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By George P. Brockway, originally published October 9, 1995

1995-10-9 Japan Does It Again TitleTHE TEXT for today’s lesson comes from the second act of The Mikado, where Ko-Ko, Nanki-Poo and Yum-Yum sing in unison, “Here’s a pretty how-de-doc!”

For Japan has done it again. Last year

I reported in “Unemployment Japanese Style” (NL, May 9-23, 1994) how Japan has given the lie to the most awesome and awesomely barbarous-notion of American economics. I mean the theory of the “natural rate of unemployment,” or, in proper academic gobbledygook, the “non-accelerating inflation rate of unemployment,” or, in a fashionable acronym, NAIRU.

As you will remember, NAIRU says that if unemployment falls below a certain level, inflation will accelerate without limit until the central bank (a.k.a. the Federal Reserve Board) raises the interest rate high enough to cause a recession. In the United States, the “desired” rate of unemployment is said to be about 6 per cent. At present it is hovering around 5.5 per cent, and the inflation rate is about 3 per cent. We maintain it all with a 9 per cent prime, and are expected to make a soft landing (from where to where no one says).

The Japanese, however, have already landed. Their unemployment rate has not been higher than 3 per cent for decades, and their inflation rate is lower than ours. In short, they have made the natural rate of unemployment and its advocates look foolish.

And now they have done the same thing to the second most hallowed doctrine of contemporary American economics productivity theory. The dogma of productivity is among the most widely invoked in economics, especially when practical policies are at issue. It is dominant at all levels, from microeconomic downsizing to macroeconomic competitiveness in the new global economy. It is central in labor and environmental disputes. Along with NAIRU, it guides the deliberations of the Federal Reserve Board. It is brought to bear on matters not strictly economic, from education to highway design.

How have the Japanese made this sublime theory (and its practitioners) look foolish? Well, it tums out that the assembly plants in the United States of two major Japanese automobile manufacturers, Nissan and Toyota, have higher productivity ratings than those of any American manufacturer. So what’s new? What’s new is that both Japanese plants lost money last year, while American automobile manufacturers were rolling in it.

There are, to be sure, plenty of reasons for the poor profit showing of the Japanese plants. First is the “strong” yen, which renders anything made of Japanese parts expensive in comparison with the same things produced in countries with “weak” currencies. Second is the Japanese determination to use only their own parts, no matter where they are assembled (a casus belli in the trade dust-up last June). Third is the evident Japanese decision to accept the losses for the sake of maintaining or improving their share of the American market. Fourth could be a Japanese preference for losses rather than paying corporate taxes in the United States (since Nissan as a whole lost ¥166.1 billion or $1.86 billion-last year, this is not a probable motive). Fifth is the Japanese policy of slighting their home market in favor of their export market, with the result that a sluggish world economy has been translated, these past three or four years, into a stagnant or recessive Japanese economy.

All these reasons for poor profits would be even more forceful if Japanese plants were less efficient and less “productive.” And American automobile manufacturers would very likely increase their profits by becoming more efficient. The point, though, is this: You can be “unproductive” yet profitable and stay in business. But you can’t stay in business forever, no matter how productive you are, if you don’t make ends meet. (Of course, the American assembly plants of Nissan and Toyota are scarcely noticeable elements of their businesses; these factories could probably be run at a loss indefinitely without much hurting long-term corporate profits.)

In a free economy, productivity may sound nice (at least if you haven’t been downsized), but profitability is essential. This being the case, one must wonder why the economics profession is enthralled by the idea of productivity. You can produce a table and chairs, knives and forks, plants and food, and sustain yourself, but productivity for its own sake is, as Midas found gold to be, not good to eat. Productivity is a less important concept than profit. It is also a slipshod, if not flatly fallacious, idea[i].

I have, over the years, worked up examples of the absurd consequences of applying standard productivity theory to micro-economic and macroeconomic problems, and (you may not believe this) I’m tired of repeating myself. If you missed those lessons, I would advise you to rush to order the third edition of The End of Economic Man, due at your bookseller’s in January.

In the meantime, I will repeat a baseball example, since that sport may again be the national pastime. Once upon a time, the Washington Senators got a rookie centerfielder by the name of Joe Hardy. On Hardy’s first time at bat in the majors (as I heard the story), he hit a grand slam home run. When he was due up next, there were only two men on base; so the manager[1], who had majored in economics, yanked him for a pinch hitter. Otherwise Hardy’s productivity (the number of runs he knocked in per at bat) would have had to go down-unless he drew a base on balls or got hit by a pitch, and neither could be counted on. I forget the manager’s name; I think M.I.T. snapped him up to coach their entry in the Neoclassical Synthesis League.

I know our baseball analogy reeks of metaphysics. So does productivity theory, and I’m sorry, but we’re going to have to think about it.

Productivity is defined as output divided by input. The output part presents no particular difficulty. It can be as definite as the 48,000 pins produced in a day by the “small manufactory” Adam Smith tells us about; but usually it is as diffuse as the Gross Domestic Product, and so has to be reduced to dollars, as the GDP is.

You might think that the input part would also be reduced to dollars, for it, too, is pretty diffuse, including at least land, labor and capital. The fact of the matter, however, is that economists tend to be embarrassed by money. Victorians thought it vulgar to talk about it. Today’s economists, like medieval scholastics and contemporary analytic philosophers, think money is merely nominal-unreal. Mathematical economists who fancy general equilibrium theory can’t find a place for money in their model. Unreal.

The obvious way to avoid using money in the denominator of the productivity fraction is to select the largest factor of input and make it a surrogate for the whole. Very well. Labor is today the single largest factor in the U.S., year after year amounting to close to 60 per cent of total costs. You will have noticed that total costs have to be stated in terms of money, and therefore that 60 per cent of the total also has to be stated in terms of money. (We’re going to have to let that pass, or this column will become a book.)

ANYWAY, the Productivity Index prepared by the Bureau of Labor Statistics of the Department of Labor divides the Gross Domestic Product of a period by the number of hours worked by all persons “engaged” in the period, including the hours of proprietors and unpaid family members. “Hours worked,” especially by unpaid workers, certainly is not money, and the category presents other problems. Most important, the hours are not homogeneous. Lee Iacocca’s hours, or some of them, undoubtedly yield a greater output than do a machinist’s, and a machinist’s hours yield a greater output than do a floor sweeper’s; but they’re all the same to the Department of Labor. Indeed, when you stop to think of it you realize that land and capital also work hours, probably more hours than labor, because they never sleep, and therefore might be thought more suitable than labor as surrogates for all inputs.

