The Price of Prosperity E-Book

Peter L. Bernstein

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Peter L. Bernstein's Finance Classics
• Sprache: Englisch

Seitenzahl: 174

Veröffentlichungsjahr: 2009

Beschreibung

One of the foremost financial writers of his generation, Peter Bernstein has the unique ability to synthesize intellectual history and economics with the theory and practice of investment management. Now, with classic titles such as Economist on Wall Street, A Primer on Money, Banking, and Gold, and The Price of Prosperity?which have forewords by financial luminaries and new introductions by the author?you can enjoy some of the best of Bernstein in his earlier Wall Street days.

First published in 1962, The Price of Prosperity speaks to today's uncertainties as clearly as to those of the past. With chapters like "The Burden of Government" and "The Economics of Democracy," Bernstein probes the future of an economy during rapidly changing times and the appropriate role of government in determining the ultimate outcome.

The questions have not changed over time, but Bernstein's answers help us understand these issues from today's perspective. How much government control is too much control? How much can government spend? How can government influence the level of unemployment?

As Bernstein shows how to navigate an ever-changing economic landscape, his timeless insights throughout these pages make The Price of Prosperity as vital and important today as when it appeared in an environment fundamentally different from our own.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Introduction

ORIGINAL PREFACE

Chapter 1 - THE ARITHMETIC OF OPTIMISM

1.

2.

3.

4.

5.

6.

Chapter 2 - THE BURDEN OF GOVERNMENT

1.

2.

3.

4.

5.

6.

Chapter 3 - THE FEAR OF TAXES

1.

2.

3.

Chapter 4 - THE USES OF GOVERNMENT

1.

2.

3.

4.

5.

Chapter 5 - THE TRAGEDY OF ERRORS

1.

2.

3.

4.

5.

Chapter 6 - THE ECONOMICS OF DEMOCRACY

1.

2.

3.

4.

5.

6.

7.

8.

STATISTICAL APPENDIX

Acknowledgements

NOTES

INDEX

Copyright © 1962, 1966, 2008 by Peter L. Bernstein. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Originally published by Random House, Inc. in 1962.

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Library of Congress Cataloging-in-Publication Data:

Bernstein, Peter L. The price of prosperity :a realistic appraisal of the future of our national economy/ Peter L. Bernstein ; foreword by Paul A. Samuelson. p. cm. Includes bibliographical references and index.

eISBN : 978-0-470-43521-2

1. Full employment policies—United States. 2. Economic forecasting—United States. 3. United States—Economic policy. I. Title. HC106.5.B46 2008 330.973—dc22 2008028074

To Shirley,with love

FOREWORD

Economic historians can benefit from reading and comparing Peter Bernstein’s successive books on American and global economic trends and ideas.

In particular, his The Price of Prosperity came just at the time in the 1960s when the Roosevelt-Kennedy-Johnson paradigms were harvesting the fruits of the new scientific findings of macroeconomics.

It was a time of earned optimism. Maybe with optimism comes complacency. No one in the 1960s realized at the time that America and the world economy were then at a fork in the road. Fable has it that baseball’s sage Yogi Berra said,“When you come to a fork in the road, take it.”

Nature’s unmanicured jungle provides no recognizable forks in the road.The same holds for realistic dynamic economic history. In lively, understandable prose, author Bernstein made clear that there are no free lunches. Needed valuable public services are in tradeoff with private consumption, always. As Justice Oliver Holmes famously said,“Taxes are the price we pay for civilization.”

What no one realized in the mid-1960s was that the quagmire of the Vietnam war—which Eisenhower-Dulles passed on to Kennedy and Johnson, and which they passed on to the Nixon-Kissinger-Burns trio—sent the American electorate off in a new libertarian course.

Jotting down counterfactual economic history cannot erase actual subsequent history. But it can teach useful lessons.

To sustain the singular growth dynamic of Camelot, after America had cut its losses in Indochina, optimal macro policy would have had to recognize that miracle growth in competing emerging societies—in Japan, Hong Kong, South Korea, Taiwan, and Singapore—did require a sizeable devaluation of the dollar.

