A Zero Sum Game

June 27, 2011

“The central problem in our economy now is not putting idle resources and unemployed workers back to work, but of ending slow productivity growth; of causing the nation to save and invest more and consume less of its income; of preventing inflation from sapping the vigor of the economy whenever it approaches high employment; and of wiping out the enormous budget deficits that are weakening the national economy and its ability to compete in world markets. And just as important, and even tougher to solve, are the problems of individual companies and industries stemming from inadequate research and innovation; poor labor-management relations; and myopic management that seems incapable of looking beyond the short-run bottom line.”

“Cutting Federal expenditures (military and/or civilian) is not a viable way to wipe out the deficits. Government at all levels has an important job to play if the nation’s economy – its educational system, its industrial base, its infrastructure, its power to innovate and forge ahead in world markets – is to be strengthened.

Higher taxes are the only way to eliminate budget deficits, and the optimum way to accomplish this is through a value-added tax (VAT), which would replace the corporate income tax and permit a sharp reduction in payroll taxes. A VAT is determined by subtracting a company’s purchases of materials from its gross selling revenue and levying a tax on the difference: it is really a national sales tax. With a 15 percent VAT, a $20,000 car would cost a consumer $23,000.

A VAT would be a good thing not just to wipe out the budget deficit, but also to help the nation to consume less and save and invest more, to collect taxes from participants in the underground economy and to encourage exports by rebating the VAT on them as foreign countries do.”

Does this sound like something from a recent economic analysis you may have overlooked? Not to worry — it is not!

It is an excerpt from THE ZERO-SUM SOLUTION: Building a World-Class American Economy, written by Lester C. Thurow, a professor of economics and management at the Massachusetts Institute of Technology. It was published in 1985 following up on an earlier book, ”The Zero-Sum Society” (1980).

Dr. Thurow argued that the United States was caught in a trap of sluggish growth from which it could not escape without making some politically powerful groups worse off in the short run, yet resulting in strengthening the U.S. by making the nation as a whole better off in the long run.

The term ”zero-sum” — apparently borrowed from John von Neumann’s and Oskar Morgenstern’s theory of games — refers to that class of games (such as football, poker and some wars), in which the total gains equal the total losses.

A negative-sum game—(a nuclear war, for example) — is one in which everybody loses.

A positive-sum game – i.e. a good trade or a happy marriage – is one in which both sides win.

The majority of challenges Thurow identified three decades ago persist today because an elite few with tremendous political influence and power refuse to step back and “bite the bullet” in the short-term to support real and sustainable long-term reform.

One clear difference between 1980 and today is the absence of rampant inflation. Fed Chairman Bernanke has consistently supported a policy of ‘quantitative easing’ which has ensured interest rates near zero and an almost endless availability of credit.

During the Reagan years, a combination of relaxed fiscal policy (resulting in huge budget deficits) was accompanied by tight-money policy (resulting in double-digit interest rates).

Thurow contended that turning big budget deficits into a moderate budget surplus would eliminate a big drain on national savings. That proved to be true during the Clinton years.

We have plenty of historical data which clearly shows that reducing taxes and increasing government spending (whether domestic or defense) is a recipe for economic disaster.

Stay tuned for more positive ideas on how we can restore the U.S. to the pinnacle of economic power, meanwhile, don’t believe what you might hear from Elected Officials along the lines that, “…enormous tax hikes on the wealthiest Americans will slow down economic growth because they will transfer resources from the productive hands of the private sector to the wasteful hands of Congress, raise energy prices, and reduce incentives to work, save, and invest. Tax hikes are not the right solution for Americans—nor are they needed to reduce the deficit. Congress should cut spending and reform the tax code so it inflicts less of a burden on businesses and families and is more conducive to job creation.”

It is great rhetoric, but as written, it’s just not true.

Real reform requires serious collaboration and involves a very carefully designed combination of spending reform; tax reform; and re-engineering of government, starting from the federal, then cascading to state, county and local levels.

Yes, there will be some pain and agony. It’s long overdue, and I predict will result in great long-term benefits across economic classes.

Isn’t that what the U.S. is all about?

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