Tag Archives: Great Depression

Remove Government Intervention And Let’s Get On With It!

After being beaten down by the inevitable regulatory stranglehold that the government imposes on anyone attempting to do anything disruptive and creative that might revolutionize the banking industry, and probably any other, I am inspired to spew my general contempt for government intervention in anything. My apologies in advance.

Through decades of research, American neurobiologist James McGaugh discovered that as humans learn information and encounter new experiences, the part of the brain known a the amygdala plays a key role in retention.  The amygadala is activated primarily by stress hormones and other emotionally arousing stimuli.  Memory consolidation, or the forming of long term memories, is typically modulated very strongly by the amygdala.  Put simply, events that invoke significant amounts of emotion make a bigger imprint on one’s brain.

Emotion, while an important element in man’s array of mental tools, can unfortunately triumph over reason in crucial matters.  Excessive anger can lead to violent confrontations.  Heartbreak can lead a person to do drastic things in order to woo back a lost lover.  In the context of simple economic reasoning, today’s intellectual establishment often disregards common sense in favor of emotional-tinged policy proposals that rely on feelings of jealously, envy, and blind patriotism for validation rather than logical deduction.  “Eat the rich” schemes such as progressive taxation and income redistribution are used by leftists who style themselves as champions of the poor.  Plucking on the emotional strings of envy makes it easier to arouse widespread support for economic intervention via the state.

In the aftermath of the financial crisis of 2008, economic growth predictably slowed down in most industrialized countries.  Many commentators on the political left have grasped onto this opportunity to point to the vast amount of income inequality which exists in the United States and reason that it played a part in causing the crash.  This argument is typically paired with a proposal to raise taxes on the rich to balance out societal incomes.  It is alleged that having government brutes step in order to play the role of Robin Hood is the best and most justified way to alleviate income inequality.

Presently, income inequality in America is at its highest peak in decades.  In 2011, a study by the Congressional Budget Office concluded that after tax income grew by 275% for the top 1% of income earners between the years of 1979 and 2007.  The top-fifth of the U.S. population saw a 10 percentage point increase in their share of total income in the same period while all other groups saw their share decrease by 2 to 3 percentage points.  The data undoubtedly shows that income inequality has been increasing over the past few decades.  New York Times columnist and economist Paul Krugman has latched onto the evidence and is suggesting that rising income inequality plays a part in causing recessions.

Economist Joseph Stiglitz, who recently wrote the book “The Price of Inequality,” has argued that without a fair share of the national income, the middle class is unable to spend enough to keep aggregate demand elevated.  Both economists see income inequality as a danger to the prosperity of a nation.   Such a message is appealing to the greater public because it plays on their perceptions that the world is unfair.  It almost seems intuitive to think that the rich posses too much wealth or that a prosperous society is one in which income is more equalized.  Comfortableness in these beliefs paves the way for income redistribution efforts by the ever-scheming political class.

With income inequality a hot topic of debate going into the fifth year of the biggest economic downturn since the Great Depression, the question remains: does income inequality have a negative impact on society as Stiglitz and Krugman suggest?  And is growing income inequality an inherit part of capitalism?

First and foremost, the idea of equality for man in physical attributes, mental fitness, and material security  is essentially anti-human.  The most appealing aspect of mankind is that every person varies from one another in a myriad of different ways.  Some are better athletes, some are quicker studies, some have outer features that make them generally more attractive.  It follows that some men and women will be more apt at producing or better attuned to the demands of the marketplace.  They will have higher incomes by virtue of their own entrepreneurship or capacity to produce.  So, in a sense, income inequality is a fact of the free market.

But it is the possibility of inequality and the ability to achieve a higher income that makes capitalism work.  Punishing those who excel at making consumers better off punishes the very market mechanism that leads to better living standards overall.  In a free society, income inequality is not good or bad; it is part of the functioning order.  Any attempt to make incomes more equal through state measures is unjustified plunder of the rightful earners of wealth.

But what of the inequality in income that exists in today’s state-corporatist economy?  Did the 1% acquire its wealth solely through hard work?  The answer is hardly in many cases.  Though there are some innovative businessmen who became rich by providing new and better products, the sharp increase in income inequality over the past two decades is due to an economic phenomenon outside of normal market operations.  Krugman and Stiglitz rightfully point out that the greatest periods of income inequality in the United States were the late 1920s and the period since the mid-1990s.  What they fail to mention is that both these periods were not defined by capitalism run amok but by massive credit expansion.

This expansion in credit, aided and abetted by the Federal Reserve’s loose money policy, is the real culprit behind vast income inequality.  Economist George Reisman explains:

“the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.”

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices.

Money acts as a medium of exchange but is not neutral in its effects on receivership.  Those first receivers are able to bid up the price of goods before any other market participants.  As the newly created money flows into the economy, the general price level rises to reflect the new volume of currency.  In practice, credit expansion which brings about a reduction in interest rates also increases the amount of time businesses can go without making deductions for depreciation on their balance sheets as they purchase capital goods.  Because investment tends to go toward durable goods during periods of credit expansion, there is less funds left over to devote to labor.  Profits end up being recorded while wages sag behind.  Since credit expansion and inflationary policy go hand in hand in distorting relative prices and must eventually come to an end, the bust that occurs reveals wasteful investment.  Recession sets in shortly thereafter.

