Dynamic Scouring II: Cold War, Hot Planet

NSC-68 proposed a vast rearmament program to be financed through a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." This dynamic expansion "might itself be aided by" the military buildup.

As the above letter from President Truman to National Security Council Executive Secretary James Lay indicates, Truman was concerned about the "probable cost of such programs" and consequently"the effect of these Conclusions upon the budgetary and economic situation." He therefore directed that the Director of the Bureau of the Budget, Frederick J. Lawton, the Chairman of the Council of Economic Advisers, Leon Keyserling and the Economic Cooperation Administrator convene to consider those budgetary and economic implications of the report. According to Keyserling, Truman would not have been aware that it was Keyserling himself who had advised the NSC-68 author, Paul Nitze, regarding the notion of "siphoning off" part of the increment in GNP generated by the arms build-up to pay for the arms build-up.

In the wake of NSC-68 (and, incidentally, the Korean War) U.S defense spending increased from $13 billion in 1950 to $50 billion in 1953. Presidential candidate Eisenhower, in a scheduled September 23rd speech he never gave (it was preempted by Nixon's Checkers Speech), condemned both the inflationary and foreign policy implications of the Truman administration's national security strategy:

The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... 

Now the weakness of the Democratic Party for 'cheap' or 'soft' money is well known. For the last 20 years, it has practiced this policy faithfully. Of late, it has given it a new twist: it is now called 'controlled inflation.' But this name does not mean what it says. 

It really means inflation plus controls. 

The way this policy has worked out is easy to describe. With one hand the Administration has been turning up the water pressure at the hydrant, while with the other hand it has been trying to check the water's flow. The Administration's controls over prices are nothing but weak stop-gaps... 

There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression.

Candidate Ike's proposed alternative to arms spending was... tax reduction. "Tax reduction is a way to boost consumer buying power and to let the people spend their own money instead of the government spending it for them." Soon after Eisenhower's election, President Truman wrote to him:

Washington, November 6, 1952. 

Top Secret 

Dear General: 

Following up my telegram of yesterday afternoon, I had a consultation with State, Treasury, Defense and Budget. 

There are some really fundamental things pending before the United Nations that must be met in a positive manner. I wish you would suggest somebody, in addition to the person who is to talk to the Budget Director, to discuss these matters authoritatively with the Secretary of State, the Secretary of the Treasury, and the Secretary of Defense.... 

... 

There is a National Security Council problem pending regarding the allocation of resources. A preliminary report is due November 15th. 

All these things are vital policy matters which can only be decided by the President of the United States but I would prefer not to make firm decisions on these matters without your concurrence, although the decisions will have to be made. These things affect the whole American policy with regard to the free world. 

If you could designate someone to act authoritatively for you, or come yourself to sit in on these meetings, it would be the proper solution to the problem. 

Sincerely yours, 

Harry Truman

Oh, and, Ike, about that "National Security Council problem pending..." If you liked NSC-68, you'll love NSC-141, the Truman administration's "last will and testament" to its successor. Historian John Lewis Gaddis described NSC-141 as "in one sense an admission of failure… But it was also a staunch reaffirmation of the essential correctness of the Truman administration's strategy."

In other words, the strategy failed so good that much more of it needed to be done: continental defense, civil defense, the development of flexible multi-purpose forces... In short, "these programs for defense of the United States against atomic attack constitute new and distinct requirements and that resources additional to those now programmed should be made available to meet them."

It is in this context that the urgency and stringency of Bureau of the Budget Circular No. A-47 -- issued on New Year's Eve, December 31, 1952 -- becomes comprehensible. Budget Circular A-47 addressed the standards and procedures for developing budget estimates for water resources projects. Item 8, which dealt with "benefits to be included in evaluation" stipulated that "Until standards and procedures for measuring secondary benefits are approved by the Bureau of the Budget, the evaluation shall be based mainly upon primary benefits." Short shrift for the consultant panel's Report on Secondary or Indirect Benefits of Water-Use Projects.

Coincidentally, that report had specifically addressed the crowding-out of public works projects imposed by heavy defense spending:

For an indefinite time ahead, the prospect is one of heavy defense outlays, but with a diminishing strain on the construction industry, and a high average level of employment, with fluctuations ranging from moderate recession to full employment and inflation. With this goes very high taxes, both on personal and business incomes. The impact of the present high business taxes has not so far shown itself in reduced private investment -- the defense-stimulated demand and high profits have seen to that -- but it means that any particular increment of investment has to show a very high marginal return before taxes, in order to show a modest rate after taxes.... If the defense stimulus lessens, while taxes cannot be reduced more than a little, taxes may become a substantial handicap to high-level employment. One remedy is deficit-spending, with inflationary potential. In this setting, inflation and high taxes are alternative evils, which may combine. In the present phase of this situation, public works bear an unusually heavy burden of proof. 

To use the glib expression from NSC-68, the required resources for further expansion of defense outlays called for by NSC-141 could be obtained by "siphoning off" funds that might otherwise have been spent on civilian public works projects. The economic rationale for A-47 was thus not so much fiscal conservatism as it was about offsetting military-industrial profligacy with austerity elsewhere in the federal budget.

