Roosevelt, Wage and Price Controls, Fringe Benefits, Health Insurance, Pensions, Unions, Bankruptcy and Bethlehem Steel

Posted by PITHOCRATES - September 3rd, 2013

History 101

(Originally published November 20th, 2012)

The Roosevelt Administration fought Inflation by Passing a Law to Cap Employee Wages

Most times when those in government try to fix things they end up making things worse.  Giving us the unintended consequences of their best intentions.  And the government had some good intentions during World War II.  They were printing money to pay for a surge in government spending to pay for war production.  As well as a host of New Deal programs.  Which sparked off some inflation.  Inflation is bad.  Enter their best intentions.

One of the biggest drivers of inflation is wages.  Higher wages increase a company’s costs.  Which they must recover in their selling prices.  So higher wages lead to higher prices.  Higher prices increase the cost of living.  Making it more difficult for workers to get by without a pay raise.  Which puts pressure on employers to raise wages.  If they do they pass on these higher costs to their customers via higher prices.  It’s a vicious cycle.  And one all governments want to avoid.  Because higher costs reduce economic activity.  And that’s how governments get their money.  Taxing economic activity.

Enter wage and price controls.  The Roosevelt administration thought the way to solve the problem of inflation was simply passing a law to cap employee wages.  To halt the vicious cycle of escalating prices and wages.  Something employers didn’t like.  For that’s how they got the best people to work for them.  By offering them higher wages.  With that no longer an option what did these employers do to get the best people to work for them?  They started offering fringe benefits.  Which became a killer of business.

As People lived longer in Retirement Retiree Pension and Health Care Expenses Soared

Employers began offering health insurance and pensions as fringe benefits for the first time.  To get around the wage and price controls of the Roosevelt administration.  Which they had to pass on to their customers via higher prices.  So the wage and price controls failed to do what they were supposed to do.  Keep a company’s costs down.  Worse, these benefits made promises many of these businesses just couldn’t keep.

Roosevelt also empowered unions.   Who would negotiate ever more generous contracts.  By demanding generous pay and benefits for current workers.  And pensions and health care for retired workers.  But it didn’t end there.  The unions also expanded their membership as much as possible.  So in those contracts they also got very costly workplace rules.  If a lamp burnt out at a workstation the worker had to call an electrician to replace the lamp.  They could not screw in a new lamp themselves.  The unions defined every work activity in a workplace and created a job classification for it.  And only a worker in that job classification could do that work.  Which swelled the labor rolls at unionized plants.  Who all were receiving generous pay and benefits.  As were a growing number of retired workers.  Greatly increasing labor costs.

For awhile businesses could absorb these costs.  Business was growing.  As was the population.  There were more younger workers entering the factories than there were older workers retiring from them.  But things started changing in the Sixties.  The population growth rate flattened out thanks to birth control and abortion.  So as the population grew slower the domestic demand for manufactured goods fell.  While in the Seventies foreign competition increased.  So you had falling demand and a rising supply.  Making it harder to pass on those high labor costs anymore.  Which proved to be a great problem as their market share fell.  For as they laid off employees fewer and fewer workers were paying the pensions and health care costs for an ever growing number of retirees.  Pensions were chronically underfunded.  Worse, people began to live longer in retirement thanks to advances in medicine.  Increasing retiree pension and health care expenses for these businesses.  Bleeding some of them dry.

Bethlehem Steel filed Bankruptcy when they had 11,500 Active Workers and 120,000 Retirees and Dependents

Bethlehem Steel helped build America.  And win World War II.  It made the steel for the Golden Gate Bridge.  And the bridges between New York and New Jersey.  Many of the skyscrapers you see on Manhattan are made with Bethlehem steel.  Little Steel.  Second only to Big Steel.  U.S. Steel.  Big Steel and Little Steel dominated the US steel industry.  Until, that is, foreign competition entered their market.  And the steel minimills arrived on the scene.  Neither of which had unionized workforces.  Or those legacy costs (retiree pension and health care expenses).  Which spelled the doom of the sprawling Bethlehem Steel.  From 1954 to 2003 hot-rolled steel sheet prices rose 220%.  While wages soared over 900%.  And it got worse.

Employment peaked in 1957 at 167,000 workers.  By the mid Eighties that fell to 35,000.  With some 70,000 retirees and dependents.  That is, Bethlehem’s retiree costs were about twice their active labor costs.  As business continued to fall employment fell to 11,500.  While their retirees and dependents rose to 120,000.  Just over 10 retirees for each active worker.  Unfunded pension obligations soared to $4.3 billion.  Just impossible numbers to recover from.  Which is why Bethlehem Steel is no longer with us today.  The company was dissolved in 2001.  With International Steel Group (ISG) buying some of their remaining assets.  Then, in 2005, a foreign steel company, Mittal Steel, merged with ISG.  Leaving no remnants of Bethlehem Steel in American hands.

ISG got the steelworkers union to reduce the number of job classifications in the Bethlehem plants they took over from 32 to 5.  Greatly shrinking the labor rolls.  And increasing efficiency.  Helping these remaining assets to move forward.  The pension fund was taken over.  With retirees losing only about $700 million, giving retirees a pension of up to $44,386.  But retirees lost their health care.  Some $3.1 billion in spending obligations that the company couldn’t pay.  And didn’t.  A sad ending for an American great.  A failure the Roosevelt administration was responsible for.  As their good intentions resulted in unintended consequences.  Setting businesses up to fail with costly fringe benefits.  Adding yet another demand to the union’s list of demands.  Spending obligations these businesses couldn’t pay once domestic demand fell while steel supplies rose.  Leading to the inevitable.  Bankruptcy of large unionized companies.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

Social Security Receipts, Outlays and Surplus 1940-2012

Posted by PITHOCRATES - February 19th, 2013

History 101

Social Security is going Bankrupt because of an Aging Population, Inflation and Untrustworthy Politicians

Social Security introduced the era of Big Government.  When the Roosevelt administration passed it into law it faced fierce opposition.  For it wasn’t the job of the federal government to provide a pension.  If it was the Founding Fathers would have included it in the Constitution.  But they didn’t.  Thanks to the Great Depression, though, a serious crisis FDR didn’t let go to waste, FDR was able to change America.  By taking the federal government beyond the limits of the Constitution.

