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By George P. Brockway, originally published September 22, 1997

1997-9-22 Why a Zero Deficit Means Failure titleI DON’T want to alarm anyone, but I think it important for us to realize that the United States of America is about to sail into unfamiliar waters. What is more, those waters are inaccurately charted.

Many years ago I had occasion to consult charts of the Aegean Sea, the island pocked body of water between Greece and Asia Minor. From 1522 to 1912 the principal southern islands were occupied by the Ottoman Turks, and from 1912 to 1947 by Italy. I used British revisions of charts originally prepared by the Italian Navy. Scores of tiny islands and mid sea rock formations had notations beside them: “Reported 2.6 mi.   north, 1949,” or “Reported 1.9 mi. south, 1948.”

The economic waters we are now entering are at least as badly charted. The years 1947, 1948, 1949, 1951, 1956, 1957, 1960, and 1969 are the only ones since the great Crash of 1929 in which we managed to balance the Federal budget. As we shall see, what happened in those eight years is the diametrical opposite of what is generally assumed, and our misconception is driving us in an unexpected and unhappy direction.

We need to understand this because we are approaching another balanced budget much faster than anyone thought possible. Indeed, the embarrassing fact is that tax revenues are so good in today’s relatively affluent society that the budget would balance itself in a couple of years if Congress just sat on its hands and watched[1].

The universal mantra has been that we must at any cost balance the budget by 2002. We came within two votes of .launching a Constitutional amendment to that effect. I suppose most people have forgotten the reasoning behind the mantra. Forgetfulness, of course, is what mantras, like the Big Lie, are for. No matter.

The various reasons that were given for balancing the budget a couple of years ago appear to have been reduced to one: President Clinton, House Speaker Newt Gingrich and all their economic advisers say that the balancing will lower the interest rate and hence save good citizens money as well as make for prosperity.

Yes, but I seem to remember that six months ago-on March 25, 1997, to be precise-the Federal Reserve Board kicked the Federal funds rate up a quarter of a point, and soon thereafter every other interest rate went up at least that much. What was the budget news then? There was certainly a noisy squabble going on, but was there anyone, inside the Beltway or out, who was proposing to increase the deficit? If no one was even thinking about such a thing, why did the interest rate go up?

We don’t have to reach back as far as March 25 for incongruities. In the midst of the budgeteers’ recent self-congratulations, the Bureau of Labor Statistics of the Department of Labor announced that the official unemployment rate had fallen to 4.8 per cent (it’s since crept up a tenth of a point or two). That prompted a flood of professional prophecies that the Federal Reserve Board would have to (the Board seems never to act of its own free will) raise the interest rate again to keep more people from getting jobs.

And shortly thereafter the International Monetary Fund, well-known for its conventional views, cautioned that “undue delay in tightening monetary policy could undermine the current expansion.”

Look at the crosscurrents we have drifted into:

  • News about an imminent budget balance, which is supposed to presage prosperity.
  • News about falling unemployment, which you might think would be an essential element of prosperit
  • Prophecies about necessarily rising interest rates, which must be bad if it’s good to balance the budget to get lower rates.

While we were being buffeted by these currents, Federal Reserve Chairman Alan Greenspan made his semiannual reports to Congress, partly televised on C-Span.

I always look forward to the televised versions of these reports, because they often include questions by Congressmen and answers by the Chairman. The Times and the Wall Street Journal usually provide little more than a summary of the Chairman’s prepared remarks. Constant readers may remember my excitement two years ago (“What Greenspan Really Told Congress,” NL, July 17-31, 1995), when I scooped the world with the news that Greenspan doesn’t believe in NAIRU (or a natural rate of unemployment), that he doesn’t think we must have high interest rates in order to sell our bonds, and that he does think the increasing inequality of incomes is the most serious economic problem now facing the United States.

