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By George P. Brockway, originally published June 3, 1996

1996-6-3 What Does it Cost You to Live Title

THE ENTRY in this space for April 5, 1982, was titled Let’s Put Indexing on the Index. The occasion was a Reagan Administration announcement of a shift in the Consumer Price Index (CPI). Fewer citizens than previously, it had been discovered, were buying houses.

There was a reason for that. The going interest rate for mortgages had reached 15.84 per cent. You may be sure there were “points” and lawyers’ fees and title insurance and surveyors’ fees and such to pay, too. As a result, the real estate market was sluggish, despite the fact that the children of the Boomer Generation were coming on line. With fewer houses sold, fewer mortgages were undertaken. Although the interest rate was out of sight, consumers had less interest to pay because not as many of them could afford it.

So the Bureau of Labor Statistics reduced mortgage interest as a factor in the CPI. This shrank the index as a whole and President Ronald Reagan got credit for controlling inflation, which President Jimmy Carter had not been able to do. Now a similar scheme is being suggested.

Federal Reserve Board Chairman Alan Greenspan, who seems to have been the scheme’s most prominent publicist, has a new and original end in view: He wants to turn the CPI into something it never was intended to be, in order to solve a problem no one thought existed.1996-6-3 What Does it Cost You to Live Greenspan

From its beginning in 1919 the CPI, issued monthly by the Bureau of Labor Statistics, has shown the changes in what urban consumers shell out for the goods and services they buy – commonly referred to as a “market basket.” (Farmers get much of what they consume “free.”) As with any index, the items in the basket are weighted to reflect how frequently they appear on the typical shopping list. It was the “weight” of mortgage interest, for instance, that was scaled down in 1982.

Alone, an index number means nothing. You must have at least two numbers that are put together in the same way for a comparison to be possible. The CPI is a series of numbers. Similar series are created by those trying to compare the price levels of different countries and periods.

The CPI is used by historians as well as economists. And it is not discriminating. It does not try to measure the cost of what consumers ought to spend their money on; rather, it tells us what urban consumers do spend their money on. Over the long run, it needs periodic adjustments to accurately reflect the basket’s cost. In the short run, it is a measure of inflation and deflation.

Fear of inflation has been the economic neurosis of our time. Especially after World War II, it became common for contracts to contain Cost of Living Adjustments, or COLAS. The purpose was to ensure that no party to a contract either profited or lost from shifts in the price level.  In 1972 and ’73 the idea was adopted for Social Security benefits. In 1986 the tax brackets in the Federal Income Tax were “indexed” to the CPI, so that taxpayers would not find themselves creeping into higher brackets even though their “real” incomes had not changed. Now COLAS appear in many kinds of contracts, public and private. Bankers also have long charged borrowers an inflation premium that is a COLA in everything but name.

What has been happening since Greenspan said last year that the CPI “overstates inflation” and should be corrected would be ludicrous if it were not liable to cause havoc in millions of lives. It seems that either the Reserve Board Chairman or someone with access to him happened to notice one day that the CPI doesn’t measure the cost of living. As we have seen, it never pretended to. Moreover, if Chairman Greenspan had time to stop and think, he would not only realize that the CPI is what is wanted in the sort of situation described above[1], but that the cost of living in a literal sense has nothing to do with it.

In sad fact, it is probable the whole mess was caused by the childish attraction almost everyone in the government and the media seems to feel for acronyms. One imagines a publicity flack being given the job of announcing a contract that provided for “an adjustment of compensation to offset, nullify, and render nugatory substantial shifts, if any, in the price level.” After much fretting and black coffee, the flack, inspired, rushes in to the director of public relations, whose door is always open. “Look, chief,” she or he cries, “let’s drop all this garbage. Let’s call it a ‘cost of living adjustment.’ Then for short we can call it a ‘cola.’ Get it?” The chief says, “Not bad.” Then he or she shows how he or she got to be chief. “We’ll run it in caps,” he or she adds softly, taking out a pad and a Mont Blanc pen and printing the word in big capitals: “C 0 L A.” The rest is history.

