One Cheer for the Dismal Science

THE OPEN MIND
Host: Richard D. Heffner
Guest: Susan Lee
VTR: 4/6/85

I’m Richard Heffner, your host on The Open Mind. Whenever we seal with economic subjects on The Editor’s Desk, my other television series, some viewer or other is bound to notice, and then to comment on the fact, that my eyes tend to glaze over, not out of indifference, Lord knows, for while it’s true that Heffners are notorious for missing the magic gene for making money, as an American historian I’m very much aware of the role that the bottom line in America is the bottom line. No, these old eyes mostly glaze over not out of indifference to economic matters, but out of ignorance. And they end to light up only when today’s Open Mind guest, Susan Lee, is around to illuminate the dismal science for me. I never call her Dr. Lee, but she is a Columbia Ph.D., as well as a senior editor and columnist at Forbes Magazine, a columnist for Vogue, formerly of Business Week, The Wall Street Journal, Fortune, and so on and on and on. And it’s good to have you here, Susan.

LEE: Thank you, Richard.

HEFFNER: I know that, as you suggested, it isn’t because you can’t keep a job, but because so m any people want to draw upon your economic knowledge, and I want to today, because I was just reading the piece that appeared in Forbes in December 1984, “The Unmanaged Economy,” and I had the feeling, as you talk about new wave economics, that the thrust of it is that nothing works in the economy, so why turn to economists. And I wonder if that’s your fix.

LEE: Well, nothing seems to work in the economy. And certainly nothing seems to work when it could, the advice is coming from economists. There’s the whole notion of the new wave economics that I wrote about is that people have become very practiced in understanding how economists make policy, how politicians make policy, and what the results of that policy are. People are not stupid. They might, like you, lack the sort of gene for making money, but they understand that X causes Y causes Z. And when they see the government is doing X, which will cause Y, they take like sort of a presumptive strike, action to make sure that they’re not get caught holding the bag over Y over here. And so what happens is, the government goes out and says, “I’m going to do X, and that will make Y,” does X, people say, “Oh no you don’t,” and Y doesn’t result.

HEFFNER: Well, how come? I mean, that’s the thought that occurs to me, to ask that question. How come? We talk about a dismal science. Dismal or not, is there no science here?

LEE: Well, I think “How come,” is an interesting question because the “How come” has only become apparent over the past decade or so. And I think for most people the central experience of that decade was inflation. Inflation is very insidious. At first you don’t understand that, you see your wages going up or you see your wages staying the same. You see prices going up. What you don’t understand is that your real income is shrinking. And what people did not understand when inflation really started taking off at the beginning of the seventies, is that it was punishing them. They began to understand it toward the middle of the seventies, of course, almost every single labor contract in this country has a cost of living, an escalator, wages were bargained for. So I think, I think it was inflation that made people very, very sensitive to what the government was doing at X and what the government had in mind for Y. And when Y was going to be that their real wages would start shrinking because of inflation, then back at X people started to make demands to make sure that Y wouldn’t result.

HEFFNER: Successfully?

LEE: I think so. I think for most, certainly unionized, industries, wages kept up, in some cases more than kept up, with inflation once people caught on. But having caught on, of course, people are not likely to forget the experience.

HEFFNER: Yes, but that makes it sound as though you believe now that there can be an economic model that works, now that we’re sophisticated, now that inflation has keyed us in on what happens in economics. And yet is seemed to me in this article that so fascinated me, “The Unmanaged Economy,” that you were also saying that we are now saying, “There’s nothing you can do that’s going to work out.”

LEE: Okay, but that’s a model. You can call it, “the checkmate model.” Okay? The model says, no matter what the government does, the citizens will say, “Ah ha. I know what you’re doing. Forget it.” Okay? So the model then would dictate. You say, “Well, what kind of policy can we get from this kind of model?” No policy. The government should stop its interventionist stance toward the economy. The feds should stop trying to titrate the money supply a little bit this week, a little less that week. And perhaps we should go back to a situation of relatively small government, small in…The government should be more, what government probably ought to be doing solely is social policy, not economic policy.

HEFFNER: And you believe that?

LEE: As an economist, I think it would be wonderful. As a journalist who knows a lot of politicians, I don’t think it’s at all possible.

