Stimulus: The False and the True
GroundSwell, January-February 2008]
Stimulus is the buzzword du jour of domestic policy, but its old
metaphors ring with sad satiety: kick-start the motor, jump the
battery, prime the pump, shot-in-the-arm, wake-up call, jolt,
multiplier, ripple effect, ... . Fact is, we've been there and done
that several times for generations back. We have been doing it again
for seven years now; that is what red ink and budget deficits are
all about, and they're massively bigger now than ever before.
It started in the U.S.A. after the Great Crash. Leading economists
had cheered on the boom of the 1920’s, then fumbled and
stumbled after the bust. They blamed the public, like leaders in all
times and places who lack solutions. The old ones scolded haplessly
as they slowly died off while the young ones, in the manner of
Thomas Kuhn's paradigm shift, rushed to embrace the theories of J.M.
Keynes and the practices of FDR, bowling over rear-guard protests.
Keynes said "Borrow and spend. Borrow to soak up idle savings
if you can, borrow newly printed money if you have to, tax if you
must, but spend, spend, spend!" Stimulus!
It didn't work. FDR had continued the price-maintenance and
cartelization policies inherited from Herbert Hoover (via his first
guru, Raymond Moley), choking off production and recovery. Note that
these price controls were FLOORS, not CEILINGS like later controls.
In 1937 came the submerged depression& a depression
within a depression. FDR, in trouble, reversed field and turned to
reviving competition and anti-trust policy. Ed Flynn of the Bronx
had replaced deceased adviser Louis Howe. Along with Flynn came
Tommy Corcoran, Benjamin Cohen, and Thurman Arnold, to revive
anti-trust and free markets. Recovery commenced, when World War II
struck and eclipsed domestic policy.
Stimulus returned with the debt-financing of W.W. II, along with
price controls and rationing to suppress and disguise inflation.
After the war, fear of deflation and renewed depression trumped fear
of inflation, while fear of Soviet communism cum imperialism
justified continued debt finance. Riding the wave of postwar
recovery came a young Keynesian super-surfer, Paul Samuelson.
Brilliant, learned, literate, numerate, witty, worldly, and
industrious, Samuelson swayed most new economists, including most of
this writer's contemporaries, and millions of students.
He averred that debt-financing of the war had proven the worth of
Keynesian policies. It was the dawn of a new era, to be understood
and celebrated through the New Economics. "Fiscal
Policy and Full Employment Without Inflation" was Samuelson's
bright promise in his 1955 best-selling text. He wrote of the "mastery
of the modern analysis of income determination," and of the "momentous
Employment Act of 1946 ... to fight mass unemployment and inflation."
Inflation could result only from "overfull employment". He
and his fellows dismissed anti-trust policy as mere structural
reform, much harder work and less fun than pulling the levers of
fiscal and monetary policy.
In 1950 the smoldering cold war flamed hot in Korea. Truman raised
the pace of deficit financing. U.S. Bonds sold paying only 2.5%.
Truman and his Treasury Secretary John Snyder pressured the
reluctant Federal Reserve Banks, led by Thomas McCabe and then
William McChesney Martin, as their patriotic duty to buy these
bonds; refusing made one a traitor, said Truman to Martin.
They called it supporting the market for U.S. securities.
Treasury paper became known as non-defaultable because the
Fed would always buy it, an open-ended commitment. Private banks
held most of it, and thus developed a vested interest in having the
Fed continue to support the market. With all its faults it had the
good side-effect of keeping the banks out of speculative real
Where does the Fed get the money to make U.S. bonds non-defaultable?
It has the power to create it, by printing new bank notes, and
creating their financial equivalent, new demand deposits. These pump
new money, the essence of Stimulus, into the private economy. Most
new Federal Reserve deposits actually lodged in private banks,
serving as their required reserves, freeing them to buy U.S.
securities by themselves creating new deposits. Observers coined a
useful term to describe what the banks did: they monetized
the national debt. Remember that word: it crops up again.
