Economic Insecurity and the Institutional Prerequisites for Successful Capitalism Author(S): Hyman P

Home , Prosperity

Economic Insecurity and the Institutional Prerequisites for Successful Capitalism Author(s): Hyman P. Minsky and Charles J. Whalen Source: Journal of Post Keynesian Economics, Vol. 19, No. 2 (Winter, 1996-1997), pp. 155-170 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/4538526 Accessed: 09/06/2010 11:36

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=mes.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Journal of Post Keynesian Economics.

http://www.jstor.org HYMAN P. MINSKY AND CHARLESJ. WHALEN

Economic insecurity and the institutional prerequisites for successful capitalism

Fifty years ago, PresidentTruman signed into law the EmploymentAct that committedthe U.S. governmentto the goal of employmentoppor- tunitiesfor all Americans.The act representeda pledge to avoid another GreatDepression. It acknowledgedthat governmenthas a vital role to play in establishingnational economic stabilityand prosperity. U.S. economic performanceduring the past fifty years can be divided into two periods of roughlyequal duration.The first was characterized by a successful economy: cyclical instability was controlled; public investmentand human resource development were supported;and flaws in selected marketswere corrected.It was a period of robusteconomic growth, rising workerincomes, and falling inequality. The second period broughta reversal of fortune. We have avoided another depression but suffer from a return of financial instability. Economic growth has been sustained for the near term, but public infrastructureis neglected and family earningsare stagnant.Corporate profits have been stabilized,but inequalityhas increasedconsiderably and economic insecuritynow pervadesthe work force. Ourcurrent difficulties make it necessaryto considernot only how we measurethe success of an economy but also the institutionalprerequisites for a successful twenty-first-centurycapitalism. But first we must ask: What accounts for the split in the United States' economic experience duringthe post-World War II era?

When this articlewas written,the authorswere DistinguishedScholar and Resident Scholar,respectively, at the JeromeLevy Economics Instituteof BardCollege. HymanMinsky died on October24, 1996. CharlesWhalen is currentlySenior Econo- mist at the Institutefor IndustryStudies, an entity within the School of Industrialand LaborRelations at Cornell University.An early version of this articlewas presented at "The EmploymentAct: Fifty Years Later,"a session of the EasternEconomic As- sociation Annual Meeting, Boston, March15, 1996. Valuableassistance and/or com- ments were providedby Don Goldstein,Triveni Kuchi,Jonathan Neale, Ronnie Phillips, Bob Pollin, SamiraRajan, Jim Tobin, and RandyWray.

Journal of Post KeynesianEconomics / Winter 1996-97, Vol. 19,No. 2 155 156 JOURNALOF POST KEYNESIANECONOMICS

Money-manager capitalism Numerousexplanations have been proposed to accountfor the falling worker incomes and rising instability,inequality, and insecurityof the past two decades.Increases in taxes,government spending, and regulation are not to blame.The United States' income problems can be tracedto pretaxeamings; governmentshares of total employmentand expenditurehave not been growingsince 1979;and regulatory costs havedeclined (Mishel, 1995).' Other explanationsfocus on one or more of the following developments: the shift of jobs from goods-producingsectors to the service sector; a long period of slow overall productivity growth, despite significanttechnological change (especially in the realmof information processing);public-sector privatization and corporatedownsizing and outsourcing;increased immigration; the erosion of the minimumwage andthe decline of unions;the growthof contingentwork; the appearance of persistenttrade deficits; and increasedcapital mobility, trade liberal- ization, and global competition.While some have sought to calculate the relative impact of these developments, Barry Bluestone (1995) seems to emphasize the most essential aspect of the matter when he suggests that the solution to this mystery is the same as in Agatha Christie'sMurder on the OrientExpress- they all did it. Despite the relevance of the aforementionedfactors, one crucial ele- ment has been left out-the evolution of the financial structure.Capi- talism is a dynamic, evolving system that comes in many forms. Nowhere is this dynamismmore evident than in its financialstructure. The financial structureof the American economy has undergone significantevolution over the historyof the republic.In the initialera of commercialcapitalism, external finance was used primarilyto facilitate commerce by financing goods in process or in transit. The present period,in contrast,is one of money-managercapitalism,where financial marketsand arrangementsare dominatedby institutionalinvestors.2 Three financial stages, industrial,financial, and managerial capitalism, were dominantbetween the eras of commercialand money-manager capitalism. The shift away from commercialcapitalism came as financing for productionand trade purposes became dwarfed by the

