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By George P. Brockway, originally published April 30, 1990

1990-4-30 Bunk About Junk Title

A RECENT EDITORIAL in the New York Times opened with these words: “Michael Milken is a convicted felon. But he is also a financial genius who transformed high-risk bonds junk bonds into a lifeline of credit for hundreds of emerging companies. Snubbed by the banks, these businesses would otherwise have shriveled …There is no condoning Mr. Milken’s criminality. But if overzealous government regulators overreact by dismantling his junk-bond legacy, they will wind up crushing the most dynamic parts of the economy.”

1990-4-30 Bunk About Junk Michael Milken

This reminded me of a story about Henry J. Raymond, the Times’ founding editor and a member of Congress. One day he was prowling the House floor, trying to arrange a pair on an important upcoming vote, so he could return to New York on business. Old Thad Stevens (one of my heroes) asked, “Why doesn’t the gentleman pair with himself? He’s been on both sides of the question already.” Raymond’s successors seem to be straining to be on both sides of the junk-bond question.

For my part, I’m ready to grant that Milken is (or was) a crackerjack salesman and a mighty cute operator. But a financial genius he was not. Certainly he was not the first investment banker (what an impressive-sounding job description!) to sell carloads of not-of-investment-grade securities (see “Junk Bonds and Watered Stock,” NL, March 24, 1986). Nor is the New York Times the first journal to discover virtue in such super salesmanship. Nor, I daresay, is this the first time the Times itself has made such a discovery. Junk bonds are a slight variation on a very old theme, played at least as early as the Mississippi Bubble and the South Sea Bubble, both of which burst in 1720.

I’m also ready to grant that a lot of emerging companies have been snubbed by banks, yet I rather wonder why. Having paid casual attention to some banks’ advertising campaigns, I was under the impression that nothing was more likely to make a banker’s day than an opportunity to lend a helping hand to a bright but inexperienced young woman with a new idea for a flower shop, or to a similarly energetic young man eager to play a part in the great drama of American business. If the banks weren’t seizing these opportunities, what were they doing with the money they persuaded us to deposit with them?

Well, one thing they did was make Milken’s junk-bond business possible. They were no big buyers of junk bonds themselves (although the savings and loans snapped up about a tenth of those issued). Instead, they supplied bridge loans. When Robert Campeau made his deals to buy the Allied and Federated department store chains, he did not put up much cash. He counted on selling junk bonds, and he knew that would take a little while, especially since it was important to wait for the moment when the market was right. The banks loaned him the money to bridge that gap. After the bonds were sold, the banks would be paid off, handsomely.

The trouble was, it turned out that the junk couldn’t be sold, at least not at the necessary price; so the banks involved couldn’t be paid off. They were stuck with nonperforming loans, and Campeau’s stores took refuge in bankruptcy. There are recurring rumors that one of the banks is on the verge of bankruptcy, too. Junk bonds aren’t doing a job the banks are falling down on; the banks are in fact doing the job indirectly by making all those bridge loans. The banks are essential players in the junk-bond game.

Not surprisingly, the Federal Reserve Board (which is responsible for the availability of credit) doesn’t see a problem here, anyhow. The Board has just reported: “There is little evidence that a ‘credit crunch’ is developing; the majority of businesses say they have not seen any change in credit terms and have had no trouble getting credit.  Where credit tightening by banks and thrift institutions has been noted, however, it has mainly affected newer small businesses and the real estate industry.” A medical researcher would scorn that diagnosis as anecdotal. It doesn’t mean much to say a “majority” of businesses have no trouble with credit; 49 per cent could be having a lot of trouble.

Whatever the situation, we can be sure that the “newer small businesses” turned away by the commercial banks are also unable to find an investment banker ready to float junk bonds for them. The junk bond market being thin and precarious, a $3 million issue is about the smallest anyone will undertake. This assumes a company with upwards of $15 million or $20 million in annual sales. It is not the sort of stuff that made Milken notorious, but it is considerably more than can be expected from most newer small businesses.

A new small business has always had a tough time and always will, for the reason suggested by John Maynard Keynes. “If human nature felt no temptation to take a chance,” he wrote, “no satisfaction (profit apart) in constructing a railway, a mine, or a farm, there might not be much investment merely as a result of cold calculation.” Every new enterprise faces a high probability of failure.

Real estate, though, is a key industry. New Building Permits Issued is one of the “leading indicators” of the economy. No prosperity lasts long if real estate does not prosper. Moreover, we have great need of it. Not only do we have uncounted millions of homeless and ill housed; we are unable, in this supposedly family-oriented society, to provide enough affordable housing for young couples, employed and upwardly mobile though both partners may be.

Still, as everyone knows, real estate loans are prominent among the troubles of savings and loans and of commercial banks like the one pushed to the brink by the Campeau fiasco. Why do the loans go bad? Not because the housing is not wanted or not needed, and only partly because prices are too high. It is the high carrying charges that are to blame. Real estate loans go bad for the same reason junk bonds go bad. The interest rates are usurious. The usury affects real estate developers (another impressive job description) and contractors as well as potential buyers, and commercial construction as well as residential. High interest rates are a main factor of high real estate prices – and of high furniture and food and clothing prices, too.

Interest charges paid by the nonfinancial sectors of the economy are now in excess of 20 per cent annually. They were only 4.9 per cent of the GNP in 1950, rising to 7.2 per cent in 1960, to 10.1 per cent in 1970, and to 15.0 percent in 1980. These great leaps forward, culminating in today’s 20 per cent, didn’t just happen. They were carefully fine-tuned by the Federal Reserve Board.

Why did the Board members do it? They have certainly told us enough times. They’ve been fighting inflation. Unfortunately, the fight has not been remarkably successful. You can see that from the fact that the Consumer Price Index, which stood at 24.1 in 1950, reached 126.1 by last December-an increase of 523 per cent in the 40 years in question. (As I’ve remarked before, this figure seems to me too low; the food, clothing, shelter, transportation, education, medicine and entertainment I buy have all increased much more than that. But let that pass.)

1990-4-30 Bunk About Junk ChartHIGH INTEREST becomes a self-fulfilling prophecy. What is prophesied is the probable failure of the borrowers. The probability is a risk the lenders must protect themselves from. They protect themselves by charging even higher interest. That, naturally, increases the risk of failure.

Abstractly there is no end to the escalation of interest rates, for there is no end to the escalation of risk. Indeed, in a sort of Malthusian progression, risk increases geometrically while rates increase arithmetically. Actually, of course, the escalation does have an end, because potential borrowers are driven off. That may be prudence, but foreclosing production (or consumption) does not make for prosperity.

It all comes back to the nation’s monetary policy – its rates and rules and regulations. Deregulation, combined with tightened credit, results in escalation of rates. Escalation of rates discourages production and encourages speculation. Junk bonds are just one of the forms speculation takes. Junk bonds are the creation of the nation and of the Federal Reserve Board (which is, absurdly, an independent power), not of the genius of a super salesperson.

There is another issue here. The Times thinks that junk bonds are good because they force companies to become more efficient (and hence more “competitive”) in order to payoff the high interest charges. If this tale isn’t false, I wish somebody would cite a few shining examples.

There are certainly examples on the other side, Allied and Federated department stores being first among them. Both chains were long established. I know, because in the days of my youth I spent many gold-bricking hours waiting in their sample rooms to see buyers. They were also successful. They’re not successful now.

