Economic Policy and the Liberal Left

MR. BUTTERFIELD:

Ladies and gentlemen: Because of Professor Galbraith's monumental achievements, his enormous influence and his extraordinarily exciting life, it has been said that, if ever Hollywood, or that other aspiring world film centre, Toronto, decided to make a movie about an economist, that movie would be about John Kenneth Galbraith.

If the movie were made in the United States, that movie would unfold with the image of a thoughtful and intellectually curious young Canadian student travelling to Berkeley, California, across Herbert Hoover's America.

The movie would focus on Galbraith the Academic, first as a student and then as a lecturer and professor in the great colleges of the United States. It would show Galbraith the theorist and administrator in Franklin Roosevelt's "New Deal" Washington. The film would explore the birth of the economist's classic works, titles such as American Capitalism, The Affluent Society, The New Industrial State, and Economics and the Public Purpose. There are twenty-one books in all. There may not be time for this film to delve into them all.

The movie will deal lavishly with John Kenneth Galbraith, the economic wizard in the court of the Kennedys. It will expose the adventures of our protaganist as the American Ambassador to India.

The movie's later frames will feature a crusading philosopher, battling the forces of corporatism, complacency, and conservatism - a man challenging the establishment to be antiestablishment.

But the life of John Kenneth Galbraith has also been contemplated as a Canadian movie. Here, the movie would begin with the story of a young man from Elgin County, Ontario, moulded in the tradition of his father's agrarian radicalism.

The film would follow the young man's career through his earnest education at the Ontario Agricultural College. It will show his six years at OAc attending classes on animal husbandry, field husbandry, poultry husbandry, dairy husbandry, butter and cheese-making, butchering and meat-cutting, agriculture, farm management, agricultural engineering, soil management, horticulture, forestry, surveying, veterinary medicine, and even English composition and plumbing.

The movie will focus on the professors who had great influence on young Galbraith, in particular, the professor of dairy husbandry who explained in a half-term credit course the proper way to put hay in a manger and who exhorted his students to remember that "the dairy cow is the foster mother of the human race," and that "the walls of the dairy stable should be built strongly to support the roof."

The Canadian film will terminate abruptly with the economist's departure south of the border to the United States, where, it will be observed, "he continued to make a contribution."

This movie will be classified as a documentary, its title, The Influence of the Ontario Agricultural College on World Economic Thought. In Washington, it will be classified as foreign propaganda, and it will go on to win an Academy Award.

Ladies and gentlemen, the hero of our fictionary American and Canadian movies: author, professor, economist, ambassador - a man, who, I can assure you, will not provide you this afternoon with (to borrow his own famous phrase) "The Conventional Wisdom" - John Kenneth Galbraith.

PROFESSOR GALBRAITH:

Mr. President, ladies and gentlemen: In the last three or four years there have been strongly contrasting movements in the political life of the more mature countries of the western industrial world. The United States has elected, and Britain has re-elected, markedly conservative administrations. So, if less clearly, has Germany. In contrast, France, Spain, Greece, and most recently Australia have moved with varying strength in the opposite direction. Governments in these countries have joined those of Austria, Scandinavia, Canada, and other lands in a continuing commitment to government guidance of the economy, to a wide range of social programs and, in a general way, to greater social and economic equality. We have, it may be noted, no agreed name for governments avowing the policies I have just mentioned. The word liberal has a different meaning in the United States and Canada from that in Europe and the rest of the world. References to socialism and social democracy have similarly a local meaning. I will, somewhat arbitrarily, speak today without reference to any particular party as governments of the liberal left.

