Tag Archives: frictional unemployment

By George P. Brockway, originally published October 31, 1988

1988-10-31 The Fear of Full Employment title

The other day a friend sent me a clipping from the morning paper. My friend is a poet, whom I occasionally charge with deliberate obfuscation, and she was, she said, getting some of her own back. “What gives?” she asked, showing she can use ordinary speech when she wants to. “Who’s obfuscating now?”

The clipping she sent me read as follows: “Economists have become more pessimistic in recent days because the most recent batch of economic statistics, including yesterday’s strong employment report, suggests that the economy may be picking up steam and may overheat.” This was, of course, a run-of-the-mill news note of the sort we have all read many times, and I wondered why it was bothering my friend. I gave her a ring. “Surely your Webster or OED has all the words,” I remarked cuttingly, and only a couple of them have more than three syllables.”

“Yes,” she replied, “and many of my poems are made up of even shorter words. What I’d like to know is, what kinds of idiots are made pessimistic by an economy’s picking up steam? If it’s in danger of overheating, why not put more water in the boiler? I know you economists are even more devoted to metaphors than we poets are, but I thought you were all enamored of the one about a rising tide lifting all boats.”

“Don’t look at me,” I objected. “I’m not one of ‘you economists’. The pessimists of your clipping know that if business gets really good the Federal Reserve Board will get nervous about inflation and raise the interest rate, and that lowers the capitalized value of all stocks and bonds.”

“You mean, if I invest my royalties in a hundred-dollar bond that pays five dollars a year, and if the interest rate goes up to 10 percent, then my bond will be worth only fifty dollars?”

“I don’t know how a poet gets a hundred dollars in royalties,” I said, “but you’re absolutely right.”

“Eureka!” she cried. “I’ve outdone Archimedes! There’s no way the stock market can go up.”

“Keep your shirt on,” I advised.

But she paid no attention. “If business is bad,” she said, “poor earnings will send stock prices down. And if business is good, higher interest rates will send the market down. Why hasn’t anyone discovered this before? If you sell short, you can’t lose. Please give me the name of a good discount broker. I sincerely want to be rich.”

It’s a shame that my friend is merely one of the unacknowledged legislators of the world. We could use some of her guileful questioning in high places, and particularly in regard to the received doctrine that high employment makes for high inflation. Practically all economists, businessmen, bankers, politicians, and journalists are united in endorsement of this doctrine. Their unanimity is very curious – first, because few, if any, other economics propositions command such universal assent; second, because it is among the most unequivocally dismal notions in all this dismal science; and third, because there is no evidence whatever to support it. I don’t mean that no evidence is offered; I mean that the evidence offered is false or irrelevant or both.

If the proposition weren’t so dismal, it wouldn’t be worth troubling about. But look at what it means: It assumes that inflation is the worst economic misfortune that could befall us, and it asserts that in order to avoid – or simply to control – inflation, we must prevent several million people from having jobs. Even if all these millions were fully qualified and fully motivated, given the inexorable working of the system, they would still be unemployable.

Let’s think about that for a minute. It is the practically unanimous opinion of everyone who talks about the subject that our system, of which we are told to be so proud, must condemn upwards of seven million people to lives of undeserved squalor, uselessness, and hopelessness. Of course, that adds up to fifteen or twenty million men, women, and children when you count their dependents.

If I believed that our system were inevitably, necessarily, and indeed systematically that cruel, I’d be on the barricades in a minute – and I like to think I would be joined by you and by most of those who thoughtlessly repeat the dismal doctrine. My God, they’re talking about fellow human beings!

I don’t believe our system has to be that cruel. It is that cruel, but it doesn’t have to be. We’re given to understand that right now, with inflation running at about 3-5 percent and unemployment at about 6-5 percent, things are perhaps actually a little better than can be expected. Certainly our leaders consider them so good that they seem able to congratulate themselves without embarrassment.

Well, consulting Economic Report of the President[1] I find that since World War II there have been thirty-four years in which unemployment was at a lower rate, twenty-one years with lower inflation, and no fewer than twenty years where both inflation and unemployment were lower. Not only that, but in the year of lowest unemployment, inflation was lower than in all except four of the forty-odd years in question. In the year of highest inflation, unemployment was higher than in seven of the years. These figures certainly do not support the doctrine.

That may be said to be the small picture. A bigger picture is presented by the runaway inflations of our time that are regularly flashed on the screen to scare us into doing something drastic about inflation now, before we all have to get wheelbarrows to carry our worthless money to market to buy a loaf of black bread.

Besides the Weimar Republic runaway, the prime examples are Hungary after World War II and Brazil recently. If the doctrine were sound, those countries would have had full employment and overheated economies to start their runaways. Exactly the contrary, though, was the case. Each one suffered from appalling unemployment, and Brazil still does, without in any way impeding or controlling the inflation. These examples do not support the doctrine, either.

To complete the empirical record, we may note that today, of all industrialized nations, Japan has the second lowest unemployment and the lowest inflation. In short, there is no relevant evidence reliably connecting high inflation and full employment. We have not, after all, ever had full employment except in wartime, when inflation of civilian prices is to be expected because civilian production is necessarily curtailed. On the other hand, we have many times had inflation in peacetime, and we have perversely tried to control it by raising the interest rate in order to curtail production.

My poet friend asked me why, if the unemployed had jobs, they couldn’t produce goods at least equal in value to their wages. I couldn’t think why. “Then there wouldn’t be more money chasing fewer goods, would there?” she asked. “So why isn’t full employment the cure for inflation?”

Well, why isn’t it?

The New Leader

[1] The basis for this post is the re-print in the book “Economics Can Be Bad For Your Health” and the author updated the data to use the 1994 Economic Report.  The original was written in 1988. The points still hold.

By George P. Brockway, originally published November 28, 1988

1988-11-28 Reality and Welfare Reform title

1988-11-28 Reality and Welfare Reform Daniel Patrick Moynihan

THE GIVEAWAY of Senator Daniel Patrick Moynihan’s new Family Security Act -aka welfare reform – is its cost. I don’t mean that the cost is to be given away; I mean that the low cost betrays the modest ambitions of the bill.

The estimated expenditure is $3.34 billion over five years. That’s $668 million a year, which may seem like a lot of money to you, but works out to $20.62 – exactly twenty dollars and sixty-two cents –  for every man, woman and child living in poverty in the United States of America.