Paranoid President Nixon, along with his shenanigan Watergate manipulators and with concurrence from his complaisant Federal Reserve Chairman Arthur Burns, did abandon Bretton Woods dollar parities. But at the same time, under reelection anxieties, Nixon introduced the price and wage controls that would plague the stagflation supply-shock economy of the 1970s.

No longer centrist macro and micro prudence, the radical right supply-side follies of the Reagan era took front stage. As economic law predicted, the 1914 to 1985 U.S. pattern of being a creditor nation reversed itself quickly during the Reagan years.

Thus, the work of a canny Bernstein is never done. Sufficient to each day was Bernstein’s vision of middle-of-the-road money and fiscal programs. The libertarians were at the gate. And the melodrama still goes on in this era of American trade deficits and deliberate destruction of the nation’s tax base.

—Paul A. Samuelson

NEW INTRODUCTION

The Price of Prosperity was my first book. It has always had a special place in my heart. Moreover, the whole project came into being as a result of a sudden and unplanned sequence of events.

One day in 1959, an editor at the New York Times called and invited me to write a short piece about the lore of gold for the magazine section. He had seen something I had written elsewhere and thought I had some promise as a writer. Not long after, a senior editor at Doubleday named Sam Vaughan called me to say he had seen the article in the Times and urged me to start work on a book.

I had been pondering for a long time the problem of how the economy could grow fast enough to provide jobs for the swarm of baby boomers when they started to reach working age at the end of the 1960s.When I suggested that topic to Sam Vaughan, he was enthusiastic and encouraged me to go ahead and get started.

Then Sam gave me some editorial advice I have never forgotten: “This is going to be your first book, and I can tell you that writing books is nothing like writing an article. With an article, you know you have limited space. In addition, articles compete with other articles for the reader’s attention. But when somebody buys your book, they buy it because they want to read it. You have their attention. So use the space freely. You have no need to be counting words or pages.You can feel free to digress and give it all you’ve got.”

The Price of Prosperity hit the bookstores in the spring of 1962. On publication date, my wife and I went out to celebrate with lunch at a fancy restaurant, including the appropriate number of martinis to match the occasion. Easter was about ten days off, and, on the way home, we saw a grey-and-white rabbit in a pet shop. We were in such a jolly mood we walked into the pet shop, bought the rabbit, and took him home. We named him Prospero, after The Price of Prosperity. Prospero was the first in a long line of pet rabbits who graced our lives over many years.

This book has also inspired its own line of descendants, each of which has brought its own special flavor of joy and excitement. Nine more books have followed The Price of Prosperity, including two co-authored with my late and beloved friend Robert Heilbroner.

The primary message of The Price of Prosperity is in the profound difference between projections and forecasts. We can put together all kinds of statistical material from the past to describe the future. If we are gloom-mongers, we produce projections of disastrous scenarios. If we are incurable optimists, we can paint beautiful pictures of a glorious future. All we have to do is choose the desired set of historical statistics and get to work.

The Price of Prosperity refers to this process as economic arithmetic. The book’s mission is to test out the necessary conditions for the fulfillment of the wildly optimistic long-run projections that were popular in 1960 to 1961 when I was writing the book. Based on economic arithmetic, these projections combined firm expectations for sharply improving labor productivity with the impending accelerated growth in the labor force as the baby boomers reached working age. The result of these calculations was a glittering promise of higher living standards by the mid-1970s.

The search for the necessary conditions to make those dreams come true was not an easy one. At that moment, the baby boomers were still too young to be entering the labor force. The oldest were in their mid-teens. The cohort received plenty of attention nevertheless, as all groups of young people receive attention, caused primarily by their social behavior and the strain they impose on their parents’ pocketbook. But nobody appeared to be worrying about what would happen when the baby boomers would be old enough to enter the labor force and start looking for jobs. On the contrary, most people figured it would be a relief not to have so many young people acting up, to say nothing of the pleasure of getting them off the family payroll.

