Tuesday, November 9, 2010

Open the Door, Richard!

Or whatever your name happens to be. Over the past several weeks we've been urging people to step up their door-opening efforts and get a hearing for the ideas of the Just Third Way, especially at this point the critical difference between credit for bad purposes . . . such as consumption, gambling (you know, what most people call "investing" on Wall Street), government deficits, and all the other unproductive activities that end up in the category of "It Seemed Like A Good Idea At The Time" . . . sort of like jumping off the Empire State Building and having second thoughts about the time the 20th floor zips by.

In any event, at the top of today's concerns is the $600 billion stimulus package being pushed by Obananke, or Berbama, or whatever they call themselves. It doesn't really matter. Whichever way it goes lacks the cleverness of George Bernard Shaw's neologism "the Chesterbelloc" to describe what he termed the terrible two-headed combination of G. K. Chesterton and Hilaire Belloc.

Unfortunately, what the Obamankeama proposes also lacks the basic soundness of the original, non-genuine-without-this-seal distributism. As we've explained once or twice before, distributism as originally conceived by Chesterton and Belloc differs substantially from the Just Third Way only in its acceptance of the alleged necessity of existing accumulations to finance new capital formation. Get over that pons asinorum, and distributism becomes easily attainable instead of a navel-gazing pastime of a nit-picking pseudo elite. (Commercial break: Dr. Harold G. Moulton's The Formation of Capital, 1935, and Louis Kelso & Mortimer Adler's The New Capitalists, 1961, close the toll booth on the pons, and open up the opportunity for capital ownership to everyone.)

So. What's wrong with the Bamaramanke's latest two-thirds of a trillion dollar spending spree? (I mean, besides the fact that I could put 0.000000001% of that to very good use . . . wine, women, and song are getting expensive. I'm going to have to stop singing.) We came up with a few thoughts on the subject.

The $600 billion stimulus package is based on an unquestioned, dogmatic belief in the necessity of existing accumulations of savings to finance new capital formation and thus create jobs. The basic assumption is that the wherewithal for new investment simply does not exist unless people cut consumption, accumulate money savings, and then invest. Keynesian economics is built on this assumption, which is also embodied in Monetarist/Chicago school economics as well as the Austrian school. Inflating the currency is, in Keynesian economics, a way to shift "forced savings" from consumers to producers via a rise in the price level — consumers "save" (i.e., cut consumption) by getting less for their money, while producers make greater profits, thereby accumulating financial capital.

The assumption that you cannot finance new capital formation without first cutting consumption was disproved by Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, in his 1935 "contra-New Deal" book, The Formation of Capital (supra). In sharp contrast to the assertions of Lord Keynes, Dr. Moulton presented historical evidence demonstrating that periods of intense capital formation were not preceded by decreases in consumption, as Keynes declared was absolutely necessary, but by increases in consumption.

That is, money savings were not being accumulated, but depleted. The financing for new capital formation came not from "forced savings" achieved by inflation and shifting purchasing power from consumers to producers, but by the expansion of commercial bank credit, repaid out of the future profits generated by the capital being financed. The new money was backed not by government debt, but by bills drawn on the present value of existing and future marketable goods and services, and thus the capital assets being financed — an asset-backed as opposed to a debt-backed currency.

In 1936 Dr. Moulton published The Recovery Problem in the United States, in which he pointed out that any viable program of economic recovery has to concentrate on two critical factors: production and employment. In conformity with "Say's Law of Markets," you cannot consume unless you first produce, and there can be no productive employment if there is consumption without production. Production is therefore necessary both to produce marketable goods and services, and to generate the "effective demand" essential to clear those same goods and services at market prices.

In the late 1950s and early 1960s Louis Kelso and Mortimer Adler co-authored The Capitalist Manifesto (1958) and The New Capitalists (1961). Particularly in the latter volume Kelso and Adler refined Moulton's work by pointing out that the value of human labor is falling relative to advancing technology and competition from lower-priced labor in other countries. Production remains critical to the proper functioning of any economy, whether in recovery or in full health, but employment — labor income — must be supplemented with capital income in order to ensure that people have adequate incomes and to generate the effective demand essential to clearing marketable goods and services produced.