Yes, I know that the plan isn’t intended to do anything about poverty, isn’t meant to help the working poor, isn’t supposed to shelter the homeless or nourish the ill-fed, has nothing to do with improving or expanding medical services. In fact, one of its charms for the radical Right is that it is expected to reduce expenditures for public housing, Food Stamps, Medicaid and Aid to Families with Dependent Children (AFDC). So let’s look at it this way: $668 million is 0.00015 – or 15 thousandths of 1 per cent-of the current GNP. Or this way: It’s about a third of the projected cost of the additional space shuttle they’re building.

I’m sorry, but I’ve overstated the case a bit, for the $3.34 billion includes a “workfare” provision that will cost $900 million. This is one feature of the bill insisted on by President Reagan and feverish-eyed Republicans like Senator Orrin G. Hatch of Utah. Everyone else, including more liberal (if they don’t mind my using the word) Republican governors who will have to administer it, apparently hopes to repeal the provision either because of its negative cost effectiveness or because of its meanness. If that $900 million is deducted from the total, we have $2.44 billion left, or $488 million a year for everything the bill promises to do. The summaries given the press naturally accent the positive. They emphasize that a real effort is going to be made to force fathers to share in the support of their offspring. No one (except the fathers) can object to that, especially since it may persuade some to stay home with their families and thus prove rewarding all around.

The summaries further emphasize education (not the same as workfare). You can’t object to that, either. We’ve heard about our illiteracy rate and our inability to do simple arithmetic and our ignorance of our government and of history. We know businessmen complain that they have to weary themselves with excessive interviews to find competent workers. And so on. It’s hard, therefore, to be against more education. It’s also hard to imagine that the puny budget will make much of a dent in the problem.

For my part, I become depressed when I hear vocational education touted as a panacea. We must train these people to be punctual, we are told, and to work diligently and not goof off. Does anyone suppose they don’t know all that? It’s no secret. They’ve heard it all before, but they haven’t seen much good come of it.

Few experiences can be more disillusioning and dispiriting than undergoing training for the kinds of jobs that don’t exist. Perhaps my long memory misleads me here, yet I recall the junior high school shop where I learned to solder Western Union splices and to thread separate black and white wires through clay pipes set in the joists and studs of a mocked-up house. I was astonished when, in the real world, I saw my first BX cable, and I remain skeptical of that sort of job training unless it is done on the job. I have had occasion to observe a couple of for-profit training schools in operation, too, and I really don’t think the answer is privatization.

The solution is jobs. We’ve seen the solution in action – but again my long memory probably misleads me, for hardly a man seems to be alive who remembers the famous days and years of the New Deal. Everyone else knows that the New Deal failed. It taxed and taxed, and spent and spent, and elected and elected, and still, in 1939, on the eve of World War II, the unemployment rate was 17.2 per cent.

As I have previously quoted Disraeli, there are lies, damned lies, and statistics; and I have yet to meet even a professor of economic history who is aware of how that 17.2 per cent lies. So I’ll tell you. It counts all the millions who worked for the CCC, NYA, WPA, and the rest of the so-called alphabet-soup agencies as unemployed. Now, the millions who worked for those agencies in fact worked and in fact produced goods for the common wealth, and were in fact paid for it. They built thousands of schools, libraries, post offices, hospitals, and dams; restored thousands of acres of forests; paved thousands of miles of highways and sidewalks; helped bring electricity to the farms; made a start on public housing; painted pictures; produced plays and concerts; published a set of state guidebooks that is still unequaled; and gave courses in every subject imaginable. If that was unemployment, we could stand a bit more of it. Nor would it be unbearable to have urban streets swept and suburban leaves raked.

Everyone knows, of course, that this was impossibly expensive and wasteful. Yes, the last budget of Herbert Hoover’s Presidency (fiscal year 1933) was only $2.8 billion in deficit. And what was the last prewar New Deal deficit? $3.1 billion; ten per cent larger. To be sure, $300 million was a lot more in those days than it is at present. But the point is that enabling millions of people to contribute to the common weal and to maintain their self-respect cost only 10 per cent more than doing nothing. Which approach was the really wasteful one?  Moreover, our wartime experience demonstrates that the so-called First New Deal would have been a lot more successful if it had spent more, not less.

1988-11-28 Reality and Welfare Reform Men Working

INSTEAD of the creative programs of the New Deal, the new scheme has its workfare, something Ronald Reagan wishes to be remembered for. He deserves to get his wish. The requirement is that by 1994, one parent in every two-parent family (an institution the bill is supposed to be encouraging) that receives benefits must be made to work at least 16 hours a week in what is grandly known as the Community Work Experience Program. What will they be paid for this work? Zero. Well, you know, beggars can’t be choosers.

Since this provision does not take effect until 1994, it is a fair guess that New York’s Democratic Senator Moynihan, among others, intends to try to repeal it after the Great Veto Threatener leaves the White House. This is a judgment call with which I beg to differ. It brings to mind Moynihan’s first attempt at welfare reform which came when he was Richard M. Nixon’s Domestic Affairs Adviser. The attempt was defeated by a combination of conservatives opposed to any form of welfare and liberals led by the late George Wiley of the National Welfare Rights Organization, who pointed out that the proposed benefits were lower than those then in effect.

I had the pleasure and privilege of knowing George Wiley, who was a wise and humorous and dedicated man. He was well aware of Voltaire‘s dictum that the best is the enemy of the good, and he understood perfectly the argument that the benefits could be improved once the law was in place. He simply doubted that the improvements would ever come. The record supports his judgment. Over the past several years, for example, AFDC payments have lost a good third of their value because of inflation. The Pentagon gets budget boosts on top of generous estimates of inflation, but I’ve not noticed any rush to rectify the AFDC situation. As for the workfare amendment, it has already, in this Democratic Senate, survived by a 41-54 vote an attempt to table (and so defeat) it.

Workfare should not be confused with what the sponsors of the Family Security Act consider its heart and sinews: JOBS (for Job Opportunities and Basic Skills. The republic would collapse without silly acronyms).The laudable aim of this program is to get people off the welfare rolls and into regular employment where they can be self-supporting and self-respecting. As I’ve said, I’m dubious about the training being offered. Anyway, after training the welfare recipients are supposed to get to work, and I don’t at all object to that. The regulations covering JOBS are moderately complicated, and some of them are not nice; but I want to talk about something more fundamental.

