Reagan's Counterfeit Keynesianism

...Although high deficits could, as we noted earlier, cause high interest rates, they need not if other conditions prevail...

...One way to view this is to translate the trade deficit into jobs...

...Most economists say Yes...

...In other words, what makes interest rates go up or down is the state of the economy as a whole, not purely fiscal decisions...

...Moynihan's perceptive analysis does not necessarily mean that a deficit—any deficit—must produce further maldistribution of income...

...In the absence of a natural market, the government will have to create a market—by borrowing and spending to the point of exhaustion...

...Nevertheless, the Keynesianism Reagan stumbled into ass-backward lacks several dimensions of the original...

...And who receives interest payments on government bonds...

...Another determining factor is the policy of the Federal Reserve Board...

...role in the world...

...There will be'fewer and fewer occasions when it can count on the natural dynamic of the private sector to generate surpluses to pay off some of the accumulated debt...

...But statistically, as Regan's office proved in a three-year study, the "nays" have it...

...they do not give the matter much weight...

...Today, the Democratic Party is warning that should Reagan be re-elected, the Republican Party will finish turning a trillion dollar debt inherited from all previous Administrations starting with George Washington's into a two trillion dollar debt...

...These circumstances are inherent in a capitalist society because capitalists count on debt and its multiplication to survive...

...Keynes, who saw the market system as self-glutting, assumed that capitalism would regularly suffer slumps...

...it was a result of building a huge defense force in line with Reagan's view of the U.S...

...This oxymoronic theory has a high-sounding name, Non-Accelerating Inflation Rate of Unemployment (nairu) . Actually, it is a cruel credo that insists we must accept a certain level of unemployment as the price for containing inflation...

...Indeed, it appears that when the deficits go up interest rates tend to go down, and vice versa...

...If the tax system were made more equitable by the institution of truly progressive income taxes, based honestly on ability to bear, then a deficit could be carried and paid for without any negative effect on distribution of income...

...Heproved Keynes was right...

...The budget decides who shall pay and who shall receive: It takes from some and gives to some as it wishes...

...Allowing for inflation, the Reagan deficit is at least twice that of any previous President...

...If the work entailed in a $ 130 billion deficit were performed in the United States, there would be 4 million more Americans at work today...

...In 1983, our trade deficit ran to nearly $70 billion...

...The key here is the way the deficit is funded...

...So are "tax expenditures" that legalize forms of tax exemption for special categories—although this is a hidden channel...

...The great irony in the current debate is the reversal of the historic Democratic and Republican roles...

...Without them the recovery promises to be a prelude to tragedy...

...The two conditions that make it possible, even desirable, to incur a deficit are the use of the borrowed money, first, to expand the economy, and second, to redistribute income...

...It is wrongly assumed that since the deficit is a "fiscal" affair, it can be handled by fiscal maneuvers alone...

...Today, a huge portion of these funds goes toward buying consumer and capital goods made in other countries...

...To the extent that there is a serious discussion of the subject, it revolves around whether high deficits cause high interest rates...

...One of the few who is aware of this and has spoken out is New York's Senator Daniel P. Moynihan...

...Left alone, capitalism will regularly fall into a depression that halts economic growth, and will so maldistribute income as to deny the great mass of people the wherewithal to support either themselves or the market requirements of the system...

...An industrial policy (or the lack thereof) affects income distribution as it strengthens (or weakens) the higher-paying manufacturing sector against the lower-paying service sector...

...Ronald Reagan, he points out," has commenced the largest transfer of wealth from wages to capital in the history of this nation...

...his object was to pump capital to an investing class that contributed mightily to his campaign...

...Consider the impact of this on the Federal deficit...

...It is the owners of capital who have rented it to the Federal government...

...So long as unemployment remains high and income is badly distributed, the budget will run even larger deficits...

...Treasury notes...

...He pressed Federal Reserve Board Chairman Paul Volcker to ease the money supply because there was an election in the offing...

...It is much more prudent to talk about enlarging, rather than reslicing, the pie...

