Plenty of Nothing

The Downsizing of the American Dream and the Case for Structural Keynesianism

Thomas I. Palley

• Publisher: Princeton University Press
• Year: 2021
• ISBN:
  9780691227603
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Business papers today are in a triumphant mood, buoyed by a conviction that the economic stagnation of the last quarter century has vanished in favor of a new age of robust growth. But if we are doing so well, many ask, why does it feel like we are working harder for less? Why, despite economic growth, does inequality between rich and poor keep rising? In this wide-ranging and provocative book, Thomas Palley pulls together many threads of "new liberal" economic thought to offer detailed answers to these pressing questions. And he proposes a new economic model--structural Keynesianism--that he argues would return America to sustainable, fairly shared prosperity. The key, he writes, is to abandon the myth of a natural competitive economy, which has justified unleashing capital and attacking unions. This has resulted in an economy dominated by business.
Palley's book, which began as a cover article for The Atlantic Monthly in 1996, challenges the economic orthodoxies of the political right and center, popularized by such economists as Milton Friedman and Paul Krugman. He marshals a powerful array of economic facts and arguments to show that the interests of working families have gradually been sacrificed to those of corporations. Expanding on traditional Keynesian economics, he argues that, although capitalism is the most productive system ever devised, it also tends to generate deep economic inequalities and encourage the pursuit of profit at the expense of all else. He challenges fatalists who say we can do nothing about this--that economic insecurity and stagnant wages are the inevitable results of irresistible globalization. Palley argues that capitalism comes in a range of forms and that government can and should shape it from a "mean street" system into a "main street" system through monetary, fiscal, trade, and regulatory policies that promote widespread prosperity. Plenty of Nothing offers a compelling alternative to conventional economic wisdom. The book is clearly and powerfully written and will provoke debate among economists and the general public about the most stubborn problems in the American economy.

CHAPTER 1

Debunking Economic Naturalism

THIS BOOK is about the American economy and the gradual dismantling of mass prosperity that has been taking place over the last twenty-five years. The focus of the book is on “long-term trends” that continue to operate on the economy independently of the temporary ups and downs of the business cycle. Though the economy periodically experiences cyclical booms, underlying the booms of the last twenty-five years has been a persistent downward trend.

This interaction of trend and cycle makes understanding the economy a difficult task. When the economy is up, it is easy to forget about the recent down. Moreover, this proclivity to short-term memory is compounded by the fact that people are optimistic, and all too ready to believe that each economic recovery marks a new beginning. That optimistic psychological disposition then inclines them to believe that their earlier concerns were misplaced, and that there is no longer any need for altering their economic course. In this fashion, Americans have ridden the economic roller coaster that has seen the majority slip behind while the few have prospered.

This proclivity to believe that each new business cycle marks a fresh start is dramatically reflected in our current experience. In April 1997, the U.S. unemployment rate fell to a twenty-three-year low of 4.9%. Following the release of this report, newspapers were filled with stories about how the U.S. economy had successfully reinvented itself.¹ Yet, just fourteen months earlier, Americans had been wrestling with the trauma of rising economic insecurity and the disappearance of the middle class: The New York Times even ran a week-long special (March 1996) titled “The Downsizing of America.” Moreover, even as the unemployment rate was hitting 4.9%, average hourly wages actually fell fractionally. As documented in chapter 4, the purchasing power of average hourly wages has actually fallen during the most recent business cycle and remains far below the peak level of wages reached in 1973.² If this is economic reinvention, something is lacking.

Capitalist economies have always had booms, and they will continue to do so. The current economic boom is therefore not at odds with the claim of an on-going erosion of the American Dream. Indeed, the character of this boom provides some confirmation. In past booms, there would have been significant wage gains at this stage of the business cycle. In the current boom, there has been welcome relief on the employment front, but wage stagnation persists; hence the claim “plenty of nothing.”

The fundamental thesis of this book is that restoring widely shared and growing prosperity will require major changes in the direction of economic policy. Effecting such change will require that people reassess their thinking about the economy, for economic policy is ultimately the reflection (albeit indirect) of popular thinking as expressed through the collective choice process that is politics. In the absence of these changes, the economy may continue to grow, but economic polarization between rich and poor will also continue to expand.

Sixty years ago, the great British economist John Maynard Keynes struggled to change popular understandings of the causes of the Great Depression. The orthodoxy of the day promoted an economic fatalism that opposed attempts to stimulate spending despite the overwhelming presence of unemployment: the orthodox claim was that any government attempt to increase spending would merely displace an equal amount of private spending. For Keynes, the difficulty in persuading people lay “not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”³ A similar argument can be made today regarding an array of issues ranging from the claim that a dose of economic austerity is the prerequisite for restoring economic prosperity, to the claim of a binding inflation constraint that compels us to live with permanently high interest rates and unemployment.

