By Daniel Glicken

There is a widespread feeling these days that something had better be done about our ailing economy. However, deep-seated economic problems are not likely to yield to good intentions and civic energy alone. One difficulty is that the search for solutions tends to bog down in a quagmire of seemingly incompatible economic theories: specifically, the competing approaches of classical economics and “interventionist” economics.

The debate over the Bush administration’s tax cuts illustrates the difference between these two approaches (for convenience, we can refer to them somewhat loosely as “schools”). It can also lead us to find underlying points of agreement and steps toward regaining economic health.

The main element of the tax cut debate is the argument over what constitutes an economic stimulus and drives the economy. Should we put our faith in capital saving, or in consumer spending?

Classical economics suggests that tax cuts should go to the people who use the savings to start up businesses, for it is business that drives production and employs the workers who can then earn enough to consume what’s produced. It’s a view of the economy as a perpetualmotion machine which splutters at times, but gets going again with savings, sacrifice and hard work. Classical economics sees no reason for interventions from government or from pseudo-governmental entities like the Federal Reserve Board.

On the opposite side, interventionist economics (which centers around what are known as Keynesian theories, after the economist John Maynard Keynes) tends to see the economy as a machine that does not run by itself, but requires frequent well-timed pushes from experts who know best. The current thinking among interventionists is that consumer spending now drives the machine. Therefore, if consumers are given the tax money to spend, they will stimulate new cycles of production and buying.

Unfortunately, neither school offers a world view that is quite real these days. Our free market has already absorbed much of the capital saving on earth and converted it into debt; instead of prosperity, the perpetual-motion machine is giving us worrisome cycles of subsidization, profit-taking and further debt. On top of that, the easy money printed by interventionists fuels the downward process. The interventionists’ view of spurring the economy with consumer spending is also unreal, because government can’t afford a tax cut that’s large enough to make a lasting difference for either consumers or producers.

It’s a kind of chicken-and-egg choice of theories: do we first stop the interventions which prevent the market from returning to equilibrium? Or do we intervene to relieve the suffering caused by market slumps?

A better approach is to break through the unreality. This does not mean to simply throw out both schools. Classical economics still helps us to understand how savings, production and spending power work to sustain an economy. The free market is also a counterweight to bureaus of experts who may not be as competent in managing a nation’s money supply as one might think: for example, vastly inflating the money supply dilutes the currency and causes inflation. It is further naïve to assume that such absolute influence over everyone’s business can be wielded with constant benevolent disinterest. On the other hand, interventions are needed to deal with immediate social needs and objectives; society is too institutionalized around them to make many drastic, abrupt changes. Intervention may be the only immediate way to accomplish such things as getting free-marketers to invest in American companies which don’t merely send their employment opportunities and profits offshore.

What we need are interventions which meet the most pressing economic and social objectives of the nation at large, but which also lead back to a sustainable market recovery. In other words, we need serendipitous new solutions which combine the best of each school, and which are firmly grounded in certain fundamentals which are common to both schools of thought. And we must also heed warnings from the critics of all schools of capitalist economics as we go.

Economist Robert Reich exemplifies the economic thinkers who come up with serendipitous ideas. He proposes interventions which stimulate innovative production and jobs simultaneously. Both schools of economics count scientific innovation and development and training of human and intellectual capital (workers, thinkers and creators) among the drivers of economies. Reich would minimize government intrusion by focusing retraining on workers in industries prone to sudden shocks of unemployment, and also by adapting educational and training institutions to serve lifelong needs for retraining.

Of course, as a needful reminder that real-world economics is truly complex, innovations sometimes are simply used as just another way to shift profits to already powerful interests. For example, the Internet is a true scientific innovation, but many of its benefits have gone to existing big companies which save on such items as purchasing costs in business-to-business transactions. This is the kind of reality check that critics of capitalism have always made about the downside of historical technological innovations. Optimists for a recovery must take the position that forewarned is forearmed, and work to retain the social benefits of innovation.

