THE MYTH OF A CAPITAL SHORTAGE
Brand, H.
The idea of a potential capital shortage has been insistently argued by Administration officials and given academic respectability by Harvard professors and Brookings Institution researchers. It...
...It causes the exodus of the more skilled and energetic workers, breaking up work teams that are hard to reassemble...
...V. Lewis Bassie, "Fiscal Policy Without Controls," Illinois Business Review, Dec...
...The deficit—generated by tax cuts, a shrinking tax base, rising unemployment insurance payments, and increases in other income supports—averaged $73 billion for all of 1975 but rose to $102 billion in the spring quarter of that year...
...First, the official figures do not indicate a significant change in the distribution of personal money incomes...
...20 But administrative measures over the wage bargain of any broad scope would spell either a basic change in current relations between labor and capital, implying fascistic tendencies or, in the absence of such a change, would impose such restrictions on prices nd profits (as well as wages) as to virtually nullify the possibility of intensified extraction of surplus value from labor...
...But during the 1973-74 period of tight money, only the residential housing sector suffered a severe dearth of credit...
...yet it should not therefore be dismissed...
...For example, earlier retirement, or the splitting-up of households, with younger or older members forming their own, tend to lower reported incomes per household, while failure to treat retained corporate earnings as stockholder income overstates incomes per household in the upper brackets, considering the decline in these earnings...
...They tripled over the 3 3/4 years that ended September 30, 1974, reaching nearly $13 billion...
...The progressive liberalization of depreciation schedules since 1962 and the investment tax credit also then instituted have increasingly offset the rise in replacement costs...
...and suggests that the speculative element has been substantial...
...The threat of renewed controls, after the original ones had been modified or abandoned in early 1973, spurred rather than restrained price increases (renewal would have to work with new, higher price ceilings...
...A consumer-goods boom did occur, but it cannot possibly be attributed to income equalization...
...they were used largely to pay off bank loans and refinance such short-term debt with bond issues...
...Albert T. Sommers with Lucie R. Blau, The Widening Cycle: An Examination of U.S...
...The arguments pro and con cannot be discussed here...
...However, there are no "givens" in capital goods...
...A possible capital shortage was first perceived in 1973, a year of inflationary boom...
...This "capital shortage" represents a paradox—a contradiction of the capitalist system—arising toward the end of a boom that generated enormous amounts of capital, a buildup of physical and financial assets so vast as to threaten a collapse of values...
...and that the proposals to overcome it, while benefiting owners of capital assets, carry no mandate that the benefits be reinvested...
...That is, such categories of income as social security, unemployment compensation, and welfare are indexed to keep pace with the price level...
...The deficit restored neither employment levels nor incomes to previous levels, yet it sustained the price system and its inflationary pressures...
...We will then analyze certain interpretations of the reasons for the presumed capital shortage, reasons that will prove to be an ideological guise justifying measures to strengthen the ownership of capital assets...
...that the rationale in its favor is fallacious...
...Since the possibilities of extracting surplus value have become more limited, the almost forced and rapid expansion of credit has been resorted to as a supplement...
...It is improbable that significant, if any, federal surpluses will develop in the foreseeable future...
...Corporate mergers or large-scale speculative purchases of land undoubtedly played a big role in accelerating corporate indebtedness, but to this writer's knowledge no comprehensive data on these matters existed...
...and 18.9 and 18.3 in 1955 and 1956, years of strong expansion...
...The limits of the commercial exploitation of knowledge and its applications, while greatly extended by multinational corporations and international patent and licensing agreements, are found chiefly in international competition, whose potency is enhanced by the participation of national governments...
...It could then be used to pay off part of the public debt, conceivably making funds available for capital investment (although, again, the ultimate use of such funds would be beyond the control of the government...
...That means that there was not nearly enough even to replace existing capacity, and nothing to finance investment in additional new capacity...
...under the law's 1971 amendment, 55 percent...
...Under the 1962 law, 48 percent of newly purchased machinery and equipment could be recovered in the first three years...
...86 ff...
...9 Banks "were helping to finance the growing volume of speculation" that characterizes inflationary boom periods, writes Arnold Diamond in the study prepared for the Joint Economic Committee that has been quoted above...
...But the resistance of organized labor has neutralized it to some extent...
...That is, these proceeds can be used to finance any profitable investment that the seller of the mortgages chooses, and often in areas other than residential housing...
