The Great Depression and the Great Recession (2)

This blog is the conclusion of The Great Depression and the Great Recession (1) in which we consider two articles which compare and contrast the 20^th Century’s  Great Depression with the 21^st Century’s Great Recession.  In this blog we are looking at “The Debt Bomb” by Louis Hyman from the Winter 2012 edition of the WILSON QUARTERLY.   Hyman sets the scenario:

“In the last hundred years, economic inequality in America has peaked twice: in 1928 and in 2007. It is no coincidence that our periods of greatest inequality have coincided with excessive lending. An industrial economy based on mass production requires mass consumption. Either credit or wages must be provided to keep the wheels of industry turning. When wages stagnate and inequality widens, debt gains nearly unstoppable momentum.”

The Great Depression came to an end during WWII after which there was a great economic boom in America and other parts of the world.

“Living in mortgaged homes, driving in financed cars, postwar Americans relaxed at new shopping centers. They borrowed more but also earned more, which meant that while the habit of borrowing grew, debt as a share of income remained relatively stable. Consumer credit kept factories humming, and those well-paid industrial jobs kept the debt burden contained. Banks and finance companies rather than capital markets funded the borrowing, which kept a leash on the credit available. The lender always had skin in the game.

The origins of the shift from a relatively egalitarian manufacturing economy to an unequal financial economy can be seen in the midst of this prosperity.”

The boom, as history has shown in capitalist countries is only part of a cycle which also has a down side.  The prosperity following WWII  changed as “…consumers also began to rely more on borrowing to make ends meet. The careful balance between rising debt and rising income was coming undone.”

The modern American economy began to shift away from manufacturing and more toward profit making through financing – investing and lending which tempted people with potential huge profits over short periods of time.

“As profits in other parts of the economy receded, the profits of this kind of lending exploded. And as consumer debt began to crowd out business debt, less money was available to invest in productive businesses and create the kinds of good jobs that had made America’s postwar formula work.”

“When Jack Welch took the helm at General Electric in 1981, largely on the strength of his success in managing the company’s consumer finance division, his vision was clear, he would later write: ‘Finance is not an institution—it has to be . . . the driving force behind making General Electric ‘the most competitive enterprise on earth.”’  Some older divisions, such as the lighting operations, would be continued, but the profits would be reinvested in financial products.”

“While GE’s profits grew, its manufacturing businesses shrank. In 1980, the year before Welch took control, the company had employed 285,000 people in the United States. By 1998, the U.S. payroll was down to 165,000. For Welch, and for successful American corporations generally, profits mattered more than all those well-paid factory jobs. The incentive was plain. CEOs had a responsibility to the shareholders to produce more profit. A dollar invested in debt made more money than a dollar invested in a factory. For the country as a whole, however, the rising profitability of finance came at a devastating cost.

As finance gained in strength and in its importance to the American economy, bankers increasingly complained that their creativity was being hampered by those pesky regulations that had safeguarded the economy since the 1930s.”

To me what Hyman is portraying is that manufacturing creates jobs that pay well and thus prosperity is spread to a great number of people (the workforce).  On the other hand, the movement in an economy to becoming increasingly based in financial products reduces the workforce thus causing  a loss in good paying jobs and concentrating wealth in the few.   The effects on the nation’s economic well being is negative – as was seen in the 1928 and 2007, both years in which the American capitalistic economy collapsed.

“Contrary to what many politicians and pundits have claimed, the upsurge of securitization was not simply a product of ‘deregulation.’ Regulations may have changed to promote a certain kind of financial system, but at no point did the state abandon the market to itself. It was the interplay of public and private purposes and mechanisms—Freddie Mac, S&Ls, mortgage-backed securities—that made these new sources of capital possible.”

Hyman offers a warning that there are lessons to be learned, or history will simply repeat itself.

“That structural connection between economic inequality and the nation’s financial crisis is still largely ignored. The dangerous investment choices that precipitated the crisis are but a symptom of this underlying cause. Income stagnation continues, pushing Americans toward greater borrowing and less saving. Unemployment remains extraordinarily high. And those who do find work often have to accept lower wages.

Meanwhile, as those at the bottom hang on, profits continue to concentrate at the top. Without a good alternative, capital continues to be invested in consumer debt rather than in the businesses—big and small—that provide jobs. Bankers are once again skittish about lending. If we are to find solutions to the crisis, it is more important to ask why so much money flowed into mortgage-backed securities and so little into productive businesses than to search for villains to blame for what went wrong.

During the Great Depression, New Deal policymakers figured out ways to harness the resale of debt, but they recognized that increasing the supply of credit without also increasing wages would only lead to another crash. But in the last 40 years, debt levels have climbed while wages have remained stagnant because securitization made it much easier to lend to consumers than to businesses. That continuing imbalance is a threat to the long-run stability of the American economy.”

The Great Depression and the Great Recession (1)

Blogging for me is a way to express some thoughts and reactions to things I read or learn about.  As I’ve note before one doesn’t have to know something to blog, one only has to have an opinion which one is willing to express.  So I’m going to venture off onto economic issues because I recently read about them, first in  the WILSON QUARTERLY 2012 article “Revisiting the Great Depression” by Robert J. Samuelson.   I found interesting his thesis that

“The role of the welfare state in today’s economic crisis recalls the part played by the gold standard in the calamitous 1930s.”

“Just as the gold standard amplified and transmitted the effects of the Depression, so the modern welfare state is magnifying the effects of the recession.”

I’ve read different comparisons between the 20^th Century’s Great Depression and the recent Great Recession of the 21^st Century, but Samuelson is the first I’ve seen indicate that the current “welfare state” may have the same drag on the economy that the gold standard had in the 1930’s.   The gold standard is thought by some to have hamstrung the economy in the 1920’s and 30’s limiting growth by limiting the amount of capital available to be invested in the economy.    Samuelson defends comparing the effects of the gold standard on the economy of the 1920’s with the effects of the modern welfare state on the modern economy:

 “Casting the welfare state in this role will strike many as outrageous. After all, the welfare state—what Americans blandly call ‘social spending’—didn’t cause the 2007–09 financial crisis. This dubious distinction belongs to the huge credit bubble that formed in the United States and elsewhere, symbolized by inflated real estate prices and large losses on mortgage-related securities. But neither did the gold standard directly cause the 1929 stock market crash. Wall Street’s collapse stemmed, most simply, from speculative excesses. Stock prices were too high for an economy that was already (we now know) entering recession. But once the slump started, the gold standard spread and perpetuated it. Today, the weakened welfare state is perpetuating and spreading the slump.

What has brought the welfare state to grief is not an excess of compassion, but an excess of debt.”

Samuelson goes on to describe how the US pulled out of the depression because of certain demographic truths.  But he also notes what factors today are not exactly the same as in the time after the Great Depression.  Our climb out of the Great Depression had some factors in its favor which are not true today.

“But this system required favorable economics and demographics—and both have moved adversely. A younger population was needed to lighten the burden of supporting the old, the largest claimants of benefits. Rapid economic growth was needed to generate the tax revenues to pay for benefits. Indeed, the great expansion of benefits started in the 1950s and ’60s, when annual economic growth in Europe and the United States averaged about four percent or more, and the expectation was that this would continue indefinitely. Long-term economic growth is now reckoned closer to two percent a year…”

But the unfavorable demographics in Europe and the US during the current economic crisis are not those of the post-Great Depression times.  So modern governments have tried a different set of solutions to the economic crisis:

“The means of escape from these unhappy trends was to borrow. Some countries with extensive welfare systems that didn’t borrow heavily (examples: Sweden and Finland) have fared well. But most governments became dependent on bond markets.”

The results of government efforts have to date not been totally successful, though some would argue a point harder to prove: what was done prevented an even worse economic disaster.    Samuelson offers a moral to the story:

“The mistake, popularized largely by economists, was to believe that regulation of the economy could be derived from theory and converted into practical precepts for policy. The reality is that economic life is not solely described or dictated by rhythms suggested by economic models. It moves in response to institutions, technologies, beliefs, and cultures that follow their own logic, sometimes with completely unexpected, mystifying, and terrifying consequences.”

The world’s economy has proven to be more difficult to push into recovery than many had hoped.  President Hoover in the 20th Century was criticized for not doing enough to stimulate the economy because of his conservatism; President Obama has been criticized for doing too much because of his being liberal.  But the two crises represent different times with efforts made having results that cannot exactly be compared to each other.   As in chaos theory, there are so many factors, and so many unpredictable factors that shape the world’s economy that trying to predict the exact effects of certain “stimulus” efforts  may not be possible.

In the next blog I will look at another WILSON QUARTERLY article, “The Debt Bomb”,  which analyzes the causes of the ongoing Great Recession.

Next:  The Great Depression and the Great Recession (2)

The Cost of Living

The 10 October 2011 issue of TIME had a few statistical graphs giving a financial picture of our lives today.   The statistical graphs I found most interesting were the ones dealing with how we Americans allocated our personal budgets through the last 60 years.  The statistics were measuring the “Percentage of Total Personal Consumption Spending.”

In 1950 Americans spent :

22% of Personal Consumption Spending on Food,

13% on housing,

10% on clothing,

3% on health care,

3% on financial services and insurance.

By 1970 we were spending

17% on housing,

16% on food,

7% on clothing,

7% on health care,

5% on financial services and insurance.

In 1990 our personal consumption spending looked like this:

18% on housing,

13% on health care,

10% on food,

7% on financial services and insurance,

5% on clothing.

Finally by 2010 our spending looked like this:

18% on housing,

16% on health care,

8% on financial services and insurance,

7% on food,

3% on clothing.

Of course the stats don’t give us a clear picture as to why these changes.  Obviously the percent of our personal consumption spending on food and clothes has declined significantly.  The stats don’t say whether that is because the actual price of these goods has fallen, or if we choose to spend less on these items, or if we simply have more disposable income and so we can devote a smaller portion of our budget to food and clothes.

What stands out in my mind is the soaring cost of health care.  As a percentage of total personal consumption spending, health care spending jumped from 3% in 1950, to 7% in 1970, to 13% in 1990, to 16% in 2010.  So while I hear some Americans claim the American health care industry is the best in the world, it appears we will have to add the caveat “for those who can afford it.”    In difficult financial times how many Americans cannot afford to give 16% of their spending to health care.  Health care is rapidly approaching taking up as much of our spending as housing.   Maybe we value our health that much, or maybe we will all have to start choosing between having a home or being able to participate in the American health care system.

Our diseases will be treated but we will have to cope with the “dis-ease” that we can not afford both health care and having a home.

Related to the above numbers, 27% of Americans have gone without health insurance which might indicate that they cannot afford to spend such a high percentage of their personal consumption on health.  But interestingly, having adequate health insurance is less a concern today – only 47%  mention worrying about having adequate health care while 77% are worried about outsourcing jobs to other countries.  Again no explanation is offered as to why people are less concerned about having adequate health insurance – it could be that they feel they can do nothing about it anyway or that health care is so expensive that they know they can’t afford to worry about as it is beyond their reach.

While I know many Americans hate government involvement in things like health care, I wonder has the insurance industry or the health care industry put forth any viable plans which do not involve government and which lower the costs of health care to make them more affordable to and more accessible to more/all Americans?  If health care is driven by wall street, the only concern is going to be profit.  Can the industry create a system whose real concerns are the American people themselves?   Are people more than simply consumers of health care?  How can we create within capitalism a system in which the benefit of the people is the concern and in which this doesn’t end up having to be what government advocates for?   The people often feel when compared to the big money of the health care industry their only hope for an advocate is big government.  What do the health care and insurance industries have to change/do to make the health of the American people the obvious focus of their concern – the real bottom line?

Redistribution of Income Revisited

In my blog The Redistribution of Wealth I made comments about the redistribution of wealth taking place in America, not as a result of taxes or liberal/socialist policies, but as a result of intentional economic policy which seemed to favor the wealthy to become wealthier.  The article in the Summer 2011 WILSON QUARTERLY, shows that from 1976 to 2007, the top 1% wealthiest Americans went from earning 9% of America’s total income to 24% – a sizable redistribution of income.  The article did note that simultaneously the American economic pie got bigger, so even those lower on the wealth scale benefited from the growing economy, but still the growth in income for the top 1% wealthiest Americans  was increasing very rapidly.

In the comments to that blog, Brian searched the Internet to check those facts and found a very different set of numbers which he listed in his comment.  His numbers look at the distribution of wealth between the top 1% wealthiest Americans and the 99% rest of Americans.  There it is obvious that the wealthiest 1% have historically and consistently owned a disproportionately large percentage of America’s total wealth, but then that is exactly what puts them in the wealthiest 1%!

Dn. Marty in another comment to the blog was able to locate the original article referred to in the WQ and reports the article is talking about income not wealth and so those statistics are quite different from what Brian quotes.  Thus is the world of facts and statistics – it isn’t so much a redistribution of the total wealth but the incomes of the top 1% are increasing at a fairly phenomenal and accelerating rate over the 31 year period from 1976-2007.

I think Dn. Marty’s comments solve the legitimate issue and questions raised by Brian.  The two sets of numbers are apples and oranges:  wealth vs. income.

The numbers Brian provided from 1922 to 2007 caught my attention in another way, which is more related to the original point I wanted to make: we see that the top 1% wealthiest Americans controlled a portion of America’s wealth ranging from a low point of 19.9% in 1976 up to a high of 44.2% in 1929.   I know I’ve read from several sources that in terms of American economics, the economy is strongest when a greater number of people share the wealth – this makes sense in an economy driven by consumer spending.  If only the elite few have a lot of disposable income, there won’t be much consumer spending.  When many/most people have income to spend – the economy benefits, and merchants and manufacturers are kept busy and prosperous.

So the numbers quoted by Brian  show (in my mind at least) a kind of Freakonomics thing about the economy.

In 1929, the top 1% wealthiest Americans possessed 44.2% of Americas wealth.  That is the all time high on the chart.   What happened in 1929?   The Great Depression.   The concentration of wealth in the hands of the few was bad for the economy as a whole.

In those same statistics, in 1976, the wealthiest 1% of Americans owned only 19.9% of Americas wealth, the lowest on the chart given.   This occurs in the years right before America went on an unabated 25 year period of economic growth; this was an unprecedented period of growth for the country.

But this growth was accompanied by the wealthiest 1% gaining possession over an ever increasing portion of America’s total wealth, peaking between 1995-1998 at just over 38% of America’s wealth.  In that same time period (1976-2007) the share of the nation’s income of the wealthiest 1% increased from 9-24%.    And then we come to 2007 when the wealthiest 1% controlled just over 34% of the nation’s wealth (and those numbers were on a annual upward trend) AND now earned 24% of the nation’s income.  Result again?  The Great Recession of the 21st Century.

There are so many factors that enter into this picture, many events outside the U.S., but still the notion that the economy does benefit when wealth is shared by a greater number of individuals seems to be in these statistics.   From 1976 to 1995, the top 1% wealthiest Americans doubled their  share of America’s wealth from 19% to 38%.  Remember the pie also got bigger so many people lower on the scale also owned “more” but relative to the whole pie, the bottom 99% had a much smaller share of the larger pie to divide up. (see also my blog American Ingenuity and Re-inventing of Government).

It is something to think about – a freakish co-incidence or Freakonomics?  When the total of America’s wealth or income gets concentrated in the top 1% of wealthiest Americans to the tune of 34-45%, is that a good predictor that the country is in for another great recession/depression?

If it is, then the question becomes, since the economy is totally human made, and we can recognize the warning signs that the economy is reaching a point where a great recession/depression is imminent, should we form policies that prevent this scenario from ever arising by insuring that wealth and income are spread over a greater portion of the population?

America became immensely wealthier through the years, but even that gargantuan increase in wealth/capital could not prevent the economic collapse/disaster which hit the country over the past few years.   Could better economic policies have helped by recognizing the signs that the system was getting out of balance?

The economy is a human made product.  Are there not ways that humans can help regulate it so that it better serves us all?   I know today government regulation has a bad name, but the economy is not mother nature, it is completely human made and responds to and is  shaped by human speculation, human fears, lack of confidence, human error, human greed, political gridlock, and world events.  And while many don’t trust government to do any better with the economy than investors or Wall Street or the banking industry, government of, by and for the people is a potential force to check other forces we’ve created.

The Redistribution of Wealth

[My note – there is a discrepancy in facts between an article I mention, and some facts that are quoted in the comments from Brian attached to this blog.   The discrepancy as explained in the comment from Dn. Marty appears to be that the original article refers to income, not wealth, while the charts Brian refers to are talking about wealth not income.   The difference is significant and certainly which statistics one is looking at changes the conclusion one can make.  I have edited my original comments to better reflect the facts being offered in the original article.  Probably need to retitle this blog to “The Redistribution of Income.”   Thanks to Brian and Dn. Marty for their comments.]

In the ears of a number of Americans, “the redistribution of wealth” is an idea which is associated with notions of socialism, or the political left or the tax and spend folk of Washington, D.C.   These fears seems also to feed the anti-tax political movements in America.

Apparently the thinking is that if only the tax rates would go down, more Americans would be or become wealthier.   Statistics analyzed in the book PRESIMETRICS claim however from the time of Presidents Eisenhower to GW Bush that there is no statistical evidence to show “that lower taxes result in higher incomes” and amazingly enough “it is pretty evident” in that same time period that “higher taxes were not hurting people’s pocketbooks” as measured in real median income or net disposable income.   Lower taxes did not yield the higher economic growth some predict and lower taxes “at least by themselves– are not the way to increase economic growth.”   (You can analyze their statistics, pp 116-130 of the book:  Some say numbers don’t lie, others that statistics can be interpreted to mean anything.)

What is perhaps more notable economically, is an article by A. Atkinson, T. Piketty, and E. Saez in the March 2011 issue of JOURNAL OF ECONOMIC LITERATURE  (as reported in the Summer 2011 WILSON QUARTERLY).   According to this article, in the United States, “The top one percent of earners more than doubled their share of income between 1976 and 2007, from nine to 24 percent.”   [The discrepancy is in that the statistics in the comments below show in the increase in wealth going from 19% to 24%,  while the article is claiming “their share of income” increased from 9-24%.  That certainly changes the basis of my comments.]   This means that in this time period the 1% wealthiest Americans  in 30 years had their share of the nation’s income increase from  9%  to 24%.   The top 1% of the wealthiest now own almost 1/4 of  the income generated in America.  This is a redistribution of wealth not engineered by socialism, but certainly the direct result of American economic policies and capitalism as we practice it.

The article goes on to say,  “For the top 0.1 percent of earners, the concentration was even more extreme: They quadrupled their share, from three to 12 percent.”

The rich have been getting richer faster!   America, claimed to be the richest nation on earth, has an ever growing portion of its wealth controlled by one percent of its population.

So a redistribution of wealth actually does take place in America, one that is not the result of leftest policies or of increasing taxes: wealth is moving toward and pooling in the bank accounts of the wealthiest Americans.   Some may say that is just the nature of things, but this doesn’t happen “naturally”, it is purely manmade:  it happens as a result of the intentional economic policies to which we choose to adhere.  It is, I suppose, a form of economic Darwinism:  the strong not only survive, they thrive in the economic world they create and control.   It is a human-made selection that favors those who have created the conditions which determine who thrives.

Now to be fair to the entire picture, in that same time period, the 99% of Americans not in that wealthiest 1% saw their income rise 18% as well. (By comparison, in that same 99% of French citizens, their income rose 26% in that same time period).   So there was an overall income increase in America across the board, but an even faster growth in the income of the wealthiest American 1%.  (The statistics show worldwide the rate of concentration of wealth in the wealthiest few occurred much more in America than in Europe or Japan).

I have not been convinced that the US can reduce its deficit and debt by spending cuts alon; rather I think we actually will need tax revenue increases to pay down the debt.  It seems that also was the concern of S & P in lowering the credit rating of the U.S.:  budget cuts alone are not going to be able to get the U.S. to balance its budget and eliminate its massive debt.  Thus maybe the next impasse is going to be between the Tea Party adherents verse the Credit rating agencies and Wall Street.

I have read before that the U.S. and world economies have tended to fall into the hardest times when a disproportional amount of wealth gets concentrated in the few.  The economy works far better when wealth is widely distributed over a greater number of people.  So the current redistribution of the wealth toward the wealthiest few does not bode well for future economics in the U.S.   Fareed Zakaria  writing in the 15 August 2011 issue of TIME, said:

So far, the national debate has been built around the fantasy that we do not have to choose between big government and low taxes–that we can get both by cutting waste, fraud and abuse. But the money is in the big middle-class items, from Medicare to the mortgage-interest deduction. With federal taxes at 15% of GDP, a historic low, and spending at 24% of GDP, there is really no conceivable way to close the gap without increasing taxes–either raising rates or eliminating deductions and loopholes. And Republicans might find to their dismay that when forced to choose, Americans will decide that they like their government programs after all. Polls show that the public would rather raise taxes than, for example, cut Medicare. (In fact, we would have to do both.) The public may hate government in theory, but it has warm feelings about most individual government programs, from the space shuttle to Head Start to Pell Grants.

Whatever agreement our politicians cobbled together to increase the debt ceiling, they still neither solved the deficit and debt crisis facing the U.S., nor did they show enough good old American ingenuity in how to bring people together to solve a problem.   They were not able enough or bold enough to take on the size of the problem facing us.

Americans often were viewed in the past by the rest of the world with amusement and admiration for their can-do attitudes toward problem solving and our belief in the power of negotiation to create compromise solutions that bring some benefits to all parties.   Time will tell whether we still have that American spirit to solve our problems today.

Next:  American Ingenuity and Re-Inventing our Government

Government by the Consent of the Governed

In the U.S. budget debates, I certainly favor a balanced budget.  It is an idea I felt was right even when Reagan was president and some conservatives were confident that debt wasn’t bad for the nation especially if the economy was growing.  That thinking seemed odd to me since Herbert Hoover got criticized for stopping government spending during the depression.  So the logic seems to be that whether good times (Reagan) or bad (Hoover), it is always time for deficit spending.  That’s how we went from a balanced budget (Clinton) to the debt we have today (Obama).

At the moment I certainly wish the congress would agree on the larger $4 Trillion dollar reduction in the U.S.’s spending habits. I am OK with some tax increases or eliminating some tax breaks/cuts.  Balancing the budget and using all of our tools to do it is more important to me than not raising taxes.  Getting the budget balanced more quickly justifies some tax increases in my mind.

Of course the problem with tax increases of any kind is that it can be treated by politicians as a quick and easier way to deal with things.  They don’t have to make the painful and painfully needed spending cuts if they can keep increasing taxes.

I just happen to think both are needed:  we need big time spending reductions, but we also need to pay for those programs that we all like.  If people want to keep Social Security and Medicare, I think we are going to have to ante-up more in taxes.  We must pay for these programs if we want the benefits we derive from them.  And there is polling evidence that Americans want to keep certain government programs funded.

Joe Klein writing in the 25 July 2011 issue of TIME (“The Power Broker”)  made a few concluding comments which make sense to me.  Writing about the anti-tax fervor among conservatives, Klein notes:

“Indeed, increasing taxes in a reasonable way doesn’t seem to have much effect on the economy at all. Reagan signed a tax increase — yes, a stiff tax increase, the first of three by the Gipper — as a deep recession was coming to an end in 1982 … and the economy boomed. The same thing happened after Bill Clinton’s 1993 tax increase. Confronted with the tax history of the past 30 years, Norquist concedes immediately, ‘Even if it’s a toss-up on that question, there’s still the question of liberty. Taxes are a limitation on liberty. You are stealing money from some people to give it to others.’

Stealing? Actually, in this democracy, there is something called the consent of the governed. If the public wants to provide health care for the elderly, as Newt Gingrich opined in the first Republican presidential debate, it is probably a good idea. In normal times, the corollary principle should be: if you decide to spend the money (on all but long-term capital investments), you have to figure out how to pay for it. That defines a brand more powerful than either party. It used to be called the American way.”

“The consent of the governed” is an operative phrase here which though enshrined in the Declaration of Independence is sometimes forgotten in the polarizing politics of America.  In American democracy, the governed – not just the ruling class or the wealthy or those of a particular political ideology – give certain powers to the government.  But if “we the people” want to keep certain government services, then we have to be willing to pay for them through taxes.  Such government is still according to President Lincoln, “of the people, by the people, and for the people” if it is in fact the consent of the people.

The Constitution limits the government but empowers the governed.  The problem of course is that the governed are sometimes unruly and unwise.   So if the people consent to government services like Social Security and Medicare it becomes the problem of the congress to raise enough taxes to fund the programs.  When the people decide they have had enough taxes they might decide to cut those programs they don’t want to fund.   That seems to be the nature of government run by the consent of the governed.

One word which has some negative overtones in our politically polarized times is “compromise.”  The concern is that compromise got us what we got, and so ideologues refuse to compromise.   They do have a point – it has been the endless series of compromises which led to our nation’s overspending, and deficit spending yields the burgeoning national debt.  We cannot afford to allow this to continue.  On the other hand, democracy by nature demands negotiations, coalitions and compromises.   The “consent of the governed” doesn’t translate into unanimity, but into majority.  We have a representative form of government which necessitates our representatives working out a budget plan that can get approval of the majority.  It will be a compromise.  For the “government” (namely, the representatives we elected) to do their job and govern with the consent of the governed, they are going to have to reach a deal.  The pain is it cannot be a deal that continues past bad habits.   It has to be a deal that not only shrinks the national debt, but also brings about fundamental change in how our elected representatives choose to spend our tax dollars.

Our civil authorities need the wisdom of Solomon and the courage of David to make the hard decisions and do the right thing for the American economy:  shrink the national debt and eliminate the yearly deficit (deal with the past) and curtail future spending so that “we the people” live within our means.    If we don’t deal with the past, the future will be bleak indeed.  If we fail to remember that the economy does go through cycles of good and bad, we also are doomed to repeat our mistakes and make very bad economic decisions.  If we try to reach national prosperity through government spending we will find ourselves at the bottom of an awfully deep and dark hole.

Whether good times or bad, it is always the right time to pray for our elected representatives that they may have the courage to make the hard decisions to correct the imbalances in our government today.

B is for Bankruptcy

The economic plague which began in 2008 and has swept the planet is not finished with its decimation of national and state economies yet.   Greece and other European countries still may be crippled by its effects and the 28 June 2010 issue of TIME reports the next phase in the United States is going to be what happens to individual states as the economic plague grips them (New York and California both in budget crises have economies far larger than Greece).   The massive influx of federal money into the economy has given the U.S. a huge debt well into the future, and yet may not have been enough to stem the weakening effects of the world economy on state and local governments.   Thirty one states anticipate a budget shortfall in 2011 of 10% as compared to their 2010 budgets leaving them with a projected $55 billion debt.

David von Drehle wrote a few comments in the Time  magazine article which I will quote:

All kinds of real estate dreams can go up in smoke in hard times

When times were good and the future seemed bulletproof, all sorts of grand ventures were floated on waves of debt. No one cared, because everyone planned to be richer when the bills came due. The arbitrageurs of leveraged derivatives, the cash-strapped subprime home buyers, the government grandees issuing bonds and boosting pensions — all were versions of the same doom-shadowed figure. Only if the bubble burst would the bills become unpayable. How did so many people forget all at once that the bubble always bursts?

Ahh, yes, and they say Christianity promises only pie in the sky – the states all banked on a miraculous Shangri-La future forgetting that meanwhile they still had to survive on this earth, and that “tomorrow never comes.”

It also is notable (to me at least) how often and to what extent real estate plays into economic and banking woes and collapses.   Real estate is linked to those false expectations that the future promises that when it comes we all will be richer, and then everyone banks on that dream.   It is also amazing the extent to which the U.S. economy relies on real estate sales and value to drive the economy – we always are relying on “the American DREAM” to build our economic present and future.  Why are we then surprised time and again  to wake up and realize we were living a dream, but now reality says the debt is due?

Tales of lavish retirements for relatively youthful public servants have been making a lot of headlines lately. The New York Times reported that some 3,700 retired New York State public employees earn more than $100,000 a year in pension payments, including a former policeman in Yonkers at the ripe old age of 47. California’s pension poster boy is a Bay Area fire chief who, at 51, was collecting more than $241,000 a year in retirement pay.

See the NY TIMES article, “In Budget Crisis, States Take Aim at Pension Costs” for more information on this crisis.

In sun-drenched San Diego, meanwhile, a grand jury probing that city’s troubled finances found a recurring practice of skipping required payments to the city’s pension fund while simultaneously awarding ever more generous pensions to public employees. Legal? Apparently. Prudent? Nope. A once solvent system is now billions of dollars in the red.

The amazing thing is people seem to forget that the future turns into reality, and when that reality doesn’t match what we were banking on, how unprepared we are for reality! 

The great reckoning of 2010 took us years to create and will be years in the fixing. It’s not as if the economic crisis isn’t plenty painful already. In government, as in life, there are cuts that injure and cuts that heal. As they continue to slog through the wreckage of the Great Recession, state and local leaders have a challenge to be surgeons rather than hacks and make this era of crisis into a season of fresh starts.

To what extent the economic problems were caused by economists mis-guessing  where things were headed is no doubt going to be debated in years to come.  I found interesting (and I can’t deny his writing style is entertaining as well) David Freedman’s “The Streetlight Effect” in the July/August 2010 issue of DISCOVER MAGAZINE.  Freedman is addressing the issue of why there is so much dubious science, and uses as his metaphor of explanation the old  joke about a drunk searching for his lost keys where the streetlight is, rather than where he lost the keys.  “Researchers tend to look for answers where the looking is good, rather than where the answers are likely to be hiding.”

Freedman examines research in several fields including physics, medicine and economics and the resulting claims by “experts.”   The relevance to this blog? 

“In 1992 a now-classic study by researchers at Harvard and the National Bureau of Economic Research examined papers from a range of economics journals and determined that approximately none of them had conclusively proved anything one way or the other.  Given that dismal assessment—and given the great influence of economists on financial institutions and regulation—it’s a wonder the global economic infrastructure is not in far worse shape. (Of course, scientific findings that point out the problems with scientific findings are fair game for reanalysis too).”

Over Feeding the Glutton While Hoping He’ll Lose Weight

I continue to marvel at the economy, mostly because I don’t understand it.  I see on the Internet:   Federal Budget Deficit Hits April Record.

Could deifying a president ever go wrong?

There is of course an alarming reaction to this soaring problem.  But then I read in this article:

So far the government has been able to pay low interest rates on the borrowing because foreign investors still see U.S. Treasury securities as a haven in times of turmoil. That was apparent last week when global markets were hit by fears over an expanding debt crisis in Europe.

Officials in China, the largest foreign holder of U.S. debt, have said it will be important for the administration to put together a credible plan for getting control of future deficits.

The mystery to me is that “investors” including China continue to be willing to take on the risk of U.S. debt because they see the U.S. government as a good place to invest money.   That is incomprehensible to me.  The investors are enabling the world’s biggest debtor to increase its debt – like offering free booze to alcoholics in the belief that eventually that will get satiated which will help them then control their excessive drinking.

Let’s see, insanity is said to be doing the same thing over and over and yet expecting different results. 

The investors seem like they don’t want the government to quit going deeper into debt.  Or are they addicted to this as well?   When everything crashes everyone will be scratching their heads saying, “What went wrong?”  and “It wasn’t our fault.”  

This all still reminds me very much of years ago when in Reaganomics people kept saying government debt is not a bad thing.  

As long as there is no tomorrow, I suppose, this thinking works.

“Investors” obviously are not sober enough to stop buying U.S. securities – risk taking (=gambling) is too addictive – and thus will never help the U.S. stop its gluttony.  The government apparently feels it is safe as long as investors are willing to keep taking the risk of buying more and more U. S. securities.  Both investors and the U.S. seem very aware of the risk involved of the soaring debt, but the co-dependency leads to denial and other reality defying thinking.