Because wage earners are seldom able to cut consumption and save, Kelso and Adler advocated applying Moulton's findings regarding corporate finance to individuals, permitting ordinary people to first invest, then save and repay the capital acquisition loans out of future profits. In this regard, the subtitle of their second book is significant: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Kelso's work was the basis for the "Employee Stock Ownership Plan" or "ESOP," which has enabled more than 10 million workers to become part owners of the companies that employ them without cutting consumption, risking personal savings, or taking cuts in pay.

CESJ has proposed an application of Kelso's theories called "Capital Homesteading" that would enable individuals to accumulate an estimated $500 thousand in capital on credit on a tax deferred basis. This would generate an estimated $1.6 million in dividend income from birth to age 65. America's capital needs would be met without artificial and inflationary stimulus packages, and entitlements, currently two-thirds of the federal budget, would be decreased dramatically.

If, instead, the $600 billion stimulus goes through (as, absent organized action, appears to be inevitable), America's wage earners will see reductions in the purchasing power of their money. Following the pattern established in the last two years, producers will not reinvest their greater profits in new capital, but will use the additional cash to "go private" (i.e., buy back their own shares), or invest in other securities on the stock market.

The effect of the stimulus to date has been to raise prices of both debt and equity on the secondary market, and this trend will continue as investors risk their money in speculative gains instead of putting it into new capital formation — the ROI is higher, chiefly because the increased demand for secondary issues is artificially driving up prices. This is similar to the situation that existed prior to October 1929, the difference being that 80 years ago money was also being created for new capital investment. If the current trend continues, there will be a drastic decline in share values as soon as the speculative prices cannot be supported by non-existent production, and the non-existent production cannot be supported by non-existent consumer demand.

Nor will increased consumer credit or government spending take up the slack. Government spending is non-productive. Consumer credit temporarily increases effective demand but at the cost of reductions in future consumption. If interest is charged on the consumer loans, future effective demand is reduced further, making the consumer worse off than before. Money created for consumption and government spending, as is the case with money created for speculation on Wall Street, does nothing to foster genuine economic growth, inflates the currency at the expense of wage earners, and undermines the country's productive capacity by depriving the productive sector of critically needed financing for new capital.

Since its formation in the 1930s, the Federal Reserve's Open Market Committee has, in effect, subverted the Federal Reserve from its original mission. This was to provide liquidity for qualified private sector investment by rediscounting bills of exchange drawn on financially feasible agricultural, commercial, and industrial capital investment. This was to be supplemented with limited open market operations in private sector bills of exchange drawn by non-member banks. The FOMC has substituted for private sector investment the technically prohibited practice of monetizing government deficits by purchasing "secondary" government securities.

How is this any use in getting doors opened? Well, for one, it gives you the argument to present to someone who is worried about the latest effort to force economic recovery without all that bothersome production and ownership of new capital. For another, it allows you to segue into opening the door for somebody to talk to members of the CESJ core group, with emphasis on Norm.

For example, you might just happen to mention that Norm was instrumental in persuading the late Senator Russell Long of Louisiana to champion the initial enabling legislation for the ESOP. It wouldn't hurt to say that he is an experienced interviewee on radio shows, and recently returned from China, where he participated in the Caux Roundtable on ethics in business, and Buffalo, New York, where he was on a panel at the Canada-U.S. Brownfields Summit presenting new possibilities for financing the "right-sizing" of cities. Some people might even find it significant that Norm met with the pope in 1986, and was Deputy Chairman of President Reagan's Task Force on Project Economic Justice, a privately funded effort to present an alternative program of economic development to combat Marxism in Central America and the Caribbean Basin.

We might mention that the "pitch" above seems to have generated interest at a radio station or two, especially with the worry over how the "end of the recession" officially proclaimed for last year doesn't seem to have done too much for anybody other than Wall Street gamblers and government bureaucrats.


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