The Vampire State and Other Myths and Fallacies About the U.S. Economy. - book reviews

Washington Monthly, Dec, 1996 by John Judis

THE CURRENT DEBATE OVER ECOnomic policy is dominated by what might be called grim realism. It holds that over become soft and flabby and that in order to regain our economic health we have to undergo a diet of strict austerity, beginning with the federal budget, whose extravagance is draining vital fluids and leaving us listless and torpid. Its most fervent proponents include banker Pete Peterson, former Senator Paul Tsongas of the Concord Coalition, and two time presidential candidate Ross Perot, but it also underlies the competing positions of the Republican Congress and the Clinton administration. Both sides agree, in effect, that America must tighten its belt and curb its budgetary excesses. It's merely a question of which programs to cut and when. In a new book, Fred Block, an economic sociologist at the University of California at Davis, argues that this grim realism is based on highly misleading metaphors that have affected popular and academic theories about the economy. Anyone who wants to understand the current debate over balanced budgets and entitlements should read Block's book.

Block, drawing upon Donald McCloskey's analysis of the role of metaphor in economic thought, argues that current thinking has been shaped by a narrative, or allegory, that is sustained by metaphors. The narrative is the story of "Amazing Grace"--of a sinful wretch who through effort and self-denial is finally saved. In terms of the economy, it is the story of an American economy that was once buoyant and healthy, but has become sick and flaccid, and can only be saved through painful exertion. The dominant metaphor casts capital as blood and the government, or state, as a vampire sucking this precious fluid out of the economy. If you listen, it's everywhere--Steve Forbes promising to "drive a stake into the heart of the Internal Revenue Service," Arizona Senator Jon Kyl comparing current budget policy to "bleeding a patient with leeches in order to make the patient healthy"

Block disputes the aptness of this vampire metaphor in two respects. First, he argues that the metaphor of capital as blood vastly overstates the importance of money capital and savings to new investment and growth. Investment and growth, he argues, depend on a host of factors, including new technology, industrial organization, and, perhaps most important, the presence of unutilized human and technological resources. The availability of cheap credit can spur investment, but not in the face of sufficient uncertainty about the future. Secondly, Block argues that the state, far from being a vampire, can spur investment and growth by employing or inducing private employers to use unutilized resources. The government can convert potentially unutilized savings--"pools of blood"--into investment. All this is fairly obvious, and has been demonstrated repeatedly over the last sixty years, but it runs counter to the prevailing metaphors--and to the dire prescriptions on which they are based.

Block contends that once you strip away these metaphors, economic reality is far different from what both politicians and economists describe. Block charges that government and private econometricians have consistently overstated inflation and understated productivity, savings, and economic growth. In measuring growth and inflation, econometricians tend to ignore qualitative changes that have occurred. In the past two decades, for instance, computerization has dramatically increased the quality of consumer goods such as automobiles and of capital goods such as machine tools, while the price of these goods has not increased proportionately Computers themselves are the obvious example. Today, one can acquire for $1500 a computer that can perform tasks that two decades ago could not have been performed adequately by a multimillion-dollar mainframe. When these qualitative factors are included in measures of GDP or inflation, then the picture changes radically According to Block's revised calculations, real wages have increased rather than declined for most workers. They have remained stagnant only for the lowest quintile. The economy has not failed to create income, but to distribute it equitably

Block makes a similar argument about savings. He shows how the figures about a decline in savings, which are gleaned from Commerce Department reports, ignore the increase in pension funds. Using Federal Reserve rather than Commerce Department data, Block shows that virtually no change occurred during the '80s in the overall savings rate. What changed was distributions of savings. While most Americans went into debt, the top one percent of earners drastically increased their savings. The Vampire State contains equally arresting analyses of the impact of the new global economy Block argues that it is possible to enjoy the benefits of an international trading system without subjecting the United States toe the whims of currency traders and to competition from foreign firms that do not adhere to minimal labor and environmental standards.