There comes a time in the affairs of men and equally, I would judge, of women when proclaimed hope must give way to reality. Now, Im suggesting, is such a time.
In the years since the collapse of communism there has been a marked euphoria about the capitalist system, but the modern western economy, commonly called capitalism, is not working very well either. The time has come when, however reluctantly, we must also see a major flaw in that system, notably in the English-speaking countries. I refer particularly to the low level of economic performance, to the persistence of what is called "recession". From this comes much personal distress and a good deal of political tension and unrest.
It is now two full years since the western economies entered what has been called recession. The term is significant. It implies a retreat from normal prosperity and well being. Clearly evident in the usage is the suggestion of a retreat from normal prosperity. The norm is high employment, steady economic expansion, and any departure from it is held to be by nature temporary and self-corrective. Accordingly, economic prediction, as released daily through the press and television, assumes an automatic recovery.
The question is only when, and how rapidly, that recovery will come. The economy has a life of its own. In the daily metaphor, it is struggling to recover, or perhaps wrestling with advanced factors it is about to overcome. A few days ago I encountered what was called the "chamberpot theory" of recession, a steep downside to the flat bottom, and a steep climb on the other side.
I had thought to collect metaphors of recession, but decided it would be too discouraging. I do note that in the last two years politically motivated prediction has been endemic. From the White House in Washington there have been weekly, and sometimes daily statements that recovery is in sight or, more often, well under way. I refrain from remarking whether such predictions have come as reliably from Ottawa. So commonplace have these predictions become that no mentally viable citizen can any longer take them seriously. Perhaps they could be damaging.
In the early 1930s, the years of the Great Depression, it came to be noticed that after a favourable prediction from Washington the stock market took a turn for the worse. If things were not worse, President Hoover would not be saying they were better. We could be reaching this stage at the present time.
In support of prediction is a strong undercurrent of theology. In the United States it is held that God is a good, if somewhat too liberal Republican. Again I refrain from any such political identification here in Canada. But I repeat: God will not let down his side or the divinely ordained market system. One need only have faith.
All of this excludes any effective affirmative action by Government, with one exception, monetary policy. (I will have a word on monetary policy later.)
The way is also open to a possibility that looms large in economic history. It is that in the United States, Canada and Britain, we could be entering into a period of more or less enduring unemployment and otherwise poor economic performance, an underemployment equilibrium.
It is undeniably part of our experience that we can indeed have such an equilibrium. So we did sixty years ago after the great stock market boom of the latter 1920s. The collapse of that boom, the effect on spending and investment, the effect on a fragile banking system in the U.S.(the Canadian situation was much better), and a concurrent and exaggerated agricultural depression (especially in Canada), brought in an experience of depressed economic performance that lasted a full ten years. It ended only with massive government intervention, responding, alas, not to social hardship, but to the expensive and expansive demands of war.
Now, as sixty years ago, weve had another speculative episode, more comprehensive than that of the 1920s. It has left us with a deeply flawed economic performance, made worse in the United States by the specific policies of the 1980s, those collectively called Reaganomics a term that usefully distinguishes this, from what more respectfully might be called, economics. The mergers and acquisitions mania of the 1980s left corporations with a heavy burden of debt. To service this debt, plant investment as well as important research and development expenditures have been curtailed. Working force and corporate staff have been cut. Some of this personnel reduction is the result of the bureaucratic excesses of the past and is not wholly to be deplored. People so discarded, in any case, are no longer fired or sacked. They are done away with in the interests of greater efficiency and it is said that they are merely shed. But it also cannot be doubted that this process, whatever the justification, has a deeply depressive effect on consumer attitudes and confidence for those who are retained, and for those who are shed as for those who are already simply unemployed.
