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By George P. Brockway, originally published September/October 2000

2000-9-10 New Use for a Bad Idea - title.jpg

IN ECONOMICS no bad idea goes unused. This is perhaps to be expected in a discipline that prides itself on being the science of the efficient allocation of scarce resources. Ideas are hard to come by in the best of times. With many hundreds of doctoral candidates looking for original dissertation subjects, and many thousands of tenure-track assistant professors looking for profound article topics, nothing that looks like an idea can be allowed to waste its fragrance on the desert air. In addition, there are the diurnal needs of business-page journalists and bond salesmen. Not to mention the problems of NEW LEADER columnists.

A subject that has met all the above needs for at least the past quarter century is the productivity index. It is with mixed feelings that I report on a quite new use that has been thought up for this fallacious procedure. Since, as we shall see, the new use is in the very highest reaches of national policymaking, it is in an especially bad place for a bad idea.

The February 8, 1982, column in this space was titled “Productivity: The New Shell Game.” On May 28, 1984, “The Productivity Scam” appeared. The third antiproductivity- index piece had to wait until  May 19, 1993, and the fourth is here and now. Productivity being a protean idea, each column is concerned with a different use of the index.

True to its metaphor of a shell game, the earliest column said that in the new game each of the three shells had a “pea” under it. The first pea, “which always turns up on metropolitan bars and suburban bridge tables,” was that “it just seems people aren’t willing to work the way we did when we were young.”

Next was the “America has gone soft pea.” We let them beat us in Vietnam; investigative journalism got out of hand over Watergate; and now a court has said that creationism isn’t science. It’s hard to tell what the country stands for anymore. It’s no wonder that productivity is down and we have to have this recession to get us back on the track.

Under the third shell was the “archaic industry pea.” Our productivity is down because we don’t invest enough, because we don’t save enough, because we tax business-too much.

In other words, the productivity “peas” were Reaganomic explanations of the recession then stagnating. Regardless of the shell we chose, we got a pea; and regardless of the pea we got, we lost.

By May 1984, the productivity focus had narrowed, with this conclusion: “The uproar about labor productivity is a scam to distract attention from a massive shift in the distribution of the goods of the economy. The share of nonmanagerial labor is being reduced; the share of managerial labor is being increased; and the share of those who do no labor, who merely have money, is being increased most of all. This is what Reaganomics (or, if you will, Volckerism) is all about, and the Atari Democrats have been gulled into going along with it.”

(Those whom the late Robert Lekachman, a wise and witty contributor to this journal, dubbed Atari Democrats called themselves New Democrats. Atari was at one time the leading producer of electronic games, and was early seduced abroad by the promise of cheap labor. What became of it, deponent knoweth not.)

Nine years later (May 19, 1993), the focus had narrowed again. The talk was all about downsizing, a nasty and disgraceful business practice that continues to this day.

The productivity index is thus one of the most powerful ideas of our time. It has malignly affected the lives of millions of men and women, the fortunes of thousands of enterprises, and the economies of nations.  It is a tragedy of almost universal scope.

The basic idea of the index is sound enough. Output is divided by input to determine how many units of input achieve a unit of output. The result is an index number that can be compared with other numbers similarly derived. A single index number, of course, is almost useless; but much can be learned from comparisons, and they are of great and daily use in business management. The current performance of a company’s sales (or any other) department can be compared with. its performance in prior years, or with the performance of corresponding departments of the particular industry as a whole. Banks routinely analyze their customers’ profit and loss statements in this way, and trade associations frequently do the same for their members.

It must be confessed that executives sometimes make unreasonable use of the comparisons. A sales department may be faulted for a falling sales index, while the sales force argues that the quality of the product has declined, or that the advertising has been inadequate, or that the sales representative suffer from stress caused by driving poorly equipped automobiles.

Rumbles from the executive floor suggest that the sales reps are too well paid, or that there are too many of them, or that some territories are not worth covering.  This is the way that downsizing begins.  Every job in every department is ultimately at risk.

Years ago a chapter in a tome on book publishing started this way: “There are two simple principles by which the business thinking of a publishing house should be guided.  They are (1) Reducing costs by $1,000 has roughly the same effect on the profit and loss statement as increasing sales by $25,000.  (2) You have to spend a dollar to make a dollar.

Downsizing tends to forget the second principle, and also the greater principle that the human beings who are so easily hired and fired are not a means to an end but are ends in themselves.  But the ethical objections to downsizing shouldn’t allow us to decide that there are not solid, hard-nosed, business-is-the-only-thing objections to the national productivity index.

THE INDEX numbers are simple fractions:  national output for a certain period in dollars (because we can’t add shoes and ships and sealing wax) divided by the hours worked by everyone engaged in production, whether paid or not.  Fractions, of course, are not unequivocal; you can increase their value either by increasing the nominator or by decreasing the denominator (2/3 and 1/2 are both greater than 1/3).  So you can increase a productivity index number either by increasing “dollars of output” or by decreasing “hours worked.”  As we shall see, the hours present a special problem.  Consider some examples of how the index works.

First, microeconomically:  Think of a journeyman plumber whose output is x, whose hours worked is y, and whose productivity is therefore x/y.  Suppose by taking on a plumber’s helper (a human being) he increases his output 20 per cent.  Being a rational person, you might conclude that such an increase in output would result in a substantial increase in productivity, but you would be sadly mistaken.  According to the formula, his productivity becomes 1.2x/2.0y, or .6x/y, and thus has fallen 40 percent.

We get similar results macroeconomically.  Take the 5.4 million or so people counted by the Bureau of Labor Statistics as unemployed. (There are about 10 million more who aren’t counted because they have a part-time job, or are too discouraged to continue looking for work, or are too turned off ever to have seriously entertained lawful employment).

Let’s accept (for argument only) that the conservative press is correct in saying the 4 percent of our civilian workforce officially designated unemployed are so careless, stupid, uneducated, arrogant, sickly or pregnant that they’re unlikely, if employed, to produce on the average more than a third as much as an equal number of those who are currently employed.  Even at that level, if we could find the wit and will to employ these people on this basis, we could increase our gross domestic product by 1.2 percent, or about $130 billion a year.

Being still a rational person, you might think such a tidy sum would increase our productivity, but again you would be sadly mistaken.  Productivity is still output divided by hours worked or x/y.  After finding jobs for the 4 percent of our civilian workforce that is now unemployed, our productivity becomes 1.012x/1.04y, a fall of 2.7 percent.

So if we really believe in the conventional theory of productivity, we must deny help to our plumber and jobs to the unemployed.  Unfortunately, a large majority of the members of the American Economic Association do believe in the theory.

A couple of other examples may clinch the case.

A young slugger lived up to his promise by hitting a grand slam home run his first time at bat in the majors.  His next time up, there were only two men on base.  His manager yanked him because (aside from drawing a walk or being hit by a pitch, neither of which would count as a time at bat) his productivity could only go down.

Then there was the unsung predecessor of Tiger Woods who hit a hole in one on the first hole of a club tournament, but retired when his drive on the second hole stopped rolling two feet short of the cup. “My productivity could only go down,” he lamented as he gave his clubs to his caddy and took up water polo to sublimate his aggressions[1].

THE THING about “hours worked” is that Gertrude Stein couldn’t have said “hour is an hour is an hour” because they aren’t. I was a lousy salesman, though I worked doggedly at it for almost five unproductive and depressing years. Many years later I became a moderately successful CEO of a small company and worked doggedly at that. I put in approximately the same number of hours a day as a salesman as I did as a CEO. After all, there are only so many hours in a day. But the value of my work as CEO really and truly was vastly greater than the value of my salesmanship, and you may believe I was paid more for it, too. Adding those different hours together in the denominator is less sensible than adding apples and oranges.

Karl Marx[2] faced a similar problem when he was wrestling with his theory of surplus value. He finally declared victory and wrote: “We therefore save ourselves a superfluous operation, and simplify our analysis, by the assumption, that the labor of the workman employed by the capitalist is unskilled average labor.” If this was a valid assumption in his day (and it probably wasn’t), it certainly is not in ours.

John Maynard Keynes also felt a need to devise a homogeneous unit of labor. He wrote: “Insofar as different grades and kinds of labor and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour’s employment of ordinary labor as our unit and weighting an hour’s employment of special labor in proportion to its remuneration, i.e., an hour of special labor remunerated at double ordinary rates will count as two units.”

The minimum wage (currently $5.15 an hour) may be taken as a homogeneous unit of labor. But why bother? It is merely a multiple of a homogeneous unit we already had ($1.00) and tells us nothing new.

Unless you naturally think like an economist, you may wonder why the denominator of the productivity fraction is “hours worked” rather than “dollars paid for labor.” The deep secret is that economists, like well-bred  characters in an early 19th-century English novel, are with a few exceptions embarrassed by talk about money. General equilibrium analysis, the most fashionable economic theory at the bulk of elite American universities, can find no place for money in its doctrine. Even monetarism, despite its name, is scornful of the stuff we pay our bills with, which it speaks of as “nominal” money, and insists that what it calls “real” money is what matters, although no such thing exists. (If you’ve read much medieval philosophy, you may find such talk familiar.)

There is another problem with the denominator. We learned in school that the factors of production are land, labor and capital. Some add technology, and Adam Smith wrote of a propensity to barter. In any case, labor is merely one of the factors of production; yet the productivity index treats it as the only one.

To be sure, labor may be the largest factor. A quasi-constant of the economy is that the cost of labor currently runs about 60 per cent of GDP. But the cost of capital-the money spent for interest by nonfinancial, nonagricultural businesses -has increased roughly five and a half times in the past 40 years, partly because the Federal Reserve has increased interest rates, and partly because today American business relies much more on borrowed money than it used to. Common laborers, not Protestant financiers, are now the austere actors on our economic stage[3].

This shift in roles may be good or bad or indifferent, but the productivity index, no matter how constructed, will at best only call our attention to the fact that a shift has occurred. It will neither judge the desirability of the shift nor tell us what to do about it. Econometrics-c-playing with statistics-is the beginning, not the end, of economics.

ALL THAT said, we come to the new use of the productivity index mentioned at the start. I’m sorry, but I can’t say who invented the new use. It was a stroke of genius, even though the Federal Reserve Board had already pioneered the implausible idea of using high productivity (according to the index) as an excuse for trying to reduce production. I’m sorry again, but I can’t say, at least with a straight face, why we should reduce production.

