A Theater of the Absurd Creates Global Collapse

Frederick C. Thayer



Early in September, President Clinton, Secretary of the Treasury Robert Rubin, and Federal Reserve Board Chairman Alan Greenspan finally decided to admit that the global economy seemed headed for a real crisis. Clinton called for a meeting within a month of the central bankers and finance ministers of the major industrial countries, shortly after Greenspan had announced that the demon of inflation had been driven to cover. The Fed seemed ready to reduce interest rates in an attempt to speed up economic activity and, perhaps, prevent the dragon of deflation from running wild. Greenspan’s hints implied that stimulating investment in new factories and equipment everywhere was an answer to the global problem, even though the US trade deficit was increasing as fewer manufactured goods were being sold aboard, and other countries could not sell their output.

By September 16, Rubin was telling Congress that too many American dollars had been invested in foreign countries, especially in Asia, and that many borrowers were unable to repay the loans. He did not admit that new firms can’t repay loans when they can’t sell what they produce, a condition known as overinvestment, overcapacity, and overproduction, but a condition economists declare impossible. I argue here that only large-scale public spending and deficits can help because the underlying principle of all-out competition must always make it impossible for producers to sell profitably all they produce. The global debacle is not just financial.

          The American economy cannot remain an island of prosperity in a collapsing world.

Before proposing to act on the emerging crisis, President Clinton had visited Russia, discussing with Boris Yeltsin how the Russians might stabilize their sinking ship, designed and built by American economics professors who no longer wanted the credit. The Russian economy is not all that important relative to, say, Japan, but the Russian crisis was peaking as Clinton arrived. Yeltsin, using standard economic guidelines, said over and over that Russia needed "foreign investors" who might build factories and make goods that could be sold abroad and, perhaps, even to a few Russians who might be able to afford them. Meanwhile, the International Monetary Fund (IMF) was giving its standard advice and threats. It could not continue to help Russia and other countries if those governments did not stop deficit spending.

Typically, deficits everywhere were paltry, as with the seven percent of Gross Domestic Product (GDP) Russian deficit, but the IMF hates all deficits. Understandably, Yeltsin was nervous about using a Vietnam War-type strategy to starve people to death in order to "save" the economy. The same prescriptions also swept America. Peter Peterson, the Wall Streeter who runs the Concord Coalition’s attack on American deficits, has warned that "global financial crisis" and "genuine poverty among the elderly" are probably needed if we are to stop being so generous to Social Security recipients. Peterson’s "scorched earth" economics has earned him a Clinton appointment to the commission charged with "saving" Social Security.

During Clinton’s Russian trip, the American stock market was going through one of those "significant corrections," with market indexes dizzily falling for a time. The stock market, after all, is the one part of the economy where big-time inflation is considered "good," no matter the underlying cause of rising share prices. Even when stocks are greatly overvalued, deflation is thought "bad" because it brings back memories of October 1929, when the market crash became wrongly identified as the cause of the Great Depression. Economic analysts said the falling stock prices showed that "economic crisis in Asia" finally was having some effect. The Europeans had earlier committed themselves to deficit-cutting as part of introducing a single currency and, despite what economics text books say deficit-cutting is always a prelude to economic downturns.

Speaking in Russia, Clinton and Rubin proclaimed that "the fundamentals of the American economy are sound," echoing Herbert Hoover’s 1929 statement that "the fundamental business of the country, production and distribution, is on a sound and prosperous basis." Hoover had lots of company in 1929. Governor Franklin Roosevelt of New York, leading economist Irving Fisher of Yale, and the heads of the American Federation of Labor and General Motors said the same thing. Only a year or two later, almost everyone except economist came to agree that the growing depression had been caused by the global production of more consumer goods, food included, than could be sold to paying customers. Unacknowledged overcapacity and overproduction make 1998 somewhat similar to 1929. The American economy has been slowing down in 1998, and cannot remain an island of prosperity in a collapsing world. Even the recent American "good times" have been less than advertised: what is called "low unemployment" used to be "too high." Worse yet, American leaders have swallowed the old economic line that if the federal budget is balanced and if we begin to pay off some of the national debt, prosperity will continue forever. Once again, economists who refuse to acknowledge the causes of depressions are the designated "experts" assigned the task of preventing or ending them. Political leaders obey, and history is ignored.

