Galbraith's "The Predator State"

[idlisambar]

cross-posted from Economy forum

I got the “The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too” by James K. Galbraith this past Christmas, and I just got around to reading it. The “Predators” he’s referring too here are those who use government institutions to set the rules in their favor at the expense of broader society. The book is actually a bit broader in scope than the title suggests, in particular it is not the typical liberal screed detailing the abuses of the Bush era. The scope of the work is much broader than that. At its best it is really an interpretation of the past 40 years of economic history.

Galbraith’s speaks from his perspective as “The Last Keynesian”. He began his professional career just as Keynesian economics was falling out of favor, and having served on the U.S. congressional staff in the early 80’s, he had a front-row seat as conservatives took the nation in a different direction. His father, John K Galbraith, is of course was an economist who as much as anyone is identified with the Keynesian consensus of the post-WWII era. James K. Galbraith, the son, is an economist very much in the mold of his father, and for me the most interesting part of the book is that it represents a worldview from an earlier time – giving a picture of what economists of this earlier Keynesian consensus era would think of today.

What Galbraith pushes in this book is a Keynesian resurgence, and given the recent economic troubles, his timing couldn’t be more perfect. I’ll say right off the bat that I find much of Galbraith’s analysis plausible and I agree with many of his policy prescriptions (with important exceptions). That said I am pessimistic about a return to Keynesianism. Too much time has passed and I’m afraid that the institutional memory for the type of program Galbraith wants is long gone; in some sense the US would have to start from scratch. In particular, the economics profession itself has gone in a different direction, so much so that Galbraith’s views are seen as iconoclastic by today’s generation of economists even though they amounted to the accepted wisdom of an earlier era. With all this in mind, let’s take a look at what he says.

The first part of the book is an all-out assault on the ideology of conservative economics. This ideology, characterized by supply-side emphasis, monetarism, and devotion to the notion of the "free market" set the tone in the early part of the Reagan administration. The program this ideology inspired was quickly shown to be a failure, and as such it was abandoned quickly by conservatives, kept alive only in rhetoric. Here, Galbraith spends some time explaining why it failed and had to be abandoned.

The most vulnerable pillar of conservative ideology – the monetarist theory that the money supply determined the rate of inflation – fell first and fell hard as he lays out in the chapter “Uncle Milton’s War”. The monetarists made the tactical mistake of making very precise predictions linking the money supply to inflation. When the data diverged from the predictions in the 80’s the theory died (even Friedman eventually conceded) but the policies born of it – mainly that the Federal Reserve through its role in setting interest rates controls inflation – live on today. In my opinion this is the most interesting single chapter in the book, as Galbraith talks about why inflation got out of hand in the 1970’s (hint – collapse of Bretton-Woods), and why traditional Keynesian price controls failed to tame it. Ultimately he argues that the inflation problem was overblown, and that the eventual cure – Paul Volcker’s severe hike of interest rates in the early 1980’s – was worse than the disease. The success of the interest rate hikes in taming inflation, he argues, were due to the structural changes brought on by the severe recession that followed – the collapse of organized labor and the acceleration of globalization with its introduction of low-priced imports.

A second pillar of conservative economic ideology – supply-side economics – is dismissed in the chapter “Tax Cuts and the Marvelous Market of the Mind”. Increasing the rate of saving was the original argument for drastic reductions in the taxes for the wealthy. Galbraith shows that the theoretical case here was weak and in actual practice the boost in savings never materialized. Galbraith goes on to note that in today’s “Predator State” the case for tax cuts on the wealthy has morphed considerably in response to the evidence and is now based on the simpler Bush-era belief that “it is their money (not the government’s), and they should get to keep it”.

Galbraith then discusses two other notions of conservative economic ideology that have been adopted almost universally among policy elites of both parties – the notion of the importance of balanced budgets and free trade. Without making Galbraith’s case here, I will say that Galbraith departs from the conventional view that balanced budgets are something to be strived for, and in fact makes the case that the given the current system , the appearance of a balanced budget implies imbalance elsewhere – as with the bubble economy of the late 1990’s. On Free trade, while disagreeing with the so called “Washington Consensus” he does not make a protectionist argument, and instead makes the case that the standard frame of debate does not capture the more complicated reality of trade. He first dispatches with the notion of “comparative advantage” as a basis for policy – making the case that it is more catch-phrase than serious theory. He then launches into a more nuanced discussion, giving examples of when trade works and when it doesn’t.

If part one was about the failure of conservative economic ideology, part 2 is about the system we have now that emerged from that failure. This is where Galbraith introduces us to the “Predator State”. Galbraith talks about the system his father analyzed, “the age of organizations”, began to break down due to the effects of globalization. With the retraction of the American industrial corporation came the expansion and shift of power to the postindustrial economy – finance, silicon-valley tech, and services. With this came a corresponding shift of power from organizations to individuals – the venture capitalist, the tech entrepreneur, the free-agent CEO. Whereas the advanced industrial organization was constrained by regulation to act toward the public interest, and in turn relied on regulation to clear the field of less sophisticated competitors, the new power actors sought to control the apparatus of the state and use its institutions toward their own ends. Major business interests in areas such as health care (insurance, pharmaceuticals), and housing finance work use the government to create a more favorable business environment for themselves. Conservatives (along with “Third Way” Democrats) have largely been serving these interests in the last 30 years while pretending to take principled free market stances.

Of interest in these chapters is not so much the notion that Conservatives have not been true to their stated principles – this is uncontroversial at this point, nor is it that certain business interests have outsized influence on government – again uncontroversial. More interesting here is Galbraith’s interpretation of how these interests came to fill the power vacuum that remained as the old organizational state broke down – Galbraith fills the gap between his father’s world and ours

In the 3rd and final part Galbraith lays out an agenda for progressives. The main thrusts: 1) Only use “market-based” solutions when they are the appropriate tool for the job. When there are better options available use them instead 2) Introduce genuine “Economic Planning”, rather than simply assuming outcomes determined by “The Market” represent the best of all possible worlds 3) Construct an regulatory system that serves the public purpose 4) Don’t be afraid to run budget deficits, as they are virtually guaranteed by the current international system.

Without going into details, I will just note that Galbraith’s proposals are ambitious but not as outrageous as they might have seemed a year ago. In fact, many of his priorities resemble those laid out in Obama’s budget (rebuild infrastructure, invest in Energy, etc) While we are a still a long way from “Economic Planning” of the scale Galbraith suggests, the political landscape has shifted enough to at least contemplate the type of program he lays out. Such a sea-change would be difficult politically, and it would go against the grain of mainstream economics, and for this reason I am not particularly optimistic, but such big transformations are not unheard of in our economic history.

That said, the program has a very definite weakness or at least an uncertainty – the aggressive spending proposals have to be financed by large deficits with most of this funding coming from abroad. Galbraith is confident that the privileged position of the dollar will allow the US to carry out this spending program, but is this confidence justified? Will our foreign creditors really be willing to foot the bill for our economic transformation? Galbraith himself expresses some uncertainty here, but his confidence in the fundamental strength of the American economy reassures him that this is the best course. He reasons that the alternative, the straightjacket of “fiscal responsibility” is the greater risk in the long run as it would compromise the dynamism of the US economy and in turn limit its long term growth. Galbraith further reasons that in acting boldly to boost our underlying fundamentals our creditors will have every reason to have confidence in us. Me, I’m not so sure.