Prescription for Economic Health; E. Groseclose

The StatisticsSyndrome Statistics have been characterized by the English industrialist Arnold Wilson as something economists col lect as others gather antiques. So treasured are they that a vast com puter industry today is devoted to compiling, analyzing and storing statistical data. No self-respecting administrator would think of mak ing a decision without the aid of his computer. Chief among the statisti cal totems are various kinds of in dexes, and high on the column is one which business and government de cision makers watch with the avid ity of a gambler watching a roulette wheel. This is the Gross National Product, or GNP. Purportedly, the GNP records the changing volume of goods and services produced by the economy. A rising GNP suggests that the country is producing more, and 395 396 THE FREEMAN July the figure suffuses the observer with a pleasant euphoria. Actually the GNP is not a mea sure of production, but of consump tion. A rising GNP may indicate that the country is producing more while actually it is producing less.

Thus, a restaurant meal for two may add as much as $100 to the GNP, if taken at the Lion d'Or, but only $5 if eaten at Burger King, and even less if prepared at home. In an infla tionary period, when vast sums are spent in restaurants, theatres, travel and Las Vegas casinos, the GNP in dex may indicate a state of economic well-being when actually physical production is declining and general poverty rising. Better political and business de cisions and improved economic heal th would follow if the GNP in dex were abolished or radically modified. The Dilemma of the CPI Another index that has gotten the government into trouble is that of the consumer price index-since pensions, Social Security and wel fare payments are adjusted periodi cally with the indicated change in this index. How accurately the in dex measures the real burden of ris ing prices is a question few examine, and how unwillingly the public would accept a correction has been re cently demonstrated by the hulla baloo over the substitution of rental costs for housing costs in the series upon which the index is based. In any case, the process has now bank rupted the Social Security system, and those who can-like state and municipal and nonprofit employ ees-are leaving it with the good sense of rats abandoning a sinking ship.

The latest indexing, which has be come a political dilemma since it may bankrupt the federal treasury, is to be applied in 1985 to income tax rates. The purpose is to relieve tax payers of what is called bracket creep-the higher tax burden that applies as income increases as a re sult of inflation. The effect will be to reduce federal revenues at a time when the indexing of the entitle ment payments is increasing ex penses. If the price level were stabi lized, there would be no need for the indexes and indexation. They serve, instead, to push prices steadily higher, like a ratchet on a tire lift. If honest money were restored to the country, there would be little need of these indexes. The Money Mill The whole mess created by in dexes and indexing would not have arisen except for the money mill on the Potomac which keeps issuing paper currency like the legendary mill at the bottom of the sea that grinds out salt with nobody to stop it. Money in circulation-and we 1983 PRESCRIPTION FOR ECONOMIC HEALTH 397 mean the legal tender currency is sued by the Fed, not the M1, M2, and the like, of the economists-has doubled in the past decade alone, from $54.6 billion in 1972 to $126.6 billion today. And this goes on de spite the impression given out of a "tight money policy."

It is too well known to require theoretical demonstration that prices are influenced by the amount of pur chasing power in the market, and that inflation is the result oftoo much money in circulation. Instead of curtailing the power of the Fed to issue currency, Congress has steadily broadened its powers until today the Fed can turn into le gal tender currency practically any debt obligation it sees fit, including Polish, Turkish, Brazilian or Argen tinian bonds. This brings us to our next proposal. Wean the Banks The Federal Reserve System came into being as a system of super banks-actually pawn shops-to as sist commercial banks in distress by taking up their short term loans and giving them cash in the form of legal tender currency, or a deposit at the reserve bank that was equivalent to cash (since it could at any time be turned in for cash). The so-called panics, depressions, or crises which the country goes through periodically are not the re sult of a shortage of money in the economy, but a shortage of cash or credit on the part of debtors. The principal debtors, of course, are the banks, since their balance sheets represent mostly liabilities sup ported by a thin margin of propri etors' capital (less than 10 per cent generally).

After the passage of the Federal Reserve Act, banks gradually let their capital drop from a mean of 25 per cent or more of total liabilities to the present low ratios (for the 15 biggest banks the ratio is less than 5 per cent). The banking system is like a brood of pigs, grown to sizable porkers, but still clinging to mother sow. It is time they were weaned and made to for age for themselves. In short, too long have money and banking been linked in economic literature. The manage ment of the banking system should be separated from the administra tion of the money system. Subsidized Debt The world today would not be in the depression it is in but for the burden of debt. Farmers complain they can't meet their mortgage pay ments; home owners, likewise; cor porate bankruptcies-now at flood occur because companies cannot meet their debt payments. Third WorId countries are half a trillion dollars in debt, a third of it owing to U.S.

banks. How did the world get in this mess?

398 THE FREEMAN Largely from encouragement by government. Through the Interna tional Monetary Fund and the World Bank, indigent governments around the world have been led to borrow beyond their means for all sorts of doubtfully viable projects until now they are bogged down in a mire of debt. Home ownership has been fos tered-no doubt, for the public good by low cost loans, or government guaranteed loans and deductibility of interest payments. Farmers have been encouraged to expand their food production; many increased their acreage by buying land at high prices, financed by mortgages. Banks have been permitted to in crease their debt (deposit liabilities) Corruption of the Coin in relation to equity capital until most banks are in difficulty, many of them technically insolvent. One measure to reduce the mania for going into debt is to restrict the deductibility of interest payment from taxable income. While no doubt justified as a social measure to en courage home ownership, the de ductibility of corporate interest pay ments is contrary to shareholders' best interests since it encourages corporate managers to leverage as sets, engage in mergers that are jus tified only by tax advantages, and shift the enterprise from producing goods to that of producing financial gain. , IDEAS ON LIBERTY AT the beginning of the sixteenth century the astronomer Copernicus addressed to the king of Poland his treatise, "Monete Cudende Ratio,"

which opens with this broad declaration: "Numberless as are the evils by which kingdoms, principalities and republics are wont to decline, these four are, in my judgment, most baleful: civil strife, pestilence, sterility of the soil, and corruption of the coin. The first three are so manifest that no one can fail to apprehend them; but the fourth, which concerns money, is considered by few, and those the most reflective, since it is not by a blow, but little by little and through a secret ap proach, that it destroys the state." FRANCIS A. WALKER, from the book Money, published by Henry Holt and Company, Boston, 1891 Clarence B. Carson THE CONSTITUTION AND PAPERMONEY THE UNITED STATES CONSTITUTION does not mention paper money by that name. Nor does it refer to paper currency or fiat money in those words. 1 There is only one direct ref erence to the origins of what we, and they, usually call paper money. It is in the limitations on the power of the states in Article I, Section 10. It reads, "No State shall ... emit Bills of Credit. . .." Paper that was in tended to circulate as money but was not redeemable in gold and silver was technically described as bills of credit at that time. The description was (and is) apt. Such paper is a device for expanding the credit of the is suer. There is also an indirect referDr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books, his most recent being Orga nized Against Whom? The Labor Union in America.