Economists, puffed up with hubris, declared they had tamed the
business cycle by managing demand. Managed Stimulus rose to the
status of a permanent panacea. Meantime the military-industrial
complex quietly grew into an even more potent vested interest
supporting deficit finance, an ominous portent. President Eisenhower
warned us, but waited until his farewell address, passing the buck
to successors (the old Army Game?). At least in the 1950s they
recognized that high federal spending calls for high taxes.
Next came JFK/LBJ and the Soaring Sixties. JFK's modified approach
was called Business Keynesianism. Early Keynesianism was
Consumer Keynesianism, with strong elements of underconsumptionism,
the idea that people save too much and should consume more. It was
born in the Great Depression, at a time when business was in
disgrace; the wage-earner serving as the consumer was to lead us out
of the funk by getting higher wages and spending them quickly on
consumer goods. Early Keynesians also scorned cutting taxes, the
idea was for government to stir up stagnant savings by spending
By 1961, however, our leaders had figured out that the essence of
Stimulus is not just spending, but the excess of spending over
taxes, financed by borrowing: deficit finance without wild spending.
They unbalanced budgets by taxing less. This was doubly stimulating:
it not only pumped in new money, it also abated the DISincentive
effects of high marginal tax rates on investing, now seen as the
independent force that animates all the work of society, as Turgot
had perceived way back in 1767. Keynesians called it income-creating
investment. Businessmen, of course, loved it, hence Business
Keynesianism. The Soaring Sixties did indeed soar. Reagan was to
rediscover part of the formula in 1981-89, but only in part,
foreshadowing the present Noachian tsunami of debt.
You might think that government borrowing would drain capital from
private industry, but people awoke to that later, when they labeled
it Crowding-Out. In the Soaring Sixties the U.S. Treasury could
borrow indefinitely without even nicking its perfect credit rating.
Crowding-Out was no problem because the Fed, by creating new money,
could buy U.S. bonds without depriving private business. The Council
of Economic Advisers (CEA) under Walter Heller and then Gardner
Ackley, bursting with confidence, declared they controlled demand so
well they could fine-tune it, the ultimate step in demand
management. Perpetual Economic Growth through perpetual Stimulus
became the reigning fashion and mindset. Chirps of protest from
fledgling environmentalists and conservationists they put down with
condescension and apparent ease (deceptive ease, as it turned out).
Heller tried to coopt environmentalists by promising them scraps
from the table of economic growth.
Samuelson passed the mitre to Heller, who put in practice a
spectacularly good idea that was standard macro-economic code in
those days, and later tragically discarded and forgotten. He
distinguished clearly between NET new investing and GROSS investing;
the former creates capital and makes jobs, while the latter includes
buying existing assets like lands, merely shuffling them from one
owner to another without directly animating any work of society or
creating any income. The national accounts, taught to every student
of macro-economics, drummed this important difference in. Keynes,
with all his faults, had defined investment to mean only NET
investing, so it wasn't even necessary to specify the net
Heller devised new creative means like the Investment Tax Credit
(ITC) and accelerated depreciation to lower the effective income-tax
rate on new investing and rev it up. These were the income-tax
equivalents of exempting new capital from the property tax, and may
be traced to the works of Heller's Georgist mentor, Professor John
R. Commons of Wisconsin. They were a form, if only a mite, of True
Stimulus, using Federal tools.
Most avowed Georgists, by that time, had boxed themselves in to the
narrow and shrinking field of property taxation. Property taxation
had become local and Balkanized, so many Georgists became
anti-Federalists, some of them simply caustic and carping and
off-putting. They could not or would not consider how income
taxation can be modified in either pro- or anti-Georgist ways. Even
the able economist Paul Douglas of Illinois, as big and noble a man
as ever graced the U.S. Senate, volunteered to me that he regretted
leaving Chicago politics because in Washington there were no
Georgist tax issues on the table. In his 1967 Report of the National
Housing Commission Douglas, working with our own Walter Rybeck, did
get in a strong plug for LVT, but only at the local level. He did
not see what Commons had seen, and Heller was seeing, that the
Federal Tax Code brims with Georgist issues. Ironically, Congressman
Henry George Jr. of Brooklyn had earlier played a key role in
framing the income tax law of 1916 in such a way as to exempt almost
all labor income from the tax. Alas, if only later legislators and
Georgists had espaliered the tree as he had bent the twig!
