Deceptively Obvious Economics

...So far, one might think this is merely another form of Say's law that production creates its own demand, or of its contemporary version, the supply-side delusion...

...It is also relevant for policy and hence for politics...

...The publisher is Benchmark Press...

...The title is Leakage: The Bleeding of the American Economy (368 pp., $39.95...

...He writes, "When the demand for consumer goods and services is reduced, so also is the demand for capital expenditures...

...Aggregate demand (and hence production) is increased by taxation of income that would otherwise have leaked from the economy, whereas taxation of personal or corporate income that would have been spent on goods and services has no effect on aggregate demand, though it certainly affects individual demand...

...Leakage will prove valuable to anyone actively concerned with economics, politics or recent American history...

...Deficit spending without appropriate taxation is "a way of transferring income from the general population to the wealthiest minority of it...

...There is no connection between employment and monetary stability...

...The reason is that struck corporations seldom give raises unless they can also raise prices...

...In contrast, Powers writes: "Receipt of income from the nation [i.e., the producing economy] entails a responsibility for the spending of that income...

...It is relevant for economic theory and turns a strong light on many dark and murky notions that are today taught in the colleges...

...They are not independent variables...

...You will note that Powers is concerned with the rate of growth, as befits a dynamic economy, whereas conventional economics is generally satisfied with statistics of absolute growth...

...In any event, Powers performs the necessary operations for us and gives the results in 48 useful tables and 32 clear, elegant graphs available nowhere else and alone worth more than the cost of the book...

...Saving—both personal saving and undistributed corporate profits—is the main example of what Powers calls "alpha leakage...

...Flying in the face of ascetic moraliz-ers since the beginning of time, Powers shows that saving, or nonconsuming, not only fails to boost production but actually lessens it...

...Despite our widely disparate backgrounds and habits of thought, we reached essentially identical positions on point after point...

...A free-fall, however, does not ensue, because the Composite Producer is continually introducing efficiencies in production processes and creating new products...

...The book's final chapter is an analysis of inflation similartothat of the late Sidney Weintraub, a frequent contributor to these pages...

...The author is Treval C. Powers...

...there is no other way the economy can recoup the costs of the goods and services that have been produced...

...Monetary restraint had no remedial effect on inflation...

...Powers' argument is deceptively obvious...

...It is not the sort of book most newspapers or magazines notice, because it is a serious work on economics and full of unfamiliar ideas...

...But the conclusions of Say and Powers are almost diametrically contrary to each other...

...Production necessarily drops below the optimum...

...Rho leakage is much more volatile than alpha leakage...

...This quasiconstant and several others, Powers observes, will require further analysis (one of Leakage's virtues is that it opens avenues for further research), for substantial reform of the economy is likely to depend on their interrelationships and on the internal organization of at least some of them...

...A certain amount of alpha leakage, mainly cash balances for routine transactions or as bank reserves, is unavoidable and fairly constant...

...That these positions are, more often than not, identical to those previously taken by Keynes (whose background and habits of thought were certainly different from either of ours) is, at least for me, an additional reason for taking this original book very seriously indeed...

...In this space it is possible to suggest only a few of his conclusions: -"Virtually every transient feature of economic behavior is a consequence of decisions and actions of persons in control of public economic policy...

...So long as domestic (not foreign) goods and services are involved, sumptuous or extravagant expenditures are not economic leakage, but of course they may be deplored on other grounds...

...At this point some may want to follow the advice of the famous footnote in The General Theory where Keynes writes, "Those who (rightly) dislike algebra [and calculus] will lose little by omitting [this] section of this chapter...

...What he calls the Composite Producer, or the producing economy considered as a whole, pays people money for the use of their labor and their capital and their land to produce goods and services...

...Powers' solution, that strikes be forbidden except for a share of dividends, is probably unconstitutional...

...The rest is a consequence of maldistribution of income, whereby some people receive more money as wages or capital income from the production of goods and services than they know how to spend on them...

...In this connection, Powers makes another observation that flies in the face of conventional wisdom: Because governmerit does not save, but spends its entire income on goods and services, taxation "cannot be a source of leakage and reduction of output...

...Given present circumstances, it seems evident that aggregate investment will not be increased without increasing aggregate consumption...

...Because the rate of growth is at issue, Powers gives us a whiff of elementary calculus...

...profit) to buy what has been produced...

...on the contrary, it always raised the price level...

...Nor is it the sort of book professional economics journals review, because it is not narrowly technical and the author is not a professional economist...

...Leakage is an extraordinary achievement—a careful, probing, empirical analysis of the American macro-economy and, a fortiori, any free-market economy in the modern world...

...I must confess that Leakage has a special fascination for me because its author took up economics after retiring from an internationally recognized career as a research chemist, while I took up economics as I approached retirement from a background in literature and philosophy and a career as an executive of a small independent corporation largely concerned with the liberal arts...

...there is, ultimately, no other source for money income...

...There is another type of leakage—Powers calls it "rho leakage"—that consists of money lost or denied the economy by constrictive policies of the banking system (in recent decades the Federal Reserve's misconceived specialty), by bank failures and business bankruptcies, and by stock market crashes...

...Despite intense union activity during most of this century, the wage share of business income has not substantially changed...

...Irregularities of performance are related to maldistribution of income...

...Thus, the supply-side cry of both classical and neoclassical economics, that we must curtail consumption in order to save, and that we must save in order to invest, is hopelessly wrongheaded...

...Say wrote: "It is the aim of good government to stimulate production and of bad government to encourage consumption...

...Studying a run of the Statistical Abstract of the United States, Powers finds that in the American economy, in good years and bad, the annual cost of producing and maintaining capital goods and services is a quasiconstant, never varying much from 20 per cent of the total cost of production...

...It is noticeable that the general price level increases most in years of heavy strike activity...

...Highly recommended, as you may have gathered...

...I'd add bull markets as well as bear markets...

...Failure to spend income for goods and services must be seen as a transgression against the weakest and most vulnerable families of the nation...

...Analyzing published government statistics, Powers is able to estimate what the American rate of growth might have been if there had been no leakage, what it actually was at any point since 1900, and over five-year periods dating back to the end of the Civil War...

...Powers notes that the Composite Consumer doesn't spend all of its income, with the result that the Producer increases prices and reduces expenditures for labor and capital use...

...Ordinary savings by some people for retirement, education and emergencies do not upset the economy, because they are roughly balanced by other people spending previous savings for the same purposes...

...The Composite Consumer, or all the people considered as a whole, uses the money (wages, rent, interest...

...Growth never required a relative increase of investment...

...see "Taking Stock of the Stock Markets," NL, July 11, 1988...

...Because they believe that the progress of the GNP over a period of several years reveals the growth capacity of the nation, economists generally underestimate the actual capacity...