Possessed of the misapprehension that when people spoke of COLAS they truly meant what it cost to keep a person alive, Chairman Greenspan, though scarcely a close student of the physiological form of the problem, saw that many of the factors in the CPI were not essential costs of living. One hypothetical example seems to appeal to most of those who have taken up the idea. Think of beef, they say; everyone knows its price has gone up, but no one has to eat it, even in England.  Chicken is not only cheaper, it’s better for you (less cholesterol, unless you persist in frying it); so chicken should be in the CPI basket instead of beef. That way, the cost of living would be less.

The reasoning would be impeccable if the CPI were supposed to measure the cost of living. Indeed, in that event the argument could be carried a step or two further. Bread (whole wheat or oatmeal, of course) is cheaper than chicken. Cake, as Marie Antoinette discovered, is not cheaper than bread, but rice (unhulled, of course) is. No doubt there are even cheaper ways of keeping body and soul together, but I’m not anxious to know about them. I can already hear King Lear: “0, reason not the need! Our basest beggars are in the poorest thing superfluous. Allow not nature more than nature needs: Man’s life is cheap as beast’s.”

Not even Speaker Gingrich is likely to argue openly that the cost of biological existence is all that should concern us. Nor does Chairman Greenspan, who has noted that the CPI may be overstated in part because it overlooks shoppers who switch to bargain brands and discount stores, really believe the index should tell us citizens what to eat and, afortiori, how to clothe and shelter ourselves. For my part, I do not think that there shall be no more cakes and ale, and I doubt that either the Chairman or the Speaker thinks so. The cost of living, as Lear implies, may well require a standard, but index numbers are compared with each other, not an exogenous standard.

THAT BRINGS us back to the purpose of COLAS. They are not, and never have been, intended to lift Social Security benefits up to the poverty level. They couldn’t do that at any acceptable cost if we wanted them to. In the case of union contracts, they would not be worth bothering about if poverty were the best they could guarantee. No, the COLAS were and are meant to offset the effects of inflation.

Needless to say, the CPI is not a perfect yardstick. In particular, there are serious difficulties with the way the housing component is calculated that result, as Dimitri Papadimitriou and L. Randall Wray of the Jerome Levy Economics Institute have shown, in an accelerating upward bias of the index. On the other hand, when senior citizens cozy up to the fireplace on cool evenings, they are apt to exchange anecdotes about how everything costs a great deal more than it used to.

Having said all that, let me say further that I am opposed to indexing in principle, for it is always and everywhere inflationary. In every case where, as in the Weimar Republic, a runaway inflation has occurred, indexing has been at the bottom of it.

But, as I’ve written before, Bankers Have the Classic COLA” (NL, January 9, 1989), and as long as they have it, the rest of us are entitled to all the CPI-driven benefits we can get. With the support of economic theorists, bankers (and lenders generally) divide the interest they charge into two parts: “real interest,” which is what they would charge in a stable economy, and their COLA, or “inflation premium,” which is generally said to be the same as the year-to-year change of the CPI. At first glance this seems as reasonable as any other COLA, but it doesn’t work out that way, because the total indebtedness of the nonfinancial sectors of the economy (you, me, the corner store, and the government) is almost double the GDP.

In other words the total Bankers’ COLA, while supposedly designed to protect lenders from inflation, is about double what inflation costs the whole economy (lenders and borrowers and everyone). The arithmetic is apparently too simple for most economists to understand: In 1995, the rate of change of the CPI was 2.5 per cent; the total indebtedness was $13,804.2 billion; so the Bankers’ COLA was .025 x$13,804.2 billion, or $345.1 billion. At the same time, the GDP was $7,297.2 billion, which, when multiplied by .025, gives $182.4 billion as due to inflation. Take away the Bankers’ COLA of $345.1 billion, and the economy is in deflation, not inflation.

I am, you may be sure, aware that the 1995 CPI applies only to indebtedness incurred in 1995, which is only about a twelfth of the total. The other eleven twelfths include mortgages and Treasury bonds stretching back to 1965, though almost all debts are of more recent vintage (the average length of current public debt is less than six years). The key point is that in only one of those 30 years (1986) was the change in the CPI lower than in 1995. In short, taking 2.5 percent as the Bankers’ COLA rate for all debts outstanding in 1995 gives lenders a generous benefit of a serious doubt, particularly since it is not unknown for individual bankers to figure more than the CPI as the inflation premium.