My purpose is to consider the policies appropriate to the liberal left, not excluding those that, perhaps optimistically, I would recommend to liberal Democrats across the border. But to be useful, such recommendation must be in the context of the larger world economic scene. This, however, is heavily influenced, if not dominated, by the trend of economic policy and performance in the United States. Recession in the United States has an adverse effect on all of the non-Communist world. Even the Communist countries, as the case of Poland sufficiently reveals, do not escape. That does not mean that other governments can shift the blame to Washington. The government of the day and place is held responsible, and perhaps it should be. All recent administrations in Washington have blamed their shortcomings on the problems they inherited from previous administrations, with ultimate responsibility resting, one must suppose, with Alexander Hamilton. Better that economic policy-makers be held to account for what happens in their own time. It is my major purpose to describe rather than to criticize recent American policy. Such criticism is a local industry best practised at home. For this I have found more than sufficient opportunity.

Recent economic developments in the United States must be understood as the product of a dramatic clash between avowed conservative theory and present economic and social reality. And the latter is by way, at least temporarily, of winning. There could be a reversion to the conservative faith after the next election; none can doubt the ability of the ideologically committed to rise above experience. But for the moment, circumstance is ascendent.

The present administration came to power in Washington with a devout commitment to three economic principles. All three are now in abeyance. The first was supply-side doctrine. This held that there was a diminished level of performance in the American industrial system; the cause was undue taxation in the upper brackets of personal and corporate income and undue social and economic benefits in the lower income brackets. The rich, it was held, were not working and investing because they had too little income; the poor were not working because they had too much. Following this line of thought, if such it may be called, the administration in its early months enacted large reductions in personal and corporate income taxes with major absolute effect on the affluent and curtailed, where it did not reduce, outlays for social programs with primary impact on the poor. Complementing this action was a general movement against public regulation, which, it was held, was contributing to a general sclerotic tendency in the economy. Notably at issue was regulation protecting consumers, workers, and the environment. There was hope that the tax and social expenditure reductions, combined with the regulatory reform, would so reinforce economic incentives and so invigorate economic activity that the resulting expansion in the economy would bring a more-than-offsetting increase in public revenues.

The second commitment was to the ancient and, indeed, all-but-sacred principle of fiscal conservatism and the balanced budget. Few names in the lexicon of American conservatives have been so inimical, even subversive, as that of John Maynard Keynes. He has rivalled in obloquy Marx himself, with the additional effect of being a much more nearly present danger. The essence of the Keynesian error was the acceptance, even advocacy, of a deficit in the public budget under conditions of high unemployment. For years every Republican candidate for major office made a fervent obeisance to the principle of the balanced budget. No pre-election promise of the present administration was so firm, even insistent.

The third commitment was to a strong, astringent monetarism. The money supply would be rigorously related to the growth in economic output. Not before in American history has a prophet been so devoutly acknowledged by an administration as was Professor Milton Friedman by that of Mr. Reagan. Professor Friedman's leading disciple, Beryl Sprinkel, came to the Treasury to have charge of monetary affairs. Mr. Paul Volcker at the Federal Reserve was felt to be a firm ally. The monetarist design, to be sure, had previously been tried in Chile, Israel, and Britain. In all, the pain had been severe or, as in Israel, where not severe, ineffective. From all, Professor Friedman, with a skill it is hard not to admire, has undertaken to detach himself. All, he holds, have applied his policy imperfectly or with incompetence. Their experience should be ignored; the United States would be the truly valid test.

The supply-side economists were the first to disappear from the American scene and, as a practical matter, from positions of responsibility in the government itself. There was a problem of plausibility. Few could believe that corporate executives, the decisive figures in the modern business enterprise, were relaxing in idleness or desuetude because of their tax bracket. Or that the poor preferred welfare benefits to a job. Or that tax relief to wealthy individuals had much to do with investment by corporations, a point made many years ago by Keynes. Then came a commendable exercise in candour. Supply-side economics, Mr. David Stockman, a distressingly senior economic officer in the administration, conceded, was really a cover for reducing taxes on the affluent. It is not possible in any democratic country in our time to urge forthright measures for the relief of the rich; that is thought politically too crude, even a trifle obscene. Some higher social purpose must be affirmed; incentives must be strengthened, incentive being the modern code word for returning more after-tax money to the affluent. That tax reduction was the real purpose of supply-side economics is now accepted by all whose detachment from concern for personal well-being allows a minimal clarity of view. That, of course, is not everyone. We must always respect the ability of the affluent to adjust economic belief to personal income enhancement.

