How the Economy Was Lost: The War of the Worlds (Counterpunch) (13 page)

Chapter 30: Which is Worse: Regulation or Deregulation?

L
ibertarians preach the morality of the market, and
socialists preach the morality of the state. Those convinced of the market’s morality want deregulation; those convinced of the state’s morality want regulation.

In truth, neither seems to work.

Consider for example the rules against collusion. The political left imposed this regulatory rule in order to prevent monopoly behavior by companies. One consequence has been that, unable to collude, firms are slaves to their bottom lines. In order to compete successfully in the competitive new world of globalism, firms have curtailed pensions and health insurance for their employees.

Or consider the regulation of new drugs, which drives up costs and delays remedies without, apparently, doing much to improve safety.

Or the fleet mileage standards that regulation imposes on car makers. These regulations destroyed the family station wagon. Families needing carrying capacity turned to vans and to panel trucks. Car makers saw a new market and invented the SUV, which as a “light truck” was exempt from the fleet mileage regulations. The effort to impose fuel economy resulted in cars being replaced by over weight fuel-guzzling SUVs.

On the other hand consider the current troubles resulting from banking and financial deregulation. The losses from this one crisis greatly exceed any gains from deregulation.

Or consider the plight of the de-regulated airlines and deterioration in the quality of air service. Or the higher costs of telephone service and the loss of a blue chip stock for widows and retirement funds that resulted from breaking up AT&T. Or the scandals and uncertainties from utility deregulation, which permits non-energy producers like Enron to contract to deliver electric power.

Economists claim that deregulation results in lower prices. Cheap advanced fare airline ticket prices are cited as evidence. What these economists mean is that the fares without stopovers are cheap to people who can plan their trips in advance. Other passengers subsidize these advanced fares by paying four times as much. Moreover, deregulation has created bottom-line competition that has lowered service, removed meals, and results in periodic bankruptcy, thus forcing the airlines’ creditors to pay for the low fares. Pilots, flight attendants, and aircraft maintenance crews subsidize the lower fares with reductions in salaries and pension benefits. Are bankruptcies and mergers leading the industry toward one carrier and the re-emergence of regulation?

Consider the fall-out from trucking deregulation. As in the case of the airlines, the claim was that more communities would be served and costs would decline. But which costs? De-regulation made every minute a bottom-line item. Trucks became bigger, heavier, and travel at higher speeds. Highway safety suffers, and highway maintenance costs rise. The courtesy of truck drivers declined. When trucking was regulated, truckers would stop to help people whose cars had broken down. Today that would throw off the schedule and threaten the bottom-line.

Economists dismiss costs that aren’t included in price. For them the cost that matters is the price paid by consumers. The truck that gets there faster delivers cheaper to the consumer. The myriad ways in which people pay the price of deregulation are not part of the price paid at the check-out counter.

Economists also say that offshoring lowers Wal-Mart prices, thus benefitting the consumer. They don’t say that by moving jobs abroad offshoring reduces the job opportunities and life-time earnings of the U.S. labor force, or that it wrecks the finances of the laid-off U.S. workers and destroys the tax base of their local communities. None of these costs of offshoring enter into the price of the offshored goods that Americans purchase.

Privatization vs. socialization is another dimension of the conflict. Those who distrust the power of private ownership put faith in public ownership, and those who distrust the power of the state find freedom to be imperiled in the absence of private ownership. Twentieth century experience established that public ownership is economically inefficient without producing offsetting gains in public welfare. Those in charge of nationalized firms live well at the expense of taxpayers and consumers.

Nevertheless, privatization can be pushed too far, and it has. As a result of the upfront cost of building prisons and their high operating costs when in government hands, prisons are being privatized and have become profit-making ventures. Governments avoid the construction costs and contract for incarceration services. Allegedly, the greater efficiency of the private operation lowers the cost.

Private prisons, however, require a constant stream of prisoners. They cannot afford to have vacant cells. If incarceration rates fell, profits would disappear and bankruptcy would descend upon the owners. Thus, privatized prisons create a demand for criminals and, as a result, might actually raise the total cost of incarceration.

The U.S.—the “land of liberty”—has the largest prison population in the world. With 5 percent of the world’s population, the U.S. has 25 percent of the prison population. The U.S. has 1.3 million more people in prison than crime-ridden Russia, and 700,000 more prisoners than authoritarian China, which has a population four times larger.