In sum, if there were no Bankers’ COLA, there would now be no inflation, hence no occasion for all the other COLAS, hence no need for Chairman Greenspan to raise the interest rate to “fight inflation,” nor for Speaker Gingrich to weary himself dreaming up arcane tricks to play on the elderly.

Furthermore, although I am not scared silly by the present deficit, I am terrified by and ashamed of the budgeteers’ mindless and compassionless trashing of American culture and civilization. Therefore

I want to point out that if the Board Greenspan chairs devoted itself to getting rid of the Bankers’ COLA, it could lower the interest rate and put us on a fast track to a balanced budget and a more humane and more prosperous America.

The New Leader

[1] Ed – the author is not here to ask but this is the link we believe he is making here

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By George P. Brockway, originally published January 17, 1994

1994-1-17 Making a Mess of Russia

THE NEWS FROM RUSSIA these days reduces one very quickly to hysterical laughter or hysterical tears. We sometimes seem to be well on the way toward Cold War II or World War III; and if we achieve one or the other (or both), we’ll have the economists of the world, with our economists in the vanguard, to thank.

Of course, the economists won’t be entitled to all the glory. They couldn’t do it alone. They’ll need the help or at least the acquiescence of the statesmen and bankers of all countries, particularly the United States. Crucial will be the austere devotion to austerity of the International Monetary Fund. No less important will be the casual mistranslation, miscomprehension, or misrepresentation of the news by the daily press and television. If, as economists never tire of repeating, we consumers are sovereign and get what we demand, it will in the end be our fault, and the world will suffer for our stupidity, our ignorance and our laziness.

The foregoing diatribe could have been prompted by almost any day’s news, but was in fact inspired by the lead story in the New York Times a couple of days after Vladimir V. Zhirinovsky‘s surprising showing in the election. The Times correspondent wrote: “In what may be a sign of a weakening of economic resolve after his electoral rebuff on Sunday, President Boris N. Yeltsin today granted new heavily subsidized loans that could aggravate the budget deficit and inflation …. The loans were for farm machinery enterprises at 25 per cent interest a year, far below the Central Bank’s discount rate of 21O per cent, the Interfax news agency said.”

Let’s start with the end. It may be that the Interfax news agency, or someone representing the agency, actually said something like what the Times attributed to it. It may also be that “discount rate” is an accurate translation from the Russian. But maybe not. With us, the term has a precise meaning and requires a developed banking system, which Russia is having difficulty organizing.

According to the Federal Reserve Board, “Discount rates are the cost to member banks of reserve funds obtained by borrowing from Reserve Banks …. discounts for member banks are usually of short maturity-up to 15 days.” A discount rate of 210 per cent is not so outrageous as the GI loan shark‘s “six for five” (a loan of $5 today to be settled with $6 on payday, next week), but it is bad enough to stop all business except gambling and thievery dead in its tracks.

With us the prime rate is usually about double the discount rate. It is inconceivable that the best-run medium-size businesses (who are given the prime rate) should be expected to survive paying 420 per cent for their money. They would do better to sell their assets for whatever they could get for them and lend the proceeds to the suckers still trying to earn a living by working for it.

It makes me sick to think of it, because it was not very long ago, when Paul A. Volcker was chairman of the Federal Reserve, that many thitherto profitable American companies found themselves saddled with such an array of “finder’s fees,” “lawyer’s fees,” “compensating balances” and so on (not to mention a 21.5 per cent prime) that they were paying what was effectively more than 40 per cent interest for their money.  Those who survived the shock treatment did so by firing people, cutting production and raising prices.  Otherwise they couldn’t have paid their bankers’ bills.

President Coolidge observed that “when many people are out of work, unemployment results.” I myself have observed that when many people raise prices, inflation results. In Volcker’s day we got it both ways: the highest unemployment rate since the Great Depression, and the highest inflation rate since World War I. The Russians are getting it both ways now and, oddly enough, they don’t seem to like it.

