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By George P. Brockway, originally published January 14, 1991

1991-1-14 Our Austerity Recession Title

FINANCIAL EXPERTS are saying that the present recession was caused by consumers failing to consume. The supply side supplied, but the demand side didn’t demand. I’ll go along with that; but I’m dismayed that the supply-siders seem to have learned nothing from the experience.

1991-1-14 Our Austerity Recession Phil Gramm

I have just finished a decennial purging of what I whimsically refer to as my files; they were crowding me off my desk, much as the Federal deficit is said to crowd entrepreneurs out of the credit market. As the clippings and offprints fluttered into my wastebasket, I was struck by the volume and vehemence of those complaining that we Americans consumed too much or didn’t save enough (take your pick).

For 20 or 30 years now, all the respectable bankers (once upon a time every banker was respectable), all the respectable journalists, all the respectable economists have been moaning about how we Americans have been on a consumption binge. (If you want the facts of the matter, ask the Economic Policy Institute, 1730 Rhode Island Avenue, NW, Washington, DC 20036, for a detailed refutation by Robert A. Blecker.)  Ronald Reagan’s Right-wing revolution was supposed to exalt the supply side over the demand side. There were tax cuts for the rich and tax increases for the poor, because the poor would only waste their money by buying things they needed or maybe wanted, while the rich would invest theirs in Wall Street and make capital gains. Austere elements of the far Left joined in the chorus (of course, for ostensibly different reasons). Consumerism got a bad press wherever you turned. Sometimes it seemed that Ralph Nader was more subversive than the Chamber of Commerce believed him to be.

Among the worthies represented in the clippings I threw out were at least four Nobel laureates, one former chairman of the Federal Reserve Board, three former chairmen of the Council of Economic Advisers, six former Secretaries of the Treasury, one former Secretary of Commerce (who seems to have started a new anti-consumption committee every other week), a past chairman of the Committee for Economic  Development, nine officers or staffers of the Brookings Institution, almost everyone who has ever set foot inside the American Enterprise Institute, innumerable other professors and journalists and TV pundits, not to mention Presidents and Senators and Representatives and unsuccessful candidates for those offices. The idea has had its spokesmen in the International Monetary Fund and the World Bank (where it is known as austerity), as well as in Britain, France, Italy, Germany, Norway, Japan, and Kenya. It has not suffered from lack of publicity.

The present failure of consumers to consume is just what these doctors ordered. Some of the doctors-those who still believe in the efficacy of purging and bloodletting – are no doubt pleased with the resulting recession. A few are puzzled and silent. But most are as noisy as ever.

Many of the respectable economists, I shudder to say, were bashing consumption in the name of Keynes. They seem not to have noticed that he concluded Chapter 6 of The General Theory with these words: “the conception of the propensity to consume will, in what follows, take the place of the propensity or disposition to save.”

Classical economists had long held that consumption was a drag on investment. Back in 1803, Jean-Baptiste Say wrote in words that could be applauded today by Newt Gingrich, “It is the aim of good government to stimulate production, of bad government to encourage consumption.” The reasoning was simple. What is spent on consumption can’t be invested in production. Obviously. Keynes also agreed with the proposition-with one proviso: There has to be full employment. Not 4, 5 or 6 per cent unemployed, but really, truly, full employment. In that case, and in that case only, with the economy running flat out, nothing more can be produced; so whatever labor goes for one thing can’t at the same time go for something else. But with millions of men and women unemployed, it is always possible to increase production by giving them jobs.

What I don’t understand is how the notion that consumption is bad got started. If consumption is bad, then production must be, too. I’m used to writing jeremiads that nobody takes seriously (someday they’ll be sorry), but why should tens or hundreds of thousands of people be expected to band together to make automobiles if nobody is supposed to buy and drive them?

The consumption thing (to use a Presidential locution) is another of those fallacies of composition economists keep perpetrating. An individual who saves his money (even hiding it under the hearth) is more likely to die rich than someone who flings roses riotously with the throng. But if everyone in the land sits home, wasting not and wanting not, the economy runs down, and no one has anything to consume, or to save, either.

The consumption thing is vastly more threatening because the government is doing its best to participate. Look at what Gramm-Rudman-Hollings has done to us. As a result of the budget deal of a couple of months ago, the Federal government is committed to spending 30 or 40 billion dollars less next year than it had planned (conservatively) to spend, and the cuts will be greater in succeeding years. A considerable part of the “savings” will be at the expense of the states and municipalities, all of which are already short of funds because of the recession, and all of which are traumatized by childish and self-defeating taxpayers’ strikes. In order to balance their budgets, the states will have to cut down on their services – and that is simply another way of saying they will have to fire people. School class sizes will rise, and bridges will fall.

Taken as a whole, the government part of the consumption thing means that, one way or another, at least a million people will lose their jobs. Some of the affected will no doubt be those dreadful goldbricking bureaucrats we keep hearing about, but most will be employees of private business – a.k.a. free enterprise – for the government is the private economy’s greatest single market for goods and services. The billions of dollars the private economy will lose because of Gramm-Rudman-Hollings will make the recession both deeper and harder to climb out of.

FACED WITH this dismal prospect, a rational Congress would repeal Gramm-Rudman-Hollings, a rational President would sign the repealer, and together they would embark on a massive public works program. Everyone knows there is plenty to be done and plenty of people to do it. But everyone knows nothing of the sort will happen because of the deficit.

1991-1-14 Our Austerity Recession Warren RudmanSuppose our reaction to Pearl Harbor had been similar. In 1941 the Federal government was running a deficit equal to 4.3 percent of GNP. It jumped to 14.4 per cent in 1942 and to 31.1 per cent in 1943. Thereafter it fell, but remained above 7. 5 percent as late as 1946, and averaged 18 per cent over the six war-time years.

In contrast, consider the current deficit and its steadily rising estimates. Last February the Economic Report of the President presented figures predicting a deficit of 1.1 per cent of GNP, while according to the latest estimate of the Congressional Budget Office, the deficit will be at least 5.4 per cent of GNP.

Had we taken deficits in this range as cause for inaction in 1941, we would have run up the white flag no later than December 11, when Germany declared war on us. And we would have  spent the succeeding 39 years studying Japanese and German industrial management from the ground up.

It is no answer to say that there was a war on. Indeed there was, and we came out of it with total Federal indebtedness equal to 127.3 per cent of GNP – more than double today’s comparable figure. Yet when the War was over we set about rehabilitating Europe and ultimately did so with the Marshall Plan, at a cost to us, in 1990 dollars, in excess of $250 billion (see “Don’t Cash Your Peace Dividend,” NL, March 19, 1990).

Did we ruin ourselves by this profligacy? Hardly. It was not until 1975 – almost 30 years later – that the unemployment rate became as high as it is today. Aside from the flash inflation caused by precipitate lifting of price controls (over Harry Truman’s veto), it was not until 1974 that the Consumer Price Index rose at its present rate. Furthermore, after-tax profits as a percentage of GNP were higher than today’s in every postwar year except three Nixon-Ford years (1974, 1975and 1976) before Jimmy Carter appointed Paul A. Volcker chairman of the Federal Reserve Board in 1979.

