Damn the Deficit! Full Employment Ahead! | Feature | Chicago Reader

Damn the Deficit! Full Employment Ahead! 

Northwestern Econoclast Robert Eisner, One of the Last True Keynesians

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Recession jitters abound. As the longest economic downturn since the Great Depression drags on, there's growing popular unease, not simply with President Bush's economic stewardship, but also with the long-term economic prospects for America. Yet while polls indicate the public wants action from the national government, the president and many prominent "mainstream" economists have adopted a cautious wait-and-see strategy.

Not Robert Eisner, the William R. Kenan Professor of Economics at Northwestern University who established a solid academic reputation many years ago for his studies of what influences levels of investment. Then part of the economics mainstream, he has watched fashion shift while steadfastly holding to and refining his course. Now 70, he frequently finds himself paddling against the new mainstream.

At December hearings before the House Ways and Means Committee he made an impassioned plea for a major program of public investment in education, health care, city reconstruction, and infrastructure repair and construction--roads, bridges, railroads, airports. Because of the current recession, he says, the country is producing $300 billion a year less than it could if people were put back to work. "I've been preaching that the economy should be stimulated. It's a continued public scandal. Think of the $300 billion we're throwing away. It's not just personal hardship, but our real wealth."

Many mainstream economists might say, "You can't launch new programs of government spending, even for worthy ends. What about the deficit?" And Eisner would answer as he has time and again: First, the real deficit is not as big as official statistics suggest. Second, government deficits--that is, borrowing--can be good, especially when invested productively (just as borrowing can be good for businesses building factories or people going to college). Deficits can be too small as well as too big (and foolishly or wisely spent). Third, when the economy is not operating near its full potential, government borrowing to stimulate economic growth is far better than the alternative, below-par performance.

Despite the assumption by numerous elite opinion makers, from conservative to liberal, that government borrowing and federal deficits will have hideous consequences, Eisner's arguments have little by little won some grudging respect. Oddly enough, he has been embraced most ardently by Reaganite supply-siders and traditional liberal adherents of an expansive government.

Yet Eisner flouts the conventional wisdom of both liberals and conservatives on issues other than budgets and deficits. Here are a few Eisnerian jolts:

The United States is not the world's greatest debtor nation, since the foreign assets purchased by Americans over recent decades are undervalued in the usual calculations.

The savings-and-loan bailout is not the fiscal disaster it appears to be; it's largely a bookkeeping transaction that will have little further impact on the economy.

Deficits may have fueled growth in the mid-80s, but Reagan's military spending was a deep drain on the American economy. Yet cutting military spending could raise unemployment if the government doesn't spend the peace dividend on useful projects, from education to railroads.

The United States should provide generous financial aid to the former Soviet republics, just as we did to western Europe after World War II--for our economic benefit as much as theirs.

Third-world countries whose economies are depressed by huge debts to the banks and governments of industrialized countries should simply default and start over, to the ultimate betterment of both their economies and ours, as we sell them goods they cannot now afford.

Eisner also takes others in his profession head-on, scolding them for attempting to work with poorly defined and therefore poorly measured basic concepts, including income, employment, consumption, savings, and wealth. "To put matters bluntly," he told colleagues in his 1988 address to the annual meeting of the American Economic Association, of which he was then president, "many of us have literally not known what we are talking about, or have confused our listeners--and ourselves--into thinking that what we are talking about is directly relevant to the matters with which we are concerned."

This iconoclast, who regularly testifies on public-policy issues and fires off controversial letters and op-ed pieces to the New York Times, is not a firebrand. Genial, mild-mannered, and avuncular, with a winsome smile and a wavy shock of white hair, Eisner seems quite content surrounded by the computers he uses in his daily labors tracking the relationships among basic variables of the overall economy.

His interest is macroeconomics--the big picture--more than microeconomics. Much of his recent work has been a kind of glorified accounting as he attempts to establish an accurate system of bookkeeping for the national economy. He hopes this will enable economists and policymakers to better understand such issues as how much we're really saving and what returns we really get on our investments, public and private.

To keep abreast of policy debates, he also reads the general press--the New York Times, the Wall Street Journal, Le Monde, Business Week, and Newsweek--though he says, "Press coverage [of economic issues] frequently appalls me." He reads and frequently contributes to Challenge, a bimonthly magazine that makes economic debates understandable to the serious but nontechnical reader.

Despite economists' claims that they're scientific, their social values deeply, sometimes unconsciously, shape their work. And Eisner's own background helps account for his professional concern with maintaining full employment to maximize social well-being.

