Destabilizing an Unstable Economy - The Market Failures Issue

Challenge, Nov-Dec, 2002 by Charles Whalen, Jeffrey Wenger

The 1974-75 period again provides a perfect example. Minsky wrote:

[B]ecause of Big Government and the large increase in government debt, the default risk of business and bank portfolios decreased. As businesses liquidated inventories, they decreased their indebtedness to banks and acquired government debt. Banks and other financial institutions acquired liquidity by buying government debt rather than by decreasing their assets and liabilities. The public, both households and business, not only acquired safe assets in the form of bank deposits and savings deposits but were also able to decrease their indebtedness relative to income. The existence of a large and increasing government debt thus acted as a significant stabilizer of portfolios during the threatening period. (Minsky 1986, 37)

Successful Capitalism

In Stabilizing an Unstable Economy (SUE), Minsky stressed that undoing Big Government threatens economic stability. "Government is frequently disparaged as an inefficient bureaucratic maze serving the interests of officeholders and time-servers rather than of the public," he wrote. But Minsky insisted "political and intellectual resources must be invested in the creation and maintenance of an effective government apparatus because Big Government is here to stay if we are to avoid great depressions." Similarly, he noted: "The Reagan effort to reduce government ... would ... make our economy more susceptible to downside instability. The Big Government impact was clearly evident in the recession of 1982-83 and the recovery of 1983-84 [the episodes most immediately preceding release of SUE]. The power of Big Government and enormous deficits to contain downside instability was demonstrated" (Minsky 1986, 22, 300).

Minsky insisted that the existence of automatic fiscal stabilizers meant the difference between failed and successful capitalism. His was a historical perspective: At the end of the first third of the twentieth century, capitalism was "a failed economic order," Minsky often wrote. In the decades that followed, Big Government capitalism turned out to be much more successful (Minsky 1996, xii). One writer summarized Minsky's views on the matter as follows: "The success of capitalism rests on the government's ability to sustain profits when the normal profit-sustaining mechanisms of investment break down. In 1929 government debt could not offset the effect on profits of the collapse of investment. In contrast, in 1990 the government deficit contained the [contraction]" (Spring 1994, 14).

Erosion of the Stabilizers

In the United States, key Big Government stabilizers have included progressive taxation, unemployment insurance, and welfare expenditures (Aid to Families with Dependent Children [AFDC] and, more recently, Temporary Assistance to Needy Families [TANF]). The minimum wage has also provided a stabilizing force by providing a floor for wages during downturns. At least since the mid-1970s, however, the corrective power of these elements has eroded.