                  Greenspan vs. History

Alan Greenspan said in June, only three months before admitting to the approaching crisis, that "the current expansion is as impressive as any I have witnessed in my near half-century of daily observation of the American economy." By referring only to the past 50 years, Greenspan could ignore the Great Depression of 1929-41 that ended only with the big deficits of World War II. The 50 postwar years have indeed been the most socially stable and economically prosperous in our history. Why is this more important than it appears to be?

This half-century is the first period of constant deficit spending, and the longest by far without a major depression. According to economic principle, this just cannot be true. Economists and today’s politicians across the board, especially such shouters as Ross Perot and the Concord Coalition of former politicians, insist that America must kill deficits and reduce the national debt (relatively speaking, only half of what it was in 1946). Both political parties, despite otherwise bitter struggles, jointly celebrate the new budget surplus. True to form, Greenspan has told Congress that "it is really quite pleasant to have this [growing budget surplus] confronting us… it is an issue of good choices [tax cut vs. debt paydown]." History says that the celebrants are fools. History says that the return to budget surpluses and debt paydowns will lead to major depression. World War II deficits brought recovery and didn’t hurt a bit. The postwar deficits deserve the credit for 50 years without another depression.

American crashes used to arrive very often, the first beginning in 1819, the most recent ending in 1941. On average a new one would begin only 17 years after the end of the one before it. Americans born in 1870 and still alive in 1941 had lived through the miseries of 1873-78, 1893-98, and the Great Depression. Some of those born in 1941 have experienced poverty and a number of relatively small recessions, but nothing like the big hurricanes and shorter but wild boom-and-bust cycles of earlier times.

In a previous article in Social Policy ("Do Balanced Budgets Cause Depressions?," Spring 1995), I pointed out that all six major depressions began after multi-year federal budget surpluses and big reductions in the national debt. Andrew Jackson is still praised for wiping out the debt as he left office in 1837, but the country fell into a six-year depression. Throughout the 1920s, surpluses steadily cut the national debt by 36 percent, but Herbert Hoover and fellow Republicans lost elections and took undeserved blame for the miseries of the 1930s. I say "underserved" because contrary to popular and even textbook history, Franklin Roosevelt was not a big spender in the 1930s. Nor was Ronald Reagan the great economizer of the 1980s.

Running for a second term in 1936, FDR promised to balance the budget, restated his determination to do so immediately after re-election, and resolutely slashed the next deficit to a paltry 0.1 percent of GDP. Even with 17 percent unemployment, he stuck to the traditional bipartisan dogma that deficits always hurt the economy, and surpluses always help. As soon as he balanced the budget, the economy collapsed again, wiping out the modest improvements of his first term. Only World War II, and deficits up to 31 percent of GDP, saved FDR’s place in history. His biggest peacetime deficit, 5.9 percent of GDP in 1934, was smaller than Ronald Reagan’s 6.3 percent in 1983. When Reagan did get around to cutting deficits in his second term, he was lucky enough to leave office before a recession swept George Bush out of the White House.

In the past half-century of relative stability, deficit-cutting relative to GDP has always hurt, as politicians have succumbed to an unconscious death wish to lose elections. Deficit cuts in the late 1950s led to the recession that helped John Kennedy win a close election in 1960. Richard Nixon and Gerald Ford cut deficits in 1971-74, and recession put Jimmy Carter in office. When Carter cut deficits, recession helped Reagan who, in turn, cut deficits and helped Bill Clinton. Harry Truman managed to defeat Thomas Dewey just before postwar deficit cuts caused the recession of 1949. In earlier times, major depressions were crucially important in the presidential elections of 1840, 1860, 1876, 1896 and, of course, 1932.