...Furthermore, since the direction of capital investment would not be affected by any of the remedies proposed to overcome the "capital shortage," misdirection of such investment would not be avoided...
...12For much valuable detail in a brief compass, see "What's Wrong with The Mortgage Market," Business Week, Oct...
...The mandatory price controls instituted briefly by the Nixon administration ultimately failed because they could not accommodate wide variations in costs and pricing practices, and in productivity—a failure that resulted in large part of course from resistance and ideological ambivalence...
...If AMONG THE MORE critical developments of the late'60s and early'70s was a rapid rise in corporate indebtedness...
...26 Capital Formation, p. 51...
...Certainly, one of the reasons for it is that the ultimate disposition of the proceeds from the mortgages these agencies acquire—close to $15 billion in 1975 or nearly twofifths of total mortgage fund flows that year—is not, and under present conditions cannot be, controlled...
...For the deficit had its counterpart in a rapid increase in the volume of gross business savings (i.e., cash flow consisting of retained profits and depreciation writeoffs)—and this really protected business and the financial system against a crisis of liquidity and deflation...
...More likely than sizable federal budget surpluses is the continued liberalization of taxes on income from capital assets...
...117 ff...
...Yet, there is some truth in this argument, although its proponents have overlooked it, a truth pertaining to a long-term development that stretches over perhaps the last 70 years...
...Short-term bank loans to business, especially to finance inventories, rose during the first nine months of 1974 by 19 percent over the corresponding year-before period—to $467 billion...
...Business income, on the other hand, absorbs much of the inflation in costs, partly because it must take the full brunt of the government's anti-inflation effort—i.e., regulatory restraints...
...3 Statement, William E. Simon, Secretary of the Treasury, before the House Ways and Means Committee, Jan...
...the highest 20 percent received 40.9 percent and 41 percent...
...q Notes 'U.S...
...All "inhibit the growth of business incomes under conditions of cost inflation...
...In 1975, federal credit programs had $178 billion in outstanding direct loans, mostly to financial intermediaries for relending...
...At the very time when it becomes more difficult to expand sales volume, and thus to raise the funds for further expansion or for debt repayment, it becomes also more difficult to obtain additional credit...
...23 Taxes would necessarily have to grow much faster than expenditures...
...25Joint Economic Committee, U.S...
...In addition, the private appropriation of socially generated knowledge and inventions has come to be ever more closely exercised...
...The economic consequences of labor's integration have been resisted at great social cost and with decreasing success...
...7, 1975), p. 36...
...24 Whatever its impact on capital formation, the 304 NOTEBOOK indicated liberalization of the tax code would benefit owners of capital...
...But these are problems with which the remedies discussed here cannot cope...
...The gross savings of nonfinancial business rose 29 percent in 1975...
...2 The rapid expansion of credit at historically high interest rates in 1973 and I974 indicated high anticipated profitability of loans as well as lenders' expectations that continued inflation ensured profit, or at least would bail them out, should defaults occur...
...Part of this is intended...
...It affects regions and localities unevenly, undermining their social and economic structures...
...It is true that government spending and government credit operations vitally affect investment decisions, but essentially they are catalysts of, not impediments to, capital formation...
...The resources required to correct these "errors" by now are enormous, and they are to be supplemented by additional subsidies to owners of capital...
...Rent controls have indeed spread but have in effect been neutralized in many instances by conversions to condominium or "cooperative" status, or by the decline of normal landlord services...
...Second, a. A this is an explanation I do not find fully acceptable, capital consumption allowances are said to have become less and less adequate because they are based on historical cost—the original purchasing price—of machinery, equipment, and structures...
...still, when the widening dollar difference is taken into account, the position of the bottom fifth deteriorated...
...The argument is flawed since, first of all, the higher cost of replacements is offset in part by their higher productivity...
...10 Hedging against currency fluctuations is a normal banking activity, and the purely speculative element therefore cannot be readily determined...
...16 In this view, then, inflation does not merely manifest a covert struggle between social classes over the distribution of the gains from economic activity, in which conflicting claims are somehow reconciled by economic growth...
...future contracts to buy or sell foreign exchange . . . and bullion for foreign branches of all [Federal Reserve] member banks 300 NOTEBOOK aggregated $105.8 billion or 90 percent of their total assets...
...5 On a first accounting, then, roughly onehalf of total corporate funds was needed to offset the declining purchasing power of the dollar...
...that is, some control over the rate of return," so as "to avoid the antidistributional effects of rises in business incomes...