The new scheme goes like this: (1) Production is produced by workers exercising their productivity. (2) The population of workers increases about 1 per cent a year. (3) The productivity index, fallacies and errors and all, increases about 1.5 per cent a year. (4) Put them together, and you get 2.5 per cent a year as the rate at which a well-mannered economy should expand. (5) The economy has been expanding at better than that rate in every year except one in the last eight. (The low one was 2.4 per cent in 1993.) Conclusion: Look out! It must be overheating!

Well, I ask you!

I regret to have to add that the Democratic Party Platform Committee listened solemnly to this kind of stuff. I doubt that the Republicans bothered their heads about it. All they need to know on earth is that a tax cut is beauty, and beauty is a tax cut, especially a tax cut for millionaires. I regret further to have to admit that the economics profession is careless about such nonsense. The other day I read a paper by a friend of mine that was decorated by several equations in which a symbol for productivity occurred. I objected that the symbol stood for a fallacy, and that his equations were therefore fallacious.

He laughed. “Everybody does it,” he said. “You’re expected to do it. It doesn’t matter.”

Well, I’ve already asked you.

The New Leader

[1] Ed:  As a similar tale goes, a golfer played at Pine Valley, arguably the best golf course on earth, and in the first four holes had two birdies and two eagles. One eagle was a hole-in-one.  He was 6 under par.  The fourth green is back at the club house.  The golfer walked off the course and into the bar and would not come out as he’d only screw up the round.

[2] Ed:  Though likely not as a salesman….

[3] Ed: emphasis mine

Originally published July 1, 1985

INTHE PREFACE to their best seller Free to Choose, Milton and Rose Friedman write, “We are still free as a people to choose whether we shall continue speeding down the ‘road to serfdom,’ as Friedrich Hayek entitled his profound and influential book …. ” Since Hayek’s book was published 40 years ago, it would seem that we have been “speeding” down that road at a remarkably sedate pace. I must confess that praise like the Friedmans’ put me off reading The Road to Serfdom until now.

That was a mistake. Hayek is well worth reading, both for what he says and for what he doesn’t say. Looking first at the latter, we find that he is far from advocating the sort of libertarian – that is, practically nonexistent state the Friedmans envisage. The Friedmans share with Marx a longing for the state to wither away, but Hayek is having none of that; he merely wants the state to act responsibly.

He is, for example, willing to consider “restricting the allowed methods of production, so long as these restrictions affect all potential producers equally and are not used as an indirect way of controlling prices and quantities …. ” He also believes that “To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition.” Hayek would thus not be sympathetic with the notion, advanced by both neoliberals and neoconservatives, that factories should be allowed to pollute as they please, so long as they pay a fee for the privilege.

Nor would he approve of the merger movement and the consequent concentration of power in sprawling conglomerates. He disputes, without naming him, his fellow countryman Joseph A. Schumpeter (who is at present being touted by neoconservatives as a foil to Keynes), rejecting “the myth … that … competition is spontaneously eliminated by technological changes.” In addition, Hayek quotes with favor from the New Deal report of the Temporary National Economic Committee: “‘The superior efficiency of large establishments has not been demonstrated … monopoly is frequently the product of factors other than the lower costs of greater size. It is attained by collusive agreement and promoted by public policies. When these agreements are invalidated and when these policies are reversed, competitive conditions can be restored.'”

In another place Hayek says, “It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us.” He is against monopoly as well as against the “monster state,” and in his last chapter, he writes (anticipating E.F. Schumacher), “It is no accident that on the whole there was more beauty and decency to be found in the life of the small peoples.”

Though Hayek’s main thesis is objection to a comprehensively planned economy, he recognizes that “the case for the state’s helping to organize a comprehensive system of social insurance is very strong.” He holds, too, that the state should be concerned in “the extremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them.” And strong as he is in his insistence on private property, he thinks that the case for inheritance may not be supported with “the same necessity.”

I have quoted Hayek extensively because his reputation is that of an extreme, devil-may-care, laissez-faire conservative. His book was actually greeted with qualified praise by Keynes, as Robert Heilbroner tells us in The Worldly Philosophers; but endorsements like the Friedmans’ have established his reactionary” image.” Much of Hayek’s later work, however (e.g., his attack on John Kenneth Galbraith; see” Rereading Galbraith,” NL, June 13,1983), does exhibit a hardening conservatism.

This is not, I think, an instance of the notorious syndrome whereby flaming youths turn into reactionary elders (“When old age came over them / With all its aches and qualms, / King Solomon wrote the Proverbs / And King David wrote the Psalms”[1]). Rather, it is an instance of a common, albeit little noticed, progression whereby a great leader becomes misled by his followers. The change is not always in a conservative direction. Marx became more violent and conspiratorial at least in part because his most vocal supporters were conspiratorial. John Dewey, whose Human Nature and Conduct showed strong elements of philosophical idealism, became famous for the contrary theory of instrumentalism that appealed to his admirers.

I have also seen such changes occur at less rarefied levels. One of the most delightful books I ever published was Little Britches (I was never good at titles) by Ralph Moody. It was the first of several memoirs of family life. No one reading the series would guess Little Britches was begun as a polemic against the Social Security system. But Ralph’s readers – starting with those in an extension writing course in Berkeley-praised him for the warmth of his characterizations, and he became more interested in people and less in abstract theory.

THERE ARE other interesting themes in The Road to Serfdom.  One of these appears in his analysis of the failure of the Social Democrats to stop Hitler. We have heard much of the trahison[2] of the Communists; but Hayek argues that the socialist emphasis on comprehensive planning predisposed the German electorate in favor of grandiose schemes like Hitler’s. If he is right, this fact should give pause to our Atari Democrats, who want to set up a committee to decide which industries we should foster and which we should abandon and in general to plan how to use our resources. As Robert Lekachman has pointed out, such committees are more likely to be run by big business than by idealistic planners.

The Social Democrats were further weakened, Hayek says, by a split that appeared in the labor movement. For various reasons, certain unions and certain categories of workers were able to achieve remarkable economic gains, while others were left far behind. The laggers were understandably disillusioned about the Social Democrats and became ready to acquiesce in, if not support, the National Socialist program.

“To them,” Hayek writes, “and not without some justification, the more prosperous sections of the labor movement seemed to belong to the exploiting rather than to the exploited class.”

This is a problem that American labor leaders have yet to solve. The split in our labor movement was opened, as I suggested last year (“Voodoo on the Primary Trail,” NL, April 30, 1984) by the Vietnam War. But it has been astutely widened by apologists for big business and by the just- folks demeanor of President Reagan, and deepened by the misguided anti-labor Presidential campaign of Gary Hart.

It is said, by the way, that Hart appealed especially to the so-called Yuppies- young, upwardly mobile professionals. I venture to think that Hayek’s analysis of what happened in Germany is closer to what is happening here. He writes that “no single economic factor has contributed more to help [the Nazis] than the envy of the unsuccessful professional man, the university-trained engineer or lawyer, and of the ‘white-collar proletariat’ in general for the … members of the strongest trade unions whose income was many times theirs.” I suggest that the “white-collar proletariat,” hitherto most visible in countries like India, will become a growing and destabilizing factor in our public life as computerization and conglomeration steadily reduce the need for “middle management.”

Another theme of current interest in Hayek’s book is his concern over the tendency of legislatures to turn hard questions over to independent public authorities. I suppose he would therefore welcome a good deal of the current deregulation, but he would appear not to have been a knee-jerk deregulator. Hayek’s concern is also a central topic in Theodore J. Lowi‘s widely read The End of Liberalism. Both men describe the irresponsibility that results from the delegation of undefined powers. Hayek emphasizes the dictatorial arrogance that ensues; Lowi notes (as does Lekachman in the comment cited above) that ill defined regulatory commissions tend to be co-opted by the industries they regulate. A different example of irresponsible delegation is the willingness of Congress to give the President power to commit military forces to action, and indeed to launch a nuclear strike, without carefully defining limits to that power.

In the same way, control over our money, and hence over our economy as a whole, has been surrendered to the Federal Reserve Board. I regret to have to admit that three Democratic Presidents played crucial roles in the surrender: Woodrow Wilson, who admitted he knew nothing about banking, signed the Federal Reserve Act. Harry Truman allowed his Secretary of the Treasury to dissolve the agreement with the Federal Reserve that had held the prime interest rate down to 1.5 per cent during the War. Jimmy Carter appointed Paul Volcker chairman of the Fed.

How all this came about is told in fascinating and chilling detail by F.W. Maisel in a little book entitled Great American Ripoff (Condido Press, Box27551,San Diego 92128). Maisel may upset the sensitive by his espousal of a conspiracy theory of American banking; nevertheless, it’s hard to fault his facts, and I’m not even prepared to say he’s wrong about the conspiracy.

Should you feel that the bankers running the Federal Reserve, far from being conspirators, are idealistic public servants who have, in Hayek’s phrase, “devoted their lives to a single task,” there is still reason to be wary of them, for “From the saintly and single-minded idealist to the fanatic is often but a step.” Single-minded conservatives please copy.

The New Leader


[1] A poem by James Ball Naylor http://www.jamesballnaylor.com/

[2] French for “betrayal” or “treason.”

Originally published November 26, 1984

I SUPPOSE I should say something about Secretary of the Treasury Donald T. Regan‘s recent Federal tax simplification proposals. As it happened, I was vacationing in Florida when they were announced and for a couple of weeks thereafter, so my initial information was limited to the local newspaper’s reports and the charismatic pronouncements of NBC’s Tom Brokaw.

The story filtering through to me and my neighbors was sufficiently vague on the interest-expense question to allow me to hope that one of my private ideas had a chance of becoming public law. It seemed that interest expense (with the exception of that on a primary-residence mortgage) would no longer be deductible. This certainly exercised the Sunbelt real estate operatives. It seemed, too, that the change would cover the interest expenses of businesses as well as of individuals. The latter, I have since discovered, is not the case. But I was briefly delighted for the following reasons, which I now offer in the event anyone asks you how the law should be revised.

Contrary to general opinion, the interest-expense deduction works mostly for the benefit of people with money to lend. It does nothing much for those with the need to borrow – especially not for those in the lower tax brackets. The first fact to bear in mind is that the interest rate is in one respect like other prices: It can’t go higher than the market will bear. You can’t get blood from a stone. If lenders attempt to set the rates too high, they will be left with idle money on their hands. If they do nothing with that money, they will be like the unfaithful servant in the Parable of the Talents. To get their cash out and working, they must lower the rates to levels that businesses and individuals are able and willing to pay.