Furthermore, the usual test of efficiency is a fat bottom line, and the quickest way to fatten the bottom line is to fire some people and put a leash on the rest. But as John Kenneth Galbraith argued years ago in The Affluent Society, an economy that makes life unpleasant for people is something we don’t need. If the virtue of junk bonds is that they are a sort of handicap inspiring efficiency, why not try a different handicap by giving all the working stiffs a raise? It used to be said that management’s first test was meeting the payroll. Why wouldn’t meeting a bigger payroll be a better test than paying higher interest?

 The New Leader

By George P. Brockway, originally published March 19, 1990

1990-3-19 Don't Cash Your Peace Dividend Title

THE THING about the peace dividend is that there is not going to be one. At least not the kind you and I long for. Not this year, and probably not next.

1990-3-19 Don't Cash Your Peace Dividend Cheney

The reason for this is quite simple: We live in a historical universe, a world where one thing leads to another, a world of time. If we lived in a world of equilibrium economics, where everything happens in an instant, we could have any kind of peace dividend we liked, just by hitting the right computer keys to switch the accounts around. It’s different in the real world.

The arguments of Irving Kristol and William F. Buckley Jr. and the mysterious Mr. Z have nothing to do with our predicament. Even if Fidel Castro shaved off his beard and became a fellow of the American Heritage Foundation, we would still need the military-industrial complex for quite a while longer. The issue, however, is economic; it is not military.

As you may have heard tell, we are alleged to be in the sixth or seventh year of one of the longest peacetime economic expansions in our history. It is not much of an expansion, to be sure, for most people. The defense budget, though, has grown handsomely – it has almost doubled, and by doing so has kept the expansion alive. Of course, the expansion would have been just as vibrant if we had spent those extra billions on public housing or better schools or controlling acid rain, but what’s done is done.

Let’s look first at the military side of the military-industrial complex. Among the things Secretary of Defense Richard B. Cheney says we could perhaps do without are two Army divisions, or maybe three. With the various support troops, that could come to about 50,000 men and women – not enough to satisfy the most enthusiastic peaceniks, but a start, anyway. If deactivating the divisions is going to contribute to the peace dividend and save us some money, the 50,000 have to be taken off the Federal payroll. They have to be fired.

I don’t know what these young people signed when they enlisted. I do know that they are all volunteers, and that we spent (and still spend) a lot of money on TV commercials during sports broadcasts persuading them that the Army is a real fun place. (The old Army, the one I was in, was more accurately described by Elliot Nugent in John Van Druten’s The Voice of the Turtle. When Margaret Sullavan asked Nugent if he liked the Army, he replied, “I don’t think you’re supposed to like it.”) In any case, we have a moral, if not a legal, obligation to these volunteers. We can’t just toss them out on the street. Even if we could toss them out, and did, they would then become part of the civilian problem. We’d have to use the peace dividend we earned by firing them to feed, clothe, and shelter them until we somehow found a peaceful use for the skills they had learned jumping out of airplanes and firing assault rifles.

Of course, many of the young men and women in the services do have skills that are in demand. Military air traffic controllers, for example, and military police could fill a gap in the civilian world without breaking stride. The trouble is, we do not have enough money in the budget for more air traffic controllers, and there is certainly no money to share with the cities and states that are too broke to hire as many cops as they need. Again we find that the peace dividend is at best a swap (maybe a swap we ought to make), not something to put in the bank. Besides, if the military air traffic controllers all went to work for the Federal Aviation Administration (or whoever runs civilian airports), who would keep the Air Force from flying its planes into each other?

The problem with the industrial half of the military-industrial complex is a little different. The workers can be fired, all right – certainly those on the factory floor – and they will wind up on the welfare rolls. Their reduced incomes will also mean some hardship for neighborhood supermarkets, the trusting banks that hold their mortgages and the Federal Deposit Insurance Corporation. The complex’ corporations, by contrast, if experience is a guide, won’t suffer.

Once upon a time I edited a book by the late Blair Bolles called How to Get Rich in Washington: The Rich Man’s Division of the Welfare State. Bolles told how, at the end of World War II, some companies got more money for canceling contracts than they would have gotten for fulfilling them, how surplus truck spare parts were sold by the government for peanuts, and so on. General Dwight D. Eisenhower, then whistle-stopping through Pennsylvania during his first campaign, referred to the book glowingly (thus stimulating some welcome sales), until some spoilsport whispered to him that most of the rich men in question were Republicans. The bottom line (to preserve the metaphor) is that there’s no likely peace dividend here, either.

All that is, I think, understandable; yet common sense cries out that somehow life ought to be better without a cold war than with one. And not only better for us, but for everyone around the globe. Certainly this was a better world after World War II than during it or, for that matter, before it. Why then and not now?

Well, it’s no secret. There’s the Federal deficit, and the Federal debt, and now the states’ deficits. We can’t afford to shelter our homeless or to teach our children to read and write or to provide comprehensive health care as good as, say, ltaly’s, or a hundred other things. What’s possibly worse, we can cheer Lech Walesa‘s gruff courage in Poland until the rafters ring and can applaud Vaclav Havel‘s eloquence in Czechoslovakia with tears in our eyes, yet the only way we can think to help them is by reducing our aid to the Philippines or welshing on our obligation to repair the damage we did to Panama. We shrug when we read Zbigniew Brzezinski‘s plan for Eastern Europe because we know we’re too far gone even to debate it.

Everyone says we are in this mess because of the Federal debt. Leonard Silk said it in the same issue of the New York Times that carried Brzezinski’s Op-Ed article. But that’s nonsense. Last year’s deficit was $152 billion, bringing the national debt to $2,866 billion, which is equal to about 55 per cent of the GNP. On June 5, 1947, when Secretary of State George C. Marshall gave his famous commencement address at Harvard, the national debt was equal to about 115 per cent of the GNP. Then, as now, we had a President and a Congress of opposing political parties, and we had a national debt that was, proportionately, more than twice what it is at present. But we weren’t paralyzed.

In the four years from 1948 through 1951, the Economic Cooperation Administration gave away $13.2 billion. Most of this went to the countries of Western Europe, although the Soviet Union was invited to participate, and Czechoslovakia actually did join but was forced to pull out. Some of the money went to the Near East and Asia, too. While no one claims that the Marshall Plan was perfect in all respects, no one doubts that it helped Western Europe recover from the War, and very few doubt that it was crucial to the recovery. Today we have a similar opportunity to do some good in the world, and we’re acting like J. Alfred Prufrock.

The $13.2 billion the Marshall Plan cost us was 1.1 per cent of the GNP of those four years. What would 1.1 per cent of the GNP of the next four years be? In 1989 the GNP was $5,233.2 billion. If our famous expansion continues at its current rate, the GNP of the next four years will total approximately four and a half times that, or $23,549.4 billion. And 1.1 per cent of the astronomical sum would be $259 billion, or roughly $65 billion a year. As Senator Everett McKinley Dirksen would have said, that’s real money. It’s about 50 -repeat fifty – times what we’ll probably come up with. We’d be out of our minds to think so grandly, we are told.