Since then our mirror has cracked from side to side, and the curse of inaction has come upon us. That is what the record of unemployment, of inflation and of after-tax profits shows. It won’t do to point a finger at OPEC (see What Happened to Jimmy Carter,” NL, November 27, 1989). Some blame falls upon us for what we did because of OPEC that is, nothing much (and as I write we threaten to go to war in its defense). But the major blame falls upon us for casually and stupidly embracing the fallacy that a nation can save itself into a healthful economy.

If we could disabuse ourselves of this fallacy, the current recession would not last long, and the subsequent prosperity would show up the alleged prosperity of the past decade for the pallid fraud that it was. Unfortunately, those who urged the fallacy upon us continue to push it; we continue to follow them; and as a result the recession will be deeper and longer than necessary.

 The New Leader

By George P. Brockway, originally published November 27, 1989

1989-11-27 What Happened to Jimmy Carter Title

James Mac Gregor Burns, Pulitzer Prize-winning biographer, historian, and political scientist, recently published The Crosswinds of Freedom, the third and final volume of his history of The American Experiment. The book confirms Burns’s standing as one of the foremost observers of the modern American scene.  It also carries forward the foreboding analysis he initiated in The Deadlock of Democracy: that American law, by creating a stalemate in politics, makes an almost impossible demand on-and for-leadership.

Jimmy Carter of course figures in Crosswinds, and reading about him makes you want to cry.  He was (and is) a decent man who apparently thought decency was enough, who had a talent for offbeat public relations, and who also had a propensity for shooting himself in the foot.  The prime example was the Iran hostage affair.  As Burns points out, it was Carter who kept that in the news, and it helped defeat him.  On the other hand, if not for Iran, Ted Kennedy might have been able to grab the Democratic nomination.  The economic situation was probably enough to finish Carter, no matter what.  In that connection I offer a footnote to Burns’s magisterial book.

During the last two years of Carter’s presidency we had double-digit jumps in the Consumer Price Index.  It is not clear why this happened.  The usual explanation blames OPEC.  What is generally forgotten is that OPEC blamed the strong dollar for its price increases.  For almost three decades – long before the advent of Paul Volckerthe Federal Reserve Board and other First World central banks had been steadily pushing interest rates higher, thus overhauling their currencies and raising the cost of the goods the OPEC members (which generally had few resources aside from their oil) bought from us.  Before raising their prices, OPEC tried for several years to persuade us to change our policies; but the Reserve plowed ahead, increasing the federal-funds rate from 4.69 percent in March 1977 to 6.79 percent in March 1978 and 10.09 percent in March 1979.

Finally, on March 27, 1979, OPEC oil went up 9 percent, to $14.54 a barrel, and three months later there was another jump of 24 percent.  In December OPEC was unable to agree on a uniform price, but individual hikes were made across the board. By July 1, 1980, the barrel price ranged from $26.00 in Venezuela to $34.72 in Libya.  Thus, in a little over a year, the cost of oil had more than doubled.

Yet petroleum accounted for less than 3 percentage points of the inflation. Moreover, in every OPEC year (and, indeed, in every year on record), the nation’s interest bill has been substantially greater than the national oil bill (including domestic oil and North Seas oil as well as OPEC oil).  If OPEC is to blame for the inflation of 1979-81, the Federal Reserve Board is even more to blame.

A major cause of the rest of it was hoarding, which resembles speculation yet differs from it in that real things are involved. During this period the stock market was quiescent:  The price/earnings ratio was lower than it had been at any time since 1950, and less than half what it would be in 1987 or is today [1989]. But hoarding, probably prompted by memories of the gas lines following the 1974 OPEC embargo, was heavy.

And not merely in petroleum; it extended to all sorts of commodities.  Manufacturers, wholesalers, retailers, and private citizens tried frenziedly to protect themselves against expected shortages. As often happens in such situations, the expectations were immediately self-fulfilled.  Confident that shortages would allow them to raise prices, manufacturers eagerly offered high prices themselves for raw materials they needed.  Maintenance of market share became an almost obsessive objective of business management.

In the book business, for example, “defensive buying” became common.  Bookstores and book wholesalers increased their prepublication orders for promising titles so that they would have stock if a runaway best-seller developed.  Publishers consequently increased their print orders to cover the burgeoning advance sales.  It soon became difficult to get press time in printing plants, and publishers increased press runs for this reason, too.  Naturally, everyone also stockpiled paper, overwhelming the capacity of the mills.  For all I know, the demand for pulpwood boosted prices of chain saws and of the Band-Aides needed by inexperienced sawyers.

Unlike speculation, hoarding has physical limits.  After a while, there’s no place to put the stuff.  And after a while, the realization dawns that a possible shortage of oil and gasoline doesn’t necessarily translate into an actual shortage of historical romances.  Moreover, the shortage of oil and gasoline, once the tanks were topped off, disappeared.  There was plenty of oil and gasoline; you just needed more money to buy it.  Hoarding-or most of it-slowed down and stopped.  Business inventories declined $8.3 billion in 1980.  But prices didn’t come down.

All this time Jimmy Carter was not idle, for he prided himself on being what we’ve come to call a hands-on manager.  As early as July 17, 1979, he got resignations from his Cabinet members and accepted several, including that of Treasury Secretary W. Michael Blumenthal. To fill the Treasury slot, he chose G. William Miller, chairman of the Federal Reserve, and that opened the spot for Paul A. Volcker, who was nominated on the 25th amid cheers on Wall Street.  At his confirmation hearings on September 7, Volcker revealed the conventional wisdom to the House Budget Committee.  “The Federal Reserve,” he testified, “intends to continue its efforts to restrain the growth of money and credit, growth that in recent monhts has been excessive.”

True to Volcker’s promise, on September 18 the Reserve raised the discount rate from 10.5 to 11 percent; and then, less than three weeks later, from 11 to 12 percent.  An additional reserve requirement of 8 percent was imposed on the banks.  More important, a fateful shift to monetarism was announced.  The Reserve, Volcker said, would be “placing greater emphasis on day-to-day operations of the supply of bank reserves, and less emphasis on confining short-term fluctuations in the Federal funds rate.”  On February 15, 1980, the discount rate was set at 13 percent.

Despite this conventionally approved strategy, prices kept going up.  In January and February, the inflation rate was 1.4 percent a month, or about 17 percent a year.

Again President Carter took action.  On March 14, 1980, using his authority under the Credit Control Act of 1969, he empowered the Federal Reserve Board to impose restraints on consumer credit.  It immediately ordered lenders to hold their total credits to the amount outstanding on that day.  If they exceeded that amount, 15 percent of the increase would have to be deposited in a non-interest bearing account in a Federal Reserve Bank. The banks and credit-card companies, adopting various procedures, hastened to comply.

All that was good standard economics.  If inflation is caused by too much money, the obvious cure is to reduce the amount of money.  President Carter and Chairman Volcker were in complete agreement.

The new policy had an immediate effect that, surprisingly, surprised the president and the Chairman.  Not only did sales slow down, as expected, but profits did, too-as should have been expected.  The automotive industry cried hurt almost at once.  General Motors reported an 87 percent drop in profits, and Ford and Chrysler reported losses.  The housing industry saw trouble coming as well.  It even appeared that consumers were taking seriously their leaders’ pleas to cut down consumption:  Some credit-card companies found their cardholders responding to restrictions by borrowing less than now permitted.

