As will quickly become apparent, the economics designated under this rubric are hardly new. The novelty of the ideas is not what makes them interesting. Nor does their emergence as a loose consensus opposed to the previous "neo-classical synthesis" version of Keynesianism make their examination necessary. We need to scrutinize these theories because they are now the basis of very real capitalist strategy during this period of economic and political crisis.
In examining these theories we must give up the habit of simply "critiquing" every new fashion in mainstream thinking. There is no point in continually pointing out the errors in capitalist thought. This only helps them improve their analysis. What we must learn to do is to spy on mainstream theory -- to read it as the battle plans of those whose aims do not necessarily coincide with ours. We need to examine strategically -- from the point of view of everyday people -- the content of supply-side economics, to interpret its meaning in the current conjuncture of social forces in order to determine how we can best organize our forces to defeat it. This article attempts to carry out this kind of analysis of supply-side economics within the limited framework of the American domestic crisis and policy debates.
To reach the heart of supply-side economics, and the capitalist policies based on it, we must first get beyond two common confusions about its nature. One of these is the notion that supply-side economics is a free market economics opposed to state interventionism. the second is the notion of the supply-siders themselves that they emphasize "supply" at the expense of "demand".
At the level of theory this preoccupation with the market is understood by both supply-siders and their critics as a renaissance of the classical economics of Adam Smith, and Jean Baptiste Say. This means a return to Say's Law that supply creates its own demand. Smith and Say were right. Keynes was wrong. Governmental interference with market allocation sooner or later was bound to bring the sky down. The profession forgot this, listened to Keynes, not to Smith and Say, and now we are paying the price. This theme accelerated during the bicentennial odes to Smith in 1976 and has now risen to a crescendo.
At the level of policy, this position is associated with demands for a reduction in the role of government as a proportion of total economic activity. Typical of this demand is a policy statement by the corporate financed Committee for Economic Development calling for a determined effort "to move toward a phased reduction of the share of government spending in the GNP". This is a well-known conservative position that has been associated with a long line of right-wing spokesmen from Friedrich Hayek through Milton Friedman to ex-Secretary of Treasury William Simon. But it would be a mistake to confuse this anti-government stance with supply-side economics.
One example of why supply-side economics is not synonymous with conservative, anti-government politics is that of Lester Thurow. Over the last few years Thurow has emerged as a major spokesman for the imposition of policies that puts him squarely in the supply side camp. But he is also a liberal economist, long associated with the use of government intervention to improve income distribution. In his recent book, The Zero-Sum Society, he concludes his supply-side analysis of the current crisis with a call for massive government intervention to improve investment allocation and the distribution of income. He explicitly rejects the conservative tendency to blame big government for all ills, pointing out that the economies of both Japan and West Germany have out- performed the U.S. in recent years despite an even higher degree of government involvement in the economy. The attack on big government is simply part of an old debate about the efficiency of private versus state capital. We must look elsewhere to come to grips with the real issues at stake in this new brand of economic theory and policy.
Their alternative approach is the stimulation of supply by the removal of government regulations and reduction of taxation. Thus we find a call for reducing or eliminating: the taxation of corporate profits, environmental controls, maximum output and minimum input prices, etc. By making it more profitable to save and invest, it is argued, business will raise investment, increase productivity and produce growth, not recession. In this second formulation , we are offered a juxtaposition of Keynesian demand management economics with supply management economics instead of one of government versus market. Examination of the policies of so-called "supply-side" economics, however, reveals a very intense concern with demand, not its neglect. As well trained economists, supply-siders must know that the stimulation of investment is a stimulation of demand. At the same time, they also attack another side of demand: consumption demand. One of the central concerns of SS economists is the reduction of government transfer payments such as Social Security and welfare. Indeed the attack on government spending turns out to be primarily an attack on subsidies to consumption. This combination of policy recommendations makes clear that "supply-side" economics is not so much concerned with limiting the growth of demand as it is with changing its composition. There is an evident desire to shift the composition of demand from consumption to investment. This is the central issue.
But this dichotomy is a very misleading one. From the point of view of social relations Keynes' ideas, as well as their actual implimentation, can most usefully be formulated and understood in terms of the dynamics of growth. By so doing we can better see what is currently at issue.
In a simple formulation of the growth process the degree of growth in aggregate output is determined by how much output takes the form of new plant and equipment for producing additional product. The only limit to the rate of growth (along with the rate of technological change and the availability of inputs) is the degree to which final output consists of consumption goods for the presently employed population instead of investment goods or consumption goods for new workers. This is formulated in terms of real output.
In terms of money, the distinction which corresponds to consumption and investment is that of wages (and other non-wage forms of consumption revenue) and profits. Wages buy consumption goods. Profits buy means of production and hire new workers.
In terms of the character of societal development as a whole, the growth model is one of unending investment, i.e., endlessly putting people to work along side of machines. In the presence of labor saving technological change, more investment may mean fewer workers in a given labor process, but at the aggregate level expanding investment either picks up the displaced workers, along with new additions to the labor force, or the system faces the crisis of rising unemployment. that is what growth is all about. Capitalist society is organized around work and investment is the means by which that social order is reproduced on an ever expanding scale.
Growth, or capitalist accumulation, is threatened if profits decline relative to wages or some other deduction from production. The history of economic theory is partly a history of various economists coming to grips with this problem.
Ricardo, for example, saw how the rising consumption of the landed aristocracy, financed by rent, could cause a short-fall of reinvestible surplus. As theoretical spokesman for the rising capitalist class in its struggles against this aristocracy, he attacked what he saw as a parasitism that undermined growth.
