Another Path is Possible

[Editors’ note: The following essay is excerpted from economist ROBERT POLLIN’s vital new book, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity, published in September by Verso.–AC/JSC]

“The world can and has been changed by those for whom the ideal and the real are dynamically contiguous.

— William James

“Too often a vehicle for mystification, economics can best become an instrument for enlightenment if we see it as the means by which we strive to make a workable science out of morality.”

— Robert Heilbroner

Since I am attempting to present only a mere sketch of an alternative program, I will focus on what I consider some of the most basic considerations. The cornerstone of an alternative policy approach in the United States is to return to the basic commitment that emerged out of the Great Depression, the New Deal, and World War II, and was sustained, for the most part, through the 1960s. This is to promote full employment at decent wages. The corollary to a policy of full employment at decent wages is that workers can afford to spending money, which then maintains overall spending in the economy at a high level. This creates the further benefit of businesses wanting to increase their investments to meet the demands of an expanding market.

Since the 1980s, U.S. economic policy has been focused on “inflation targeting”-which means to either completely stamp out inflation or at least to contain it at a negligible level of two percent or less. Eliminating federal deficits was added to inflation-targeting in the 1990s as a first-tier policy concern. A shift back to what we may call “employment targeting” does not mean ignoring either inflation or excessive government deficits, which would be self-defeating. But it does mean that the goal of expanding the supply of jobs at decent pay should receive at least as much, if not more, consideration among policy makers as controlling inflation or the federal deficit. In other words, employment targeting means that when Alan Greenspan and other Federal Reserve officials recognize that U.S. workers are experiencing “a heightened sense of job insecurity,” as Greenspan put it in 1997, this should not be celebrated as a positive development because it inhibits inflationary pressures. It should rather be attacked as problem requiring a solution.

The last years of the Clinton presidency did illustrate how powerful a tool low unemployment can be. With unemployment having fallen below 4.5 percent for three straight years, average real wages finally began to rise and poverty fell. The last time unemployment fell this low in the U.S. was when Lyndon Johnson was President in the second half of the 1960s. The benefits in this period of approaching full employment were even more dramatic. As Arthur Okun, a member of the Council of Economic Advisors under President Johnson wrote about those years:

Prosperity has been the key to the reduction of the number of people below the statistical poverty line from 40 million in 1961 to 25 million in 1968. It has meant jobs for those formerly at the back of the hiring line.It has made economic security a reality to millions of middle-income families.

Of course, both under Clinton in the 1990s and Johnson in the 1960s, there were severe problems with the way low unemployment was attained. Because workers had experienced the “heightened sense of job insecurity” under most of Clinton’s tenure, when wages did finally start to rise significantly in 1997, this was from an extremely low base. Moreover, the injection of increased spending under Clinton that produced low unemployment came from the stock market bubble which, as has now become transparently clear, was unsustainable. In the 1960s, the catalyst driving the economy to full employment was government spending on the Vietnam war-that is, a source of economic stimulus that was also unsustainable and even more undesirable than the 1990s market bubble.

The central challenge for an employment-targeted policy in the U.S. today would therefore be to identify alternative sources of job expansion that do not require waging war or destabilizing the financial system. The Bush-2 plan for huge military spending increases obviously does not qualify any more than the Vietnam War as a desirable source of job expansion. But an alternative plan is staring the Bush administration in the face: to expand substantially federal government support for state and local governments programs. This would enable the state and local governments to reverse the severe spending cuts they experienced in the aftermath of the 2001 recession, and beyond this, to expand their commitments in education, childcare, health, environmental protection, and public infrastructure investments. Increasing spending in these areas would have a double benefit, in that they stimulate overall spending in the economy in the short-run while also promoting higher productivity and general well-being in the long run.

But if an employment-targeted federal spending program could be crafted around expanding such socially desirable projects, that still wouldn’t prevent, on its own, a return to the afflictions that accompanied the expansion of the 1990s, i.e. destabilizing financial practices, along with rising inequality and wage stagnation for most of the decade. The employment-targeted spending program would therefore have to be buttressed by new forms of regulation of both labor and financial markets. How to proceed in these areas?

Labor regulations. One of the most basic elements of a new regime of labor regulations in the U.S. has already been powerfully advanced since the mid-1990s by the so-called “living wage” movement. By the end of 2002, some version of a “living” minimum wage standard has become law in around 90 U.S. municipalities, while similar such measures are being debated elsewhere throughout the country. The guiding principle behind the U.S. living wage movement is very simple: that the minimum wage should be high enough such that workers can support themselves and their families at least at a modestly decent standard. This means a wage which offers workers “the ability to support families, to maintain self-respect, and to have both the means and the leisure to participate in the civic life of the nation,” as the historian Lawrence Glickman describes the concept as it initially emerged during political struggles early in the 20th century. In practical terms, it is impossible to identify a single hourly wage rate to which this notion of a “living wage” corresponds. But municipal governments around the country have passed ordinances setting the minimum within a range of $8 – $11 plus benefits. This contrasts with the current national minimum wage of $5.15.

