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By George P. Brockway, originally published March 23, 1998

1998-3-23 Moynihan's Social Security Hocus Pocus titleON MARCH 16 Senator Daniel Patrick Moynihan delivered a speech titled “Social Security Saved!” at Harvard’s John Kennedy School of Government. Said to be the Senate’s authority on the subject, he has addressed it many times over the years.

This time he referred to “the magic of compound interest” and presented some figures that surely seem magical at first glance. At second glance, they seem more than magical.

The Senator would cut the Social Security tax rate 1 percentage point and cut the employers’ tax (officially called “contribution”) likewise in order to “get the system back on a pay-as-you-go basis.” That is a worthy objective; unfortunately, the Senator does not say anything more about it.

According to the Moynihan plan, workers would be given a choice: They could take their 1 per cent cut and spend it on riotous living, or they could take both their own tax cut and their employers’ and put them in “voluntary personal savings accounts.” This is where the compound interest comes in, and it comes in with a roar. A table accompanying the text of the Senator’s speech shows that a worker who earns the “average wage” of $30,000 and stashes an amount equal to 2 per cent of it away every year for 45 years in a voluntary savings account compounding at 3 per cent, will wind up with a nest egg of $275,000 at retirement. And that will be on top of his or her Social Security benefits.

It sounds great, but anyone can do better. The present Social Security tax (employee plus employer) is 12.4 per cent. Suppose the whole caboodle were put in the magical voluntary savings account and compounded at 3 per cent. Then the nest egg would be $1,685,000. If the interest were compounded at 5 per cent (a rate sufficiently close to credibility for the Senator to include it in his table), in 45 years the $30,000-a-year average worker would be worth $2,790,000. At age 65 or thereabouts, he or she could retire and, leaving this lordly sum in the magical account, live on the annual interest of $139,500[1].

With astute quasi-legal advice of the sort advertised in many journals, the principal, or most of it, could be sheltered from the inheritance tax and passed along to the worker’s heirs or assigns, who could live comfortably without working at all. Indeed, since on these assumptions even the $12,000-a-year minimum-wage worker would have $1,085,000, we can safely say that after at most another generation, no one would ever have to work again. It might take somewhat longer in Bangladesh.

Now, I am enough of a Yankee to believe that honest labor never hurt anyone and is good for the soul; so I find this outcome appalling, and I would be sorry I brought it up if it didn’t reduce Senator Moynihan’s scheme to the absurd. Why does the scheme wind up in absurdity? Do you remember how, when lRAs were first peddled, banks advertised that they would make us all millionaires? There was and is nothing wrong with the mathematics. Bankers have books of tables that contain such calculations, and I assume the Senator has consulted one.

The trouble here, however, is that there are not enough ways to invest the bags full of money that would theoretically accumulate. The bags of money will therefore not exist, no matter what the mathematics says. They will not be sitting in bank vaults, waiting for a good deal to turn up, or available for some jolly use. They will not exist, tout court. They will never have existed.

If the Senator’s average worker deposits $600 a year every year for 45 years in the bank of his or her choice, and the bank can’t find people willing and able to pay interest for the use of it, the worker will reach retirement with $27,000, which ain’t hay, but is a long way from the $275,000-or $350,000 at 4 percent, or $450,000 at 5 per cent-the Moynihan table promises. Compound interest is truly magical, but the magic won’t work if there is no interest to compound.

We have now reached a point in the argument where John Maynard Keynes parts from Classical and Neoclassical economics. All three agree that saving equals investment. The conventional schools hold that saving creates investment, and they nag us about it every chance they get. In contrast, Keynes observed that entrepreneurs borrow and invest, not for the fun of it (though it may be fun), but to make money by producing things people are willing and able to buy. Accordingly, he wrote, “The propensity to consume will … take the place of the propensity or disposition to save.”

In any case, three current events teach us that there is now no use for the tremendous savings the Senator’s scheme would generate. (I) Major corporations daily announce plans to buy back sizable blocks of their own stock, thus confessing that they don’t know how to put all the money they already have to work producing goods and services. (2) Corporations of every size and shape raise and spend vast sums of money to buy and sell each other. The rash of mergers and takeovers may keep Wall Street busy scratching but ordinarily is intended to result in a contraction, rather than an expansion, of productive activity. (3) The stock market boom, again, mostly concerns Wall Street. The earnings of the companies on the Dow or the Standard and Poor’s 500 are now less than 1.5 percent of their stocks’ market value. Profits, while growing, cannot grow as fast as the market. Many actively traded stocks on the NASDAQ have never earned a profit at all.

As I have remarked before, the law of supply and demand works if, and only if, supply is restricted. The supply of stocks is indeed limited; consequently, as long as-but only as long as-Baby Boomers worried about looming retirement keep pouring their savings into the market, the market will keep rising. That is why Wall Street is eager for the commissions to be earned (“the old-fashioned way”) from handling the Senator’s voluntary personal savings accounts.

The economic sterility of capital gains, it needs to be recalled in the present context, is that they increase the price but not the productiveness of capital assets. The risk with capital gains is that when large numbers of people try to cash in their gains all at once, the market can crash very far and fast. Some day – at the latest when Boomers start cashing in their gains in order to live on them – the music will stop, and many people will find themselves without a chair to sit on.

In the meantime, conservatives hail Senator Moynihan’s scheme and urge him on. James K. Glassman of the American Enterprise Institute proposes, in the Washington Post, cutting “another few points off the payroll tax” as a step toward the happy hunting ground of complete privatization.

Complete privatization is of course what we had before we had Social Security, and it was not pretty[2]. The inadequacy of the unregulated free market was taught to all who had eyes to see in the months following October 29,1929. It was not until August 14,1935, when the Great Depression was almost six years old, that the heart-rending inadequacy of private charity was ground into the public consciousness. Then the New Deal was finally able to break through the barriers to the general welfare that had been thrown up by Republicans, Dixiecrats and a states’-rights-minded Supreme Court.

THE RESULTING Social Security Act was-thanks to the long years of wrangling and compromising-pretty much like the proverbial horse designed by a committee. It was not, and is not, ideally suited to any of its several functions. Nevertheless, it was, and remains, one of the most useful and successful and necessary public laws of the century. It was enacted because there are, in fact, limits-actual limits that we have tested more than once-to the assuredly great capabilities of private enterprise and private charity.

Despite this record, conservatives are likely to push for complete privatization of Social Security benefits. They are not likely to want to eliminate the system, though, and especially not the tax that supports it. Since Social Security accounts for almost a quarter of what makes ours a big government (which conservatives pretend to be scared by), and since the Social Security tax, including the employers'”contribution,” is indubitably a tax (which in principle conservatives object to), it may seem surprising that they wouldn’t want to abolish the whole shebang.