Alarmed by these and other complaints, the Reserve relaxed the new regulations after two and a half weeks, cut the reserve requirements on May 22, lowered the discount rate on May 28, and abolished the credit controls on July 3, whereupon the president rescinded the Board’s authority to act.  It was all over in three and a half months, in plenty of time for the nominating conventions.  Everyone pretended to be pleased with the result, and in fact the inflation rate did fall, but not below the double-digit range.  Still, Carter had shown that he could “kick ass” (his phrase), so he won renomination.  His hope of reelection, though, was dashed.

As Jimmy Carter moved back to Plains, Georgia, he must have wondered why inflation remained high.  The OPEC turbulence had subsided.  Hoarding had largely stopped.  Cutting consumer purchasing power had brought on instant recession.

Conventional theory has taught us to look at the money supply, or the budget deficit, or the trade deficit in seeking an explanation for inflation, since it is supposed to follow when these are high and going up.  Well, M1, the measure of the money supply the Federal Reserve claimed to control, went from 16.8 percent of GNP at the start of Carter’s term down to 15.3 percent at the end.  Carter’s reputation as a spendthrift notwithstanding, the budget deficit, again as a percentage of GNP, was lower in every one of his years than in any one of Ronald Reagan’s.  As for international trade, the deficit on current account was four and a half times greater in Reagan’s first term than it was under Carter, and of course in the second term it pierced the stratosphere- where on a clear day it can still be seen.

Carter’s mistake- and the mistake of the American people-was the common one of simply accepting what someone says he or she is doing.  Everybody, including the Federal Reserve Board itself, believed its contention that it was fighting inflation by encouraging the interest rate to soar.  Meanwhile, in the last two years of Carter’s term the nation’s interest bill went up 51 percent, although the outstanding indebtedness increased only 23 percent.  In addition to the fall in M1 that we’ve noted, the board increased the federal-funds rate 68 percent and the New York discount rate 59 percent.  In 1951 (when the Reserve started its well-publicized wrestle with inflation) it took only 4.59 percent of GNP to pay all domestic nonfinancial interest charges.  The Reserve pushed the rate up, in good years and bad, until it stood at 15.04 percent at the end of Carter’s term. (It’s much higher now [in 1989].)

It is generally recognized that Volcker slowed inflation (he obviously didn’t stop it) by inducing a serious recession, (if not depression) in 1981-83. Putting aside the question of whether causing so much grief was a noble idea, we may ask how pushing the interest rate up caused the recession.  The answer, of course, is that it made goods too expensive for most consumers.  Standard economics, though it pretends the consumer is supreme in the marketplace, perversely believes that consumption is a bad thing.

Goods became unaffordable for two reasons.  On the supply side, interest is a cost of doing business; so the prices businesses charged had to cover all the usual costs, plus the cost of usurious interest.  On the demand side, interest is a cost of living; so the prices consumers could afford were reduced by the interest they had to pay.  Usurious interest pushes prices up and the ability to pay down.

Had the interest rate not risen, wages would probably have risen.  Unemployment would certainly have fallen.  More people could have bought more things.  More producers could have sold more things.  Prices might have gone up until could no longer afford to buy; but if so, that stage would not have been reached so quickly or so inexorably as with usurious interest.  And those who had money to lend would have been worse off, unless they were wise enough to invest their money in productive enterprise or spend it on consumption.

Would instant Utopia have been achieved?  Of course not.  The point is that the conventional policies of Jimmy Carter and Paul Volcker were good for lenders but bad for everyone else

The tests of a “sound” economy that people still chatter about-a stable money supply. A balanced budget, and a favorable trade balance-all were worse under Reagan than under Carter.  Inflation was worse under Carter-and defeated him-because the interest rate was higher.  Professor Burns rightly fears that we will not find leaders able to organize power to handle the usual social and international problems.  I fear that we are even less likely to find leaders capable of understanding and leading us out of the slough of conventional economics.

The New Leader

By George P. Brockway, originally published September 18, 1989

1989-9-18 Something Seems Unbalanced Title

I  HAVE WAITED in vain for editorial comment on one of the most astounding public pronouncements of recent times, prompted by the news that Michael R. Milken had made $550 million selling junk bonds in 1987. I quote in full: “Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working.”

Indeed it does. My sentiments exactly. Well, not exactly, because I don’t think the news raised questions. It answered them, affirmatively and emphatically.

The astounding thing about the pronouncement, however, was its pronouncer: David Rockefeller. What could possibly have given him reason to suspect that there is something unbalanced in the way our financial system is working? Has it ever occurred to him to wonder whether his extraordinary inheritance raises such questions?

This column, I should hasten to note, is not going to be about David Rockefeller (even though I admit to a personal grudge against him). But before going to other matters, I would point out that he was one of the leaders in pressing impossible loans on eager Latin American republics, that he denied loans to New York City to do so, that he has not taken a lead in repairing the disasters his misjudgment (speaking mildly) has created, and that, to boot, he pressured Jimmy Carter into his misadventures (again speaking mildly) with the late Shah of Iran.

What interests me now is the general question of the distribution of income and wealth in this country, and in the world. This is a problem that is with us always. A couple of recent learned journal articles illuminate different aspects of it.

The Winter 1988 issue of The Journal of Economic Perspectives has an article by Professors Samuel Bowles, David M. Gordon and Thomas E. Weiskopf, who tell us that “Conservatives have been waging an economic revolution since the late Carter years,” and ask, “Have they succeeded?” The professors have many strings to their bow, but the following one in particular caught my ear: “The net effect of the low levels of capacity utilization and the high real interest rates which prevailed over the 1979-1987 period was to dampen investment even in spite of the beneficial effects that slack labor markets and the high demand for the dollar had on the power of capital to strike favorable deals with workers, citizens’ and the rest of the world.”

Our authors support their mildly class-conscious conclusion with an ingenious display of statistical analysis that is obligatory in contemporary professional economics. But it seems to me to stand very well on its own.

Ironically, the conservative program was (and is) class-conscious, too. The conservative aim was to get government and labor off business’ back. It took more than firing the air-traffic controllers to weaken labor; it took the threat and actuality of unemployment. But unemployment means slackened demand, which means constricted sales, which means constricted profits. It also means reduced tax collections and increased welfare costs. Entrepreneurial capital shot itself in the foot.

The authors try to be, so to say, conservative in the inferences they draw. They allow it will be a while yet before we know the outcome of the Reagan-Volcker revolution. Since I have no academic reputation to protect, I shall rush in and announce that the conservative revolution is and always will be a failure, except in the spirit of the old Peter Arno cartoon with the caption, “Let’s all go down to the Trans- Lux and hiss  Roosevelt.”

1989-9-18 Something Seems Unbalanced David Rockefeller

It is easy enough to get labor off your back, but you are liable to rip your shirt in the process. Likewise it is easy to get government off your back, but business’ back would atrophy without the exercise of filling the orders of big government. Big business needs big markets and big government. The conservative program is self-contradictory.

The trouble is that millions of people are hurt by the attempt to make the program work. A measure of how much the economy has suffered is provided by an article in the Spring 1989 issue of the Journal of Post Keynesian Economics, where Professors John F. Walker and Harold G. Vatter ask, “Why has the United States operated below potential since World War II?” We are told at every hand that we never had it so good, that the present “recovery” is the longest on record, and so on. Yet unemployment has been high for decades, utilization of our industrial plant has been low for decades, and our cities and infrastructure are decaying. Why have we get-up-and-go Americans done so poorly?