YES, WE WOULD be out of our minds-but not because we couldn’t afford it. We could afford it. We could afford it, and we could balance the budget at the same time, for that’s what we did in 1948-51, back in the days of Harry S. Truman, the supposed spendthrift. What I’m afraid we are incapable of now is summoning up the necessary intelligence and the vision to tackle the job properly.

Although we have the successes of the Marshall Plan to show us what to do, and the disasters of the banks’ recycling of OPEC money (see” 100 Million Children Can Be Wronged,” NL, January 8) to show us what not to do, we also have an Administration that is at least the second most doctrinaire of our history. The Marshall Plan worked because it required each of the receiving countries to develop detailed recovery plans that fitted in with neighbors’ plans. The plans were theirs, not ours. Can you imagine the man who sent the Army and the Air Force into Panama standing for such namby-pamby stuff? He’s no wimp. The first thing he would do is send the Vice President to warn the potential recipients of our help against abortion and the capital gains tax.

Today there’s no danger of our doing anything like the Marshall Plan or the Brzezinski Plan. Gramm- Rudman-Hollings and President Bush’s lips will forbid it.

At best, we might pick up some crumbs at home. The Department of Defense is now eager to enter the war on drugs. It could be helpful. For my part, I’m skeptical. Recalling the old Army again, I remember that six months after Hiroshima morale was so poor that the more guards they put around supply depots and motor pools, the more hands there were to steal the stuff. It may be different with volunteer troops.

There are other things that might be done, especially by the Army engineers, who could work on playgrounds and airports and roads as well as on the dams and waterways they always handle. Tent cities could be quickly established for the homeless on vacant city lots. The Civilian Conservation Corps, one of the most successful of the New Deal programs, could be resurrected. In fact, the New Deal had a lot of ideas that might be suitable, as we used to say, for retreading.

Well, I dream. As I said at the start, I don’t expect that there will be a peace dividend. Not even a crummy one.

 The New Leader

By George P. Brockway, originally published February 5, 1990

1990-2-5 Social Gains and Capital Security Title

TRYING TO UPSTAGE New York’s Democratic Senator Daniel Patrick Moynihan, who wants to stop using the Social Security Trust Fund to reduce the budget deficit, the Bush Administration has concocted something it calls the “Social Security Integrity and Debt Reduction Fund.” This is supposed to do part of what the Senator is urging, but in 1993 instead of now. The Senator, of course, had a pithy comment: “It is well known that the Federal budget is always in balance three years from now. Never, however, now.” It is equally well known that the Administration’s sudden action is motivated by fear that Moynihan’s proposal of a tax cut for everyone will show up President George Bush’s proposed cut in capital gains taxes as the rich man’s scam it is.

1990-2-5 Social Gains and Capital Security Daniel Patrick Moynihan

Among the many things wrong with the Social Security tax, the two principal ones are, first, that it is regressive; second, that it is a tax on employment and both adversely affect the distribution of income. The regressiveness is generally recognized, except by those who have come to believe that all taxes must be regressive. Budget Director Richard G. Darman, for instance, claims the Moynihan tax cut would have to be replaced by some new tax that would fall on the same people and therefore be just as regressive. But that is nonsense.

Not very long ago the Federal income tax had a progressive schedule that exempted the lowest incomes and then ran from 11 per cent to 70 per cent. The top brackets were knocked off under Presidents

Richard M. Nixon and Jimmy Carter, with a 50 per cent maxitax substituted. For a brief period, a 35 percent bracket was added to the capital gains tax, making it somewhat progressive. This was soon dropped, unfortunately, and opportunities for tax shelters were so expanded that when they were largely eliminated by the current tax law it could be claimed that lowering the top bracket to 28 per cent or 33 per cent was revenue neutral. (“Revenue neutral” was Ronald Reagan’s educated way of saying Read my lips.”)

Some argue that while the Social Security tax is regressive as it is collected, it is progressive as it is paid out. The examples usually given are not encouraging. They show people who evidently lived in constant poverty, paid a high percentage of their minuscule incomes in taxes, and retired to receive benefits exceeding the taxes they had paid. But they were below the poverty level all their lives nothing to cheer about. Anyway, there is no reason on earth why Social Security should not be progressive when it collects as well as when it pays out.

Furthermore, from the point of view of the Social Security system, there is no reason to replace the Moynihan tax cut. When Bush says, “The last thing we need to do is mess around with Social Securiity,” he implies that the Moynihan tax cut would reduce benefits either now or in the future. I’m sorry to say that Senator Moynihan allows us to make the same inference when he quotes a newspaper’s opinion that using the Social Security surplus to balance the budget is “thievery.” I’ll grant that it is skulduggery, that it is intellectually dishonest and economically counterproductive and unjust. People are conned into paying an unfair tax and liking it. Still, it is not thievery. No one gets away with anything, except politically. Neither present nor future benefits are at risk-at any rate, no more at risk than they will be no matter what happens.

Budget Director Darman suggests that the Moynihan tax cut would make it necessary to raise taxes a couple of decades down the road to pay the baby boomers’ benefits as they reach the golden years. Yet taxes will have to be raised for that purpose then whether they are cut now or not. What is the Social Security surplus anyhow? It is not a bank vault stuffed with crisp Federal Reserve notes. It is simply some entries in a ledger showing that the Social Security Trust Fund owns some Treasury bonds.

Once the boomers’ benefits have to be paid, the Treasury will be asked to redeem the bonds for cash. The Treasury doesn’t have a bank vault full of Federal Reserve notes, either. To get the money, it will have to ask the President and Congress to use some of that year’s taxes to make good on the bonds. This will happen regardless of the size of the surplus, just as the benefits I am now receiving come out of current taxes, regardless of what and when I paid in.

People talk about Social Security as a sacred trust, and it’s pretty close to that. There is no doubt that millions of citizens depend on the benefits and are scared whenever they hear talk of changing them. Actually, changes are made every year as the cost-of-living allowance is adjusted, and there have been changes several times for other reasons. The present growing surplus is a consequence of comprehensive revisions made in 1983. Because I own some municipal bonds, half of my benefits are now subject to income tax. I didn’t agree to that; the President and Congress just hauled off and did it, and it costs me over $2,000 a year. I don’t object in principle, because I think all Social Security benefits should be taxable, and I think all municipal bond interest should be taxable. (But I do feel it is a mite unreasonable not to tax everyone who has one or the other. Why me?)

Besides being regressive, the Social Security tax is a tax on employment. It taxes workers for working, and it taxes employers for hiring them. In addition, because production is achieved solely as a result of work, the Social Security tax is a tax on production.

Yet the Chamber of Commerce and the National Association of Manufacturers and the Business Roundtable have not rallied around Senator Moynihan. That’s rather remarkable. Half of the Social Security taxes are paid by businesses, from the smallest to the largest. And the half paid by employees is a drag on business, too, because it contributes to costs. Moreover, the paperwork involved is bothersome and expensive (or so they used to complain).

It would appear that business associations are more interested in the capital gains tax, which is paid by their members as individuals, than in the Social Security tax, which is paid by the businesses they supposedly are acting for. Well, we shouldn’t be surprised. Very little of what is reported as business news has anything to do with producing goods or services. Takeovers, buyouts and the like make big headlines – and big changes (usually unpleasant) in the lives of workers and the cities they live in. If there is evidence of these shenanigans having a positive effect on the production of goods and services, it is a well-kept secret. Nevertheless, that is the sort of activity the President is eager to encourage by reducing the capital gains tax.

