― Kurt Vonnegut
The dead man does not know the value of his coffin.
― African Proverb
Continuing on the theme from the last post, as Matt Yglesias pointed out, no one ever lost a war because of a lack of money. They lost because they lacked resources, or rather they lost enough resources that could no longer fight on. Resources were mobilized directly by the Central State. However- and this is critical, the means of production were still privately owned.
This post from New Economic Perspectives by fellow architect J.D. Alt explains how this was done. He first describes the conventional wisdom: that the money to mobilize for war was caused by raising the money from the citizenry by selling war bonds; that is, the government “got” the money from the citizens because it needed it. In other words, the money was “out there” in the private sector, and the government sucked it all in to fund a war. But the money was not “out there;” this was during the Great Depression! People didn’t have any money, so how could they “give” it to the government? If all that money was “out there” in the private sector, hiding under mattresses and in bank accounts, then why was there a depression in the first place? Not to mention the money to redeem the bonds had to come from somewhere, so the citizenry would eventually have to be taxed to redeem their own war bonds!
This story seems a little fishy. Alt then describes the alternative version: that the money was spent into the economy by the mobilization effort itself. The money came from production, not the other way around. War bonds were designed to remove money from circulation because all that extra money being spent into the economy would be chasing too few goods and services, because those were all dedicated to the war effort rather than consumer demand. To redeem the bonds, the government “printed” money to redeem them, which was not inflationary since the rapidly expanding post-war economy was easily able to absorb the additional dollars.
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.http://neweconomicperspectives.org/2013/08/mobilization-and-money.html
These, now, were the well-paid workers who were able to buy the War Bonds—using dollars the sovereign government had already paid them. But why, if the sovereign could simply continue issuing dollars by fiat, did it sell War Bonds—and by so doing, appear to be eliciting the financial help of the people in the war effort? And why, if the sovereign could simply continue issuing dollars by fiat, did Roosevelt feel compelled to force Congress to impose the large tax increases? In a pivotal chapter in the middle of his book, professor Klein gives a very clear answer to these questions—and it’s an answer that is a text-book illustration of the basic principles of Modern Money Theory.
Between 1941 and 1942 the cost of living in the U.S. rose over 16%. Labor was threatening to strike for wage gains matching the rise in living expenses—putting the mobilization effort at risk. A looming inflationary spiral threatened to undermine America’s ability to accomplish what it so desperately needed to do: continue to pay itself whatever dollars were necessary to build the machinery required to defeat Hitler and Hirohito. The cause of the inflationary pressure was clear to everyone: The U.S. was at—or even beyond—full employment. American workers were pulling in more paychecks every week than they’d ever seen before, and were flush with cash to go on spending sprees. At the same time, however, virtually everything there was to buy had been diverted to the war effort: gasoline, tires, sugar, nylon, shoes, clothing, canned foods and automobiles. (Production of new automobiles was halted in February 1942, and all the auto-plants converted to war production.) There was suddenly very little to buy, and the excess money in the private economy began quickly driving up prices for what was available.
In the face of this crisis, the Roosevelt administration had to do everything it could think of to take spending money out of the hands of the people. In other words, it had to destroy money in the private sector to create the “space” that would allow it to continue to pay those same people to produce the war machinery that would still be required to defeat the Axis powers. The War Bonds and the Revenue Act creating the personal income tax, then, were specifically created not for the purpose of “collecting” money so the government could have it to spend—but rather for the purpose of destroying money so the government could then issue and spend even more dollars without feeding an uncontrolled inflationary spiral.
The most astonishing thing is what the unprecedented sovereign spending of the U.S. war mobilization accomplished. The people had paid themselves—through the fiat monetary actions of their sovereign government—to build a monumental war machine that defeated the Axis powers. But more than that, they had also paid themselves to invent an array of new technologies and apparatuses originally conceived for waging war, but which now were clearly seen to have useful applications to peaceful life as well—and they had paid themselves to build a great many factories, research and production facilities capable of adapting and producing these useful things to civilian life—and they had paid themselves to train a very large workforce of engineers, technicians and skilled workers who knew how to make it all work. This was a powerful economic brew—and it was spiced by the fact that the returning G.I.s were getting paid to go to college to explore how to make the whole thing run even better. America never looked back (until now.)