The fear was that it would grow into a massive program requiring more and more taxes to support it.  Which the FDR administration refuted in a 1936 pamphlet (see The 1936 Government Pamphlet on Social Security).

…beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

Of course, that wasn’t true.  It was either a lie.  Or a disbelief that anyone would ever decouple the dollar from gold.  Or wishful thinking that we can trust politicians.  Whatever the reason the Social Security tax rate is a long way from that 3% today.  And the maximum earnings amount is a lot higher than $3,000.  But despite the tax rate and the maximum earnings amount soaring from these promised lows it’s still not enough.  For Social Security is struggling to avoid bankruptcy in the near future.  Because it has become a massive program requiring more and more taxes to support it.

Social Security is suffering from three major problems.  The first is an aging population (fewer people entering the work force to pay for the greater number of people leaving the workforce).  The second is inflation.  And the third is that politicians manage it.  Who just can’t control themselves around big piles of money.

The Social Security Surplus increased in the Nineties thanks to the Peace Dividend, Japan’s Lost Decade and the Dot-Com Boom

Social Security is off-budget.  Employers and employees pay into the program to provide for the program’s benefits.  These are dedicated taxes.  They are only to pay for Social Security benefits.  That is why it is off-budget.  They don’t mingle Social Security taxes with all the other taxes the government collects.  To pay for all the things in the federal budget.  Technically, those taxes are supposed to go into a retirement account that grows with interest.  And this big, growing pile of money is supposed to pay the benefits.  But in reality it doesn’t work this way.  The government collects taxes.  From these taxes they pay current benefits.  And anything left over, the Social Security surplus, goes into the Social Security Trust Fund.  We can see this graphically if we plot receipts, outlays and the surplus (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017 and Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 at FISCAL YEAR 2013 HISTORICAL TABLES).

Social Security Receipts Outlays Surplus 1940-2012

For the first 30 years or so of this program it hardly made a dent in our lives.  Small amounts were going in.  Small amounts were going out.  And small amounts were going into the trust fund.  Then a lot of people started retiring.  Just as birth control and abortion changed the family size.  And President Nixon decoupled the dollar from gold.  Allowing them to print money like never before.  Which, of course, depreciated the dollar.  This is why receipts and outlays started trending up after 1971 (when Nixon decoupled the dollar from gold).  To get a better look let’s zoom in and look at the years from 1970-2012.

Social Security Receipts Outlays Surplus 1970-2012

The Seventies were a horrible time economically.  As the government went all in with Keynesian economics.  Which resulted with high inflation and high unemployment.  And stagnant economic growth.  Stagflation.  And Social Security was in trouble.  Receipts were greater than outlays.  But not by very much.  Receipts and outlays may have been trending up but the surplus was pretty flat.  Until President Reagan and the Democrat Congress fixed Social Security to avoid bankruptcy.  After 1983 receipts trended up greater than outlays.  Which caused the surplus to trend up.  Thus saving Social Security.  For awhile.  Now let’s zoom in further to the years 1990-2012 to see what happened in the last two decades.

Social Security Receipts Outlays Surplus 1990-2012

President Reagan won the Cold War by spending more on defense than the Soviets could ever match.  At least not without starving her people to death.  And the Strategic Defense Initiative (aka Star Wars) was the straw that broke the camel’s back.  In 1991 the Soviet Union was no more.  Creating a huge peace dividend for President Clinton.  Which coincided with the dot-com boom.  And Japan’s Lost Decade (Japan’s economic woes were America’s prosperity).  Making the Nineties a very good time economically.  And that healthy economic activity translated into a nice uptrend in the Social Security surplus.  However, low interest rates and irrational exuberance fed the dot-com boom.  It was not real economic growth.  It was a bubble.  And when it burst it gave George W. Bush one painful recession at the start of his presidency.  Which was compounded by the tragedy of 9/11.  Causing a fall in economic activity.  Which caused Social Security receipts to fall.  While outlays continued to grow.  Causing a decline in the Social Security surplus.  Once again cuts in tax rates restored economic activity.  And the Social Security surplus.  Which continued until another bubble burst.  This one was a housing bubble.  Caused by President Clinton with his Policy Statement on Discrimination in Lending.  Where his justice department pressured lenders to qualify the unqualified.  And when the housing bubble burst into the Subprime Mortgage Crisis giving us the Great Recession receipts fell while outlays increased.  Sending the surplus into a freefall.

Social Security is Doomed to Fail because you just can’t Trust Politicians around Great Big Piles of Money

There is both a Social Security tax rate.  And a maximum amount of income to tax.  Both of which they have had to increase to keep up with inflation.  To make up for that aging population.  And to offset the corrupting influence of politicians around big piles of money.  And contrary to that 1936 pamphlet those tax rates started rising early.  And often (see Historical Social Security Tax Rates).

Social Security Surplus and Tax Rate

The Social Security tax rate rose as high as 12.4%.  Which is a 313% increase from the maximum amount guaranteed in that 1936 pamphlet.  And this great upward trend began in the Fifties.  Continuing through the Sixties.  In fact most of the increases came before Nixon decoupled the dollar from gold.  Showing what a horrible job the government actuaries did in crunching the numbers for this program.  As it turned into exactly what the opponents said it would.  A massive program requiring more and more taxes to support it.  And President Obama reducing the tax rate from 12.4% to 10.4% didn’t help the surplus any.  Or the solvency of Social Security.