Printed money is not the same as accumulated savings which would otherwise fund sustainable lines of investment.  And it is only through adding to the economy’s pool of real savings that productive capacity is able to increase in the long term.  The wealthy have a higher propensity to save precisely because they have a higher income.  It is through their savings that new business ventures are funded and the economy is able to grow without the faux profits from government-enabled credit expansion.  This is why raising taxes on the rich is a backwards solution to income inequality.  Taxation only funnels money out of the productive, private sector and into the public sector which focuses on spending to meet political ends rather than consumer satisfaction.  All government spending boils down to wasted capitalThe truth is that capital is always scarce; there is never enough of it.

Pointing out this fact is by no means corporate shilling.  Many corporations and well connected businesses lobby for tax increases in order to burden their competitors.  Currently in California, Governor Jerry Brown is campaigning for a ballot measure which would raise taxes on the state’s richest residents.  According to the Wall Street Journal, companies such as Disney, NBC, Warner Bros., Viacom, CBS, and Sony have each already pitched in $100,000 for the initiative.  Various energy companies are financially supporting the ballot measure to make sure that a 25% tax on natural gas and oil extraction isn’t next.  As the scope of government becomes all the more encompassing, big business starts seeing profit opportunity in using its forceful authority to better its own competitive position.  In their unceasing tirades over income inequality, Stiglitz and Krugman recognize the trouble rent-seeking poses to competitive markets yet both reason that the problem doesn’t lie with the state but with those politicians and bureaucrats who occupy its enforcement offices.

To put it bluntly, this notion isn’t just juvenile; it rests on the fallacious assumption that government is staffed by only the most well-meaning of individuals in society.  As history and reason dictate however, good souls are not attracted to positions of absolute power.  The state, by Max Weber’s definition, holds the monopoly over force in a given area.  Practically every action taken by state officials introduces violence or the spoils from violence into an otherwise free society.  It follows that only those seeking to use state authority for their own benefit naturally gravitate toward politics.

Krugman and Stiglitz believe, as most do, that Americans should be born with the opportunity to succeed.  To create an environment of fairness, they propose a variety of government policies so that even the most impoverished individuals will have a shot at the American Dream.  Their arguments rest largely on emotion instead of reason and are aimed at inspiring reactionary protest.  What they fail to see (or refuse to acknowledge) is that the free market provides the best opportunities for someone to make a decent living by providing goods and services.

In a totally uninhibited market, profits come only to those who satisfy consumers more than their competition.  Contrary to Stiglitz’s suggestion, Henry Ford wasn’t a great businessman because he paid his workers a high wage.  He made his fortune by streamlining the process from which cars were built in order to sell them at a lower price.  The employees at Ford were able to increase their productivity, and thus wages, through the previous accumulation of capital and investment in machinery.  Ford’s massive profits didn’t last long however as domestic and foreign competition copied the mass production model and were able to attract market share of their own.  The greater the amount of cars on the market meant lower prices for all consumers in the end.

Again, in a truly free market the only way to maintain a rising income is to continually produce at a more efficient and more innovative rate.  In an economy plagued by the heavy hand of government, the market becomes rigged in favor of those connected to the ruling establishment.  Competition is decreased by the rising cost of adhering to regulations, innovation stagnates, and more income flows to the top.  Through central banking and credit expansion, profits are able to be recorded by the financial industry and first receivers of money before the rest of the population; which in turn leads to further evidence of income inequality.

No matter how you slice it, taxation is theft It is indiscernible from highway robbery and devoid of any moral justification.  Income inequality is a problem not because the government isn’t doing enough to combat it but because politicians and bureaucrats never tire of intervening into the private affairs of society.

With government intervention present in practically all market transactions, the solution to income inequality is to remove the intervention; not empower the state further by increasing the amount of funds at its disposal.

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The (New) Great Depression (Part II).

The media’s popular narrative about the causes and cure for the Great Depression invariably start with the storyline that the stock market crash caused the Great Depression.

Herbert Hoover purportedly refused to spend government money in an effort to reinvigorate the economy. Franklin Delano Roosevelt’s New Deal government spending programs allegedly saved America.

This is a big lie.

The 1920s marked the beginning of mass production and the emergence of consumerism in America, with automobiles a prominent symbol of the latter. In 1919, there were just 6.7 million cars on American roads. By 1929, the number had grown to more than 27 million cars, or nearly one car for every household. During this period, banks offered the country’s first home mortgages and manufacturers of everything – from cars to irons – allowed consumers to pay “on time.” Installment credit soared during the 1920s. About 60% of all furniture and 75% of all radios were purchased on installment plans. Thrift and saving were replaced in the new consumer society by spending and borrowing. Notice any parallels? 