Let's return in closing to that earlier formulation of a "dynamic expansion of the economy" such that "the required resources could be obtained by siphoning off a part of the annual increment in the gross national product." The contention was that the massive increase in military spending "could be accomplished without a decrease in the national standard of living." The incoherence of this claim may be concealed by its obtuseness. Paul Samuelson's explanation from a 1950 article on "Evaluation of Real National Income" may help to clarify:

Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times.

That is to say, the "dynamic" increment in GNP resulting from the military buildup could only serve as an index of the extent to which the standard of living would not have been decreased if it weren't for the wasteful spending on war goods. Yes, and if we had some bacon, we could have bacon and eggs -- if we had some eggs. At the conclusion of his article on national income (in which he also criticizes the Kaldor-Hicks-Scitovsky criterion) Samuelson offers "one last warning": "to define what is feasible involves many arbitrary assumptions, some of them of an ethical nature."

So much for the "Cold War" in the title. What about the "Hot Planet" bit? Recall Samuelson's remark about "an index of useful things that might be produced in better times." There's a catch. 

Dr. Krugman Loves a Lump

From Equities.com:

Free Trade Claims that Deserve Some Lumps 

Alan Tonelson | Thursday, 31 March 2016 09:54 (EST) 

All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.” 

As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.” 

So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.

Wild Things: Question Mark and the Austerians

At his blog today, Paul Krugman cited Michael Kalecki's 1943 essay, "Political Aspects of Full Employment":

Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence.

Sandwichman serialized Kalecki's essay on EconoSpeak in 14 installments four years ago. Strategically, it makes a difference whether your analysis comes before or after the damage has been done. Hindsight is no substitute for foresight.

There's something Krugman didn't mention today about Kalecki's essay. In it, Kalecki also singled out an important exception to the businessmen's fear of full employment: spending on armaments. See also: Krugman of Mass Destruction, October 30, 2011 and Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP," October 31, 2011.

I wonder, though, whether Kalecki went too far or spoke too subtly when he observed that "obstinate ignorance is usually a manifestation of underlying political motives." That might indeed be true when we include as "political" the rather mundane motivation of fitting in with one's colleagues. But I suspect it is misleading if we take "political motives" to refer to some larger purpose. Thus the controversy between the self-proclaimed Keynesians, like Krugman, and the austerians may be a bit of a phony war.

The choice is not between politically-motivated "bad" economics and technocratic "good" economics. The latter is a posture that only leads to what C. Wright Mills called "crackpot realism" -- a sort of Faustian bargain that settles for half the treasure in return for the whole soul on the assumption Old Scatch will be so pleased he gets to keep half the treasure he'll forget about collecting. The Sandwichman has a namesake's affinity for the story of the Faustian bargain.

Bern't Offerings

If Bernie Sanders had won all three primaries yesterday in Missouri, Illinois and Ohio by 51% to 49% margins, he would have picked up a stupendous NINE (9) more delegates than he did. Headlines would have read:

CLINTON FLORIDA LANDSLIDE SWELLS DELEGATE EDGE

Because even if Sanders had won three out of five primaries, Clinton would have picked up 55% of the delegates. The mainstream media's disdain for a non-center-right Democratic campaign comes as no surprise, however. What fascinates the Sandwichman is an insistant narrative from certain "left" critics that the Sanders campaign is the worst thing since Vidkun Quisling.

I feel their pain. The U.S. Democratic Party is a card-carrying member of the military-industrial-financial complex's bipartisan repressive duopoly. You can't teach an old hyena new tricks -- and it's dangerous to try. And all that.

But there is a tone to left anti-Sanders ranting that is reminiscent of the post-2000 Ralph Nader hate fest. "If only Nader hadn't run..." the narrative began and then proceeded to ignore the actual popular vote count, the electoral irregularities in Florida and the Supreme Court's tendentious squashing of a judicial recount AND to assume that every Nader voter would have been a Gore voter if it hadn't been for Nader. (Not to mention that if only Gore had won the presidency, the millennium would have arrived in the year 2001).

The every-Nader-voter assumption is preposterous. Probably a majority of Nader voters would not have voted if Nader hadn't been on the ballot. Some proportion of Nader voters would have voted for Bush. Some voters, who might otherwise not have voted, may have been drawn to the polls by the prospect of voting for Nader and changed their mind in the voting booth. In short, speculative reallocating of third party votes is pointless.

There is a sense in which the anti-Sanders left is making the same mistake as the anti-Nader crowd. They imply that if it wasn't for Sanders there would somehow be a genuine socialist alternative; that if all those naive BernieBros and the young women who pursue them would only give up their illusions about the Democratic Party, there would be a real revolution.

AYFKM?

The funniest part of the anti-Sanders left ranters is how eagerly they adopt DLC anti-Bernie talking points from the mainstream media. May I suggest a slogan? "I stand with the New York Times, the Washington Post and CNN Against U.S. Imperialism and White Millennial Bro-dom!"

Negroes and Utensils

Economics, huh, yeah... What is it good for?

There are two types of economists...

One invents flimsy rationales for policies the elites want to impose. The other explains to the public that those policies are "not good economics."