People do not land jobs just because they are in the job market. Employment expands when the demand for goods and services expands. That condition is never pre-ordained. The problem, then, was as simple as its solution was complex. Sustaining a low level of unemployment as the baby boomers matured would require unprecedented peacetime growth in the demand for goods and services. Demand for higher living standards is always there, but these projections ignored any problems that might arise in generating sufficient incomes to pay for that big jump in the consumption of goods and services. The whole exercise was meaningless unless we could identify the sources of growth in purchasing power.

In 1960, the number of people of working age—say, ages 20 to 64—was 94 million, just about half the total population.a Ten years earlier, the working age population had been 89 million. Thus, the number of people of working age had increased only about 5 percent since 1950, compared with the growth of nearly 20 percent in the total population. Under those conditions, sustaining full employment in most years was no problem.

But by the end of the 1960s, the oldest of the baby boomers would begin seeking jobs and that number would grow at an accelerating rate. By 1980, the cohort aged 20 to 64 would grow to about 130 million, an increase of 43 percent from 1960, while the total population would increase by only 25 percent. It was clear that a rapid expansion in the demand for goods and services would be essential if the country were to achieve full employment over that twenty-year span.

After a detailed exploration of the alternatives, I could find no solution to this problem other than an increase in government spending (state and local as well as federal) relative to the economy as a whole. The private sector by itself did not appear likely to provide a sufficient growth in demand.

The remainder of the book is a critical examination of all the issues surrounding government spending. I tried to think of every possible argument against government spending and then proceeded to show why those arguments, one after another, would not hold water. Indeed, as the argument progressed, I became increasingly convinced there were strong positive reasons for providing for an increase in government expenditure.

The difficulty in reaching full employment I identified in 1961 did develop as I had feared. During the 1960s, when the baby boomers were still in diapers or in school, everything had been great. An average of 3.5 million people were unemployed, equal to 4.8 percent of the labor force. At the end of the decade, the unemployment rate was down to 3.5 percent, close to a practical minimum. But in the 1970s, thanks to the bulging influx of baby boomers seeking jobs, the level of output and employment turned out to be far below what the economic arithmetic had projected. From 1970 to 1974, unemployment averaged 5.4 percent; the average over the next five years was 7.0 percent in a range of 5.8 percent to 7.7 percent—eight million people at the worst, or just about the same number as were unemployed at the time of Pearl Harbor when the economy was still showing the consequences of the Great Depression.b

Economic conditions during the 1970s are usually referred to as “stagflation,” or a combination of stagnation and inflation. Inflation there was for certain: from the end of 1969 to the end of 1979, the Cost of Living Index rose at an annual rate of 7.4 percent One reason for this dire outcome was Federal Reserve policy. The members of the Open Market Committee were reluctant to make money sufficiently tight to snuff out inflation at a time of unprecedented growth in the labor force. Stagnation, however, is something of a misnomer. The economy grew, in real terms, at an annual rate of 3.3 percent over the decade of the 1970s, not far below the average of 3.8 percent for all ten-year periods ending 1957 through 1969—but average growth was insufficient to create full employment at a time when the increase in the labor force was rapidly accelerating. In addition, the widely anticipated rise in productivity failed to make an appearance. Productivity growth for the decade was only 2.6 percent a year.

Perhaps the poor record on unemployment reflected the failure of the nation to provide the increase in government spending I had called for in The Price of Prosperity. Measured by government purchases of goods and services, including state and local spending (the metric I use in the book to exclude transfer payments like social security and unemployment insurance), government accounted for 21 percent of gross national product in 1962, the year the book came out. In 1979, even with defense spending on a steep uptrend, total government purchases were still 20 percent of gross national product.c

The Price of Prosperity is a paean for government spending. In a romantic kind of way, the book analyzes the many positives government can contribute. The merits of government spending, which I refer to on page 66, in the chapter on “The Uses of Government,” include “education, better roads, urban renewal, less juvenile delinquency, better-balanced defense programs, less poverty in foreign lands, and so on and on and on.” Then I add, “[W]here there are needs that a profit-oriented economy will fail to meet, [there] is no reason to argue that such needs have a second-class character whose satisfaction can readily be postponed.”