Neither the classics nor Marx thought that rising working class consumption could pose a long term threat to profits or growth because they felt workers were dominated by the workings of the labor market. Despite Say's Law (which Ricardo endorsed and Marx dismissed) no one really expected the economy to grow smoothly. In the short period wages could rise and cut into profits, but before long the market would restore equilibrium. The dynamics of this process were explained in various ways. For example, if real wages rose above the equilibrium rate -- say because of a slowdown in population growth for Malthus or a shortage of the reserve army for Marx -- then they would be subsequently forced back down -- by an increase in population growth for Malthus or a crisis which replenished the reserve army for Marx. Thus the overall growth pattern could include both cyclical downturns and secular growth.
This way of thinking about distribution and growth, in the simplistic static model of the labor market, led easily to thinking about the relationship between wages and profits in terms of zero-sum games: someone's gain is another's loss. This kind of thinking was commonplace in the 19th century despite not necessarily being implied by the theory. In both Smith and Marx, for example, it is easy to show that they understood the possibility of secularly rising real wages within capitalist growth. However, it is probably not an exaggeration to say that most businessmen as well as most economists felt that any substantial rise in wages was a danger to profits and thus to investment and the future of the system as a whole. The righteous attacks on wage increases can be explained as much by a defense of growth and civilization as by simple greed.
The Great Depression of the 1930s resulted in the creation of a new level and composition of class confrontation which changed the rules of capitalist development. Keynes was one economist who grasped the most essential of these changes and formulated a creative capitalist response to them. In terms of growth, the problem faced by capital in the Thirties was the failure of the old cyclical mechanisms to bring about adjustments in the relationship between wages and profits, and in the balance of class power. In particular, despite the dramatic Wall Street crash and persistent massive unemployment, real wages and other consumption income failed to fall sufficiently to restore profitability, business confidence and hence investment. The interpretation of Keynesian economics as a response to the failure of "demand" in the 1930s, ignores that the central lack of demand was not consumption demand but investment demand. The growing strength of workers made wages "sticky downwards" (a given for Keynes) and pushed Roosevelt and others not only to support income with new social programs but also to support wages and unionization. Consumption demand was growing. But the very factors that supported this growth of working class power were also inhibiting investment demand -- business was effectively on strike. In terms of growth and accumulation the problem being posed to the capitalists and to their economists was how do you achieve growth when you can no longer use the old solution of periodically pushing wages back down via cyclical crisis?
The relatively unexplored side of the Keynesian solution is to be found in the composition of government spending and how it has been used to subsidize investment and technological innovation as well as demand. This is a subject that is usually ignored in macroeconomics and is relegated to public finance as a special field.
There have thus been two sides to the relationship between Keynesian policy and capital. The first was the club. Beginning with the Norris-La Guardia Act in 1932 business was essentially told by President Roosevelt that it had to accept wage increases and social security programs and respond progressively by raising productivity. He was acting under the pressure of the working class, but in the interests of the capitalist class as a whole. Those businessmen who understood the former better than the latter have hated him ever since. The second side was the carrot: expanded government spending was used to subsidize the necessary growth of productivity. This side really took off with World War II -- in which massive government spending was plowed not only into final demand (e.g. guns, tanks) but directly into increased investment (e.g., the building of new factories) and research and development.
This solution of linking rising real wages and rising productivity was partly codified in the much discussed "productivity deals" of union contracts, in which the rule of the thumb was that wage increases be tied to productivity increases. The solution was also guaranteed by the manipulation of monetary and fiscal policies. Fiscal policy permitted the government to intervene in both non-waged income (e.g. transfer payments) and investment via both spending and taxation. If during a crisis business failed to invest the government could tax profits and either transfer it to workers to sustain demand or invest directly itself. It could also cut taxes to stimulate final demand. On the other side, monetary policy allowed some impact on investment by affecting the interest rate in capital markets, but it was most powerful in generating whatever inflation might be necessary to undercut any rise in nominal wages above the growth in productivity. This would work as long as such inflation was fairly low and workers made no attempt to correct marginal drops in real wages. The lower real wages would help keep employment up.
In social terms, we can see that the rise in workers' power during the Thirties forced capital to accept two new conditions: permanently rising real wages and full employment (in the sense that cyclical high unemployment was no longer workable as a mechanism to regulate the level of wages). On top of this the working class also gained unemployment insurance and social security to cushion the shocks of marginal unemployment and retirement. These programs were vastly expanded in the Kennedy-Johnson programs of investment in human capital in the early 1960s. If Keynesian economics, with its prominent "consumption function, " has been a demand-side economics it has been because for the first time in history the working class has achieved the power to make its own "demands" for rising real income the point of departure for capitalist development!
What Critical Theory calls the "consumerist" logic of late capitalism refers directly to this new priority of working class need over capitalist development. Capital, forced to accept rising real wages, has tried to shape working class demand through advertising and cultural manipulation to prevent that demand from becoming the basis of further struggle.
This failure is not immediately obvious because it can easily be shown that real wages and productivity have pretty much tracked each other. The problem has only been manifested through a slowing of growth and an acceleration of inflation.
Unlike the monetarists who attribute inflation simply to an expansion of the money supply that exceeds the growth of real output, we can discover how accelerating inflation is symptomatic of deeper problems in the balance of class forces.
There is a general agreement among economists that the acceleration of inflation in the late 1960s was attributable to one of two causes, and probably a mixture of both. The first was President Lyndon Johnson's effort to finance both the War against Vietnam and the War against Poverty without an increase in taxes -- leading to demand-pull inflation. The second was an acceleration in the growth of nominal wages and benefits that, after 1967, increasingly outstripped the growth of productivity which was itself slowing down -- leading to cost-push inflation. In both cases a permissive monetary policy effectively sanctioned the increase in the price level.
