February 2009 Archives

I realize that I seem to have become graph-addicted, recently but check this one out. It provides a classic reminder that while figures may not lie, they can damn sure be of value to people who do.

The blue line in the figure is more or less the basis for the GOP’s not-so-solid current party line as it attempts to discredit the Obama administration’s stimulus package by discrediting its presumed ancestor, the New Deal. The argument goes something like this. Unemployment stood at about 25 percent when FDR took office in 1933 and was at roughly 19 percent in 1938. This just shows us, therefore, that we can’t spend our way out of a recession. Not only is this conclusion pure horse pucky, (We got out of the Depression when the government really got serious about spending for defense in a run-up to World War II, didn't we?) but the data that is supposed to support it is extremely misleading as well because the blue line counts anyone who has a job created by a New Deal program as unemployed. I don’t know about you, but where I come from, we tended to think that anybody who went to work each day and got a paycheck at the end of the week must have a job. If you’ll take a look at the pink line below the blue line, you’ll see what real unemployment (as in no job and no paycheck) looked like under the New Deal. As you can see, there’s a substantial gap between unemployment without the New Deal and with it. As you can see from the pink line, actual unemployment dipped below 10 percent in 1937 in response to expanded New Deal spending in 1935. Contrary to stereotypes, FDR had always had misgivings about large-scale deficit spending, however, and at that point he really got all Nervous Nellie and decided to slow the flow of federal funds and raise taxes to get the budget in better shape. Note that regardless of which line you’re watching, joblessness jumped back up at this point. In response, an exasperated Roosevelt went back to spending in April 1938, and unemployment was soon on the downswing, a trend that would accelerate significantly as we began to produce the materials that we would supply Great Britain under lend-lease and moved to shore up our own preparedness. At this point, all the brakes on government spending were off. To offer a little perspective, the value of just the ten largest defense contracts issued between 1942 and 1944 was roughly equivalent to total government expenditures during the New Deal. New Deal spending may not have worked as effectively as FDR had hoped to reduce unemployment, but it did work, and the more we spent, the better it worked. If unemployment stats aren’t enough to persuade you of this, please note the consistent growth in GDP until the 1937 cutback/tax hike.

Nothing is a surer sign that a Democrat is in the White House than the sudden resurgence of Republicans’ concern about the deficit. Neither, however, are they particularly keen on Oby’s plan to reduce said deficit, since it entails a reported 2% tax hike on incomes over $250,000. Before the economic populists out there get too excited about this, we should note that FDR’s “soak the rich tax” of 75% on incomes over $5 million turned out to have minimal impact on the revenue stream. It’s also true that if FDR was unwilling to spend enough government money to get us out of the Depression, this measure and his consistent rhetorical pounding on Wall Street didn’t do much to get the wealthiest segment of the private sector to open up their wallets either. On the other hand, Oby has done a much better job of reaching out in this area than Roosevelt did, and even if it’s largely symbolic, after eight years of indifference, some effort to address the deficit definitely seems in order. Anyone who thinks that higher taxes don’t await those of us a little farther down the food chain, however, probably thinks Bill Clinton is pulling for Oby any more than Rush is.
In sum, while it may be true in a twisted sort of way that much of the credit for actually getting us out of the Depression should go to Adolf Hitler rather than Franklin Roosevelt, we can legitimately judge FDR’s New Deal a “failure” only if we know what would have happened without it. Since we obviously don’t and can’t, I’d be just as inclined to suggest that in transforming our economic and political system, the New Deal may have saved them as well. The Republicans are clearly gambling that the Obama stimulus plan will fail. (How many life preservers do you think there are on the S.S. Limbaugh?) They may well be right, but who’s to know a year hence whether success should be judged in terms of making things better or simply keeping them from getting worse?

I thought I was way beyond being stunned by anything I heard on hate radio, but as I was driving home yesterday, I heard something that almost made me drop my beer. Some right-wing lunatic was actually screaming that President Obama had used "fear" to get the American people to open wide so that he can ram his bleeding-heart pinko spending bill down their throats. This came from a dude who never blinked in backing the former prez’s relentless fear-mongering campaign to persuade us that invading Iraq was somehow necessary for our safety. (I might also point out here that Oby’s shamelessly “wasteful” stimulus package is well over $200 billion shy of the still accumulating costs of that foolhardy profligate venture whose end is, regrettably, still not in sight.) This episode, along with an excellent recent discussion with friends about whether O.B.’s inaugural oration could have benefited from some FDR-style, Happy-Days-Are-Here-Again optimism, got me to thinking about an earlier post here concerning the similarities between Oby’s and Roosevelt’s first speeches as president. In that post, I tried to suggest that even the Great Persuader himself didn’t really offer that much upbeat material, save for his assertion that the only thing we have to “’fee-uh’ is ‘fee-uh’ itself.” I’ll grant you that Oby seems a bit wanting in the ebullience gene that was dominant in FDR, whose proclamation of a “Bank Holiday” made his announcement that he was closing all the banks sound more like one of those “customer appreciation” days when banks offer cotton candy and pony rides for the kids and offer toasters and microwaves as door prizes. Still, as I also tried to suggest earlier, having seen himself transformed into a veritable cult figure of Elvisian proportions, B.O. probably felt he had to let everybody know that he couldn’t simply raise his uplifted palms and make it all go away. Finally, there is still plenty in the behavior of the corporate, financial, and political polecats to suggest that they ain’t got “inkling one,” as an old friend used to say, about what a mess they have helped us get into. Frank Rich makes a good point when he writes, "Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door."
The key here for Oby, as it was for FDR, is to find the right balance between fear and hope because most presidents ultimately find that the fear factor definitely cuts both ways. Near the outset of the Cold War, Harry Truman announced he intended to “scare the hell out of the American people” about the communist threat, and he wound up setting the table for Joe McCarthy. Likewise, inducing a moderate level of popular fear may be necessary to dispelling any illusions about the severity of an economic crisis, but, in larger doses fear is seldom conducive to economic recovery. For example, one of the many similarities that I have encountered between the Great Depression and whatever the hell it is that we‘re in or about to be in right now is the savings paradox. Margin buying and that great innovation of the 1920s, the installment plan, along with the fact that wages had been deliberately suppressed meant that 80 percent of American families had no savings whatsoever when the bottom fell out in 1929. Although we’re not in quite that bad a situation savings-wise right now, it ain’t exactly great, either. Prior to last year, we had a couple of years when the savings rate was actually negative, and researchers claim that 70 percent of American families now have less in savings than they would need to tide them over for three months. Once the Great Depression hit, Americans who had anything at all held onto it as tightly as they could and even FDR’s cajoling and efforts to convince them that the banking system had been shorn up availed but little. The New Deal’s famed Civilian Conservation Corps directly targeted single young men who were expected to spend the dollar they earned every day as quickly as they could. It took a while, but CCC officials eventually discovered that a large percentage of the boys were sending most of their paychecks back home to Mama who was dutifully stuffing as much of the money as she could under the mattress. Our current crisis, which was also, in part at least, the result of our trying to spend everything we had and way more besides, has had something of a similar effect in that we have recently seen a noticeable rise in savings rates at a time when a little more spending surely would be nice.
There is also the comparable condition of income inequality. On the domestic side of the ledger, the biggest contributing factor to the Great Depression was the growing disparity of incomes and wealth. I’m not saying that income maldistribution is necessarily as severe today as in the 1920s, but it has been steadily intensifying since the 1970s..