...We briefly summarize his data in what follows...
...has been based throughout most of the post-World War 11 period, is anachronistic and unworkable and cannot restore the conditions of the mid-19th century to which it applied...
...23, 24...
...But a repetition of the banking crisis of the '30s was averted chiefly by the stabilizing effects of the federal budget deficit on incomes and output, and on the financial values embodied in bank loans...
...It must be regarded as a harbinger of a more pervasive state capitalism, a threat to social gains...
...True, for every debt an asset is created, but this does not mean that debt can be expanded indefinitely...
...The apparent stability of the U.S...
...22 A budgetary surplus would presumably be generated in conditions of "full" employment...
...New capital never merely replaces the old...
...21 For an informative statement, see Robert F. Lanzillotti in U.S...
...It also points to changes in the conditions of capital accumulation that need to be examined...
...The analysis offered here is meant as a weapon to combat the myth and its probable consequences...
...New stock issues remained of little significance...
...True, the "shortage" is anticipatory rather than actual...
...In addition, they extended loans to finance company takeovers, corporate purchases of their own outstanding shares and "luxury-type" expenditures by middle and upper income families...
...IV WE HAVE attacked the notion of "capital shortage" on the ground that it lacks a foundation in recent historical experience...
...Loans by commercial banks to mortgage companies and real estate investment trusts rose to more than $34 billion by September 1974, from $15.5 billion three years earlier...
...The income figures cited in the text refer to the upper limit for the lowest quintile, and to the lower limit for the top 5 percent of the income distribution...
...However, inasmuch as virtually all of the benefits are financed by payroll contributions, which rose at about the same pace, no new source of consumer outlays was created...
...NOTEBOOK 301 III NEVERTHELESS, it is necessary to go beyond a demonstration of recent developments pertaining to capital investment...
...A "deterioration of investment environment" has accompanied (and presumably resulted from) the shift in economic policy from "aggregative goals" during the first two decades of the postwar period to "distributive goals" since 1965...
...Medicare has given rise to a profitable nursing home and hospital industry...
...The average monthly benefit of a retired worker rose to $188, or by about $100 between 1965 and 1974...
...incomes are inflationary, efforts to subdue the resulting inflation are usually "anti-investment...
...This spells ever higher face amounts for the loans, bonds or stocks by which they are financed...
...6Simon Kuznets, Capital in the American Economy...
...1975, p. 18...
...Still, the argument is politically too weighty to be dismissed out of hand...
...It makes life difficult for the more highly capitalized industries (which pay comparatively high wages), since marginal firms in such industries are enabled to hire available unemployed labor at lower wages and can underbid the prices of the NOTEBOOK 303 technologically more advanced firms...
...3 06 NOTEBOOK...
...The "capital shortage" is a myth, but like all myths it carries a weighty message: it represents a demand upon the state to reduce its compensatory social outlays and to aid private accumulation...
...These projections are devoid of any foundation in historical experience...
...and under its 1975 amendment, 61 percent...
...1 ° Second, and more important, however, is the fact that the dollar difference in actual money incomes between the lowest and the highest quintiles widened enormously in the two years—from $13,195 to $25,443...
...We cannot detail the many kinds of favored tax treatment of capital assets and of income derived from them...
...Ever larger sums were required to buy a given basket of capital goods...
...7 Richard Musgrave, in Public Hearings before the Committee on Ways and Means, quoted in Capital Formation, p. 35...
...Such measures have been proposed by the chairman of the Federal Reserve Board, Arthur Burns...
...Hence, to associate the expansion of social security transfer payments with "inflation" is preposterous...
...It has gained widespread acceptance and requires analysis from an adversary point of view...
...6 Let us assume that, over the 1965-74 span, the replacements of, and new additions to, the stock of capital improved about the same rate as labor productivity—17 percent...
...This would raise the after-tax yield of assets and thus presumably spur capital formation, although this result has been disputed...
...it brings the existing stock of capital "to the latest level of efficiency...
...Secretary Simon, in a statement before the House Ways and Means Committee in January NOTEBOOK 299 1975, turned the 71-percent increase in reported after-tax profits between 1965 and 1974 into a 50percent decline for the period, after he had "adjusted" for the "understatement" in capital consumption allowances and the effect of inflation on inventory valuation...
...High interest rates do not deter borrowing by business because of the tax deductibility of interest, so that business shoulders only about half of the cost of the interest it pays on loans...