IRONICALLY, the same sort of activity would be encouraged should Senator Moynihan succeed in the second half of his ambition: to use the Social Security surplus to buy up all the public debt. The private funds released would, he reasons, be saved. Since it is a widely propagandized faith that our troubles are caused by our failure to save, the Senator imagines that prosperity would be around the corner.

I have previously discussed John Maynard Keynes‘ theorem that saving equals investment (see “Much Ado about Saving,” NL July 13-27, 1987). What I overlooked in my discussion (and what Keynes overlooked in his) is that “investment” covers many noble works and a multitude of sins. If you have saved some money and want to invest it, you can buy a factory (fixed capital), goods to sell (working capital), some common stock (claims on future profits), bonds (which will pay fees for the use of your money). You can also put your money where your mouth is in Las Vegas or Atlantic City or any of several state-run lotteries. You can buy land or a collection of beer cans or rare stamps or a painting by some pseudo-Monet. That is not all, but it gives the idea.

When you come right down to it, only the first two items (fixed capital and working capital) are investments certainly intended to result in production of additional goods and services. A company issuing stock gets its money from the first sale; no subsequent sales have any effect on production. In some instances, even the proceeds from the first sale may be intended merely to finance the purchase of another company, whose takeover may not in any way expand total production. As for the other kinds of investments, it is plain that they are speculations and have nothing whatever to do with production.

Consequently, although saving may equal investment, as Keynes argued and as most economists today agree, and although production requires investment, it by no means follows that all investments are productive of goods and services. In the present state of our economy, there are not enough sound productive investments for the money already available. The lack of attractive investment opportunities is frequently cited as the reason banks became involved in the Campeau fiasco. When productive investments are scarce, money runs to speculation, as it has been doing in a turbulent stream for the past decade.

In spite of the irrelevance of any hoped-for encouragement of saving, Senator Moynihan’s proposal offers a big step toward solving the fundamental problem of the maldistribution of income. If the Senator’s Democratic colleagues were as wise in statesmanship as he (and as astute politically), they would rally to his standard instead of sulking on the sidelines pretending to be “responsible.”

After all, a very strong case can be made for the proposition that the Reaganomic shift of the tax burden from the rich to the poor is largely to blame for the stagnation of the economy and (if you want to fuss about it) the escalation of the deficit. This case is, indeed, far stronger than that for the Bush myth that cutting the capital gains tax would stimulate productive investment and increase tax collections (see “George Bush’s New Trojan Horse,” NL, September 19, 1988). If the Democrats were not determined to self-destruct still another time, they might combine the Moynihan and Bush proposals in a single bill, and let the President worry about being “responsible” for a change.

 The New Leader

By George P. Brockway, originally published January 8, 1990

1990-1-9 100 Million Children Can Be Wronged Title

ONE HUNDRED MILLION children are expected to die unnecessarily in the brave new decade that lies before us. The estimate is, I fear, reliable, because children are dying–unnecessarily–at that rate now: 10 million a year, 27,000 a day, 1,200 an hour, 20-30 in the time it has taken you to read this far. They are dying that fast; and while many dedicated people are desperately doing what they can about it, we as a civilized and sophisticated nation are doing nothing substantial to help, nor are we likely to. In fact, we are more likely to hinder than to help.

Forgive me for emphasizing that these deaths will be unnecessary. There will be other deaths–perhaps more than 100 million–from accidents or incurable diseases or congenital disorders. But the 100 million I’m talking about will die from common diseases like measles that we have vaccines against, from infections that would yield to an inexpensive antibiotic, from all the intestinal illnesses that can be caused by bad water. Most of the deaths will occur in the Third World, especially Africa. (The United States of America will have a shameful percentage–the highest among the industrialized nations–but that’s another story.)

This is one problem that, in the cynical phrase, could be solved by throwing money at it. The medical supplies and medical knowledge are available. Money is lacking. All sorts of dramatic comparisons are possible. Only a few dollars a head would save most of the children. The total cost would be only a little more than the Third World is now paying for arms, and less than the First and Second World military squander in a week. The millions that were spent to rescue and televise three whales trapped in the arctic ice could have saved tens of thousands of children. The millions that are spent in Right of Life political campaigns and demonstrations could save millions of children who have the right but no possibility of maintaining it. And so on. All that misses the point

You and I assuredly could spend our money more wisely and more responsibly, but we are not directly to blame for these unnecessary deaths. Nor will our attending occasional charity rock concerts or across the continent do much to end the plague. No. Those 100 million children are doomed because our bankers “want to succeed, not just survive, and because we are too timid or too lazy or too ill-informed to call the bankers to account.

Thirty years ago the outstanding indebtedness of the Third World was $7.6 billion. It is now approaching (if it has not already passed as I write) 200 times that, or $1.5 trillion. It would certainly appear that the First World (including the World Bank, the International Monetary Fund, and private and government banks) has been pretty generous. No doubt there is some generosity lurking in this huge amount of money, but most of the sum comes from the great recycling bankers like to boast about.

The whole thing started with OPEC, which made the oil-producing countries very cash-rich very quickly. The banks saved them from the worry of spending this money in the nations where the sold the oil. They all–foreign banks as well as American–rushed in and offered the Arabs and their associates high interest rates for their deposits. Having attracted a share of OPEC’s money, the banks now had to complete the cycle and find someone to lend it to. The Third World was ideal for the purpose. The countries were many and small; the needs were great; the governments were weak; and many of the rulers were rapacious, almost as rapacious as the bankers.

In their fierce competition with each other the bank’s loan officers became salesmen. Often with the advice of experts from the World Bank, useless projects were financed–like the longest power transmission line in the world, with nothing to speak of at either end, or a billion-dollar state-of-the-art steel mill that was too sophisticated to handle the low-grade ore it was supposedly built to process. Skyscrapers were put up next to mud huts. Stately mansions were built for dictators. And a great many dollars went straight into numbered accounts in Switzerland. The bankers didn’t care, because the interest rates were high, and former Citicorp CEO Walter Wriston had convinced them that countries don’t go bankrupt.

The entire gaudy tale is told in Richard W. Lombardi’s Debt Trap: Rethinking the Logic of Development. When Lombardi’s book appeared in 1985, the Third World debt had not quite reached a trillion dollars. Since it is now a trillion and a half, it would seem that the First World has been sending the Third $100 billion a year for the past five years. Well, not exactly. In fact, hardly at all. For most of the $500 billion never went to the Third World. It never left the First World, because it never really existed. The bulk of that lovely nonexistent money is usurious interest that the Third World couldn’t pay, and that the banks, after profound consideration and solemn negotiation, have simply added to the principal. So things get steadily worse.

There is no lack of suggested solutions. When James A. Baker III was Secretary of the Treasury, he had the Baker Plan, which the press pronounced brilliant–and precisely nothing came of it. Nicholas Brady, his successor, brought forth the Brady Plan about a year ago, and the papers were filled with praise of it for a while, especially after Mexico and the banks accepted it, or said they did. The actual results haven’t been so newsworthy, but Teotihuacan wasn’t built in a day.

IN THE MEANTIME the International Monetary Fund and the World Bank haven’t been idle. They publish their ideas in Finance & Development, a quarterly magazine written in the sort of mush that might be produced by crossing a banker’s banquet speech with a TV talk-show on economics. The message is that the debtor countries have to reform. This is probably true, yet the required reforms are curious. They seem to have been cribbed from the Republican campaign platform, with perhaps a thought or two from Margaret Thatcher.