A factor constraining False Stimulus then was the consignment of
much land collateral to the S&L; (Savings and Loan) industry. S&Ls
lend on land collateral, but they do not create new money the way
the Fed, and commercial banks, do. S&Ls lend just the money the
public deposits in them. Public policy nurtured the S&Ls; and
kept the commercial banks (the ones that can create new demand
deposits) from competing effectively in this risky business. For
example, Regulation Q capped the interest rates that S&Ls could
pay their depositors, mostly small savers, passing this benefit on
to their borrowers. Fannie Mae and Freddie Mac backed more such
lenders. Housing and Urban Development (HUD) became a Cabinet Office
in 1965, overseeing pouring billions into its many programs to
finance housing without recourse to commercial banks that would have
monetized land values as they had in the 1920s.
Thus Washington, the Fed and the Treasury in tandem, could feed out
stimulus in manageable doses, based on Federal debt instruments, and
keep it under better control than it had back in the Roaring
Twenties when commercial banks went crazy in the land boom, and bust
in the sequential fall. What the banks did then, and are doing again
now, is monetizing speculative land values, a process proven ruinous
many times in the long history of capitalism; when will they ever
Economists debated lengthily, tediously, repetitively, whether the
key to Stimulus was Fiscal Policy (deficit finance) or Monetary
Policy (banking expansion). In retrospect that was internal academic
bickering, and the personality cult that grew around Milton
Friedman. In practice Fiscal Policy and Monetary Policy worked in
double harness to manage demand, financing perpetual Stimulus for
perpetual Growth. The good side of that is that land values did not
again become most of the basis of our money supply, not then.
Federal debt had been more attractive, for scores of years; but in
the recent land boom, 1995-2007, banks have found mortgages and
their various new packages more alluring, until they are again a
large share of bank assets. Danger ahead! In fact it is at the
gates, and breaking through the walls, but we are getting ahead of
Returning to the 1960s, along came the war in Viet Nam, and several
kinds of social and cultural revolution, shattering the dreams of
Camelot while the war, like all wars, led to more false Stimulus,
Federal debt, to pay for the war without annoying current taxpayers
and voters by reminding them of its cost.
Some Keynesian economists adapted nimbly to the Pentagon State,
touting warfare for work relief. They earned the name of Keynesian
Hawks. Here is model-building Lawrence Klein, President of the
American Economic Association, 1976:
"Defense spending ... has been a large part of the
whole expansion of the American economy since World War II.
The key question is "whether we should hold down defense
spending for either economic or security reasons, and I think not,
on both counts. ... Every cutback of a dollar in defense will cut
two dollars from overall GNP and drag down a lot of jobs.... If we
were to hold spending to $395 billion, the recovery of the economy
would fade away" (Business Week, Jan. 19, 1976, pp. 51-52).
The Swedes, who also hand out a Peace Prize, dubbed him Nobel-worthy
four years later. In fairness, Klein in 1990 may have done a 180,
joining Economists Against the Arms Race. His autobiography offers no
clue to the why of this quiet tergiversation, but it hardly offsets
the influence he exerted in his prime.
In 1971 Nixon abandoned the convertibility of dollars to gold and let
the dollar float on the foreign exchanges. It immediately lost 10% of
its value, aiding exports. It also gave the Fed, under putatively
hard-money Chair Arthur Burns, latitude to loosen credit, to spur GNP
and help get Nixon reelected in 1972. Nixon also imposed wage and some
price CEILINGS. (He did not repeat FDRs and Moley's early mistake of
imposing price FLOORS.) The combination of high demand with low prices
was indeed stimulating , so long as it could be made to stick. The
problem, of course, is that price ceilings merely suppress and
disguise inflation, which soon burst forth to embarrass Nixon's
successors, Ford and Carter.