Encouraging the spending, the three Republican administrations of the 1920s practiced laissez-faire economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-intervention into business and banking became government policy. These policies led to over-confidence on the part of investors and to a classic credit-induced speculative boom. Gambling in the markets by the wealthy increased. While the rich got richer, millions of Americans lived below the household poverty line of $2,000 per year. The days of wine and roses came to an abrupt end in October 1929, with the Great Stock Market Crash.

The Great Depression was caused by the Federal Reserve’s expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. Just like the early 2000s. When the Federal Reserve belatedly tightened in 1928, it was too late to avoid financial collapse. According to Murray Rothbard, in his book America’s Great Depression, the artificial interference in the economy was a disaster prior to the depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. Government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.

And, this is exactly what the IMF and the Central Bank are doing in Europe today. Pouring more capital into a failed banking system to avoid a runaway withdrawal panic is crazy. Where will bonds be when it is over? Every country in the Eurozone, save for Germany and the United Kingdom, are broke and their banks are failing. More of the same lunatic monetary policy will bring Europe to its own Great Depression, and it will happen next year.

The parallels between the 1930s and today are uncanny. Alan Greenspan expanded the money supply after the dot-com bust, dropped interest rates to 1%, encouraged a credit-driven boom, and created a gigantic housing bubble. By the time the Fed realized they had created a bubble, it was too late. The government response to the 2008 financial collapse has been to expand the money supply, reduce interest rates to 0%, borrow and spend $850 billion on useless make-work pork projects, encourage spending by consumers on cars and appliances, and artificially prop up housing through tax credits and anti-foreclosure programs. The National Debt has been driven higher by $2.7 trillion in the last 18 months.

The government has sustained insolvent Wall Street banks with $700 billion of taxpayer funds and continues to waste taxpayer money on dreadfully run companies like Fannie Mae and Freddie Mac. The government is prolonging the agony by not allowing the real economy to bottom and begin a sound recovery based on savings, investment, and sustainable fiscal policies. President Obama continues to exacerbate the problem by creating more burdensome healthcare, financial, and energy regulations. And, regulations are not the same as a single payer health care program, so please understand; these policies are hurting businesses and failing to help anyone.

Today’s politicians and monetary authorities have learned the wrong lessons from the Great Depression. The result will be a second, Greater Depression and more pain for the middle class. The investment implications of government stimulus programs are further debasement of the currency and ultimately inflation and surging interest rates.

And, at the end of the day, we will be forced to allow capital markets to sort it out without any additional government intervention after all, and, as they say in golf, take our medicine and play the next hole. But, we’re really bad at that, aren’t we?


The (New) Great Depression.

For those of you who don’t think we are in the beginnings of a Great Depression, you might want to think again and take a look at the charts below.

Here’s what we all know:

1)      The U.S. economy remains stalled out with a housing crisis that won’t go away, because foreclosures have only now really begun to start through the process; credit card and student loan bubbles loom on the horizon to the tune of $2.4 trillion; and, Europe is about to fall into the biggest depression in history. This will get worse.

2)      The U.S. unemployment rate remains high and will continue to stay where it is, as analysts finally begin to come to grips over the reality that all of the jobs that went away aren’t coming back, because corporate America doesn’t want them back, and because productivity is at an all-time high (as are corporate profits). This will not change.

3)      Income inequality has been surging and has reached historic highs – like, as in, never before. And, this gap will continue to expand.

But, just in case you thought things couldn’t possibly get any worse, check out three charts from Gluskin Sheff strategist David Rosenberg’s latest report, that show the share of personal income from government transfers like welfare and social security, and the spike in food stamp participants.

In the 1930s, you could tell the country was in a great financial depression because you could see the soup lines everywhere you looked. You could see the unemployed lined up in front of every employment hall (sort of like Europe right now). We don’t have soup lines and we don’t have employment lines anymore, but we surely do have a Great Depression.

Rosenberg writes:

Government transfers to the personal sector now makes up nearly one-fifth of total household income. That is incredible. Even Lyndon Johnson, the architect of the Great Society, would blush at that statistic. The reason why nobody considers this to be a modern-day depression is because nobody can see the soup and bread lines that were so visible during the 1930s. That’s only because these days, you receive your bread and soup from Uncle Sam either electronically or in the mail.”

Here’s the chart from Gluskin Sheff that shows the shocking rise in transfer payments to personal income:

personal income chart

And this chart shows the surge in the number of food stamp participants:

soup line chart gluskin sheff

Any questions?


Debt. And More Debt.

I have been thinking about debt lately.

We have a lot of debt, both as a nation and as individual consumers. Does it matter? Yeah, probably it does. Our current situation as a nation is unprecedented historically. During the 1990s, debt held by the public had risen to nearly 50% of GDP in the early 1990s, but fell to 39% of GDP by the end of the decade. The public debt burden fell, due in part to decreased military spending after the Cold War, 1990, 1993 and 1997 budget deals, gridlock between White House and Congress, and increased tax revenue resulting from the Dot-com bubble. The budget controls instituted in the 1990s, successfully restrained fiscal action by the Congress and the President and together with economic growth contributed to the budget surpluses that materialized by the end of the decade. These surpluses led to a decline in the debt held by the public, and from fiscal years 1998 through 2001, the debt-to-GDP measure declined from about 43 percent to about 33 percent. Sweet.