The villain, again, is the conservative theory, but this time there is no need to suggest a mean elitist or anti-labor spirit on the part of conservatives. They’re wrong, regardless of their intentions. Walker and Vatter consider the conservative theory that prosperity depends on investment and contrast it with a theorem independently developed by Roy Harrod and Evesy Domar some 40 years ago. The standard conservative theory has dominated American economic policy, even  in Democratic years, ever since the end of World War II. In accordance with it we have steadily cut taxes, especially corporation taxes, and have enacted many sorts of incentives to investment.  Nevertheless, investment has fallen in relation to GNP.

The reason for the fall is that investment has two effects. The first, which conservatives rely on, is that it creates jobs. The second, which the Harrod-Domar theorem emphasizes, is that it makes goods. Now, you’d think that the making of goods would itself be good. The catch is, the new industry can make goods faster than the new workers can consume them. Moreover, we already have the capacity to make more goods than we use-not more than we might use, but more than we can afford to buy.  Since we can’t afford to buy them, business can’t afford to make them; consequently investment languishes, regardless of incentives, and so does employment.

Keynes‘ observation that an economy can save itself into recession does not merely apply to one phase of the business cycle; it describes a general condition of modern industrial production in a market economy. The constant danger is that the demand side will be inadequate to consume what the supply side can produce.

In our current pallid recovery, with bankers becoming alarmed at the slightest improvement in business, big government has taken up some of the slack. It could have taken up more, and should have done so, and will have to do so in the future. But unless we want to go all the way toward some form of socialism (here I’m speaking in my own voice and not that of the articles referred to), we’re going to have to make a serious effort to redistribute income and wealth.

IT IS OFTEN said that the gap between the rich and the poor is not really significant because taking from the rich and giving to the poor would not give the poor a great deal more than they have now.  This may once have been true, but it is far from the truth today. In 1987 the total of personal incomes in the United States was $3,780 billion. If this sum had been equally divided among the 65.1 million American families, every family would have had an income of $58,065. Actually in that year only 16 per cent of families had incomes that large (and 11 per cent of families were below the poverty level).

The knee- jerk response to the idea of any leveling of income is that it would so sap the incentive of the wealthy that they would quit working, depriving the nation of the leadership of its best minds, and generally reducing the GNP.  Nobody really believes this. Common knowledge is against it, and there are no statistics to support it. Taxes have been raised from time to time, but no one has ever tried to prove that production has fallen as a result. Indeed, Walker and Vatter show that we have, in general, been most prosperous in periods of highest taxation.

Very few of the really important movers and shakers of the world have been primarily moved by lust for money. Lust for power or popularity, perhaps; lust for money, no. A financial incentive is certainly prominent in the case of wheelers and dealers of the first rank (not to mention scoundrels), but a wise society does not devote much effort to encouraging such people. It is enough to tolerate them. There are plenty of trustworthy and competent people ready to step into the jobs of those who call it quits.

In any case, the incentive argument proves too much. If people really responded primarily to money, think of the great leap forward that would follow from raising everyone’s realistically attainable income to $58,065! Eighty four per cent of the people would have their incentive stimulated; only 16 per cent of the people would have theirs sapped (most only marginally), and a considerable portion of that 16 per cent did not work for their money, anyhow. Like Rockefeller, they got it in the good old-fashioned way: They inherited it.

Hardly anyone proposes absolute equality of income, or anything closely approaching it. But it would not be difficult to suggest reasonable guidelines enforceable by steeply progressive income and inheritance taxes. We can say, at one end, that everyone’s self-respect depends on making a contribution to society-that is, on having a paying job. At the other end, we can say that no one is essential and deserving of unlimited income. Our aim should be to bring the ends steadily closer together.

New York’s Democratic Senator Daniel P. Moynihan suspects, and he is in a position to know, that conservatives deliberately let the budget deficit grow in order to make politically difficult or impossible the expansion of social welfare, ecological and other programs designed to do good and to improve the quality of life. In this conservatives prove themselves not only mean-spirited but foolish. The quality of life they deny includes their own.

 The New Leader

Originally published July 14, 1986

LIKE THE Ancient Mariner, we war veterans have a glittering eye.  (I have seen mine reflected, dully, in my grandchildren’s eyes as they prepare to listen dutifully.) We could tell you a tale or two-and we will. Indeed, I will, here and now, tell you war story that has a lesson for us today and for tomorrow too.

Perhaps you were there. After all these years I may be off a bit on some of the details. If so, you can correct me. But I’m sure that I have my oral straight.

It was, as I remember it, in the fall of ’37. The battlefield was not on the banks of the Ebro but in Herald Square. Macy’s let loose a barrage advertising a special on the Modern Library: three volumes for a dollar. Skirmishing had been going on for months or maybe years but the price had rarely fallen below wholesale, somewhere around 50¢ (the list was 95¢). The big battles in the last half of ’36 and the first of ’37 were fought over Gone with the Wind, which, in spite of its $3.00 list price and an ordinary wholesale price of $1.80, sold as low as 49¢ in auto supply stores. It was the big loss leader: possible profits on Margaret Mitchell’s work were expendable as-Ion- as it lured in people to buy bigger-ticket items.

By the fall of ’37, practically everybody who wanted a copy of Gone with the Wind-and many who didn’t-had one. So Macy’s tried to effect a breakthrough with the Modern Library. The book section, then on the main floor, was mobbed. We rushed in from every point of the compass as soon as the doors opened. I still have my three books: The Education of Henry Adams, The Theory of the Leisure Class, and D.H. Lawrence’s The Rainbow (a novel, I’m ashamed to confess, that I’ve never been able to finish).

Did Macy’s tell Gimbel’s? No, but Gimbel’s was not caught napping. Its comparison shoppers were in the front line, rushing the news from 34th Street to 32nd Street as fast as it occurred. And of course, Macy’s spies were doing the same in Gimbel’s.

I was a well brought up young man; so after I had elbowed my way to the table and grabbed my three books, I waited patiently for a clerk. My good manners were rewarded. Twice, as I stood there, an assistant buyer rushed in (we smartly made way for her) and lowered the price-first to 31¢, then to 28¢, the price by the time I was waited on. Maybe I’d have done better at Gimbel’s.

I don’t know. Anyway, it was a good war. Even the most flaky Harvard philosopher would call it a just war. But it had repercussions. Booksellers for miles around were hurt, or thought they were, and screamed.

Some returned their stock of the Modern Library to Random House; some refused to buy Random’s new books; all urged Random to protect the Modern Library price under the new Fair Trade Act. (This law allowed producers of copyrighted, patented or trade-marked goods to follow a complicated procedure that would require every retailer to maintain list prices. The act has since been repealed, and it is conventional to denigrate it; constant readers will not be surprised to learn that there I go again, being unconventional.)

Macy’s moved quickly. They ordered in, on top of their usual heavy inventory, an extra $50,000 worth of the Modern Library. That was a lot of money in 1937. Random was delighted. But when the publisher started talking about price maintenance, Macy’s whispered that it would have to return all those books for cash. Random decided to bear those ills it knew, and continued to do so for another four or five years, until wartime shortages allowed it to call Macy’ s bluff and declare that it would take back any books Macy’s was ready to send. End of war story.