Social Security Surplus and Maximum Earnings

While the tax rate began rising in the Fifties the maximum taxable earnings amount didn’t.  This amount was pretty flat and able to produce a surplus until 1971.  When President Nixon unleashed the inflation monster by decoupling the dollar from gold.  And the only way to produce a surplus after that was by continuously increasing the maximum earnings amount.  Further proving what a horrible job the government actuaries did in crunching the numbers for this program.  But why are they projecting Social Security will go bankrupt after raising both the tax rate and the maximum taxable earnings amount?  For despite all of the ups and downs there has been a surplus throughout the life of the program.  Some seventy years of a surplus and the miracle of compound interest should have built up quite a nest egg in the Social Security Trust Fund.  But it hasn’t.  Why?  Well, we can see what it could have been.  If we take each year’s surplus (starting in 1940) and add it to an account earning interest compounded annually at an interest rate of 3% through 1971 and 6% after 1971 (to account for inflation) it would look something like this.

Social Security Surplus Earning Compound Interest

Note that these amounts are in millions of dollars.  So at the end of 2012 the ending balance in the trust fund would be $16.5 trillion.  Which is large enough to wipe out the entire federal debt.  From 1980 through 2008 the surplus grew on average 8% each year.  If we assume this growth through 2050 that would take the trust fund to $184.5 trillion.  In 2075 it would be $960.9 trillion.  In 2076 it would be $1.03 quadrillion.  Or $1,027.3 trillion.  With this phenomenal growth based on a realistic 6% interest rate why is Social Security going bankrupt?

Because there isn’t a big pile of money in the Social Security Trust Fund earning compound interest.  The money goes in.  And the government takes it out.  Leaving behind treasury securities.  IOUs.  They raid the Social Security trust fund to pay for other on-budget government expenditures.  With the off-budget surplus.  Hiding the true size of the federal deficit.  And putting Social Security on the path to bankruptcy.  Because you can’t loan money to yourself.  You can only take money meant for one thing and spend it on another.  Leaving that first thing unpaid.  This is Social Security.  And why it was doomed to fail from the beginning.  Because you just can’t trust politicians around great big piles of money.

 www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

Roosevelt, Wage and Price Controls, Fringe Benefits, Health Insurance, Pensions, Unions, Bankruptcy and Bethlehem Steel

Posted by PITHOCRATES - November 20th, 2012

History 101

The Roosevelt Administration fought Inflation by Passing a Law to Cap Employee Wages

Most times when those in government try to fix things they end up making things worse.  Giving us the unintended consequences of their best intentions.  And the government had some good intentions during World War II.  They were printing money to pay for a surge in government spending to pay for war production.  As well as a host of New Deal programs.  Which sparked off some inflation.  Inflation is bad.  Enter their best intentions.

One of the biggest drivers of inflation is wages.  Higher wages increase a company’s costs.  Which they must recover in their selling prices.  So higher wages lead to higher prices.  Higher prices increase the cost of living.  Making it more difficult for workers to get by without a pay raise.  Which puts pressure on employers to raise wages.  If they do they pass on these higher costs to their customers via higher prices.  It’s a vicious cycle.  And one all governments want to avoid.  Because higher costs reduce economic activity.  And that’s how governments get their money.  Taxing economic activity.

Enter wage and price controls.  The Roosevelt administration thought the way to solve the problem of inflation was simply passing a law to cap employee wages.  To halt the vicious cycle of escalating prices and wages.  Something employers didn’t like.  For that’s how they got the best people to work for them.  By offering them higher wages.  With that no longer an option what did these employers do to get the best people to work for them?  They started offering fringe benefits.  Which became a killer of business.

As People lived longer in Retirement Retiree Pension and Health Care Expenses Soared

Employers began offering health insurance and pensions as fringe benefits for the first time.  To get around the wage and price controls of the Roosevelt administration.  Which they had to pass on to their customers via higher prices.  So the wage and price controls failed to do what they were supposed to do.  Keep a company’s costs down.  Worse, these benefits made promises many of these businesses just couldn’t keep.

Roosevelt also empowered unions.   Who would negotiate ever more generous contracts.  By demanding generous pay and benefits for current workers.  And pensions and health care for retired workers.  But it didn’t end there.  The unions also expanded their membership as much as possible.  So in those contracts they also got very costly workplace rules.  If a lamp burnt out at a workstation the worker had to call an electrician to replace the lamp.  They could not screw in a new lamp themselves.  The unions defined every work activity in a workplace and created a job classification for it.  And only a worker in that job classification could do that work.  Which swelled the labor rolls at unionized plants.  Who all were receiving generous pay and benefits.  As were a growing number of retired workers.  Greatly increasing labor costs.

For awhile businesses could absorb these costs.  Business was growing.  As was the population.  There were more younger workers entering the factories than there were older workers retiring from them.  But things started changing in the Sixties.  The population growth rate flattened out thanks to birth control and abortion.  So as the population grew slower the domestic demand for manufactured goods fell.  While in the Seventies foreign competition increased.  So you had falling demand and a rising supply.  Making it harder to pass on those high labor costs anymore.  Which proved to be a great problem as their market share fell.  For as they laid off employees fewer and fewer workers were paying the pensions and health care costs for an ever growing number of retirees.  Pensions were chronically underfunded.  Worse, people began to live longer in retirement thanks to advances in medicine.  Increasing retiree pension and health care expenses for these businesses.  Bleeding some of them dry.

Bethlehem Steel filed Bankruptcy when they had 11,500 Active Workers and 120,000 Retirees and Dependents

Bethlehem Steel helped build America.  And win World War II.  It made the steel for the Golden Gate Bridge.  And the bridges between New York and New Jersey.  Many of the skyscrapers you see on Manhattan are made with Bethlehem steel.  Little Steel.  Second only to Big Steel.  U.S. Steel.  Big Steel and Little Steel dominated the US steel industry.  Until, that is, foreign competition entered their market.  And the steel minimills arrived on the scene.  Neither of which had unionized workforces.  Or those legacy costs (retiree pension and health care expenses).  Which spelled the doom of the sprawling Bethlehem Steel.  From 1954 to 2003 hot-rolled steel sheet prices rose 220%.  While wages soared over 900%.  And it got worse.