...The concept of an "unemployment-inflation" tradeoff, on which economic policy in the U.S...
...Other loan losses too have not been insignificant...
...Moreover, loans made to purchase additional assets are then often secured on the expected higher price of a lien, thus creating an ever more labile debt structure...
...In this respect, the state's role is by now well entrenched...
...Finally, we will offer a critique of the solutions that are proposed to deal with the capital shortage...
...Among the forms this resistance has taken has been the pursuit of a relatively high unemployment rate as a key tool of economic policy...
...This is not so...
...the scourge of sharp and frequent cyclical swings in economic conditions would be exacerbated by the additional capital investments from the proposed incentives...
...5"The data do not describe an economy subsiding into stagnation over the last decade...
...18 Thus, while efforts rapidly to equalize...
...it derives from tax cuts and higher investment allowances...
...Such loans are held by banks as well as by nonbank mortgage lending institutions, which are heavily financed by the banks...
...While normally more funds flow into then out of the United States, outflows rapidly rose in relation to inflows in 1974, despite supposedly stringent domestic credit conditions...
...Thus the threat of a corporate debt collapse was greatly mitigated...
...But the bankruptcies of such banks as Franklin National in New York or Herstatt in West Germany, caused by foreign exchange losses, entailed large if less ruinous losses suffered by banks in the U.S...
...Capital Requirements of Energy Independence, p. 33...
...Senate Committee on the Budget, Effects of Fiscal and Monetary Policies on Capital Formation and Economic Growth (Washington, D.C.: G.P.O., 1975), p. 113...
...Senate, Committee on Finance, Capital Requirements of Energy Independence...
...The entire financial structure is seen to be at risk, since a downward valuation of assets might be in the offing...
...The expectation that the additional dividends would be reinvested, i.e., that capital formation would be spurred, is merely conjecture...
...Prepared for the use of the Committee on Ways and Means (Washington, D.C.: Oct...
...A "capital shortage" appears to be in the making (businessmen call it a "liquidity squeeze...
...Businessmen "experienced little difficulty in obtaining increasingly larger loans...
...3. Currency transactions: American banks maintained 621 branches abroad at the end of 1973...
...It accounts for the "declining vigor in the response of profits to business expansion" over the past decade, and "is the most general reason for the present preoccupation of businessmen with fears of a capital shortage...
...1. Stock market credit: Despite the decline in stock prices in 1974, margin credit extended to commercial banks and brokers (primarily financed by the banks) totaled more than $5 billion at the end of September 1974, $7 billion a year earlier, and $9 billion two years earlier...
...The banks expended vast sums on speculative investments...
...26 The income distribution would be substantially shifted in favor of owners of capital assets (which include stocks): in 1972, fewer than one-fifth of all tax returns accounted for close to three-fifths of all dividend income...
...3 Elsewhere, the Secretary has said that the large share of investment needed for replacement and modernization of existing facilities does "not add to the total productive capacity of our economy...
...Comparable increases in bankers' acceptances and commercial paper issuances by nonfinancial companies attest further to this credit ease...
...Yet it remains an elusive conception, the more so since it has been advanced throughout the current recession, when utilization of tangible industrial capital—machinery, equipment, structures—has run at 70 percent or less of optimal levels, bank loans to business have been declining) and corporate liquidity, badly straitened in the boom period 1973-74, has been rapidly restored...
...financial liabilities were incurred at comparatively very low rates...
...For underlying concern with an impending capital shortage is the belief that the growth in consumption, particularly the expanding consumption claims transmitted through the federal budget, increasingly diminishes the resources available for capital formation—i.e., that this growth in consumption has tended to redirect the allocation of resources so as to threaten the future productivity, strength, and living standards...
...Industry and commerce did not find it difficult to finance one of the great capital goods and real estate booms in the annals of capitalism...
...Such a crisis never developed on any generalized scale...
...in fact, the real growth of plant and equipment outlay has been faster since 1965 than it was the preceding twelve years, and the rate of growth in physical output has been about as well maintained...
...unemployment cannot be allowed to rise to levels that threaten the system (although one should not overestimate the control over the level of employment and unemployment that is possible within the terms of conventional policy...
...At least here, it might seem, a "capital shortage" prevails...
...relief was afforded by what in effect was the absorption of the federal budget deficit in corporate cash flow...
...In the absence of price controls, income equalization is inflationary because the increased money consumption demands raise the money incomes of upper-income recipients who own a disproportionate share of productive facilities...
