by Louis O. Kelso and
Patricia Hetter Kelso
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Asking whether there will be another depression is like asking, 50
years before the discovery of microorganisms, “Will there be
another plague?” Almost six decades after the Great Depression
began, the economics establishment is still unable to explain its cause.
We know only what ended that catastrophe — a second catastrophe,
World War II. The intervening years also have exposed the costs of
the Keynesian measures the New Deal introduced to stave off economic
collapse. This country, which for three-quarters of a century was the
world’s largest creditor nation, suddenly became — in 1987 — the
world’s largest debtor. What we have hailed as ever-rising prosperity
is, in fact, the hollowing out of the economy — a process which,
if not interrupted, must end with the collapse of the shell.
Since 1932 we have kept the U.S. economy running by jacking up income
redistribution each year in an attempt to enable consumer purchasing
power to support the economy’s production. Over half of all state
and federal taxes are levied upon those who earn income in order to
give it, through transfer payments, to those whom government deems
to “need” it.
Taxpayer resentment of welfare led to Ronald Reagan’s election
and reelection. But as The New York Times pointed out in an
article on Reagan’s seven-year budgetary legacy, the president
who promised and still ceaselessly advocates balanced budgets and fiscal
integrity has “overseen the creation of more new debt than the
combined deficits of all previous presidents.” The president
who promised to reduce big government’s size and scope has seen
the federal civilian workforce increase by 150,000 to more than 3 million.
The president who pledged to reduce government spending has seen it
rise by $321 billion to more than $1 trillion.
The surge in military spending from $157 billion in 1981 to $282 billion
this year represents not a change in principle, but a deliberate enlargement
of welfare disguised as “defense” production. Conservatives
accept redistribution more willingly when, as they say in Congress,
it is “wrapped in the flag.”
Regardless of which political party is in power, more income redistribution
is an indispensable part of the U.S. economy. This continues to be
true because from the beginning of the Industrial Revolution, business
and government have focused exclusively on enlarging the production
and improving the quality of economic output. Meanwhile, the other
side of the economic equation has been ignored — we have failed
to increase the earning power of consumers. Who will consume the ever-rising
flood of goods and services that technology enables the private sector
to produce is apparently not a concern of business or government. Nor
does business ask or care about where or how its customers get the
money to purchase goods. It leaves that question to government and
labor unions, whose idea of a solution is the technologically obsolete
national economic policy of full employment — a policy more appropriate
to the Stone Age than to an advanced industrial economy where technology
has transformed the nature of work from labor-intensive to capital-intensive.
In pre-industrial times, full employment of mature labor power was
not only a practical and moral necessity, it reaped as high a level
of production from the economy as was possible. Originally, economic
power was labor power. Each consumer, equipped with brains, limbs,
and muscles, was capable of being a producer. Furthermore, this innate
productive power was so integrated with the physical person that it
could not be taken away without enslaving or killing the owner. Since
people differ considerably in their labor power endowments, this distribution
was not egalitarian. But it was democratic — individual and personal,
not collective. From this primordial economic arrangement emerged private
property and democracy — the foundation of economic and political
freedom.
But the Industrial Revolution, as historian Arnold Toynbee said, marks
a change in the way people produce goods and services — a change
from labor-intensive to capital-intensive production. This change affects
the dynamics of a free market, with its automatic distribution of income
(purchasing power) to those — and only to those — who take
part in production, either as labor workers or as capital workers.
As production grows more capital-intensive, it follows that capital
workers produce more and receive more income, unless wage and salary
costs are “administered,” rather than set by free-market
forces. If the markets remain free and competitive, labor workers produce
and receive less. As technology widens the income gap between capital
workers and labor workers, redistribution becomes necessary to subsidize
labor worker consumption and to provide welfare for the growing numbers
who cannot earn an adequate living solely through labor. For those
nonproductive and underproductive millions at the bottom of the income
pyramid, depressions do not come and go — they are ongoing and
permanent.
Economic depression is largely a middle-class phenomenon. The rich
are above it; the poor hardly know the difference. The Wall Street
Journal reported that shortly after the 1987 stock market crash,
80 percent of respondents, asked by a Democratic pollster to rank the
crash on a list of six national problems, put it last. Only two percent
ranked it first and second. The same article cited a 1985 New York
Stock Exchange study estimating that only 20 percent of the U.S. population
directly holds any stock or mutual funds, with only one percent to
three percent of the population having portfolios of $50,000 or more.
Will we have another depression? Yes, because the gap between the
economy’s production and the power of a mere segment of consumers
to earn adequate incomes on a pay-as-you-go basis has reached its limits
of sustainability, and so has income redistribution. The stock market
gyrations merely evidence the confusion resulting from the sterilization
of the mighty purchasing power of the rich (much of whose income cannot
be used to purchase consumers goods and services thanks to a lack of
desire to consume more), along with the inability of the solely labor-
and welfare-dependent masses to earn enough to live well. Pension funds
are in the same predicament, because they do not equip either present
or prospective pensioners with effective capital ownership; the full
earning power of the underlying assets.
Can the depression be averted? Possibly — if we seriously commit
ourselves to reconnecting the economy’s vast stock of capital
with the 95 percent of individuals and families now disconnected from
ownership of non-residential capital and its earning power. This would
necessarily involve restoring full private property to capital stock
so that each stockholder would fully collect the “wages” of
his or her capital (at least a 90-percent payout of corporate net earnings).
This vast job will require switching from conventional finance of capital
transactions, which merely makes the rich richer, to binary methods.
Through the use of one or more of the eight financing techniques built
on the logic of the ESOP, all families and individuals can purchase
capital and pay for it out of capital’s own earnings instead
of labor income.
-- Originally published in Management Review, May, 1988.