The supply-side tax reductions, along with the large increase in military outlays, combined to produce the next reversal of policy. That was the abandonment of the balanced budget, the reversion to Keynesian deficit financing in a magnitude that must be a source of wonder to Keynes himself from wherever he watches. Deficits that range upward from $200 billion are now solidly in prospect for the relevant future. And, with a mental adaptability not often previously manifest, even the most confirmed conservatives in the administration have declared themselves in favour of deficits. At worst, such deficits do not matter; at best, they are quite benign. Not for months now has any high Washington official made even a routine liturgical gesture to the balanced budget.

Further and finally and most important of all, the commitment to Friedmanite monetary policy has been abandoned. Here came the clash with harsh reality. The experiment with monetarism is now complete; the results are clear and not seriously subject to dispute. Never resolved was the continuing grave doubt as to which of the several monetary aggregates should be controlled - the problem as to what is money in the modern economy. Unresolved also was the question of whether the particular monetary aggregate selected for control, and notably M1 or currency and bank deposits subject to check, could, in fact, be controlled. Large random fluctuations continued to occur with the further possibility that velocity was far from constant. But clearest of all was the consequence of the effort at control. That, without doubt, was a marked reduction in the rate of inflation. High interest rates, the operative instrument of the policy, suppressed producer investment and consumer purchase. The price effect came from the resulting massive unemployment, the major reductions in plant utilization, a record level of small business failures, special suffering in the so-called credit-sensitive industries, and a strongly adverse effect on agriculture. We learned what some had long urged: monetary policy works against inflation in the modern highly organized economy only as it produces a major recession - or depression.

So, along with the supply-side vision and the balanced budget, the monetarist effort has also now been abandoned. The monetary aggregates have been allowed to increase greatly in recent months. Administration policy-makers have openly urged the Federal Reserve to stay its hand. Professor Friedman has now added his own country to the impressive list from which he has found it necessary to separate himself. Of the American policy, he now says, "If this be monetarism, I am no longer a monetarist."

With the reversal of the policies with which it came to power - specifically, with the abandonment of monetarism and the new commitment to heavy Keynesian deficit financing - the administration has arrested the economic decline that its earlier monetarist enthusiasm induced. Instead a substantial recovery seems now in progress with consequent world effect. For this, needless to say, I give the administration credit. The policies that it has now reversed are those which, in company with others, I have most criticized. A special grace always awaits the reformed sinner. Perhaps we could have had a more contrite confession of error, a more strenuous affirmation of new intention. But that, no doubt, is asking too much.

There is also a new tenet of policy which, if the recovery continues, will be a source of grave trouble in the United States and, by resonance, to the governments of the liberal left. We are presently operating in the United States with the peristalsis theory of inflation. This holds, by analogy to physiological process, that once inflation has been extruded from the economic system by a sufficiently painful application of monetarism - the economic and oral equivalent of a major dose of castor oil or epsom salts - it is gone for good. Flushed away. There can then be American and world recovery without danger of inflation. This is egregious nonsense. If monetary policy remains relaxed, if the deficit continues to exert an expansive Keynesian influence on the economy as higher employment and plant utilization levels are reached, inflation will resume. Of that we can be perfectly certain. In consequence, there must be in place some acceptable alternative to a new resort to monetarism with its return to unemployment, idle plants, and recession as the remedy for inflation. As in the United States, so in other countries, a subject to which I will return.

Such is the American context with its large external influence on capital movements, interest rates, international trade effects and, not least, its role as a compelling recent lesson in economic policy. I turn now to the policies of the liberal left as they emerge in this context. But first let me deal with its traditional concerns.