Debt relative to GDP then rose due to recessions and policy decisions in the early 21st century. From 2000 to 2008, debt held by the public rose from 35% to 40%, and to 62% by the end of fiscal year 2010. During the presidency of George W. Bush, the gross public debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, due in part to the Bush tax cuts and increased military spending caused by the wars in the Middle East. Under President Barack Obama, the debt increased from $10.7 trillion in 2008 to $15.5 trillion by February 2012, caused mainly by decreased tax revenue due to the late-2000s recession and stimulus spending.

The total, or gross national debt, is the sum of the “debt held by the public” and “intragovernmental” debt. As of February 2012, the “debt held by the public” was $10.7 trillion and the “intragovernmental debt” was $4.8 trillion, for a total of $15.8 trillion.

The national debt can also be classified into marketable or non-marketable securities. As of February 2011, total marketable securities were $9.0 trillion while the non-marketable securities were $5.2 trillion. Most of the marketable securities are Treasury notes, bills, and bonds held by investors and governments globally. The non-marketable securities are mainly the “government account series” owed to certain government trust funds such as the Social Security Trust Fund, which represented $2.5 trillion in 2010.Other large intragovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund and the Federal Hospital Insurance Trust Fund (Medicare).

Notice that the major debt culprit going forward is not social security nor medicare, but rather the net interest we will owe on our debt.

And, not to totally freak you out, but the U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The GAO projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues, and social security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.

The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have to be set aside during 2012 so that the principal and interest would pay for the unfunded obligations through 2084. Approximately $7.7 trillion relates to Social Security, while $38.2 trillion relates to Medicare and Medicaid. In other words, health care programs will require nearly five times the level of funding than Social Security. Adding this to the national debt and other federal obligations would bring total obligations to nearly $62 trillion. However, these unfunded obligations are not counted in the national debt.

Forget the math. That’s a lot of debt!

If we look back at history, we will find that we have never carried this much total debt to GDP and we may now be standing in the middle of the biggest credit bubble in history … and, it does not include the impending student loan bubble of $1.2 trillion. Current total credit market debt (including consumer debt) stands at more than 340% of total Gross Domestic Product (GDP). Not so sweet.

This only happened once before, and that was precedent to what we call The Great Depression. Following 1929, debt rose rapidly in comparison to GDP, because we continued to borrow but failed to produce much. Sort of like, now.

With the exception of the Great Depression, our country always held less than 200% of our GDP in debt. We only started getting crazy with debt since the mid-1980s (perhaps coincident with a sense of a personal indulgence that really got crazy during the 80s, but that is another post)and as a result, the current experiment with debt is really only about 27 years old. From a historical perspective, it’s like only this morning. So, my point is that we haven’t been here before. And, the future should remain pretty uncertain.

The other thing that is interesting about debt from a macro-view is that it is based on the assumption that the future will always be bigger than the past. That is to say, we will produce more in the future than we have in the past and thus we will always be able to pay off future debt. That is the way we hold our student loans, our mortgage loans, our auto loans and our credit card debt. Our next job will pay more than our last job. Our GDP will always keep growing. We will always be able to borrow as much as we want by printing treasury notes, and our creditors will always be willing to take on more debt. Similarly, when we need a loan to consolidate out-of-control debt, we just go to a bank. Well, not so much now.

But in the last 4 years, we saw what happened to many of those beliefs when we discovered that some of the underlying assumptions didn’t turn out to be so good. Most of us are stuck now with whatever loans we were able to take out, and with whatever interest rates we are paying, because the consumer credit markets are frozen.

That does not mean we shouldn’t believe that our government won’t figure out a way to remain solvent through un-expected twists in the road ahead. There is ample evidence to suggest that it will, but it is also hard not to believe that the next 15-25 years might be pretty different than the past 27 years.

What becomes of our old reliable consumer credit machine when banks won’t give credit cards to anyone with a late payment history? What happens to the housing market when the only people who can qualify for a mortgage loan have 800+ credit scores and at least 20% down in original cash? What happens to the under-banked, who only carry a $1,500 balance in their checking accounts and a single bank product, causing the banks to lose $70/year on each of their “class”. If the banks continue to winnow out the costly low-end checking customers, and return to the old banking dictum that the only people who are qualified to borrow are those who don’t need the money, there are 60 million Americans who will be affected in the form of checking accounts they can’t afford, credit cards for which they can’t qualify and mortgages that they can’t get.

What do you think happens to the economy?