Employment peaked in 1957 at 167,000 workers.  By the mid Eighties that fell to 35,000.  With some 70,000 retirees and dependents.  That is, Bethlehem’s retiree costs were about twice their active labor costs.  As business continued to fall employment fell to 11,500.  While their retirees and dependents rose to 120,000.  Just over 10 retirees for each active worker.  Unfunded pension obligations soared to $4.3 billion.  Just impossible numbers to recover from.  Which is why Bethlehem Steel is no longer with us today.  The company was dissolved in 2001.  With International Steel Group (ISG) buying some of their remaining assets.  Then, in 2005, a foreign steel company, Mittal Steel, merged with ISG.  Leaving no remnants of Bethlehem Steel in American hands.

ISG got the steelworkers union to reduce the number of job classifications in the Bethlehem plants they took over from 32 to 5.  Greatly shrinking the labor rolls.  And increasing efficiency.  Helping these remaining assets to move forward.  The pension fund was taken over.  With retirees losing only about $700 million, giving retirees a pension of up to $44,386.  But retirees lost their health care.  Some $3.1 billion in spending obligations that the company couldn’t pay.  And didn’t.  A sad ending for an American great.  A failure the Roosevelt administration was responsible for.  As their good intentions resulted in unintended consequences.  Setting businesses up to fail with costly fringe benefits.  Adding yet another demand to the union’s list of demands.  Spending obligations these businesses couldn’t pay once domestic demand fell while steel supplies rose.  Leading to the inevitable.  Bankruptcy of large unionized companies.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

FDR Suppressed the news of the Soviet’s Katyn Forest Massacre so he could give Eastern Europe to Stalin

Posted by PITHOCRATES - September 15th, 2012

Week in Review

World conquest is a lot like real estate.  The three most important things are location, location and location.  And Poland has always been in a prime location.  If you look at a map you can see why.  To the east are Ukraine (bread basket of Europe), Belarus and Lithuania.  All one-time members of the Russian Empire.  As well as the Soviet Union.  To the west is Germany.  And Western Europe.  To the north is the Baltic Sea.  Making Poland the crossroads between Western Europe and Eastern Europe, Russia and the Soviet Union.  Prime real estate indeed.  From the days of Catherine the Great Russia wanted her land.  As did an Austrian about 150 years later.  Adolf Hitler.  Who conspired with another Russian to take her land.  Joseph Stalin.

Hitler and Stalin joined forces to conquer and partition Poland along the Narew, Vistula, and San rivers.  After the Allies gave Hitler Czechoslovakia.  Lying along the southern border of Poland.  So Poland felt the wrath of two of the worst dictators of the Twentieth Century.  As the Nazis invaded from the west and south (via Czechoslovakia).  And the Soviets invaded from the east.  They crushed Poland.  And committed some of the worst atrocities of World War II.  Which the Nazi-Soviet invasion of Poland officially kicked off (see AP Exclusive: Memos show US hushed up Soviet crime by RANDY HERSCHAFT and VANESSA GERA, Associated Press, posted 9/10/2012 on Yahoo! News).

The American POWs sent secret coded messages to Washington with news of a Soviet atrocity: In 1943 they saw rows of corpses in an advanced state of decay in the Katyn forest, on the western edge of Russia, proof that the killers could not have been the Nazis who had only recently occupied the area.

The testimony about the infamous massacre of Polish officers might have lessened the tragic fate that befell Poland under the Soviets, some scholars believe. Instead, it mysteriously vanished into the heart of American power. The long-held suspicion is that President Franklin Delano Roosevelt didn’t want to anger Josef Stalin, an ally whom the Americans were counting on to defeat Germany and Japan during World War II.

Documents released Monday and seen in advance by The Associated Press lend weight to the belief that suppression within the highest levels of the U.S. government helped cover up Soviet guilt in the killing of some 22,000 Polish officers and other prisoners in the Katyn forest and other locations in 1940…

The Soviet secret police killed the 22,000 Poles with shots to the back of the head. Their aim was to eliminate a military and intellectual elite that would have put up stiff resistance to Soviet control. The men were among Poland’s most accomplished — officers and reserve officers who in their civilian lives worked as doctors, lawyers, teachers, or as other professionals. Their loss has proven an enduring wound to the Polish nation.

Franklin Delano Roosevelt (FDR) loved Joseph Stalin.  It was the era of Big Government.  And Stalin liked what he saw happening in Italy under Benito Mussolini.  And what he saw in the Soviet Union under Joseph Stalin.  These were men who thought big like FDR.  And knew the great things the state could do if only not hindered by laws and elections.  He would have professed admiration for another Big Government type had he not made his ambitions clear so early.  Because Nazi Germany was National Socialism.  With a lot of the same kind of make-work programs FDR had in his New Deal.

But FDR was naive when it came to communism.  While others saw the true Stalin FDR lived in denial.  He liked Uncle Joe.  Knew that he could talk to this man.  That he could trust this man.  He was so naive that his own administration contained Soviet operatives.  Something he would refuse to even entertain the possibility of.  Because the future was going to be made by men like Mussolini, Stalin and FDR.  Then that horrible day came.  When FDR suffered his greatest shock and disappointment.  When the Soviets and Nazis entered into their non-aggression pact.  The Nazi-Soviet Non-Aggression Pact of 1939.  Where the Soviets agreed not to enter any war Germany started.  In exchange for the Poland Partition and the Baltic states of Estonia, Latvia, and Lithuania.  Also, the Soviets agreed to provide Germany the raw materials she needed for her war industry that the British denied Germany with her blockade.  Making the conquests of Nazi Germany possible.  As well as her crimes.  So Joseph Stalin has more blood on his hands than just that horrible massacre in the Katyn Forest.  He has the blood of all those who died under Nazi aggression.  And Nazi oppression.  Including the twenty million or more Soviets who perished in World War II.  The innocents who paid the price for their leader’s ambitions.  As they always do.

