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Spring/Summer 2001

Growing Prosperity: The Battle for Growth with Equity in the Twenty-first Century
By Barry Bluestone and Bennett Harrison
Review By Leonard S. Rodberg

Bluestone and Harrison, professors of political economy at Northeastern University in Boston and (until Harrison’s recent, untimely death) at the New School University in New York, respectively, collaborated on two previous books which charted the changes in the U.S. economy —especially its manufacturing sector —that were severely affecting America’s workers.  In The Deindustrialization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry and The Great U-Turn: Corporate Restructuring and the Polarizing of America, Bluestone and Harrison described the shift from an economy featuring high-wage, unionized jobs to one in which corporations cut real wages, resisted union organizing, and shifted production to low-wage sites overseas.

 

Now, in the last book of their remarkable partnership, they consider what the overall economic policy of the United States should be in the new century.  While their conclusions provide a valuable framework for progressive policy advocacy, the means by which they arrive at them are, unlike in their earlier works, quite theoretical.  They avoid any discussion of the class conflicts and political struggles which will be at the heart of any shift of the kind they advocate.  Whereas in their earlier books Bluestone and Harrison clearly and straight forwardly presented the issues facing workers in their conflict with globalizing capitalism, Growing Prosperity is written in the abstract, dehumanized language of mainstream economics. This style seems to reflect the sharp rightward shift in public discourse during the 1990s, and it makes the book, while welcome, a frustrating exercise in translation to the real world of workers and class conflict.

 

Bluestone and Harrison devote the first portion of Growing Prosperity to an examination of productivity growth, which they argue must be at the heart of any improvement in the lives of America’s working people.  The central question they address is the apparent abrupt drop in the growth of labor productivity—the average output per worker

hour—starting in 1973, and the consequent stagnation in the average worker’s standard of living.  They examine the possible explanations for this shift, citing the work of mainstream economists such as Dale Jorgenson and the late Edward Denison.  As they report, these analysts can explain only a small portion of the shift, with as much as 60 percent of the change having some unknown cause. 

 

Bluestone and Harrison then report on the work of a number of younger economists, particularly Paul Romer, who suggest that the failure of productivity to grow from 1973 on, and the resumption of growth since the mid-1990s, can both be explained on technological grounds.  In this view, productivity rises when a new technology has been fully incorporated into the productive process.  No significant new productive technology was available to propel growth, in this view, from the mid-1970s until now.   But computer technology and the Internet, which were introduced during this period, lie at the root of the explanation they offer.  Drawing on the work of the “New Growth” theorists, Bluestone and Harrison suggest that the information revolution has finally been incorporated into the economy, from manufacturing through office management to the sales process, and is finally leading to the growth in productivity that had been promised all along.  This explanation seems plausible but, as I will suggest in a moment, is not really adequate to explain the dramatic shift during the early seventies or the much more modest upswing we have recently witnessed.

 

The second portion of this book is an examination and critique of the current reigning orthodoxy in economic policy, what they term the Wall Street Model, or the Wall

Street–Pennsylvania Avenue Accord.  By this, they mean a government policy that relies on monetary policy (the regulation of interest rates and money supply by the Federal Reserve Bank and its chairman, Alan Greenspan) to stabilize the economy, cuts in government taxes and spending, balanced budgets (or even a budget surplus) to allow reductions in interest rates and expanded private investment, deregulation, privatization, and a regime of slow growth.  This policy has, they suggest, been  imposed by a “confederation” of forces—wealthy Americans, bankers, financiers, money

managers—who worry also that inflation might be unleashed if employment expanded too rapidly and the economy grew too swiftly. 

 

In critiquing this policy, Bluestone and Harrison note especially that it relies on spending by wealthy investors—its chief beneficiaries—to sustain the consumer demand underlying the private investments which are central to the Wall Street Model.  The growing inequality of the past two decades is a necessary consequence of a policy that favors high-income people and wealthy investors over those low- and moderate-income families who would benefit from the government programs that are slashed or eliminated and from the increased employment that a more rapidly expanding economy could generate.

 

The most important aim of their critique, though, is to show that the prosperity which this policy seemingly produced in the 1990s is fragile and unlikely to be the basis for any long-term improvement in living standards.  As they write, “Surely real prosperity should be based on something more durable than volatile capital markets and the bankers, financial managers, and hedge fund speculators who run them” (p. 21).  They identify the trickle-down nature of consumption spending (only the wealthy have seen their income grow in the last two decades), the dependence on lowered interest rates to encourage investment, and the restrictions on growth and employment that result from the focus on controlling inflation as reasons to question the long-run viability of this as a growth policy.  They see the Wall Street Model as having made the rich richer but workers less secure.

