Galbraith correctly calls to memory that the Fed is not really an impartial government institution, but a body from within the banking system. There are some private interests here, which would be sufficient reason for reform anyhow. In an appendix I give the ‘parallel argument’ of the Economic Supreme Court with respect to the Central Bank. Galbraith’s text set me thinking on this.
Galbraith proposes that the US Fed becomes more accountable to the US Congress - as it is ‘a creature of Congress’. I tend to opt for independence like now exists for the European Central Bank. There must be some co-ordination in economic policy making, and co-ordination becomes somewhat difficult if too many institutions and interests are involved.
As a European, it strikes me that Galbraith concentrates so much on pre-tax equality, while I would be satisfied with after-tax equality. I don’t believe the stories that many of the fellow economists tell about ‘technology’ and ‘globalisation’, but my approach tends to be to let them argue and research, and concentrate on the after-tax equality. This however is not Galbraith. He attacks the conventional wisdom on the pay structure.
He correctly reminds us that pay is not so much an outcome of marginal productivity in a free market, but as much a result of social rules - education, laws, unions, living standards, and such. Where laws and customs affect the economy, then we know from Coase’s Theorem that perhaps the final utilisation of resources is not affected, but at least the distribution of welfare is so. Galbraith here is in line with Keynes’s attention for relative wages, and my reference to the ‘pecking order’.
However, when Galbraith argues that ‘more equality also helps to control inflation’, then his argumentation is less convincing. For example:
“We will discover that efficiency improves when a larger number of people feel they have a fair shot at being middle class, and when ‘middle class values’ come again to define our broader culture.” (p268).
He here refers to Nothern Europe and Japan. I tend to think that there is value in this argumentation, but I doubt that US free market economists will agree. They will point out that, alas, Europe has an official rate of unemployment of 10%, while the unofficial rate is higher. So, Galbraith here likely is right, but loses the argument because his munition isn’t strong enough yet.
At one place he shows him aware that Germany has such a high unemployment rate, but then he suggests that this is caused by an error in policy making (p235). So in one place ‘more equality’ is advanced as the solution, and at another place it is not enough. I am a sympathetic reader, and can see through the argumentation. But the argument now is vulnerable to readers with less sympathy. Also, Galbraith’s critique on European policy differs from mine.
The reason why I find value in Galbraith’s argumentation should be clear. Proper tax measures can keep the lowly productive in the labour market, and thus increase competition: making it more difficult for the higher productive to demand pay rises. Thus, there is a valid argument that should convince the US free market economists - and Galbraith’s and my arguments nicely complement each other. But I don’t use the inequality argument: I use market positions.