After the Crash:
Designing a Depression-Free Economy
Mason Gaffney
[A paper presented to the Citizens-University
Committee, University of California, Riverside; 26 January, 2011]
FOREWORD
These proposals will seem too radical to some, but consider:
A. We have been radically, spectacularly wrong, and so we need to
change radically. Bush I, Bush II, and now Obama have demonstrated
their incompetence. If Clinton and Gingrich's Congresses were better
it was only marginally. They have used the same set of economists, the
same paradigms with the same astigmatic limits. They narrow their
vision to money, its quantities and flows, without reference to real
events and resources, not even the synchronized symbiosis of real
estate collateral and the volume of demand deposits. They look only at
ancient "in-the-box" policies, ever leaving us with dismal
choices. In Washington it is "inflation or unemployment, take
your pick". In Sacramento with successive Governors it is "regressive
taxation or kill incentives, take your pick". In either case it
is our fault, not theirs, if the side-effects are bad. They offer no "win-win"
solutions, except where two private rivals may both win at the expense
of the amorphous general taxpayer.
B. Many changes proposed here are returns to older traditions that
prevailed when California policies made us a magnet for capital and
labor, and the U.S. was the hope of and model for the world. Returning
to tradition is not "radical" in the sense of untried or
frightening or unpredictable. 40 years ago, California was the most
successful case of "economic development" in history -- not
the basket case of today.
C. Some proposals here entail State and local action; some entail
Federal action. I have not, in the time available, distinguished
sharply between them, but left that to the listeners to infer.
I. Premises.
(These go back at least to A-R. J. Turgot, the tutor both of Adam
Smith and several of the Founding Fathers of the U.S.A..)
A. Investing is the healthy circular flow that animates most of the
work of society. Capital is a Great Revolving Fund: the faster any
fixed quantity of it revolves, the more work it animates. More capital
may be better, but we can always make do with what we have.
B. Politicians and popular thought today (and for centuries past)
have seen "consumption" as the key driver of circular flows,
with magical "multiplier" effects as consumption creates
more incomes which create more consumption, and so on. Actually,
consumption per se only takes goods off the shelf; REPLACEMENT is what
creates new incomes. Replacement anticipates liquidation, and by
anticipating it creates the incomes that make it happen. Consumption
is mainly a passive function of income, but Investing is the
autonomous variable that regulates the circular flow. See appendix, "Replacement
anticipates liquidation".
C. "A" applies only to NET new investing, income-creating
and job-creating. It does not apply to buying existing assets like
land and old buildings. It MAY apply to IPO's, depending on how the
new capital is expended. It does not apply to M&A. Since the
beatification of "uniformity" in and after the tax reform of
1986, Washington, the academies and even the labor movement have lost
consciousness of this principle.
D. Walter Heller demonstrated one way to down tax net new investing
without losing revenue from the income of old assets (Investment Tax
Credit; fast write-off of NEW capital). Since his time his policies
have been abandoned and reversed; wage rates and the demand for labor
have steadily fallen, probably partly in result.
E. Land available in the right place at the right time at the right
price is the necessary venue for "A". With Prop. 13 cum
urban sprawl it has been available in the wrong places, freezing up
precious capital in attenuated infrastructure, while also invading
pristine environments.
F. Taxes and other charges based on giving and receiving jobs are
directly and obviously job-killers. They have risen steadily and
inexorably over the last century.
II. Our present economic problem summarized.
We have a shortage of liquid capital; a shortage of available land
and resources; and a surplus of labor.
III. Solution Summarized
A solution should be obvious to any reasonably bright 12-year old -
lower the coefficients of capital and land per worker. Get capital
moving (turning over); get land in use. Those will put labor to work.
IV. Capital: turning too little capital into enough
Capital may be a Great Revolving Fund, but some capital revolves much
faster than other. To simplify, there are two kinds of capital: fixed
and working. We have lots of fixed capital just now, but capital in
empty buildings, mothballed ships and airplanes and bridges-to-nowhere
do not make jobs by themselves. We need more working capital, or "Capital
in motion", capital that keeps returning to be reinvested
(revolving, or turning over) to meet the next payroll.
