The Chicken and the Egg

Originally published September 9, 1985


As I WRITE, the great deficit debate is out of the headlines, and it may still be out when you read this. The news of the fall season is tax reform, and a determined effort is being made to separate the two issues. In a more rational world, one might expect taxes and the deficit to be intimately related, but in the lame-duck Presidency of Ronald Reagan the sloganeering calls for a “revenue-neutral” tax bill. Though convinced that the Republic hangs in the balance because the deficit doesn’t, even the Senate Majority Leader, Bob Dole of Kansas (perhaps reflecting on what happened last November to Fritz Mondale’s campaign for fiscal responsibility), is muting his austere determination to raise some taxes somehow.

It would be a mistake to consider the deficit merely a nuisance. It will continue to pop in and out of the news because it has us in what Gregory Bateson termed a “double bind.” Our situation is not so obvious as the classic example (“Have you stopped beating your wife?”); nonetheless, it is binding. If we do something effective about the deficit (such as raising taxes or cutting expenses across the board), we will almost certainly turn the current” growth correction” into a full-fledged depression. If we don’t do anything effective about the deficit, we will almost certainly induce a rate of inflation (and, probably, stagflation) far worse than anything we have yet experienced. That, in turn, simply because of our size, will place the entire free world at risk, not to mention those nations that former UN Ambassador Jeane Kirkpatrick taught us to view as authoritarian but not totalitarian.

Bateson developed the idea of the double bind in connection with his studies of schizophrenia. The pathology takes three recognized forms: paranoia (e.g., Secretary of Defense Caspar Weinberger’s and the Russians’ suspicions of each other), hebephrenia (endless absurd chatter, such as President Reagan’s call for a constitutional amendment mandating a balanced budget), and catatonia. The last has two states: agitated

(New York Republican Congressman Jack Kemp’s manic insistence that there’s no taxes like no taxes), and stuporous (Vice President George Bush’s silences on his best days). The periodic alternation of paranoia, hebephrenia and catatonia is what causes the deficit to be a media event one day and a nonevent the next. But the pathology remains.

It must be recognized that we are in a true double bind. We are damned whether we do or not. One has only to listen carefully to the pronouncements of Federal Reserve Board Chairman Paul Volcker to appreciate how hopeless our situation is. To be sure, Volcker continues to voice confidence that we will pull through. He bases his confidence on Congress’ success in cutting $50 billion from the 1986 budget. This is what he asked for as a signal to the financial markets (a.k.a. the speculators of the Wall Streets around the world) that we are serious about putting our house in order. He got his $50 billion plus a bit more, depending on whether you believe Bob Dole or House Speaker Tip O’Neill of Massachusetts. But now in September it is expected that the 1986 deficit, with the cuts, may be greater than it was predicted to be last January, without the cuts. Nevertheless, Volcker remains cautiously hopeful.

What can a rational man or woman make of that? I think you and I have two choices: We can head for the storm cellar because disaster is about to strike, or we can conclude that Volcker and the rest were in some way mistaken in their understanding of the significance of the deficit. Speaking for myself, I will confess that I am at least taking the precaution of scouting my route to the storm cellar. I’m allowing myself the dim prospect, though, that the almost universal misunderstanding of our distressing situation may suggest a way out of the double bind.

A double bind cannot be broken so long as you wrestle with it on its own terms. As Paul Watzlawick, Janet Beavin and Don Jackson put it in their classic Pragmatics of Human Communication, you have “to step outside the frame and thus dissolve the paradox by commenting on, that is, metacommunicating about, it.” Let us, therefore, do a little commenting on – or metacommunicating about – our predicament and the reasoning behind it.

Judging from the actions of our leaders and the dicta of our opinion makers, it would appear that our economy has three points of reference. One is a high gross national product, the second is a low rate of inflation, and the third is a high rate of saving. It would appear, further, that the rate of saving is understood to control the other two. On the first point, saving is assumed to lead to investment, which leads to increased production. On the second point, whatever is saved is seen to be withheld from consumption, thereby decreasing the number of dollars chasing whatever goods are produced. Hence the rate of saving is, as the mathematicians say, the independent variable: save that and you save all.