Although borrowers are subject to euphoria, businessmen are restrained by the necessity to make a profit, or at the minimum to make ends meet. For some months now, despite the well -advertised recovery, profit rates have been falling. And so have interest rates. The connection between the two is indirect, not direct. Interest rates have been coming down partly because the Federal Reserve Board has slightly relaxed its control of the money supply, but mainly because there has been a declining demand for loans. Many businesses have not been pursuing loans for the simple reason that business isn’t good enough for them to afford the rates asked.

The second fact is that the corporate tax deduction for interest expense cuts the cost of business borrowing roughly in half, at least for the bigger borrowers. In other words, at the present time some businesses are able and willing to borrow money effectively costing them, say, 6 per cent, not the 10.75 per cent (or a point or two more) they pay their friendly bankers before taxes. It is consequently reasonable to foresee that, if the interest-expense deduction were abolished, the demand for loans at 10.75 per cent would truly plummet, callable bonds would be called, refinanceable loans would be refinanced, lenders would be drowning in money to lend, and the interest rate would have to drop until solid ground was reached again. For various reasons (including, we may be sure, inappropriate reactions of the Federal Reserve Board), the rate would probably not fall quite to the present effective rate of 6 per cent. Nevertheless, observe the outcome: Abolition of the interest-expense deduction would leave borrowers about where they were, while the take of lenders would be cut almost in half. To repeat for emphasis, the interest-expense deduction mainly subsidizes those with money to lend, not those eager to put it to work[1].

Obviously, introduction of the change in a hurry would hurt many individuals, businesses and banks. The suffering of most individuals and businesses would be assuaged by the promised reductions in the tax rates, but the crisis in banking might be acute. Don’t get me wrong.  If it were not for possible damage to the economy (and this could be mitigated by phasing in the change-over two or three years), I could regard a pit full of squirming bankers with a fair show of equanimity. My point has nothing to do with my feelings for bankers, some of whom are my best friends (though not always when I need them). My point is that the interest-expense deduction makes usurious rates seem tolerable. It is a prop holding up those rates for the enrichment of money lenders. I therefore thought Regan was absolutely right in trying (as I mistakenly understood it) to knock out this deduction.

Of course, I feared there wasn’t a prayer that he would prevail, despite the fact that everyone -everyone in the whole wide world (except for big lenders) – is longing for interest rates to come down. Last year, even with a more docile Congress and strong support from a not-yet-lame-duck President, the Secretary couldn’t get the banks to withhold taxes on interest – a measure that would have hurt only cheaters and the people who encourage cheating.

ALSO DOOMED (I thought, and still think) is Regan’s proposal to get a rein on the charity deduction. The churches and the colleges, the foundations and the funds, the museums and the libraries, the clinics and the think tanks – all the eleemosynary institutions in the land – are up in arms about this one. It is very sad and disillusioning. Many undoubtedly worthy, dedicated and, yes, necessary citizens have been tricked by the issue into making fools or hypocrites of themselves. Two pitiable examples turned up in the Florida paper I read.

An official of the local United Way observed that the median income thereabouts is $17,000, and he worried that the vast majority of its contributors would not be able to continue their generosity if the law were changed. The United Way does its supporters an injustice. For it is surely true that practically all taxpayers with a gross income of $17,000 take the standard deduction and make most of their contributions because they want to, not because it is a way of diddling the tax collector.

A local parson had a clearer under-standing of finance – and of his parishioners. He argued that Secretary Regan’s proposal to cut the top tax rate from 50 to 35 per cent would greatly reduce the value of the charity deduction to those in the top bracket. He is certainly right. Rich people are in (if the parson will forgive me) a hell of a fix. We’ve been told since New Deal days that high taxes sap their incentive to work and save. Now we discover that low taxes sap their incentive to be charitable. Of such is the Kingdom of Heaven.

The local Salvation Army made a more responsible observation. It noted that the talked – about budget cuts (a.k.a. “freeze”) in welfare programs would increase the calls on private charity, while the tax changes would reduce contributions. Indeed, one wonders (to introduce a little of the spice of argumentum ad hominem into the discussion) what the President himself might be expected to do in these circumstances. You will remember that the Treasury proposes to count only contributions in excess of 2 per cent of adjusted gross income. You will also remember that the President’s tax returns have rarely (if ever) shown contributions up to or much beyond that level. Add to this the fact that he promises to cut his own pay, and I am led to suspect that his favorite charities won’t be able to count on him (and on many like him) as they have in the past.

There is no doubt that the charity deduction is grossly abused (mostly in ways I haven’t discussed). There is little doubt that Secretary Regan’s modest proposals for its reform will fail. Then we have the matter of no longer allowing the Federal deduction for state and local taxes. Here I think the Secretary has his best chance of succeeding.

The proposal has drawn fire from New York’s Governor, Mario Cuomo, as well as from both of its Senators, Democrat Daniel P. Moynihan and Republican Alfonse D’ Amato, and it is easy to rally the rest of the country in opposition to the Empire State. I’m opposed to this part of Regan’s plan, too, however. As I have argued in this space (“Eliminating Frictional Unemployment,” NL, March 7, 1983), the most rational approach would make state and local taxes a 100 per cent offset against Federal taxes. In brief, that would put an end to the game of beggar my neighbor states now play as they try to lure corporations away from each other with inadequate taxes. No chance.

Perhaps the most important single change advanced by the Treasury would eliminate most of the corporation investment credits and rapid-depreciation dodges. These allow companies like General Electric to have profits in the billions and pay no income tax at all, but instead receive rebates of a hundred million or more. The change was not deemed worth mentioning by my Florida paper. Maybe the editor foresaw that lobbyists would not have much trouble explaining to the President that his major campaign contributors would hardly be amused.

THE FOREGOING are only the principal ways the Secretary of the Treasury has gotten people mad at him. An indicator of the wrath he has incurred is that as staunch an Administration ideologue as William F. Buckley Jr. finds the program a disaster. This being the case, why did Regan make his irritating tax proposals?

In answer, I’ll venture the guess that he is playing the game perfectly straight, yet that the result will neutralize the Democrats. For the Regan plan is very close to (actually more liberal than) the one put together by Senator Bill Bradley of New Jersey and Representative Richard Gephardt of Missouri (see “A Cautionary Tale of Tax Reform,” NL, January 23), which has wide verbal support, especially among neoliberals. It would thus seem that with a substantial majority of Republicans and a scattering of Democrats, a melding of the plans – including the somewhat similar scheme of Republican Representative Jack Kemp of New York – might have a good chance of sailing through.

If it does, the new law will certainly have the nice low rates that have been proposed. You should not be surprised, though, if the lobbyists manage to keep most of the loopholes open. For my part, I’d not be surprised if Republicans and Democrats started bidding against each other, as they did in 1981, to see who could give the lobbyists more of what they want. The not impossible result could be both lower taxes and wider loopholes.

What then?

The first consequence would be, as in 1981, an upward surge of the deficit. The second consequence would be, as in 1982, a move (over the obviously sincere opposition of President Reagan) to increase Social Security taxes (although they have no bearing on the budget deficit) and reduce Social Security and Medicare benefits. The third consequence would be, as in 1983, the realization that controlling the deficit requires some brave new taxes. It would be explained that the campaign pledges of no tax increase have after all been honored, since the income tax rates actually were lowered. But something had to be done.

What would it be?

Few fortunes have been made by people acting on my prophecies. Still, if I were a betting man, I’d wager that we would start hearing a lot more about the value added tax – how widely it is used in Europe, how invisible it is in comparison with the sales tax, how comparatively easy it is to collect, how it taxes consumption rather than production (a fallacy I have discussed more than once).

I know the smart money says that former Democratic Representative AI Ullman of Oregon was defeated in 1980 because he supported a value added tax; that references to it in the last campaign drew a strongly negative response; and now even the Treasury has come out against it. Nonetheless, with the income tax rates down and the loopholes wide open the pressure to act would be very great. On other occasions Secretary Regan has argued for a tax on consumption, and so have people as far to his left as Senator Gary Hart of Colorado. The American Enterprise Institute and the Brookings Institution similarly want to tax consumption.

My prophecy stands. What we get won’t be called a value added tax, but what’s in a name?

The New Leader


[1] Editor’s emphasis

Originally published May 18, 1984

SEVERAL Sundays ago the New York Times business section had one of its recurring roundups of professional opinion on productivity. This is a live issue because publicists and politicians keep it alive. President Reagan and his retiring, but not bashful, chief economic adviser, Martin Feldstein, never tire of talking about it. The Atari Democrats also fancy the issue, though they began keeping their heads down once their advisee, Gary Hart, became a serious candidate for the party’s Presidential nomination. At least two White House commissions are supposed to have been working on the question for the past two or three years (no one knows the results, if any). Innumerable editorials have been written on it, and not a few books.

Yet the whole debate is an elaborate scam, because what is presented as a value-free examination by sober social scientists is actually a struggle over the distribution of the national income. Some (maybe most) of those perpetrating the scam may know not what they do. It is a scam, nevertheless.

As pseudo-science, the argument goes like this: Of the various factors of production, labor is the largest. Employees’ compensation-wages, salaries, bonuses, fringe benefits-comes to about two-thirds of the Gross National Product. That being so, it would seem plausible to take this largest factor as an index of the efficiency of the whole.

As the Times puts it, “A worker who produces 100 widgets an hour, for example, is clearly more productive than a worker who produces only 50 widgets an hour. ” There are many sleepers in the seemingly innocent example and the Times isaware of some of them: “the machines that are used, the worker’s education or skill, advances in technology, the working environment.” The worker can be praised or blamed for few of the items in this little list; most are someone else’s doing. That fact is not noticed by the judgmental types who complain that people don’t work as hard as they used to.

But the trouble with the Productivity Index starts with the GNP itself (see “Sinking by the Numbers,”NL, May2, 1983). The GNP has nothing to do with widgets, or with shoes or ships or sealing wax. The reason for this is obvious enough: You can’t add shoes and ships and sealing wax and widgets, any more than you can add apples and pears. All you can add is the prices of the widgets and shoes and so on, and you get a result in dollars that depends as much on the prices of widgets and shoes as on the numbers of widgets and shoes.