Thus in a recent issue we read, “A more active policy to reduce rigidities in the labor market and in wage determination will assume an increasingly important role in sub-Saharan Africa in order to promote both employment and economic expansion, particularly as the size of the skilled labor force increases and as the trend toward public sector employment is reversed.” Do I need to translate? (Wages are too high, and so are taxes. Can it be because of high wages that Africa’s per capita income is less than $425 a year?)

A few paragraphs further we learn that the banking system suffers from “insufficient supervision, and excessive administrative interference.” This would seem a dilemma unless you understand that the IMF should supervise, while the locals mind their manners. A little later we are told that “a more flexible, market-oriented interest rate policy will contribute to enhancing financial intermediation, improving resource mobilization, and increasing the efficiency of credit allocation.” Ex-Federal Reserve Chairman Paul A. Volcker couldn’t have put it better as he transformed us from the world’s largest creditor to the world’s largest debtor.

As a final example, consider this: “The objective will be to select revenue measures that enhance the elasticity of the tax system. The former will help improve incentives [and so on and on].” Since the gap between the rich and the poor is even greater in sub-Saharan Africa than in the United States, and the African rich are notoriously casual about paying their taxes anyhow, I leave it to you to imagine how “incentives” can be improved. The IMF insists on other “reforms”: currency devaluation to bring local money closer to overvalued dollars; privatization of the few existing public services; schemes to encourage foreign speculators by making it easy for them to pull out if the going gets rough; abolition of import quotas and most tariffs. (The United States is threatening sanctions against Nigeria for trying to conserve foreign exchange by banning the importation of wheat.) The IMF demands practically guarantee that the debts cannot be paid, but it is gravely averred that their purpose is to improve the prospects of payment.

I have left for last the most bitter irony of the situation. The Bush Administration has just done a good deed, reversing a niggardly Reagan policy. It has been quiet in the act, releasing the news in Nairobi, perhaps because it is bashful about being generous, or perhaps because the money involved is too little for White House Press Secretary Marlin Fitzwater to have noticed. At any rate, it has agreed to cancel $735 million in government debts owed us by 12 African nations. (Belgium, Canada, France, West Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom have already canceled the debts owed them.)

Will not this forgiveness save at least the children of the 12 nations? Sadly, there is no reason to expect it to, for there are strings attached to our generosity. Our cancellations will take place over the next two years, and only if the lucky 12 are good little nations and do what the IMF says. True to its primary mission of helping countries correct balance of payment deficits, the IMF will see to it that the First World banks (who have not canceled their loans) have first call on the foreign exchange that becomes available, and children will die for lack of medicine.

As Calvin Coolidge remarked about World War I debts, They hired the money, didn’t they?

 The New Leader

By George P. Brockway, originally published November 27, 1989

1989-11-27 What Happened to Jimmy Carter Title

James Mac Gregor Burns, Pulitzer Prize-winning biographer, historian, and political scientist, recently published The Crosswinds of Freedom, the third and final volume of his history of The American Experiment. The book confirms Burns’s standing as one of the foremost observers of the modern American scene.  It also carries forward the foreboding analysis he initiated in The Deadlock of Democracy: that American law, by creating a stalemate in politics, makes an almost impossible demand on-and for-leadership.

Jimmy Carter of course figures in Crosswinds, and reading about him makes you want to cry.  He was (and is) a decent man who apparently thought decency was enough, who had a talent for offbeat public relations, and who also had a propensity for shooting himself in the foot.  The prime example was the Iran hostage affair.  As Burns points out, it was Carter who kept that in the news, and it helped defeat him.  On the other hand, if not for Iran, Ted Kennedy might have been able to grab the Democratic nomination.  The economic situation was probably enough to finish Carter, no matter what.  In that connection I offer a footnote to Burns’s magisterial book.

During the last two years of Carter’s presidency we had double-digit jumps in the Consumer Price Index.  It is not clear why this happened.  The usual explanation blames OPEC.  What is generally forgotten is that OPEC blamed the strong dollar for its price increases.  For almost three decades – long before the advent of Paul Volckerthe Federal Reserve Board and other First World central banks had been steadily pushing interest rates higher, thus overhauling their currencies and raising the cost of the goods the OPEC members (which generally had few resources aside from their oil) bought from us.  Before raising their prices, OPEC tried for several years to persuade us to change our policies; but the Reserve plowed ahead, increasing the federal-funds rate from 4.69 percent in March 1977 to 6.79 percent in March 1978 and 10.09 percent in March 1979.

Finally, on March 27, 1979, OPEC oil went up 9 percent, to $14.54 a barrel, and three months later there was another jump of 24 percent.  In December OPEC was unable to agree on a uniform price, but individual hikes were made across the board. By July 1, 1980, the barrel price ranged from $26.00 in Venezuela to $34.72 in Libya.  Thus, in a little over a year, the cost of oil had more than doubled.

Yet petroleum accounted for less than 3 percentage points of the inflation. Moreover, in every OPEC year (and, indeed, in every year on record), the nation’s interest bill has been substantially greater than the national oil bill (including domestic oil and North Seas oil as well as OPEC oil).  If OPEC is to blame for the inflation of 1979-81, the Federal Reserve Board is even more to blame.

A major cause of the rest of it was hoarding, which resembles speculation yet differs from it in that real things are involved. During this period the stock market was quiescent:  The price/earnings ratio was lower than it had been at any time since 1950, and less than half what it would be in 1987 or is today [1989]. But hoarding, probably prompted by memories of the gas lines following the 1974 OPEC embargo, was heavy.

And not merely in petroleum; it extended to all sorts of commodities.  Manufacturers, wholesalers, retailers, and private citizens tried frenziedly to protect themselves against expected shortages. As often happens in such situations, the expectations were immediately self-fulfilled.  Confident that shortages would allow them to raise prices, manufacturers eagerly offered high prices themselves for raw materials they needed.  Maintenance of market share became an almost obsessive objective of business management.

In the book business, for example, “defensive buying” became common.  Bookstores and book wholesalers increased their prepublication orders for promising titles so that they would have stock if a runaway best-seller developed.  Publishers consequently increased their print orders to cover the burgeoning advance sales.  It soon became difficult to get press time in printing plants, and publishers increased press runs for this reason, too.  Naturally, everyone also stockpiled paper, overwhelming the capacity of the mills.  For all I know, the demand for pulpwood boosted prices of chain saws and of the Band-Aides needed by inexperienced sawyers.

Unlike speculation, hoarding has physical limits.  After a while, there’s no place to put the stuff.  And after a while, the realization dawns that a possible shortage of oil and gasoline doesn’t necessarily translate into an actual shortage of historical romances.  Moreover, the shortage of oil and gasoline, once the tanks were topped off, disappeared.  There was plenty of oil and gasoline; you just needed more money to buy it.  Hoarding-or most of it-slowed down and stopped.  Business inventories declined $8.3 billion in 1980.  But prices didn’t come down.