I While there is little evidence linking contemporaryeconomic problemsto tax increases, Wolfson ( 1993) identifies a numberof business tax breaksenacted since the 1980s that have providedstrong incentives for corporaterestructuring. 2 As the name "commercial"capitalism suggests, merchantand commercialbanks were the dominantfinancial institutions of this early capitalistera. ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 157 reliance on external funds to finance long-term capital development. Thus, industrialcapitalism was characterizedby the rise of industries thatrequired vast resourcesfor projects such as railroads,utilities, mills, and mines. This createda marketfor the services of investmentbanks thatnot only arrangedto financesuch investmentsbut also financedthe rise of trusts and cartels. The largely unregulated era of financial capitalism that emerged was broughtto an end by the United States' economic contraction and eventual financial-systemcollapse in the period 1929-33. The managerial era was ushered in by the economic policies and reformsof the New Deal. Importantaspects of the managerialperiod's financialsystem included:

* Countercyclicalfiscal policy, which sustained profits when the economy faltered;3 * Low interestrates and interventionsby the FederalReserve uncon- strainedby gold-standardconsiderations; * Deposit insurancefor banks and thrifts; * An infusionof governmentequity into transportation, industry, and finance throughthe ReconstructionFinance Corporation(a tem- porary,national investment bank); * Restrictionson competition(including geographic barriers to mar- ket entry, compartmentalizationof financialinstitutions by func- tion, and interest-rateregulation); and * Interventionsby specializedorganizations (such as the Agricultural AdjustmentAdministration and the FederalHousing Administra- tion) createdto addresssectoral concerns.

Anotherimportant aspect of themanagerial period was thenature of indebtedness.From 1933 through the end of WorldWar II, government represented themain source of extemalfinancing for the economy. By 1946,a broadset of householdsowned financial assets mainly in the formof governmentdebt or as interestsin insurancepolicies and bank deposits that were in turnlargely offsetby governmentdebts. Business and household indebtedness was minimal;many ofthe great corporations had large net positions in govemment debts and bankdeposits--and many working-class households held substantially largernet financialasset positions than hitherto.

3For a discussion of how the National LaborRelations ("Wagner") Act was also designed to contributeto macroeconomicstabilization, see Kaufman(1996). 158 JOURNALOF POST KEYNESIANECONOMICS

Money-managercapitalism emerged out of this initial postwar posi- tion. In part, it was the result of the evolution of financial practices toward more speculative endeavors. But money-managercapitalism was also a consequence of institutionalinnovations and the growth of privatepensions that supplemented social security.As the label"money- manager"capitalism suggests, centralto this new stage are institutions that manage large portfoliosof financialinstruments. Economic activity in the early postwar setting began with a cautious use of debt.But, as the periodof economicprosperity began to lengthen, marginsof safety in indebtednessdecreased and the systemevolved: not only toward a greaterreliance on debt relative to internalfinance but also towardshort-term financing and the increaseduse of debtto acquire existing assets. There was also an explosion of activity by finance companiesand other non-bank financial institutions-as well as a steady streamof bank innovationssuch as the securitizationof loans and the creative use of off-balance-sheetcommitments.4 As a result, the once robustfinancial system became increasinglyfragile (Minsky, 1986). The first twenty years after World War II were characterizedby financialtranquility. No seriousthreat of a financialcrisis existed. Since the "creditcrunch" of 1966,however, the amplitudeof the businesscycle has increasedand financial crises have become regularoccurrences.S Another Great Depression has been prevented,but many actions that stabilizedthe economy also validatedspeculative financial practices. In addition,financial fragility and instability have often been exacerbatedby the FederalReserve's fight against inflation (Minsky, 1986).6 In the currentera, the largestproportion of the liabilities of corporations are held eitherby financial institutionssuch as bank trustdepart- ments and insurancecompanies or by pension or mutualfunds that are only contractuallyrestricted in theirholdings.7 Money-manager capital-