Born to teachers in Brooklyn in 1922, Eisner grew up exposed to left and liberal political ideas from his family and social milieu. Around 1890 his maternal grandfather fled from a small town in what is now Ukraine--not to flee the draft, as his mother idealistically reported, but because his family's bootlegging business ran into trouble. Bribes to the czar's agents didn't forestall a raid, and he decided to flee after he was jailed for a night.

In America Eisner's grandfather had a hard time making a living, but he devoted himself to organizing workers for many years. "Finally," Eisner recounts, "the bosses would say to the union, 'All right, we'll accept your union, but first get rid of Genosse [Yiddish for comrade] Goldberg.' And they got rid of my grandfather." Comrade Goldberg, who at the tender age of 11 abandoned dreams of becoming a rabbi and decided he was an agnostic, was an independent radical. "He'd go to the socialist-labor camp carrying the Freiheit, which I think was the Yiddish communist paper, and argue with them. Then he'd go to the communist camp with the socialist paper and argue with them."

During the 30s Eisner witnessed but did not directly suffer the hardships of the Depression. "My mother used to say she voted socialist, not because she was a socialist but out of protest. But the last election she voted, in 1936, she deserted [socialist] Norman Thomas to vote for Roosevelt. My father was in the good liberal Jewish tradition."

Eisner's mother, an English teacher, died when he was 14, the same year he entered City College of New York. His father, a math teacher, urged him to be "a leader of men," and he developed an interest in history and the social sciences. It was a radical time for student politics: though Roosevelt won a campus straw poll for president in 1936, both the communist and socialist candidates outpolled Republican Alf Landon. Following in his grandfather's footsteps, Eisner remained a political independent and hoped he could bring together warring left-wing groups.

After getting a master's degree in sociology at Columbia, Eisner worked briefly for the government before enlisting in the Army at the beginning of World War II. In Europe for the next three and a half years, he was in combat for several months and made first lieutenant. Back in the States on leave, he met his wife-to-be, Edith, and they were married soon after. (They had two daughters and now have two granddaughters.) After he left the Army, he worked for several government agencies, including the Office of Price Administration.

From 1947 to 1948 he tried to organize North Carolina janitors and garbage collectors into the Public Workers Union. Eisner recalls that he thought his arguments had won over the antiunion Durham newspaper--until the paper ran a hostile editorial that concluded, "We don't need no outside agitators or spaghetti eaters from Brooklyn or the Bronx." Shortly after the North Carolina defeat he decided that union organizing was "too rough a life for me."

He turned to graduate work in economics at Johns Hopkins University. "I said, with idealistic intentions, that if I couldn't uplift people through the union, I'd work to improve the world through understanding the economy. I thought economics was a rigorous body of theory and could really get to the core of things, not just talk anecdotally or generalize."

Mainstream economics had undergone a revolution under the influence of the brilliant British thinker John Maynard Keynes, and Eisner became a leading American advocate of Keynesian ideas. Keynes had argued forcefully during the 1930s depression that, contrary to prevailing academic convictions, capitalist market economies were not always self-correcting. They could reach equilibrium at levels well below their potential, in part because there might not be sufficient demand--people wouldn't have the money to buy even if there were many unfulfilled needs and an abundance of products.

Keynes and his followers argued that government could stimulate the economy by borrowing and spending to increase demand for goods and services. That would set off a spiral of growth, which would ultimately increase private production, create jobs, encourage investment, and generate tax revenue. In many cases, Keynes argued, government would also have to make long-range investments that private capitalists were unwilling to undertake.

Elements of Keynes's ideas were widely accepted in the first decades after World War II, despite conservative harangues about the virtues of balanced budgets. But in the 1970s Keynesian analyses came under attack. Despite recession and unemployment, prices rose faster than expected. "Stagflation," as this peculiar mix of stagnation and inflation was called, seemed to confound Keynesianism. Unions were blamed for pushing up prices, even though they usually lagged behind or barely kept up with the cost of living (and most nonunion workers lost real purchasing power). President Carter's deficits of $30 to $50 billion a year (compared to Reagan deficits of $200 billion and more) were also seen as responsible for driving up prices.

At the same time a renewed conservative theoretical assault on Keynesian macroeconomics preached the virtue of unconstrained free markets. These conservatives argued that left on their own, markets worked perfectly, if not always painlessly. Any attempt to alleviate the pain or achieve ends other than what private markets dictated was naive at best and more often harmful.