What a social analysis of these two sources of inflation gives us is the insight that both were a manifestation of social conflict. Not only was the Vietnamese revolution an obvious war by peasants and workers against foreign domination, but the opposition to the war within the United States certainly raised its total cost. In the case of the wage explosion and the productivity crisis, here too we find their origins in workers' struggles. By the time American participation in the war declined in the early 1970s, the wage-price spiral was well underway. It was no longer useful to debate whether workers' wage increases were pushing up prices, or price increases were forcing workers to fight for higher wages. What was important was that workers continued to have the power to raise money costs (nominal wages and benefits) and to contribute to the stagnation of productivity growth.
Inflation ceases to be a solution to demand management and becomes a problem for business when accelerating price increases undermine real profits and disrupt capitalist planning. This occurs, for example, when unindexed tax rates lower after-tax capital gains or corporate profits. Analysing the extent of problems such as these has been a central preoccupation of supply side economists.
The reasons for the slowdown in productivity have been much debated. We can trace many of the most often discussed causes to growing social conflict. This is obvious in cases such as sabotage and wildcats -- major factors in mining where productivity has actually dropped 25% in five years. Also fairly obvious has been the widespread resistance of workers to the introduction of labor displacing technology that would raise productivity. Less obvious but still very important is the shift in the weight of industrial sectors from high productivity manufacturing to low productivity services. This has partly been due to changes in the composition of demand by workers (e.g. housewife demands for eating out) and partly due to the export of manufacturing jobs to Third World countries by capitalists fleeing more militant and powerful American workers. The rise in government regulations, especially those which impose the costs of improvements in job safety and environment protection have also been the direct result of workers struggles -- both in their role as workers and in their lives outside the factory. At this point it is also worth pointing out that the inability of capital to close down many low productivity operations -- to disinvest in so-called "sunset" industries -- has also bee partly due to worker resistance to losing secure sources of income. The reasons for the decline in productivity growth are not simple. But as the above comments show, many of them can be seen to be expressions of growing class power.
Parallel to this collapse of productivity in the industrial sector has been a similar crisis at the level of social capital. The rapid expansion of non-waged income through government transfers that occurred in the 1960s and 1970s as part of the War on Poverty, the Great Society and the attempts to upgrade the quality of labor power through investment in schools, failed to produce a more readily available, maleable labor force. The poverty programs became a source, not of disciplined workers, but of strength for more struggle. Educational scholarships were used to finance anti-war campaigns and countercultural explorations of new and diverse ways of being outside of work. The ecology movement forced the expansion of regulations to improve the quality of the environment and became one of the bases of the anti-nuclear movement. Welfare and family allowances were used by women to increase their power in the home to refuse domination and procreation -- undermining the reproduction of labor power. In short, the expansion of non-wage income was not off-set by a parallel increase in social productivity from capital's point of view.
The final breakdown of Keynesianism was marked by the failure of the recession of 1970 to stem the growth of wages and restore the productivity deal. The beginning of a new era of capitalist crisis management can be dated from August 1971 when President Nixon unhooked the dollar from gold -- ending the international monetary system -- and imposed wage and price controls. From this point on a series of ad-hoc crisis solutions were substituted for the previous reliance on Keynesian policy.
In response to the failure of controls, Nixon was forced to sanction a new round of inflation to offset he renewed growth of wages and benefits. These included administered increases in food prices in 1972 and then the repeated increases of oil prices after 1973. These price increases made it possible to transfer back to capital the nominal losses due to wages outstripping productivity. This was a new version of W.A. Lewis' approach to development in the 1950s. Lewis suggested the use of inflation to speed development by transferring real income from the poor who had low propensities to save, to the wealthy who had high propensities to save and invest. The inflation of the 1970s and the 1980s follows Lewis closely except that instead of an exaggerated Keynesian inflation managed through monetary expansion, we have had an administered commodity inflation made possible by an increase in the money supply. As a result of this inflation the rapid increases in money wages, which continued despite the Great Recession of 1974-75, were neutralized and real wages were held fairly constant and then brought down.
Because of this ability to use inflation to undercut wage increases the so-called "rational expectations" economists have argued that the present behavior of workers is irrational when they try to raise their real wages above productivity gains. From their point of view the policy object must be to undermine inflationary expectations, to shift the Philips curve down and establish a rational equality in the growth of wages and productivity at a low level of inflation. Once the expectations of inflation are broken, they argue, people will rationally adjust their demands to their willingness to work and to the ability of the economy to produce.
This critique of worker behavior exemplifies the inability, or the unwillingness, of mainstream economists to come to grips with what is at stake in the current crisis from the point of view of the everyday people. As we will see, supply-side economics understands the situation fairly well from capital's point of view; at least it knows what conditions have to be created for capitalist development to proceed. What it has difficulty seeing is the new vision of social development implicit in those social struggles that have produced the crisis.
The rational expectations critique of working class behavior only holds if we accept the underlying, implicit assumption that the distribution of relative shares between capital and labor must remain fixed. If we drop this assumption then there is no necessary irrationality involved in the simultaneous demands being put on the system for increased social wealth and for less work.
The demand for more income and wealth embodies one side of working class self-defined development of needs. The refusal of work constitutes a rejection of capitalist conditions for growth namely the linkage of wages to productivity within the context of a fixed working day. For here is the rub. The Keynesian productivity deal generally assumed that the average working week (approximately 40 hours) would remain constant. And this was largely the case throughout the pot-WWII period until the late 1960s. During that period people pretty much accepted the argument that rising wages and income had to be tied to rising productivity. But over the years the rise in the absolute level of consumption undermined that. Today people in growing numbers no longer accept the idea that you have to work more in order to get more -- at least so their actions indicate. Even though there is always a struggle over speed up, twenty-five years of rising productivity has been based more on technological change and the substitution of machinery for labor than on increases in the intensity of labor. This teaches an important lesson. It shows materially what the definition of rising labor productivity says abstractly: more output for a given amount of work. But, this also teaches that rising productivity technically makes possible an increase in the amount of output that can be obtained from less work. For example, a technological change that enables a worker to produce 200 units an hour instead of 100 units, also enables her to produce 150 units in only 45 minutes.