But let’s not forget about those lucky (or well-connected) farm machinery manufacturers who got the “subsidized” loans at “only” 25 percent, thus somehow throwing the budget out of whack and lighting a fire under inflation. I’ll agree that a loan at 25 per cent is inflationary (not so inflationary as 210 or 420 per cent, but sufficient unto the day). After all, interest is an expense, just as rent and wages are expenses; all expenses increase the cost of doing business; and all costs have to be covered by prices charged. I do not, however, believe that is what the Times story meant.

No, the Times (like the Wall Street Journal and all lesser media) is possessed of the curious fancy that interest expense has the mysterious property of lowering prices, whereas all other expenses raise prices. How this magic works is never explained. In contrast, the Times never mentions the prime rate without  pedantically telling its financial section readers what it is, and always makes sure business people understand that when the bond market rises, the interest rate falls. (For more on the mysteries of interest, I refer you to “Why a Low Interest Rate Is the Proper Preventive of Inflation in a forthcoming issue of the Journal of Post Keynesian Economics.)

Let’s put those farm machinery manufacturers in a larger context. We are told that Russian agriculture is in a bad way, and that Russia needs billions of dollars in foreign aid in order to feed its people. It certainly would be better for everyone (except, perhaps, American, Canadian and Australian wheat farmers) if Russia boosted its own wheat production. And it is, I suppose, no secret that the purpose of farm machinery is the more expeditious production of food. So it should be obvious even to an economist that it would be a smart idea, as well as less inflationary, to get cracking on the production of farm machinery.

But economists know, if they know anything, that international trade is good because it is good, as they have recently taught us in regard to NAFTA and GATT. So even if Russian firms make the best farm machinery (for all I know, they do: Poland is said to make the best golf carts), economists would advise Moscow to import farm machinery on a shock program (shock programs are good because they are good), rather than “subsidize” Russian manufacturers with loans at usurious rates. The alleged subsidy is, they say, inflationary. But assuming the inflation were due to the supposed subsidy, it still could not hold a candle to the inflation caused by unnecessary importing.

There are two sorts of inflation. The sort we’re familiar with is what happens to our Consumer Price Index. The other sort is what is happening to the Russian ruble on the international money market. The two are not closely related, for when all is said and done, even in the brave new global village, domestic markets are many times larger than the import-export business. In the early 1980s, for instance, when our CPI kept on setting new double digit records, our dollar was far “stronger” against foreign currencies than it is today.

The Russian CPI, whatever it is, is undoubtedly very bad because of the usurious interest rates. But it is nothing compared with the free fall of the ruble, which is tumbling because Russia has lost its export markets in Eastern Europe and consequently is unable to import in the style it was accustomed to. When it is said Russian inflation is in excess of 20 per cent a month, that does not mean today’s $2 loaf of bread will be $2.40 next month and $5.97 in six months. It merely means that if you want to show your neighbor what a wheeler and dealer you are, you had better buy your Mercedes today, because it will cost you three times as much if you wait six months.

It is this second kind of inflation that exercises the International Monetary Fund, since it is the Fund’s purpose to make all the world’s currencies interchangeable. It is also this kind of inflation that attracts the attention of Western reporters, who exchange Western for Russian currency to pay for their food and shelter and entertainment. More important, it is this kind of inflation that can get out of hand and pass over into hyperinflation, as it did in the Weimar Republic and then several other places.

Hyperinflation comes about when a nation has debts it can’t repay that are denominated in foreign currencies. Our contribution to Russia’s troubles is a clutch of economic advisers, mostly from Harvard, who seem determined that Russia must destroy the industry it has and borrow to import state-of-the-art factories from us. How else will the Russians be able to compete in the global village (where they were, only yesterday, sufficiently competitive to scare us silly)?

