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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 The New Leader

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By George P. Brockway, originally published January 9, 1989[1]

1989-1-9 Bankers Have The Classic Cola Title

IN “The Fear of Full Employment” (NL, October 31, ’88) we examined some of the fallacies behind the almost universally held doctrine that full employment makes for high inflation. This time we’ll look at another almost universally held doctrine, namely that raising the interest rate is the cure for whatever inflation exists. An astonishing thing about the latter doctrine is that no one bothers to say why it should work. The New York Times, which never mentions the prime interest rate without pedantically explaining that it is the rate banks charge their most credit-worthy borrowers, regularly reports without question that if the Consumer Price Index (CPI) starts to rise, the Federal Reserve Board will have to raise the interest rate.

Economists divide what they call the nominal or “money” interest rate (which is what you pay) into two parts: “real” interest (what they think you’d pay if the economy were in equilibrium) and an allowance for inflation. The allowance for inflation is what in other sectors of the economy is called a Cost of Living Adjustment, or COLA. People with money to spare are said to be enticed into lending by the prospect of getting back their money at a stated time with stated interest. What they want back is not the money, but the money’s purchasing power; and in inflationary times the only way to get back the same purchasing power is to get back more money. Hence the Bankers’ COLA.

Of course, bankers don’t call it a COLA. They have, in fact, been unremitting in propagandizing the notion that COLAS are bad and greedy and inflationary and likely to cause the downfall of the Republic. The COLAS bankers talk about are those that appear (or used to) in labor contracts, where they are manifestly an increased cost of doing business for companies with such contracts, and those that appear in Social Security and other pension payments, where they are manifestly an increased cost of running the government. (Another COLA, seldom mentioned, is the indexing of the income tax.) Since increased costs of doing business increase prices, and increased costs of running the government increase taxes (or the deficit), it is argued with some reason that COLAS are inflationary.

The propaganda against them (coupled with high unemployment and underemployment) has pretty well knocked cost-of-living clauses out of labor contracts. The Social Security COLAS are somewhat more secure because there are more worried senior citizens than alert union members. Even so, the steady cacophony from Peter Peterson and other investment bankers (when they take time off from promoting leveraged buyouts, which they evidently don’t think inflationary) has put the American Association of Retired Persons on the defensive. The Bankers’ COLA, however, is accepted as a natural law and discussed matter-of-factly in the textbooks, while the others are deplored as the work of greedy special interests out to line their own pockets at the expense of the nation and its God-fearing citizens.

One way of stating the Banker’s COLA is that it is the difference between the interest rate now and that of some earlier, less inflationary time. The prime rate at the moment is 10.5 per cent, and may have gone higher by the time this appears. In the 4O-oddyears since the end of WorId War II, there is one stretch, from 1959 through 1965, when the CPI and the prime were both substantially stable. In those seven years the CPI varied from 0.8 per cent to 1.7 per cent, and the prime from 4.48 per cent to 4.82 per cent. (Readers with a political turn of mind will note that the Presidents in this period were a Republican and two Democrats- Dwight D. Eisenhower, John F. Kennedy and Lyndon B. Johnson.). The Bankers’ COLA was evidently no more than 1.7 in those years, and the “real” interest rate was somewhere between 3.5 per cent and 4.5 per cent.

Let’s accept the higher figure, even though it is substantially higher than, for example, the rate in the years when the foundations of the modern economy were laid. Subtracting 4.5 per cent “real” interest from the current prime, we determine that the current Bankers’ COLA is, conservatively, 6 per cent.

But only about a tenth of outstanding loans were written in the past year, and many go back 25-30 years. Over the past 10 years the CPI has increased an average of 6.01 per cent a year. That is remarkably (and coincidentally) close to our estimate of the current Bankers’ COLA.  The average gets higher as we go back 15 and 20 years, and falls slightly if we go back 25 years. Consequently if the Bankers’ COLA has been doing what it’s supposed to do, we are not overstating the case in saying that today it is running at about 6 per cent.

