A New Round of Stagflation
Jude Wanniski
March 29, 1994


The Whitewater controversy has blotted out almost all political discussion of the national economy in Washington. The Clinton Administration has been content to take credit for what appears to be a modestly expanding economy, keeping a wary eye on the Greenspan Fed. The Republicans in Congress have been carping about the budget, but silent on the economy, more or less accepting the idea that it is okay. In fact, even the modest expansion is fragile, threatened by financial markets that are sagging under the weight of uncertainty. Into this vacuum, we now observe the stage being set by the academic neo-Keynesians and their friends in the press for a return to the Carter years, which of course will produce only a new round of stagflation. The furniture and lighting on this stage are being presented in the pages of The New York Times, which has more neo-Keynesian Ph.D. economists guiding the Democratic agenda than the rest of the press corps combined. Their demand model infuses the editorial page as well as the business and financial pages with the predicates of stagflation, heavily influencing the thinking of its most dedicated readers, including the President himself.

In recent weeks, the Times news pages have carried a commendable series on the plight of the middle class, which was more in tune with our sense that the nation's economic engine is in much worse shape than government statistics suggest. Now, though, come the Times' remedies. As Congress went home for the Easter recess, the Times began its campaign with three lengthy reports that are sure to wend their way into conventional wisdom when Congress returns. The first appeared last Friday on the first business page, "Myth: Small Business as Job Engine," by Sylvia Nasar. The second appeared on yesterday's front page, "Middle-Class Debt Is Seen as Hurdle to Economic Gains," by Keith Bradsher. The third appeared on yesterday's first business page, "Inflation Specter: The Latest Fears May Be Groundless in a Global Economy With New Rules," by Louis Uchitelle.

The Nasar piece is clearly the most dangerous of the three, as is Ms. Nasar herself. A Ph.D. economist who studied under Wassily Leontief, who won a Nobel Prize for proving that socialism works, Ms. Nasar is the same reporter who on March 5, 1992 provided candidate Clinton with all the ammunition he needed to proclaim the '80s a decade of greed. The headline on her 1992 front-pager, "The 1980s: A Very Good Time for the Very Rich" proclaimed that "Data Show the Top One Percent Got 60 Percent of the Gain in Decade's Boom." The article essentially massaged arguments by MIT's Paul Krugman, who himself massaged statistics published four months earlier by the Congressional Budget Office. The CBO, which does not even compile statistics on "the rich," issued a staff memo the following day disavowing the Times story, which the Times did not report. Even Krugman's own numbers showed, under closer examination, that income disparities, as opposed to wealth disparities, widened during the Carter years and were sharply reversed during the Reagan years! As recently as July 20, 1993, President Clinton was citing the gist of the Nasar story as proof of Republican greed -- a complaint that has now come back to haunt him in the Whitewater revelations.

In her latest effort, Ms. Nasar wants her readers to forget "the image that took root about a decade ago, when David Birch, a business consultant and lecturer at MIT, contended that small businesses created 8 out of 10 new jobs. The statistic has been repeated like a mantra ever since, usually to argue for special breaks for small businesses in Washington," she writes, although we add the emphasis on the last phrase to reveal her agenda. Forget small business and take care of the big guys! she advises. "Even Mr. Birch now says he regards his own statistic as neither `interesting' nor `meaningful.' But, he complains, `That number won't go away.'" In a letter to the Times that he faxed to us, moreover, Mr. Birch disavows the Nasar account. He advised us by telephone that he has "ten media contacts a week," but never has material he presented to any reporter been as mangled as it was by Dr. Nasar. 

The Nasar story is preposterous but, without saying so directly, beautifully supports Clintonomic Corporatism: Why not help the Big Guys by off-loading their health care costs onto the backs of the Little Guys, via employer mandates? Why not bash the Japanese into buying more Motorolas and Chryslers and Business Roundtable widgets? Why not grease the wheels of commerce a bit by devaluing the dollar against the yen? And why, for goodness' sake, even think of cutting or indexing the capital gains tax to help spawn new enterprise? Sure, jobs are created for a little while, but most new enterprises go out of business and all their jobs are destroyed, while big businesses only downsize! 

Responding to all this nonsense, Birch writes the Times: "The research on which you base your story is hardly myth-shattering. It is based on a sample of factories (not companies) that, on balance, created no jobs during a period in American history when 31 million new jobs were added. It escapes me how you, or anyone else, can draw general conclusions about job creation from a sector that created none, and that represents at most seven or eight percent of the workforce. Furthermore, smaller factories in the research described in your article added, on balance, one million jobs, and larger ones eliminated about one million. This is hardly a case for larger firms. I am disappointed that a newspaper of your stature would present so much unchecked, false information in an article it took four months to write. You had ample time to verify your facts, and chose not to do so." Oh, well.

The Bradsher piece is actually correct in arguing that the working middle class is buried under a mountain of debt, and that this is a threat to economic recovery. He cites a recent speech of Fed Gov. Larry Lindsey, who said he "believes the household sector poses one of the most serious risks to the continuation of the recovery." The problem with the piece is that, except for Lindsey's comments, it is written entirely within a demand model, which militates inexorably in the direction of a stagflation formula as a remedy. It cites the debt burden of non-elderly, "non-rich" households as a percentage of income, when the appropriate measure is debt as a percentage of wealth. Again, the Fed does not even collect data on family household wealth, but in aggregate this is what is threatening the recovery. It is the value of family collateral that determines its willingness to take on debt, just as it is collateral that determines the willingness of creditors to lend to households. Since 1989, debt/income ratios remain abnormally high, but debt/wealth ratios are even worse, given the national decline in asset values that has occurred over the past four years. The demand model would attempt to jack up income by pumping money into consumer pockets. It would do this by taxing it away from the "rich" and spending it on the non-rich, and through easier monetary policy that also inflates away debt. Instead, we should be thinking of ways to increase the wealth of the nation. In the supply model, this can best be accomplished by reducing tax rates on capital formation and by sound money, which increases the efficiency of capital. 

The Uchitelle article in yesterday's Times is a clear rationale for inflation, bolstered by quotes from Alan Blinder of the President's Council of Economic Advisors, who is slated to be named vice chairman of the Fed!! The argument is that prices can't rise because we are now in a world economy, and if our auto companies raise prices, they will lose out to Japan's. Blinder argues that there remains unutilized plant capacity in the U.S., a "cushion" against inflation. These are precisely the arguments made in the Nixon-Ford-Carter years by the Ivy League economists, Blinder of Princeton included, on why inflation would not occur as long as there were lots of idle plants and plenty of unemployed workers. They then sat back and watched prices rise faster even as more plants idled and unemployment lines lengthened.

This is where we are headed again, it seems. The only person who could head it off remains Fed Chairman Alan Greenspan, who could do so with one hand tied behind his back if he wanted to. The free hand, though, has to hold a golden sword, which could slash through Blinder's hoary and discredited Phillips Curve. He is almost at that point, but unless he is willing to take the extraordinary step of telling us what gold price he is willing to defend, as a ceiling, he can't win the political support of the marketplace. President Clinton, who is reading all this baloney in the Times, is not going to be nice to Greenspan for much longer. If he doesn't have any friends at the White House and no friends in the marketplace, he will be an awfully lonely fellow -- unhappily watching the country catch another case of "the British disease," another bout of stagflation.