[From Bill Powers (970218.1910 MST)]
Rick Marken (970213.1030)--
Rick, thanks to you and Linda for putting up with us for a couple of days.
We always enjoy our visits with you.
If I understand the analysis in "Leakage" correctly (and I don't know
if I do) then I would say that the only thing wrong with a balanced
budget amendement is the implied method of rectifying an imbalance.
Remember that "Leakage" is strictly about macroeconomics -- it deals only
with composite entities, not individual groups. The only way in which the
distribution of income comes into the picture is when any group has control
of far more buying power than it can possibly use (i.e., spend), even
allowing for reasonable contingency savings. The effect is to remove money
from circulation, so the composite producer can't sell all it could produce.
This leads to increased unemployment (and/or lowering of wages) and
inflation. The very rich aren't the only causes of leakage, but they are
among the important ones. The macroeconomic solution of the problem of
leakage, however, isn't to do away with rich people. It's simply to get them
to spend their income on goods and services instead of hoarding it, wasting
it on bad loans outside the economy, lighting cigars with dollar bills, and
so forth.
The solution to the
problem (if people want to solve it) is to put _UNSPENDABLE_ income
(leakage) back into the hands of those who CAN spend it. This not
only makes life better for those who can now buy what they need but
it also makes life better for everyone else because it makes the
economy as productive as it can be.
This is indeed how TCP sees it. Unfortunately, as one otherwise very
favorable reviewer put it, TCP's specific proposals for how to do this are
probably unconstitutional, in peacetime.
And it doesn't hurt anyone
because we are only taking money that the rich could _not spend_
even if they TRIED (the government would have to prove that the
income to be taxed as surplus could, indeed, _not_ be used for
_consumption_ before it could take any away; so a rich person
could avoid the surplus income tax by buying stuff and showing that
what was bought was actually being _used_; for example, if you're
using both yacht's regularly then there would be no surplus tax on
the income used to buy them).
One fact about TCP's analysis that makes it somewhat more palatable to the
rich is that there is no need for the money to be spent wisely, as long as
it's spent for goods and services within the economy. If a billionaire buys
ten yachts and lets them rot at the pier, this does not hurt the economy:
the money was spent on goods and services and is now being circulated by
those to whom it was and is being paid. The material goods themselves have
no intrinsic value; they are basically free. All that costs money is hiring
people to dig up the raw materials for them, design and build them, repair
them, and dispose of them, or renting the facilities where they are stored,
or paying the agree-on share to the stockholders, owners, etc.. Only people
cost money. ALL the costs of the composite producer are in the form of money
paid to the composite consumer. If all is well, the composite consumer has
just enough income to buy the whole product of the composite producer
working at full capacity (Say's Law).
A balanced budget amendment simply says that the government can't borrow
(except when 2/3 of the legislature agrees). Government borrowing is a very
large source of income for those who have surplus money and lend it to the
government. The money that is lent goes immediately into circulation,
because the government spends all of it; however, the interest paid on the
debt simply increases the wealth of those who are already wealthy,
excerbating the problem of spending all of income on goods and services. And
if you remove the avenue of lending money to the government, the unspendable
income simply increases. I'm surprised that the rich are so in favor of the
balanced-budget amendment; have they really thought it through?
I don't think that the answer to the problem of leakage is self-evident. The
fact is that every year, an average of about 7% of the Gross National Income
simply disappears. We can account for some of it, roughly, but where it all
goes is not obvious. This percentage subtracts directly from the growth rate
of the economy: if productivity (combined with population) is growing at 7%
per year and leakage is at 7%, the net growth rate is zero. It's obviously
important to get a handle on leakage, but I don't think that taxing the rich
is the answer. That may be an answer to the gross maldistribution of income,
but it's not the answer to leakage.
For those who haven't read TCP's book yet, I should explain that this 7%
leakage is recorded in the statistical abstracts under two headings:
"personal savings" and "undistributed corporate profit." However, it is not
derived from any actual records of personal or corporate savings: it is
simply the difference between total income and total expenditures, with
income always being greater than expenditures for the nation as a whole.
Economists have explained this difference by saying it is the savings of the
economy that is turned into investment, just as a family or a corporation
saves its income, invests it, and later draws down the savings again.
However, this analogy doesn't hold for the nation as a whole, because at any
given instant both savings and withdrawals are going on at the same time;
the actual _composite_ net savings rate must be close to zero. Economists
have always had trouble explaining how NOT spending (i.e., saving) can spur
economic growth, which is measured in terms of spending. Their difficulties
are justified; if you forget the idea that this 7% imbalance represents some
form of savings and investment, and look on it simply as a loss to the
economy, you suddenly become able to explain all the historical ups and
downs of the growth rate rather exactly. It also helps to look at more of
the facts: for the past 100 years, the composite producer has spend just 20
+/- 2 percent of its total income on capital investment, in good times and
in bad. There is no relation between capital investment and "savings", or
between the rate of capital investment and growth rate of the economy as a
whole. Economic theorists insist that these relationships must exist, but
according to the Statistical Abstracts, they don't.
As best he can estimate, TCP finds that if leakage were entirely eliminated
(probably impossible), the economy should be growing at around 13% per year,
without inflation and with full employment. Of course then it would soon
become resource-bound, but that's a different problem.
I think TCP's model could use more work, but so far it has uncovered some
very interesting relationships, and some major deviations of popular
economic theories from reality. So it's a good start.
Best,
Bill P.