The moral is this: If you maintain a large inventory, you can force your suppliers to play the game according to your rules. And where can we put that lesson to good use? Ina word: oil. Oil is certainly the second most screwed-up topic in political economy. I’m not sure what is first. Probably the deficit, or maybe the defense budget. No matter; they’re all related.

Everyone knows you can’t run a war or a police action or even a defense without oil. It is the absolutely essential military resource. It is not surprising, therefore, that we have at least the outlines of a policy on oil, and that we’ve followed them for a long time. But if you tried to think the problem through, calmly and rationally, you would not guess what our policy is, not in a million years. For example,

President Eisenhower, who certainly did not regard defense frivolously, imposed a partial embargo on imported oil. Ike said (if you don’t believe me, you could look it up) this was a defense measure.

Its expected and intended and actual results were (l) to reduce the importation of foreign oil, (2) to let domestic producers raise their prices, and (3) to encourage domestic producers ( a.k.a. wildcatters) to explore for new oil fields and exploit existing fields more thoroughly, Now, you, being a sober citizen, will wonder how all this made America  stronger, and I will have to say that it had the diametrically opposite effect, for it caused us to use up our oil reserves faster than we might have otherwise. To be sure, the higher price of oil may have persuaded some people to conserve a bit; but the principal consequence was a draw-down of our reserves.

The crazy thing is, people are clamoring for us to do the same thing again. This time the alleged purpose isn’t national defense but deficit reduction. Of course, if your real aim was to reduce the deficit, you would put an extra excise tax on all oil. No one, however proposes this, because it would annoy a number of politically active oilmen.

Similarly, if you really wanted to make America stronger, you would import every ounce of foreign oil you could, now that the price is down. You would move, with more than deliberate speed, to fill up those salt mines (or whatever they are) where we started, back in the discredited days of Jimmy Carter, to accumulate a ready oil reserve. Before the oil glut, OPEC warned us that if we tried to fill those mines in order to reduce our dependence on them, they’d consider it unfriendly behavior and would respond by pushing up the price of oil, or maybe slapping a new embargo on us. Today, though, with pretty bad business and pretty good conservation world- wide, OPEC has so much oil it doesn’t know what to do. In addition, we have banks failing all over the West, and the growth of Houston, especially, is being corrected. So far, the only thing we have been able to think of is a trip for Vice-president Bush to explain to the Saudis that the people he represents hope that prices won’t fall too low.

ADMITTEDLY, filling those mines would cost real money, even at present oil prices, and everyone has been programm-rudmanned to worry about the deficit. But here is where the moral of the Herald Square war comes in. Just as Macy’s excessive inventory of Modern Library books inhibited Random House from fixing the price at 95¢, so if we had all our depleted mines (and all our storage tanks) brimming with oil, it would be difficult, if not impossible, for OPEC ever to spring another embargo on us.  Those full reserves would be a new declaration of independence for us. They’d make a quicker and more effective (and probably cheaper) contribution to national defense than Star Wars or nerve gas or re-commissioning obsolete battleships.

What’s more, buying that oil would be an investment in something useful for civilian as well as military life. At the minimum, it would be a guarantee that we would not have lines at the gas pumps until oil was really running out. Charging such investments to the current budget is nonsensical accounting (but that’s another story).

Filling our reserve capacity would also give us opportunities for a creative and hard-nosed foreign policy. Consider how the reduction of Arabian pressure on us would strengthen our position in the Middle East. And consider how we might distribute the orders for the oil: Naturally, we’d buy most from friendly countries that are heavily burdened with debt (much of it owed to us).

Thus we could help, first of all, Mexico, which is on the brink of lMF-sponsored chaos. Then we could think of Venezuela, one of the struggling South American democracies, and of Nigeria, one of the struggling African democracies (at least in ideals). In the Middle East we could favor countries willing to put a bit of pressure on Syria. The possibilities are very great. Prudent friendliness on our part could earn us friendly prudence on the part of many important nations.

So why don’t we do it? You know why. Even if we weren’t hung up on the deficit issue, even if the Administration and Congress could be gotten to see the light, the program would be stopped dead by influential senators and congressmen who are obligated to, or in fear of, 50-odd men who’ve made a killing in oil. You know these people would stop it, just as they’re now stopping tax reforms that might treat them like everyone else.

These 50-odd men are not the Seven Sisters of Big Oil. Exxon and the rest usually support what they do, and their support rivals the clout of any other industry’s lobby. But the initiative and most of the money comes from the independents. What makes these few men so powerful? They are wealthy-really and truly wealthy-and they don’t give a damn about anything except having their own way. Every one of them is capable of signing checks for hundreds of thousands without worrying about the bank balance. Every one of them can make maximum contributions to political action committees as fast as the committees are invented.  If you want a rundown on who they are and how they work, I refer you to The New Politics of Inequality by Thomas B. Edsall (one of the last books I edited, and a good one).

We’re not talking about merely Texas and Oklahoma. There are appreciable amounts of oil in 10 or more states, some of them very populous. That gives the oil lobby a bloc of, say, 20 senators and 50-60 congressmen it doesn’t have to worry about. Moreover, many of these legislators have accumulated seniority and the committee chairmanships that go with it.

In spite of all this, maybe the current economic difficulties of the oil states can give us a chance to get some of our own back. Suppose we said we’d fill up those reserves with true-blue American oil. Could they resist the temptation? We would lose the chance to do something useful in foreign policy. Still, we wouldn’t be doing something harmful to our national defense. And the existence of that ready reserve just might make the oil senators a little more respectful of the rest of us in the future.

The New Leader

Originally published July 1, 1985

INTHE PREFACE to their best seller Free to Choose, Milton and Rose Friedman write, “We are still free as a people to choose whether we shall continue speeding down the ‘road to serfdom,’ as Friedrich Hayek entitled his profound and influential book …. ” Since Hayek’s book was published 40 years ago, it would seem that we have been “speeding” down that road at a remarkably sedate pace. I must confess that praise like the Friedmans’ put me off reading The Road to Serfdom until now.

That was a mistake. Hayek is well worth reading, both for what he says and for what he doesn’t say. Looking first at the latter, we find that he is far from advocating the sort of libertarian – that is, practically nonexistent state the Friedmans envisage. The Friedmans share with Marx a longing for the state to wither away, but Hayek is having none of that; he merely wants the state to act responsibly.

He is, for example, willing to consider “restricting the allowed methods of production, so long as these restrictions affect all potential producers equally and are not used as an indirect way of controlling prices and quantities …. ” He also believes that “To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition.” Hayek would thus not be sympathetic with the notion, advanced by both neoliberals and neoconservatives, that factories should be allowed to pollute as they please, so long as they pay a fee for the privilege.

Nor would he approve of the merger movement and the consequent concentration of power in sprawling conglomerates. He disputes, without naming him, his fellow countryman Joseph A. Schumpeter (who is at present being touted by neoconservatives as a foil to Keynes), rejecting “the myth … that … competition is spontaneously eliminated by technological changes.” In addition, Hayek quotes with favor from the New Deal report of the Temporary National Economic Committee: “‘The superior efficiency of large establishments has not been demonstrated … monopoly is frequently the product of factors other than the lower costs of greater size. It is attained by collusive agreement and promoted by public policies. When these agreements are invalidated and when these policies are reversed, competitive conditions can be restored.'”