There has been another, deeper tendency of these years. The basis of economic motivation, it has long been agreed, is profit maximization. This, those of all political faiths, accept. All economics textbooks would have to be rewritten if it were not true. But profit maximization in our time has taken a special turn. Extensively and quite admittedly it is not any longer for the owners of capital in common terms the stockholders, owners or investors of the modern corporate enterprise. These people are powerless and in large measure, unknown to the managers of modern enterprise. Profit maximization is now sought extensively by modern corporate management for itself. This is wholly plausible. Management has the requisite power. Can it be imagined that it will always be motivated in a kindly philanthropic way for shareholders, distant and, as 1 have noted, unknown? Alas, there is no certainty that those primarily impelled by self-interest and the protection of their corporate power will best serve economic performance. This is not the purpose of the leveraged buyout or the taking of a company private. Such tactics reflect the managers own interest.
Henceforth, when we speak of profit maximization in the modern market system, we must ask, who is it for and with what economic effect?
There is more to our past and present situation. We are also in the aftermath of the great real-property boom, a point that need hardly be emphasized here in Canada. This, and its collapse, have had a profoundly adverse effect on banks and bank-lending in the United States and here also. And in the U.S. we have had the celebrated collapse of the great savings and loan institutions, the S & Ls, with similar effect. We have now the certainty of depressed values for commercial real estate for years to come. Saloman Brothers of Wall Street recently estimated that in the United States it will be an average of twelve years before commercial real estate, now vacant, will be absorbed.
Alas, you must not trust averages. They estimated that it would be twenty-six years in Boston, forty-six years in New York, and fifty-six years down in San Antonio, Texas, the leader, so to speak, in this provision for the future. The statistics, I judge, would not be wholly encouraging in Toronto and Montreal. There are, to be sure, distinctions to be drawn. The great mergers-and-acquisitions insanity built nothing and contributed nothing to the permanent capital stock. Let it be said for the Reichmanns, and even for the unlamented Donald Trump, that if you can survive visually their sense of design, these entrepreneurs did leave behind them their monuments. Some day in London, tourists will journey down the Thames to view Canary Wharf. The adverse and enduring economic effect of these excesses is, however, not in doubt.
There is even more. The large department store chains, which also owe something to Canadian initiative, and the sad situation of our deregulated and extensively bankrupt airlines are part of the grim picture and prospect.
Finally, there has been in our country the well-celebrated transfer of income from the poor and those of middle income to the rich. The justice of this transfer has been much discussed, and much of the discussion has been adverse. The United States Treasury has recently tried to put a better face on the matter, initiating a discussion that may well have made it look even worse. My friend and colleague Paul Goodman of the Massachusetts Institute of Technology has reliably concluded that the richest one per cent of American families captured seventy per cent of the growth in family income in the years 1977 to1988.
One per cent, as I say, captured seventy per cent of the growth or increase. The justifying economics was that the rich needed the incentive of gain and the poor needed the spur of their own poverty. Theres another version of that which goes back to my own youth in Elgin County, Ontario, which is perhaps more pertinent, more aggressive the doctrine that if you feed the horse enough oats, something will pass through to the road for the sparrows.
Insufficiently mentioned is the larger economic effect of this gross disparity in income distribution. People of middle income and below can be counted on to spend what they receive. Their contribution to what economists call aggregate demand is assured. There is no similar assurance as to those with greatly more income. Reasonable equity in income distribution is, most of us would agree, socially good. It is also a most important point economically functional, something that keeps security of spending in the economy.
The clear need now is to take economic life seriously. Let us accept that its norm, based on all recent experience, is not high employment and is not socially calming economic growth. All recent experience shows that we can now have continuing unemployment and economic stasis, stagnation. The question then is not whether we will have recovery but what we must do to ensure recovery.
The first need is that we cease to rely on the presumed efficacy of what is called monetary action. Monetary action has a powerful appeal, involving as it does no legislation, no taxes, no increase in government bureaucracy or activity. It also invokes the magic that, in all public attitudes, is associated with money. It is a magic that economists do much to cultivate. Raving penetrated its mysteries, we stand apart, and above lesser scholars and citizens. This adds greatly to our esteem and to our self-esteem. It is also nonsense. Or, more precisely, an intensely cultivated mysticism.