"Liberal" and "conservative" economists and politicians subscribe to economic principles that are at war with history or contradict each other, one by one. The principles are treated as holy writ, and even the most obvious questions are studiously avoided. Many of the principles are logically absurd. In political language, for example, a "free market" is nothing but anarchy, and it is foolish to believe that anarchy can move toward equilibrium, a basic economic belief. In pointing to obvious contradictions, I will quote chairman Greenspan not because he is unique, but because he is a widely accepted spokesperson for the economic consensus that crosses party lines. A well-known Republican, his views differ little from those of such Democratic Federal Reserve colleagues as Alice Rivlin and Alan Blinder.

This critique of contradictory and silly economic principles actually endorses Treasury Secretary Rubin’s recent but vague explanations of the global crisis. An "underweighting of risk factors by lenders" produced a lot of unrepayable loans and, of course, the overinvestment and overproduction that economists deny every time they complain of capital shortages that prevent still more investment. Greenspan blames the "borrowers" more than the lenders, akin to blaming middle-class Americans earning stagnant wages who are lured by endless advertising to "take our credit cards and buy out the store." Neither lenders nor borrowers should be faulted for believing the standard economic principle that the market for consumer goods is an infinite one. I begin with everyone’s favorite, "productivity."

              Productivity vs. Supply and Demand

Greenspan told Congressional questioners in July that "labor productivity is really a measure of the aggregate output per unit of labor input… the standard of living of human beings is determined by the output per worker." Sermons about "productivity" and "efficiency" can be heard almost every day. Workers are told that if they produce more per hour, or more per day, they will earn higher wages, a promise made earlier in this century by management guru Frederick Taylor, and by Lenin when he made Taylor’s writings the centerpiece of Soviet industrial policy. All the promises and assertions were and are pretty silly.

The productivity principle is at war with the ancient principle of supply and demand. If workers turn out more and more goods, the total supply keeps increasing, the market price of those goods must decline, and so must wages. The most typical and constant example is farming, the closest industry to a "perfect market." With the help of government research, farmers have greatly increased productivity over the years, only to reap surpluses that push prices below operating costs unless government helps. Only those unaffected by changes in supply and demand (the independently wealthy) enjoy higher living standards as productivity goes up and prices fall. The simplest but most profound aspect of economics remains unnoticed. Consumers are to be helped by providing them lower prices at the expense of workers and farmers. The "consumer interest" is considered a "public" interest, but the "worker/farmer interest" is a "special" interest, a concept that pits most Americans against themselves. The goal of "consumerism," the lowest prices, is best achieved in depression, when jobless workers cannot be consumers.

To make matters worse, productivity is easily increased on paper by replacing workers with machinery. Tax breaks permit firms to write off machinery in a very few years, and many would prefer no write-off delays at all. Yet firms can write off worker expenses only one year at a time. The result is a form of fakery that badly distorts the productivity / profit relationship. The most basic contradiction of all, however, surrounds the ancient economic principle that an infinite increase in productivity and total output is not only possible, but a guaranteed road to prosperity and profits.

              Say’s Law vs. Competition

Jean Baptiste Say’s 1802 "law" holds in its simplest form that "supply creates its own demand." Because individuals are thought to have an infinite desire to consume goods and services, there is an infinite total demand for such goods and services. And, because natural resources are infinite, or infinitely and easily substituted for, there is every reason to encourage maximum production and the fastest possible depletion of any natural resource in order to satisfy that presumably infinite global demand. There is an infinite need for jobs to produce the goods and services that people want and need. By definition, it is impossible to produce too many goods and services, it is impossible to suffer from exhaustion of any one resource, large-scale unemployment is impossible, and those who occasionally refer to "overproduction" or "overcapacity" are simply ignorant. Asked in July by one Congressman about "global overcapacity in manufacturing… and the seeds of a deflationary trend," Greenspan vaguely mentioned the possibility of deflation, but carefully avoided any mention of the "overcapacity" or "overproduction" that economic principles deny. Because economics is advertised as the "science of scarcity", the distinction between "scarcity" and "limits" is often lost. "Scarcity" refers only to the inability of an individual to satisfy his/her infinite desire to consume, but this has nothing to do with natural resource availability. Time is a scare resource for the very rich individual who can buy everything he would like to consume, but does not have enough time to do it. No matter how wealthy, the individual cannot eat more food than the body can accommodate, even if some try. In economics, "scarcity" and other principles relate only to individuals. Both governments and corporations are also treated as "individuals," but government is considered an alien who "distorts" the market by spending money on worthless projects and people. Many now suggest, however, that the supply of natural resources is by no means infinite. Whatever the amount of oil left to discover, for example, that amount is limited. Taking this as evidence of "scarcity," many look mistakenly to economics to solve a problem that economists do not acknowledge. The real killer for Say’s Law, however, is competition.