We are told that the unemployment rate has now fallen to 5.2 per cent. Everyone knows this figure is too low, but I’m not going to quarrel with it – at least not here and now. I’m merely going to note that currently received economic doctrine, taught in practically all colleges and universities in the land, and I am sure accepted as gospel by large majorities  of both houses of Congress, holds that full employment actually means 6 per cent unemployment. If unemployment really falls any lower than that, the economy is expected to overheat, and we’ll have inflation. (I’m not aware that we have been without inflation since World War II, except for one year in President Harry S. Truman’s second term, and one year in President Dwight D. Eisenhower‘s; so let’s just say that we’ll have even more inflation.)

Indeed, the newspapers and the airways are full of ominous questions right now: Will the Federal Reserve Board raise the interest rate again to head inflation off at the pass? Will that send the stock market into a tizzy? Will it abort our slowly recovering foreign trade? Will it make it harder to reduce the deficit? Will it make the mortgage rate so high that home ownership becomes an impossible dream even for two-earner Yuppies? Anyone who believes that mainstream economists know what they’re talking about will answer all those questions in the affirmative.

Where does that leave us? It leaves us with a JOBS program that is a mirage or a hoax. Assuming we believe the unemployment figures, we already have too many people working for our own good. Even if the JOBS training program should succeed beyond all rational expectations, even if the trainees could then be successful in finding work that would not (one of the requirements) displace anyone already working, we would have to head them off at the pass. We couldn’t afford to have so few people unemployed.

I AM NOT making any of this up. If you have merely glanced at journalistic reports of the thoughts of our mainstream economists, you may think that when they talk about 6 per cent of the work force being unemployable, they are saying all those millions are too little educated, too stupid, too sick, or too pregnant. That’s not exactly what they mean. They do classify many people under those headings, but they mean something else as well. They are speaking of friction in the economy – that is, time lost while workers are between jobs. Again there’s misunderstanding (and some of the economists even misunderstand themselves), for they make it sound as though there are several million people out there whimsically flitting from job to welfare to another job for no good reason. No doubt some such free spirits exist, and they will always be good for Presidential anecdotes; but the real friction results from business coming and going. It’s known as free enterprise.

In 1987, something more than 60,000 corporations went bankrupt. Most of the bankruptcies were very small. Nevertheless, they totaled over $36 billion. That ain’t hay, and it accounts for a couple of million people thrown out of work.

Then there are all the “efficient” mergers, which are efficient because they fire people. There is all the seasonal unemployment – clerks and warehousemen let go after the Christmas rush, farm workers between seasons, people laid off in model changeovers. There are all the customers’ men dropped after a market crash, and all those who lose their jobs when business temporarily slows, and those whose jobs disappear when their companies relocate for tax reasons – or in search of cheaper labor.

The foregoing account for the 6 per cent friction in the economy. The friction is not the fault of the workers; it is the fault of the system and its ethics. And the system is not a fact of nature; it is our creation. We created it in the image of mainstream economics, and the result is not altogether pretty.

The thing about mainstream economics is that it starts with the price system as given. The price system is not simply what the stickers read in the supermarkets or how the bidding goes in the grain pit in Chicago. It includes all prices, interest rates, rents – the works – and particularly and especially wage and salary scales. Mainstream economics assumes that the way the rewards of the economy are distributed is none of its business.

Our present price system will be relatively stable so long as there are 6 per cent unemployed or underemployed. This is not quite like Marx’ industrial reserve army, because the important point is that these people must be drastically under rewarded, whether they work or not, and that the next 10-15 per cent above them can’t be treated much better (the average income of the bottom quintile of our families is below the poverty level).

Under our present price system, anything substantial you do for those at the bottom has to cause inflation. Other things can cause inflation, too, but really helping the poor is sure to do so. The only noninflationary way of helping the poor entails fundamentally changing the price system, specifically and dramatically narrowing the chasm between rich and poor. For the past 15 years we have been passing by on the other side (see The Golden Mean,” NL, November 2, 1987), and it will take a whole lot more than JOBS, as well as something a whole lot different, to change direction.

The New Leader

Originally published November 14, 1983







A FRIEND has taken exception to my proposal to limit or forbid the importation of foreign manufactures that threaten to destroy important domestic industries because of low prices based on the exploitation of local labor (“The Way to Protect,”November 14, 1983 NL, September 19). He says his freedom would be unacceptably abridged if he couldn’t buy a Japanese automobile, because he thinks they are better made than ours. He doesn’t deny that Americans are thrown out of work when our industries are shipped abroad, but he is confident that their distress is only temporary and perhaps not altogether undeserved. Besides, he objects to the word “exploitation” as old-fashioned rabble-rousing.

Two questions are mixed together here. The first I find difficult to take seriously. It is nowhere writ – not in the Bill of Rights, not in the Magna Carta, not in the Sermon on the Mount, not in the Code of Hammurabi – that my friend has a right to buy a Subaru, no matter how well it may be made. For various pragmatic or prudential reasons, the government will not interfere with his use of money except reluctantly and after due reflection; yet many uses are now routinely denied him, and there is no use that cannot, in principle, be denied. Money is, after all, a social, not an individual, creation. The issue is not whether denial is legitimate, but whether denial in this particular case is reasonable.

The other question is one of fact. In setting forth my proposal, I specified two steps that would have to be taken before barring a given import: “First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider “exploitative.”

Now, whether these conditions apply to Subaru or not can readily be determined. I repeat: It is a question of fact, not of theory. For the purposes of our argument, my friend conceded that the conditions do apply, and that thousands of Americans in Detroit are thrown out of work because of Japanese labor policies. He nevertheless maintained that in the long run not too much suffering would be caused by the collapse of the American automobile industry; and that if suffering is caused the way to alleviate it is directly through the dole, not by forbidding the importation of Subarus.

I’m afraid that no doubt exists about the suffering, and it is by no means confined to the automobile industry. As I have previously said, as long as the American standard of living is higher than the Oriental standard of living, there is nothing whatsoever that cannot be manufactured more cheaply there than here. This goes for high-tech industries even more than for smokestack industries, because the technology of the former is in fact simpler and the capital requirements less extensive.

