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By George P. Brockway, originally published August 9, 1999

1999-8-9-lessons-from-the-depression-titleTHE NEW Congressional committee created ostensibly to reach a nonpartisan solution to the Social Security “crisis” may not really be intended to do anything, except perhaps issue a report calling for further study of the problem. In fact, I think it is probably a device for changing the subject whenever some humorless member of Congress tries to make an “issue” out of Social Security. “We must wait until the committee reports,” will be the ready response. If I’m right, Social Security will be effectively eliminated from the front lines of the November general election campaign, and no one will have to take a possibly unpopular stand either for or against any of the myriad “reform” schemes lurking on the horizon.

My junior high school civics teacher would be saddened to hear of my lapse from her innocent teaching, but I, for one, am enthusiastically in favor of another do-nothing committee on Social Security. A little over a year ago the much larger National Commission on Retirement Policy, made up of presumed experts business leaders, academics, Congressmen- managed to split three ways on which reform should be endorsed; so nothing was done. That was fine, because all of them would have gotten Social Security mixed up with the stock market in one way or another. Since the stock market is still dangerous, our need for a do-nothing committee is still great.

Nevertheless, I have not forgotten all I learned in those dear, departed civics classes, where we were taught to analyze legislation under three headings: (1) the need for the law, (2) the constitutionality of the law, and (3) the proper taxation to pay for it. That continues to strike me as a good, systematic approach, and I hereby suggest that the committee spend its time looking at the existing Social Security Act accordingly. This will give it something to do that no prior committee has done and keep the matter bottled up until after the balloting. Let me demonstrate.

1. Why was the Social Security Act needed? Well, there was a jim-dandy depression on. There being no official or semi-official definition of “depression,” one has to be supplied: A depression is a massive, comprehensive and persisting breakdown of the economic system. The economy does not recover without major changes or a major shock or both.

In the 1930s, millions and millions of people were out of work; the municipal poorhouses and charity soup kitchens were overwhelmed; beggars were everywhere; bands of hobos hitched long journeys on freight trains, tracking the seasons or wandering aimlessly. In most towns, near the freight yards or in the gashouse district, there appeared “Hoovervilles” of shacks made from old cartons and discarded (or stolen) boards, furnished with broken furniture from the town dump. In many cities a portion of the local jail was used as a temporary shelter for the more respectable homeless. I myself spent a night as a guest of the Hudson, New York, jail in the course of a hitchhiking journey to search for a job that I didn’t find.

The Great Depression was not a pretty time. Millions suffered, despite having worked long and hard and faithfully. Their dependents, of course, suffered along with them. So did young people coming fresh to a labor market that had no place for them. The society had failed, not a particular individual or group or class. Thus the Social Security Act was needed to deal with at least one aspect of the collapse of the social system-namely its effects on the elderly, the disabled and the orphaned.

2. Was the act constitutional? That proved to be a tough question for a Congress dominated by Southern Dixiecrats and Northern Republicans, and for a Supreme Court possessed of states’ rights notions that had become obsolete at Appomattox Court House on April 9, 1865. It took six years of depression for Congress and the Supreme Court to follow the election returns and take the general welfare seriously. Follow they eventually did, and our second question was answered in the affirmative.

3. Is the taxation appropriate? That question is still with us. The dispute today concerns the adequacy of the present payroll tax. No one wants to increase the rate. Some want to increase the income by putting a portion of the money in the stock market; others argue that income will be more than sufficient as long as the economy remains robust. The real trouble, however, is in the method of taxation itself.

A payroll tax has nothing going for it. It is comparatively easy to evade, especially by those in domestic or casual work. It also discourages employment. If you have a job, that laudable fact triggers a tax on you or your employer or both. On the other hand, if you are a professional gambler, or if all you do for a living is clip coupons and play the market, you don’t pay any payroll tax.

To be sure, aid for the needy is a responsibility of the state; and all businesses-manufacturing, wholesale or retail –owe their existence to the state. In some cases the state licenses or charters or franchises them; and in every case the state protects the society that is the source both of their work force and their market. Consequently, it is reasonable for businesses to be taxed to help pay for the general welfare of the government that nourishes them.

But a payroll tax is a poor way to do it. It is an up-front cost that must be met with the first employee hired, that increases with each additional employee and each wage increase given, and that continues until the last hour of the last employee’s employment. In his book The Next Left, the late Michael Harrington argued that French President Francois Mitterrand‘s bold, popular and promising social policies resulted in economic stagnation because he financed them by levying payroll tax after payroll tax. Instead of expanding, French industries cut employment to the bone in a largely vain attempt to keep their prices competitive with those of neighboring countries. The failure of Mitterrand’s programs had nothing to do with the fact that he was a Socialist. Their effect would have been the same even if the programs had been private fringe benefits.1999-8-9-lessons-from-the-depression-tight-money

OUR Social Security system, although in many respects the most successful legacy of the New Deal, has twice the vices of an ordinary payroll tax, since both employee and employer are taxed. Wage negotiations are rendered more difficult because the employees’ present value of any wage is reduced by the 6.2 per cent Social Security tax plus the 1.45 per cent Medicare tax, while for employers labor costs are increased by the same 7.65 per cent (called, no doubt to spare their delicate sensibilities, a “contribution”).

In addition, the Social Security tax has the extraordinary effect of being a radically regressive tax on the nation’s workers, especially the working poor. It is, to begin with, a flat tax–even flatter (as far as it goes) than the various flat tax proposals of current Republican politicians. It has no exemptions or credits, and starts with the first penny a worker earns. It continues at 7.65 per cent on both employee and employer until the employee earns $72,600, whereupon only the Medicare portion remains. A Fortune 500 CEO who pulls down $10 million a year therefore pays a rate that is less than one ten-thousandth of the rate paid by the charwoman whose job it is to clean up after him.

Nor are these the only indefensible unfairnesses of the Social Security tax. More important in the long run is the fact that the tax has been used to eliminate the higher brackets of the personal and corporate income taxes, and hence exacerbates the widening gap between the rich and the poor in the United States.

The Social Security system is said to be a pay-as-you-go plan, but of course it isn’t. It is a pay-years-before you go plan. The Trust Fund that is being paid for now will not be used up before 2029, and probably much later, if ever. In next year’s budget, the total of employee taxes, employer contributions, and interest earned by the Trust Fund is $636.5 billion, while the entire cost of Social Security (beneficiaries, bureaucrats and all) is only $408.6 billion. The $227.9 billion Social Security surplus not only goes to make possible the budget balance everyone is so proud of, but also accounts for the entire budget surplus that Congress is squabbling about.

The trouble with Social Security; in short, is the method of meeting the costs. A payroll tax is adverse to national employment and investment, and is unreasonable in its incidence. Moreover, the present payroll tax may be incapable of paying the bills. It is anticipation of the last that has caused today’s uproar. But speculating on the stock exchange, whatever else may be said for or against it, is almost guaranteed to fail at the most critical moment. A booming stock market does not guarantee a booming economy, but a crashing market is sure to bring the economy down with it.

Again I can offer a personal reminiscence. My father put together a satisfactory nest egg by playing the boom market of the 1920s. When the ’30s began he believed President Herbert Hoover and did not “sell America short.” In August 1933 he died broke. As the HMO lobby’s ads say, “There must be a better way.” And there is: The Social Security Act addresses a national need and it should be funded by a national tax. The income tax does not inhibit employment and investment, because it falls only on persons and enterprises capable of sustaining employment and investment.