The rejection of the productivity deal amounts to a demand that society should be reorganized around the principle of more wealth for less work. It amounts to a demand for a change in the basic nature of growth to one in which increasing output is obtained with continually declining amounts of work.
In some ways this constitutes a return to the demands of an earlier era. Between 1870 and 1940 the struggles of American workers chopped the average working week almost in half: from about 75 to 40 hours. The subsequent generation fought for more wealth to use in the time made available. The present generation, having grown up with the forty hour week and rising real income, has now renewed and old working class demand to take the fruits of productivity growth in the form of less work and more time away from work. At the same time, people have moved far beyond the earlier period. Whereas the period 1970-1940 was one in which capital colonized the increasing free time with its institutions of cultural domination (public schools, home economics, etc.), this last period has been one in which that colonization has been challenged on every side. Not only have people been fighting for less work but they have been experimenting with many new forms of self-development. This positive content of workers' struggles over time has been called a process of working class self-valorization by Italian Marxist Antonio Negri. These struggles have carried popular resistance beyond either utopian or socialist ideologies by actually constituting independent moments of development outside and against capital -- moments which both constitute and prefigure the emergence of a new society.
This is why the current crisis is so profound. Not only does it strike at the very heart of capitalist accumulation by rupturing the productivity deal, it goes deeper than the crisis of the 1930s by demanding a new kind of social development in which life is increasingly freed from the constraints of work. It is possible for capital to respond positively to the demand for more wealth if it can enforce its relative surplus value strategy. It becomes increasingly difficult for it to respond to the demand for less work because its very social order is based on imposed work and imposed surplus work (surplus value). for capital to concede to the demand that rising productivity be continually converted into less work as well as more consumption would be to conceed to its own demise. For as the hours of labor are reduced, both in production and reproduction, the time over which capital comands is also reduced. As capital's control over labor time slips away, its control over social life must also decline. Along this path "business" ceases to be a major social force and is relegated to the mere managerial supervision of production to meet human needs -- "human" because with the decline of work, the "working" class dissolves.
Under these conditions capital must rebel. It has demonstrated time and time again that it is not willing to give up its control over society peacefully. As a class the capitalists are not willing to give up their power. As individuals they are not willing to give up their superior income and social status. For them the present crisis is one of life or death. Either they succeed in restoring the connection between work and income, and with it their ability to rule, or they are doomed as a ruling class. This is the threat to them. This is the opportunity for us. Supply-side economics constitutes one set of capitalist strategies for responding to this threat.
Perhaps because of its peculiarly American origins, supply-side policies are often presented in a very "populist" wrapping by their main ideological spokespersons. Central to this populism is the assertion that Keynesian economics went awry by creating a series of incentives that distort people's natural tendencies to inventiveness and hard work. Supply-side policies are designed to "free" society from these influences and to create a more propitious climate for individual enterprise and intitiative.
When we examine the content of these policies we discover that this populism is just a gloss for the old conservative belief in using poverty as a spur to force people to work. This is most obvious with respect to the attacks on exactly those programs workers obtained in the Keynesian era that reduced their dependence on capital. It is less obvious, but just as true, with respect to the supply-side proposals for positive incentives, especially tax cuts.
The attack on government transfer programs includes the rejection of welfare, unemployment insurance, social security, food stamps and medicare. Martin Feldstein, one of the most prominent supply-siders, built his reputation by his willingness to take on one of the earliest and most sacred programs of the New Deal: social security. Not only does social security reduce the pressures to work hard now to save for retirement, but it may also encourage early retirement -- the withdrawal from the labor force of older workers. Arthur Laffer's, and many other supply-side, attacks on welfare and other income maintenance programs make the same general point: these programs must be eliminated to remove their disincentives to work. Income must not be maintained if people are going to be made available for work. Welfare must become at least Workfare, and preferably be eliminated entirely. Among these assaults on nominal income growth, we must also regroup the standing conservative attack on minimum wage, and more recent attempts to repeal both child labor laws and prohibitions against indrustrial home work. What we have here are modern versions of very old capitalist arguments against the English poor laws and in favor of using the weapon of poverty against the refusal to work
These proposals directed against workers' money income are complimented by similar proposals to repeal many of the regulations of OSHA, and the EPA that have improved working and living conditions.
The attacks on the income of waged and unemployed workers are also complimented by parallel proposals directed against students and women -- two of the most conspicuous protagonists of recent years. The central proposal against students is the reduction of government aid to schools and scholarship programs. the major attacks against women include the reduction of aid to mothers on welfare and the general offensive to roll back gains made by women in the area of abortion rights and the refusal of procreation. If much of the rhetoric concerning this last issue is left to the Moral Majority and the Right-to-Life Movements, it is not because it is inimical to the supply-side programs to force people to work more -- in this case women would be forced back into their role as procreators. It is simply a division of labor among conservative forces. The close connection between the reduction of women's rights and the ability to force men to work can be seen in George Gilder's book Wealth and Poverty." Gilder, who has become something of a conservative guru, expounds at length on the importance of family pressure as a stimulus to forcing men's energies into constructive work. As his overt sexism makes clear, the major problem confronting capital is the imposition of work -- in reproduction as well as production.
