Andre Gunder Frank

NO ECONOMIC POLICY IN THE U.S.
A Review of
Bernard D. Nossiter
Fat Years and Lean: The American Economy Since Roosevelt.
New York: Harper & Row 1990, 271 pp.

A revised version was later published in Z Magazine (Boston) Vol. 5, No. 1, January 1992.

They didn't know what they were doing. With regard to their economic policy, according to Nossiter, that was true of every American president from Franklin Delano Roosevelt to Ronald Reagan. Their only saving grace was that they followed the well known rule of "don't do as I say." For these lead actors in the 50 year drama all mouthed mistaken political lines about the economy, especially the balance the budget" Gospel, which reflected their conservative political prejudices and constituencies. Moreover, they were reenforced by the theories and advice of the presidents' supporting actors or chief economic advisors. Fortunately however, the presidents sometimes also followed their own gut feelings and/or pragmatic political sense to improvise on stage and do as I don't say. Thus the presidents themselves still did more for the economy than their economic advisors, even if the presidents often lacked the courage of their own convictions and soon compromised them or took U turns. The worst performance bar none in the whole drama - nay, farce - was that of the academic and other theoretical economists, who first wrote the script and then the reviews all wrong.

Nossiter studied economics at Harvard but made sense of the real world as a journalist, including twenty four years as national economic reporter at the Washington Post. Nositer notes that his life happened to coincide with a cycle in public policy, which went from Hooverism in the thirties to neo-Hooversism in the eighties. However, he does not observe that it also coincided with the cycle of American dominance in the world economy. His observation post at its political center perhaps is what allows him to have written a good book about these fifty years of fat economic ups and lean downs and a marvelously incisive and delightful - and in my experience unique - expos‚ of the tragi-comic economic performance of nine presidents (including Hoover) and dozens of their supporting economic actors, many of whom Nossiter seems to have known personally. The book is a delight to read - now that the damage is done.

In Nossiter's turn the tables review, the lead actor who gave by far the best performance was President Hoover! The worst was FDR, at least during his first five years in office. The most savy was "we are all Keynesians now" Nixon. The most self-deluded, and perhaps deluding, lead actor was Mr. Reaganomics. The most confused was President Ford; and the one who most switched back and forth was Jimmy Carter. That leaves presidents Truman, Eisenhower, Kennedy and Johnson as giving the most balanced performances, which is not saying much. But then, they also had the easiest times of it during the post war boom. For a reader, like the present reviewer, who was able to witness the tragi-comic performances of recent decades himself, the most novel and interesting part of Nossiter's account is about the pre-war period.

The much maligned man who gave the Great Depression and Hoovervilles his name was actually its most valiant and relatively successful combattant. As Secretary of Commerce in the early 1920s, he already took measures to combat the post World War I recession. Already in 1921 Hoover spoke of the "Multiplying Effect of Successive Use of Funds in Circulations" and thus anticipated by ten years the famous multiplier of R.F. Kahn and by fifteen years its incorporation into John Maynard Keynes General Theory! Moreover, Hoover started deficit spending programs both during the 1920s recession and (including the Reconstruction Finance Corporation) during the 1930s depression - at least before his Treasury Secretary Andrew Mellon nudged or pushed him back into fiscal orthodoxy and a tax increase at the wrong time. Unfortunately, Hoover also let the Federal reserve Bank (Fed) cut the money supply and Congress impose the Hawley-Smooth tariff, which deepened and extended (but did not cause, as per Milton Friedman and his monetarism) the slump. Anyway, the liberal Democrat and later advisor to FDR, Bernard Baruch, chastised Hoover for his "socialistic legislation," and FDR's brain truster Rexford Guy Tugwell later admitted that "we didn't admit it at the time but practically the whole New Deal was extrapolated from programs that Hoover started."

But not before FDR undid many of them again in his first term. For his part in his first months, FDR launched seventeen major programs, only two of which were of major help in fighting the depression. FDR did not understand the role of aggregate demand and after his re-election again promised a balanced budget for 1937. "Roosevelt's economics were still so primitive that he did not understand how his budget would kill the fragile recovery." He "had it exactly wrong," and it did. FDR also agreed to two contradictory economic policies presented by rival advisors within a few hours of each other. FDR's super orthodox Secretary of the Treasury Henry Morgenthau never managed to learn, not even from the lessons of WW II. Fortunately at the Fed, FDR had the more pragmatic Mariner Eccles, who observed that "an unbalanced budget could help counteract a depression or a downswing." Of course, all New Deal economic policy was too little and too late; and it was only the war induced deficit spending and exports, which pulled the economy out of the depression. Meantime except for Alvin Hansen at Harvard and a few others, the economics profession as a whole remained completely stuck in the mud. Or, to put it more charitably with Schumpeter, they held their ground firmly; but the earthquake was shaking it beneath them.