The reason for this inconsistency is simple. The various flat tax schemes that Congressional Republicans are busy devising have for them the charm of being resolutely regressive. Anatole France observed that rich men, as well as poor, could sleep under the bridges of Paris. Flat-taxers boast that they will give poor men the honor of being taxed at the same rate as the rich. Yet regressive as the flat tax is, it is nowhere near as regressive as the Social Security tax.

The two systems are similar in that each taxes only earned income. Malcolm Forbes probably pays himself and his office boy a fair salary. The two of them pay Social Security taxes at the same rate, and they would both be flat-taxed at the same rate, but they wouldn’t pay any tax on their incomes from the fortunes they inherited, no matter how large or small. David Rockefeller and I, being retired, now pay no Social Security tax (except as employers of servants, if any) and would pay no flat tax at all.

But the Social Security tax is more regressive than the flat tax on two counts: (I) The Social Security tax is levied on the first dollar you earn, while the flat tax proposals, like the present income tax, exempt the first few thousand dollars you get your hands on. (2) The Social Security tax does not tax at all earnings over $68,400, while the flat tax goes to the last dollar. (Moynihan proposes to increase the “cap” to $97,500 by 2003, still leaving the top 13 per cent of wages untaxed.) In short, the Social Security tax is a flat tax that is extra hard on the poor and extra easy on the rich.

At least since the Social Security system was “reformed” in 1983 by Senator Moynihan and others, it has been running a surplus that has been used to bring the “unified budget” closer to a balance. Even in this alleged near-balance year for the budget and near-crisis year for Social Security, the near-balance depends on an actual Social Security surplus of about $40 billion.

For reasons I advanced in this space last September 22, I contend that “A zero deficit means failure,” and for reasons I have advanced here many times, I contend that the Social Security Trust Fund is a serious error. Putting these two mistakes together, we have compounded them, for we have been using the proceeds of a most regressive tax to avoid increasing the income tax, which is moderately progressive, to achieve an unnecessary and wasteful balance.

Senator Moynihan’s scheme continues these injustices, as well as his erroneous attack on the Consumer Price Index. Reactionaries will rejoice.

The New Leader

[1] Ed:  I have tried and tried using the financial functions in Excel, and have asked others to do so.  We cannot replicate these numbers.  We’d be happy to see how they are calculated.

[2] Editor’s emphasis

By George P. Brockway, originally published January 13, 1997

1997-1-13 Milking the Social Security Cash Cow titleTHE BEST that can be said for the Advisory Council on Social Security is that after two years of study, its 13 members could not agree on what to do about the allegedly ailing program. They did agree about some of the “facts,” and that agreement is enough to make one relieved they didn’t agree about much else.

Somehow they got into their heads the notion that the program’s surplus, which goes into a “trust fund” invested in long term government bonds, earns only 2.3 per cent interest. They say that rate is “adjusted for inflation,” but I have my doubts. According to the latest figures available, at the end of 1994 the fund contained $415 billion, and in 1995 it earned $31 billion. I make that out to be 7.5 per cent[1]. Taking into account the change in the Consumer Price Index (2.7 per cent), we arrive at a real return of 4.64 per cent[2] more than twice the rate assumed by the Advisory Council.

A point to notice is that there was almost no trust fund until Social Security was “reformed” in 1983. After all, the actuarial problem is not complicated. Even in the BC (before computer) era, the number of people reaching retirement age in any year could be accurately foretold, and reliable estimates could be made of those who would die or become disabled.

In such circumstances it is ridiculous and wasteful to maintain a trust fund. The businesslike thing to do with regular costs is, as the accountants say, to expense them-that is, to pay them as they become due, just as the rent and wages and interest are paid. It is prudent to put aside an amount equal to a few months’ expenses in case another nut imagines he has a contract to shut the government down. Otherwise, in a population as large as ours the risks are as level as can be, and the nation can and should be a self-insurer.

In 1981 David A. Stockman, President Reagan‘s Director of the Office of Management and Budget, worked up some figures purporting to show that the “most devastating bankruptcy in history,” namely that of Social Security, was imminent. A bipartisan National Commission on Social Security Reform was duly appointed. Alan P. Greenspan, then a private citizen, was chairman.

For a year the commission dithered, apparently convinced that Stockman was born for strange sights, things invisible to see. Then, as Senator Daniel Patrick Moynihan later told the story in a newsletter to his constituents, he and Senator Bob Dole put together a semisecret unofficial group to take action. “In brief,” he wrote, “in 12 days in January 1983, a half-dozen people in Washington put in place a revenue stream which is just beginning to flow and which, if we don’t blow it, will put the Federal budget back in the black, payoff the privately held government debt, jump start the savings rate, and guarantee the Social Security Trust Funds for a half century and more.”

The Senator’s circular letter was dated June 10, 1988-less than nine years ago. How did the supposedly magnificent “revenue stream” it describes dry up so quickly? Why must we find a new one now? We hear a lot about the size of the Baby Boomer generation as compared with the size of the succeeding generation. But in 1983 the Boomers were all grown up, and their children were mostly born; so there were no big demographic surprises. It is also said that the Boomers’ life expectancies are longer than those of their parents’ generation. This is certainly true, but just as certainly it should have been obvious to the architects of the 1983 solution. The World Almanac could have told them that life expectancies in the United States have increased every year since at least 1900.

If a blue-ribbon commission somehow got it wrong in 1983, is there any reason to expect that another blue-ribbon commission, perhaps with Mr. Greenspan again as chairman and Messrs. Dole and Moynihan again as members, could get it any better in 1997?

No, there is not. The Social Security Act Amendments of 1983 set up a system of increased taxes and reduced benefits in order to build a trust fund that was expected to take care of things until 2030.  Now we are being told by prophets of doom (some of whom were members of the 1983 commission) that we must do something drastic about Social Security entitlements today or the trust fund will run out in 2030, inciting an intergenerational war.

What, I wonder, is all the excitement about? The trust fund was planned to run out in 2030. If the end of the fund in 2030 is expected to signal the end of the Republic, why didn’t the 1983 commission Senator Moynihan was so proud of attend to it, instead of pushing the problem off on another generation? And why should the present generation be saddled with solving a crisis that won’t occur until long after Senator Strom Thurmond has retired? Why shouldn’t the generation of 2030 be expected to solve a problem that will occur, as they say, on its watch?

There are answers, but they’re not what you read about in the papers. The thing is, the Social Security system is what Wall Street calls a cash cow-by far the biggest cash cow, public or private, there’s ever been. Greedy men and women-exemplars of homo economicusdream about her and can’t keep their hands off her.