Monetary policy in relation to economic performance has only one dimension, that is, lower interest rates and easier lending terms by banks and other institutions. There is no assurance that when interest rates are so reduced more money will be borrowed, invested or spent. Being hard pressed, lenders banks in particular may still not lend. Borrowers, similarly pressed or frightened, may not borrow. Business firms contemplating dismal earning prospects, or struggling with a past load of debt, may not borrow to invest. The lower rates will also curb the expenditures of the small lenders, small renters who depend on those earnings, a point that is little noticed by students of monetary policy, but is noticed by those who suffer. Thus the magic of monetary policy dissolves in reality. Theres no certainty that it will break the underemployment equilibrium.
For two years now it has not done so. Nothing more wonderfully affirms the vulnerability ofthe financial and economic and journalistic mind than the excited comments when all talked of interest-rate reduction by the federal reserve or the Bank of Canada, or other central bank action.
On one thing we may now agree. So far there has been no affirmative result. When we hear about monetary policy, when we hear words from the chairman of the federal reserve, or the Bank of Canada, is it not time to cultivate some deeply thoughtful doubt? There is experience to affirm a low expectation. In the Great Depression interest rates fell to nominal levels. American banks, as the years passed, accumulated reserves far in excess of legal requirements. The level of such excess reserves became a statistic of common comment. And the depression continued. The underemployment equilibrium remained unbroken.
As a way of breaking the equilibrium there must be equal doubt about the next most discussed action, that is tax reduction, the usual reference being to middle-class tax reduction. We live in a time of major middle-class concern. With others across the border, I yearn for a more frequent reference to the underclass, to those who live in New York, Chicago, notably in Los Angeles, and elsewhere in our big cities, at a level that would invite adverse comment were it in the third world. While assuring all of my middle-class sympathies, I must urge that tax reduction is a strikingly inefficient way of breaking the equilibrium. From each dollar of revenue so foregone, and therefore available to the middle class, only a fraction would be spent. The rest, by some estimates as much as a third, would be, in the ancient phrase, socked away. Those who urge tax reduction as an economic stimulus are appealing to an audience for applause, not to serious economics.
Im reminded of a pleasant moment four or five months ago when I was in Washington making this case before the house budget commit-tee of the Congress. A distinguished statesman from North Carolina (Im being hard on the South tonight, but this is... inevitable) interrupted my testimony to say, "You have spoken of the febrile rush for middle-class income tax reduction" febrile meaning feverish "and Ive had my staff look that word up, and I dont think it means what you think it means."
It was one of those occasions in life at which you rejoice for years. I said, "Well, congressman, I am the adviser on English usage to the American Heritage Dictionary and if that dictionary is wrong, I will have it corrected." There was a penalty from that particular exercise. It was the only headline I got in the Washington Post.
Theres only one way to break this equilibrium, that is by state intervention to create employment. This was the lesson of the Great Depression, and it should be equally evident today in Ottawa and Washington. It was such civilian action later the war generated the man that brought the stagnation and unemployment of the Great Depression to an end. We should now, in the United States, Canada, and elsewhere in the industrial world, take immediate and ample steps to put people back in employment. The need for roads, reformed railroads, airports, educational plants, recreational facilities, hospitals and housing notably in our case, housing. These needs are very great. This is agreed by the mentally accessible everywhere. The time has come to get on with it.(And meanwhile there should be no cutback in assistance to those who are without income.)
In that area, in these past years in the U.S., weve had the cruellest public action of modern times and, as unrest in our great cities reveals, also the most damaging and dangerous action.
I have referred directly to job creation. Across the border, we must also take steps with regards to jobs lost. Our states and cities are now cutting back unemployment relief and especially in education and social services. So extreme is the financial pressure that California has recently been reduced to paying its bills with latter-day assignats. These cutbacks, and especially the discussion, pleas for mercy and sanity that accompany them, add to the unemployment and help to sustain the continuing unemployment equilibrium. It is urgent to arrest this disastrous trend of affairs. In the United States that would mean federal aid in generous amount to the lower levels of government. The problem has a similar urgency here in Canada.
I allowed myself some months ago to speak well of the decision of the government of this province to protect its social and other services during the recession by some resort to borrowing.
