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wild bill V rides again
"William Jennings Bryan used to declaim,
"You shall not crucify mankind
upon a cross of gold."
Today's cross is not made of gold,
but is concocted
of a web of obfuscatory financial rectitude
from which human values have been expunged"william vickrey 1993
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August 6, 1993
We are not going to get out
of the economic doldrums
as long as we continue
to be obsessed
with the unreasoned ideological goal
of reducing the so-called deficit.The "deficit" is not an economic sin
but an economic necessity.Its most important function
is to be the means whereby
purchasing power not spent on consumption,
nor recycled into income
by the private creation of net capital,
is recycled into purchasing power
by government borrowing and spending.Purchasing power not so recycled
becomes non-purchase, non-sales,
non-production, and unemploymentWe have not had a satisfactory approach
to full employment, except in wartime, since 1926.Over much of this century
trends in the ratio of profitable private capital
to national product have been downward
as a result of capital-saving innovation
such as fiber optics
the trend to light industry
away from steel mills and other heavy industry
and the increasing importance of servicesProspects are that for the foreseeable future
the capacity of private industry
to find profitable use for private capital
will be not much greater
than two years of gross domestic product"On the other hand
aspirations of individuals
to acquire assets
to provide for retirement
and other purposes have been growing,
due to longer life expectancy,
higher retirement aspiration levels,
the loosening of family ties,
the development of expensive medical technologies,
and other factors.Current aspirations appear to be moving towards
three years or more of gross domestic product.
This leaves a gap to be filled by government debt
of about one year of gross domestic product.
If we aspire to a satisfactory level
of full employment by 1998,
whereby anyone not too finicky
about the type of work could find a job
at a living wage within 48 hours, this will,
if we assume inflation to average about 3%,
call for a gross domestic product
of about 10 trillion dollars.To fill the gap between the asset aspirations
of individuals at this level of income
and the ability of the private sector
to provide assets, the supply of government securities
would have to rise to 10 trillion dollars,
implying a level of income recycling
by governments of about one trillion a year
on the average over the next five years.Once this level is reached,
to continue in equilibrium
the supply of government securities
will need to grow pari passu
with the gross domestic product,
to correspond to the gap between
the demand of the population for assets
and the provision of assets
by the private sector.Whatever interest charges on the debt
are not financed
out of this growth in the debt
can more than be met
out of savings in unemployment insurance payments
and the increased tax revenues
derived from the larger national product
at rates no greater than at presentA 10 trillion debt
with a full employment economy
will be far easier to deal
with than a 5 trillion debt
with an economy in the doldrums
If governments fail to fill the gap
and meet the demand for assets
by issuing an adequate volume of securities
the attempt by individuals
to acquire assets by non-spending
will cause a reduction in sales
temporary investment in excess inventories
cutbacks in orders, unemployment,
and reduced national income and productThis may be partially offset
by the bidding up of asset values,
leading to a certain amount
of additional spending out
of capital gains,
but the "saving" imbedded
in these capital gains
does not involve the creation
of new capital
or the employment of individuals in construction.The reduction in interest rates
could in principle increase
"deepening" types of investment
in labor-saving technology,
but after the initial stimulus
the effect on employment tends
to be negative.Little "widening" investment
is likely to take place
regardless of reduced interest rates
if the market for the product
is not there.There is a serious danger
that the bidding up of asset prices
could create a bubble of unsustainable values
that is likely to collapse disastrously,
as occurred in 1929
after the budget surplusses
of the preceding years.Sooner or later a reduction in production
and national income will set in
until the reduction in income
reduces the demand for assets
to conform to the supply.Reducing the "deficit"
may reduce the debt of the government,
but it also reduces
the supply of assets people
want to acquire to take care
of their security needs.Reducing the "deficit"
does not improve the real heritage
left for the future,
rather it impairs that heritage
by leaving a legacy of inexperienced workers,
impaired infrastructure,
and reduced investment in plants
because of reduced demand
for the products,
to say nothing of the impact
of unemployment on health, delinquency,
crime, and broken homes.The "deficit" is not even calculated
on a businesslike basis.It makes no distinction between
current account and capital account items.If GM, AT&T, and the nation's households
had been compelled to "balance their budget"
calculated in the way the federal budget
is calculated,
we would now have many fewer automobiles,
telephones, and houses.Urging individuals to save more
is counterproductive.Individual saving does not mean
that funds are created out of thin air
to put into savings accounts
or the capital market;for most individuals savings
is non-spending which becomes
the non-income and reduced savings
of the vendor.Funds are transferred
from the bank acount of the vendor
to the account of the saver,
there is no increase in total money
in the bank,
and no facilitation of investment,
while reduced market demand
will actually discourage investment.Savings are neither a prerequisite
nor an inducement for investment.Rather, non-spending
by reducing market demand
lowers incentives to invest.On the other hand
if a businessman can show good prospects
for profitable investment
he can nearly always get credit
and proceed with the investment,
which will constitute an increase
in someone's wealth
which is ipso facto savings.Supply does not create its own demand
as soon as some of the income generated is saved,
but investment does create its own savings,
and more.Eventually, in all likelihood,
we will have to find some way
of dealing with the threat
of an unacceptably high rate of inflation
that does not involve
the maintenance of what Marxists
used to call "the reserve army of the unemployed."For the moment, however,
that threat seems sufficiently remote
that we could proceed with the first steps
towards full employment
and deal with that bridge
when we come to it.There has been no dearth of plans
for controlling inflation
in ways that preserve the essence
of free markets.The administration is trying to bring
the Titanic into harbor with a canoe paddle,
while Congress is arguing over whether
to use an oar or a paddle,
and the Perot's and budget balancers
seem eager to lash
the helm hard-a-starboard
towards the iceberg.Some of the argument seems
to be over which foot is the better one
to shoot ourselves in.We have the resources in terms
of idle manpower and idle plants
to do so much,
while the preachers of austerity,
most of whom are in little danger
of themselves suffering any serious consequences,
keep telling us
to tighten our belts
and refrain from using the resources
that lie idle all around us.Alexander Hamilton once wrote
"A national debt, if it be not excessive,
would be for us a national treasure."William Jennings Bryan used to declaim,
"You shall not crucify mankind upon a cross of gold."
Today's cross is not made of gold,
but is concocted
of a web of obfuscatory financial rectitude
from which human values have been expunged.
Posted by pinky at August 1, 2006 11:18 PM
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