 

Most tellingly, they point out that investment decisions depend on far more than interest rates.  Investors must believe there will be a growing market for the goods and services their investment will make possible.  Bluestone and Harrison use this as the launching platform to present, in the third portion of their book, their alternative policy: the Main Street Model.  In contrast to current economic policy, this approach would feature an expansion in government spending, a strengthening in union protections, and growth in workers’ wages.  In this model, prosperity would be fueled by a combination of a rebuilding of the public infrastructure—highways, air-traffic measures, research and development, workforce education and training—and an expansionary fiscal and monetary policy that would encourage a growth in spending by the average consumer. They contend that all of these elements of public policy have been short-changed since the 1970s, and they urge that the budget surplus be used to invest in the physical and social infrastructure of the country.  The resulting rise in aggregate demand and the fostering of new technology would encourage investment and, in their view, generate a broad-based, stable growth that would benefit the entire population, not just those holding the majority of investments.  Bluestone and Harrison note that the last period of rising standard of living, from 1947 to 1973, was also a period in which government spending accounted for a rising portion of GNP (that share has been declining ever since).

 

Their strongest point is to contrast such a high-wage, high-productivity, high-growth path with the low-wage, low-productivity, slow-growth path we are on today.  And unions have a central role in this vision: Bluestone and Harrison urge a role for the federal government in “raising labor standards and restoring the ability of labor unions to offer a viable collective voice to workers.  This combination can boost economy growth while reducing economic inequality” (p. 231). They see the most desirable path as one of “wage-led growth based on strong unions, higher minimum wages, and measures that improve job security” (p. 236).

 

The Bluestone and Harrison presentation rests on the assumptions that facilitating growth should be the most basic goal of economic policy and that productivity growth is the way to achieve the goal.  The issue they pose is:  Which policy, the Wall Street approach or the Main Street approach, is the best way to bring about growth in productivity and in the overall economy?  The problem is that “productivity” and “growth” are too ambiguous and arbitrary to serve as touchstones for an economic policy.

 

Clearly, something dramatic happened to the American economy in the early 1970s.  Figure 1, from the Economic Policy Institute, shows average real wages for American workers since World War II.  After 1973, something obviously caused wages to stagnate, and even decline, until the very recent period.  It seems most unlikely that anything dramatic happened to the production process that could account for such a change—and, in fact, as we have noted, economists have not found any cause within the production process to account for it.

 

What they have left out is national economic policy itself.  In 1973 the Nixon administration initiated a regime of wage and price control.  The objective of this policy, as stated by its director, was to “zap labor.”  And attack labor they did, first by freezing wages, then by encouraging employers to hold down further wage increases and resist unionization.  Then, with the coming of the Reagan administration, the attack on the labor unions’ ability to achieve wage increases accelerated.  The firing of the air traffic controllers and the support for the hiring of replacement workers during strikes knocked labor out of the box for a long while.  It is only recently, with unemployment descending to historic lows around 4 percent, that both organized and unorganized workers have felt strong enough to press for increased wages, and employers have felt it necessary, in the face of labor shortages, to raise wages to attract new workers into the labor force.  It is likely that these public policies, rather than anything that happened in the production process or in workplace productivity, changed the character of the economy, as shown in figure 1, and account for much of the missing 60 percent of the change in productivity growth. (All of this is chronicled well in Bluestone and Harrison’s earlier books.)

 

Reliance on productivity growth as a measure of how well an economy is doing seems misplaced also, because of the serious ambiguity underlying its definition.  If one is talking about the production of some standard product such as wheat or steel, it is easy to define and measure the number of worker-hours required to produce a bushel or a ton.  But if the product changes (e.g., new models of automobiles) or is completely new (e.g., personal computers) or is of a completely different type (e.g., comparing manufacturing productivity with productivity in the service sector), there are difficult problems of measurement and comparison.

 

What economists have done to solve this problem is to use the value of the output in any production process (actually, the net value added after material inputs are deducted) to define labor productivity, as dollars produced per worker-hour.  However, the dollar output is very largely determined by the wages of the workers involved in the production process (the only exception is those special cases where firms can derive exceptionally large profits from a monopoly position).  That is why workers in the low-wage service sector always appear to be less productive than corresponding workers—with the same educational background and skills—in the high-wage manufacturing sector.

 

This use of dollar output is justified within mainstream economics by the assumption that workers are paid what they are worth—or, to put it in economists’ language, that wages are determined by the marginal product of the workers.  It is this assumption that allows economists to define productivity in terms of the output that workers produce in an hour.

 

Indeed, this definition of productivity, which Bluestone and Harrison rely on, is quite circular.  It declares that wages are determined by the value of the product the workers produce, but the cost of the product is determined by the wages (and, of course, the profit and other costs incurred by the employer—but the principal costs, through the production chain, are wages). 