HEFFNER: What do you mean?

LEE: Politicians, you can’t say to a politician, “I’m going to replace you by a robot. We’re going to put the economy on automatic, and you have nothing to do here.” Okay? Politicians would say, “Now wait a minute. You don’t understand. I promised my constituents certain things. I understand their needs. I, you know, just let me put this little tiny item in the budget. It won’t hurt anybody.” You’ve all, tons of politicians doing that. That’s what American politicians think they’re for. As you said, the bottom line in America is money. Okay? And whether the money is motored back out to their constituents in whatever program, that’s how politicians think they ought to be operating.

HEFFNER: Well then, what I don’t understand is whether you’re saying, “Hey, look. Let the economists keep their hands off, because they don’t really understand sufficiently what their consequences are going to be of this act and that act and the other one tied together,” or whether you’re simply saying, “The economists may understand; it’s the politicians who should just keep government out of economic matters to the extent that they can,” which is it? Or is it both?

LEE: I think I’m saying both. Economists and politicians don’t understand, don’t belong, make things worse, can’t fool the people, should subside to the sidelines and let the economy run with a minimum of fiddling and fooling with it.

HEFFNER: Yes, but Susan, you say, “Certainly not let it go haywire.” You know? At what point is it going haywire? Isn’t that in itself the statement of a call for intervention? “Don’t let it go haywire.”

LEE: Of course. And the problem, the problem with economic policy, unlike social…If you make a social policy decision, you understand what the consequences are the next day. Either you’re deluged by constituents’ telegrams, or people take to the street and they complain, or somebody stands up in Congress and calls for your impeachment. Consequences of bad social policy are always very clear. The consequence of bad economic policy take a long time. After all, Great Britain was sliding down that awful stagnation for decades before anybody said, “These are consequences of our economic policy.” So you’re right, when do you say, “Ah, haywire,” and at that point it might be too late. But we do know that what the government has been doing in the past two decades has not worked.

HEFFNER: Do you think there are things that the government could do? In other words, do you still harbor the notion that if you could find the right model and follow it, we could make things work as economists?

LEE: No, I don’t think there is a right model.

HEFFNER: Plain and simple?

LEE: Plain and simple. I think the government should be less interventionist. I think the feds—I probably sound like a Milton Freedman here—but I think the fed ought to stop trying to fine tune the money supply and interest rates. I think the economy would just be better off if people, not left it entirely alone, but focused on it less and tinkered with it less, and tried to improve it less.

HEFFNER: Well, creating our own little tinkerbell phenomenon here, what you would you do? What are the areas where you think, as an economic historian, that we ought to intervene? At what point? Because clearly, you don’t mean totally hands off. You’re saying, “Don’t tinker.” But what should we do, economically speaking?

LEE: Well, I’m not sure. We should do the things that promote price—and I’m going to sound like a (laughter) your eyes are going to glaze over; here we are, Principles 101—the government should promote price question, these are the kinds of policies that call for no policy at all. Okay. Economic growth depends on the government crucially getting out of areas like the whole farm question. Okay? The government policies, government farm programs created our farm program. What the government should do now is gracefully say, “We’re sorry. We’ve caused hardship. We were right minded, but wrong headed here,” kind of. Okay? And get out of the business of making agricultural policy.

HEFFNER: That’s not, I gather from what you say, as a means of righting the economic system, but just a product of your feeling that government should not be involved at all.

LEE: Oh, no. It’s also righting. But the government, as it has, what the government, the farm program has done is encouraged inefficient farmers not only to stay on the land farming, but encouraged them to go into debt, to expand their operations. I think the government would go a long way to making the United States again a productive and…Well, you had to get more productive. Let me say, a first-rate competitor internationally, which we are not anymore. We’re overpriced. If the government simply withdrew the farm program and said, “The most productive and most efficient farms should continue.” Now that, I think we would see within three years the United States would go out into the world and cream those nations that are creaming us now, like Argentina and…

HEFFNER: Of course you’ve also said that you believed that politicians wouldn’t permit that to happen, because the voters wouldn’t permit that to happen.

LEE: Well, we live in New York (laughter) and it’s hard to tell what’s actually happening out there. There are a lot of…I come from America’s dairy land, Wisconsin. And the dairy farmers, of course, are the worst offenders for the farm program. It costs each taxpayer something like $100,000 to support a dairy farmer. And they, I know what I…

HEFFNER: You mean it costs us $100,000 for each dairy farmer?

