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By George P. Brockway, originally published January 11, 1999

1-11-1999 Interest Rates I have Known titleFRIENDS have been congratulating me on bringing the Federal Reserve Board around to my way of thinking about the interest rate. It is, to be sure, true that over the years I have scolded Chairman Alan Greenspan many more times than once about his interest rate policy, and that I scolded his predecessor, Paul A. Volcker, even more harshly (because his notions were indeed worse). Well, I am still at it: I don’t think the Federal Reserve Board has gone far enough.

Greenspan himself had the Federal Funds rate lower than it is at present from November 1991 through November 1994, and he kept it hovering around 3 per cent from mid-1992 through early 1994. Somehow it seems impossible for most people, especially financial reporters and bankers’ advertising agents, to remember what happened that long ago. Every day we read in the business pages that truck and minivan sales are responding vigorously to the current “low” interest rates, and that the real estate market is strong thanks to “low” mortgage rates. Commercials running on television have been touting mortgages at 6.5 per cent as “the lowest they’ve ever been!”

My own memory goes back somewhat farther. In 1940, like millions of our fellow citizens, my wife and I had an FHA mortgage at 4 per cent. In 1947, we refinanced it with a GI mortgage that started at 4 per cent and ultimately dropped to 3.5 per cent. At that time, anything above 6 per cent was condemned as usury by state law.

In 1947, too, I became a junior officer of a small firm and quickly learned the importance of a low interest rate to any company whose business is at all seasonal (you borrow money in one half of the year and pay it back in the next). The prime rate (what the majority of banks charge their most reliable customers) was then 1.5 per cent (it is now 7.75 per cent).

Two years later the prime was up to 1.75 per cent. I remember especially the concern with which our legal counsel telephoned us a few months later to tell us that he had just seen on the ticker that the prime had jumped to 2 per cent. He strongly recommended that we raise prices and go slow with some of the projects we were working on.

The point I’m trying to make is that, contrary to what you read in the newspapers or hear on the radio or TV, interest rates in this country are high by historical standards. They are higher than they have been in most of the years since the end of World War II, higher than in most of the years since the creation of the Federal Reserve Board in 1913, higher than of the Constitution.

In fact, they are so high that it will take a good long time to get them down to where they ought to be. How long is a good long time? Well, Milton Friedman says his empirical work convinces him that it takes at least two years for monetary policy to have a substantial effect in the world of action. Given the $15 trillion of mortgages, bonds and other long term indebtedness now outstanding, and given the number of leases and other long-term contracts with settled prices, I expect it will take nearer five years, and perhaps 10, to squeeze an appreciable amount of the inflation out of the system.

AS I HAVE SAID many times before, our capitalist system runs on borrowing, and borrowing is paid for by interest. Interest is a direct or indirect cost of every business and every farm in the land. The direct cost is what you pay to whoever lends you money. The indirect cost (technically termed “opportunity cost”) is what you pay yourself for using your own money in your own business, instead of taking the opportunity of lending it to another firm and making an effortless profit from the interest you would receive. Your business has to earn its opportunity cost, or it is not worth doing, except for fun; and it has to earn the direct cost, or it goes bankrupt. I’m all for having fun running a business (or a farm, though that seems more like hard labor to me)-after all, it is how you spend most of your waking hours-but you have to pay for it directly or indirectly or both.

Direct and indirect interest costs are therefore factors in the prices you charge. They are not the only factors, but they are unavoidable factors. You can’t escape them. If the interest rate falls, competition is likely to persuade you to lower your prices. If the interest rate goes up, the prices you charge have to go up too, or your profits go down.

In all this, you are not alone. That’s the way our economy works, and it works better than any other yet invented. But, to paraphrase President Calvin Coolidge, as I like to do, when many people raise prices, inflation results.

Last year, and for at least the past half century, the total indebtedness of the nonfinancial sectors of the economy ran fairly close to double the Gross Domestic Product. On this basis, a shift of one percentage point in the interest rate should cause a shift of almost two percentage points in the price level. Like most economic calculations, this one is far from precise. There are too many gaps and lags and crosscurrents and arguable assumptions and downright errors in the statistics.