Not surprisingly, transferring wealth to the already rich is a hidden agenda of many economic policies. Taxes are but one means of transferring wealth, and inflated military spending is another. And this introduces the second element in the tax debate: if the net effect of tax cuts is to add more to the debt than to recovery, then critics of the cuts can rightly say they’re little more than a transfer of wealth to the rich. But under the Bush administration, such critics are increasingly accused of “fomenting class warfare.” The two main schools of economics, however, would hold
otherwise.

Classical economics developed in concert with a moral philosophy for broadening the wealth of all people and relieving the plight of the poor in the process. Interventionists likewise intended to relieve suffering caused by business down cycles, which fall most heavily upon the poor. Neither school has recommended giveaways to the rich. Indeed, both expected that because rich people demonstrably make more use of public infrastructures such as courts, roads, regulatory agencies and the like, they must therefore carry a larger share of the public burden in some form or another. Only today’s neocons, including those presently occupying the White House, could conceive of relieving the rich of centuries of public obligation.

In connection with administration neocons, there is yet a third element of the tax debate, which was put forward while everybody was debating the first two. Bushonians convinced many people that all objections to their cuts were much ado about nothing (employing their usual tactic of trying to dismiss the opposition as being irrelevant, as in their airy dismissal of “Old Europe”). They argued that whatever the cuts do or don’t do, it all evens out on the bottom line: the cuts would be fully recouped by a modest 4 percent annual rise in the Gross National Product. The rise in GNP would cause tax revenues to rise accordingly, thus making up for every red cent of lost revenue.

The Bushonians are demonstrably wrong, according to those who’ve crunched the numbers. It may be so that the GNP will rise four percent, due to such factors as increased defense spending, rising medical costs and a weakened dollar which generates exports. But that’s not going to change the bottom-line revenues. More than one savvy economist has shown that if all the tax cuts are added up (all shelters, subsidies, capital gains cuts on real estate, etc.) government revenues do not rise proportionately with GNP. Rather, they stay flat. Moreover, if revenues are calculated in generally accepted accounting principles, as opposed to the pro-forma accounting required by one of W. Bush’s first executive orders, the bottom line is a negative four percent. This is without counting Iraq.

The essential problem here is not the tax cuts as such, but a general lack of economic acumen. Too many people accept an authoritative figure’s economic pronouncements without question. This naiveté allows economic distortions and scams to flourish unchecked, from cooked books in a company’s annual report, to accepting a pack of industrial lobbyists as “The President’s Council of Science Advisors.”

Whether problematic economic assumptions are generated intentionally or not, there are people who are hurt by them, and others who take full advantage of them. For example, artificially expanding the currency dilutes the value of every dollar. The money supply has been increased 1100 percent since 1971, which is roughly equal to the inflation rate since then, if you count such items as insurance and education. This penalizes savers and people on moderate and fixed income. Those who are positioned to benefit from the low prime rates and easy credit, early in the inflation cycles (stock market investors, homebuilders, etc.) can stay far ahead of inflation. But others cannot. Further, when the Fed creates money and loans it below market rates, mal-investments and overcapacity of production have tended to develop, which sets the stage for the next recession.

Whether problematic economic assumptions are generated intentionally or not, there are people who are hurt by them, and others who take full advantage of them.

In searching for economic solutions to this type of problem, it’s especially relevant that scam-artistry has now gone from “retail” to “wholesale.” In the early days, only a few insiders and royals pulled the big economic levers. Today, a securities trader along with an investment banker can bankrupt as many people as any Robber Baron ever did. If more people would simply become better at detecting economic miscalculations and misdoings in their early stages and be proactive in calling for reform, trillions of dollars in losses and debt could be stopped at the source. Neither of the two main economic schools countenances miscalculations and frauds, at least none caught by law. When mismanagement or fraud are brought out in the open, both public and private remedies are available. We will return to this theme later.

Continuing with our examples of basic assumptions that are common to both economic schools, we find that both developed within a common view of the world at large. Both assumed that the planet’s natural life-support systems support all economic activity, and that there can be no wealth without the world of nature. But since nature seemed virtually inexhaustible in the formative centuries of economics, economists referred to it as an “externality”—a cost which does not affect a particular deal or venture. Today, all economists (except those in the White House) realize that environmental costs must be taken into account. However, there is no general agreement yet as to who should pay these costs, and how.

For example, should government heavily penalize polluting businesses? The danger here is that jobs can be displaced. Should pure market forces such as pollution credits be used instead? These credits tend to be palmed off on the poorest and most polluted countries. People need to realize, though, that we can solve our environmental problems if profit-skimming and other economic abuses do not drain away the funds that are needed for environmental remedies. Serendipitous remedies are also optimal here. Developing environmentally sound technology can drive productivity and jobs across a wide area of endeavors, from labor-intensive organic farming to hightech retrofitting of millions of buildings for energy efficiency.

Both schools also take for granted the idea of a “commons”—resources that are available for public rather than private use. Some of the commons was lost by the time modern economics developed. The economic term for this loss is “enclosure,” as in fencing off the medieval pastures, or the free range out west. However, special interests are now enclosing areas of the commons that no one, including economists, ever thought much about, or knew the importance of before. These new enclosures, or wouldbe enclosures in some cases, include:
• Patenting the genetic material of life, including the world’s local heritage crops, essential seeds in general, and even our bodies.
• Controlling intellectual capital through cartel control of patents. This constricts entry and competition into broad areas of economic endeavors, as when I.G. Farben and other interlocking cartels held sufficient patents to give Nazi Germany sway over industry worldwide, from the late 1920s to the early 1940s. I.G. Farben, it should be noted, was subdivided after WWII, but has nonetheless expanded substantially ever since.
• Enclosing and exploiting space and the atmospheric commons for commercial and military purposes.
• Enclosing the electromagnetic spectrum on behalf of a handful of media companies.
• Enclosing resources of health and nutrition, as in Senator Durbin’s plan to give doctors and the pro-corporate FDA greatly increased control over the sales and availability of vitamins and other nutritional supplements. People without health insurance can say goodbye to the affordable, safe supplements which often comprise their only way to stave off illness and stay healthy. (The book< World Without Cancer, by G.W. Griffin, American Media, 1997, tells the history of the pharmaceutical industry’s unremitting effort to thwart or capture the sales of nutritional supplements through regulatory processes.)

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In their common view of the world at large, both economic schools also assumed that certain things—roads, education, water and fire departments, jails and the like—are more efficient when owned by the public. They therefore referred to such things as public goods, not intended for privatization. People are up in arms about the underfunding and potential loss of such goods due to the budget crisis; but they should also be aware of less well-known public goods which they stand to lose as well, including:
• Other public utilities and services. Along with those already mentioned, they are increasingly targeted for privatization and deregulation.
• The accounting and computing systems of the most sensitive governmental departments and agencies, including Treasury and Defense. In connection with this, one economist recommends asking every business person this question: “If your contractors and vendors had control of your computers and accounting systems, would you still be in charge of your business?” The next question, of course, is: “If private contractors run your sovereign nation’s accounting system, computers, operations, etc., is your nation still a sovereign nation?” • The public voting process. Politically connected companies own or control electronic voting machines with proprietary (private) codes and no paper trails.
• Public courts, which can now be overridden by private corporate trade tribunals (World Trade Organization tribunals).
• Control of the money supply. Although the Constitution mandates that Congress shall control the nation’s money supply, this control was turned over to > private bankers in 1913. Despite the implications of its name, the Federal Reserve Bank is a private bank, owned by the world’s largest banking families and > syndicates.

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The two schools also held it as a given that, along with big business or government, local and regional economies were going concerns. This was the unified economic arena in which capital and labor, and production and consumption, all directly interacted. People negotiated in face-toface encounters and reached practical and moral consensus about labor disputes, bolstering town business, and other economic and civil affairs. The founding economic thinkers never envisioned the obliteration of Main Street by a Wal- Mart. It’s a hopeful sign that counterefforts are now happening. For example, the town of Jefferson, Wisconsin, is pulling together to keep Tyson Foods from dropping wages to a level which cannot sustain local business.

Also, both schools took shape in an atmosphere of “personal agency,” in which people could develop their talents and earn their livelihood with relative freedom. The environment, the commons, public goods and local economies were there to support them. We must restore the importance of such things in the economic picture today.

Finally, both schools acknowledged that there are such things as “perverse incentives”—incentives that produce economically and socially non-beneficial results.

The privatization of public corrections facilities is an example of a perverse incentive, in that it makes it more profitable (for entrepreneurs, not for society) to house people in jail rather than rehabilitate them. The children of an incarcerated mother are more likely to end up in the prison system themselves. Over a period of years, one family can bring in millions to prison owners, whereas a year of full-service rehabilitation for the mother would cost less than one year of housing her in prison, and would also help end the cycle of imprisonment down through the generations.

Perverse incentives in the present health-care system include having one third party (government) pay another third party (insurance companies) for a transaction that’s actually between patients and care providers. This system perversely encourages people to get and give as much treatment as possible, without necessarily improving health outcomes or controlling cost. A sounder system might remove the barriers to faceto- face negotiations between patient and doctor, and provide competition between small, specialized hospitals. We might also consider adopting aspects of systems such as China’s, where doctors traditionally are paid only when they actually restore health.

Politics often functions as a perverse incentive also, distorting economic policy around the need to attract campaign contributions and distribute pork, regardless of sound economics and social benefit.

Politics often functions as a perverse incentive also, distorting economic policy around the need to attract campaign contributions and distribute pork, regardless of sound economics and social benefit. Our laws are riddled with perverse incentives, like the massive tax breaks for those who buy gas-guzzling SUVs, or send factories, jobs and profits off-shore. Government and business alike must be confronted by people who know and care what economic incentives are about.

Distortions and possible scams will continue to proliferate unless citizens really do become engaged, aware, and committed to educating themselves on economic matters. Most, if not all, of the trillions of leaking dollars could gradually be plugged, if people ask the right questions, and demand that reporters and politicians ask them too. We need to seek out investigative reporters who have enough experience, credibility, connections and funding to put the pieces together with real documents, as opposed to real disinformation, which is always free to reporters.

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As for politicians, those who are preparing for the next election naturally have a fair amount to say about the economy. Space does not permit an adequate survey of their proposals, but a few observations may be made.

Serendipitous solutions that bridge the gap between classical and interventionist ideas naturally appeal more to politicians than do deep structural adjustments. Nonetheless, some Democratic presidential primary candidates have offered some solutions which cover important ground.

John Kerry, for example, promotes a targeted capital gains moratorium for economic investments that are kept in one business within the United States for five years or more; prison reforms that deal with the economic “perverse incentives” described above; and the use of scientific development as a basis for economic development and job creation. (It is not clear if Kerry understands the need for extreme caution in developing such technologies as genetic engineering and nanotechnology, and in being wary of their possible use as a means for social control.) Kerry also promotes the creation of mini-infrastructure for environmental and economic solutions, > such as smaller “green” sewage-treatment plants.

Finding ways to solve national security issues and economic issues in one stroke, instead of having to choose one over the other as we do now, is perhaps the ultimate serendipity. Dennis Kucinich is thinking along these lines. He proposes a U.S. Department of Peace that could greatly facilitate conflict resolution and > cultural and economic exchanges among nations. He would also take 15 percent of the money known to be wasted by Pentagon mismanagement, and use it to pay for public jobs that rebuild the economic infrastructure and generate wages to spend in the economy. By getting our own house together in ways like these, we can better participate in a sustainable and peaceful economic base —with other countries.

The candidates in general also recommend austerity. There is little left to be austere about now, but still plenty of leaks to plug.

We must repudiate any solution which simply picks and chooses from various economic schools like candy, in order to further a political agenda, crony capitalism and the aggrandizement of power.

Solutions ultimately rest with the people and our pressure on the media and the government. We must become knowledgeable about economic issues, and passionate about finding better ways to deal with ongoing problems.

We must turn off Fear Factor and Survivor, and start exercising the ways in which our individual good depends on the common good. We must track financial connections between specialinterest groups and government, including its regulatory agencies.