Let us now turn from these negative spurs to work, to what supply-side economists consider their program of positive incentives. Without doubt the most widely proclaimed element of the supply-side program has been the proposed reductions in personal income taxes. This suggestion is best known in the form of the Kemp-Roth plan for an across the board reduction of personal income taxes of 10 percent a year for three years. The most important feature of the plan is the way it will supposedly encourage greater work effort by people who will now receive a greater after-tax income for their efforts. This comes directly through the 10 percent cut, and indirectly it is supposed to encourage greater work over the long run by making the income tax structure less progressive. In effect, by one calculation the proposal would reduce marginal tax rates from 14 to 10 percent at the lowest level while reducing from 70 to 50 percent at the highest level.
Explicit in this argument that cutting taxes will increase work effort is the assumption that most people's labor market behavior can be characterized by an upward sloping labor supply curve. In other words, it is argued that if income taxes are cut, real after tax wages will rise and people will be willing and ready to work longer and harder. The supply-side economists rarely consider the possibility that at current wage levels, many people are no longer interested in working more for higher wages but are rather interested in taking more of their wealth in the form of time away from work. They do not take seriously enough the evidence that many, perhaps most American workers are already on the backward sloping portion of a backward bending supply curve of labor. For such workers higher after-tax wages will lead only to less work, not more. This formulation not only reflects the growing refusal of work, but it is also more in line with the frequent conservative lamentations over the decay of the work ethic within the cultural contradictions of capitalism.
Regardless of the beliefs of the supply-siders, an examination of the Kemp-Roth proposals suggest that it is not likely to provide much of an incentive to most workers. This is simply because the proposed tax cuts will have very little impact on the income of most workers. In the first place, a ten percent tax cut in a period of ten percent inflation means that there is very little real cut at all. In the second place, those workers at the bottom of the income hierarchy who already pay no taxes will not be benefited. Those in the middle range receive relatively small benefits (and are hurt most by "bracket creep"). The major absolute and marginal benefits go to the rich who don't need income incentives.
These tax cuts, along with proposed cuts in business taxes, can also be seen as a defensive reaction to the rapid growth of the underground economy of off-the-books employment that evades taxation. Reducing taxation lowers the advantages of this kind of activity relative to risk. However, even on this ground, the magnitude of the tax cuts being discussed are not likely to have much impact.
Much of the supply-side argument about the obstacles to greater growth has been directed at the so called "crisis of savings". "Over the long term", says Martin Feldstein, "the real problem is savings and how to stimulate a high rate of saving." (Other supply side economists agree with this assessment. They only differ on the appropriate policies to produce higher savings.) The object in raising savings is just as clear: to increase the resources available for investment which must also be raised as a percentage of national output. Feldstein and many other supply-siders prefer policies that stimulate private savings and investment. Others such as Lester Thurow believe that the private sector has demonstrated its inability to do the job, and call for the creation of massive government budgetary surpluses and national investment boards instead.
Feldstein's work on the social security system has been preoccupied as much or more with its tendency to reduce savings as it has with the disincentives to work. Supply-siders are all concerned with the steady decline in the personal saving rate out of current disposable income. It fell from around 8 per cent in the early 1970s to less than 5 per cent in late 1979. This decline was associated with a rise in consumer credit as workers continued to expand their expenditures in a period of stagnant real wages. It was against this working class use of credit that Fed Chairman Paul Volcker, on March 14, 1979 raised interest rates and changed credit rules. This move was very much in line with supply-side objectives of reversing these trends and increasing the saving rate.
What these lamentations about the decline in personal savings usually omit to mention is that they constitute only some 25 per cent of all savings. The other 75 per cent is corporate retained profits. Moreover, there has been no dramatic decline in the availability of corporate savings -- at least not in the aggregate. In some well-known cases such as the oil multinationals, the recent price increases have brought in vast amounts of net earnings, most of which have been retained. Statistics on corporate liquid assets show no shortage of investible resources. All of this suggests that the "savings crisis" is not the real issue in the stagnation of real capital formation.
This is reinforced by supply-side arguments that accuse government taxation and regulations of hindering investment in new productive plant and equipment. "We face a tremendous problem," argues Alan Greenspan, "of overcoming the increasing preemption by government of large chunks of savings flows from productive private investment..." In this view private business is "crowded out" of the capital market by government debt financing, is stripped of its retained earnings by the taxation of capital gains and corporate profits and is forced by government regulations to spend its investible funds on various unproductive projects such as antipollution or industrial safety equipment. Thus the supply-side program invariably calls for reducing or eliminating taxes on capital and deficit financing -- some are even pushing for a constitutional amendment to this effect -- and dramatic cutbacks in regulations that raise costs to business. One of the central reasons for supply-side concern with bringing inflation under control is the way it increases real business taxes and undermines profits.
Prominent among these proposals are tax breaks for business -- either directly in the reduction in corporate taxes and capital gains taxes, or indirectly in accelerated depreciation write-offs. One justification for such cuts is Laffer's tax curve relating actual revenues to tax rates. He argues that when tax rates are raised too high they begin to undercut economic activity -- reducing the incentives to work and invest -- and thus lower the actual amount of revenue the government can receive at the higher rate. The United States, is, he argues, already at tax rates well above the optimal level and those rates can be cut back substantially without reducing government revenues. Now this theory is obviously based at least partly on the previous observations about labor supply curves and has been applied to justify income tax cuts as well as business tax cuts. At this point, however, I am concerned more with the question of the relationship between government taxation of business and the willingness to invest. Laffer's argument is very straightforward. Business invests to make profits, if high taxes undermine the rate of profit sufficiently then business will cut back on investment, economic activity will decline and government revenues will fall. This argument can be generalized to state that any and all changes that tend to reduce the rate of profit will tend to reduce investment -- a statement not at all at odds with Keynes' thoughts on the behavior of the marginal efficiency of capital curve. If business has had sufficient savings in recent years to finance far more productive investment than it has undertaken, then we might suspect that the reason lies in business dissatisfaction with the going rate of profit.
