Candidly, on Economics
Wim Rietdijk, D.Sci.
|Experts know too well what cannot be done.|
Our peacetime concern for production (...) is selective and traditional. As a result, at any given time both our total output and its rate of increase are only a small part of what they might be, perhaps indeed only a minor fraction.
John Kenneth Galbraith
(The Affluent Society)
1. Inadequacy of orthodox economics as regards some vital points
a) During the Depression of the 1930s, not a few prices deflated to non-remunerative levels. Reaction of the then economic orthodoxy: reduce supply (e.g., by destructing crops), so that prices regain remunerative levels.
Result: even more stagnation and hardship.
Better solution: Increase demand by creating money by the printing press to such an extend that demand and prices increase to remunerative levels. That is, subsidize - and control - wages to such degree as necessary to increase demand without increasing labour costs to the producers. Continue such policy up to approximating full employment.
b) Hypothetical present-day situation:
Suppose the Japanese lose confidence in the US dollar because of the US's huge deficit in its balance of payments, and start massively dumping US bonds. The latter slump and US interest rates increase; a recession is the result, according to received wisdom in orthodox economics. But it is completely unnecessary according to sound common sense. For if the Federal Reserve (Fed) keeps interest rates down by massively buying bonds from the Japanese by means of created money, nothing negative happens. The Fed shelves the bonds, the American public "hardly notes what is going on", the Japanese get their money from the Fed rather than from US investors, and everybody is happy, no recession appearing. For US citizens retain their buying power, interest rates, production capacity and supply don't change, and neither does demand. Hence no inflationary impact results from the massive transaction between the Japanese and the Federal Reserve. When the bonds mature, the Fed does nothing...
Still, orthodox economics (wrongly) prohibits creating the money in both of our cases a) and b).
c) An especially crude instance of both politics and "free" markets failing in getting priorities right is constituted by the following quotation from an article by Zbigniew Brzeszinski (former adviser of President Carter), that also appeared in NRC Hb. of 14 Aug. 1999:
"Americans spend $ 8 billion per year on cosmetical products. The UN estimate that $ 6 billion would suffice to give everyone in the world a primary-school education.
Europeans spend $ 11 billion a year on ice cream, whereas the UN estimate that $ 9 billion would give clean drinking water and safe sewerage to everyone in the world who still lacks it. Americans and Europeans spend $ 17 billion a year on feeding their pets, whereas $ 13 billion more development aid would suffice for primary medical care and ending undernourishment for all relevant people in the world."
Now it would be both unrealistic and unnecessary for US and European citizens to stop spending on cosmetics, ice cream and pets - thus "saving" $ (8 + 11 + 17) billion = $ 36 billion - in order to address the relevant Third-World core problems. Actually, current foreign aid is a multiple of $ 36 billion a year.
What is necessary is redirecting it so as to make it effective, after which some increase could be considered too. The industrial world should aggressively see to it that education, health care, clean drinking water, sewerage and undernourishment are given precedence over big interests, over accepting the practices of corrupt Third-World governments and their officials and military expenditure, and also over simple mismanagement. The $ 36 billion is about 0.1 percent of the world's GNP! (To put this in perspective: about 20% of the world's production capacity is idle.) Actually, politics, economics and global markets - that is, human reason and conscience - are still far from allocating economic means so that primary things indeed come first, which should be their main purpose.
2. The Japanese slump of the 1990s
The Japanese, largely clever in managing their economy before 1990 - 10% growth for about forty years but, on the other hand, e.g., a very inefficient and protectionist distribution system -, failed radically thereafter. What should they have done? A few ideas:
a) One should not have increased 1989 interest rates in the first place, as a means against the so-called "bubble economy" as to stock and real-estate prices. Better alternatives would have been b) and c) below:
b) Radically removing import restrictions, and stimulating competition in industry, trade and agriculture by a drastic reduction of regulation, also in the building industry and real-estate trade. E.g., making the transformation of farmland into building land a mere formality, apart from zoning schemes attuned to allowing building up to material capacity. This would have corrected the real-estate "bubble", as prices would have come down to those of farmland plus competitive building costs.
c) Once the slump had set in (after the error of the rate increase), government should have increased public buying power. Not via (rather ineffective) public works, but by drastically reducing taxes (say, by 25%) and completing the resulting budget deficit by creating money rather than borrowing it.
Such measure would cause inflation under normal circumstances, but does not so during a slump. Of course, overdosing should be avoided. But in conjunction with b) a stiff dose could have been applied: the one needed to increase buying to the level of full employment. (In the event of a small overdose, temporary wage and price controls might be applied.)
3. Of course, the program of (2), with situation-dependent variations, can be applied to fight economic recessions at all. Generally, high interest rates should be avoided as a means against inflation: production capacity should remain fully employed and its expansion should get priority, for which low interest rates are favourable. Inflation can better be fought by increasing competition, reducing regulation and, if necessary, wage and price controls or tax increases, full employment remaining top priority, also in how the government expends the (possibly extra) tax receipts. Mind within this scope that wage controls are more easy to implement than price controls because wages are settled in much fewer "centres" than prices are. Therefore, it is revealing about economic dogmatism that, if wage inflation appears, the authorities will take refuge in increasing interest rates rather than establishing wage controls. (See for details my book The Scientifization of Culture, Chapter 6.) The gist of our argument is that a paper problem of liquidity (buying power) falling short should always be corrected so as to give precedence to full employment.