 

This can be seen in Figure 2, taken from the Web site of the National Association of Manufacturers.  As this suggests, wages are proportional to the productivity of the economy, the output per person (the horizontal line in the graph).  However, one could as easily turn the graph around to suggest that the output per capita of an economy is proportional to the wages paid to its workers. 

 

In fact, it seems far more reasonable to believe that wages are determined by the bargaining power of workers than by a vaguely defined “productivity.”  That is why unionized manufacturing workers earn more than largely nonunion service sector workers, and why high-status managers get paid many multiples of what the workers they oversee earn.  And it is why, as unemployment has fallen to levels lower than we have seen in three decades, workers’ wages have finally started to rise.  Telling workers they are paid what they are “worth”—that is, their marginal product—is, of course, one of the most important mystifications that capitalism uses to suppress worker activism. 

 

This is not to say that there are not differences among societies and among production processes in the physical productivity of work processes.  Certainly, far fewer man-hours are required today to mine a ton of coal than was required even 25 years ago, much less 100 years ago.  But such comparisons of physical productivity are far simpler and clearer than attempts to compare productivity across industries and between societies.  The journalist John Cassidy, in a New Yorker article entitled “The Productivity Mirage,” examines a very modern example:  the question of whether computers have improved productivity as they have gotten faster and more powerful.  In the United States economists have adjusted the price of computers to incorporate this increased value, using a method known as “hedonic” pricing.  (Since productivity grows as the dollar value of output increases, while computer prices continue to fall, hedonic pricing adjusts the nominal price of computers upward to reflect the improved power.)  European economists reject this method.  The difference is important, since the technology sector accounts for much of the apparent recent growth in productivity.

 

All of this is to say that judging the success of an economic policy by whether productivity is growing—and, if so, at what rate—has two major drawbacks. First, such a  measure is difficult, if not impossible, to define. Second, usual definition is circular and thus, ultimately meaningless.

 

There is a further reason why growth should not be the measure by which economic success is evaluated.  Economic growth, as conventionally defined, is not necessarily a fully desirable goal.  We can have economic growth galore without the lives of ordinary people getting any better. There has been enormous economic growth since the 1950s, but it now takes two working adults to maintain a middle-class lifestyle.  Is this progress?

 

As many authors have pointed out in the last thirty years, an increase in the gross national product (GNP) includes an increase in “bads” as well as “goods.”  Not only may environmental pollution be growing as physical output increases, but the increased medical costs resulting from this pollution (from cancer, emphysema, asthma, etc.) will contribute to economic growth and certainly do not represent an improvement in people’s lives.  That is, what may be good for the economy as measured by GNP may well be bad for people.

 

Figure 3, from the Web site of Redefining Progress, a California-based think tank, shows the U.S. gross domestic product for the past forty-eight years as compared with an alternative measure, the genuine progress indicator, which attempts to describe the quality of life yielded by the nation’s output.  Growth in output has not, by this indicator, produced a corresponding increase in the well-being of the American people.

 

As one example, the reliance of Bluestone and Harrison on economic growth as the measure of progress leads them to welcome the growing number of workers in the economy and even the longer hours they work.  Together, these have contributed about half of all economic growth in the last decade.  But is this good for people, is it good for family life, is it really progress to have more people working longer hours?  We used to think that increased productivity could generate more free time and more leisure, but the world they envision would have more of us working—and working longer hours—in the name of economic growth.

 

Thus, in Growing Prosperity we have a line of argumentation questionable on a number of grounds, both methodological and social, but a conclusion that is still correct:  An economic policy that uses government to provide the physical infrastructure and education needed for an improved society, along with support for union organizing and for higher wages, will lead to a society that has greater equity in which the average working person can lead a better life. 

 

The problem, politically, of course, is that as long as there seems to be continued prosperity—at least as touted by the media, if not as felt in the average workers’ paycheck—theoretical argumentation alone will not lead to the kind of far-reaching change in policy they advocate.  It is only through political action by forces aligned with the majority of working people that a change from the current policy will be made.  As long as the media proclaim, with near unanimity, that prosperity is at hand, there will not be any popular upwelling of support for a policy change.  But when the downturn comes and cannot be denied, then the country will be searching for an alternative approach.  It is here that the prescriptions offered by Bluestone and Harrison  will come into their own.  At that point, as they say, “the notion that [the Wall Street Model] has contributed to prosperity rather than threatened its sustainability” will be “recognized for the illusion it is” (p. 261).  And the country will, at that point, be ready to support a return to the “high road” envisioned by Bluestone and Harrison.