...At such conjunctures, credit policies are tightened...
...In fact, it has been calculated that, for large corporations, this capital gain offsets the presumed shortfall in depreciation writeoffs based as they are on the original purchase cost of capital goods.' If no capital shortage can be demonstrated for the industrial core of the economy, the activities of the banks over the past few years also show conclusively that very large amounts of capital can be generated for speculative and related profitable purposes...
...15/bid., p. 19...
...Thereafter, their relative importance contracted to well below one-half, while that of external sources, such as bond issues and bank loans, expanded...
...23See Capital Needs in the Seventies, p. 32, tables 2-9...
...Corporate capital consumption allowances plus after-tax profits—i.e., cash flow or gross profits— accounted for 17.8 percent of the domestic product of non-financial corporations in 1974, and 16.2 percent in 1973...
...However, banks have lent millions of dollars to real estate investment trusts ("REITS") many of whom either would now be bankrupt NOTEBOOK 305 but for their bank sponsors' forebearance or compelled to file for bankruptcy when forbearance was withdrawn, 9Arnold Diamond, Credit Flows and Interests Cost...
...Ieibid., p. 32...
...This latter alternative is the more probable, at least for the present...
...In 1965, corporate debt exceeded the dollar value of corporate output by 16 percent...
...9Statistical Abstract of the United States, 1975 (Washington, D.C.: G.P.O...
...The claim that egalitarian policies or pressures led to the suppression of price increases sufficient to pass on cost increases, while allowing incomes full play by means of indexing them, is also problematical...
...Until 1967, these two items together accounted for two-thirds or more of the total, internal and external, sources of corporate funds...
...in 1974, by 55 percent...
...families in the bottom fifth received $3,500 and $6,500...
...they evolve as tendencies, not as sudden barriers...
...True, because of the rise in the total number of benefits, and because of the higher monthly unit benefits paid out, the total amount of social security more than tripled over the decade...
...Congress, The 1976 Joint Economic Report (Washington, D.C.: G.P.O., March 1976), p. 169...
...These solutions would in essence require the federal budget to distribute resources toward the owners of capital, even while their efficacy of contributing to capital formation would be severely in doubt...
...Inflation creates a growing gap between original and current prices of capital goods—and business, it is claimed, is forced to go into debt in order to bridge the gap, unless depreciation allowances are based on replacement costs...
...1975, p. 2. "QAlbert T. Sommers, "Social Goals and Economic Growth—the Policy Problem in Capital Formation," The Conference Board Record, Dec...
...Markets become quickly saturated as real incomes decline, owing to the inflationary forces of the boom, and as employment levels off and unemployment rises...
...They stem from an inability (or growing difficulty) to expand debt...
...income distribution over 20 years of strenuous effort toward equalization—including enormous growth of transfer payments, and a steeply progressive personal income tax, and the implementation of antipoverty programs—is . . almost certainly misleading"—i.e., the available data, which indicate no significant change, obscure conflicting underlying trends...
...p. 14...
...4. Inventories: It is generally believed that tight monetary policies restrict credit...
...Experience with Stabilization Policy in the Last Decade (New York: The Conference Board, 1975), p. 34...
...Therefore (and we have not exhausted the reasons), a policy that seeks to stabilize prices by means of unemployment cannot succeed...
...It is that the gradual, albeit incomplete integration of labor in the polity, particularly of organized labor, has tened to change the conditions of capital accumulation, i.e., the extraction of surplus value from labor...
...See also the statement of James J. Needham, Chairman, N.Y...
...Expenditures for plant, equipment, and inventories, on the other hand—i.e., capital spending—dropped 18 percent...
...These relationships have not changed significantly over the past decade and do not manifest the pressures for "equalization" postulated by those arguing its case...
...Now 95 percent of the cost of such capital goods can be recovered within seven years.I The liberalizations in depreciation writeoffs partially account for the decline in the share of reported profits in total corporate product over the past decade...
...During booms, assets (e.g., plant, equipment, machinery, inventories, real estate, as well as entire companies) are acquired at ever higher purchase prices...
...The very threat of this development imperils the values on which the repayment of debt is predicated...
...25 Still, major new kinds of tax relief for owners of capital assets have been proposed, e.g., the removal of the "double taxation" of dividends, which are currently taxed as profits at the corporate level, and as income at the shareholder level...
...Senate, Select Committee on Small Business, Economic Aspects of Government Patent Policies (Washington, D.C.: G.P.O., March 8, 1963), pp...
