On the Matter of Consumption

By George P. Brockway, originally published April 4, 1988

1988-4-4 On the Matter of Consumption Title

 

 

THREE AND A HALF years ago, in THE NEW LEADER of November 26, 1984, to be exact, I made a prophecy that is remarkable among my prophecies in that it has come true. I said we would “start hearing a lot more about the value-added tax-how it is widely used in Europe, how invisible it is in comparison with the sales tax, how comparatively easy it is to collect, how it taxes consumption rather than production …. What we get won’t be called a value-added tax, but what’s in a name?”

Well, the name that seems to have been settled on is consumption tax, and the chorus in support of it is tuning up with a vengeance. For some reason no one bothers to explain, the stock market crash of last October 19 is thought to have provided a suitable occasion for taxing consumption. Everyone from Pierre DuPont to Peter Peterson has solemnly warned us that Wall Street won’t be satisfied with anything else. (If you asked me, I’d say Wall Street has a problem satisfying the rest of us. Who laid the egg, anyhow?)

As a distinguished example of consumption- tax thinking, I cite Robert M. Solow of the Massachusetts Institute of Technology, who gave the following advice to the next President in a recent issue of the New York Times: “If there is no recession, the first order of business is to make a start on reducing the deficit…. And [the President] should do it by increasing taxes on consumption, not investment …. Because a consumption tax means spending will fall, he must do something to offset that like lower interest rates.”

Now, Solow is not a fool; I don’t think you get to be an MIT professor by being a simpleton. Nevertheless, and putting aside a question of fact (hasn’t a “start on reducing the deficit” already been made?), I ask you to look closely at his two-step policy recommendation. First step: He would tax consumption. In other words, he would reduce the standard of living of the middle class (the poor will presumably not be taxed, at least not much, on necessities, which is what they mostly consume; and the rich won’t be much bothered). Second step: He would lower the interest rate. If the middle class stops consuming there will be a depression, so he would keep them consuming by making it easy for them to borrow. (When liberals propose lowering the interest rate, Wall Street insists that only the impersonal unregulated market can do it, but let that pass.)

Let us suppose Solow’s scheme works. What will the next President have accomplished? (1) The deficit will have been reduced, at best, by the amount of the consumption tax. (2) Since nothing will have been done to stimulate the economy, it will, at best, continue to languish in its present “prosperity.” (3)

Some indebtedness will have been shifted from the nation as a whole to the middle class as individuals. (4)The money borrowed by the middle class will have been lent them by the rich, whose extra dollars will have been left untaxed to better enable them to make this “investment.”

Solow’s scheme is, as the mathematicians say, elegant in its simplicity. But I don’t think it will work, at least not if its purpose is anything other than a transfer of wealth from the middle class to the already wealthy. The scheme would bring about such a transfer; there’s no doubt of that. There would also be some leakage, as the economists say. Because the middle class’ spending money will in effect be taxed twice (once by the consumption tax, then by the interest paid on the borrowed money), spending will be reduced after all, and the proceeds of the consumption tax will be correspondingly reduced. Depending on the new interest rate, the reduction in spending could be very large-large enough to bring on another recession (if you’re timid about saying “depression”).

Now I ask: We already did this, didn’t we? Do we have to go through it all again? We did it in 1981, and we got the depression (I’m not afraid to use the word) of 1982, not to mention the deficit everyone talks about. Those whose attention span is very short may have forgotten about the Laffer Curve, which purported

to show that you could increase tax collections by reducing the rates, and the Kemp- Roth tax bill, which promised to increase investment by cutting taxes, especially of the rich. Those were the heady days of the supply-side theory, but investment didn’t respond as promised. What actually happened was that tax collections fell far below expectations, creating the mega deficit that was covered by bonds paying usurious interest rates, purchased by the rich with their tax-cut windfalls. In effect the rich were given the bonds, just as Solow’s scheme would give the rich the promissory notes of the middle class. It is deja vu.

 Indeed, it is, if Yogi Berra will pardon me, deja vu all over again: The Great Depression was also preceded by tax cuts for the rich. I do not think this is mere coincidence, or mere post hoc, ergo propter hoc. For I am persuaded that there is a fatality about economics that in the end chokes any society making too great a distinction between the rewards of the favored and of the disfavored. It is a commonplace of legal theory that a law must not only be just but also be seen to be just. It is the other way around with economics, where it is more important for a policy to be fair than for it to be accepted as fair. This is particularly true when it comes to policies determining the distribution of a society’s rewards.