Despite temporary relief, most Americans are apprehensive about the economy, and they have reason to be. For the last twenty years, the wages of the average worker have been falling, economic insecurity has been growing, and the prospects for future prosperity have been receding. This is not a matter of progress at a slower pace: rather, we are going backward. The existing configuration of economic arrangements and policies has produced this outcome, and the belief that the market will suddenly reverse its existing course in an act of goodwill is tantamount to the fatalist thinking that characterized the depression era.

The restoration of the shared and growing prosperity that marked the immediate post-World War II era requires the restoration of an appropriate balance of power within our economic system. The technological and organizational changes of the last thirty years have upset the previously extant balance of power among government, big business, and labor. As a result, there is a need to recalibrate our system so that it again delivers for all.

STRUCTURAL KEYNESIANISM

The notion that we need to recalibrate our economic system gives rise to an economic philosophy that I call “structural Keynesianism.” Like traditional Keynesianism, it shares the fundamental proposition that capitalism is the most powerfully productive social system that has ever been created. Capitalist economies are capable of generating a greater bounty of goods and a higher standard of living than any economic system heretofore, or any economic system we can currently imagine.

Like traditional Keynesianism, structural Keynesianism also shares the core proposition that capitalist economies have a fundamental tendency to generate a deficiency of demand for the goods and services that they are capable of producing. Moreover, this deficiency of demand can occasionally be severe enough to generate economic depressions and mass unemployment. A large class of problems in capitalist economies can therefore be understood by reference to the principle of aggregate demand—that is, by understanding the economic forces determining the total demand for goods and services in an economy. Keynes and his followers understood this principle, and in the period after World War II they applied it in guiding economic policy. The result was an unequaled period of full employment during which the scourge of mass unemployment was replaced by mass prosperity.

This period of success led Keynesian economists to believe that demand management, conducted by government through its control over interest rates (monetary policy) and government spending and taxes (fiscal policy), was sufficient to eliminate permanently the problems of the business cycle and unemployment. Behind this belief lay an implicitly static view of the world, in which the structure of the economy was fixed so that monetary and fiscal policy would always be feasible, effective, and sufficient means of managing demand and ensuring prosperity.

The last twenty years have been marked by the return of higher rates of unemployment and the withering of popular prosperity. This has undermined the sanguine prognosis of traditional Keynesianism. Thus, it has become increasingly difficult to apply expansionary monetary and fiscal policy, and, even when applied, the results have not been as in the earlier period. It is true that expansionary monetary and fiscal policy are still able to reduce unemployment, but the reduction has proven temporary. Moreover, Keynesian demand management policy has been impotent with regard to the problems of widening income inequality and stagnating wages. It has also become increasingly difficult to pursue expansionary policies owing to mounting government debts and the threat of a sell-off in bond markets, which raises interest rates.

Structural Keynesianism builds on the analytic inheritance of traditional Keynesianism. Thus, it recognizes both the unequaled productivity of capitalist economies and the tendency of capitalist economies to generate problems of insufficient demand. However, it supplements the Keynesian argument in two important ways. First, just as there is a proclivity to generate insufficient demand, uncontrolled capitalist economies also have an unyielding tendency to generate exploitation of ordinary people that results in a distribution of income in which a few have vast riches and the many have some or none. This skewing of income distribution in turn feeds back adversely on the level of demand. As a result, income distribution takes on a profound import, because running a system of mass production at full employment requires a robust mass market, which requires a healthy distribution of income to support demand. From a policy standpoint, income distribution is of concern not just for ethical reasons of equity, but also for reasons of economic prosperity.

Second, structural Keynesianism recognizes that capitalism is a dynamic system in which business seeks to promote an economic environment that maximizes profits. This means that business will seek to influence policy by such activities as political lobbying. Even more importantly, business will also innovate with regard to production technologies and methods of business organization, and these innovations will change the economy’s structure. Though the abstract driving forces of capitalist economies remain unchanged, the specific visible economic arrangements and production techniques are constantly changing. This economic dynamic is summarized as follows: “the more things change, the more they remain the same,” while at the same time “one can never step in the same river twice.”⁴

This recognition of the dynamic process governing economic activity has momentous implications for the conduct of economic policy. Traditional Keynesians believed that demand management was sufficient to ensure full employment and popular prosperity, and their early success convinced them of this belief. However, the reality is that the period immediately after World War II was characterized by a configuration of structural factors that was highly conducive to successful demand management. This structure included strong trade unions, controls on international movements of financial capital, limited ability of business to relocate jobs, and strong domestic demand conditions.

Over time, these favorable conditions have gradually been eroded, and replaced by unfavorable conditions that render demand management policies less effective and less feasible. This change did not happen by accident or bad luck: rather, it reflects the systematic workings of the free market. Thus, through a combination of technological innovation, organizational innovation, and political action, business has succeeded in asserting dominance over both government and labor. As a result capitalism’s proclivity to unequal income distribution and demand deficiency is reasserting itself with a refound vengeance.

Such an analysis gives rise to three fundamental propositions of structural Keynesianism.

