The Price of Civilization

by Jeffrey D. Sachs

  Fourth, as economic life becomes more complex, we should expect the role of government to become more extensive. Therefore, expecting to find good twenty-first-century economic answers in a constitution that dates back to 1789 is unrealistic. The Founding Fathers were clever, to be sure, but the cleverest thing they realized is that Thomas Jefferson’s famous aphorism that “the earth belongs to the living” means laws from a premodern age should not blindly bind us today. We need fresh thinking about our circumstances, especially at a time of rapid globalization, environmental threats, and a knowledge-based economy.

  Fifth, we should appreciate that circumstances as to the appropriate role of markets and government differ across countries. There is no reason to expect that the United States, Europe, China, India, and others will or should make exactly the same choices about the roles of government and markets. History has shown that the emerging economies such as Brazil, China, and India should devote special government resources and policies to closing the technology gap, while countries in the lead (such as the United States) should devote special government resources to cutting-edge research and development. Thus, China and the United States each needs its own distinctive kinds of industrial policies, China’s to facilitate rapid catching up and America’s to facilitate scientific and technological leadership. In neither case would a naive free-market position be warranted.

  A Market Economy? Yes—with Balance

  To recap, the modern market economy is an amazing human contrivance.15 In a highly decentralized way it engages the self-interest of billions of people in millions of businesses and more than 1 billion households around the world to organize the use of labor time, natural resources, and produced capital goods (such as machinery and buildings). Yet the market by itself is not equipped to achieve the triple bottom line of efficiency, fairness, and sustainability. The market system must be complemented with government institutions that accomplish three things: provide public goods such as infrastructure, scientific research, and market regulation; ensure the basic fairness of income distribution and long-term help for the poor to escape from poverty; and promote sustainability of the earth’s fragile resources for the benefit of future generations. These are not simple or static tasks; they require the ingenuity and creativity of each generation to respond to the challenges of the times.

  CHAPTER 4.

  Washington’s Retreat from Public Purpose

  How did we get into the dreadful situation in which the federal government is in the lap of the corporate lobby? Why has the federal government stopped providing the public goods that Americans need to remain globally competitive in a fair and sustainable society? These are the puzzles we must solve in order to move forward. In the next four chapters we’ll look at the role of globalization, domestic politics, social change, and even the media as contributors to this debacle. We’ll see that many powerful currents have flowed together to tilt our politics away from the public good to special interests. As society understands what has happened, it will be in a position to turn the country toward its true democratic values once again.

  From the New Deal to the War on Poverty

  For roughly three decades, from the New Deal of the mid-1930s to the War on Poverty of the mid-1960s, the federal government steered the national economy as a relatively trusted and respected instrument of democratic power. The federal government led America through depression, war, and peacetime boom. The federal government conceived and financed the national highway system and the national power grid. Science and technology (S&T) initiatives created in Washington helped launch several of the most important technologies of the past half century: nuclear power, satellites, computers, the Internet, and much more. The federal government fought poverty and exclusion, culminating in the 1960s in Medicare for the elderly and civil rights legislation on behalf of minorities, women, and the disabled. When necessary, as in World War II, the government mobilized industry, putting it at the service of the nation. More often, it partnered effectively with industry in starting new industries (such as computers and the Internet) or expanding them (such as aviation and satellites). There was no question, however, about who was in the lead of the relationship.

  Then, after three decades of active economic leadership, Washington gradually stopped steering. The public’s support for collective action through federal policy making dissipated. The government stopped steering just as America faced growing challenges in the forms of globalization, the ecological crisis, and the massive rise of immigration. During the 1980s and onward, the instruments of federal power were increasingly handed over to vested corporate interests to be used for private advantage. The new corporatocracy was under way. And the economy, now guided by narrow interests, quickly became divided, unstable, and ultimately vulnerable to the kind of collapse that ensued in 2008.

  The overarching reversal of Washington’s role, from defender of the common man to the enabler of narrow interests, is the most important political change during the eight decades since the Great Depression in the 1930s. It is eye-opening today to recall the clarion words of Franklin D. Roosevelt in his second inaugural address, as he ushered in the era of government leadership in the economy:

  [G]overnment [is] the instrument of our united purpose to solve for the individual the ever-rising problems of a complex civilization. Repeated attempts at their solution without the aid of government had left us baffled and bewildered.1

  Those sentiments are no longer recognizable. America had already begun to change fundamentally by 1981, when Ronald Reagan proclaimed:

  In this present crisis, government is not the solution to our problem; government is the problem.… It is my intention to curb the size and influence of the Federal establishment.2

