Monthly Archives: July 2012

Originally published September 3, 1984

THE Continental Illinois and the Financial Corporation of America bailouts, although different in nature, have one glaringly obvious lesson that everyone sees and even talks about endlessly yet refuses to think about. The lesson is that this bank and this thrift institution were too big to be allowed to fail, just as Chrysler and Lockheed were before them.

Everyone knows and says that. Everyone has enough mathematics to know as well that if Financial Corporation of America, the nation’s 12th-largest organization of its kind (counting both commercial banks and thrifts) is too big to be allowed to go under, there must be at the very least 11 others in the same category. Clearly, Citibank and Chase and the rest did what they did in South and Central America because they were confident that no matter what happened, they would not be allowed to fail, and in the meantime they could make a lot of very big loans at very high interest. Still, only a few people – like William Wolman, editor of Business Week – dare to say that in the end many, if not most, of these loans will be repudiated, and that Uncle Sam will, in one way or another, pick up the tab.

This may not be so bad in the event as it looms in contemplation. You have probably been struck by the fact that an awful lot of money is involved, and that no one seems to be certain exactly how much; yet whatever the amount, it is not overwhelming in relation to our national debt or even to our annual Reaganomic deficit. When Uncle Sam picks up the tab, we won’t be bankrupted. Indeed, we may be sure that the whole operation will be handled in such a discreetly indirect way that we will not notice it. There is a time for flamboyance and a time for discretion, and bankers are very good at telling which is which. Have you heard anything about the Polish loans lately?

More than money is at issue here. There has been talk about having someone – the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, or some private insurance company – look more closely over the bankers’ shoulders. New laws are being proposed, and complaints are being made that old ones are not being enforced. The bankers are not much concerned, though, because they know that not much can come of it.

As long as the big banks are substantially free of regulation on the interest they can pay, they will be free of significant regulation elsewhere. Walter Wriston, the recently retired chairman of Citibank, who may be said to have initiated the current state of affairs with the dictum that countries don’t go bankrupt, now says that bankers are too proud to conduct their business in the expectation that the government will rescue them from their mistakes. He is undoubtedly as reliable one time as the other.

Early last month, the New York banks had a little war to see who could pay the highest interest on certificates of deposit. The war was apparently started by Manufacturers Hanover as a macho gesture, to show that current rumors of its weakness were false. An ad for Citibank, and several others, at one stage quoted an effective annual rate of 13.6 percent on one-year CDs. That sounded dandy (and was) for those with the cash to take advantage of it.

You may wonder how, with a prime rate that was then 13 per cent, Citibank could pay 13.6 per cent for its money. Mr. Micawber would have said: “Annual income thirteen per cent, annual expenditure thirteen and six-tenths, result misery.” It’s pretty hard to fault Mr. Micawber’s reasoning. Are bankers alchemists after all?

AT LEAST three things are going on behind the scenes. The first is that the bankers are practicing alchemy-up to a point. When they increase their reserves by selling you a CD for $1,000, they are able, very conservatively, to increase their lending by $5,000. A prime rate of 13 per cent on $5,000 earns them $650; so they can easily afford to pay you $136 for your money and are happy to spend a lot on television and newspaper ads to lure you into their shops.

(Incidentally, should similar battles flare up among the banks where you live, you might want to keep in mind that you can be an alchemist, too – assuming you are in the 50 per cent bracket and have some security to offer. It’s easy: You borrow $100,000 from Bank A, paying perhaps 15 per cent interest. You use this money to buy a $100,000 CD from Bank B that will earn $13,600. Since your tax will be reduced by $7,500 because of interest paid, you will have a profit of $6,100. After taxes you will be left with $3,050 net-all for simply signing your name a few times, and having a lot of money to begin with. And if you run part of this through your IRA, your gain will be greater.)

Can the banks continue doing that forever? Well, it isn’t quite like a chain letter, but it can be kept up as long as there are people and businesses clamoring to borrow money. (The private dodge I have outlined for you can be pursued as long as Congress allows a deduction for interest paid.) Should the demand for loans collapse, or should the loans turn “nonperforming,” the party would be over. For this reason, one may presume that a modest shuffling of the feet is also going on behind the scenes as the banks get ready to raise the prime rate again, probably not until after the election.

And why not? It’s as plain as day that their little CD wars will result in a higher cost of funds for all of them. Finally, a playlet is being prepared behind the scenes that will go like this:

Enter Stern Bank Examiner, who says (sternly): “Hey, you’ve got to stop making those crazy loans to Third World countries and oil wildcatters and speculators in California real estate. Even though the United States has figured out how to have what we say is a recovery with eight or 10 million unemployed, the rest of the world is still depressed, and the demand for oil is going down, and there really is a limit to what anyone in his right mind will pay for a piece of the San Andreas Fault.”

To that, Deregulated Big Banker will reply (contritely): “Well, shucks, sir. Then this bank, which I remind you is bigger than you can possibly imagine, will have to go bankrupt, because our cost of funds is so high that we have to make these crazy loans at high rates, or we can’t pay our bills. If you say we have to go bankrupt, why of course, we’ll do as you say. But if we go, I humbly remind you, we’re so big that we’ll pull a whole lot – maybe everything-down with us, and we wouldn’t like to do that. ”

Whereupon Stern Bank Examiner will answer (sternly): “Well, all right. If you can’t be good, be careful.”

The consequences of such unavoidably permissive regulation will extend far beyond the cost of bailing out a superbank every now and then. Most immediately, the rest of the banking system will be strangulated. If the biggest banks are essentially free of regulation, the remaining banks (some of them bigger than I can imagine) will be at a competitive disadvantage unless they can sell out to a super bank or combine with others similarly situated and become superbanks themselves. The merger movement, already possessed of enough momentum to satisfy a sports announcer (including one formerly known as Dutch[1]), will proceed apace. Everybody will become too big to be allowed to fail.

That last sentence is twice as long as it should be. If we are truly to learn the lesson of Continental Illinois and Financial Corporation of America and Lockheed and Chrysler, the sentence should read, “Everybody will be too big.” Period. Put another way, the lesson we should learn is that great size, in and of itself, is an economic evil. For almost a century, since the passage of the Sherman Antitrust Act in 1890, we have said and repeated and contrived to believe that the issue is competition, not size. The Sherman Act has been amended and strengthened, most notably by the Clayton Antitrust Act of 1914 and the Robinson-Patman Act of 1936; the courts have been clogged with cases, some of which dragged on for decades without a decision; and always the effort has been to discover and enforce a judicial definition of competition.

The effort has not succeeded. The power of the “trusts” of 1890 was insignificant in comparison with that of the Fortune 500 or the Forbes 500 of today. Absurdities have multiplied. It is, for example, established antitrust law that a company can engage in what the law defines as unfair business practices when the company has to do so to meet competition. If you think that’s nutty, you’re right.

I’m not saying that we would be better off without Robinson-Patman and the rest. I’m merely saying that the expensive, time-consuming antitrust effort has failed to come close to its promise, and that its failure follows from the apotheosis of competition.

In this space a couple of months ago (“Unthinkable Thoughts on Competition,” NL, April 2), I presented some empirical evidence that competition doesn’t always work for the benefit of the consumer. For evidence that it doesn’t always work for the benefit of the producer or of society, I refer you to a 1921 essay entitled “The Ethics of Competition” by the late Professor Frank H. Knight of the University of Chicago. Knight demonstrates in careful detail what we know in our hearts, namely that the competitive race is seldom fair, and that the effort it stimulates is as likely to result in chicanery as in beneficial innovation. One of Knight’s favorite pupils was Milton Friedman, showing that, happily for mankind, personal relations are thicker than ideology.

If competition doesn’t work, what does? Not cooperation. That is merely the flip side of the coin. Milovan Djilas and a great many others are ready to tell you in convincing detail that cooperative societies, with the best will in the world, tend to degenerate into stultifying dictatorships. I propose that we look a bit more closely at the question of size.

