Charting America's Future: Supply-Side Trickle-Up
TYLER, GUS
This is the latest article in a year-long exchange on CHARTING AMERICA'S FUTURE 6. SUPPLY-SIDE TRICKLE-UP It's kind of hard to sell 'trickle-down,' so the supply-side formula was the only way...
...God and His reason commanded him to subdue the earth—i.e., improve it for the benefit of life and therein lay out something upon it that was his own, his labor...
...It can mean that the investing class and the people who manage funds for institutions prefer not to put available capital into fixed capital...
...did not have to rebuild almost from scratch after World War II...
...Economies begin with labor...
...We shall return to this objection in a later piece...
...In the 1980 campaign, Reagan rhetoricians usurped the Left lingo as a device to oust Carter and install a true-blue conservative who would turn a Socialist prayer (plenty) to Capitalist profit (trickle-down...
...What has happened over time almost everywhere is that a relatively small class of proprietors has gotten possession of the key instruments of the economy (land, factories, mines, transport, commerce, finance) and said to the great mass: "If you want to live, you will have to come to us to till our land, run our machines, dig in our mines, drive our trucks, sell our wares, or borrow our money...
...Describing the causes of the Great Depression, Marriner Eccles, a governor of the Federal Reserve Board under Franklin D. Roosevelt, wrote: "Had there been a better distribution of the current income from the national product—in other words, had there been less saving by business and the higher income groups and more income in the lower groups—we should have had far greater stability in our economy...
...Now suppose you put a man or a family on an island—Robinson Crusoe or Swiss Family Robinson—with the commandment to produce (although it would hardly be necessary...
...As Brockway pointed out, only a small portion of the vast sums that change hands there daily finances productive economic activity— namely, new stock...
...Yet this made sense, the magazine went on, because of "the excess capacity of existing plant...
...The reasons may be more psychological than logical...
...In 1980, pension funds held half a trillion dollars in investments and were growing at about 10 per cent per year...
...About the desirability of increasing supply there should be little difference between liberals and conservatives...
...therefore, it is necessary for government to rewrite the tax law and make the rich richer than they are...
...Quite ironically, what should have been billed as Ronald Reagan's reply to Nixon appeared to be the Republican retort to the Democratic policies of Jimmy Carter, an impression strengthened by Carter's inability to get out of the rut dug by his GOP predecessors...
...Undoing the New Deal (1939-1981)" (NL...
...I don't even know how many people Conoco employs...
...Receiving bread from us," says the spokesman for the Establishment, "they will see clearly that we take the bread made by their hands from them, to give it to them, without any miracle...
...If Mobil were to acquire Conoco some jobs would be lost____When you have an existing entity like Conoco bid for by three other existing entities, there is no reason to imagine any jobs would be created...
...Inflation, it was proclaimed, is caused by too much money chasing too few goods...
...This is not due, however, to a shortage of capital and an excess of buying power...
...The 1981 tax act's redistribution of the national income created precisely the condition Eccles singled out as bringing on the Depression...
...Sidney Jones, now a resident scholar at the conservative American Enterprise Institute, suggests that an imbalance in the economy developed severely during the 1970s: "An analogy for the nation's current difficulties with capital formation can be found in the adage, 'Don't eat your seed corn.' Planted for future harvest, seed corn is not consumed directly by farmers, but rather is employed for the future...
...An investing class may be desirable (if taught proper manners), it is absolutely not indispensable...
...In sum, it is from the capitalist, replacing both labor and God, that all blessings flow...
...The conversion was a fairly simple three-step bit of argumentation: Supply must be increased to put people to work while holding down prices...
...Jobs are a small issue in this whole thing...
...In November 1980—amid the rising agitation about how poor the rich were—Harold M. Williams, chairman of the Securities and Exchange Commission, testified before the Small Business Committee of the U.S...
...No sane corporation will expand its facilities if its plant and equipment are running at only 75 per cent of capacity...
...but capitalist societies, too, can accumulate capital without channeling more of the national income into the pockets of the most affluent...
...Edward Cliney of DuPont's public relations department answered: " I don't know how many jobs would be created...
...This principle is an evident truth that emerges from the whole of man's historical experience...
...and if you wish to use what is ours, you must pay for it in the form of rent, profits, interest...
...Concerning Civil Government, Locke wrote: "God, when He gave the world in common to all mankind, commanded man also to labor, and the penury of his condition required it of him...
...Jones is not to be faulted for his mistake...