...16/bid...
...It is worth noting that federal agencies have come to dominate the market for residential mortgages, but that mortgage funds remain tight and very expensive...
...Corporate debt rose much faster than either consumer or government debt...
...The creation of a budget surplus, to be sure, represents a form of capital allocation, but the intent is to channel the available funds to a class, not to a social purpose and to benefit, established interests...
...These conditions would seem to indicate a surfeit, not a scarcity, of capital...
...in certain major real estate investments, loans have had to be "refinanced" or written off altogether...
...True, the relative position of both quintiles remained unchanged...
...The inventory buying of 1973-74, for example, represented to a large extent a hedging against higher prices...
...2. Land and land redevelopment loans: Such loans involve the purchase of unimproved pockets of land, usually in suburban areas, whose value is expected to rise as development of the urban ring proceeds...
...4 The progressive equalization of incomes, or the attempt to attain it, is associated with rising pressures of consumption on supply and generates competition for scarce resources...
...He also calculated that undistributed profits had dropped so precipitously that for 1974 the figure was "a minus of nearly $10 billion...
...But there is no evidence for such preemption...
...the revenue loss to the Treasury has been estimated at $12 billion, which probably represents the gain to shareholders...
...But this alternative has not been mentioned by the proponents of a budgetary surplus...
...Removal of the tax on dividends at the corporate level would increase dividend payouts (alternatively, it may take the form of a tax credit allowed to shareholders...
...its function in redistributing resources to owners of capital would be enlarged...
...Congress (Washington, D.C.: G.P.O., March 17, 1975), p. 28...
...Diamond identifies several specific areas of speculation and calculates the gross amounts of credit extended by commercial and savings banks...
...Ibid., p. 35...
...Hence, some form of control is required, and this spells "a firmer control over the price level than the wage level...
...But if virtually all economists including those in the Treasury Department, with their expensive computers and research staffs, failed to foresee the deepest slump since the late '30s, why should one now have confidence in their prognostications of a capital shortage...
...Rather, we will first examine aspects of capital formation over the past decade...
...The lowest 20 percent of the population received 5.2 302 NOTEBOOK percent of total money incomes in 1965, and 5.4 percent in 1974...
...One should not...
...Elaborate arguments have been advanced that seek to demonstrate the destructive impact of inflation on corporate profits and capital formation...
...Government Printing Office [hereafter, in following notes, G.P.O.], May 7 and 8, 1975), p. 29...
...The rationale for taxing dividends twice is that corporations are, in effect, legal entities, separate from shareholders, with interests and responsibilities necessarily separate from and transcending those of shareholders...
...Fears of a capital shortage usually arise at critical junctures of business cycles...
...Therefore, only a partial answer to the question can here be advanced...
...But it raised unit labor costs, which in turn limited profit gains and hence also the amount of profits for reinvestment...
...4 All this is mostly fallacious, for it implies that stagnation, if not disinvestment, have characterized the U.S...
...13 In sum, the spuriousness of "capital shortage" is patent...
...Regulatory rate setting has been taking higher costs generously into account, especially over the past two years...
...The function of the federal budget in redistributing income to those in need would be diminished...
...20"The Real Issues of Inflation and Unemployment," Address by Arthur F. Burns, Chairman, Board of Governors of the Federal Reserve System at the Blue Key Honor Society Annual Awards Dinner, (Athens, Georgia: University of Georgia, Sept...
...Inflation thus constituted a less than perilous threat to capital formation...
...Stock Exchange, in U.S...
...This is one of the general causes of inflation in developed societies, perhaps the most important...
...Banks have refused to make mortgage loans on dwellings in rundown or racially "unstable" neighborhoods on the ground that "they cannot risk their depositors' money by making bad loans," Business Week, March 22, 1976, p. 143, reporting on a federal court decision on the "redlining" of neighborhoods...
...Investment "errors" have tended to become larger, and less easily expungeable because of the financial stakes and employment involved (Lockheed, beneficiary of $195 million in government loan guarantees, employs 56,000 persons...
...Alternatively, the government could use the surplus to buy stocks or bonds of private businesses, thus helping to finance them...
...13'Deficits appear to be largely and ever more quickly absorbed into corporate surpluses...
...and nominal wages continue to rise even in periods of declining output...
...Official price controls in the early '70s probably were a factor, preventing business from fully passing on the rise in costs to consumers, so that the pressure on retained profits was partially compensated by going into debt...