The principle of competition dictates that at the time of every purchase, each consumer must be able to choose among many producers of the good or service that the consumer wants to buy at that moment. The principle is that the greater the competition, the greater the duplication or redundancy of output, and the better the outcome for the consumer. At the time of each purchase, therefore, there must be a significant surplus of supply over demand and, when all potential consumers of all products are added together, there must be a truly significant surplus over demand in order to give consumers the many alternatives they should have. The entire system of anti-trust laws and court decisions is designed to prevent restrictions on competition, duplication of output, and plain old glut.

Say’s Law holds that supply cannot exceed demand. The principle of competition holds that supply must exceed demand. Economics fully supports both principles, but double-talks the contradiction. Followers have argued that Keynesian economics abolished Say’s Law, but this a false claim. In the early years of the Great Depression, politicians, business executives, and financiers agreed that overproduction caused it. Herbert Hoover and Franklin Roosevelt agreed with this long-accepted idea about the cause of depressions. Keynes merely invented the new term "underconsumption" that, at first glance, mistakenly appears the same as "overproduction."

"Depletion" and "overproduction" imply that there are infinite limits to what can be discovered, produced, sold and consumed, but "underconsumption" implies that no such limits are even possible. In both classical and Keynesian economics, the planet has infite resources and can accommodate an infinite number of automobiles and humans. Religious fundamentalists love economic principles because they give a scientific flavor to the dogma that it is evil to limit population growth. The Keynesians specify only that if supply does not automatically create demand, perhaps because consumers must save for a rainy day, government can stimulate enough demand to buy everything produced. In principle, there is never a need to regulate or restrain factory or farm output. The Keynesians succeeded in labeling "temporary shortfalls in aggregate demand" as the cause of depressions, recessions, and other downturns in the business cycle. By simply restating Say’s Law, Keynesianism allied itself with tradition by ignoring competition.

Competition of course, cancels out Say’s Law. When price supports and government purchases of surplus crops are ended, prices fall, farmers produce still more, prices fall still more, and farmers suffer, as is now the case. When global competition intensifies, producers in many countries vie with each other for shares of the available market. "Free trade" becomes everyone’s panacea, but every leader who advocates all-out global competition seeks an increase in his country’s exports to other lands, not an increase in imports. Every leader wants to sell surplus production abroad, not take in more and more of the surpluses of the other countries. Say’s Law of infinite demand is illogical, and competition proves as much by accelerating overproduction. The very purpose of competition is to produce much more than consumers can possibly buy and use.

What Hoover and Roosevelt learned the hard way is now forgotten. Greenspan and Congress demonstrated at the beginning of October that they don’t understand how competition works in this era of partly deregulated banking. When the New York Federal Reserve assembled a group of banks to bail out an unregulated hedge fund, Greenspan and a House committee agreed that some banks had made "bad" decisions to make "bad" loans. This is simply wrong; when many banks compete head-to-head to make loans or take deposits, each bank manager must try to make more loans and take more deposits than all the others. Loans are counted as assets, and banks make big and risky loans to businesses. The loans cannot be repaid when businesses collapse in the glutted market. A few years ago, many banks opened branches in Florida to welcome drug-dealing depositors then had to ask for amnesty when they were caught violating laws requiring them to report large deposits. All these bank managers do just what competition demands of them.

