On the Matter of Consumption
BROCKWAY, GEORGE P.
The Dismal Science ON THE MATTER OF CONSUMPTION BY GEORGE P. BROCKWAY Three and a half years ago, in The New Leader of November 26, 1984, to be exact, I made a prophecy that is...
...It is the other way around with economics, where it is more important for a policy to be fair than for it to be accepted as fair...
...he did not produce for a market, however, nor was he himself an important outlet for what was produced on the estates where he worked...
...In any case, his has remained a minority view among American businessmen...
...Now, Solow is not a fool...
...And [the President] should do it by increasing taxes on consumption, not investment...
...Every day the " financial" news was a joy...
...Indeed, it is, if Yogi Berrà will pardon me, déjà vu all over again: The Great Depression was also preceded by tax cuts for the rich...
...I ask you to look closely at his two-step policy recommendation...
...There are limits, though, and they have been reached in many an industry...
...there's no doubt of that...
...The policies are seen to be fair, but their actual unfairness may be our undoing...
...It is déjà vu...
...As a distinguished example of consumption-tax thinking, I cite Robert M. Solow of the Massachusetts Institute of Technology, who gave the following advice to the next President in a recent issue of the New York Times: "If there is no recession, the first order of business is to make a start on reducing the deficit...
...This costs us, and may finally destroy us...
...yet it would seem that substantial majorities of American voters have been satisfied with current policies...
...Nevertheless, and putting aside a question of fact (hasn't a "start on reducing the deficit" already been made...
...First step: He would tax consumption...
...It is a commonplace of legal theory that a law must not only be just but also be seen to be just...
...Solow'sschemeis, as the mathematicians say, elegant in its simplicity...
...For some reason no one bothers to explain, the stock market crash of last October 19 is thought to have provided a suitable occasion for taxing consumption...
...If you asked me, I'd say Wall Street has a problem satisfying the rest of us...
...Such masses need to include the employees of the giant corporations, and the employees are able to buy only to the extent that they are well paid...
...4) The money borrowed by the middle class will have been lent them by the rich, whose extra dollars will have been left untaxed to better enable them to make this "investment...
...I said we would " start hearing a lot more about the value-added tax-how it is widely used in Europe, how invisible it is in comparison with the sales tax, how comparatively easy it is to collect, how it taxes consumption rather than production...
...Giant markets are masses of people willing and able to buy...
...Henry Ford talked as if he understood this, but even his shockingly high wages were not enough to raise his employees out of the ranks of the working poor...
...The improvements, whether in the shape of stately homes or scientific agriculture, were craft industries...
...What will the next President have accomplished...
...It would appear that the first eight months of 1987, when the Dow went from under 2,000 to over 2,700, was the happiest period in millions of tawdry lives...
...Agriculture produces more than could be consumed even if somehow the idiocies that permit widespread starvation could be overcome...
...I don't think you get to be an MIT professor by being a simpleton...
...Worse, we hear again the cry to tax consumption, with the deliberate purpose of destroying the mass market modem industry depends upon-which would foreclose rational investment opportunities and bring on a new fever of speculation...
...1) The deficit will have been reduced, at best, by the amount of the consumption tax...
...As near as we can tell, the Roman mob was appeased, if not altogether satisfied, by bread and circuses...
...The majority view, in recent years embraced by the electorate at large, is that consumption should be curtailed and investment should be encouraged...
...Individuals with a few sharesofamutualfund and college presidents with great fortunes in their care were equally delighted...
...Economists, who gave the stock market a prominent place in their models, looked upward...
...Who laid the egg, anyhow...
...In times past it could always be in vested in land and in improvements thereon...
...Because a consumption tax means spending will fall, he must do something to offset thatlike lower interest rates...
...Some of this can be explained as simple greed...
...Tens of millions more, although not directly involved, shared in the euphoria...
...Because the middle class' spending money will in effect be taxed twice (once by the consumption tax, then by the interest paid on the borrowed money), spending will be reduced after all, and theproceedsof the consumption tax will be correspondingly reduced...
...Despite the shock of October 19, these people seem determined to do it again...
...The giant markets are crucial...
...Depending on the new interest rate, the reduction in spending could be very large-large enough to bring on another recession (if you're timid about saying "depression...
...The scheme would bring about such a transfer...
...Besides, the glittering gains from speculating in a churning stock market are enormous...
...3) Some indebtedness will have been shifted from the nation as a whole to the middle class as individuals...
...Those were the heady days of the supply-side theory, but investment didn' t respond as promised...
