Zeroing in on Thurow

Perspectives

ZEROING IN
ON THUROW

THE OTHER DAY, as I was going down in an elevator with a black activist friend of mine, we were joined by a young black messenger who pulled out a paperback and started to read. My friend, having nothing more active to do at the moment, snatched the book away. “What’s that you’re reading?” he demanded. “The dictionary.” “The dictionary! Why the dictionary?” “Well,” the young man said, “it has the words.” My friend frowned, then thrust the book back. “All right,” he said sternly, “but challenge it.”

That is more or less how I feel about Lester C. Thurow’s The Zero-Sum Society, which I just got around to reading as a result of an Op-Ed piece he had in the Times a couple of weeks ago. If you haven’t read it, I think perhaps you ought to, all right-but challenge it, starting with the title. In the book trade, the rule is that a good title is the title on a bestseller. It doesn’t have to mean anything, and The Zero-Sum Society doesn’t mean anything, even to Professor Thurow. In his first chapter he announces that “All sporting events are zero-sum games.” But the precise contrary is the case. I can’t offhand think of any sporting event that is a zero-sum game. I grant that in every sport there are winners and losers, but the sum of their scores is not zero (as it is in gambling). As for political economy, it is not like any kind of game at all (the election of Richard Nixon was a situation where everyone in the nation lost).

Thurow actually understands this very well, for in the Times article I mentioned he points out the risk we all run in allowing our cities to deteriorate. He is absolutely right that the risk is great, and that we all-repeat, all-run it. If deterioration is a game, it’s one that has no winners, and whose score is a great deal less than zero. So I advise you to challenge the title and all those passages scattered through the book where Thurow remembers the title and works it into a paragraph or two. That’s mostly window dressing.

I also advise you to challenge what he has to say about environmental problems in Chapter 5, especially as compared with his Times article. He starts off with an unsupported ad hominem comment to the effect that “environmentalism is an interest of the upper middle class.” What’s that supposed to mean? Are all interests of the upper middle class (economics, for example) suspect? Has Harlem no interest in good garbage collection? (My activist friend thinks it has.)

Next he does a bit of shadow boxing with the GNP, because it doesn’t include a clean environment among the goods worth counting. This point is even more important than he allows: Not only does the GNP have no way of registering the value of clean air; it actually counts the unhappy results of pollution – higher doctor and hospital bills – as additions to the GNP. A miner who contracts black lung disease is thus improving our national productivity.

Thurow is aware of this, at least up to a point, yet he goes ahead and asks questions that presuppose a clean environment is not a real economic objective because it is not counted in the GNP. (But don’t get me started on the GNP.) Then, on the assumption (still unsupported) that different economic classes look on the environment differently, we are presented with an allegedly intractable problem of allocating benefits and costs. Zero-sum melodrama aside, it happens that our society has made a good bit of progress with these questions – just as it supports schools (even though many taxpayers have no children), builds highways (even though many taxpayers have no cars), “and maintains parks (even though many taxpayers have hay fever).

In the meat of the chapter, Thurow tells us how we “should think about the problem of how much ‘clean environment’ to buy. Imagine,” he says (economists are great imaginers), “that someone could sell you an invisible, completely comfortable face-mask that would guarantee you clean air. How much would you be willing to pay for such a device? Whatever you would be willing to pay,” he explains, “is what economists call the shadow price of clean air.” As Mark Twain would have said, ain’t that a daisy! I have a question or two for him: How much would you pay to avoid death in the next instant from asphyxiation? Or lingering death next Earth Day from lung cancer? My questions make just as much sense as his. In other words, no sense at all.

This absurd discussion leads into the most fantastic proposal in the book (not, I understand, original with Thurow): Rather than prevent pollution, we should charge for it by a system of “effluent charges.” The confusion here is between public and private good, and the unstated assumption is that since there is no absolute line between them, they are really the same. But what would you pay for a Superman suit so you could go jogging in Central Park at midnight? Your answer is the shadow price of police protection; and instead of trying to protect you, we’ll charge muggers for a license to beat you up (if they want to kill as well as maim you, the fee will be somewhat higher).

The point is that although all costs are stated in dollars, they cannot all be compared. Police protection has a cost, but it is a condition for society. Clean and decent public services are also a condition for society – for our society – as Thurow’s Times article shows. These services cost dollars. The dollars that this magazine or Thurow’s book cost are not comparable because these goods (though surely great) are incidental, not fundamental, to our society. That environmental concerns are relatively new fundaments for society is no argument against their necessity. London didn’t have a public police force until Sir Robert Peel invented the bobbies in 1829.

All public goods are, in principle, historical, and the environmentalists are making history today. If I find so much to challenge in only one chapter of The Zero–Sum Society, why do I recommend that you read it? Aside from the stimulation the book provides (you can see that it has stimulated me), it has a few pages in another chapter that say some extraordinarily interesting things about taxation. I would never have believed it possible that anyone could convince me the corporation income tax should be abolished, yet Professor Thurow has done it. I fear his proposals on capital gains taxes are unworkable (he wants them withheld as the gains accrue; but fast growing companies – the ones with substantial gains – generally don’t have the cash to withhold), If I had my druthers, I’d trade off the abolition of the corporation income tax against the cancellation of special treatment of capital gains (which ought to be taxed as they are realized, as regular income, as they were before 1922) and the elimination or drastic modification of deductions for contributions and interest expenses. This is all moderately complicated, but I am told that Congress’ Joint Committee on Taxation has an excellent staff, and I am sure they could work it out.

SPEAKING of capital gains reminds me of a circular letter just received from Senator Daniel P. Moynihan. It is always a pleasure to hear from the Senator, because, like Professor Thurow, he writes so well. This time, however, he’s congratulating himself on his role in lowering capital gains taxes, and he’s dead wrong. As proof that he was right in advancing the lowered rates, he cites increased total collections in spite of them. The Senator connects this result with the Laffer curve. It ain’t necessarily so (more likely a lot of long-term gains were cashed for a one-time killing), but it doesn’t matter.

What does matter is that the Senator seems to be saying that (1) taxation is for revenue only, and (2) the best tax is the one that’s easiest to collect. The first question was put on the road to settlement by Andrew Jackson’s” force bill” of 1833, and was definitively settled by the Civil War. About the second issue the Greeks and Romans (not to mention the Kwakiutl Indians) had much more efficient ideas than anything proposed today. When the ancient Greeks wanted to hold a festival or build a trireme, they simply told off a rich man for the honor of paying for it. The Romans used to do the same before they became an empire, and thereafter they developed the system of selling collection rights to a tax farmer. These were a sort of license to steal (like a license to pollute) and caused no immediate trouble at all to the government selling them. The Kwakiutl evened things up by holding a potlatch: very easy and lots of fun. So the Senator’s ideas on taxation are neither so new nor so pragmatic as he thinks. The thing about special treatment for capital gains is that it is a special break for the rich, which stimulates them to gamble (not to make productive investments), and which results in more inflation for the rest of us. See THE NEW LEADER for September 7, 1981.

GEORGE P. BROCKWAY, a past NL contributor,
is the chairman of the board of directors of W. W. Norton & Co.

Caveat Venditor

Originally published November 16, 1981

THE NEW Chairman of the Federal Trade Commission, James C. Miller III, must be surprised at the initial flak he has had to fly through for proposing that the FTC drop its programs (such as they are) protecting consumers against fake advertising claims and defective products. “Consumers are not as gullible as most regulators think they are,” he remarks, almost plaintively. He need not worry. He is in the mainline of the ideology of this most ideological of administrations; he is saying nothing that has not already been said by Virginia  Knauer, the President’s consumer affairs adviser. The President himself is understood to want to scrap the Consumer Product Safety Commission in the interest of balancing the budget. The commission is in for $33 million a year, while the deficit is feared likely to run perhaps 2,000 times that; so the effect would be petty, but at least it would show he’s trying.

Such a move would also fulfill a campaign promise, and we all know it’s good to keep a promise-even a stupid one. President Reagan has in fact kept a high percentage of his campaign promises- up to a point, anyway-and a high percentage of them have proved stupid. Wall Street and Main Street (not to mention Broadway) were mobilized to lobby for the new tax law, and now they’re unhappy with the result. Everyone else figured out that if you cut taxes more than you cut spending, you increase the deficit, but brokers and bankers  and businessmen couldn’t see that far ahead. It would be a Laugher if we weren’t all liable to be hurt.

The same sort of thing will happen with the demise of Federal consumer protection, though it’s possible that in this case most businessmen won’t even finally recognize that they have managed to hit themselves in the solar plexus. Herbert Stein, Nixon’s Chairman of the Council of Economic Advisers, once made a widely retailed mot to the effect that people of liberal mind trust anyone over 18 to vote for President of the United States (billed as the most powerful office in the world), but don’t think the common man or woman capable of buying a bicycle without do-gooding governmental protection. Caveat emptor, says Professor Stein (like me, he had five years of Latin).

To gain a little perspective on the question, let us turn caveat emptor around. A purchase, after all, is not a one-way transaction; I don’t get a bicycle for nothing. When I buy one from Professor Stein for $99.99, I give him a $100 bill and he gives me a penny and the bike. Stein says that I, the emptor, should make myself a self-reliant expert on bicycles before I trade in his shop; if what he sells me proves dangerous or shoddy, it’s my fault, not his.  Now, my question is, Why shouldn’t caveat emptor be balanced by caveat venditor? If he can (unintentionally or maybe not) sell me a dangerous or poorly made bicycle at my peril, why can’t I pay him with a counterfeit $100 bill at his peril? Or a rubber check? Or a credit card I happened to pick up on the street? Why shouldn’t he be required to make himself a self-reliant expert on these matters, and not be allowed to go running to the sheriff for help? It is no answer to say that counterfeiting is against the law. That law can be repealed, just as the Consumer Product Safety Commission can be abolished.

It is no answer either to say that check bouncing is cheating, and therefore immoral and bad for the soul. The same can be said for selling dangerous bicycles. Nor is it any answer that government regulations impose an intolerable burden of paperwork on the bicycle business. The legal requirement that I have enough money in my account to cover my checks means I must balance my checkbook, and I find this chore an intolerable burden of paperwork.

These matters have a long history, going back at least to Lydia in Asia Minor in the seventh century BC, when government coinage was invented. For the next 2,500 years princes and principalities and powers struggled with the problems of coinage: how to get away with debasement on the one side and prevent clipping on the other. Then there came the nagging problems with counterfeiters of paper money (a collateral forebear of mine was so good at it that the entire note issue of a Connecticut bank had to be withdrawn a couple of hundred years back). Only in the past 50-60 years have checking accounts been widely used, while credit cards are a mere 30 years old.

All of these inventions-coined money, paper money, personal checks, credit cards-have been good for business. They make business easier to transact. Neither  seller nor buyer now needs to wear out his teeth biting coins. Within very broad limits we can trust what is proffered. We can trust because this is in general a trustworthy society. And it is a trustworthy society in part because the sanctions of the criminal law enforce the trust.

If the merchant who receives a rubber check had to rely on the civil law, he would be faced with endless delays and absurd costs. He would have to spend hundreds or thousands of dollars, plus many hours in court appearances, to try to get what was due him. He couldn’t afford this; so he couldn’t afford to accept checks; so he’d have to restrict himself to a much slower and smaller cash-only business. The threat of criminal penalties, enforced by the state, deters check cheats and makes it possible for merchants to trust the rest of us, to the merchants’ benefit and ours.

What’s sauce for the goose is sauce for the gander. I’ll be readier to buy Professor Stein’s bicycle if I know its safe; and I’ll be surer it’s safe if I know the law will crack down on him in the event that it’s not. I can’t afford to sue him for damages  unless I’ve been catastrophically hurt, which neither of us wants to happen. Since he really does not intend to cheat me, and I really do not intend to cheat him, we’ll both be better off knowing the law will call to account those who do cheat: We’ll both be better able to trust each other.

Ultimately, trust is what economics is all about. The simplest barter is impossible without some measure of it. Among barbarians the trust may be minimal, yet that is what marks them as uncivilized. In civilized society the most suspicious traders, exchanging a bushel of wheat for a pound of meat, can carry their skeptical examinations only so far. Volume and weight can be readily tested, but it is well-nigh impossible to guard against adulteration. The grains of wheat cannot all be microscopically examined, nor the meat be completely dissected, especially if the traders are ever to do anything else.

Besides, the proof of the foods is in the eating-and that must await the consummation of the trade.
So if the traders are to do business, they must trust that there are limits to the deviousness of their trading partners. The greater the trust, the easier the trading; the easier the trading, the more trading can be done in a given period of time; and time is money, especially with the prime rate at 17 or 20 per cent.

PRACTICALLY all business depends on the reliable nosiness of the Bureau of Weights and Measures. The meat industry would go out of its mind if it could not base its pricing on USDA standards and regulations. Lobstermen may grumble, but without regulation they’d fish themselves out of business in short order. Even the stock exchanges provide a dramatic example of the effectiveness of regulation in promoting trade. In the Great Bull Market of blessed memory, the New York Stock Exchange, “self-regulated” as it was, traded roughly 4 million shares a day (and only 16.4 million shares were traded in the frenzy of Black Tuesday). Now, in spite of (really because of) the interference of the SEC, trading is at a 40-50 million share a day clip. The common man can still lose his shirt on Wall Street, but because he is no longer likely to be cheated out of it he is more willing to risk it-to his broker’s profit, and possibly to his own.

It is a notable fact that businessmen with one side of their brains-understand the principle at work here very well. That is why they spend millions to establish brand names, which are a sort of pledge of product quality. Their reasonable expectation is that weary travelers, for example, unable to face the uncertainty of the inspection of local accommodations, will settle for an interchangeable HoJ oMoLo even though they might prefer some variety in their plastic decorations. A recent Holiday Inn advertising campaign labored precisely this point. As with brand recognition, and at less cost, Federal standards instill consumer confidence and thereby increase trade. One of the reasons for the current troubles of the automobile industry is the doggedness of the Big Three in fighting every measure for consumer protection. The understandable inference is that they wouldn’t be making such a fuss unless they intended to put something over on us.

Consumers (that is, all of us) will of course be hurt by the elimination of consumer protection programs. But producers (that is all of us, too) will also be hurt. Although businessmen are no doubt right to protest the onerousness or irrelevance of this regulation or that, it is a fundamental mistake to oppose the whole movement. The truth of the matter is that the consumer movement has been good for business. Ralph’ Nader insists that he’s trying to make the capitalist system work, and the Marxists, clear eyed on this point anyhow, oppose him as wholeheartedly as do the Reaganites.

GEORGE P. BROCKWAY, a past NL contributor,
is the chairman of the board of directors of W. W. Norton & Co.