Glass-Steagall: Economic Effects and Policy Response Options
Composition of US Labor Force (Left) Dow Jones Industrial Average (Right)
I wish to address a question I have respecting some of the economic effects of the reinstatement of Glass-Steagall. I will present this question as it arises from my understanding of the current economic situation, and the effects of the reinstatement of Glass-Steagall on that economic situation.
The current US financial system is based on an unsustainable process of monetary accumulation in various markets (primarily financial markets) which the majority of bank investment is currently tied to. That is to say, the vast majority of the financial system is participating in a bubble. For more on this, see LaRouche’s triple curve.
One of the corresponding economic features of this process is that a growing portion of total physical-economic output is being consumed by individuals in the population which have accumulated money, in one way or another, on the basis of this misallocation of money into speculative bubble markets. In the US, the percentage of total economic output consumed in this way is very likely greater than 50% by my guess. Let’s assume that this estimate is true, for purposes of illustration of the problem. If this is true, then each individual business firm in the United States, on average, attributes about 50% of its total sold product to purchases by individuals using money obtained, in one way or another, on the basis of speculative-bubble monetary accumulation. Now, if the capability for this kind of monetary accumulation to continue is drastically reduced (as by the reinstatement of Glass-Steagall), the resulting contraction of total demand will cause a nearly 50% reduction of total sales for the average business firm in the US economy. (This is, of course, assuming that the total consumption via monetary waste is indeed 50% and that the reinstatement of GS would result in a 100% elimination of monetary waste accumulation.)
There are two ways I am thinking about the economic changes which would occur under such a circumstance.
Firstly, we assume that prices remain stable after the elimination of the waste consumption. In this case, the resulting demand contraction could cause many businesses to lose significant revenue, many of which would become bankrupt (this is not necessarily a bad thing). However, there is a collapse-vulnerability gradient, or spectrum, on which each individual business firm is situated given conditions of such an elimination of “bubble money” allocation (and corresponding consumption). The position of an individual firm on this vulnerability spectrum is, obviously, dependent upon the degree to which the total sales of the individual firm were dependent upon “bubble money” purchases. Some businesses, whose proportion of “bubble money” revenue is high, or nearly 100% would collapse, and should collapse as they would represent nothing but centers of the decadent economic waste consumption of society- nothing but concrete manifestations of physical-economic drainage. (For the most part, this would be service firms, as opposed to manufacturing firms- besides those which manufacture economically decadent items - like the “manufacturing” of modern “art” for example). Some firms, however, will not see much of an effect on their product-demands/sales from this severance of economic cancer. For example, producers of basic foodstuffs would not see any significant reduction of sales or revenue, for, assuming our society does not allow people to start starving after the financial realignment, everyone, including “bubble money” profiteers like the Wall-Street crowd, will probably continue to eat just as many calories as they did before. After all, even if these sorry bankers were to lose everything in terms of financial “wealth”, and, afterward, had not even a penny to their name, we can assume that they would still procure food for themselves, whether through government food stamps, moving back in with their parents who would buy more food in order to keep their newly indigent children fed, or in other ways- all of which would make up for any reduction of sales by basic foodstuffs producers to “bubble money” consumers, at least for the most part. (Some incredibly fat and gluttonous Wall-Street financiers may actually be unable to find enough income to sustain their formerly decadent eating habits- but this is a good thing, for it would only reduce the allocation of healthcare resources needed to treat the ailments which usually accompany such habits.)
However, as mentioned before, the situation is not so black and white, for there is a gradient to the collapse-vulnerability among the individual business firms in the economy under conditions of “bubble money” elimination. There may be many cases in which individual businesses which are of important use for the economic system lose so much revenue that they are forced to shut down. This is something which we must prevent, for the productive capabilities of the nation (even as decrepit as they are now), must be maintained if we are to have any hope for a recovery. In order to prevent such a collapse of productive capacities, we must rapidly create a new source of demand. The demand which is created must, however, correspond to real work which provides the economy and society with some useful benefit. This puts into its proper perspective the fear, among many today, that Wall-Street’s income cannot be cut off since it would reduce the demand in the economy and collapse many businesses- even though the consumption by the “bubble money” sector generates absolutely no real economic benefit to society in return! Thus, the demand we must create after wiping Wall-Street out, is a demand for the basic necessities associated with productive increases in economic output via the labor of the participating individuals. For example, establishing conditions of life (housing, healthcare, basic goods consumption) requisite to the productive capabilities of the individuals engaged in the new productive work.
A good example of this would be the establishment of a new CCC program. Millions of Americans, especially youths, could rapidly be put to work in the reconstruction of basic infrastructure- a process which will not only lead to total economic productivity increase, but which will also insinuate productive skill sets into a sector of the population which were otherwise idle, and left to rot. Financing for this is to be done by the government.
Other methods of increasing the margin of demand include massive federal spending on high productivity-gain investments in advanced infrastructure, and new currency creation in the form of new credit generation in the banking system directed into economically vital investments for the purpose of ensuring a maximization of productive capacity utilization for economic growth.
Of course, the point of all this is not to “create demand” for the sake of “creating demand” as some people passing as economists seem to think is a legitimate economic goal for the leaders of society to pursue. (Demand is easily created- print a bunch of money, give it to people, and there you have it.) The issue here is that two things need to be accomplished simultaneously- one, the increase of economic productivity, and two, the sustenance of a margin of demand which will ensure that the physical productive capability potential of the nation is not thrown into a devastating stasis, or even lost completely. We don't want an economic freeze-up after GS is passed.
To restate, the foregoing elaboration is based upon the assumption that prices do not adjust after the elimination of consumption by W by reinstatement of GS.
Secondly, we assume that an adjustment of prices takes place after GS is reinstated- we assume deflation.