...For I am persuaded that there is a fatality about economics that in the end chokes any society making too great a distinction between the rewards of the favored and of the disfavored...
...In the first place, they have not become rich by investing in land-speculating in land, maybe, but accumulating rents, no...
...Labor power is the ultimate power-and Rome threw it away...
...Each staircase or mantelpiece designed by Grinling Gibbons and carved by him or his apprentices was the subject of an ad hoc contract between him and the lord of the manor...
...In the eventual crash the too-much money of some of the rich and of some of the funds disappears...
...This is particularly true when it comes to policies determining the distribution of a society's rewards...
...Hence, as we've remarked here before, the rich have more money than they know what to do with, and so do the massive pension and charitable funds...
...But I don't think it will work, at least not if its purpose is anything other than a transfer of wealth from the middle class to the already wealthy...
...that any attempt to control it would, in the tasteless cliché, throw out the baby with the bath water...
...In effect the rich were given the bonds, just as Solow's scheme would give the rich the promissory notes of the middle class...
...Automobile companies struggle to maintain their share of the market, because the market is limited, and because the industry's present capacity is much greater than the market...
...Second step: He would lower the interest rate...
...but in the imperial city alone, upwardsof 150,000 lived on the dole, while uncounted thousands waited upon the whims of the favored few...
...In the third and most important place, industry today is built on mass production: Giant corporations serve giant markets...
...What actually happened was that tax collections fell far below expectations, creating the megadeficit that was covered by bonds paying usurious interest rates, purchased by the rich with their tax-cut wind falls...
...If the middle class stops consuming there will be a depression, so he would keep them consuming by making it easy for them to borrow...
...Now we have an underclass, and we have a large class of the underemployed...
...2) Since nothing will have been done to stimulate the economy, it will, at best, continue to languish in its present "prosperity...
...Those whose attention span is very short may have forgotten about the Laf fer Curve, which purported to show that you could increase tax collections by reducing the rates, and the Kemp-Roth tax bill, which promised to increase investment by cutting taxes, especially of the rich...
...When liberals propose lowering the interest rate, Wall Street insists that only the impersonal unregulated market can do it, but let that pass...
...Steel mills, all over the world, are closed down or running at a fraction of capacity...
...In other words, he would reduce the standard of living of the middle class (the poor will presumably not be taxed, at least not much, on necessities, which is what they mostly consume...
...What we get won't be called a value-added tax, but what's in a name...
...There would also be some leakage, as the economists say...
...The inevitable consequence of limited markets is limited opportunities for productive investment...
...on October 19 perhaps as much as a trillion dollars disappeared forever...
...without them the giant corporations cannot exist...
...There certainly was demand for his work, and this certainly affected how much he could charge...
...The problem of today's rich is different...
...In 1928, a year we look back on as a period of idyllic prosperity, almost 60 per cent of American families lived in poverty, then calculated at less than $2,000 a year...
...Let us suppose Solow's scheme works...
...Brokers stood tall...
...Do we have to go through it all again...
...The Dismal Science ON THE MATTER OF CONSUMPTION BY GEORGE P. BROCKWAY Three and a half years ago, in The New Leader of November 26, 1984, to be exact, I made a prophecy that is remarkable among my prophecies in that it has come true...
...We did it in 1981, and we got the depression (I'm not afraid to use the word) of 1982, not to mention the deficit everyone talks about...
...that our liberty as well as our prosperity depends on its ineffable wisdom...
...Now I ask: We already did this, didn't we...
...and the rich won't be much bothered...
...Arbitragers stood taller...
...The rich have always had a problem knowing what to do with their money...
...The appalling fact is that practically everyone seems to want a repeat performance...
...The Reagan revolution created a deficit to give this money to people who couldn't use it...
...Ironically, consumption has nevertheless expanded as the banks have discovered profits to be made in personal loans at usurious interest rates...
...I do not think this is mere coincidence, or mere post hoc, ergo propter hoc...
...Well, the name that seems to have been settled on is consumption tax, and the chorus in support of it is tuning up with a vengeance...
...In the second place, theirriches are vastly greater than the sums necessary to recreate a Chatsworth or a Montacute, should their fancy happen to take that turn...
...Everyone from Pierre DuPont to Peter Peterson has solemnly warned us that Wall Street won't be satisfied with anything else...
...More stridently than ever the claim is being made that the stock market is both the heart blood and the brains not only of the national economy but of the whole free world...
...But beyond that there is a pathological psychology whose etiology I can't even imagine...
Vol. 71 • April 1988 • No. 6