Much of this attack was associated with University of Chicago economists such as Milton Friedman and Robert Lucas. Friedman argued for regulating the economy by controlling the money supply rather than by adjusting government budgets. Lucas's "rational expectations" school attacked Keynesianism for inadequately explaining individual behavior (or microeconomics). Some rational expectationists argued that government fiscal policy had no influence on the economy because rational people would always neutralize the effects of government deficits by factoring either future taxes or inflation into their decisions. Conservative trends in the economics profession coincided with a conservative drift in politics. Conservatism triumphed with Ronald Reagan's 1980 election, but it was already visible in the policies Jimmy Carter adopted late in his tenure.

As a result of these trends increasing numbers of economists who once might have considered a 3 percent jobless rate as full employment came to accept as "natural" a higher and higher level of unemployment. Pushing unemployment below, say, 6 or 7 percent, they argued, would simply set off a spiral of inflation. Of course Japan and many western European countries had maintained unemployment levels of 3 percent or less with minimal inflation for many years. To the embarrassment of those who believed in this natural-rate theory, unemployment in the United States slipped below 6 percent in the late 80s while the rate of inflation declined.

The new conservatives were dubbed the "freshwater" economists, because they were then concentrated at the University of Chicago, the University of Rochester, and other inland universities--as opposed to the previously dominant "saltwater" economists at Harvard and MIT, who were more Keynesian. The cute dichotomy has since broken down, but even when it was coined it ignored the high salt content along the Evanston shores of Lake Michigan.

There was also a slightly disreputable strain of conservative economics preached by the supply-siders, who revived the pre-Keynesian, long-discredited belief that "supply creates its own demand" (a view that inverts Keynes). They prescribed massive tax-rate cuts, especially for the rich, who would rush to invest so that overall tax revenues would more than make up for the rate reductions. Many conservatives joined this chorus out of their fundamental dislike of government, perhaps reasoning that even if the strategy failed, the deficits could be used as a club to attack all domestic public investment and social spending.

Reagan administration policy was a strange mismatch. The Federal Reserve, following Milton Friedman- style policies initiated under Carter, greatly tightened credit, raised interest rates, and choked off the economy to reduce inflation. But the Reagan tax cuts combined with massive increases in military spending stimulated the economy. In this tug of war recession won out. That eventually reduced inflation, but it also widened the deficit even further.

As the deficit grew, it became the center of debate. Many traditional conservatives called for budgets that were draconian in their austerity, even in the midst of the recession of the early 1980s. There was also renewed crusading for a balanced-budget amendment, which Reagan continued to advocate even as he ran up big deficits. Many Democrats, groping for a stick with which to beat Reagan, began bemoaning the deficits--a Republican tactic that had rarely worked well against Democrats in the past. In fact, all sorts of economic Cassandras warned of the perils of continued deficits. Many still contend that stock- market investors (or speculators) fear the deficit, despite a decade of deficits and a booming stock market.

Stagflation and the conservative theoretical attack drove many Keynesians to retreat. But Eisner persisted in believing that government borrowing could stimulate a sluggish economy. He argued that inflation soared in the 1970s even while unemployment was high not because Keynesian analyses had gone awry, but because two oil shocks drove up basic energy prices. Eisner looked again at the Carter administration deficits and concluded that, adjusted for inflation, the Carter budgets had really run surpluses--which were a drag on the economy. Even more shocking to the common perception, in real (inflation-adjusted) terms Japan during the same period had the largest deficits of any advanced industrial economy, and Germany and other successful competitors had larger real deficits than the United States.

Eisner recalculated the federal budget several ways, pulling his research together in a 1986 book, How Real Is the Federal Deficit? Deficits simply add to debt, but inflation erodes the value of the debt. This "inflation tax" on government bondholders reduces the burden of repaying the debt, since the federal government repays with "cheaper" dollars than it borrowed.

This major correction is critical, Eisner says, but he also argues that other points need to be kept in mind. First, if government spending and taxation at all levels were lumped together, state and local budget surpluses would reduce the net government deficit. Second, it is entirely appropriate for the federal government to borrow for capital investment that will increase productivity, much as local governments float bond issues for sewers or streets and businesses borrow to pay for new machinery. Third, the budget deficit is very much influenced by the state of the economy: each percentage point decrease in unemployment, for example, would cut the budget deficit by about $20 billion. The important yardstick, then, is the full-employment budget--that is, whether there would be a deficit or surplus if the economy were employing everyone who wanted to work.