4 The growth of finance companies is discussed by D'Aristaand Schlesingerin Dymski et al. (1993); bank innovationsare examined in Wray(1990). S At the centerof the 1966 "creditcrunch" was a runon bank-negotiablecertificates of deposit (see Minsky, 1986, pp. 87-91, and Wolfson, 1994, pp. 31-39). 6 Otherfactors contributing to increasedfragility include the deregulationand glob- alizationof financial markets(Wolfson, 1994; Wray, 1994). 7 Between 1950 and 1990, money managerssaw the fractionof U.S. corporateequi- ties undertheir control grow from 8 percentto 60 percent(Porter, 1992, p. 69). Over the same period, pension funds increasedtheir shareof total business equities from less than I percentto almost 39 percent,while theirfraction of corporatedebt rose from 13 percentto 50 percent(Ghilarducci, 1992, p. 117). ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 159 ism.introduces a new layerof intermediationinto the financialstructure. The statedaim ofthese money managers,and the sole criterionby which they are judged, is the maximizationof the value of the investments made by the fundholders. This is measuredby the totalreturn on assets: the combinationof dividendsand interestpaid out and the appreciation in per-sharevalue. A consequence of the rise of such funds is that business leadershave become increasingly sensitive to the stock-marketvaluation of their firm. In the earlypostwar period, managers were allowed some freedom from stockholderinfluence due to widespreadcaution in finance, the United States' dominance in the global economy, and less financial intermediation.Today, however, top managementis often subject to relentless shareholderpressure via these funds. Anotherconsequence ofthe rise of such fundsis thatthey help generate an environmentconducive to mergers,acquisitions, breakups, leveraged buyouts,and stock buybacks.Fund managers have a powerfulincentive to supportall takeoversand buybacks that will at leasttemporarily boost portfoliovalue. Theirfunds often provide the resourcesthat raiders need to secure corporatecontrol.8 Whenone considersthe pressureson corporationmanagers due to both the rapidlyevolving financialsystem andthe economy's otherstructural changes, it is no surprisethat economic insecurityis widespread.With the end of the managerial financial era, stability in U.S. industrial relations has also ended. Workersat nearly all levels are insecure, as entire divisions are bought and sold and as corporateboards exhibit a chronic need to downsize overheadand to seek out the least expensive set of variableinputs.

Economicsuccess

In the early postwarperiod, economic success was measuredprimarily by two aggregatestatistics-the gross nationalproduct (more recently, the gross domestic product)and the unemploymentrate. Price stability andgreater income equality were additionalobjectives, but inflationwas not a significant problem until the late 1960s, and a direct assault on inequality seemed unnecessary since the trend was toward a more

8 These funds have also contributedto financial-systemevolution by providinga ready pool of buyers for securitizedloans, the commercialpaper of finance companies, and other innovations. 160 JOURNALOF POST KEYNESIANECONOMICS

equitabledistribution of income.There appeared to be muchtruth to the expression,"a rising tide lifts all boats." Relianceupon these measuresof success was partlya productof history:The maineconomic difficulty of the century'searly decades was consideredto be capitalism'stendency to generatesevere depres- sions.These were also measures that required only a minorreconsider- ation of standardeconomics. Countercyclical fiscal and monetary policiescould be easilyreconciled with traditional theory through the "neoclassicalsynthesis"; a focus on aggregatesmade it possibleto ignorethe need for an evolving institutional underpinning for economic activity.These gauges of successwere also pragmatic. For the firsttwo decadesof the postwarera-despite valid concernsabout perennial matterssuch as how nationaloutput ignores environmental costs and how the unemploymentrate ignores discouraged job seekers(persons countedas not in the laborforce)-overall outputand employment functionedas usefulindicators of economicwell-being. Today'seconomy is different.Many families cannot distinguish reces- sion fromrecovery. Despite strong profits and some evidence of very recentproductivity gains, chief economistStephen Roach of Morgan Stanleysummarizes the view of most Americanswhen he writes, "Recoveryor not, the 1990s are still all aboutdownsizing, longer workdays,white-collar shock and relatively limited opportunities for new employment"(Roach, 1995). Today'swidespread insecurity requires economists and policy makers to look beyonda few aggregatestatistics. The aggregatesconceal not just income stagnationfor many (and other difficultiesmentioned above)but also longeremployment searches, increased family depen- denceon multiplejob holdings,and an explosivegrowth in part-time andcontingent work.9 Also concealedis the anxietythat accompanies thefact that, since early 1994, private firms have announced plans to cut morethan a half-millionjobs,many in companies(AT&T, for example) thatonce referred to theirwork force as "family"(Challenger, Gray and Christmas,1996). Polls releasedin early1996 indicate approximately one-thirdof America'sfamilies fear job loss in thenear future (Herbert, 1996;Montague, 1996). Perhaps even more striking are findings, from a late 1994 survey conducted for U.S. News and WorldReport, that indicate"a major shift" from America's historic optimism. According

