FAT YEARS AND LEAN The American Economy Since Roosevelt By Bernard D. Nossiter Harper & Row. 271 pp. $22.50
IF GEORGE GALLUP polled Americans about what's gone wrong with the economy, imagine the range of answers. The deficits are too big. The debt is too high. The Japanese are too tough. Too many mergers. Too little saving. In Fat Years and Lean: The American Economy Since Roosevelt, Bernard D. Nossiter, formerly a national economic reporter for The Washington Post and former United Nations bureau chief for the New York Times, provides yet a different and more provocative answer, one worth mulling over even if you do not agree with him.
Looking at economic policy from Franklin Roosevelt to Ronald Reagan, Nossiter's preoccupation is with the ways presidents have managed government spending, taxes and interest rates.
The theme is clear. The economy worked best when all efforts were directed at full employment. During the "fat years" job creation was the main target, and other goals were subordinated. To put everyone to work, Washington was willing to spend more money and to reduce taxes when there was economic slack. It would then recapture revenues as business picked up.
The mechanisms for keeping the growth engine running in this way were in place until the 1980s. In bad times, the Pentagon spigot could be turned on and unemployment compensation could be increased; moreover, the government had a manageable deficit as a starting point. The Federal Reserve could ease credit by lowering interest rates, too. As recovery took place, a progressive income tax, which guaranteed that increased earnings resulted in disproportionately higher taxes, insured that the Treasury would be repaid.
Roosevelt, Truman and Eisenhower supported such policies, which were called Keynesian economics. President Kennedy, in particular, embraced them. And from the early 1940s to the mid-1960s, the American people benefited handsomely.
From Johnson onwards, however, presidents took a different course. LBJ ignited inflation with unrestrained war spending, and refused to levy new taxes to cool off the economy. Nixon, Ford and Carter were paralyzed by skyrocketing oil prices. All seemed to lack direction. Why? Because, says Nossiter, they forgot the simple lesson about what makes the economy tick -- that is, jobs. Instead, their compasses went haywire, and they alternated between repressive tax increases and half-hearted stimulation, between wage and price controls and free markets. The result was a vicious circle. Uncertain policies caused business to cut back on investment. This led to fewer jobs. As workers had less to spend, consumer demand dropped. Business contracted even more.
Nossiter's wrath is saved for the 1980s. Ronald Reagan, he says, deliberately abandoned the attempt of eight presidents to reach high employment, and consciously followed policies to put people out of work in order to hold down prices. By carelessly running up the deficit, he paralyzed fiscal policy. By gutting the progressive income tax, he reversed four decades of income transfer from rich to poor. It was class warfare, in the author's view, and the nation paid dearly in terms of the human misery and lost productive capacity. It was action, he says, based on "country club economics."
"Reagan and his friends thought the welfare rolls were loaded with loafers and cheaters," says Nossiter. "So federal funds for the poorest must be cut drastically . . . there had to be a big increase in military spending. It would show the Russians and be good for business without threatening to create the socialism of welfare spending. These feelings are a commonplace in the locker rooms of the country clubs in affluent suburbs across the country. They reflect the wisdom of comfortable men drying themselves with terrycloth towels, standing on carpeted floors, enjoying a companionable drink at the nineteenth hole."
The supporting cast in this saga is large, but most do not come off well. In the Ford years, for example, Treasury Secretary William Simon and Council of Economic Advisers chairman Alan Greenspan were unimaginative. Under Carter, CEA chairman Charles Schultze was politically naive. In the 1980s CEA chairman Martin Feldstein wanted to line the pockets of the rich with lower taxes. Donald Regan (formerly chairman of Merrill Lynch, then the largest investment bank and brokerage firm in the world) was "a stockbroker turned Treasury secretary." Nobel laureate Milton Friedman engaged in pop sociology and not economics. Paul Volcker was arrogant and his policies catastrophic. Economists generally were sycophants, and businessmen liked deflation and beaten-down employees. About the only praise to be found is for economists Arthur Burns and Walter Heller, who are pictured as strong and skillful advisers. FAT YEARS and Lean is a serious indictment. Nossiter is at his best telling a story, as when he describes how Roosevelt and his advisers wrestled with overcoming the Depression or how the Federal Reserve fought to become independent of the administration. He is a master of quick and simple explanations on issues like the political implications of cutting taxes versus increasing spending, or the politics of military budgets. On the other hand, in his description of the last decade or so, he has oversimplified America's plight and has given short thrift to the dilemmas faced by policy makers.