Several schemes are being floated simultaneously. Some want to increase Social Security taxes to preserve and increase the trust fund. They want to do that not for any actuarial reason, but because the Social Security surplus is used to reduce the Federal deficit, and there is the possibility (remote yet real) some deficit hawk will get the shocking idea of levying progressive income taxes to control the deficit.

Since Social Security taxes are as regressive as taxes get, an increased Social Security tax is a valuable trade-off for the benefit of the rich and famous. It’s even better for them than the Forbes flat tax, because the tax starts with the first dollar anyone earns (that sticks it to the lower classes!) and ends at $65,400 instead of continuing on to tax every last megabuck reaped. In addition, it is a tax only on those who are employed and those who employ them. If you are an economic specialist and restrict your activity to clipping coupons and cashing dividend checks, you don’t pay any Social Security tax at all.

As it happens, Senator Moynihan understood the ploy in 1990 and tried to forestall it by reducing Social Security taxes and returning the system to a pay-as-you-go basis. When he couldn’t persuade his fellow Democrats to go along, he asked why we needed the Democratic Party. It was, and too often still is, a good question.

Another greedy scheme yields an additional motive for wanting the Social Security surplus to be ever larger. Brokers and investment bankers have long had their eye on the trust fund. For them it presents a charming opportunity. Think of it! Imagine your rich and doting uncle[3] turning over to you a fund of half a trillion dollars, now growing at the rate of close to $50 billion a year, and instructing you to churn the market and make it grow faster. Wouldn’t that be fun?

It would, in fact, be unadulterated fun. You wouldn’t have to weary yourself persuading tens of millions of timorous senior and pre-senior citizens to entrust their savings to you; your uncle would handle that. Nor would you have to maintain tens of millions of separate accounts and draw and mail tens of millions of checks every month, together with resolutely upbeat letters explaining why benefits are less than expected. Your uncle would handle those chores, too. A very handy and efficient fellow, that uncle, regardless of what you may hear on the radio.

MOST OF THE “reformers” put great stress on the questionable assertion that an individual citizen knows better what to do with his or her money than some faceless and indifferent bureaucrat in Washington. This tired old wheeze goes back at least to Adam Smith, whose faceless and indifferent bogeys were, Smith-quoters may be astonished to learn, not government employees, but members of the boards of directors of private corporations, some of which were remarkably similar to today’s mutual funds.

Let us try to foresee what would happen if some privatization scheme-say, investing 25 per cent of the trust fund in the stock market-should be adopted by Congress and signed by the President. Since, as we noted in “Caught in a Boom Market” (NL, September 9-23, 1996), the number of available shares is limited, the influx of something more than $125 billion would send prices shooting up. But it would have taken a while to get the “reform” bill through; consequently, much-if not all–of the rise would have been anticipated by smart money pulled out of other investments. The trust fund would not participate in the initial boom. Also, the source of the cash needed to move into the market would be a problem. The trust fund would have to redeem some of the government bonds it is holding, the Treasury would have to sell other bonds to get money to pay these off. In other words, the deficit would be increased by the amount invested in Wall Street.

Where would the money to buy the new bonds come from? All the smart money would already be in the stock market’ but perhaps there would be some timid money eager to shift from stocks to bonds, especially if the new bonds were priced low enough to yield an attractively high rate of interest. The high interest would send stocks down as more money shifted from stocks to bonds; then some would shift the other way, just as money sloshes from technology stocks one day to nursing homes the next. Where would the turmoil end? It would not end. As Ring Lardner might have said, that would be part of its charm.

Both the stock market and the bond market are always churning, because traders are constantly evaluating and reevaluating possible investments, trying to determine their comparative future earnings, capital gains and risk. When the market is volatile, the vital question is what the various stocks and bonds are going to sell for tomorrow. In the end, this all is guesswork, even when mainframe computers spew out charts of many colors: What’s to come remains unsure.

If the stock market is now “outperforming” the bond market, it is because the stock market is considered riskier, and the claimed difference in performance is a measure of the perceived risk. The very term “social security” suggests that the program is correct in its present stance of being risk-averse.

Some claim that investing Social Security funds in the stock market would send prices even higher, and that high stock prices make it easier for new companies to be launched and old companies to be expanded. Other things being equal, as economists say, this claim may be sound enough, but there is another side to it. When the market is really soaring, it becomes much simpler to make money by speculating in stocks and bonds than by producing commodities for people to use and enjoy. Things apparently are not equal at the present time, for leading American companies seem to have more cash on hand than they know what to do with. Why else would IBM and so many others be buying back their own stock instead of investing in new or expanding enterprises?

All that would be accomplished by putting Social Security funds at risk in the stock market, it can safely be said, would be a steady upward redistribution of income and wealth. The rich would in general become richer, and the poor poorer. Try as they may, some people seem never to be near a chair when the music stops.

Stockholders and bondholders (both new and old) would, as a group, be likely to prosper about as fast as, but no faster than, the Gross Domestic Product. The only way they might have the illusion of prospering more grandly would be if inflation accelerated. Brokers and investment bankers would be the big winners in fact, taking them as a group, the only winners. The cash cow would be lavish with commissions and fees and interest on margin accounts.

The costs of moving the Social Security trust fund into the market-particularly the increased deficit and the interest bill on the new bonds-would be borne by the government. There would be a furious struggle to decide whether to increase the debt or to downsize the budget. No matter how it was resolved, those at the bottom of the income scale would be pushed lower. Almost all bonds are necessarily bought by the rich; the interest they receive is, in our present tax system, disproportionately paid by the lower middle class-the same people who typically suffer when the budget is shrunk.

It all comes down to this: Individuals can, and many do, make out like bandits on Wall Street, but society as a whole cannot be more comfortable or more secure without producing more goods and services. Whatever it is that Wall Street produces, it is good neither to feed you if you’re hungry, nor to clothe and shelter you if you’re cold, nor to heal you if you’re sick.

The New Leader

[1] Do the math, the author is correct

[2] The author appears to have subtracted 2.7% from 7.5%… Ed. I don’t follow why that’s the right calculation

[3] Uncle Sam, in this case

By George P. Brockway, originally published March 14, 1994

1994-3-14 Ending Welfare As We Know It Title

1994-3-14 Ending Welfare As We Know It Moynihan

POLITICAL COMMENTATORS are practically unanimous in telling us that Candidate Bill Clinton’s most popular sound bite in his 1992 campaign was a pledge to “end welfare as we know it.” I don’t recall it that way. Welfare is certainly a part of the economy, stupid; but I doubt that many voters even know what “AFDC” stands for, let alone how it works. My suspicion is that the average middle-class citizen’s interest in the question is nothing more than a mean spirited irritation at anyone (especially anyone who is not a big-time operator) getting something for nothing.