Competition cannot and does not provide the other benefits claimed for it. By drastically reducing profits as competitors struggle against each other, competition provides too little money for research. Before the break-up of AT&T, Bell Laboratories was far and away the most innovative research organization in the country, and the Western Electric subsidiary invented the quality control concepts that we now label Total Quality Management. Americans credit such things to Japan, but this country gave them to Japan as a part of the Cold War foreign policy. Government now permits high-tech companies to do collective research instead of keeping secrets from each other and slowing progress, an exemption from antitrust laws that purists would label "collusion" or "conspiracy." The primary cause of bankruptcies, the very epitome of waste, is competitive proliferation, redundancy, and glut. According to economic theory, of course, only government produces waste; everything produced in the private sector is officially labeled "wealth."

              The "Wealth vs. Waste" Circus

The most gruesome examples of our national accounting system, based as it is upon fundamental economic principles, are military hardware, nuclear technology, and biochemical products. If government buys a fighter plane for the Air Force, the airplane is considered "waste" because it will not be sold in the marketplace and, therefore has no market value. While all the parts that go into the plane are part of the GDP, the plane as a whole is not. If government helps industry by approving the sale of fighter planes to other countries, however, this is normal marketplace behavior, and the planes do indeed have market value. Thus, the planes bought for the Air Force are "waste," but those sold to Taiwan are "wealth." Even the economic bookkeeping system, sad to say, pushes firms to sell weapons, nuclear technology, and biochemical agents anywhere in the world. Arms races, nuclear proliferation, and the spread of "weapons of mass destruction" are simply by-products of global competition and absurd economic concepts.

Global markets are not a phenomenon of any one ideology, and it is a mistake to believe that competition is capitalist in origin. Nations must compete against each other in their efforts to sell export products abroad, and subsidies and cheap labor are always in order. The Chinese still preach a Marxist gospel from time to time, but they create cheap prison labor in order to attract foreign investment in new factories. As prisoners, workers lose their socialist "rights" as "owners of the means of production," and the Chinese easily combine socialist dogma with slavery.

At a less ugly level, a brewery is considered "wealth" because it is supposedly worth at least the cost of building it. In principle, the brewer can easily sell all his beer. The money borrowed to build the brewery is backed by the brewery as a form of collateral, and the brewery and all its equipment are officially counted as "investment." If government builds a bridge that the brewery cannot do without, however, the bridge is considered "waste" because it will not be sold. If government borrows to build the bridge, the money is considered worthless because the bridge has no economic value. True enough, many people casually speak of "needed investment in public works," but the fact remains that public works are not counted as investments.

Using this logic, all public spending can be labeled as "waste" that takes money away from where it is needed "new factories and equipment" and puts it into such "worthless" expenditures as public works and social programs. If potential criminals were provided jobs so that they could learn to lead normal lives, a sensible economic theory would label this a necessary and official investment in the national quality of life, but since this is not a marketable commodity, all such programs are thought to be "waste" that should be removed from the federal budget. Indeed, government has even made itself the hostage of standard economic claptrap by using a policy of compulsory unemployment to violate its own laws, and then trying to deny that it wants to keep people out of work. Bill Clinton may have lied about his sex life, but everyone lies about unemployment.

                                                                            "Everyone Must Work" vs. Compulsory Unemployment

John Kennedy’s council of Economic Advisers invented the concept of a Non-Accelerating Inflation Rate of Unemployment (NAIRU) in the early 1960s (they called it "target unemployment rate" to give official recognition to something economist have always preached. A significant amount of joblessness is needed, they say, if there is to be room in the economy to create new jobs and increase economic growth. After all, if everyone had good jobs, it would be impossible to start new businesses without paying very high wages to bribe workers away from their current employers. The high wages would then drive wages up, the economy would "overheat", and we would have runaway inflation. To prevent inflation, therefore, millions of active job-seekers must be kept out of work so that those who have jobs will dare not ask for wage increases. Marx correctly pointed to a "reserve army of the unemployed," but he was wrong to label it a part of capitalism instead of normal national and global competition.