Now, you may say to yourself, there isn’t a war on. There isn’t a threat on the horizon like Nazi Germany or Imperial Japan to worry about. But of course there is, a greater threat than any human army: climate change. Yet we are not mobilizing to meet this enemy. To convert to a post-carbon economy is a massive undertaking on the scale of a war that requires large-scale nation-wide coordination. And most of the technology needed to convert to a post-carbon economy has already been invented or is sitting on the drawing board! These include things like solar panels, wind farms, hydrogen fuel cells, high-speed rail lines, energy efficiency measures, smart meters, nuclear reactors (although this is highly controversial), ethanol (that actually uses less energy to make than it provides), an alternative infrastructure for cars (hydrogen or electric, pick one already!), better batteries, and could include things like Permaculture farms, composting programs, and environmental restoration. As Dan Kervick writes:
This is not a pitch for re-militarization and a re-commitment to the US war machine. The point of the above historical lesson is that the United States and its people were mobilized by the war, and by the Cold War imperatives that followed. And the result was stunningly rapid economic development and progress in the areas of life that people of that time regarded as most important to the nation’s mission and ambitions. Those years were full of teamwork, can-do spirit and powerful government engagement. But they were also terrible times of global war, fear, the growth of secrecy and the security state, and the omnipresent threat of nuclear annihilation. But why must national mobilization take a military shape? Progress in the 21st century will not look like progress in the 20th century, and the most urgent imperatives of our time are not the imperatives of a past world doing battle with Nazi expansion and then entering into Cold War struggle. In the 21st century our mission is to transform the ways in which we obtain energy resources and utilize them to live on the Earth in a sustainable way, and to reform our society, material infrastructure and politics in ways that allow us to live harmoniously and sustainably as equals.Market Myths and the Real Drivers of American Progress (New Deal 2.0)
The conventional wisdom is that this will “cost too much.” But as we saw above, cost is not an issue, resources are. And at the moment, we have more than enough resources at our disposal (especially labor), and the technology is already there and will only become better over time. And these would create jobs in fields we want, rather than what we don’t want. And since we know that taxation is not used to raise revenue but to withdraw excess money from the system, we can tax the things we don’t want more of. A tax on carbon has been proposed as as an obvious choice. We want carbon based fuel to be more expensive. We want things that have “externalities” like pollution to more expensive – in such cases we are merely correcting the lack of the full accounting of costs to the wider society (taxing “bads” instead of “goods”).
Advocacy of the “free market” just means the status quo; the free market has never accomplished anything in history. It certainly hasn't won any wars lately. The fossil fuel industry has been heavily subsidized since day one; the automobile and suburbia were government projects to stimulate the economy (roads weren't privately built), and even the “fracking” revolution came about because of generous government subsidies. The fact is, “free markets” are entirely created and sustained by governments.
This is the “Green New Deal” idea often advocated by progressives. Lester Brown contrasts the mobilization of the country against the Axis powers with the passivity against climate change today:
In his State of the Union address on January 6, 1942, one month after the bombing of Pearl Harbor, President Franklin D. Roosevelt announced the country's arms production goals. The United States, he said, was planning to produce 45,000 tanks, 60,000 planes, and several thousand ships. He added, "Let no man say it cannot be done."
No one had ever seen such huge arms production numbers. Public skepticism abounded. But Roosevelt and his colleagues realized that the world's largest concentration of industrial power was in the U.S. automobile industry. Even during the Depression, the United States was producing 3 million or more cars a year.
After his State of the Union address, Roosevelt met with auto industry leaders, indicating that the country would rely heavily on them to reach these arms production goals. Initially they expected to continue making cars and simply add on the production of armaments. What they did not yet know was that the sale of new cars would soon be banned. From early February 1942 through the end of 1944, nearly three years, essentially no cars were produced in the United States.
In addition to a ban on the sale of new cars, residential and highway construction was halted, and driving for pleasure was banned. Suddenly people were recycling and planting victory gardens. Strategic goods—including tires, gasoline, fuel oil, and sugar—were rationed beginning in 1942. Yet 1942 witnessed the greatest expansion of industrial output in the nation's history—all for military use. Wartime aircraft needs were enormous. They included not only fighters, bombers, and reconnaissance planes, but also the troop and cargo transports needed to fight a war on distant fronts. From the beginning of 1942 through 1944, the United States far exceeded the initial goal of 60,000 planes, turning out a staggering 229,600 aircraft, a fleet so vast it is hard even today to visualize it. Equally impressive, by the end of the war more than 5,000 ships were added to the 1,000 or so that made up the American Merchant Fleet in 1939.