Eisner argues that by borrowing, mainly from its own citizens, the government makes them richer and increases their willingness to spend. If demand for goods increases, then there are more jobs and income. There is also more wealth to invest and the potential for profit to motivate that investment. Rather than "crowd out" private investment, government deficits can actually "crowd in" investment (that is, instead of government competing with private borrowers for money, its debt can help enlarge the economy, spurring private investment).

Anyone holding a government bond will feel richer and therefore more inclined to spend, says Eisner. "Some people say that will reduce savings, but an increase in consumption does not reduce savings in the aggregate unless you hold income constant. But if we consume more, more will be produced, and there will be more income. Unless the economy is bounded by full employment, more consumption means more income and more saving."

Looking back over the decades since World War II, Eisner recalculated the deficits and surpluses that would have been produced if the economy had consistently been at full employment, and then adjusted for inflation. He found that shortly after the deficits were incurred, consumption, employment, and investment increased. Even stock-market prices rose, just as Keynes might have predicted, and inflation actually declined slightly.

In other research, former Chicago Federal Reserve Board economist David Aschauer, now at Bates College in Maine, has shown how larger federal spending on infrastructure (roads, bridges, sewers, etc) will actually increase private profit and investment more than a similar amount of private investment.

So despite the prevailing antigovernment ethos, two important points must be kept in mind: First, public investments boost the productivity of the whole economy. Second, deficit budgets can spark an increase in productive work in an economically sluggish time.

If the economy were running at full capacity, then big budget deficits could overstimulate the economy and spur inflation. Under those conditions, public borrowing could compete with private borrowing. But there hasn't been much threat of unemployment being too low in nearly a quarter of a century. Also, even during the time of the huge budget deficits of the 80s, billions of dollars were available for the takeover craze--deficits clearly did not make capital unavailable to private borrowers. To the extent that interest rates were too high (and in real terms are still too high), Eisner blames the Federal Reserve Board's tight-money policies.

So why don't Eisner's views win more adherents? "The popular view moves slowly, particularly when there are basic beliefs, dogmas, myths, and prejudices at work," Eisner says. "It took a long time for people to become convinced that the earth was round and not flat. A lot [of the sentiment concerning budget deficits] goes back to deep roots in the old puritanical tradition: it's bad to go into debt, bad to sin, debt is sin. Yet everyone knows you have to borrow. If you ask people in a public-opinion poll if it's bad to be in debt, 90 percent would say yes. Then you point out, "Well, didn't you want to buy a house?' Then they might be puzzled.

"In terms of economic ideology, there's an essential view that the economy is doing as well as it can, and there's nothing to be done about it--a capitalist, free-enterprise, private- property economy will automatically generate as close to full employment as you can get. If you accept that, then some of the arguments against budget deficits fall into place. If you're sure you have full employment, then a bigger budget deficit tends to be inflationary. Since people want to combat inflation--perhaps more than I do, since I recognize costs of combating inflation that outweigh the costs of inflation itself--combating inflation is done by tight money, and that does crowd out investment."

Eisner believes strongly that we're far from full employment. But, he laments, "a new generation of economists is somehow divorced from the notion that unemployment can be and is a major problem, and that the major inefficiency in our system, its major weakness, is unemployment. They tend to ignore it or accept it as necessary for the system."

There's no way to determine in advance the level of public debt that's desirable, Eisner says. If, for example, public capital investment is too low, the transportation system is collapsing, and the population is ill-educated, then those needs could justify more debt. "Aside from the fact that Reagan budgets hurt low-income people, the whole economy is hurt by the failure to invest adequately in the future," Eisner argues. "There's a lot of talk about savings and investment, but what people forget is that private saving and private investment are not easily influenced by government policy, except to the extent that a prosperous economy will give you more investment and hence more income and more savings. The big place where government policy can matter is public investment. That's what's being shortchanged. We don't invest enough in education, training, basic research, infrastructure--roads, bridges, airports, natural resources."

The conventional diagnosis of American economic ills is that Americans don't save enough or invest enough, that we've been on a consumption binge. The proposed cure is economic cod-liver oil--cutting back on consumption, saving more. But Eisner argues that makes about as much sense as applying leeches as a cure for malaria. Though the personal savings rate dropped in the 80s, the gross savings--government, corporate, and personal savings--declined only slightly. To the extent that there was a consumption binge, it was limited to the rich. With real income declining or stagnant, most people had to cut back or go into debt to maintain their standard of living.