National Debt: It’s Greek To Me

Watching American politics makes me wonder how the country can continue on its current path without serious and painful changes to government programs and layout.  Americans want many things from their government (military, roads, social security, health care, rapid & massive response to manmade and natural disasters) while simultaneously not wanting to pay the taxes needed to support the government.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

David Leonhardt writing in The NEW YORK TIMES Economic Scene, In Greek Debt Crisis, Some See Parallels to U.S., describes the problem exactly.  Any politician who ever tells the American public hard news is likely to find an unsympathetic electorate (One can think of President Carter telling Americans something has to change in our oil consumption habits).  Leonhardt writes:

And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

I-80 Bridge

We can blame government and politicians, but our government is chosen by we the people, and we keep putting people in office who create what we’ve got.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

What kind of spending cuts or tax hikes are we talking about?  Current estimates say we need to come up with $1 Trillion in such changes today and in today’s dollars.  Leonhardt points out:

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

So a plan is needed that would completely eliminate those departments and programs, or their equivalent!   This is where I think those who say they favor reducing the size of government need to start presenting the hard realities of what they would reduce to stop the out of control deficit increase.   Leonhardt’s proposal for coming up with $1 Trillion:

Pentagon

A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

 

In my estimation we need people to make concrete proposals with real numbers that total $1 Trillion, not just alarmist arguments for reducing the budget.  We the people have to give courage to our politicians to start now proposing the $1Trillion in budget changes.  If their ideas (spending cuts for example) don’t add up to $1 Trillion,then they are offering only pie in the sky and  we need to tell them, it isn’t good enough.

The American Myth and Its God

Stanley Fish, university professor and NY TIMES editorial columnist in his 3 May 2009 piece, Think Again, offers comment on British critic Terry Eagleton’s new book, “Reason, Faith and Revolution.”    While Fish and Eagleton offer much food for thought, I want to draw attention to and comment on one of Fish’s paragraphs:

…  “The coming kingdom of God, a condition of justice, fellowship, and self-fulfillment far beyond anything that might normally be considered possible or even desirable in the more well-heeled quarters of Oxford and Washington.” Such a condition would not be desirable in Oxford and Washington because, according to Eagleton, the inhabitants of those places are complacently in bondage to the false idols of wealth, power and progress. That is, they feel little of the tragedy and pain of the human condition, but instead “adopt some bright-eyed superstition such as the dream of untrammeled human progress” and put their baseless “trust in the efficacy of a spot of social engineering here and a dose of liberal enlightenment there.”

Oxford and Washington are metaphors for academia (the infallible brainchild and savior of the Enlightenment ideology) and modern political power (for Washington and the U.S. are the progeny of  Enlightenment values).  Eagleton has Oxford and Washington both thralls of “the false idols of wealth, power and progress.”  

That is worth pausing to think about.   For we might ask what is wrong with wealth, power and progress?  Aren’t these in fact the greatest, most virtuous goods which modern Western and particularly American society have spawned?

Eagleton sees them as being false idols and superstitions.  

Just think about the recent world wide economic collapse.    The world’s economy was growing at this unprecedented pace, and the world’s financiers and American politicians were so awed by the growth that they could see it as nothing but human  progress and the triumph of American values.  It was our god/idol which was worshipped by all the powers that be, but who were blind to the fact that it all was a bubble, not founded upon anything solid or real but based in the economics of capitalist psychology.   It felt so good, who cared if it was a delusion?  

It was indeed an intoxicating vision which caused many to become drunk on its seemingly endless powers.  It did turn out to be a false god who could not deliver on its promises.  Read Revelations 18 about Babylon where merchants grew rich on the wealth of her wantonness but whose wealth was lost in one hour as no one buys her cargo anymore.  How quickly we forget when we ignore the Scriptures.  We have been warned but just can’t believe it  would be us and our generation who would be decieved by wealth!   Shouldn’t our much vaunted human progress have saved us from self deception?

It could not resist false Idol of  limitless and infinite wealth expanding and growing throughout the universe.  It was unbridled human progress – trickle down economic wealth was finally dripping down to the lowest levels of society from the ever expanding but vacuous balloon.   Wealth. Power. Progress.  The Trinitarian gods of American idealism and ideologues.

But it was a false god, an idol which had forgotten the Genesis mythology of the Fall of humanity, Eden’s clever but deceiving serpent, and the existence of evil in the world.  It was an American paradise, retelling the Genesis story by exorising any mention of a serpent and totally trusting in American ingenuity to complete what Adam and Eve failed to do:  fill the earth and subdue it and have dominion over it.

Genesis – that great myth telling us about why life on earth is not paradise – turns out to be a truth about America and Americans as well.   Who’d have guessed?

(In the Lucas Cranach painting that is not John Chapman offering us a tempting but delicious apple!  America’s mythology about itself as paradise excludes the serpent, but in so doing proves the truthfulness of Genesis 3).   America very much belongs to the same earth as the rest of the nations of the world.