SINCE THERE ARE unquestionably economies of scale, it would seem that we are stymied in that direction, too. As a matter of practical politics, we are undoubtedly stymied now and will be for a long time. But there does exist a workable solution. It is embodied in a 166-page book published in 1947. The title is The Limitist, and the author is Fred I. Raymond.

Raymond was a successful executive in a family business that was sold, against his advice, to Wall Street speculators. Then he was an inventor of successful heart-regulating devices that he had to sell to Minneapolis-Honeywell because he couldn’t get at the market for them. Then he pondered what had happened to him and wrote his book, which I am very proud to have published. It attracted attention from John Chamberlain of the Wall Street Journal on the Right and Senator Paul Douglas of Illinois on the Left, but of course was (and unfortunately still is) long before its time.

Observing the courts’ inability to define competition, Raymond put forward what he called a limitist law. The speed limit is such a law. If you go over 55 miles an hour you are in violation, no matter what arguments you can make about safety or efficiency or the behavior of others. Observing the way business works, Raymond concluded that seeming economies of scale are often (if not generally) results of the favored access great size can command to finance and to markets. The Chevrolet plant in Tarrytown, New York, for instance, achieves (or could achieve) all the engineering economies of scale available in automobile manufacturing. It is not made more efficient by the existence of similar Chevrolet plants elsewhere.

On the basis of these observations, Raymond proposed that a business organization could be as large and as spread out as it wanted to be, provided that it had only one place of shipment to its customers, whether other manufacturers, retailers or the public. If a business had more than one point of delivery, it would be limited to a certain number of employees. Raymond suggested 1,000 as the maximum. He drafted a “Business Limitation Act” that runs to not quite 2,000 words, including definitions of terms.

I doubt that you have heard of a more elegant, simple, effective, and far-reaching proposal. The book never sold many copies and has long been out of print, but I suppose you can find one in some library. If you do, you will be well repaid for the two or three hours it takes you to read it. It is, as Chamberlain said, “a practical way of dealing with the economic ‘sin’ of bigness that doesn’t require cumbersome bureaucratic supervision, insidious taxation of human energy, or incessant effort to prevent government corruption.”

We can, of course, simply give up and turn the country over to the Business Roundtable. Or we can keep muddling through the courts. Or we can make a start at diagnosing and treating our actual ailment. That is, we can face up to the problem of bigness.

The sad fact is that we had a limitist law in banking in the shape of Regulation Q, which limited the interest certain banks could pay. It was not altogether effective because it could not (given the patchwork control of our financial system) cover all it should have covered. In the circumstances it would have been rational to extend the coverage. But overawed by the wealth and wisdom of Walter Wriston and his ilk, we reduced it, instead. The more fools we.

The New Leader

[1] Reagan

Originally published August 6, 1984

Dear Editor


I have regularly read George P. Brockway’s column on economics, “The Dismal Science”- albeit without great enthusiasm, but recognizing it as a serious attempt to educate himself and then us in a very difficult subject. The glorious reward for Brockway and for us has now come!

I refer to his “Civility and Labor Relations” in your June 25 issue. Brockway has there managed in a few paragraphs to give us an understanding of the quite deliberate way in which capitalism in general, and U.S. capitalism in particular, not in the dead past but today, creates unorganized and disorganized armies of the unemployed in order to drive wages down and keep workers out of unions. With extraordinary brilliance, Brockway has culled a series of passages from Marx’ Capital and shown that they express the present ideas of big capital in America. The living part of Marx – his profound grasp of the process of capitalist accumulation – is thus as it were rescued by Brockway, while he happily and correctly consigns the rest of Marxism to the grave it has dug for itself in the Soviet Union, China, Cuba, and the dreary wastes of Eastern Europe.

Big capital is armed with this understanding of the living part of Marx. The trade union movement here and in Europe is disarmed by its sodden failure to understand this process. More accurately, of course, I mean the trade union leadership. When Brockway concludes that whatever will happen will be our doing, each of us chooses his place in making the future. But some of us are better placed to affect the future, and it is in this sense that the trade union leadership bears responsibility for the terrible decline of the labor movement. In this darkness, Brockway has lighted a candle of hope.

New York City                                                                                      FELIX MORROW[1]

[1] Editor’s note:  We can’t know if we’ve linked to the correct Felix Morrow but, given the Wikipedia entry, it appears to be a reasonable guess…

Originally published August 6, 1984

A COUPLE of months ago I had occasion to mention Gary Hart’s search for “a better title” for the radically new form of taxation he referred to as an “expenditure tax” or a “consumption tax”. (“Voodoo on the Primary Trail,” NL, April 20). Well, the Brookings Institution (described by the New York Times as” a liberal think tank”) has solved Hart’s problem. In a long pamphlet entitled “Economic Choices 1984, the scheme is called a “cash flow tax.” If it is adopted, the person who thought up the new name will be as much to blame as anyone.

The Brookings pamphlet, edited by Alice M. Rivlin, distinguished former director of the Congressional Budget Office, concerns many issues besides taxation. Parts of it remind one of Claude Rains’ line at the end of Casablanca: “Major Strasser has been shot. Round up the usual suspects.” In the opening sentence of the opening chapter we learn that “High deficits in the Federal budget, together with high interest rates, are endangering the future growth of the U.S. economy and undermining the ability of American industry to compete in world markets.” Following this, we are told that fiscal policy and monetary policy are at cross purposes, that Medicaid and Medicare cost more than expected, that many a father shirks his responsibilities to his children and their mother, that the B-1 bomber, the MX missile and various flocks of airplanes and schools of warships are a waste of money.

Now, I am persuaded that all of these suspects are guilty as charged, and I have no doubt that the list could be considerably extended. But none of this is news, as the cash flow tax is purported to be.

The first thing to note about the Brookings statement of this tax is a disclaimer.

“It does not,” the authors say, “propose any shifts in the tax burden among economic classes.” And a complementary proviso declares that if the scheme should prove to be heavier on corporations than the present law, rates would be revised to restore the “balance.” You will remember that similar disclaimers and provisos are included in the plan put forward by Senator Bill Bradley (D.- N.J.) and Representative Richard A. Gephardt (D.-Mo.) (“A Cautionary Tale of Tax Reform,” NL, January 23). You may also have noticed that when the Reaganites undertook to remake the tax laws they had no compunction whatever about shifting the burden from the rich to the poor or reducing the share paid by corporations (the corporate share had already declined from 26.5 per cent in 1950 to 12.4 per cent in 1980; it is now less than 10 per cent).

On the basis of the foregoing I propose a new law of political science: In any confrontation between neoconservatives and neoliberals, the neoconservatives will always win, because the neoliberals will allow them to keep whatever they have previously gained, regardless of when or how they gained it.

It would not be difficult to convince me that the neoliberals have their priorities precisely wrong. As John Maynard Keynes said, “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” I hold these truths to be self-evident, and I therefore hold that the first test of any tax law is whether it contributes to the rectification of these faults.

The proposed cash flow tax deliberately fails this test, except to the extent that it pays some attention to gifts and bequests. The Brookings people insist that this feature distinguishes their levy from a straight consumption tax. In fact, the straight consumption tax people could take the same step without breaking stride, so it is a distinction without much difference. (Brookings, by the way, proposes that each household have a lifetime exemption of $200,000 for such purposes. Try that on your recordkeeping problem.)

What, then, is a cash flow tax? To keep my bias from showing, let me quote from the pamphlet: “Each taxpaying unit [household] would be taxed on all cash receipts, minus net saving… Receipts would include all wages and salaries, rent, interest, profits, dividends, transfer payments, gifts received, and inheritances. Savings would include all net payments into certain ‘qualified accounts,’ including all financial assets (stocks, bonds, and other securities), all accounts in banks and other depository institutions, the cash value of life insurance,  and real estate (except owner-occupied housing) …. Just as additions to saving would be deducted from income, such dissaving as the sale of stock or withdrawal from a bank account would be added to the tax base… Personal exemptions would be allowed as under the present personal income tax, although the amount should be modified… For joint returns, existing revenues could be matched with a 5 per cent tax on the first $10,000 of taxable expenditures, 20 per cent on the next $30,000… and 32 per cent… over $40,000 per year.”