...He has been challenged, perhaps even replaced, by the institutional investor—huge funds held in trust and invested for the wage and salaried people of the country...
...And the evidence is quite persuasive that this is exactly what has been happening...
...The theme was picked up by American liberals...
...Allowing for these serious exceptions, it seems reasonable to hold that improving supply is desirable (a) to meet expanding human needs...
...leasing of equipment from financial institutions, such as banks...
...Remember, too, that the U.S...
...Discussing the lure of "speculation" as contrasted with "investment" in these pages, ("Why Speculation Will Undo Reaganomics," NL, September 7, 1981), George P. Brockway, chairman of the board of W.W...
...The primary difference between the Left and Right view of supply-side economics is that where the former sought to redistribute income from the very top down, the latter seeks to reverse the process...
...The hard part of the supply-side tax cut," said Budget Director David A. Stockman in William Greider's now famous December 1981 Atlantic magazine article, "is dropping the top rate from 70 to 50 per cent—the rest of it is a secondary matter...
...it is based on an official figure revised only recently...
...But the myth of the capitalist's primacy persists...
...Suppose you placed all the gold (capital) in Fort Knox on a deserted island with the command to "produce," or you set up a potter's wheel (a more useful form of capital) on the same island with the order to "make pots...
...Adam Smith, a Scottish moral philosopher and present-day economic guru of American conservatism, similarly traced back the origin of our modern economy to the laborer...
...The double irony is that the push for plenty had for decades been the big talking point of America's Left...
...Then, the general argument was that, in order to make this palatable as a political matter, you had to bring down all the brackets...
...In fact, the revised percentage as applied to the ONP of the United States shows this country putting as many dollars into fixed capital—into expanding existing plants, setting up new ones, or introducing new methods of production—as Germany and Japan combined...
...The capitalist would no longer be needed as a capitalist perse, but would be welcome to earn his livelihood in the "sweat of thy face" along with his fellow workers...
...Last December, the economists of the Business Council, who represent the largest corporations in the nation, found that supply-side economics, as embodied in the 1981 tax law, had done little "to stimulate the final demand that might help 10 spur a larger increase in business investment...
...A sweeping revision of the National Income and Products Account," reported Business Week in February 1981, "seemed to challenge the widely held view that inadequate capital investment was a major cause of the slow growth and sagging productivity of the U.S...
...A failure to put more money into fixed capital does not necessarily indicate a shortage of capital...
...The reason is a decline in consumer confidence...
...DAVID A. STOCKMAN The term "supply-side economics" is, in one sense, a redundancy...
...In his essay...
...It directed the pigs to go to the market—to the stock market to speculate...
...In the election of 1980, supply-siders offered an alternative: Enlarge the available supply of goods...
...The percentage of the GNP that went into fixed capital in 1980 was slightly over 14.5 per cent, not 10.4...
...Over the last half century, though, the "individual investor," the capitalist Croesus, has not been the sole source of capital formation...
...He would demand "production for use, instead of for profit," and almost ritual-istically would perorate with a plea for "peace, freedom and plenty...
...But the New York Times reported in June that "although credit has been eased, companies are planning to invest less than they said...
...With their new-found riches, investors gather collectibles—stamps, coins, horses, old books, gold—whose value rises faster than the return on a new steel plant or supermarket...
...The Politic of Productivity " (NL...
...Williams' testimony was only a prelude to the 1981 corporate version of musical chairs...
...In short, the supply-side strategy of shifting additional money toward the investing class at the expense of the consuming class must deter the movement of capital into production...
...Karl Marx, following in the fool-steps of Locke and Smith, took the intellectual journey to what he believed was its logical end...
...The combined errors grew so huge that correcting them for 1980 changed the U.S...
...The original argument was that the top bracket was too high, and that's having the most devastating effect on the economy...
...quite the opposite, as all the evidence proves...
...Do you realize the greed that came to the forefront...
...it was set forth in the mid-1930s, in a series of four great studies by the Brookings Institution that supply-sid-ers apparently have neglected to read...
...In its advice to businessmen, the February 8,1981, Fortune noted: "It might seem almost unpatriotic nowadays to say that business needs to spend less on plant and equipment...
...The Lord made no scriptural allowance for anyone to nibble his daily cake by using capital to employ others tosweat...
...The hogs were really feeding...
...Theoretically, the purpose of any economy is to supply goods and services...
...economy during the 1970s...