There are three things that especially interest me about the present welfare problem, and I’m going to tell you about all three of them.

First, as near as I can determine, we ended welfare as we know it (or thought we ended what we thought we knew) in 1988, and I wrote about it in this space (“Reality and Welfare Reform,” NL, November 28, 1988). The Family Support Act of that year has a curious legislative history, and an even more curious media history. Senator Daniel Patrick Moynihan guided it to a 93-3 vote in the

Senate on June 16. (A “less stringent” version of the bill had passed the House by 230 to 194 the previous December.) The New York Times ran the story in the lead column on the front page the next day-and almost immediately dropped it. If you search business papers and magazines of that time, you will find little or no reference to the event. I can’t tell you about TV coverage because I’m not a close student of the medium.

I can, however, guess why the course of the bill through the Senate-House conference, the final passage by both houses, and its signature by President Reagan on October 7 attracted little attention. A tip-off is Reagan’s Budget Message of January 9, 1989, which includes funding for the Family Support Act but still reduces “welfare” by $800 million. A further tip-off is the fact that in the following two years 40 states froze or cut Aid to Families with Dependent Children, 11 cut emergency programs for the homeless, nine cut ordinary programs for the homeless, and 24 froze or cut programs for the elderly, blind or disabled. All this happened without causing any public uproar. No one gave a damn one way or the other.

I mention all this because, so far as I can make out, President Clinton’s end to welfare as we know it is the same as Senator Moynihan’s Family Support Act of 1988. Both make a fuss about tracking down “deadbeat dads”; both make a fuss about training welfare mothers for private sector jobs; and both propose to shove people off welfare and into workfare in two years, more or less. It therefore seemed to me it might be helpful to know how the 1988 Act has worked.

Well, I’m not paid to be an investigative reporter, but I tried. A full half hour on hold at the Department of Health and Human Services didn’t even console me with Muzak. Two letters to Senator Moynihan have gone unanswered. An appeal to his press secretary produced a sheaf of papers about the provisions of the 1988 Act, but nothing about its implementation or results. The Budget of the United States Government for Fiscal Year 1994 shows that in 1992 only about two-thirds of a $1 billion appropriation for payments to states with AFDC work programs was spent, and that the estimated outlays in 1993 and 1994 are about three fourths and five-sixths of the respective appropriations. Six years ago Senator Moynihan estimated that his plan would cost $3.34 billion over five years; so it would seem not to have been underfunded, at least on its own terms, but who knows whether it has done any good? Someone ought to answer that question before we end welfare as we know it all over again.

Which brings me to my second point of interest. There exists a fully worked out plan that actually would end welfare as we know it, that would practically administer itself, that would begin to heal the suppurating wound in our society between the haves and the have-nots, and that would start to restore the self-respect of fellow citizens who have become entangled and degraded in our safety nets. Not only does the plan exist, it was for one shining moment a major plank in the platform of a leading candidate for the Presidency of the United States.

The plan is the creation of Leonard Greene, an inventor who bubbles with three new ideas while he’s chatting with you. He’s president of Safe Flight Instrument Corporation, founder of the Institute for Socio-Economic Studies, leader in a fistful of social welfare activities, and author of a book I’m proud to have published titled Free Enterprise Without Poverty. Greene devised his plan in answer to a problem he ran into in his business.

In the course of his civic work he had met and hired a bright and eager young black. The young man was a fast learner and seemed to have a rosy future, when one day, without warning or explanation, he quit. Greene sought him out at home and discovered that his wages, together with his mother’s Social Security and some AFDC payments for younger siblings, would make them too rich for their public housing and Medicaid and AFDC money, but would be far from enough to make up for what they would lose. “Welfare as we know it” would make it smart for him to leave home or not to work. Greene found it easy to collect scores of similar cases.

Greene’s reaction was to figure out how the law could be changed. His solution was beautiful in its simplicity, its comprehensiveness, its practicality, and its fairness. First, each person would take all his or her existing entitlements or transfer payments and put them in one pot. Those that were “in kind” (food stamps,Medicaid, public housing, and so on) would each be assigned a standard cash value that would be added to the cash received from Social Security and other transfer payments.

Second, every citizen, from Ross Perot to the bag lady on the comer, would receive what Greene gave the unfortunate name of a “Demogrant,” which is a sort of guaranteed income similar to what Milton Friedman calls a negative income tax. In most cases this would be a bookkeeping transaction; no money would actually change hands.

Third, all of the foregoing would be added together and taxed at progressive rates, starting, of course, very much higher than the rates do today. In general, none of the poor not now subject to Federal Income Tax would be taxed under Greene’s plan. But Greene’s excellent young man could accept a good job, paying the applicable income tax, without compromising his family’s public housing.

Most important, the hurdles now erected between underclass poverty and full membership in the commonwealth would be removed. The course would still be far from the level playing field demanded by the Wall Street Journal for speculators; but it would at least be a smooth upward path, and reasonably diligent young people could hope to do reasonably well on it.

I REMEMBER (more clearly than I remember talk about welfare reform) that hope was a steady theme in Clinton’s campaign message. As long as the inhabitants of the inner cities and the rural slums are without hope, we have no hope of solving the problems they make for society as a whole as well as for themselves. Conrad had it right: “Woe unto him who has not learned while young to love, to hope, and to put his trust in life.” The same woe threatens a nation.

Obviously, there would be complications in the Greene plan, especially as old plans were phased out and the new one was phased in. Yet work would not be discouraged, families would not be broken up, and everyone would be on the same scale as everyone else. Needless to say, the plan would not be without costs. Greene would cover them with a value added tax-but that’s another question.

As I’ve said, the plan once seemed a political possibility. Leonard Greene had George McGovern‘s ear. They were so close that Greene flew McGovern in his private plane to file for entry in the New Hampshire primary of 1972. McGovern carried the Greene plan into the primaries, where he had trouble getting it across.

The press made fun of “Demogrants,” which sounded like the grunting of Democratic candidates. Hubert Humphrey, I’m sorry to say, charged that the negative income tax was a gift to the rich. By the time of the California primary the Greene plan had come to seem a handicap. McGovern renounced it and never mentioned it again.

On reflection, I have concluded that the plan was too sensible, too simple, too practical. We Americans pride ourselves on our down-to-earth pragmatism, just as the French pride themselves on their rationality and the Indians on their spirituality. We are the most theory-driven people on earth, however, constantly prattling about market discipline and other such nonsense. And there is what the literary critics call a dark side to the issue: Everyone knows that blacks are disproportionately represented among recipients of the present welfare benefits. For a shamefully large number of us, welfare as we know it can be improved only by slashing it to ribbons.