Eisner has a more fundamental dispute with the belt-tighteners who want to raise taxes to reduce the budget deficit, supposedly freeing more capital for lending to private business. "I have a basic quarrel with people who somehow assume that if people don't consume there will be investment," he says. "That flies in the face of what any businessman will tell you is common sense. If I can't go out and buy a new Chrysler because my taxes go up, will Mr. Iacocca go out and invest in a new plant? If we buy fewer consumer goods, there will be less investment, not more. The old classical economists had a faith that somehow that's going to work out. If you assume full employment to begin with, then if you don't buy the car, you'll put the money in the bank, and the bank will loan it at a low rate of interest and encourage more investment. That's dogma. It doesn't work that way. If you don't buy the new car, the bank will have trouble finding anybody creditworthy to borrow the money to invest. What will they invest for? There's no demand for their product."

Eisner has another fundamental disagreement with many economists and business executives over what should be counted as "investment." This is no idle quibble--it goes to the heart of the question of where money should go in order to raise productivity. Increasing productivity permits us--at least in theory--to enjoy either more income for consumption (and saving) or more free time. Over the past decade most Americans have worked longer and earned less, though the rich have prospered.

Conventional analyses concentrate on investment in new factories (or similar structures) and equipment. But Eisner argues that total investment--"the sum of economic activity which is expected to contribute to future production"--is five times greater than what's measured in current, narrowly defined government statistics. The biggest omission--nearly half of total investment as Eisner calculates it--is "intangible capital," investments in education, training, health, research and development. Eisner calls his laborious redefinition and recalculation of investment, output, and other important variables "the total incomes system of accounts" (the University of Chicago Press published his book under that title in 1989).

As analysts of varying persuasions have argued, this "intellectual capital" of individuals and society as a whole will most dramatically determine which countries will prosper and hold a comparative advantage in world trade. This does not imply that the country's fate hinges on some intellectual elite; the training and education of the whole work force is critical. Indeed, the United States has done a particularly bad job of translating advanced scientific and engineering inventions into mass production, indicating a real shortage of intellectual capital in manufacturing processes. "Our figures indicate that investment in intangible capital has a generally high payoff," Eisner argued. "Investment in research and development has a high payoff. There may not be as good a payoff to college education as there is to good preschool education, but we may need more of everything."

Yet even Eisner acknowledges that the stimulus of budget deficits can have drawbacks. If the economy is booming, interest rates may go up and consumption of imports may rise. But he says that can be countered with a looser monetary policy by the central bank. He thinks the main cause of high interest rates over the past decade has been overly tight control of credit by the Federal Reserve Board. And he insists that even the recent rate cuts don't go far enough.

If the Federal Reserve had made credit easier and lowered interest rates during the 80s, the interest paid by the federal government would have been lower (and the transfer of wealth to upper-income bondholders, which distresses some liberals but not Eisner, would have been reduced). It's also possible that with lower interest rates a smaller deficit would have provided a strong stimulus to the economy, as Yale University economist James Tobin, another Keynesian of Eisner's generation, has argued.

Eisner contends that the trade deficit could be reduced by simply adjusting exchange rates to make the dollar cheaper, which would make U.S. products cheaper for foreigners. After 1985 the dollar dropped, and the trade deficit declined. But it did so very slowly, and last year the deficit with Japan shot back up again dramatically. That persistent deficit gives ammunition to those who contend that Japan's trading practices prevent a normal adjustment.

The economy is hardly booming now. Though this recession is not yet as deep as the one in 1982, it may be especially troubling to many people, Eisner says, because "the real wages of the middle class are where they were 15 years ago or more. When things have been dragging for years and then you get hit in the head, it seems worse."

Recessions are inevitable in any capitalist market economy, but Eisner speculates that the current downturn may have been triggered by the temporary oil price increase at the time Iraq invaded Kuwait combined with tight-money policies of the Federal Reserve. Yet having the Fed ease credit and lower interest rates won't be enough to get the economy going.

Beyond massive investment in public needs (education, roads, research, urban reconstruction, etc) and major new aid to states and cities, Eisner recommends temporary cuts in sales and excise taxes to encourage big-ticket purchases by individuals, temporary investment tax credits for increased levels of investment by business, and long-term tax cuts for child care.

Eisner argues strongly against temporary income-tax cuts--which are gaining favor with politicians in both parties--and even more strongly against tax breaks intended to increase saving. There is an argument to be made for greater tax fairness, he says, but paying for a middle-class tax cut by taxing the rich more heavily will be a fiscal wash and provide no economic stimulus. He also told Congress that Bush's favorite proposal--a capital-gains tax cut--wouldn't help business investment or get us out of the recession. And though a longtime critic of military spending, Eisner warns that defense cuts will worsen the recession unless they're "matched by increases in useful government spending elsewhere," but not reducing the deficit.

