In Pursuit of a Fiscal Fantasy
BROCKWAY, GEOROE P.
The Dismal Science IN PURSUIT OF A FISCAL FANTASY BY GEORGE P. BROCKWAY President Clinton's $31 billion "stimulus package" was defeated by a filibuster that was organized, not on the...
...Some expect the computer to play a similar role, but the information revolution is responsible for much of the payroll-cutting currently in progress, including its own...
...We are, as I say, sponsors of all this crime and squalor...
...It serves to retard the free fall of the economy, and with our altruistic and pragmatic practices it will eventually help us to settle at a stopping point somewhere between here and the pits...
...Heartbreaking thousands of these people take a flier at drug running or prostitution just to survive...
...The invisible hand pushes everyone and everything inexorably down...
...but often forgotten are the grants of public land to build the railroads, together with the postal contracts to keep them running, and the paving of streets and building of highways for the automobile...
...Very likely some people would lose their jobs as prices tumbled, although the classical theory merely calls for wages to fall...
...What is all too probable is that the welfare of the nation and of increasing millions of our fellowcitizens will continue to be sacrificed to an accounting fantasy called a balanced budget...
...The expenditures for war are obvious...
...They would, he said, increase the natural rate of unemployment...
...All competitors can lower their prices by cutting their costs...
...Are you worried silly about the $16,750 that rabble-rousers say is your share of the national debt...
...One assumption we've mentioned previously: full employment...
...When we do reach it, we will find ourselves in what economists call an equilibrium, with upwards of a quarter of our productive capacity unused, with 20 million of our people unemployed or underemployed, and with probably 50 million men, women and children living lives that are far from solitary but are nevertheless (in the rest of Hobbes' phrase) poor, nasty, brutish, and short...
...The Civil War made us a nation...
...For we take steps to prevent disaster, either by accident or by design, and those steps reveal that we are, by turns, do-gooders, pragmatists, and sponsors of crime...
...All that's necessary is for the successive owners to be able to pay the interest...
...So take your pick...
...Sell the sizzle...
...The same is true of the United States of America and its national debt...
...The players must have at least fairly equivalent equipment...
...Adam Smith put it this way: "The whole of the advantages and disadvantages of the different employments of labor and stock must, in the same neighborhood, be either perfectly equal or continually tending toward equality...
...what actually happens...
...In the past, similar equilibria have been upset by wars...
...The thing about these equilibrium upsetters—these wars and these creative destroyers—is that they've all required ever bigger expenditures by ever bigger government...
...Then the competitors would lower their prices, and pretty quickly there would be one big price war...
...In any event, whereas business people applaud the pronouncements of conventional economics, very few act in accordance with them...
...Micawber would say, result happiness...
...In addition, there's an assumption that economists pretend doesn't matter...
...And so on...
...If you accept each of the assumptions, you probably can see some sense in the notion that an invisible hand will guide us to the recovery of our dreams...
...For most practitioners that may betrue, but it pays enough above the bottom of the current legitimate pay scale to entice hundreds of thousands into making a career of it...
...The bank isn't worried...
...Pre-Depression America, which knew very little of such things, is touted as a time of low unemployment...
...Their costs are someone else's prices, which likewise can be lowered by cutting costs...
...Either way, if the free market were left to its own devices, the price-cutting, cost-cutting, payroll-cutting, demand-cutting sequence would continue unabated until prices, payrolls, production, and profits all approached zero...
...What is the alternative...
...There is, of course, a third outcome...
...Short of collapse, there could be no end to such wars...
...If we had to borrow the entire $200 billion, the deficit would be increased by the interest, or by $13 billion—and if the Federal Reserve Board should miraculously decide to be on the same team as the rest of us, the interest could be as low as $6 billion...
...Grow up...
...World War I industrialized us...
...If I really knew what I was doing when I shopped for a car, I'd make the best buy possible—and so would you and everyone else...
...Of course we could...
...Professor Joseph A. Schumpeter celebrated the creative destructiveness of great new industries, like the railroads, which rendered canals obsolete, and the automobile, which doomed the horse-and-wagon...
...Is it conceivable that we can summon the wit and the will to make the expenditures that need to be made today...
...A contemporary school of economists gets rid of this assumption with another, namely that everyone acts rationally and rationally expects everyone else to act rationally, too...
...And that's not all...
...The Walrasian theory has free competition ending in monopoly...
...Whoever believes this assumption should have followed me around last week as I shopped for a new automobile...
...The late Arthur Okun, a universally respected economist and the chairman of the President's Council of Economic Advisors under LBJ, maintained that a 1 per cent rise in unemployment causes a 3 per cent fall in real national product...