In another place Hayek says, “It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us.” He is against monopoly as well as against the “monster state,” and in his last chapter, he writes (anticipating E.F. Schumacher), “It is no accident that on the whole there was more beauty and decency to be found in the life of the small peoples.”

Though Hayek’s main thesis is objection to a comprehensively planned economy, he recognizes that “the case for the state’s helping to organize a comprehensive system of social insurance is very strong.” He holds, too, that the state should be concerned in “the extremely important problem of combating general fluctuations of economic activity and the recurrent waves of large-scale unemployment which accompany them.” And strong as he is in his insistence on private property, he thinks that the case for inheritance may not be supported with “the same necessity.”

I have quoted Hayek extensively because his reputation is that of an extreme, devil-may-care, laissez-faire conservative. His book was actually greeted with qualified praise by Keynes, as Robert Heilbroner tells us in The Worldly Philosophers; but endorsements like the Friedmans’ have established his reactionary” image.” Much of Hayek’s later work, however (e.g., his attack on John Kenneth Galbraith; see” Rereading Galbraith,” NL, June 13,1983), does exhibit a hardening conservatism.

This is not, I think, an instance of the notorious syndrome whereby flaming youths turn into reactionary elders (“When old age came over them / With all its aches and qualms, / King Solomon wrote the Proverbs / And King David wrote the Psalms”[1]). Rather, it is an instance of a common, albeit little noticed, progression whereby a great leader becomes misled by his followers. The change is not always in a conservative direction. Marx became more violent and conspiratorial at least in part because his most vocal supporters were conspiratorial. John Dewey, whose Human Nature and Conduct showed strong elements of philosophical idealism, became famous for the contrary theory of instrumentalism that appealed to his admirers.

I have also seen such changes occur at less rarefied levels. One of the most delightful books I ever published was Little Britches (I was never good at titles) by Ralph Moody. It was the first of several memoirs of family life. No one reading the series would guess Little Britches was begun as a polemic against the Social Security system. But Ralph’s readers – starting with those in an extension writing course in Berkeley-praised him for the warmth of his characterizations, and he became more interested in people and less in abstract theory.

THERE ARE other interesting themes in The Road to Serfdom.  One of these appears in his analysis of the failure of the Social Democrats to stop Hitler. We have heard much of the trahison[2] of the Communists; but Hayek argues that the socialist emphasis on comprehensive planning predisposed the German electorate in favor of grandiose schemes like Hitler’s. If he is right, this fact should give pause to our Atari Democrats, who want to set up a committee to decide which industries we should foster and which we should abandon and in general to plan how to use our resources. As Robert Lekachman has pointed out, such committees are more likely to be run by big business than by idealistic planners.

The Social Democrats were further weakened, Hayek says, by a split that appeared in the labor movement. For various reasons, certain unions and certain categories of workers were able to achieve remarkable economic gains, while others were left far behind. The laggers were understandably disillusioned about the Social Democrats and became ready to acquiesce in, if not support, the National Socialist program.

“To them,” Hayek writes, “and not without some justification, the more prosperous sections of the labor movement seemed to belong to the exploiting rather than to the exploited class.”

This is a problem that American labor leaders have yet to solve. The split in our labor movement was opened, as I suggested last year (“Voodoo on the Primary Trail,” NL, April 30, 1984) by the Vietnam War. But it has been astutely widened by apologists for big business and by the just- folks demeanor of President Reagan, and deepened by the misguided anti-labor Presidential campaign of Gary Hart.

It is said, by the way, that Hart appealed especially to the so-called Yuppies- young, upwardly mobile professionals. I venture to think that Hayek’s analysis of what happened in Germany is closer to what is happening here. He writes that “no single economic factor has contributed more to help [the Nazis] than the envy of the unsuccessful professional man, the university-trained engineer or lawyer, and of the ‘white-collar proletariat’ in general for the … members of the strongest trade unions whose income was many times theirs.” I suggest that the “white-collar proletariat,” hitherto most visible in countries like India, will become a growing and destabilizing factor in our public life as computerization and conglomeration steadily reduce the need for “middle management.”

Another theme of current interest in Hayek’s book is his concern over the tendency of legislatures to turn hard questions over to independent public authorities. I suppose he would therefore welcome a good deal of the current deregulation, but he would appear not to have been a knee-jerk deregulator. Hayek’s concern is also a central topic in Theodore J. Lowi‘s widely read The End of Liberalism. Both men describe the irresponsibility that results from the delegation of undefined powers. Hayek emphasizes the dictatorial arrogance that ensues; Lowi notes (as does Lekachman in the comment cited above) that ill defined regulatory commissions tend to be co-opted by the industries they regulate. A different example of irresponsible delegation is the willingness of Congress to give the President power to commit military forces to action, and indeed to launch a nuclear strike, without carefully defining limits to that power.

In the same way, control over our money, and hence over our economy as a whole, has been surrendered to the Federal Reserve Board. I regret to have to admit that three Democratic Presidents played crucial roles in the surrender: Woodrow Wilson, who admitted he knew nothing about banking, signed the Federal Reserve Act. Harry Truman allowed his Secretary of the Treasury to dissolve the agreement with the Federal Reserve that had held the prime interest rate down to 1.5 per cent during the War. Jimmy Carter appointed Paul Volcker chairman of the Fed.

How all this came about is told in fascinating and chilling detail by F.W. Maisel in a little book entitled Great American Ripoff (Condido Press, Box27551,San Diego 92128). Maisel may upset the sensitive by his espousal of a conspiracy theory of American banking; nevertheless, it’s hard to fault his facts, and I’m not even prepared to say he’s wrong about the conspiracy.

Should you feel that the bankers running the Federal Reserve, far from being conspirators, are idealistic public servants who have, in Hayek’s phrase, “devoted their lives to a single task,” there is still reason to be wary of them, for “From the saintly and single-minded idealist to the fanatic is often but a step.” Single-minded conservatives please copy.

The New Leader


[1] A poem by James Ball Naylor http://www.jamesballnaylor.com/

[2] French for “betrayal” or “treason.”

Originally published November 1, 1982

BY THE TIME this reaches you, the election returns will be in and the pundits may well have finished talking about them. As I write, however, the election is almost a month away and the pollsters have made only the vaguest of preliminary predictions. Yet I have no hesitation in saying that appalling numbers of people will have expressed approval of Reaganomics. (Since I am appalled that even Reagan himself approves of his policies, you may think that my crystal ball doesn’t have to be very clear.)  Very few of these approving voters are beyond disappointment with the present state of affairs, but all of them are sustained by the belief that we are on the right track. Or they may use some other metaphor.

The one that seems most popular now, almost two years into the Reagan Presidency, compares the economy to a person who has destroyed his health in years of overindulgence and today faces a long and rigorous convalescence. You cannot, we are earnestly assured, correct in a year or two the mess made in 10 (or 20 or 30) years of mismanagement. This is absurdity of a high order.