9Details on these and other dimensionsof U.S. economic insecuritycan be found in Whalen(1996). ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 161 to the survey, 57 percentof those asked said the AmericanDream is out of reachfor most families, while morethan two-thirds were worriedthat their childrenwill not live as well as they do (Roberts, 1994, p. 32). In the currentera, economic success requires more than economic growth,low unemployment,and minimal inflation. It requires that every citizen have the opportunityto develop andutilize his or hertalents and capacities,and that workers are rewardedwith rising standardsof living and the prospectof an even betterlife for their children.It requiresthat economic insecurityis diminishedand that prosperity is availableto the whole of society. Without these, American capitalism will not be successful by any measure for very long in the twenty-firstcentury.

Institutionalprerequisites for successfulcapitalism Economies evolve, and so, too, must economic policy. The institutional innovationsof the New Deal, which remainthe foundationof much of the currentinstitutional structure, have become insufficient. The task todayis to meetthe challenges ofthe comingmillennium without forgetting the valuablelessons of the past,lessons that include: (1) capitalismcomes in manyvarieties; (2) institutionsestablished through public policy play a vitalrole in determiningthe performance of capitalism;and (3) laissez-faire is a prescriptionfor economicdisaster. Two alternate futures for U.S. capitalism can be envisioned. The pessimistic futureinvolves a hostile and uncivilized "fortress"capitalism; the optimistic future is an open and humane"shared-prosperity" capitalism.Fortress capitalism-a systemwith decliningfortunes for all but a minoritywho seek protectionbehind walled and gated communities-would be the unavoidableproduct of a returnto laissez-faire.'0 Institutionalprerequisites for a successful, shared-prosperitycapitalism are outlined below. A conceptualstarting point is providedby a brief discussion of the relationshipbetween economic securityand progress.

Securityand progress

Capitalismcan be successful only if the institutionalstructure reflects an understandingthat people have a limited tolerance for uncertainty and insecurity. Evidence of this limited tolerance is provided by the widespreadreliance on privateinsurance, which is purchasedto provide protection against large contingent losses. When deleterious conse- 10 For more on fortresscapitalism, see Thurow(1995). 162 JOURNALOF POST KEYNESIANECONOMICS

quences arise from uncertainty,which cannot be covered by private insurance,society must respondthrough public action. Many have long maintainedthat the reductionof economic insecurity is inconsistentwith economic progressunder capitalism.But as John Kenneth Galbraithobserved decades ago, insecurityis cherished "almost exclusively in the second person or in the abstract"(Galbraith, 1958, p. 98). Reducing economic uncertaintyhas been a centralobjec- tive of corporations,labor unions, and associations of farmerssince their inception. Economic progressmay be threatenedby privateor collective efforts to reduce insecurity.The centrallesson of the eraof managerialcapitalism, however, is that security and progresscan also be mutuallyrein- forcing. Indeed, when one takes off the blinders of conventional economics, it becomes clear that countercyclicalstabilization policy was only one of many arrangementsthat strengthenedcapitalism by reducinginsecurity. Consider,for example, the case of farmpolicies.New Deal agricultural programs,by settingminimum prices and providing crop insurance, had the effect of settingfloors to farmers'incomes. These stabilizedincomes made it possible for farmersto finance investmentin new technology. Furthermore,agricultural extension services and experiment stations served to socialize researchcosts and disseminateinformation on sci- entific breakthroughs.What followed was a period of unparalleled advanceand productivitygrowth in agriculture. Conventionaleconomists often worry that security will reduce economic efficiency. But the experienceof U.S. agriculturedemonstrates that security can ignite an advantageousdynamic-one that improves the technological conditionsthat determinethe very meaning of "effi- cient." Moreover, as Henry Simons suggested long ago, economic efficiency-even when considered from a dynamic perspective-should not be the sole aim of economic policy. Rather,policy should strive to assure the civilized standardsof an open and democratic society. A humanesociety shouldnot be sacrificedon the altarof narroweconomic efficiency (Simons, 1948).