Nor is there any doubt that very little of the suffering we have so far seen will be alleviated by the so-called recovery. What’s going on now does not fit into the late Joseph A. Schumpeter‘s theory of new industries – ” railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motor car, colonial ventures” – Ieading the upswing of fresh business cycles. The only new industry now on the horizon is high-tech, which, as noted, is high-tailing it for the Orient, and is not a big employer anyhow. For this reason, all the vague talk of retraining the millions of our unemployed fellow citizens is cruel nonsense. Retraining for what?

My friend is a compassionate man and is willing to consider the problem. Like Mr. Micawber, he expects something to turn up, but in the meantime he is willing to institute the dole (he is not a Reaganite) and to pay for it with a progressive income tax.

I am not one to say that it could not be done. Indeed, I say that it should be done. It is little enough. A dole at the poverty level might seem a bonanza for a part-time textile worker; it is a disaster for a veteran automobile worker who has saved a little money, started a family, bought a house, and nurtured the American dream. If, as some tell us, he was overpaid, then the dream was a fraud.

That is one side of the problem: the unconscionable cost to American workers of my friend’s assumed right to buy a Subaru or a Hong Kong sports shirt. The other side is the cost to my friend in taxes. Being in thrall to classical economics, he wants to balance the budget. At present rates, the Federal income tax raises about $285 billion, leaving a deficit of about $200 billion. A poverty-level dole would cost another $100 billion; a halfway decent dole would be double that. Thus to do what my friend wants to do would require income taxes one and a half times (if he doesn’t balance the budget) to two and a half times (if he does balance) those now in force. A flat tax at that rate of increase, let alone a truly progressive tax, would be a lot to pay for a Subaru. And millions of our fellow citizens would be condemned to aimless, hopeless lives.

Against this dreary scenario, my friend raises the specter of the Smoot-Hawley Tariff, sponsored by reactionary Republicans in 1930 and ever after blamed by junior high school civics texts for the Great Depression, the rise of fascism, World War II, the Cold War, and innumerable minor irritations. The analysis doesn’t rise even to the level of post hoc ergo propter hoc[1], for the Great Depression was already well under way when Smoot-Hawley was passed, while fascism had been in power in Italy for eight years, and was rapidly growing in Germany.

An interesting thing about Smoot-Hawley is that its original impetus came from distress on the farms. Although by the time the bill was passed, duties were raised on almost everything under the sun, the presenting complaint in President Hoovers call for a special session of Congress was largely agricultural. Today there is again distress on the farms, but its cause is different. This time no one is underselling us in our domestic market, or in our international market. The trouble, instead, is that the Poles and others who want our wheat haven’t anything to pay us with. (Except, my friend says, golf carts: Would you have believed that almost all carts on American golf courses were made in Poland?) The Poles have coal for sale, but so have we-and so do the Germans, the French, the Belgians, the British; (One of the “reindustrializing” schemes that has been advocated and, for all I know, implemented involves rebuilding the port of Norfolk to facilitate the export of coal to God knows whom.)

Since the Poles can’t pay us for our wheat, we had to fall back on our ingenuity. The solution was simplicity itself: We lent them the money. Partly we lent it as a nation through the Export-Import Bank, and partly we had it lent for us by our friendly bankers. Of course,

Chase and Citibank and the rest didn’t exactly use our money; they used the Arabs’ money, deposited with them because of the high interest rates the Federal Reserve Board encouraged, allegedly to fight inflation. Just as bankers become unwitting partners of debtors to whom they lend too much money, however, we as a nation have become the unwitting partners of the banks that now have shaky foreign loans far in excess of their assets[2].

THE UPSHOT of all this is that we the people of the United States will in effect pay our farmers for the wheat that is in effect given to the Poles. I have nothing against the Poles, but it occurs to me to wonder why it is better to give our wheat to them than to poor fellow citizens, whom we expect to feed themselves on a supplement of less than a dollar a day. Charity should no doubt be world-wide, yet it should certainly begin at home.

The result of the banks’ loans to Brazil et al. in many ways is worse. The Brazilians invested the money (which, you will remember, couldn’t be lent to New York City because it was a “bad risk”) in building up their industry, particularly steel. Thanks to their low wages, they are now driving American steel out of the world market and to a considerable extent out of the domestic American market. To repay the loans, though, Brazil has to export still more steel and import less of whatever it imports. It must adopt what the bankers and the International Monetary Fund (IMF) aseptically refer to as austerity measures. This means reducing Brazil’s standard of living, and consequently paying its steel workers even less than at present.

If the bankers’ scheme succeeds, by no means a certainty, additional American steel workers will lose their jobs. Should the scheme fail, the banks will come crying to Uncle Sam to bail them out (they’re already lobbying for an increase in our contribution to the IMF), and we will in reality have given Brazil the steel mills that are destroying our industry and putting our fellow citizens out of work.

A very high percentage of foreign trade follows the patterns I have outlined, distorting economies everywhere to the principal benefit of bankers. There are, naturally, many things we want or need to import; oil (because we are too witless to cope with our energy requirements), tungsten, chrome, bauxite, coffee, and there are many things we can, without special government assistance, export to pay for them. But the necessity, or even the desirability, of foreign trade has been grossly oversold.

Trade is one of the modes of civilization (that is what makes economics a humanistic-and ethical-discipline). Trade also adds to wealth – the wealth of individuals, of nations, of the world. It does this by increasing and rationalizing employment, for wealth is the product of work. When trade expands employment for both partners, the prosperity of both is advanced, and David Ricardo’s Law of Comparative Advantage (see “How Our Sun May Rise Again,” NL, July 12-26, 1982) can be said to apply. Conversely, when trade brings about unemployment for one of the partners, its advantage disappears. Trade will always result in some unemployment in a competitive situation, and the unemployment will be compounded where the competition is based on gross wage differentials. If Japanese citizens were to buy up the output of Korea’s nascent automobile industry in preference to Subarus and Toyotas, Japanese wealth would be decreased, and you may be sure that the Japanese government has imposed effective restrictions.

Microeconomically – that is, company by company-foreign trade can be very attractive. Once a company is successful in its home market – factories built and paid for, experience gained – it takes little extra effort to open an export business, and economies of scale will make that business extraordinarily profitable at the margin, especially when stimulated by tax incentives. The profitability of multinational conglomerates is enhanced by their ability to manufacture where wage scales are the lowest (and declare their profits where taxes are the lowest).

