DESTROYING THE ECONOMY IN ORDER TO SAVE IT
Brockway, George
DESTROYING THE ECONOMY IN ORDER TO SAVE IT What a way to win a war ... by George Brockway If war is too important to leave to the generals, money is too important to leave to the bankers. But...
...the third way of doing business, which prevails today, is characterized by credit cards...
...First, we can divide businesses into two basic categories: those that can get loans, and those that can't...
...Something like an oil embargo can start it quivering like a tuning fork, When they hear the mysterious humming, oil-dependent industries protect themselves in the only way they know-by raising prices...
...But so did George Armstrong Custer...
...Actually, however, our economy is notably susceptible to shocks...
...We must," they chant in solemn unison, "increase productivity...
...The other is that what the bankers are giving us in the short term is a recession...
...The time has come to price the products the plant produces...
...Someone has to stop chasing those goods...
...The government's largesse is meaningful mainly to those who already have large, profitable stables...
...Life will be very hard for awhile, they say, but we must stay the course...
...The mere use of the tactic-and the threat of its repeated use when things heat up again-creates its own shock wave...
...And behind him, the wholesaler waits for his money too...
...Everybody knows inflation is "too much money chasing too few goods...
...Instead of settling accounts in 45 days, retailers suddenly discover trouble in their new micro-computer, the kind of trouble that somehow prevents them from getting a check into the mail for another six weeks...
...It will be good for us in the long run...
...In the real world, there's too little money in circulation-where it counts...
...Well, yes, these are irritating details still to be addressed, but in the meantime we must press on, encouraging everyone to invest in more efficient (that is, labor-idling) plants...
...The political bankers attacked inflation by raising the interest rate...
...But since we have more than seven million people unemployed, a moderately rational man might think that our national productivity (total output divided by total labor force, including the jobless) would not be improved by making more people idle...
...After all, when reporters asked Mr...
...In theory, this should not be the case...
...This fact alone naturally causes ordinary people to be preoccupied with the short term...
...Yes, there are things in stores that you can't afford to buy at the posted prices...
...You remember...
...It hardly matters whether they then lower rates again...
...Fierce competition might force us to make concessions, of course...
...You can't appreciate a gift of free hay unless you first own a horse...
...The first line of defense against rising interest rates is an extension of the float...
...If you can't afford to buy something, does that mean you have too much money...
...No one denies that the word "recession" is simply a euphemism for arranging to have lots of people thrown out of their jobs...
...In The Long Run We can get a clue by taking another look at the prevailing philosophy of the political bankers...
...This was done, they said, to restrict the amount of money in circulation...
...inflationary pressures have been building for years...
...Moreover, they can't see how it will really help things to shrink government income just at the moment that government expenses-those welfare payments-are being increased...
...Therefore, bring on the goods...
...we must stay the course...
...Somebody has to accept the honor of making the system work for the rest of us...
...too few goods being chased by too much money...
...Just as the New Deal shift from one-year mortgages at six percent (or more) to 20-year mortgages at four percent (or less) launched a housing booni, the credit-card shift has created a fantastic e~pansion in the sllPply of all kinds of consumer goods, and consequently an expansion of the whole economy...
...Where trade a half century ago was largely cl,lrrent, it is now largely afloat...
...and back there at the beginning of the whole process, the producer of raw materials waits...
...Volcker stands tall in the saddle...
...by George Brockway If war is too important to leave to the generals, money is too important to leave to the bankers...
...Well, if I had only one guess, I'd guess that the last thing we would dovoluntarily- is cut prices...
...Not to worry, the political bankers have anticipated these concerns and have their moonshine ready...
...It became a matter of policy t'o encourage the use of credit as the only readily feasible way to stimulate buying during the Depression, and this policy became institutionalized after World War II...
...But where will that competition come from...
...with only ten percent down...
...What is this nonsense about "too few goods...
...Moonshine Lullaby At this point we might glance at another notion endorsed by President Carter, the Congress, and the political bankers...
...You remember all those companies that couldn't afford the horses, let alone benefit from the free hay...
...Working Without A Net Looking back over the economic events of this century, I think we can detect three substantially different ways of doing business- that is, ways of selling things to people...
...The privileged minority had charge accounts-but these were expected to be settled monthly...