But workers also deserve the right to organize themselves to achieve more than a decent minimum-that is, to promote gains in wages, benefits, and workplace conditions more broadly, not just for those near the bottom of the pay scale. This will entail strengthening the legal rights of workers to organize and form unions. In his powerful 2001 Presidential Address before the Industrial Relations Research Association, Sheldon Friedman surveyed ways in which workers in the U.S. “who seek to form a union nearly always face a broad array of well-honed and devastingly effective employer tactics designed to suppress their freedom to organize.” Among other evidence, Friedman reports on a 2000 study by Human Rights Watch that documented the exploding rate at which workers in the U.S. face job discrimination, harassment and discharge for attempting to form unions. In the 1959s, only hundreds of workers suffered such reprisals. But by the 1990s, just the number of cases recognized by the National Labor Relations Board had risen to over 20,000 per year. Clearly, advancing an egalitarian policy agenda will not be sustainable unless employers and government regulators respect workers’ fundamental rights to organize themselves as they wish. Indeed, the very notion of an egalitarian policy project absent this basic right is a contradiction in terms.

Defending workers’ rights to organize can also produce broader benefits, since workers receiving decent wages through union contracts will also be able to stimulate overall demand in the economy through their own enhanced ability to spend. A well known, though probably apocryphal encounter between Henry Ford and Walter Reuther, the first President of the United Auto Workers union, captures this point. Ford and Reuther were said to have been together watching as one Ford plant became more automated. As the new machinery rolled into the plant, Ford said to Reuther, “Well Walter, how will you organize those machines?” Reuther responded, “Yes, that will be a problem Henry. But how will you get them to buy Fords?”

Financial regulation. U.S. politicians began deregulating the financial system in the 1970s based on the contention that the regulatory structure devised during the 1930s Depression-the so-called Glass-Steagall system-was not appropriate to contemporary conditions. Bill Clinton, Alan Greenspan, and Treasury Secretary Robert Rubin maintained that same position through the 1990s, as they presided over the final dismantling of Glass-Steagall.

Given that the financial system has become infinitely more complex since the 1930s-including in its capacity to circumvent regulations-there is no question that the Glass Steagall system was becoming increasingly outmoded. However, the conclusion that the financial system should therefore be deregulated-as Greenspan, Clinton, and virtually all other policymakers have claimed over the past 30 years-never followed from this fact. After all, the Keynes problem-that, if left to their own devises, financial markets will inevitably be overtaken by destabilizing speculative forces-did not disappear over the past 30 years. Rather, the symptoms of the Keynes problem only became more virulent as deregulation proceeded. Recognizing the flaws of the old regulatory system should therefore have led not to deregulation, but to constructing a new regulatory system appropriate to these contemporary symptoms.

Because the contemporary regulatory system has become so complex and nimble in its capacity to circumvent regulations, an effective regulatory system should be guided by a few basic premises that can be applied flexibly and broadly across market segments, including the stock, bond, foreign currency and derivative markets (these last including the markets for options and future contracts on financial instruments). In this spirit, one principle around which a new system should be structured is that the regulations be applied consistently across the various institutions and financial instruments that make up the overall market. A major problem over time with the Glass Steagall system was that there were large differences in the degree to which, for example, commercial banks, investment banks, stock brokerages, insurance companies, and mortgage lenders were regulated, thereby inviting clever financial engineers to invent ways to exploit these differences. Beyond this, an egalitarian system of regulations would clearly also promote the aim of fairness as well as economic stability.

One measure for promoting both stability and fairness is a small sales tax on all financial transactions-that is on the sale of all stocks, bonds, derivatives and foreign currencies. Proposals of this type have become well-known through the specific case of taxing foreign currency transactions. This is the so-called “Tobin Tax,” named for the late Nobel laureate economist James Tobin who first proposed it. The idea behind the financial transaction sales tax-whether it applies to foreign currency transactions or to stocks, bonds, or other instruments-is that it raises the costs of speculative trading and therefore discourages the types of excesses that occurred in the U.S. stock market in the 1990s, since the tax would have to be paid every time a trade takes place. The tax will not discourage investors who intend to hold onto their assets for a longer time period, since, unlike the speculators, they will be trading infrequently. A tax of this sort will also raise lots of revenue, even if one assumes a sharp decline in trading occurs after the tax is imposed. Two colleagues and I have estimated that a consistently applied tax of this sort in the U.S.-starting at a 0.5 percent rate for stocks and sliding down from there for bonds and other instruments-would generate approximately $100 billion per year in revenue, even after factoring in a significant decline in the amount of trading due to the tax. The funds generated by this tax, in other words, would itself fully cover all the cuts in state and local spending for 2003 that are likely to occur due to shortages of revenue sharing funds from the federal government.