When we shift from microeconomics to macroeconomics – from firm to nation – we find (as we frequently do in such shifts) that we have committed the fallacy of composition. What is good for each firm individually is not necessarily good for the nation. In the circumstances we have been discussing, some (not all) American exports are being paid for by us in the shape of high interest rates that inordinately benefit a few, and we will doubtless bear the further cost of rescuing banks in danger of failing. On the other side, some (not all) American imports are being paid for by individual citizens in the shape of shattered prospects and grinding poverty.

These outcomes are not divinely ordained. They are the result of policies deliberately, albeit perhaps blindly, adopted. If this be rabble-rousing, as I told my friend, make the most of it.

[1] A logical mistake which assumes that when things happen in a sequence that means that the second event was dependent on or caused by the first.

[2] Reading this in 2012, post the late 2000’s mortgage fiasco, I can change this sentence by replacing “shaky foreign loans” to “shaky mortgages” and not have missed a beat.

Originally published June 13, 1983

I HAVE BEEN rereading, 25 years later, John Kenneth Galbraith’s The Affluent Society, Galbraith is one of the great economists of our time, and this is one of several great books he has published. It has changed our way of looking at things. Even those who affect to sneer at the author for being funny must take it seriously. Attempts to dispute its thesis, such as F.A. Hayek‘s essay “The Non Sequitur of the ‘Dependence Effect,’ ” end by missing the point.

Galbraith’s attack on what he calls the conventional wisdom moves against its unquestioning acceptance of two propositions: (1) that production is per se desirable, and (2) that consumer choices, through the market, guide production into channels that society values. The first proposition leads to the current worship of the GNP, some of whose absurdities I mentioned in this space last month. Exposure of the second proposition’s failure, in an affluent society, is the great contribution of Galbraith’s book. He writes that “our concern for goods … does not arise in spontaneous consumer need. Rather … it grows out of the process of production itself. If production is to increase, the wants must be effectively contrived. In the absence of contrivance, the increase would not occur. This is not true of all goods, but that it is true of a substantial part is sufficient.”

It is sufficient for his argument, because if advertising or other means of persuasion have any effect at all, they must increase demand at the margin. And “since the demand for this part [of production] would not exist, were it not contrived, its utility or urgency, ex contrivance, is zero.” Hence “the marginal utility of present aggregate output, ex advertising and salesmanship, is zero.” From this it follows that private production is not sacrosanct, and it becomes possible to consider the likelihood that a clean environment may be more valuable than a newly packaged detergent.

In his attempted rebuttal, Hayek grants that “the tastes of man, as is true of his opinions and beliefs and indeed of his personality, are shaped in great measure by his cultural environment.” That is not exactly Galbraith’s point, yet on the basis of it, Hayek finds it impossible to judge some tastes less urgent than others, though he himself puts great store by “the novels of Jane Austen or Anthony Trollope or C.P. Snow.” Thus he undercuts his own position. If there is no way of judging relative wants, then there can be no way of judging the success of the economy in satisfying those wants, nor any way of making things either better or worse. Economics becomes a waste of time – as much of what passes for economics certainly is.

Although many are uneasily aware that The Affluent Society is a book on morals, few note that it is a history book. Consequently, those who think that economics is an immutable science of unchanging laws have trouble with it. Galbraith observes, for example, that “bad kings in a poorer world showed themselves quite capable, in their rapacity, of destroying or damaging the production of private goods by destroying the people and the capital that produced them.” In such circumstances, laissez faire was a reasonable response. Galbraith shows, however, that what was reasonable then is not reasonable now. The world moves.

The world continues to move, and as a result one of the minor or incidental arguments of The Affluent Society has been superseded. It is not central to the main thesis, but is a recommendation of a particular strategy for practical politics.

Galbraith contends that many measures for the public good are lost because liberals insist on raising “the essentially unrelated issue of equality.” In the debate over progressive vs. regressive taxation, for instance, a coalition of conservatives and simon-pure liberals defeats the socially desirable program. As Voltaire said, the best is the enemy of the good. Galbraith therefore urges liberals to get on with the programs and live to fight another day on the equality question.

Whether deliberately or not, the Democrats did in effect follow Galbraith’s strategy in 1981. The Republicans were encouraged, even outbid, in “reforming” the tax laws to their liking. Did they then acquiesce in the expansion of national programs for the public good? Not that anyone noticed. The sight of blood drove them mad. Even Budget Director David Stockman was shocked at their greed. It would appear that at some times and with some people a civilized accommodation is impossible.

A convenient and scary summary of what has happened to the tax laws is given in a booklet by Robert S. McIntyre and Dean S. Tipps of Citizens for Tax Justice. The study, entitled Inequity and Decline, is published by the Center on Budget and Policy Priorities, 236 Massachusetts Avenue NE, Washington, DC 20002. (I give the address because you won’t find the booklet in regular bookstores; the publishers will send you a copy free, though they wouldn’t object to your making a modest donation.)

One of the virtues of this booklet is its demonstration that what happened in 1981 was not an isolated event but had a history stretching back to the Nixon years and in several respects earlier. Especially illuminating is the analysis of the tax “revolt” that broke out in California in 1978 and spread throughout the country, contributing, probably decisively, to the Reagan election and to the Reagan-Kemp-Roth tax laws that followed.

As Mclntyre and Tipps show, the revolt had legitimate grievances that were skillfully misdirected. In California, homeowner property taxes had increased 61 per cent in the three years from 1975-78, the year of Proposition 13. In the same period, taxes on business, industrial and agricultural property were down 5 per cent (for reasons for this decrease, see Eliminating Frictional Unemployment,” NL, March 7).  The revolt, though, was not against the shift of the tax burden; it was against taxes in general, accompanied by vague cries of “waste” and “fraud.” The upshot was a greater movement away from business taxation.

THE SAME THING happened on the national level. A number of big-business lobbyists known as the Carlton Group (because they met for breakfast at the Sheraton-Carlton in Washington) had headed a loose coalition in blocking President Carter’s tax-reform proposals and in widening various loopholes. This preliminary success encouraged the group to refine its strategy and led to its devastating victories in 1981. Here are some of the results of its earlier and later lobbying, as culled from the booklet:

Item: In the years 1969-80 average hourly wages went up 6 per cent in constant dollars, while top executive salaries went up 71 per cent.

Item: “By 1981, one-quarter of all taxpayers had more Social Security taxes withheld from their wages than they paid in Federal incomes taxes.” Social Security taxes are, of course, regressive, and of course this year’s “reform” has increased them.

