Freeman

ARTICLE

A Reviewers Notebook: Debts and Deficits

MARCH 01, 1988 by JOHN CHAMBERLAIN

Hans F. Sennholz, who has been featured for years in The Freeman, still counts in his native German, but otherwise he both thinks and writes in as forceful English sentences as anyone is apt to see. His book called The Politics of Unemployment was reviewed in this space in the December 1987 issue. It made the incontestable point that labor laws, including the minimum wage, keep wages from falling to levels that would clear the market and create full employment.

Now Professor Sennholz has come out with a new book called Debts and Deficits (Libertarian Press, Spring Mills, PA 16875, 189 pp., $7.95 paper). It makes the point that deficits do matter. The time must come when bad investments have to be written down or written off. So we face a coming storm at some indeterminate future. The economists will be quick to say that credit contraction is the cause of the depression, or recession, or whatever. But Sennholz tells us that most economists are poor historians. The credit contraction is a symptom of the readjustment process, not the cause.

The depression of the 1930s was, says Sennholz, the inevitable consequence of the credit expansion that preceded the contraction. (Here he follows his Austrian mentor, Ludwig von Mises.) The difficulties were compounded in 1929 and after by stupid political policies everywhere. Economic nationalism eroded the world division of labor. The Hawley-Smoot tariff, passed in 1930, raised American tariffs to levels that practically closed our borders to foreign goods. Other countries were quick to retaliate. Our export industries fell into deeper and deeper depression, and our farmers, who had been struggling anyway, could no longer make ends meet.

The obvious cure in 1932 would have been to take government off peoples’ backs. But in the midst of depression which had an unemployment rate of 20 per cent, Congress doubled the income tax. Estate taxes were boosted, gift taxes were levied with rates going as high as some 33 per cent. Hoover stood for all of this, but Roosevelt did no better. His National Industrial Recovery Act increased payrolls, which momentarily added to the purchasing power of a few but took investment money away from non-monopolistic businesses. Peoples’ gold holdings were confiscated. The Agricultural Adjustment Act destroyed little pigs and cut the planting of crops, which raised the price of food in the cities. The National Labor Relations Act, which created the National Labor Relations Board, led to thousands of strikes.

As Sennholz says, individual enterprise at this point “just did not have a chance.”

No two periods are ever precisely alike, but Sennholz doesn’t think our politicians have learned much from the Thirties that would be applicable today. We still talk of raising taxes. We still believe in the spread of redistributive entitlements.

The interesting thing about Sennholz’s proposals is that he doesn’t blame our politicians for the fix we are in. He blames the moral condition of the country. In a final chapter called “Eternal Hope: A Moral Standard” Sennholz, following Leonard Read, says that reform, like charity, must begin with the individual. “Once accomplished at home,” he writes, reform “will radiate outward, kindle new light, and spread in geometric proportion. The true reformer is a seminal reformer, not a radical, He does not pass laws that mandate the reformation of others. He himself makes a beginning and does not think of himself as a reformer. The world may reject him as odd, impractical, and even irrational; but he clings to his principles, regardless of the world around him. There is boldness, a spirit of daring, in the heart of a reformer.”

Our transfer system is based on political expedience, but it is also founded in political immorality. Here Hans Sennholz invokes the eighth and tenth Commandments. Theft and covetous yearnings cannot be justified by bringing government into the picture. There won’t be much change until individuals begin to take Mosaic law seriously. Sennholz suggests that individuals should be informed of the nature and source of their Social Security benefits. Every check should carry a stub that reveals the cumulative amount of benefits received as of that check. The shocking revelation that one has withdrawn $69,501.15 when he or she has contributed a paltry total of $817.15 would “soon silence the most common defense: ‘I paid in.’”

When the total benefits received in retirement exceed the contributions made during working years, a Social Security recipient should submit to a means test. Those who can cover their own expenses should be expected to do so. Millionaires should be expected to pay their own bills. Anyone willing to assume self-responsibility for old age and medical expenses should be encouraged to do so.

Sennholz, seeking a dismantling of Social Security and Medicare in an orderly fashion, suggests beginning with a spending freeze that would call a trace in the political struggle. Senator Domenici of New Mexico has proposed that Congress freeze Fiscal Year 1988 budget authority at Fiscal 1987 levels. Fiscal 1987 spending has been estimated at $1 trillion and revenues at $850 billion. Predictably revenues will rise to $996 billion in 1989 and to $1.058 trillion in 1990. Assuming a freezing of expenditure levels at 1987 levels until 1990, the Federal budget would then be in the black.

The Domenici proposal is better than nothing, but Sennholz says it still attacks symptoms instead of the disease. The root cause of evil, the transfer mentality, would remain to generate outlays under conditions of surplus faster than revenue can be collected.

ASSOCIATED ISSUE

March 1988

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