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Jeff Madrick’s Case for Big Government

Jeff Madrick.  The Case for Big Government.   Princeton University Press, 2009.  205 pp.  ISBN 978-0-691-12331-8 (Hardcover).

In The Political Economy of Growth, Paul Baran argued that the increased role of the US government in post-New Deal America did not solve the contradictions of monopoly capitalism but merely “removed the onus for the malfunctioning of the economy from the capitalist class and placed it upon society at large and its expendable political functionaries. …”1  His writings and his joint work with Paul Sweezy developed a strong critique of the liberal belief that, with the right kind of government intervention, the US economy could become “capitalism with a human face.”

What a difference fifty years make.  Beginning in the late 1970s, the mainstream belief that government intervention could cure the ills of capitalism was replaced in the US and Britain by what has come to be called neo-liberalism, summarized by Ronald Reagan’s famous assertion that, far from being the solution, “government is the problem.”  As the golden age of the postwar economy ended in the stagflation plagued 1970s, US economic policy turned away from the post WW II model of Keynesian interventionism, a (temporary) capital-labor truce in some key industries, and relatively low levels of unemployment to an all-out war on the standard of living of the working class in order to prop up the rate of profit and thus increase the rewards to capitalist investors.

Thirty years later, the neo-liberal model has risen, triumphed, and come crashing down in a wreckage which at this writing is causing the first decline in world GDP since World War II.

In this context, the Economics profession has begun to rediscover certain contradictions of monopoly capitalism.  Though still not prepared to give credit to Baran and Sweezy who in Monopoly Capital pointed out the severe limitations of American Keynesian practice, some have demonstrated a willingness to recognize the more radical implications of Keynes and particularly to understand and appreciate the work of Hyman Minsky, who warned of financialization as a potential cause for a future great depression.2

I suggest that, in this context, we on the left need to rethink Baran and Sweezy’s dismissal of government activity as a partial corrective for some of capitalism’s most serious failings.  Absent a working-class based movement for truly radical change, the choices before us are not Rosa Luxembourg’s “socialism or barbarism,” but the more realistic equally dangerous choice of fighting for a new “social democratic” America (however incomplete or uncertain the improvement would be) or suffering a xenophobic, nationalistic, militarist, even fascist extension of the neo-liberal political economy, supported by shock troops of fundamentalist Christians and Rush Limbaugh’s dittoheads.3

Faced with this choice, it is essential that the left make common cause with the liberals and Keynesians even though in the 1960s the governing version of corporate liberalism brought us massive military budgets and the invasion of Vietnam.4

The Case for Big GovernmentIn search of commonalities, we can do no better than to start with the book under review.  Jeffrey Madrick has for the past twelve years been editor of Challenge Magazine, a highly accessible journal covering a broad range of economic issues.  The journal has welcomed heterodox writers providing opportunities for people on the left to reach a broader audience than in explicitly left publications.  Dr. Madrick, himself, is firmly in the economic mainstream but he has not done what too many mainstream economists do — banish those with leftist heterodox views from the forum of responsible discourse.

In the book under review, Madrick has taken off his hat as a neutral editor and directly confronted the assumptions, assertions, and conclusions of the intellectual underpinnings to neo-liberal economic policy.

He does this extremely forcefully with an overview of the role of government in the trajectory of American economic growth and progress since the creation of the Republic.  His goal is to demonstrate that the intellectual underpinnings of the neo-liberal model are flimsy at best and for the most part just plain false.  Drawing on the meticulous empirical work of Economic Historian Peter Lindert,5 he shows that there is absolutely no causal connection between high levels of government involvement in the market economy to redistribute income and unacceptably low economic growth.  He makes this comparison between different countries with different levels of government intervention as well as between different periods in American history.

A lot of his focus is on the unimpressive macroeconomic performance of the US economy under the neo-liberal regime since the 1970s and on the “damage to the standard of living” of the typical American: “To put it most simply, the U.S. economy no longer raises the incomes of workers the way it once did” (84).

Madrick identifies two chasms that opened in the US working class since the 1970s.  The first is between men and women where men’s incomes stagnated while women’s incomes rose (but insufficiently to close the gender wage gap).  Madrick is clear that the opening of women’s opportunities in the employment field is to be celebrated not condemned as some reactionaries have done, but he argues that “an adequate economy would have been raising most boats, even if perhaps raising women’s wages faster” (85).

“The other divide is by education — and by extension, class circumstances” (85).  The median male college graduate experienced only a 10 percent rise in real incomes since the 1970s, but those who never go to college have seen their standards of living worsen over the past 30 years.

Madrick notes that there was a serious question in 19th century America as to whether the move from an agricultural economy with widespread land ownership to an industrial economy based on wage labor would create high enough incomes in industry to compensate for the decline in autonomy when hitherto independent farmers became wage laborers.6   He argues that it was because of government action that the answer ultimately turned out to be in the affirmative.  “In the 1800s and early 1900s, average wages rose for two reasons: rapid productivity growth and substantial government regulation and social transfers” (86).  The rise of labor unions was another important element.

He argues that the current shift that the US economy is experiencing away from manufacturing employment towards service employment has revealed a great chasm between highly skilled, highly educated individuals and a great mass of employees whose incomes cannot come close to those achieved in the unionized manufacturing sector during the first 25 years after World War II: “Americans must now go to college and ideally graduate school to raise prospects of a middle class life, but this amounts to a significant new cost in America.  It is the cost of four or even six years or more of education” (87).

Madrick reminds us that the large increase in costs associated with first universal elementary education and then universal high school had all been borne by the government.  “This is how it should be, because the gains were broadly social as well, not simply individual” (87).  However, he warns, “. . . government has not risen to the occasion of providing college for all who choose to go” (87).