Item: The Reagan-Kemp-Roth tax cuts, coupled with the 1983 Social Security tax hike, have produced a tax increase of 22 per cent for those whose income is less than $10,000 and a tax decrease of 15 percent for those whose income is more than $200,000. (For those with incomes between $20,000-$30,000, the situation is about a stand-off.)

Item: The rate on capital gains is now lower than the marginal income and Social Security tax rate paid by a wage earner with a family of four earning $20,000.

The main concern of Inequity and Decline is with corporation taxes and their loopholes. You are probably aware that corporations – especially the Fortune 500 and the Forbes 500 – pay a smaller share of the Federal taxes than they used to. Back in 1950, when Harry Truman was President, the corporate income tax produced 26.5 per cent of the Federal revenue; by fiscal year 1983 the figure had dropped to 5.9 per cent. The fall has been steady, in response to growing pressure from businessmen and bankers and their publicists, who have been careful to insist that they really are not greedy but are anxious to increase investment in productive enterprise, for the advantage of us all.

Long before President Reagan’s ironically entitled Economic Recovery Tax Act of 1981, United States business was taxed much more lightly than that of Japan or of any Western European nation – with one exception. This fact and its exception should give pause to hard-nosed, pragmatic men of affairs accustomed to judging things by how they really work rather than by how someone who has never met a payroll says they ought to work. For the exception was Britain, which was also the only one of all those nations whose productivity grew less than ours in the 1970s.

That brings us back to The Affluent Society. Our recent experience shows that the question of progressive vs. regressive taxation cannot be postponed to some more propitious time, nor can it be safely separated from wider social concerns. Conservative tax policies are as destructive as conservative social policies; one leads to massive and degrading unemployment, the other to an impoverished society.

When he wrote The Affluent Society, even when he published the third edition in 1976, Galbraith could not imagine that the conservatives would be so blind and so brutal as to throw 14 million of their fellow citizens out of work and complacently plan to keep them there. Although sarcastic and witty at the conservatives’ expense, he was more generous in his opinion of them than that. He was, in fact, generous to a fault, the only fault in his great book.

 The New Leader

Originally published May 2, 1983

I HAVE BEEN reading with great interest but no sense of urgency (I’ve had it for four months) the Economic Report of the President. It consists of three parts: a moderately tendentious little essay of five-and-a-half pages signed by President Ronald Reagan; an already superseded essay of 135 pages signed by the members of the Council of Economic Advisers; and 125 pages of statistics. The statistics cover more things than you would think possible, starting with “Gross National Product, 1929-82,” and ending with “Unemployment Rate, and Hourly Compensation, Major Industrial Countries, 1960-82. “They’re more fun than the World Almanac and Guinness Book of Records rolled into one.

Entertainment aside, though, I wonder what good they are. If you’ll forgive me for asking a personal question: What use have you made of any economic statistics in the past year? Oh, I know you’ve cited some in debates with your husband or wife or friend. You picked these up from the press or the tube, probably not remembering them precisely; the press had picked them up from the government, probably choosing those that seemed most astonishing and overlooking footnoted qualifications. Or perhaps you listened with half an ear to some claim President Reagan made, or to the rejoinder from Speaker Tip O’Neill. I don’t mean to disparage your intelligent concern with public questions. I am merely asking about the practical use you have made of economic statistics in your daily life.

Speaking for myself, I will say that there are two figures I have paid some attention to. Having enough foresight to peer a short distance ahead to my retirement, I’ve glanced from time to time at the interest rate and the unemployment rate. Up until last May or June the interest rate was preposterously high (it’s merely ridiculous now), making bonds the investment of choice unless a surge in the economy could be expected, and the scandalously high unemployment rate suggested this was unlikely. Anyway, I made my decision and I’ll have to live with it.

Although those two rates have loomed large in my thoughts, they are insignificant among the available masses of other information. Indeed, all I had to know in dealing with a problem like mine could be learned from following the daily news, which gave me the quotations on Treasuries and municipals and also reported on unemployment.

I recognize, however, that there was more going on here than that. The people who were, in one way or another, involved in setting the interest rate may very well have studied and based their actions on all kinds of numbers. And the Bureau of Labor Statistics did not count the noses of the unemployed, of course, it extrapolated from a carefully constructed sample.

Yet it must be acknowledged that the results were poor excuses for all the work that went into compiling the underlying data. The interest rate was, as I have said, preposterous. The unemployment rate was, as I will now say, gravely flawed, in that it excluded the unquestionably unemployed – that is those who’ve been out of work so long they’ve quit looking. (The figures for the New Deal years, by the way, count everyone in the CCC,WPA and the rest of the alphabet soup as unemployed. So much for the government as the “employer of last resort.”)

Reflecting on the foregoing, I am emboldened to wonder if it would be proper to paraphrase what Oliver Wendell Holmes (Sr.) said about the medicine of his day: “I firmly believe that if the whole materia medica as now used could be sunk to the bottom of the sea, it would be all the better for mankind and all the worse for the fishes.” Could it be that the fishes would also choke if the National Bureau of Economic Research, the Bureau of Labor Statistics, the Census Bureau, and their ilk, together with their computers, were similarly lying asleep in the deep?

As a first guess, I’d venture that nothing much would change, except in index-related activities, possibly in big business (what John Kenneth Galbraith calls the planning system), and naturally in some schools of economics. And those are precisely the sectors that are in greatest disarray today.

The indices I could happily forgo, for reasons set forth here last year (“Let’s Put Indexing on the Index,” NL, April 5, 1982). But if we didn’t have these series of numbers, would the President, the Congress and the Federal Reserve Board still be able to do their job of maintaining a prosperous economy with stable prices? Would the managers of the steel and textile and motorcycle industries be able to continue leading us to new heights? All I can say in answer to those questions is, it hurts to laugh. Since laughing at our leaders is a cheap shot (and since they’re our leaders because we follow them), I hasten to add my opinion that whatever they’ve done wrong could not have been corrected if they’d had more statistics.

I’m conscious of sounding like a troglodyte, and maybe I am one; nevertheless, I fail to see how either our successes or our failures have been due to the figures we’ve collected or not collected. Our failures – the Volcker Depression chief among them-have been spectacular, and it is an indisputable fact that our statistics haven’t protected us. Casey Stengel once complained at colorful length of a player who failed to catch a pop fly in spite of an expensive new glove. “At least, I didn’t see him catch it,” Casey added. The same can be said of our expensive statistics: At least, we haven’t seen them protect us from depression. So what good are they? The statisticians answer that rhetorical question with their own: Isn’t it better to know something, no matter how little, than to know nothing at all?