Now, THERE IS in the world a good example of what can happen if you tell the IMF to go peddle its papers. All of a sudden China is being hailed as an economic miracle, more miraculous than Taiwan. I am an authentic old China hand, having spent three weeks there in 1976, when Chairman Mao was still alive. Mao tried shock treatment long before Harvard thought of it. He called it “The Great Leap Forward, and had befuddled peasants trying to make steel in their backyards. It proved a disaster. He tried another shocker – “The Great Proletarian Cultural Revolution – and that, too, passed away, but not before thousands of people were killed and thousands more ruined. After Mao’s death and the defeat of the “Gang of Four,” Deng Xiaoping, who had twice been disgraced by Mao, took over.

Deng is an eclectic gradualist. He followed Mao in scorning foreign loans, in not breaking up the less-than-state-of-the-art factories, in plowing with oxen when tractors were not available, in encouraging (or requiring) teams of workers to plan their year’s work. The plans were subject to veto, but they had the virtue of getting some people to think about what they were doing. It was a form of privatization more meaningful than selling shares of stock on a trumped-up exchange.

Recently Deng has accepted substantial investments by “round-eyes” and has relaxed some controls, especially those on retail trade. Now he is regularizing the currency. Yes, I remember Tiananmen Square; and no, I do not favor the extension of China’s most-favored-nation status. I cite China as an example of what can be done if you take a little time and eschew international finance.

As an example of what is likely to happen after shock treatment, I would cite almost any country in sub-Saharan Africa or South America. All of them are crushed by debts denominated in foreign currencies.

Most of them, bowing to the advice of their IMF masters, have tried to balance their budgets by destroying their civil service, whose officers then supplement their starvation wages with extortion.

The enthusiasts for shock treatment cite Germany’s successful ending of hyperinflation in 1924. They forget that the inflation ran for more than three years, and that those who really got shocked were the bankers and investors who lent Germany money to “pay” the War debts, which were ultimately forgotten. Yeltsin wouldn’t mind that sort of shock.

The New Leader

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

1989-2-6 The Truth About InflationTitle

1989-2-6 The Truth About Inflation Dollar Sign

THERE ARE supposed to be two kinds of inflation, cost-push and demand-pull.  A benevolent

Providence is supposed to have provided them with the same cure: raising the interest rate or – if you prefer to do things indirectly – restricting the money supply. Last time out (“Bankers Have the Classic COLA,”NL, January 9), we looked at the panacea macro-economically and came up with the heretical conclusion that it caused inflation, rather than cured it. This should have occasioned no surprise, since medicine is a lot older than economics, and it was not until about a hundred years ago that your odds were better if you consulted a doctor than if you didn’t. Neoclassical economics has about caught up with Paracelsus.

The interest-rate panacea is, nevertheless, so solidly fixed in everyone’s pharmacopoeia that we’d better look at it micro-economically to try to discover its supposed merits. I should confess, at the outset, though, that having once met a payroll, as they used to say, I can’t imagine how raising the interest rate is expected to inhibit or prevent businesses from raising prices in response to the increased cost.

Every business must have money, and it therefore has to consider the cost of money, which is interest, whether it is a borrower or not. If it needs to borrow, interest is obviously a cost of doing business. If it is cash rich and doesn’t need to borrow, interest is an opportunity cost. By investing in its own business, it passes up the opportunity of lending its money to someone else and thereby earning the going rate of interest without working; so unless its own business can earn at least that much, it’s not worth continuing.

Interest is thus an inescapable element in doing business, and hardly a trivial one. Moreover, raising the rate not only affects every business, it does so geometrically. An increase in the interest rate is continuously compounded; the push is to an upward slope that becomes steadily steeper. Consequently, if the problem is cost-push inflation, upping the rate makes it worse.

In contrast, an increase in the price of oil is a one-time affair: It pushes most costs (not all, but most) up to a higher plateau, because oil is essential for the contemporary economy. At any given moment – now, for example – a certain quantity of it is used in myriad ways. At another moment – tomorrow, for example – the price may be doubled, thus doubling the economy’s outlay for oil and of course the percentage of total costs devoted to it. Producers, faced with the new cost, will raise their prices. They could maintain their profits if they just covered the increased cost of oil. In all probability, however, they will have been brought up to set their prices as a percentage markup on costs, and workers will have been brought up to expect their wages to be a certain percentage of costs.