This is true for the economy as a whole, and it is true for the firms that make it up. Even the rare company that makes widgets alone judges its productivity in numbers of dollars rather than numbers of widgets. If it manufactures 100 widgets and can sell only 50, the remaining 50 are not products but waste. Companies that deal in a variety of products have no choice except to measure their total output in dollars.

Nor is this procedure necessary only in market economies. In the purest communism of our time, the brief reign of the Gang of Four in China, several streets in Shanghai were lined with thousands of boilers quietly rusting under the plane trees. Somebody had built them and no doubt got a commendation for exceeding his quota, but there was no use for them. They were waste, not products, and (if they’re not still there) they had eventually to be broken up for scrap.

The next difficulty with the GNP is as I argued last year – what it includes and what it excludes. The Times article provides a good example of the mischief that results. “Increased regulation,” says the Times, “aimed at such things as clean air and water and increased safety in the workplace . . . absorbed management time and business resources in the ’70s. Now that the pace of new regulation has slowed, if not reversed, business will be freer to concentrate its money and effort on other things, such as productivity.

“You’ve heard so much of this kind of talk that you may not be immediately struck by how fatuous it is. If you will read the passage again, you will notice the unstated (and unstatable) assumption that clean air and water and increased safety are worthless in comparison with more widgets or cheaper widgets or anything at all (a widget being the ultimate nondescript object). Well, there may be some things more important than clean air, but a widget isn’t one of them. In a rational world, what you produce is a more important question than productivity.

Productivity is a ratio (see Productivity: The New Shell Game,” NL, February 8, 1982). So far we have dealt only with the numerator. The denominator is suspect in its own way. The figure usually used is the total hours worked by everyone in producing the GNP. This is a moldy fudge. Since you can’t think how to quantify (except in dollars, of which more later) the relative contributions of the designer of the widget, the operator of the machine that stamps it out, and the fellow who sweeps up the scraps, you sweep the problem out with the scraps and conclude that Gertrude Stein would have been right if she had said, “Hour is an hour is an hour.” Or as Karl Marx did put it, “We save ourselves a superfluous operation, and simplify our analysis, by the assumption, that the labor of the workman employed by the capitalist is unskilled average labor.”

On this basis, you’d have to say that if a skilled journeyman carpenter could increase his output 50 per cent by taking on an unskilled apprentice, the result would be a 25 per cent decrease in his productivity. In addition, you’d have to say that the apprentice’s productivity was equal to the journeyman’s. Worse still, you’d have to say – and people do –  that it’s better for national productivity to have millions of men and women unemployed than for them to be working and producing less than their co-workers. The Times, for instance, says: “The entry of 20 million new and inexperienced workers into the labor force during the 1970s acted as a drag on productivity.”

Any theory that makes you say things like that is silly, and any figures that lead to such conclusions are mischievous. Productivity, at least as everyone measures it, is a grievously misleading notion. If you take it seriously, you believe that clean air and water and increased safety are bad and should be opposed. You believe, too, that employing young people and women and blacks and others without experience is bad, and that therefore an unemployment rate of 8 per cent is not merely acceptable but desirable.

IT MAY OCCUR to you to wonder why the denominator of the productivity ratio is “hours worked.” Why not “workers’ compensation?” Then at least you wouldn’t have silly results like our journeyman-apprentice example or the all-too-real unemployment problem. Then you wouldn’t have to pretend, as the Times does, that management has been wasting its valuable time on the environment.

You would, however, be in danger of calling attention to one of the hidden aspects of the scam – that is, the place of management, especially top management, in the whole picture. For the chief executive officer of a company is a wage slave just like the operator of the widget machine. As long as you focus on hours worked, you meld his allegedly productive hours with the less valuable hours of the operator, thereby improving the index and demonstrating your scientific willingness to put the faltering American workingman in as favorable a light as possible.

You also diminish the risk of having someone point out that CEOs are often paid five or six thousand times as much as widget machine operators (I’ll say more about this in another column). Or of someone separating management productivity from working-stiff productivity and introducing a brand new ball game: It would no longer seem that the Japanese are catching up with us because their production workers are workaholics, while ours are goof-offs; the catching up, if any, would appear to be due to the fact that they have fewer managers, who have fewer Lear jets, stretch limousines, three-martini lunches, tax shelters, and golden parachutes.

The scam has yet another aspect. Labor may be the largest factor of production, but looking back on the others the Times mentioned (“the machines that are used, the worker’s education and skill, advances in technology, the working environment”), you will note that the first and last of these are supplied by capital, the second is largely the responsibility of the state, and the third is a joint activity of capital and the state. A capital productivity index would be at least as reasonable, therefore, as a labor productivity index. The numbers would not be markedly different, but they’d have a vastly different meaning.

You can carry this a step further. For although productive capital is not money, it is bought with money, and money has a cost, namely interest. The prime rate has gone from 1.5 per cent (really and truly) in 1947 to 12.5 per cent today, having had flings as high as 21.5 per cent along the way. In other words, with every dollar American industry now pays (actually, or as opportunity cost) for interest, it is able to buy only one eighth as much of capital goods as it could have at the end of World War II (and this is without counting inflation).

There is the real drag on the American economy, and on the world economy. As I said at the beginning, the uproar about labor productivity is a scam to distract attention from a massive shift in the distribution of the goods of the economy. The share of nonmanagerial labor is being reduced; the share of managerial labor is being increased; and the share of those who do no labor, who merely have money, is being increased most of all. This is what Reaganomics.

(or, if you will, Volckerism) is about, and the Atari Democrats have been gulled into going along with it.

            The New Leader

Originally published April 30, 1984

 

 

 

 

 

 

            THE DEMOCRATIC Presidential primary campaign that is now drawing to a close can be counted as another of the evil consequences of the Vietnam War. For several months we have watched a candidate sincerely cultivate a liberal “image” (that awful concept), successfully appeal to many intellectuals, and at the same time vehemently attack labor unions as “special interests.”

Nothing like this could have happened before Vietnam. Before Tonkin Gulf, it went without saying that liberal intellectuals were for labor unions, and that labor unions were for liberal policies. There were exceptions, like the Teamsters, saddled with such as Jimmy Hoffa; and the building trades, bemused by racism. But in general the Democrats could count on the liberal intellectuals and organized labor. They were both concerned about the common man, and they were both members in good standing of FDR’s coalition.

With Vietnam, this changed. Aside from the few who were engaged in waging the war, the intellectuals came down pretty solidly against it. And the unions, with some exceptions, supported it. Intellectuals accused the unions of a conspiracy with the bosses to raise prices, profits and wages under the pretense of patriotism. Unionists accused intellectuals of a cowardly concern for their own skins. Antiwar marchers shouted taunting slogans; machos in hard hats beat up on the marchers. It was then, if I am not mistaken, that the term “hard hat” came into general use, and it did so as a disguised synonym for “hard head.”

Once the intellectuals began badmouthing the unions, they found much to say, especially about the alleged conspiracy with the bosses. Eventually, someone among the bosses or their publicists was struck by lightning. Whether there had been an actual conspiracy, or merely a tacit understanding, or nothing but a figment of intellectual imagination, the conspiracy theory had effectively split the intellectuals – who by now included press and TV reporters – from the labor movement. If anyone wanted to launch an antiunion offensive, his rear was protected.

With the winding down of the Vietnam War, more and more such offensives were launched. Union leaders, some of whom had prophesied an era of good feelings in boardroom negotiations (not the same thing as a conspiracy), were caught by surprise. Suddenly they had no friends outside the labor movement, while inside the movement they were faced with waning enthusiasm and declining membership.

All this had its political side. The chaotic Democratic convention of 1968 had tarred AFl-CIO President George Meany and Presidential candidate Hubert Humphrey with the same brush as Chicago’s Mayor Richard Daley, contributing to the election of Richard Nixon. The more sedate conventions of 1972, 1976 and 1980 left the unions isolated. Hence their early backing of Walter Mondale’s bid to be the 1984 Democratic standard bearer in hopes of reversing the trend.

And hence a predicament for Mondale rival Gary Hart. It must also be remembered that Hart, as George McGovern’s 1972 campaign manager, had additional reason to be cool toward the unions.

But for a Democratic candidate to attack labor unions as special interests is to adopt an ultimately self-defeating political strategy, as well as to do a considerable disservice to the American economy. An attack of this kind is self-defeating because (if successful) it splits nonmanagement workers and drives half of them into voting Republican or going fishing. It is a disservice to the economy because unions are at present the sole viable force working for a reasonably egalitarian society.

Talk about a reasonably egalitarian society sounds, I admit, pretty pompous. Yet that is simply a sign of how far we have drifted from an understanding of justice as the basis of political economy. I will say this: If justice is not the basis of political economy, the whole thing is a series of squabbles over private whims and satisfactions. As Jeremy Bentham, the father of utilitarianism, observed approvingly, “Quantity of pleasure being equal, [the game of] pushpin is as good as poetry.

Since, however, justice is the basis of political economy, no matter how frequently forgotten, it is possible to inquire into the justification for our enormous and growing gaps between the top and bottom incomes, and between the top and bottom amounts of personal wealth. Further, it is possible to argue that these should be narrowed, for reasons I hardly have space even to list. But my point is that the steady thrust of union activity, whatever else you may think about it, is toward narrowing the gaps.

Some unions are of course more successful than others. It is fashionable to contrast the relatively high wages in steel and automobiles with the much lower wages in other industries. It is, for example, shown that wages in steel and automobiles increased 137 per cent and 112 per cent, respectively, between 1972-80, while average manufacturing wages increased 104 per cent in the same period.

As I never tire of emphasizing, there are always two ways of looking at such comparisons. The Chamber of Commerce way is to see steel and auto wages as too high. The labor union way is to see the other wages as too low. As far as the mathematics is concerned, both visions are equally valid. As far as economic justice is concerned, the labor union way is surely the correct one. What we need is stronger unions in the disadvantaged industries, not attacks on all unions as “special interests.”

BESIDES BEING unhappily misoriented, Hart’s campaign has not been lacking in ironies. He has presented himself as the man of new ideas. What these ideas may be has not been much publicized – and for this the media are no doubt more to blame than the candidate. Nevertheless, I can name two.

The first is his long-standing fascination with a so-called consumption tax. After he became a conceivably successful candidate, Hart understandably muted this idea. Robert S. McIntyre, of Citizens for Tax Justice, quotes him as saying, “If anyone can think of a better title for this than ‘expenditure tax’ or ‘consumption tax,’ I would certainly welcome it.” Well, I can think of a better title: “sales tax.” It is neither a new idea nor a good one, and it leaves me speechless (almost) that anyone presenting himself as a liberal or a neo-liberal Democrat could entertain it for a minute.