It is often argued that the income tax is too subject to the cold and shifting winds of politics to be the support for something as vital as Social Security. But the raucous history of the present debate has surely demonstrated that Social Security is in any event buffeted by the very same winds as the rest of our political life.

The New Leader

By George P. Brockway, originally published November 2, 1998

1998-11-2 Learning From Russia title

THIS IS OUR learning year. At least it is a year of learning opportunities. Whether we’re capable of actually learning remains to be seen.

In January the debacle of Southeast Asia taught us, as I pointed out at the time in this space, that “In the special branch of ethics that is economics, any system built on the backs of the downtrodden will be forever unstable.” A couple of months ago I observed that Japan “is as successful a supply-side economy as the modern world has seen, and as such its difficulties should be a warning to the United States.” Today the object lesson is Russia, and what it teaches is that a sound government is the sine qua non of a sound economy.

Please note that sound government comes before sound economy. To the extent that the Soviet Union was Marxist, things were the other way around before Communism’s collapse seven years ago. They are still the wrong way around in Russia’s brave new world of privatization, plunging rubles and other economic shock treatments.

In a footnote in Capital, Karl Marx wrote, “The middle ages could not live on Catholicism, nor the ancient world on politics. On the contrary, it is the mode in which they gained a livelihood that explains why here politics, and there Catholicism, played the chief part.”

That bothered his collaborator, Friedrich Engels. “Without making oneself ridiculous,” he wrote to Joseph Bloch, “it would be a difficult thing to explain in terms of economics the existence of every small state in Germany, past and present, or the origin of the High German consonant shifts.” Nevertheless, Engels did not doubt that the “economic situation is the basis” of everything even though “the various elements of the superstructure … also exercise their influence ….”

The form of government Lenin instituted, said to be a “dictatorship of the proletariat,” was certainly some kind of dictatorship. lts civil law concerned orders and commands, but not customs and contracts. So Mikhail S. Gorbachev and Boris N. Yeltsin found no legal system in place to regulate the revolution to a market economy.

It should be noticed that the high-powered “reform” economic advisers from Harvard and MIT and the International Monetary Fund were not dismayed by the lack of a free-market legal system. They were all convinced that the vice of the Western world is excessive regulation, and that the former Soviet Union and its former Warsaw Pact allies would benefit from the shock treatment of being thrust to sink or swim in the turbulent waters of the new global economy. Although this might cause some suffering and even some inefficiency (which in standard economics is evidently more blameworthy than suffering), they contended that it would be better to get rid of the bad old ways at one fell swoop than to creep along incrementally. Once the market was freed and assets were privatized, the reformers promised, everything would efficiently fall into place.

Of course, that is not what happened. In some respects Russia may be the American West all over again, but there are significant differences. Our “privatization” was better managed as a result of long experience with land settlement, and blatant corruption was at least reined in by posses of settlers eager and able to take the law in their own hands. Furthermore, our pioneers could maintain themselves by subsistence farming and small-scale mining; in Russia there is little to fall back on when large-scale privatization misfires. Most important, our banking and taxation systems grew with the country, whereas in Russia they are struggling to be transmogrified from Soviet systems utterly unsuited for their present purposes.

Suppose for a moment that you live in Minsk and have gotten your hands on a factory that produces something used in Pinsk. Ten years ago a commissar periodically instructed you to send x amount of the stuff to Pinsk and gave good grades for fulfilling the quotas. The people in Pinsk accepted whatever they received.

Since the orders were large enough to keep the factory busy-that’s one reason you went after the shares when it was privatized-you pursue them. “Sure,” the Pinsk people say. “What do we have to do now that we’re free?” You explain that you will have a lawyer draw up a contract. It takes some time, because the lawyer never did such a document before and has trouble literally digging up a water soaked 1912 textbook. Finally, you send the contract to the Pinsk peopIe, who naturally have to get a lawyer to read it. Meanwhile, they say: “By the way, we went to some lectures on free enterprise, where we heard there are factories in Omsk and Tomsk, not to mention some in Krakow, Kinshasa, Kyoto, and Kalamazoo, that can make what we want. We were told you should be competing with them for our business.”

Well, you can see this is going to be a drawn-out affair and you may get nothing for your trouble. Moreover, you find that your bank and the Pinsk bank have no satisfactory clearinghouse arrangements (they’re working on them). Assuming you get the order, your payment will be slow and uncertain.

In the meantime, it turns out that you already have staggering taxes to pay. A trip to the tax office enlightens you: The local bureaucrats have not been paid for months. But you are confidentially told the taxes can be taken care of with a few dollars or marks (and cautious winks tell you where to get hold of some) in the proper hands, plus several samples of what you manufacture. You resist with all your patriotic heart. Then you learn that the local big-time operators (known as “moguls”), whose Mercedes and dachas you have envied, have embraced this system (and it is, after all, not unlike what you were taught to expect of capitalism). You go along.

The Harvard and IMF economists are possessed of the notion that the ruble keeps falling in value because neither the national budget nor the foreign trade account is balanced. (The same was true of the United States for decades, and our dollar remained embarrassingly strong, but let that pass.) The economists’ models convinced them that Russia required an austere tightening of the public belt that could be accomplished by downsizing the government, including the tax offices. As might have been expected, tax collections shrank further, just as they did in Nigeria and other emerging markets of the global village.

The problem with the ruble is that only suckers now have much need of them. Almost everyone else takes care of taxes under the table-or simply disregards them altogether.

Money is a funny thing. If no one has to pay taxes, it‘s not of much use for other purposes. There is no gold or anything else “behind” it, and it can hardly serve any practical purpose, even as wall decoration. The Federal Reserve bills I have in my pocket say on their face in small capitals, “This note is legal tender for all debts, public and private.” That means I can settle all debts I now owe by offering Federal Reserve notes to my creditors, including the government. It does not mean that anyone has to sell me something I want because I offer to pay in dollars.

Storekeepers could demand cigarettes or Confederate currency or a bag of barley seeds (the money of account in some prehistoric societies), or they might just say no. It’s a free country. But if they have bills and taxes to pay-why else would anyone maintain a store? -they will need dollars.

For my part, I need a good many dollars to settle things with the various tax collectors (Federal, state and local). And I don’t have much trouble getting rid of whatever dollars I have left, since the country is full of people willing to sell me things because they need dollars to pay taxes, and there are plenty of bureaucrats ready to see that they do. We’re all happy to work to earn dollars. We know that we will be able to use them to buy what we want as long as-but only as long as taxes are as certain as death.

Russia recently announced that it would print rubles to help meet the government’s payroll and bills. Commentators in the American media have expressed horror at this use of the printing press. But the question is not how rubles are manufactured, it is whether enough taxes are levied and collected to ensure that there is a great demand for rubles by both individuals and businesses. As I’ve remarked before, the notes issued during our Revolution were “not worth a Continental” because the Continental Congress had no power to collect taxes.

THE LESSON of our story is as promised at the beginning: A sound government is the sine qua non of a sound economy. Russia’s troubles are not primarily economic. Seven years ago its economic “fundamentals” were strong enough to scare us silly, as some of us are scared silly by China today. Its population was large and better educated than China’s. Its natural resources were greater. Its infrastructure was more highly developed. Russia had gone about as far as it could go peacefully, but it has a long way to go before its legal system can support a free economy.