...Such acquisitions are often speculative...
...Withholding of land, of course, raises the price of land undergoing development and is a major factor in suburban sprawl...
...These branches held $118 billion in assets...
...A Study of the National Bureau of Economic Research (Princeton: Princeton University Press, 1961), p. 396...
...19, 1975...
...new commitments amounted to $35 billion...
...But funds not tied to specific expenditure goals or financing objectives are needed, and one of the recently more widely discussed means for generating such funds is to run a budgetary surplus...
...Ibid., P. 20...
...12, 1974, pp...
...Moreover, the labor market positions of those who should presumably have benefited most from "equalization" has not materially changed: in 1975, the unemployment rate of black men 20-64 years old was nearly twice as high as that of their white counterparts, and the rate for adult women was one-fifth again as high as that for adult men...
...That is, families in the top fifth of the income distribution received $16,695 in 1965 and $31,943 in 1974...
...it will take place unless, in the words of Secretary of the Treasury Simon, we "will make a fundamental shift . . . away from continued growth in personal consumption and government spending, and toward greater savings, capital formation, and investment...
...15 Inflation would not have any allocational consequences, were it not that consumption incomes tend to "track the inflation rate," while business incomes generally do not...
...22, 1975 (Washington, D.C.: G.P.O...
...Surpluses of great magnitude are envisioned in some studies, $82 billion in 1980 in one of them...
...In the words of one of the more articulate business analysts, this redirection stems from the political and social pressures toward the "equalization" of incomes that is characteristic of modern societies...
...Federal expenditures, as for example for the purchase of military hard goods or the support of research and development, provide the basis for large-scale capital investments...
...As earlier noted, a portion of the federal budget now constitutes a vehicle for private capital investment...
...Let us merely point to the steady decline in the effective tax rate paid by corporations on their income, which fell below 40 percent in 1974 for the first time in 25 years, and to 39.2 percent in 1975 (the nominal rate is 48 percent...
...A Study Prepared for the Subcommittee on Economic Progress of the Joint Economic Committee, U.S...
...First, there was a slowdown in labor productivity resulting from a combination of retarded output growth and a reluctance at the time, to discharge employees so as to raise output per man-hour...
...These societies "find [the] frustration of consumption to be increasingly difficult because the structures required for the purpose are unpopular and often in apparent conflict with an attractive social goal...
...Only in some instances have these expectations been sorely disappointed...
...It is probable that there have been structural changes, which tend to limit the accumulation process—e.g., the social power of organized labor...
...It has also gained wide currency by alarming projections and been the subject of inquiry by congressional committees...
...z"See Barry Bosworth et al., Capital Needs in the Seventies (Washington, D.C.: The Brookings Institution, 1975...
...Joint Hearings before the Subcommittee on Energy and the Subcommittee on Financial Markets (Washington, D.C.: U.S...
...The rationale of the policy is that a large, unemployed labor supply will restrain wage bargains...
...The extent of . . . currency speculation is revealed by the fact that at the end of December 1974...
...The oft-repeated comparisons with the '30s were not inappropriate, but they omitted to take account of the role of federal financial flows...
...the sharpening rivalries in the world economy...
...In view of the enormous federal deficits in recent years and in prospect, the idea of enlarging the national pool of savings by deliberately creating surpluses seems chimerical...
...In what follows, we will not be detained by the details of recent projections of a "capital shortage...
...there was merely a shift in spending power from the currently employed to retired workers...
...This is the main reason why business can outbid housing for funds when these are otherwise in "scarce" supply...
...Its rise has in large part been related to evident difficulties in generating sufficient internal funds, i.e., cash flow from undistributed profits and capital consumption (depreciation) allowances...
...Those who argue that equalization policies have prevailed also ignore the fact that unemployment has been deliberately allowed to rise as a means to limit wage bargains, thus restraining consumption and prices...
...This in part vitiates the equalizing effort, requiring it to be intensified, and thus also further intensifying inflation...
...This capital gain partially offsets the supposed erosion in after-tax profits caused by inflation and the inability to pass on higher costs...
...partial price freezes or periodic resort to mandatory controls (or the threat of them...
...The only direct way for capitalist industry to regain control over the conditions of surplus value extracted from labor is through administrative measures, possibly combined with a public employment program that pays a lower-thanstandard wage rate and is mandatory for the unemployed who have exhausted their unemployment benefits...