Whether or not the new prices are enough to restore the balance among the factors of industry, they pretty quick-1yr each a new level and settle down there. Some industries and companies and workers may make out better than others, especially in the short run, yet by and large business soon goes on about as before. Prices are somewhat higher, to the detriment of people living on fixed incomes and of people who have lent money-and to the benefit of people who have borrowed money. But there is no reason for prices to rise above the new plateau unless the interest rate is tampered with.

When the Organization of Petroleum Exporting Countries (OPEC) made its successful moves, the Federal Reserve Board characteristically reacted in precisely the wrong way. OPEC raised costs for almost all businesses, and they now needed more money to continue. The Reserve Board perversely tightened the money supply, hiking the interest rate. I suppose they thought that by hurting business they would reduce the need for oil and OPEC would then be forced to lower the price. If so, they forgot that we had, as Art Buchwald wrote, encouraged the sheiks to send their sons to Harvard Business School rather than to Bowling Green State to learn basketball. At any rate, OPEC’S response was the standard one of a modem business faced with falling demand. Instead of cutting the price (as a neoclassical economist would have done), they cut production (as a modern businessman would do).

To be sure, the Reserve Board did manage to induce a recession, and that did, after eight years of trying, eventually result in an oil glut and lower oil prices. Just as in Vietnam some of our more thoughtful military leaders occasionally destroyed a village in order to save it, the Reserve Board caused massive unemployment, widespread bankruptcies, a growing Federal deficit, disaster in Latin America and the Third World, and a loss of much of our overseas business – all in the effort to control the price of oil. It was not a rational trade-off; and micro-economically the fact remains that raising the cost of any of the factors of production, of which interest is one, is not the way to inhibit cost-push inflation.

Demand-pull inflation is described by the popular cliché of too much money chasing too few goods. What is in the back of everyone’s mind is either an auction where millions of dollars are unexpectedly bid for a painting, or the hyperinflation that occurred in Weimar Germany, or the bread riots of pre-Revolutionary France. Briefly let us note that modern business is nothing like an auction, that hyperinflation occurs only when a nation has un-payable debts denominated in a foreign currency, and that the failure of the bread supply caused, not general inflation, but a deflation of all other prices as desperate people sold whatever they could at distress prices in order to pay for bread.

Putting to one side the probability that there is no such thing as demand pull inflation, we may doubt whether raising the interest rate will prevent too much money from chasing too few goods. A high interest rate no doubt chills the ardor of borrowers and thus may be thought to hold down the amount of money in circulation. Not all borrowers, however, are chilled equally. Speculators find high rates stimulating. Of course, money that goes into speculating doesn’t go into consuming; it chases paper, not goods; as far as consumption (or production, for that matter) is concerned, it might as well not exist.

Consumers, for reasons thought important by Professor Franco Modigliani and others, are said to try to maintain their accustomed or desired standard of living. They will shoulder heavy debts at usurious rates to do so. Hence their readiness to assume mortgages at more than double the maximum legal interest rate of a few years ago; hence the cavalier expansion of credit-card borrowing; and hence the failure of high interest rates to impede the chase for goods. In fact, because high interest rates have proved acceptable to consumers, the consumer loan business, once left to frowned-upon outsiders, has become attractive to banks-with the paradoxical probability that high rates have resulted in more money chasing goods, not less.

The famed bottom line, on the other hand, forces a more circumspect demeanor on businesses; few of them find it profitable to expand when the cost of financing is well up in the double-digit range. Many find it impossible to go on (right now, in this supposedly prosperous time, corporations are going bankrupt at a greater rate than at any time since the Great Depression). So high interest rates, while having only a minor effect on demand, have a major effect on supply. Whether or not there is more money in the chase, there are fewer goods in the running. To put it more generally, there are fewer goods than there might have been otherwise.

OUR HALF-CENTURY-LONG preoccupation with inflation is a sign of a profound confusion of American-even of global mind and will. Since World War II, inflation has been regarded as a pandemic disease, and a panacea has been sought. But social ills are specific, not universal, and corrective policies must be similarly specific.