None of these price ceilings, either Nixon's or any others, ever
applied to land prices. A few cities applied local rent controls to
limited kinds of residences. Prominent academicians and think-tankers
trained their big guns on these, although they were only flyspecks in
the big picture, serving mainly as targets for ideologues. Real estate
boomed, 1971-73, only to bust from its own internal dynamic in 1974.
Each of these periodic shots of stimulus of course added its mite to
long-term inflation, which has proceeded inexorably up its curve of
exponential growth until the nickel ice-cream cone of 1940 costs $2.50
today, the penny postage stamp is 41 pennies and rising, the $500
motor car is $25,000, the once-affordable country club membership is
up to 5, 6, or even 7 figures at the top, and the $10,000 entry-level
house is $400,000. People with middle class real incomes got pushed
into upper class income-tax brackets, a process called Bracket Creep.
The result was a radical reaction against the progressive personal
income tax, which earlier had been popular. This, in turn, translated
itself into a reaction against all taxation, but not against public
spending, setting the stage for Ronald Reagan and the levee-break of
public debt that has followed.
At the state level, clever property lobbyists like Howard Jarvis
turned it into a reaction against property taxes specifically, a
conversion analyzed by Robert Kuttner in his insightful Revolt of
the Haves. One result of that is Sacramento's current deficit of
$12 billions, slashing of basic public services, especially welfare
and medical aid, and rising tuition for students at State Colleges and
Vietnam, Watergate, and all that provoked a strong backlash against
Nixon, Ford, and their party. More provoking and personal, for the
median voter, was the curse of Stagflation, double-digit inflation
coupled with economic stagnation. Stimulus had lost its power, and
therewith its charm. Real wage rates peaked in about 1975 and started
their long glide to the present, a gentle slide, to be sure, but
downhill all the way. President Jimmy Carter's economic pilot,
Keynesian Arthur Okun, offered the public no bread but a stone:
"No one in the world has a recipe for correcting
our price performance without some unfortunate increase in
unemployment. ... [the public] should be told the facts of life"
(Arthur Okun, 1970).
The most visible leaders of economic thought joined him, from Milton
Friedman on leftwards. Economics had become a New Dismal Science, a
science of choice where all the choices are bad. They called it The
Phillips Curve dilemma.
"One must face up to the bitter truth that only so long as the
economy is depressed are we likely to be free of inflation"
quoteth Paul Samuelson, the same who when young had promised that the
New Economics would deliver Full Employment Without Inflation.
Conservatives and Monetarists preached on the same text:
"... there is no other way to stop inflation. There
has to be some unemployment. ... It is a fact of life" (Milton
Friedman, 1970). "The election will show whether the American
people are mature enough to accept a sustainable (low) level of
activity" (Henry Wallich, 1970). "... this economy can no
longer stand a real boom with low levels of unemployment without
kicking off a rampant inflationary spiral" (Alan Greenspan,
After Nixon/Ford came Carter, Arthur Okun, the Phillips Curve, and
stagflation. There were gas lines, price controls, and shortages.
Stimulus lost its magic as a panacea, and price ceilings lost their
fan base. Late in his term Carter appointed Paul Volcker Chairman of
the Fed, with a new mission. The old goal of stabilizing interest
rates gave way to a new goal of stabilizing prices, raising interest
rates as high as need be. Volcker responded full bore, and interest
rates soared to the sky. This helped cost Carter his reelection, but
the new President Reagan continued to support Volcker. He discarded
demand-management and the old Keynesian crew to try a new idea,
Supply-side Economics . It was to be Morning in America .
Reaganites lured Democrats by citing JFK, Walter Heller, and the
Soaring Sixties as precedent. They could stimulate demand by cutting
taxes as well as by boosting spending. At the same time, unvexed by
consistency, they epitomized Reagan's new outlook in the Laffer Curve.