  He not only curbed the government’s steering of the economy but also, wittingly or not, turned the levers of power over to the highest bidder. Fifteen years after Reagan came to power, Democratic President Bill Clinton made the handover of power to the corporate sector a bipartisan reality when he declared, “The era of big government is over.”3 Clinton was especially the enabler of Wall Street power, which gained enough leeway to win tens of billions of dollars per year of bonuses and cost the world tens of trillions of dollars of financial losses in the great crash of 2008. After Clinton, the United States no longer had a center-right Republican Party and a center-left Democratic Party, but rather two center-right parties whose heated differences on the surface mask a common agenda at the core. Washington’s obeisance to the rich while squeezing the poor has so far proved to be bipartisan and durable. Yet the results are so meager for the broad public that its death knell will also toll.4

  The Rise of Public Spending

  The rise of the federal government’s economic role from the New Deal onward is well captured by a single key statistic: the size of civilian (nondefense) federal spending relative to national income (Figure 4.1). From around 3 percent of GDP in 1930, the civilian budget rose to 8 percent of GDP by 1940 under the aegis of the New Deal.5 By 1950, the share of federal civilian spending had reached 10 percent of GDP. Civilian spending gradually ascended to around 12 percent of GDP by 1970 and 16 percent of GDP by 1980, where it stayed roughly unchanged until the 2008 financial crisis. (The 2008 crisis ushered in a spike in spending that may or may not prove to be temporary, depending on the budgetary choices we make.) The long-term rise in spending occurred in every high-income country in the world, in fact more in Europe than in America. The long-term rise in public spending relative to GDP reflects the deep need of every modern society for a mixed economy rather than any specific twists and turns of U.S. politics.

  Figure 4.1: Civilian Federal Spending as a Percentage of GDP, 1930–2010

  Source: Data from Office of Management and Budget Historical Tables.

  Figure 4.2 displays the allocation of civilian spending between “mandatory” programs such as Social Security and Medicare, where the benefits are written into law, and “discretionary” programs such as N
ASA’s space missions and U.S. energy research, where the spending has to be approved annually by Congress.6 Up until 1980, both the mandatory and the discretionary parts of the budget had an upward ascent. Since 1980, the mandatory spending has risen slightly while the discretionary spending has been cut as a share of GDP. Therein lie many of the crises of poor governance today.

  The federal programs brought in by the New Deal and then extended during the 1940s to 1960s include several kinds of activities: construction of physical infrastructure (roads, bridges, electricity, dams), regional development (such as in the Tennessee Valley), increased provision of public services (health and education), retirement and disability pensions (Social Security), support for science and technology, public administration, income security (unemployment insurance), transfers to the poor (food stamps), and others. Almost none of those programs existed before 1933, when Roosevelt assumed the presidency in the depths of the Depression.

  Figure 4.2: The Trajectory of Civilian Spending as a Percentage of GDP, 1962–2010

  Source: Data from Office of Management and Budget Historical Tables.

  Roosevelt’s New Deal policies generated enormous controversies in their day, with many of Roosevelt’s fervent opponents decrying the rising role of government in the economy, much as libertarians call for a scaling back of government today. Nonetheless, after the United States had passed through the Great Depression in the 1930s and World War II in the first half of the 1940s, American society coalesced around a new vision of the economy. Democrats and Republicans alike agreed that a new and larger federal government was needed to ensure that the U.S. economy would stay out of depression and keep the nation secure in the postwar era. During the 1940s through the 1960s, the public consistently supported the expansion of the major federal initiatives of the 1930s and 1940s.

  There are several reasons for this era of consensus during the 1940s to the 1960s. First, the nation as a whole had passed through two “near-death” experiences together and emerged as an increasingly united society. The Depression and World War II were rites of passage for the Greatest Generation, as Tom Brokaw memorably called those who grew up in the Depression and fought in the war. Second, and less widely recognized, the 1924 Immigration Act had served to reduce the flow of immigrants, so that immigration was not a political lightning rod or a source of dissension on social programs. The share of foreign-born in the U.S. population fell from approximately 15 percent of the population in 1924 to less than 5 percent of the population by 1970, when it started to rise because of revisions to immigration law.7

  Third, simply and crucially, the government was viewed as highly competent and representative of broad national interests. It had nursed the nation through the Great Depression; it had led the nation to victory in World War II; it had led to the creation of postwar institutions including NATO and the European Coal and Steel Community (eventually to become the European Union) and to the recovery of Japan; it had helped the economy recover from the end of the war more swiftly than anyone imagined. Government was widely trusted and seen as a guarantor of national prosperity. It was not seen as a tribune of special interests, and particularly not the interests of the rich, who paid stiff income taxes, with top tax rates soaring to 80 percent or higher after 1940.