As we review our own political campaigns of the past couple of decades, we must doubt whether we have learned the lesson. Recent slogans have included “Balance the budget by 2002,” “It’s the economy, stupid,” “Read my lips. No new taxes,” “It’s your money,” “Abolish the IRS.”

Our new slogan, greeted with cheers on both sides of the Congressional aisle, is “The era of big government is over.” Marx would have been delighted with it. The state, you will remember, was supposed to wither away.

We have recently shown our allegiance to this slogan in at least four major ways. First, we led the way for NAFTA and GATT, both of which subordinate national sovereignty, human rights, and labor and environmental protection to commerce. Second, we extended most favored nation status to China on the fanciful ground that association with our business representatives would teach the Chinese not to torture or execute an untold number of political prisoners every year. Third, we are preparing to use our long-sought budget surplus, not to repair our torn social fabric, but to cut taxes, mainly for the well to-do. Fourth, it is not improbable that majorities in both houses of Congress could be whipped up in favor of abolishing or privatizing the Internal Revenue Service.

Big government has a special and indispensable role in a free market economy. As the late Hyman Minsky pointed out, although we had three full-fledged depressions in the first third of this century (1907, 1921 and 1929), we have had none in the last two thirds, mainly because of two institutions bequeathed to

us by the New Deal and World War II: (1) The New Deal gave us bank regulations and deposit insurance that have forestalled bank runs, and (2) World War II gave us our “big government”-24 per cent of GDP as opposed to the prewar 3 per cent-that provides a solid foundation of demand on which the supply side of the private economy can build with confidence, regardless of what happens in the rest of the world.

Will we ever learn?

The New Leader

By George P. Brockway, originally published September 6, 1996

1996-9-6 Caught in a Boom Market Title

ON OCTOBER 15, 1929, less than two weeks before the worst crash in the history of any stock market anywhere, one of America’s most renowned economists, Professor Irving Fisher of Yale, announced that stock prices would be “a good deal higher … within a few months.”

Fisher’s prophecy is as good today as it was on the eve of the Depression. All it took to make the market go up then was an influx of money, and that is all it takes now. Per contra, without an influx of money nobody, not even the wisest professors in the land, can induce the market to levitate.

The stock exchanges are, after all, among the few remaining places where the law of supply and demand still runs according to script. Brokers, bankers and publicists who operate in the shadow of the exchanges come to feel the law obtains always and everywhere, imposing market discipline as it goes. But as anyone who has noticed the programmed gyrations of prices in malls and supermarkets knows, this is not the case.

For the law to work, supply must be limited. It no longer is limited in most transactions of daily life. When a bookstore runs out of a bestseller today, it can have fresh stock tomorrow. If you want a new automobile, there are, as my Vermont father-in-law once remarked, plenty of people ready to sell you one.

Supply used to be limited in isolated provincial markets of the sort familiar to Adam Smith, and it is still limited in the narrow confines of Wall Street. Only the issues of a certain number of companies, and only a certain number of shares of each, are admitted for trading on the exchanges. When millions of people with money in their fists start demanding to purchase some of the finite supply, the old law comes into play and prices go up. We have a bull market.

The 1920s upsurge was generated by what may be called exuberant greed. The Great War had liberated and greatly enlarged the middle class. Wall Street promised more liberation. Today greed is certainly just as crucial, but the mood is noticeably different, more desperate than exuberant. For a moment, it seemed like morning in America, but the Baby Boomer generation has grown up and begun to worry about its retirement years, because suddenly they bode to be less golden than those of its parents.

The problem is, at least initially, demographic. Generation X (or whatever it may ultimately be named) is substantially less numerous than its parents’ generation. It is said, therefore, that the Social Security and Medicare trust funds will be depleted, and that the burgeoning costs of these “entitlements” will fall on a smaller number of taxpayers. Much as they love their folks, the young are expected to revolt. Boomers are advised to start looking out for themselves.

Where to look is the question. Many financial advisers answer that, over the years, the stock market has out-performed all other kinds of investment – Treasury bonds, foreign currencies, real estate, collectibles, gold, pork bellies, the lot. The difficulty that few citizens are qualified to play the market seems solved by the existence of 7,000 or more mutual funds whose comparative performances are widely rated. It is unlikely there are 7,000 fund managers more qualified today than Irving Fisher was in his day, but let that pass: The 7,000 funds now manage close to $3 trillion.

Unfortunately, this astronomical sum must be multiplied many times if it is to do the job expected of it. The Boomer objective, after all, is a decent retirement income. Not to be too ambitious, let us say something around $35,000 a year, which is somewhat more than the present median family income. This will certainly not be enough if Medicare is privatized any further, or if the Social Security COLA is eliminated. Nor will it be enough if inflation continues at its current “optimal” rate of 2.5 per cent, since over 10 years this will raise the price level 31 per cent. We can’t, however, allow for every contingency, or we would give up at once.

So let’s assume $35,000 a year, and let’s assume further that Social Security will somehow be good for $10,000, leaving our typical Boomer with $25,000 a year to coax from Individual Retirement Accounts (IRAs), 401(k) schemes and other available fliers. Right now the average stock’s dividend is running at not much more than 2 per cent. At this rate, to rake in $25,000 a year in dividends, our Boomer’s portfolio would have to be worth roughly a million and a quarter.

Although I am no Irving Fisher, nor was meant to be, I think I shall not go far wrong in prophesying that the market will continue climbing, because the desperate Boomers are going to have to put their retirement money somewhere; and regardless of what Bob Dole’s new supply-side friends say, the country isn’t full of enterprises crying for new capital. As long as the Boomers’ annual contributions to IRAs and 40 1(k)s go into the market faster than other people take their money out, the weary bull is bound to keep scrabbling upward, at least for a while.

BUT ALL good things come to an end, and we have already received intimations of the mortality of this one. There are, to begin with, the worries about our corporations’ abilities to compete in the new global village, plus the uneasy suspicion that the information superhighway may turn out to be a curiosity, like the English Chunnel[1]. The principal sign of danger, however, is the 2 per cent dividend rate previously mentioned. Stocks paying only 2 per cent are an acceptable gamble as long as capital gains keep piling up. When they start falling (or turn negative), the stodgy 6 or 7 per cent yield of the Treasury long bond looks like an increasingly desirable port in what could develop into an unpleasant storm.

In 1983, when the present bull market began, the dividend yield of the Standard & Poor’s 500 was more than 6 per cent. When (post hoc and probably propter hoc) the dividend rate fell below 3 per cent, we had the “corrective crash” of 1987. Four years later, the rate had worked its way back to 4 per cent. Now, ominously, it is the lowest it has ever been.

It is by no means certain that even a 2 per cent dividend rate can last. The economy is strong enough to frighten the Federal Reserve Board, and all that, but the rate of profit has been maintained to a considerable extent by downsizing, and the thing about that is it frequently means exactly what it says. For when a company cuts staff, it cuts output, too-unless it has previously been unlucky or unbelievably inefficient or surprised by overwhelming technological change.