Nevertheless, let’s take it at its face value. The economy has, the story goes, been on an extended debauch. When did this all start? Is Jimmy Carter solely to blame? To say so is unfair, since it was he who appointed Paul Volcker chairman of the Federal Reserve Board and so may be said to have initiated the “cure.” Surely Gerald Ford and Richard M. Nixon aren’t the ones, for they are Republicans. Was it Lyndon B. Johnson, then? That would make John F. Kennedy the Golden Age, which can’t be allowed. One is tempted to like Ike, but the sad fact is that he ran up the largest peacetime deficits until the advent of Ronald Reagan.

The metaphor is nonsense on its face. The alleged debauch never began. There was never a pre-existing” healthy” state that we should now be returning to. The Golden Age is and always has been merely an enchanting dream.

Another trouble with metaphors is that, once you get them started, they’re hard to stop. This is perhaps particularly true with medical metaphors, medicine being an art and all that. In the present instance, the doctors of the far Right agree with the diagnosis of the doctors of the far Left; but instead of an austere program of drying out, they prescribe an equally drastic program of surgery. On the basis of metaphor, there is no choosing between programs. Block that metaphor.

Of course, there may still be some truth behind the metaphor. It is conceivable that when an economy has been badly damaged it cannot be repaired in a short period of time. If this is so, it would certainly be churlish to deny President Reagan time for his program, as he says, to take hold. If, on the other hand, there is a case where a ruined economy made a rapid recovery, then we had better recognize that Reaganomics is a failure and quickly embark on another program.

Well, there is such a case. I’ll name it, but first let’s glance at John Stuart Mill’s Principles of Political Economy, a work that even more than Adam Smith’s The Wealth of Nations can be called the leading statement of “classical” economics.

“Capital,” says Mill, “is kept in existence from age to age not by preservation, but by perpetual reproduction: every part of it is used and destroyed generally very soon after it is produced, but those who consume it are employed meanwhile in producing more …. This perpetual consumption and reproduction of capital afford the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war.”

Some may object that the world has grown vastly more complicated in the almost century and a half since Mill wrote, that today’s factories and infrastructure could not be replicated so easily as those of the mid-19th century. It might have been no great thing to reinvent the water wheel; it would be harder to rebuild the automobile industry from scratch. But this objection is beside the point.

The devastation alleged to have been caused by an economic debauch has not extended to factory buildings or machinery. As was pointed out in the debates over saving Lockheed and Chrysler, the physical factories would have remained even if the companies had gone bankrupt. The factories may be judged obsolete, as people tell us the steel industry is, yet it is noticeable that U.S. Steel decided against modernizing its plants, not because it lacked the ability to do so, but because it felt the economy too weak to need the steel it could produce. Nor has the infrastructure been destroyed; it has merely been allowed to deteriorate, and the deterioration has resulted precisely and solely from the astringent measures of the end the-debauch doctors.

In short, Mill’s observation remains as sound as ever. And we have had, well within the memory of man, a situation that confirms it. Although Congressman Jack Kemp (R.-N.Y.) is perhaps not old enough to have experienced the Great Depression, and President Reagan apparently had his mind on other problems, some of us remember how things were and how they changed. I hasten to add that I am thinking of Mr. Win-the-War, not of Mr. New Deal. I don’t mean to denigrate Mr. New Deal; I merely say that, for change, Mr. Win-the-War was nonpareil.

In the late’ 30s I was a traveling salesman and had occasion to travel over a good deal of the northeastern United States. I was not a very good salesman, but I did keep my eyes open, and what I saw out the day coach windows was miles and miles of abandoned factories, empty warehouses, and railroad sidings whose rusted rails were overgrown with weeds. In between were miles and miles of farmland that no one bothered to farm. People were scarcely visible. I did not sell many books; once I spent an entire day in Albany and Troy, called on a wholesaler, a department store, and five bookstores, and didn’t sell a single book. This was in the winter of 1938-39.

In mid-1940, when France fell, there were about 8 million unemployed in the United States, or 14.6 per cent of the labor force. Those figures make little allowance for women, who stayed home if they could, and blacks, who just tended not to be counted. The GNP, in 1958 dollars, stood at $227.2 billion. Two years later, unemployment was practically nonexistent and the GNP was up to $297.8 billion, for an increase of 31.1 per cent. Contrast these figures with those of the first two years of Reaganomics.

Yes, there was a war on. I noticed that myself. When you stop to think of it, that makes the achievement all the more remarkable. The state of the economy in 1940 was incomparably worse than it was in 1980. War industry does not, in itself, improve the standard of living. Guns (except handguns, which aren’t of much use in war) are not consumer goods. The 18 million of us who ultimately wore khaki or blue suits did not produce anything of ordinary usefulness while we did so. But by the end of the War, there were 7 million more civilian jobs than there were in 1939.

THERE IS ONE crucial difference between Mr. Win-the-War and all the proposals and programs that we have had for the last 35-40 years.  Mr. Win-the War saw what had to be done, and did it. All subsequent programmers – and I mean all, both Right and Left-have tried to accomplish their ends by indirection.

If millions are out of work, the problem is to be met by the indirect route of encouraging investment; and if one wants to encourage investment, one encourages savings; and to encourage savings, one attacks inflation; and controlling inflation seems to require controlling the money supply-which immediately throws people out of work but, it is hoped, will do better in time. That’s the conservative scenario.

The liberal scenario, I’m sorry to say, is not much better. It now goes like this: If people are out of work, they are disadvantaged and have the wrong skills or none, so they need to be trained or retrained; in the meantime, a nationwide commission of unemployed economists will be convened to figure out what industries should be fostered – and how they should be fostered – to  employ the retreaded workers. This remedy will also take time. In the long run we are all dead.

But can the national will be mobilized except in time of war? Is there a moral equivalent of war? There’d better be, or we are all either amoral or dead. It will not, however, be something incidental, like cutting down on the consumption of oil, as Jimmy Carter, costumed in a cardigan sweater, and posed before a fireplace in supposed imitation of FOR, told us an inner light had told him. Nor will it be something mean spirited and tawdry, like depriving the poor and helpless in order to bribe the rich and fortunate into making themselves richer, hoping thereby to improve the GNP. The GNP, too, is incidental, perhaps a means but certainly not an end in itself.

The only ends are people. I’m not going to give a lecture on morality – at least not a comprehensive one, not here-but I will say this: Each of us as individuals and as a nation is responsible for ourselves. If we are not responsible, we are nothing. One version of the Hippocratic Oath starts with the words, “First, do no harm.” Even in terms of medical metaphor, Reaganomics is a failure. Two years of irresponsibility in Washington are more than enough.

The New Leader

Originally published May 3, 1982

AN OLD TEACHER of mine once tried to “motivate” (a word he would never have used) his sullen pupils by arguing that Latin is the road to success in any line of endeavor. He was ready for us when we cited Henry Ford as an exception. “Ah, yes,” he replied, “but think of how much more successful Mr. Ford would have been if he had studied Latin.”

That kind of argument provides the principal, if not the sole connection between macroeconomics (the economics of the nation or world) and microeconomics (the economics of the firm or individual), as they are at present understood. Ordinarily the link is silently assumed. The root of both branches, like the root of both words, is the same. Surely, too, it is obvious that the prosperity of the nation depends on the prosperity of the entities that make it up.

I shall nevertheless dare to express doubt. For I have had the experience, not once but several times, of seeing the firm for which I work prosper in what were generally judged to be bad times. And, I am sad to report, I have also seen the contrary. There used to be, moreover, a bit of folk wisdom to the effect that the book business is, for various almost plausible reasons, depression proof. (Some say that it is prosperity-proof, as well.) In the face of all this, how can one assert a connection between macroeconomics and microeconomics?