Then the ultimate Polish betrayal came at the Yalta Conference.  Where FDR still trusted Stalin.  And gave him whatever he asked without asking for anything in return.  The part of Poland Hitler agreed to give to the Soviets remained Soviet.  Her western border was moved into Germany.  But the Soviets never left Poland.  Poland fell behind the Iron Curtain that fell from “Stettin in the Baltic to Trieste in the Adriatic.”  And all the conquered people behind the Iron Curtain remained oppressed throughout the Cold War.  Stuck in time.  Often hungry and without the basic necessities of everyday life.  Proving the point that presidents with aggressive domestic agendas tend to have inept and naïve foreign policy.  FDR may have won the war.  But he lost the peace.  And the price of losing the peace (44 years of Cold War) was as much if not greater than the cost of winning World War II.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

Great Depression, FDR, New Deal, John Maynard Keynes, Labor Unions, Collusion, Unemployment, Lend-Lease and Stages of Production

Posted by PITHOCRATES - September 11th, 2012

History 101

FDR increased the Power of Labor Unions and allowed Big Corporations to Collude with Each Other

Those in mainstream economics (i.e., Keynesian economics) studied the Great Depression and determined that the problem was a lack of spending.  Which is why they cheer FDR and his New Deal programs.  Because the New Deal spent enormous amounts of money.  And according to prevailing Keynesian thought that was all that was needed to end the Great Depression.  Spending.  And if the private sector wasn’t going to spend money then the government could.  And the government’s spending could replace all that economic activity that disappeared when the private sector stopped spending.  So the government spent.  But in those 10 to 15 years they failed to pull the nation out of the Great Depression.

According to Keynesian thought, and John Maynard Keynes himself who visited FDR in the White House, the government needed to spend money.  Even money they didn’t have.  Keynes urged the president to deficit spend.  To run huge deficits in the short term to kick-start the economy.  Keynes showed that it was the only way with a lot of figures and math.  FDR later said Keynes was more a mathematician than an economist.  Still, FDR spent.  But he did even more.  Believing part of the reason for the lack of spending was the evils of capitalism.  There was just too much competition keeping prices low.  And businesses selling at low prices couldn’t pay high wages.  Ergo to stimulate economic activity FDR wanted to increase the cost of doing business.

FDR increased the power of labor unions to help them negotiate higher wage packages.  And he allowed big corporations to collude with each other so they could raise their prices so they could afford to pay those higher union wages.  These two things really helped workers get better pay.  Some 25% higher they otherwise would have had.  This was a big win for labor.  And for the socialists and communists in America who hated capitalism.  (The 1930s were a time of nationalist, socialist, fascist and communist movements sweeping the world.  And strong elements in the U.S. wanted to join these movements.  The Soviet Union even had agents working inside the Roosevelt administration.)  In fact, they were angry that FDR didn’t take this chance to deliver the deathblow to capitalism once and for all by nationalizing some big industries.  Something FDR wasn’t willing to do.

FDR did Everything in his Power to Increase Wages & Prices because of the Massive Deflation of the Great Depression

Then came the alphabet soup of make-work agencies.  Civilian Conservation Corps (CCC) paid young unemployed men to do landscaping and other outdoor activities.  Tennessee Valley Authority (TVA) paid young men to build dams and other water related activities.  Agricultural Adjustment Act (AAA) raised food prices by paying farmers not to grow crops and to kill off some of their livestock herds instead of bringing them to market.  National Industrial Recovery Act (NIRA) reduced unfair competition by letting big corporations collude with each other to keep their prices high.  Public Works Administration (PWA) was a whole new agency that built roads and bridges.  Works Progress Administration (WPA) paid for more construction work for men, sewing work for women and arts projects for the creatively inclined.  National Labor Relations Act (NLRA) gave more power to unions to keep their wages (and the prices of the things they made) high.  And many other alphabet agencies.

Most of these programs passed between 1933 and 1935.  So FDR put a lot of money into workers’ pockets during the 1930s.  And according to Keynesian economics all that money would cause an explosion in consumer spending.  Thanks to the Keynesian multiplier.  For every dollar a consumer received from the government it would generate up to $5 of new GDP.  Which was probably one of the mathematical equations Keynes discussed that so underwhelmed FDR.  And that formula is 1/(1-MPC).  Where MPC stands for the marginal propensity to consume (and if it’s 0.80 you get a multiplier of 5).  If a person receives $100 and spends $80 then their MPC is 0.80 or 80%.  This is basically trickle-down economics Keynesian style.  If the person above spends that $80 those receiving it will spend $64.  Those who receive $64 will spend $51.20.  And so on until these other people create an additional $400 of economic activity in addition to that original $100.

And FDR couldn’t ask for a better time to spend that money.  During the Great Depression.  He was doing everything in his power to increase wages and prices because of the massive deflation of the Great Depression.  So even though he was trying to raise prices they were still low throughout much of the economy.  Which meant a little bit of money bought a lot of stuff.  Because deflation strengthened the dollar.  Giving it more purchasing power.  Allowing buyers to get a lot of bang for the buck.  Especially those union workers making 25% more than they normally would have been making.  Talk about kick-starting an economy.  It was so easy.  They even had mathematical formulas saying this would end the Great Depression.  The Great Depression was as good as over.

Had President Obama not been Elected the Great Recession would have Ended some time in 2010

The unemployment rate topped out at around 25% in 1933.  Excluding the government make-work, the true unemployment rate didn’t fall below 20% until 1936.  And never got below 14% until 1941.  When America began tooling up to build the instruments of war.  To become the Arsenal of Democracy.  A few things happened during this time to greatly reduce the unemployment rate following 1941.  The war removed a lot of men from the workforce to serve in the military.  The Supreme Court found parts of the New Deal unconstitutional.  And there was a split in organized labor that helped conservatives (Republicans and Democrats) gain power in Congress.  And they shut down some of those liberal New Deal programs.  So while one war began (World War II) another ended (the war on business).