The trick is to cut jobs and wages faster than output. If a firm can manage that, its “productivity” will rise, though its production will probably fall. The lower cost per item produced may delight its economist and please its cost accountant; nonetheless, its total profits are likely to fall with its total output. Indeed, a company can be the most “productive” outfit in an industry (as Nissan’s and Toyota’s American automobile plants were rated last year), yet operate at a loss (as the Nissan and Toyota factories did).

For the nation all the time, and for the stock market in the medium and long run, what counts is production, not productivity. Production-goods and services created-can be used and enjoyed, and if so, can yield profits. Productivity which is merely an index number, a ratio of output to hours worked, nothing tangible – is not good to eat and pays no dividends.

The way things stand, if dividends fall much lower, capital gains will dry up as cautious money leaves stocks for bonds; the bull market will 1996-9-6 Caught in a Boom Market Nissanapproach its end. At some point before the end, or soon after, fall. Ever mounting capital gains would be a thing of the past, and to the extent that market and economic troubles are due to vanishing profits in relation to stock prices, an interest rate hike would have the wrong effect. The case for lowering the rate is not much happier, given the present temper of the Reserve Board. The initial consequence would naturally be to raise the price of bonds and, almost simultaneously, of stocks. The price/earnings ratio would stabilize, but again without encouraging capital gains. On the other hand, costs, sales and the profits of ordinary businesses would gradually improve. Up with this the Board could not put, so back up would go the interest rate.  Therefore, for the Boomer generation to enjoy a reasonably comfortable retire there will no doubt be calls for the Federal Reserve Board to intervene, and the Board will be tempted to comply. Besides wringing its hands, it will have two choices: to raise the interest rate, or to lower it. It will be leery of raising it, because someone on its staff may remember that in 1929 and 1930 the Reserve’s tight money policy was blamed for triggering the Crash and then turning it into the Depression.

In any event, raising the interest rate would lower the price of bonds; and almost immediately the price of every income-earning asset, including common shares, would follow. In other words, the stock market would fall, or at the minimum be impeded in its climb. In addition, the costs, and hence the prices, of ordinary businesses would sooner or later increase, and their sales and profits would fall. Ever mounting capital gains would be a thing of the past, and to the extent that market and economic troubles are due to vanishing profits in relation to stock prices, an interest rate hike would have the wrong effect.

The case for lowering the rate is not much happier, given the present temper of the Reserve Board. The initial consequence would naturally be to raise the price of bonds and, almost simultaneously, of stocks. The price/earnings ratio would stabilize, but again without encouraging capital gains. On the other hand, costs, sales and the profits of ordinary businesses would gradually improve. Up with this the Board could not put, so back up would go the interest rate.

Therefore, for the Boomer generation to enjoy a reasonably comfortable retirement, as every generation should, it can no longer consult its narrow self-interest. Instead, it must look forward to, and participate in, and help organize, a great surge in the gross domestic product. This can be accomplished in only one way in a free society. It is not enough for goods to be manufactured and services to be made available. To contribute to private profits and common wealth, commodities must be sold, and someone must be both willing and able to buy them. Otherwise, sensible producers will cut output and make up for the resulting drop in profits by laying off employees.

Mass industry requires mass consumption. But that will require a more generous and hopeful and responsible attitude toward the distribution of income than has been seen, in this country for many long years.

The New Leader

[1] Ed – so much for prognostication, neither turned out to be “merely a curiosity.”

By George P. Brockway, originally published January 29, 1996

1996-1-29 The Assumed Employment Virus Title

I SEE BY THE PAPERS that big corporations are downsizing their economics departments. IBM and GE have eliminated theirs altogether. Others are keeping a few people on for special projects, but still are outsourcing from one think tank or another when they want to know about the economy.

There is poetic justice in this, for economists have not been bashful about claiming credit (if that is the right word) for developing the theory of productivity. That allows the sensitive readers of the Wall Street Journal to call their brokers and take a position in the stock of any company announcing its intention to fire 10,000 or more employees, particularly those with 20 years of service or better.

I do not mean to gloat. Some of my best friends are economists; moreover, intellectual life in America is thin enough without sending more PhDs down to swell the ranks of telemarketers anxious to interact with me during my happy hour about a new exercise machine or a new insurance policy. No, I don’t mean to gloat, but I do intend to seize the day to fret a bit about the state of the profession.

I became concerned about the profession when I sent my brother a copy of my first book. He thanked me in due course, and congratulated me, but he didn’t pretend he had read it, nor did he promise to read it. “After all,” he wrote, “I doubt that I’ve ever in my life read an economics book straight through. You can hardly expect me to break that record now, even for my kid brother.” So far as I know, he never did.

My brother was not a dope. He was far from adopting what James Truslow Adams a half century ago called “the mucker pose.” He held both the baccalaureate and a doctorate from Harvard. He traveled widely and read widely. All his life he was involved in community affairs. But he couldn’t be bothered with economics. When I pressed him for an explanation, he said, “You people claim to be scientists, but you disagree with each other about everything. No two of you speak the same language. Some of you seem not speak any language.”

Although my brother was not a dope, I’m inclined to think that in this case he was almost precisely wrong. Economics is not a science, and the discipline’s practitioners tend to agree too much. Especially about the wrong questions.

One of the puzzles of contemporary economics is the number and variety of theories – including those most prominent in the universities today – that trace their origin to sensationally different journal articles, yet all end up advocating laissez-faire or something remarkably close to it. The puzzle is of course the greater because, not so long ago, the Great Depression and World War II seemed to have laid laissez-faire permanently to rest.

General Equilibrium Analysis, Monetarism, the Neoclassical Synthesis, and Rational Expectations are among the schools affected. In computer jargon, one might say that a virus has attacked them all, disrupting programs, infiltrating compositions, corrupting data bases.

We didn’t use to think of mathematics or logic in such highly charged terms. We were well aware that an error at any point in an exercise would render all that followed suspect; but our exercises used to be more insulated from each other, so that our assumptions were more frequently considered.

Be that as it may, I believe it can be demonstrated that something like a virus has indeed infected most contemporary models of the economy. We may give the virus a name: the Assumed Employment Virus.  For it is an assumption or presumption that the economy is operating either actually or effectively under conditions of full employment.

The Assumed Employment Virus appeared almost contemporaneously with The Wealth of Nations in 1776, but no one noticed for a century and a half. It was not until the Great Depression that providing employment was recognized as an economic problem. Adam Smith, for example, devotes a few pages to the comparative wages of different “employments” and to the “price of labor” generally. Yet the only unemployment he takes notice of is the seasonal one of bricklayers and masons. He pays some attention to the “Poor Laws” (which for 400 years were a staple of British fretfulness, the way “welfare as we know it” continues to occupy us), but seems not to have considered the possibility of, and need for, regular employment for the poor.

The “classics,” or most economists from Smith to the middle of the 20th century (except Karl Marx), presumed that all laborers could get jobs, no matter how bad the times, if they merely lowered their wage demands to what entrepreneurs offered. It was not suggested that in bad times (or at any time) entrepreneurs should pay a living wage at the expense of the going rate of profits. Bob Cratchit was a fortunate man, even though he couldn’t afford adequate medical attention for Tiny Tim. In modern jargon, entrepreneurs were forced by market discipline to cut wages. Laborers were free to accept jobs that would allow them to starve to death. As Phil Gramm and Dick Armey taught undergraduates only the other day in Texas, those who lacked jobs were unemployed because they didn’t want to work. There was no such thing as involuntary unemployment.