Finally, there is the third thing I mentioned at the beginning. This is the notion that welfare recipients are to be given two years of job training and then pushed out into the labor market, where they will help us compete in the new global village.

Six years ago, when the Family Support Act was passed, I thought that was a nutty idea, and I still do. It is impracticable and it is vindictive. Moreover, it conflicts with the theory of a natural rate of unemployment (see Are You Naturally Unemployed?” NL, August lO-24, 1992). Although accepted by every mainstream economist in the land, the theory is a nutty idea too. If you believe in it, you must believe it would be a disastrous mistake to get everyone off welfare and into regular employment, because the natural rate of unemployment would be violated and inflation would rage without limit.

Indeed, the trouble is that if President Clinton actually begins to end welfare as we know it, the Federal Reserve Board will be theory-bound to raise the interest rate high enough to restart the recession and move those welfare mothers back among the naturally unemployed. I would like to see this conflict brought out into the open.

The New Leader

By George P. Brockway, originally published May 19, 1993

1993-5-19 Why Productivity Will Unto Clintonomics title

THE FIRST COLUMN in this series, almost 12 years ago, was titled “Why Speculation Will Undo Reaganomics” (NL, September 7, 1981). Well, I was wrong. I was right enough in my analysis – that speculation would enrich the rich and impoverish the poor and bring on what we now call a credit crunch – but I naively could not imagine anyone being pleased with such an outcome. By last November, of course, a considerable majority of the voters did become displeased, if not with the enrichment of the rich and the impoverishment of the poor, at least with the stagnation that followed from the polarization of the economy.

I now feel possessed of another prophecy. And I hope I’m wrong again.

When I say productivity will undo Clintonomics, I mean just that. I don’t mean lack of productivity. I mean what the New York Times and the Wall Street Journal and the Economist are always writing about, what Nobel laureates in economics from MIT are always talking about, what Labor Secretary Robert Reich is now planning to try to increase. I mean that to the extent that Clintonomics is successful in improving our productivity, it will fail to improve our standard of living.

If our aim is what all these worthies say it should be, we can achieve it by decreasing production, profits, employment and wages. In fact, this is what General Motors and IBM and other giants of our economy are doing today. The fashionable word for their activity is downsizing, and the purpose is to step up productivity. Given a modicum of managerial skill and luck, half of the downsized corporations may actually improve their rating on the productivity scale. But their production and profits and employment and wages will mostly be lower. And the national product and profits and employment and labor income will certainly be lower.

Productivity is not a new idea. It was an old idea when President Reagan, in his first year in office, created a 33-member National Productivity Advisory Committee headed by former Treasury Secretary William E. Simon. You never heard of that committee? Who ever did? A year or so after its appointment I spent some time trying to find out what it had accomplished. Although I wrote as CEO of an American corporation, Simon did not answer my inquiries, nor did the White House. Finally, Senator Daniel Patrick Moynihan was able to dig up for me three or four slim pamphlets published by a second productivity committee that had been created some months after the initial one. I still have the pamphlets somewhere in this mess I call my study. As I recall them, they were paeans to efficiency and might well have been written by Frederick Winslow Taylor a hundred years earlier.

When economists started playing with productivity they changed it radically. They defined it clearly enough as output per unit of input. In keeping with their passion for mathematics, though, they devised an equation to determine it and an index to rank performance. Since labor is by far the largest factor of input, they thought to simplify the equation by letting labor stand for all inputs. This had the further attraction of allowing them to quantify input in “real” rather than dollars-and-cents terms, as they would have had to do in order to add the input of labor to the inputs of land, capital, technology, and whatever other factors one might name. Mathematical economists tend to believe that money is not real and don’t like to talk about it in public, but their simplification, as I’ve shown in greater detail elsewhere (see The End of Economic Man, Revised–Adv.), causes a serious distortion.

The productivity equation relates two quantities. It is a ratio, an ordinary fraction. In the United States it is computed by the Bureau of Labor Statistics of the Department of Labor, which divides the gross domestic product of a period by the number of hours worked in the period. “Hours worked” includes those of proprietors, unpaid family members and others “engaged” in any business.

Like all simple fractions, this one can be increased in the two ways we learned in grade school: by increasing the numerator (2/3 is greater than 1/3), or by decreasing the denominator (1/2 is also greater than 1/3)[1]. Given this property of fractions, a moment’s reflection will satisfy you that the productivity index is constitutionally incapable of providing an unequivocal answer to any question you may reasonably want to ask. It tells nothing of the size or nature of the domestic product, and nothing of the size, composition or compensation of the labor force.

The index goes up when production fails, provided “hours worked” falls faster; that is what the downsizing movement aims for. The other name for this result is recession, or depression. On the other hand, the index declines when production rises, provided “hours worked” rises faster. The other name for this result is nonsense. The economy is not less prosperous, nor is the nation weaker, because more people are working. (Otherwise, why are we so eager to get welfare mothers to work?)

The foregoing is obvious, and the mathematics is indefeasible. How is it, then, that so many intelligent, experienced, well-intentioned men and women –practically the entire membership of the American Economic Association, not to mention the with-it managements of our corporations great and small – are bemused by the productivity delusion? Psychology aside, I can make a stab at explanation.

Let’s begin with a quotation from a back issue of the Times: “A worker who produces 100 widgets an hour is clearly more productive than a worker who produces only 50 widgets an hour.” That is certainly true. And generalizing the observation, a nation of 100-widget-an-hour workers should be twice as prosperous as a nation of equal size composed of 50-widget-an-hour workers. True again – with one proviso, namely that both nations have full employment[2]. Should the first nation have only a third of its workers employed, while the second has full employment, the second will produce 50 per cent more widgets than the first and therefore will be more prosperous.

The assumption of full employment is one that economists are so comfortable with that they make it routinely, without thinking about it. Indeed, classical economics was based on this assumption, and so is neoclassical, or the economics currently practiced by most of the profession.

The beauty of full employment is that if you have it, almost anything you try will work. David Ricardo thought that England should stop making wine and concentrate on wool cloth, that Portugal should do the opposite, and that the two countries should exchange surpluses. The English vintners would become weavers, and so on. Given some rather special assumptions, this was a dandy idea in 1817 (and today it underlies the North American Free Trade Agreement). A better idea, because the British Isles were plagued by roving bands of homeless unemployed, would have been to employ the unemployed as vintners (or brewers or barley-water bottlers) and let the Portuguese keep their port, along with the wool they were perfectly capable of weaving.