In her book No Ordinary Time, Doris Kearns Goodwin describes how various firms converted. A sparkplug factory switched to the production of machine guns. A manufacturer of stoves produced lifeboats. A merry-go-round factory made gun mounts; a toy company turned out compasses; a corset manufacturer produced grenade belts; and a pinball machine plant made armor-piercing shells.
In retrospect, the speed of this conversion from a peacetime to a wartime economy is stunning. The harnessing of U.S. industrial power tipped the scales decisively toward the Allied Forces, reversing the tide of war. Germany and Japan, already fully extended, could not counter this effort. British Prime Minister Winston Churchill often quoted his foreign secretary, Sir Edward Grey: "The United States is like a giant boiler. Once the fire is lighted under it, there is no limit to the power it can generate."
The point is that it did not take decades to restructure the U.S. industrial economy. It did not take years. It was done in a matter of months. If we could restructure the U.S. industrial economy in months, then we can restructure the world energy economy during this decade.Reorienting the Economy is a Challenge That can be Overcome (Treehugger)
And as for the unsustainable debts this would cause, it’s funny how you didn’t hear any of that when the government bailed out the banks or the auto companies, or anything that the wealthy oligarchy needed. The fact is, we already run the economy this way for the rich, not just for anyone else. So the promises to bankers were made whole by money printing with no ill-effects like hyperinflation, but promises made to workers and retirees can be reneged on at any time with no consequences? Why do we believe this?
Recently divulged information reveals that the Federal Reserve secretly loaned trillions of dollars to major corporations between 2008 and 2009, and that Harley-Davidson received a total of $2.3 billion to help cover operating expenses during the economic crisis.Federal Reserve Reveals $2.3 Billion Was Secretly Loaned to Harley Davidson (About.com)
Harley wasn't alone. The Fed's Commercial Paper Funding Facility also disbursed $26.8 billion to Ford, Toyota, and BMW. Large corporations including General Electric, McDonald's, and Verizon also received assistance, as well as financial institutions like Citigroup, Barclays, and Goldman Sachs. The total amount loaned? $3.3 trillion.
As for the cost issue, here’s some perspective from Barry Ritholtz:
In doing the research for the "Bailout Nation" book, I needed a way to put the dollar amounts into proper historical perspective.And here’s George Monbiot making a similar point:
If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars.
People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.
Crunching the inflation adjusted numbers, we find the bailout has cost more than all of these big budget government expenditures – combined:
• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion
They bailed out the banks in days. But even deciding to bail out the planet is taking decades.We’re “broke”? Really?
Lord Stern estimated that capping climate change would cost around 1% of global GDP, while sitting back and letting it hit us would cost between 5 and 20%. One per cent of GDP is, at the moment, $630bn. By March 2009, Bloomberg has revealed, the US Federal Reserve had committed $7.77 trillion to the banks. That is just one government’s contribution: yet it amounts to 12 times the annual global climate change bill. Add the bailouts in other countries, and it rises by several more multiples. This support was issued on demand: as soon as the banks said they wanted help, they got it. On just one day the Federal Reserve made $1.2tn available – more than the world has committed to tackling climate change in 20 years. Much of this was done both unconditionally and secretly: it took journalists two years to winkle out the detail. The banks shouted “help” and the government just opened its wallet. This all took place, remember, under George W Bush, whose administration claimed to be fiscally conservative.
But getting the US government to commit to any form of bailout for the planet – even a couple of billion – is like pulling teeth. “Unaffordable!” the Republicans (and many of the Democrats) shriek. It will wreck the economy! We’ll go back to living in caves! I’m often struck by the wildly inflated rhetoric of those who accuse environmentalists of scaremongering. “If those scaremongers have their way they’ll destroy the entire economy” is the kind of claim uttered almost daily, without any apparent irony.
No legislator, as far as I know, has yet been able to explain why making $7.7tn available to the banks is affordable, while investing far smaller sums in new technologies and energy saving is not.