Whose Economy Is It, Anyhow?

There are a few things they don't teach you in Economics 101. The first is that there are different classes and groups in America whose economic interests vary widely and are often in direct conflict. Simply put, we are not all exactly in the same boat, and policies that help A do not necessarily benefit B.

For starters, take the matter of deficits. A generation of orthodox classical economists and conservative political theorists have condemned deficit spending as the Devil's own work. Mainstream politicians, including those in the formerly Keynesian Democratic party, have been drawn along, accepting the conventional wisdom that deficits are evil.

Deficit spending, however, can be a positive good; in times of limited tax revenue, it permits government to make needed social and infrastructure investments, spur a lagging economy (not presently a problem), and redistribute income downward through public employment to those not sharing in prosperity. Traditionally, deficit spending is applied in recessionary times, but it is useful even in boom times like the present.

For example, universal health coverage is something Americans are told they can't have, because it would "bust the budget" and use up the future surplus. Put aside, for the moment, consideration of a modest tax increase, one common-sense way to finance such a program. If small, periodic deficits were permitted, which they presently are not in the political straitjacket of the 1997 budget agreement, national health insurance would be perfectly feasible, even in the absence of a tax hike. Occasional surplus shortfalls, or unanticipated cost overruns inevitable in any comprehensive initiative of this sort, could be accommodated without calamitous effects. After all, as innumerable economists have pointed out over the years, we owe our public debt (except for the 15 percent held by foreign banks) basically to ourselves.

As it is, leaders like former Senator Bradley, who suggest addressing the one-million-per-year increase in the number of medically uninsured Americans, are accused of threatening the sacred surplus, which has acquired a symbolic importance beyond logic.

Why, you might ask, are deficits so dangerous that we can never run one? The truth is they aren't, unless and until they reach staggering proportions and assume critical mass. Why, then, such panic at the mere prospect of an unbalanced budget? One answer is that deficits run by the government do have an admitted drawback: They soak up, through federal borrowing, some of the money available for private-sector credit, making business borrowing a bit more difficult and marginally more expensive. Corporate America, always with one eye on the bottom line, has an obvious vested interest in resisting any suggestion of deficits that may indirectly cut into profit margins, however slightly, despite the fact that they may be used to improve the lot of ordinary citizens. It's not a question of right and wrong, but of whose interest will be served.

There are other reasons for the anti-deficit fervor, of course. Among them are business fears of any public expenditures that might tend to enlarge government and enhance its regulatory role. Limiting the size and scope of government is always high on the corporate agenda, and a ban on deficits promises to shrink the public sector, or to at least stunt its growth.

Not surprisingly, given the temper of the times, many politicians who should know better share the prevailing bias in favor of disappearing government. Vice President Gore is fond of pointing to the fact that federal manpower rolls have been cut by 350,000 in the last seven years and are now smaller than they've been since the Kennedy administration, a positive outgrowth, he says, of his drive to "reinvent' government. This assumes that government should steadily shrink with the passage of time as Washington supposedly does more with less, but that makes little sense. The U.S. population has grown by almost 100 million since 1960, a 50 percent increase; if government services and responsibilities are simply to keep pace with population expansion, the federal presence has to expand accordingly -- even at the cost of incurring an occasional deficit.

Although manageable deficits are mainly a threat to America's corporate hegemony, there is another evil that must surely threaten us all: the spectre of inflation. Inflation is what keeps Alan Greenspan awake at night. He doesn't worry about unemployment; job losses cause him only a momentary nocturnal twitch. But inflation is his recurring nightmare, the horror of horrors that constantly disturbs his blissful slumber. He fights against it even when it isn't there. So, too, the people whom his Federal Reserve Board represents: bankers, bondholders, and creditors in general.

The dirty little secret of American capitalism, however, is that for ordinary people, a little inflation is actually a good thing. I'm not speaking here of the type of hyper-inflation that threatened Germany's Weimar Republic in the 1920s, or even the oil-shock inflation visited upon the U.S. in the 1970s. Rather, I refer to the sort of incremental, low-single-digit inflation that permits debtors to pay back what they owe in slightly depreciated dollars.

For obvious reasons, bankers and other creditors despise this relatively benign form of inflation; they make less in constant dollars on their loans. Debtors living on the edge, conversely, are often saved from the tyranny of high interest by a little gradual inflation. The conflict inherent in these competing concerns has been a constant refrain, off and on, throughout American history; it helped form the basis for the political struggles of the late 19th century that pitted farmers and workers against capitalists, "free silver" against the gold standard, and cheap-money inflationists against hard-money deflationists.

Especially beneficial to most people is the kind of slow, imperceptible inflation caused when employees get modest pay hikes that actually match or (Heaven help us) exceed the annual economic growth rate. Large employers, in particular, dislike this type of wage inflation, since their labor costs rise and their profits go down -- unless they pass the raises along to consumers in the form of unpopular price increases. To big business, in fact, rising wages are the one true cause of inflation that must be guarded against; rising prices don't really count.

Wage increases also disturb the stock market, which is why business journalists invariably hail government reports showing that average wages have not increased in the latest quarter -- or have even gone down. Such happy "anti-inflationary" news always pleases Wall Street and causes a jump in stock values based on enhanced company profit margins. Deflationary price reductions for consumers somehow don't have the same salutary effect.

The lesson here is that what is good for bankers, businessmen, and investors is not always good for average Americans. This is true regardless of the collective opinion of the mass media, which mostly reflects one side in the silent debate, that of corporate ownership. The question is, whose economy is it, anyhow?

Wayne O'Leary lives in Orono, Maine.

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