If you have full employment, you can (and should) invest almost without limit to upgrade your product and upgrade the workers and capital plant that produce it. If you have millions of men and women who are unemployed or underemployed, you need to increase the number of hours worked. It doesn’t make much sense for the nation to train these people for jobs in industries that don’t exist, or that we can only imagine, to satisfy the presumed demands of a hypothetical global economy.

The new global economy is a hot ticket today. In the sense that we have one, however, there has almost always been one. Archaeologists now claim that the fabled Silk Route is two or three millennia older than Marco Polo thought. But the economic impact of the route was slight in prehistoric times, and at present the economic impact on us of Bombay and Cairo and Mexico City does not extend much beyond our corporations exploiting their labor in order to undercut our wage rates.

Unemployment is our problem. Adding up those who are officially called unemployed, those too discouraged to look for work, those too turned-off to think of working, and those able to find only occasional part-time work, recent testimony before a Congressional committee reached the appalling total of 17.3 million men and women. If we followed Mexican practice and counted as employed everyone who as much as cadged a tip for opening a car door last week, our unemployment total would be as low as the 2 per cent Mexico reports. Or if we followed mainstream economic practice and did not count at all the “naturally” unemployed, we could squinch our eyes shut and pretend that the problem didn’t exist (see “Are You Naturally Unemployed?” NL, August 10-24, 1992).

It exists, nevertheless. It really and truly exists, and as long as our best brains are trying desperately to reduce “hours worked,” it will not go away. Clintonomics may cauterize a few hundred malignant polyps at the top of our income distribution, and that will be all to the good. It may find suitable work for a few thousand middle managers rendered redundant by corporate or governmental downsizing, and that will be to the good. But unemployment will not be substantially reduced (except by the withdrawal of people from the official labor force), aggregate consumption will not be substantially increased, and whatever brave new hi-tech industries are created will stagnate for lack of consumers, here or abroad, able to buy their products.

These dismal outcomes will no doubt be exacerbated by the eagerness of Congress, whipped to a frenzy by Citizen Ross Perot, to cut government expenditures, and by the complementary unwillingness to fund the President’s already inadequate stimulus program. But all that aside, a mad drive for “productivity” in the face of long-lasting unemployment is fully sufficient to undo Clintonomics.

I hope I’m wrong, for I joined in the grateful cheering during the State of the Union address.

The New Leader

[1] Ed: Reminds me of seeing a colleague trying to explain some numerical analysis in a peer review session, a Friday Afternoon Seminar, and failing. Finally our founder stood up and said, “Well, that’s the trouble with ratios… They have a numerator and a denominator.”  He then walked off…

[2] Ed: Loyal readers will recall that the author does not believe in NAIRU, the natural rate of unemployment.

By George P. Brockway, originally published February 8, 1993

1993-2-8 Social Security on the TableTHEY SAY THAT Social Security is on the table. I hope the table is spacious and sturdy, for Social Security is like the proverbial horse designed by a committee. It is part employment tax, part endowment, part life insurance, part social welfare. It doesn’t fulfill any of these functions well, especially since it embodies a scheme of family values that would ordinarily be thought archaic even by members of the 1992 Republican Platform Committee.

The best thing to do with Social Security is start over again. All citizens should without question be entitled (that’s right, “entitled”) to decent protection of their dependents and a decent retirement. Since everyone should be covered and the claims can be closely anticipated, it is foolish to try to build up trust funds of one kind or another. The benefits or entitlements should be treated as ordinary expenses of government and paid for out of current income taxes, not out of taxes on employment.

Actually, of course, that is already the case. In 1992 the Social Security tax brought in $126 billion more than had to be paid out. The 1993 surplus is estimated to be $131 billion, and the surplus is expected to continue to increase for another decade or more. These billions of dollars make up the Social Security Trust Fund, but they aren’t stuffed in a bank vault somewhere, as our gold reserves used to be at Fort Knox. Instead, the Fund buys U.S. Treasury bonds, and the money thus lent to the government is used to pay bills.

Twenty or 30 years from now[1], when the baby boomers are enjoying their golden years, the smaller succeeding generation, though paying the same Social Security tax rate, will not pay in enough to cover their parents’ entitlements. So the Trust Fund will annually redeem some of its Treasury bonds. And where will the Treasury get the money to meet its obligation? Out of current taxes. Where else?

As the detective stories say, follow the money. When you do, you will see that under the present system the Federal government collects 38 per cent of its revenues by a grossly regressive tax that takes 15.3 per cent of her pay from the mite of a widow housekeeper but only 0.6 per cent (or less) of the pay of the millionaire executive who employs her, and nothing at all from those whose sole quasi-economic function is to clip coupons and cash dividend checks. Furthermore, you will see that the surpluses generated by this regressive tax will not in the slightest lighten the burden of future generations.

What can be done about this? Probably nothing. A couple of years ago New York’s Senator Pat Moynihan tried to get the Social Security tax lowered to a rate that would simply cover the outlays. He said, in what still seems to me a measured observation, that if the Democratically controlled Congress failed to adopt the proposal, it would be difficult to see what the party stood for. He got nowhere (although the publicity he generated probably derailed President Bush’s drive for a reduced capital gains tax). Indeed, the Senator was accused of planning the rape of generations yet unborn, of financial ignorance, and of much else.

Moynihan is now chairman of the Senate Finance Committee, the third or fourth most powerful man in the country when it comes to taxes, but I doubt that he will have more success with his proposal than he did earlier. And I’m sadly certain that he would have no success whatever, even if he was of a mind to, in persuading the good citizens of the Republic of the virtues of my proposal. So I retreat to a prepared position with suggestions for treating the sores exposed by Nannygate, bearing in mind the fact that we’re talking about provisions of the law that ‘are violated at least three-quarters of the time by otherwise law-abiding citizens-provisions, moreover, that everyone who thinks about them for even a minute recognizes as unjust.

Consider first the case of a nanny (I thought the word went out when Peter Pan grew up) or a cleaning lady (as the job description used to have it) who is a married woman, perhaps a widow, perhaps a senior citizen. The odds are that she will be or is entitled to Social Security benefits as her husband’s spouse. In addition to her regular income tax, 15.3 per cent of her earnings will be collected by the Internal Revenue Service simply to swell the Social Security Trust Fund. She will almost certainly receive no retirement benefit or social welfare or anything except what she would have received if she hadn’t done a lick of work in her life.

