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By George P. Brockway, originally published March 13, 1995

1995-3-13 The Enemy is Us title

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Leader

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

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

By George P. Brockway, originally published January 1, 1993

1993-1-1 Clinton's Supply Side title

THE LITTLE ROCK “economic summit was one of the most moving and inspiring and uplifting events in recent public life.  Earnest men and women dedicated to serving their fellows, some of them obscure, were able to explain their goals and difficulties to a President-elect who plainly shared their goals and had a sympathetic understanding of their difficulties.  Nothing like this has occurred before in our history.  Few of our Presidents would have been capable of it.  (Face to face with an ordinary citizen during the campaign, President Bush was puzzled.  “I don’t get your question,” he said.)

At the same time, and from the point of view of this column, the economic summit was one of the most depressing and disheartening – and dismal – events in recent public life.  There was remarkable agreement among the business executives, bankers and economists present.  I wasn’t able to watch the complete proceedings, but while I watched I heard only two bankers and three economists interpose objections to the mainstream that was rushing by.  To be sure, there were ripples in the mainstream – quibbles about details – yet the fundamental message was clear.

In fact, if you closed your eyes, there were times you could easily have imagined you were listening in on a planning session of Ronald Reagan’s early advisors, or perhaps a meeting of the Business Roundtable. One after another, the bankers wailed about regulation and boasted cheerily of what they could do if government could be gotten off their backs. One after another, the business executives and economists hailed the glories of investment (especially in the interest of “productivity”) and excoriated the seductions of consumption.  With a few exceptions, all the business and economic people fretted over the perceived necessity to stimulate the economy and the corresponding horror of failing to reduce the deficit.  Saving was soberly praised, and a word or two was said in favor of reduced capital gains taxes.

It was, as I say, a dismal performance.  For it was the supply side all over again.  The words “supply side” could not be read on anyone’s lips; no one traced a laughable curve on a cocktail napkin; and the ideas were restated less breathlessly than Jack Kemp does.  Nevertheless, it was the same old story.  A few spoke scornfully of trickle-down economics, and several spoke approvingly of the middle class.  I imagine most of the speakers would be shocked to be called supply-siders.  They should listen to the tapes.  The rhetoric was different, but the theory was substantially the same.

So where is the change that Candidate Clinton promised us so tirelessly?  Well, unpaid compassionate leave will be available to corporate employees; there will be less overt or covert endorsement of racial, sexual and ethnic cleansing; in close calls, the decision will usually go to the otherwise disadvantaged; the environment will not be a dirty word; family planning will again be a virtue; and something will be done about medical insurance.  In issues like these (except, perhaps, for the last named[1]), we can expect common sense and common decency to prevail. Common sense and common decency are no small things; we have lived without them far too long.  Their recovery will make the Clinton Presidency worthy of being remembered.  But I fear that the economic rebirth we long for will continue to elude us.

The rebirth will be aborted because the new supply-siders have, so to say, a monetarist side.  Speaker after speaker warned against over stimulating the economy.  It was explained that, whether by stepping up spending or reducing taxes, stimulation would increase the deficit, which would scare the “market” into increasing long-term rates, which would spur short-term rates, which would renew or deepen the recession.

Either way the deficit had to be reduced; and any way the deficit was reduced, the economy could not be stimulated.  That’s a dilemma for you. The proposed solution was twofold: First, the economy should be stimulated, but cautiously.  Second, a long-term, foolproof deficit-reducing program should be enacted to convince the market that the deficit is on the road to reduction; so renewed inflation will not be a danger, and interest rates need not be raised.

Let’s look at the stimulation, to be produced by expanded public works (I don’t believe in the second part of the solution any more than I did in Gramm-Rudman.) The largest sum I heard mentioned was $50 billion, with most of it going to state and local governments to restore services and repair infrastructure neglected under Reagan-Bush.

I can’t say that’s a bad idea because a little over a year ago in this space (“Taxing our Credulity,” NL, December 2-16, 1991) I wrote, “If Federal grants to state and local governments were restored merely to the same proportion of Federal expenditures as in 1980, a sum of $63.1 billion would be available to break the back of the recession.”  You will note that I proposed spending at least 26 per cent more than did the most spendthrift speaker at Little Rock.  Even so, I would not have been satisfied, as I made clear in subsequent columns, for $63.1 billion may seem like a lot of money, but it is only about 1 per cent of our gross domestic product (GDP).