Many reports demonstrate that competition - inter alia, as a means of fighting inflation - could indeed increase much as soon as vested interests are no longer humoured. E.g., it appears that at this moment the prices of computers are substantially lower in the US than in Europe, that those of many medicines are much lower in Mexico than in the US and that apart from taxes the prices of cars can differ substantially over the world and even between EU countries. The conclusion is that much can be done against the inflation that possibly would accompany stimulative money creation.
As to most governments' humouring vested interests a significant question arises. Between 1933 and 1938 the nazi's reduced German unemployment from 5 to 0.4 million. Both Keynes and Tinbergen acknowledged that their approach was correct. Now the question is: "Why other countries did not roughly emulate the relevant approach as soon as its success became evident?"
4. The Japanese and general East-Asian debt crisis.
If banks or other organizations lend money, it is obvious that it is in the interest of an economic allocation of it that lenders realize the risks and suffer the consequences if the borrower defaults.
In a situation, however, in which bad debts appear to be a national phenomenon, damaging the relevant economy as a whole by
a) threatening the banking system and its general willingness to lend out money, so that economic activity declines, and
b) causing many losses, the productivity of capital, profits and buying power decreasing, then it is in the national interest that the authorities massively take action by paying off, say, 80 percent of the bad debts by means of created money. Then, lenders still experience that incurring bad debts hurts, but the national economy, at the same time, is not drawn into a recession. No common good is served if banks etc. that are entitled to get their money back, still massively don't get it. What the authorities do in creating the relevant money is merely preventing the destruction of capital.
Especially, it was mismanagement to the extreme when Japanese government, after engineering real-estate price reduction by higher interest rates, did not compensate the banks on frequently defaulting mortgages by means of created money.
Again, orthodox economics and the IMF - in the case of developing East-Asian countries - applied the wrong recipe as they prescribed high interest rates, more than incidental liquidations and other measures reducing economic activity. E.g., currencies should not be defended by high interest rates, but by increasing exports and reducing imports by a combination of wage controls and accepting a certain degree of devaluation. Full employment should be given priority because in comparison with production the rest is largely "paper problems".
In other words: physical production capacity should never be prevented from being optimally used by mere problems of "liquidity", that may fall short by artificial reduction or other causes. "Liquidity" is a mere "paper problem" as long as the relevant physical production capacity is on hand: one can create it.
The foregoing implies that the approach of the Asia crisis, in Japan and the relevant developing countries, has been far from optimum. Of course, corruption, favouritism and competition-unfriendly regulation should be radically fought, and this may indeed result in forced liquidations. But the latter should never be a more than incidental result from economic policy.
5. Roughly, what has earlier been said about liquidity (that is, buying power) and about less than optimum competition is important in connection with recessions and economic stagnation in general, not merely during the Depression and as to East-Asia.
A vital point here is that communism and several other variants of planned economy indeed demonstrated to be failures, but this does not demonstrate that all variants of state intervention in (not seldom merely purportedly) free markets are counterproductive! E.g., what we proposed above about creating additional liquidity, and the policies spurring growth in Japan during the four decades before 1990, or doing so in Singapore, Taiwan or South-Korea in the eighties and most of the nineties, on the whole, are not at all discredited by the demise of communism. Neither are they by the Japanese and other Asian "deviations" of the nineties.
Though generally making markets freeer is positive and government regulation should be modest, one can also be dogmatic as to this. (Earlier, John Kenneth Galbraith emphasized this point.) Government expenditure as to good education, scientific research, libraries, non-commercial media for the well-educated, space travel, "genome projects", crèches and allowances to the guiltlessly poor should have precedence over private holiday trips and other luxury that may suffer from higher taxes. Various free-market tendencies, on the other hand, give priority to the short term because the general population is inclined to do so and because market profitability of, say, space travel, genome projects and serious-literature libraries may be far away or nonexistent. Truly leading quality elites should more emphasize the long term. Also, market intervention by the authorities can be necessary because "free" participants not seldom create (un)official cartels, restrictive practices and old-boys networks (e.g., think of lavish option schemes).
6. We can also see the dogmatic nature of objections that creating money will practically always spur inflation by our realizing that, e.g., the massive increase of stock (and, in some countries, real estate) prices in the eighties and nineties did not result in inflation, whereas it actually increased buying power. E.g., the value of their securities increased so much that various pension funds stopped collecting contributions, directly increasing their members' liquidity. Also, buying power increased by many raising the amount of the mortgage on their (more and more expensive) house. At the same time, the eighties and nineties saw one of the smallest inflations in recent history.
Of course, it remains essential that both physical production capacity and competition are and remain sufficient to meet the relevant increased demand at stable prices. Hence, any additional ("artificial") buying power should always be limited. (This failed to occur in many historic situations, with predictable results.)
7. Apart from the foregoing, a crucial argument about fighting recessions is implied by asking oneself: In an economic expansion demand is vigorous, businessmen invest more and inflation is manageable as a rule. Now suppose a recession follows on the relevant boom. Then my question is: Why inflation would be a result if government, using created money to subsidize incomes, manages demand to resume its pre-recession vigour (or, increases it to boom-volume)? Why in such artificial boom inflation would exceed its level in the previous "natural" expansion? Note that the authorities can even prevent (now subsidized) wages paid by business from increasing, so that not even labour costs would grow. Buying power equals previous boom volume and production capacity did not decrease. Why inflation would then frustrate this proposed anti-recession policy? And why cut-backs in government expenditure would be necessary at all? What purpose is served by authorities closing libraries and swimming pools that before the recession could function without the appearance of inflationary pressures caused by supply not able to keep up with demand?
Mind within the above scope that, in a democracy, interest groups like business and labour should not have any rights or means to obstruct (e.g., by strikes) government policy such as wage or price controls.
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