...The incurring of long-term debt also means, in the present era at least, that it is repaid in cheaper dollars...
...2] The limits of credit expansion, to some extent, have been discussed earlier...
...The rate of increase in incomes, then, was roughly the same for all income quintiles, and no redistribution can be shown...
...One of the basic data for this argument is that equalization of incomes over the past decade has led to an inflationary consumer boom...
...In time, however, the accumulation of stocks of capital at ever higher purchase prices is slowed or ended...
...High unemployment spells reduced demand, which today's mass production industries can ill afford...
...economy in the past decade Between 1965 and 1974 outlays for producer durables and structures rose 176 percent, while the purchase prices of these capital goods rose 56 percent...
...Nothing demonstrates the spuriousness of the "equalization" argument more strikingly...
...Sce Capital Formation, p. 35...
...Tax revenues in excess of budgeted expenditures would provide an additional source of capital accumulation...
...it becomes more problematical to realize anticipated rates of return...
...8 Ibid., pp...
...5. Loans to foreigners: Bank loans to foreigners, classified as claims on foreigners, sharply rose between 1973 and 1974, nearly doubling in the first three-quarters of 1974, to $20 billion...
...price controls (on fuels, rents...
...the vast expansion of debt with its threat to financial values...
...Therefore their real value increased 78 percent...
...2Joint Committee on Internal Revenue Taxation, Capital Formation...
...the growth of a class of unemployed, underemployed, and unemployable persons requiring rising maintenance expenditures...
...These assets were mostly traded between the branches and foreign banks...
...The question why the corporate debt expanded so rapidly over the 1965-74 decade cannot be fully answered without examining changes in the asset structure of corporations...
...The rapidity with which these limits impose themselves need not be assessed here...
...Rather, inflation tends to be inherently inimical to capital formation on which economic growth depends...
...This is also evidenced by a brief examination of the expansion in such programs as social security...
...The evidence for "declining vigor" of profits in recent business cycle expansions is less than convincing...
...While Secretary Simon and others appear concerned with the future supply of capital, their failure to review the recent past in light of this concern makes their assumptions highly dubious...
...This argument is based on a highly selective and therefore fallacious view of the evidence that supposedly supports it...
...If we then add this gain to the gain in the real value of capital goods replacements and additions, we arrive at the difference between total funds laid out for capital goods and their inflationary component, which, on this reckoning, amounted to about one-third...
...This argument represents a logically coherent rationalization for countering the alleged trend toward equalization of incomes embodied in the federal budget, and for measures that would improve the economic position of business, largely at the expense of "consumption...
...Over the past two decades, the constant-dollar shares of personal consumption, fixed capital investment other than residential housing, and government purchases of goods and services have fluctuated very little...
...It expresses a sense of crisis among economists and others to whom the socialization of investment and the allocation of credit is anathema...
...This interpretation of capital shortage differs radically from Secretary Simon's, who along with other economists holds or implies that personal consumption together with government spending have grown at rates that preempt the funds and resources needed for capital formation...
...At any rate, the more they are perceived, the more the state comes under pressure to help generate the means toward larger capital formation, i.e., "corporate savings...
...To some, it would seem not to matter whether savings are generated in the public or the private sector of the economy...
...More generally, the slump that began in the fall of 1974 would have had devastatingly deflationary effects had it not been for the huge federal deficits cushioning the drop in incomes and output, which prevented a collapse of values and of the financial system in its train...
...These purposes are often unrelated to any ultimately productive objectives, let alone social goals.' Banks— rapidly increased the number and size of foreign branches, moved aggressively into direct lease financing, provided extensive credits for the acquisition and holding of land, expanded considerable trading operations in currencies and securities and furnished financing for the heavy accumulation of business inventories...
...After adjusting for the declining purchasing power of the dollar, it rose by little more than $50...
...This reluctance was linked to expectations of continued boom conditions...
...1975), tables 636 and 637...
...7 The nub of the problem is the presumed policy to "equalize" incomes...
...This represents a capital gain to the debtor...
...If in contrast to the developments of the early '30s (when prices slumped and values col298 lapsed) that threat appears to be less acute today, it is because inflation, sustained by huge federal budget deficits, persists through recessions, feeding corporate cash flows...
...Even more, it derives from the price system, which acts as a transfer system to benefit those whose power to raise prices is unrestricted...
...These ratios compare with 15.3 in 1965 and 1968...
Vol. 23 • July 1976 • No. 3