LEE: The subsidy. To each dairy farmer. The subsidy. When I go home, and a significant portion of my family still are dairy farmers, which is to say…

HEFFNER: You better make sure they don’t see this program.

LEE: Well, they know…

HEFFNER: Or are they the big dairy farmers?

LEE: They know. No, they’re small and big dairy farmers. But what I mean is, they know they’re doing something wrong, they know that their neighbors and their relatives are angry with them. I think—it’s hard to tell, living in New York—but I think even among farmers and people who are around farmers, that the feeling is the government has really made a mess. The farm program has made a mess. And let’s get rid of it.

HEFFNER: All right then, in the area of tariffs, I gather you feel that there too, when we tinker we make a mess. Take off the tariffs?

LEE: Absolutely.

HEFFNER: Okay, now what about such areas as insurance of deposits in banks? Are we making a mess there? That’s an economic step, isn’t it?

LEE: Oh, we’ve made a terrible mess with deposit insurance. That’s a complete, terrible mess. But deposit insurance—I’m so happy you asked. It’s one of my favorite messes—Deposit insurance says, “Look, bank, we don’t care. You can make these loans to Argentina, you make these loans to Brazil. You make these loans for oil and gas exploration rigs. You make any loan you want.”

HEFFNER: Bad loans.

LEE: “Bad loans. Who cares? Because you will still get depositors at your bank because we are going to guarantee $100,000, no loss to any depositor.” So people at Penn Square in Oklahoma City, they go to the Penn Square bank, and they get a nice return for their CDs, and they give out $100,000, and they know it doesn’t matter if the bank is run by yahoos. The federal government will stop in and refund everybody’s money then the yahoos go bust, which the yahoos are bound to do. Federal Deposit insurance is another great example of how the government stops in to make things right, and makes things big foot.

HEFFNER: Okay, farm support, farm price support, tariffs, federal deposit insurance, all these things we can do away with. Are we going to leave anything very much that government does now?

LEE: Well I think government can continue to do whatever social policy government likes.

HEFFNER: What do you mean “social policy?” I mean, certainly, the insurance of my deposit is part of social policy. Certainly the support of farmers is social policy. What do you mean?

LEE: But there are purer forms of social policy.

HEFFNER: Like what?

LEE: Like—ah, see, you’re trapping me—I guess I can’t think…

HEFFNER: Oh, I never trap you.

LEE: (Laughter) Yes, I’m completely trapped. I can’t think of a few…

HEFFNER: No, but…Welfare payments.

LEE: Some transfer payments…No you’re right. You’re right. I can’t…It was hard to make a distinction between what’s economic policy and what’s social policy, I guess…

HEFFNER: So, all of it is out the window?

LEE: No. What I want them to stop doing is things I don’t like, (Laughter) and what I want them to do with social policy is things I like.

HEFFNER: And I’m so glad we have an honest person at this table. You’re against things you don’t like, and you’re for, on principle…

LEE: Absolutely. On principle.

HEFFNER: Seriously though, what do you like in terms of government intervention?

LEE: I think capital formation is extremely important. I think human capital formation is extremely important. We’re both teachers. We believe that people should go, people should learn how to read and write, they should do arithmetic, they should take their Economics 101…

HEFFNER: Right, right.

LEE: They should do all these things. And it’s important for the, it’s important for economic growth, it’s important for the health of the country. This I would call social policy, but it’s only because I like it. I think the government should have a hand in making sure its citizens are extremely, or as educated as they possibly can be.

HEFFNER: That means extending bank loans and restore sending government loans, and the rest to them. Is that what you mean?

LEE: Yes.

HEFFNER: Providing free education.

LEE: Yes.

HEFFNER: But others, as you would admit, would say, “This is just in the ‘bad’ category,” as you would say?

LEE: (Laughter) That’s right.

HEFFNER: That’s the thing that puzzles me, because here in this article on “The Unmanaged Economy,” you say at the end—and it’s a lovely paragraph—“But against the undoubted appeal of the old Keansian arguments for government management, consider this: the result of the presidential election (obviously that of 1984) showed that a lot of people think the homely economics of an AB from Eureka College, Ronald Reagan, are better than the advice given by a bunch of interventionist PhDs. That may not be tidy progress, but it is progress.” Why is it progress?