In the U.S. the number and kind of crimes have exploded. Prisons are full of drug users, and the U.S. now has “hate crimes” such as the use of constitutionally protected free speech against “protected minorities.” It is in the self-interest of prison investors to agitate for yet more criminalization of civil liberties and ordinary human behavior.

The case for deregulation is as ideological as the case for regulation. There is no open-and-shut case for either approach. Such issues should be decided on their merits, but usually are decided by the reigning ideology of an epoch or by powerful interest groups.

The Bush regime has de-regulated the government in the sense that the regime has removed constraints that the Founders put on executive power. This was done in the name of the “war on terror.” Simultaneously, Bush has increased the regulation of our travel and communication, spying on our Internet use and specifying to the ounce the quantities of toothpaste and shampoo with which Americans can board commercial airliners.

Crises destroy liberty. Lincoln used the crisis of states withdrawing from the union to destroy states’ rights, an essential preservative of liberty in the minds of the Founders. Roosevelt used the Great Depression to destroy the legislative power of Congress by having that power delegated to federal agencies. Bush used 9/11 to assault the civil liberties that protect Americans from a police state.

Perhaps we have now reached a point where both libertarians and left-wingers can agree that the U.S. government desperately needs to be re-regulated and again held accountable to the people.

January 30, 2008

Chapter 31: Deficit Nonchalance

W
ho remembers economists’ hysteria over the “Reagan
deficits”? Wall Street was in panic. Reagan’s fiscal irresponsibility was bringing the end of the world.

The fiscal year 2009 federal budget deficit that Obama is inheriting, and adding to, will be ten times larger in absolute terms than Reagan’s biggest and a much larger share of GDP in percentage terms. Yet, economists are sending up no alarms.

Paul Krugman, for example, couldn’t damn Reagan’s puny deficits enough. But today he thinks the deficit can’t be large enough!

The central issue of the stimulus and bailout plans is how to finance the massive budget deficit. This issue remains unaddressed by economists and policy-makers.

As far as I can tell, the government, its advisers and cheerleaders think financing the deficit will be a cakewalk, like the Iraq War.

I am tempted to claim that economists’ nonchalance about the massive deficit is an indication that Krugman and the whole lot of them are converts to supply-side economics—,“deficits don’t matter.” I triumphed, and economists have become my acolytes. The Nobel Prize will arrive tomorrow.

Only we supply-side economists never said that deficits don’t matter. We said that deficits have different causes and consequences. Some are problematic. Some are not, or are less so.

Obama’s deficit is problematic. It is a massive deficit, far beyond anything ever before financed on planet Earth. It is arriving at a time when pressures on the dollar as reserve currency have mounted from decades of rising trade deficits. The deficit is hitting the financial markets when the rest of the world is in turmoil from ingestion of toxic Wall Street financial instruments. The U.S. must service massive debt when the U.S. economy is hollowed out from the offshoring of manufacturing and professional service jobs. The Obama deficit is a far more serious deficit than the “Reagan deficits.”

As President Reagan’s first Assistant Secretary of the Treasury for Economic Policy, my job was to find and implement a cure for “stagflation.”

“Stagflation” was the word used to describe the worsening “Phillips curve” trade-offs between inflation and employment. The postwar policy of Keynesian demand management relied on easy money to expand employment and GNP and used recession and unemployment to cool down inflation when inflation got out of hand. Over the years, the trade-offs worsened. It took more inflation to get the economy going, and more unemployment to cool down the inflation.

This problem worsened during Jimmy Carter’s presidency. Reagan used the “misery index,” the sum of the unemployment and inflation rates, to boot Carter from office.

Keynesian economists concluded from the Great Depression that the way to maintain full employment was for the government to manage aggregate demand. If the sum of consumer and investor demand was not sufficient to maintain full employment, government would step in. By running a deficit in its budget, economists thought that government could add enough additional demand to bring employment up to full.

The way this policy was implemented was to use easy monetary policy to stimulate demand and high tax rates to restrain excessive consumer spending that could push up inflation. The Keynesian economists did not understand that the high tax rates contributed to inflation by restraining the output of goods and services, while the easy money drove up prices.