Eisner figures that the deficit for the past fiscal year was not $269 billion, as officially reported, but only $17 billion. First, he removed the $67 billion charge for deposit insurance for the savings-and-loan bailout. His reasoning? Unlike most government expenditures, the bailout is not a stimulus to the economy, but simply prevention of financial collapse--it makes good on a debt implicit in the government's guarantee of S-and-L deposits. Eisner minimizes the harm, but there's reason to believe that years of dissipating savings in nonproductive uses--much of it was squandered on corruption, call girls, lavish offices, and other high jinks--will be a drag on the economy in the years to come.

Eisner then subtracted roughly $70 billion from the deficit to reflect current public investment, such as highway construction, which is properly financed through debt. Surpluses in state and local budgets (such as payments into pension funds) reduce the overall governmental deficit by another $30 billion. Subtracting the inflation tax on the federal debt slashes the deficit by another $85 billion.

A balanced budget, in Eisner's formulation, is not one in which income and outgo match at the end of the year. (In any case, why should the balance period be a year instead of a week or ten years?) He would rather consider a budget balanced when the deficit maintains a constant ratio of debt to gross domestic product (GDP). After World War II--when the debt was about 120 percent of GDP rather than about 47 percent of GDP, as it is now--the ratio of debt to GDP steadily declined. In the early 80s the ratio rose before heading down slightly again in recent years. Therefore, Eisner argues, the debt (or deficit) can grow as fast as the economy--or about $268 billion for this fiscal year--and still be "in balance."

In recent years Reagan defenders have used some of Eisner's arguments, even though that made them uncomfortable; most of them do not favor larger public investments, deep cuts in military spending, and other parts of Eisner's program. But Eisner's work has also given new ammunition to liberal Democrats, labor unions, and advocates of strong government who are sick of the budget-deficit straitjacket put on all their proposals. For example, Iowa Senator Tom Harkin used to favor a balanced-budget amendment to the constitution, but he recently defended his calls for massive public investment in this country's infrastructure using Eisner's rationale that borrowing for such ends is legitimate.

Eisner does have critics on all sides, but Herbert Stein, chief economic adviser to Richard Nixon and now with the conservative American Enterprise Institute, is willing to grant Eisner a place at the policy roundtable. "The economics profession is pretty much at sea about macroeconomics," Stein says. "It would be unwise for us to throw out any plausible theories, and he's one of the strongest remaining exponents of one of the strongest theories that nearly everyone held 30 years ago. He's a stalwart defender of a rather pure version of Keynesianism which has gone out of fashion, probably more than it should. I think it's good he's there on the horizon."

Some of Eisner's sharpest critics come from the Brookings Institution, a venerable think tank once associated with Democratic liberalism, now a more center-right establishment. Alice Rivlin, who has been at Brookings since serving as director of the Congressional Budget Office from 1975 to 1983, agrees with Eisner that "a deficit is OK if you're using it for investment. But that's not what's happening. If it were being spent on roads, bridges, and the like, it would be more defensible. The other point he makes that's correct in principle is that the deficit should be seen in the context of inflation. That's true--but not relevant to the deficits of the 80s."

But Rivlin, like many in the mainstream, insists that the economy now suffers from too little investment rather than too little consumption, and that American savings have dropped dramatically in the last decade. If total savings equals public plus private savings, and the public is spending more than it saves, she argues, "almost by definition . . . there is lower savings overall." In the 80s private investment was crowded out to some extent, she says, though foreign borrowing relieved some of the squeeze. (Eisner of course argues that such a static analysis misses the point: in an economy operating at less than full employment, deficits expand the economy, raise income and consumption, and therefore lead to increased savings and investment. Foreign debt holding increased in absolute terms in the 80s, he insists, but not significantly as a percentage.)

Despite her theoretical points of agreement with Eisner, Rivlin contends that his influence on budget debates has "been mostly for ill. It's fed into the public image that economists never can agree on anything. It doesn't make people willing to sacrifice to bring the deficit down."

Yet legitimate disagreement remains, despite a self-reinforcing chorus among the political, journalistic, and public-policy elite. For example, some economists on the left--especially the younger generation--disagree with the mainstream and with Eisner, though they enthusiastically support his call for increased public investment.