It remained for John Maynard Keynes to demonstrate why involuntary unemployment is a fact of laissez-faire life. He observed “that men are disposed … to increase their consumption as their income increases, but not by as much as the increase in their income.” If the resulting weakness in demand is not countered by investment (sooner or later by government investment), production will be decreased, and workers will become unemployed – involuntarily.

Laissez-faire theorists have tried to refute Keynes’ demonstration by presenting arguments that unemployment cannot be reduced to zero. The Monetarist Milton Friedman came up with the first of these -the Natural Rate of Unemployment (whatever is natural is ipso facto involuntary), now usually referred to as the Non-Accelerating-Inflation Rate of Unemployment, or NAIRU. It has also been called the Normal Rate, the Warranted Rate, and (in a triumphal oxymoron) the Full Employment Rate.

There is a sort of reason behind even that last name. All of the involuntary unemployment arguments maintain either that unemployment cannot be reduced below the mentioned rate, or that if it is temporarily reduced (and it can only be reduced temporarily), it will be followed by some unacceptable consequence, usually inflation without limit. If at some point policy forbids, for whatever reason, further reductions in unemployment, why not call that point Full Employment?

The Rational Expectationists, whose leader was recently crowned with a Nobel Memorial Prize, make the problem easy for themselves. It is, they say, rational to expect the economy to behave as the classics would have it; so involuntary unemployment doesn’t exist, and laissez-faire does.

In effect, then, for most contemporary economists both voluntary and involuntary unemployment amount to full employment. Distinguishing among the three terms would saddle scholars with two extra variables that could enormously complicate their equations. The obvious course is to simplify by using one term for three. It is with this simplification that the Assumed Employment Virus enters today’s models.

ONCE THE VIRUS is in the models, two things happen. First, since full employment is now an unequivocal term in an equation, the equation can be solved for it. Full employment is no longer a mere possibility or desideratum or dream but an eventuality, if not a determinate actuality – just as in General Equilibrium Analysis the “proof” of the possibility of an equilibrium quickly entails proof that an equilibrium exists, and that it is optimal. Second, since full employment is at last one of the prime objectives of any modern economic policy, any model containing the virus has apparently proved the achievability of the objective, and it can therefore be assumed. Whatever still remains for the economy to do can be done with comparative ease. In other words, take it easy: laissez-faire.

As might be expected, the Assumed Employment Virus, having successfully infected models of the economy as a whole, has had equal success in confusing more restricted models. Thus the proofs of Keynes and Michal Kalecki that saving equals investment have been used, and are still used, to justify the constant cries for decreased consumption and increased saving. (The proofs merely mean that whatever is invested has been saved; they do not mean that whatever is saved is invested.)

More to our present point, in the absence of truly full employment, too much saving can actually be, as Keynes was at pains to emphasize, a bar to investment as well as to consumption. Because what is saved cannot be consumed, saving reduces demand; and when demand is reduced, prudent entrepreneurs are not emboldened to invest in new production to satisfy it. Consequently, the recurrent schemes to encourage saving are generally either unproductive or counterproductive. In the 1993-94 debates over NAFTA and GATT,   Ricardo’s Law of Comparative Advantage was similarly cited regularly without acknowledgment or recognition of its dependence on the assumption of full employment.

It is obvious enough that a nation is neither enriched nor strengthened if substantial numbers of its citizens lose their jobs and are kept unemployed while the nation imports some product these citizens once made or could now make. This manifest truth is, however, rendered irrelevant by the Assumed Employment Virus.

Those who have been downsized into joblessness (including the economists we mentioned at the start) are likewise victims of the Virus. The standard productivity index is derived by dividing the Gross Domestic Product (GDP) for a period by the number of hours worked during that period. The index is a common fraction, so it will naturally rise if the denominator (“hours worked”) is reduced; hence the rush to downsize everything from the Federal government to the local supermarket.

“Productivity” may thereby be improved, but production (which is not an index number but actual goods and services produced for actual people to use and enjoy) falters. The victims of downsizing, being now unemployed, necessarily reduce their consumption, that is, the demands they make upon the economy. Entrepreneurs, faced by this reduction in demand, reduce production, which of course leads to a reduction of the GDP.

It would be different if full employment were the actuality rather than a deluded assumption caused by a “virus” in economists’ models. As long as there are unemployed workers, though, the first mission of macroeconomic policy should be to increase “hours worked”-that is, employment. This is not to say that we need a return of the Luddites. It is to say that we need economists dedicated to devising policies that will make full employment a hard reality instead of an easy assumption.

The New Leader

By George P. Brockway, originally published March 13, 1992

1992-3-9 The Key to Consumption Title

 

 

 

 

 

 

 

 

LAST TIME I reported why our present economic muddle should be called a “contained depression.” The term is the coinage of S Jay Levy and David A. Levy of the Jerome Levy Economics Institute of Bard College. It distinguishes our present situation from the five or six recessions we’ve had since World War I, and also from the Great Depression of the 1930s.

The earliest recessions were temporary gluts of unsold consumer goods-relatively easy to slip into and correspondingly easy to recover from. Hence President Bush‘s long mad posture of “What? Me worry? Hence the frigid, almost insolent objections of Chairman Michael J. Boskin of the Council of Economic Advisers to extensions of jobless benefits. Hence the plaintive repetitions of Chairman Alan Greenspan of the Federal Reserve Board that the present recession will be short and shallow, and that recovery will start about six months from the date on which he happens to be speaking.

As the thing drags on, I’m reminded of the Elaine May- Mike Nichols skit in which a patient complains that she has been sick for a couple of weeks with what was diagnosed as 24-hour flu. “Well,” responds the doctor after carefully thinking the matter through, “this may be something of longer duration.”

Indeed it may. What we are now trapped in is not a consumption goods glut but a capital goods glut. We have too many factories, too many warehouses, too many office buildings, too many shopping malls, too many retail chains, too many too expensive apartments, too many too expensive vacation resorts, and especially too many banks and insurance companies and pension funds with too much of the foregoing as collateral for loans.

This sort of glut is not easily worked off in the modern world. Regardless of what the Cassandras say, we’re marvelously productive. If you want more steel, we certainly can turn it out for you. Or more automobiles, refrigerators, escalators, computers. Or more houses and highways. Or more cough medicines and handkerchiefs. Or more magazines and books. Or, when the President’s four new pair wear out, more sweat socks.

We are not oversupplied with any of these things – well, not with many of them. Our inventories are mean and lean and all that, but there’s no danger of serious shortages of anything for very long. What we are oversupplied with is the capacity to make more of almost anything. We have factories and machinery and office equipment and distribution systems and office managers and workers and know-how aplenty. No problem with any of that, except that we have too much and, like the sorcerer’s apprentice, the manic capacity to make more.

An inventory glut can be handled by shutting down the factories for a few weeks or months. But what can be done with a capital goods glut? There are two principal solutions: (1) We can let the unneeded capacity stand idle until it rusts out, or enough currently used capacity wears out, to bring our capacity to produce down to the level of our capacity to consume. Or (2) We can bring our capacity to consume up to the level of our capacity to produce.