"Welfare reform" was a hot issue in 1994, the year that Bill Clinton’s chief economist wrote in The New York Times that an unemployment rate between 5.9 and 6.3 percent was needed to control inflation. Unemployment has dropped since then, and Clinton’s advisers now talk about something around 5.0 percent as the desirable rate. The last time Congress announced a desirable minimum jobless rate was the Humphrey-Hawkins Act of 1978, and the rate was 4.0 percent. Every year since then, White House economists and the Federal Reserve chair have had to publicly explain why government takes no action to hit that 4.0 percent target. Yearly economic reports and Federal Reserve appearances before Congress always involve double-talk about why Humphrey-Hawkins must be forgotten because 4.0 percent unemployment would cause inflation.

So it was that Greenspan trooped up Congressional Hill in July to outline how the Fed was always alert to signs of potential inflation. "Should pressure on labor resources begin to show through more impressively in cost increases," he declared, "policy action may need to counter any associated tendency for prices to accelerate." If more people had jobs, he hinted, the Fed would raise interest rates to slow job creation. As the questioning continued into the following day, one Congressman asked Greenspan to verify that a recent increase in the minimum wage had not caused employees to get rid of people they could not afford to pay. Greenspan disagreed, asserting that the increase did indeed have a "negative effect" on jobs, but the decline had been "overwhelmed by far stronger forces." He insisted that if the minimum wage had not been increased, more people probably would have found jobs.

Locked into another theoretical blind alley, Greenspan was arguing that minimum wage increases are "bad" because they force employers to get rid of workers… But he also was arguing that it would be "good" if his own interest rate hikes caused unemployment by "cooling" the economy. When Greenspan and many others talk about minimum wages, they pose as advocates of putting as many people to work as possible but, when they talk about inflation, they vaguely talk about their policy of compulsory unemployment. As I pointed out before, ("The Comic Opera of Welfare Reform," Social Policy, Summer, 1995), those who now force everyone on welfare to find jobs also keep people out of work to keep wages down. They know very well that many being forced off welfare rolls will not find jobs. The standard technique is to support full employment while whispering about the anti-inflation job-killing NAIRU policy.

              Protectionism vs. Free Trade

Professors of economics at leading universities make more and louder speeches about the "evils of protectionism" than any other group. Without exception, they truly have lifetime employment at their universities. Professors even managed to get legislation enacted that now prevents universities from forcing them to retire at age 70, or at any other age, a law that has crippled the abilities of universities to plan ahead. Professors love to "protect" their own job security, but they hate legislation that "protects" others. This is especially the case for "liberals" who see antitrust laws and all-out competition as the one best way to guard against monopoly power. "Consumerists" such as Ralph Nader do not believe the public interest is being served unless bankruptcies occur, because this is the only way to "know" that businesses are really fighting each other. Yet the consumerists also fight mergers because they believe that every firm is still needed, a wholly contradictory stance. Without realizing as much, consumerists fall into the old trap of helping consumers at the expense of workers.

The most unusual form of "protectionism" was World War II itself, the first conflict to destroy much of the world’s industrial plant. While nobody thought of it that way, this country was the only industrial giant to escape major damage. For years afterward, American companies dominated markets because competitors had been wiped out. This is how the most stable period of our economic history began, with people holding secure jobs for a few decades. The simple lesson we should have learned, but did not, was that economic stability brings social stability, a 30-year mortgage being the best indicator of both. Today, our secure academics and many politicians gleefully tell Americans that they will have at least seven different employers during a working lifetime, keeping quiet about how long it will take to find a new job after losing one. In all-out competition, many become "losers," and not necessarily for only a week or two.

To this day, the Smoot-Hawley tariff of mid-1930 is blamed for "causing" the Great Depression that actually began in August of 1929. The deeper, typically incorrect, explanation, of course, is that the tariff made the depression longer and deeper but, early in 1930, perhaps the most expert observer of all had it right. Financier Bernard Baruch, who advised many presidents and had organized industrial contributions to World War I, pointed to "a worldwide crisis of overproduction," asking that a worldwide "supreme court of business" must assemble to regulate the glut.

Franklin Roosevelt’s timid New Deal was designed to attack glut, but it was too mild to take on a task it could not accomplish, and the Supreme Court abolished it as blasphemous. Tariffs and New Deal structures are by no means the best way to deal with global overproduction, but they do begin with valid definitions of the problem. Those who preach economic gospel simply refuse to consider overproduction, resource limits, and human overpopulation as even remotely possible.