We already know that wages have been flat for the last 12 years – that’s right, no real wage increase in today’s dollars over the year 2000. While at the same time, inflation has averaged around 3% per year since the year 2000. You may have noticed some changes at the gas pump ($1.45 avg. price per gallon in 2000 in California, while much cheaper in the rest of the nation), and price increases at the grocery store (2000 – 2010):

Fruits/Vegetables            46%

Coffee                                  29%

Milk                                       19%

Poultry                                 19%

Beef                                      46%

Pork                                       37%

Flour                                      57%

Inflation? Congress says no. They obviously don’t shop for food or gas. I won’t even go to heating oil. You get the point.

Unless something happens soon to reverse the frozen credit markets, the broken capital markets, the failure of our government to re-train those who are now well into their second year of receiving unemployment benefits, our inability to pass meaningful legislation that can help create actual jobs for people and loans for small businesses, then I think the upward climb will only get steeper. Regardless of who gets elected in the fall. Remember, through all of this, the Federal government is not stopping borrowing and cannot stop spending. And, the little guy will continue to get screwed.

Now, this would be the perfect moment to promote the iPeopleFINANCE lending model, but I won’t.

We care about all of this deeply and we are committed to doing something about it when we launch in September.

In the meantime, try to keep your powder dry and your credit clean, and work out what you can with your creditors, so you can minimize the impact on your credit history. Try to pay your bills on time. Keep your seat belts fastened, and don’t give up. There are lots of entrepreneurs working hard right now to solve big chunks of this problem. Help is on the way. But, it ain’t coming from Congress.


To Hell In A Handbasket.

I watch the ripples change their size
But never leave the stream
Of warm impermanence and
So the days float through my eyes
But still the days seem the same
And these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re going through

“The world is going to hell in a handbasket”, my Grandfather used to say to my Mother when she was around 15 years old, in 1932. And, indeed it was.  That phrase is an American alliterative locution of unclear origin, which describes a situation headed for disaster without effort or in great haste. It has been used frequently over the decades to describe a social condition that usually represents in the adolescent or more recently, in the pre-adolescent periods of childhood development.

When my Mother was 15 years old, the Great Depression had only begun to sink its teeth into the fabric of American society. 1932. What a great year. The British arrest and intern Mohandas Gandhi, the Archbishop of Canterbury forbids church remarriage of divorced persons, Brave New World, a novel by Aldous Huxley, is first published, and Japanese warships arrive in Nanking. That was just January.

In February, Adolf Hitler obtains German citizenship by naturalization, opening the opportunity for him to run in the 1932 election for Reichspräsident, while Pope Pius XI meets Benito Mussolini in Vatican City, and Clara, Lu & Em, generally regarded as the first daytime network soap opera, debuts in its morning time slot over the Blue Network of NBC Radio, having originally been a late evening program.

But, none of this was very stimulating for my Mother, who would instead, sneak out of the house at night, using the branch of an elm tree outside her second story bedroom and climb down and then up a separate Elm tree overlooking a corner near downtown Akron to observe young, self-important Italian boys pretend they were mobbed up, while smoking Luckys and flashing handguns. Yeah, that’s what she did for kicks in 1932. While the world was going to hell in a handbasket.

My Mother tasted her first kiss in 1935 and then followed the kisser, my Father, out to San Francisco on a Greyhound bus, where they got married and had me. Their idea of a good time was to drink some beers, listen to Dragnet and Yours Truly, Johnny Dollar on the radio, and play cards with my Father’s friends. When my Mother was in her late teens , her complete world of influence was Movies and Radio, and she had only one or two looks that were deemed appropriate for the youth of her day. Smoking cigarettes and drinking martinis were what young women of sophistication aspired to in 1950.

When I grew up, the notion of sex and the weird appeal of young women began to rattle around somewhere in my stupid consciousness around 11 or 12. When I got near girls, I felt like I was itching like a man on a fuzzy tree, but I had no idea why. My Father tried to have “the talk” when I was 12, but he couldn’t figure out what to say and left my room. I was on my own. My first “love” was Julie Rothschild, but I only got to kiss her girlfriend, which was fantastic (I still can taste that sweet, Apricot flavored saliva), but I was pretty sure she wasn’t Julie. I felt like “The world was going to hell in a handbasket.”

As a confused 12 year old, my influences were The Kingston Trio, three guys with striped button down shirts, the Catholic priesthood, lots of guys with long, black robes and white collars, Sal Mineo in West Side Story, and James Dean in Rebel Without a Cause. I could also go with Marlon Brando in On The Waterfront, but there were no motorcycles in Burlingame, California in 1959, and certainly no guys wearing leather Village People outfits. So, since there were also no Puerto Ricans and the closest I got to emotionally confused suburban, middle-class teenagers was sneaking out in the middle of the night to drive over to my girlfriend’s house and make out on the lawn, I leaned toward the Kingston Trio.

My Father would listen to the news on the radio and declare, “The world is going to hell in a handbasket”.

When TV was introduced into my home, I was amazed to see that there was a whole world outside my bedroom, my street, and my neighborhood, that actually looked nothing like my own. My parents watched The Ed Sullivan Show, The Jack Benny Show, What’s My Line?, I Love Lucy, The Adventures of Ozzie and Harriet and Search For Tomorrow. I watched The Mickey Mouse Club, Cheyenne, Gunsmoke, The Steve Allen Show, American Bandstand and Leave it to Beaver.