No doubt chagrined by my scooping them, the rest of the media have not noticed my reportage (though I have a videotape of Greenspan’s words). Neither were they moved to fully report Greenspan’s latest testimony, although in the course of it he had a wary yet respectful exchange with Congressman Jesse L. Jackson Jr. of Illinois.

Jackson questioned the wisdom of relying on the official unemployment figures, since they count as unemployed only people who looked for work last week. A better number, Jackson suggested, would include those too discouraged to continue looking for work, those too turned off ever to have looked for lawful work, those working part time when they would rather work full time, and those slogging away at jobs for which they are overqualified. If all these people were counted, Jackson said, unemployment would be nearer 20 million than the officially reported 6 million or 7 million.

1997-9-22 Jesse L. Jackson Jr..jpgGreenspan replied that he did not know enough about the people Jackson mentioned to use them as a basis for policy, but he acknowledged that they exist. His acknowledgment is my scoop for this week. For I submit that an economy incapable of providing proper jobs for 15 or 20 per cent of its work force is not an adequate economy. It may be “prosperous,” but it does not come close to doing what an economy ought to do. So we have a fourth crosscurrent to reckon with as we approach the waters whose charts are questionable.

PRESIDENT CLINTON and Speaker Gingrich and practically the entire economics profession, as I have said, are united in steering us toward a balanced budget on the theory that this will reward us with lower interest rates. A look at the records, however, reveals that in every one of the eight post-Depression years with a balanced Federal budget the prime interest rate (to which most rates we pay are related) went up, not down. We must conclude, therefore, that either our leaders or the records (or both) have lost their bearings. Clinton, for instance, claims credit for reducing the Federal deficit and says it has resulted in lower interest rates. Granted, recent budgets have boasted a reduced deficit. The Republicans, not surprisingly, insist they brought about the reductions, but that’s not what is plainly wrong with the President’s story.

What’s wrong is that although the deficit has gone down in all five years of his watch, the interest rate went up in three of them -1994, 1995 and 1997-and the prime rate is now two full points higher than it was when Clinton took office.

In other words, five years of reinventing government-of “it’s the economy, stupid”; of the end of welfare as we know it; of the end of the era of big government-have brought forth, not a decrease, but an increase of 32 per cent in the prime interest rate. The emperor, his advisers and his loyal opposition may have plenty of new clothes; they just have them on inside out and backward. There is no empirical evidence whatever that a falling deficit causes or inspires or favors or even accompanies lower interest rates.

Nor is there evidence for a contrary causation: A high deficit has not automatically produced high interest rates. Consider the famous years 1981 through 1986, when Ronald Reagan was President and Paul A. Volcker was the Federal Reserve Board Chairman. The prime interest rate fell from 21.5 per cent to 7.5 per cent. Was this the result of a falling budget deficit? Hardly. The deficit more than tripled in those years, and the interest rate went down at an equally record breaking pace.

Conventional economics, incidentally, teaches that high deficits cause high inflation, and that high interest rates cure inflation. Consequently, true believers should expect that inflation soared in the Reagan- Volcker years. Again the records belie conventional expectations. In 1981 the annual change in the Consumer Price Index was 10.3 per cent. In 1986 it was only 1.9 per cent.

In short, the economic waters we are now entering are charted to correlate high deficits with high interest rates and low inflation. A realistic mapping, though, shows that low or nonexistent deficits are not associated with falling interest rates, while high interest rates are commonly associated with high inflation.

The discrepancies between the conventional view of the economy and its recent performance lead me to suggest the future may prove Proust was right in observing that our desires may be fulfilled on condition that they do not bring the happiness we expect of them. We may succeed in balancing the budget, but it is exceedingly unlikely that the interest rate will fall as far as our leaders and advisers expect. Even if the rate should drop a point or two, it is unlikely that business will correspondingly expand. If anything, a balanced budget will act as a constraint on business, in the same way that the drive for a balanced budget has constrained expenditures for maintaining our infrastructure, for improving the lot of the disadvantaged among us, and for nurturing progress in the arts and sciences.