As William Nordhaus and Martin Feldstein have documented, and debated there has in fact been a secular fall in the rate of profit over the 1960s and 1970s. It is not an exaggeration to say that in response capital has been, effectively, on strike. When it has invested the object has been diversification and conglomerate mergers more often than investment in new products and new technology. The case of the oil companies has been one prominent example cited by critics of supply-side economics to show that the deregulatin of oil prices is not resulting in higher exploration and production as promised. Instead the oil companies are taking over coal fields and buying supermarkets. The supply-side demands for reducing business taxes, regulatory costs, and capital market constraints, along with attacks on consumption, are aimed at achieving a secular reversal in the trend of profitability as a precondition for productive investment. It is important to understand that business is on strike because it does not like expected profits and the "business climate" created by growing government programs that help workers, the it is quite possible that a cut in taxes together with the associated reduction in expenditures on programs judged to be inimical to business health could indeed produce more investment, more growth and higher revenues. In this way the reasoning behind the curve does point to an important series of connections in current capitalist strategy.
The failure of the crisis strategies of the early 1970s to change this pattern was indicated by the low rate of real capital formation which was a dominant and much discussed characteristic of the weak recovery after the recession of 1974-75. Since then business investment has reached 10 percent of GNP only because of a slowing in growth. Continuing stagnation in the growth of aggregate demand has created a situation of growing underutilization of capacity further undercutting incentives to invest. This has been especially true for factory construction (structures) which has continued to account for a smaller share of GNP than in every year between 1947 and 1974.
Solving the productivity crisis requires business to invest in research and development and in new, more productive technology. But declining rates of profit have lead to a refusal to invest. Without investment productivity will continue to stagnate. The supply side program is aimed at breaking this vicious circle forced on capital by the working class, by raising the rate of after-tax profit. Those supply siders such as Lester Thurow who are impatient with and skeptical of the ability of private capital to respond to increased incentives argue that the process can be speeded up through government action.
Thurow argues that "the direct way to solve the problem [of generating more savings] in an equitable manner is simply to run a surplus in the government budget of the appropriate magnitude". The budgetary surplus, according to Thurow, would then be used by the government to finance investment and the creation of jobs. "Since private enterprises is incapable of guaranteeing jobs for everyone who wants work," he argues, "then government, and in particular the federal government, must institute the necessary programs". What he suggests is nothing less than "a socialized sector of the economy" designed to put everyone to work who is not employed in the private sector. We have here a vivid example of how supply side economics regroups within its framework the "socialist" prospective of the social Democratic left as well as the "capitalist" perspective of the free enterprise right. They all share the same preoccupation: putting people to work via increased investment.
The analysis of investment, however, goes further than a simple desire to increase it, or even of the desire for new productivity raising technology.
Central to much recent discussion is the understanding that raising productivity and putting people to work requires a fundamental restructuring of the productive apparatus. In the early 1970s, explicit government restructuring policies were largely absent from discussion of raising investment. Debates about the "capital shortage" mostly dealt with aggregate investment requirements. Unlike Western Europe where "industrial policy" has been an integral part of economic planning throughout much of the post World War II period, American policy makers have largely shied away from overall planning, even though the government has always had a de facto industrial policy made up of its myriad interventions that affect the structure of particular industries (regulations, antitrust law, protectionist measures, etc...).
Under these circumstances private industry has been the principal agent of industrial restructuring to date. Whether this restructuring concerns the organization of the labor market or shifting capital investments between products, within or between industries, or between regions, the initiative within the U.S. has come mainly from the private sector and has then been validated, or hindered, by government actions. As the crisis has deepened, however, the existence of new patterns of disinvestment and investment has come to be recognized and studied. Well known examples are the rise of so-called high technology industry (e.g. microelectronics), the emergence of new energy sectors (e.g. nuclear and then solar systems), the rise of the Sunbelt (e.g., the massive shift of capital investment from the old manufacturing centers of the Midwest and Northeast to the South and Southwest), and the runaway shop phenomenon of multinational corporations moving production facilities out of the U.S. to areas of cheaper, more disciplined labor. It is already clear that these changes are so far advanced as to be constituting a new composition of class forces. Each of these changes means a reorganization of both production and reproduction: of the factory, the labor market and the community. Each of these shifts in capital investment is being used as the occasion to undermine previous patterns of working class organization. The supply-side push for increased investment is wielded against most people's consumption; the restructuration of capital is the means of decomposing a social power that has undermined its pre-eminence.
As these private movements have developed and have been studied, a debate has emerged concerning government policy in this area. Supply-side economists all agree that the process should be speeded up to hasten productivity growth and undermine workers' ability to refuse work. They differ only over the kind and degree of government intervention that is warranted. The free enterprise advocates of the supply-side right want the government mainly to remove measures which restrict business. They believe the market will best indicate the directions for capital to move. Liberal interventionists, on the other hand, argue that government action can help identify the "sunrise" industries whose development should be facilitated, and can use its overview and resources to speed up this process. For example, for industries where disinvestment is judged desirable supports such as international trade protection can be lifted and resources made available to move workers into other jobs.
