Toward the Integration of Economic Science: Policy Applications of the IDMF Model

Although some of the policies cited here may not seem directly related to that longer-term objective, a little reflection suggests that learning to manage the world economy more effectively is one of the most essential requirements for achieving that larger objective. We must not forget that it was the Great Depression of the 1930s that led to Hitler and the Japanese military takeover, and thus to World War II. We cannot afford another world depression with its unpredictable consequences.

In a "free market" economy, a primary requirement of economic policy should be to create an economic environment in which the "rational expectations" of businessmen and consumers can be based on a firm and credible national commitment to maintain stable, full-employment, non-inflationary, ecologically sustainable economic growth. This will facilitate socially responsible long-run individual economic planning, and provide less incentive and opportunity for disruptive speculative activity.

A primary purpose of the IDMF model, like the Keynesian model, is to facilitate socially responsible macroeconomic management, particularly by functionally appropriate coordination of monetary and fiscal policy. In the U.S. political framework, discretionary monetary and fiscal policies have almost always been wrong in amount or timing or both. Thus, wherever possible, the policy tools of this model are designed for "automatic pilot" (formula-controlled) administration, so that, once installed, they can avoid becoming political footballs.

The following are some of the model's more specific objectives and the policy tools for achieving them. Most of these suggest challenging perspectives for further research.
 
Better economic statistics
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This objective includes not only conceptual integration and improvement of the NI and FoF accounts, but other conceptual improvements. Seasonal adjustments of housing, construction, energy production, etc. need to take account of the weather as well as the calendar. Automobile sales data need to take account of dealer rebates and other incentives. GNP needs to treat OPEC (and other cartel) price increases as taxes which transfer real income, rather than as a reduction in inflation-adjusted GNP. To minimize the "spiral" effect of inflation, we need a tax-free COLA price index. Etc., etc.
 
Stable, non-inflationary, full-employment economic growth
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This should be maintained by a functionally appropriate money-growth formula (Figure 9), based on precise current monitoring of the trend growth rate of the MDR. The formula provides for a soft-landing (asymptotic) approach to, and subsequent maintenance of, stable, noninflationary full-employment economic growth. [ 1 ]

Figure 10 shows how this formula would have tended to prevent the inflationary GNP growth accelerations in 1965, 1968, 1972 and 1978. (It was the latter two which helped give OPEC the power to levy its devastating oil tax). This formula would also have avoided the subsequent depressions (periods of excessive unemployment) during 1970-72, 1974-78, and 1980-88.

The Monetary Policy Sunshine Act provides for initial, non-mandatory, application of this approach to monetary policy, to test its political and economic practicality. It requires the Fed to recommend the most appropriate real GNP growth track for the 5-year period corresponding with the federal budget period, and to project the money growth needed to achieve that.
 
Stable low interest rates
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These should be maintained by fiscal policy, including:

• Balancing the full-employment (structural) operating budget, excluding the Social Security OASI accounts;

• Strengthening the automatic stabilizer component of the federal deficit by an "automatic" Stabilization Tax Adjustment (STA) which maintains a stable balance between the economy's total supply and demand for credit (including the supply of new money) at the lowest functionally appropriate real interest rates (e.g. -1 % on Treasury bills, 2-3% on bonds). This would relieve the Fed of its confusing and destabilizing targeting dilemma between money growth and interest rates.

Because interest is an important cost of production, high interest rates are a cause of continued inflation and productivity-reducing quick-buck business strategies. Unnecessarily high real interest rates are an effective "tax" on the whole economy, with effects much like the OPEC oil tax.

Maintaining stable low interest rates by maintaining a continuous balance between the total supply and demand for credit would also tend to greatly reduce the speculative churning of the financial markets (stock, bonds and "money"), and thus release skilled labor for more economically productive pursuits.
 
Stable prices (and economically appropriate wage rates)
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These should be maintained mainly by:

• a stable economic growth rate, which avoids inflationary bottlenecks by facilitating longer-run planning by business, households and government; and

• non-monetary anti-inflation policy tools, such as the tax-free mandatory COLA price index, soundly-based wage and price guidelines, formula-controlled commodity buffer stocks (preferably on an international basis), and much more effective control of excessive market power, including consumer education and product labelling, and a new monopoly-investigating body like the 1930s Temporary National Economic Committee (TNEC).

Effective full-employment stabilization policy necessarily includes measures to address structural maladjustments which are essentially beyond the scope of private initiative, including such things as poor education, training and health of the labor force, and the monopolistic impediments to a free competitive market which cause gross maldistribution of income and economic power and exploitative and bureaucratic management.

Structural balance necessarily requires stable full employment, not only because "business cycle" fluctuations cause many kinds of structural imbalance, but also because idle labor resources are ipso facto a key kind of structural imbalance.
 
International economic coordination
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Coordination could be facilitated by common use of the IDMF analytical and policy toots by other nations, and by application of the non-credit money concept and money growth formula to the development and management of an effective international money. Such coordination is becoming ever more essential in the present internationalized economy, with its multi- national corporations, international commodity cartels (e.g., OPEC), international drug trade, electronic money flows, secret Swiss bank accounts, and the Third World debt problem, not to mention our own deficit.
 
Greater economic democracy
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With formula control of the key macroeconomic factors, more policy attention could be devoted to developing more effective checks and balances to control the excessive concentrations of public and private economic power which adversely affect the economy's basic structural relationships. this would include greater decentralization of economic activity and clearer distinctions between creative/productive economic entrepreneurship and those activities motivated primarily by counter-productive private greed and desire for power.
 
Global responsibility
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Although irresponsible mismanagement during the past dozen years has greatly weakened the US. economy, we are still the most powerful and creative economy in the world, much admired in the "developing" economies of eastern Europe and the Third World. It would indeed be a tragedy if those countries were to adopt the destructive aspects and conceptual confusions of American laissez faire capitalism along with its productive and creative aspects. In an increasingly integrated world economy we cannot afford another world depression which would again give rise to dictators promising to clean up the mess and put people back to work. American economists have a political and moral responsibility to quickly put our own house in order so as to be able to provide credible guidance for others.
 
Ecological sustainability
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It has become obvious that continued depletion of economic resources at the present rate cannot be sustained indefinitely, particularly if the rest of the world attempts to achieve the present US. standard of waste. But much opposition to the idea of "economic growth" is based on a misconception. As long as there is continued growth of the labor force (hours of work) and growth of productivity (output per hour) the potential full employment GNP will continue to grow. Therefore, to achieve ecological sustainability without involuntary unemployment requires coordinated economic policies of many far-reaching kinds (see Appendix A).

Note

1. Note that this is much more precise, flexible and functionally appropriate than the traditional rigid and simplistic monetarist formula.
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