As our economy is now organized, wages and salaries are about 80 per cent of GDP.  The median income for full-year male workers over 15 years old is about $30,000; the corresponding figure for females is about $20,000.  Beneficiaries of an economy-stimulating program might be paid less than the median – say, $20,000 as the average for both sexes.  And of course much of the stimulus would go to people who are employed.  Putting all these guesstimates together, I conclude that a $50 billion stimulus would directly create about 2 million jobs, while $63.1 billion would directly create about 2.5 million jobs.  Factoring in the “multiplier,” these totals might double, although not at once.

That’s not bad – provided you’re not one of the 6 or 7 million who would still be unemployed.  Please read and reread the previous sentence until its meaning in human suffering starts to become real to you.  I fear that it is not real to most mainstream economists, especially those who believe in the “natural rate of unemployment.” (See “Are You Naturally Unemployed?”  NL, August 10-24, 1992.[2])

A couple of the Little Rock economists pointed out – as I have done here many times (thus showing how obvious the point is) – that the debt and deficit ratios to our gross national product (GNP) were about twice as high in 1947 as they are at present, yet we proceeded to save Europe with the Marshall Plan and enjoyed a quarter-century that never saw the unemployment rate come close to what it is today.  The interest rate also was lower than today’s in every year except 1968, ’69 and ’70, and the inflation rate was lower in every year except 1948, ’51 and ’70.  One of the mainstreamers o9bserved that the postwar prosperity was driven by the demand for consumer goods pent up during World War II.  He did not seem impressed by the counter-observation that a lot of demand for consumer goods would be released now if the unemployed had jobs.

A CURIOUS FACT about the conference was the virtual absence of any reference to the Federal Reserve Board.  It was almost a case of the dog that didn’t bark.  There was a good deal of talk about the interest rate, but I heard only two participants refer to the agency that sets it.  One of the references suggested that things would change when we got “our” Board (unhappily, not an immediate possibility).

The other reference was a brief but remarkably comprehensive paper by a former governor of the Board.  He made two main points:  First, the long-term rate remains high because the Board keeps hinting the short-term rate will be pushed up to meet it (although there is plenty of room for the short rate to come down further). Second, the long-term market is effectively merely the market for 30-year Treasury bonds.  If there were no 30-year Treasuries, there would be scarcely a long market at all.  The Treasury raises only about 7.5 per cent of its funds long term and would save money if it gave them up.  Why not do so?  I regret to report that Secretary of the Treasury-designate Lloyd Bentsen did not respond, nor did President-elect Clinton.

Taking one thing with another, my sorrowful conclusion is that the Clinton economy is not going to be sensationally better than the Bush economy.  The National Bureau of Economic Research (not an “official” body, regardless of what the New York Times says) thinks you can have a recovery with both wages and profits falling and 10 million unemployed.  The awesomeness of this organization and the power of the Federal Reserve Board practically guarantee that the economy will get only a minimal stimulus, and that for only a minimal length of time.

Practitioners of economic science have dismally short memories.  In 1937 the GNP jumped up 7 per cent, where-upon the New Deal rushed to mollify Wall Street by cutting relief programs.  The budget deficit, which had reached the vertiginous height of $3.1 billion in 1936, was converted to a surplus (yes, surplus) of $300 million in 1937.  The result was a sharp recession within the Depression.  I fear that we’re getting ready to do it all again, and with far less excuse.

But one sound proposal, calling for full funding of Head Start, was generally endorsed at the economic summit.  Some of the economists saw Head Start as an “investment” in future productivity.  Their supply-side bias blinded them to its certain contribution to economic recovery.  Nonetheless, most of the money – and it will not be a trivial amount – that goes into Head Start will immediately go out to teachers’ or leaders’ salaries, to snacks and lunches, to consumable supplies like finger paint and soap, and to low-tech and expendable furniture and decorations.  At the end of a year there will be little or nothing tangible to show for these expenditures.  In the eye of an accountant the whole thing will seem like consumption of the most profligate sort.

Yet such profligate consumption (if it actually happens) will do more to stimulate the economy this year, and every year of the program’s existence, than the schemes to restore the investment tax credit, to rehabilitate IRA’s, and to cut taxes for the middle class.  All of those are bum Reaganesque ideas that we have already tried and found wanting.

The Clinton-Gore book title had it right:  We should be Putting People First.

The New Leader

[1] True enough, no action until the Affordable Care Act, aka ObamaCare

Ed: [2] We do not have a copy of this.  If you have one, PDF or in print, please share

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