As near as we can tell, the Roman mob was appeased, if not altogether satisfied, by bread and circuses; but in the imperial city alone, upwards of 150,000 lived on the dole, while uncounted thousands waited upon the whims of the favored few. Labor power is the ultimate power-and Rome threw it away. In 1928, a year we look back on as a period of idyllic prosperity, almost 60 per cent of American families lived in poverty; then calculated at less than $2,000 a year. Now we have an underclass, and we have a large class of the underemployed. This costs us, and may finally destroy us; yet it would seem that substantial majorities of American voters have been satisfied with current policies. The policies are seen to be fair, but their actual unfairness may be our undoing.

The rich have always had a problem knowing what to do with their money. In times past it could always be invested in land and in improvements thereon. The improvements, whether in the shape of stately homes or scientific agriculture, were craft industries. Each staircase or mantelpiece designed by Grinling Gibbons and carved by him or his apprentices was the subject of an adhoc contract between him and the lord of the manor. There certainly was demand for his work, and this certainly affected how much he could charge; he did not produce for a market, however, nor was he himself an important outlet for what was produced on the estates where he worked.

The problem of today’s rich is different. In the first place, they have not become rich by investing in land-speculating in land, maybe, but accumulating rents, no. In the second place, their riches are vastly greater than the sums necessary to recreate a Chatsworth or a Montacute, should their fancy happen to take that turn. In the third and most important place, industry today is built on mass production: Giant corporations serve giant markets.

The giant markets are crucial; without them the giant corporations cannot exist. Giant markets are masses of people willing and able to buy. Such masses need to include the employees of the giant corporations, and the employees are able to buy only to the extent that they are well paid. Henry Ford talked as if he understood this, but even his shockingly high wages were not enough to raise his employees out of the ranks of the working poor. In any case, his has remained a minority view among American businessmen. The majority view, in recent years embraced by the electorate at large, is that consumption should be curtailed and investment should be encouraged.

IRONICALLY, consumption has nevertheless expanded as the banks have discovered profits to be made in personal loans at usurious interest rates. There are limits, though, and they have been reached in many an industry. Automobile companies struggle to maintain their share of the market, because the market is limited, and because the industry’s present capacity is much greater than the market. Steel mills, all over the world, are closed down or running at a fraction of capacity. Agriculture produces more than could be consumed even if somehow the idiocies that permit widespread starvation could be overcome.

The inevitable consequence of limited markets is limited opportunities for productive investment. Hence, as we’ve remarked here before, the rich have more money than they know what to do with, and so do the massive pension and charitable funds. Besides, the glittering gains from speculating in a churning stock market are enormous. In the eventual crash the too-much money of some of the rich and of some of the funds disappears; on October 19 perhaps as much as a trillion dollars disappeared forever. The Reagan revolution created a deficit to give this money to people who couldn’t use it.

The appalling fact is that practically everyone seems to want a repeat performance. It would appear that the first eight months of 1987, when the Dow went from under 2,000 to over 2,700, was the happiest period in millions of tawdry lives. Every day the “financial” news was a joy. Individuals with a few shares of a mutual fund and college presidents with great fortunes in their care were equally delighted. Economists, who gave the stock market a prominent place in their models, looked upward. Brokers stood tall. Arbitragers stood taller. Tens of millions more, although not directly involved, shared in the euphoria.

Despite the shock of October 19, these people seem determined to do it again. More stridently than ever the claim is being made that the stock market is both the heart blood and the brains not only of the national economy but of the whole free world; that our liberty as well as our prosperity depends on its ineffable wisdom; that any attempt to control it would, in the tasteless cliché, throw out the baby with the bath water.

Worse, we hear again the cry to tax consumption, with the deliberate purpose of destroying the mass market modem industry depends upon-which would foreclose rational investment opportunities and bring on a new fever of speculation. Some of this can be explained as simple greed. But beyond that there is a pathological psychology whose etiology I can’t even imagine.

The New Leader

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