Tag Archives: The New Deal

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 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

By George P. Brockway, originally published March 6, 1989

1989-3-6 How We Can Control The Interest Rate Title

IN THREE recent contributions to this space[1] I have argued that the conventional theories of inflation are wrong-that it is not caused by full or almost-full employment, and that it is not cured by raising the interest rate. I have gone further: I have maintained that raising the interest rate (which I call the Bankers’ COLA) is precisely what produces inflation in the first place. A legitimate question now is: What do I propose we do?

Let it be admitted – nay, insisted – at the outset that there aren’t any easy answers. No matter how ingenious the laws we enact, we can be certain that ingenious ways of avoiding them will be discovered. Legal avoidance happens with even the most uncomplicated statutes. There is a book out on how to defend against a drunk-driving charge by a trial lawyer who has had thousands of such cases and never lost a one. The unremitting search for loopholes in the income tax laws is sporadically countered by searches for ways to close them. It will be the same with whatever we propose. Perfection is impossible, because perfection cannot act.

To control the interest rate – to eliminate the Bankers’ COLA – one must be able to control the money supply. The Federal Reserve Board tries to do that now (for reasons different from those I’ve advanced) by fiddling with the reserve requirements it imposes on the banks and with the interest it charges them for temporary loans. Using these levers, the Fed can control the supply pretty well; but the interest rate – the cost of money – depends also on demand, and there is one demand for money that the Fed has so far refused to do much more than talk about. Seven and a half years ago (“Why Speculation Will Undo Reaganomics,” NL, September 7, 1981), I wrote in these pages: “Unless one is ready to run the printing presses flat out, the only way to get money into productive hands is to see to it that little or none of it falls into speculative hands.”

Although there is probably no way of keeping speculators from getting their hands on money if they want to, it would be quite easy to keep them from wanting to. All one has to do (as Felix Rohatyn and others have suggested in order to inhibit leveraged buyouts) is tax capital gains at 100 per cent on property held less than a year or two, then at 95 per cent on property held less than two or three years, and so on until the rate got down to the level of ordinary income.  (This, it will be noticed, is exactly contrary to the proposal of our new President, but he has never been quite clear in his mind what was and what was not Voodoo Economics.)

The foregoing, however, earth shaking as it is, would not be enough. For the archetypical speculators of our day are not beefy gents in flashy suits on the order of Betcha-million Gates or even aristocratic gentlemen with narrow ties on the order of J.P. Morgan or even indescribables like Ivan Boesky. No, the big-time wheeler-dealers are “institutions,” and institutions are churches and colleges and foundations and pension funds and insurance companies and mutual funds. We might almost say with Pogo that we’ve met the enemy and they is us, for most of us are beneficial owners of pieces of one or more of the nameless, faceless institutions the market gossips gossip about.

These institutions, our surrogates, write the computer programs that run the market, and they do it for capital gains. Unless that candy is taken away from them, it will do little good to take it away from the old-time speculators who still exist. Consequently, we’ll have to take a deep breath and tax the capital gains even of charitable institutions. (I said it wasn’t going to be easy.) The demand of nonproducing speculators for money would thus be greatly reduced, if not altogether stopped, and the Reserve Board, by increasing the money supply, could lower the interest rate for everyone else and take a step toward eliminating the Bankers’ COLA.

But it would be only a step. The bankers would resist, and their line of argument would be practically identical with the one they used in freeing themselves from most of the New Deal regulation. They were, in fact, remarkably successful in getting Democrats to make their arguments for them, as William Greider documents at excellent length in Secrets of the Temple. For example, Wisconsin’s recently retired Senator William Proxmire “delivered a short lecture on inflation and interest rates. At 15 per cent inflation, an investor lending $1 million at 10 per cent ‘loses’ $50,000 a year. ‘You cannot count on the lender being a complete idiot,’ Proxmire said. Sooner or later, he will stop lending at the low interest rate and invest the money himself in commodities or real estate.”

Our capital gains tax would cancel the commodities option and could be made to cancel the real estate option, but suppose the Senator’s million-dollar lender is smart and doesn’t lend at all, thus saving that $50,000 “loss.” He would be like the unfaithful servant in the parable, for at the end of a year he would have only his million dollars, while his neighbor, who wasn’t so smart and lent his million at 10 per cent interest, would have $1,100,000. What happened to the $50,000 loss Senator Proxmire talked about? If there was anything more to it than fancy rhetoric, the 15 per cent inflation affected both investors. The one who refused to lend wound up with $850,000 worth of purchasing power, while his neighbor wound up with $950,000. A negative “real” interest rate, in apparent defiance of the laws of mathematics, proves to be greater than zero. Perhaps we can count on the lender not being a complete idiot.

