The Economics of Futility

...As a means of strengthening the economy, this type of one-shot infusion is bound to be particularly ineffectual...

...It is a well established economic principle that, dollar for deficit dollar, an increase in government spending provides greater stimulus to the economy than a reduction in taxes...

...There are many obstacles in its path, not the least being that it consists of 535 egos in search of reelection...

...Indeed, in conjunction with the new international monetary arrangements, the commodity agreements would free the United States from any serious balance of payments concerns...

...The second institutional innovation would be a series of commodity agreements, worked out in concert with both the industrialized and underdeveloped nations of the world...

...And it must be admitted that their radical nature within the American context pretty much precludes any of them being adopted in time to help with the present economic difficulties...

...The problem is that the President insists on holding the line on spending, and this means the economy will have to recover without any significant Federal stimulus...

...Is there a third approach...

...It would not be that hard for the new Democratic-controlled Congress to design a more effective antirecession policy...

...Yes-and one that accepts neither a prolonged period of halting expansion nor continuing inflation and a worsening balance of payments as unavoidable...

...For while it may not be hard to devise Keynesian policies aimed at getting the economy back on the road toward full employment, their success would exacerbate the two problems that most worry the White House-inflation and the adverse balance of payments...

...Is the aim merely to discredit the type of policy identified in the public mind as Keynesian...

...The effect of inflation given the existing tax structure, then, is to redistribute the national income in favor of the government, further reducing consumer purchasing power...

...Indeed, that drop-off, together with a similar decline in corporate profits, is likely to be the principal factor behind the eventual bottoming out of the recession...

...Yet the lower the level of government spending, the sooner that choke-off point will be encountered...

...Not that the tax reduction is unnecessary...

...The third, and most critical, institutional innovation would be a system of indicative planning for the domestic American economy...

...It happens to be badly needed-but to overcome a mischievous effect of the tax structure in the present inflationary situation, not as an economic shot in the arm...

...The primary reason for the current inflation is that at present growth rates the American economy is not able to accommodate all the demands being made upon it...

...Some economists would settle for the Administration doing nothing more to deepen the recession...

...The sole difference is that, with higher petroleum prices, the oil companies rather than the government would chiefly benefit...

...The new Congress, meanwhile, has begun by unexpectedly reining in the power of the once untouchable committee chairmen, making them accountable to the Democratic Caucus...

...And it is the decline in consumer purchasing power, under the impact of inflation, that is perhaps the most important underlying cause of today's recession-aside from the misguided efforts to cope with inflation by curtailing government spending and tightening up the money supply...

...It can allow the President's program to be enacted, in which case it will show how inadequate that is-at the same time, though, proving its inability to carry out its popular mandate to do something about the recession...

...With the President calling for new cutbacks almost daily and the chairman of the Federal Reserve Board, Arthur F. Burns, warning that he will not significantly ease up on monetary policy, there is not much hope even on that score...

...The objective would be to deal with these not as isolated problems, but rather as an interrelated set of problems, all involving fundamental questions of national priorities...

...to oversee the budget...

...The first was to create a joint committee under the chairmanship of Senator Edmund Muskie (D.-Me...

...But his proposal is part of the package for levying a $3-a-barrel duty on imported oil in order to lessen this country's dependence on foreign supplies...

...Now that the futility-not to mention considerable risks-of such a go-it-alone policy has been demonstrated, the United States must move more quickly to work out with the other industrialized nations of the world a replacement for the dollar as the basis for international exchange...

...The agreements would assure the industrialized nations access to the raw materials of the less developed nations at prices fixed in relation to the new international currency, prices that would in turn assure the less developed nations of being able to finance the inflow of capital goods they need for their own modernization...

...The one-time rebate would, moreover, do nothing to reduce taxes on future income and thereby counteract the longer-term mischievous effects of the existing tax structure...

...While the beneficiaries of a tax reduction are likely to diminish its effect by saving part of the additional income, a dollar spent by the government for the products of industry is a dollar added directly to aggregate demand...

...True, the President has proposed that tax rates be lowered...

...In some respects, this is a more interesting time politically than it is economically...

...At the same time that inflation acts to contract the real income of households, it enlarges the government's tax yields...