  The apogee of government leadership of the economy was reached in the mid-1960s, immediately following John F. Kennedy’s assassination. Lyndon B. Johnson declared war on poverty in early 1964 and launched an astonishing array of legislative initiatives in 1965, including: the Voting Rights Act of 1965, the Elementary and Secondary Education Act of 1965, the Water Quality Act of 1965, the Higher Education Act of 1965, the Federal Cigarette Labeling and Advertising Act of 1965, the Solid Waste Disposal Act of 1965, the Motor Vehicle Air Pollution Control Act of 1965, and, most important in terms of size of outlays, the Social Security Amendments of 1965, which ushered in Medicare for the elderly and Medicaid for the indigent. The War on Poverty had its most lasting effect on two groups, the elderly and African Americans. Medicare and the expansion of Social Security effectively ended the persistent high poverty among those over sixty-five. In 1959, the elderly poverty rate stood at 35.2 percent; it fell to 25.3 percent by 1969 and just 9.7 percent by 2007. African American poverty rates fell from 55.1 percent in 1959 to 32.2 percent in 1969 and 24.5 percent in 2007.8

  One more crucial factor made possible the surge in social programs during the period of the 1960s: the availability of existing government revenues to pay for them. Up until the mid-1960s, politicians could enact new social programs without having to raise taxes as a share of national income for a simple but powerful reason: the federal tax system that emerged from World War II and the Korean War (1950–1953) was able to collect 18 percent to 19 percent of GDP in revenues and therefore to support a roughly equivalent level of spending; as defense spending declined after the Korean War, nondefense spending had room to expand.9

  The Great Reversal

  As of the mid-1960s, most political observers expected a continued ascendancy of social programs in the service of promoting prosperity and fighting poverty. Few guessed at the time that the great consensus on the role of government in the economy would soon begin to unravel, and that a rival economic strategy calling for small government and privatization of public functions would surge to the forefront by 1980. Deep social cleavages surrounding the civil rights movement were the first wedge in the national consensus. I describe those in the next chapter. Yet economic shocks also played a role in undermining the public’s confidence in Washington.

  The rise of inflation at the end of the 1960s and a series of major economic upheavals of the 1970s shook the faith of the public in the ability of government to steer the economy and to fight poverty at a modest cost to society. The two most important events were the collapse of the post—World War II global exchange-rate system in 1971 and the sharp increases in oil prices in 1973–1974 and again in 1979–1980.10 Rather than see the events of the 1970s as temporary aberrations requiring specific problem solving, conservative politicians, with Reagan as spokesperson, argued that they were signs of fundamental failures of the public sector and its role in the economy.

  President Jimmy Carter’s one term, 1977–1981, proved to be the transition in every way.11 Big Labor lost its political influence reflecting the rise of Sunbelt power and that region’s antipathy to organized labor.12 The 1978 Revenue Act began the process of cutting capital gains taxation that would be greatly extended during the Reagan years. The tax measure “discarded historic principles of interclass equity and methods of promoting business investment” and was “not simply a triumph of capital, but of financial capital, which was assuming a prominent role in U.S. politics.”13 Japan’s exports to the United States in steel, automobiles, and electronics goods surged, giving the United States a first taste of the tough competition that would arise in the new era of globalization.

  Carter also began the processes of deregulation (notably in airlines, trucking, and finance) that would become a hallmark of the Reagan years and after. Many of Carter’s forays into deregulation (for example, in transport) proved to be successful, but the process of deregulation got out of hand in the years that followed, especially in the financial sector. And tellingly, Carter lost his effort to reform the energy sector, tripped up by the power of the oil and gas sector to block his initiatives in alternative energy sources. By 1981, the country was set for a major transformation favoring the Sunbelt, financial capital, wealthy Americans, and Big Oil.

  All of this tumult gave an extraordinary opening to the new philosophical assertion that it was “big government” itself rather than new and specific challenges (energy, the exchange rate, and so forth) that constituted the major barrier to prosperity. This was an odd assertion. The major problems that had been experienced were macroeconomic in nature: the collapse of the gold-based exchange system, the budget deficits caused by the Vietnam War, and the oil price shocks. They did not, evidently, relate to the
size of government (other than the Vietnam War) as much as to shifts in the world economy.

  The assertion that big government had destabilized the economy was doubtful on its face, but Reagan uttered his ideas with such conviction and charm that an unhappy public was ready to vote him into office. Had the evidence been brought to bear, the flimsiness of the claim would have been exposed. Federal tax revenues as a share of GDP were nearly constant from the mid-1950s onward at 17 percent to 18 percent of GDP. Total federal spending as a share of GDP had increased slightly, from around 18 percent of GDP in the late 1950s to around 20 percent of GDP in the late 1960s and 21 percent of GDP in the late 1970s.

  There was no evidence then—or now, looking back—that the shocks of the 1970s had much if anything to do with the War on Poverty, social programs, infrastructure investment, science and technology, community development, Medicare, Social Security, or other government programs. Yet the chaos created by the oil price shocks, the new floating exchange rate regime, and lax monetary policies by the Federal Reserve reverberated into budget politics. Suddenly tax cutting, shrinking civilian government, and rolling back welfare policies became the vogue and the diagnostic basis for policy change. There was no turning back. However dubious was the interpretation of the economic mayhem of the 1970s, a political reality had resulted: government lost its aura of competency. Probably this alone was fatal to the economic consensus that had guided the country for almost forty years.