Respecting the elimination of the waste component of consumption of total output, standard economic analysis would tend to lead us to think that the margin of output formerly consumed by “W” -the waste sector of the population- is now made available to “P” -the productive sector. Theoretically, this would be the case if every waste dollar previously allocated to W were somehow put into the bank accounts of P, and, if this were to happen, then total consumption, demand and prices should all remain stable. But, besides the fact that this would not lead to any total productivity increase (Fn.1), it is also the case that there is no reason that this money transfer would happen- that is, total income and dollar-holdings of P will not change immediately. What will occur, then, if the waste consumption is eliminated and all other things remain equal? Theoretically, if across-the-board prices were to fall such as to enable the nominal income of P to purchase an increased aggregate product to make up for the elimination of W purchases/consumption, then nothing would change except that P would be that much more wealthy. How might we ascertain to what extend such a deflationary effect would develop after passing GS?
There are complexities to this which beg consideration. Certain consumer goods, the most basic and necessary kind, can be said to already “saturate” the majority of the American population, and thus, even if prices for such goods were to decrease, we could imagine that the consumption of them would not increase significantly- basic foodstuffs for example. But, as mentioned before, the allocations of the most basic of goods to the now cut off W sector would probably remain the same even after their parasitical income capability is eliminated. Thus, demand will be essentially constant for firms which produce such basic goods. These prices may tend, thus, to stay more stable in terms of the demand determination of price. Systemic deflation would, probably, however, lead to a reduction of prices in these basic goods sectors as well, due to reduced production costs. All this seems to imply that the majority of deflation would come in those categories of consumer goods which have been unavailable to P due to income restrictions. We might say that the more basic the consumer good, the less the price will change, and the less basic the consumer good, the more the price will change.
A certain “weeding out” of certain business firms can be expected under these conditions. For, given the relative stability of the prices in certain more basic goods, combined with the across-the-board decreases in prices associated with goods generally, the more an individual firm would need to reduce it’s price in order to equalize with the demand of P, the less profitable it becomes when compared to costs of basic goods. For example: Each firm has a unique constellation of expenses respecting the kinds of goods it requires as inputs in the production of its final product. If we assume a non-homogeneous reduction in prices of all goods, then we imply that the total input expenses of all firms will not be reduced in the same proportions. The individual firm will be required to adjust its prices in order to service the demand of P. But, if the price decrease of the sold product is greater than the price decrease of the input costs, then profitability is reduced. The ratio between the price decrease of the firm’s inputs to the price decrease of the firm’s output compared to the firm’s initial profitability will define whether the individual firm will go bankrupt.
It seems that we could expect that, in the case of individual business firms, those whose total expenses are due primarily to the payment of employee wages, as opposed to supply costs, will be less capable of reducing the price of the good or service they provide, since employee wages generally are not permitted to be decreased. It seems to me that service sector businesses would probably be more of an example of this since their total costs are more inclined to wages, as opposed to manufacturing firms which have a greater percentage of their total incurred costs from the procurement of materials. (as far as I would reckon). Certain squeezes may be expected as a result.
Deflationary effects can be expected to be nationwide, yet also highly localized in major cities which were former centers of employment of W. For example, we can expect that housing prices in Manhattan will be drastically reduced, and that much further than housing prices in Columbus, OH.
The diffusion of purchasing power over a greater section of the population will tend to eliminate certain businesses which primarily catered to high income W sector consumers, and the total composition of the US business sector will thus be changed.
As mentioned before, and restated here for emphasis, this scenario would not result in any significant productivity increase.
Thus, I have briefly elaborated the two kind of effects which could result from a reinstatement of GS on the basis of two assumptions as to how economic adjustments could take place. The first elaboration utilized the assumption that prices would remain stable, and that, therefore, the reduction of demand and the potential freeze-up effects on the economic system would need to be addressed by increasing demand to counter this, and to do so in an economically sound fashion (increasing production). The second elaboration utilized the assumption that prices of goods in the economy would adjust such that production would be maintained at about the same level as before GS would be passed.
What pathway should we take in a post-GS implementation? Should the government immediately intervene with measures to boost the demand in the economy in (sane) ways as outlined above? Or should a hands-off approach be adopted in which the government does nothing, and allows prices to adjust as described above (if this would even happen in an orderly way).
The process will be very complex, and so I think it would be folly to pretend that our options are black and white. However, I think that the first approach should be attempted. As mentioned before, increasing the wealth of P by the waste margin (D) formerly consumed by W would probably not lead to significant increases in total economic output. However, by allocating the former D margin to newly employed workers who are engaged in productive labor, the same economic expense will now result in greater economic output. We will probably not be able to summon up the idle labor quickly enough to quell price decreases though. But this may be a good thing.
That is to say, both processes seem to be desirable if they happen in the right combination with each other. For either way, beneficial results ensue. Either the wealth of P is increased through deflation, or the total output of the economy is increased by employing idle labor, or certain amounts of both occur at the same time. Any way you slice it, reinstating GS and cutting off the parasites is a good thing.
Of course, this discussion left out important related issues such as the need to increase the production and total delivery capability of many vital components of the economic market-basket of basic human necessities needed by the population which are currently in a disastrous state of decrepitude (as evidenced by the increasing death rates in our population). This includes, most emphatically, healthcare, but also treatment centers for drug-addicts, schools, basic infrastructure etc. For example, even if deflation were to occur, the healthcare system would still be unable to meet the needs of the population because we are simply lacking in the adequate facilities needed to meet all the requirements of our population. Discussions as to how these basic necessities can be secured for all of our citizens are of the utmost importance, and will be taken up later.
1.)(Besides that which may arise from a needed increase in the consumption of consumer goods by P.)