...On the other hand, if you are running a small, struggling enterprise with no prospects of finishing the year in the black, a tax deduction is no help to you...
...They give two reasons...
...Chryslers and Magnavoxes, May tags and Barcaloungers were all sold on the installment plan...
...These require the prudent manager to peer ahead into the mists, looking to the time when the tax credit has been used up and the plant is crumbling, encountering upkeep costs that will surely be very big (after all, we have the graphs from the past few years, and we simply extend this curve upward, assuming prudently that inflation will continue, and building in a fudge factor for the unknown...
...Was that really happening...
...of course, there are things in those wellstocked stores you can't afford...
...they were renewed only if your standing remained good...
...Anyone who encounters the real world on a regular basis might be tempted to conclude that the political bankers had things inside out...
...They note that the tax credit reduces the government's income and thus increases the government's deficit...
...That was not due solely to the increase in consumer credit, of course, but it added up to an astronomical leap in tl'\e need for money...
...When reporters asked Vo1cker if his policies would produce high unemployment, he said, "Yes, and the sooner the better...
...They may simply go bankrupt, or (more likely) they may sell out to a conglomerate, but either way you won't find them in the phone book anymore...
...Yes, it does look like a depression, but they insist on using their own nomenclature...
...To be sure, there was credit available for speculation, backed up by haridsome steel-engraved certificates that failed to withstand the scrutiny of October 1929...
...Checking accounts became commonplace, and almost anyone could cash a check in almost any local store, because merchants came to prefer the risk of a bad check to the loss of an irate customer...
...At long last, the facility comes on line, as they say...
...For other people, it's a hoax...
...Was anything at all in short supply...
...Well, something had to be done, and everyone knows that inflation is at least partly the result of too much money chasing too few goods...
...Volcker finds ~ way to win his war-that is, to reduce inflation, at least temporarily-many of the ordinary foot~ soldiers like me will be too dead to feel grateful...
...But the goods will cost too much unless they can be produced more economically...
...No matter how much we may want to admire their nerves of steel, there are ample grounds to be troubled about their reasoning...
...In their choices of tactics, the political bankers have chosen to fight fire with fuel...
...This spreads, slowly at first, and then much more rapidly as everyone tries to 'hedge against real or imagined calamities...
...The manufacturer, however, finds it somewhat more difficult to dodge behind this shield...
...Why...
...Have you been in a store recently...
...If manufacturers didn't think it was prudent to build a new plant back in the days when they could borrow at a stable ten percent or less, what is it that will make them want to plunge ahead at nearly twice the cost, and in an environment where they can't be sure what the political bankers will do to them next...
...I can see that Mr...
...It will reduce purchasing power, so there will be fewer dollars chasing all those goods...
...Volcker if his policies would not produce high unemployment, he said, "Yes, and the sooner the better...
...In a rare display of bipartisan unity, they agreed that bankers-especially the political bankers, of whom Federal Re~ serVe Chairman Paul Volcker is chief mullah-are sacrosanct, and that we should follow them uncritically into "-the war on inflation, much as we were once expected to follow the generals into Viet~ Iiam...
...Some will opt to wait, hoping that when the political bankers ease the screws off, loans will be more...
...My guess is that the outcome is going to be very similar...
...My fear is that even if Mr...
...Next, there are the businesses that can get loans-perhaps only a couple of points over the prime rate, to which they have to add the equivalent of another couple of points for the compensating balances the banks have dreamed up...
...However ebullient our credit economy may be, it has a breathtakingly delicate equilibrium, like a high-wire artist working without a net in a full gale...
...Governmerit agencies guaranteed mortgages for 20 years at four percent...
...In the 25 years from 1955 to 1980, the nominal Gross National Product multiplied almost six times...
...He raises them, in' fact, against the very uncertainty of the interest-rate situation...
...That's because you don't understand the generally accepted principles of accounting...
...The first way of doing business, which lasted until the Depression, was cash-onthe- barrel...
...When this happens, of course, the seller has to wait for his money...
...True, Macy's still advertised "6% Less for Cash," but that was an echo from the past...
...In theory, the economy could be stable at any rate of activity you choose (if you ask me, rich is better...
...He must keep on borrowing to cover the extended float, even at the high interest rate decreed by the political banker's...
...More money was needed to float this kind of economy, but the government kept interest rates low, and the money was there...
...Too few goods...