...much internal dissension and the challenge of Presidential vetoes remain to be overcome...

...Previously, there was no mechanism by which Congress could consider the various appropriations measures as a whole, comparing them with the estimates of tax revenues to see what their total stimulative effect would be...

...Yet the Ford Administration has chosen a reduction in taxes as its one and only way of quickly countering the current recession, the worst since World War II...

...That task would more certainly and efficiently be accomplished if the White House were to move immediately to spend the monies already authorized by Congress that it has so far refused to release for fear of "fueling the flames of inflation...

...That duty would lead to substantially higher prices for all petroleum products, particularly if present controls on the price of domestic oil are also eliminated...

...The new standard of value should not be susceptible to the changing international fortunes of the American economy or give the United States any undue advantage over other countries...

...In addition, since the imposition of the duty is to precede the reduction in tax rates, the net result would be to add to the constraints on consumer purchasing power and make any subsequent recovery still more problematical...

...One special task force might well take up the problem of energy, another the problem of transportation...

...While some progress has been made along these lines, involving initially the creation of special drawing rights (SDR's) through the International Monetary Fund and today the recycling of petrodollars, the world economy still lacks the monetary system it needs to provide the proper growth of international liquidity...

...The general outlines of such a program have already been indicated: substituting a permanent tax reduction for the single return...

...Any number of Democratic economists would be willing and able to help Congress flesh out the specifics: The question is whether it has the capacity as a collective body to impose its will on the Executive...

...Perhaps with the Caucus, and especially its steering committee, providing some central direction, the House and Senate will again surprise everyone by substituting their own economic program for the one put forward by the White House...

...Once the figure was established, it would be possible to set wage rates and other elements of household income at levels that would not be inflationary...

...The most that can be hoped for, at least in the short run, is a strengthening of Congress as a co-equal branch of government...

...it is one of the automatic stabilizing features built into the economy...

...Many of our present economic difficulties can be traced to the collapse of the old international monetary system, brought about by the decision to devalue the dollar in 1971...

...If agreements of this kind could be worked out, defining the long-term trading relationships between developed and less developed nations, the United States would no longer have to worry about importing too much oil...

...At the heart of the announced program is a $16 billion rebate on the taxes already collected for the past year, $12 billion of it to go to households and the rest to businesses...

...But this approach would require at least three major institutional innovations...

...The work of the various task forces would have to form a single indicative plan for the next several years, stipulating the investment, reorganization and other measures required to prevent serious shortages from developing in key sectors of the economy if certain desired goals, including high employment, are to be achieved...

...In part, this would involve a group of experts working under the direction of labor, business, agricultural and other leaders to determine precisely how much income was available to distribute to households once all the other essential demands on the economy-to expand productive capacity, meet the needs of the public sector and pay for imported raw materials-had been satisfied...

...So congress is beset by a dilemma...

...and making sure that monetary policy remains relatively expansive...

...Whether there is any long-term political payoff to such a strategy remains to be seen...

...The second important step was to enact legislation severely restricting the power of the President to impound-that is, not spend monies appropriated...

...Anyone mindful of his reputation as a pundit would have to bet against this happening...

...The prospect, then, is for the Ford Administration and the Congress to wage their struggle over economic policy without either being particularly successful in achieving its goals -with the economy, in fact, falling short of solving the problems of high unemployment, continuing inflation and a serious balance-of-payments deficit...

...With an incomes policy derived from a system of indicative planning, the necessary adjustments could be worked out in a less disruptive and more equitable manner...

...But that would be only one feature of the system of indicative planning...

...What they would save as a result of the lower tax rates would be less than the higher fuel bills they would wind up paying...

...This would be especially the case if, as the Administration has proposed, the rebates go primarily to middle-income families...

...Keynesian fiscal policy, it should be clear from recent experience, is only useful for getting the economy out of a recession...

...The first would be a new international monetary arrangement to replace the badly damaged dollar standard...

...pumping additional money into useful Federal programs now limping along for lack of adequate funding...

...Even parts of the service sector, like medical care, might well come under the scrutiny of one of these task forces...

...But once the recession does bottom out, government revenues can be expected to begin going up again at a disproportionate rate...

...Households are inclined to use a substantial portion of a rebate to lower outstanding debts, and money employed in this manner would have virtually no positive impact on the economy...