...Reagan did not cut taxes in 1981 to stimulate buying...

...A "capitalist" is, by definition, one who makes his money available for a fee...

...My list does not exhaust the possibilities, but it does suggest that fiscal measures are only part of a strategy...

...A bigger pie pleases everyone...

...a reapportioned pie, even if it pleases many, will also displease a few who are the powerful...

...he has prevailed upon the Fed to ease up on the money supply...

...By 1983, when government spending on arms created consumer demand, with Uncle Sam as the big consumer, some of that new capital bestowed upon our investors by the government began to go into productive work...

...If previous Chief Executives knew about Keynes' emphasis on this point, they treated it cavalierly, looking upon it as some bit of ethical obiter dictum, a sentimental frill on an economic fabric...

...the Republicans will point to the Congress...

...By raising the rediscount rate, by lifting the overnight rate banks charge each other, by changing the "gearing-ratio" between bank deposits and bank loans, and by shrinking the money supply through the selling of securities, the Fed can keep interest rates high...

...If "full employment" can be redefined from 4 to 7 per cent, it can just as easily be further lifted from 7 to 10 per cent at a cost of $300 billion a year to the U.S...

...Many countries of the world, notably in Europe, openly use the budget to shift income from top down...

...This Punch and Judy show will be contrived to play to a public that, candidates believe, judges an administration as it would the head of ahousehold—by the good old American virtues of dutiful diligence and austere frugality to "make ends meet...

...There is a second reason why the Reagan Administration cannot provide full employment: The billions the Federal government has been pouring into the economy as a stimulant are going into a leaky bucket...

...If there are no people who want to pay for the use of his capital, he is out of business...

...Four powerful groups favor policies that make it very difficult to plug the holes in the leaky bucket: American retailers who want to buy cheap in other lands and sell dear here...

...That is why a more equitable income distribution is not merely an ethical desideratum...

...That is why America's present recovery is counterfeit Keynes and can only double our trouble when we are called to account in the coming years...

...But he did them, and they worked...

...In 1981-82, itlooked as if Keynes a la Reagan would be a bust because the 1981 tax cut—the biggest in the nation's history—did not boost the economy...

...On the other hand, deficits are not an evil to be avoided at all times...

...Likewise, if a deficit were incurred to stimulate demand, to allocate capital for reindustrialization, to refurbish our infrastructure, to achieve full employment, then such a deficit would generate the growth and revenue needed to wipe out deficits and to reduce the national debt—witness several Truman years and one Johnson year...

...Reagan's Keynesianism does not address itself to either of these "outstanding faults...

...In 1981, he cut taxes...

...This Administration, if it completes its plan—and its budget is its plan—will require those who work for wages to pay vast sums to those who own capital for generation after generation...

...In sum, no amount of tinkering with the level of taxes and level of expenditures by itself will balance the budget...

...In the welter of talk about deficits virtually nothing has been said of how the deficit itself—as currently financed—is a major factor in furthering income maldistribution...

...That Reagan is up to his kiester in Keynes has been recognized by America's foremost Keynesians...

...and he has incurred, by far, the largest Federal debt in our nation's history...

...British capitalism's solution was to ship the capital abroad, hence the enthusiasm for an empire...

...Transfer payments —unemployment insurance, Social Security, aid for dependent children, food stamps, rent supplements—are forms of open redistribution...

...Conversely, when the economy recovers the government enjoys substantial revenues, but the demand for capital in the private sector may be so great that interest rates rise...

...An incomes policy regulating wages, prices and profits goes directly to the core of income distribution...

...The Federal debt was not incurred so that the government might stimulate demand...

...Although nobody is quite prepared to set down a fixed figure for the "necessary" level of unemployment, we do know that the consensual number has moved upward in the last decade from four to seven...

...But the truth is that virtually no President in our lifetime has really given serious attention to what Aristotle called "distributive justice...

...The richest took their newly found riches to play speculative games, instead of investing in productive enterprises...

...Deficits could make the United States a debtor nation, paying out huge sums annually to overseas investors in U.S...