...Did you go into a store at any time in the past several months...
...As prudent managers then, what should we do...
...One is that, as Keynes used to say, in the long run we'll all be dead...
...And then the political bankers, who know about too much money chasing too few goods, do what comes naturally to them: they raise interest rates to keep things from heating up...
...Any kind of store-hardware or supermarket, discount department store or specialty boutique...
...Why should we do that...
...Let's not even pause to fret over how that reduction in purchasing power comes about...
...It is part of my job to watch the political bankers from a respect~ ful distance and try to figure out where they are leading me...
...Credit was tight-but not much credit was needed to float the economy...
...And they also detect that the tax credit is designed to help most those who need it least...
...First, because inflation is caused by (can't you remember anything...
...Credit cards themselves account for only a sI:Ilall portion of consumer d~bt, but they sYI:Ilbolize a philosophy that encourages almost anyone to buy almost anything almost anywhere on credit...
...This way of doing business has been explosively dynamic...
...What seems to be at stake, then, is our national productivity...
...What a dandy strategy...
...And how do we encourage manufacturers to invest...
...Mortgages were usually written for a year's time...
...Perhaps from the Germans or the Japanese, but certainly not from the smaller domestic companies that couldn't afford to modernize their plants...
...If you run a large, highly profitable enterprise, you will naturally be attracted to any available tax deduction...
...Here, the thinking is that wages are too high, relative to output, thus forcing prices up and making it difficult for us to compete with Germany and Japan...
...It may seem obvious that this is what business is all about, but if you spend much tirpe reading the financial pages, you are likely to forget that the rea/bottom line of financial activity is the mundane matter of somebody buying something to have and to hold...
...Members of the second category go out of business...
...Oh, them...
...They won't be doing anything helpful about productivity, and the money used to acquire them won't be available for productive purposes either...
...and you can't expect us to cure inflation overnight...
...We play with the interest rates, jacking them up to 20 percent for awhile, then letting them drop when enough of the economy shows signs of fibrillating...
...Was anything in short supply...
...What did you find there...
...Since the plant is new, nearly devoid of workers, and largely tax exempt, you might think prices would be set mighty low...
...Many of his costs are fixed, in plants that must be kept up and payrolls that must be met...
...And what will this recession do...
...and the manufacturer waits...
...Wonder whatever happened to them...
...This elegant solution is not without its critics, of course...
...The second wayof doing business lasted from the New Deal until roughly the Eisenhower administration...
...What are you supposed to deduct it/rom...
...Do you still have to ask...
...And so he does what comes naturally to him: he raises prices...
...But mark this as the year when that seemingly obvious lesson was lost on President Carter and his challeng~ ers...
...Any~ thing at all-even plastics and other petroleum products...
...I write not as a theoretician but as a businessman, eager to sell books, which is what I_do for a living...
...Fine.·Let's confine ourselves to looking not at people but at businesses struggling to stay the course in a recession induced by high interest rates...
...The quibbling here is over the basic distinction between profit and loss, and their relationship to taxation...
...but let's not wander off into digressions like that...
...A barter economy will be sluggish and poor, and a credit economy will be vibrant and rich, but both could theoretically be stable...
...This troubles them, because they have had it dinned into them that the deficit is an evil thing, something that looks very like the root of inflation, because it's what we have to print money to cover...
...It's a tax credit, providing speedier depreciation for investments in labor-saving plants...
...and everyone knows how slow the mails are...
...someone has to accept the honor of making the system work for the rest of us...
...If you can't afford something, does this mean you have "too much moneyT' That's because a rise in the interest rate today quickly affects all business-because all businesses today are afloat ona vast and deep sea of credit...
...Of course, in a recession fewer goods are produced, too...
...In effect, everything is 45 days past due...
...What kind of logic is that...
...To paraphrase Calvin Coolidge, when many people raise prices, inflation results...
...Be reasonable, the bankers say...
...And someone will have to arrange welfare payments to the idled workers, an activity both costly and nonproductive...
...It was not possible to cash a check except where you were known personally, and not always then...
...But let's put all of thiS nasty carping aside and consider what actually happens when a large, robust business takes the tax credit, borrows money, and builds a shiny new labor-saving plant (no doubt abandoning New Jersey for Arizona in the process...
Vol. 12 • June 1980 • No. 4