All right. Now listen to me. I will make just three points:

1. Those seductively low rates are achieved, not because of the miraculous properties of the cash flow tax, but because none of the deductions – other taxes paid, charitable donations, interest paid, and the rest-would be allowed. If an income tax were similarly astringent (I’ d be in favor of that) it could achieve still lower rates, for it would not have made that massive deduction for saving.

2. Since the paperwork necessary to complete a cash flow tax return would hardly be much less than that for the present return, the new tax would not be substantially more “efficient” than the existing one. Indeed, if the present tax eliminated deductions and the special treatment for depreciation and capital gains, the return would be a piece of cake for almost everyone, like the present Form 1040A.

3. The switchover from an income tax to a consumption or cash flow tax would present horrendous problems. I’ll take a little space to explain one that is near and dear to my heart: What do you do about recently retired individuals like David Rockefeller, Walter Wriston and me? For the rest of our lives we’re going to be dissavers. We got taxed on the salaries from which we saved to make our nest eggs; we got taxed on much of the income earned by those eggs; and now we’re going to be taxed a third time when we use the income to live on.

Well, you know what would happen. We senior citizens are not so easy to kick around anymore. We belong to the American Association of Retired Persons and the Grey Panthers and such. We have the clout to insert a little provision in the law to the effect that those who have to be dissavers because they have no other income would not be taxed. This would only be fair. After all, if David Rockefeller, Walter Wriston and I don’t spend our income, we don’t live. But for you poor slobs who still work for a living the rates would have to go up.

The Brookings people are aware of this difficulty, and they have a solution whereby “each household could calculate the aggregate cost of all assets accumulated from savings out of previously taxed income (‘basis’ in current tax law) and claim an exemption spread over a number of years for consumption until the aggregate cost had been recovered tax free.”  Messrs. Rockefeller and Wriston might be able to live with that, too, because they have probably had accountants working for them night and day all their lives. The rest of us, who can read the words of the “solution” but are not even quite sure what they mean, and who certainly do not have meticulous records stretching over 65 years and more, might wonder what happened to the advertised simplicity of the new tax.

WHY DO THE Brookings people want to make what would be a fantastically complicated change? They have two principal reasons, both ideological. First, they have got hold of the notion that the trouble with the American economy is a lack of saving. But their own figures show that private saving (both individual and corporate), as a percentage of GNP, was 16.2 per cent in the 1950s and 16.3 per cent in the 1960s. True, these were the allegedly prosperous years. Yet in the 1970s, when things are supposed to have fallen apart, the rate was 17.1 per cent; and it is projected, under the existing law, to rise to 17.5 per cent in 1986-89. Given the inherent imprecision of these figures, they are nothing to bet your life or livelihood on. Nevertheless, one thing is certain about them: They do not support the view that the economy has been in trouble because of a lack of private saving. And of course everyone knows that the current recovery has been led by consumption, not by saving.

The other ideological notion is that the ideal economy would be one without taxes,  and that the cash flow tax is similarly” neutral.” This is nonsense. It is doubtful that a state of nature would be ideal for anyone; but there is no doubt  that a civilized state must have taxes, that just taxes are levied in accordance with ability to pay, and that ability to pay turns on income and wealth, not on savings.

There are many other things to be said about consumption taxes and consumption-like taxes. For further information I refer you, as I have before, to Robert S. McIntyre of Citizens for Tax Justice, 2020 K St. NW, Suite 200, Washington, D.C. 20006. Here I want to conclude with a reference to a table in the Brookings pamphlet, whose burden, as I mentioned at the outset, is that the deficit is going to destroy the economy unless we do something drastic in a hurry.

With that in mind, let’s look at Table 2-4. The first line of this table shows “Projected surplus or deficit under policies in effect January 1, 1981” (that is, when President Reagan took office), and the last line shows the projections “under policies in effect January 1, 1984.” The projection for 1989 on the first line is a surplus of $29 billion, while that on the last line is the now-familiar deficit of $308 billion.

Remember those figures when President Reagan tries to tell you that the deficit was caused by Democratic spending. He can, if he wants, blame the recession on Federal Reserve Board Chairman Paul Volcker. The deficit, however, is Reagan’s very own.

The New Leader

Originally published June 25, 1984

IN TWO mind-opening books on money (Money and the Real World and International Money and the Real World) Paul Davidson, professor of economics at Rutgers University, has occasion to use the phrase “in a world where slavery and peonage are illegal.” In both cases, he is explaining that industrial production takes time, requiring industry to plan for weeks, months or even years ahead. To be sure of adequate materials at acceptable prices, manufacturers enter into contracts with their suppliers for future delivery. The largest factor in the cost of both supplies and finished goods is the cost of labor; therefore, Davidson argues, stable labor contracts are in the interest of modern industry.

Davidson is a civilized as well as a rational man. Consequently he sees a stable labor market as one in which labor is fairly paid and decently treated. “Efficient planning … in a world where slavery and peonage are illegal,” he says, “requires contractual commitments for …  regular (non-casual) employment and fair treatment for labor over time.” This proposition will surely commend itself to other civilized and rational individuals.

Toiling in a neighboring vineyard, John Kenneth Galbraith, professor emeritus of economics at Harvard, has argued in The Affluent Society that modern industry is so productive it does not have to coerce workers (as Victorian industry perhaps had to) by keeping them in squalor and threatening them with starvation. He observes the money and effort modern business puts into advertising and selling, and concludes that the things produced must be little needed if finding buyers requires such expenditure. From this “it follows,” he explains, “that the efficiency of the process by which they are produced ceases to be an overriding consideration… Under these circumstances, the relation of the modern corporation to the people it comprises -their chance for dignity, individuality and full development of personality – may be at least as important as its efficiency …. Evidently the unions, in seeking to make life tolerable on the job, were being governed by a sound instinct. Why should life be intolerable to make things of small urgency?”

And as a matter of fact it was possible, only a few years ago, to hope that such obvious logic and reasonableness were beginning to break through the age-old barriers of greed and fear. As I noted recently in this space (“Voodoo on the Primary Trail,” NL, April 30), many labor leaders were confident of the dawn of an era of good feelings. Davidson is describing the rational actions of civilized businessmen, and Galbraith is prescribing rational actions for a civilized society. We are not, however, beneficiaries of any law guaranteeing that either businessmen or their society will be rational or civilized. There is, indeed, another way of looking at the economy that is as up-to-date as neoconservatism or neoliberalism, and is now generally accepted in the boardrooms of our great corporations. For convenience we may call it The Business Roundtable way.

This starts, as do Davidson and Galbraith, with the observations that labor is the largest single cost of production, and that we don’t need all the labor available to us in order to maintain ourselves in the style to which we have become accustomed. But The Business

Roundtable way concludes from these observations that the smart thing to do is to stabilize labor costs at the minimum, and that a whiff of unemployment is a mighty convincing stabilizer.

There is no doubt that the recent depression and the so-called recovery, with 8 million men and women still unemployed, have been deliberately stage managed accordingly.

A few quotations may dramatize the reasoning behind The Business Roundtable way: “With increasing productiveness of labor, the power of sudden expansion also grows, because the technical conditions now admit of rapid transformation into additional means of production. In all such cases, there must be the possibility of employing masses of men suddenly without injury to other spheres.”

“Industry progressively replaces skilled laborers by less skilled, mature by immature, male by female. The productiveness of labor increases the supply of labor.”

“Overwork of employed labor swells the ranks of the unemployed, while the latter, by their competition with the employed, force them to submit to harder work and lower wages.”

“Investment in the means of production and the productiveness of labor means that the labor force increases more rapidly than the need for workers.”

“Taking them as a whole, the general movements of wages are regulated by the expansion and contraction of the unemployed.”

