'Please better shut their mouths': German influence on U.S. macroeconomic policy under the Carter administration.

Author:Widmaier, Wesley W.
 
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In the late 1970s, as the Democratic Carter administration confronted intensifying trade-offs between price stability and full employment--and so between dollar stability and growth--the U.S. abandoned the use of incomes policies and adopted macroeconomic restraint as the primary means to currency stabilization. Subsequently, incomes policies--defined as standards for variation in wages and prices--would be decisively discredited as policy instruments. (1) In this paper, I offer a constructivist analysis of the evolving debates which drove this transformation, emphasizing the interplay of domestic shifts and foreign pressures stemming from German Social Democratic Chancellor Helmut Schmidt in particular. (2) In the process, I counter views of incomes policies as inherently flawed, suggesting instead that what "everybody knows" about prospects for private wage and price restraint on behalf of the public good can have a self-reinforcing effect on the viability of incomes policies. In other words, "how agents think" about economic policy can affect "how policies work." From this vantage, over the early post-World War II period, collective trust in possibilities for the exercise of private wage and price restraint on behalf of the public good enhanced the effectiveness of incomes policies. In contrast, by the late 1970s, collective skepticism in prospects for private wage and price restraint assumed the force of a self-fulfilling prophecy, as the social fact that "everybody knew" that incomes policies did not work undermined support for their use. ... Restraint was left the sole means to wage, price, and currency stability.

Following an explicit overview of a revised constructivist framework--one stressing in particular the interplay of mass and elite discourses--I trace over three sections the their influence on late-1970s U.S. macroeconomic policies. In a first section, I address the domestic context of early Carter-era policies, characterized by a halting movement toward incomes policies that culminated in an ultimately failed October attempt at defining wage guidelines. In a second section, I pull back to examine the systemic context of U.S.-German interactions across the London and Bonn economic summits, as the Carter administration shifted to a phase of support for gradual austerity in November 1978. In a third section, I describe the social forces that compelled a shift of U.S. policy toward support for unqualified fiscal and monetary austerity. It should be stressed that the fact that the dollar was losing value over these periods did not in itself compel a U.S. tightening. Instead, incomes policies might have served as ongoing means to bolster the dollar. However, the socially-governed collapse of trust in government within the U.S. undermined popular support for voluntary wage and price guidelines. In this context, Federal Reserve Chairman Volcker would subsequently employ unqualified monetary restraint as the primary means to stabilization. Schmidt's influence on Volcker was particularly important, as he expressed to the Chairman a marked impatience with U.S. policies prior to the late IMF-World Bank meetings. Writ large, to the extent that incomes policies remained an ongoing possibility over this period, their breakdown cannot be understood in abstraction from an evolving social context.

Theoretical Overview: The Social Construction of Macroeconomic Interests

In explaining the breakdown of incomes policies, a variety of materialist approaches emphasize either their basic economic inefficiencies or the gradual erosion of their postwar coalitional, institutional and/or ideational bases of support. However, such explanations are inadequate to the extent that economic structures can vary and as policy incentives must always be interpreted in terms of some intersubjective framework. Consider first economists' criticisms of incomes policies as impediments to efficiency that at best suppress inflation and at worst undermine growth and price stability. Such views admittedly have some merit in the context of perfectly competitive markets. However, they lose force where imperfect competition enables firms to restrict output in order to raise prices. In such settings, incomes policies offer both a means to restrain prices and raise output, and so provide a key contribution to the "policy mix" as alternatives to macroeconomic restraint. Consider more fundamentally still that economists' arguments lose added force where self-reinforcing expectations drive wage-price spirals, as wages and prices lose contact with underlying market forces.

From a more explicitly political vantage, consider approaches which emphasize the coalitional or paradigmatic bases of macroeconomic preferences. Regarding the former, scholars like Peter Gourevitch argue that postwar shifts in political alignments reduced the ability of labor to support Keynesian policies, which were premised on some degree of capital-labor accord (Gourevitch, 1986). Regarding the latter, scholars like Kathleen McNamara argue that the ostensible mid-1970s collapse of the Phillips Curve trade-off undermined Keynesian frameworks, leading economists to place an increasing emphasis on monetary restraint (Hall 1989; McNamara 1998). However, such arguments remain wanting to the extent that they abstract away from the social context. With respect to coalitional arguments, representatives of labor and capital can define their interests in varying fashions, seeking to advance private interests in wage and profit gains or public interests in macroeconomic stabilization. Similarly, economists can interpret identical wage-price trends in a range of fashions. The "impossible" emergence of simultaneously increasing unemployment and inflation could justify either the intensification of incomes policies (as in the 1950s, when the combination of rising unemployment and prices was termed a "New Inflation") or their dismantling in favor of monetary restraint (as in the late-1970s context examined here). More specifically, the degree of trust of government can vary in ways which affect such coalitional and paradigmatic attitudes alike. Consider that the percentage of Americans saying they trusted the government "just about always" or "most of the time" fell from 73 percent in 1958 to 25 percent in 1980. (3) To the extent that the extent of trust in government can have self-reinforcing implications for the effectiveness of public appeals to wage-price restraint, this social context--as a "social fact"--can have an objective impact on the effectiveness of incomes policies. In more formal terms, where "social facts" regarding trust in government change, coalitional and paradigmatic interests can likewise vary.

To highlight such potential variation in ideas and interests, I provide in this effort a constructivist analysis of shifting interests in the use of incomes policies. In recent decades, recognizing the limits of approaches which treat material structures or trends as self-evident, scholars arguing from a broadly constructivist vantage have stressed the role of intersubjective forces in giving meaning to incentives and shaping interests in cooperation. In what might be termed "first generation" constructivist efforts, scholars like John Gerard Ruggie and Peter Katzenstein emphasized the intersubjective and institutional bases of state and societal interests (Ruggie, 1982; Katzenstein, 1978). However, while such efforts provided a key alternative to materialist approaches, they also exhibited something of a "structural tilt," and were often better suited to explaining stability than change. In this light, over the 1990s, a second generation of constructivist scholars sought to highlight the role of agency and expressive practices in driving change. These included efforts by Peter Haas and Emanuel Adler on elite epistemic communities and Martha Finnemore and Kathryn Sikkink on the role of "norm entrepreneurs" in driving change. (4) Nevertheless, while representing an important step forward in highlighting the scope for agency, these efforts often cast intersubjective pressures as moving primarily in one direction, from elite to mass settings. They therefore remained limited not only to the extent that intersubjective structures often remained beyond the scope of elite manipulation but also as elite debates themselves could be shaped by mass pressures.

To highlight the broader mass influences, a "third generation" of constructivist scholars has accordingly sought more recently to go beyond the analyses of elite debates and to highlight the influence of what John Hobson and Leonard Seabrooke term "everyday politics." These efforts have stressed the extent to which "ideas" cannot be simply reduced to cognitive paradigms imposed by elites upon mass agents, but rather encompass wider traditions, frequently developing outside specific issue areas or formal policy contexts. Such broader mass-oriented influences can include definitions of national and cultural identities, attitudes regarding class, consumption and thrift, norms regarding...

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