Employment

The Employment Act of 1946 committed the federal governmentto promote maximum employment, production,and purchasingpower. ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 163

The Full Employmentand Balanced Growth Act of 1978 reiteratedthese objectives and put greateremphasis on employmentby identifying a particulargoal, 4 percent,for the overall unemploymentrate. Today it is necessaryto go beyond a statementof objectives and goals. It is time to fulfill PresidentRoosevelt's call for employmentto be not merely a responsibilityof the able-bodiedbut also a right, one guaranteedby a public-sectoremployer of last resort. The economic andhuman costs of unemployment-to individualsand to the nation-are too greatto be toleratedin a society repletewith unmet needs. Using the Depression era's Works Progress Administration (WPA), National Youth Administration(NYA), and Civilian Conser- vation Corps (CCC) as prototypes, federal, state, and local officials could easily design programsthat would enableunemployed citizens to supportthemselves by making useful contributionsto their communities.'

High-performancecompetition

In the short run, societies can choose between two routes to competi- tiveness: a "high-performance"path and a "low-wage"path. The former involves encouraging firms to compete on the basis of innovation, product quality, and the development of new markets. In the United States, a policy vacuumhas caused most firms to follow the low-wage path-a strategythat ultimately leads to an economic and social disaster as firms engage in a "raceto the bottom."Instead of the unsustainable vicious cycle of the low-wage path, the United States' public policies and institutionsmust supporta virtuouscycle of economic and social advancement(Harrison, 1995; Marshall,1995). Pursuit of a high-performancepath requires incentives for private investment, but it also requires public investment in education and training, science and technology, and infrastructure.The incentives must include taxes and subsidies that encourageindividuals and firms to enhance productivitythrough training and the upgradingof skills. Public investment,a crucialcomplement to privateinvestment, can and should take many forms-ranging fromparticipation in public-private partnershipsto directexpenditures on public goods. The U.S. budget is not structuredto engender rational investment

1 Community-serviceemployment is certainto receive much attentionin the years ahead if the currentWisconsin approachto welfare reformis to be fully implemented in that state and elsewhere. 164 JOURNALOF POST KEYNESIANECONOMICS decisions. Althoughthere have been periodsduring which Washington officials committed themselves to improving public capital, federal nondefense investments-as both a shareof budgetoutlays and a share of gross domesticproduct (GDP)-peaked in the mid-1960s. Today our nation has the lowest ratio of public-capitalinvestment to GDP of any of our majorindustrial competitors (Joint Economic Committee, 1994, p. 62). Investmentsin educationcan be improvednot merelyby more money (to upgrade facilities, provide supplies, and reduce class sizes, for example) but also by closer collaborationwith the business community and across levels of government. Vouchers redeemable at private schools are not what's needed;rather, we must have high educational- performancestandards, national certificates of mastery,and improve- ments in apprenticeshipprograms and otherorganizations and services that facilitate the transition from school to work (Marshall, 1996; Marshalland Tucker, 1992). Science and technology policies and institutionsare also required.A role for governmenthas always existed here due to the social benefits, large-scale risks, and long time horizons associated with researchand development.But today this role is more importantthan ever due to the rise of "brain-power"industries-industries such as microelectronics and biotechnology that can be located whereverthe necessary talents are coordinated. As in Europe, consortiums for particularprojects should be establishednot by governmentalone but throughpublic-private partnershipsthat requirematching funds from participatingfirms (Thurow, 1996).12 According to Wallace Peterson, America's neglect of public infra- structurehas left us with more than a trillion dollars in necessary construction,repairs, and renovations (Peterson, 1994, pp. 200-201). A study released recentlyby the Manhattan-basedRegional Plan Associ- ation indicates that the New York metropolitanregion alone requires $75 billion in transportationand other improvementsover twenty-five years to save it from outrightdecline (Johnson, 1996). Institutionsand policies that renew the nation's commitmentto infrastructureinvest- ment cannotbe avoided if the United States is to prosperin the twenty- first century. Perhapsthe most significant obstacle to greaterpublic investmentis

12 Considerationshould also be given to the idea of a nationalbusiness-assistance networkmodeled afterthe U.S. agriculturalextension system. ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 165 an approach to budgeting that treats biotechnology research no dif- ferently from a White House dinner party. To enable policy makers and the public to make sound judgments on budget matters, the United States needs more useful accounting techniques. A full balance-sheet approach-listing, as do privateorganizations, both assets and liabilities-is worth exploring. At the very least, the U.S. government should follow the lead of the states and establish a federal capital budget for tangible investments in public facilities, commu- nications, and transportation.