The foregoing passages, which accurately enough represent the thinking of The Business Roundtable, are of course somewhat edited and sanitized quotations from Capital by Karl Marx. The original versions can be found in Chapter XXV – “The General Law of Capital Accumulation” -where Marx develops his notion that what he cleverly calls the industrial reserve army is necessary to the capitalist system. As a military commander uses a reserve army to exploit sudden openings or reinforce sudden weaknesses, so, Marx says, capitalists use the industrial army of the unemployed.

ONLY THE other day, as the Great Society of Lyndon Johnson unfolded under the supervision of Joseph Califano, it seemed that, like so much of Marx, the industrial reserve army was specific to the 19th century and consequently destined to be discarded in the last half of the 20th. But instead we have been discarding the Great Society, while the industrial reserve army is still with us, 8 million strong. And besides the 8 million in the domestic divisions, there are uncounted millions in the Orient and in the Third World generally.

The usefulness of this massive army that already exists lies in its very lack of organization. Its deliberate exploitation has so changed labor relations that rational analyses like Davidson’s of the need for civilized labor contracts are being brushed aside as irritatingly idealistic. Industry still needs to plan ahead, as Davidson says, and planning still depends on the availability of adequate labor at foreseeable wages. But as Marx said, and the Business Roundtable agrees, productivity is a euphemism for employing less skilled and less well-paid labor. As a result, the world-wide industrial reserve army can be expected to be mobilized to exert a steady downward pressure on wages and working conditions. If wages are falling, and potential scabs are plentiful, business has a greatly reduced incentive to contract for “regular employment and fair treatment for labor over time.” Slavery and peonage are of course illegal, but the industrial reserve army is a more convenient means to the same end. Marx recognized that, too.

It is, in truth, difficult to fault Marx on his analysis, and impossible to fault him on his passionate attack on the abuses he observed. We read with horror of Bradford, a Yorkshire worsted-mill city, where as many as 18 people – for the most part regularly employed workers – lived crowded into a single room; where in one neighborhood there were 223 houses sheltering 1,450 inhabitants, but with only 435 beds (many of them merely “an armful of shavings”) and 36 privies, or one for every 40 people. According to The Blue Guide: England, Bristol today “preserves … splendid examples of Victorian industrial architecture.” At the time those factories were built, Marx reports, Bristol was notorious for “the misery of its dwellings.” And this one chapter of Capital has 72 pages of similar details.

That we react with amazement to such accounts points to the fact that some things are better now than they were 150 years ago. That some things are better now points to the fact that Marx was mistaken in thinking his dialectics of materialism would inevitably bring his apocalyptic vision to pass. Given the nature of that vision, this is a blessing.

Nothing inevitably comes to pass, for there is nothing either good or bad but doing makes it so. What is done – or not done – is our doing. Whether we move ahead into the rational and civilized world described by Davidson and Galbraith, or fall back into the brutal and degrading world described by Marx and complacently accepted by the Business Roundtable – whichever we do, it will be our doing. We had better get on with it.

            The New Leader

Originally published May 18, 1984

SEVERAL Sundays ago the New York Times business section had one of its recurring roundups of professional opinion on productivity. This is a live issue because publicists and politicians keep it alive. President Reagan and his retiring, but not bashful, chief economic adviser, Martin Feldstein, never tire of talking about it. The Atari Democrats also fancy the issue, though they began keeping their heads down once their advisee, Gary Hart, became a serious candidate for the party’s Presidential nomination. At least two White House commissions are supposed to have been working on the question for the past two or three years (no one knows the results, if any). Innumerable editorials have been written on it, and not a few books.

Yet the whole debate is an elaborate scam, because what is presented as a value-free examination by sober social scientists is actually a struggle over the distribution of the national income. Some (maybe most) of those perpetrating the scam may know not what they do. It is a scam, nevertheless.

As pseudo-science, the argument goes like this: Of the various factors of production, labor is the largest. Employees’ compensation-wages, salaries, bonuses, fringe benefits-comes to about two-thirds of the Gross National Product. That being so, it would seem plausible to take this largest factor as an index of the efficiency of the whole.

As the Times puts it, “A worker who produces 100 widgets an hour, for example, is clearly more productive than a worker who produces only 50 widgets an hour. ” There are many sleepers in the seemingly innocent example and the Times isaware of some of them: “the machines that are used, the worker’s education or skill, advances in technology, the working environment.” The worker can be praised or blamed for few of the items in this little list; most are someone else’s doing. That fact is not noticed by the judgmental types who complain that people don’t work as hard as they used to.

But the trouble with the Productivity Index starts with the GNP itself (see “Sinking by the Numbers,”NL, May2, 1983). The GNP has nothing to do with widgets, or with shoes or ships or sealing wax. The reason for this is obvious enough: You can’t add shoes and ships and sealing wax and widgets, any more than you can add apples and pears. All you can add is the prices of the widgets and shoes and so on, and you get a result in dollars that depends as much on the prices of widgets and shoes as on the numbers of widgets and shoes.

This is true for the economy as a whole, and it is true for the firms that make it up. Even the rare company that makes widgets alone judges its productivity in numbers of dollars rather than numbers of widgets. If it manufactures 100 widgets and can sell only 50, the remaining 50 are not products but waste. Companies that deal in a variety of products have no choice except to measure their total output in dollars.

Nor is this procedure necessary only in market economies. In the purest communism of our time, the brief reign of the Gang of Four in China, several streets in Shanghai were lined with thousands of boilers quietly rusting under the plane trees. Somebody had built them and no doubt got a commendation for exceeding his quota, but there was no use for them. They were waste, not products, and (if they’re not still there) they had eventually to be broken up for scrap.

The next difficulty with the GNP is as I argued last year – what it includes and what it excludes. The Times article provides a good example of the mischief that results. “Increased regulation,” says the Times, “aimed at such things as clean air and water and increased safety in the workplace . . . absorbed management time and business resources in the ’70s. Now that the pace of new regulation has slowed, if not reversed, business will be freer to concentrate its money and effort on other things, such as productivity.

“You’ve heard so much of this kind of talk that you may not be immediately struck by how fatuous it is. If you will read the passage again, you will notice the unstated (and unstatable) assumption that clean air and water and increased safety are worthless in comparison with more widgets or cheaper widgets or anything at all (a widget being the ultimate nondescript object). Well, there may be some things more important than clean air, but a widget isn’t one of them. In a rational world, what you produce is a more important question than productivity.

Productivity is a ratio (see Productivity: The New Shell Game,” NL, February 8, 1982). So far we have dealt only with the numerator. The denominator is suspect in its own way. The figure usually used is the total hours worked by everyone in producing the GNP. This is a moldy fudge. Since you can’t think how to quantify (except in dollars, of which more later) the relative contributions of the designer of the widget, the operator of the machine that stamps it out, and the fellow who sweeps up the scraps, you sweep the problem out with the scraps and conclude that Gertrude Stein would have been right if she had said, “Hour is an hour is an hour.” Or as Karl Marx did put it, “We save ourselves a superfluous operation, and simplify our analysis, by the assumption, that the labor of the workman employed by the capitalist is unskilled average labor.”

On this basis, you’d have to say that if a skilled journeyman carpenter could increase his output 50 per cent by taking on an unskilled apprentice, the result would be a 25 per cent decrease in his productivity. In addition, you’d have to say that the apprentice’s productivity was equal to the journeyman’s. Worse still, you’d have to say – and people do –  that it’s better for national productivity to have millions of men and women unemployed than for them to be working and producing less than their co-workers. The Times, for instance, says: “The entry of 20 million new and inexperienced workers into the labor force during the 1970s acted as a drag on productivity.”

Any theory that makes you say things like that is silly, and any figures that lead to such conclusions are mischievous. Productivity, at least as everyone measures it, is a grievously misleading notion. If you take it seriously, you believe that clean air and water and increased safety are bad and should be opposed. You believe, too, that employing young people and women and blacks and others without experience is bad, and that therefore an unemployment rate of 8 per cent is not merely acceptable but desirable.

IT MAY OCCUR to you to wonder why the denominator of the productivity ratio is “hours worked.” Why not “workers’ compensation?” Then at least you wouldn’t have silly results like our journeyman-apprentice example or the all-too-real unemployment problem. Then you wouldn’t have to pretend, as the Times does, that management has been wasting its valuable time on the environment.