Robert Pollin, an economist at the University of California in Riverside and a participant in both the liberal Economic Policy Institute and the Union for Radical Political Economics, salutes Eisner as "one of the best of the elder members of the profession." But Pollin insists that to the extent that economists want to measure the stimulative impact of budget deficits, they "want to look at the increased spending at the moment it occurs. We need to look at how much money it puts in people's pocketbooks," not how it affects the wealth of government bondholders. "The deficit is a flow, a current variable, and we have to measure it independently of its impact on the price level."

So Pollin argues that recent deficits have indeed been big, but that their stimulating effects have not been as great as they should be. He says deficits are less potent now because economies are increasingly open and much of the stimulatory effect of the budget deficits in the early 80s leaked out to boost the Japanese, Taiwanese, German, and other economies. Eisner agrees that there is some leakage, but says it "will come back to us" as those more prosperous economies buy things from the United States. Pollin argues that isn't happening. He says the Japanese in particular continue to run a huge trade surplus with the United States, and though in theory they could use their prosperity to reduce that surplus, they don't.

Pollin also argues that budget deficits have not given the economy as much of a kick as they should because of other deep-seated problems: long-term stagnation and financial fragility. He contends that as the U.S. economy has lumbered along with relatively slow productivity growth for several decades, it has taken a bigger and bigger deficit to pack a punch. At the same time private debt--both corporate and personal--has been rising even faster than public debt, making the private economy more vulnerable in economic downturns. During the 80s, Pollin says, private businesses borrowed at a higher rate than in the 60s (so much for the "crowding out" argument), but they squandered much of it on nonproductive takeovers, leveraged buy-outs, stock buy-backs, and takeover defenses.

Eisner responds that even such speculative financial borrowing doesn't detract from real investment: when the money is spent, it's available to someone else to lend again. And if it isn't loaned for real investment, it's because the investment opportunities aren't sufficiently profitable.

Has the U.S. become a "casino economy," based on financial gambles more than productive investment? Eisner replies, "There does seem to be too much of an opportunity to make a fast buck by operations that seem to have little to do with basic production of wealth. But you don't want the foolish view that may be a misapplication of Marx that leads you to think only producing goods is good, and retail and financial services are of no great value. People who undertake financial transactions are not necessarily wasting public resources. But eyebrows can probably be raised about people making fortunes on the deals and takeovers and buy-outs, and you can ask yourself how much that is really accomplishing for production." He argues that the deductibility of interest payments encourages corporations and even individual home owners to take on excessive levels of debt--and that includes the debt-driven speculation of the 80s.

Many of the younger-generation economists on the left argue that government must do more than simply stimulate the economy and let the engines of capitalism rip. They insist that strategic decisions must be made to guide the private economy and that government often must intervene in markets that are not functioning well with regulations or targeted financial assistance.

Ann Markusen, a former Northwestern University economist who now directs the Project on Regional and Industrial Economics at Rutgers, is a great admirer of Eisner as "a voice in the wilderness" who is "very brave to continually take this position [on the desirability of deficits and public spending]. He's had to undergo a fair amount of ridicule or people saying, 'This is just Bob Eisner on his hobbyhorse.'"

But she also adds that macroeconomists such as Eisner miss important relations by not analyzing the structure of the economy more carefully. "They have a really hard time thinking about the economy in a more fine-grained way. The way the Japanese regulate their economy is more hands-on: What's wrong with these sectors? Is this one ailing? What do we do? For the macroeconomists, if gross national product is growing, everything is fine."

Many liberals who would agree with Eisner on deficit budgets advocate some kind of public strategic planning or industrial policy, such as the Japanese and some European governments have. Eisner doesn't agree. "I'm enough of a believer in the private market to say, "Leave it to the businessman.' If he believes this piece of machinery is productive and will make a profit for him, he'll buy it. If he doesn't, then it's not worthwhile. I'm not prepared to second-guess him."

Eisner sees three major economic roles for government. It should provide economic stimulus to full employment, make adequate public investments, and step in where markets don't work well (for example, taxing polluters who would otherwise treat the environment as a dump or sewer).

"Labor markets do tend to be imperfect by their nature," he argues. "If a person loses a job in an automobile or steel plant in Detroit, it ain't easy to find another one. It's easy to say 'retrain them,' but who's going to pay for the education? He may not be in the right locality. There's an expense to moving, and he may not know that he has a job. You can find a lot of reasons for government intervention to try to improve labor markets. For example, race and sex discrimination not only hurts the individual but leaves the economy worse off."

