Bankers Have the Classic COLA
BROCKWAY, GEORGE P.
The Dismal Science BANKERS HAVE THE CLASSIC COLA BY GEORGE P. BROCKWAY IN "The Fear of Full Employment" (NL, October 31, '88) we examined some of the fallacies behind the almost...
...In the 40-odd years since the end of World War II, there is one stretch, from 1959 through 1965, when the CPI and the prime were both substantially stable...
...Another comparison: The Bankers' COLA costs close to three times as much as the Federal deficit the bankers moan about...
...What they want back is not the money, but the money's purchasing power...
...Hence the Bankers' COLA...
...The Bankers' COLA, however, is accepted as a natural law and discussed matter-of-factly in the textbooks, while the others are deplored as the work of greedy special interests out to line their own pockets at the expense of the nation and its God-fearing citizens...
...Since the Bankers' COLA costs the economy more than inflation does, without it there would in effect be no inflation...
...The figures we have been working with are from the past, but bankers —including, especially, those who make up the Federal Reserve Board—set rates that will have to be paid decades into the future...
...Since the GNP is currently about $4,500 billion, inflation is currently costing us 4.5 per cent ofthat, or $202.5 billion...
...Vastly more important, the Bankers' COLA is a forecast, a prediction, a prophecy...
...So much for the fear of full employment...
...We used to hear a lot about the wageprice spiral, but a wage increase in the automobile industry (for many years the pundits' whipping boy) works its way through the economy slowly and uncertainly...
...In those seven years the CPI varied from 0.8 per cent to 1.7 percent, and the prime from 4.48 per cent to 4.82 per cent...
...It would trigger a one-time surge in the stock and bond markets, followed by a gradual tapering of f of speculation...
...That is remarkably (and coincidentally) close to our estimate of the current Bankers' COLA...
...and while it is possible for borrowers to shop around a bit for a loan, they find that rates vary within a very narrow range...
...The Bankers' COLA is thus costing us almost two and a half times as much as the inflation it is claimed to offset...
...This figure includes everything from the Federal debt to the charge you got hit with when you didn' t pay your bank's credit card on time...
...One way of stating the Banker's COLA is that it is the difference between the interest rate now and that of some earlier, less inflationary time...
...The interest cost is the only one that has a general effect on the economy...
...The propaganda against them (coupled with high unemployment and underemployment) has pretty well knocked cost-of-living clauses out of labor contracts...
...Of course, bankers don't call it a COLA...
...The number of people living in poverty is growing, and within that group the number of those who work full time yet are poverty stricken is growing still faster...
...That this is so is revealed by the statistics whose subject is people rather than things...
...More important, interest costs affect all prices, because all businesses must have money, even if they don't have to borrow it, and the cost of money is interest...
...The allowance for inflation is what in other sectors of the economy is called a Cost of Living Adjustment, or COLA...
...Another COLA, seldom mentioned, is the indexing of the income tax...
...At the moment the CPI is said to be about 4.5 per cent (less, you will have noticed, than the Bankers' COLA, because bankers expect inflation to get worse...
...Consequently if the Bankers' COLA has been doing what it's supposed to do, we are not overstating the case in saying that today it is running at about 6 per cent...
...As matters stand now, the Bankers' COLA is an incubus of terrible weight depressing the economy...
...The Bankers' COLA was evidently no more than 1.7 in those years, and the "real" interest rate was somewhere between 3.5 per cent and 4.5 per cent...
...The Dismal Science BANKERS HAVE THE CLASSIC COLA BY GEORGE P. BROCKWAY IN "The Fear of Full Employment" (NL, October 31, '88) we examined some of the fallacies behind the almost universally held doctrine that full employment makes for high inflation...
...This time we'll look at another almost universally held doctrine, namely that raising the interest rate is the cure for whatever inflation exists...
...Well into the 21st century, for instance, we will be paying up to 15.75 per cent interest on a trillion dollars' worth of Treasury bonds sold in the wonder-working days of former Fed Chairman Paul A. Volcker...
...The rate of unemployment—even counting part-timers as fully employed, and not counting at all those too discouraged to keep looking for work—would have been shocking a few years ago...