You would, however, be in danger of calling attention to one of the hidden aspects of the scam – that is, the place of management, especially top management, in the whole picture. For the chief executive officer of a company is a wage slave just like the operator of the widget machine. As long as you focus on hours worked, you meld his allegedly productive hours with the less valuable hours of the operator, thereby improving the index and demonstrating your scientific willingness to put the faltering American workingman in as favorable a light as possible.

You also diminish the risk of having someone point out that CEOs are often paid five or six thousand times as much as widget machine operators (I’ll say more about this in another column). Or of someone separating management productivity from working-stiff productivity and introducing a brand new ball game: It would no longer seem that the Japanese are catching up with us because their production workers are workaholics, while ours are goof-offs; the catching up, if any, would appear to be due to the fact that they have fewer managers, who have fewer Lear jets, stretch limousines, three-martini lunches, tax shelters, and golden parachutes.

The scam has yet another aspect. Labor may be the largest factor of production, but looking back on the others the Times mentioned (“the machines that are used, the worker’s education and skill, advances in technology, the working environment”), you will note that the first and last of these are supplied by capital, the second is largely the responsibility of the state, and the third is a joint activity of capital and the state. A capital productivity index would be at least as reasonable, therefore, as a labor productivity index. The numbers would not be markedly different, but they’d have a vastly different meaning.

You can carry this a step further. For although productive capital is not money, it is bought with money, and money has a cost, namely interest. The prime rate has gone from 1.5 per cent (really and truly) in 1947 to 12.5 per cent today, having had flings as high as 21.5 per cent along the way. In other words, with every dollar American industry now pays (actually, or as opportunity cost) for interest, it is able to buy only one eighth as much of capital goods as it could have at the end of World War II (and this is without counting inflation).

There is the real drag on the American economy, and on the world economy. As I said at the beginning, the uproar about labor productivity is a scam to distract attention from a massive shift in the distribution of the goods of the economy. The share of nonmanagerial labor is being reduced; the share of managerial labor is being increased; and the share of those who do no labor, who merely have money, is being increased most of all. This is what Reaganomics.

(or, if you will, Volckerism) is about, and the Atari Democrats have been gulled into going along with it.

            The New Leader

Originally published May 14, 1984

Between Issues

…..Back on these shores, George P. Brockway exposes the “productivity scam,” in his upcoming “Dismal Science” column. Small wonder he has been sticking close to home. He has just completed Economics for the Living, to be published as a Cornelia and Michael Bessie Book by Harper and Row. Having had an opportunity to read the marvelously provocative and lucid manuscript, we suspect he’ll be doing a lot of traveling to talk shows when the book appears next winter…..

            The New Leader

Originally published April 30, 1984







            THE DEMOCRATIC Presidential primary campaign that is now drawing to a close can be counted as another of the evil consequences of the Vietnam War. For several months we have watched a candidate sincerely cultivate a liberal “image” (that awful concept), successfully appeal to many intellectuals, and at the same time vehemently attack labor unions as “special interests.”

Nothing like this could have happened before Vietnam. Before Tonkin Gulf, it went without saying that liberal intellectuals were for labor unions, and that labor unions were for liberal policies. There were exceptions, like the Teamsters, saddled with such as Jimmy Hoffa; and the building trades, bemused by racism. But in general the Democrats could count on the liberal intellectuals and organized labor. They were both concerned about the common man, and they were both members in good standing of FDR’s coalition.

With Vietnam, this changed. Aside from the few who were engaged in waging the war, the intellectuals came down pretty solidly against it. And the unions, with some exceptions, supported it. Intellectuals accused the unions of a conspiracy with the bosses to raise prices, profits and wages under the pretense of patriotism. Unionists accused intellectuals of a cowardly concern for their own skins. Antiwar marchers shouted taunting slogans; machos in hard hats beat up on the marchers. It was then, if I am not mistaken, that the term “hard hat” came into general use, and it did so as a disguised synonym for “hard head.”

Once the intellectuals began badmouthing the unions, they found much to say, especially about the alleged conspiracy with the bosses. Eventually, someone among the bosses or their publicists was struck by lightning. Whether there had been an actual conspiracy, or merely a tacit understanding, or nothing but a figment of intellectual imagination, the conspiracy theory had effectively split the intellectuals – who by now included press and TV reporters – from the labor movement. If anyone wanted to launch an antiunion offensive, his rear was protected.

With the winding down of the Vietnam War, more and more such offensives were launched. Union leaders, some of whom had prophesied an era of good feelings in boardroom negotiations (not the same thing as a conspiracy), were caught by surprise. Suddenly they had no friends outside the labor movement, while inside the movement they were faced with waning enthusiasm and declining membership.

All this had its political side. The chaotic Democratic convention of 1968 had tarred AFl-CIO President George Meany and Presidential candidate Hubert Humphrey with the same brush as Chicago’s Mayor Richard Daley, contributing to the election of Richard Nixon. The more sedate conventions of 1972, 1976 and 1980 left the unions isolated. Hence their early backing of Walter Mondale’s bid to be the 1984 Democratic standard bearer in hopes of reversing the trend.

And hence a predicament for Mondale rival Gary Hart. It must also be remembered that Hart, as George McGovern’s 1972 campaign manager, had additional reason to be cool toward the unions.

But for a Democratic candidate to attack labor unions as special interests is to adopt an ultimately self-defeating political strategy, as well as to do a considerable disservice to the American economy. An attack of this kind is self-defeating because (if successful) it splits nonmanagement workers and drives half of them into voting Republican or going fishing. It is a disservice to the economy because unions are at present the sole viable force working for a reasonably egalitarian society.

Talk about a reasonably egalitarian society sounds, I admit, pretty pompous. Yet that is simply a sign of how far we have drifted from an understanding of justice as the basis of political economy. I will say this: If justice is not the basis of political economy, the whole thing is a series of squabbles over private whims and satisfactions. As Jeremy Bentham, the father of utilitarianism, observed approvingly, “Quantity of pleasure being equal, [the game of] pushpin is as good as poetry.

Since, however, justice is the basis of political economy, no matter how frequently forgotten, it is possible to inquire into the justification for our enormous and growing gaps between the top and bottom incomes, and between the top and bottom amounts of personal wealth. Further, it is possible to argue that these should be narrowed, for reasons I hardly have space even to list. But my point is that the steady thrust of union activity, whatever else you may think about it, is toward narrowing the gaps.

Some unions are of course more successful than others. It is fashionable to contrast the relatively high wages in steel and automobiles with the much lower wages in other industries. It is, for example, shown that wages in steel and automobiles increased 137 per cent and 112 per cent, respectively, between 1972-80, while average manufacturing wages increased 104 per cent in the same period.

As I never tire of emphasizing, there are always two ways of looking at such comparisons. The Chamber of Commerce way is to see steel and auto wages as too high. The labor union way is to see the other wages as too low. As far as the mathematics is concerned, both visions are equally valid. As far as economic justice is concerned, the labor union way is surely the correct one. What we need is stronger unions in the disadvantaged industries, not attacks on all unions as “special interests.”

BESIDES BEING unhappily misoriented, Hart’s campaign has not been lacking in ironies. He has presented himself as the man of new ideas. What these ideas may be has not been much publicized – and for this the media are no doubt more to blame than the candidate. Nevertheless, I can name two.

The first is his long-standing fascination with a so-called consumption tax. After he became a conceivably successful candidate, Hart understandably muted this idea. Robert S. McIntyre, of Citizens for Tax Justice, quotes him as saying, “If anyone can think of a better title for this than ‘expenditure tax’ or ‘consumption tax,’ I would certainly welcome it.” Well, I can think of a better title: “sales tax.” It is neither a new idea nor a good one, and it leaves me speechless (almost) that anyone presenting himself as a liberal or a neo-liberal Democrat could entertain it for a minute.

