conomics "inevitably blends ideology and science."
This dictum of economist Joseph Schumpeter, passed on by Nobel Prize winner James Tobin to a group of economists during last week's annual meetings of the American Economic Association, has a lot of truth. So much so that many non-economists, looking to the "professionals" for answers to today's huge economic problems, see more ideology there than science.
Many of the hundreds of economists gathered in New York this week worried over their image and over what clear policy prescriptions they could offer in a world hit by the worst slump since World War II. There is "intellectual chaos" in the profession, William Nordhaus of Yale University acknowledged at one session, blaming this at least in part for what he described as the "complete policy paralysis" in this country and abroad.
"It bothers me sometimes that economists follow fashion," said Robert Solow of the Massachussetts Institute of Technology, adding, "I suppose being up to date is a lot easier than making sense."
Nordhaus did not blame his professional colleagues entirely. Economics has been "polluted" by the nonsense often talked by people in government who want to justify what they are doing, or by others who want to promote ideas that do not have the backing of much of the profession, he said.
President Reagan's supply siders are an obvious candidate. The supply-side notion of having tax cuts to boost the economy, together with monetary control to fight inflation, swept the political scene and influenced Reagan's economic policy. But it never was taken very seriously by the bulk of the economics profession.
Even in Washington, supply-side fervor has abated now. Radical economist Robert Lekachman of the City University of New York commented with glee that "Reaganomics had the shortest life span of any economic idea in my recollection." The new members of Congress coming to Washington this month apparently are wary of ideology.
But it is not clear what will be put in its place. Although economists may like to think there are some scientific answers to today's problems that they can agree on, last week's meetings underscored their fundamental differences on what to do. Many of the sessions concentrated on narrow questions rather than broad policy issues. But there were also a lot of people here who worried about what Washington officials should be doing now to get the economy moving and to ward off a deeper world slump.
Most could agree on one thing: Contrary to the promises of some monetarists and supply siders, the fight against inflation in the last two to three years has been extremely costly, and whatever happens to policy now, unemployment is likely to remain extremely high for years to come.
In the words of Lawrence Summers, on leave from MIT to work on Reagan's Council of Economic Advisers, "When policy turns to being radically disinflationary, [it] leads to a sharp decline in real" gross national product.
From conservative economist Robert Hall of Stanford University, who devoted much of the paper he sent to the conference to a tongue-in-cheek analogy of unemployment with waiting in airports, "Forces that should take us back [to lower levels of unemployment] are working painfully slowly . . . disinflation is a costly process."
Liberals and radicals agreed with that, but agreement ended there. Even among mainstream economists, there was division over whether such a high price had to be paid to curb inflation, whether it was worth it, and--perhaps most fundamentally--whether the administration and the Fed now can do anything to reverse the recession and provide new jobs without falling back into the inflation trap.
Charles Schultze, economic adviser to former president Carter and the AEA's new president-elect, divided economists into two camps: those who believe that it always will take a huge loss of output and jobs to make gains against inflation, and those who believe that the price now being paid for bringing down inflation is only high because of overexpansionary policies in the 1960s and 1970s.
Once the inflationary expectations that became embedded during those years have been beaten down, it will be possible to resume growth and high employment without inflation, according to the latter view. However, if the first camp is right, then it always will be painful and difficult to reduce and hold down inflation.
Schultze put himself in the first group. He said that the "stickiness" of wages and prices, which means that they do not respond quickly to changes in demand, is a structural problem in the United States and not simply the result of an inflationary binge in the post-World War II period. Before the war, there was less inflation, he agreed. But that was because "we were willing to knock the economy on the head."
For 45 percent of the months between the Civil War and 1929, the U.S. economy was shrinking, he said. After World War II, the ratio shifted dramatically, so that the economy was contracting for only 20 percent of the time and growing for the other 80 percent.
An attempt to rid the economy of inflation entirely, in the hope that noninflationary and rapid growth will be possible thereafter, is doomed if the argument of the first group is right. If current fiscal and monetary policies are continued, the recovery will be only "feeble and halting," Schultze warned in a session on the prospects for the United States over the next five years.
Although he and the other two speakers called for measures to reduce projected federal deficits for the latter half of the decade, Schultze said that cutting the deficit would do nothing to promote recovery. Easier monetary policy and lower interest rates are the key to a stronger expansion, he said. Unless monetary policy is eased, "We will get pain that is greater than necessary," Schultze said.
He is willing to trade off a rise in prices to win some growth and a swifter reduction in unemployment.
Tobin later said that those who blame today's problems on an inflationary expansion of the money supply during the 1970s, and suggest that the expansion was pointless or unintended, really are saying that "we should not have had recovery from the two recessions" of the decade.
The monetary expansion was aimed then at boosting the economy out of recession, he said, adding, "I wish people would say . . . straightforwardly" that they believe policy should not have been aimed at recovery. "The idea that any recovery is inflationary" is responsible for today's continued recession, he said. Officials are reluctant to ease policy because of the fear of renewed inflation.
Federal Reserve Governor Henry Wallich indeed warned against recommendations for easier money policy, saying that giving up anti-inflation policy could lead to a quick burst of economic activity, which in turn would lead to high inflation and another stop-go cycle.
Wallich and many others at the conference stressed the international nature of today's economic problems. With growing worries about the stability of the world financial system, the meetings on international economics generally were well attended. The International Monetary Fund, which is now involved with several of the major borrowing nations, was criticized for advocating too restrictive policies for the poorer countries. These, in turn, worsen the economic prospects of industrialized nations, several economists argued.
The Fed's monetary policy also came in for criticism as an important factor worsening the problems of the developing countries. The reason for the current international crisis, with so many poorer countries now unable to repay their debts, is that "the Fed overreacted to inflation and failed to understand the impact of its measures," said Richard Herring of the University of Pennsylvania.
But despite the gloom about today's economy, in some ways the many Keynesians at the conference were more optimistic than they might have been. Although their ideas have been pushed aside by policy makers in recent years, many believe that there are ways of sharply improving economic prospects now. A return to the idea that government can and should stimulate the economy would aid recovery, reduce unemployment and make the coming years a good deal better than the past. Easier monetary policy was identified by many as the key.
With policy shifts, the problems of high unemployment and interest rates were "ameliorable," Schultze said. Although structural problems threaten the auto and steel industries, the United States is not in the process of "deindustrialization," he said. "There is not a shred of evidence" to suggest that the bulk of American industry cannot make the gradual structural adjustments that it needs to survive, and the United States "is in no danger of becoming a nation of hamburger joints and boutique owners," he said.
Others, particularly the radical economists, disagreed. "The crisis is going to be a very long one," according to Barry Bluestone of Boston College, who predicted "a decade or more of tremendous turmoil in labor markets and capital markets" as jobs in the older industries disappear.
At a session on the military economy, Lloyd Dumas of the University of Texas-Arlington complained that neither Keynesians nor monetarists look at the long-term processes of economic change, and how government policies affect them. John Ullman of Hofstra University, in a biting paper on the links between military buildup and the decline of U.S. industrial prowess, said that the U.S. economy has been like a Sleeping Beauty since 1960, with few successful innovations and a deteriorating industrial and technological prowess.
"Mr. Weinberger is the very antithesis of the prince," he said.