Thegoodfinancial society An essentialprerequisite for establishmentof a "goodfinancial society" (the term was used first by Simons) in the early twenty-firstcentury is a FederalReserve (Fed) that continues to preventdebt deflations through its lender-of-last-resortpowers. In addition,Fed officials need to focus more on qualitativecredit controls (i.e., refusingto guaranteeor prohib- iting purchaseof assets likely to experiencespeculative price swings by organizationswhose liabilities enjoy centralbank protection)than on quantitativecontrols. Central-bank supervision and regulatoryrequire- ments should vary accordingto the types of assets purchased.'3These steps would not only reducethe riskinessof banklending but also enable creditto be directedtoward socially desirableactivities (Wray, 1996). Duringthe 1992 nationalelection campaign,Bill Clintonadvocated a nationalnetwork of communitydevelopment banks, designed to meet the needs of communities and citizens not well served by existing financialinstitutions. The idea takes on increasingimportance because of the heighteneduncertainty associated with money-managercapitalism. The attractivenessof investmentin small businessesincreases with the uncertaintyattached to jobs in firms whose futureis dependenton the vagaries of money-managerevaluations. Community development banks should evolve into full-servicecommunity financial institutions (Minsky, 1993; Minsky et al., 1993; Papadimitriouet al., 1993). The Fed's focus on inflationis misguided.Contemporary wage-setting patternsand internationalcompetition have createdan environmentin which low unemploymenthas not broughton the threatof high inflation (Bennett, 1995; London, 1995; Rissman, 1988). Moreover, the con- 13 The need to vary bank supervisionaccording to the types of assets purchasedis especially strong in the case of institutionsdeemed "too big to fail." As L. Randall Wray suggested recently, such an institution"should be subjectto increasinglyclose supervisionas it engages in activities thoughtto be risky"(1996, p. 143). 166 JOURNALOF POST KEYNESIANECONOMICS sumerprice index is a flawed tool for those seeking to controlinflation (Papadimitriouand Wray, 1996). Shared-prosperitycapitalism requires thatthe currentmonetary-policy goal of "zeroinflation" be replacedby a returnto the early postwar policy of low and stable interest rates (Papadimitriouand Wray, 1994). Finally, the good financial society also requiresinstitutional adjust- ment in the sphere of internationalfinance. The currentflexible exchange-rate system discourages forward contracts, encourages speculation,and exerts a stagnationistinfluence on the world economy (as nations impose austeritymeasures to deal with trade imbalances). Essentialfeatures of a moresecure and prosperous international-finance system include:stable exchange rates; an accommodativemono-reserve setup;and an internationallender of last resort.A startingpoint for the developmentof this type of worldwidefinancial structure can be found in the writings of John MaynardKeynes (Keynes, 1980; Davidson, 1992; Wray, 1996).14

Sharedprosperity

While the arrangementsidentified so far provide a foundationfor an affluent future,ensuring sharedprosperity requires additional institutional elements. These include an enhanced minimum wage (at this writing, an increaseis underconsideration in Congress);stronger trade unions and employee associations; an expanded Earned Income Tax Credit;portable pensions; and a health-caresystem that provides basic care to all Americans.Also needed are tax incentives and otherinduce- ments that lead firms to: shareproductivity and profitability gains with their workers; offer family-friendly employment benefits and work arrangements;and fosteremployee participationfrom the workplaceto the boardroom. Privatemoney incomes-such as wages, salaries,dividends, interest, and transferpayments-are not the sole source of personaland family income. Some of our "income"is independentof these privatesources and is the resultof publicly providedgoods and services. It is ambience income-public consumption.Just as both rich andpoor were once free to sleep underthe bridgesof Paris,today's richand poor areequally free to "enjoy" safe streets. Public investments that promote economic growth and enhance the efficiency of privatelyowned capital are cer- 14 Additionalrecommendations for financial-systemreform that are worthconsider- ation can be found in Dymski et al. (1993). ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 167 tainly important,but expenditureson public consumption-in urban parks and other public spaces, and in public health and safety, for example-are also required for a civilized society. Moreover, such undertakingscan easily be made compatiblewith the full-employment objective discussed earlier. Finally, the public sector needs a tax system adequateto supportits various operational,employment, resource-creation, consumption, and debt-validationneeds. The explosion of federal debt relative to GDP duringthe Reagan-Bushera was due largely to an irresponsiblefiscal policy that underminedthe revenue system while increasing defense spendingand failing to controlrising transfer costs, particularlyin health care. As the United Statesprepares for the twenty-firstcentury, tax and spending policies should be used to reduce the ratio of federal debt to GDP from its currentlevel of 70 percentto approximately50 percent. While thereare a wide rangeof revenuealternatives-including income, consumption, inheritance,wealth, and value-addedtaxes-some ele- ment of progressivityis warrantedas a result of the increasedincome inequalityproduced by today's capitalism.'5