Taxing consumption is, in fact, a central idea of supply-side Reaganomics and was the excuse for giving tax breaks to the rich, who were expected to save their windfalls. Fortunately they spent them instead, and their consumption expenditures (together with those of the Department of Defense) have fueled the current so-called recovery. Even the business press acknowledges that this is a consumption-led recovery, which ought to be puzzling to supply-siders, if they are capable of being puzzled. It is sufficiently shocking that Secretary of the Treasury Donald Regan, in spite of what has happened, still wants to tax consumption; it is preposterous that any Democrat should ever have toyed with the notion.

Hart’s second “new” idea is his espousal of the Atari Democrats‘ suggestion that a committee of neoclassical economists and investment bankers with time on their hands direct the reindustrializing of America. This idea is not so new, either, having been thought up by President Herbert Hoover in the form of the Reconstruction Finance Corporation something over a half century ago.

There is an even more ironical aspect to the new ideas issue. I have in my hands a document (to use a once-popular phrase) entitled, “Rebuilding America: A National Industrial Policy.” If there is anything wrong with the proposals therein, it is that they are largely indistinguishable from Hart’s “new” ideas on the same subject. The document, I hasten to say, is published by the Industrial Union Department, AFLCIO, alleged to be a special interest.

Hart’s vagueness about his positive program is unfortunate – yet understandable, given the way we run our campaigns. His innuendo-laden attack on the unions is bad. Worse than both, though, is his scorn for” old solutions” to our problems. Since he does not name what he rejects, one must suppose that the “old solutions” he has in mind are those of the New Deal and the Great Society. Thus he parrots the Ronald Reagan view of history, as he has adopted the Donald Regan view of taxation. But as John E. Schwarz shows in his recently published book, America’s Hidden Success (part of which ran in THE NEW LEADER of November 28, 1983), those “old solutions” were in fact remarkably successful and should be extended rather than abandoned.

Primary campaigns seem inevitably productive of rhetoric that is later regretted. One can desperately hope that Senator Hart’s words will be no more harmful – either to him or to Walter Mondale – than were George Bush’s words about voodoo economics.

            The New Leader

Originally published April 2, 1984








CHIEF JUSTICE Warren Burger used to use his addresses to the American Bar Association to complain that the courts (and presumably the society as a whole) are plagued by incompetent lawyers. Since he named no names, a few law school deans grumbled a bit, while everyone else said ho-hum and wondered why he belabored the obvious.

This year the ABA met in Las Vegas, a city renowned for its cultural and intellectual advantages. Although the Chief Justice was said to disapprove of the site, he went anyhow to give the assembled lawyers the benefit of his thoughts. It turned out that he had been thinking the unthinkable. He allowed himself to wonder in public whether the Anglo-American legal system – otherwise known as the adversary system – might not be something less than perfect. A shocked silence followed. He might as well have questioned Mother’s Day or the Little League or the Space Shuttle. Or even the Super Bowl.

Mr. Chief Justice Burger may be comforted to learn that he has emboldened one citizen (me) to wonder about the economics counterpart of the adversary system, which is the idea of competition. In the same way that adversary litigants are said to reach the truth by trying to confuse each other (and the court), adversary businessmen are said to outwit each other into being productive, efficient, forward-looking, and cheap.

Both ideas are deeply imbedded in the Anglo-American tradition. It is often claimed that trial by jury is a humane development from medieval trial by combat and trial by ordeal. This is only superficially so. Trial by combat and trial by ordeal assumed that God, the Mover of the Universe, would reveal the hidden truth by giving the just man strength to prevail or survive. Trial by jury assumes that neither litigant (the “people” being one of them in a criminal trial) knows the whole truth; therefore, each should marshal the evidence as strongly and as one-sidedly as possible. The contest between the partial truths leads the jury to the whole truth.

If you wanted to coin a phrase, you might say that the jury is led to the truth as by an invisible hand.

There is, however, another side to the story – what literary critics would delight in calling the dark side. In brief, the theory is that, given the nature of man and woman, the adversary system is the best we can hope to devise. The reason for this is not, as the medieval mind had it, that in Adam’s fall we sinned all and so are naturally depraved. Grace abounding might take care of all that. The reason is rather that we are naturally solitary.

In a vivid and oft-quoted phrase, Thomas Hobbes, the first modern British philosopher, wrote that the life of man in a state of nature was “solitary, poor, nasty, brutish, and short.” Being clever devils, men get around this by pragmatically forming societies for their own reasons, and they disregard or dissolve the societies for their own reasons – unless restrained by the leviathan-state. They consequently have no reason to trust each other or their society, either. John Locke, philosopher of Britain’s Glorious Revolution and mentor of our Founding Fathers, had a more sanguine temperament than Hobbes, yet still based the right of revolution on the original separateness of mankind.

A century after Hobbes, David Hume, a friend of Adam Smith‘s and an early formulator of the mischievous quantity theory of money, could not see a” necessary connection” between natural events, let alone between human beings. In our day, Bertrand Russell‘s view was not essentially different. The British tradition embraces an atomic theory of truth and of man.

If men and women are naturally atomic, solitary, responsible only to themselves, you have a problem when you try to devise a system for settling quarrels. The leviathan-state can torture people into telling the truth, but torturers are untrustworthy, too, and have been known to ply their trade to payoff grudges, or simply for the fun of it. The alternative is to recognize openly that every party to a law suit (including the “people”) is out for number one, and exclusively for number one. Let them all do their damnedest to win, since that is what they will do anyhow.

Mr. Chief Justice Burger was not the first to notice that this is a shockingly expensive way to get shockingly uncertain results. Among others was Abraham Lincoln, a great President who had been a successful trial lawyer. His notes for several cases survive; in one of them

his strategy was” Skin the defendant.” W.S. Gilbert was confident that Victorian audiences would laugh when the Lord Chancellor in Iolanthe sang of his youthful resolution never to “throw dust in a juryman’s eyes, or hoodwink a judge who is not over wise.” Today, anyone who has been a plaintiff or a defendant or member of a jury (though of mild disposition, I have been all three) could, without straining, think of possible improvements in the system.

I mention the adversary legal system only as it throws light on the competitive system in economics. For that is also based on an atomic theory of mankind. Everybody is out for number one. We all learned at our mother’s knee that competition makes everything come out right, and that the knocks we took in midget football not only were good for us but also made America strong. Competition rewards the efficient and effective producer, and it does so by laying before the consumer the greatest array of the best products at the lowest prices. Even though businessmen, like everyone else, have no other intention than to get ahead, to do this they must offer the consumers a better deal than their competitors do. Competition, in short, automatically drives prices down and quality up.

Most people are dimly aware that things don’t work this way in the world of big business. Proprietary medicines outsell their cheaper generic equivalents; automobile manufacturers believe (with market surveys to support the belief) that price competition forces them to resist installing safety air bags; and no one any longer thinks it feasible (though Lewis Mumford proved it cost effective 50 years ago) to produce local brands of soap or cornflakes or myriad other standard products whose manufacture does not require high entry outlays. If consumers are confused or stupid, that’s not the market’s fault. The trouble with this apology is that the theory of the free market requires both buyers and sellers to be perfectly informed and perfectly rational. Gerard Debreu won the Nobel Prize last year for almost proving this absurd theory mathematically.

JOHN KENNETH GALBRAITH, who writes too well and too sensibly to be a likely recipient of the Nobel Prize, has taught us not to expect the free market to work in the world of big business, which he calls the planning system. I’m here to tell you that it also doesn’t work as it is famed to do even in what Galbraith calls the market system.

In the minutely fragmented and fiercely competitive textbook business, competition frequently has the effect of pushing prices up rather than down. I was once a protagonist in such a drama, when I saw a chance to capture an extraordinary share of the market for a history textbook by inserting full-color illustrations where the competition had black-and-white. With the larger market share, resulting in longer press runs, we could do this without raising our price. But of course our competitors put in color, too; we lost our advantage, and with it, our larger market share. Our press runs went down and our costs went up, as did everyone else’s. We all then did what we had to do: We raised our prices.