Is there no limit to the deficit that we can sustain? Sure there is a limit. My father advised my wife and me always to stretch a little when buying a home for our family. That way we could, and did, steadily improve our standard of living. Naturally, we had to be able to pay the interest on our successive mortgages. It is the same with a capitalist nation. Capitalism is based on borrowing as much as it can from the future in order to build for the future.

A zero deficit is a confession of a failure of faith in the future, especially when 20 million citizens lack proper jobs.

The New Leader

[1] As it happened, over the four years following the publishing of this article the Clinton Administration balanced the Federal Budget four years running: http://www.factcheck.org/2008/02/the-budget-and-deficit-under-clinton/

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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 13, 1995

1995-3-13 The Enemy is Us title

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Leader

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

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

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

1994-11-7 Junk Mail from Concord title

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

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

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

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

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

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

It may be stupidity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Leader

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

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

By George P. Brockway, originally published November 30, 1987

1987-11-29 Bursting the Supply-Side Bubble Title

1987-11-29 Bursting the Supply-Side Bubble Wall Street

ONE LISTENS with astonishment to the explanations of the Great Crash of 1987. With unprecedented unanimity, pundits and brokers and bankers and public officials call the budget deficit and the foreign trade deficit to blame.

In his post-crash press conference, President Reagan seemed not to understand. He was being pushed into what the press called a summit conference with Congressional leaders to see about reducing the budget deficit, but his heart plainly wasn’t in it. Look, he protested, the budget has been Gramm-Rudmaning down and will go down some more, even without a conference. He couldn’t see what is so bad about that trend, although he was ready to blame the Democrats for anything anyone happened to think bad about it.

It’s not hard to share the President’s bewilderment. If the budget deficit is a problem, it is in fact being reduced. A few hardliners may be upset that the reductions are not greater and faster; yet most people (including Ronald Reagan) have absorbed enough from Keynes (whom the President gracelessly and ignorantly disparaged) to know that doing too much too fast with the deficit would be a pretty sure prescription for a recession. Keynes himself might well have thought the reductions an utter mistake at this time. But he is dead (as we all are in the long run), and what is actually being done is what the pundits say Wall Street wants. If Wall Street is really upset by the deficit, it should have broken two years ago, when the deficit was higher, or five years ago, when the deficits (and the market itself) started their dramatic climb.

No, the deficit story is a fairy tale. It is implausible on its face, and its implausibility can readily be tested. We had a pretty good market crash in 1929. What happened then? Well, one thing is sure: The 1929 crash wasn’t caused by a budget deficit, for the budget was in surplus that year to the tune of $700 million, which was a lot of money back then. Either the crashes of 1929 and 1987 are totally different breeds of animal, or deficits had nothing to do with either of them.

The two crashes did, without question, have one thing in common. Both were preceded by prolonged and steep run-ups of the stock markets. That in itself is no surprise, since you have to have attained a certain height to be able to make an attention-getting fall. But what it signifies is that both climbs were speculative: Business didn’t improve all that much. Though in both years all persons of prominence assured us that the economy was fundamentally sound (there seem to be no other words to express this meaningless thought), in neither year was there a justification for the heights the market reached.

Speculation, however, doesn’t need a justification; it merely needs an occasion. The necessary occasion is a very simple one: Some people have to have more money than they know what to do with.  Literally.

We have been satisfying this requirement. As the recently announced figures from the Census Bureau show, the number of people with large incomes has increased in the decade and a half from Richard M. Nixon through Ronald Reagan. The top 20 per cent of American families had an average income of $126,415 last year and together engrossed 46.1 per cent of all personal income. More important, they have improved and are improving their position at the expense of the middle class and the poor.

Now, it is practically impossible to spend a million a year on living well (although some 57 professional baseball players are having a go at it), and it is perfectly possible to be pretty comfortable, even in a high-priced city like New York, on as little as a hundred thousand. You can, of course, spend pots of money collecting lead soldiers or used postage stamps or post impressionist masters. The trouble with such collections is that, even at a moderate rate of inflation, they increase in value very rapidly and so add to rather than deplete your wealth. So lots of people-and not merely ball players have lots of money.