Taxing consumption is, in fact, a central idea of supply-side Reaganomics and was the excuse for giving tax breaks to the rich, who were expected to save their windfalls. Fortunately they spent them instead, and their consumption expenditures (together with those of the Department of Defense) have fueled the current so-called recovery. Even the business press acknowledges that this is a consumption-led recovery, which ought to be puzzling to supply-siders, if they are capable of being puzzled. It is sufficiently shocking that Secretary of the Treasury Donald Regan, in spite of what has happened, still wants to tax consumption; it is preposterous that any Democrat should ever have toyed with the notion.

Hart’s second “new” idea is his espousal of the Atari Democrats‘ suggestion that a committee of neoclassical economists and investment bankers with time on their hands direct the reindustrializing of America. This idea is not so new, either, having been thought up by President Herbert Hoover in the form of the Reconstruction Finance Corporation something over a half century ago.

There is an even more ironical aspect to the new ideas issue. I have in my hands a document (to use a once-popular phrase) entitled, “Rebuilding America: A National Industrial Policy.” If there is anything wrong with the proposals therein, it is that they are largely indistinguishable from Hart’s “new” ideas on the same subject. The document, I hasten to say, is published by the Industrial Union Department, AFLCIO, alleged to be a special interest.

Hart’s vagueness about his positive program is unfortunate – yet understandable, given the way we run our campaigns. His innuendo-laden attack on the unions is bad. Worse than both, though, is his scorn for” old solutions” to our problems. Since he does not name what he rejects, one must suppose that the “old solutions” he has in mind are those of the New Deal and the Great Society. Thus he parrots the Ronald Reagan view of history, as he has adopted the Donald Regan view of taxation. But as John E. Schwarz shows in his recently published book, America’s Hidden Success (part of which ran in THE NEW LEADER of November 28, 1983), those “old solutions” were in fact remarkably successful and should be extended rather than abandoned.

Primary campaigns seem inevitably productive of rhetoric that is later regretted. One can desperately hope that Senator Hart’s words will be no more harmful – either to him or to Walter Mondale – than were George Bush’s words about voodoo economics.

            The New Leader

Originally published October 17, 1983

CONSTANT readers of this column have foreseen since THE NEW LEADER issue of March 8, 1982, what last month burst like a paper bag full of cold water over the heads of the self-assured enthusiasts for Reaganomics. The New York Times, evidently relying on Federal Reserve Board figures, announced that our national rate of saving has steadily declined in spite of the massive supply-side tax cuts that were supposed to stimulate it.

This development has caused some bewilderment. Norman B. Ture, former undersecretary of the Treasury for tax and economic affairs, who was the “architect” of the 1981 tax cut, said the news was disturbing and surprising. “It’s very difficult to understand,” he added. Other worthies were tempted to dispute the figures, for the mind-boggling reason that “they cannot show tax-evasion income” (the inference being, I suppose, that the so-called recovery has been fueled by illegal savings).

As you know, I am like Adam Smith in that I hold no brief for statistics. (One of the most successful books I ever edited was entitled How to Lie with Statistics.) It does, nevertheless, seem to me fitting that those who live by statistics should die by statistics. In the present instance, I think it as likely that the rate of saving has been overstated as the other way around; but whatever the precise figures may be, they certainly show that the tax cuts didn’t do what President Reagan promised they would do.

Nineteen months ago I told you why they wouldn’t. I wrote that unless the government is running a surplus, there is no way for tax cuts to be a direct stimulus to productive investment.“ To emphasize the point, I said it in italics, a typographical device I don’t resort to lightly.

My reasoning was as follows: “Try as he will, the supply-sider can’t get money into the hands of producers. This is not because of the conspicuous consumption of the rich or the notorious perversity of Wall Street. Even when everyone is doing his best to cooperate, the scheme can’t work. The supply-sider’s tax cuts go to the rich, all right; but the recipients have to lend the money right back to the government to cover the [increased] deficits. No more money becomes available for productive investment than there was before the game started.” I continued: “You will note that I say ‘available,’ because I don’t for a minute believe that much of that tax windfall would go into productive investment even if it could. Almost all of it is earmarked for speculation. No goods will be produced as a result of it, nor any services rendered. But the rich will be richer.”

Two months after my column appeared, the Times had a roundup of opinion on the economy, in which Professor Arthur Laffer was quoted. He was a big man in those days, with a curve named after him. The Laffer Curve, you will remember, was the principal intellectual underpinning of the Reaganomic tax cuts. Though it first appeared on a cocktail napkin and never was able to find empirical support, it was used to justify giving major tax cuts to the rich (whose incentive would otherwise be sapped). But on May 2, 1982, Laffer was quoted to the effect that the cuts would have “no economic effect” because the government would “give a dollar back and then borrow it right away from you.”

Yes, that is what I had said, and it amuses me to think Laffer might have gotten the idea from my column. That would have been sufficiently astounding. Sensationally astounding was the fact that here was one of the original supply-side gurus confessing that the scheme wouldn’t work. Laffer’s recantation was on a par with David Stockman’s confession that Reaganomics was a Trojan Horse for the rich.

Unfortunately, the Times business reporters are so used to stitching stories together out of mindless handouts, and Times readers are so used to skipping such stories that not even the Times editors noticed the recantation. In an editorial some weeks ago they still didn’t understand what had happened, attributing the fall in savings to the failure of the tax cuts to give individuals any “particular incentive” to save.

Now, in discussions like this, one can easily lose track of what the real issue is. The real issue here is not why savings have fallen but whether it makes any difference, and whether any “particular incentive” should be legislated to change the situation.

Classical economics noted that steam driven looms produced more cloth than hand looms, and were bought by men who had saved some money or could borrow the savings of others. Thus it seemed obvious that savings increased production (and so were virtuous and should be rewarded). That analysis, however, was inside out, as any moderately reflective businessman has known these past two centuries. For regardless of the savings one has accumulated, one is not well advised to buy a power loom if there is no effective demand for cloth or if the demand is already oversupplied. Of course, if there are no investment possibilities in textiles, there may be some elsewhere. But when you have 12 per cent of your labor force and 30 per cent of your industrial plant standing idle, the odds are against finding suitable places to put your savings, no matter how much you have laid by.

In this situation – which is the situation we have been in and are still in –  you can do two things with your savings: you can live it up, or you can speculate. Speculation, I’m ready to admit, is my King Charles’ head; I will therefore confine my remarks on the point to asking where you think all the billions came from that have gone into the stock market in the past 15 months.

Putting speculation aside, let’s look at living it up, otherwise known as consumption or demand. Here again, classical economics has something to say that seems plausible enough until you stop to think about it. The gimmick is Say’s Law. Jean Baptiste Say, a French contemporary of Adam Smith’s, had it figured out that production creates its own demand. He reasoned this way: If you set up a textile mill, you have to pay the people who build the factory and those who make the looms and those who raise and shear the sheep and those who run your looms. All these payments are used by these people to buy things they want or need, and the people who sell them these things use the money they are paid to buy what they want or need, and so on and on. Sooner or later, someone will buy your cloth. Or if no one does, it still happens that a lot of other goods are sold, so that, in the aggregate, production creates demand, and a universal glut is impossible.

MALTHUS, among a handful of others, saw that this is nonsense (because of the time lapses involved, if for no other reason), but he couldn’t convince his friend Ricardo or the followers of Ricardo. It took the Great Depression, when an unsalable glut existed for all to see, to exorcise the ghost of Say. And yet, only a half century later, the ghost of Say is again seen nightly on the battlements and occasionally stalking abroad in full daylight, driving Atari Democrats and self-advertised liberal businessmen mad with schemes to reduce consumption in the hope of increasing production.

A convenient example is at hand in an Op Ed page piece in the very issue of the Times that carried the story about the fall in savings. The author is one Fletcher Byrom, chairman of the Committee for Economic Development, described as “an organization of chief executive officers and university presidents.” Awesome. Byrom proclaims: “The United States needs to move away from a patchwork tax system that penalizes saving and investment toward one with more systematic emphasis on taxing consumption.” Someone should take Byrom aside and tell him about the Economic Recovery Tax Act of 1981.

He might also glance at another story in the same issue of the Times revealing that millionaires have multiplied like fruit flies even as savings have been languishing. There were about 180,000 millionaires in 1976 and 500,000 in 1981. It is not irrelevant that the great leap forward coincides with the introduction of the maxi tax on “earned” income. Goodness knows how many millionaires there are today, but I’ll bet the number has redoubled since the maxitax on unearned income went into effect two years ago. (I’ll bet the number of those below the poverty level has redoubled, too.)

If Byrom and his committee have their way, there will be still more people with millions to throw around. Their fortune-good for them but bad for the country – will be made possible by lowering the personal income tax and the corporation tax, while raising Social Security taxes and sales taxes, and maybe introducing a value-added tax, which is a semi-hidden kind of sales tax.

I am sorry, but I find it difficult to have proper respect for chief executive officers and college presidents who talk this way. The empirical evidence is plain that their policies have not done what they promised, yet they persist in them. The empirical evidence is plain as well that their policies have caused appalling suffering, not only in this country but throughout the world. Nonetheless, they persist. Although I find it hard to have proper respect for these people, I’m scared that they will continue to have their way.

The New Leader

Originally published September 19, 1983

LAST MONTH (NL, August 8-22) I suggested that the world’s Less Developed Countries might be better off if we denied their manufactures (mostly produced by multinationals) unlimited access to our markets. Here I propose to look at the problem from our point of view, starting with the reiteration of some observations I made a year ago about the Atari Democrats’ notion of inventing “sunrise” industries to replace “sunset” industries lost to foreign competition.

One of my points was that whatever we devise can also be devised or copied or, it is occasionally claimed, stolen elsewhere, particularly in the Orient. I must confess my astonishment at some people’s reluctance to accept this point, which seems to me as obvious as a sore thumb-now rendered somewhat sorer by the decision of Atari itself to start moving to Hong Kong. For again and again we have lost our domestic markets to multinational competition, with the results that millions of us are out of work and that our industrial plant is operating at 70 per cent of capacity.