Two parts of solution to capital shortage:
1. When down in the hole, stop digging
a. Avoid new "economic pyramids", e.g.
proposed tunnel under The Delta of the Sacramento-San Joaquin
Rivers.
i. Long building periods swallow up capital, first in
construction costs; then in compound interest on the funds
(Allowance for Funds During Construction); and then in slow
recovery, for capital costs interest every month until you recover
it.
ii. Some dreadful cases in point: "high-speed rail"
with low-speed construction, the 65-mile "first leg" of
the dreamy 500-mile line from San Francisco Bay to San Diego ; the
Washington Public Power Supply System ("WHOOPS"); the
Tenn-Tom Canal, begun when Andrew Jackson was President and
finished only recently; The Chunnel; The Seikan Tunnel
(Honshu-Hokkaido); empty mansions; Louis XIV's long-a-building
Canal du Midi; 1846 work-relief in starving Ireland, building
roads for the next century while people died of hunger; etc. ad
inf.
iii. iii. Generic case: urban sprawl, continental sprawl, and our
worldwide sprawl swallow up massive capital and keep it from
recycling. We do not need "shovel-ready" projects so
much as sales-ready or use-ready projects from which we recover
capital fast to meet the next payroll.
iv. iv. Solve problems in other ways than building monuments and
pyramids, e.g. by using local waters economically. In the Kaweah
Delta, little local economies would have obviated the massive
Friant-Kern Canal (Gaffney, 1960); in southern California,
reasonable local economies would have obviated the massive,
energy-gobbling California Water Plan.
b. Restructure income tax system, drastically - yet by
returning to tradition
i. Reallocate undistributed profits
ii. Downtax quick profits, a la Heller; uptax slow profits and
capital gains
iii. Downtax both giving and receiving jobs
c. Forget "shovel-ready" slogan, replace it
with "sales-ready"
2. Recover that capital
a. It takes working capital to thaw out frozen capital.
Use empty buildings, remove mothballs. b. Complete half-finished
work before starting new projects: "full-funding" vs.
trading earmarks.
V. Solutions to land and resource shortage
- Repeal or amend Prop. 13; recreate the magnetic tax system that
made early California flourish: no sales tax, no state income tax,
heavy taxes on land
- Note that property taxes based on land values are both
progressive and pro-enterprise. This is one of the best-kept
secrets of modern economic orthodoxy. Data available on
www.masongaffney.org.
- Note that the prospect of steady annual tax rates levied on the
base of land values will have a tempering effect on the present
high amplitude of cyclical swings in the price of land, which in
turn is the collateral behind wild swings in bank credit. This is
a central part of "Designing a Depression-free Economy".
- Use new funds from property tax to lower other taxes and fees,
that now "shoot anything that moves", suppress local
enterprise, and, sarcastically, "welcome, strangers".
- Stop water and other subsidies to farmers who produce the least
value per acre-foot of water: rice, alfalfa, pasture, sugar beets.
Reallocate water to higher uses. The market would do it, if we had
a market, but we hardly do. Give high priority to creating new
institutions to facilitate water marketing. This could be "California's
new frontier" (Gaffney, 2006).
VI. Making jobs by untaxing labor, replacing revenues from
resource and environmental taxes and charges
1. Remove FICA tax, and various state taxes and charges that vary
with jobs. Replace revenues from:
a. Higher property taxes
i. Raise rates to 1977 levels, 3% or more. It worked
for a century before then; why not now? 40 years ago California
was El Dorado, a magnet for both labor and capital at the same
time. It was expressed as "the continental tilt" of
interest rates, but not at the expense of labor, for wage rates ,
too, were higher here - a double continental tilt.
ii. Sunset preferential assessments:
1) Timber Preserve Zone (TPZ)
2) Williamson Act
3) Golf courses
b. Raise taxes or charges on various natural resources that are now
tax-free, and often heavily subsidized
i. Assets held by licenses, which are not taxable
property. E.g. liquor licenses; taxi licenses; utility franchises;
licenses to preempt the electromagnetic spectrum, a valuable part
of the public domain;
ii. Water: "Turn Negabucks into Megabucks". The State
Constitution declares that "The waters of California belong
to the people of California", so charge for it instead of
subsidizing people to waste it, as now.
iii. Oil and gas,
1) Severance taxes, common in every state but ours
2) Administer leasing on State and some city lands more
aggressively
iv. Timber and timberlands, private and public
v. Charge for curb parking on public streets (Shoup, High
Cost of Free Parking)
vi. Charge for road use by moving vehicles
1) Crudely, by raising gas taxes that have fallen
since 1920
2) Gradually introduce more sophisticated methods as practiced
in Singapore and some other pioneering cities
vii. Effluents in air and water: estimates of enormous revenue
potential in carbon taxes (Barnes)
viii. Coastal access: slips and Moorings
ix. Fisheries, fin and shell
x. "Sweetheart" leases, e.g. on Federal lands ("possessory
interests")
xi. xi. Eleemosynary institutions
c. Close loopholes in sales taxes and income taxes (if we must have
them). Long lists of loopholes are available on request.
d. Assert State ownership using Public Trust Doctrine potentially
covering vast areas, e.g. the entire Delta and that half of the
original San Francisco Bay that has been filled in.
VII. SUMMARY
Please go back over headings I through VI. Consider how they just
scratch the surface; use your imagination to fill in the blanks.
