Goodbye Keynes, Hello Coolidge
For the moment, leave aside the question of whether this New Economy theory adds up. The crucial point is that once its conservative premises are accepted, they influence Gore's entire agenda. His approach mimicks the incrementalism of Clinton, not the big and fundamental ideas that liberal Democrats had hoped to see once federal deficits were eliminated. Gore began the 2000 campaign as a fiscal conservative and used Bill Bradley as his foil, denouncing Bradley's moderate version of healthcare reform as irresponsible. Subsequently, as new budget projections pumped up future surpluses enormously, Gore loosened his wallet a bit. He began committing modest sums to a growing list of standard liberal concerns--various tax credits for education, families, healthcare and other matters. His one big and original proposal is a major subsidy to help finance private savings accounts for middle- and low-income families, which could become an important first step toward ameliorating the growing inequality of wealth.
On the whole, however, Gore and his advisers remain skeptical of big ideas and new departures that involve government intervention. During the Clinton years, for instance, the number of Americans without health insurance grew from 38 million to 44 million. One of the acknowledged causes is welfare reform; another is the steady growth of temp jobs without benefits. When I asked Laura Tyson why advisers were unwilling to propose a major reform, she said it wasn't clear what, if any, intervention might work. So they agreed that market forces should be allowed to play out, while modest steps are taken on the margins to help poor families get or regain coverage (George W. Bush has a similar, though smaller proposal). The notion that government should confront the labor market and push businesses to assume a larger responsibility for their workers wasn't on the table.
The commitment to market forces is likewise reflected in Gore's views on globalization. He now promises that any new trade agreement in his administration must include strong provisions for labor rights and environmental protections. But one recalls that this is the same promise Clinton made in 1992 and repeatedly violated in numerous trade agreements, most recently with China and Vietnam.
What Gore himself truly believes (or fully understands) is unknowable, of course, but he certainly wants to sound fervently committed to the importance of endless surpluses. Earlier this year, his enthusiasm led him into what any economist (including his own advisers) would recognize as a gaffe. Gore told the press that if recession were to develop, he might have to cut spending to maintain a balanced budget. The New York Times reported Gore's promise to raise taxes in a recession to defend the surpluses. The idea of doing either is economic nonsense, since both would deepen a recession. The idea is a political nonstarter, in any case, since even the flintiest right-wingers would oppose it. Numerous inquiries to the Gore campaign about whether these remarks have ever been retracted went unanswered.
The big question about Gore's conservative bookkeeping is whether the economy could stand it. In olden days, when Democratic economists were liberals, they would have explained the negative "fiscal drag" that an overly austere fiscal policy exerts on economic growth--undercutting incomes and profit by sapping aggregate demand. The unfolding fiscal circumstances are unprecedented for at least the past seventy years, and some dissenting economists foresee grave danger if Gore were actually to implement what he is promising. Indeed, L. Randall Wray of the Levy Institute and the University of Missouri, Kansas City, argues that in the process of gradually eliminating the "structural" deficits created by the Reagan era, government has overcorrected and created the opposite problem--"structural" surpluses that persist regardless of the business cycle. The government's own projections seem to confirm this, he observed. Growth is expected to be somewhat slower on average in coming years, and recession is anticipated to occur at some point, yet the huge surpluses endure year after year. Since the government will be collecting perennial surpluses of revenue, the private sector--businesses and especially families--will be compelled to borrow more and more to maintain the aggregate demand needed to sustain growth. Indeed, Wray said, that already seems to be happening. This year, while the government is flush with extra cash, the household savings rate has fallen to zero. The danger of running huge structural surpluses (much like the deficits of the eighties and nineties) is that once this condition is embedded throughout government by tightening or eliminating the spigots for spending, it may prove difficult to reverse quickly. If an economic contraction develops, fiscal surpluses would shrink but might continue for several years, Wray warned. If so, the government's fiscal policy would be inadvertently feeding the recession, not stimulating a recovery. One can see the danger, Wray suggested, by looking at Japan's miserable decade. In the late eighties Japan was astride its own fabulous financial bubble, and its government was running huge budget surpluses. After the bubble burst, Japan's government responded hesitantly and Japan's surpluses persisted for three or four years, dragging the economy into a severe deflationary recession. The central bank lowered interest rates to nearly zero, but it didn't help. Private firms had been deeply damaged, and consumers were too frightened to spend. Japan is still struggling.
It can't happen here, we are assured, because the government could respond swiftly and restore deficit spending, that is, unfashionable Keynesian pump priming. Maybe so, but once politicians have embraced a new faith, it is often hard for them to grasp that reality contradicts their convictions. In the meantime, the Gore posture is like Clinton's. He would count on the Federal Reserve to steer the economy wisely and, if the worst happened, to lower interest rates smartly to revive a failing economy. Come to think of it, that's what Herbert Hoover relied on too.