All this time Jimmy Carter was not idle, for he prided himself on being what we’ve come to call a hands-on manager.  As early as July 17, 1979, he got resignations from his Cabinet members and accepted several, including that of Treasury Secretary W. Michael Blumenthal. To fill the Treasury slot, he chose G. William Miller, chairman of the Federal Reserve, and that opened the spot for Paul A. Volcker, who was nominated on the 25th amid cheers on Wall Street.  At his confirmation hearings on September 7, Volcker revealed the conventional wisdom to the House Budget Committee.  “The Federal Reserve,” he testified, “intends to continue its efforts to restrain the growth of money and credit, growth that in recent monhts has been excessive.”

True to Volcker’s promise, on September 18 the Reserve raised the discount rate from 10.5 to 11 percent; and then, less than three weeks later, from 11 to 12 percent.  An additional reserve requirement of 8 percent was imposed on the banks.  More important, a fateful shift to monetarism was announced.  The Reserve, Volcker said, would be “placing greater emphasis on day-to-day operations of the supply of bank reserves, and less emphasis on confining short-term fluctuations in the Federal funds rate.”  On February 15, 1980, the discount rate was set at 13 percent.

Despite this conventionally approved strategy, prices kept going up.  In January and February, the inflation rate was 1.4 percent a month, or about 17 percent a year.

Again President Carter took action.  On March 14, 1980, using his authority under the Credit Control Act of 1969, he empowered the Federal Reserve Board to impose restraints on consumer credit.  It immediately ordered lenders to hold their total credits to the amount outstanding on that day.  If they exceeded that amount, 15 percent of the increase would have to be deposited in a non-interest bearing account in a Federal Reserve Bank. The banks and credit-card companies, adopting various procedures, hastened to comply.

All that was good standard economics.  If inflation is caused by too much money, the obvious cure is to reduce the amount of money.  President Carter and Chairman Volcker were in complete agreement.

The new policy had an immediate effect that, surprisingly, surprised the president and the Chairman.  Not only did sales slow down, as expected, but profits did, too-as should have been expected.  The automotive industry cried hurt almost at once.  General Motors reported an 87 percent drop in profits, and Ford and Chrysler reported losses.  The housing industry saw trouble coming as well.  It even appeared that consumers were taking seriously their leaders’ pleas to cut down consumption:  Some credit-card companies found their cardholders responding to restrictions by borrowing less than now permitted.

Alarmed by these and other complaints, the Reserve relaxed the new regulations after two and a half weeks, cut the reserve requirements on May 22, lowered the discount rate on May 28, and abolished the credit controls on July 3, whereupon the president rescinded the Board’s authority to act.  It was all over in three and a half months, in plenty of time for the nominating conventions.  Everyone pretended to be pleased with the result, and in fact the inflation rate did fall, but not below the double-digit range.  Still, Carter had shown that he could “kick ass” (his phrase), so he won renomination.  His hope of reelection, though, was dashed.

As Jimmy Carter moved back to Plains, Georgia, he must have wondered why inflation remained high.  The OPEC turbulence had subsided.  Hoarding had largely stopped.  Cutting consumer purchasing power had brought on instant recession.

Conventional theory has taught us to look at the money supply, or the budget deficit, or the trade deficit in seeking an explanation for inflation, since it is supposed to follow when these are high and going up.  Well, M1, the measure of the money supply the Federal Reserve claimed to control, went from 16.8 percent of GNP at the start of Carter’s term down to 15.3 percent at the end.  Carter’s reputation as a spendthrift notwithstanding, the budget deficit, again as a percentage of GNP, was lower in every one of his years than in any one of Ronald Reagan’s.  As for international trade, the deficit on current account was four and a half times greater in Reagan’s first term than it was under Carter, and of course in the second term it pierced the stratosphere- where on a clear day it can still be seen.

Carter’s mistake- and the mistake of the American people-was the common one of simply accepting what someone says he or she is doing.  Everybody, including the Federal Reserve Board itself, believed its contention that it was fighting inflation by encouraging the interest rate to soar.  Meanwhile, in the last two years of Carter’s term the nation’s interest bill went up 51 percent, although the outstanding indebtedness increased only 23 percent.  In addition to the fall in M1 that we’ve noted, the board increased the federal-funds rate 68 percent and the New York discount rate 59 percent.  In 1951 (when the Reserve started its well-publicized wrestle with inflation) it took only 4.59 percent of GNP to pay all domestic nonfinancial interest charges.  The Reserve pushed the rate up, in good years and bad, until it stood at 15.04 percent at the end of Carter’s term. (It’s much higher now [in 1989].)

It is generally recognized that Volcker slowed inflation (he obviously didn’t stop it) by inducing a serious recession, (if not depression) in 1981-83. Putting aside the question of whether causing so much grief was a noble idea, we may ask how pushing the interest rate up caused the recession.  The answer, of course, is that it made goods too expensive for most consumers.  Standard economics, though it pretends the consumer is supreme in the marketplace, perversely believes that consumption is a bad thing.

Goods became unaffordable for two reasons.  On the supply side, interest is a cost of doing business; so the prices businesses charged had to cover all the usual costs, plus the cost of usurious interest.  On the demand side, interest is a cost of living; so the prices consumers could afford were reduced by the interest they had to pay.  Usurious interest pushes prices up and the ability to pay down.

Had the interest rate not risen, wages would probably have risen.  Unemployment would certainly have fallen.  More people could have bought more things.  More producers could have sold more things.  Prices might have gone up until could no longer afford to buy; but if so, that stage would not have been reached so quickly or so inexorably as with usurious interest.  And those who had money to lend would have been worse off, unless they were wise enough to invest their money in productive enterprise or spend it on consumption.

Would instant Utopia have been achieved?  Of course not.  The point is that the conventional policies of Jimmy Carter and Paul Volcker were good for lenders but bad for everyone else

The tests of a “sound” economy that people still chatter about-a stable money supply. A balanced budget, and a favorable trade balance-all were worse under Reagan than under Carter.  Inflation was worse under Carter-and defeated him-because the interest rate was higher.  Professor Burns rightly fears that we will not find leaders able to organize power to handle the usual social and international problems.  I fear that we are even less likely to find leaders capable of understanding and leading us out of the slough of conventional economics.

The New Leader

By George P. Brockway, originally published October 30, 1989

1989-10-30 Polution - Going Once, Going Twice.... Title

WE ARE SUPPOSED to cheer the Bush Administration’s clean air bill, which is intended to cut sulfur dioxide emissions  in half by the year 2000 and to do various other things. Well, I do cheer. Anything at all is better than what we’ve had for the past decade.

But there is a catch here-as there seems to be to every kinder, gentler proposal. Pollution control is going to be turned over to the economists, led by Michael J. Boskin, chairman of the Council of Economic Advisors; and the economists are going to push for as silly an idea as any the profession has spawned in this century. Unfortunately, this idea of theirs is not simply silly; it is, in a word, uncivilized. They should be ashamed.

The scheme is to establish a market for licenses to pollute-or, as I have sometimes heard it delicately put, for effluent rights.

This scam has been around for several years (you might even have read about it in this space as early as December 28, 1981). The major premise is that enforcing antipollution laws is expensive. The minor premise is that the free market can do everything. The conclusion is that rights to pollute should be auctioned off to the highest bidder (an auction being erroneously viewed as the ideal market), then the government could use the money to clean up the messes the polluters bought the rights to make. Not  only that, but the rights could be transferable- sort of like taxi medallions and the hope is that they would be traded on one of the exchanges, even that a futures market could be developed. And not only that, but environmental groups could bid for the rights and thus render them more expensive for polluters. If it weren’t a restraint on trade, environmental groups might go ahead and buy some of the rights and keep them off the market, thereby actually stopping the corresponding pollution. The mind boggles.