And how did things progress after they ended their war on business?  Pretty well.  The unemployment rate fell.  To 14.6% in 1940.  To 9.9% in 1942.  To 1.9% in 1943.  To 1.2% in 1944.  Then it soared back up to 1.9% in 1945.  With the war over the unemployment rate rose again.  But nowhere near where it was during FDR’s New Deal 1930s.  From 1948 to 1968 it averaged 4.7%.  Not too bad considering full employment is 5%.  So for the 30 years or so following the end of New Deal policies the economy returned to full employment.  And stayed at full employment.  The conservatives in Congress needed but 4 years to do what FDR couldn’t do in 10 years with his Keynesian, New Deal policies.

Yes, the war helped.  A lot.  It pulled a lot of men out of the workforce.  And American industry ramped up to provide the war material for war.  However, we financed that buildup with deficit spending and American war bonds.  As most of that war material went to our allies via Lend-Lease.  Which means we gave most of it away to allow others to fight the war.  So it was little different than Keynesian spending.  So why did the war spending work when all those alphabet soup make-work agencies didn’t?  Because of the stages of production.  Putting more money into consumers’ hands only helped the retail and wholesale stages.  It did not do anything to stimulate the manufacturing or raw commodities stages.  Especially with those high union wages and lack of competition thanks to the collusion to keep prices high.  All that did was pay the very few who actually had jobs very well.  While making it economically foolish to hire any new workers because of the exceptionally high cost of labor (25% higher than it would have been without the New Deal programs).  That high cost of business just slammed the brakes on economic activity.  Economic activity picked back up only after conservatives in Congress undid some of the damage of the New Deal.  In fact, had it not been for FDR’s New Deal the Great Depression would have ended some 7 years earlier.  Extrapolating this to the Great Recession today one could estimate that the Great Recession would have ended 7 years earlier had it not been for the Keynesian policies of President Obama.  So if the current recession lasts as long as the Great Depression and President Obama wins a second term and continues his anti-business policies the recession will last 7 years longer than it need be.  Or, had President Obama not been elected it would have ended some time in 2010.  Giving us full employment today instead of 14.7% U-6 unemployment.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , ,

LESSONS LEARNED #28: “Politicians love failure because no one ever asked government to fix something that was working.” -Old Pithy

Posted by PITHOCRATES - August 26th, 2010

THE TELEVISION SHOW Gomer Pyle, U.S.M.C. aired from 1964-1969.  It was a spinoff from the Andy Griffith Show.  Gomer, a naive country bumpkin who worked at Wally’s filling station, joined the Marines Corps.  And there was much mirth and merriment.  To the chagrin of Sergeant Carter, Pyle’s drill instructor (DI).  Think of Gunny Sergeant R. Lee Ermey’s Sergeant Hartman in the movie Full Metal Jacket only with no profanity or mature subject matter.  Sergeant Carter was a tough DI like Sergeant Hartman.  But more suitable for the family hour on prime time television.

Gunny sergeants are tough as nails.  And good leaders.  They take pride in this.  But sometimes a gunny starts to feel that he’s not himself anymore.  This was the subject of an episode.  And Gomer, seeing that Sergeant Carter was feeling down, wanted to help.  So he stuffed Sergeant Carter’s backpack with hay before a long march.  While the platoon was worn and tired, Sergeant Carter was not.  He was feeling good.  Like his old self.  Until he found out he was not carrying the same load his men were.  He asked Pyle, “why hay?”  He could understand rocks, but hay?  Because if he outlasted his men while carrying a heavier load, he would feel strong.  But knowing he had carried a lighter load only made him feel weak.

This is human nature.  People take pride in their achievements.  They don’t take pride in any achievement attained by an unfair advantage.  Self-esteem matters.  And you can’t feel good about yourself if you need help to do what others can do without help. 

AN OLD CHINESE proverb goes, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”  Let’s say I am a fisherman in a small village.  I catch fish to feed my family and sell/trade for other family needs.  There’s a man in my village who asks me for a fish each day so he can eat.  I’m a caring person.  So I give him a fish each day.  So a pattern develops.  Each day he shows up when I come in from my fishing.  He takes the fish and goes away.  It works out well for him.  He doesn’t have to work.  He can live off of my kind charity.  Then I move.  Without me being there to give him a fish each day, he no longer can eat.  And dies.  If I only had taught that man to fish. 

Kindness can lead to dependency.  And once dependent, you become lazy.  Why develop marketable skills to provide for yourself when someone else will provide for you?  The problem is, of course, what happens when that charity ends?  If you’re unable to provide for yourself and there is no longer someone providing for you, what do you do?  Steal?

Dependency and a lack of self-esteem are a dangerous combination.  And they feed off of each other.  This combination can lead to depression.  Behavioral problems.  Resentment.  Bitterness.  Envy.  Or a defeatist attitude.

These are often unintended consequences of government programs.  A failed program, then, has far reaching consequences beyond the initial economic costs of a program.

LIQUIDITY CRISES CAUSE a lot of economic damage.  If capital is not available for businesses to borrow, businesses can’t grow.  Or create jobs.  And we need jobs.  People have to work.  To support themselves.  And to pay taxes to fund the government.  So everyone is in favor of businesses growing to create jobs.  We all would like to see money being easy and cheap to borrow if it creates jobs.

But there is a downside to easy money.  Inflation.  Too much borrowing can create inflation.  By increasing the money supply (via fractional reserve banking).  More money means higher prices.  Because each additional dollar is worth a little less. This can lead to overvalued assets as prices are ‘bid’ up with less valuable dollars.  And higher prices can inflate business profits.  Looks good on paper.  But too much of this creates a bubble.  Because those high asset values and business profits are not real.  They’re inflated.  Like a bubble.  And just as fragile.  When bubbles burst, asset values and business profits drop.  To real values.  People are no longer ‘bidding’ up prices.  They stop buying until they think prices have sunk to their lowest.  We call this deflation.  A little bit of inflation or deflation is normal.  Too much can be painful economically.  Like in the Panic of 1907.