Many companies invest in excess of depreciation. A company can do
that - by tapping others. An economy cannot, except by new saving. It
is a closed system with a zero sum of capital transfers. To meet the
national payroll the economy must deliver the goods, or cut the
payroll. The national capital is indeed a Great Revolving Fund. The
fund receives inputs from labor and delivers to consumers. Labor and
consumption set limits on the throughput, as we know. But so does
turnover of the fund - and economists neglect this.
Meeting the national payroll has two sides: spending money for work,
and delivering real goods to back up the money. Turnover generally
balances the two sides nicely. Replacement anticipates liquidation.
The keepers of the fund - capitalists - anticipate the maturity and
sale of their goods, and pay workers to replace them. This gives
workers the income to buy the ripe goods. (Along with turnover there
are net saving and investment, but these are small next to turnover -
too small a tail to wag so big a dog.) Note well that Replacement ,
not consumer demand, is the autonomous causative variable here. The
latter is a passive function of income. It is investing that is
discretionary, hence autonomous, hence the key to starting and
sustaining the circular process.
Ordinary macro models take care only of the spending side, the money
demand. Their fault is to assume that delivering the goods then takes
care of itself. Turnover is assumed mutable, totally accommodating in
response to the touch of spending. The fact is that turnover itself
controls spending, since replacement anticipates liquidation.
If we perceive the problem as how to remove surplus goods from the
market, the doctrines and policies that result will welcome
investments with only deferred benefits. These create money incomes
and no consumer goods. The result has to be inflation, and has been
for many years. We have traded on the symbol and denied the substance
until the symbol has lost its power to command. Neoclassical macro
models do not omit turnover from their equations. Rather they bury and
obscure it by keeping it implicit. This occurs when one treats "consumption"
as an income-creating expenditure. Now really, consumer spending as
such does not create much income; it takes off the shelf goods already
produced. Replacement is the spending that creates income. There is
disinvestment and reinvestment. In macroeconomic logic these two
transactions are netted out, so consumption creates income, and only
the uncleared balance shows up as net investment-which is what "investment"
means in current macroeconomic lingo. The great mass of gross
investment is called consumption. The turnover of capital required is
assumed to occur passively, automatically, accommodatingly.
Only it doesn't. Turnover has its own set of determinants, including
the tax biases we have surveyed. Furthermore, since replacement
anticipates liquidation, and the time for liquidation depends largely
on the physical character of the capital in question, turnover plays a
strong role in determining income and consumer spending, rather than
the other way around. It is the pacer, not the paced. Consumer
spending is the result, not just the cause of the ripeness and sale of
goods. It is this that keeps balance between aggregate demand and
supply.
This is the missing link in neoclassical macro models enmeshed in
consumer determinism. Actually it is replacement, mainly, that
determines gross investment which generates most income. Replacement
in turn is determined by the schedule of maturity of capital in being.
That analysis would seem to explain better than neoclassical macro
models our current predicament. In it, replacement spending falls
short because of a shortage of ripe goods, not a surplus. If there are
not enough jobs to go around it results from too few goods flowing out
the pipeline, not too many. A shortage of ripe goods requires that
they be rationed, and unemployment is the rationing agent. If there is
not enough consumption to employ all workers, it is because there is
too little to consume.
What's happening is that turnover is too slow. A lot of good capital
is simply wasted and lost forever too, which is worse in the long run
but not very different in the short from freezing it up for twenty
years. This means slow delivery of final goods, and slow recovery of
capital to reinvest.
How can capital be short when there is so much, and you can buy it so
cheap? Easy. There is plenty of capital stuck in the ground. The
shortness is of readily recoverable capital for reinvestment. The
shortness raises discount rates and devalues common stock, but cannot
transmute concrete into peaches or recycle 'phone poles into sugar.
The moving finger has written. We have gone astray by thinking that
what is good for capital is good for labor. It is a half truth, and we
are now having to face up to the other half.
The microeconomic solution to unemployment is lowering the
coefficient of capital and land per worker. This also contains a
macroeconomic solution. An important aspect of substituting labor for
capital and land is to apply labor to land more often and recover and
reinvest capital more often. This increases replacement demand, which
is almost all of aggregate demand, and does it without any inflation.
The key to good macroeconomic policy is not net new investment and
growth of capital, but turnover, recovery and reinvestment of capital.
Favors to capital are not favors to labor unless they come in such
form as to accelerate the cycling of capital.
APPENDIX: "Replacement Anticipates Liquidation, and Causes it."
Excerpt from Gaffney, "Towards Full Employment with Limited Land
and Capital" Accessible on www.masongaffney.org.
(Economics Professor Mason Gaffney, Ph.D., may be emailed at
m.gaffney@dslextreme.com)
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