For the post-war period, 80 percent of polled members of the American Economics Association thought another depression was coming, and only 4 percent thought that appropriate economic policy could do anything about it. In the real world also as Hansen observed "businessmen, wage-earners, while collar employees, professional people, farmers -- all alike expect and fear a post-war collapse." So did the politicians from right to left. That is why they passed the Employment Act of 1946 (the word "Full" was omitted in a political compromise). Still, Harry Truman also wanted to balance the budget, and to do so he proposed a tax increase during the 1949 recession. However, "Truman's performance was better than his words," and soon he abandoned his idea. Instead, he launched the cold war and its military Keynesianism.

Despite many now effective built in stabilizers, President Eisenhower faced three recessions in 1953-54, 1957-58, and 1960-61. Although Ike was the first really Keynesian president, "typically, however, government programs to counter slump were too little and too late." In economic policy as otherwise, Ike liked to keep to what he called "the extreme center of the road." While warning against the "military- industrial complex" in his speeches, the General also "relied on the Pentagon again for countercyclical spending," especially after Sputnik -- and the recession -- in 1957.

President John F. Kennedy was a continuation of Eisenhower, but perhaps an exception to the rule of having the right, that is left, gut feeling: "No President was better prepared in modern economics. It was all the more surprising that Kennedy almost failed his first test, proposing to cover his Berlin crisis spending with a tax increase, a move that would have aborted the recovery....Kennedy, still in the grip of older conventional thought, wanted to increase taxes to cover the added [military] spending. His economists talked him out of it, and the recovery continued unimpeded...Whatever the economics, Kennedy got the politics right." Johnson, as we know, escalated the Vietnam War but refused to adjust economic policies to its exigencies. Instead, to disguise the war's cost he invented statistics which were dubbed "for internal use only, but dangerous if swallowed." Thereby, Johnson and the Vietnam War bequeathed his successor Nixon with an external imbalance, which was untenable without drastic measures -- which would eventually make matters still worse.

Nixon said that "we are all Keynesians now," but he was the first American post-war president for whom Keynesian demand management was inadequate. The reason is that Nixon's principal economic problems were the external ones Johnson bequeathed to him, which were not amenable to simple Keynesian management by the US government alone. The pragmatist Nixon faced these problems by dumping the whole postwar international monetary system, the dollar-gold standard, and devaluing the dollar. That stemmed the foreign tide in the short run, but left the United States even more adrift in the world economy in the long run. Nixon's appointed successor, Gerald Ford had to face the first serious post-war recession and the institutionalization of stagflation as well as external imbalance. Therefore, Keynesianism failed him too, and he "never could decide whether a budget deficit was good or bad in a recession." No wonder. Ford's chairman of the Council of Economic Advisors was Alan Greespan. Now he is chairman of the Fed, and let us beware of his economic management in the severe recession, which began in 1990.

Keynesianism was abandoned by Jimmy Carter in late 1977, a year after taking office with Keynesian promises. However, Nossiter is less clear than he might be about this "odd switch behind the scenes." The reason for the switch was the continuing and still growing world economic crisis, as I showed in Frank (1980). The switch was epitomized by Martin Feldstein, whom Nossiter calls from the "Pangloss school" of everything being for the best in the best of possible worlds. "Feldstein had forecast Reagan's policy" and "the Carter approach provided a splendid ramp for Reagan." Nossiter does not mention it, but after his resignation Carter's Secretary of the Treasury, Michael Blumenthal, recalled that "the people running the major economies of the world don't know what they are doing....Of all the economic projections we got on growth and unemployment - and we consulted a wide spectrum - not a single one turned out to be right" (quoted in Frank 1981: 5).

It was also Jimmy Carter who appointed the man to the Fed, who would serve Reagan so well: Paul Volcker. To begin with, Volcker helped defeat Carter and elect Reagan. Nossiter notes that Carter appeared to listen only to Volcker and "with Carter's support, Volcker turned Carter's mild recession into a harsh slump," which along with the Ayatollah Khomenei turned the tide to Ronald Reagan. With the likes of Volcker at the Fed, Feldstein as Chairman of his Council of Economic Advisors, and cynical hypocrites like David Stockman and his Trojan horse at the Budget office ["the numbers were written in the sand....None of us really understands what's going on with all these numbers," "unemployment is part of the cure, not the problem,"] Reagan made a revolution. De facto, he abolished the 1946 Employment Act and waged a "class war" of enriching the rich at the expense of the poor. Moreover, the much vaunted monetarism of Milton Friedman, the laughable Laffer supply side curve, getting the government off our backs, and all that were nothing but ideological figleafs for this policy of income redistribution from poor to rich - and for the major de facto policy instruments to effect it: Regressive taxes, and "progressive" Pentagon military Keynesianism at home and consequently burgeoning deficits and debt abroad. The Reagan administration and Congress also imposed the highest degree of de facto protectionism since Hoover's Congress.

Nossiter devotes an entire separate chapter to "Keynes Armed." A strength of the chapter is that it shows beyond a shadow of a doubt that "all presidents since Truman have used defense outlays to fight slump...The postwar history is clear. Recovery from every slump has been stimulated by increased Pentagon spending," which more often than not had no military purpose or function. A weakness in my view is that Nossiter reserves this analysis for the end and separates it out from his step by step historical review, in which for instance he does not show the Korean War playing the role it did in overcoming the 1949 recession. Indeed, Nossiter also jumps back and forth in history for his treatment of some other topics and does the same with the international dimensions of the American economy. They are also lumped into a section following the review of the Nixon years. Thus, Nossiter fails to devote due attention to the step by step relations between domestic and international economic policy and says precious little about the much weakened sad state in which Ronald Reagan left the United States in the world economy.

On the other hand, Nossiter is at his instructive and at the same time amusing best when he unmasks the economic naivt‚ and political opportunism and hypocracy of politicians and economists alike. He recalls Stockman's observation that "the fiscal and economic illiteracy among the core White House group was simply too great....[They] were almost entirely innocent and uninformed." Nossiter adds, that Ronald Reagan and his team were practical men who were little troubled by theoretical consistency or even ideological clarity. "They are capable of playing any role, employing any script, to promote an end." But in this role, the Reagan White House was not new, but only moreso. "Successful politicians tend to be opportunists, wedded to no one theory, drawing on whatever is available." For their part, "economists have been explaining events to suit their master's political needs since Joseph modeled farm output for the Pharaoh." Even the Fed's conduct is dominated by "what the administration wants or is perceived to want."

Thus, all this 50 year history of tragi-comic economic mismanagement and sophistry "illustrates a well-known law of economics: he who pays the piper calls the tune." However, perhaps because of his observation post at the political center, Nossiter accords much more ability to this policy tune to shape events [by President X and/or Fed "made in Washingtion" recessions and recoveries] than it really has in the real world. Viewed more dispassionately from afar on the contrary, the evidence suggests that the cyclical course of events was largely beyond anybody's control. Moreover, it was these events that made the policy makers hop and determined their policy -- much more than their policy shaped events. The policy was always too little and too late at best; at more often than not, the policy did not reverse but rather reenforced the underlying cycle. This reality was visible for instance in the switch from Keynesianism by Carter [and by every other government in the West and South, and ultimately also in the East] and its continuance by Reaganomics, which Nossiter did not explain. Even so, Nossiter ends his historical review and argument firm in the faith that if only the lead actor and piper knew the (Keynesian) score, he could call a tune that would keep not only his supporting actors, but also the whole American economy hopping and happy.

This reviewer, on the contrary, remains more than skeptical about this theme underlying the whole political economic musical comedy under review by Nossiter and myself. Moreover, if this thesis is doubtful about the past when the United States was dominant in the world economy; it is all the more doubtful now that the absolutely and relatively weakened American economy is so no longer, but is slushing or even sinking in a stormy sea of foreign debt and competition. However that may be, now we have only the Bush team, mostly inherited from the era of Reaganomics, to lead us in this new recession - and Gulf War Keynesianism - in 1991. They may well put another Depression style marathon dance show on for us. Therefore, regardless of which of us is right or wrong, woe be to us all. In this scenario, not even Nossiter can take or make delight.

REFERENCES CITED

Frank, Andre Gunder 1980. Crisis: In the World Economy. New York: Holmes & Meier and London: Heinemann

----- 1981. Reflections on the Economic Crisis. New York: Monthly Review Press and London: Hutchinson

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