...A boost in the prime rate of a prominent bank, on the other hand, immediately affects the rates charged by every bank in the country...
...Subtracting 4.5 per cent "real" interest from the current prime, we determine that the current Bankers' COLA is, conservatively, 6 per cent...
...Let's accept the higher figure, even though it is substantially higher than, for example, the rate in the years when the foundations of the modern economy were laid...
...Even so, the steady cacophony from Peter Peterson and other investment bankers (when they take time off from promoting leveraged buyouts, which they evidently don't think inflationary) has put the American Association of Retired Persons on the defensive...
...The Social Security COLAS are somewhat more secure because there are more worried senior citizens than alert union members...
...An astonishing thing about the latter doctrine is that no one bothers to say why it should work...
...Kennedy and Lyndon B. Johnson...
...If there were no Bankers' COLA, we'd be running a surplus, not a deficit...
...The standard of living of the median family is falling, even with two earners per family much more common than formerly...
...As the late Senator Everett McKinley Dirksen would have said, we're talking about real money...
...They have, in fact, been unremitting in propagandizing the notion that COLAS are bad and greedy and inflationary and likely to cause the downfall of the Republic...
...and in inflationary times the only way to get back the same purchasing power is to get back more money...
...Now, the present outstanding debt of domestic nonfinancial sectors is about $8,300 billion...
...it causes it...
...The prime rate at the moment is 10.5 per cent, and may have gone higher by the time this appears...
...And of course very great changes would follow if so large a factor as the Bankers' COLA were eliminated...
...Reducing the interest rate to its "real" level would quickly and powerfully stimulate investment in productive enterprise, with a consequent growth in employment...
...Initially it affects only the price of automobiles, and it never brings about a uniform wage scale...
...Other things being equal, there would actually be deflation...
...So we come to Brockway's Law No...
...excluded are the debts banks owe each other and, for some reason, charges on your nonbank credit card...
...2: Raising the interest rate doesn't cure inflation...
...The average gets higher as we go back 15 and 20 years, and falls slightly if we go back 25 years...
...If there were no Bankers' COLA, none of the other COLAS would exist, because the cost of living would not be going up...
...Let's try to put it in perspective...
...These are signsof recession, of bad times...
...People with money to spare are said to be enticed into lending by the prospect of getting back their money at a stated time with stated interest...
...The cost of the Bankers' COLA for this year therefore comes to about $498 billion (6 per cent of $8,300 billion...
...Also: The Bankers' COLA costs more than giving every working man and woman in the land, from part-time office boy to CEO, a 10 per cent raise...
...Since increased costs of doing business increase prices, and increased costs of running the government increase taxes (or the deficit), it is argued with some reason that COLAS are inflationary...
...Also: The Bankers' COLA costs many times more than all the other COLAS put together, and about 50 times—repeat 50 times—more than the Social Security COLA that so exercises investment banker Peter Peterson...
...Wages of grocery clerks remain low, and all wages in Mississippi remain low...
...The New York Times, which never mentions the prime interest rate without pedantically explaining that it is the rate banks charge their most credit-worthy borrowers, regularly reports without question that if the Consumer Price Index (CPI) starts to rise, the Federal Reserve Board will have to raise the interest rate...
...But only about a tenth of outstanding loans were written in the past year, andmanygoback25-30 years...
...Over the past 10 years the CPI has increased an average of 6.01 per cent a year...
...Economists divide what they call the nominal or "money" interest rate (which is what you pay) into two parts: "real" interest (what they think you'd pay if the economy were in equilibrium) and an allowance for inflation...
...1: Given the fact that outstanding indebtedness is greater than GNP (as is always the case, in good years and bad), the Bankers' COLA costs more than the total cost of inflation, at whatever rate...
...So we come to Brockway's Law No...
...Readers with a political turn of mind will note that the Presidents in this period were a Republican and two Democrats—Dwight D. Eisenhower, JohnF...
...The COLAS bankers talk about are those that appear (or used to) in labor contracts, where they are manifestly an increased cost of doing business for companies with such contracts, and those that appear in Social Security and other pension payments, where they are manifestly an increased cost of running the government...
Vol. 72 • January 1989 • No. 1