Now, the present outstanding debt of domestic  non-financial sectors is about $8,300 billion. This figure includes everything from the Federal debt to the charge you got hit with when you didn’t pay your bank’s credit card on time; excluded are the debts banks owe each other and, for some reason, charges on your nonbank credit card. The cost of the Bankers’ COLA for this year therefore comes to about $498 billion (6 per cent of $8,300 billion).

As the late Senator Everett McKinley Dirksen would have said, we’re talking about real money. Let’s try to put it in perspective. At the moment the CPI is said to be about 4.5 per cent (less, you will have noticed, than the Bankers’ COLA, because bankers expect inflation to get worse). Since the GNP is currently about $4,500 billion, inflation is currently costing us 4.5 per cent of that, or $202.5 billion. The Bankers’ COLA is thus costing us almost two and a half times as much as the inflation it is claimed to offset.

So we come to Brockway’s Law No. 1: Given the fact that outstanding indebtedness is greater than GNP (as is always the case, in good years and bad), the Bankers’ COLA costs more than the total cost of inflation, at whatever rate.

Another comparison: The Bankers’ COLA costs close to three times as much as the Federal deficit the bankers moan about. (If there were no Bankers’ COLA, we’d be running a surplus, not a deficit.)

Also: The Bankers’ COLA costs many times more than all the other COLAS put together, and about 50 times – repeat 50 times – more than the Social Security COLA that so exercises investment banker Peter Peterson. (If there were no Bankers’ COLA, none of the other COLAS would exist, because the cost of living would not be going up.)

Also: The Bankers’ COLA costs more than giving every working man and woman in the land, from part-time office boy to CEO, a 10 per cent raise. (So much for the fear of full employment.)

SINCE THE Bankers’ COLA costs the economy more than inflation does, without it there would in effect be no inflation. Other things being equal, there would actually be deflation. And of course very great changes would follow if so large a factor as the Bankers’ COLA were eliminated. Reducing the interest rate to its “real” level would quickly and powerfully stimulate investment in productive enterprise, with a consequent growth in employment. It would trigger a one-time surge in the stock and bond markets, followed by a gradual tapering off of speculation.

1989-1-9 Bankers Have The Classic Cola Factory

As matters stand now, the Bankers’ COLA is an incubus of terrible weight depressing the economy. That this is so is revealed by the statistics whose subject is people rather than things. The standard of living of the median family is falling, even with two earners per family much more common than formerly. The number of people living in poverty is growing, and within that group the number of those who work full time yet are poverty stricken is growing still faster. The rate of unemployment – even counting part-timers as fully employed, and not counting at all those too discouraged to keep looking for work – would have been shocking a few years ago. These are signs of recession, of bad times.

The interest cost is the only one that has a general effect on the economy. We used to hear a lot about the wage price spiral, but a wage increase in the automobile industry (for many years the pundits’ whipping boy) works its way through the economy slowly and uncertainly. Initially it affects only the price of automobiles, and it never brings about a uniform wage scale. Wages of grocery clerks remain low, and all wages in Mississippi remain low. A boost in the prime rate of a prominent bank, on the other hand, immediately affects the rates charged by every bank in the country; and while it is possible for borrowers to shop around a bit for a loan, they find that rates vary within a very narrow range.

More important, interest costs affect all prices, because all businesses must have money, even if they don’t have to borrow it, and the cost of money is interest.

Vastly more important, the Bankers’ COLA is a forecast, a prediction, a prophecy. The figures we have been working with are from the past, but bankers – including, especially, those who make up the Federal Reserve Board – set rates that will have to be paid decades into the future. Well into the 21st century, for instance, we will be paying up to 15.75 per cent interest on a trillion dollars’ worth of Treasury bonds sold in the wonder-working days of former Fed Chairman Paul A. Volcker.

So we come to Brockway’s Law No. 2: Raising the interest rate doesn’t cure inflation; it causes it.

The New Leader

[1] Editor’s Note:  For those who are too young or forget the Coca Cola company came out with the “New Coke” in 1985, and it bombed.  Under-duress they kept the New Coke on the market, for a while, and re-issued the product people wanted to buy as Coca-Cola Classic, or the “Classic Cola.” http://en.wikipedia.org/wiki/Coca_Cola_Classic. Thus the gentle wit of the title of this article.

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