Absent a significant expansion in the role of government to make the new working class occupations in the service area pay as well as did the old blue collar jobs, Madrick fears that the erosion in the standard of living experienced by the typical American will continue.

The final 50 pages of the book are a series of proposals for what could only be described as an American version of social democracy — a government-regulated, redistributionist approach to raising the standard of living of the American working class and channeling public investment funds into socially productive directions.

Government must subsidize pre-K education for all, equalize K-12 expenditures across state and school district boundaries, and subsidize college education for all who wish it with special subsidies for those planning careers as care-givers (teachers, nurses, pre-K specialists, elder-care workers).

Government must re-regulate the financial sector, take steps to rationalize our energy and transportation systems, increase the progressivity of the tax system including possibly raising the payroll tax and pay-out structure of social security in a progressive manner, create a universal health care system, and develop programs that specifically address the needs of women workers both within the two wage-earner family and as single mothers.

Madrick’s set of specific proposals are summarized in a table on p. 174 with an annual price tag of 3% of GDP.

Here is where a fruitful dialog between radicals and mainstream writers like Madrick can begin.  The general conclusions of most radicals is that structural reforms such as those proposed by Madrick would certainly work, in the technical sense of achieving higher incomes for working Americans and higher rates of economic growth.   However, the political forces arrayed against them are as strong if not stronger than they were in the 1960s when Baran and Sweezy argued that civilian government purchases of goods and services had reached their “outer limits,” at about 14% of GDP.  Last December in Monthly Review, Fred Magdoff and John Foster pointed out that Baran and Sweezy’s conclusion was correct.  The ratio of civilian government expenditures to GDP has averaged 13.8% of GDP from 1960 to the present.7  Madrick wants to raise that number to about 15.6% of GDP.8

He does agree that vested interests have succeeded in constraining the role of government in the US economy, but he would no doubt argue that part of the reason why these interests have so far succeeded has been the triumph in the “public square” of bad economic analysis and even serious intellectual dishonesty.  In other words, he would argue that there is nothing inherent in monopoly capitalist society that prevents government from expanding its role in the directions recommended by Madrick.  All it takes is a new political alliance that could push for what has been referred to as a “New” New Deal.

We on the left have decisions to make.  Do we think that the search for structural reforms in the current system is a worthwhile endeavor, or do we think that it is a waste of time and that Madrick and others are deluding themselves that they can “reform away” enough of the contradictions of modern capitalism to set the stage for another round of relatively sustained growth and improvements in the standard of living of average citizens such as occurred between 1945 and the late 1970s?

I will firmly state my view that the danger of fascism arising from the frustrations of ordinary Americans and the political backwardness of both our media and political parties makes it absolutely essential that we make common cause with mainstream liberals and reform-minded conservatives to stave it off.  The communist party of Germany made a terrible decision in the 1920s and early 1930s symbolized by the slogan, “after Hitler, us!”  We should not let our skepticism about the efficacy of reforms interfere with an important political and intellectual alliance.

 

1  (NY: Monthly Review Press, 1962): 98.  Baran also wrote an outstanding essay which included a detailed discussion of the limits of planning for full employment in the advanced capitalist world for an American Economic Association publication A Survey of Contemporary Economics.  The essay was reprinted in The Longer View, Essays Toward A Critique of Political Economy, ed. Paul M. Sweezy (NY: Monthly Review Press, 1969).  It was entitled “National Economic Planning” and the section referring to advanced capitalist countries is on pp. 116-138.

2  See Hyman Minsky, Can “It” Happen Again, Essays on Instability and Finance (Armonk, NY: ME Sharpe, 1982).  For a fascinating look at the perverse incentives to steal from one’s own company, see George A. Akerlof and Paul M. Romer, “Looting: The Economic Underworld of Bankruptcy for Profit,” NBER Working Paper No. R1869 (April 1994), available at SSRN: ssrn.com/abstract=227162.  Readers of MR obviously do not need to be reminded of the rich Marxist literature that followed the publication of Baran and Sweezy’s work.  For a set of sources, check the bibliography and footnotes of the recent book by John Bellamy Foster and Fred Magdoff, The Great Financial Crisis (NY: Monthly Review Press, 2009).

3  See Chris Hedges, American Fascists: The Christian Right and the War on America (NY: Free Press, 2007).

4  Let us recall that the coalition that successfully resisted the imperialist war in Indochina included many liberals — including liberal economists like John Kenneth Galbraith and Robert L. Heilbroner.

5  See Peter H. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century (NY: Cambridge University Press, 2004).

6  Of course this issue did not arise for ex-slaves who actually experienced an improvement in class status when they went from unfree chattels to partially free sharecroppers and tenants.  But then they were virtually excluded from the benefits of improved standards of living in the manufacturing sector until the second half of the 20th century when job growth in that sector came to an end.  On this see Baran and Sweezy, Monopoly Capital, ch. 9.

7  See The Great Financial Crisis: 138.  This argument applies to those government expenditures which actually directly produce or purchase goods or services.  It does not include government transfer payments which are a very large percentage of federal expenditures.  The reasons is, of course, that the surplus absorption problem presents itself as an inability of the capitalist system to realize all the profits that could be potentially earned in producing goods and services.  Government purchases of goods or the hiring of workers absorbs surplus.  Government transfers of income from one individual to another does nothing to directly utilize resources, though there might be an indirect effect if the transferred income leads to higher levels of consumption or investment than would have existed absent the transfers.

8  Madrick’s 3% of GDP includes proposed expenditures in the form of transfer payments.  Subtracting the 40% of proposed expenditures that are transfer payments leaves 1.8% of GDP in increased purchases of goods and services.


Michael Meeropol is Professor Emeritus of Economics from Western New England College.


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