After the Crash: Designing a Depression-Free Economy
GroundSwell, November-December 2010]
(The following was prepared for a Jan. 26, 2011 talk to
the Citizens-University Committee, U.C.Riverside. This is not an
outline for a short talk, but more like an appendix. In speaking I
will just hit a few high spots.)
FOREWORD These proposals will seem too radical to some, but
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
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
A. Investing is the healthy circular flow thatanimates
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 downtax net new
investing without losing revenue from the income of old assets
(Investment Tax Credit; fast writeoff 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
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:
i. When down in the hole, stop digging Avoid new "economic
pyramids", e.g. proposed tunnel under The Delta of the
Sacramento-San Joaquin Rivers. 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
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
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. 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.
D. Restructure income tax system, drastically yet by returning
i. Reallocate undistributed profits
ii. Downtax quick profits, a la Heller; uptax slow profits and
iii. Downtax both giving and receiving jobs.
iv. Forget "shovel-ready" slogan, replace it with "sales-ready"
v. 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
1. 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
2. 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.
3. 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".
4. 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".
5. 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 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. Sunset preferential assessments:
- ) Timber Preserve Zone (TPZ)
- ) Williamson Act
- ) Golf courses
b. Raise taxes or charges on various natural resources that are
now tax-free, and often heavily subsidized 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;
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. Oil and gas,
- ) Severance taxes, common in every state but ours
- ) Administer leasing on State and some city lands more
aggressively Timber and timberlands, private and public Charge
for curb parking on public streets (Shoup, High Cost of
c. Charge for road use by moving vehicles
- ) Crudely, by raising gas taxes that have fallen since 1920
- ) Gradually introduce more sophisticated methods as
practiced in Singapore and some other pioneering cities
Effluents in air and water: estimates of enormous revenue
potential in carbon taxes (Barnes) Coastal access: slips and
Moorings ix. Fisheries, fin and shell x. "Sweetheart"
leases, e.g. on Federal lands ("possessory interests")
xi. Eleemosynary institutions
d. Close loopholes in sales taxes and income taxes (if we must
have them). Long lists of loopholes are available on request.
e. 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 thatby 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 fundand 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 fundcapitalistsanticipate 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 turnovertoo 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 investmentwhich
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
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"