As I entered (an all-boys) High School, I thought that all of my classmates’ families must be like the Beavers and that I was the wacky odd-ball, out of place and afraid to admit that I thought Steve Allen was funny (and crazy). But, I had suddenly grown out of my skin and through Television, I had then owned a perspective on the world that allowed me to fantasize in ways never before possible.

By the time I went off to college (across the Bay), I was sophisticated and mature, and had kissed and had sex with several girls and while I still had no idea who I was or where I was going, I had climbed out on that elm tree branch and was finally on my own. Oh, yes, I also had a wife and child.

The rest happened really fast. The Beatles happened, and the sexual revolution happened and free-speech happened, and drugs, and rock and roll, and the Vietnam War, and the draft, and protests, and Black Power, and Woodstock, and the Chicago riots, and increasing political awareness and political and economic liberty of women, and the Kennedy’s and Martin Luther King, and birth control. It all happened, and it all happened in a period of only six years, from 1964 to 1969. The world was surely going to hell in a handbasket then.

When homely young women took one look at Janis Joplin and decided immediately that their lives could change by buying a a’63 VW van, decorating the insides like an opium den and donning velvet and wild scarves, lots of cheap jewelry, Victorian boots and long Indian saris, and when the college chemistry geek could grow his hair long and cook LSD in his basement and they could both easily get laid, the world turned inside out. The Grateful Dead attracted the ugliest crowd of humans ever assembled, but they all got laid, many for the first time and it was all so groovy, so very, very groovy.

Then somehow the 70s and 80s came and crapped all over that pure hippie grooviness, commercializing the looks, the music, the lifestyle and the dope. Instead of authentic hippie values, a general new attitude began to develop, moving Americans towards atomized individualism and away from communitarianism in clear contrast with the 1960s. And, Richard Nixon resigned right alongside all of this cultural wasteland characterized by Grease, Saturday Night Fever, mood-rings, smiley faces, pet rocks, Aerosmith, the Carpenters, Smerfs, Cabbage Patch Dolls, Vanilla Ice, Flashdance, Roseanne, Tanning Salons and Joe Namath appearing in women’s pantyhose to promote Beautymist hosiery. Totally awesome! Clearly, the world was really going to hell in a handbasket then.

The 80s were terrible, but they did produce the most amazing leaps forward in technology that started us on this exponential growth curve that has led to smart phones, startlingly realistic video games, hundreds of channels of broadcast television, computer generated graphics and motion picture technology that defies reality. It has also led us to infinite choices for both fantasy and reality and to pre-adolescents that have a complete understanding of the nature of sexual and human relationships and a seemingly endless  library of options, described in vivid detail about the sort of “reality” lives they might choose to live when they “grow up”.

The appropriate looks and styles for these children range from rock star to rapper, from Stefani Joanne Angelina Germanotta to Alicia Moore,

from lounge singer to gangsta, from cowgirl to feminist, from football star to gay choral lead, from scientist to reggae, from lawyer to comic, from parent to teacher, from female downhill skier to golf professional, from Olympic medalist to reality star, from snow-boarder to viticulturist and from political activist to pothead. 

Thank God I had boys. Because the poor, unfortunate daughters I never had would have never gone out of the house, would have never been allowed out the front door with a boy by their sides, never been allowed to watch television, own an iPhone, a PC or an iPad, drive a car or listen to the radio, and would have always had a chaperone with them on every date. Me.

So, the differences between the narrow, weird little life I had when I was 12 years old and the amazingly broad, sophisticated and option-rich life a 12 year old child enjoys today, feels like comparing the Edison light bulb to Apple Computers, a canoe to a jet ski, Mitt Romney to Barack Obama, or a Maserati to a Model-T.

There is no doubt in my mind which is better, and which offers the greatest opportunity for self-discovery and growth, but there is no doubt about it, the world is so going to hell in a hand basket, I can’t even tell you how bad it is.


Rich People Create Jobs!

And five other myths that must die for our economy to live.

Rich guy

 Illustration by Zina Saunders.

In the movie Groundhog Day, Bill Murray‘s character is forced to relive a single day over and over and over—waking up to the same song every morning, meeting the same people, having the same conversations—until, after thousands of repetitions, he finally realizes what a shmo he’s been his entire life. With that epiphany, the calendar starts to flip forward again. His life reboots, and he once again gets to hear new songs, meet new people, and have entirely new conversations.

When it comes to the economy, we’re stuck in our own version of Groundhog Day—and this one doesn’t seem to be coming to an end. America is in a deep and persistent slump, and unemployment is mired at more than 9 percent. Yet when you turn on the TV, all you hear are the same manufactured sound bites delivered in the same apocalyptic tones from the same pack of talking heads—over and over and over. Groundhog Day has turned into the eighth circle of hell.

Unfortunately, these zombie talking points aren’t just wrong; they’re dangerous. If we’re ever going to revive the economy, we’ve got to tackle them head on. Here are six of the worst.