...In February and March 1980, when credit eased up a bit, one out of every 10 dollars borrowed from banks went to two men, the Hunt brothers, whose object it was to corner the world silver market...
...A favorite arena for speculation is the stock market...
...Within seven years [from 1980], pension funds will be worth more than a trillion dollars and, according to estimates by the New York Stock Exchange, they are expected to provide almost one half of all external capital raised by U.S...
...corporations in the next decade," report Jeremy Rifkin and Randy Barber, in their book, The North Shall Rise Again...
...In the 1970s, investment averaged about 10 per cent of GNP, but the growth rate of real GNP dropped to 1.4 per cent...
...The final tax law did more than feed the hogs...
...Thereason forthis was the exclusion of two major forms of investment: land for commercial use...
...At the beginning, he writes in Chapter V of Wealth of Nations, "the whole produce of labor belongs to the laborer...
...to accomplish this, capitalists must have more capital...
...Neither the gold nor the wheel would issue anything at all...
...Starting with Richard M. Nixon's 1970 Economic Message calling for "actual output" to be kept below "potential output," Washington tried to check inflation by pursuing restrictive measures...
...Whatever the projection may be— quantitatively or qualitatively—the simple fact is that the modern worker (wage or salaried) is no longer merely a consumer...
...The "formula" came at the end of a decade when it had been official policy to constrain the economy...
...Perhaps the simplest way to look at the respective roles of labor and capital is to apply common sense...
...But there has been one profound change in the way capital is formed that could be used to great positive effect...
...The greed level, the level of opportunism, just got out of control...
...In establishing the sanctity of property, the British philosopher John Locke, whose writings profoundly influenced the Founding Fathers of the United States, argued that the right to have and to hold begins with labor...
...Leonard Silk, the Times economic commentator, submits some fascinating data in this connection: "During the 1950s, real nonresidential fixed investment averaged about 8 per cent of GNP, but the economy grew at an average annual rate of 3.1 per cent...
...John Flynn of Mobil's public relations department answered: "How many what...
...Before exploring the merits of this syllogism, it is instructive to note that the supply-side conservatives called upon the Federal government to intervene directly and massively in the economy, just as liberals and radicals had done...
...For decades the government had been underreporting the sum going into fixed capital (plants and equipment), as distinguished from the payroll and materials making up variable capital...
...The sermons of Smith, Locke and Marx were really expressions of moral philosophy...
...There are also those who believe, in the vein of the last three Administrations, that growth equals inflation because it heats up the economy by running the engine too fast...
...in this process labor is always a primary efficient cause, while capital, the whole collection of means of production, remains a mere instrument or instrumental cause...
...For the benefits from this redistribution of the national income to the people who form the foundation of our economic structure would ultimately provide a market— that indispensable market—for our market economy...
...This should not have come as a surprise, since the essence of the tax law was not to give more income to consumers but precisely the reverse, to give a greater share of the national income to investors...
...They buy up houses and land...
...In the first half of last year, encouraged by the promise of the Reagan tax breaks that were to bring them additional billions, corporations spent $35.7 billion on acquisitions...
...No wonder we suffer from low growth, high prices, and lagging productivity...
...For example, Sidney L. Jones, a former Treasury Department assistant secretary for economic policy, notes in Context, a Du-Pont Corporation publication, that in 1980 West Germany put 22.9 per cent of its GNP into fixed capital and the United States put in only 10.4 per cent...
...During the '70s, one-fifth to one-quarter of our national plant was unused— thanks in good measure to our national policy of restraining the economy...
...In the 1970s, the decade of deliberate restraint, buying power lagged and we ushered in stagflation...
...Yet in reality, this belief is both illogical and unhistor-ic, as we see whether we consult the Bible, Adam Smith, John Locke, Karl Marx, orourown common sense...
...More to the point, should there be a shortage of capital in America—at the moment there is not—it no longer follows, if it ever did, that we should write laws to enrich the richest...
...The capitalists have not been putting their capital into productive enterprises for three reasons: Present facilities are under-utilized, demand is slack, and there are faster ways to make money...
...I don't have any feel for this whatsoever...
...To prove that America is suffering from a poverty of riches, it is faddish to contrast the share of our Gross National Product devoted into "non-residential fixed capital" with that of other countries...
...January 25), "Responses-1" (NL, February 8), "The Roots of Stagflation" (NL, February22...
...There are many ways to provide capital for goods and services without enriching the richest...