The first solution, in its more benign form, is what Joseph Schumpeter called creative destruction. Schumpeter saw the economy driven by a succession of new industries, whose birth and growth led to the destruction of large existing industries. The most familiar example is the automobile industry, with its subsidiary industries of steel, glass and so on, and its ancillary industries of highway construction, petroleum and parking facilities. The new industry gradually overwhelmed industries built on the power of horses.

That did not happen all at once. As late as the 1920s, many cities still had horse-drawn fire engines whose pumps were powered by dramatic coal-fired steam engines. As late as the outbreak of World War II, the Boston Globe discovered to its surprised delight that it had not gotten around to completely dismantling its capability to deliver newspapers by horse-drawn wagon. A few carriage makers were able to convert to the production of automobile bodies. Many livery stables became garages. But manufacturers of buggy whips provided a metaphor for progress and quietly went out of business.

As Schumpeter pointed out, the new industries were bigger and in most ways better than the ones they destroyed. Or as folk wisdom has it, you can’t make an omelet without cracking eggs. The trouble now is that there’s no great new omelet industry on the horizon. The computer industry, which many expected to save us, is itself stumbling[1].

In fact, our situation is dauntingly similar to that of 1930. The unneeded or unwanted capacity is not limited to a single doomed industry. It is universal. Its destruction – if it occurred-would not be creative. It would be merelv destruction: wasted money, wasted resources, blighted hopes. And perhaps most important of all: wasted time. Once again Bessie in Clifford Odets’ Awake and Sing! would be speaking a bitter truth: “On the calendar it’s a different place, but here without a dollar you don’t look the world in the eye. Talk from now to next year – this is life in America.”

It would take a long time for the bright new assets to rust out or the good old assets to wear out. It would take a long time for banks and insurance companies and pension funds to become solid again. It would not be a pleasant time. For millions of citizens it would be a hopeless time, made more bleak by the deterioration of their surroundings both social and physical.

It took World War II, with its enormous stimulation of governmental and then personal demand, to pull us out of the Great Depression. The New Deal had moved painfully slowly, hamstrung by a coalition of Northern Republicans and Southern Democrats, and hampered by its own emotional commitment to classical economics. (A “responsible” effort to reduce the minuscule deficit in 1937 caused an instant recession.) Yet the New Deal was open, eager, hopeful, vigorous, experimental, caring. New Dealers didn’t have to make speeches about how they cared; they showed it. In their place we have Boskin, Brady and Darman and their trickle-down schemes.

So much for the first solution to our troubles. It is no solution at all.

The second solution (bringing our capacity to consume up to the level of our capacity to produce) would seem, on its face, to be easy as pie. Consuming is what we’re supposed to do best. Shopping malls are where we shine. But all the wise men kept telling us not to consume-until Bush bought those socks. Unfortunately, now that they are telling us consuming has become patriotic, we either haven’t any spare money or are afraid we soon won’t have any spare money.

The problem is, the wrong people have what spending money there is. Worse than that, practically nobody in public life says it is the wrong people who have money to spend – except Senator Tom Harkin, and look what happened to him in the Democratic Presidential primaries.

Somehow it has become conventional to believe that the distribution of wealth or income is not the issue. Or that redistribution is not practicable. Or that it wouldn’t make any difference, anyhow.

LET ME INTERPOSE a little story. The other evening I was a dinner guest at the home of some liberal friends. There were eight of us around the table, and none of us was afraid of what the President calls “the ‘L’ word.” We are liberals, possibly even knee-jerk liberals, and proud of it. After all, some injustices are so flagrant, and some events so sudden, that decent people must respond to them semi-automatically. A liberal response is surely more honorable than a reactionary withdrawal.

Anyway, there we were, and we got talking about the very subject of this article. You will not be surprised to learn that I argued in favor of restoring steep progressivity to the income tax. And I was not surprised to be told that Robin Hood was a seductive medieval myth, that taking from the rich and giving to the poor would simply make everyone poor because the rich are so few and the poor are so many, and that soaking the rich would not much improve revenues because tax avoidance would then increase.

We have all heard that line of talk before, very likely first meeting up with it at our father’s knee, if not at our mother’s. The line may actually have been true back then (though I doubt it), but it’s certainly not true today. The average of all family incomes in the United States is somewhere between $70,000 and $80,000.  It’s difficult to be more precise, because it’s hard to agree on exactly what a family is. In any case, it’s obvious that the Robin Hood myth is not impossible today.

I don’t suppose that anyone advocates perfect equality. (Even Engels called equality “a one-sided French idea which was justified as a stage of development in its own time and place but which now should be overcome.”) Nevertheless, it is important to understand that the present distribution of income is not an aspect of the universe that we, like Margaret Fuller, had better accept. It is not the unalterable consequence of some mathematical or psychological or perhaps theological law.

A second point must be made: Any attempt to change the distribution of income will certainly give some people, including those whom Shaw’s Mr. Doolittle called the undeserving poor, some money for nothing. I’ll let you compile your own list of why something for nothing is bad-psychologically, socially, ethically-and I’ll even grant the validity of most of your reasons. But then I’ll ask you to compile a list of the Astors and Morgans and Fords and so on who got something for nothing. A wit on the New York Times a couple of years ago noted that most of the richest people in America got their money the good old fashioned way-they inherited it. Something for nothing is, Nelson Rockefeller might have said, in the mainstream of Republican thinking.

Once we have mastered the message of the two preceding paragraphs, we have earned the right to consider ways of building demand worthy of our productive capacity. We all know the most obvious ways: First, massive public works, massive support for education, comprehensive national health care insurance.

Second, an almost vertically progressive inheritance tax, a steeply progressive income tax, probably a negative income tax at the bottom, and possibly an income limitation tax at the top.

We don’t have to do it all at once. But unless we get started soon, it will be a long time before happy days are here again.

 The New Leader

[1] Ed:  OK, so even this author gets it wrong from time to time….

By George P. Brockway, originally published January 13, 1992

1992-1-13 Mister Bush Meet Mister Hoover Title

 

 

 

 

 

 

 

 

 

 

Mister Herbert Hoover
Says that now’s the time to buy;
So let’s have another cup o’ coffee
And let’s have another piece o’pie

.

THE ABOVE text for today’s lesson was composed (words and music) by that universal philosopher of the American way of life, Irving Berlin. The song was the high point (or perhaps more accurately, the sardonic point) of Face the Music, a Broadway hit of 1932- just 15 presidential terms ago.

It all came back to me as I gazed in wonder at the TV coverage of President Bush‘s Thanksgiving demonstration of the propensity to consume, during which he showed how to buy four pair of sweat socks for $8.00.  I suppose the President’s handlers meant the sweat socks worn by some working stiffs inside metal-toed boots and by all preppies while jogging or playing racquet ball-to remind us that the President is a regular guy as well as a consumer doing his part to get the economy going again. But it reminded those who didn’t laugh at the spectacle that Mr. George Bush’s economic policies have a lot in common with Mr. Herbert Hoovers. That is to say, he has practically no policies at all.

Not only are President Hoover’s and President Bush’s policies similar, but so are their depressions (and ours). For what we are now mired in is something quite different from the half dozen or so recessions we have gone through since World War II.

Economists persist in calling our present experience a recession, and they are puzzled by its failure to perform like the others. Even the fact that business is bad puzzles them, because the “indicators” they take seriously have not been ominous. Their biggest worry has been that inventories might get out of hand. “The current downturn is expected to be short and shallow,” wrote the Council of Economic Advisers a year ago.