The traditional social and economic concerns of the liberal left remain valid, compassionate, and essential. They derive from the fact that capitalism in its original and pristine form had major manifestations of social cruelty and major areas of economic failure. So it was, even when modified by trade union organization. The pristine system was notably indifferent to the social and economic needs of the young, the old, the ill and the handicapped, the unemployable and the unemployed. And, except as modified by public action to support prices, it was nowhere acceptable to particular industries, the outstanding example being agriculture. Additionally it did not maintain reasonable standards of safety in mines and factories; its external diseconomies were increasingly adverse to the environment; its products were, on frequent occasion, inimical to the health and well-being of the consumer.

Further, in all countries capitalism has proved incapable of performing certain industrial tasks. The most notable being provision of lower-cost housing, urban transportation, rail transportation, hospital and health care - these along, needless to say, with the conventional functions of the state. It has been the special concern of the liberal left to mitigate the cruelties of the system and to perform, even welcome, the tasks in which the system is in default. This has been persistently controversial. Those opposed have rarely if ever admitted to the true source of their objection, which is, extensively, the fear that these measures will be at pecuniary cost to themselves or to those on whose votes and political support they rely. Instead it is averred that these welfare measures are a burden on economic activity, damaging once again to the incentives of the rich and poor.

There must be no tendency on the liberal left to retreat on the services and functions that give this position its name. Nor should it fail to identify the motives of those who oppose. Let us agree that it is a perfectly plausible political aim to want more money, including lower taxes for one's self and one's supporters. Let this be said; we are old enough to bear the truth. But let it be also made clear that the modern structure of social services is essentially conservative in effect. Capitalism would not have survived in the absence of their compassionate and ameliorating role. Revolutionists going back to Marx have correctly identified the menace of reform. And, above all, let us be resistant to the aberrant argument that these measures are adverse to liberty - the freedom to choose. Great tears are shed for the loss of liberty of consumer choice proceeding from any, even modest, reduction in the income of the affluent. No one mentions the far greater increase in liberty that is inherent in a modestly reliable income for the poor. Nothing is so resonant as the adverse effect of safety or environmental regulation on the liberties of the business enterprise. Little is said of the liberty associated with health and life itself.

I have a few additional observations on the role of the liberal left in the compassionate services of the state. Having built the regulatory and welfare structure over the last seventy-five years, we must recognize that there is now both a qualitative and a quantitative change in the nature of the task. When something is built, it is built; thereafter one proceeds to improvement, refinement, and accommodation to change. So with our public welfare and regulatory systems. There are rough corners still to be smoothed. And, as notably in matters of environmental protection and consumer and worker safety, there will always be new dangers to confront. But the age of great social innovation is over.

Instead there is need for much stronger effort to improve administration. We live in an age of large organizations, public and private. In neither the capitalist nor the Communist world has the problem of managing great organization been solved. We are recognizing at long last in the United States that the performance of the great private corporate bureaucracies is far from optimal. They suffer from a persistent proliferation of white-collar and executive personnel; executive excellence in the modern large industrial enterprise is regularly what most resembles those executives already there; wise policy is what is already being done. It must never be supposed, as numerous conservatives aver, that the administrative problems of the modern public bureaucracy are unique. But they are very important. Generally speaking, on the liberal left, we have thought a problem solved when we have achieved the requisite legislation and appropriation. We have given too little attention to the further problem of good and efficient management. This must henceforth be a major concern.

As a goal, per se, of the liberal left, public ownership in almost all countries is in decline. Not even the avowed socialist is reliably in favour of much such government ownership. The reason is that, in the modern and generally affluent society, the problem of private ownership is not exploitation but administration - the effectiveness of the management. This problem, all too obviously, remains when the enterprise passes into public ownership. And it is this - administrative inadequacy and incompetence as well as technical and market obsolescence - which now leads to the demand for public ownership. All the industrial countries, including the United States, now contend with the urgent socialism not of socialists but of modern bankers and industrialists. Socialism now comes when a major industrial or financial enterprise is in trouble. Then, as the late Hubert Humphrey once observed, the Gods come marching in.