A second type of measure that would be important for promoting both stability and fairness in the financial system is what are called asset-based reserve requirements. These are regulations that require financial institutions to maintain a supply of cash as a reserve fund in proportion to the other, riskier assets they hold in their portfolios. Such requirements can serve both to discourage financial market investors from holding an excessive amount of risky assets, and as a cash cushion for the investors to draw upon when market downturns occur. One example of an asset-based reserve requirement that is already in operation is the so-called margin requirements on stocks purchased with borrowed funds. As we have discussed, Alan Greenspan acknowledged in September 1996 that he could have prevented the speculative market bubble at that time by raising margin requirements. A simple proposal would therefore be for Greenspan or his successors to actually make use of this policy tool as the next incipient bubble begins to form.

The same policy instrument can also be used to push financial institutions to channel credit to projects that promote social welfare. One major example of this was that from the 1930s to the 1970s, Savings and Loan institutions in the U.S. were permitted to only lend money to households to finance the purchase of private homes. This requirement channeled massive pools of credit toward supporting the goal of middle-class home ownership, and everything that goes with that. This same policy measure could be used to promote the construction of low-cost housing over more vacation homes. Policymakers could stipulate that, say, at least five percent of banks’ loans portfolios should be channeled to low-cost housing. If the banks fail to reach this five-percent quota of loans for low-cost housing, they would then be required to hold this same amount of their total assets in cash. The banks would therefore not necessarily have to meet the five percent low-cost housing threshold, but they would have a strong incentive to do so rather than to hold cash, which would generate no interest for them.

Implications for Trade Policy. If the U.S. successfully implemented a complimentary set of egalitarian policies such as these, an important additional result would follow: that the costs to U.S. workers would fall sharply from opening the economy to exports, in particular, from poor countries. From the workers standpoint, trade protectionist policies are actually a form of social protection. They aim to preserve U.S. workers jobs and bargaining power over wages by reducing the pool of foreign workers that effectively compete to produce products for the U.S. market. But trade protectionist measures are a poor substitute for direct forms of social protection, including the measures we have discussed in the areas of employment targeting and increasing overall demand as well as labor and financial regulations. Thus, contrary to the neoliberal perspective on globalization, the case in behalf of an open trading system actually becomes stronger when effective social protections work to promote standards of fairness and social solidarity that a free market economy undermines.

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Adam Smith’s dictum which has served as this book’s epigram deserves reflection at its close. The corruption of moral sentiments through “the disposition to admire, and almost to worship the rich and powerful, and to despise or at least neglect persons of poor and mean condition” is an unavoidable, ever-present peril in any large, complex society, regardless of whether it is called capitalist, socialist, or something else, and independently of the extent to which the society is integrated into the global economy. But this danger is naturally compounded under a neoliberal economic regime, given that the premise of neoliberalism is that the market determines society’s winners and losers in a fair and efficient way. It further follows within a neoliberal framework that the rich and powerful-those that have either been the biggest winners in the market or at least have had close relatives or friends within this gilded circle-should also be responsible for establishing the boundaries of a society’s acceptable political debate and economic policy interventions.

The priority of serving the rich and powerful was obviously foremost during the Clinton presidency. How else to explain, among other things, Clinton and Greenspan’s energetic advocacy of deregulating the financial system when Greenspan knew full well that the stock market had become a dangerous bubble? Then there is the Bush-2 administration. Can anyone doubt what its priorities are, given Bush’s unwavering dedication to cutting taxes for the rich, converting both a national security emergency and a recession into opportunities to shower more gifts on the overprivledged? The International Monetary Fund has also made no secret of its own fealty to the premises of neoliberalism as expressed in its Washington Consensus policy model for less developed countries. The fact that this model has failed to promote economic growth and financial stability, or to reduce poverty and inequality, appears beside the point to Washington Consensus insiders when the fundamental premises of neoliberalism are at stake. This is the corruption of moral sentiments on a global scale.

Adam Smith was clear that a market economy will not be sustainable without a commitment to social solidarity as its undergirding. But creating this foundation of solidarity does not mean eradicating markets, competition and inequality of wealth. We do not yet have the self-knowledge or wherewithal to organize a society in a fair and effective way without these basic elements of capitalism. We can debate whether it might be possible to do so within a longer-term historical horizon. But as that debate proceeds, we have the capacity now to push the institutions of liberal capitalism to their limit in allowing democratic politics and egalitarian goals to gain ascendancy over acquisitiveness. Economics, moreover, need not continue in its present role as the insurmountable fortress defending the moral sentiments of neoliberalism. Economics is fully capable of serving now, as it has in the past, as one useful tool among many that creates the pathway toward a more just society.

ROBERT POLLIN is professor of economic and founding co-director of the Political Economy Research Institute at the University of Massachuesetts-Amherst. He is also the author of the Living Wage (with Stephanie Luce). He can be reached at: