All sides in the debate on the debt limit agree that the point of spending cuts or revenue increases is to make room for private investment, and thus to induce growth by creating jobs. The question all sides ask is, how to save more—how to consume less, as both individuals and citizens. The question, in other words, is how to spend less on consumption, which presumably slows growth because it crowds out private investment, whether this consumption takes the form of credit card debt or “entitlements” guaranteed by the welfare state.
Either way, the urge to spend less on consumption makes sense only if more saving, whether private or public, leads to more investment, and if private investment causes economic growth. The connection between private saving and investment looks doubtful these days because corporations are still sitting on a mountain of profit, doing nothing but whining about uncertainty.
But surely the connection between private investment and economic growth holds?
Maybe not. We have assumed all along, for good reasons, that private investment is more important than the public version, and we’ve arranged our tax codes accordingly—we keep cutting taxes on corporate profits, or wanting to, because we assume that higher profits mean more investment, more growth. And I do mean “we.” New York Times/CBS polls from April 2009 and May 2011 show that the majority of Americans fear higher taxes on wealthy individuals and corporate profits because they believe this policy could slow investment and thus growth.
The budget stalemate could change our minds about the connection between private investment and growth, because despite the Democrats’ maddening silence on the moral economy of budget cuts, it reveals a difference between the parties that’s worth our scrutiny.
This difference came clear in the speech President Obama gave on Monday night. He delivered all the platitudinous equations of household spending and the federal budget we’ve come to expect of people who know better. But in suggesting that “our growing debt” could cost us jobs and do serious damage to the prospects of growth, he also said this: “And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.”
According to this formula, public spending or investment is the crucial source of job creation—your taxes pay for the schools and the roads, among other things, and in doing so they pay the wages of public-sector employees, including all those teachers, janitors, and cops, thus creating demand for goods and services produced by the private sector. It’s not as far-fetched a formula as it sounds in the environment created by neo-liberal abjection to market forces: state and local government, which is now shedding jobs, was the fastest growing source of employment in the postwar period, roughly the 1950s through the 1990s, as meanwhile transfer payments were the fastest growing source of labor income from 1959 to 1999.
In this moral universe, the criterion of need (from each according to her abilities, to each according to her needs) regulates the distribution of what Walter Weyl called the social surplus—“our excess of social product over social effort.”
According to the Republican formula offered by John Boehner, Eric Cantor, and Paul Ryan, by contrast, the “job creators” to be rewarded by cuts in government spending and taxes are entrepreneurs all: growth happens as a result of private investment out of profits, they say, not public spending out of tax revenues. They live by the criterion of productivity (from each according to his abilities, to each according to his production of value through work), acting always on the assumption that any surplus, whether economic or emotional, must be reinvested rather than redistributed.
Who’s right? The answer will determine where you stand on the budget stalemate. And it depends, as always, on whose numbers you take for granted. But let’s take a new, empirical look at investment, and answer according to the historical record rather than our party loyalties or our ideological propensities.
The figures are drawn from canonical works by Simon Kuznets, Raymond Goldsmith, and Wassily Leontief, and verified, as it were, by the theoretical formulations of Joan Robinson, Piero Sraffa, and Robert Solow, among others, and by the empirical studies of Moses Abramovitz, Solomon Fabricant, Harold Vatter, Harry T. Oshima, B F. Massell, and many others. More recently Steve Roth and I have brought these figures up to date in an appendix to my new book, Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul (Basic Books, 2011).
Here’s the bottom line. Gross Domestic Product grew about 600 percent between 1900 and 2010. As a share of GDP, net private investment declined about 70 percent. Gross investment, which is replacement, maintenance, and net additions to the capital stock, did grow slightly—but since the 1950s, the category of “investment” has come to include government spending and purchases of residential real estate. So the unavoidable conclusion to be drawn from the National Income Accounts is that extraordinary GDP growth has happened in the absence of increasing net private investment.
Why, then, would anyone want to increase profits at the expense of wages, savings at the expense of consumption? What would be the point? The theoretical argument in favor of this policy is, of course, that lower taxes and higher profits lead to more private investment, thus more jobs, improved productivity, better incomes, increased consumer spending, faster growth, and so on. The benighted Martin Feldstein has carved a policy-relevant career from this one argument. But the historical record shows that economic growth doesn’t require more private investment out of increased profits.
Instead, economic growth requires massive government spending, including transfer payments and so-called entitlements, because the real engine of growth is “job-creating investments in things like education and infrastructure,” on the one hand, and consumer expenditures, including “residential investment,” on the other.
From this historical perspective, sacrificing the poor and the elderly—slashing “entitlements,” Social Security, Medicare, and Medicaid—on the altar of private-sector “job creators” is just another faith-based initiative, an offering to ancient gods that have already failed. It makes no economic sense because the real “job creators” are consumers and bureaucrats.
But it does make perfect moral sense. And it makes a kind of political sense. The moral universe posited by Boehner, Cantor, and Ryan is the place where the bourgeois virtues still organize social life and discipline individual appetites, thus creating what we used to call character or authenticity, self-made men. In this place, effort and reward, work and income, crime and punishment, even supply and demand still align properly, symmetrically, and transparently. The Right has no exclusive claim, by the way, on this moral high ground: the Left’s pathetic attempt to personify and criminalize the causes of the Great Recession derives from the same bourgeois sources (and please note that “bourgeois” has no negative connotation in my usage). For the latest examples of that righteous urge, see George Packer’s piece in The New Yorker of June 27 and Joe Nocera’s most recent New York Times column about Wells Fargo.
This bourgeois place, this hallowed ground, seems familiar—it still makes moral sense—because no one is willing to defend the alternative, where accountability is absent and all bets are off. For the same reason, it makes political sense to stake a claim here, particularly when all the evidence indicates that the personal is, in fact, the political, and vice versa. The collapse of the distinction between family and federal budgets is just another symptom of our inability, or rather our unwillingness, to distinguish between what is private and what is public.
But it is this very mix-up that makes Obama’s position more interesting and productive than its Republican opposite. Like Bill Clinton before him, the president is blurring the distinction between private and public investment in accordance with the confusion that attends the National Income Accounts (where, again, “investment” includes government spending and purchases of residential real estate). The moral universe posited here hasn’t been mapped, so it can’t yet make sense to most of us, especially since it’s the place where the bourgeois virtues don’t count for much—where you receive income but haven’t worked for it, where effort and reward don’t align in an intelligible way. And this same mix-up won’t make political sense until we realize that the profit motive has outlived its usefulness, having become what J. M. Keynes called a “somewhat disgusting morbidity.” That was in 1930.
So yes, there is a budget crisis, a stalemate. Each side is talking past the other. And we’ll keep reaching this verge, this impasse, so long as we keep ignoring the actual economics—the history—of growth. For insofar as we remain ignorant of what actually causes growth, we’ll be prisoners of economic theory and beholden to private-sector “job creators” that are mere figments of faith. We’ll also be unable to map the moral universe that is already under our feet. One day historians will notice our epic inertia, our colossal failure, our intellectual default, and they will wonder how we could have been so detached from the reality of our times.