Four and a half decades later a profound change has taken place in my view of these matters.This shift has two sources. One is subjective but the other confronts hard facts that make a radical difference from conditions in the early 1960s.

First, I have my doubts that what I wrote about government spending in the early 1960s is a satisfactory description of government spending in our own time. Although all of those laudatory objectives listed above are included in government today, unfortunately a lot more goes on in Washington and the state capitals that I would just as happily exclude. Graft and waste were always present, but now they occur on a larger scale than in the early 1960s and in a balder and less apologetic fashion as well. Defense spending back then was minimal; today it is a critical variable in the size and objectives of the federal sector. In short, the romance with which I once embraced the notion of government spending has been replaced to a significant degree with something more sullied.

Second, and less debatable, the baby boomers have come a long way since I wrote this book.Then they were still in their teens, at the very edge of joining the labor force and seeking employment. Now they are graying men and women on the crest of retirement, with some forty years of employment behind them. Back then, the problem was one of trying to find jobs for all of them. Today, the problem will be one of trying to finance the promises for retirement and health care the taxpayers have bestowed upon them. Unlike the economic arithmetic of which I was so skeptical in 1962, today’s projections are to be taken seriously: a huge mandated increase in government spending lies ahead and threatens to crowd out a host of other urgent needs in the public sector. That threat will be real unless difficult and painful adjustments are made in the promises the government is expected to keep.

Some 75 million people—a quarter of the total population—are in the age group 45 to 64 and will turn 65 over the next fifteen years. The 45 to 64 age group has more than doubled since I wrote The Price of Prosperity in 1960 to 1961, while the total population has increased by only 67 percent.This is a problem to worry about!

Thus, I end this introduction on a note of irony. One of the surprises to me when I wrote The Price of Prosperity was the absence of concern over what would happen in the labor market when the baby boomers reached working age. Nobody seemed to be worrying about them. Everything would turn out all right.

The situation today is exactly the opposite. Now people do worry about what is going to happen in the American economy when the baby boomers reach retirement age.

At long last, the futures of the baby boomers are receiving the national attention they deserved when I was writing The Price of Prosperity.

ORIGINAL PREFACE

The preparation of revised editions always opens the author to the temptation of using hindsight to make him appear wiser and more prescient than he had been when the original edition appeared. Despite the passage of five years and some major changes in economic thinking, I have resisted this temptation here. The argument reflects no changes in substance whatsoever, although the statistics that appear in the last four chapters have been updated where appropriate.

Hindsight has led me to yield to one temptation, however, which is to improve the readability of the early part of the book. Hence, the first five chapters have been condensed into one, thereby eliminating much discussion that the passage of time has made superfluous. In addition, the statistical analysis in the original five chapters now appears unnecessarily tedious and has been relegated in this edition to an appendix.

I am happy to have this opportunity to express once again my gratitude to those whose help I have acknowledged on a later page and to express as well my thanks for invaluable editorial guidance from Mrs. Miriam Z. Klipper of Random House.

—Peter L. Bernstein Brattleboro, Vermont April 1966

Chapter 1

THE ARITHMETIC OF OPTIMISM

In real life, you have first of all to find the question; to learn to identify, almost as if by instinct, the one forgery amongst a mass of genuine signatures, or to spot the googly amongst a string of innocent leg breaks.

—Speech by MR. ANTHONY TUKE Chairman of Barclays Bank, London

1.

While it is far easier to describe Heaven than it is to provide a map showing how to get there, the man who undertakes the first without considering the second has done us little service.Yet the economists who purvey the glowing and finely detailed descriptions of the prosperity of the years ahead may have failed us on just this count.

Of course we face a dazzling opportunity. Our labor force is on the verge of an enormous expansion.Automation is rapidly increasing our ability to produce more goods with less work. Our economic history has been characterized by the happy combination of bold businessmen and ingenious engineers. Within the entire scope of our economy, from private houses to public works, we stand a real chance of stamping out want in the United States during the decade of the 1970s.