WELL, that depends. “It ain’t the things we don’t know that hurt us,” said Artemus Ward, another of our wise men, “it’s the things we know that ain’t so.” One of the things we know that ain’t so is the Gross National Product. The GNP is treated with such reverence that we talk about it in capital letters. It is nonetheless riddled with error, and is not only irrelevant to responsible public policy but is often positively subversive of responsible public policy.

This subversion is partly because of what the GNP includes and partly because of what it excludes. Let’s consider some examples:

Item: The GNP, though it is an aggregation of prices, is indifferent to values. Thus the $14 billion budgeted for the space shuttle looks the same to the GNP as would $14 billion spent for public housing. There is no doubt that we need the 150,000-250,000 housing units we could build with that amount of money, and there is little evidence that our lives will be greatly improved by putting additional communications satellites in orbit. Moreover, the public housing would provide many more jobs than does the space program. But the GNP doesn’t care, and neither do those who base their policies on the GNP.

Item: Not so long ago Brazil was the wonder of the Western world because of its skyrocketing GNP[1]. Bankers who couldn’t see their way clear to lending money to New York City elbowed each other in their eagerness to press our savings on the miracle workers under the sign of the Southern Cross. Now the same bankers are nervously (yet still self-righteously) preparing the way for the Federal government to bail them out [2]with some more of our money (tax money, this time). Nor is that the worst of paying attention to the GNP. Far worse is the fact that while the Brazilian GNP was soaring, the squatters in the hillside barrios behind Rio and the sugar workers in the northeastern provinces, who were already abjectly poor, became oppressively poorer. Trickle down worked there no better than it ever does. The GNP didn’t care, and neither did those who based their behavior on the GNP.

Item: Johns Manville made a triple contribution to the GNP by manufacturing things out of asbestos. First, the asbestos products swelled the GNP when they were made and sold. Second, the resulting leukemias made work for doctors, nurses, hospitals, pharmaceutical manufacturers, insurance adjusters, and lawyers, with all those activities swelling the GNP. Third, the removal of asbestos installations made work for the removers, and that swelled the GNP. It was all the same to the GNP, and to those (like some recent officials of the Environmental Protection Agency) who base their policies on the GNP.

Item: The quip attributed to Mark Twain about two women “who earned a precarious living by taking in each other’s washing” points to the comprehensive inability of the GNP to measure the contributions of housewives and househusbands, volunteer workers of all kinds and both sexes, and unpaid scribblers like me. This means that somewhere between a quarter and a half of the work done in the country is not counted. The GNP can’t think how to count it, so it forgets about it.

In short, the GNP has only a tenuous and accidental relation to the way people live, and not infrequently the relation is inverse. Winston Churchill‘s metaphor, later taken over by John F. Kennedy, had it that a rising tide raises all ships. This may be true of tides and ships; the GNP is not the tide, and we are not ships.

Won’t I agree, you may ask, that the GNP is useful in studying the performance of our economy, as they say, over time? The answer is, no, I won’t because there is no point in comparing meaningless figures. (As Tolstoy might have put it, all meaningless figures are meaningless in their own way and therefore are incommensurable.)

Then what would I do to fix the GNP? Nothing, because I don’t think it can be fixed. If I don’t think it can be fixed, what would I put in its place? Nothing, because the problems to which the GNP was supposed to give automatic solutions don’t have such solutions.

When we say that it is better to increase Aid to Families with Dependent Children than to recommission some battleships that were next to useless even in World War II, our saying depends not at all on the GNP. Again, when we say that chemical companies shouldn’t pollute the inland waterways, that saying depends not at all on’ the GNP. Yet again, when we say we need the Equal Rights Amendment, that saying depends not at all on the GNP. Finally, any manufacturer of detergents or building materials or anything whatever for a broad market is a fool if he bases his plans on the GNP: What should matter to him is whether there are enough employed people to buy his products.

The fact is that the GNP is either irrelevant or adverse to every important question. Every important question is specific, and has a specific answer that requires specific thought and judgment.

The New Leader

[1] This statement was made in 1983.  Like much of the Dismal Science series it can be made once again….

[2] Ibid,.. you can’t make this up…

Originally published March 7, 1983

IN MY January column (“Loving and Working,” NL, January 10), I made an offhand comment to the effect that Federal tax treatment of depreciation, interest, and state and local taxes contributes to frictional unemployment. A professor at Berkeley has challenged me to tell how. I’ll try.

First, let’s understand that I’m talking about the sort of unemployment that is caused when a factory or an office or sometimes a store pulls up stakes and moves to another town or state in hot pursuit of lower taxes or a tax moratorium.

I’m not talking about moves motivated by a desire to get closer to supplies or markets, or even to find cheaper labor, though all are in fact encouraged by the present tax laws.

Second, let’s agree that the malign effect of the present irrational treatment of depreciation is too obvious to need much discussion. As things are now, I can build a million-dollar warehouse, depreciate it down to almost nothing, sell it for a million or more, pay capital gains instead of regular income taxes, and repeat the process somewhere else. If that’s not bad enough, the company that buys the warehouse can depreciate it again. You don’t have to build anything to play this game, though that’s what its apologists would have you think they’re encouraging. The practice is known as tax sheltering, and it’s also done with shopping malls and condominiums and nursing homes and Broadway musicals. It should be stopped. It would not be easy to do so.

Third, let’s at least keep an open mind on the treatment of interest expense. It’s worth a separate article, and I’ll try to get to it another day.

Here I want to talk about state and local taxes. And I want to advance an idea that may appear startling but is already in operation, in modified form, in the new treatment of estate taxes.

What happens under the existing tax laws? Let’s say you wake up one morning and find yourself mayor of a city a whole lot like New York, with the center running down and thousands of people unemployed and the place pretty near broke. So you hustle around and button-hole some friendly bankers and hard-working brokers and beg them to build shiny glass skyscrapers and move their offices to your city. Or at least not move out. With all the unemployed, you say, there’s plenty of cheap and eager labor available.