They called it Supply-side Economics, to spite the Demand-side
Economics of Keynes. The new idea was we can lower tax rates and raise
tax revenues for the Pentagon in the same stroke. Taxes impair
incentives so much, on the Laffer Curve, that lowering tax rates by,
say, 10% would raise taxable incomes, trade, and wealth by, say, 20%,
thus providing more revenue with lower tax rates. The secret of the
miracle is unleashing long-suppressed natural urges to work, trade,
and invest. Under Reagan, Treasury officials were ordered to replace
old methods of forecasting tax revenues with dynamic revenue
forecasting , based on assuming such positive Laffer Effects, at least
Art Laffer, Jr., was a professional upstart and persona non grata to
the aging avatars of Keynesianism, now gone stale. Campaigning for
Reagan, Laffer often quoted Henry George, who had written so
eloquently on how taxes dull the edge of husbandry and clog the gears
of commerce. It could have been a great defining moment in American
history. Surely this young Lochinvar quoting George must see that TRUE
Stimulus, supply-side Stimulus, means taxing land values to permit of
untaxing production and trade! Except, alas, Laffer turned out to be
another Pied Piper. He left out the centerpiece of George, that is
replacing baneful taxes with others based on land value. In 1978 he
even campaigned in California for Prop. 13, explaining lamely over my
protests that the property tax is a tax on buildings, period.
Reagan wanted more military spending to cow those awful Reds in
Moscow, and even back then those nasty Ayatollahs in Tehran who had
kicked out our guy, Shah Mohammed Reza Pahlevi, and fought off our
cat's-paw, Saddam Hussein. The result was more deficits; they just
Didn't call that Stimulus any more, and rarely mentioned Keynes except
to remember he said that investment is good, and depends on the animal
spirits of investors. Even those ideas they voiced in tendentious
business codewords like confidence, property rights, capital
formation, credit ratings, and sanctity of contract.
No, now they promoted the Ricardian Equivalence Theorem of Professor
Robert Barro of Rochester, who claimed to know that government
deficits automatically make private saving rise by an equal amount, in
anticipation of higher future taxes. a breathtaking feat of
self-deception, endorsed by Milton Friedman himself. Barro's reward
was tenure at Harvard and a column in Business Week. The nation's
reward was a higher national debt and a fall in private saving. No one
ever seems to have noticed how wrong Barro and Friedman were.
In 1979 I, grasping at a straw, called Laffer to give a paper at the
Annual Meetings of the AEA. I was chairing a session on the Centennial
of Progress and Poverty, courtesy of AEA President Moses Abramowitz of
Stanford. Laffer's secretary explained she could not disturb him for
less than his minimum fee of $5,000 and expenses. But, I objected,
This is his professional association; no one gets paid, it's an honor
and good exposure. That cut no ice. He has been quoting Henry George,
I persisted, I want him to speak on Henry George. Oh, that's
different, why didn't you say so? Mr. Laffer simply LOVES Henry
George; I'll put you right through. Laffer accepted on the spot; I was
Grayer heads warned me against him, but I assumed they were just
professionally biased and jealous of this upstart whose credentials
were a bit shadowy, but who was talking sense. Perhaps they were being
jealous and small, but I was going for the big score. Alas, it turned
out they were right. He charged me nothing, but that is all his talk
was worth, when he finally straggled in. I was hoping for something
classic and definitive; what we got was a shallow canned spiel for the
chicken-à-la-king circuit of Babbitt Clubs, damning all taxes
in the most simple-minded way.
Reagan in power, 1981-89, lowered the wrong tax rates. The idea of
True Stimulus is to lower tax rates on producing and investing; that
is, on NET new investing in the old Keynesian sense. First-term Reagan
actually did some of that, accelerating depreciation again and
reviving the ITC (investment tax credit). He offset the brake of
Volcker's high interest rates by unleashing S&Ls; to lend on
commercial real estate and take risky equity positions, even while a
Federal agency continued to insure their depositors, a huge and soon
catastrophic blank check to subsidize investing. This led to what
James Follain and Patric Hendershott and James Ling called a lending
frenzy. These measures lurched clumsily, as frenzies will, stimulating
an unbalanced and insupportable boom in limited kinds of capital like
office buildings, and later a spectacular bailout of overextended S&Ls.