In these matters the clamorous voices of conventional finance are not the inevitable source of economic sense. If, as they urge, the recession is temporary, all the more reason for having a bridge over its hard-ships.
The course of action I have just urged will increase public deficits. That is its nature. Its justification is that the employment and end product so created add not alone to public tranquillity but also to public wealth. No other remedial action offers similar certainty of effect. A good proportion of the deficit in the United States could be covered by a shift to civilian from military expenditure. Military spending, especially for exotic weaponry, is a notably inefficient way of creating employment.
There is also a strong case on social as well as economic grounds for transfer of income through taxation from the rich to the unemployed and the poor. As I noted earlier, this is fiscally functional. The poor have a high marginal propensity to spend and consume. (I always put in a few of those old economic terms so youll know that I have something that you do not have.)
The poor are reliable participants in the economy.
And with recovery as and when it comes there should be a firm movement back to a balanced budget. Throughout the 1980s, throughout that reign of economic error, no error was more egregious, more irresponsible than the running of large budget deficits as stimulants to the economy when stimulation was not especially needed. There is no country that should allow this kind of mismanagement again.
More generally, we must see that there are no confining rules governing public and private action by which policy is determined. In dissent from Adam Smith the English-speaking countries have attempted to draw a sharp line between the roles of government and of the market. That defining line has long since disappeared, if indeed it ever existed. Germany and Japan, each in a different tradition, have shown in recent years how damaging adherence to such a doctrine can be.
This must be the age of intelligent pragmatism. We must be governed, not by theory but, painful though it is, by thought.
I come to the end of this dissertation. If I have drawn heavily on American experience, I offer my regrets. But only in a moderate way. The long and economically porous border is there. So is the long and close association and the even closer association that is now so much under discussion.
Some of our misfortune in the United States, we have learned in these last years, is made in Canada. Far more Canadian misfortune is made south in the great republic. And in any case you would not forgive me, a native Canadian, were I to return to talk only about Canada. You would rightly ask what in hell Id been doing all these years. Thank you very much.
The procedure at Couchiching is to put questions, not make speeches from the floor. The rule may reflect the conferences original involvement with adult education. Many participants attempt to evade it, only to be sternly quashed by a moderator.
A Calgary participant, suggesting that the private wealth of the U.S. was about equal to the four trillion dollar national debt and that a 25 per cent capital levy would wipe it out, received the testy answer, "Why are you asking me a question when you know the answer?"
The Calgarian went on to attempt a speech and was called to order.
The next participant had even more difficulty in putting forth his question. When he suggested that targeting unemployment was an example of an administered rather than a market solution, as in the Soviet Union, he was interrupted loudly by Professor Galbraith "Oh, no, no, no. Theres all the difference in the world between the massive controls exercised by the Soviet Union and the kind of thing youre talking about. This is a comparison that will not work!" When the questioner doggedly returned to the fray, the professor said, "I congratulate you. I have the feeling that to some extent you have made up your mind."
The man laughed. "Im deeply troubled," he said. "Youll have to admit "
"Ill admit anything that will make you happy!"
A question about free trade elicited some remarks on how small the effects of such agreements normally are. Instead of looking forward to what might come of free trade, one should look back at previous measures of the kind, when it would be seen that nothing drastic had resulted. It seemed likely that Mexico would be the greatest beneficiary of the new agreement. "But we should recognize that Mexico is in much more need of gain than the United States or Canada. The larger consequence will be a modest movement of lower paid factory work from the southern United States and from Canada to Mexico. I think that will happen. But lower-wage employment here will not be very much affected because so much of that is in the service industry, which cannot be moved. And there will be a compensating increase of employment in the United States and Canada in much more technical, much more complex capital goods equipment which the Mexicans will need. So while there will be readjustment I dont see any grave net loss or net gain, except, as I said before, I think there will be some overall advantage for the Mexicans. That is a concession I think we should give to our neighbour. But I go back to my main point. Always remember that we have had these discussions of international trade going on now for years and years. And how little difference, in retrospect, they have made! Weve always been facing great possibilities in the future, and very little change in the past.