Of course, the millionaires have other choices. They could take their money and invest it directly in productive enterprise, or they could live it up. The former option is what we had hoped they would do, anyhow; that’s why all the editorial writers in the land have been urging them to save. As for the latter option, they might find consuming a million a little difficult, but it would be fun to try, and the economic result would at least be some priming of the pump. Someone has to consume what the economy produces.

The fact remains, though, that both millionaires have taken a loss in purchasing power, and that deliberate, cold-blooded national policy has forced the loss upon them. That’s not nice, and it’s nothing we can be proud of. So what can we do? Well, all that the Fed and other true believers in traditional economics have proposed (and put into practice) is raising the interest rate, usually by restricting the money supply. That’s how former Reserve Board Chairman Paul A. Volcker got the prime interest rate up to 21.5 per cent in December 1980, while the Consumer Price Index was up only 13.5 per cent, leaving Senator Proxmire’s investor with “real” interest of 8 per cent, which should have made him happy. The funny thing was, it didn’t make others eager to become like him. The real interest rate was greater than the prime itself had ever been (with one exception) before 1978; nevertheless, the national savings rate fell, and in spite of the subsequent Reaganomic tax cuts for the wealthy, the savings rate continued to fall. Moderately reflective true believers should have had their beliefs shaken just a bit.

Moderately compassionate believers should have been severely shaken by what else happened. The number of people unemployed went from 6.1 million in 1979 to 10.7 million in 1983. In the same years, 9.2 million more people were impoverished, and the median family income (in constant dollars) fell $2,305. That was not so nice either, and it was brought about by deliberate, coldblooded national policy.

Nor was that the whole story. The Federal deficit soared, our foreign trade was savaged, and Latin America was saddled with loans at un-payable interest rates. And all this was done to keep the real interest rate from falling below zero.

IFTHAT WERE merely a trade-off – suffering a lot of grief and getting back a little stability – it would be bad enough, for what was exchanged was the livelihood and prospects of millions of fellow citizens for the” reality” of usurious interest rates. The economy was deliberately depressed to “save” it from the possibility – the mere possibility – of being depressed later. But the savings rate continued to fall, corporate investment continued to fall, and industry after industry was allowed to fall before the Germans and Japanese, the Koreans and the Taiwanese.

At this point Wall Street-wise types will explain that Volcker was concerned about more than Senator Proxmire’s millionaire; he was concerned about the Japanese. He needed their money to pay for the deficit, which was all of $40.2 billion in 1979 (or about a third of the Gramm-Rudman target President Bush is going to be unable to meet). If Volcker had not given the Japanese what they wanted, they wouldn’t have bought our bonds, and Proxmire’ s millionaire would have sent his money abroad. The argument, in short, is that any attempt to reduce the interest rate will cause a flight from the dollar, and that the flight cannot be stopped because the financial world is international, its denizens are multinational, and they communicate electronically, instantaneously and secretly.

That is almost true. Yet multinational corporations are taxed. Granted, some of them may not be above diddling their books a bit, and very likely the diddling is difficult to detect; but taxes are collected, and where taxes are collected money can be controlled. The fact that financial operatives set up shop in the Cayman Islands to escape inconvenient regulation indicates that a flight from the dollar has to be an actual flight; a pretended flight won’t do.

We could perhaps stop the flight if we wanted to, but it would be much easier to let the money go. It is merely marks on paper; the factories and even the computers remain. The time to do the stopping is when the money wants to come back. Under present law, the Treasury Department is responsible for control of foreign exchange. It could require those who want to bring money into the country to go to the Treasury to buy dollars and to satisfy any taxes and regulations they had been fleeing from. The flight would no longer be so attractive, or serve any purpose.

Would that be the end of the problem? Of course not. Still, the proper direction of policy is, I think, clear. To control inflation, the interest rate has got to be brought down – way down. To do this, money has to be withdrawn from speculation and made available to productive enterprise. Faced with inconvenient regulation, finance will flee the dollar. The flight can be controlled by controlling foreign exchange. Such control will certainly affect foreign trade; but only doctrinaire true believers in laissez faire will blanch at that, and doctrinaire laissez faire is what got us into the mess we’re in.

The New Leader


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

1988-11-28 Reality and Welfare Reform title

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

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

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

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

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

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

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

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

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

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

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

1988-11-28 Reality and Welfare Reform Men Working

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Leader

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