They pat you on the shoulder. That’s not good enough, they say. There’s cheap and eager labor everywhere; that’s why we have this depression. The trouble with New York, they say, is the taxes are too high. Besides, the traffic is terrible, the subways have been turned over to young punks to wreck, there aren’t enough cops even to keep the muggers out of the nice parts of town, and it is impossible to get a taxi when it’s raining.

You say, gee, taxes would have to be raised sky-high to take care of those things. They shrug and threaten to move the Stock Exchange to the Jersey meadows, where they’ve already moved the Giants, which used to be a football team, and are talking of moving the Yankees, which used to be a baseball team. A guy can’t make a buck in New York, they say. At least he can’t make as many bucks as he might in a lot of places that have a better understanding of the problems of running a business. Like Cleveland.

Like Cleveland, you repeat tonelessly. For you know that Cleveland has certainly been sympathetic to business, enticing companies to come and build by offering them tax gimmicks they can’t refuse. You also know Cleveland is broke. Worse off than New York as a matter of fact.

This little scenario can be re-enacted right across the face of the land. Every town big enough to have a Rotary Club or Kiwanis or Elks has a committee busily making calls on nearby industries, or writing letters to a list somebody has. Mindlessly compiled (I’m on most of them), or sending out more or less professional looking circulars extolling the town’s advantages. The advantages are the people, who are friendly and hardworking, and the countryside, which is beautiful, at least at certain times of the year. But this approach seldom gets very far, because, as the Rotarians would insist on other occasions, and actually sing at their luncheons, America is a beautiful country populated by friendly and hard-working citizens. On this basis there is no reason for locating your factory in one town in preference to the next.

What it comes down to, the committees eventually learn, is taxes. This presents a problem, given that one of the reasons for going after new industry in the first place – was to broaden the tax base. The whole effort becomes a standoff and nothing more is heard of attracting new industry, except for ritual platform planks at election time.

That is what happens in most towns. Elsewhere the real estate speculators are so strong, or the unemployed so many, that an accommodation is reached. One way involves hanky-panky. I have heard tell of a Fortune 500 company sending a town official’s son to college to protect a $25,000 tax abatement. Since $25,000 isn’t much to a Fortune 500 company, I was speechless when I first heard of this, and I still am, but the story does indicate the cool passion with which tax advantages are sought.

Of course, a similar reduction can be achieved-and, I trust, generally is achieved-legally. Factories are seduced with tax breaks, or with low-interest loans from a public authority, or with both. A state like Connecticut goes out of its mind trying to make do without an income tax for fear of losing what industry it has. A state like New Jersey legalizes gambling in Atlantic City, at the risk of completely corrupting its politics, in the vain hope of keeping taxes down. A state like New York sees its infrastructure disintegrate and its services decline as carpet factories leave Yonkers and steel mills shut down in Tonawanda.

The standard view of the frictional unemployment that results is that it is one of those zero-sum games. A lot of people lose jobs in Ohio, and the same number of people (or almost) get jobs in Oklahoma. Hard cheese for the former; jolly good for the latter. It all evens out.

But it does not all even out-if there are human beings involved. There is no way that my gain compensates you for your loss. It’s as simple as that. Nor does it all even out if there are factories or warehouses or office buildings involved, for in such cases an existing serviceable building goes to waste while labor and resources are spent unnecessarily on a new one. Nor does it all even out if there are states and municipalities involved.

Well, there are states and municipalities involved, and what happens to them is that they have to go to wrack and ruin to avoid taxing business. Giving and receiving are equally cursed. The state that loses industry loses tax income and is saddled with additional welfare costs. The state that gains industry has to come through with the highways and water supply and sewers and what-not it promised to lure the industry – yet it can’t tax the industry, because a tax break was part of the lure. Both ways, our states and municipalities are in trouble. As a consequence, our cities – all our cities – are a mess. We’re all hit where we live. Our civilization is not so civilized as it was, and its decline is accelerated by the same forces that make for frictional unemployment. This is what people mean when they say you can’t stop “progress” (quotation marks added).

And it would indeed appear that, given our federal system of government old federalism or new – there’s no way states and municipalities can be stopped from playing beggar my neighbor. The British Parliament can tell the county councils what to do and how to do it. We don’t have that system, and the country is so big and various it wouldn’t work here, anyhow.

IN JUDO (so I’m told), the trick is not to work against the other guy’s strength but to get it working for you. Various kinds of schemes have been proposed to keep industry from running away to greener pastures: mandating public members on boards of directors, requiring long notice of plant shutdowns, special taxes or performance bonds to pay for worker retraining.

But these schemes suffer from two fatal flaws. They are certain to become entangled in endless litigation; and they are liable to the same sort of pressure that industries exercise on taxes. No industry in its right mind would locate in a state that had such provisions in its laws. So no legislature in its right mind would enact them.

Still, there is a judo-like solution. If state and local taxes were not merely a deduction but a 100 per cent offset against Federal taxes, then state and local taxes would have no direct bearing whatever on a corporation’s (or an individual’s) total tax bill, and industry would have no incentive to flit hither and thither in search of tax breaks. Moreover, industry would also have the possibility of showing a real – as opposed to a public-relations – concern for the communities where it located and would no longer tend to oppose expenditures that might make these communities better places to live. The result would be something vastly superior to the Model Cities plan (which wasn’t so bad as people say), because it would leave it up to the cities themselves-all cities, not just the models – to decide whether and how they wanted to become civilized. This would make local politics – and hence all politics – meaningful in a way it is not currently. That’s a plus.

Now, it’s conceivable that some wise guys in a sleepy village might try to tax their town to build an Olympic stadium, or some nature lovers might opt for the world’s largest botanical garden, or dwellers in a cold climate might want to build a glass dome over their entire city (this has actually been proposed for Winooski, Vermont). Probably the best way to abort such undertakings would be to limit allowable state and local taxes to a certain percentage of the previous year’s, giving Congress the power to change the figure from year to year as fiscal policy required. Thus, for the first time, a comprehensive fiscal policy would become possible. And that’s a plus.

The Federal tax rates would of course have to go up – though revenue-sharing, as such, would be abolished. Constant readers of this column may suspect I’d then argue for a more steeply progressive income tax, but that’s another question. The present proposal should help keep our states and cities from going down the drain. At the same time, frictional unemployment would be greatly reduced – and employment is what it’s all about.

The New Leader

Originally published January 10, 1983

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

The New Leader

[1] To excess

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