...But the costs of wage goods are not immuneto cutting, so the regress would continue...
...So our massive stimulus could produce a modest reduction in the deficit...
...It is not bad to do good—except in the eyes of conventional economics...
...Don't be too sure...
...It was also a time of child labor, the 12hour work day, labor injunctions, and similar amenities...
...All the buyers and all the sellers are assumed to know all about all the products available and the demand for them...
...The free market could not stop the process—nor, if they played the game by the rules, could any of the participants...
...He wrote that "production in free competition, after being engaged in a great number of small enterprises, tends to distribute itself among a number less great of medium enterprises, to end finally, first in a monopoly at cost price, then in a monopoly at the price of maximum gain...
...The Dismal Science IN PURSUIT OF A FISCAL FANTASY BY GEORGE P. BROCKWAY President Clinton's $31 billion "stimulus package" was defeated by a filibuster that was organized, not on the reasonable ground that the package was woefully inadequate, but on the fanciful ground that by increasing the deficit it would hurt the recovery now supposed to be under way...
...In his speech launching the idea of a natural rate of unemployment, Milton Friedman condemned all altruistic measures...
...If these people were to renounce housebreaking and carjacking and mugging, and were to look for decent work, their competition for jobs would push the legitimate pay scale even lower...
...Finally, we are sponsors of the crimes we deplore...
...One dealer would start to get all the business...
...World War II got us out of the Great Depression...
...And so on ad infinitum...
...I cannot conceive it...
...You bet...
...It is proposed that we get government out of the way or off business' back or whatever metaphor appeals to you, and let the present "recovery" rip...
...It's a well-built house and should last (and be mortgageable) for another hundred years or more...
...Suppose we had an adequate stimulus—something on the order of $200 billion, rather than the proposed $31 billion...
...My estate will pay it off, of course, and whoever buys the house will mortgage it again and will no doubt later refinance the mortgage to pay for some improvements or repairs...
...The more conventional theory, though it says nothing about an end, offers no reason why general disaster should not result...
...A character in the funnies used to say, crime don't pay well...
...If Okun's Law works backward and becomes a multiplier (not guaranteed), the 5 per cent fall in unemployment we're after should result in a 15 per cent rise in output...
...The good old free enterprise system, we are told, the very system our economists are teaching with such smashing success to Russia and Eastern Europe, would soon show that a man knows what to do with his money a lot better than some bureaucrat in Washington...
...Economics, however, takes time, and it will be years before we reach that point...
...In our role as do-gooders we enact child labor laws, minimum wage laws, worker-safety laws, social welfare laws, and many other laws to mitigate the horrors of free competition...
...But there are many millions who are capable of denying its possibility, and (as with other diseases) the denial makes its actuality the more deadly—especially since conventional economics can think of no way to upset the equilibrium, except by doing more of the same...
...As John E. Schwarz and Thomas J. Volgy show in grim detail in The Forgotten Americans, there are 30 million working poor in America—people who are desperately trying to live the work ethic yet still cannot afford the basic necessities at the lowest realistic cost...
...As Mr...
...The drama has a different ending in the scenario of Leon Walras, the patron theorist of free market analysis...
...A second is that a level playing field, of the kind the Wall Street Journal pines for, isn't enough...
...The result would still be far from misery even if Okun's Law didn't quite work backward, and even if the government proved incompetent in all the ways the naysayers say it is...
...1 want to talk about the alleged recovery, but first let' s pay our respects to the deficit...
...That kind of money could knock 5 points off the official unemployment figure, bringing it down to an arguably tolerable level of 2 per cent, and could start to do a job as well on those who are working part time or are too discouraged to look for work...
...But could we afford it...
...I don't suppose that, aside from a few fanatics for the apocalypse, there is anyone who is eager for such an equilibrium...
...I have a $75,000 mortgage that I'll not pay off if I live till I'm 105...
...They may compete vigorously, but very few compete primarily on price, having learned (as a book of business advice once had it), "Don't sell the steak...
...That would be about $850 billion and should, in turn, yield about $210 billion in taxes at present rates—not to mention the gains for state and local governments, or the savings in reduced welfare outlays...
...With less pressure on prices, there is less pressure on costs...
...I don't even know how to kick the tires...
...The big trouble with this prescription for prosperity, worked out by the classical economists, is that it is based on unrealizable assumptions...
...It must be confessed that we are more comfortable thinking of ourselves as pragmatists than as altruists...
...David Ricardo and his followers argued that this regress would be stopped by the costs of food and other basic things (called "wage goods") that workers need to survive...
Vol. 76 • June 1993 • No. 8