...Under Reagan, a bad distribution has become worse...

...In short, deficits could make America a "banana republic" plagued by unemployment, inflation, waste, external debt, and economic polarization...

...it is an economic imperative...

...Who pays the personal income tax...

...The capitalist was then left mired in his capital—glutted...

...Democratic policy, cried the Republicans, was to "tax and tax, spend and spend, elect and elect...

...It was John Maynard (Lord) Keynes who offered an alternative, a way to keep capitalism alive through a collection of governmental policies—one portion of which was deficit spending...

...Tobin's last word, "inadvertent," is the key to understanding the nature of Reagan's Keynesianism and what is wrong with it...

...Both the number and the percentage of persons and families living in official poverty have risen...

...You might think the business community would want to hold down the trade deficit, yet that is not really the case...

...In a sense, he did all the right things (almost) for all the wrong reasons...

...Politically, redistribution has been a subject to avoid...

...In The General Theory of Employment, Interest and Money Keynes summarized his position in one sentence: "The outstanding faults of the economic system in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income...

...A third reason Reagan cannot realize full employment is the failure—or the unwillingness—of his Administration to pursue policies to counteract the deindustrialization of America...

...In our time, there was the ludicrous campaign of Franklin Delano Roosevelt in 1932, when he accused Herbert Hoover of bringing on the Depression through excessive spending...

...Both parties will put forward plans designed to reduce the deficit by either raising taxes or cutting expenditures—silly little gestures that add up to a dubious drop in a bucket...

...So long as the balance between the two in the private sector is out of whack, the government will be called upon to provide greater amounts of buying power with increasing frequency...

...Overwhelmingly, it is paid by men and women who work for wages and have the tax deducted from their paychecks...

...American manufacturers who get their work done overseas...

...In all respects except one (a lowered inflation rate), Reagan policies have redistributed income from the bottom and middle to the top...

...Voters have thus come to simply assume that the "balanced budget" is what candidates talk about before an election, then forget about afterward...

...In the many years since FDR that America has been in the hands of Presidents allegedly living by the Keynesian prescription, including Richard Nixon ("Now we are all Keynesians"), no President has ever in practice indulged the Keynesian dogma more lavishly than that anti-Keynesian Ronald Reagan...

...American agribusiness that demands protection for its products but fears retaliation if anyone else's are similarly protected...

...The entrepreneurs who borrowed from the capitalist (sometimes the two parties were the same) stopped borrowing because they had no need to produce goods...

...The periodic slumps of capitalism (the business cycle) derive from a maldistribution of income, the inability of consumption to keep up with production...

...In reality, what is needed is a whole range of policies: on full employment, trade, monetary problems and, above all, income distribution...

...What is required is a measure of national planning to direct the flow of capital, and that is rejected by the White House out of hand as a first crawl toward creeping socialism...

...under Reagan it has been covertly used to move income from everyone else to those at the top...

...The Democrats will point to Ronald Reagan...

...When this was imitated by Holland, France, Germany, Belgium, Spain, and the United States, so that the whole world became an enlarged replica of glutted Britain—as it really was in 1929—the erstwhile national depression became international...

...Logically, the "ayes" should have it, because heavy government borrowing must increase the demand for money and hence push up interest rates...

...James Tobin of Yale, as learned a disciple of Lord Keynes as any in the world, put it bluntly: "The beginnings of recovery that have brightened the economic news this year, mainly in the United States, can be credited to Keynesian policies, however reluctant, belated and inadvertent...

...Still another factor is the inflow of foreign capital, whether it be for direct or portfolio investment or to buy government securities...

...And to do so he must persuade people to go into debt—whether individuals, companies or governments here or abroad...

...Both require governmental intervention...

...That is why he—as one bank puts it—"likes to make a loan...

...This attack of the "outs" upon the "ins" has been a ritual of American politics at least since 1796, when Thomas Jefferson promised to liquidate the debt incurred by Washington's Administration...

...Without redistribution, though, Reagan's Keynesian solution for unemployment must eventually lose its potency...