There is also an Employment Cost Index, which divides the total annual compensation of all employees of private business, from handyman to CEO, by the annual total of hours worked for pay. This gives us a figure that I frankly can see only cynical use for. Since it combines rapidly growing executive salaries with slowly falling common laborer wages, it has almost doubled from 64.8 in 1980 to 123.5 in 1994, and so can be used by readers of the Wall Street Journal to prove to their seat mates on the commuting train that labor never had it so good.

The conclusions drawn from the Productivity Index are similarly not remarkably reliable or even useful. During our autumn of discontent, mainstream economists recommended single-minded devotion to productivity to prepare us for the explosive competitiveness of the brave new global village. We learned that to become more productive, we must reduce “hours worked,” and to reduce “hours worked,” we must downsize.

Well, you don’t need a productivity index to know that you could make more money if you could turn out the same quantity of commodities with fewer employees. I could do that one with my eyes closed. With my eyes open, I can see that you make more money by producing the same output while borrowing less and paying lower interest on the sum borrowed, or paying lower taxes, or reducing advertising, or having fewer three-martini lunches, or organizing your business more rationally.

What I see with my eyes open as well are a lot of situations where input and output are stated in terms of money. That is not as strange as modern economists seem to think. When we divide total output in dollars by total input in dollars, our answer is the rate of profit, which is not an esoteric new idea at all. Business managers seeking to compare their firm’s current operations with those of their competitors, and with their own in other years, have used such ratios for generations. It’s nothing to them how many hours are required to make their product; what they’re after is the minimum cost.

For years the Japanese have demonstrated that you don’t have to have unnaturally high unemployment to maintain low inflation. Now Nissan and Toyota offer empirical proof that although yours may be the most “productive” outfit in the village, it may profit you nothing. Thus the Japanese have cooled off the two hottest tickets of modern American economics.

What will they think of next?

The New Leader

[1] Benny Van Buren

[i] Shades of Clayton Christensen and, among other things “When Giants Fail”

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By George P. Brockway, originally published July 17, 1995

1995-7-17 What Greenspan Really Told Congress titleTODAY’S LESSON will be in two parts. The first will be an exhibition of a complaint; the second an exhibition of a gleam of hope for better times in this nation and this world and even this dismal science.

The complaint concerns the press, particularly the business press, which is so busy collecting meaningless quotes from pseudo-prominent bankers and brokers that it fails to notice the story it is presumably covering. For example, on July 19 Chairman Alan Greenspan of the Federal Reserve Board, who is as entitled as his predecessor to be called “the second most powerful man in America,” appeared before a subcommittee of the House of Representatives in accordance with the provisions of the Full Employment Act of 1978, otherwise known as Humphrey-Hawkins.

Now, Humphrey-Hawkins has not had a good press. In his excellently useful Presidential Economics, Herbert Stein says that its “goals are so unrealistic and inconsistent that they are not taken seriously by anyone.” Still, it is the law of the land, so Greenspan duly appeared on the Hill, surrounded by advisers and armed with a prepared statement plus supporting documents. At least some of the Washington press corps came to pick up the handouts and perhaps lend an ear to part of the subsequent testimony. It was a routine assignment.

The shape of a Greenspan news story is now well established. The question always is, will-he-won’t-he raise (or lower) the interest rate? The Chairman always answers it, to the delight of his audience, in his personal version of Casey-Stengelese. Thereupon the reporter interviews a clutch of brokers’ economists for their differing interpretations of what he said, and offers the thoughts of a smaller clutch of Congress people or government officials.1995-7-17 What Greenspan Really Told Congress Joseph Kennedy

And so it was with the New York Times account of the latest Humphrey-Hawkins affair. Three brokers’ economists were interviewed – one from Minneapolis (thus showing that the Times is a national newspaper), one from New York, and Allen Sinai. Sinai is from New York, too, but he is quoted in almost every story and I assume must be considered universal. Of the Congress people, the Times made do with a mildly querulous comment by subcommittee member Joseph Kennedy II (D.-Mass.) and a reverential tribute to the Reserve and its leader

By House Banking Committee Chairman Jim Leach (R.-Iowa). All in all, the 28-inch Times story (counting picture and headlines) did not do much more than, as the saying goes, keep the advertising columns separated (a problem we rarely have at THE NEW LEADER).

As it happened, however, Chairman Greenspan interspersed among his answers to questions from the Congressional panel several profound, profoundly astonishing and profoundly hopeful observations. The Times missed them all, and so did the Wall Street Journal. That’s the complaint I promised.

But fortunately for you and posterity, I was channel-surfing[1] the next day and came upon CNBC, which was using clips of the Humphrey-Hawkins hearings to keep sections of its Money Wheel separated. The first clip I heard stopped me short.

“I don’t believe,” Greenspan was saying, “that any particular unemployment rate – that 5 per cent or 5.5 per cent or whatever numbers we’re dealing with is something desirable in and of itself. I don’t believe that.”

Well, you may be sure that I stopped surfing and anchored myself to CNBC. At considerable trouble and expense I also now have the whole thing on videotape. If you want a good journeyman definition of the barbarous notion of a natural rate of unemployment, you can do worse than settle on “a particular unemployment rate that is something desirable in and of itself.” In his December 29, 1967 speech that named the cruel notion, Milton Friedman put it as follows: “At any moment of time, there is some level of unemployment which has the property that it is consistent with equilibrium in the structure of real wage rates.”

During the 28 years since Friedman made his speech, one or another of several theories of a natural rate of unemployment has swept through the economics profession. Some of the theories depend on productivity rankings; some on a distinction between nominal wages and real wages; some on both; some on neither. But all agree that the rate of unemployment is so linked to the price level that as one goes up, the other goes down. The linkage is not explained; it goes without saying. Everyone presumes that a fall in unemployment will “force” the Federal Reserve Board to damp the “inevitable” inflation by raising the interest rate. In fact, this presumption explains most of the gyrations of the interest rate during Greenspan’s tenure. (For a detailed refutation of the linkage, see the September issue of the Journal of Economic Issues self-advt.)

Now we have heard Chairman Greenspan repudiate the natural rate nonsense. If the second most powerful man in America can do that, there is hope for the rest of us.

From December 29, 1967, to date, economic thought in the United States has been stopped dead because the fundamental economic problem was solved. To be sure, it was solved the way Ko-ko explained the solution of his problem to the Mikado: “Your Majesty says, ‘Kill a gentleman,’ and a gentleman is told off to be killed. Consequently that gentleman is as good as dead-practically, he is dead and if he is dead, why not say so?”

In the same way, Paul Krugman, self-proclaimed spokesman for mainstream economics, writes: “Most of the 5 million or so unemployed are either unskilled or part of the inevitable ‘frictional’ unemployment.” In other words, there are no employable unemployed; hence there is no unemployment problem. Furthermore, says Krugman, “adding 2 million jobs, if we could do it, would drive the U.S. unemployment rate down to about 3 per cent. But that isn’t possible, or at any rate not for very long. At that low unemployment rate, inflation would begin to accelerate rapidly.”

Having grossly underestimated the number of unemployed and having arrogantly dismissed as useless their fellow human beings who make up that number, mainstream economists have embraced the theory of the natural rate of unemployment and simply declared joblessness a non-problem. This has left them free to spend the past quarter century pondering such weighty concerns as “Games with Incomplete Information” (the lead article in the current American Economic Review). Perhaps Greenspan can guide us to a fairer land.

INDEED, the Chairman took another step in that direction as the Humphrey-Hawkins hearings wore on. He was asked if it would be possible to lower interest rates and still have our bonds attractive to German and Japanese investors. Greenspan’s reply was short and to the point: “I’m not aware that we have had very many difficulties selling the debt – the Federal debt – at low interest rates.”

It was very brave of Greenspan to make that statement. Not only does it give the lie to his six-foot- four predecessor – who claimed the budget deficit forced high interest rates that crowded entrepreneurs out of the credit market – it undercuts his own words regarding the deficit. He is for balancing the budget (but no constitutional amendment) because, he said, “there is no doubt, in my judgment, that the net result of moving to budget balance will be a more efficient and more productive U.S. economy.” In forming that judgment he can scarcely have considered what is going on in Washington today or what will happen throughout the nation thanks to these “revolutionary” goings-on.

Nor can he have considered his own power over the deficit. The interest bill on the national debt is at present roughly equal to the budget deficit. A fraction of the debt is rolled over every year. If the new loans were issued in accordance with the “patterns of rates” followed by the Reserve and Treasury during World War II, the reduction in the interest bill alone would practically eliminate the deficit by the mystic year 2002 -and not a single welfare family would have to camp on the public sidewalk while the mother begged for a nonexistent job.

I don’t suppose you are willing to bet anything like that will happen. (It would be a good “derivative” to have the other side of.) You’re right, but it is not some esoteric economic law or some superhuman market that will prevent the happening. The reason, rather, is that we the people of the United States of America care more about money, and individuals with money, than we do about our fellow citizens and ourselves.  We should at least recognize that we are in the deficit mess (if it is a mess) not because too few people are unemployed, but because for the past 40-odd years relatively high interest rates have transferred money from the many who do the work of the world (including the government) to a comparatively few bankers,  rentiers and speculators.

The transfer has not escaped Greenspan’s attention. In response to a question from Congressman Kennedy he said, “Evidence suggests in recent years that income is being dispersed rather than concentrated [that is, the rich are becoming richer, the poor poorer, etc.]. … There has been a regrettable dispersion of incomes that goes back to the later ‘60s…. What’s the major threat to our society? I’d list this as a crucial issue. If it divides the society, I do not think that is good for any democracy of which I am aware.”

Unfortunately, Greenspan did not see that there was anything the Federal Reserve Board could do to change the situation. He did not mention anything anyone else could do either, beyond the new obligatory red herring of higher education for competing in the coming world economy.

Nevertheless Greenspan had a vital three-part message: First and most important, there is no such thing as a natural rate of unemployment, therefore there is work aplenty for economists eager to grapple with real problems of the real world. Second, Federal Reserve policies based on the alleged crowding-out concept can now be forgotten. Third, we should embrace policies that unite us, because policies that divide us may well prove ruinous.

Greenspan’s message permits the gleam I mentioned at the beginning. Put into practice, it would make a better nation, a better world and a better economics. It’s a pity the Times, the Wall Street Journal and the rest missed it.

The New Leader

[1] Ed. – many who knew the author well are reeling, shocked, that he knew how to spell “channel-surfing” much less had a concept of what it was… God forbid he did it!  Oh!  How delicate the façade!

Between Issues1995-7-17 Cover

AFTER WATCHING CNBC’s excerpts of Federal Reserve Board Chairman Alan Greenspan’s latest semiannual appearance on Capitol Hill, George Brockway phoned us. “I have some bad news,” said our veteran economics columnist cheerfully. “Greenspan may be reading THE NEW LEADER.” But his actual purpose was to alert us that he was pursuing the entire videotaped hearing. If he found his eyes and ears had not deceived him, the next installment of “The Dismal Science” would be devoted to it.

Why there was a tinge of uncharacteristic excitement in Brockway’s voice will become apparent when you read “What Greenspan Really Told Congress” (page l3). Our own actual purpose here is to alert you to the publication in October of Economists Can Be Bad for Your Health, his third book since starting his second career in these pages almost 14 years ago.

His first career, in publishing, ran some 46 years. Following graduation in 1936 from Williams College and (jobs being scarce) a year in graduate school at Yale on a fellowship, Brockway went to work for McGraw Hill in 1941 he joined W.W. Norton, where before long his editorial talents and his business acumen put him on the up escalator. By 1958 he was named president, and in 1976 he assumed the chairmanship of the now employee-owned company. Along the way, he fashioned Norton into the major independent publisher it is today.

When rampaging Reagan-era inflation and 21 per cent loan rates threatened to undermine the house he built, bankers became Brockway’s bête noire and people-friendly economics his preoccupation. Already an occasional contributor to the NL on foreign policy matters, he did several pieces for us in 1981 on his new subject. Then he proposed the column that began running in alternate issues the next January, two years prior to his retirement. His relaxed style, quiet wit and devastating debunking of mainstream wisdom soon attracted a wide audience. Even those who were infuriated by his central thesis – that “economics is a branch of ethics, not of natural science” – could not resist reading him. At a recent conference Brockway met Martin Feldstein, who was a member of Ronald Reagan’s Council of Economic Advisers. “I always read you,” confessed Feldstein, “but you’re all wrong.”

Brockway’s first two books, published by Harper, were Economics: What Went Wrong and Why and Some Things to Do About It (1985) and The End of Economic Man (1991). The latter was brought out in paperback by Norton, which is about to issue a third revised edition. As for Economists Can Be Bad for Your Health, also from Norton, we neglected to mention that it is a selection of his NL columns. Previewing it, Jeff Faux, president of the Economic Policy Institute, wrote: “George Brockway is a national treasure. His new book picks apart foolish economic dogma with deft application of common sense in simple English. He entertains us and inspires us to think for ourselves. May he write forever.”

Amen.

OUR COVER drawing of Alan Greenspan is by Mwaura Kirore.

By George P. Brockway, originally published March 13, 1995

1995-3-13 The Enemy is Us title

HARDLY A DAY goes by without your being asked by a political party or a news organization or some other public-spirited body to name the three or five or 10 most urgent problems facing America today. If you subsequently reflect on your answers, you are likely to realize, whether sadly or cynically, that little or nothing will be done about any of the problems, even those that have a large majority worried about them.

The reason is simple: We don’t have the money.

Everyone knows we can’t have universal health care; we can’t have a welfare system we’re not ashamed of; we can’t have a superaccelerator; we can’t improve our schools and colleges; we can’t keep our libraries and museums open as long as they were 60 years ago; we can’t clean up the pollution of our air and water; we can’t fix our roads and highways; we can’t clear our streets of garbage; we can’t hire enough cops and judges or build enough jails to curb crime – because we don’t have the money. Everyone knows this, and everyone, from the President to this year’s kindergarten graduate, says it every day.

But everyone is wrong. What we don’t have is intelligence. What we don’t have is good will or strong will or, honestly, any will at all. What we don’t have is the ability to learn from our experience. We don’t even have common sense and ordinary decency. Pogo was right: We have met the enemy and they is us.

“Enemy” suggests a couple of lessons from World War II. When Germany started the War, the papers were full of prophecies that despite its possible superiority in tanks and airplanes and training, it would surely lose. You could try all day and never guess why; so I’ll tell you. Germany would lose because its gold reserves were too low, even though Hjalmar Horace Greeley Schacht had been trying to conserve them by bartering instead of paying cash for the things it needed. It didn’t have the money. All we had to do was to sit back and wait for it to collapse.

Five and a half desperate and bloody years later, collapse did come, but not because the Germans lacked gold. They lacked manpower. At the end, they tried to defend their “heartland” with half-trained regiments of teenagers and retirees. They were overwhelmed.

During the War we had a money problem too. After all, when Germany attacked Poland we were slowly pushing our way out of the Great Depression. Then as now, the Federal budget deficit was on everyone’s lips. We were on the road to serfdom (at the time inflation was more a promise than a threat). By 1945 the national public debt reached $235.2 billion, or 111 per cent of Gross National Product. That sounds like bankruptcy if you have heard Warren B. Rudman and Paul E. Tsongas making a fuss over the present ratio of 66.8 per cent. Given our clearly not having the money to pay for the War, we should have surrendered and undertaken the close study of German and Japanese management practices from the ground up.

Yet somehow, before the year was out, we won the War. More than that, as we demobilized our Army and Navy, we enacted the GI Bill of Rights, enabling the wartime generation to be the first in history to have a college education and to buy their own homes. Two years later we still didn’t have the money, but we started the Marshall Plan and saved Europe. Afterward we enjoyed a quarter century of more rapidly rising wages than we’ve had since, higher corporate profits after taxes than we’ve had since, lower inflation than we’ve had since, and lower unemployment than we’ve had since – all at once. We could have done more (President Truman tried to get universal health care almost a half century ago, but was blocked by the American Medical Association and the Republican Party); nevertheless, what we did do was better than we have managed lately.

Let’s look at a somewhat less impersonal situation. Think about the Baby Boomers. Their parents and grandparents won the War and passed the GI Bill and saved Europe with the Marshall Plan. Of course, this increased the national debt left to their children. Now I ask you: Would the Boomers have been better off if they had not been saddled with a victorious America, prosperous parents, and a recovered Europe?

Next, let’s think about the Boomers’ children – the present younger generation that we are worried about saddling with debts we don’t have the money to pay. Are we doing them (or the nation) a favor by cutting the deficit so that those who happen to survive the measles (we don’t have the money to vaccinate them all) will grow up half educated and in dangerous, squalid surroundings? Or will we do anyone a favor by leaving children essentially uncared for while we force their mothers to work at jobs that won’t pay enough to lift them out of poverty?

Finally, think of your own children. Where are you going to find $125,000 apiece to send them through college? Should you go into debt, along with them, or should you give the whole thing up? And what about your mortgage? If you have one, it is because you want a better place to live and to raise your children than you could otherwise afford. If you die before the mortgage is paid off, your estate will have to pay the balance and your children’s inheritance will be diminished. Is that mortgage against your children’s interests?

Like all good rhetorical questions, these have obvious answers. The resulting problems have equally obvious solutions, if we stop long enough to consider the distinguishing marks of the capitalist system we praise so mindlessly.

MODERN CAPITALISM depends on ongoing indebtedness to support ongoing investment in ongoing production that will provide ongoing income. This is something quite new under the sun. For convenience we will call what we previously had mercantilism. To be sure, the two systems have run together, and certainly are not disentangled yet, but let’s try to focus on their differences.

To begin with, rather than burdening themselves with ongoing indebtedness, good mercantilists followed Polonius‘ advice: “Neither a borrower nor a lender be.” If they did borrow, they did so for a specific purpose and paid off the loan as quickly as possible. In contrast, AT&T, industrial giant though it is, rolls over its massive debt as that comes due. Alexander Hamilton foresaw that a national debt, widely held by prominent citizens, would be a stabilizing and unifying element in the new republic, and so it has been.

Second, instead of investing in ongoing enterprises, mercantilists looked for big deals where they could make a killing. The merchants of Venice took shares in a particular voyage of a particular galley. As recently as a hundred years ago, most American corporations were chartered in New Jersey or Delaware because other states would grant charters only for limited and specific purposes. In contrast, a modern corporation is usually at least moderately diversified and is, theoretically anyway, immortal.

Third, because of its ad hoc investing, the characteristic mercantilist form of profit is the capital gain, which is realized when the investment is withdrawn and the enterprise ceases. In contrast, the characteristic capitalist investment continues indefinitely, produces a regular flow of goods, yields regular dividends, offers regular employment, and pays regular taxes.

When money was gold or silver or some commodity, or was convertible to some commodity, the amount of borrowing that could be done in an economy was limited by the amount of the money-commodity. Today, when money is realized credit or debt, the amount of borrowing is limited by the amount of unused resources, especially labor, available to the economy[1].

In the United States at present we have upwards of 17 million potential workers who are either unemployed, underemployed, discouraged, or turned off. That’s about an eighth of our work force and represents an enormous available resource, greater than the labor power of most nations of the world. We also have all the urgent, if not desperate, needs we mentioned in the beginning. Our problem is to use this resource to meet those needs.

Modern capitalism has tried to do that and has failed. It has been an enormous economic success in many ways, but the market, as economists rather coolly admit, has imperfections. The state, therefore, has to create the jobs – and that will take money. Let’s say it will take $20,000 for each of the 17 million people in our “resource,” or $340 billion.

Well, $340 billion sounds like a lot of money, but it is really only 5 per cent of the current Gross Domestic Product (GDP). It is little more than half of what I call the Banker’s COLA (the extra interest the Federal Reserve Board encourages lenders to charge to “protect” themselves from inflation, which is itself a principal cause of inflation).

Most of the money would be borrowed, just as businesses borrow the money they require. During World War II the Treasury and the Federal Reserve cooperated to keep the prime rate at 1.5 per cent. If the government borrowed the entire fund at 1.5 per cent, the interest would be $5.1 billion per annum – less than one tenth of 1 per cent of the GDP. The additional taxes paid by newly employed workers would far more than cover that[2].

There remains the nagging mantra: We don’t have the money. Do we not? What do you think has pumped up Wall Street so that bored TV anchors tell us “trading was moderate” on days when half again as many shares change hands as in the frenzy of the Crash of 1987? Why must brokers and bankers weary themselves thinking up $14 trillion worth of “derivatives” (three times as much as our total national debt) for people who don’t know what to do with their money, while others search out ways to speculate on growth industries in Tashkent, now that they have ruined Mexico? No, we have the money, all right. What we lack are brains and guts.

The New Leader

[1] Ed.:  I’m sure this is accurate but I don’t follow.  If a reader could comment with an explanation I’d be obliged

[2] For each 10% of tax the people earning the newfound $340 billion pay $34 billion is returned to the Treasury vs an interest cost of $5.1 billion

By George P. Brockway, originally published January 17, 1995
1995-1-30 The Phantom Tax Cut title

TWO YEARS AGO, reporting on the Little Rock “economic summit” (remember that?), I wrote sadly: “It was a dismal performance. For it was the supply side all over again. To be sure, the words ‘supply side’ could be read on no one’s lips; no one traced a laughable curve on a cocktail napkin; and the ideas were restated less breathlessly than Jack Kemp does it, and with a profundity beyond the capabilities of the Great Communicator. But if you had your eyes closed, there were times you could easily have imagined you were listening in on a planning session of Ronald Reagan’s early advisers.”

I was nevertheless confident that common sense and common decency would prevail more often in the Clinton White House than during the Reagan and Bush years, and that this would “make the Clinton Presidency worthy of being remembered.” Cheering the reiterated plea for full funding of Head Start, I concluded that the low-tech (and hence demand stimulating) operation would quickly get significant amounts of money circulating, and therefore would “do more to stimulate the economy this year, and every year of the program’s existence, than the schemes to restore the investment tax credit, to rehabilitate IRAs, and to cut taxes for the middle class-all of which are bum Reaganesque ideas we have already tried and found wanting.”

Well, the Reaganesque ideas are back again and are likely to be re-enacted by supply-side Republicans and “New” Democrats – none of whom is as stylish as the Bourbons, but all of whom, as Talleyrand said of the Bourbons, “have learned nothing and forgotten nothing.” In the process, what is represented as a version of the GI Bill of Rights for retraining downsized workers will be corrupted by a doctrinaire eagerness to support proprietary education mills.

Since anyone who is curious can look up the sorry record of previous investment tax credits and IRAs, let’s talk a bit about the tax cut for the middle class, arguably a demand-side action. The media have already noticed it will not amount to much – the equivalent of another couple of pizzas a month for every family. Still, the sheer number of pizzas is mindboggling and may result in supply-side expansion in the bakery industry as well as demand-side pressure for more laxatives and anti-gas pharmaceuticals, which will, in turn, inspire the creation of more sick-making television commercials. Although I am not now and never have been a pizza man, I have no great objection to any of that.

Nor do I have a strong objection to the elastic, not to say formless, definitions we are being given of the middle class. After all, speaking sociologically, as I occasionally do (“The Golden Mean,” NL, November 2, 1987), in any stable society the middle class is the society, the ultra-rich being exclusive and the infra-poor excluded.

Speaking economically, though, I find it hard to believe the Republicans believe anyone earning $200,000 a year (that is, snugly in the top 1 per cent of the population) needs a handout for an extra pizza. And I am sure everyone making $8,850 a year (the full-time minimum wage) should have a handout for more than that.

The President’s tax cut proposal presumes $75,000 a year is the top of the middle class (still almost 95 per cent of the population) and is estimated to cost $60 billion over five years – or something less than two-tenths of 1 per cent of the gross domestic product. That’s not even pizzas; that’s peanuts. It is barely a third of the woefully inadequate Clinton “stimulus package” the Republicans filibustered to death a year and a half ago.

So what’s all the fuss about? The fuss is about the votes of the small percentage of the American electorate that is not too lazy to go to the polls. Specifically, about its fear and loathing of the way things are going in the country; its stouthearted determination not to try to understand why the prospects aren’t brighter; its puerile anger against imagined tormentors; and its desperation for a quick fix, especially one that is mean to somebody else. An electorate with such qualifications can be bought and sold and made dizzy by spin doctors – who are undoubtedly a growth industry, but beyond the normal purview of this column.

For this column, the question is, What difference does all the fuss make to the economy? And the answer is, Precious little, and most of that counterproductive.

The tax break for the middle class (whether Clinton’s, Minority Leader Gephardt‘s, or the Republican Contract‘s) will of course be paid for by the middle class. Who else is there? Indeed, the paying will undoubtedly come to more than the cutting, particularly for those in the bottom half of that protean middle class. There are two principal reasons for this.

First and most important (constant readers may be certain) is the Federal Reserve Board, which considers itself entitled to frustrate every program, especially every promising program, of the constitutionally elected Executive and Legislature. In the notorious black wit of former Chairman W M. Martin, the Reserve’s aim in life is “to take away the punch bowl just when the party gets going.” It is sure as shooting going to raise the rate again if the talk about a tax cut continues. A tax cut at least pretends to give people money to spend, and people with money to spend give the Federal Reserve Board goose bumps.

When the Board gets goose bumps, it raises the interest rate. It can’t be bothered with the fact that this increases both the cost of producing and the cost of consuming, and consequently is doubly inflationary. It’s all the Reserve can think to do, even though inducing inflation while pretending to fight it makes the Reserve look silly.

Something more than silliness is involved. If the prices of consumer loans are raised, borrowers have less money to buy things with. ‘But where does their money go? It goes to the banks, of course. For example, I have a little adjustable rate mortgage. As a result of the Board’s recent maneuvers, my interest charges this year will be about $700 greater than they were last year. That won’t break me; but if the Board keeps it up (and you can bet it will), my pizza-size tax cut will disappear – roughly 10 times over – into the shining coffers of my friendly banker.

As Deep Throat said, follow the money. The famous middle-class tax cut, assuming there is one, will mean the United States of America will have less money to spend (and I’ll get to that in a moment). Congress will dangle that money before our eyes; but when we try to get our hands on it, the Federal Reserve Board will whisk it away and give it to our bankers, along with some money we thought was safely ours.

Every time the Reserve raises the interest rate to “head off inflation,” it effects a massive transfer of wealth and income from mostly middle-class borrowers to mostly rich lenders. Never mind what Polonius advised about borrowing; he was a Renaissance courtier, and not an over wise one. Borrowing is what modern capitalism is all about. Today’s borrowers have done nothing to deserve having their money taken away from them, and today’s lenders have done nothing to deserve being given it. You can forget about your pizza; your banker will be eating cake.

So much for the first reason why the middle-class tax cut will cost the middle class money.

THE SECOND REASON is that most of the “savings” proposed to pay for the cuts are fake, illusory, smoke-and-mirrors. I suppose it is true that, as Vice President Gore said the other day, there is an Agricultural Department field office within a day’s horseback ride from every farm. That sounds worse than it is; it doesn’t take many 50-mile radius circles to cover most farm country.

Schemes like turning air traffic controllers over to a government or private corporation (and there are a lot of such schemes) amount to nothing more than getting the costs off the Federal budget. The costs won’t vanish; they will reappear in the form of local taxes or user fees to be paid directly or indirectly by the middle class. Either that, or the airlines’ insurance premiums will take off into the wild blue yonder, and will have to be covered by higher fares.

Then there are all the truly vicious notions to eliminate or underfund programs that are already underfunded, like housing (as though there weren’t a million or more homeless fellow citizens in the streets), and school lunches and food stamps (as though ill nourishment were not a fact of life in the United States), and Medicaid (as though we have solved our health problems by yakking them to death). Not to mention Head Start, which was so promising two years ago. Or ending welfare as we know it by sending kids to orphanages and putting their mothers to work at jobs that won’t get them out of poverty, but will violate mainstream economists’ theory of a natural rate of unemployment and so give the Federal Reserve Board another excuse to raise the interest rate to head off inflation.

“Saving” by dumping on welfare and relief programs is what will cost the middle class – and the rich, too-many times more than their tax cuts will be worth. Supply-side Republicans and New Democrats are sensible enough not to like our decayed inner cities and rural slums, and they are reasonable enough to be afraid of the sullen, desperate people who live there. They seem to think there is an underclass, and that it can be cowed with long mandatory prison sentences and the death penalty. They shouldn’t count on it.

But they should count on having their household expenses and local taxes increase to pay for more guns and locks and burglar alarms and insurance and police and judges and prisons, some of which will have to be in their backyard for lack of anyplace else to put them. This being the case, they would be wise to take a long, straight look in the mirror and ask themselves if they really are or want to be as self-righteous, callous and mean-minded as they are in danger of becoming.

 The New Leader

By George P. Brockway, originally published November 7, 1994

1994-11-7 Junk Mail from Concord title

I’M ON A NEW mailing list, and I suppose you are too. The soliciting organization calls itself the Concord Coalition, and it seems to be the plaything of former Senator Warren B. Rudman, Republican of New Hampshire, and former Senator Paul E. Tsongas, Democrat of Massachusetts.

If I didn’t know anything about the two ex-Senators and had to judge them solely by the mailing piece, I would have difficulty deciding whether they are extraordinarily stupid or extraordinarily slick. Either way, they are dangerous, and are likely to make the next few years less pleasant than we might have found otherwise.

Let’s talk about the slickness first, because that’s more fun. Their bag is deficit reduction. In his “Dear Friend” letter to me, Mr. Rudman writes, underlined, “Our goal is nothing short of changing public opinion to demand less, not more, deficit spending and force the elimination of the deficit.”

Now, if you read that quickly, you may get the idea the Coalition is out to lobby the President and Congress to do something about the deficit. But that can’t be its intention. The letter asks me for a “special tax-deductible dues contribution,” and so far as I know, you cannot get a tax exemption for your organization if you are planning to lobby the Legislature. Common Cause doesn’t have tax exemption, nor does the Council on Foreign Relations, nor the National Association of Manufacturers nor the National Organization for Women nor the National Rifle Association nor the Academy of American Poets nor the American Automobile Association.

Some of the organizations on my little list play pretty hard ball, but most of them do not back candidates, and it is impossible to say with a straight face that the Concord Coalition is less “political” than they are. Either the Coalition is led by a couple of mighty shrewd lawyers, or is encouraging violation of the law right off the bat. They are cute enough, however, to add in a postscript that “contributions are tax-deductible to the extent permitted by law.” (Personal subscriptions to THE NEW LEADER are also tax-deductible “to the extent permitted by law,” which, I regret to say, is not to any extent at all.)

And that’s not the worst of it. The bookkeeping reason for the deficit is that our expenditures are too high and our taxes are too low. The Coalition proposes that tax collections be reduced by the amounts otherwise payable on the contributions they receive. By its very existence it is increasing the deficit it is complaining about. If that isn’t cynicism, what is it?

It may be stupidity.

But I doubt it. Both Mr. Rudman and Mr. Tsongas are grown men, and they are both (I think) lawyers. They have both spent a lot of time thinking about taxes, and presumably they both can add and subtract. Rudman also makes a point of the fact that “the hundreds of hours that Paul and I are putting into the Concord Coalition are strictly on a volunteer basis.” Not to worry. They are both entitled (I think that’s the word) to comfortable government pensions, complete with cost-of living adjustments (aka COLAS), not to mention better health insurance than you will ever see. Besides, if theirs truly is a tax-exempt organization, their expenses of running hither and yon to appear on talk shows are deductible. But not otherwise, although the expenses might be legitimate charges against whatever contributions they manage to collect.

Well, that’s all good for a chuckle or two in this winter of our discontent[1]. But what will happen to the economy if the Concord Coalition gets its way won’t be very amusing. And given the results of the recent election, one would be ill-advised to bet it won’t succeed without even trying.

So let’s look at the deficit. The estimate for 1995 (the fiscal year that started last October 1) is $176.1 billion. That’s down substantially from the $220.1 billion deficit of fiscal year 1994. In relation to the Gross Domestic Product, it is the smallest deficit we have had since 1979. But it is still a lot of money.

Suppose that, by constitutional amendment or otherwise, the whole deficit could be wiped out. What would become of all that money? Would you and I get refunds for our share of it? Or would the government deposit it where it could earn interest – say, in a Texas savings and loan bank (if any survives)? Or would it be stashed away in Fort Knox? Or could we use it to pay off our trading debts to the Germans and the Japanese?  Or to buyback the bonds they have bought from us? Or would it be an advance payment on the following year’s budget?

The correct answer, of course, is, None of the Above. And the reason for the answer is that all those billions do not exist, because as I’ve said before, and say again here in a minute, money is debt. Not only does the money not exist, the goods and services the money was budgeted to buy do not exist, either. Maybe you and I did not want those goods and services, anyhow.

Maybe we thought it was wasteful to spend money on them. Even so, we had better stop a minute to consider what their nonexistence means to the economy – that is, to us.

First off, we can’t cut government expenditures by $176.1 billion without firing people. And they won’t all be lazy, faceless bureaucrats, because the Federal government is not only the nation’s largest employer, it is the nation’s largest purchaser of stuff produced by the private sector. (Where did you think the paper for the paperwork comes from?)

The point is that the people who will lose their jobs are fellow citizens; so when we talk about the number of them, we should never forget that they are ordinary people like you and me. The number is very large. I estimate it at 3,785,631, which I arrive at as follows: (1) The way the pie is cut in our economy today, labor gets about two thirds of it, and two thirds of$176.1 billion is $117.4 billion. (2) The median income of full-time workers in the United States is $31,012. (3) Divide (1) by (2) and you get 3,785,631 new recruits for the army of the unemployed, the great majority of them obviously from the private sector.

That should push our total unemployment over 10 million. In fact, when you consider the lost purchasing power of those 3.7 million people, and the lost business of those who used to sell to them, there is little doubt that trimming $176.1 billion from the Federal budget will enable us to set a new post-Depression unemployment record, not to mention anew record for relief expenses.

I know, of course, the answer Messrs. Rudman and Tsongas would make to the foregoing, because I have heard Newt Gingrich touting a balanced budget amendment that would codify the problem. They’d say cutting $176.1 billion out of the Federal budget would so stimulate the private sector, overjoyed to get all that government off its back, that it would forget it had ever coined the word “downsizing[2]” and would invest and expand its businesses to take up the slack and then some.

I would not be surprised if the private sector talked that way; but I would be astonished if it acted that way, because when business people forget about politics and mind their businesses, they are not quite so stupid as they sometimes sound. If they are not already investing and expanding, there would be no reason for them to change course if the deficit is cut. Taxes won’t be a reason; the deficit is caused because taxes do not cover expenditures now. Budget balancing won’t be accomplished by lightening up that side of the scales. Besides, the only taxes likely to be cut are capital gains taxes; that will be dandy for speculators, but it will do nothing good for producing entrepreneurs and will probably increase the interest they have to pay. (I forgot:

There is likely to be an attempt to get a cut for the middle class, too, meaning people with adjusted gross incomes over $250,000.)

No, I think we can expect downsizing to continue, no matter what is done with the budget.

AS CONSTANT readers know, I’m a mild-mannered chap; so I find it difficult to believe the Concord Coalition is just another Trojan Horse. If they are really naive instead of slick or stupid, their naiveté goes pretty deep into their misunderstanding of economics. They don’t begin to understand money and its role in the capitalist system.

They have possibly never wondered where the Federal Reserve notes in their pockets came from and what makes them worth more than the paper they are printed on. They have possibly never looked closely at a dollar bill. It says right on its face, “This note is legal tender for all debts, public and private.” What does that mean? It means that it was issued by the government in payment for some good or service, and that, in the end, the government will take it back in payment of some fee or tax. In the meantime, the government owes a dollar to whoever holds the note. It is an acknowledgment of debt.

In the capitalist system, not all debt is money, but all money is debt. If the Concord Coalition gets rid of the $176.1 billion deficit, that much of the money supply will be washed out. Now, if business is to continue merely at its present sluggish pace, the $176.1 billion will have to be replaced from somewhere. Since it seems unlikely that private business will kick its downsizing habit any time soon (why should it, with GATT on the horizon?), state and local governments will have to pick up the slack and go deeper into debt to the tune of $176.1 billion. Needless to say, slumping Federal services will force them to do some of that, anyhow. Deficit reduction turns out to be a scam shifting some Federal burdens to the states, probably (I regretfully suspect) in the expectation that the burdens will be either fumbled or financed with a regressive sales tax.

As you will no doubt remember from “In Pursuit of a Fiscal Fantasy” (NL, 6/14-28/93), the government can be in debt forever and ever, issuing new bonds to pay off those that come due. The only thing it has to be able to do is pay interest on the loans, and that would be no problem at all if the Federal Reserve Board were at least moderately committed to the national welfare. Most of the Fortune 500 companies, and indeed almost all companies of every size, are constantly rolling over their debt this way. Capitalism is a system based on borrowing and lending.

You and I could do the same if we were immortal. As it is, we don’t hesitate to go into debt to provide our family with a better place to live and to give our children the best education possible. Would we have done our children a favor if we had not made the commitment, even though some of the debt may still be unpaid at our death?

On reflection, you have to say that the Concord Coalition is not only slick but stupid.

The New Leader

[1] Ed. – Which raises the question, what did the Shakespearean data base administrator say when he found snow in his VTOC?

[2] Ed. – we recommend you read this when considering “downsizing”: http://wp.me/p2r2YP-hx

By George P. Brockway, originally published September 12, 1994

1994-9-12 Practicing 'Escalito' on the Economy titleWHEN ALAN BLINDER, the new vice-chairman of the Federal Reserve Board, happened to suggest last month that the rate of unemployment was a legitimate concern of public policy, the financial press typically tried to discover a personality clash between him and Chairman Alan Greenspan. Blinder insisted that there was no personality or policy clash. That’s a pity, because Greenspan’s policy has only weak and tangled connections with either experience or theory.

Over a year ago (see “The Reserve Takes Flight Once Again,” NL, August 9-23, 1993) he abandoned his prevailing theory and promised a new one. Since then what we have been given are at least four unoriginal theories that seem to lack any special relationship – except that they are all current notions of the Federal Reserve Board, and that each is to be implemented by fiddling with the interest rate. Maximizing four unrelated programs by a single action might be thought an improbable long shot, if anyone took them seriously.

The oldest of the four is the monetarist scheme of setting a target for the growth of the money supply. Milton Friedman held that the target should be 3 to 5 per cent, and that it did not matter how you measured the supply so long as you were consistent. Greenspan denigrated the concept last year, but went ahead anyhow and set a target for M2 between 1 and 5 per cent. Since M2 is currently growing at the low rate of 0.6 per cent, disciples of Friedman should be worrying about deflation rather than inflation.

The second program calls for a “neutral” rate of interest, which is apparently a rate that will neither heat up the economy nor cool it off. Sometimes the objective is said to be a soft landing. In other times and other metaphors, this was called “fine-tuning.” It has for many years been ridiculed, especially when suspected of being advocated by liberals.

During the summer a TV interviewer tried to get Wayne Angell – until recently a governor of the Reserve, and now an officer of a brokerage house – to say how the Board would know what to do in order to be “monetary neutral.” Were there “indicators” that reliably pointed to increasing or decreasing the rates? “No,” Angell answered. “It’s something you can’t precisely do. It’s a matter of the ‘best guess’ opinion.” He added that it would be a clever idea for the Reserve to overshoot the mark and then bring the rate back down. “That way,” he enthused, “the bond market would really take off!”

For a while after the interview there was talk of investigating the possibility that Angell was leaking information from a crony at the Reserve. My fear is that he was delivering one of the Board’s famous messages, and that the nonsense he divulged will be next month’s official policy. Is what’s good for the bond market necessarily good for America?

The third program we hear a lot about concerns the “real” interest rate – determining what the rate would be if there were no inflation, and allowing banks to compensate accordingly. This, it appears, is a particular pet of Chairman Greenspan’s. As I have said before, adding an inflation premium to the “real” rate amounts to giving lenders a Banker’s COLA that is ipso facto inflationary and already costs the economy upwards of $500 billion a year.

The claim is that bankers must have this COLA or they won’t lend, and the economy will stall for lack of investment. But the supposed shortage of funds to invest is nonsense. The securities markets are awash in money. Why else do they have to invent $41 trillion in “derivatives” in order to have enough stuff to sell to meet the demand?

The fourth and most obvious scheme is analogous to the bombing strategy pursued a quarter century ago under the code name Rolling Thunder, whereby, as Tom Lehrer put it, we “practiced escalation on the Vietnamese.” That is to say, we would bomb a little bit; if they didn’t give up, we would bomb a little bit more; if they still wouldn’t give up, we would go after them again, and again, and again, escalating the attacks so they could see we were serious.

In the same way, the Federal Reserve Board is now engaged in bombing the economy bit by bit in order to send the message that it is serious about inflation. Considering that the message has to be repeated until everyone gets it, I think it a shame that the information highway is not yet in operation. Couldn’t the idea be passed around by e-mail[1]?

In any case, these disparate programs are to be brought to coincidental fruition through the buying and selling of Treasury securities by the Federal Open Market Committee. That is not a coherent policy; it is a four-ring circus of guessing games.

Besides the performances in the main tent, Greenspan has two sideshows. The first, learned years ago from Ayn Rand, is based on the extraordinary notion that speculators in gold are infallible judges of the imminence of inflation. So he keeps his eye out for any increase in the price of gold.

The second, which is brand new, relies on the fact that years with low inflation tend to post high productivity gains, and vice versa. There are said to be some glitches here, and two staff economists have been detailed to fix them. My bet is that they won’t be able to fix them in a way that will give their boss another excuse to raise interest rates, because while years of low inflation are years of high productivity, they are also years of low interest rates.

In 1964, for example, productivity gained 4.3 per cent (its highest record since World War II), while the Consumer Price Index advanced only 1.3 per cent (one of its lowest), and the Federal funds rate was 3.5 per cent (also among the lowest). Ten years later, productivity fell 2.1 per cent (its worst performance), the CPI hit 11.0per cent (its third worst), and the Federal funds rate was 10.5 per cent (its fifth worst). A high interest rate is evidently a guarantee of decreased productivity. As I’ve said before, I don’t subscribe to standard productivity theory, but I do think it only fair that those who live by it should die by it.

Raising the interest rate has an inflationary effect because interest is a universal and inescapable cost of doing business. It is also a universal and inescapable cost of living. It is an explicit cost when you borrow money to run your business or buy your new car; it is an implicit or “opportunity” cost when you use money you have instead of lending it to someone else and earning interest yourself.

People think of the inflation of the ’70s and early’ 80s as having been caused by OPEC price-fixing, but interest then (and always) was a far greater cost to the economy than oil. The Federal Reserve Board, foreseeing inflation (then as now), rushed to head it off (then as now) and raised interest rates. As a consequence, instead of an oil-driven inflation, we got an oil-and-interest-driven inflation, and the prime rate reached 21.5 per cent before it all ended in a recession that the Reserve deliberately sought.

Interest rates must be raised again and again, because with every hike, prices rise to cover costs. The Federal Reserve Board then has actual rather than feared inflation to deal with, and so up go the rates once more. The only end to this game is recession. Just as in Vietnam we destroyed a village in order to save it, so the Federal Reserve is willing to destroy the price system in order to save it.

THE PRICE SYSTEM is far from monolithic. If it were, all prices commodities, wages, interest, taxes, the lot-would go up in lockstep, and no one would be much hurt. The part of the system that the Reserve worries about is a numerically small part of the economy-essentially banks, securities exchanges, and the investors (mostly functionless investors) who exploit them. This part of the economy produces no wealth itself but makes fortunes arranging and rearranging the wealth produced by others. We may call it the Speculating Economy. It is the price system of the Speculating Economy that the Reserve acts to protect.

Now, it is no secret that the cost of labor is several times the cost of interest. Therefore when wages (including multimillion-dollar executive salaries) go up, we might have a wage-price spiral instead of an interest-price leapfrog. But no wage-price spiral has ever spun into recession (except, as in Weimar Germany, when prices and wages are indexed and the nation has massive debts denominated in foreign currencies), whereas every interest-price leapfrog, if not abandoned by the monetary authority, ends in recession.

It is common knowledge, and freely reported by the press, that the Reserve practiced escalatio on the economy this past spring and summer. It really wanted to hurt the housing market, because it wanted to hurt the construction industry, because it wanted employment reduced and wage scales constrained, because it wanted to send a message that it was serious about inflation.

If you are not profoundly shocked by that last sentence, please read it again. It shows the depths of savagery below which we have fallen. I say “below” because even savages tend to share with their fellows in lean times; and those who seek to unload their troubles on a scapegoat usually try to choose one arguably blameworthy. Our behavior is not so civilized. In lean times we become mean, and we boast of it.

Since we are all members one of another, since what we do unto others we do to ourselves, the most important of the costs of production is labor. More people are primarily involved in labor than in any other cost, and more people are arbitrarily excluded.

The arbitrary exclusion is an official act of the Federal Reserve Board, an arm of the United States government, which raises the interest rate with the express intent of restricting the employment of labor and preventing increases in the wage scale. This intent has been formed and announced despite the fact that millions of our fellow citizens are living lives of desperation that is not always quiet. The message they receive is that the society has small concern and less respect for them.

The members of the Federal Reserve Board who have raised the interest rate, and the economists and speculators who have applauded their action, may protest that they intended no such message. But the message certainly has been received, and it certainly is as clear as the message that the Federal Reserve Board is serious about inflation.

It is a mark of strength of the American tradition that in relation to their numbers so few of the rejected have lost respect for themselves, developed what the late Erik Erikson described as a negative identity, and lashed out against the society that rejects them. Some at the bottom, though, are already lashing out. They impose such severe moral, emotional and fiscal costs on society (and on themselves) that one must wonder whether the policy of rejection may not be as imprudent as it is unjust.

The New Leader

[1] Ed:  On the one hand, knowing the author, I’m quite surprised he was aware of the term in 1994.  On the other, if he were writing more recently he’d suggest we tweet the info.  Plus ça change….

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