There is always a hypothetical better economics that isn't being implemented.

Tucker's Infallible Maxim

Whether Sir Josiah Child did not call it a Vulgar Error to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man's Labour creates Employment for another? -- Josiah Tucker

Whether it was in the preface of his 1690 Discourse about Trade, that Child called it a vulgar error -- so commonly held as to have become "almost proverbial" -- to suppose that "We have people enough, and more than we can employ"? And whether Child did not also observe there that "the profit of the merchant, and the gain of the kingdom, are so far from being always parallels, that frequently they run counter one to the other..."?

Whether it was Child who said that "one man's labour creates employment for another"? Or was what he actually said, "Every English man in Barbadoes or Jamaica creates employment for four men at home"? And what, then, was the context for that remark?:

...where Liberty and Property is better preserved, and Interest of Money restrained to a low rate, the consequence is, that every person sent abroad with the Negroes and Utensils, he is constrained to employ, or that are employed with him; it being customary in most of our Islands in America, upon every Plantation, to employ eight or ten Blacks for one White Servant; I say, in this case we may reckon, that for Provisions, Clothes and Household-Goods, Sea-men, and all others employed about Materials for building, fitting and victualling of Ships, Every English man in Barbadoes or Jamaica creates employment for four men at home. [italics in original]

Whether Paul Lambert did not conclude his 1952 article "The law of markets prior to J.-B. Say and the Say-Malthus Debate" with the following assessment of Tucker's "infallible maxim"?:

The wording is loose; Tucker did not trouble to elaborate a consistent theory; he was looking for arguments in support of proposed naturalization legislation, and this coloured his approach. He did, however, enunciate the concept which in a more fully developed form was to become known as "the Law of Markets".

Whether Abba Lerner, in his review of the collection of International Economic Papers in which it was contained, called Lambert's article, "an oppressively learned examination of the origins of Say's Law"? Whether Lerner wrote that the article  "shows very clearly how the proposition that production creates its own demand developed as an illegitimate extension of the innocent proposition that money is a medium of exchange by which goods and services are exchanged for goods and services"? And whether he wrote that it "concludes with a fascinating account of how Malthus forced Say to re-define "products" to exclude products that could not be sold at a price that covered costs, so that his Law would properly read 'production creates its own demand except when it doesn't'"?

Whether backdating the origins of the law of markets from Tucker to Child casts doubt on the innocence of the proposition? Whether it would be frivolous to concede the compatibility of slavery with liberty? Whether liberty is compatible not only with slavery but with the proud assumption of "an infallible maxim"?

Whether John Stuart Mill wrote in On Liberty, "To refuse a hearing to an opinion because they [those who desire to suppress it] are sure that it is false, is to assume that their certainty is the same thing as absolute certainty"? Whether Mill maintained that "All silencing of discussion is an assumption of infallibility"? Whether any assumption of infallibility, in Mill's view, would be legitimate?

Whether Mill's view gives rise to a paradox similar to the liar's paradox? Whether this is what a correspondent to The English Churchman implied by stating, "If all principles be uncertain, upon what grounds can this principle be made the exception? Is this the one great infallible maxim, the one self-evident axiom?" Whether the criticism in The Churchman misses its mark? Whether instead of proposing an infallible maxim about infallible maxims, Mill was distinguishing between subjective certainty and absolute certainty and maintaining that one cannot ascertain the latter on the basis of the former?

Whether the claim of infallibility is rendered even more dubious by disputes over what the law of markets asserts and who should be recognized as its author? And whether some credit John Stuart Mill's father, James, as the author?

Whether one cannot refute the hydra-headed maxim unless one refutes all its myriad themes and variations, which, of course, regenerate from their bloody stumps as one proceeds from version to version? Whether there is any alternative to wrestling with Say's Mill's Tucker's Child's polycephalous serpent?

Whether Mill wrote also, "He who knows only his own side of the case, knows little of that"? Whether the other side in this case is the one labeled "vulgar error" by Tucker and Child: "We have more hands than we can employ; we have people enough, and more than we can employ"?  Whether the word "can" in those passages refers to anything substantive? Whether we can employ all, provided those in power implement policies that they would never agree to? What kind of a possibility would that be?

Whether the "vulgar error" may be restated as "a certain proportion of work to be done" or "a certain quantity of labour to be performed"? Whether in his Natural and Political Observations upon the Bills of Mortality, John Graunt (1662) assumed a "certain proportion of work" in arguing against employing beggars in the woolen industry?:

That if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another...

Whether Dorning Rasbotham (1780) disputed the "certain quantity of labour" in his defense of the use of machinery in the manufacturing of cotton?:

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go.

Whether the latter argument glides between a given and a hypothetical possibility? Whether either Graunt's pessimistic assumption or Rasbotham's sanguine projection is infallible? Whether Rasbotham's refrain, became "almost proverbial" in the course of the 19th century industrialization of Great Britain?

Whether Josiah Child's warning about the frequent conflict between private profit and public gain is chronically ignored? And whether his speculations about the domestic employment generating prospects of colonial plantations was discretely expunged of its unsavory association with chattel slavery?