...Outside experts, matching the reduction in tax rates that are part of the Administration's energy conservation program against the price effects of the $3-a-barrel duty on imported oil, have concluded that on balance most households would find themselves worse off...

...Either way, the Administration hopes to gain running room for the policy it really has in mind: to lead the country through a period of sustained, albeit not necessarily deep, recession in order to squeeze out what its economic advisers see as built-in inflationary forces at work within the economy...

...in fact, as individuals move into higher tax brackets, the government collects an increasing percentage...

...Alfred S. Eichner is Associate Professor of Economics at the State University of New York at Purchase, as well as Senior Research Associate on Columbia University's Conservation of Hitman Resources project...

...Something has to give, and in the nature of things it is the price level and the real income of households that suffers...

...It was Milton Friedman who first observed that households are apt to spend less out of any such windfall income than if the money could be counted on as part of their permanent income...

...What is one to make of a program so obviously inadequate for getting the economy out of its present difficulties...

...Another feature would have to be a series of special task forces to deal with the supply bottlenecks throttling the economy...

...The mischievous effect of the tax structure is now being concealed by the sharp fall in government revenues stemming from depressed business conditions and high unemployment rates...

...It already had sufficient control over the level of taxes, leaving only monetary policy beyond its grasp...

...With the slightest encouragement from the Executive, Congress would quickly authorize additional outlays, too...

...In short, the higher prices for petroleum products would be no less a tax on the consumer than if the government were collecting all of the additional sums itself...

...That gave the President, with his annual budget message and the Office of Management and Budget, an edge in any dispute concerning the level of government spending...

...For those concerned about the overweening power of the President, that may be some consolation in the continuing hard times...

...This is not the place to spell out the full details of the new institutional arrangements...

...It is against this background that the Ford Administration's proposals for dealing with the recession through tax reduction have to be seen...

...Or it can muster up previously unsuspected strengths and impose its own program, in which case it will be saddled with the responsibility for rising prices and a deteriorating international liquidity position...

...IN THE FACE OF RECESSION The Economics of Futility BY ALFRED S. EICHNER The Ford Administration seems determined to do to Keynesian fiscal policy what the Nixon Administration did to wage and price controls-?°prove?± it won't work by so misapplying it that in fact it won't work...

...This will be true whether the rise in national income is due to greater real output or to the mere further swelling of prices...

...Nevertheless, the last Congress took two important steps to check the independence of the Executive in economic matters...

...finding some means other than the $3-a-barrel duty for dealing with the problem posed by oil imports...

...Or is there some other objective...

...Congress, hitherto the mere respondent to Presidential initiatives, is being forced by the obvious inadequacies of the White House incumbent to develop policy on its own...

...And pumping more money into any of the several Federal programs now stalled for lack of funds is the fastest, surest method of reversing the economic downturn...

...Consequently, though each of these steps would put the Federal government equally in the hole financially, an expenditure increase would bring the economy closer to whatever is deemed the full employment level of the Gross National Product than would an equivalent reduction...

...The two steps together were all that was necessary to give Congress effective control over expenditures...

...In any event, a $16-billion rebate is not much of a stimulus for a $l,500-billion economy in the grip of a severe recession...

...That, however, could lead the legislators into the very trap the Administration seems to be setting for them...

...Still, it is not beyond the realm of possibility that Congress will, in its stumbling way, give the country a better plan for getting out of the current recession...

...Here one needs to take note of the growing competition between the Legislative and Executive branches, in economic no less than in other areas...

...The reason is that when households finally succeed in obtaining additional income to help offset price rises, they must first pay the Internal Revenue Service its usual cut...

...It can do little about the redistributive effects that manifest themselves as inflation and an adverse balance of payments once the problem of cyclically high unemployment has been dealt with...

...Thus, a reduction in tax rates is needed to prevent an economic recovery from being cut short by too rapid an inflow of funds into the Federal treasury...

...Still, neither ideological fervor nor sheer ineptitude can be discounted entirely in trying to explain the Ford Administration's economic program...

...Here Congress will find itself hamstrung, not by defects in its own internal organization, but rather by the intellectual poverty of what passes for conventional economic theory...