That’s where the family values I mentioned at the outset come in. A man and his wife are not individuals but a couple in the eyes of the Social Security system. After the principal bread winner retires, the couple gets one and a half times his benefit. In the statistically unlikely case that the wife is the principal breadwinner, the couple’s entitlement will be based on her earnings. Because the Social Security tax is levied only on the first $57,600 of a person’s income, it may happen that both husband and wife have paid the maximum tax. If so, the benefits will be paid on the husband’s tax even where the wife’s total earnings are many times greater. That, I imagine, will one day be the case of corporate lawyer Zoe Baird and her academic husband.

For the Bairds the situation is merely ridiculous. They will not have to rely on Social Security in their retirement; and given the lack of much progressivity in the present income tax, they are taxed little enough as it is. The cases of the cleaning lady and the nanny are of a different order. There are undoubtedly many who love babies and even some who like housework and enjoy the gossip that often goes with it. But the great majority of women who do this sort of work do it because they need the money. For them the Social Security tax is a cruel hoax. It would be surprising if most did not pressure their employers to join them in breaking the law. Once Social Security is on the operating table, it shouldn’t be too difficult to remove this diverticulum, preferably by increasing the benefits payable to a second wage earner in a family.

Now consider the kid next door who mows your lawn or baby-sits for you. While we’re at it, let’s consider all part time workers under the age of, say, 21. Suppose that instead of filling out forms and withholding taxes and all that, you gave such claimants, along with their pay, a voucher worth approximately 15 per cent of the money due. You’d buy the vouchers at the local post office, where they would be available in several convenient denominations. Banks and even grocery stores might want to sell the vouchers as a public service. The vouchers would earn interest in the same way and at the same rate as series E bonds, with these provisos: They would have to be used to finance some approved form of education, and they would have to be cashed before the holder’s 26th birthday. The vouchers would be required for all paid work by youths that is, no records would have to be kept to see whether the present $50 minimum was reached.

I MENTION VOUCHERS because that is a popular word today in educational circles, but stamps would be better. You are probably too young to remember the Postal Savings stamps one used to be able to buy at the post office or the Defense Stamps of World War-II, but I’m sure you can imagine how easy stamps would be to handle. Each worker would be given a little booklet with spaces to stick them on and instructions on their use.

Not only would this scheme free employers of annoying paperwork, it would free the government of expensive record keeping. Moreover, it would be largely self-enforcing. The present system is widely evaded because the supposed beneficiaries are unlikely to get any benefit from the Social Security taxes they pay as teenagers. Upon retirement, their benefits will be calculated on their highest 35 years of earnings. Under my proposal, young workers would get the benefits almost immediately, and those benefits would go for a purpose most employers strongly approve of. The nation would give up the relatively small taxes it now collects and will get in return a much larger contribution toward a cause its future depends on. Last but not least, good citizens who hire teenagers will both feel a public pressure to pay the tax and be relieved of the guilty conscience and anger that go with breaking a bad law.

Finally, let’s look at the COLA problem that at this writing is still teetering on the edge of the table. Cost-of-living adjustments, or COLAS, seem to derange the minds of many worriers about the deficit. Bankers are peculiarly susceptible, perhaps, because they enjoy the most refreshing COLA of them all. They don’t call theirs a COLA, of course. They call it an inflation premium. The interest they charge you for a loan is, they figure, made up of two parts-the real interest and a premium to offset inflation. Well, my Social Security benefit is also made up of two parts-the base benefit and the cost-of-living adjustment. Same thing exactly, except for the amount of money involved.

The Social Security COLA last year came to about $12 billion, while the Banker’s COLA came to about $800 billion. The Banker’s COLA was, in fact, more than double the budget deficit that upsets bankers so. And mark this: Inflation last year ran at a rate of 3.1 per cent, costing the economy about $186 billion. The Banker’s COLA that theoretically makes up for inflation happens to have cost the economy 4.2 times as much. If there had been no Banker’s COLA, there would have been no inflation.

On the other hand, if there were to be no Social Security COLA next year, some 500,000 senior citizens would be pushed down below the poverty line. The same fate would await hundreds of thousands more in every subsequent year that the Social Security COLAS were frozen. Very few retired people can survive on Social Security alone, yet for many millions it is the difference between modest comfort and penury.

In the past 10 years (as the Federal Reserve Board was being congratulated for inducing two recessions in fear of inflation), the cost of living has increased 47.2 per cent. Without the COLAS, a 1O-year retirement (the present expectancy) inexorably becomes very bleak indeed.

Well, it’s fine to have Social Security on the table. But if your problem is reducing the deficit, the way to do something about it is by increasing the taxes of those who benefited from the ’81 and ’86 tax breaks. Or, as Jeff Faux, president of the Economic Policy Institute, put it: “Send the bill to those who went to the party.”

The New Leader

[1] This article is being loaded into the blog 21 years after it was originally published

By George P. Brockway, originally published December 2, 1991

1991-12-2  Taxing Our Credulity Title

EVERYONE seems to agree on two things. First, the economy is in a mess and something should be done about it. Second, neither the President nor congress did anything this year (beyond a belated extension of unemployment benefits), and nobody will want to do anything fundamental next year because of the election. If the second thing is correct, the first is moot: At least from now to 1993 we will have to test how we run on an automatic pilot that does not seem a whole lot more competent than the one in Airplane.

In the meantime, you and I can work off our frustrations by talking about them. We might as well start by talking about taxes, which can always generate heat on a wintry day. Several tax proposals are floating around Washington. All of them provide for reductions of one sort or another, most of them claim that they “target” the middle class, and some of them pretend to improve our productivity and beef up our international competitiveness.

The longest-running of the tax-cut schemes is Housing and Urban Development Secretary Jack F. Kemp‘s undismayed conviction that the way to balance the budget is to cut taxes à outrance. Kemp got us to go along with him on this scheme 10 years ago, when he was a New York Republican Congressman. He promised that savings and investment and tax collections would all increase, and we (present company excepted) believed him. None of his promises was fulfilled; instead we got an instant recession, followed by still burgeoning deficits. There is no reason to expect that what contributed to a recession yesterday will end a recession today.

The next longest-running notion is the President’s steadfast passion for a capital gains tax cut. The Education President told the children about it the other day when he visited a grade-school class. No one gave him an argument, but the best that can be said for the idea is that it might result in a modest one-time increase in tax collections as speculators rush to cash in old gains they’ve been sitting on.

Until 1987, when capital gains became taxed as ordinary income, executives with an eye to the main chance devoted endless time and ingenuity to schemes allowing them to take their compensation as capital gains. The use of stock options, a fairly routine dodge, could have gaudy results. One Donald A. Pels (whom you never heard of), CEO of LIN Broadcasting (which you never heard of), cashed his options in 1990 for $186,200,000 (which looks like a thousand times the speed of light). After paying taxes he had only $134,064,000 (plus a few millions in regular salary) left to show for 10 years’ work. If Bush had been able to get his tax cut through, Pels would have had $158,270,000 left, and his incentive wouldn’t have been so sapped.