Conclusion

Capitalism was a failed economic order in the winter of 1933. The EmploymentAct reflected a nationaloutlook that producedan institutional structurefor successful capitalismafter World War II. Perhaps the first two decades following enactmentof the 1946 legislation were not a "GoldenAge," but they standas a historicaland practicalbest. Capitalismevolves and so, too, must the legislated institutionalstructure.The institutionalstructure ofthe privatesector is primarilymarket- driven-its evolution is driven by agents acting in their own interest. This evolution can underminethe barriersto instabilityand dynamic inefficiency. Such undermininghas to be offset from time to time by legislatedchanges in the institutionalstructure. The aim of such institutional changes is to preservethe dynamicefficiency of capitalism. The institutionalstructure of managerialcapitalism reduced economic insecurityand enhanced the performanceof the economy so thata failed economic system was transformedinto a successfulorder. Similarly apt institutionalchanges are needed to transformthe insecurity-breeding money- managercapitalism into a new structureconducive to successfulcapitalism. 15 For one approachto the revenue system, see Minsky(1996). 168 JOURNALOF POST KEYNESIANECONOMICS

The fiftieth anniversaryof the EmploymentAct should be celebrated by looking back and congratulatingourselves for many accomplish- ments. But we should also commemoratethe occasion by looking ahead--toward a new era of institutionbuilding. Economic systems are not naturalsystems. It is possible not only to reduce present-dayeco- nomic insecurity without sacrificing economic progress but also to frame and establish the institutional prerequisitesfor a successful twenty-first-centurycapitalism. The goals of the EmploymentAct are best honoredby workingto achieve a new age of sharedprosperity.