“Most firms have kept inventories low relative to sales, reducing the need for a sharp cut in production to work off excess inventories. Such inventory corrections accounted for much of the decline in output in earlier postwar recessions.”

The smallest mom-and-pop novelty store today boasts a computer at the cash register that scans bar codes, not simply to generate sales slips but also to indicate when and how much to reorder. At the other end of the spectrum, most manufacturers have long since learned how to order “just in time. Inventories have been lean and clean for several years now; yet the downturn came, and it refuses to go away.

S. Jay Levy and David A. Levy, respectively chairman and vice chairman of the Jerome Levy Economics Institute of Bard College, have a simple yet comprehensive explanation: This downturn is not a recession at all, it is a depression.  To be sure, it is a new sort of depression. They call it a “contained depression. Because Mr. Bush’s depression is “contained,” it is not likely to be so deep as Mr. Hoover’s, but it may well last as long, or even longer.

To the Levy’s, a depression is not, as it is in ordinary speech, merely a very severe recession. They agree with the majority of other economists that a recession is essentially an inventory glut, which comes about in a quasi-natural fashion in the modern economy. In the ancient and medieval worlds, most nonagricultural goods were made to order. If you wanted a pair of boots, you didn’t go to a store

And buy them off a shelf, the way Oliver North picked up revolutions. You went to a cordwainer, who would run up a pair to fit your last. In such a system there might be a glut of agricultural produce (though there seldom was), but manufactured goods were never oversupplied.

In addition, of course, few economies of scale were available; production was slow, expensive and weak. In the modern world, where most production is for sale, not for use, economies of scale are everywhere, and output is exponentially increased, as Adam Smith showed with the manufacture of pins.

But time is necessarily introduced between the start of production of goods for sale and the purchase and use of those goods by the eventual consumer. In that time, many things can go wrong (and some can go surprisingly well), because the future is unknowable.

Among the things that can go wrong is an inventory glut. This starts slowly, as optimistic producers expand output to take advantage of economies of scale. Stepped-up orders gradually push manufacturers to capacity, heighten competition for time on the machines, and result in ever larger orders (see “What Happened to Jimmy Carter,” NL, November 27, 1989, for the way  this “defensive buying” works). The increases in plant utilization naturally require increases in employment. Newly employed workers have new money to spend and encourage greater production.

At this point, manufacturers are likely to seize the opportunity to raise prices, thus depressing demand. Banks will see inflation and raise the interest rate, thus intensifying the inflation, further depressing demand, and perhaps throwing he cycle into reverse. Even without inflation an inventory glut will develop, for our irrational income distribution and usurious interest rates guarantee that workers cannot earn enough to buy what they produce.

Manufacturers participate in the buildup in self-defense as well as in search of profit. Those that don’t participate find themselves squeezed out by their more aggressive competitors. In any case, the buildup is necessarily blind and eventually overleaps itself, whereupon it recedes by stumbling down the up staircase.

According to the Levy’s, a depression, like a recession, is cyclical, and proceeds in a similar manner. It is a capital goods glut, however, rather than an inventory glut. Since capital goods typically are expensive and take a long time to produce, more money is tied up in them, and the tie up lasts longer. The Levy’s argue that what we have now is a depression. Factories, warehouses, office buildings, stores, motels, apartment buildings – all are overbuilt. The banks and insurance companies and pension funds that financed the construction are in trouble – unless they have already failed.

NOW, FASHIONABLE commentators say our problem is that we no longer compete successfully in the world market, partly because our interest rates are too high (they still are), and partly because, all of a sudden, our educational system has fallen apart. Michael Boskin, chairman of the President’s Council of Economic Advisers, testified the other day that we spend more on elementary and secondary education than any other industrialized country, except maybe Switzerland, and that our kids still perform toward the bottom. That sounds enough like the state of our medical services to be true; but if true, it is clear that we will not be able to correct the situation in the present century. In the unlikely case that Mr. Bush’s scheme of making schools compete for students were to be immediately successful, it would take 12 years for the full effects to be realized and then there would still be the problem of the colleges and graduate schools.

1992-1-13 Mister Bush Meet Mister Hoover Herbert Hoover

I’m not opposed to doing something about education (though I am opposed to Mr. Bush’s scheme), but it won’t make us internationally competitive overnight. As I have said before (“The Productivity Scam,” NL, May 28, 1984), I don’t take seriously the underlying notion of productivity. More to the point, the United States of America is not the only nation that is smothered in overcapacity. Every industrialized and partially industrialized country in the world is, too. Plants everywhere are standing idle because plants everywhere are capable of choking us to death with steel, automobiles, TVs, cameras, toaster ovens, and sweat socks. Indeed, they are already choking us with them.

This worldwide overcapacity means that there is no quick solution to our depression. Nevertheless, our depression will, as the Levy’s put it, be contained. In the United States, banks fail and will fail, but there will be no runs on them, as there were in the Great Depression, because the Federal Deposit Insurance Corporation exists. Businesses as remarkable as Pan Am will fail, but there will be no panic selling of assets, because big government will, budget agreement or no, prevent a free fall.

In Mr. Hoover’s day, the government accounted for less than 3 per cent of GNP; in Mr. Bush’s, it accounts for almost 25 per cent. Mr. Bush thinks his 25 per cent too much (as Mr. Hoover thought his 3 per cent), but it is our true safety net. With that high percentage of GNP assured, plus its multiplier effect on the rest of the economy, we will not drop to the lowest depths.

On the other hand, we may be truly depressed for years or decades to come. The glut of capital goods that caused the Great Depression was not absorbed until World War II. There is no reason to expect our present glut to be more tractable. The American oversupply is probably greater now than it was then, and the worldwide oversupply is certainly greater.

Yet I detect a glimmer of hope. Today the richest 1percent of American families have as much income as the poorest 40 per cent. That’s outrageous. But in 1929, on the eve of the Great Depression, the richest 0.1 per cent had as much as the bottom 41 percent. We are, in a manner of speaking, 10 times better off now. The way to put the oversupply of capital goods to use is to draw the bottom two-fifths of us into full participation in the economy. That will not be easy, especially since we have, for the past 15 years, been going hell-bent in the opposite direction. The tentative appeals to “fairness” that the Congressional Democrats made in the budget debate are only a faint promise of a beginning, as are some proposals now coming before the Joint Committee on Taxation. Yet all are opposed by Mr. Bush and his men.

In another column I’ll try to suggest some specific things to do about our predicament. In the meantime, be sure you have plenty of sweat socks.

 The New Leader

By George P. Brockway, originally published October 1, 1990

1990-10-1 What Color is Your Recession Title

EVERYBODY SEEMS to have a theory about the when or what or how of a recession. The official or customary theory (I’m not sure what office decrees the custom) is that you have a recession if you have two back-to-back quarters of falling real GNP. Some journalists, apparently trying to avoid monotony, say you need to have six months of falling real GNP-which is a little bit harder to do. Federal Reserve Board Chairman Alan Greenspan has a different approach. A business downturn has to feed on itself for him to call it a recession.