The supply-side theory, to which the President pledged continued devotion the other night, contemplates that the rich, thwarted in their struggle to consume their income, will invest it. But when 20 per cent or more of the economy’s productive capacity is lying unused, the possibilities of prudent new investment are severely limited. What to do? Nothing for it but to take a flyer in the market. At the same time, the rich of the rest of the world have the same problem-and the same solution. Add to all this the mutual funds, the pension plans, the educational and charitable endowments, the insurance reserves, and the unabashed speculations, and you have a lot of money chasing a limited number of shares of stock.

Ingenious men have worked very hard to increase the number and kinds of paper to buy and sell. Two ways have especially recommended themselves: the development of the stock futures markets, and the computerization of Wall Street. The first created new products (as the brokers call them) out of nothing but the eagerness to speculate; the second, by enabling an increased velocity of trading, increased the opportunities to speculate, just as an increase in the velocity of money in effect increases the money supply.

There was also a partially contrary movement. Takeovers and buyouts, which generally substituted debt for equity, reduced the number of shares of some stocks available for speculation while simultaneously greatly enhancing the taste for speculating.

THE MOST elementary fact about a bull market is that it absolutely and unceasingly depends on sucking more money into it. If there are 100 shares of stock, and $100 available for investment, the price of each share will fluctuate narrowly around a dollar, no matter what incantations are uttered by market analysts and government officials. If the number of available shares is reduced, or the number of available dollars increased, the price will rise proportionately. But all who anticipate a further increase in available funds will become more eager in their bids, in the expectation of quickly and profitably selling what they buy to the holders of the new money. Thus Holland’s Tulipmania was sustained, and thus the Great Bull Market of the ’20s, and thus the Reagan-Thatcher-Nakasone market that has now crashed.

Because one way or another the number of pieces of paper to speculate in has greatly increased, the number of dollars to sustain the recent bull market had to be increased still more, and this has been done in two ways: the shift of trust and endowment funds out of the bond market and into the stock market, and the supply-side tax cuts for the wealthy. The former was substantially effected a couple of years ago, and the latter has gone about as far as it can go with the new tax law’s reduction of the top rate to 28 per cent. There is still a fantastic amount of money around, but it is no longer being increased rapidly. The kissing had to stop.

The trade deficit is said to have joined with the budget deficit in scaring foreigners out of our market. This explanation of the crash overlooks what is ordinarily insisted on: the global interdependence of financial markets. It wasn’t Wall Street alone that laid an egg. Eggs were laid in Tokyo and Hong Kong and Sydney and London before the New York market opened on Black Monday. You might say that all over the world bull markets that had known no boundaries were suddenly fenced in.

Just as the reason for the crash is grievously misunderstood, the policies proposed for dealing with it are grievously misconceived. Since what happened was caused by a large number of people having more money than they knew what to do with, it follows that it is counterproductive to resist taxing some of that money and applying it to public purposes, not excluding deficit reduction. The supply-side tax cuts were a disaster. Since the wealthy couldn’t find enough new productive investments for their surplus funds, it follows that there hasn’t been enough effectual demand (as Adam Smith would have said) to keep our existing productive capacity busy; so the enthusiasm devoted to union busting, entitlement shaving, welfare restricting, and real-wage reducing-all of which reduce effectual demand-has been disastrously misdirected.

Our pundits seem able to behold the mote in German and Japanese eyes but not to consider the beam that is in ours. If the world economy would be strengthened by increased consumption in those lands (and it would), it can scarcely make sense to decrease consumption in ours. Over the past 15 years the income share of the poorest 20 per cent of our families- those who have to spend their incomes-has fallen 10.8 per cent. An economy that reduces its aggregate demand in that way-and seems determined to do more-is not fundamentally sound.

The New Leader

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