We don’t need precision in this case, however. We merely need a direction, because the desired end is an interest rate barely high enough to cover transaction costs (which will, I hasten to say, include loan officers and clearinghouses and deposit insurance and much of the other paraphernalia of modern banking). The record here is so clear that it does not overstate the matter to say that a rise of one percentage point in the interest rate will cause a rise of at least one percentage point in the price level, and that a fall of one percentage point in the interest rate will cause a roughly corresponding fall in the price level. (Constant readers will recognize that the foregoing is a restatement of what appeared in this space 10 years ago as “Brockway’s Law No.2: Raising the interest rate doesn’t cure inflation; it causes it.”)

WELL, as you have no doubt guessed, I am in favor of the Federal Reserve Board continuing the policy of nibbling away at the interest rate started last summer. It might be risky to do this too fast, but it should be done steadily, and there is a recent example that should give the Board confidence. The Reserve brought the Federal Funds rate down from 9.21 per cent in 1989 to 3.02 per cent in 1993. That is a fall of about 67 per cent in four years. Such a fall, starting today, would give us in 2003 a Federal Funds rate of 1.5 per cent-just about what it should be.

Also in the years from 1989 to 1993, the annual change in the Consumer Price Index fell from 4.6 per cent to 2.7 per cent, a fall of about 60 per cent. This may be little more than a coincidence, rather than a consequence of the fall in the Federal Funds rate, but at least it’s a happy one and does not contradict our theory that the interest rate and the inflation rate tend to go up and down together, with the former causing the latter.

There are certainly occasional cases where a short supply, natural or man-devised, of a quasi-essential resource allows the ancient “law” of supply and demand to drive a particular price up, whereupon a one-time shock runs through the economy. In ordinary commerce today, though, price is the independent variable, usually set by the seller, while supply and demand are dependent upon it.

If the foregoing analysis is correct, the role of the Federal Reserve Board should be largely restricted to regulating banking (or some of it), to running a clearinghouse, and to maintaining a truly low and steady pattern of interest rates in order to stabilize the price level. Most of the other great desiderata of a good economy must necessarily be left to Congress and the President, provided they can get their minds off sex.

The New Leader

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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

Originally published December 26, 1983

A DELUSION appears from time to time in philosophy whereby appearance and reality are so separated that, as Charles Peirce observed, their connection is like that of a freight train held together only by a feeling of good will between the engineer and the brakeman in the caboose. A corresponding delusion suffered by many economists is that there is a real economic world underlying the actual one in which we live and have our being.

Classical economists are especially prone to talking about the real world rather than the actual one. They investigate the “real” GNP, not the “nominal” GNP (the quoted terms aren’t the same as those of medieval philosophy, but they give rise to similar difficulties); real interest rates, not nominal ones; real wages, not money wages: These investigations seem sensible and down to earth. Money, after all, is only good for what it can buy.

It was one of the marks of John Maynard Keynes‘ genius that he saw through at least some of the confusion this causes. At the very start of The General Theory, he showed why labor is concerned with money wages, not with real wages, to the bewilderment of classical economists. “Since there is imperfect mobility of labor,” he explained, “and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals who consent to a reduction of money wages relatively to others will suffer a relative reduction in real wages, which is sufficient justification for them to resist it.” He noted further that no specific wage negotiation can have a great enough effect on the general price level to make the latter worth considering by either party. High wages in Detroit have a slight and remote effect on the prices of the food and clothing automobile workers (and automobile magnates) buy.

Conservative businessmen nevertheless argue for “reality,” and not only in labor negotiations. Thus we hear much talk about the real interest rate, and how – regardless of what you thought when you talked with your friendly banker about a loan – until recently it was very low, or even negative. The nominal interest rate is what the banker was going to charge you; the real rate is generally determined by subtracting the rate of inflation from it (Keynes reasonably thought the deduction should be for future inflation, but that is obviously a guessing game and so not properly scientific).

