A Reviewers Notebook: The Squeeze

Mr. Davidson’s theory is that most of our woes derive from a system that allows the government an extreme latitude in monetizing its debt. This results in an ever- accelerating emission of paper which represents no production. What happens is that Say’s Law—the law that says production creates its own purchasing power in the form of wages, payments for raw materials, dividends and interest—is sabotaged. The money created by political fiat enters the bidding stream, disrupting the closed circuit of J. B. Say’s truism.

The original beneficiaries of the government’s paper emissions—such as bureaucrats, government contractors—cash in before the general populace is aware that the signals of exchange have been distorted. What Mr. Davidson calls the “information deficit” could be avoided if the federal budget were balanced. With government income equaling government outgo, there would be no need for the federal borrowing that creates “securities” that can be used as the basis for inflationary bank credits.

Balancing the budget, however, would not be enough to rid ourselves of the nine squeezes. Theoretically, the budget would be in balance if the government were to tax the underlying population at 100 percent, giving back to people whatever it chose to leave to individual discretion in spending. There would, of course, be no production under such a dispensation, for the incentives to invest and earn would be nil. It is obvious, then, that the place where the budget is balanced is all-important. Mr. Davidson recognizes this when he gets to talking about the “three species of capital.”

Three Forms of Capital

The individual trying to get along in the world has three choices. He can, says Mr. Davidson, throw in his lot with productive capital, which was the way favored by the nineteenth century. But in an inflationary age, with productive capital earning little if anything in excess of the inflationary gap, the temptation is to divert one’s wealth into static capital (i.e., gold, silver, diamonds, works of art). Finally, with the growth of the State, there is a third alternative. Financial writer Scott Burns has used the phrase “transcendental capital” to describe the right of those favored by politicians to latch on to money laid out by the government in one form or another. Bureaucrats, of course, are prime beneficiaries of transcendental capital. But the Chrysler Corporation, which is attempting to avoid bankruptcy by applying to Washington, is seeking a transcendental- capital claim to a cash-flow that the market has denied to it.

Inflation means less money for productive capitalists for the simple reason that people can do better for themselves by seeking a store of value in precious metals, fallow land and old masterpieces. Those who lack capital to put into static forms will, of course, be tempted to settle for bureaucratic employment that carries with it all sorts of perquisites. The typical federal employee, says Mr. Davidson, receives almost twice as much vacation pay-$1,140—as the typical employee of business—$636. And government sick leave is more than 200 percent more generous than that provided by most private firms.

The illusions that one can permanently better one’s self by betting on the market for old masterpieces or latching on to an early-retirement government pension must, at some point, be shattered. For it is productive capital that provides the money needed to keep people housed, fed and clothed. When the productive side of the economy falters, general impoverishment results. So it is important to balance the budget at a point that will leave plenty of money in the hands of producers. We need, in addition to a constitutional amendment to balance the budget, an overall limitation on the percentage of the gross national product that politicians are entitled to seize. When they grab more than thirty percent of the GNP the result is chronic stagflation.

Interventions That Fail

Mr. Davidson’s treatment of the nine squeezes is generally brilliant. He warns us that any effort to halt inflationary price rises by compulsory wage and price controls will result in a severe quality depreciation. Enterprisers who are forbidden to pass the cost of qualitative improvement along to the buyer will simply degrade their wares. It is the only way that bankruptcy can be avoided in a controlled economy.

We have a health-care squeeze, says Mr. Davidson, because the monopoly achieved by our doctors precludes experimentation with “paramedics” who are perfectly qualified to do hospital work without spending four years in medical school to get a physician’s license. We have a housing squeeze because building codes and zoning regulations deprive people of the right to make their own decisions about how and where to build. We have a bureaucratic squeeze because of the built-in incentives that federal commissions and bureaus have to extend their empires. We have an energy squeeze because it is profitable for government to create crises that can be used to extend the reach of the professional allocator and price fixer.

Accepting the “imperative” to free productive capital, Mr. Davidson urges people to strike out for themselves as their ancestors did when they built sod houses on the prairie. He wants to see a compulsory budget-balancing amendment combined with a provision for proportional taxation. He favors a redeemable currency based on silver and gold. He would abolish capital gains taxes. He would do away with monopoly forms of medical licensing. He does not say that lawyers should be denied the right to enter Congress, but he does think that voters should be aware that if they send a lawyer to represent them he will have a vested professional interest in passing more complicated laws.

Finally, Mr. Davidson would limit government service. This would force people to give up their transcendental right to squeeze the productive side of the economy for a lifetime.

All in all, Mr. Davidson has written a great book. It is both analytic and constructive, in a heartening blend that allows for just enough optimism to have a creative effect.