Without going into details, there was a speculative bubble that burst in 1907.  This led to a liquidity crisis as banks failed.  Defaults on loans left banks owing more money than they had (i.e., they became illiquid).  They tried to borrow money and recall loans to restore their liquidity.  Borrowers grew concerned that their bank may fail.  So they withdrew their money.  This compounded the banks problems.  This caused deflation.  Money was unavailable.  Causing bank runs.  And bank failures.  Business failures.  And unemployment grew. So government passed the Federal Reserve Act of 1913 to prevent a crisis like this from ever happening again.  The government gave the Federal Reserve System (the Fed) great powers to tweak the monetary system.  The smartest people at the time had figured out what had gone wrong in 1907.  And they created a system that made it impossible for it to happen again.

The worst liquidity crisis of all time happened from 1929-1933.  It’s part of what we call the Great Depression.  The 1920s had a booming economy.  Real income was rising.  Until the Fed took action.  Concerned that people were borrowing money for speculative purposes (in paper investments instead of labor, plant and material), they put on the brakes.  Made it harder and more expensive to borrow money.  Then a whole series of things happened along the way that turned a recession into a depression.  When people needed money, they made it harder to get it, causing a deflationary spiral.  The Great Depression was the result of bad decisions made by too few men with too much power.  It made a crisis far worse than the one in 1907.  And the Roosevelt administration made good use of this new crisis.  FDR exploded the size of government to respond to the unprecedented crisis they found themselves in.  The New Deal changed America from a nation of limited government to a country where Big Government reigns supreme.

ONE PROGRAM OF the New Deal was Social Security.  Unemployment in the 1930s ran at or above 14%.  This is for one whole decade.  Never before nor since has this happened.  Older workers generally earn more than younger ones.  Their experience commands a higher pay rate.  Which allows them to buy more things.  Resulting in more bills.  Therefore, the Great Depression hit older workers especially hard.  A decade of unemployment would have eaten through any life savings of even the most prudent savers.  And what does this get you?  A great crisis.

The government took a very atypical moment of history and changed the life of every American.  The government forced people to save for retirement.  In a very poor savings plan.  That paid poorly by comparison to private pensions or annuities.  And gave the government control over vast amounts of money.  It was a pervasive program.  They say FDR quipped, “Let them try to undo this.” 

With government taking care of you in retirement, more people stopped providing for themselves.  When they retired, they scrimped by on their ‘fixed’ incomes.  And because Social Security became law before widespread use of birth control and abortion, the actuaries of the day were very optimistic.  They used the birth rate then throughout their projections.  But with birth control and abortion came a huge baby bust.  The bottom fell out of the birth rate.  A baby bust generation followed a baby boom generation.  Actually, all succeeding generations were of the bust kind.  The trend is growing where fewer and fewer people pay for more and more people collecting benefits.  And these people were living longer.  To stay solvent, the system has to raise taxes on those working and reduce benefits on those who are not.  Or raise the retirement age.  All these factors have made it more difficult on our aged population.  Making them working longer than they planned.  Or by making that fixed income grow smaller.

FDR used a crisis to create Social Security.  Now our elderly people are dependent on that system.  It may suck when they compare it to private pensions or annuities, but it may be all they have.  If so, they’ll quake in their shoes anytime anyone mentions reforming Social Security.  Because of this it has become the 3rd rail of politics.  A politician does not touch it lest he or she wishes to die politically.  But it’s not all bad.  For the politician.  Because government forced the elderly to rely on them for their retirement, it has made the Social Security recipient dependent on government.  In particular, the party of government who favors Big Government.  The Democrats.  And with a declining birth rate and growing aged population, this has turned into a large and loyal voting bloc indeed.  Out of fear.

A PROGRAM THAT straddled the New Deal and LBJ’s Great Society was Aid to Families with Dependent Children (AFDC).  Its original New Deal purpose was to help widows take care of their children.  When program outlays peaked in the 1970s, the majority of recipients were unmarried women and divorced women.  Because this was a program based on need, the more need you had the more you got.  Hence more children meant more money.  It also reduced the importance of marriage as the government could replace the support typically provided by a husband/father.  Noted economist Dr. Thomas Sowell blames AFDC as greatly contributing to the breakdown of the black family (which has the highest incidence of single-parent households).

With the women’s liberation movement, women have come to depend less on men.  Some affluent women conceive and raise children without a husband.  Or they adopt.  And the affluent no doubt can provide all the material needs their children will ever need.  Without a husband.  Or a father for their children.  But is that enough?

The existence of ‘big brother’ programs would appear to prove otherwise.  Troubled children are often the products of broken families.  Mothers search for big brothers to mentor these fatherless sons.  To be role models.  To show an interest in these children’s lives.  To care.  When no such role models are available, some of these troubled children turn to other sources of acceptance and guidance.  Like gangs.

AFDC has compounded this problem by providing the environment that fosters fatherless children.  And another government program compounds that problem.  Public housing.

POOR HOUSING CONDITIONS hurt families.  They especially hurt broken families.  Without a working husband, these families are destined to live in the cheapest housing available.  These are often in the worst of neighborhoods.  This is an unfair advantage to the children raised in those families.  For it wasn’t their fault they were born into those conditions.  So, to solve that problem, government would build good public housing for these poorest of the poor to move into.  Problem solved.

Well, not exactly.  Public housing concentrates these broken families together.  Usually in large apartment buildings.  This, then, concentrates large numbers of troubled children together.  So, instead of having these children dispersed in a community, public housing gathers them together.  Where bad behavior reinforces bad behavior.  It becomes the rule, not the exception.  Making a mother’s job that much more difficult.  And because these children live together, they also go to school together.  And this extends the bad behavior problem to the school.  Is it any wonder that public housing (i.e., the projects) have the worst living conditions?  And some of the highest gang activity? 