My old Latin teacher would have had no trouble with that question. He would readily have granted that our firm could prosper in bad times, and then rejoined: “Think of how much more prosperous you’d have been if the times had been good.” That is a hard argument to meet and an impossible one to formulate. It seems the most obvious of common sense, but there is no way to test it. The fact of the matter is that our company sometimes-not always-prospered in bad times; beyond this fact we have merely wild surmise.

Indeed, I would suggest that the connection between macroeconomics and microeconomics actually is silently denied about as often as it is silently affirmed. The former head of General Motors who served as President Eisenhower’s Secretary of Defense, Engine Charlie Wilson (so called to distinguish him from Electric Charlie Wilson, at the time head of General Electric), was greeted with derisive laughter when he made his way into the dictionaries of quotations with the howler, “What’s good for General Motors is good for America.” You don’t have to cudgel your brains to think of lots of examples of business doing good for itself at the expense of the national interest. In such instances, macro and micro seem to be at war with each other rather than mutually supportive.

Many college curricula are also unmindful of a possible connection. It is not unusual to be able to take an introductory semester of micro without macro, or vice versa, or a semester of each in either order. It doesn’t matter, because the truth is one doesn’t depend on the other.

The discontinuity is not to be wondered at but to be expected. For we have here another instance of the fallacy of composition (see my “Productivity: The New Shell Game,” NL, February 8, on how this turns up in discussions of productivity). Webster’s New International Dictionary, using almost identical language in both the second and third editions, defines the misleading reasoning as follows: “The fallacy of … assuming that what is true of each member of a class or part of a whole will be true of all together.” Websters then gives an example from economics: “If my money bought more goods, I should be better off; therefore we should all benefit if prices were lower.” The fallacy of composition might well be called the characteristic economics fallacy.

In its relatively benign form it may underlie proposals to operate the government on “sound business principles”- that is to keep accurate accounts. Somewhat more dangerous is the belief, widespread at least among businessmen, that success in business is an indicator of probable success in government. This can lead to a lot of benefit- cost analysis and similar foolishness. Or it can lead to reliance on bankers (who are not, properly speaking, really businessmen) to settle monetary and financial questions (what is good for Citibank and Chase may in fact be very bad for America, as the Polish crisis has shown).

It is in the fields of taxation and regulation, however that the most dangerous misapplications of microeconomic principles to macroeconomic problems come. Reaganomics is frankly built on such reasoning, and the Democrats have been floundering because they tend to accept the same fallacies. As things stand today, their uneasy feeling that it is bad to be mean to the helpless is what distinguishes them from the Republicans. The sentiment is a credit to them; in a rational world it would be a badge of honor to be called a do-gooder. Yet feelings are an inadequate response to a ruthless and fairly consistent program, especially if one has the despairful suspicion that the theory behind the program may turn out to be pragmatically correct.

The Democrats have been kidded into believing that President Carter was from their ranks, and that his failures proved the Great Society was a bum idea. As a result, they have not only supported the Reaganomic tax breaks for the rich but have mindlessly tried to outbid the Republicans for the favor of the oil industry. Several, not excluding notorious liberals like Teddy Kennedy, are demanding credit for being in the forefront of actions to dismantle some regulatory agencies. The reasoning, again, is a fallacy of composition.

Current theories of microeconomics assume that the purpose of business enterprise is profit maximization, and a now well established principle of successful business management is that it is sensible to cut your losses. Any fledgling MBA has a quick eye for seeing how a firm’s activities can be divided into _ semiautonomous “profit centers,” plus a quick ear for hearing which profit centers are yielding a desired rate of profit, which ones can be made to do so, and which ones are hopeless. Those in the last category may be profitable; they are simply not profitable enough. The minimum acceptable rate of return is the money-market rate. If you can get roughly 15 per cent by lending your money to someone else, there clearly is no point in bothering to run a business that earns less. Or if in the normal course of your business you borrow money from banks, and pay the prime rate of roughly 16.5 percent, you’re obviously losing money on a profit center that doesn’t earn that much.

So the weak profit centers should be sold if possible, liquidated if not. You will probably have to take a loss, but more than half of your loss will be paid for by the government via the reduction of your income and hence of your tax bill. The funds thus freed can then be applied to the promising profit centers, or put into the money market, or used to reduce your corporate debt. Whether you sell or liquidate, the overall profit of your company will be improved.

There is no doubt that this barbarism works. Consider a profit center that is earning 5 per cent on invested capital of a million dollars, while the firm’s target is 15 per cent. Even if the weak profit center-workers, customers, machinery- is abandoned at a total loss, the after-tax result will be that more than a half million dollars will be available for use in the centers that earn 15per cent or more. Fifteen per cent of a half million dollars is $75,000, while 5 per cent of a million is only $50,000. It’s as simple as that, and the underlying principle is similar to that of the Blitzkrieg.

Let us note in passing that this sort of thing is encouraged by the corporation income tax, and that a higher tax would encourage more of it. It is of course also encouraged by the interest rates produced by the Federal Reserve Board’s monetarist policies.

NOW TRANSFER this microeconomic thinking to macroeconomics. Just as in a firm there are many profit centers, in a nation there are many firms. In the same way, therefore, that a firm is strengthened by eliminating relatively weak profit centers, the nation will be strengthened by eliminating relatively weak firms. From this, Reaganomics follows as night the day. And in the long dark night it makes sense to foster the strongest and starve’ the rest. It makes sense to embrace the reality that in monetarist economy strength is a question of financial-not productive-capacity, even though that may be literally counterproductive. It makes sense to keep the interest rate high and to push the bankruptcy and unemployment rates higher. It makes sense to promote the amalgamation of whatever industry remains.

If you stop to think about it, none of this makes sense. It is the most vicious, most debilitating nonsense you could imagine. But it is what results from the application of microeconomic principles to macroeconomic problems.

I hasten to emphasize that this sort of thinking is not the exclusive province of the Business Roundtable and other far out Republicans. During a Democratic administration alleged to be liberal, I was involved in discussions with representatives of the Federal Trade Commission and was told that bookstore chains deserve much better terms than individual stores because economies of scale benefit the consumer. Had the FTC lawyers looked at the actual situation rather than at their doctrine, they would have noticed that the chains, for a variety of reasons, would collapse without the more favorable terms. But my main point is that the notion of economies of scale is a notion in microeconomics. When the government-in this case the FTC-gets involved in microeconomics, it usually makes or perpetuates a mess.

Until the Democrats learn this lesson, we will have no relief from Reaganomics. It may well happen that the Republicans will achieve disaster so quickly that the Democrats will win in the fall elections. But so long as the Democrats, too, are bemused by microeconomic doctrines, the dark night will continue.

The President pleads for patience, for more time to allow his program to “take hold.” He will probably get his time give or take a few wrist-slaps at the Pentagon budget-because the Democrats, like him, are in the thrall of theories that have proved successful on the level of individual firms and individual banks. Let it be stipulated that those theories do in fact work on that level; they are uncivilized even there, but they do “work.” But let it some day soon be understood, and insisted upon, that the economy of the nation-and of a free market-is based upon entirely different principles.

The New Leader

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