MYTH #1: THE STIMULUS FAILED.

For the first four years of his presidency, Franklin Roosevelt tackled the Great Depression with inflation, easy monetary policy, and government spending. But in 1937, FDR’s advisers persuaded him to reverse gears. After all, interest rates had been close to zero for years, commodity prices were climbing, and fear of inflation was on the rise.

Bust or Boost?

What happened next is now called the “Mistake of 1937” (PDF). Federal spending was cut and monetary policy was tightened up, with disastrous results: GDP immediately began to plummet, and industrial production fell by a third. Within a year everyone had had enough. In 1938 the austerity program was abandoned, and the economy started to grow again.

The truth is that stimulus worked in 1933 and it worked in 2009. So why is our economy still in such bad shape? For one, partly due to political considerations and partly because it was rushed through Congress, the 2009 stimulus wasn’t as well designed as it could have been. It was also sold badly. If the bill passed, administration economists predicted, unemployment would peak at 8 percent and then start declining (PDF). But the recession was far worse than the White House originally thought. Unemployment peaked in the double digits, and that’s made the stimulus a fat target for Republican critics ever since.

But as awkward as it is to argue that things would have been worse without the stimulus—”Not as bad as it could have been!” isn’t a winning slogan—well, the truth is that things would have been a lot worse without the stimulus. Everyone from the nonpartisan Congressional Budget Office (PDF) to private-sector forecasting firms have concluded that it increased economic growth, reduced unemployment, and put millions of people back to work. It just wasn’t big enough, or long-lasting enough. Unfortunately, this has given conservatives an opening to demand tighter money and lower spending—exactly the same mistake we made in 1937.

MYTH #2: THE DEFICIT IS OUR BIGGEST PROBLEM RIGHT NOW 

If your credit card company offered you $30,000 interest-free to buy a car, would you take the deal? Sure you would. It’s a three-way win: You replace your clunker, the auto industry keeps its assembly lines humming, and the credit card company is happy to have made a safe loan, even at no interest. Apparently, they think you’re a pretty good credit risk.

The Bush Effect

This is pretty much the situation the US government is in now. If our national debt were really at dire and unsustainable levels, as conservative economists and Republican leaders have taken to arguing, nervous investors would be driving up interest rates on federal borrowing. But just the opposite has happened: As I’m writing this, 10-year real treasury yields are at 0.00 percent. The seven-year rate is actually negative. Apparently, the financial markets think we’re a pretty good credit risk.

It’s true that the United States needs to address its long-term deficit problem—a problem almost entirely due to Medicare and other health care expenditures. (Domestic, defense, and Social Security spending have actually decreased as a percentage of GDP over the past 40 years, and there’s no reason to think that’s about to change.) But that’s in the long term. Right now, our problem is a sluggish economy and too many people out of work. The real answer to future deficits is to spend money now to get the economy growing again.

America’s infrastructure is crumbling, there are people who could be put to work fixing it, and banks are practically begging us to take their money. A trillion dollars in infrastructure spending would be good for our economy today, good for economic growth tomorrow, and thanks to those low interest rates (and the increased revenue that would come from growth), it wouldn’t even increase our debt much. As they say, only an idiot turns down free money.

Only an Idiot Turns Down Free Money

MYTH #3: LOWER TAXES ARE THE BEST WAY TO GROW THE ECONOMY.

There’s no greater orthodoxy in the Republican Party than unconditional fealty to tax cuts. In a recent GOP debate, when the candidates were asked whether they’d walk away from a deficit deal that included just $1 in tax increases for every $10 in spending cuts, every single hand shot up.

Taxes have been the third rail of American politics ever since the California tax revolt of 1978. Even Democrats are nervous about touching them: President Obama has famously called for letting some of the Bush tax cuts expire, but he’s always careful to make it clear that he wouldn’t change rates for anyone earning less than $250,000 per year. In other words, he’d repeal less than a quarter of the Bush tax cuts.

This fear is easy to understand. No one likes paying higher taxes. But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country’s growth rate since then. His conclusion? There’s virtually no correlation.

Recent US history backs this up too. Bill Clinton raised tax rates in 1993, and Republicans insisted it would cripple the economy. Instead, the economy boomed. In 2001 and 2003, George W. Bush lowered taxes and Republicans insisted the economy would flourish. Instead, we got the weakest expansion of the past century. Republicans are simply wrong about taxes: Within reason, high tax rates don’t hinder growth, and low tax rates don’t stimulate it.

But don’t high taxes reduce the incentive for people to work? Actually, no: For ordinary wage earners, participation in the job force and total hours worked barely respond to taxes at all. (According to tax specialists Joel Slemrod and Jon Bakija, this is “a rare example of a question on which there is a broad consensus among economists.”) The same is true for rich people. As a trio of prominent economists concluded last year after reviewing the literature, “there is no compelling evidence to date of real economic responses to tax rates” (PDF).

Even capital gains rates have virtually no impact: During the past few decades, they’ve bounced up and down from 40 percent to their post-Depression low of 15 percent. The effect on business investment is nil.

