol was so ineffective that global fossil fuel emissions accelerated by 2.5 percent per year, compared to 1.5 percent per year in the preceding two decades.  As Bill McKibben so rightly emphasizes, Hansen has warned that to continue life as we know it on this planet the world must phase out all coal burning over the next two decades and leave the tar sands in the ground. 

The National Security Growth Economy

How this happened to us is a long, sad story.  World War II had been great for the U.S. economy.  While tens of millions died in Europe, Japan, and China, our unemployment rate dropped to one percent in 1944 and the GNP nearly doubled that of six years earlier.  Economic inequality was reduced at a pace never seen before or since: incomes of the lowest fifth increased 41.6 percent between 1941 and 1947 compared to an 18.2 percent increase for the top fifth.  Once the U.S. economy ramped up during the war, policymakers began to plan for the victorious postwar world and worry about the economy sinking back into depression.  The first manifestation of this concern was the Employment Act of 1946, which declared the federal government’s objective of maximum employment, production, and purchasing power and created the President’s Council of Economic Advisors.  This Council would advise the president and prepare the Economic Report of the President transmitted to Congress in January of each year.  The worrywarts were vindicated when, in spite of a burst of pent-up consumer demand, the real (adjusted for inflation) Gross National Product fell in 1945, in 1946, and, again, in 1947, as the country demobilized after the war.

Truman declared in his 1949 Economic Report of the President that it was the federal government’s job to compensate for the “war created-demand and war-created purchasing power [that] has waned.”  John Maynard Keynes had provided in 1936 the theory that explained the necessity of increased federal government spending in a recession without accompanying tax increases (i.e., deficit spending), and the wartime experience of the United States had proved Keynes’ theory worked.  The political problem for the postwar economy was how to obtain assent from conservative Republicans and southern Democrats who were opposed to deficits and what we now call Big Government.

As Richard Parker explains in his masterful biography of John Kenneth Galbraith, the solution was to combine emerging Cold War hysteria on the right with liberal Keynesian support for the high levels of federal spending and the economic growth that would ostensibly end poverty and extreme inequality.  These seemingly contradictory impulses were embodied within liberals like Leon Keyserling, who was Truman’s key man on the Council of Economic Advisors.  Keyserling authored the President’s 1949 Economic Report and also helped Paul Nitze write the infamous NSC-68, a top secret policy document that set the stage for vast expansion of the U.S. war machine under the guise of fighting Soviet and Chinese Communism.  Although far and away the strongest nation in the world, NSC-68 warned that the United States was in “deepest peril” from the Soviets who viewed the mere existence of freedom as a dire threat.  (Sound familiar?)  The new national security consensus would require the federal government to spend massively on a peacetime military—and maintain deficit budgets whenever necessary.  The result would be a perpetually growing economy that rewarded working people with the growing incomes required to finance endlessly larger cars and homes, as well as kitchen appliances and fun electronics without end. Corporate profits would soar and the world would be saved from the Soviet threat.  In the words of Lizabeth Cohen, author of Consumer’s Republic: The Politics of Mass Consumption in Postwar America, “Consumer Keynesianism and military Keynesianism would go hand in hand in the era of the Cold War.”

And that’s how it worked out—sorta

Total “national security” spending in 1929, before the Great Depression got underway, was $1.7 billion (in 1957 dollars); in 1949, prior to the Korean War, the total was $23.6 billion (’57 dollars).  In 1929, 36 percent of federal purchases of goods and services went to military purposes; in 1949 the corresponding number was nearly 75 percent.  Buoyed by military spending, the economy never returned to Great Depression levels.  Military spending has continued to grow, never flagging even in the face of the disappearance of the all-powerful Soviet threat.  In 2010, military spending officially accounted for more than $770 billion, or two out of every three dollars spent by the federal government on goods and services.  While recessions frequently come and go, the overall trend for the past 65 years has been growing GDP, disposable income, and consumer spending.  Inequality remained, poverty persisted, occasional wars had to be fought, but many (white) working families—until quite recently—continued to feel confident that their children would have a higher standard of consumption and their grandchildren higher still and so on indefinitely. 

The Third Missing Truth

It was never going to work out that way because our planet imposes limits to growth.  However, in the 1980s and 1990s before these limits became undeniable—as they are now—the rich increased their share of national income.  Reich says, “Government could have enforced the basic bargain.  But it did the opposite.”  No, because by that time corporations had the power to get whatever they wanted.  Hard times during the Great Depression had forced many working people to become active in labor unions and left-wing parties, as well as taking direct action (strikes, tenant organizing, unemployed councils…) and participating in electoral politics.  The youth revolt of the sixties also countered corporate power.  But by the 1980s working people and youth had become passive, the political right counterrevolution was on the rise, and there was no check to the exercise of corporate power. 

Reich’s wish to have the basic bargain restored neglects the issue of power, who has it and who doesn’t and why.  Governments of all places and eras respond to those who have the power and use it.  The federal government of the last several decades, Democrat or Republican, could not reinstitute the old basic bargain—and no rational person should want it to. 

What happens now?  Buy a Prius?

Both the Tea Party with its small government and Reich with his big government would have us back on the old economic growth path.  While one might expect such thinking from climate change deniers, it is astounding that liberal analysts continue to believe that we can return to the rapid economic growth of 1947-1977.  They appear to believe it is just a matter of having the political will to create “green” jobs and “green” consumption and plenty of renewable sources of energy, all sparked by “green” entrepreneurs.  Not so.  There are simply no high quality energy sources available that can replace fossil fuels, which turned out to be the gift of nature that powered industrial capitalism and was squandered in the blind pursuit of corporate profit.  Before attempting to reconstitute the basic bargain of the fifties and sixties, Reich and the American Dream restoration folks might want to study the unpleasant facts, as summarized, for example, in Heinberg’s essay Searching for a Miracle: “Net Energy” Limits and the Fate of Industrial Society, a joint publication of the International Forum on Globalization and the Post Carbon Institute.

For myself, I refuse to believe that our species is going to wink out while reminiscing about past glories like a bunch of old men.  You don’t bargain with the devil, you cast him out.

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