Jeff Faux is president of the Economic Policy Institute in Washington, D.C. Prior to establishing EPI, he was co-director of the National Center for Economic Alternatives. He has worked as an economist for the U.S. Office of Economic Opportunity and the U.S. Departments of State, Commerce and Labor. Faux is the author of New Hope of the Inner City and a co-author of Rebuilding America and The Star- Spangled Hustle. He is writing a new book on prospects for the American economy in the twenty-first century.
Multinational Monitor: What would be the effect on the economy of adopting a balanced budget amendment?
Jeff Faux: The effect would be pretty grim. Since World War II, we had absorbed the Keynesian lesson that when private spending diminishes, you need the federal government to step in and deficit spend, in order to keep purchasing power up. As a result, in the 50 years since World War II, we haven't had a depression. We'll be back to where we were in the nineteenth century.
If this balanced budget amendment goes through, it's going to make it virtually impossible for the automatic stabilizers to go into play in a recession. As unemployment rises and tax revenues decrease, the government will be forced by law to compensate for that loss of revenue by either raising taxes or cutting spending, which is exactly the opposite of what you need to do in an economic downturn. It�s a formula for turning recessions into depressions.
There are two other important points. First, this will put the economy at the mercy of the Federal Reserve Board. That is, since we will be abandoning fiscal policy as a way to deal with economic slow downs, all we will have is monetary policy, meaning lower interest rates. But the Federal Reserve Board has never been all that concerned with unemployment and keeping wages and purchasing power up. Its primary self-defined function is to be the guardian against inflation. So you have the institution that is normally reluctant to stimulate the economy become the institution upon which we depend for economic stimulus.
Second, given the fact that monetary policy takes nine to 18 months to affect the economy, we are going to have to wait too long for our only stimulus tool to have an effect. So the balanced budget amendment is really a formula for disaster.
MM: Is there any legitimate concern about the size of the budget deficit?
Faux: Sure. It's better to have less debt than more debt. And the debt that we ran up in the 1980s, going from about $1 trillion to $4 trillion, is a burden on the economy.
But it's a terrible mistake to be so obsessed with this deficit issue that it obscures the larger questions of how the economy grows and the need for investing in infrastructure and human capital in order to give our children the tools they need to compete and make it in the world.
The notion that somehow the most important thing we can do is to leave as little debt as possible to our children lacks common sense. Take two families, both of whom have a child graduating from high school. One family says to the child, "Well, we'd have to borrow the money to put you through college. But if we did that we'd end up with more debt to pay off and we wouldn't be able to leave you as big an estate when we die. So we're not going to put you through college."
The other family says, "We'll go out and borrow money and put you through college because that's the best thing for you." Most people would say the second family was more responsible to their children. To a significant degree, that's the same thing that we're talking about here. Most families go into debt. Anybody who has bought a house with a mortgage unbalances their budget in the sense that we calculate the federal accounts.
The federal government doesn't have any capital accounts. If it puts up the money for a bridge that's going to last 50 years, all of that money is slapped against the current budget. That makes no sense. If we had a capital budget, then there would be a good case to be made for balancing the operating budget, and having a capital budget for borrowing for long-term projects. But we don't have a capital budget, so a simple-minded obsession with the deficit distorts our ability to invest in the future and to stabilize the economy.
MM: How do you account for the obsession? Why is there such support for a balanced budget?
Faux: I think it is due to the remarkable ideological organizing success of the conservative part of our political world and the timidity of the liberals, and particularly the Democratic Party. The deficit itself is more symbolic than real in the voter's mind. Despite the fact that the Republicans ballooned the deficit during the 1980s and despite the fact that Clinton - whatever else you might think about him - actually has done some of the hard work that conservatives say needs to be done to reduce the deficit, an overwhelming majority of voters think that Republicans are more fiscally responsible than Democrats. That tells you that there's something going on in the voters' minds other than an analysis of the budget numbers from the Office of Management and Budget.
That something else is the steady drumbeat of propaganda against the government, against government spending, and the lack of spine on the part of the side that is inevitably identified with the use of government to solve public problems.