If inflation were all prices going up together, a few people would be befuddled, but no one would be hurt much. As early as David Hume it was recognized that moderately rising prices stimulate the vital juices of entrepreneurs. As recently as the current “prosperity” it has been evident that business can readily accommodate itself to pretty steep inflation if it is fairly steady.

The trouble is that even moderately rising prices can be devastating to people living on fixed incomes, because they have no way of protecting themselves. This is a specific ill (there are others). Specific treatments are available, and some of them have been successfully applied. In 1966 Medicare began to protect the aged from one of the most crushing burdens of old age, and at the same time to provide millions with health care that otherwise would have been denied them. Since 1972 the Social Security COLAS have done much to prevent many of the retired from falling into poverty.

Some now say that the aged have it too good. This is a dubious proposition, but it is not to the point. The point is that the mentioned policies have had an effect. A specific ill was perceived, a specific treatment was devised, specific cures were effected, the cures may be judged, and specific improvements in them can be made. In contrast, the conventional theory of inflation that regards it as a pandemic ailment can propose only the panacea of a growing underclass of the chronically unemployed, and a narrowing overclass of those who have been able to make the Bankers’ COLA work for them.

Because interest payments are made pursuant to contract and continue years, often decades, into the future, the heavy hand of the Bankers’ COLA will be upon us, no matter what we do, for years to come. In the meantime our urgent task is to free ourselves, our politicians and our bankers from thralldom to the most dismal view of this dismal science.

The New Leader

Originally published January 11, 1982

This is the FIRST article published in the series named “The Dismal Science”

THE REAGAN Administration has not managed the feat singlehandedly, and we may hope that it will not be completely successful, but in the very short time of a year it has gone a very long way toward destroying the morale of the American people. By morale I do not mean merely eagerness for life or sense of well being, though they are included. More fundamental than psychological tone are morale as mores and morale as morality. It is these that are being destroyed. For the first time in the history of the world, a society is being deliberately and cheerily based on the proposition that it’s good to be greedy. The world has certainly seen greedy people before, and many of these have been completely convinced of their right to their riches; but never before, I think, have the rich pretended that they benefit the poor by stealing from them.

For 35 years, since the end of World War II, we have been giving ourselves quite a beating. It is an argument for our strength that we have survived McCarthyism and Vietnam and Watergate. Yet these traumata were not comparable to Reaganomics. The junior Senator from Wisconsin notwithstanding, very few saw Red-baiting as more than a political ploy; tragic though Vietnam was, it cannot be seriously argued that we embarked on it to get anything for ourselves; Watergate was an ad hoc lunge for personal survival, not a way of life proposed for a society. But Reaganomics is earnestly hailed as a universal ethical system. There is nothing- well, almost nothing-cynical about it. There is a world of difference between, say, the thinly veiled threats of CREEP‘S fundraisers and the boyish candor of President Reagan. We will learn that boyish is not better.

Most of the discussion about the effects of Reaganomics has understandably focused on the harm it does to the poor, in whose safety net it has ripped gaping holes. Many lament this harm. Some expect it to result in an electoral reaction of the underprivileged that will sweep the Republicans from power. Cruel as the fact may be to contemplate, there is little in the political experience of mankind to encourage such an expectation. Unlike the rich and the pseudo rich, the poor don’t vote their pocketbooks; they just don’t vote. Even Marx expected little from the lumpenproletariat. It implies no indifference to the desperate plight of the poor to suggest that the special and original vice of Reaganomics lies elsewhere, nor did we really need David Stockman’s indiscretions to call it to our attention.

What President Reagan is accomplishing is the corruption of the economic elite, that is to say the rich, who are assured that they will serve mankind better the richer they manage to become. This is not Adam Smith’s Invisible Hand guiding entrepreneurs-that is, doers-for the public good. Our new rich are expected to work their miracles merely by being rich, not by doing anything at all.

The doctrine is of course not without its recent forerunners, including the “maxi-tax” of 50 per cent on earned income that produced, in 1972 and after, a rank and gross efflorescence of six- (and even seven-) figure executive salaries(and now we’ll have a maxi-tax on all income). Then there is the flaccid side of consumerism, which, under the tutelage of television, presents living it up as the aim of life. And it says a great deal that for many years now men who think of themselves as honorable have used the term “tax shelter” without shame or even a trace of embarrassment.