All governments, and certainly those on the liberal left, must now have an industrial policy for failing enterprises - one which distinguishes between those that are subject to organization sclerosis and senility and can be saved and those that should be allowed to die. There must also be an efficient design for the financial rescue of those to be preserved. I would further urge that there be an early warning system where, as once in the case of the Chrysler Corporation and now in the case of much of our steel industry, incompetence is palpable. I see no reason why governments should wait for the final disaster before moving in with public funds. There must also, let me repeat, be a willingness to let those industries that have been overtaken by history disappear from the scene. The task for the government here is not rescue but the alleviation of personal and community despair. We are currently having much talk of an industrial policy in the United States. Some of it is by politicians who would like to evade the yet more troublesome questions of macroeconomic policy to which, presently, I will come. But such a policy is necessary in the modern economy - an economy where no one can assume optimal private performance. No policy, I might add, requires a higher level of informed judgment.

I would like also to see the liberal left take a far more concerned position on the industrial-military power in our time - what President Dwight D. Eisenhower called the militaryindustrial complex. Anciently on the left there has been suspicion of the military power deriving from its service to conservative purpose, its enrolment for service and possible death of the sons of the people at large. This suspicion was never more relevant. Service to corporate interest by the military power remains. The promise of death remains. It has, indeed, been democratized; in the thermonuclear age it is now the prospect for all. The liberal left must address this problem far more directly than in the recent past. It must be especially critical of those who, on coming to power, feel that they must show they are strong and practical as regards military purposes, that they must eschew the soft-headed tendencies which conservatives so stridently and also so successfully attribute to the left. In the United States one cannot doubt that conservatives dislike communism. They have, on occasion, been outdone by liberals who fear even more being thought soft on communism. Nothing must be allowed to soften or dilute concern for effective arms control, to interfere with the civil communication on which it depends. Let it not be thought that this is an issue for the superpowers alone. In the ultimate conflict, if it comes, none will be spared. On this matter all voices everywhere need to be heard.

I return now to the macroeconomic policies that, given the change of course in the United States and, one hopes, in the world economy, I would urge on the liberal left.

As recovery continues - as one hopes it will - there will again in all countries be the problem of inflation. There are basically two forms of inflation in the modern highly organized economy. One, the classical form, derives from the general pressure of demand on prices. The second, equally evident in a world of great organizations, comes from the pressure of incomes on prices and of prices on incomes - the familiar wage/price spiral. That these two forms of inflation cannot, except at unacceptable cost, be addressed by monetary policy is now sufficiently evident from the American experience - an experience which, in all-but-open admission, our present administration accepts. If inflation is unacceptable, as I believe it to be, then the control of demand must be addressed by fiscal policy and the incomes-prices interaction must be addressed by an incomes and prices policy. These two steps are essential. There must, as demand outruns the capacity of the economy to produce, be willingness and ability to use the public budget as a restraining influence on demand. And since, for reasons that I have sufficiently urged, social programs must be protected, this means a willingness to use taxes. (In the American context there is an additional opportunity in military expenditures; these must never be considered outside the sphere of legitimate economic concern.) Few things are politically so inconvenient as the use of taxes for macroeconomic purpose. But for balancing aggregate demand with supply they are the only socially acceptable alternative to monetary policy. A resort to monetary policy is, in every respect, worse. Taxes work against an excess of aggregate demand by restraining consumer demand. Monetary policy works against such excess of demand by restraining investment. It is immeasurably better, in fact, far more in line with conservative goals of economic productivity and growth, to restrict consumption than to restrict capital investment. In talking of taxation as part of an effective fiscal policy, I do not exclude sales taxes, including the value-added tax, a point which I judge to be more acceptable here in Canada than in the United States. In an affluent world the old case of the left against these taxes diminishes, for they no longer curtail physically vital consumption. But there remains a strong case for the use of progressive taxation to restrain demand when this is required. At all points such taxation is superior to monetary policy. Restraint by increasing the level of progressive taxes contributes to greater equality in income distribution. Monetary policy, in contrast, is socially regressive; it favours those who have money to lend, and those who lend money have, as a reasonably obvious rule, more money than those who borrow money. (The notion that monetary policy is socially neutral, though widely accepted by economists, is not valid and has, indeed, important elements of social disguise and evasion. Its service to the financially competent is a major reason for its conservative support.) Progressive personal income taxation does not directly affect investment; the operative effect of monetary policy is through a cutback in business investment. None can doubt that higher personal income taxes evoke screams of anguish from the affluent. Such despair, however, could be a modest contribution to social tranquility, for it shows the poor that the rich are suffering too.