If a Tax Rate Falls…

Will the Economy Notice?

 

MYTH #4: REGUALTORY UNCERTAINTY IS CLOGGING THE ECONOMY.

Are American businesses paralyzed by fear of a tidal wave of new regulations? When McClatchy  reporter Kevin Hall went out and asked small-business owners about this, he got a clear answer. “Absolutely, positively not,” said one. “Government regulations are not choking our business,” said another. In its most recent quarterly survey (PDF) of small-business trends, the National Federation of Independent Business reports that sales—i.e., lack of demand—is the No. 1 concern, beating out taxes, regulations, inflation, and everything else.

The Bottom Line Is the Bottom Line

In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses (PDF). Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway (PDF).

Dumb and outdated regulations are no friends to the economy—and the Obama administration has undertaken a regulatory review that’s projected to save an estimated $10 billion during the next five years. But as welcome as that is, our economy’s biggest problem right now isn’t regulatory uncertainty. It’s economic uncertainty.

MYTH #5: OBAMA IS DEBASING THE DOLLAR.

In one of the most infamous moments of his young candidacy, Republican presidential hopeful Rick Perry decided to tee off on Federal Reserve Chairman Ben Bernanke last summer. “If this guy prints more money between now and the election,” he told an enthusiastic audience in Cedar Rapids, “I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”

Bernanke’s sin? Pumping money into the banking system after the collapse of 2008. Although this is widely credited with helping prevent a second Great Depression, tea partiers and gold bugs are convinced that Bernanke’s actions have debased the dollar. There are two problems with that claim. First, it’s not true. Second, we’d be better off if it were.

 First things first: Has the dollar lost value under Bernanke and Obama? No. The usual measure for the strength of the dollar is called “trade-weighted value.” In July 2008, just before the financial crisis erupted in earnest, the greenback’s value stood at 95.4. As of this writing it is sitting at 96.1. Taking a longer view, the dollar lost value under Reagan and Bush I, gained value under Clinton, lost value under Bush II, and has mostly stayed steady under Obama. There’s just no basis to the claim that Obama and Bernanke have debased the currency.

And that’s unfortunate. As economist Dean Baker is fond of pointing out, if we want to get our national savings rate up and our long-term budget deficit down, there’s only one way to do it: by fixing our massive trade deficit. We have to import less and export more, and one way to make that happen is with a weaker dollar. A weaker dollar makes foreign goods more expensive, so we’ll buy less of them, and makes American goods cheaper, so others will buy more of them.

The truth is that we’d be better off if we ditched the loaded “strong/weak” terminology and just talked about an “export dollar” (weak) and an “import dollar” (strong). Sometimes one is good, and sometimes the other is. The Chinese, for example, have done well for decades with an export Yuan. Likewise, an export dollar would be our friend right now.

Bad News for Tourists…

Is a Holiday for Manufacturers

MYTH #6: IF YOU UNSHACKLE THE RICH, THEY WILL REV UP THE ECONOMY.

Think of this as the supermyth—the one underlying so many other fallacies. For decades, America’s economic policies have been based on the notion that catering to corporations and the wealthy is the way to stimulate the economy. Republicans routinely insist that we need to bail them out, lower their taxes, allow them to repatriate hundreds of billions in overseas profits, and free them from annoying government meddling. If we don’t, the “job creators” will stay in a funk, and the economy will stay in a rut.

But here’s a pesky fact neither corporate America nor the GOP establishment is trumpeting: After-tax corporate profits are currently at an all-time high. The problem businesses face isn’t lack of cash but rather a lack of confidence that consumer demand will pick up in the future. So they’re not expanding or hiring at the rate they should be.

Rich people don’t create jobs when we hand them big windfalls. They create jobs when the economy is growing and they have customers for their businesses. And the key to solving that problem, at least during a deep economic slump like the one we’re in now, is to focus like a laser on more stimulus, easier money, higher inflation, and a weaker currency. Unless we want to relive 1937 over and over and over again. As Bill Murray said, “Anything different is good.”

Wall Street’s Gain…

Main Street’s Pain

This November, please vote responsibly!


Chart of the Day: The Great Depression Repeats Itself!

Via Paul Krugman, this is kind of fascinating. Jonathan Portes provides us with this chart,which shows the trajectory in Britain of both the Great Depression and the current Great Recession. The red and black lines at the bottom are the ones to look at:

Now, there’s a bit of cherry picking going on here, I think, since Britain had a nasty recession following World War I and sluggish growth throughout the 1920s, which meant they simply didn’t have as far to fall during the 30s as we did. Unemployment was also worse during the 30s than it is today. So take this with a grain of salt. Nonetheless, it’s sobering: in Britain at least, the Great Recession of 2008 is, in some ways, arguably worse than the Great Depression was. Now, imagine what happens when Greece finally fails to get an agreement from their bond-holders to take a 50% haircut and is forced to default.  Et, tu France, Spain and Portugal? Do you think Germany, in an attempt to hold the EU together decides to bail them all out? Would you? Stay tuned.