The lasting legacy from all that was to lower tax rates on land
rents, and on rents from old capital. How did Reagan's handlers manage
that? Don't ask, it was death by a thousand cuts, but if you want to
dig into it see the paper that Michael Hudson and Kris Feder published
at the Levy Institute, or my forthcoming Hidden Taxable Capacity of
The ruling objective was to boost values of existing property; the
sales line was that this would stimulate job-making investing.
Reaganites revived and boosted Schumpeter's old idea that new products
and new firms blew in with a benign gale of creative destruction,
obsolescing old forms of capital. Good, but in practice Reagan's
Treasury shifted taxes off old property and onto creative activity.
They lauded the profit motive, but in practice they spoiled military
suppliers with cost-plus contracts, unfitting them ever again to
compete in real markets. Industrial economist Seymour Melman of
Columbia documented the decline under this regimen of the U.S.
machine-tool industry, and our ability to compete with foreigners, but
who was listening then, as scientists and inventors were diverted into
war work at Pentagon prices without competition?
In 1986 Reagan endorsed and signed The Tax Reform Act, crafted by
Treasury economists led by Princeton Ph.D. Charles McLure, once of
Rice University, now comfortably retired at the Hoover Institution and
covered with honors. Uniformity was the new catchword, and what could
sound better? The idea was to close the notorious loopholes via which
crafty billionaires and corporations were avoiding taxes.
I held high hopes for McLure. He, like Follain and Hendershott (cited
above) was a member of TRED (Committee on Taxation, Resources, and
Economic Development), the small group that Weld Carter of the
Schalkenbach Foundation and Professor Arthur Becker and I had founded
in 1962 at the University of Wisconsin-Milwaukee. Our avowed purpose,
expressly stated, was to create a modern literature in the tradition
of Henry George. In 1983 McLure had edited a book for us, Fiscal
Federalism and the Taxation of Natural Resources, showing his
understanding and, so I thought, a measured sympathy. Alas, the
measure was too small.
The 1986 Reform closed mostly the wrong loopholes. Its main targets
were the ITC and accelerated depreciation, the Commons-Heller-JFK
innovations designed to downtax new investing, Turgot's independent
force that animates all the work of society and Keynes's
income-creating force that makes jobs and raises national income by
multiples of itself. Did they throw out the baby with the bath-water?
No, just the baby; they saved the bath-water, soiled with special
favors for land income.
The traditional liberal establishment of tax reformers were
completely taken in. Robert McIntyre, veteran spokesman for
union-supported CTJ (Citizens for Tax Justice), lauded the death of
ITC and accelerated depreciation. As a union man he favored higher
taxes on capital in all forms and manifestations (fund or flow), blind
to differences between those that made jobs and others that just
valorized old capital and land.
All this time payroll taxes were creeping upwards to their present
high level. None of these reformers, not even the union-based CTJ,
seems to have noticed or cared. As the rising payroll tax surpassed
the falling corporate income tax, and the personal income tax devolved
into primarily a payroll tax with huge loopholes for property income,
economists who made it into print mostly deplored and exaggerated the
alleged double-taxation of savings, and of corporate profits, and the
alleged triple-taxation of capital gains followed by estate taxes.
Laffer had been full of examples of how high taxes discourage people
from working hard. Supply-side Stimulus was going to correct that, but
when it came to downtaxing or untaxing work effort, Reagan's tax
reformers did nothing.
The 1986 Act did appear to close one big loophole for land, the
exemption of half of unearned increments (capital gains) from taxable
income. That closure, however, lasted just one year, and sparked a
concerted drive to downtax or exempt such gains that has now driven
the rate down to 15%.
Economists James Follain and Patric Hendershott, also members of
TRED, at one point wrote that the 1986 Act, by lowering after-tax
rates of return on new investing would tend to drive investors into
pushing up prices of land and old buildings, thus in one stroke
lowering the proper economic incentive to build (productivity of
capital) while inflating the wrong incentive (capital gains). If
anyone was heeding, however, they were swamped in the follies to
follow. McLure after 1986 joined the movement for a national VAT or
sales tax, a cause totally at odds with the goals of TRED.