Anyone who has had the slightest connection with government can foresee dozens of practical difficulties with the scheme, especially if local governments are involved. I’ll take up a couple of them later. For the moment, let’s look warily at the theory.

The first thing about the free market is not just that it can’t do everything; it can’t, by itself, do anything. It can’t even set itself up and maintain itself. As Leon Walras, patron saint of General Equilibrium Analysis (a.k.a. the theory that The Market Knows) wrote when his followers weren’t looking, “[Production in free competition, after being engaged in a great number of small enterprises, tends to distribute itself among a number less great of medium enterprises, then among a small number of great enterprises, to end finally, first in a monopoly at cost price, then in a monopoly at the price of maximum gain.(Walras’ emphases.)

Yet antitrust laws are so difficult to write and so expensive to enforce that Milton Friedman, our contemporary conservative guru, throws the whole thing over. We act as if we had perfect competition, he says; therefore we do. On the same reasoning, we act as if pollution weren’t worth taking much trouble about; therefore it isn’t.

Once you start thinking this way, there is not much left for government to do; and if the voters get excited about pollution or whatever, you can pacify them by holding an auction. It would seem, for example, that the current fuss over the best way to approach the drug crisis is misdirected. It would be more economical to auction off the right to sell crack on the streets, possibly restricting the bidding for certain prestigious posts (like Official Lafayette Park Purveyor of Props for Presidential TV Shows) to pushers who promise to shave and wear a jacket and tie, even in summer.

Closer to pollution rights would be adulteration rights. The Pure Food and Drug Laws are expensive and difficult to enforce, too, and require lots of enterprise- stultifying paperwork. Why not auction off adulteration rights? We might have separate auctions for the right to mix sawdust with flour, for the right to let a processing plant get a teeny bit filthy, and for the right to use handy carcinogens without telling anybody, and without being sued if found out. This last auction would have to be carefully handled to avoid adverse publicity for the winners, which might have a depressing effect on their sales, and hence on the GNP.

To be sure, carcinogens are life-threatening. But so are air and water pollution. And so, for a different sort of example, is jogging in New York’s Central Park at night. As I suggested here eight years ago, why not admit that taxes would have to go up if Central Park were made safe? The economical solution would be to auction off mugging rights. Wilding rights might go for a little less per participant because of economies of scale. Also, we’ll be better able to compete internationally if we teach these youngsters how the free-market system works-or anyway how economists think it works.

On the other hand, the knock-down price (no pun intended, of course) for the right to commit mayhem and murder might be a bit higher. One would not want to set the price too high, because there wouldn’t be any bidders, and there would be no money to pay for the homicide squads needed to catch cheaters who didn’t pay for the rights. Some of these costs, though, could be defrayed if cops wore little logos advertising their shoes and underwear, like tennis professionals.

The economists are too convinced of their own cleverness to notice, but at this point prospective polluters would see a fault in the scheme and might hesitate before putting in their bids. One of them, a veteran of the antiwar demonstrations of the’ 60s, might persuade the others as follows: “Suppose they held an auction for pollution rights and nobody came. Then there would be no money to enforce antipollution laws or to clean up the messes. There would not even be any laws, because the Environmental Protection Agency wouldn’t have enough money to write the appropriate regulations. Without any laws or enforcement, who cares about pollution rights? They’re free. Only a sucker would pay for them.”

All kidding aside, it is clear that the economists’ scheme is self-contradictory. It promises to get rid of bureaucratic interference with the free-market system. Visions of balanced budgets dance before the professors’ eyes, and of the fantastic growth in “productivity” that would result from not wasting time and money on nonessentials (“externalities,” economists call them) like clean air or pure water. Yet these visions cannot be realized unless the Environmental Protection Agency, or some surrogate, stands ready to lower the boom on polluters who refuse to play by the new rules. No one is going to pay to avoid what does not exist.

Furthermore, without continued enforcement after the auctions you can bet that crafty polluters here or there would buy certain rights and then exceed them. The malefactors would have a leg up on their competitors and might well win awards for competing internationally. In short, the economists’ scheme would cost as much as ordinary control but would be far less effective. (I’ll admit it would give brokers another “product” or two to trade on the exchanges.)

AS I MENTIONED earlier, there are some practical difficulties, particularly if, instead of nationwide auctions, local options are recognized. (After all, who knows the environment better than those who live in it?) Suppose you have a steel mill on the shores of Lake Superior and you want to pollute the lake. Fine. We’ll have an auction. What are we offered? Since no one else needs the rights, how about a dollar?

I’m not forgetting the busybody (and probably elitist) environmental groups. They’re spread pretty thin, however (an awful lot of their budgets goes to sending me junk mail), and can’t all enter every auction. They take turns. The steel mill, meanwhile, provides most of the employment for our Lake Superior town, and the mill’s conglomerate owner threatens to shut it down. So the town enters the bidding, swamps the environmentalists, and wins, whereupon it gives the pollution rights to the steel mill for free. Everyone is happy, except for the environmentalists and the fish and the people who drink lake water instead of beer.

In most towns or regions there may be more than one polluter seeking the rights, and naturally they will compete vigorously for them. It’s the American way. Once upon a time I lived in New Jersey, where there are God knows how many separate municipalities, and almost all of them hire scavenger services. In each county there are several competing scavengers. At any rate, they all submit bids for every municipality’s business.

Much to everyone’s surprise, the same fellow is low man in the same towns year after year, while other players always win in their usual towns. (Economists think they know about this, too. The scavengers’ “experience” enables them to avoid the “Winner’s Curse,” which is the result of bidding too low.) Occasionally a feud breaks out, and a few truly surprised towns find themselves opening sealed envelopes containing very low bids. The feuds don’t last long.

It doesn’t take much imagination to visualize something similar with pollution rights, especially since the oil industry (one of the most stylish polluters) is familiar with a practice that looks to suspicious souls like collusive bidding. Offshore oil leases are expensive and risky, moreover, prompting oil companies to form syndicates to spread the risk. Syndicates would also appear to narrow the bidding.

What I’m afraid it all comes down to is that today’s economists don’t understand government. They don’t believe in government. Although they would quickly and nervously deny it, they are like Karl Marx in thinking that the state should wither away because all questions are economic questions. They get irritated when people object to cheap imports that take away their livelihood, or when unions strike to prevent wage cuts, or when attempts are made to use taxes to distribute income a little more equitably.

It further has to be said that economists do not take the general welfare seriously. They certainly don’t take the environment seriously. They don’t really believe in the greenhouse effect, or acid rain, or the consequences of PCBs in drinking water, or the possibility of another, closer Chernobyl. They can’t possibly understand these matters and make their fatuous proposals about auctioning off the right to pollute.

 The New Leader

By George P. Brockway, originally published September 18, 1989

1989-9-18 Something Seems Unbalanced Title

I  HAVE WAITED in vain for editorial comment on one of the most astounding public pronouncements of recent times, prompted by the news that Michael R. Milken had made $550 million selling junk bonds in 1987. I quote in full: “Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working.”