Returning to a more mundane level, we find several Senators, Texas Democrats Lloyd Bentsen and Phil Gramm among them, eager to stir up lRAs again. You probably remember the commercials of a few years ago that had sports stars and movie actors earnestly urging us to join them in planning for a wealthy old age.

The beauty of it was that our self-serving endeavors would have the incidental effect of increasing the national saving rate and consequently the national investing rate. What happened, of course, is that those who participated merely switched their savings from one account to another. I can’t think why it would prove any different the second time around.

Finally, there are at least two proposals for reforming the income tax, both advanced by Democrats. A group led by Senator Albert Gore of Tennessee and Representative Thomas J. Downey of New York is pushing a plan they call (in pointed contrast to the President’s) the Working Family Tax Relief Act. This would reduce the taxes of 95 per cent of all families with children. Cuts would range from roughly $875 at the bottom of the income scale to $185 at the top; singles and families without children would continue to pay the present rates. The reductions would be paid for by increasing the taxes of the richest 1 per cent of taxpayers (whose average income is $676,000) by an average of $21,600, and of the next 4 per cent (whose average income is$132,000) by an average of $530. These increases are about 3.2 per cent and 0.4 per cent of the respective incomes. You will note that the Working Family Tax Relief Act is intended to be “revenue neutral” and so doesn’t upset last year’s budget agreement.

The simplest proposal has been made by Representative Dan Rostenkowski (D.-Ill.), Chairman of the Joint Committee on Taxation, who would allow a tax credit equal to one- fifth of Social Security and Medicare taxes. He would pay for it by boosting the tax on the richest 1 per cent; so he would be revenue neutral, too.

The effects of his plan on individuals look like this: The median family had an income in 1989 (the latest figure I can lay my hands on) of $35,975. Assuming that the entire income is from wages, the family pays $2,752.09 in Social Security taxes (which is an outrage, as Senator Moynihan says). One-fifth of that tax is $550.42, or $10.58 a week-not enough to make a difference in financing a new car or a new home or even a new video camcorder, but certainly welcome as a help in covering expected increases in bus and subway fares.

Chairman Rostenkowski’s average cut is about the, same as Senator Gore’s for a $75,OOO income. Since the Chairman’s plan is tied to Social Security taxes paid, the benefit for the lowest quintile of taxpayers is dramatically lower – $161, as opposed to the Senator’s $875. Also, of course, the cap on Social Security taxes puts a cap on Rostenkowski’s benefits – about $8S0, which would apparently be available to everyone right up to whoever succeeds Donald Pels as leader in the income sweepstakes.

Speaker Tom Foley of the state of Washington says he expects the House to pass Rostenkowski’s plan. Congressman Newt Gingrich of Georgia, the Republican whip, sneers that the plan would merely redistribute the wealth but would not make more money available for investment. For my part, I don’t think redistributing the wealth is such a bad idea. After all, those at the top of the income pyramid had wealth redistributed to them by the Kemp-Roth tax law 10years ago. As Jeff Faux of the Economic Policy Institute puts it, the bill should be sent to those who went to the party and are thirsting for another one.

If the purpose is to jump-start the economy, the trouble with all these plans is in the timing. Even if we could get Congress and the President to agree on one of them, could run it successfully past the House Ways and Means Committee and the Senate Finance Committee, and could manage veto-proof majorities in both houses (in case the President noticed at the last minute that the cost of an abortion would still be a deductible medical expense} – even then little good would come of it in our winter of discontent.

With luck we might put our 1040s in order by April 15 and begin getting our hands on the increased disposable income a week later, with spring already a month old. The economy would no doubt be startled, but the time for jump-starting would be past. This is not to suggest that the tax schedule should not be changed, and right quickly. As I’ve said before (see “The Evils of Economic Man,” NL, July 9-23, 1990), our economy and the society it supports are in for a long decline unless we correct our present course toward increased polarization.

So the correct answer to the multiple choice question asking which scheme will end the recession seems to be “None of the above.” None of the proposals on the table is likely to do much to get the economy out of the doldrums. Furthermore, they are not self-sufficient. Each silently assumes that a further step will be taken, yet that depends on whether their beneficiaries will be of a mind to take it. If they are not psychologically ready to spend their benefits with enthusiasm, the effects on the economy will be tentative and minimal.

WHAT IS needed is something positive to get money circulating – to get people working, to get consumers consuming, to get producers producing. I can think of two ways to achieve these results.

The first is the way we’ve done it for the past decade: Damn the deficit and go ahead with a military buildup. The effectiveness of defense spending has been demonstrated repeatedly over the centuries, from Periclean Athens to Reaganite America. Not the least of its virtues is its dramatic size. It is plainly visible. Its impact on localities and industries and job classifications can be calculated and counted upon, and so can the multiplier effects that spread throughout the economy. Plans can be made to get a piece of the action. Things start stirring very quickly.

Happily, there is another way. We are not doomed to waste our wealth and energy on devices we hope will never be used. Again we can learn from Periclean Athens, which is remembered now less for the power of the Delian League than for the wonders of the Acropolis, the most glorious public works project the world has yet seen.

American public works projects have hitherto been hampered by the lack of ready plans; consequently, they have been viewed as too slow-starting to be useful in ending a recession. But it happens that this is not true today of the states and municipalities.

Partly because of the niggardliness of the Reagan-Bush “New Federalism,” and partly because of the current recession, state and local governments have been in trouble for a couple of years and are in grave trouble now. Caught between constitutional requirements that they balance their budgets and the blind frenzy of taxpayers’ revolts, they have had to abandon capital improvements, emasculate services and fire thousands upon thousands of employees.

These draconian measures could be reversed in a moment. New York City alone has a list of several hundred bridges it needs to repair. Work on many of these could start tomorrow if money were available. In almost every city and suburb, library hours have been reduced and branches closed; what only a year ago was a marvelously helpful and rapid system of inter-library loans currently operates only sluggishly. The people who used to make that system function could be rehired overnight. The second cop who used to man patrol cars is also ready to return to duty in a flash. A year’s volume of this magazine could be filled with examples from every corner of the land.

If Federal grants to state and local governments were restored merely to the same proportion of Federal expenditures as in 1980, a sum of $63.1 billion would be available to fund such projects and break the back of the recession-peacefully. Could we do it? Well, we spent a lot more than that trying to drive Saddam Hussein from office. We could do it, all right, if we had the sense and the will.

 The New Leader

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

1990-2-5 Social Gains and Capital Security Title

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 The New Leader

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