In response to those who object that industrial policies of this sort deny the value of market forces, some pro-interventionists, such as the Trilateral Commission, respond that the policies are designed to "make markets work better," that they are designed to work "with" market forces. Others, such as the AFL-CIO, Felix Rohatyn Lester Thurow, and Ronald Mueller, are less persuaded of the usefulness of "market forces" and see state intervention as the only means to fulfill the failed promise of capitalism: putting everyone to work. "Since we regard the United States as a work ethic society," Thurow proclaims "this restructuring should be a moral duty as well as an economic goal...we have a moral duty to guarantee full employment." These debates are not unimportant for anticipating the direction of capitalist strategy in the United States, but they are secondary to the generally agreed-upon goal of achieving a pattern of restructuration in which a new balance of class power is established, making possible a new cycle of investment and accumulation.
It is important to note that although it does not lie within the usual province of supply-side economics, the current debates over restructuration in the sphere of reproduction are every bit as fierce as those over production. Along with the supply-side call for reducing the income of workers, students and women on welfare, there is also an extensive national policy debate over how best to restructure the school and the family. The breakdown of the Keynesian investments in "human capital" have led to many experiments and much discussion over the reorganization of those investments to restore capitalist control lies in the need to restructure production and reproduction simultaneously in such a manner that they complement each other. Supply-side economists have not generally addressed this problem, but it has been taken up and debated by other intellectuals, conservative and liberal, who understand that raising investment cannot occur without changing the framework of reproduction.
That Reagan's plan is ideologically on the right wing, free market side of the supply-side spectrum is shown by its rhetoric. The overall goal of the recovery program is "to nurture the strength and vitality of the American people by reducing the burdensome, intrusive role of the Federal government." This program includes: a reduction in the growth of Federal expenditures, a reduction in tax rates, reduction of federal regulations, and a restrained monetary policy aimed at controlling the growth rate of the money supply. These policies, it is claimed, will create "a dramatic improvement in the underlying economic environment." Detailed analysis of this plan reveals that the "strength and vitality" it is designed to nurture, and the "environment" it is designed to improve, are both those of American capitalism, not those of the "American people." When Reagan said government fiscal policy must not be used to "bring about social change," he most definitely meant change that hinders capital accumulation. He is more than willing to build a budget to help it.
Overall, Reagan's budget, which by law is a revision of Carter's, proposes to cut 1982 expenditures from Carter's proposed $736.9 to $695.5 billion, a reduction of some $41.4 billion. Further reductions are planned for the next four years, rising steadily to $95.8 billion in 1986. A considerable portion of these reductions come directly from programs benefiting the the poor and middle classes.
Policy changes aimed at reducing workers' consumption include the following cuts in 1982 social programs: $1.8 billion in food stamps, $1.6 billion in child nutrition, $1.2 billion in unemployment benefits, $1.2 billion in trade adjustment assistance, $2.2 billion in cuts to education (including $1.9 billion in student loans and $800 million in grants). While the degree to which each of these programs has strengthened workers in their struggles can be debated, it is clear that these cuts embody the supply-side program of slicing the "padding" out of the lower end of the income hierarchy.
Another important government program Reagan wants to cut is the Comprehensive Employment and Training Act (CETA) program that provides public service jobs to the unemployed. The proposed cut of some $3.6 billion is designed to throw some 300,000 persons out of their present jobs and into the private labor market. Killing CETA typifies the freemarket position of Reagan's advisors within the sprectrum of supply-side economics. They reject the position that the State should be the "employer of last resort."
Reagan has also moved against standards of living by using his executive power to cut regulations that protect workers and raise business costs. Upon taking office he immediately blocked any further regulations and set up a Task Force on Regulatory Relief. Since then he has sanctioned the removal of a wide variety of protective rules that are "not justified on the basis of benefits." The whole federal bureaucracy is under orders to reduce regulations on everything from consumer protection testing, to automobile and job safety. Among the regulations quickly thrown out by Reagan in his first weeks were labeling requirements for dangerous chemicals used in industry, energy conservation criteria for materials used in home construction and efficiency standards for home electrical appliances. To this kind of deregulation must be added his decontrol of domestic oil prices eight months ahead of Carter's schedule. All of these moves have the impact of reducing working class real income and thus increase pressures to work.
In terms of "positive incentives" to incite people to work harder, Reagan, after some debate among his advisors, included the Kemp-Roth proposal for a 10% cut in income taxes as a central feature of his recovery plan. I have already discussed the likely limited impact of such a program on work effort. When we put the stingyness of these so-called positive incentives alongside the substantial cuts in income maintenance programs, it seems more likely that the income tax cuts are only an illusory bribe offered to the middle class so that they will keep quiet while Reagan goes after unwaged and low income workers. The bribe is illusory not only because there is little real substance, but also because once programs such as welfare, food stamps and unemployment insurance have been crushed, it will be easier for capital to attack the wages of those higher up the wage hierarchy -- those for whom these programs will no longer provide back-up support. Divide and conquer may be an old strategy, but it is still being used.
With respect to the stimulation of business investment to help resolve the productivity crisis, Reagan's proposal contains three elements: increased depreciation write-offs, reduction of regulation costs and massive defense expenditures increases.
The first part of the proposal takes the form of an "Accelerated Cost Recovery System," that sets new, shortened periods over which the costs of various investments can be deducted from gross income before calculating taxes. The expected impact of the new schedules will be to increase corporate investable funds by some $9.7 billion.
The second part of the proposal, deregulation, was discussed above. Many of these changes cut business costs while they reduce most people's standards of living. Besides the administrative costs of regulatory programs, the Reagan proposal estimates the costs of compliance with present regulations at some $100 billion a year. These will be reduced as quickly as the administration can manage it.
The third subsidy to business, made up of increased defense expenditures, is planned to be at least $7.2 billion greater that the Carter budget which already raised military spending plans above present levels. The Reagan plan will raise Department of Defense outlays from 24.1 percent of the 1981 budget to 32.4 percent in 1984. These expenditures, as I have pointed out, include not only outlays for final products but also direct financing for research, development and investment in required plants and equipment. This part of the plan is being packaged and sold as part of the current post-detente climate of a new cold war with the Soviet Union.
