CHAPTER TWELVE

Six Durable Economic Myths

THERE IS A GREAT DEAL of talk today about changes that are taking place in the structure of the American economy. But our political rhetoric and our economic policies are dominated by myths about this structure rather than by the structural realities themselves.

In particular there are six such myths believed by almost everyone but completely at odds with the realities of the American economy.

The first of these is the belief, shared by practically all economists as far as I can see, that we face long years of high unemployment, even if the economy returns to “normal.”

This simply does not jibe with our population figures. Begin ning no later than 1980, we face a very sharp drop in the number of young entrants into the labor force, the result of the “baby bust” that began in 1960 and that lowered the birth figures by 25 percent or more within a very short period. At the same time, for at least another ten years (1981 note: that is, until 1990), the number of people who reach retirement age will still go up.

Thus we face long years of a diminishing labor supply, except in the event of a worldwide depression, at least until the mid-nineties, which is the earliest time at which a reversal in the birthrate could have an impact on the size of the labor force. President Ford, in his Labor Day address in 1975, quoted a figure of 95 million people who will have to have jobs in 1985. But if the President assumed a condition of official “full employment”—or 4 percent unemployed—in that future year, then 95 million people at work ten years hence are hardly more than would have been at work in 1975 if we had 4 percent instead of 9 percent unemployment. The figure which the President cited as an indication of the magnitude of labor force growth turns out to include no labor force growth whatsoever.

The resulting labor tightness will not be felt equally in all areas. Indeed, the area that displayed the greatest manpower shortage in the fifties and sixties—teaching jobs—will continue to be a labor surplus area, again because of the “baby bust” of the last decade. This may explain why the “experts,” who are all, or nearly all, university teachers, foresee a continuing labor surplus instead of the reality of an almost certain labor shortage.

The second myth is also closely related to demographics. It is the myth that we can restore high economic activity by reviving consumer demand for the two truly depressed industries of today (1981 note : i.e., 1975)—automobiles and housing. In the very short run this pump-priming may work. For anything longer, say three years or so, demand in these two areas will be low and decline, no matter what economic policies we pursue. The demand will simply not be there.

We have known for fifty years, ever since General Motors made its basic studies in the twenties, that the single most important factor in the demand for new automobiles in the United States is the number of people reaching the age at which they get their drivers’ licenses. Of course, they do not, as a rule, buy new cars themselves. They buy the old cars and this enables the former owners of the old cars to buy new cars. And the number of these old-car buyers, beginning in the next year or so, will go down by 25 percent or more and will remain low for the foreseeable future.

Similarly, we have known in respect to housing that it is not “family formation”—that is, the number of men and women who marry (or otherwise take up housekeeping)—but the number of second children born which correlates most closely with demand for new residential housing. And that number, too, is down. All that can be done by pumping money into housing in these circumstances is to drive up the price, which, I suspect, has been the main effect of all the government housing policies all along.

We are not underhoused in this country. We probably have too large a stock of housing, though, of course, it is not all in the places where the people are or want to be. What is needed is a policy that enables people to maintain the value of existing houses, whereas most of our present policy, beginning with rent control and continuing on to the exceedingly high interest rates for housing renewal, has the opposite effect and is—consciously or not—meant to discourage people from maintaining their homes and to encourage them to acquire or build a new one. And that cannot work.

The third myth is that deeply ingrained belief that we, in this country particularly, practice “planned obsolescence” of products—and especially of automobiles. What we have been obsoleting and rapidly is the first owner of a car.

The American automobile, in fact, has a longer working life, measured in miles driven—the only sensible yardstick—than any other automobile. Indeed, the American system, under which people traded in their new car after a year or two, represented, without being planned, the most effective form of income distribution we had in this country—since the first owner paid about twice as much per mile as the third owner (if you include total expenses), so that the poorer people got cars in excellent working condition, good for approximately another 50,000 miles, at a substantially lower price than the first owner paid for what is essentially vanity.

Assuming a new car price of $4,000 (1981 note: the price in 1975!), the first owner, driving an average of 10,000 miles a year, pays 28-1/3 cents a mile, consisting of a loss in the car’s value of $1,200 and a mileage cost of 13-1/3 cents. The second owner, paying $2,500 (the dealer taking a slight loss normally) and keeping the car for three years, pays 20 cents a mile (a loss on the car of $2,000, $500 in repairs and 13-1/3 cents a mile). The third and final owner, who pays perhaps $700 and drives 50,000 miles, after which the car is worthless, pays 16 cents a mile.

A more equitable form of income distribution has never been designed. The car itself does not become obsolete; on the contrary, it keeps going on.

My fourth myth would be that basic belief, ingrained in practically all of our economists today, that there is in the American economy, or in any other developed one, a tendency toward over-saving.

This is largely the result of the belief that buying a house, paying Social Security, or contributing to an employee retirement fund is saving. But these are, in effect, transfer payments. The only viable definition of savings is “funds which are available to create jobs.” Housing does this to a minimal extent and Social Security not at all. Private pension funds, unless raided by irresponsible and shiftless elements such as have shown themselves in some recent union situations, will accumulate capital for a few more years. But then their pension payments will begin to equal the amounts paid in.

Thus the savings in this country are grossly “undersavings.” And we need to think through how to stimulate genuine savings—that is how to form capital available for investment in productive assets (the residential home is not such an asset by the way; it is a durable consumer good).

Fifth, there is the general belief that the corporation income tax is a tax on the “rich” and on the “fat cats.” But with pension funds owning 30 percent of American large business—and soon to own 50 percent—the corporation income tax, in effect, eases the load on those in top income brackets and penalizes the beneficiaries of pension funds. In many cases it means an effective tax of almost 50 percent on the retired worker as compared with the 15 percent or less that he is supposed to pay. The corporation income tax has become the most regressive tax in our system, and a tax on the wage earner and on wages. Eliminating it would probably be the single largest step we could take toward greater equality of incomes in this country.

Finally, there is the nice phony figure, believed by everybody and quoted again and again, that the top 5 percent of income earners (those making more than $30,000 or $40,000 a year) own 40 percent of the personal wealth of America. It is, of course, becoming particularly popular as the old figure of “distribution of income” no longer supports those who tell us how terribly unequal American society is.

The joker, of course, is the word “personal.” For the single greatest asset of the typical American middle- and working-class family, its future contingent claim on the pension fund of the employing company, is not personal wealth. Nor is it property. But it surely is an asset—and increasingly worth a great deal more than the family home or the family automobile. If it were included, and it is not difficult to do so on a probability and a statistical basis, the distribution of wealth in this country would show a remarkable and progressive equality in which age rather than income is the factor making for inequality.

This adjustment for contingency claims on pension funds would show that the top 5 percent income earners probably own not 40 percent of the wealth of America but no more than 10 percent. Moreover, translating pension expectations into today’s values, about 60 percent of the total amount of future pension claims is held by persons in the $9,000 to $20,000 wage bracket. This is by far their biggest asset. Yet, sadly, it is an asset being destroyed very rapidly by the impact of inflation.

These myths are not harmless. They lead to “soak the rich” legislation, which, in effect, then “soaks the poor,” the former workers on pensions. They lead to policies enacted as “antirecessionary,” which primarily fuel inflation without stimulating consumption or employment. And these myths inhibit the right measures—measures to encourage capital formation. Indeed, unless we discard these myths and face up to economic reality, we cannot hope to have effective economic policies.

(1975)