Over the last several decades, liberals, accepting the premise that the American people are ideologically conservative and operationally liberal, conceded the principle of the effectiveness of government action to conservatives, and focused instead on bringing home the bacon to individual special interests in terms of programs. Having acquiesced on the principle for so long, the Democrats and the liberals really were quite helpless against the anti-government onslaught in the 1994 elections.
MM: Are there substantial economic interests underlying the campaign for a balanced budget, or is it basically just a politically driven move?
Faux: Oh, sure, economic interests underlie most of this stuff. Financial capital rules in America today. Both the Republican and the Democratic parties have essentially become wards of Wall Street. What we see these days is a sophisticated version of a very simple proposition: lenders will do anything to keep the dollar and prices stable while creditors benefit from a little inflation. To their own long range disadvantage, the bond markets are obsessed with this idea of a fiscal conservatism, and I think that's where a lot of the pressure for a balanced budget comes from. You look at the Clinton operation, and there really is virtually nobody there who can stand up to the Wall Street view of the world. In the long run, I think that if the balanced budget amendment passes in the states, you're going to see some negative reactions in the financial markets. But right now they're not worried about the year 2002, they just care about what's going to happen in the markets in the next half hour.
MM: What kind of stimulus or investment strategy would you ideally like to see enacted?
Faux: I would like to see a capital budget, focused on investments in physical and human infrastructure and separate from an operating budget. I would capitalize an investment trust which would finance a 10- or 15-year catch up spending program with a tax stream that would last maybe 30 to 40 years. A capital investment program designed to rebuild our cities, and create meaningful jobs and career ladders and upper mobility in the inner city and to convert a lot of our military technology into civilian projects would be the centerpiece of an economic program that I would adopt.
On the matter of conversion, by the way, I think that the failure of this administration to have a serious conversion program is part of what explains the movement now to add more money to the defense budget. The Cold War is over, but by 1999, we'll be spending as much in real terms on defense as we were spending in the mid- 1970s. This is madness, and a complete waste of resources.
MM: What would adopting a conversion strategy actually mean in practice?
Faux: It would mean making some national commitments, especially in the area of transportation and environmental technology. These are two areas where you don't get too much of an argument that the government has an important role to play. The broad-brush answer is you'd set some national goals and you'd be willing to give contracts to current defense contractors that were interested. If they weren't, you would be willing to give long-term contracts to companies formed out of the people and some of the resources that are currently used in defense. This sounds radical, but it is the way many technologies have been developed.
In 1919, British Marconi made a bid for the subsidiaries of General Electric that had patents for long-term radio transmission, which was the big technology of that era. The Woodrow Wilson cabinet said, "No way. We're going to develop this ourselves." They called in Westinghouse, GE, AT& T and some other companies. Because none of those companies were willing to develop it, the government formed a new corporation to take the patents and the Navy Department put some equity money into it, and they began to work on developing the technology. A few years later, they renamed the enterprise the Radio Corporation of America. That's how RCA was started. So there's lots of precedent for that kind of thing.
The end of the Cold War was such a historic moment that this kind of program could have been sold as something that was extraordinary. You could make the argument that these technologies, people and production systems were national assets: when we need them for defense we ought to apply them to defense. If we need them to build electric trains, we ought to apply them to that. Some people will say that that's inefficient. But it's a hell of a lot more efficient for those people to be out there figuring out how to make bullet trains at perhaps a higher price than someone would like to pay than it is to have all of those people now spending their time making missiles that nobody is going to use - I hope.
MM: Why isn't there more support in the manufacturing sector for the kind of ideas you are outlining?
Faux: I think there are several reasons. One, a lot of these manufacturing companies have become less manufacturing companies and more financial companies. They also have become more multinational and have lost their interest in the economic development of the United States. Two, the defense people need to be led. They don't know anything about new markets and doing something in some other industry. There's a whole culture that's built on Uncle Sam, and Uncle Sam's got to lead.
MM: Shifting gears, how serious a problem is capital flight for the economy and economic policy?
Faux: It's more serious than it used to be, obviously, with the creation of a global financial system. Anybody, no matter what their politics, has to pay more attention to financial markets and the so-called judgments of the global financial world than they had to 30 years ago.