...It would be more sensible to write laws that enabled America's large middle class of wage and salaried workers to put more into banks, insurance, mutual funds, health-welfare pension funds, and stock ownership arrangements...
...But theUnited States has devoured more and more of its 'seed corn.' That is, much more of the national resources have gone to direct consumption rather than investment in production facilities...
...Whether the compulsion to bow before a master is an act of nature or nurture is, to be sure, open to debate...
...With uncanny insight, Dostoev-sky had his Grand Inquisitor in Brothers Karamazov explain how this perverse mental mechanism works...
...So Adam, sans capitalist, set out to till "the ground from whence he was taken," thereby beginning the economic evolution of mankind...
...During the 1960s, investment moved up to more than 10 per cent of GNP, but the growth of...
...The New Deal sought to get the nation back to work to produce more goods and services, and as we have seen it was reasonably successful...
...But that is a non sequitur...
...Man's dominion over the earth is achieved in and by means of work," he stated...
...If, as Smith asserted, labor is the fount of value "at all times and all places," and if, as Locke insisted, labor was the origin of all "property which another had no title to," then, concluded Marx, all property and all goods belong to those who labor, especially the "means of production...
...But companies have been unusually slow to plow their money back into new plant and equipment and into Research and Development...
...But, I mean, Kemp-Roth was always a Trojan horse to bring down the top rate...
...The latter is the larger item and went unreported because the financial institution that bought the equipment and the industrial corporation that leased it did not count it as a fixed capital investment...
...Norton & Co., observed: "Everything from a collection of beer cans to an example of Picasso's blue period has been soaring in price as much as 100 per cent a year____ No productive enterprise can make money that fast...
...The after-tax earnings on equity of the Fortune 500 business runs around 10-15 per cent, even in good years____A man is a fool to work to produce something in the hope of earning 10-15 per cent when he can make many times that simply collecting Dresden china...
...Nor is this the first time such an imbalance has occurred in our economic ups and downs...
...Business theoretician Peter Drucker sees this proletarian takeover of capitalism as America's very own peculiar brand of socialism...
...hence, the available money should be cut down to limit demand...
...everything else was window dressing and windy talk...
...Agreement on the first step, though, does not necessarily mean approval of placing more capital in the hands of the capitalists...
...and "Responses-3" (NL...
...c) to provide more jobs...
...This is the latest article in a year-long exchange on CHARTING AMERICA'S FUTURE 6. SUPPLY-SIDE TRICKLE-UP It's kind of hard to sell 'trickle-down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle-down!' Supply-side is 'trickle-down' theory...
...Sidney Blumenthal, author of The Permanent Campaign, called the three giants bidding to take over Conoco Oil to ask how many jobs would be created by a merger...
...Responses-2'"(NL, March 8...
...The preceding pieces in this series were: "The Great Debate"(NL, November30, 1981), "Those New Deal Years (1933-1938)"(NL, December28,1981...
...The 400 largest corporations have more than $60 billion in cash, almost triple the amount they had at the beginning of the 1970s," reported Business Week in April 1980...
...March 22...
...The entire discourse here on how capital is formed and used is old stuff...
...With the tax rate on capital gains drastically reduced (20 per cent maximum), it is far more profitable to make money by turning over stock than by turning out goods and services...
...Setting aside, for the moment, the manipulative misuse of supply-side as the packaging for what in effect is trickle-up, let us examine the merits of the conservative prescription by considering each of its three steps...
...and Senator William V. Roth (R.-DeL) was to reduce thetaxes paid by the top brackets...
...The notion that the starting point of an economy is the capitalist's resources is one of those myths so widely held that it seems beyond question...
...The biggest transfers of stocks and cash, involving mergers, do not produce a single extra item or create a single new job...
...Indeed, it is the deeply-held, almost religious tenet of sophisticated thinkers like George Gilder, who in his Wealth and Poverty writes: "The crucial source of creativity and initiative in any economic system [italics mine—G.T.] is the individual investor____The crucial role of the rich in a capitalist economy is not to entertain and titillate the classes below, but to invest: to provide unencumbered and unbureaucratized cash____ A successful economy depends on the proliferation of the rich...
...He that, in obedience to this command of God, subdued, tilled, and sowed any part of it, thereby annexed to it something that was his property, which another had no title lo...
...When the government eased up on credit in the spring of 1980, it was expected that investment would increase...
...We have addressed this argument in "The Roots of Stagflation," NL, February 22...
...One month later Bank of America, in its analysis of the economy, wrote: "With plant utilization still low, business has little incentive to spend for capacity expansion...