As the foregoing graph shows, in 1928-1929, the top 1 percent of individual earners raked in roughly 24 percent of all personal income in the U.S., as compared to about 22 percent in 2005. Although worker output rose by 32 percent between 1923 and 1929, wages rose by only 8 percent while corporate profits shot up by 62 percent and dividends by 65 percent. As a result, as the nation careened toward economic disaster, the share of total personal income going to the top one-tenth of one percent of Americans equalled that trickling down to the bottom 42 percent. Workers and middle-class Americans tried to keep up by installment buying as long as they could, but when they finally tapped out even though the rich spent liberally, a family with an income of $100,000 simply couldn’t buy forty times as many cars, houses, and radios as the family earning $2,500 or less, which in 1929, meant three-fourths of all American families.* The resulting slump in consumer demand might have been less severe had we enjoyed a booming export trade at that point, but, then, as now, the eonomic crisis was more globla than national. Throughout the 1920s, much of Europe was still struggling to recover from World Rumble #1, thanks in some measure to our insistence on the repayment of $10 billion in war debts ( much of which, as the Europeanos pointed out, had actually been used as credits to purchase American goods during the nearly three years that they were fighting while we were still making up our minds as to whether it was worth our time to head on “over there.”) Even more critical to Europe’s woes—and ultimately to our own as well—were the incredibly short-sighted protectionist tariff policies in an era when, as the laconic Cal Coolidge put it, “the business of America is business.” Even in 1930, with the Great Depression already under way, we threw up a damn near impenetrable trade barrier around ourselves with the Hawley-Smoot Tariff, which raised import duties to their highest level in U.S. history. This made it extremely difficult for European nations to sell anything to us, and thereby further reduced both their capacity and inclination to purchase any of the stuff we produced but couldn’t--or were afraid to—buy ourselves. The Hawley Smoot Tariff, by the way, was immortalized in “Fast Times at Ridgemont High,” a true cinematic classic bested in the Ol’ Bloviator’s humble estimate only by the exalted and untouchable “Blame it On Rio.” (Eat your heart out, “Slumdog Millionaire”!) This reminds the O.B. that tonight is Oscar night, and he has better things to do than continue a commentary that has doubtless dispatched even his longest- suffering readers into the arms of the Sand Man several pontifications ago. Unfortunately, there is more where this came from, so perhaps you should think twice next time before clicking on the link on the porn site that sent you here.

P.S. Just to show that the O.B. ain't got too big to admit a mistake, he wants to share this exceedingly polite correction from Evan: I hate to dither over an otherwise good blog entry, but it is _Ferris Bueller's Day Off_ that has the wonderful scene of Ben Stein teaching the Hawley-Smoot Tariff. The O.B. stands appreciatively corrected on getting his high school history class movie scenes jumbled up, but he holds to his humble estimate of "Fast Times..." as the second greatest film ever made.

*In the interest of full disclosure, I should point out that in the immediately preceding discussion, I have drawn heavily on an essay by one Mr. Paul A. Gusmorino, apparently composed while Mr. G. was still in high school. I have already checked its accuracy to my satisfaction and I regularly assign it to my students as well. Lest any of you harbor doubts about this precocious essay, however, let me simply say that it was attacked last year by none other than ol’ Rush “Better Living Through Chemistry” Limbaugh himself, who advised Mr. Gusmorino, to “check Karl Marx and see if you plagiarized him in putting this piece together.”

My far-too-modest and self-effacing friend JL was going to post this as a comment, but I prevailed on him to allow me to put it here, lest this example of his talents as the thinking man's storyteller be overlooked. Take it away, JL!

Please allow me to present my opinion of what's wrong with our system of capitalism from an old linthead's point of view.

Some things just ain't right!

To all this, of course, the ol' Bloviator lends his heartiest "Amen!" A very insightful British journalist once observed that "in America, the poor don't hate the rich, they envy them." Perhaps it's wishful thinking, but the signals i'm picking up from polls, letters to the editor, etc. suggest to me that our current misery may have at least exhausted our tolerance for the born-on-third base types who act as if they actually earned what they have--or had. Since Wall Street is widely perceived as having way more than its share of these folks, maybe that crowd ought to think about being a little less particular about the terms on which they would be willing to allow us to bail them out.

After several months of truly Herculean exertion, the ol’ Bloviator managed this week to bestow on his long-suffering publishers up in wicked New York City a fairly complete draft of the next ponderous tome he means to inflict on that small-and-shrinking populace sometimes known as the “reading public.” In light of this achievement, he decided to reward himself by cutting back this weekend on anything requiring action by that part of his body lying above his ears and eye brows.
Despite his very best efforts, however, one thing did keep rolling across OB’s mind. Earlier in the week, he had noticed on the web site for his U.S. History course that a student was asking if someone would share his or her notes with him because he had gone “on a cruise” and missed class. Then that lying Hotlanta paper actually reminded me of a parallel to this kid’s casual indifference to how his less than heart-wrenching story might be received by the objects of his supplications. In an article asking “how stimulating” the proposed economic stimulus plan might actually be, not only did the AJC kindly provide a nice head-to-head comparison of how and when the House and Senate versions actually differ, but it offered a brief “pro” and “con” on Oby’s proclaimed $500k limitation on pay for executives of financial firms that are the very tallest hogs at the federal bailout trough. Here, for your scrutiny and delectation is the argument against the pay cap advanced by one Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable: “The pay scale for Wall Street is different for the pay scale for America. [Thanks for the breaking news, Scott. Got any more where that came from? Hear anything about some guy named Made-off pulling some kind of scam?] So these numbers look large, but the market value for these executives—there’s a very small talent pool of individuals that have the education, experience and knowledge to operate a global, international services firm in this day and age.” [ Recent events would seem to make this blatantly obvious as well, Scottso. Too bad some of the people splashing around in this teensy weensy “talent pool” weren’t actually working for some of these dead-beat firms that are on the dole right now.]“Executives may quit banks that fall under the new $500,000 pay limits…. I don’t think the issue is a dollar amount. It’s being paid what you’re worth. . . . Would you be willing to work for less than what you think you’re worth?” [ Maybe you should beam yourself down to our galaxy, Scotty. You just described the circumstances of at least 95 percent of all the employed people on the face of the earth. Hasn’t it ever occurred to you that most people work all their lives for less than they think they’re worth? And they don’t do that because they “want to,” you dimwit!. They do it because they have to.] “Companies will have to re-evaluate whether the benefits are still worth it under the new rules.” [ Right on, dude! That’s what the “free market,” (the one you guys are so fond of extolling when it suits your purposes) is all about: choices. We’ll all be waiting anxiously to see after they soberly “re-evaluate whether the benefits are still worth it” how many of the high-rolling firms who want to keep rollin,’ period, decide to say, “No thanks” to any more of our money. If these companies feel their current execs are simply “indispensable,” ( Anybody recall what ol’ Chuck DeGaulle said one time about cemeteries being chock-full of these types?) then they can always sweeten the pot simply by setting aside enough of the firm’s stock to fund the “sweetener.”]
Maybe I’m stretching it a bit , but I find it difficult not to see a link between my student’s lack of hesitation in divulging why he needed the help of the poor losers who were slogging away in class while he was lolling around on the Love Boat and the damn-near delusional sense of entitlement among people like our friend Scott, or for that matter, the big-time New York bankers whose case he pleads. The sad tale of what the Obama pay cap means for this latter crew is told “if not for sympathy, at least for sport” in today’s New York Times, by Allen Salkin, who reminds us that “more than a few of the New York-based financial executives who would have their pay limited are men (and they are almost invariably men) whose identities are entwined with living a certain way in a certain neighborhood west of Third Avenue: a life of private schools, summer houses and charity galas that only a seven-figure income can stretch to cover.”
The bare-bones-minimum pre-tax income required to sustain this MO, Salkin reckons, is a tad more than three times what ol’ Oby’s allowing. Who better to give us an idea of the trauma that will be inflicted by the truly Draconian downsizing that awaits many of these poor little rich boys than Candace Bushnell, the author of “Sex and the City” and all-around chronicler of “New York social mores”? “People inherently understand that if they are going to get ahead in whatever corporate culture they are involved, they need to take on the appurtenances of what defines that culture,” sez Ms. Bushnell, “[s]o if you are in a culture where spending a lot of money is a sign of success, it’s like the same thing that goes back to high school peer pressure. It’s about fitting in.”
You got that right, Candy! “Fitting in” is also precisely what it’s going to be “all about” for the once high-altitude New York money changers and their mouthpieces like Scott and for the young cruiser in my class as well, as they get their imminent, involuntary, but long overdue introduction to the real world, where, as Paul Krugman puts it, “It’s hard to exaggerate how much economic trouble we’re in.”
Finally, the O.B. had been just as curious as many of you, I’m sure, about why he wasn’t picked for a key post in the new administration. Then, it finally dawned on him, that over the course of well-nigh forty years of pure matrimonial bliss, he and the missus have been just about the tax-payingest tandem they know. If you wonder how Geitner and Daschle had heretofore gotten away with stiffing the IRS, then consider this fact, also courtesy, the AJC. On average, roughly half the taxpayers audited each year earn less than $25,000. If the Feds intend to continue the practice of searching for tax cheats in the welfare line, it might be more cost-effective in the future to check out the guys wearing Guccis.