The trouble with the atomic view of mankind goes a lot deeper than the mere fact that competition doesn’t always produce the good results claimed for it. The fundamental difficulty is that if you start with the atomic view, there is no way to generate the idea of what is good. If you are fundamentally independent of me, what interest can you have in me? You may regard me with prudent wariness. You may contemplate using me for your purposes. But whether I prosper or fail in my purposes can be only an incidental or sentimental concern of yours.

In Adam Smith’s first book, The Theory of Moral Sentiments, he announced: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him,” and so on. The alleged principles in man’s “nature” are on the same level as the mother love of birds that even great biologists like the late Jacques Loeb like to enthuse about. It is the pathetic fallacy. Whatever the atomic system generates, it is not right or wrong, any more than catbirds are right and cats are wrong.

You can carry the argument a step further. The atomic system cannot generate anything without contradicting itself. A systematically solitary man has no words to express his ideas. Humpty Dumpty, a true atomist, proposed to be in charge of his words, yet he could not even state his purpose without using words that were meaningful because of the social and historical uses made of them by others.

What, then, becomes of competition? I don’t know, but I think we can say at least this much: It is not the foundation on which to build an economics system, nor is its encouragement – or discouragement – a proper objective of social policy. Thus, that aspect of the antitrust laws that is supposed to foster competition is wrong-headed, and it would be equally wrong-headed to try to foster cooperation. Although there are good reasons for antitrust laws (small is beautiful), they are confused and compromised by the attempt to make competition an objective of policy. Likewise, the best society is not one where workers are in a life-and-death contest for jobs. Nor is the state of the world improved by 156 nations playing beggar-my-neighbor. I hope the Chief Justice will be alert to these problems as he ponders the future of adversary justice.

The New Leader

Originally published February 20, 1984








IT IS ASSUMED that a lender is entitled to get his money back when a loan he has made matures. It is further assumed that he is entitled to get not only his money but his purchasing power back; so if inflation is anticipated, he is entitled to charge extra-high interest on an account.

These assumptions are certainly understandable. Why should I lend money if I do not expect to have it returned? Why should I temporarily forgo the use of my money unless I am suitably paid for my abstinence? Yet understandable or not, these entitlements have curious consequences.

Let us begin by examining what capital is (for our purposes here we will not bother to distinguish between cash and producer’s goods). Capital, regardless of how you define it otherwise, is saved labor. It is past labor, as opposed to current labor. No capital ever came into existence except as the result of labor, and no capital ever did any work except in conjunction with labor. Not even land, in the economic sense, exists except as a consequence of labor. At the most primitive level, someone has to go to the labor of discovering the land, occupying it and exploiting it in some way.

Whatever right capital has to earnings is based on the fact that it is saved labor. As an object, capital has no rights. No object has rights (except in the cuckooland of some now fashionable philosophers), because objects can discharge no duties.

Now, if capital is saved labor, it would seem that it should be treated the same way as labor. A laborer is worthy of his hire. A week’s labor brings a week’s wages. But the laborer does not expect to have his labor, or any part of it, returned to him at the end of the week, nor does the laborer expect to continue to draw wages for that week’s work after it is done. (He may, when he retires, receive Social Security benefits, but they are not wages.)

It should be immediately obvious that capital, though it is saved labor, is different from current labor. It can earn interest forever; and at the end of one job, it is expected to be returned intact, whereupon it can be let out again. There is another difference: Capital can be bought and sold, can change hands indefinitely. But with the exception of slavery and possibly certain sports and entertainment contracts, labor can be “sold” only once. To paraphrase Yogi Berra, when it’s over, it’s over.

These differences provide the ground for a far more important one. Since capital is long-lived – sometimes almost immortal – and since it is interchangeable – sometimes as nondescript as putty – it is not bound, at least to the extent labor is bound, to a particular time and place. And being less restricted than labor, capital is more agile and more powerful in any contest between them.

Very likely the original capital was a hunter’s club or stick that proved as effective in controlling other men and women as in killing game. Perhaps, as Marx claimed, the state with its police performs the same service for today’s capitalists. The law, in its determination to protect a man’s home, which is one form of property, has drifted into absolute protection for all forms. This situation, though, obtains also under communism. For control of the means of production, what Communists call capital, enables the state to decide how the people shall work and live. Even without weapons and enforcers, however, capital is stronger than labor.

This is very strange because as we have said, capital is nothing if not past labor. Thus what is past, what is no longer, turns out to be more powerful than what is. Yet we cannot help feeling that Jefferson was right in saying that life is for the living. How can it be for the dead and gone?

Interest has always been a problem for thoughtful men. Although St. Thomas Aquinas lived long ago, he was not a fool, and his opposition to usury was not without reason. Banking was originally money-changing; this was inappropriate in a Temple, but it was and is a necessary service and worth modest fees. Interest, St. Thomas thought, was something else. “The proper and principal use of money,” he held, “is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take money for the use of money lent.” He is evidently thinking of the use of money to buy consumption goods.

What chiefly distinguishes our economy from his is the shift of banking from money-changing to money-lending, and the further shift from lending money to support the consumption of kings and dukes to lending money to support production. The discovery of the enormous power of compound interest, which is using money to support production, dates only from the 16th century. Keynes once calculated that every £1 Sir Francis Drake brought home in 1580 had by 1930 become £100,000.

Oddly enough, philosophers have not been bothered by rent (aside from Henry George, who objected to landowning). It seems reasonable and proper for a landowner to charge another for the use of his land. Once you take that step, you are on a slippery slope, though the slide has taken centuries. If you can charge for the use of your land, you can charge for the use of your shovel or boat or whatever. The principle seems the same, and furthermore you can sell your land and buy shovels to rent out, and vice versa. If real estate (remembering my column on “Appearance and Reality in Economics,” NL, December 26, 1983, note that word “real”) is alienable (see “Life, Liberty and Property,” NL, July 11-25, 1983) then practically all kinds of property are, as the lawyers say, fungible; that is, they can be exchanged for each other.

The next step is a big one. In modern societies it rarely happens that one exchanges land directly for shovels or boats or other forms of capital. The exchange is indirect. One sells one’s land, gets money for it, and uses the money to buy the shovels. The land, the shovels and the money are interchangeable. Consequently, it would seem only right that if it is just to charge for the use of land or of shovels, it is also just to charge for the use of the money that can be exchanged for land or shovels.

THE NEXT STEP is an even bigger one. If in a free market the price of shovels depends on the supply of and demand for shovels, it would seem reasonable that interest depends in the same way on the supply of and demand for money. But, reasonable as it may seem, we are at this point off the slope and into the soup. For contrary to what is widely thought, money is different from ordinary commodities such as potatoes, shovels to dig them with, or ships to transport them in.

The difference was unknown to Aristotle, St. Thomas’ mentor, and it is unrecognized by today’s hard-money men, but it can be quickly illustrated. If potatoes are overpriced, for whatever reason, only the potato business languishes. One can always eat cake. If, however, money is overpriced, bankers (who have the money to lend) may not suffer at all, but the entire economy languishes.

And this is what we have seen happen. Our bankers, led by Walter Wriston of the sleepless Citibank, managed to shrug off many of the New Deal regulations that were based, albeit unconsciously, on the fact that money is different. In particular, bankers outwitted so-called Regulation Q, limiting the interest they could pay. This, at first blush, appeared to be an act of generosity on their part. People with money to lend were charmed by the high rates that banks urged upon them. Competing with each other in the good old free market fashion, even reluctant banks (notably the savings-and-loan associations) had to run up their rates or lose their depositors to more aggressive neighbors. To pay their depositors increased rates, they had to charge their borrowers increased rates. The Federal Reserve Board cooperated by restricting the supply of money, thus magnifying the demand.

After a bit, the demand diminished. Businesses (who do most of the borrowing) couldn’t afford the high rates and cut back on production or went out of business altogether. Individuals did not buy new homes, and many lost the ones they had. Recovery or not, there are now over 735,000 bankruptcies before the courts, the most ever; and a record 4 per cent of the nation’s banks are on the Federal Deposit Insurance Corporation’s “problem list.

In a free money market, the only way the banks can be kept from ruining each other is by allowing them to ruin the economy. In the process, those with money to lend (in general, the rich) are enriched, and those with a need to borrow (in general, the almost-poor) are impoverished. This is a Reaganomic result probably even greater than that achieved by the Trojan Horse budgets and tax laws. The entitlements mentioned at the outset may not now seem so absolute – and indeed far less absolute than the entitlement of every citizen to food, clothing, shelter, and care in his old age.

The New Leader

Originally published January 23, 1984

SOMETHlNG over a year ago, Senator Bill Bradley of New Jersey and Congressman Richard A. Gephardt of Missouri put forward a new scheme for the Federal Income Tax. Last summer they unveiled a revised and more thoroughly worked out version of their proposal. It should now probably be taken seriously because it has been substantially incorporated in a document entitled “Renewing America’s Promise,” released by a group calling itself the National-House Democratic Caucus. In any case, what has happened to Bradley-Gephardt during its gestation period is an instructive and cautionary tale.

First off, let it be stipulated that Bradley and Gephardt are men of good will – probably of liberal will – and that their plan is less harmful than many others that are being noisomely noised about. Among the latter is one by Republican Senator Jesse Helms of North Carolina, who would tax everyone at a flat rate of 11-12 percent. Another, by Democratic Senator Dennis DeConcini of Arizona, would be more generous with exemptions and therefore would have to set its flat rate at 19 percent. Various banker-sponsored proposals would abolish the income tax altogether, substituting sales taxes or the more sophisticated (and insidious) value added tax. Then there are nutty ideas like those of Robert Nozick, a professor of what passes for philosophy at Harvard, who thinks you ought to be allowed to choose the government activities you want to support, if any, and how much.

Bradley and Gephardt start with the premise that the present law is unfair and overcomplicated; on this no one is likely to say them nay. The current tax code, Senator Bradley observes, “spans more than 2,000 pages” and has more than 100 major loopholes that “will be worth at least $250 billion this year.” He doesn’t tell us how many of those pages and loopholes and billions are attributable to the personal tax and how many to the corporation tax, nor does he estimate how many of the loopholes he will close. If he closed them all, we’d be worrying about a surplus of $50 billion instead of a deficit of $200 billion. Don’t count on it.

In their original scheme, the Senator and the Congressman proposed to throw out practically the whole shooting match – medical deductions, veterans benefits, interest deductions, charity deductions, local tax deductions, shelters, the works. In place of the existing rates (which aren’t so progressive as they were a few years ago), they offered a three-step schedule: zero up to certain income, 14 per cent to another point, and 28 per cent thereafter. (I don’t remember – if I ever knew – what they planned to do with the corporation profits tax.)

The new version of their scheme isn’t quite so radical. Let’s let Senator Bradley explain it as he explained it last summer to the National Press Club: “For individuals the simple progressive tax would have three rates-14 per cent, 26 per cent, and 30 per cent. Roughly four out of five taxpayers will pay only the bottom 14 per cent rate. The only people paying the higher rates will be individuals with adjusted gross incomes above $25,000 and couples over the $40,000 mark.

“Our bill makes another significant change which is directed primarily at low-income people. Putting it simply, we want to increase the amount of money that a person can earn before having to pay any taxes at all ….

“To make this approach politically possible, we recognize that it is necessary to preserve certain deductions, credits and exclusions generally available for many years to most taxpayers. We thus propose to retain the $1,000 exemptions for dependents, the elderly and the blind. We also want to permit deductions for home mortgage interest, charitable contributions, state and local income and real property taxes, payments to IRAs and Keogh plans, some medical expenses, and employee business expenses. Lastly, we favor continued exclusion of veterans’ benefits, Social Security benefits for low and moderate income persons, and interest on general obligation bonds. These personal exemptions and itemized deductions would apply against the 14 per cent rate.”

As I look at the two versions, I see three main differences: (1) The new rates are slightly higher, though still far less progressive than even the present law; (2) practically all deductions and exclusions and exemptions are back in; and (3) regardless of your tax bracket, the deductions are limited to 14 per cent.

The first difference is no great shakes. The third is a grand idea that could and should be incorporated in the law. But the second difference gives the game away.

It is plain that Bradley and Gephardt have heard the insistent drums of The War March of the Priests – and of the college alumni associations and veterans’ organizations and senior citizens’ lobbies and real estate operators and IRA bankers and municipal bond holders and all the rest. Having heard that stern impassioned tread, and being practical politicians, they have fallen back on what they call “the best means available” and have surrendered-before the committee hearings-the issue of the complicatedness of the tax law as it relates to the ordinary taxpayer. H. & R. Block and all the tax accountants and tax lawyers, great and small, have nothing to fear from Bradley and Gephardt.

I hasten to stress that their bill includes provisions I’m ready to cheer. One is the abolition of special treatment for capital gains, which, as they point out, is scarcely necessary, since their regular rate is so low. They would also repeal indexing, another thing I’m always grumbling about. On the other hand, it seems to me that their treatment of depreciation is as cozy, for tax sheltering purposes, as anything now going, although it may be a slight improvement on the corporation side.

Now, you may wonder what the net effect of all this coming and going would be. The answer, in a word, is nil. At least that’s its declared effect, and one that the New York Times has (typically) praised it for. The sponsors themselves say that each “income class” will carry” approximately the same tax burden as under the present law.” I’m not sure how they square this statement with their claim that they “want to increase the amount of money that a person can earn before having to pay any taxes at all.” I further note that the proportion of Federal taxes paid by corporations would be unchanged, staying at the present 5.9 per cent (down from 26.5 per cent 30 years ago).

The exemptions and the loopholes and the corporate provisions of the present law are important because they exacerbate the unjust and uneconomic distribution of income in this country. Everyone knows that the Reagan-Kemp-Roth ironically entitled Economic Recovery Act of 1981 was intended to make the rich richer and the poor poorer, and that it succeeded in its intention. Yet Bradley and Gephardt, in what they called the Fair Tax Act of 1983 (now necessarily some other year), ultimately proposed to confirm this brutal unfairness and, by the title of their bill, to certify that it really is fair after all.

THIS IS, as I said at the beginning, a cautionary tale. What started out as a drive for reform (perhaps a misguided drive, but still an honest one) has become a desperate search for something some sort of majority will somehow agree to. Thus the really important reform – a redistribution of the tax burden – was abandoned at the outset: The gains rich individuals and corporations have made in the past 30 years – and particularly in the past three – are not to be disturbed, while for a few they will surely be increased. Thus the arguably useful reform of eliminating special exemptions and deductions was abandoned. Thus the certainly needed reform of deroofing tax shelters was scarcely attempted. In trying to get a comprehensive law that might be passed, Bradley and Gephardt have come up with one not worth passing – and this before being ground down by the legislative process.

The conclusion must be that comprehensive liberal revision of the tax laws is not possible in the present – or foreseeable – political climate. It will be hard enough to get piecemeal reform, as has been shown by the inability of President Reagan to muster even a Republican majority in favor of the innocuous withholding of taxes on bank interest, and by the inability of House Speaker Tip O’Neill to muster even a Democratic majority in favor of limiting the windfalls the rich got from the third round of Kemp-Roth.

On the record, the scary probability is that any enacted” reform” of the income tax will be in the direction of abolishing it altogether. If you’re not scared, ask your friendly banker what he hopes for, and remember that Treasury Secretary Donald Regan has already opined that “A move toward consumption taxes will probably be an absolute necessity.”

Senator Bradley and Congressman Gephardt have, as I’ve mentioned, a handful of good ideas that are worth trying to incorporate into the present law. Let them concentrate on those and forget their grandiose scheme. In any case, let Senator Bradley reflect on the fact that no sponsor of major tax legislation has ever been elected President, though there would be a certain piquancy in a race between a former professional basketball star and a former professional quarterback[1].

The New Leader

[1] For those who’ve forgotten, the author refers here to Jack Kemp, he of Reagan-Kemp-Roth

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