"Now that is the sort of answer you get if you ask a question!"
Moderator: "Maybe were on a roll. Next question!"
"My name is Brian Macdonagh. What alternative do you see in the future to the market capitalist system?"
Galbraith: "Oh, I dont see any great change. Ive never felt that there were plausible alternatives. The only economic system that is successful is a pragmatic combination of market effects and public intervention, determined not by theology, not by theory, but by the practical exigencies of the case."
"Nobody, for example, would want pure capitalism any more. And weve already seen the breakdown of comprehensive socialism. What remains? A mixed system. What is the nature of the mixed system? It is one that decides in the particular case. Im very much for government intervention in social insurance, social security. And nobody in this room is against that. At least I dont think so. It would be a position of extreme eccentricity. But I would not be in favour of government intervention in retail enterprise. Thats something that works extraordinarily
well in and of itself with the assistance of Mr. Campeau, properly restrained. So I go back to what I said before. These are matters that have to be decided in the individual case, by thought and not by overall theory. Overall theory is an escape from thought."
Jim Harris of Toronto raised the issue of overpopulation. Galbraith thought it a good question. "I would like to see a much stronger population policy. a much stronger commitment to population control. I spent a lot of my time on economic development in the third world and started the first courses on the subject at Harvard, maybe the first in the United States. I do not foresee any great change in the population explosion until you escape from the population compulsions of poverty. In the poor country, family is a support for people of middle age and beyond; and therefore its very important to have a family as a form of social security. Hence the population pressure is related to the lowest levels of income. It diminishes with increasing well-being. Stuck with that fact, I see no great hope of success in family planning unless there is economic development."
But Harris wanted to raise a further point. The human economy was secondary to the earth economy. Growth in G.N.P. was assumed to be good, even if it destroyed the environment. If the earth economy is bankrupt the human one would quickly follow. Galbraith agreed. He did not think we should wait on disaster. The notion that G.N.P. growth was good in itself was something he had argued against 30 years ago in The Affluent Society. On the other hand the dynamic of G.N.P. growth was very powerful. Though that was true, he did not think we should hesitate to minimize pollution. In parenthesis he complained of the awful appearance of our suburban communication system. "Our roadsides are a disgrace."
A retired businessman rose to explain that his daughters had made him read Galbraiths books, and that as a result, he had completely changed his ideas to the point where, "Sir, I look upon you as some kind of a mentor;" to which the professor replied, "The answer to your question is, youre perfectly right!"
The businessman persisted, despite the roar of laughter that greeted Galbraiths interjection: "If you can do a selling job on me, how come you cant move the people in power in Washington?"
"The answer is to turn them out of office, and Im certainly going to do what I can to that end."
The time had come for Dave Shea to rise, a familiar Couchiching figure, in shirt-sleeves and stout suspenders to hold up his pants and arguments. He said he was mechanically minded, that the economy was a machine, and that the parts fell into place while the professor talked. True to his word, Shea later set up a machine in the lobby; it resembled the wheels within wheels described by the prophet Ezekiel. His question was about interest rates in Britain in the 1940s. His figures sounded low to Galbraith, who repeated his assertion that monetary policy was an ineffective instrument. He offered a metaphor illuminating the fact that high interest rates had some effect, while low ones had none: you could pull on a string, but you couldnt push on it.
A question from a university student about the possibility of commercial interests taking over education evoked indignant denial. "Oh, no, no, no, were not going to have that! Let us keep the basic civilized idea of a good public school system and recognize that it costs money. Let us not imagine that there is any solution in turning education over to private enterprise. There isnt!"
Steve Probyn, program vice-president, thanked the professor on behalf of Couchiching for one of the most memorable evenings he had ever witnessed. He told Galbraith that he was a practising Canadian that he had been practising common sense and compassion for many years in a land which we felt needed quite a lot of it. The keynote speech had introduced program architecture designed to marry the competitiveness industry (as it had become) with the Canadian values of fairness and compassion.