Tuesday, July 12, 2011

An Old Philosophy of Public Debt and Taxes

One of the points stressed in Dr. Harold G. Moulton's The Formation of Capital (1935) is that the demand for capital — which presumably creates the jobs that allegedly keep the economy running . . . such as it is . . . is derived from consumer demand. In English, that means that if people like you and me aren't buying things like food, clothing and shelter, there is no incentive for other people to provide food, clothing and shelter, and thus no reason to invest in new capital formation to keep the supply of marketable goods and services coming.

The obvious conclusion to this observation is that anything that causes the real value of personal income to decline — such as inflation, job loss, debt service for past expenditures, and anything else that does not yield a direct, new benefit when the money is spent or the value held by the consumer otherwise diminished — consumption also declines. This requires either new or additional sources of income (additional production, since "production = income"), or manipulation of effective demand by inflating the currency to increase aggregate effective demand, but reducing it individually.

Thus, for example, the Keynesian concept of "forced savings" is a way that forces ordinary consumers to reduce consumption for the benefit of producers in the (false) belief that the only way to finance new capital formation. Individual wage earners and others on fixed incomes find their purchasing power reduced, but the slack is (presumably) taken up by the new jobs created as the result of the new capital formation. Thus, individual purchasing power is decreased, but in the aggregate is increased; an indirect redistribution of wealth from consumers to producers, and from producers to other consumers . . . after deductions along the way to meet costs.

In the Keynesian paradigm if insufficient new jobs are created by the process of new capital formation, the State steps in and redistributes wealth directly through the tax system, as Moulton explained in his 1943 book, The New Philosophy of Public Debt. Given that, with a permanently expanding — and non-repayable — public debt, taxation should (allegedly) not be necessary, the powers-that-be will still insist on taxing people. Why?

That a reorientation of thought with respect to tax policy would be necessary is suggested in a statement already quoted: "Once freed from the obsolete concept of the balanced budget, the larger uses of federal taxes can be creatively explored." The suggested creative purposes are: (1) To regulate the distribution of income; and (2) to prevent inflation in periods of full employment. (Harold G. Moulton, The New Philosophy of Public Debt. Washington, DC: The Brookings Institution, 1943, 71-72.)

Were Moulton any less eminent, we might suspect him of sarcasm. Still, to make certain that the reader knows full well that he is not advocating the abolition of taxes in favor of a permanently expanded public debt and that the whole paradigm is fraught with contradictions, Moulton hastens to add, "These objectives, as we shall see, might be realized on a very low plane of taxation." (Ibid.) This tends to hint that Moulton knew very well that (1) meeting government expenditures by borrowing in anything but an emergency is a very, very bad thing, and (2) if borrowing were as sound and as good for the economy as the Keynesians made it out to be, why would it be necessary to continue to tax in order to fix everything that goes wrong because of debt financing?

The fact is that even if the whole of the money supply was made up of currency, bills and notes backed only by government debt created at will by the State, redistribution of existing wealth through the tax system is absolutely essential in the Keynesian paradigm. Keynesian economics requires concentrated ownership of the means of production in order to ensure that the rich — or the State — can accumulate sufficient savings to finance new capital formation. This, however, means that there will be insufficient demand existing in the economy unless (1) the currency is inflated, and (2) the tax system redistributes wealth. At the same time, the tax system has to be finagled to ensure that the rich retain enough wealth to finance new capital.

Nobody ever said any of this makes sense.

Anyway, all of this highlights the horror (speaking economically) of a news item that appeared in yesterday's New York Times: "Economy Faces a Jolt as Benefits Checks Run Out." As the article opens,

Close to $2 of every $10 that went into Americans' wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody's Analytics. . . . By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody's Analytics estimates $37 billion will be drained from the nation's pocketbooks this year.

Thus, right in the middle of the current "recovery" (evidently fueled by government spending), the economy is going to take it right on the chin in the form of a decrease in effective consumer demand of $37 billion.

Recall that, as Moulton pointed out in The Formation of Capital, the demand for new capital — and thus job creation — depends on consumer demand. If consumer demand takes a nosedive, then no new capital formation takes place, and there are fewer, if any, new jobs. With the release of the "net new jobs" data for June last week (18,000, or, statistically, zero, the same as for May, with 25,000 new jobs), this will likely translate into more jobs lost as workers are laid off in response to the decrease in consumer demand.

The effects could be much worse than the 1936-1937 "Depression within the Depression" that hit the country with the failure of the New Deal and before the need for war production increased demand — and employment — dramatically. War production (against Keynes's advice) was financed by borrowing (actually, printing money), but even despite the increased debt of the New Deal, the country at that time still had substantial productive capacity to back up the government debt. Now, we're borrowed to the hilt and beyond, and productive capacity has, in many cases, shifted overseas.

It may be time to do more than "eat your peas." It may be time to start growing some.

Capital Homesteading by 2012.


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