Indeed it does. My sentiments exactly. Well, not exactly, because I don’t think the news raised questions. It answered them, affirmatively and emphatically.

The astounding thing about the pronouncement, however, was its pronouncer: David Rockefeller. What could possibly have given him reason to suspect that there is something unbalanced in the way our financial system is working? Has it ever occurred to him to wonder whether his extraordinary inheritance raises such questions?

This column, I should hasten to note, is not going to be about David Rockefeller (even though I admit to a personal grudge against him). But before going to other matters, I would point out that he was one of the leaders in pressing impossible loans on eager Latin American republics, that he denied loans to New York City to do so, that he has not taken a lead in repairing the disasters his misjudgment (speaking mildly) has created, and that, to boot, he pressured Jimmy Carter into his misadventures (again speaking mildly) with the late Shah of Iran.

What interests me now is the general question of the distribution of income and wealth in this country, and in the world. This is a problem that is with us always. A couple of recent learned journal articles illuminate different aspects of it.

The Winter 1988 issue of The Journal of Economic Perspectives has an article by Professors Samuel Bowles, David M. Gordon and Thomas E. Weiskopf, who tell us that “Conservatives have been waging an economic revolution since the late Carter years,” and ask, “Have they succeeded?” The professors have many strings to their bow, but the following one in particular caught my ear: “The net effect of the low levels of capacity utilization and the high real interest rates which prevailed over the 1979-1987 period was to dampen investment even in spite of the beneficial effects that slack labor markets and the high demand for the dollar had on the power of capital to strike favorable deals with workers, citizens’ and the rest of the world.”

Our authors support their mildly class-conscious conclusion with an ingenious display of statistical analysis that is obligatory in contemporary professional economics. But it seems to me to stand very well on its own.

Ironically, the conservative program was (and is) class-conscious, too. The conservative aim was to get government and labor off business’ back. It took more than firing the air-traffic controllers to weaken labor; it took the threat and actuality of unemployment. But unemployment means slackened demand, which means constricted sales, which means constricted profits. It also means reduced tax collections and increased welfare costs. Entrepreneurial capital shot itself in the foot.

The authors try to be, so to say, conservative in the inferences they draw. They allow it will be a while yet before we know the outcome of the Reagan-Volcker revolution. Since I have no academic reputation to protect, I shall rush in and announce that the conservative revolution is and always will be a failure, except in the spirit of the old Peter Arno cartoon with the caption, “Let’s all go down to the Trans- Lux and hiss  Roosevelt.”

1989-9-18 Something Seems Unbalanced David Rockefeller

It is easy enough to get labor off your back, but you are liable to rip your shirt in the process. Likewise it is easy to get government off your back, but business’ back would atrophy without the exercise of filling the orders of big government. Big business needs big markets and big government. The conservative program is self-contradictory.

The trouble is that millions of people are hurt by the attempt to make the program work. A measure of how much the economy has suffered is provided by an article in the Spring 1989 issue of the Journal of Post Keynesian Economics, where Professors John F. Walker and Harold G. Vatter ask, “Why has the United States operated below potential since World War II?” We are told at every hand that we never had it so good, that the present “recovery” is the longest on record, and so on. Yet unemployment has been high for decades, utilization of our industrial plant has been low for decades, and our cities and infrastructure are decaying. Why have we get-up-and-go Americans done so poorly?

The villain, again, is the conservative theory, but this time there is no need to suggest a mean elitist or anti-labor spirit on the part of conservatives. They’re wrong, regardless of their intentions. Walker and Vatter consider the conservative theory that prosperity depends on investment and contrast it with a theorem independently developed by Roy Harrod and Evesy Domar some 40 years ago. The standard conservative theory has dominated American economic policy, even  in Democratic years, ever since the end of World War II. In accordance with it we have steadily cut taxes, especially corporation taxes, and have enacted many sorts of incentives to investment.  Nevertheless, investment has fallen in relation to GNP.

The reason for the fall is that investment has two effects. The first, which conservatives rely on, is that it creates jobs. The second, which the Harrod-Domar theorem emphasizes, is that it makes goods. Now, you’d think that the making of goods would itself be good. The catch is, the new industry can make goods faster than the new workers can consume them. Moreover, we already have the capacity to make more goods than we use-not more than we might use, but more than we can afford to buy.  Since we can’t afford to buy them, business can’t afford to make them; consequently investment languishes, regardless of incentives, and so does employment.

Keynes‘ observation that an economy can save itself into recession does not merely apply to one phase of the business cycle; it describes a general condition of modern industrial production in a market economy. The constant danger is that the demand side will be inadequate to consume what the supply side can produce.

In our current pallid recovery, with bankers becoming alarmed at the slightest improvement in business, big government has taken up some of the slack. It could have taken up more, and should have done so, and will have to do so in the future. But unless we want to go all the way toward some form of socialism (here I’m speaking in my own voice and not that of the articles referred to), we’re going to have to make a serious effort to redistribute income and wealth.

IT IS OFTEN said that the gap between the rich and the poor is not really significant because taking from the rich and giving to the poor would not give the poor a great deal more than they have now.  This may once have been true, but it is far from the truth today. In 1987 the total of personal incomes in the United States was $3,780 billion. If this sum had been equally divided among the 65.1 million American families, every family would have had an income of $58,065. Actually in that year only 16 per cent of families had incomes that large (and 11 per cent of families were below the poverty level).

The knee- jerk response to the idea of any leveling of income is that it would so sap the incentive of the wealthy that they would quit working, depriving the nation of the leadership of its best minds, and generally reducing the GNP.  Nobody really believes this. Common knowledge is against it, and there are no statistics to support it. Taxes have been raised from time to time, but no one has ever tried to prove that production has fallen as a result. Indeed, Walker and Vatter show that we have, in general, been most prosperous in periods of highest taxation.

Very few of the really important movers and shakers of the world have been primarily moved by lust for money. Lust for power or popularity, perhaps; lust for money, no. A financial incentive is certainly prominent in the case of wheelers and dealers of the first rank (not to mention scoundrels), but a wise society does not devote much effort to encouraging such people. It is enough to tolerate them. There are plenty of trustworthy and competent people ready to step into the jobs of those who call it quits.

In any case, the incentive argument proves too much. If people really responded primarily to money, think of the great leap forward that would follow from raising everyone’s realistically attainable income to $58,065! Eighty four per cent of the people would have their incentive stimulated; only 16 per cent of the people would have theirs sapped (most only marginally), and a considerable portion of that 16 per cent did not work for their money, anyhow. Like Rockefeller, they got it in the good old-fashioned way: They inherited it.

Hardly anyone proposes absolute equality of income, or anything closely approaching it. But it would not be difficult to suggest reasonable guidelines enforceable by steeply progressive income and inheritance taxes. We can say, at one end, that everyone’s self-respect depends on making a contribution to society-that is, on having a paying job. At the other end, we can say that no one is essential and deserving of unlimited income. Our aim should be to bring the ends steadily closer together.

New York’s Democratic Senator Daniel P. Moynihan suspects, and he is in a position to know, that conservatives deliberately let the budget deficit grow in order to make politically difficult or impossible the expansion of social welfare, ecological and other programs designed to do good and to improve the quality of life. In this conservatives prove themselves not only mean-spirited but foolish. The quality of life they deny includes their own.

 The New Leader

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