In an attempt to sell his budget a "evenhanded" Reagan has argued that it contains a number of budget cuts that will adversely affect business. Added together those budget cuts which clearly hurt some parts of business add up to only about $5.5 billion, a sum hardly able to balance out an explicit cut of $9.4 billion in "social entitlement" programs and considerable other cuts in programs for workers.
Reagan's monetary goals are pretty much in line with the monetarist position which has come to dominate U.S. monetary policy in recent years -- namely a continuation of the shift from using the Federal Reserve System to control interest rates, with an aim to encouraging investment, to the control of the growth of the overall money supply with an aim of forcing the reduction in some prices (especially wages) while others continue to rise (e.g. energy and food).
The Reagan program claims that these different policies will raise growth rates to a 4-5 percent annual path through 1986. This will be accomplished because "the most significant growth of economic activity will occur in the supply side of the economy. Not only will a steady expansion in business-fixed investment allow our economy to grow without fear of capacity-induced inflation pressures, but it will also increase productivity and reduce the growth of production costs..."
The primary preoccupations of social democratic Keynesians and supply-siders have been with the negative impact of the program on income distribution and with its possible inflationary wallop. They point to the cutbacks in social programs and the way the tax cuts are biased toward the wealthy and business -- a rich man's budget they conclude. They warn that the abandonment of progressive programs created in response to social turmoil together with a perceptible increase in income inequality, risks plunging the country back into the conflicts of the 1960s. In opposition to such policies, they generally call for some form or incomes policy. Skeptical of the program's ability to generate rapid increases in savings and investment, they look at the aggregate amounts of tax money that will be left in peoples' hands ($44.2 billion in 1982 raising to $162.4 billion in 1986) and argue that the money is more likely to be spent than saved and would generate a new round of demand-pull inflation. Finally they attack the reduced role of government in generating and guiding the creation of investment and employment. They especially dislike the proposal to abandon the CETA jobs program and the withdrawal of government from overseeing alternative energy development. Having less faith in private business' willingness to respond with vastly expanded investment they want more, not less, government intervention to spur "reindustrialization."
The Keynesians pull out their "accelerator models", point to current high levels of underutilization of capacity, and call for government programs to expand demand. The liberal supply-siders generally agree but emphasize the ways those government programs can directly increase the share of investment.
Right wing conservatives point out that despite the anti-government rhetoric of Reagan's program, it only slows the growth of the budget rather than actually cutting it down. They also point out that while income taxes are to be cut, increases in social security taxes and inflation-induced "bracket creep" largely off set these reductions. They are even more vociferous about the limited nature of Reagan's tax cuts for business. They lament the absence of direct reductions in capital gains taxes and corporate income taxes, as well as the continuation of Carter's "windfall profit" tax on domestic crude oil production. Libertarians also attack Reagan's planned expansion of military spending. Overall conservatives consider that both they and supply-side economics have been betrayed by a President who campaigned on a right-wing platform, but who has swung back to traditional moderate Republican conservatism, back into the arms of the East-coast establishment.
Most importantly in social terms, the broad attack on social programs has prompted the mobilization of just about every group of people who have made gains over the past two decades, to defend their positions. The various coalitions of pro-welfare groups that grew out of the urban insurrections of the 1960s, and that have successfully resisted previous attacks on such programs as food stamps, child nutrition, and welfare, have once more moved to mobilize their constituents and their lobbyists. National organizations of teachers and students have also mobilized to fight the cutbacks in education. Although Reagan's original proposal left social security old-age benefits untouched, subsequent demands for their substantial reduction has resulted in the rapid activation of the well-organized block of retired workers. Under pressure from rank and file, organized labor is protesting the reduction of a wide range of programs, from cuts in Black Lung Trust Funds, to reductions in unemployment benefits and trade adjustment assistance. All of the program reductions which irritate these groups also throw fear into the hearts of local and municipal governments who must deal with angry workers directly. As a result, the representatives of theses governments are also protesting these cuts which they fear may undermine their ability to control local unrest. They are warning Reagan that the underlying conditions that produced the urban insurrections of the 1960s have not changed and that only the government transfers to ghetto residents have prevented further upheaval. They point to the widespread looting during the "Black Christmas" blackout in New York City and the recent black explosion in Miami as indications of how delicately social stability is balanced.
How effective these pressure groups will be remains to be seen. With a Republican-controlled Senate and the House potentially dominated by a coalition of Republicans and Southern Conservative Democrats, ideological commitments may well outweigh the usual tendency for Congress to mediate these diverse social forces. Even if this is so, and Reagan's proposals are passed in anything resembling their present form, they will constitute only the opening round in what must be a new and prolonged stage of social conflict. As conservatives point out, the programs do not go far enough to totally reverse the balance of class forces. As liberals point out, the program may not work at all. And as popular mobilization is showing, people will not passively accept these attacks on the growth of their power. The supply-side economists know this and recognize that the implementation of their program will take many years to decompose the level of social power achieved over the last decade and a half. The necessarily protracted character of this conflict means that people also have time to come to grips with these capitalist strategies and to work out ways to defeat them or utilize them for their own development. What are called for at this point are careful assessments of each capitalist proposal for the restructuration of production, reproduction and income distribution. But such assessments will remain only woeful complaints against repression if they do not take as their point of departure a clear understanding of the growth of projects and spaces of self-valorization. Such understanding is the only possible basis for determining how such restructuration would be harmful and how such programs may be defeated or used. In other words, we must continue the project of this paper in spying on capitalist strategy, but we must do so from the vantage point of an equally clear understanding of our own power and its development.