My previous ZCom was on possibilities/probabilities of deflation/depression. This is meant to supplement that argument.
I should note at the outset that those who regularly read the economic and business news â€” and especially those who have also majored in economics â€” will see my treatment of this topic as sheer nuttiness. The reasons are several: 1) My examination goes against the teaching and preaching of mainstream economists for the past 25 years or so (as compared with the 25 years preceding them); 2) the omnipresent fog of confusion that has been created by public officials and financial journalists (with Greenspan the main foghorn); 3) the natural tendency to think of governmental deficits as one does household debt (there being little occasion to think of household surpluses).
The conventional wisdom today is very much what it was before the mid-1930s â€” namely, it is a sin to run a governmental deficit (which increases its debt) and a virtue to accumulate a surplus (which reduces its debt). You can think of deficits and surpluses as rivers running into or out of a lake, causing debt (the lake level) to rise or fall.
In the USA, local and state governments are forbidden to run deficits without voter confirmation of a bond issue and/or tax increases. The federal government, on the other hand, can run a debt and sell bonds to finance it, merely by getting congressional approval â€” a process which often has had the effect of â€œprinting money.â€
Before World Wars I and II, the economics profession divided its analyses and theory into micro and macro, the former referring to the behavior of individual markets (for commodities, labor, etc.), the latter to the behavior of the economy as a whole. But until the ideas of Keynes were set forth in 1936 and put into practice in the 1940s, macroeconomics was mere monetarism, as carried out by the Bank of England throughout the 19th and into the 20th century.
â€œThe Little Old Lady of Threadneedle Streetâ€ (as it was called) was privately-owned and controlled. It is thus something of a model for our Federal Reserve System, which is also privately-owned. The Fed (as it is called) is controlled by its governors, who are in turn appointed by the White House, which wouldnâ€™t even think of appointing anyone not approved by â€” guess who? â€” the private banks. (This practice is otherwise known as the fox guarding the chicken coop.)
Until the past few years, banks have always had as their first concern the protection their loans. Read: THERE SHALL BE NO INFLATION. Why all the fuss about inflation? Because when there is inflation, the value of a loan decreases proportionately.
Suppose I borrow money when the price level is at an index of 100, and then by the time I am to pay it back, it has risen to 150. The rate of inflation is 33 percent (150/100). The cost of the loan to me, the borrower, has now decreased by one-third, for money is â€œcheaper.â€ And the lender has, of course, lost proportionately, having lent out money that was â€œmore expensiveâ€ than it is now. So bankers staunchly oppose government spending to stimulate the economy. It might raise prices, and that increase might reduce the real value of bonds and other loans.
Of course, it is not that the bankers are entirely wrong. Indeed, such spending, precisely because it is stimulative, will often contribute to some degree of inflation. But it may also do lots of other things that are valuable for both the economy and the society as a whole. And that includes the bankers, who after all, lose when their borrowers go bankrupt in bad times.
Sadly, this concept seems to be beyond the comprehension of the banking world. Itâ€™s not that bankers are stupid (although that, too, is possible), itâ€™s that their focus has the width of a needleâ€™s eye.
But is inflation really intrinsically bad? In 1936 Keynes (in his General Theory of Employment…) argued that price inflation of three percent or a bit more is in fact essential to a healthy capitalist economy. When the economy is in decline, or â€œstuck in the mudâ€ (as he wrote), the government should initiate projects of â€œsocial consumptionâ€ and â€œsocial investment.â€
These would be useful for the society and its people. Plus, because they would add public to private demand for labor and resources and commodities, they would be good for the economy as a whole. That includes, of course, businesses that didnâ€™t have enough buyers and banks that didnâ€™t have enough borrowers.
Keynesâ€™s position came to be called â€œfunctional finance.â€ He proposed that whether the government should run a deficit or a surplus depends upon whether the economy is too cold or too hot. If itâ€™s too cold, the government should warm it up by (1) spending and (2) not raising taxes. If itâ€™s too hot (that is, if it is threatening to inflate too much), the government should cool it off by (1) decreasing its expenditures, (2) raising taxes, and (3) using monetary policy to raise interest rates, thereby making it harder for people to buy and for businesses to borrow. Thus, for Keynes, there is neither virtue nor sin inherent in deficits and surpluses; everything depends upon the context.