Saying that, however, I think it has been exaggerated on several levels. First, while the United States is engaged in more international trade than it used to be, roughly 90 percent of what is made in America is sold in America. So we're really still largely dependent upon our domestic economy.
Second, there's a lot of myth and mystique about the markets themselves. I think a lot of central banks and international policymakers hide behind the imagery of the markets telling us to do this or that. I'm convinced, for example, that there are not too many people on Wall Street who, when they look at the price of a 30-year bond, are really thinking about what the inflation rate's going to be 20 or 30 years from now. Mostly what they're thinking about is what Federal Reserve Board Chairman Alan Greenspan is going to do next week.
Third, the markets are manipulated all the time. The line between these volatile mysterious financial markets and real people making decisions in governments to take advantage of markets, either personally or for other reasons, is pretty thin. I'm convinced now that, while the devaluation was inevitable, the run on the peso was precipitated by Mexican high rollers who are very close to the ruling party and who got a whiff that the peso was going to be devalued. They bailed out, and that then triggered the bailout, which, of course, was done in the name of the free market.
Fourth, failure to make the distinction between speculative capital and capital that goes to invest in real goods and services gets us into a lot of confusion. We end up trying to tax capital less and put more of a burden on labor to save more so that there will be enough investment. But a lot of that investment just gets put into the black hole of speculation. For example, investment in Mexico disappeared when the stock market collapsed and the peso devalued. Most of that stuff was just speculative paper. The real investment in plants around the border actually will do quite well.
MM: What about corporate flight and the effect of international competition?
Faux: The question of international competition is very real. There are two international parts to what's driving wages down in this country. One is real competition, especially from low-wage countries, but from others as well. And the other is the threat of competition, whereby the game of chicken is played by labor and management, where the management says you've got to take this cutback, otherwise we're moving to Mexico .
Labor has to make a decision on how real that threat is. But, with the North American Free Trade Agreement and the availability of cheap labor in Mexico, you don't have to be a Ph.D. in economics to figure out that if Mexican productivity is 80 to 100 percent of U.S. levels, and getting closer all the time, and wages are 10 to 15 percent, then there's some incentive for going South.
People have this notion that, well, we're really just talking about unskilled labor. First of all, the economist's notion of unskilled labor is usually anybody who hasn't graduated from college. That makes up 75 percent of the labor force. But, second, you can get computer programmers in India as competent as they are here and you can pay one-fifth of the price for them. You can get them in Russia. So, it is a real problem and, in the absence of any kind of international labor regulation, it's going to continue to be a problem.
MM: Do you believe that developing international labor and other standards is the best way to address the problems posed by international competition?
Faux: You've got to face some hard choices here. You can't participate fully in the global economy and not have institutions that regulate that economy. Sovereignty has got to be sacrificed. Ask yourself some simple questions: If we're in a global economy, where is the central bank of the global economy? Where is the Securities and Exchange Commission? Where is the Occupational Safety and Health Administration for the global economy? At some level that seems absurd, but the logic of a global market is that you either have those things and you get a stable marketplace with some hope that you'll have rising living standards all around, or you're into some nineteenth century version of the marketplace with a lot of volatility, a lot of exploitation and a lot of suppression of wages.
I think that a sensible, progressive answer to this issue is to insist on trade being strongly linked to verifiable and enforceable labor rights and standards. While we can't force anybody else to adhere to these standards, we can refuse to trade with them if they don't. I'm not so sure that that's off the political horizon. I think that, if properly framed, this whole issue has got a lot of political bite.
The other point is that you got to have international institutions. The problem, of course, is what happens to not only sovereignty but to democracy? Those are hard problems. There's a lot of honest struggling going on about that in Europe now and I think that's the place where the future's happening, at least the future that I would like to see.
MM: What are your views on more protectionist sorts of approaches?
Faux: I'm pretty pragmatic on that. I think that you trade when the conditions are right. You don't trade when the conditions are wrong. In the latter case, I would be protectionist. I'm not afraid of that idea.
In a country like Mexico, it's official government policy to keep wages rising at half the rate of inflation, which means you've got a permanent real wage decline in Mexico. That condemns at least a big chunk of the American labor force to a similar permanent wage decline. That makes no sense, and if the only thing available to stop that is something that people call protectionist, then so be it.