REFERENCES

Bennett,Amanda. "Business and AcademiaClash Over a Concept:Natural Jobless Rate." The WallStreet Journal, January24, 1995, Al. Bluestone, Barry."The InequalityExpress." The American Prospect, Winter 1995, 20, 81-93. Challenger,Gray and Christmas,Inc. LayoffReport. March 6, 1996. Davidson, Paul. InternationalMoney and the Real World,2d ed. New York: St. Martin'sPress, 1992. Dymski, Gary A.; Epstein,Gerald; and Pollin, Robert,eds. Transformingthe U.S. Fi- nancial System:Equity and Efficiencyfor the 21st Century.Armonk, NY: M.E. Sharpe, 1993. Galbraith,John Kenneth.The Affluent Society. Boston: HoughtonMifflin, 1958. Ghilarducci,Teresa. Labor's Capital: TheEconomics and Politics ofPrivate Pen- sions. Cambridge,MA: MIT Press, 1992. Harrison,Bennett. "Averting a Race to the Bottom."Technology Review, April 1995, 98 (3), 74. Herbert,Bob. "SeparationAnxiety." TheNew YorkTimes, January 19, 1996, A29. Joint Economic Committee,U.S. Congress. The 1994 Joint EconomicReport. Wash- ington, DC: U.S. GovernmentPrinting Office, 1994. Johnson,Kirk. "Report Sees MajorDecline for New York Region." The New York Times,February 14, 1996, Al. Kaufman,Bruce E. "Whythe WagnerAct?: ReestablishingContact with Its Original Purpose."In David Lewin, Bruce Kaufmnanand Donna Sockell (eds.), Advancesin Industrialand Labor Relations. Greenwich,CT: JAI Press, 1996. Keynes,John Maynard. The Collected Writings ofJohn Maynard Keynes, vol. 25, Donald Moggridge,ed. London:Macmillan, 1980. London, Paul. "FullerEmployment: The Often UnrecognizedNeed for a More Struc- turalView of Inflation."Presented at a Conferenceof the JeromeLevy Economics In- stitute of BardCollege, Annandale-on-Hudson,NY, April 28, 1995. Marshall,Ray. "TheGlobal Jobs Crisis."Foreign Policy, Fall 1995, 50-68. . "HumanResources, Labor Markets, and Economic Performance."In CharlesJ. Whalen(ed.), Political Economyfor the 21st Century:Contemporary Viewson the Trendof Economics. Armonk,NY: M.E. Sharpe, 1996, pp. 103-124. Marshall,Ray, and Tucker,Marc. Thinkingfora Living:Education and the Wealth ECONOMICINSECURITY AND SUCCESSFULCAPITALISM 169 oJ Nations. New York: Basic Books, 1992. Minsky, Hyman.Stabilizing an UnstableEconomy. New Haven,CT: Yale Univer- sity Press, 1986. . "CommunityDevelopment Banks: An Idea in Searchof Substance."Chal- lenge, March-April 1993, 36 (2), 33-41. . "Uncertaintyand the InstitutionalStructure of CapitalistEconomies." Jour- nal ofEconomic Issues, June 1996, 30 (2), 357-368. Minsky, Hyman;Papadimitriou, Dimitri B.; Phillips, Ronnie J.; and Wray, L. Ran- dall. "CommunityDevelopment Banking." Public Policy Brief, no. 3. Annandale-on- Hudson,NY: JeromeLevy Economics Instituteof BardCollege, 1993. Mishel, Lawrence."Is This Progress?"Jobs and Capital, Summer 1995, 4, 14-19. Montague,Bill. "Feelingthe Squeeze of Downsizing."USA Today,February 16, 1996, Al. Papadimitriou,Dimitri B.; Phillips, Ronnie J.; and Wray, L. Randall."A Pathto CommunityDevelopment." Public Policy Brie%fno. 6. Annandale-on-Hudson,NY: JeromeLevy Economics Instituteof BardCollege, 1993. Papadimitriou,Dimitri B., and Wray,L. Randall."Monetary Policy Uncovered." Public Policy Brief, no. 15. Annandale-on-Hudson,NY: JeromeLevy Economics In- stitute of BardCollege, 1994. . "TheConsumer Price Indexas a Measureof Inflationand Targetof Mone- tary Policy." Preparedfor presentationat the EasternEconomic Association Annual Meeting in Boston, March 15, 1996. Peterson,Wallace C. Silent Depression: TheFate of the AmericanDream. New York: W.W. Norton, 1994. Porter,Michael E. "CapitalDisadvantage: America's FailingCapital Investment Sys- tem."Harvard Business Review, September-October1992, 70, 65-82. Rissman, Ellen R. "Why Is InflationSo Low?"Federal ReserveBank of Chicago Let- ter, August 1988. Roach, Stephen S. "Who Should Worryabout the Economy." TheNew YorkTimes, June 16, 1995, A27. Roberts,Steven V. "Why Are We So Angry?"U.S. News and WorldReport, Novem- ber 7, 1994, 30-36. Simons, HenryC. EconomicPolicy.for a Free Society. Chicago: Universityof Chi- cago Press, 1948. Thurow,Lester C. "WhyTheir World MightCrumble." New YorkTimes Magazine, November 19, 1995, 78-79. . "ComparativeAdvantage, Factor-Price Equalization, Industrial Strategies, and TradeTactics." In CharlesJ. Whalen(ed.), Political Economyfor the 21st Cen- tury: ContemporaryViews on the Trendof Economics.Armonk, NY: M.E. Sharpe, 1996, pp. 2 13-224. Whalen, Charles."The Age of Anxiety." USA Today(monthly), September1996, 14- 16.. Wolfson, MartinH. "CorporateRestructuring and the Budget Deficit Debate."East- ern EconomicJournal, Fall 1993, 19 (4), 495-520. . Financial Crises: Understandingthe Postwar U.S. Experience,2d ed. Armonk,NY: M.E. Sharpe, 1994. Wray, L. Randall.Money and Creditin CapitalistEconomies: TheEndogenous MoneyApproach. Aldershot, UK: EdwardElgar, 1990. 170 JOURNALOF POST KEYNESIANECONOMICS

. "The Political Economy of the CurrentU.S. FinancialCrisis." International Papers in Political Economy, 1994, 1 (3), 1-51. . "MonetaryTheory and Policy for the Twenty-FirstCentury." In CharlesJ. Whalen(ed.), Political Economyfor the 21st Century:Contemporary Views on the Trendof Economics. Armonk,NY: M.E. Sharpe, 1996, pp. 125-150.