For a parallel to our present debauch, one must go back to the Germany of World War I and its aftermath. The Junkers and industrialists made no pretense of uplifting their fellow-men, but their greediness provides a chilling example of how the morale of a society is destroyed from the top. It is often contended that the Weimar inflation of 1922-23-with its wheelbarrows of marks for a loaf of bread-ruined the middle class and so destroyed the society. Actually it was the other way around. The center did not hold because it had already been destroyed by wartime profiteering.

Hjalmar Schacht, no wild-eyed radical in spite of his middle names (Horace Greeley), wrote of “the bountiful flow of money [during the War] from the coffers of the Treasury into the pockets of the producers [industrialists and Junker agriculturalists],” and contrasted this with the relatively heavy wartime taxation in Great Britain and the United States. After the War there was “the impression made on the public by the spectacle continually paraded before their eyes of particular undertakings and firms expanding their concerns, acquiring new works or erecting new buildings, amid the general monetary collapse, all with the aid of paper mark credits which they were able to obtain at will and repay in currency which every day was worth less and less. The private banks, in giving such paper mark credits, did so at the expense of their depositors or at the expense of the Reichsbank …. ”

Change a few words and you might think you were reading today’s newspaper accounts of the oil companies, who insist that they need their windfall profits in order to drill for more oil yet instead use them to start an office machines company (Exxon), to buy Montgomery Ward (Mobil), and to try to gobble up “competitors” (Mobil again). Or you may be reminded of DuPont borrowing $4 billion to buy Conoco; or of U.S. Steel begging the government for protection against foreign competition while using its credit, not to update its obsolete plants, but to bid for Marathon Oil. In Germany, since the rich insisted on being rewarded rather than taxed, and since by 1922 the middle class had already been despoiled, resort was finally had to the printing press. Speculation, as Schacht tells us, “spread to the smallest circles of the population.”

I’MNOT SAYING that we are condemned in a Santayana-esque way to repeat that, or any other, history. I am saying that if you want to destroy an economy, the first thing to do is to corrupt the rich. The rot will spread very fast indeed, simply because the rich are the ones with the money.

Money is a sign of faith. The full faith and credit of some institution is behind it. Money is good if it is issued in good faith and credited-accepted-in good faith. The question of faith extends far beyond the relationship between the one who tenders the money and the one who accepts it. Although tenderer and acceptor must have faith in each other, they also must have faith in the relative stability of the economy and the relative equity of the society in which they participate. The acceptor must have faith that someone else will accept the money should he decide to spend it; and the tenderer must have faith that he will be able to enjoy what he bought with the money he tendered.

Money circulates only when these faiths are living. To the extent that they are compromised, the money is compromised. This is true even of so-called hard currencies. Gold is preferred to paper by the individual who wishes to opt out of the economy; but even he has to have faith that somewhere at some time there will be an end to whatever prompts his preference for gold, and that someone else will then accept the gold in the ordinary course of living. If no such use for gold can be foreseen, if the hand of every man is indeed against every man, only guns and butter are worth accumulating. The Inca’s hoard did him no good.

People fear that too much money will be issued unless it is tied to something tangible, like gold. But there is too much money in an economy only when a society’s morale is sagging: The government can exhibit bad faith by taxing inequitably. The banks can exhibit bad faith by creating money for speculative rather than productive purposes. And both of these exhibitions are very visible today. They are centerpieces of Reaganomics. Hard as the Federal Reserve Board may try to fine tune the economy, it has neither the strength nor the means to overcome the effects of the bad faith of Reaganomics, except by destroying faith in the economy altogether. This is the notorious trade-off between continuing inflation and deepening depression.

Every editorial writer in the land worries that if the Fed releases its brakes on the money supply, the economy will, as they say, overheat and inflation will, as they say, roar out of control. Those bitter alternatives are inexorable only where a people’s morale has been destroyed, where the rich are rewarded rather than taxed, where greed is held to be the height of virtue. We are not there yet, but boyish enthusiasm has already taken us a long way.

The New Leader

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