When his ideas were applied in the USA and elsewhere in the 1930s and again after World War, Keynes was shown to be correct. And a significant part of the business world in the USA also saw the light, helped to do so by the expedient of massive military expenditures, which alone took us out of the depression (and continued in the Cold War.)
But the number of (by this definition) sane businesses has diminished greatly in the past quarter century â€” with mainstream economists dutifully trotting alongside. Moreover, since in the past quarter century, the structure of business power has shifted toward finance, the blindered banker mentality has come to dominate economic policy always more: NO deficits allowed, only surpluses.
At least no old-fashioned deficits. Those birthed by Reaganomics are OK. You can reduce the taxes of the rich, jack up military expenditures (which benefit mostly the rich), and reduce social expenditures. Praise the Lord and pass the ammunition, say the berserk financiers.
The Bush budget proposal for fiscal 2004 (which took hold October 2003) asked for $2.3 trillion, with an expected deficit of $400 billion when Iraq is counted. Compare this deficit with a surplus of $127 billion for 2001! But (as Keynes noted) the deficit as such isnâ€™t the problem â€” not now, not even under the Reagan crazies. The problem is what the deficit is and is not paying for â€” that is, who benefits and who pays?
The recent recession, declared to be over some six months after it began in 2002, may be over for some, but it sure as hell isnâ€™t for the nine or so millions officially unemployed and the other nine or so million who are also unemployed. The lousy times that continue have the Bush-spun name of â€œjobless recovery.â€
According to Keynes (and me), now is the time for the federal government to stimulate the economy by spending more than itâ€™s taking in. But all too many Democrats are as blindered, as stupid â€” or just as corrupted â€” as most of the GOP. A mere handful of Democrats understand (or care) that what the economy needs most are jobs and more purchasing power for the bottom 80 percent of the people, and that what this society needs most is what those jobs would be working away at.
To the degree current governmental thinking touches on any of the matters I have discussed, it is in one area alone â€” taxes. However, not only does a massively disproportionate allocation of Bushâ€™s tax cuts go to the rich, but the deficits are used to cut direct federal social expenditures and payments to the 50 states for their social expenditures. The inexorable result has many sides, among them that as direct taxes (personal and corporate income) fall, indirect federal and state taxes must rise, while at the same time, the statesâ€™ social expenditures (education, housing, health, prisons, public transportation) will fall. And because incomes fall when states cut expenditures back, incomes fall even more even as more jobs are lost. Hail Herbert Hoover!
Are there really any alternatives? You bet there are! They were tried and got fine results in the late 1930s â€” right here in the U. S. of A. They came to be called â€œalphabet soup,â€ because of their acronyms: WPA (Works Progress Administration), PWA (Public Works Administration), CCC (Civilian Conservation Corps), NYA (National Youth Administration), TVA (Tennessee Valley Authority). Thatâ€™s the short list, and the best part of it. Just a few words about those noted:
The WPA was wonderful. Some of their â€œsubtitlesâ€: Writers Project; Musicians Project; Actors Project…get it? Take a slow look at the some of the 6,600 in the Writers Project who got their start in it: Richard Wright, Saul Bellow, John Cheever, Conrad Aiken, Nelson Algren, Malcolm Cowley, Studs Terkel, Ralph Ellison, Zora Neale Hurston…Read any good books lately? These writers got $20â€“25 a week for working five days. (â€œUnmasking Writers of the W.P.A.,â€ NYT, August 2, 2003)
(Personal note: I was in the student project, NYA, while going to San Francisco Junior College, 1936â€“38 (tuition $1 year) while getting paid 40 cents an hour â€” $20/week â€” to work with a history prof; and it made a very big difference to me).
As for PWA, when you cross a bridge, drive on a road, look at a dam, chances are it was built first by the PWA. The CCC…You may know some old guy who was kept from starving while, at the same time helping nature along, when he worked in the CCC. The TVA…If you live in the Tennessee Valley, your whole familyâ€™s life was changed for the better by the TVA; and so on.
Those who worked in any of those agencies were not only getting what was an almost livable income then, they were also spending it and helping to maintain or increase jobs for others. At least as important, they were doing something noticeably useful with their lives â€” and whether they cared or not, their work was good for their society.
However, because everything is just hunky-dory today, we have no need for such social expenditures â€” no reason to repeat the errors of those bad old days. At least, so they say.