1990-10-1 What Color is Your Recession Greenspan

Before Greenspan will sit up and pay attention, inventories have to rise, causing orders for more goods to fall, causing workers who might make more goods to be fired, causing stores that might have sold goods to those ex-workers to lose business, causing them to cancel orders from their suppliers, causing more factory closings, and so on and on and on. The trouble with this is that if such a self-cannibalistic process should get started, Greenspan is not likely to be able to do much about it. The Federal Reserve Board was not conspicuously effective when it realized (some months after the event) that the Great Depression was upon us. Anyway, Milton Friedman, the monetary guru, says it takes two years for monetary policies to take effect.

In short, most economists feel they have done their job if they just say No to recession. But whether what we are now going through is a recession or not, it seems like one to honest proprietors of S&Ls (there used to be many), to automobile dealers, to building contractors, to all the earnest Willy Lomans desperately trying to meet their Christmas-line quotas, and to all their regular customers trying desperately to emulate the Japanese and place their orders “just in time.”

My poet friend has what she calls the Taxicab Theory. As late as the middle of August, she says, you could not get a cab in New York even if there wasn’t a cloud in the sky. It took a half hour or more to sweat out the line at the Vanderbilt Avenue side of Grand Central. Now, she points out, you can get a cab anywhere, rain or shine, night or day. She concludes that if people don’t have money for taxis, we are in a recession. “If you don’t believe me,” she says, “you can ask the cabbies. They’ll tell you.”

No doubt there are other recession theories. What difference do the different theories make?  Suppose all those who are saying we’re in a recession, whatever their degree of technical sophistication, are right. So what? To be able to refer to “The Recession of1990-91” will no doubt be convenient for future historians, but how does it butter our parsnips today?

The answer, of course, is that if somehow someone could convince the Federal Reserve Board that we are in a recession, they might bring themselves to do something about it. And (this is what Samuel Johnson would call the triumph of hope over experience) they might even do the right thing. That’s why Chairman

Greenspan’s definition of a recession is so ominous. If, as he says, a recession is a disaster feeding on itself, there is not much that the monetary authorities can do; and if we are not in a recession, there is no need to do anything. His formulation is an ideal excuse for inaction.

Rather, it is an excuse for no change of action, for what former Chairman Paul A. Volcker liked to call “staying the course.” He was probably brought up (like me) on Iron Men and Wooden Ships and Howard Pyle’s Book of the American Spirit; so he couldn’t help it if others of our generation had visions of him as David Farragut standing in the rigging, shouting, “Damn the torpedoes! Captain Drayton, go ahead!” or as Ulysses S. Grant, lounging on a rough bench during the Wilderness campaign, calmly proposing to “fight it out on this line if it takes all summer.”

The “two quarters” approach to recession is only slightly less lethargic than Greenspan’s. According to this view, the last recession ended in 1982. It follows that we have had prosperity ever since-in fact, we are told, the longest sustained prosperity in our history. Thus the definition of recession is also important because when you say what you mean by recession, you ipso facto reveal what you mean by prosperity. The meaning of bad times implies the meaning of good times. How good are the good times we have been enjoying from the end of 1982 to the present? Let me count the ways. The national debt has increased from $1.137 trillion in 1982 to $3.319 trillion today. The annual trade deficit has gone from $7 billion in 1982 to $136.5 billion today (with two higher years in between). The nation’s atomic plants have so deteriorated that it will cost $200 billion to repair them. Likewise, at a similar cost, the interstate highway system. The United States of America, the world’s largest creditor nation at the start of the period, is now the world’s largest debtor nation.

To be sure, we have been staying the course in order to conquer inflation. So what has happened? The Consumer Index has risen 34.7 per cent. Perhaps you are politically inclined and want to compare these eight Reagan-Bush years with the eight Kennedy-Johnson years. During the latter (which included the Vietnam War), the CPI went up only 22.7 per cent.

The foregoing is not the worst that can be said of our allegedly prosperous era. The worst is what was done to people directly.

In the years since 1982, the number of our unemployed fellow citizens has never fallen below 6.5 million and has generally been much higher. The number of those too discouraged or demoralized to look for work has hovered around 1 million. The number of those working part time has not fallen below 35 million. The number of men, women and children living in poverty has not fallen below 31.5 million. The number of the homeless can only be guessed at. Our infant mortality rate has become the worst of any industrialized nation. We have the most expensive and the least satisfactory medical care system. And the gap between the rich and the poor has steadily widened, reaching its widest in the figures just released by the Census Bureau.

I submit that the economy sketchily described above is not prosperous. Nor is it “fundamentally sound,” although that meaningless phrase will be trotted out if anything more goes wrong. Certainly the current state of affairs is not so wonderful that it justifies “staying the course.” Every sane citizen must want America to do better. Therefore the customary definition of recession and the Greenspan definition are both mischievously misleading.

We want to be alerted to any weakness in our society, and we want especially to be alerted to faltering in our striving to build and maintain a fair and free economy. We don’t have an economy simply to put chickens in our pots and automobiles in our garages. Communism in the Western world has collapsed because its objectives narrowed to just such trivia. When capitalism judges itself on the basis of its GNP, it risks succumbing to the same fate.

We have economics so that we all can be free and responsible providers of our own sustenance, thinkers of our own thoughts, and definers of our own relationships with our fellows. By “all” I mean all. We have come a long way, and obviously we have a long way to go.

HOW CAN WE measure our progress more precisely? We now have two statistical series that will serve at least for the time being. The first gives us the number and percentage of families living in poverty.

To no one’s surprise, the proper way of determining poverty is in dispute. On one side are those who say that the reported numbers of the poor are too high because the definition of poverty is limited to cash income only and excludes the value of public housing, food stamps, Medicaid, and so on.

On the other side are those who say that the reported numbers are too low because the definition of poverty is based on an estimate of the cost of necessary food, which is assumed to be one-third of the minimum budget. It is argued the estimate of the cost of necessary food is too low, and that other essential expenditures come to more than double the cost of food.

We may eventually reach that happy day when we have reduced the number of poor to the point where it is vital to settle this dispute. In the meantime our performance is so disgraceful that almost any definition of poverty will serve to mark our progress (or lack thereof) from year to year. Whether the number is 31 million or 16 million or 40 million, it is shameful and should spur decent people to action.

The other relevant statistical series shows the share of the national income that goes to the different quintiles or deciles of the population. Again there are disputes over details, and again the trend is a good-enough measure for now. Surprisingly, many people (among them Friedrich Engels) have fretted that perfect equality is either impossible or bad or both, but they really need not worry.

The two statistical series-the number or percentage of fellow citizens living in poverty, and the distribution of the national income-are both socially revealing and economically crucial. A free economy not only produces goods, it consumes them. If significant numbers of the citizens are unable-for whatever reason-to produce goods, the economy is weakened. If significant numbers are unable-for whatever reason-to consume what is or might be produced, the economy is weakened. The supply side must be balanced by the demand side, or the whole thing grinds to a halt.

The grinding to a halt is very like Greenspan’s self-cannibalism. It is not quite so bloodthirsty, but it is no less deadly. Real GNP may be increasing from quarter to quarter, yet increasing numbers of men, women and children are excluded. It may take decades or centuries, but the resulting stagnation and rot could destroy the society (see The Evils of Economic Man,” NL, July 9- 23).

We are not fated to destroy ourselves. To avoid destruction, however, we must first understand what can go wrong what is going wrong. The current popular tests of recession hinder-they do not help-our understanding.

 The New Leader

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