...Ronald Reagan's Treasury Secretary, Donald Regan, says No...

...Treasury...

...The scenario will continue to omit the crucial question of what the President and the Congress must do about the total economy to grapple with the budget...

...It can no longer be assumed, as Roosevelt in his time properly assumed, that Federal spending is an effective way to "prime the pump," with each dollar received by Americans spent on goods made by Americans to spur jobs andin-come for other Americans...

...Deficits could force the government to start rolling the printing presses to pay creditors with deflated dollars...

...Consequently, 7 per cent costs $210 billion—a sum large enough to cover present deficits and provide several billion extra for other purposes...

...Deficits could—and at present do—redistribute income, taxing wage and salary earners to pay off the investing class that holds government securities...

...The Reagan Administration cannot achieve full employment—by definition: Theprevailingorthodoxyin Washington is that what was once called "full employment" is a jobless rate of 6.5-7 per cent, a level that would in the past have been called massive unemployment...

...If the Fed allows the money supply to grow, the government and the private sector can borrow without putting undue pressure on the capital market...

...Deficits could push up interest rates to the point where they choke the economy...

...Depending on the gestalt in which they are incurred and how they are used, they often can be both necessary and desirable...

...Such an Administration cannot deal either with what Keynes described as the second fault of the economic system: the inequitable distribution of wealth and income...

...Inflation redistributes income, too, taxing the unpropertied and unmonied who must pay more for what they want, and enriching the rich whose properties rise in value and whose money can bring in high returns...

...The rule of thumb is that one percentage point of unemployment costs Uncle Sam $30 billion a year...

...Early analysts of the process discovered an endemic disease they called "glut...

...Recovery was on its way—just as the good Lord said it would be...

...The supply-side strategy—cutting the taxes of the wealthiest on the theory that they will use their new-found capital to reindustrialize the nation—does not work...

...the restrictive policy of the Fed, if continued, would make the Republicans look bad in November 1984, as it had in November 1982...

...If the deficit were incurred to redistribute income —as it can be by expanded social programs financed through taxes on those best able to pay—the ultimate effect would again be to spur growth and to put the government in a better position to balance future budgets...

...In 1983, the Reagan deficit was $195 billion, virtually three times the previous record deficit of $68 billion under Ger-aldFordin 1976...

...their underpaid employees (their market) lacked the means to buy...

...The Marxist forecast was the inevitability of socialist revolution...

...One reason for this perverse phenomenon is that some of our greatest deficits have occurred in recession years, because the depressed state of the economy depresses revenue, but in such slump periods businesses are not about to expand and therefore make few demands for funds...

...To move toward a more equitable and economically efficient distribution would require an about-face in most of the policies of the last four years...

...2) increasing the money supply...

...in 1984, it is estimated that the trade deficit will run to about $130 billion...

...In sum, the Yes or No approach to the impact of deficits on interest rates is shallow stuff...

...Income can be redistributed in many ways, fiscal measures being one...

...So long as nairu rules in Washington, as it does with most Democrats as well as Republicans, the unemployment rate and our Federal deficits will be high...

...Taxes must be raised and expenditures (mainly military) cut to balance the budget, insist the Democrats...

...Whenever this happened it was the government's responsibility to stimulate demand by 1) cutting taxes...

...Unfortunately, though, most of the shouting will be about whose fault it is...

...The individual "investors" prefer buying and selling pieces of paper in the hope of realizing huge overnight profits that are taxed at a ridiculously low 20 per cent...

...Labor-management policies are at the very core of income distribution, strengthening or weakening labor's claims in collective bargaining...

...Yet the budget is very important...

...and American bankers who want near-bankrupt debtors to accumulate dollars by exporting to the United States—all these use their massive influence on government not only to keep the present holes in the bucket but also to punch a few more holes...

...and 3) incurring a deficit...

...The Democrats were burying America under a mountain of debt to keep themselves in office forever...

...For roughly half a century conservative Republicans assailed liberal Democrats for their wastrel ways: "liberal" meant "spendthrift...