But I don't think that the vision is either we seal up the borders or we leave ourselves open to the absurd practices of the past couple of decades. The intelligent approach is that you have standards, you have reciprocity and you don't stop the process of negotiation because somebody gets up in Mexico and says, "You can't trample on our sovereignty." When the Mexican upper classes' economic interests are at issue, there never seems to be any problem of sovereignty. They give themselves over to Wall Street in a minute. But if someone suggests that you ought to have a decent minimum wage, you suddenly hear a lot of nonsense about imperialism.
MM: You identified the ways in which international competition is driving down or at least stagnating real wages. What are some of the other factors that account for the dismal U.S. wage performance of the last 20 years?
Faux: It's a related package. Many economists talk about the productivity decline. If you look at the tradable goods sectors, there actually hasn't been that much productivity decline. In those sectors, it turns out the median wage has not been tracking increases in productivity for the first time since we've been calculating these numbers. That suggests that productivity benefits are being shared less and less with workers and they're going to other costs, to lower prices or to profits. One of the things in back of that is that the bargaining position of unions and workers has been weakened. That is partly because of a very aggressive effort by employers to undercut and eventually destroy unions, and partly because of the shift from manufacturing to services. There are some other causes, like the lower value of the real minimum wage.
MM: Do you view concentrated corporate power as an economic problem?
Faux: There's an interesting shift going on in the power of corporations. Old line corporations are downsizing and you get these newer virtual corporations that are leaner and meaner are becoming more important in the economy. Leaner, meaner and less unionized. That's a challenge in several ways. It's a challenge to government regulation because it's easier in some ways, once you've got a regulatory strategy, to regulate big companies rather than smaller ones because you can get to them.
These smaller corporate units also tend to be more mobile, more flexible and they pose a problem for the labor movement. And I can't imagine a politically credible progressive future unless you have a strong labor movement. So, you've got those changes going on. But I don't think the labor movement yet has a strategy about how to deal with some of these smaller, more flexible markets and kinds of organizations.
There's another thing that's going on. Since World War II, we've had an alliance between government, especially the Defense Department, large defense contractors and unions. It has been a burden on the economy, but within it's own sphere it had a virtuous cycle. Unions supported defense budgets and received the benefits of expansion, etc. We're now seeing that system - in some versions called the "iron triangle" - diminishing in power. As the Cold War disappears, the companies that are becoming politically more important are companies that are not committed to manufacturing in the United States but are committed to manufacturing where they can get cheaper labor.
In the old system, high wages were part of the glue that kept the working force loyal to the corporate-government structure. In the new system, the American working force politically has been abandoned and now you've got the government, perhaps more the State Department and the Commerce Department, out there helping American corporations find places in the world where they might produce cheaply. The deal that followed World War II between the corporate community, its unionized labor force and government is breaking apart. A new deal has been formed, and there are only two partners. Labor is being dropped out.
Another point is that in the global economy corporate power vis-a-vis the public sector has increased. Twenty-five years ago, we all knew about how corporations were playing off one state against another state for tax breaks and subsidies. That has now gotten to the level of the United States versus other countries. The hidden point to Commerce Secretary Ron Brown roaming around the world to secure contracts for the U.S. companies is that he's making concessions. The United States is being played against other countries or other groups of companies. Just the way that the Illinois taxpayer or Arkansas taxpayer has had to subsidize the business community in order to keep it from going other places, so the American taxpayer as a whole is more and more subsidizing U.S. companies in a variety of ways.
Around the turn of the century, when we had economies that were essentially state and regional economies, national corporations were created and ran roughshod over the states. Finally we got federal legislation to impose, as John Kenneth Galbraith called it, countervailing power. Now the multinationals have broken the bounds of the ability of national governments to restrain them; the question then becomes: is there some international order that's necessary? I think the answer is yes.
You and I can sit down and draw boxes and say here's the [international] central bank and here's the international Securities Exchange Commission, but that wouldn't be worth anything. The real question is how you develop a politics that recognizes this and creates a popular understanding that this is our objective situation and, from there, develop a democratic politics around this understanding. But we are at the very, very embryonic stages of that. Meanwhile, the multinationals are off to the races.