However, more than a strong tax-oriented fiscal policy is required. The incomes-prices interaction, we now know, occurs well below the full-employment level. In consequence, there is a choice between restraining it by unemployment, idle plant capacity, and recession, or doing so by more direct means. In the United States in these last years, with strong Canadian effect, we have had the peculiarly brutal form of incomes policy imposed by unemployment - and recession or depression. It will come as no surprise that I urge, not as a temporary but as a permanent policy, a negotiated restraint on industrial wages and prices and a broadly consistent policy on farm price supports and publicly regulated prices. This is not a policy, I hasten to say, that is to be confined to wage and salary workers. I would not be too meticulous about applying it to small business and unorganized workers. There are administrative problems here that are decisive. But it is essential that there be a broad restraining effect on higher incomes. One recurs to the tax system. An incomes policy and a progressive tax system are natural counterparts in any equitable and successful macroeconomic policy.

In one form or another an incomes and prices policy is now accepted in most of the industrial countries - in Germany, Austria, Scandinavia, in ostentatiously free-enterprise Switzerland, in Japan, and in Australia. It is still resisted in the United States and Britain, including by the parties of the liberal left, and it is a matter of no slight controversy here in Canada. There are few subjects that those currently running for the Democratic nomination in the United States more assiduously avoid; monetarism all oppose, but as to the alternatives, it is their strongly shared belief that God will provide. There is, unfortunately, no such escape. If we do not use monetary policy to arrest inflation, we must have an alternative policy. If we do not wish to use unemployment, idle capacity, and recession as the restraint on the incomes-prices interaction, we must, along with an effective fiscal policy, have a system of direct negotiated restraints. God is not, in all certainty, a member of the liberal left. This, I suggest, is the agenda for the liberal left - one that is largely indifferent as to national boundaries. We take full pride in, and protect, our social services and accommodate these and regulatory effort to changing circumstance and need. We address strongly the matter of administration, recognizing that this is now the central problem of all great organizations, private and public. We reject, as experience now manifestly requires, the painfully false premise of monetarism. When demand presses on capacity, we see taxation as the major instrument of restraint. We accept the need for a direct incomes and prices policy as the alternative to one enforced by unemployment. We see this in the context of an overall thrust to a greater equality and fairness in income distribution. This reflects a recognition that what conservatives urge in the name of incentives and improved economic performance, including the commitment to monetary policy and its high interest rates, is, in true purpose, a poorly concealed design for enhancing the income of the affluent. We are sternly cognizant of the problem of the military power in our time; this must be a matter of special urgency for my fellow liberal Democrats in the United States.

I do not suggest that the policies I offer are brilliantly original. In the United States in these last months, numerous of my fellow Democrats have been engaged in a search for new and creative policies; surely there is somewhere some policy design that is simple, easily administered, magical in its result, wonderfully acceptable to all. The search has not succeeded; that is because no such alternative exists. The future of the liberal left lies with a continuing compassionate role for the state, a continuing devotion to the far-from-easy policies that serve to combine high employment and stable prices with fairness in the distribution of the product.

The appreciation of the audience was expressed by Mr. Douglas L. Derry, F.C.A., President of The Empire Club of Canada.