Proposition I. Keynesian demand management can only solve the systemic problem of deficient demand if an appropriate economic structure is in place.

Proposition II. Keynesian policies of demand management must be supplemented by regulatory policies that ensure an appropriate economic structure. This requires regulation of business (both industrial and financial), regulation of international financial markets, and regulation of labor markets. These regulatory structures must be designed so as to preserve the incentives for productive enterprise that are the source of capitalism’s bounty.

Proposition III. These regulatory policies need to be periodically updated because capitalism is a dynamic process that will persistently seek to evade them. If regulation is successful, it means that it is binding in the sense of restraining business from doing something it would have freely chosen to do in the absence of regulation. This sets up an incentive to innovate (technologically or organizationally) so as to circumvent the regulations.⁵ Over time, this process of innovation will be successful, which means that regulations have to be periodically updated. In effect, successful regulation always sows the seeds of its own destruction.

POLITICS BEFORE ECONOMICS

Structural Keynesianism elevates the significance of structure and policy, and in doing so it forces politics to the forefront of the stage. Structure is inevitably a political matter: the establishment of a structure conducive to widespread prosperity can only be accomplished by individuals acting in concert; achieving prosperity within that structure then becomes the province of individuals acting on their own account.

This is the great paradox of free-market capitalism. Though driven by the pursuit of individual self-interest, all free-market economies require some collectively agreed upon structure. The popular myth is that free markets are free of structure, but this is a fabrication. Even the most radically laissez-faire economy rests on laws and institutions governing and enforcing the rights of property and the obligations of contract: at a minimum, there is always a “policeman,” a “judge,” and a “jailer.” It is also true that such a minimalist structure will never generate the widespread prosperity that is the hallmark of the American dream.

The failure to recognize that widespread prosperity rests on appropriately designed market rules and regulations is the cancer that is killing the American dream. Thus, as the old regulatory structure that promoted the success of Keynesianism has withered, we have failed to update it. Instead, by a combination of default, misunderstanding, and apathy, Americans have gotten locked into a new set of market structures that set worker against worker to the disadvantage of all but big business. This new structural environment generates a cruel paradox: the pursuit of self-interest, which is both individually rational and the source of the bounty of free markets, ends up hurting ordinary workers. Worse still, none can escape: not to pursue one’s self-interest while others do, is to consign oneself to an even worse economic predicament. This is the logic of the infamous “prisoner’s dilemma,” and it is easily illustrated.

The Stock Ownership Dilemma. Many Americans own small amounts of stock. Each individual wants higher profits at the company in which he owns stock, as this will increase the stock price. If these profits come from reduced company wages, that’s all right because the individual does not work there. However, when all adopt this mentality, everyone is worse off. The increased stock value pales by comparison with the decreased value of wages, which represent the dominant source of income for working Americans. The sole beneficiary is the small group of the wealthiest Americans who own most of the stock. Despite this, each of us has a private interest to canvas companies in which we hold stock to seek higher profits through wage reductions—as long as it’s not at our own place of employment.

The Rat Race Dilemma. Most people want to make it to the top, and win the prize of a high salary that goes with being at the top. To get there, they try and distinguish themselves by working harder, which involves putting themselves under increased strain and stress, reducing their community involvement, and shortchanging their families of time and attention. However, when their colleagues see them working harder, they too have an incentive to respond by increasing their effort because they also want to get to the top. Consequently, a rat race develops in which each tries to outwork the other. From the start, only one can be top dog: yet, all have an incentive to participate in a rat race that makes all but one worse off.

The Wal-Mart Dilemma. During the 1980s, the Wal-Mart chain of discount stores spread across rural America. In its wake, it decimated downtown business districts as local retailers and merchants could not compete with Wal-Mart’s buying power, which enabled it to offer lower prices. Local residents, including the local merchants who were being driven out of business, had an incentive to shop at Wal-Mart to get these lower prices. Yet at the end of the day, communities were worse off, with downtowns destroyed and higher paid dignified local business employment replaced by low-paying service work at Wal-Mart.

The Automobile Dilemma. Most people want cars that are safe and have good gas mileage. To get a l...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Figures
• List of Tables
• Preface to the First Edition
• Introduction to the Paperback Edition
• Chapter 1: Debunking Economic Naturalism
• Chapter 2: Making Sense of the Economy and Economics
• Chapter 3: Plenty of Nothing: An Overview
• Chapter 4: The State of the American Dream
• Chapter 5: The Logic of Economic Power, Part I: Diagnosing the Problem
• Chapter 6: The Logic of Economic Power, Part II: Policies for Prosperity
• Chapter 7: The Triumph of Wall Street: Finance and the Federal Reserve
• Chapter 8: From New Deal to Raw Deal: The Attack on Government
• Chapter 9: Free Trade and the Race to the Bottom
• Chapter 10: International Money: Who Governs?
• Chapter 11: Structural Keynesianism and Globalization
• Chapter 12: Recipe for a Depression
• Epilogue: Ending Economic Fatalism
• Notes
• References
• Index