Casinos have come into sudden popularity with governments. There was a time when only remote jurisdictions of Anglo-Saxondom like Ireland and Nevada tolerated gambling. Playing the Wild West tradition to the hilt, Nevada even supplemented it with legalized prostitution. But now state-sponsored gambling is seen by any number of Canadian provinces and U.S. states as a way to help meet their bills.

There is a deeper logic to this development: established monetary policy has made respectable business endeavors as long-shot gambles as roulette - even of the Russian variety.

Let us examine the odds.

If your industrialist manages to sell his wares, he must first of all pay his staff and his suppliers, his rent and other items of overhead. What remains is his Net Operating Income (NOI). But that does still not belong to him. His next call is to pay the interest on his borrowings. Out of what is left he pays his corporation tax. The residue is his bottom line, by which he lives or dies.

He is, in short, last in the feeding line. The government, at least as far as its corporation tax goes, shares the entrepreneur's good or bad luck. Unwelcome a bedfellow as he may be, the taxman is in this respect a partner.

Not so the money-lender. His take is not geared to the NOI. It should therefore be clear that the rate of interest charged must fit within the NOI to leave the entrepreneur a net profit.

But the rate of interest has been conscripted to serve another purpose. Since monetarist doctrine took over our central banks, interest rates are seen as a tool to keep the price indexes flat. A little analysis should convince anybody that this arrangement rather than fly, can only crash.

Though disregarded by central banks, the NOI is the first thing accountants examine. The reason that central bankers today take so bizarre a position, is that they dwell in a world unrelated to reality. In their universe any increase in the price level means that the economy is overheated, that there is too much demand for the available supply and businessmen as a result are driving up their prices to profiteer.

In the world where our businessmen operate, the picture is very different.

If the interest on their borrowings does not leave them an adequate margin of profit, they are in trouble. The accompanying graph shows that between 1946 and 1990 the share of interest payments in the NOI of U.S. corporation rose from less than 10% to 60%.* Lenders themselves see in the businessman's profit margin a cushion that protects their own interest. They will therefore respond to a return on equity that has shrunk because of their own exactions, by railing in their loans.

But not to worry, our central bankers will say, the borrower merely has to get "lean and mean" and slash his costs. But more and more of a firm's costs today are non-discretionary. Taxes make up an ever greater portion of their expenses and are not negotiable. They go up for some very powerful reasons: to run a modern urbanized, high-tech society, more and more public services are necessary.

Ever more demanding standards are imposed on producers - limits on toxic emissions of automobiles, for example. The taxes and the cost of compliance to such mandated standards do not disappear when the central bank raises the bank rate "to fight inflation." On the contrary, they go up further.

When central bankers deliver sermons to their borrowers to get lean and mean", they usually have in mind slashing wages and staff. In central bank doctrine, wages are an income that can be spent extravagantly, but the interest paid on loans merely keeps the economy virtuous.

In this vision lenders neither eat nor defecate. They do nothing but save, save, and save for the greater social good. The lender indeed is cast in the role of queen-bee. She must be fed royal jelly so that she can do all the egg-laying.

Lenders do not even have to be aggressive to increase their take - the central bank does the dirty work for them.

That, however, gives rise to a few problems. By the very workings of the market the whole fantastic structure collapses from voracious overload.

In such a setting the casino becomes a den of prudence. The croupier at least does not rake in the chips until the roulette wheel comes to a halt. k

from Economic Reform, July 1992