Keynesians had no solution for the problem their policy had caused, so Congress and President Reagan turned to supply-side economists who offered a solution: restrain demand with tighter monetary policy and increase supply with greater after-tax rewards. Supply-side economics reversed the policy mix of demand-side economists. Instead of easy money and high tax rates, there would be tighter money and lower tax rates.

This change caused consternation. Keynesian economists, who sat atop of the profession, bitterly resented the dethroning of their orthodoxy. They turned on supply-siders with a vengeance. We were “voodoo economists,” “trickle-down economists,” “tax cuts for the rich economists.” Keynesians had been the great defenders of budget deficits, but Reagan’s were intolerable. They forgot their own Kennedy tax rate reductions. Supply-siders were bringing the end of the world.

Federal Reserve chairman Paul Volcker was part of the problem. Volcker had limited economic understanding. He did not understand the worsening boom-bust cycle that the Keynesian policy had set the Fed upon. He viewed the Reagan tax rate reductions as a Keynesian stimulus to consumer spending that would worsen the inflation, the subduing of which he saw as his responsibility. He feared that the tax rate reductions would cause inflation and that he would be blamed.

At the Treasury we had weekly meetings with Paul, attempting to bring him into an understanding of what it meant to reverse the policy mix. We patiently explained the importance of the Fed bringing money growth down slowly as the tax rate reductions came into play in order to avoid a monetary shock to the system.

Volcker just couldn’t get it. He thought the Reagan Treasury consisted of dangerous inflationists. He went home to the Fed and turned off the money supply, reasoning that if there was no money growth he couldn’t be blamed for the inflation that Reagan’s fiscal policy would cause.

Volcker’s fears were reinforced by his advisors. As the Treasury’s representative at the Fed’s meeting with its outside advisors, I heard Alan Greenspan, Volcker’s successor, tell Paul that in view of the Reagan tax rate reductions (which Greenspan also saw as a demand stimulus) “monetary policy was a weak sister that at best could conduct a rear-guard action.”

It was amazing to us at Treasury that the Federal Reserve chairman could not understand that monetary policy controlled inflation and that fiscal policy, or the right kind of fiscal policy, helped control inflation by increasing the output of goods and services.

But this was over Volcker’s head. Instead of giving us the gradual reduction in the growth of the money supply, he slammed on the brakes. The economy went into a serious recession just as Reagan’s tax cuts passed.

The embittered Keynesians wanted to blame the recession on the tax cuts, but that was inconsistent with their own analysis. So they seized on the deficits that resulted from the recession and blamed the tax cuts. This was also inconsistent with Keynesian analysis. However, they used writings by people who had popularized supply-side economics. Some of these people made claims that “tax cuts pay for themselves.” In other words, there would be no deficits.

No supply-side economist ever said this. And neither did the Reagan administration. The Reagan administration used static tax analysis and forecast that every dollar of tax cut would lose a dollar of revenue.

The forecast went wrong for an entirely different reason. The Keynesian orthodoxy of the time was that it was impossible for the economy to grow without paying for it with a rising rate of inflation. Yet, the supply-side position was that by reversing the policy mix, the economy could grow while the rate of inflation fell, which is in fact what happened during the 1980s and 1990s.

As economic forecasting was locked into the “Phillips curve”—the belief that inflation was the price of full employment and that unemployment was the price of lower inflation—the Reagan administration’s budget forecast was restrained by the “Phillips curve.” Orthodoxy would not permit us to forecast the extent to which a supply-side policy would bring down inflation as the economy grew. Even if we had been able to disregard forecasting orthodoxy, our forecast would have been off as Volcker brought money growth in below target.

The “Reagan deficits” thus resulted from the unanticipated collapse of inflation. As inflation came in below forecast, nominal GNP came in below forecast. Thus, tax revenues were less. But appropriation bills are in nominal dollars, which meant that real spending was greater than intended because inflation was less than forecast.

Wall Street believed that the “Reagan deficits” would cause inflation, but, of course, they did not cause inflation as they were the consequences of the collapse in inflation.

This shows how totally wrong conventional opinion can be even when it tries to think. Today no policy-maker or establishment economist is thinking at all.

The “Reagan deficits” were not financed by printing money or dependent on recycling of surplus dollars by trading partners. The deficits were no threat to the dollar, which was thought to be too strong. The increased after-tax return on investment reduced the flow of U.S. capital abroad, and we financed our own deficit.

This brings us back to the original question: How is the Obama deficit going to be financed?

February 13, 2009