It will be observed that practically everyone who counts (with the possible exception of Tip O’Neill) believes this. The spectrum of believers stretches from Jack Kemp and his supply-siders, through Bob Dole and the sound money men, through Paul Volcker and the bankers of every size and shape, through the surviving New Frontiersmen and their investment tax credits, to Gary Hart and the New Industrial Policy of the Atari Democrats. And over them all arches the rainbow of President Reagan’s smile.

Let’s metacommunicate first about the rate of saving, that allegedly independent variable that is supposed to make the system go. We have, constant readers will remember, commented on this before, prophesying in “Why Deficits Matter” (NL, March 8, 1982) that the Kemp- Roth tax cuts and the associated accelerated depreciation allowances would not have the intended effect of increasing the rate of saving. Then, in “The Savings Bust” (NL, October 17, 1983), we diffidently called attention to the fact that our prophecy had come true. Now, as Coach Lombardi used to say, let’s get down to basics.

To illustrate the importance of saving, standard textbooks note that someone has to save seed corn if we are to have a crop to eat next year. This is surely true, and it seems to make saving prior to production. It is true as well that someone has to have harvested this year’s crop if we’re to have any seed to save, and that makes production prior to saving. It’s also true that no one would have planted this year’s crop (farming being uncompromisingly hard work) if we weren’t experiencing diminishing returns from hunting and gathering, so that someone could anticipate a strong demand for a substitute food. And anthropologists show that the demand was increased by an increase in population resulting from our prior success at hunting and gathering.

We have here four truths, independently valid, and they seem to be arranged in a straightforward cause-and-effect order. Accordingly, it would follow that if we want to grow more vegetables, we’d better stimulate hunting and gathering.  No one, however, is likely to see much sense in that, except perhaps the National Rifle Association[1]. Where’s the fallacy?

IN FACT, there are several fallacies here. For our purposes the most important lies in the assumption that living systems – systems composed of people – operate in the same way as the systems of classical physics (see “On Political Arithmetic,” NL, April 4, 1983). The idea of independent and dependent variables – a supremely powerful idea in its own domain – simply does not apply. With living systems you cannot learn much from experiments where you vary one factor, holding the others unchanged, and observe the outcome. The rate of saving depends on the GNP, as much as the other way around; moreover, a high rate of saving often depresses the GNP, while a rising rate of inflation may have a favorable effect on the GNP and on the rate of saving, too. But in other times and places it may not. Everything depends on the historical conditions of an actual place and time.

In a 1928 article that was a significant precursor of Keynes’ General Theory, Professor Allyn A. Young argued that in order to understand economic progress, “What is required is that industrial operations be seen as an interrelated whole.” (Or, in the terminology of the communications theorists, the economy is a system of interrelated feedback loops.)

In this connection Young made an observation that would have saved us all a lot of grief if it had been taken to heart by the late Mohammed Reza Pahlevi (and by Messrs. Richard Nixon and Jimmy Carter, who backed him, and George Shultz and David Rockefeller, who did business with him). “An industrial dictator,” Young wrote, “with foresight and knowledge, could hasten the pace somewhat, but he could not achieve an Aladdin-like transformation of a country’s industry so as to reap the fruits of a half-century’s ordinary progress in a few years.”

Although Young concluded that Adam Smith was right in emphasizing the importance of the division of labor, he cautioned: “The division of labor depends on the extent of the market, but the extent of the market also depends on the division of labor.” In short, in a living system it is nonsense to wonder whether the chicken comes before the egg.

What is not nonsense is to be concerned with people. All three of the points that define our double bind – the GNP, the rate of inflation, and the rate of saving – are measures of things. To break out of our double bind, we will have to shift our attention to measures of people: the number of unemployed; the number of men, women and children living below the poverty level; the spread of living conditions between the poor and the rich. If we did this, we would take a vastly different attitude toward Social Security, Medicaid, Medicare, and all the now-denigrated hopes of the New Deal, the Fair Deal and the Great Society. We would even find that we could afford these decencies once we abandoned the notion of a revenue-neutral tax law that leaves unchanged the taxes paid by the various levels of our society.

Of course, it may be nearly impossible for us to make the necessary moves to break or even weaken the double bind. That is a political problem, and a public opinion problem, and it would be pretty to think that our politicians and our opinion makers will rise to the challenge. Yet, as matters stand at the moment, they are, with a few exceptions, part of the problem.

The New Leader

[1] In the original it was the “American Rifle Association.”  The editor has decided this was an error.


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