George H.W. Bush took the next turn at President. He sacrificed his
entire Presidency for one overriding, obsessive domestic cause: to
lower the tax rate on unearned increments to land values (aka capital
gains ). After all, he had come from the oil industry which makes so
much of its income from the rise of petroleum deposits in situ (in the
ground), a rise Congress has defined as a capital gain . He lacked the
power to lower the tax rate on gains by more than a point, but he
fought and fought until he finally established the principle that
capital gains are different from ordinary income. It was the thin end
of a wedge that his successors were to drive through to the hilt.
To win his goal he had to deal with Democrats who wanted higher
taxes. In return for a little break on capital gains, he conceded them
higher taxes on ordinary income, breaking a famous pledge (Read my
lips; no new taxes!). That and a housing bust after 1991 lost him a
second term. In 1987 Reagan had appointed Alan Greenspan to succeed
Volcker at the Fed. Of course the housing bust was not Greenspan's
fault; nothing ever is -- and Bush paid the price in 1993.
Bill Clinton ran for President with a new take on stimulus: balancing
the budget. Washington's deficits, he said, were crowding-out capital
funds from private industry, and he would reverse the flow by paying
down the national debt. This was a denial of old Keynesian ideas and
must have tickled the ghost of Andrew Mellon, hard-nosed Republican
budget balancer from 1921-32, but, in the circumstances of 1993 it
worked. Positive Stimulus to the private sector more than offset
Negative Stimulus from the public sector. It took higher tax rates to
do it, which of course offset much of the stimulus, but 1993-2001 were
good years, as recent years go. An ominous portent, though, was a
foretaste of the coming land boom, and the movement of commercial
banks, freed from old prudential shackles, into monetizing it.
Next at bat was George W. Bush (Bush II). When it comes to the False
Stimulus of deficit finance, none can surpass him, and somehow he ran
up these trillions of national debt in tandem with Ayn Rand's disciple
Alan Greenspan gushing out the new dollars like Spindletop. Like
Reagan before him, Bush favored taxing less while spending more.
Deficits don't matter, chimed in Vice-president Dick Cheney,
supposedly the stabilizing elder statesman. Reinforcing Federal
deficits was another lending frenzy, but this time by commercial banks
monetizing unearned increments as they boosted them, a positive
feedback loop of the most dangerous kind.
As we near the sunset of what most people consider a failed
Presidency, suddenly to cap Bush's woes the dollar is sinking, banks
are failing, Russia is rearing up, allies are wavering, and the
housing bubble is imploding sensationally. His new Fed Chair, Ben
Bernanke, faces in real time what he analyzed so insightfully in
history, a major depression following a wild land boom. So what
creative new idea does this team of leaders offer? Why, more False
STIMULUS, what else? It failed before, be sure it will fail again as
Bush follows the sunset back to Crawford, leaving the night of despair
to us and his successor and possibly a crippled and chastened Ben
The luck of compensating error may save the banks from a collapse
like that of 1929-33. As land collateral fails them, and they retrench
their housing and other real estate loans, they will have more U.S.
bonds to replace them. Their major income, again, will come from U.S.
taxpayers. This, however, will soon push us up against an unavoidable
moment of truth, as debt service looms into an ever greater fraction
of the budget. Delusional economics cannot sustain us much longer. How
much debt can the U.S. sustain with low tax rates, low household
savings rates, anti-tax ideologues dominating the public dialogue, a
worldwide flight from the dollar, and a shrinking tax base? The worst
possible outcomes are chilling.
So who's on deck, and with what kind of Stimulus? Will the successor
bat in the dark, or under lights? Will the voters continue to obsess
over crotch politics and world power, or demand True Stimulus? We
cannot tell. In a long life one meets many reverses and
disappointments, many flawed leaders and weak friends. Still we can
guide our individual lives in the spirit of Cullen Bryant's old
reverie on a lone-winging waterfowl (slightly adapted to our theme):
There is a power whose care teaches thy way along that pathless
coast, The desert and illimitable air, lone, wandering, but not lost.
He who from zone to zone guides through the boundless sky thy certain
flight, In the long way that we must TRED alone will guide our steps