Economists and the politicians trapped in their dogma can always be counted upon to preach "free trade" as the answer to everything. Actually, everyone sees global openness as the way to export the goods that cannot be sold at home, the root cause of the imperialistic expansions of the late 19th century. Americans should ask themselves why we sent the Navy into Tokyo Bay, before the Civil War, to convince the Japanese that they should "open" themselves to free trade. Obviously, every country cannot export more than it imports, but that is every country’s objective in a "free trade" regime.

              Government and Money

Economic thinking is still mired in gold standard principles. The money with which government buys things is thought worthless because government buys worthless goods. The historic solution was to require that government tie the money in circulation to the amount of gold or silver (any commodity would do) on hand. Taking on unsecured debt would simply flood the country with still more worthless money, "monetizing the debt" and causing inflation. Thankfully, we now live in a world of fiat money, an ugly label for a wonderful system still hampered by gold standard thinking.

Government now creates money and puts it into the global economy by spending it. Government must spend at least as much as it takes in if those who pay taxes will be able to pay them. Basically, monetary policy should be understood as logically driven by the need to pay taxes. If goverment spends less than it takes in, those who owe taxes will have to liquidate holdings and take losses in order to pay, a depression-type activity. The same problem exists for those across the world who must repay any of their debts in dollars. The ability to pay taxes rests upon deficit spending. Along with many others, Greenspan often claims that government deficits push up interest rates, another leftover from gold standard days. In so arguing, he chooses to forget that he constantly raises and lowers interest rates according to his interpretation of what is needed. If he raises rates as deficits increase, and if the deficits are the actual cause of inflation, why does he raise the rates if it is a useless action? These are important questions because higher interest rates cause inflation by increasing the cost of doing business.

Government spending cannot damage the economy by "crowding out" (factories) by putting money into "worthless" government functions, sometimes labeled "necessary but wasteful," as in the case of the military. With fiat money, there cannot be a shortage of savings available for new investment. The capital is created when it is needed because savings are the accounting record of investment. Economists, including Keynes, have erroneously denied the possibility of "overinvestment" along with overproduction, but they are twins. A "low savings rate" indicates that deposits have been moved from banks into the stock market to take advantage of inflated share prices. A "low savings rate" may also indicate that in a world of glut, there is little need for immediate new investment in factories and equipment.

Only government spending can safely solve the problems of recessions and depressions. Because all government spending is, by definition, meeting some of the needs of society as a whole, \all government spending should be officially considered an investment in the nation’s future. Those who would list only spending on capital goods as investment fall short in their analysis. The health of citizens, for example, is as important as bridges.

When government is customer, it promises to buy what it orders people to produce, a stabilizing factor that cannot exist in a free market. While the IMF and others still do not accept the notion that government deficit spending can halt economic downturns, there is less hesitation than there used to be. The problem is that there used to be. The problem is that recessions cannot be clearly seen until a year or more after they begin. And, if deficits can end depressions and recessions, they can prevent them as well. The evidence of history shows that when deficits end recessions, but are then cut back during a recovery, the stage is set for the next downturn. Deficits should not be used only as overdue "jumpstarting," but are constantly needed as stabilizers. The "business cycle" is not an Act of God beyond human control, but only another by-product of theoretical economic nonsense.

Every part of the public economy, with perhaps the partial exception of the military, has been starved for years. Roads, bridges, and schools are national disgraces, and the complete list is far too long to include here. Taking money out of the military and putting it into other programs helps not at all with respect to the list of deficiencies, especially when there is no economic reason whatsoever for refusing to meet such needs. The old, the disable, the poor, the mentally ill, and even the young are targets of economic concepts that push leaders into condemning single parents for taking care of children instead of walking factory-to-factory looking for jobs. If "welfare reform" is a comic opera, our dominant economic concepts are a long-running theater of the absurd. Ignoring the cause of 50 years without a depression, we now resolutely move once again to create another great collapse.