Government didn’t plan it this way.  It’s just the unintended consequences of their actions.  And those consequences are devastating.  To the poor in general.  To the black family in particular.  AFDC and public housing enabled irresponsible/bad behavior.  That behavior destroyed families.  As well as a generation or two.  But it wasn’t all bad.  For the politicians.  It made a very large constituency dependent on government.

THERE ARE SO many more examples.  But the story is almost always the same.  Dependency and a lack of self-esteem will beat down a person’s will.  Like an addict, it will make the dependent accept poorer and poorer living standards in exchange for their fix of dependency.  Eventually, the dependency will reach the point where they will not know how to provide for themselves.  The dependency will become permanent.  As will the lack of self-esteem.  Conscious or not of their actions, Big Government benefits from the wretched state they give these constituencies.  With no choice but continued dependence, they vote for the party that promises to give the most.  Which is typically the Democrat Party.

But how can you fault these politicians?  They acted with the best of intentions.  And they can fix these new problems.  They’ll gather the brightest minds.  They’ll study these problems.  And they will produce the best programs to solve these problems.  All it will take is more government spending.  And how can you refuse?  When people are hungry.  Or homeless.  Or have children that they can’t care for.  How can anyone not want to help the children?  How can anyone not have compassion?

Well, compassion is one thing.  When the innocent suffer.  But when government manufactures that suffering, it’s a different story.  Planned or not the result is the same whenever government tries to fix things.  The cost is high.  The solution is typically worse than the original problem.  And the poorest of the poor are pawns.  To be used by Big Government in the name of compassion. 

Of course, if Big Government were successful in fixing these problems, they would fix themselves right out of existence.  So as long as they want to run Big Government programs, they’ll need a stock of wretched, suffering masses that need their help.  And, of course, lots of crises.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

LESSONS LEARNED #2 “The international community prefers liberals over conservatives because it’s easier to fool a naïve idealist than a wise realist.” -Old Pithy

Posted by PITHOCRATES - February 25th, 2010

EVERY GENERATION HAS had naïve idealists.  Even the founding generation.  Thomas Jefferson was an intellectual.  Kind of quiet and shy, he found solace in his books.  He knew more than most of the Founding Fathers.  But he was an idealist.  He saw the world more as how it should be than how it was.

Jefferson would become the leader of the opposition party…while serving as Washington’s Secretary of State.  The main split was between Jefferson and the Secretary of the Treasurer, Alexander Hamilton.  Hamilton was smart like Jefferson but wasn’t quiet or shy.  And, unlike Jefferson, he understood commerce and capital markets.

They had two different views of America.  Hamilton saw a rich manufacturing base while Jefferson saw farmers.  Jefferson thought Hamilton’s views were too British and called him a monarchist.  He didn’t trust him or his financial schemes and opposed them at every opportunity.

Hamilton admired the British Empire.  He wanted an American Empire, using the British as the model.  Jefferson hated all things British.  He also owed a fortune to British creditors, another reason to hate both Great Britain and things financial.

When trouble brewed between the British and the French, Hamilton wanted to side with the British.  Jefferson with the French.  Washington wanted to stay neutral.  And did.  But when that neutrality clearly favored the British, Jefferson was furious. 

America’s interests, though, clearly aligned with Great Britain.  America’s trade had always been with Great Britain.  As a British colony, she was there to provide raw materials to the mother country.  During the Revolutionary War, there was limited trade with France, but she didn’t throw open her markets to American goods.  Then there was the British Fleet.  It ruled the seas.  An infant nation just couldn’t take on the British Empire and restore her economy.

Jefferson was a great philosopher.  But he wasn’t a great executive.  Idealists rarely are.  He was both governor of Virginia and president of the United States.  He put neither of these accomplishments on his tomb stone.  Even he knew.  He was a thinker of great thoughts.  He wasn’t a doer of great things.  The British leaning neutrality provided peace and prosperity while much of Europe was embroiled in the Napoleonic wars.  He was wrong on this one.

IN GERMANY THERE was National Socialism.  In the Soviet Union there was communism.  In Italy there was fascism.  And in the United States there was the New Deal.  They all shifted control of business to the government.  They all rejected capitalism.  They all favored state planning.  They all favored putting the collective good above individual self-interest.  And they all had charismatic leaders.

These charismatic leaders, Hitler, Stalin, Mussolini and Roosevelt (FDR), were elitists.  They shared a condescending contempt for those who clung onto the old, unenlightened ways.  It was an era of progressive state power.  And through their will and charisma they were building a new world order.

War would make fascism and National Socialism enemies of the United States.  But FDR still had ‘Uncle Joe’.  He had a hot and cold love affair with Stalin.  It was hot until 1939.  It turned cold when Germany and the Soviet Union signed a non aggression pact and invaded, conquered and partitioned Poland.  It turned hot again when Hitler turned on Stalin and invaded the Soviet Union.

Roosevelt refused to hear criticisms of Stalin.  He knew Stalin.  He could work with him.  He could charm him.  Just who was charming who, though, was a matter of debate.  Soviet spies where everywhere in Roosevelt’s administration.  And, when they met to discuss post war policy, against advice, Roosevelt foolishly lodged at the Soviet embassy which was bugged (he wanted to show Stalin that he trusted him).  The Soviets listened in on all private discussions of the American delegation.  Stalin played him like a piano. 

And the rest, as they say, is history.  Roosevelt gave away Eastern Europe and condemned them to the misery that was life behind the Iron Curtain.  And that was just the start of the Cold War.  Communism, as an ideology, would be responsible for more deaths than any other despot or empire the world has ever known.  And Stalin was the architect of most of that.  If not personally, his style of harsh communism known as Stalinism.  And FDR, in his naïve idealism, was there in the beginning to help him on his way.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , ,