Monday, August 25, 2014

Paying to build a sustainable infrastructure

When Jimmy Carter had to confront the great oil crises of 1977, he took to TV to describe the resulting mess, complete with long waiting lines for gasoline, as the moral equivalent of war.  As someone who had studied the ways USA had organized the WW II efforts, I was sure he meant that we would engage the oil problems the same way.

Unfortunately, he wasn't saying economic equivalent of war.  Carter was something of a creature of David Rockefeller's Trilateral Commission / Council on Foreign Relations.  The way USA had funded the WW II war effort was so contrary to what Rockefeller wanted and believed, it probably gave the man a bad rash.  When Carter would appoint fellow trilateralist Paul Volcker to head the Fed in 1979, easily the most reactionary man to have ever held that office, Carter thought so little of the appointment that when he published his memoirs in 1982, he considered the event so trivial he didn't even mention it.

What a shame.  Because the oil crises really WAS the moral equivalent of war and a meaningful response should have been the economic equivalent of WW II (or the the Civil War.)  I have read many accounts of how the war economy was managed and what an enlightened central banker USA was so lucky to have, and never once have I seen where anyone objected to the Manhattan Project or the mass production of penicillin or any of the other major projects because we could not afford them.

So what was different?  The follow article gives an excellent description for why the USA could afford to re-engineer its industrial base in order to fight WW II.  These facts should always be kept in mind whenever someone tells us that we cannot afford to meaningfully address problems like Peak Oil and climate change.  The key is to stop thinking like David Rockefeller and Jimmy Carter and think more like the economists who figured out how to manage the mega-project that was WW II.  I have only copied the first seven paragraphs of a much longer and incredibly well-written piece.  I encourage everyone to read the whole thing.

Mobilization and Money

Posted on August 27, 2013 by Devin Smith
By J.D. Alt

I’m nearly finished with a very long book that may well be the best illustration of the basic principles of Modern Money Theory available. The book is “A Call To Arms,” by Maury Klein. It is an historical account of the U.S. mobilization as it prepared for, and engaged in, war with Germany and Japan. The scale of the task was unprecedented in human history—and the accomplishment of it changed not just the structure of the American economy, but American society as well. What is striking about the story—and the monumental effort to quickly build, virtually from scratch, the largest and most sophisticated war machine ever to exist on the planet—is that there is nary a peep of concern or argument about how this enormous task would be paid for. All of the anguish and struggle had not to do with finding enough “money” to pay for things, but rather with finding enough things to buy—and enough skilled labor to properly marshal it all together. In the end, virtually every real resource available in the continental U.S.—oil, gas, steel, aluminum, rubber, copper, sugar, tin, and man-hours of labor—was purchased by the Federal government to build the Army, Navy, Air Force and Marine Corps that ultimately defeated the Axis powers. The scale of the sovereign spending is almost beyond comprehension—especially given the fact that, at the starting gate, the U.S. economy was still decimated and impoverished by the Great Depression. At the finish line, however—VJ day, September 2, 1945—the U.S. had become the most powerful, efficient, and equitable economic power the world had ever seen. So how did it all get paid for? And even more important, how did we travel from that VJ day of economic triumph to our sorry state of today, where we think we are so “broke” we can’t even afford to hire enough fire-fighters and equipment to put out the forest-fires raging in our western states?

A lot of people will say the mobilization and war were paid for in the same way the federal government always has, and always will have to pay for anything: by collecting taxes and selling bonds. Evidence for this will be the $186 billion in War Bonds the U.S. government sold to the American people between 1941-1945, and the Revenue Act of 1942 which doubled federal tax revenues. Let’s assume, for the sake of argument, that the War Bonds and taxes didpay for the mobilization and war effort. Conceptually, when we say that, what we’re proposing is that the American people had a whole lot of what we call “money” stashed away in bank accounts and mattresses, and the sovereign government needed that money to build an Army and Navy and Air Force. So the sovereign government collected some of the people’s money, and borrowed even more by selling them War Bonds. Now, what did the sovereign do with the “money” it collected and borrowed? It paid the money back to the people in exchange for the materials and labor to build ships and airplanes and bombs and tanks. The war was fought and, through perseverance, the sovereign defeated the Axis powers, while a great deal of the war machinery the people built was destroyed, spent or ruined in the process.

Looking at it from a simple balance sheet perspective, what is the net position after the war is over? The people have gotten their “money” back, apparently having used it to pay themselves (through the actions of their sovereign government) to build all the stuff they had to build, and do all the things they had to do, to win the war. On the sovereign’s side of the balance sheet there’s a big debt: When the sovereign government traded its War Bonds to the people for their “money”, it made a promise to redeem the bonds at maturity, with interest. To redeem the War Bonds with interest, the sovereign needs…what? It needs the people’s “money” all over again! And, once again, our “logic” tells us there’s only two ways the sovereign can obtain the people’s “money”—by collecting taxes or by issuing (what we might this time call) Peace Bonds. Let’s say this is done, and now the sovereign has collected the people’s “money” back again, enabling it to do…what? It pays the “money” once more back to the people to redeem the original War Bonds with interest.

Now the people have their “money” once again—but what has actually been accomplished? The sovereign government now has a new debt: when it sold the Peace Bonds it promised to redeem them at maturity, with interest. To redeem the Peace Bonds with interest, the sovereign needs…what? It will have to get the people’s “money” back again! And, as before, there are obviously only two ways the sovereign can “get” the people’s “money”….

According to my calculations, the people have now paid for World War II three times over: first, when they bought the War Bonds, second when they bought the Peace Bonds so the sovereign could have the money it needed to redeem the War Bonds, and thrice because now the sovereign needs to tax and borrow their money one more timeto redeem the Peace Bonds! Can this possibly be the way things actually work?

Fortunately, there’s another explanation for how the U.S. mobilization against Germany and Japan was “paid” for—an explanation that doesn’t, by logic, devolve into mathematical absurdity. Here it is:

When the mobilization began, the U.S. was still struggling to emerge from the Great Depression. Most households had scant savings to spend on War Bonds, and could hardly afford the burden of higher taxes, so the idea of taxing and borrowing their money to pay for the building of a great war machine was not even a viable option. Nor was it necessary. Instead, the sovereign government simply issued the U.S. dollars, by fiat, as it needed them to buy materials and pay wages: It declared the dollars into existence—and then it paid those dollars to the American people to build the ships and planes and guns. In the historical narrative by professor Klein, we never encounter someone saying, “Sorry, Mr. Roosevelt, we need to sell another billion dollars in War Bonds before we can build that new aircraft carrier.” That conversation just doesn’t come up. By the time 1941 rolls around—and especially in the months after the Pearl Harbor attack—mobilization has pushed the economy to virtually full employment: Millions of previously unemployed people (including women who’d never before been in the workforce) were suddenly pulling paychecks as engineers, technicians and machine operators. more

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