LEE: Because we’ve stopped thinking that a bunch of economists can come in a tidy house. That’s progress. There was, during the sixties, a feeling in this country that if something was broken, all you had to do was call in a bunch of economists, and they’d gather around it, tinker, tinker, tinker, and everything would be fine. That’s not the case. And I think it’s sort of, I think, I mean, I’m an economist; I want people to look up to me and respect me, but I think it’s healthy that they don’t.

HEFFNER: You know, I wondered when I was reading A New Economic View of American History, a book you and Peter Passell wrote—and it’s so darned well written—that I realize that, had I had it available to me a thousand years ago when I went to college, I might have become more interested in economics. A New Economic View of American History. Interesting, when Charles Beard wrote an An Economic Interpretation of the Constitution, I guess it was Nicholas Murray Butler who, when asked had he read Beard’s last book, said, “I certainly hope so.” Because the idea of offering an economic interpretation of historical events was anathema. I gather we no longer feel that way. I gather you economists have been able to convince us that there is an economic way of looking at anything that transpires in the present, or had transpired in the past. If that’s the case, how can we avoid having economic models? How can we avoid having all this tinkering that you don’t like?

LEE: Ah. Well, since we’ve already agreed that educating people is important, okay, we can say there are things like, endeavors like this, where economists go back through American history and say, “you thought this was a political struggle. Ha, ha, ha. This was absolutely bottom-line economic struggle.” We can do thinks like that without then having to say, “But having explained all of history to you, we are not going to chart the future for you.” I think they’re two different…I feel comfortable with the…And it’s certainly a very conceited thing saying, “I will explain the past to you,” but I feel extremely comfortable doing that. And I feel comfortable saying, “Things that you thought were great moments in political history turned out to be really rather shabby moments in economic history.” I don’t feel comfortable saying to the fed, “I think the money supply is growing too fast; I think the money supply is growing too slowly,” things like that.

HEFFNER: It interests me that, when I published my Documentary History of the United States, oh, 32, 33 years ago, and in it I paid my respects to Charles A. Beard, there was a review that indicated, “this fellow who has written this book must be some kind of radical, because he was an economic determinist because he used the name Charles A. Beard.” Now you, an arch conservative, Forbes Magazine, The Wall Street Journal, Fortune, etcetera, you can write about an economic view and not have to worry about that charge whatsoever, because I gather we all do know now that that’s where it is, that bottom line.

LEE: Yes. And in fact, Peter and I express our thanks to Charles Beard for exactly that reason. He was the first. And it was a sort of a shocking thing, because people do believe that great moments in history are political and patriotic. The Constitution, the War for Independence, and the War Between the States. It is kind of grubby to have economists come in and say, “Ha, ha, ha, look bottom line was money.”

HEFFNER: What do you think that means now, then, for or the position that you take and the new wave economists take about the inadequacy perhaps of our models? What doe sit mean for the future in terms of planning anything at all?

LEE: (Laughter)

HEFFNER: You’re just not going to?

LEE: I think we will continue to. I think, I mean, I think all the incentives for politicians, as we talked about, are to keep planning and to keep motoring the money around and to keep an active interventionist role. I think it will be like the tides. We went through the sixties and the seventies and a lot of interventionism and a lot of stateism, and now we’re going through the eighties where, sort of, the tides have receded a bit, starting possibly with President Carter, who started in earnest to deregulate the economy. And who knows. In the nineties there could be another tide of economic regulation and economic fooling around.

HEFFNER: Do you think that the deregulation that has taking place this far has been productive? I have been reading a piece, I guess it was the Vogue piece, “Dial a Deal,” about “The Big Bell Breakup: What’s It Doing to Your Phone Bill?” And there are other things that you have written about along those lines. DO you think that deregulation has been a positive thing for the American economy?

LEE: Oh, absolutely. I think that in ways which are unmeasurable now but which will become clear over the next decade, by deregulating financial services and telecommunications and, to some extent, transportation, and certainly the airline industry, these are things which are called the “infrastructure” of the economy. In order to have a healthy, functioning economy, you’ve got to have a good infrastructure. You’ve got to have a solid skeleton. And by deregulating and making, and bringing competition into these three areas, and making them more efficient, we’re setting the stage, right? We’re making a nice, big, strong skeleton for economic growth way into the 1980s, 1990s.

HEFFNER: Will that growth, in your estimation, be accompanied by the kind of distribution, more equitable distribution than we have experienced in the past, or don’t you care?

LEE: Well, as an economist, one cares, but not quite as much. As a social…

HEFFNER: Being?

LEE: …being…

HEFFNER: Okay.

LEE: …one cares a little bit more. But the point of economic growth is—and you’ve heard it a zillion times, and you’ve probably taken offense each time you’ve heard it—is that even if the shares of the pie don’t change, you have a growing pie. So that even if the wedge, the cut is the same, the pie itself has gotten larger. And so even if distribution didn’t change at all, if we got a bigger pie, everybody’d be better off.

HEFFNER: Good old nineteenth century AFL position. Do you think that’s acceptable today? We talked before about the politicians being put upon by the people who want more of a bottom line themselves. Does it make any sense to say, “Whoopee” about growing productivity if this country if we don’t have something of a distribution system that’s more satisfying to larger numbers of people?
LEE: I’m not sure the distribution, I think…You see, I disagree with you. I think what people are angry about the distribution system is that middle-class people feel that their income is being distributed away from them to poor people.

HEFFNER: Okay.

LEE: And I think that explains a whole lot of Reagan’s appeal and, God resuscitated the Republican Party, really, from the dead. So, I think deregulation and what Reagan is doing is giving people, at least, of not the reality, the notion that government has stopped its, what they felt was a headlong drive into the pocketbook, “Here’s the money. Here, find a poor person! Oh.”

HEFFNER: Susan, I, as part of that middle class, like you, I feel the same way. But, the real question is whether politically this country can accept that, will accept that. I mean, you’re talking about a large middle class, but there is, in a nation as large as ours, substantial in real numbers, a very large number of people at the bottom of the ladder. The question again: In a democratic society, can we work that through? Can we live with it?

LEE: Of course we can. We can work it through. We can work it through by ensuring—I’m going to give a campaign speech—

HEFFNER: Go ahead.

LEE: We work it through by ensuring that the pie keeps growing. What happened in the seventies which really shocked people and unsettled people is the pie stopped growing in the seventies. We started to look like Great Britain. And that is a scary…Great Britain, after all, which has a much more even distribution of income, socially is in much poorer shape because the pie stopped growing there. That’s what creates, I think, the conditions—and I’m not a social historian; and you are—but I think that sort of things creates social chaos and anger and hostility more than…

HEFFNER: Yeah, but that’s not quite fair. That’s a copout: “I’m not a social historian; you are.” Or, “I’m an economic historian.” As someone who ahs watched the field go round, again it seems to me the real question is whether, when there is a clear, large amount of inequality, even if each individual’s share of the pie is larger, whether a society is going to tolerate that. You obviously think it will.

LEE: I think the society will, the things that society will not tolerate, people going hungry, lack of equal opportunity, a whole bunch of things that people will not tolerate, okay, crime in the, you know, wanton crime, a whole bunch of things, that once you can say, “There’s opportunity for all that care for it. We’re feeding anybody who wants to be fed. Anybody who wants to go to school can…” I mean, certain minimum standards, at which point, I think, a democratic society is entitled to then say, “We have created certain minimum standards here. Perhaps we’re a little on the low side, or perhaps we’re a little on the high side. Let’s leave it at that.”

HEFFNER: And so that’s your point: Meet the minimum standard. That’s a very optimistic point, because you do believe that if the economists, if you economists, leave your hands off of government, we’re going to experience an increase in productivity?

LEE: Oh, yes. Yes. And I think that these kinds of social questions, what are the minimum standards, ought to be determined by consensus. Everybody ought to have some say in what the minimum standard is.

HEFFNER: Susan, I think I’m getting a signal that our time is up. I am, indeed. Thank you so much for joining me today.

LEE: Thank you.

HEFFNER: And thanks, too, to you in the audience. I hope that you will join us again next time here on The Open Mind. Meanwhile, as an old friend used to say, “Good night, and good luck.”