...Some speculators reach out for bigger objects than Dresden china...
...They will see that we do not change the stone to bread, but in truth they will be more thankful for taking from our hands than for the bread itself...
...Socialist societies are, of course, the obvious example...
...All three preached a "work ethic," not in the vulgar sense that a proper ethic dictates hard work but that work is the original and eternal spring of the world's wealth...
...Beginning in 1928, the perennial Socialist Party candidate for President, Norman Thomas, would assail capitalism as an "economy of scarcity," where monopolies controlled output to puff upprofits...
...They owned about one quarter of the stock of companies on the New York and American exchanges...
...Instead, the capital goes wherever it will yield the most in the least time...
...In another context, however, "supply-side" takes on a more substantive meaning...
...There are those who believe that any growth—even if it brings full employment and prosperity—is dangerous because it hastens the exhaustion of the planet's resources...
...he is also an investor...
...Nonetheless, the resultant myth that the way it is is the way it always was, and must be, is likely to continue...
...This principle directly concerns the process of production...
...b) to hold down prices...
...In the 1930s, as in George Gilder's 1981 book, the unstated assumption was that the capitalist is the source of capital and the wage and salaried folk are the source of consumption...
...Once word got out that the Administration was determined to enrich the rich, all the specialists in self-aggrandizement gathered at the public trough...
...Even if one grants, purely for argument's sake, that the capitalist is the primary source of seed corn or the means of production, it remains to be demonstrated that he needs any more capital than he has at present to do what has to be done...
...Before long they would both have some kind of an economy going, including the use of tools (capital) they had created with their own muscles and minds...
...What the speculators know is that in the absence of wages and salaries and government expenditures strong enough to provide consumers for goods and services, the economy will not grow even if capital is spent for plant equipment...
...they can prosper without a single capitalist on the scene...
...we lack the capital to do the job...
...d) to step up productivity and (e) to expand government income...
...AprilS...
...The net effect of all these forces," said the prestigious corporate economists, "is that business fixed investment is expected to decline through the first quarter of next year and to rise only moderately after that...
...The first fallacy in this argument is factual...
...The moral approach to economics is continued in statements such as the papal encyclical Laborem Exercens, delivered by Pope John Paul II last September...
...The principle of the priority of labor over capital has always been taught by the Church...
...It is assumed that if we are not investing at some desirable level— whether measured by our own needs or by contrast with other countries—we are failing because we lack the capital...
...asked Stockman...
...House of Representatives:" In the last five years I would estimate that $100 billion of corporate cash reserves—resources which, in my personal opinion, could have been devoted to capital spending, product development and innovation opportunities—have been diverted to rearranging the ownership of existing corporate assets through tenders alone...
...For "it was not by gold or silver, but by labor that all the wealth of the world was originally purchased____Therefore labor alone is the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared...
...So he proposed a commonwealth where all those who toiled would collectively own the fruits of their labor...
...These are resources that do not flow back as new capacity, improvements in productivity, new products or new jobs...
...The straightest answer came from Jonathan Rinehart of the PR firm that handles Seagram:" I don't think anyone is suggesting that any jobs will be created...
...picture a big 40 per cent...
...The Bible advises us that when the Lord banished Adam from the Garden of Eden, He told our miscreant forebear that he and his descendants would have to eat their daily bread "in the sweat of thy face...
...The second error in the argument is conceptual...
...He is the primum mobile, the first mover, of an economy and the indispensable source of its growth...
...In March 1981, Bank of America declared: "The current sluggish behavior of business is attributable largely to slack demand...
...in 68 of the Fortune 500 companies, the largest stockholder was the employees' fund...
...real GNP slipped to 2.9 per cent...
...Had the $6 billion, for instance, that were loaned corporations and wealthy individuals for stock market speculation been distributed to the public as lower prices or wages and with less profits to the corporations and the well to do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929...
...The object of the bill put forward by Representative Jack F. Kemp (R.-N.Y...
...they play the futures game in commodities...
...The drop in the growth rate although investment remained high is less of a puzzle when we look at what happened to demand: In the 1950s and '60s, buying power was still sufficient to keep the growth rate hovering around 3 per cent...
...After all, it is the capitalist who sets up the plant, hires the employees, pays for the salesmen and advertising, and in general carries the expenses until there are returns on manufacture—and he does it (can do it) because he has the capital...
Vol. 65 • April 1982 • No. 8