The New York Times ran a story recently about the Sinchu Science-Based Industrial Park, currently being developed in Taiwan. “Sinchu has all the ingredients of Silicon Valley 20 years ago,” says Irving Ho, the park’s director. That may be commercial puffery, but why not? And how could anyone fancy it might be different with the as yet uninvented sunrise industries?

In the famous peroration of The General Theory of Employment, Interest, and Money, Keynes wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” The almost universal obeisance to the doctrine of free trade confirms this observation. Adam Smith lives, defunct though he has been these two centuries.

Adam Smith indeed lives – that is, has a place in history – and we will better understand our own place if we understand his. The first eight chapters of his Book IV [of The Wealth of Nations], where his thoughts on foreign trade are laid out, are not written in a vacuum. They are an explicit, devastating attack on the mercantile system and especially on Thomas Mun‘s England’s Treasure by Forraign Trade, the leading exposition of that system.

Foreign trade, as Smith saw it, served two purposes: it enabled countries to exchange surpluses, and it facilitated the division of labor by expanding the market. In furtherance of these ends he opposed the monopolies and bounties and other restraints on, or inducements to, trade that were root and branch of the mercantile system. And he advocated independence for the colonies, largely because he judged trade with the nearby Continent more profitable.

But a lot has happened in the past 200 years, especially in America, and this makes The Wealth of Nations a historical document, not a present help in trouble. Our domestic market is now far larger than any world market Smith could imagine, and the division of labor has gone far beyond the 18 operations in the manufacture of pins that he immortalized. More important, his merchant adventurers have been succeeded by our multinational conglomerates.

Today’s problem with foreign trade is that our industries are losing out to foreign competition or are being shipped abroad by the multinationals. This happens because foreign labor is cheaper than ours. We are told by the three Harvard Business School authors of Industrial Renaissance: Producing a Competitive Future for America that the members of the United Automobile Workers had better shape up because they are paid 80 per cent more per hour than their Japanese counterparts, who are, in addition, more productive. The American man in the street reads this and says, “Just what I always suspected. American automobile workers are way overpaid. No wonder we’re having this depression.” The American man in the board room reacts a bit differently. “It’s a healthy thing we’re having this depression,” he says. “Now we’ll be able to get those wage scales back down where they belong.”

I venture to suggest that there is another way of looking at these figures (whose accuracy I will not question at the moment, though I may do so another time). One might as logically conclude that Japanese auto workers are underpaid as that our fellow citizens in Detroit are overpaid. Indeed, on the basis of the history of industrial relations, I’d lay even money that a better case could be made this way than that. When you stop to think of it, the idea that a working stiff anywhere is overpaid is not, on the record, over plausible.

Everyone talks about automobiles, but they’re comparatively well off. Sol C. Chaikin, president of the International Ladies’ Garment Workers Union, points out that 25 years ago imports accounted for 5 per cent of the sales of ladies’ and childrens’ apparel, but it is estimated that this year they will account for over 50 per cent. In the Peoples’ Republic of China, garment workers are paid 16 cents an hour; in the Federal Republic of China, the rate is 57 cents; and in Hong Kong it’s a little over a dollar. Does anyone seriously propose to reduce American wages (which in the garment industry are already low) to these levels? If not, what does the incessant chatter about “productivity” mean?

Fashionable economics tells us we should be delighted to buy cheap textiles from the Orient and should concentrate on selling “information” in return. Information about what? one wonders. Books are not meant, because they happily pirate whatever they want right now. Nor is hi-tech (as we’re learning to call it) meant, because our multinationals are already manufacturing “hardware” there. That leaves “software,” but that’s easy to pirate, too. And if Orientals should perversely take an interest in the data we busily beam at each other, they can pick up all they want off a satellite, with a disk they can make cheaply.

We’d better face it: until the world standard of living is brought up to ours, there is nothing whatever that cannot be manufactured less expensively abroad than here. Nothing whatever. How long will it take for the world standard to approach ours? If you’re old enough to read this, you’re too old to live to see the day. The question is, what do we want to do about it now?

There’s no doubt what the National Association of Manufacturers wants to do about it, or the Business Roundtable, or the Reagan Administration. They want to lower labor costs every way they can think of: cut wages, cut fringe benefits, cut safety regulations; and to keep those who still have jobs in line, cut unemployment insurance and welfare generally.

Let’s assume, however, that you and I don’t find labor-baiting attractive. Let’s assume we think it a good thing that the American standard of living is higher than the Japanese or the Taiwanese. If we make these assumptions, how can we protect our standard?

Well, the way to protect is to protect. First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider exploitative. Third, we refuse entry to goods produced in grossly exploitative conditions.

The proposal is not complicated. It does not cover all industry but only the industries we declare to be important and threatened in our home market. It does not require elaborate cost accounting (as do the reciprocal trade provisions against “dumping”) but simply straightforward questions of fact: What are the wage scales? What are the working conditions? Is child labor employed? It does not interfere with foreigners’ or multinationals’ trade anywhere else in the world. In every respect the proposal is analogous to our present laws refusing entry to contaminated foods or dangerous drugs or unsafe automobiles. Those laws protect Americans as consumers; the proposed law would protect us as workers and, incidentally, as entrepreneurs.

IT WILL be objected that the proposal can’t work because it is impossible to compare foreign wage scales and working conditions with ours. In reply, I would enquire how, if the comparisons can’t be made, the noisy critics of the American workingman know he is overpaid. What is proposed is merely the reverse of the critics’ coin. The fact of the discrepancy in wages is accepted; but instead of saying that our fellow citizen Americans are overpaid, we say that our fellow-human Orientals are underpaid. Mathematically, there is no difference in what is said; morally, there is an astronomical difference.

Of course the comparisons can be made, and they will be invidious. The real question is, as the lawyers say, who should have the burden of proof? I am reminded of Thaddeus Stevens‘ reaction to proposals that the North tell the South eliminating slavery was not its war aim. “Ask those who made the war what is its object,” Thad growled. In the present case, I think we could reasonably ask those who want access to our markets to prove that their workers are fairly paid and fairly treated by our standards. American unions and American companies would have the right to challenge the proof. No need to make a big fuss about it, any more than a big fuss is now made about determining that certain foreign automobiles don’t meet our emissions standards or that certain drugs are impermissible.

No doubt many will argue against protecting the American standard of living. Two arguments stand out. The first purports to be consumer oriented. Cheap imports, it says, benefit everybody. But they don’t benefit those millions whose jobs are taken by the imports, and those other millions who are being forced back to the poverty level.

The second argument purports to be producer oriented. Restrictions on international trade, it says, threaten all our industries, because exports now represent our margin of profit. To this argument there are three answers: (1) Our really threatened industries-automobiles,

steel, textiles, etc.-have already lost their export markets; (2) our biggest export business-agriculture will continue because the world needs it; and (3) we have at home an unexplored market larger than any we might lose.

Our 14 million unemployed, plus the millions of working poor, plus their dependents, comprise a “nation” of up to 50 million people-bigger than all but a handful of the 157 members of the UN. In spite of our failures, these people are better educated than the rest of the world, have a better understanding of the work ethic, and are closer to the rest of us in needs and wants. If our national and industrial policies were directed to helping these our fellow citizens, there would be plenty of domestic business to keep U.S. industry fully occupied and highly profitable.

 

The New Leader

Originally published August 8, 1983

LAST SUMMER I wrote a couple of columns questioning the Atari Democrats notion that we should write off our “sunset” industries (automobiles, steel, textiles, what have you), where we’re losing dominance in even our own market, and concentrate on some “sunrise” industries to be invented by a commission of unemployed economists. You will be astonished to hear that in spite of those pieces, the notion is still around. Now, the unstated premise of the Atari Democrats’ notion is the belief that protectionism is unthinkable in the modern world. We learned this in those high school courses on Problems of American Democracy we took instead of history. Even President Reagan learned it. In this year’s Economic Report he said, “I am committed … to preventing the enactment of protectionist policies in the United States.”

I am pained to suggest that President Reagan is wrong once again. In explanation, I am going to start with what the consequences of American protectionism might be for the rest of the world, particularly for what are euphemistically called Less Developed Countries, or LDCs. It is, make no mistake, the LDCs that would ultimately be most seriously affected by a rebirth of protectionism. Most of the talk now is about Japan, but that is merely because most businessmen and most business commentators don’t remember yesterday and can’t imagine that tomorrow may be different from today. It was only yesterday (let us remember) that the Germans were the Wundermenschen. The VW bug had bitten off a piece of the American market long before Toyota mastered the pronunciation of Corolla, Everyone had a Leica before Cheryl Tiegs taught us to prefer Olympus. The cognoscenti turned up their noses at Avery Fisher’s consoles and rushed to get the latest components from Telefunken. German productivity was proverbial.

But now all that is forgotten. The Germans are having a depression just like us, and the Japanese are selling cars and cameras all over Europe. VW is losing money hand over fist, and Telefunken is on the verge of bankruptcy.

A moderately reflective person might wonder whether what happened to the United States, and then to Germany, might not one day happen to Japan. As a matter of fact, it is already happening. The Japanese are writing off their textile industry and are manufacturing electronic components in Singapore and South Korea, just like the rest of us. Aha! says standard economics, this will benefit the Japanese. The benefit will come from lower consumer prices, and the Japanese who lose their jobs to Koreans will turn their hand to things the Koreans want but can’t make. That is the way standard economics thinks things work, and next month we’ll consider why they don’t work that way.

For the present, let’s step back a bit. The factors of production, we learned from standard economics, are land, capital, labor, and perhaps technology. Which of these factors do the multinationals seek in strange strands? Not technology, certainly, and not land, especially if they’re doing their seeking in Singapore. Not capital, either, though a sheik here or there may have more than he can think what to do with. No, the factor sought is labor.

Well, everybody knows that. Asian girls, especially young ones, have remarkably nimble fingers and are wiry and strong and able to work long hours, and they’re smart and eager to learn. Moreover, they’re fresh from the bush or the slums and never saw regular pay before and so are easily pleased. They don’t fuss about safety regulations or health insurance or sex discrimination or any of that stuff. Nor is this so bad as it may sound to us liberals, because these people are in for a tough life any way you look at it, and work in an electronics sweatshop is a lot better than their alternatives, and that is true even without mentioning prostitution.

Overworked and exploited though they may seem by our standards, these girls may have been chosen by destiny to use their nimble fingers to scratch out the first painful steps toward the establishment of a middle class in their underdeveloped lands. Such steps were not easy in the 19th-century Northern Hemisphere, and there is no reason to expect them to be easy in the 21st-century Southern Hemisphere. And unless the steps are taken, the LDCs will continue to be at the mercy of imperialist or neoirnperialist powers. This is the standard view of the situation-hard-nosed, perhaps a bit regretful, but above all forward looking.

Now, I will contend that neither standard economics nor Marxian economics understands what is wrong with imperialism. The thing about imperialism, I propose, is that it is extractive. It extracts the produce of mines and of agriculture, and it pays for these products whatever the market will bear[1]. Sometimes the market will bear a lot, mostly it won’t. Some American farmers are old enough to remember how it was in the days before price supports;  that’s the way it is now and always has been with LDC producers of copper and bauxite, cocoa and bananas and sisal. If you’re puzzled by this performance of the market, you will find it beautifully explained in the works of John Kenneth Galbraith, particularly Chapter VIII of Economics and the Public Purpose. Meanwhile you can rely on the avouchment of your own eyes that somehow prosperity has not come to Guatemala or Guinea or Bangladesh.

It is obvious enough that imperialism extracts the minerals of the earth and the fertility of the fields and ships them abroad. What it does to the factor of land, it also does to the factor of labor. The only reason for employing LDC labor is that it’s cheap. It’s far away and not always very efficient, and usually in need of an embarrassingly brutal dictator to keep it in line. But it is cheap.

Its cheapness is revealed by what it is exchanged for. When the labor of an LDC is used to manufacture products for export to the developed countries, the LDC earns foreign exchange that it spends in the developed countries on what it wants or needs – often on food it once produced itself – until seduced into maximizing exports. To understand what such an exchange means, we can compare the average hourly wage in the LDCs with that in the industrialized world. The precise numbers of course vary from place to place, but a ratio of one to five won’t overstate the differential and will do for purposes of illustration. This requires the LDCs to exchange five hours of their labor for one hour of our labor. The produce of the four-hour labor difference is in effect extracted, no less than the produce of their land was (and still is) extracted.

It is important to understand that this is not a situation of temporary unfairness, or of an imbalance that will be righted even in Keynes’ famous long run. What is extracted is gone forever. The situation, furthermore, has grown steadily worse in our time, much to the bewilderment of everyone who had great hopes for the results of liberation.

WHY HAVEN’T the newly liberated colonies been able to duplicate the success of the U.S. following its freedom? Wasn’t our position right up to World War I just like that of the LDCs? Didn’t we need and use British and European capital, just as the other former colonies need and use the multinationals’ capital today?

No, and again no. We used British and European capital, all right, and for the most part they were handsomely rewarded, but we used it first to build our infrastructure – canals, then railroads, eventually even street railroads. And we were inevitably the ones to employ that infrastructure; there was no way that benefit could be extracted. When foreign capital went into steel and soap and thread and chemicals, those products were for our own market; their benefits were not extracted, either. An interesting short book with a long title published last year, European Direct Investment in the USA before World War I by Peter J. Buckley and Brian R. Roberts, is able to discuss all the details of its subject without once considering the possibility that Europeans invested in the U.S. to manufacture for their own consumption. A sign that our development was not extractive is the fact that throughout the period in question – and indeed until very recently-our wage scales were the highest in the world. (That used to be a proud boast.)

In contrast, when GE manufactures plastic-frame irons in Singapore or Atari makes mind-boggling games in Taiwan, the irons and games do not stay in the underdeveloped world. They are shipped out, and with them is effectively extracted the wage differential between the underdeveloped world and the developed world.

The United States was able to escape similar domination by Britain and Europe in the 19th century mainly because of the sheer size of the country. A chronic shortage of labor kept wage scales relatively high, and a large internal market encouraged the use of foreign capital to produce goods for our domestic demand rather than for export. To duplicate the U.S. performance, the LDCs must duplicate the conditions. This won’t come naturally; they will have to be driven to it. Nevertheless, their objective should be to use their labor to produce what they themselves need. They should be manufacturing equipment for an equivalent of the Rural Electrification Administration. They should be developing trade within the LDC world and reducing their trade with the industrial world. The LDCs will always lose in trading with the industrial world (though a few of their citizens may become filthy rich); by trading among themselves they can pull themselves up by their bootstraps, just as we did a century ago.

Such quasi- internal trade would require cooperation on a scale that appears implausible. But the industrialized world-particularly, as I’ve said, the United States – could enforce such cooperation on the LDCs by the simple expedient of denying their manufactures unlimited access to our market. If GE could not sell its Singapore-produced irons in the U.S., it would find it necessary either to produce something else in Singapore, or to pass up the opportunity to employ its capital there in a highly profitable way. Even if it opted for the latter solution and pulled out, the Singapore economy would be, literally and figuratively, healthier.

The proposal to deny unlimited access to our market goes against everything we used to be taught. It also goes against what the publicists for big business continue to teach us. It is, however, merely an extension of the anthropologists’ commonplace that subsistence farming is better for peasants than is a one-crop plantation system. In my next column, I will take up more fully how a change might be implemented, as well as what its effect would be on us.


[1] Editor’s note:  Those who knew the author, and his wife Lucile H. Brockway, my parents, know that these ideas were discussed between them and that she published a ground breaking book, “Science and Colonial Expansion” in 1979, four years before this article appeared, that makes these points, and others, at length from an anthropological perspective.  The two of them were quite a pair….

Originally published January 10, 1983

ON NEW YEAR’S DAY I made my annual start at cleaning up my desk, and first off I threw out a big pile of clippings. They all had to do with predictions about the economy. I didn’t actually weigh them, but as I riffled through them I could see that they would assay very high in optimistic words of politicians anxious for my vote and brokers eager for my money.

I had saved the clippings with the idea of some day doing a piece making fun of them. If I confined myself just to the pronouncements of Secretary of the Treasury Donald Regan, I could fill the available space, and it would be good for some bitter laughs in a winter of discontent. Turning the old gag around, I could ask: “If he’s so rich, how come he knows so little?”

I also thought of explaining how to tell this depression from the great one of 1929. Fifty years ago Secretary of the Treasury Andrew Mellon (touted as the best since Alexander Hamilton) kept prophesying that the economy was about to turn the corner. His present day successor keeps telling us it is about to bottom out. The plane of the economy seems to have rotated 90 degrees, not necessarily in a better direction.

But the state of the economy is not funny, and the performance of our leaders is not funny, and I have been wondering why our politicians and our economists (most of whom surely are decent men) have been so steadily wrong. Certainly they haven’t intended to be wrong. Although they are perhaps not above a willingness to mislead us a teeny bit, they would undoubtedly be suffused with sincere delight if their predictions should come true and bring us all comfort and joy.

A string of recent predictions offers a clue. I’ll not single out any particular one, for there are a great many, and they all take this form: The long-awaited recovery will start some time in 1983, but unemployment will continue to rise and will persist in the double-digit range at least well into 1984. I find two elements of the form arresting.

The first is the phrase “long-awaited recovery.” Sometimes it is “long-expected recovery.” Either way it suggests nothing so much as the South Seas cargo cults that employ ritual incantations intended to bring a heavily laden ship over the horizon to satisfy all their members’ wants. It is magic; and aside from the incantations, it is passive. Nobody has to do anything-there is nothing for anybody to do-to bring about the desired result. Passivity is a renunciation of responsibility, that is, of  freedom; and it is now common in our high places.

The second striking feature of the predictions is the universality of the expectation that even when the magic ship Recovery is unloaded to widespread rejoicing, there will be 10 or possibly more millions of men and women left empty handed and unemployed on the beach. What on earth are our prophets thinking of?

Please understand that I am not questioning the accuracy of what is being said. Indeed, I think it altogether probable that the next two years will see a modest advance in the Gross National Product together with an increasing (or, at best, slowly decreasing) rate of unemployment. I think this outcome probable because, as near as I can see, everyone is doing his level best to bring it about. President Reagan will no doubt quarrel with the Jack Kemp Republicans to his Right and the Atari Democrats to his Left, but the quarrels will be mostly over details. There is, I am sadly convinced, little likelihood that any of the parties will do anything to cause the predictions to go awry.

The quarrels will be mostly over details because all parties have drifted into the belief that the rate of unemployment is merely one among several “indicators” of the state of the economy. It is, moreover, said to be a “lagging indicator,” by which is meant that we can enjoy something called prosperity at the same time that several millions of our fellow citizens are out of work. You may not be surprised to hear this, for it is part of the conventional wisdom of this wise age.

There are other examples of the same sort of wisdom. For a generation now, full employment has been complacently defined as a situation where 4 per cent of those willing and able to work are unemployed. In other words, 96 per cent equals 100 per cent; but I don’t advise you to tell that to your banker when he asks you to satisfy your loan in full. More to the point, 4 per cent of our labor force is close to 5 million men and women.

Recently the wisdom favored by the Atari Democrats has inspired what is called a full-employment budget, showing how much money the government would have available if we had full employment. Since unemployment costs the government billions of dollars in benefits paid and taxes not paid, a full employment budget is easier to balance than the one President Reagan has been wrestling with. The catch is that the Atari Democrats’ full-employment budget calls for 6 per cent unemployed.

The Republicans, you will be comforted to hear, are more realistic, or say they are. They have noticed that American manufacturing industries are in trouble. They do not talk much about sunset industries, that’s an Atari Democrat metaphor; their metaphor is an old one from physics: frictional unemployment. This is what happens when a steel company decides to abandon its mills instead of updating them, or when it updates them by substituting robots for human beings, or when textile mills leave New England for the Carolinas in search of what local boosters call cheap and contented labor, or when the mills leave the Carolinas for even cheaper and more contented labor in the Orient, or when data processing companies flit hither and thither in pursuit of low rents and lower taxes.

People can become unemployed in each of these ways, which are called frictional because, like friction in any machine, they are thought to be an inescapable concomitant of the machine’s functioning. The point about it now is that conservative economists (more in character than “liberals”) say frictional unemployment in our technological age runs at 8 per cent.

So, the wise men who think about the problem at all tell us that somewhere between 4 and 8 per cent of us will always be out of work even when the economy is going full speed ahead or full blast or however you want to put it. After you add in the” lagging indicator” factor, you can see that many millions of unemployed will be with us in the midst of what is called prosperity.

Nonsense.

THE PREDICTION is not, as I have already said, nonsense; the definition or understanding of prosperity is. Carry that a step further: The definition or understanding of economics is nonsense. Almost all textbooks, from Left to Right, say that economics is the science of the efficient allocation of scarce resources, with the goal, explicit or implicit, of increasing the GNP à outrance[1]. It is this pervasive notion that is nonsense.

But let’s assume that it’s not. What is the GNP? It is the sum of personal consumption, private domestic investment, government purchases, and net exports. You will note that in order to arrive at that sum we have to talk about prices, not about things. Any schoolboy knows that you can’t add apples and oranges and tons of steel and square miles of computer printouts and calories of three-martini lunches and achieve anything other than mush. The one way we can arrive at the Gross National Product is by adding up the prices paid for all the goods and services. Money is not simply handy for this purpose; it is, as has been recognized at least since Aristotle, the critical element.

Only the prices paid count. I may think that my better mousetrap is worth a hundred dollars and refuse to sell for less. If no one is willing to pay the price, my trap is no part of the GNP, except perhaps for the prices I paid for the material and labor that went to make it. A price is not paid in the abstract –buyers and sellers must be involved. And buyers and sellers are people.

That may strike you as stupefyingly obvious: surely it goes without saying. Well, it does go without being generally said, with the results that economics is said to be about things, and that an economic system is said to be successful if things proliferate despite the fact that many millions of people are hurting. Otherwise employment could not be thought of as a lagging indicator of a phenomenon called recovery.

What I should like to insist as this new year starts is that economics is about people, and is about things only in connection with people. Does this make any difference? It makes several, and I will name one: So-called frictional unemployment is not a heavenly curse but the consequence of our way of doing business, and our way of doing business is promoted by the way our tax laws treat depreciation, interest and local taxes. The fault is not in our stars, nor will it be corrected when our ship comes in. If we acted on the understanding that employment is really what recovery is all about, we would change those tax laws.

We are accustomed to hearing that today’s pain is necessary to prevent worse developments tomorrow. We are assured that President Reagan and Federal Reserve Board Chairman Paul Volcker do, too, care about people, but that if the economy is allowed to heat up (the metaphor has shifted to thermodynamics) too rapidly, inflation will start raging again (that’s combustion), and more suffering will be caused than is caused now by staying the course (navigation).

The question that pops into my mind is, How do the wise men know that prodding the economy to provide jobs will turn the United States into the second coming of the Weimar Republic? The answer is, They don’t know. But anyone who looks at the record knows that full employment was not one of the things rotten in inter-war Germany. The best that can be said for what now passes as wisdom is that it inflicts present and certain suffering in the hope of warding off future suffering that is only problematic. This is what you do when you have your eye on things rather than people.

As Freud told us, the aims of living are loving and working. Economics can’t do much about the former, but the latter is its special domain. If it fails there, it fails altogether.

The New Leader


[1] To excess

Originally published November 29, 1982

EVER SINCE the elevation of Paul Volcker to its chairmanship three years ago, I have been one of those nattering about the Federal Reserve Board and the interest rate. Our steady cry has been that the Fed’s policy of trying (vainly) to control the money supply would first send the interest rate through the roof and then bring on a depression. Well, they’ve done it, and they’re not altogether pleased with the result. So now they are pawing at the start of the other course and are straining to bring down the interest rate and bring on prosperity. You might expect me to be happy, but I’m not.

My considered opinion, in which I’m not alone, is that they’re too late. A moment’s reflection will convince you that this opinion has extraordinary implications. If you say that something is too late, you are saying that chronological time is a factor [see footnote[1]]; and if you say that time is a factor, you are saying that you are dealing with history, not with science. So let’s face it: Economics is historical and ethical; it is not an exercise in algebra or analytic geometry. If economics were merely algebraic, and if a high interest rate depressed business (it does), then it would be a simple matter to lower the interest rate and stimulate business. In spite of what commentators say, though, there are no such tradeoffs.

It doesn’t work out that way in real life. It won’t work out that way in our life for at least two reasons: (1) Fourteen million of us (including those who have been out so long they’ve given up looking) are now unemployed, and (2) our industrial plant is running at less than 70 per cent of capacity.

Last month in this space I called attention to our World War II triumph of putting 15 million men and women in uniform and, at the same time, creating 7 million civilian jobs. But I remind you that it took an all-out effort. It took Mr. Win-the-War; Mr. New Deal had been unable, despite almost nine years of devoted endeavor by thousands of good men and women, to do more than make a dent in the mess created by the Harding – Coolidge – Hoover “prosperity. (The quotation marks call attention to the fact that at the height of that alleged prosperity almost 60 per cent of American families had annual incomes below the poverty level, then calculated at $2,000.)

I remind you, too, that President Hoover was not quite so feckless as his reputation allows. Not quite. To be sure, he did not believe in the dole. But he did come to believe in public works. Under the Federal Employment Stabilization Act of 1931, he drew up a six-year schedule of Federal projects to stimulate business. In a foretaste of the New Federalism, he urged the states and municipalities to expand their public works. And in the Reconstruction Finance Corporation (RFC) he anticipated the sort of industrial stimulation now advocated by those Robert Lekachman calls Atari Democrats. In relation to the GNP as it was then, and as it is now, the RFC was bigger than anything recently proposed. Yet things got steadily worse.

The lesson of the experience is that although it is easy to throw people out of work, getting them jobs again is a massive problem. John Maynard Keynes painstakingly explained all this 45 years ago, but many so-called Keynesians have persisted in thinking quick solutions are possible.

The underutilization of existing industrial plant should, of course, have warned the supply-siders (are there any left?) that investment was not the immediate difficulty. Why should I invest in a new or expanded plant when I don’t have enough business to keep my present one occupied? The size of this stumbling block is indicated by the fact that, with nearly a third of the nation’s plant idle, the economy would have to increase by almost 50 per cent simply to do what it is currently capable of doing.

Two years ago interest rates were a manageable factor. If they had even been held down to the usurious rates they have now descended to, the situation, while serious, would not have become as serious as it is. Now it’s too late. The recent fall in rates certainly has had some effect on the statements of profitable firms, and it will no doubt save some marginal businesses from bankruptcy; but it is probable that most still-profitable firms have already, by draconian measures, so reduced their reliance on borrowed money that the effect of the lower rates will be minimal. (The main use for borrowed money today is in takeovers like the Bendix fiasco.)

Consider a company that, before the advent of Volcker’ s form of monetarism, had been accustomed to borrowing $10 million of short-term money. When the prime went to 20 per cent (and higher), its interest costs soared to an unacceptable 2 million. Management did what had to be done: raised prices, abandoned plans for expansion, cut production and inventory, reduced marketing expenses, cracked down on slow accounts, perhaps shifted from FIFO to LIFO accounting, dragged its feet on pay raises-and laid off or fired  as many people as it had stomach for.

As a result, the company reduced its need for short-term money from $10 million to $2 million, and in the meantime the prime (partly because other companies drastically reduced their borrowing as well) went from more than 20 per cent to less than 12 per cent. Thus the firm’s interest costs fell from $2 million to $240,000 – and it survived. A further fall in interest rates from 12 per cent to 10 per cent reduces the firm’s costs merely another $40,000, a welcome development but nothing to get excited about – certainly not in the way Wall Street has been excited.

Our little scenario has applications right across the economy; and if you try to put yourself in the shoes of the managers of a company that has been through it, you will understand that they feel pretty smug about surviving and are not at all eager to put themselves in jeopardy again, at least not right away, not with the present people in charge of the banking system. The scenario also explains what must otherwise seem a case of levitation: why so many British companies are improving their earnings in the face of the ravaging of their economy. Since Messrs. Volcker, Ronald Reagan and Donald Regan have learned their lessons at the knee of Prime Minister Margaret Thatcher, we can expect similar occurrences here.

KEYNES laid all this out in The General Theory of Employment, Interest, and Money. The great message of that great book was that full employment is the only rational meaning of prosperity, and that it doesn’t just happen. The economists under whom Keynes had studied thought that a recession would lead to lower wages, which would make hiring people more profitable to entrepreneurs, which would bring about full employment again. Insofar as Volcker, Reagan and Regan think about people at all, they still think that that’s how it works. But it didn’t work that way in the Great Depression, and it doesn’t work that way now.

As Keynes showed, “the economic system in which we live … seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” It is, in short, perfectly possible for the economy to crawl indefinitely with (to choose some figures at random) more than 10 per cent of the labor force unemployed and more than 30 per cent of the industrial capacity unused. It is possible, too, that the modest proposals the Atari Democrats have advanced might in time knock as much as a third out of those figures and achieve a modest jog-trot at the lower level. That would be better, but it’s not great, and it is probably the best that can be done by indirect methods in the foreseeable future.

By indirect methods I mean schemes to diddle the taxes in order to promote savings or investment or international trade or sunrise industries or the like. I especially mean schemes to control inflation by keeping the economy cool. By direct methods I would mean those designed to do something for people. I don’t mind if you call me a populist. I hold that our greatest national sins are the unconscionable spreads we allow in incomes and in wealth. We have deliberately’ first under Richard Nixon and at present under Reagan, increased those spreads by the maxitax on earned income, the maxitax on unearned income, the reduction of the capital gains tax, and the emasculation of gift and inheritance taxes. And we now have before us the disgraceful spectacle of a private committee of so-called investment bankers (who make their fortunes arranging wasteful takeovers) spending heavy dollars to propagandize a cut in Social Security benefits and an increase in Social Security taxes.

Until we reverse these trends, the rich will stay as rich as they are, while the poor will grow poorer. If that is not bad enough on its face, no stimulation of the economy could come from consumption. The rich are already consuming as much as they want, and the poor are consuming as much as they can afford. We have surely seen that supply-side stimulation was, as David Stockman admitted, a Trojan Horse to make the rich richer. Even if the motives had been as pure as the driven snow (whose are?), the supply-side ploy was, as a bush-league politician said, voodoo economics.

Simply reversing the errors of the years from Nixon through Reagan, however, will not bring prosperity. Algebraic tradeoffs will at most keep things from getting worse. Nor will the job be done by the tentative public works programs that are being timidly proposed. No, to put 14 million of our fellow citizens to work will require perhaps $100 billion. If we don’t spend $l00 billion to pay our fellow citizens for doing useful work, we’ll have to spend upwards of $30 billion to maintain them in miserable inactivity. Can we find the $70 billion extra we need to do the job? Well, it’s proportionately much less than we accomplished in World War II. So the question is not Can we? but Will we?

The New Leader


[1] [Editor’s note:  even Einstein knew that time = money…..  :)]

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