In the end, his recommendations may salve populist yearnings, but they are not apt to be meaningful guideposts.
How should Reagan have reacted to the 19 percent inflation he inherited -- with lower interest rates? Weren't his pork barrel defense spending and his tax cuts Keynesian? At the outset, there was terrible unemployment, but weren't the last six years of the administration a time of unprecedented job creation? These are not rhetorical questions and the answers are not simple. But the questions do underline the weakness of Nossiter's nostalgic, one-theme approach to the economy.
Another recent quandary for America, barely acknowledged by the author, is our increasing interaction with the world economy. Nossiter's prescription for modern economic slumps is to prime the pump by running even larger government deficits than the United States now has, as well as to reduce taxes. Let's assume that he got his way and economic activity started to rebound. What would happen then?
In the 1960s and 1970s most of the increased consumer demand would have been satisfied by U.S. producers. But in the early '90s, Japan, South Korea, France and Italy will supply many of the televisions and cars and clothing that will be bought; some 40 percent of all capital goods will come from abroad. In other words, many of the benefits of boosting the American economy would go to other nations. Imagine what kind of budget deficit we would need to get the same results we would have expected in the old days.
In the 1960s and 1970s the United States would barely have been distracted by what foreign markets thought of American deficits. Today, Wall Street and the Treasury quiver when Tokyo and Bonn, America's main creditors, criticize our economic policies and when foreign investors implicitly threaten to raise the cost of lending to America.
In the past, if lower interest rates caused a big drop in the value of the dollar, America would have yawned. Today, there would be a painful increase in the price of imports and a panic as the stock markets tumbled.
The sad fact is that with every day that goes by, the United States loses more and more of its independence to make effective policy.
Finally, in focusing so exclusively on Keynesian policy, Nossiter may be giving too much importance to general stimulus from the budget or from the Federal Reserve.
Yes, spending on public works can create jobs. But what kind of jobs? The need is for high quality work where wages are decent and disposable income means something. However, the good jobs require a technically skilled workforce, and they won't be filled unless the deterioration of our schools is arrested and technical training for workers is vastly improved.
Likewise, lower interest rates can give companies an incentive to expand. But unless changes are made in the operations of our capital markets, many firms will borrow not to build new facilities but to take over someone else.
The point is that whatever the goals of government policy -- including high employment -- the level of spending and taxes is now merely a starting point for our complex economy.
Of course, there is an Alice-in-Wonderland quality to any discussion about sensible fiscal policy today. In the 1980s, the big crime was not that economic policy was too lax or too restrictive; it was that the administration and Congress made a mockery out of governing altogether. In what other major industrial country is the national budget a shameful display of shell games and accounting gimmicks? Where else among America's competitors is the budget no longer a tool for setting priorities, but rather a frantic exercise in avoiding automatic, across-the-board cuts?
Whatever political compromises are made this summer or fall, the odds of a responsible long-term fiscal policy, taking into account the savings and loan mess, the illusive peace dividend, the requirements for education, etc., are pretty slim. It would already be a tall order for the administration and Congress to recapture just a bit of credibility before the American electorate and world. Nossiter, who writes passionately on this subject, must feel bad and even enraged. So should we all. Jeffrey E. Garten, an investment banker in New York, worked in the Nixon, Ford and Carter administrations. He is writing a book for the Twentieth Century Fund on upcoming trade conflicts among the U.S., Japan and Germany.