But Eisner wouldn't have government intervene to stop businesses from fleeing to low-wage areas or overseas: eventually, he says, the shift in business will drive up pay in low-wage areas, and the investment in the new area will ultimately lead back to new investment in a more profitable industry in the abandoned location.

Yet many liberal and left economists claim that corporate flight has simply driven down wages in this country. They say that as long as there are weak unions, conservative governments, and huge pools of poor peasants and urban squatters as potential laborers in the low-wage countries, wages will not rise significantly or quickly anywhere. These economists also have less faith than Eisner that the free market will ensure the best private investments for society's long-term needs.

At times Eisner seems willing to defend growth and expansion of any sort, insisting that even wasteful government spending or extravagant savings-and-loan speculation produces jobs and buildings and thereby keeps the economic fires stoked. Yet at other times he stresses that some investments are better than others. He thinks, for example, that money spent on education or research is more productive than military spending. "I always give the example that if somebody goes into debt to go to Las Vegas and gamble away the proceeds, that's terrible. But if he goes into debt to buy a house or educate his children, it's not. If General Motors goes into debt to expand its plant, as long as it can sell its cars that's fine. If the United States goes into debt and the debt is financing private and public investment, we may all be better off. If there's anything bad, it's the public investment we're not making." That, he says, is the real deficit problem.

Public decisions are inevitably strategic and not just abstract consumption or investment. For example, public investment in efficient high-speed trains and mass transit might make more sense now than some of the investment being made in highways and airports. Government policies thus inevitably shape and steer private investment decisions. Yet the government lacks the political will to make those decisions in a coherent way with the overall public well-being in mind. Eisner's analysis tells us that public investment is essential. Yet beyond giving greatest weight to investments in people, his analysis doesn't tell us precisely which investments to make.

Within the Northwestern University economics department, where Eisner has worked since 1952, Eisner is known as an enthusiastic teacher of undergraduates. He's also "something of a loner," says his younger colleague Robert Gordon. "He's the quintessential Mr. Outside," a man who writes, testifies, and influences the world, but doesn't lunch with colleagues and schmooze about academic life. But Eisner does play an important role in the department. "There's a very admirable link in his professional work and votes in department meetings," Gordon says. "He's consistently on the side of affirmative action or helping the underprivileged. He'd stand up when a woman is considered [for hiring] and say that we should give her a chance."

Eisner continues to have a strong influence on the profession with his research and analysis, despite the attempts of many to discount and marginalize him. (One graduate student who came to Northwestern to study with Eisner sadly concluded that he would have to find another mentor if he wanted to get a job in the profession.) But the times seem to favor a swing back in his direction.

"He and I are very much opposed to the academic work that assumes the economy is always in equilibrium and people are always doing what they want all the time," Gordon says. "It's unbelievable seeing all those people in front of the Sheraton Hotel [looking for jobs] that people [in economics] would still be so out of touch with reality."

Gordon adds that Eisner is "an enormously respected person with the department and around the country. He's got old-fashioned beliefs we need more of today--to care about the poor and disadvantaged and abandon the discredited Reaganomics that just made the rich richer and the country poorer."

Not surprisingly, Eisner has no use for Bush's economic proposals. "The capital-gains thing is outrageous, a huge giveaway to the rich that at best would do nothing," he says. But he's not overly impressed with the Democrats' ideas: Harkin is good on infrastructure investment but too protectionist; Clinton is too hawkish on foreign policy; Tsongas is "pandering to business."

"It's tough," he says. "If you're running for office, you can't educate the public and get rid of 100 years of ignorance in six months. You could say things that are true and get laughed off the stage as an idiot."

Eisner's views of the younger members of his profession are only slightly more charitable. "I consider myself one of the truest Keynesians. I think I'm up-to-date. But the terrible thing in the last 20 years is that the younger generation hasn't read Keynes. What's happened in the academic world is that too many of the youngest and brightest have become caught up with mathematical neatness and methods of estimating things of trivial importance and less and less of relevance. Academics are out in a corner. Practical men of affairs rely on Keynesian models but don't apply them well. Also, they aren't adequately concerned with unemployment."

Robert Eisner may not share his grandfather's faith in socialism, but he certainly has maintained the family tradition of critical independence of thought and of belief that an injury to one is an injury to all. Economics need not be dismal, his work suggests, but a guide to a better society for all. His grandfather--while finding much to criticize--would surely approve.

Art accompanying story in printed newspaper (not available in this archive): photo/Marc PoKempner.

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