We can resist the overemphasis on global business consolidation by redeveloping local, sustainable economies with social investment, cooperative economic arrangements for people caught outside the economy, and leveraging municipal assets to a position of strength in negotiating with corporations.

We must repudiate any solution which simply picks and chooses from various economic schools like candy, in order to further a political agenda, crony capitalism and the aggrandizement of power.

Columnist Molly Ivins recently reminded a gathering in Bloomington, Illinois, that all important efforts can and must be fun. Teaming up with a nearby organic farm or urban project is certainly more fun than living on Survivor island.

In searching for sound economic solutions, websites like www.solari.com are good places to start. So are books like Natural Capitalism, by Amory and L. Hunter Lovins and Paul Hawken, and magazines like Dollars and Sense. One can find economic reporting on the far investigative edge from Al Martin Raw, From the Wilderness and the Yurica Report, all on the web.

It is only a short step from “perverse incentives” to gross economic distortions and frauds, such as the following:
Energy crisis After this summer’s blackout, the media devoted much space to the grand-sounding Energy Reliability Council (an industry group), which said that while it didn’t know the cause of the blackout, it was certain of the cure: a new transmission superhighway at a cost of $60 billion. The public, of course, would pay the toll in the usual scheme of socializing cost and privatizing profit. Where is the incentive in this plan for the companies to build their own superhighway, or develop new technologies and reward conservation?
Prescription drug cost Under pressure from the FDA and the pharmaceutical industry, the Senate may derail a House bill which allows people to purchase their prescription medicines out of the country. The FDA’s supposed rationale here is that other countries are unsafe. In the FDA’s view, even Canada is too distant and, by implication, too uncivilized to be trustworthy or supervisable by either its government or consumer groups. This fiction insures that people buying prescription drugs in the U.S. will have to keep on paying through the nose, and that small business recovery will be drained by insurance costs.
Stock market The same kind of watering-down that dilutes the money supply also hits the market in watered-down stocks. People at Microsoft were happy to receive their pay in bluechip Microsoft stock for a couple of years. Unfortunately, each payday diluted the stock for everyone with newly printed shares. There are many more such methods of creating and trading “extra” or non-existent stock shares, all waiting to be widely exposed.
Derivatives Derivatives are basically bets on the price of securities themselves. They come in a seemingly endless variety of forms which involve betting on the future price of anything, from stocks and bonds to market indices, changes of interest rates, ratios of interest rates to gold prices, or literally a thousand other types of bets, not to mention customized ones being created every day.

In some ways, derivatives manage risk, but in other ways, they create it. Every bet has many “partners” on the opposite side of the bet, and each bet may ride on the aggregate results of hundreds of other bets, each with many partners. If any one partner to any of these bets goes bankrupt during the period of the deal, it affects all the others. When one derivatives fund (LTCM) failed, it took two years just to sort out (“unwind”) all the partners and obligations of the various trades. Some banks trade so-called “derivatives positions” worth trillions in a single day. Federal bailouts can’t even cover the biggest positions, nor can all the available money on earth. For “smaller” bailouts that can be covered in mere billions, the ultimate bill goes to taxpayers or bank depositors and their children and grandchildren, assuming the nation lasts. Everyone with a working brain should become well informed about derivatives.
Money in the bank Many people are so worried about stocks that they keep all their money in the bank for safety. Whistleblower Al Martin reports that despite what it says on many bank doors, the Federal Deposit Insurance Corporation (FDIC) has not been fully funded since the first President Bush lowered obligations of banks to pay their dues. The amount of the dues are still deducted by banks from depositors’ accounts as points off the interest rate, but how much money is actually being collected and put into the FDIC fund?
“Corporate personhood” Author Thom Hartmann (www.thomhartmann.com) has proved that the notion of corporate personhood is a fiction based on an accidental misreporting of a Supreme Court decision. Corporate privileges based on this notion can now be challenged.
Corporate charters At present, corporations are legally bound to earn profits for their shareholders, at whatever cost to society at large.