If in 1980 you screamed when your banker reluctantly offered you a 16.5 per cent mortgage, he could sweetly point out to you that, what with inflation then running at 13.5 per cent, he was really asking you for only 3 per cent (plus, naturally, several mysterious fees and “points”). Moreover, if your tax bracket was, say, 30 per cent, he probably noted that your tax deduction for interest paid would amount to almost 5 per cent, putting you ahead of the game. You may have wondered who was keeping score.

The competing architects of the mishmash that is Reaganomics are agreed that your banker was correct in his reasoning. Messrs. Martin Feldstein and Donald Regan, Paul Volcker and Jack Kemp, all chant in unison that the economy suffers because rich people don’t have enough incentive to save. In particular, they don’t make long-term investments because they fear that when they get their money back it won’t buy as much as it does today. (The few I know seem to fancy buying extra condos here and there, and that seems like a long-term investment to me, but let that pass.) At this writing, when the real interest rate as calculated by your banker is at an all-time high, those with money to lend are (they would be shocked to learn) following Keynes in allowing not for present, but for future, inflation, which they evidently guess will increase.

Here Reaganomics has a stock answer: Make the rich richer. Considering what has been done so far, it’s hard to imagine what remains to be done, yet we need not doubt that pressure will be steady to reduce taxes in the higher brackets and to reduce income in the lower.

The anonymous White House and the palpable Representative Kemp (R-N.Y.) say in addition that the Federal Reserve Board should reduce the interest rate. Chairman Volcker replies that he could do so for a short while by increasing the money supply, but that resulting fears of inflation would send the long-term rate through the roof and would soon drag along the short-term rate, too. In brief, it is argued that the lenders’ search for real interest would make the nominal interest rate too high for anyone to borrow. Even though we may not like what is being done to us, it is for our own good.

T O CHECK on this argument, we must look a little more closely at the meaning of “realism” in economics. Does it in fact make sense to disregard money values and concentrate on real values? I will say that it does not.

In the actual world, where we do our actual buying and selling, it is money values that we do – and should – pay attention to. Keynes satisfied his tastes for old books and new paintings by speculating, mainly in commodities and currencies. He used his winnings for (among other purposes) buying paintings at the Degas auction in 1918. The real value of the paintings he bought for himself and urged others to buy was not about to change and, by definition, could not change. But the money value, as he anticipated, changed dramatically. He needed money to pay the money price for the paintings before it went up; the real values of either commodities or paintings had nothing to do with the case.

And of course it is impossible to say what the real value of those paintings was or is. Some of them I’d not give house room to, except for their sentimental association with the great man who once owned them. As far as the Consumer Price Index (CPI) or the GNP Deflator is concerned, the value of the paintings is nil. They don’t count; and to value them in terms of Smith’s or Ricardo’s or Marx’s labor theory would be ridiculous, as it would be ridiculous to attempt to apply Keynes’ wage unit to them. Since there is no way of saying what their real value is, it seems quixotic to insist that they have any in economic terms.

Nor are the paintings unique. The market basket of the CPI includes many items I would not give house room to and many others – entertainment, for example – that can be connected with a labor theory of value, or with any other “reality,” only by dint of the most laborious of gyrations. A theater ticket can be counted in the CPI because it is bought, that is, because it has money value. What its real value may be is beyond calculation.

The mere fact that the CPI is not the all-purpose market basket for all seasons, and that other indices (including many of the same items) have to be devised, indicates that the alleged reality shifts as the sands. In any event, like Keynes with his paintings, I need money to buy the things I want out of the baskets; and the more money I have, the more things I can buy. Regardless of the rise or fall of real values (whatever they might be thought to be, and however they might be determined), I’ll be able to buy more if I have more money. Why then should I not join other workers in resisting a reduction in my money wage?

In this I am no different from the investor (or speculator) who resists a reduction in money interest. Regardless of the so-called real rate, his choice is between the money rate and nothing at all. Like the unfaithful servant in the parable, he can bury his money, but that won’t help him. Or he can spend it, and that will help the economy. But if he wants to invest, he’ll have to follow the money rate of interest. In the end, he will compare the results of various investment strategies in accordance with the amounts of money they earn. Realism has nothing to do with it.

The New Leader

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…

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