After the Civil War Men became less Manly and the Federal Government became more Progressive

Posted by PITHOCRATES - March 25th, 2014

History 101

(Originally published February 12th, 2013)

Prior to 1900 the Role of the Federal Government was primarily to Provide for the Common Defense

In 1800 the new federal government didn’t do a lot.  It spent only about $11 million (in nominal dollars).  With 55% going to defense.  About 31% went to pay interest on the war debt.  About 2% went to the postal service.  And about 12% went to other stuff.  Defense spending and interest on the war debt added up to about 86% of all federal outlays (see Government Spending Details).

In 1860, just before the Civil War, spending increased to $78 million (in nominal dollars).  Defense spending fell to 37%.  Interest spending fell to 4%.  And postal service spending rose to 19%.  While spending on other stuff rose to 40%.  Just over 60 years from the founding the federal government had changed.  It was less limited than the Founding Fathers designed it to be.

In 1900 spending increased to $628.6 million (in nominal dollars).  With defense spending coming in at 53%.  The postal service at 17%.  Interest went up to 6.4%.  And other spending fell to 24%.  Again, defense spending consumed over half of all federal spending.  For the role of the federal government was still primarily providing for the common defense.  Running the postal service.  Treating with other nations.  And trading with them.  As well as collecting duties and tariffs at our ports which paid for the federal government.  There was a lot of graft and patronage.  And long lines for government jobs.  Primarily because government was still somewhat limited.  With a limited number of government jobs to reward campaign contributors.  But that was about to change.

The Progressives expanded the Role of the Federal Government in our Lives and made it more Motherly

The American Civil War killed about 625,000 men.  With an 1860 population of 31,443,321 those deaths amounted to about 2% of the prewar population.  To put that into perspective if 2% of the U.S. population died in a war today that would be approximately 6.2 million people.  And to put that into perspective the total population of the state of Missouri is about 6 million people.  So the American Civil War claimed a very large percentage of the population.  Leaving a lot of children to grow up without a father.  Which had a profound impact on the size of the federal government.

Prior to this generation American men were some of the manliest men in the world.  Tough and rugged.  Who could live off of the land.  Completely self-sufficient.  These are the men that made America.  Men who fought and won our independence.  Who explored and settled the frontier.  Farmers who worked all day in the field.  Men who dug canals by hand.  And built our railroads.  Men who endured hardships and never complained.  Then came the Civil War generation.  Sons who lost their fathers.  And wives who lost their husbands, brothers, fathers and uncles.  Who lost all the men in their lives in that horrible war.  These women hated that war.  And manly displays of aggression.  For it was manly displays of aggression that led to fighting.  And war.  Having lost so much already they didn’t want to lose the only men they had left.  Their sons.  So they protected and nurtured them.  Taught them to shun violence.  To be kinder and softer.  To be not so tough or rugged.  To be less manly.  And when these men grew up they went into politics and started the progressive movement.

The federal government was no longer just to provide for the common defense.  To run the postal service.  To treat with other nations.  To trade with other nations.  Run our custom houses.  No.  Now the federal government grew to be kinder, softer and more motherly.  The progressives expanded the role of the federal government in our lives.  Woodrow Wilson wanted to turn the country into a quasi monarchy.  With a very strong executive branch that could rule against the wishes of Congress.  The Federal Reserve (America’s central bank) came into existence during Wilson’s presidency.  Which was going to end recessions forever.  Then came the Great Depression.  A crisis so good that FDR did not let it go to waste.  FDR expanded the size of the federal government.  Putting it on a path of permanent growth.  And it’s been growing ever since.

They decreased Defense Spending and increased Borrowings to increase Non-Defense Spending

The federal government grew beyond its Constitutional limits.  And the intent of the Founding Fathers.  Just as Thomas Jefferson feared.  It consolidated power just as all monarchies did.  And that was Jefferson’s fear.  Consolidation.  Seeing the states absorbed by a leviathan federal government.  Becoming the very thing the American colonists fought for independence from.  So that’s where the federal government changed.  In the early 20th Century.  Before that it spent money mostly for defense and a postal service.  Now it spends money for every social program under the sun.  There is great debate now in Washington about reducing the deficit.  With the Democrats blaming the deficit problems on too much defense spending.  And too little taxation on the rich.  But if you look at the history of federal spending since 1940 the numbers say otherwise (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 and A History of Debt In The United States).

Federal Spending and Debt

As defense spending (including Veterans Benefits and Services) rose during World War II non-defense spending (Education, Training, Employment, Social Services, Health, Income Security, Social Security, Energy, Natural Resources, Environment, Commerce, Housing Credit, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice and General Government) fell as a percentage of total federal outlays.  And the federal debt rose (federal debt is in constant 2012 dollars).  After the war defense spending fell to 50% while the percentage of non-defense spending rose.  And the federal debt dropped slightly and remained relatively constant for about 30 years.

This tug of war between defense spending and non-defense spending is also called the guns vs. butter debate.  Where those in favor of spending money on guns at the federal level are more constructionists.  They want to follow the Constitution as the Founding Fathers wrote it.  While those who favor spending money on butter at the federal level want to want to buy more votes by giving away free stuff.

Defense spending ramped back up for the Korean War and the Cold War during the Fifties.  After the armistice ended hostilities in Korea defense spending began a long decline back to about 50% of all federal outlays.  Where it flattened out and rose slightly for the Vietnam War.  After America exited the Vietnam War defense spending entered a long decline where it dropped below 30% of all federal outlays.  Reagan’s defense spending raised defense spending back up to 30%.  After Reagan won the Cold War Clinton enjoyed the peace dividend and cut defense spending down to just below 20%.  After 9/11 Bush increased defense spending just above 20% of all federal outlays where it remains today.

During this time non-defense spending was basically the mirror of defense spending.  Showing that they decreased defense spending over time to increase non-defense spending.  But there wasn’t enough defense spending to cut so borrowing took off during the Reagan administration.  It leveled off during the Clinton administration as he enjoyed the peace dividend after the defeat of the Soviet Union in the Cold War.  Non-defense spending soared over 70% of all federal outlays during the Bush administration.  Requiring additional borrowings.  Then President Obama increased non-defense spending so great it resulted in record deficits.  Taking the federal debt to record highs.

So is defense spending the cause of our deficits?  No.  Defense spending as a percentage of all federal outlays is near a historical low.  While non-defense spending has soared to a record high.  As did our federal debt.  Clearly showing that the driving force behind our deficits and debt is non-defense spending.  Not defense spending.  Nor is it because we’re not taxing people enough.  We’re just spending too much.  In about 50 years non-defense spending rose from around 22% of all federal outlays to 74%.  An increase of 223%.  While defense spending fell from 76% to 22%.  A decline of 245%.  While the federal debt rose 619%.  And interest on the debt soared 24,904%.  The cost of favoring butter in the guns vs. butter debate.  The federal government has been gutting the main responsibility of the federal government, defense, to pay for something that didn’t enter the federal government until the 20th Century.  All that non-defense spending.  Which doesn’t even include the postal service today.

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The Politics of Liberal Economic Policies

Posted by PITHOCRATES - November 18th, 2013

Economics 101

What doesn’t Kill You Makes you Stronger

They say what doesn’t kill you makes you stronger.  And you can see that in military basic training.  There have been some good movies showing what military basic training is like.  Perhaps one of the best is Full Metal Jacket.  Where Gunnery Sergeant Hartman played by R. Lee Ermey wasn’t acting as much as reliving his days as a Marine Corps drill instructor.  Watching it you may come to hate Sergeant Hartman for he was pretty sadistic.  But they didn’t design basic training to be a pleasant experience.  They designed it to prepare recruits for the worst thing in the world.  War.

In the miniseries Band of Brothers we follow Easy Company, 2nd Battalion, 506th Parachute Infantry Regiment, 101st Airborne Division, from basic training through D-Day and to the end of the war.  Airborne training followed basic training.  And was harder.  Fewer people make it through airborne training than they do basic training.  Ranger training is even harder.  And fewer people make it through Ranger training.  But airborne units and Rangers get the more difficult missions in combat.  Because they can do more.  For their training is more difficult.  But it didn’t kill them.  So it made them stronger.

Perhaps the most difficult military training is the Navy’s SEAL program.  Where if they get a good class of recruits they may have 1 in 10 complete training.  For it is that hard.  In fact, some have died in training because they refused to give up.  That’s why you will find few tougher than a Navy SEAL.  They are tough.  And they never quit.  Which is why we give them the most difficult missions to complete.  Missions that others would find impossible.  Proving that the more brutal and difficult training is the stronger and more able we get.

During the 20th Century the American Left has tried to replace Rugged Individualism with the Nanny State

Those who founded this nation were tough people who worked hard and never gave up.  They provided their own housing, food, clothing, etc.  If they needed something they figured out how to provide it for themselves.  They worked long hours.  Survived brutal winters and hostile environments.  But they never gave up.  In fact, they raised families while doing all of this.  With no help from government.  As there were no government benefits.  Yet they survived.  Even prospered.  For what didn’t kill them only made them stronger.  These rugged individuals could do anything.  And did.  Which is why the United States is the leader of the free world.  And the world’s number one economy.  Because of that rugged individualism.

This is the way America was before the progressives came and softened us.  And made rugged individualism somehow a bad thing.  Beginning with Woodrow Wilson.  Then FDR.  LBJ.  And then President Obama.  A long line of American presidents who eschewed individualism.  And thought in collective terms.  When the Americans rejected socialism they gave us progressivism.  When we rejected communism they gave us liberalism.  The 20th century has been a tireless attempt for those on the left to replace rugged individualism with the nanny state.  With their brilliant selves in power.  Managing the economy.  And making life fair.  To undo the unfairness of laissez-faire capitalism.  To make the United States better.  And more according to their vision.  Just like the socialists did.  And the communists did.  Yet no socialist or communist state became the leader of the free world.  Or the world’s number one economy.

Those who lived in those socialist and communist utopias learned one thing.  It was better to live someplace else.  And their ultimate destination?  The United States.  Yet those on the left refused to believe that life was worse in those states where they put people first instead of profits.  Like that unfeeling and cruel laissez-faire capitalism did.  Which is why Wilson, FDR, LBJ and Obama worked tirelessly to move the United States in the direction of socialism and communism.  Because they cared for the people.  Or the power they got by making so many people dependent on government.

Someone receiving a Comfortable Level of Benefits will not be pushed to Leave their Comfort Zone

So is it about the power or that thing about helping people?  What is it exactly that progressives/liberals really want?  Well, we can look at the historical record to determine that.  By looking at a point in time when America really changed.  With the assassination of JFK.  JFK’s chances of reelection weren’t great.  Which is why he went to Texas.  As he needed LBJ to deliver Texas to the Democrats.  Instead of electoral victory, though, he fell to an assassin’s bullet.  The great outpouring of grief and love for their fallen president exceeded the love he got before the assassination.  The heightened emotions allowed LBJ to pass the many programs of the Great Society into law.  In the memory of JFK.  The greatest expansion of the federal government since FDR’s New Deal.  Making the welfare state the largest yet.  In an attempt to put people first.  Not profits.  In fact, LBJ declared a war on poverty.  By providing government assistance to lift everyone out of poverty.  And he championed civil rights.  LBJ was going to make the United States that utopia socialists and communists always dreamt about.  For everyone.  Blacks.  And whites.  Especially blacks.  Who were suffering great discrimination then.  But things would be different for them.  Starting in the Sixties everything was going to get better.  And how are blacks doing today?  Well, if you use employment as a measure, not good (see Table A-2. Employment status of the civilian population by race, sex, and age by the Bureau of Labor Statistics)

Unemplyment Rates by Race Age Sex Rev 2

The federal government has done a lot for blacks.  More than any other minority group.  Affirmative Action was to correct all past wrongs.  By making it easier to get into college.  And to get a job.  Yet we don’t see that when looking at the unemployment numbers.  In fact, the group the government does the least for—white men—is doing the best.  They don’t need any help because they won life’s lottery.  By being born white.  According to liberals.  So there’s no Affirmative Action for them.  Yet they have half the unemployment rate black men have.  While white women have half the unemployment rate black women have.  And white 16-19 year olds have half the unemployment rate black 16-19 year olds have.  Brilliant progressives/liberals have been trying to make life better for blacks for 50 some years now and have failed.  Despite this blacks have never been more loyal to them.  Which answers the question what the Democrats care more for.  The people?  Or the power the people give them.  By getting them dependent on government.  Who they tell over and over again that they would have nothing if it weren’t for them.  The Democrats.  For blacks just can’t make it on their own without help.  Even though after receiving all of that help blacks are suffering the greatest levels of unemployment.  Clearly something isn’t right here.  And it goes back to that thing that made America great.  Rugged individualism.

You know what the difference is between a white SEAL and a black SEAL?  Nothing.  Blacks have equality of opportunity in SEAL training.  And that’s all they need.  They don’t need special treatment.  And the Navy doesn’t tell them that they do.  All they need is the strength.  And the will.  Which will be there if you don’t keep telling people that they can’t succeed without the government’s help.  Because if you keep doing that they will come to believe that.  And they will keep voting Democrat.  Looking for help.  Whereas those who face adversity and overcome it grow stronger.  Because what doesn’t kill them makes them stronger.

Handing out government benefits will make people like you.  But it won’t get them a job.  For someone receiving a comfortable level of benefits will not be pushed to leave their comfort zone.  And while they languish in their comfort zone they will not gain work experience.  Allowing others to gain experience and move up in their careers.  Making them more employable.  While those with less experience and less education are less employable.  And that’s what Democrats do when they buy votes with government benefits.  Make people less employable.  And blacks have been especially useful to them.  As they can stoke the fires of racism to drive blacks even further to the Democrat Party.  By calling Republicans racists.  Because they want to take away their benefits.  Just because they hate black people.  Or so goes the Democrat line.  So they keep voting Democrat.  While losing their rugged individualism.  And suffering higher levels of unemployment than everyone else.

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After the Civil War Men became less Manly and the Federal Government became more Progressive

Posted by PITHOCRATES - February 12th, 2013

History 101

Prior to 1900 the Role of the Federal Government was primarily to Provide for the Common Defense

In 1800 the new federal government didn’t do a lot.  It spent only about $11 million (in nominal dollars).  With 55% going to defense.  About 31% went to pay interest on the war debt.  About 2% went to the postal service.  And about 12% went to other stuff.  Defense spending and interest on the war debt added up to about 86% of all federal outlays (see Government Spending Details).

In 1860, just before the Civil War, spending increased to $78 million (in nominal dollars).  Defense spending fell to 37%.  Interest spending fell to 4%.  And postal service spending rose to 19%.  While spending on other stuff rose to 40%.  Just over 60 years from the founding the federal government had changed.  It was less limited than the Founding Fathers designed it to be.

In 1900 spending increased to $628.6 million (in nominal dollars).  With defense spending coming in at 53%.  The postal service at 17%.  Interest went up to 6.4%.  And other spending fell to 24%.  Again, defense spending consumed over half of all federal spending.  For the role of the federal government was still primarily providing for the common defense.  Running the postal service.  Treating with other nations.  And trading with them.  As well as collecting duties and tariffs at our ports which paid for the federal government.  There was a lot of graft and patronage.  And long lines for government jobs.  Primarily because government was still somewhat limited.  With a limited number of government jobs to reward campaign contributors.  But that was about to change.

The Progressives expanded the Role of the Federal Government in our Lives and made it more Motherly

The American Civil War killed about 625,000 men.  With an 1860 population of 31,443,321 those deaths amounted to about 2% of the prewar population.  To put that into perspective if 2% of the U.S. population died in a war today that would be approximately 6.2 million people.  And to put that into perspective the total population of the state of Missouri is about 6 million people.  So the American Civil War claimed a very large percentage of the population.  Leaving a lot of children to grow up without a father.  Which had a profound impact on the size of the federal government.

Prior to this generation American men were some of the manliest men in the world.  Tough and rugged.  Who could live off of the land.  Completely self-sufficient.  These are the men that made America.  Men who fought and won our independence.  Who explored and settled the frontier.  Farmers who worked all day in the field.  Men who dug canals by hand.  And built our railroads.  Men who endured hardships and never complained.  Then came the Civil War generation.  Sons who lost their fathers.  And wives who lost their husbands, brothers, fathers and uncles.  Who lost all the men in their lives in that horrible war.  These women hated that war.  And manly displays of aggression.  For it was manly displays of aggression that led to fighting.  And war.  Having lost so much already they didn’t want to lose the only men they had left.  Their sons.  So they protected and nurtured them.  Taught them to shun violence.  To be kinder and softer.  To be not so tough or rugged.  To be less manly.  And when these men grew up they went into politics and started the progressive movement.

The federal government was no longer just to provide for the common defense.  To run the postal service.  To treat with other nations.  To trade with other nations.  Run our custom houses.  No.  Now the federal government grew to be kinder, softer and more motherly.  The progressives expanded the role of the federal government in our lives.  Woodrow Wilson wanted to turn the country into a quasi monarchy.  With a very strong executive branch that could rule against the wishes of Congress.  The Federal Reserve (America’s central bank) came into existence during Wilson’s presidency.  Which was going to end recessions forever.  Then came the Great Depression.  A crisis so good that FDR did not let it go to waste.  FDR expanded the size of the federal government.  Putting it on a path of permanent growth.  And it’s been growing ever since.

They decreased Defense Spending and increased Borrowings to increase Non-Defense Spending

The federal government grew beyond its Constitutional limits.  And the intent of the Founding Fathers.  Just as Thomas Jefferson feared.  It consolidated power just as all monarchies did.  And that was Jefferson’s fear.  Consolidation.  Seeing the states absorbed by a leviathan federal government.  Becoming the very thing the American colonists fought for independence from.  So that’s when the federal government changed.  In the early 20th Century.  Before that it spent money mostly for defense and a postal service.  Now it spends money for every social program under the sun.  There is great debate now in Washington about reducing the deficit.  With the Democrats blaming the deficit problems on too much defense spending.  And too little taxation on the rich.  But if you look at the history of federal spending since 1940 the numbers say otherwise (see Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 and A History of Debt In The United States).

Federal Spending and Debt

As defense spending (including Veterans Benefits and Services) rose during World War II non-defense spending (Education, Training, Employment, Social Services, Health, Income Security, Social Security, Energy, Natural Resources, Environment, Commerce, Housing Credit, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice and General Government) fell as a percentage of total federal outlays.  And the federal debt rose (federal debt is in constant 2012 dollars).  After the war defense spending fell to 50% while the percentage of non-defense spending rose.  And the federal debt dropped slightly and remained relatively constant for about 30 years.

This tug of war between defense spending and non-defense spending is also called the guns vs. butter debate.  Where those in favor of spending money on guns at the federal level are more constructionists.  They want to follow the Constitution as the Founding Fathers wrote it.  While those who favor spending money on butter at the federal level want to buy more votes by giving away free stuff.

Defense spending ramped back up for the Korean War and the Cold War during the Fifties.  After the armistice ended hostilities in Korea defense spending began a long decline back to about 50% of all federal outlays.  Where it flattened out and rose slightly for the Vietnam War.  After America exited the Vietnam War defense spending entered a long decline where it dropped below 30% of all federal outlays.  Reagan’s defense spending raised defense spending back up to 30%.  After Reagan won the Cold War Clinton enjoyed the peace dividend and cut defense spending down to just below 20%.  After 9/11 Bush increased defense spending just above 20% of all federal outlays where it remains today.

During this time non-defense spending was basically the mirror of defense spending.  Showing that they decreased defense spending over time to increase non-defense spending.  But there wasn’t enough defense spending to cut so borrowing took off during the Reagan administration.  It leveled off during the Clinton administration as he enjoyed the peace dividend after the defeat of the Soviet Union in the Cold War.  Non-defense spending soared over 70% of all federal outlays during the Bush administration.  Requiring additional borrowings.  Then President Obama increased non-defense spending so great it resulted in record deficits.  Taking the federal debt to record highs.

So is defense spending the cause of our deficits?  No.  Defense spending as a percentage of all federal outlays is near a historical low.  While non-defense spending has soared to a record high.  As has our federal debt.  Clearly showing that the driving force behind our deficits and debt is non-defense spending.  Not defense spending.  Nor is it because we’re not taxing people enough.  We’re just spending too much.  In about 50 years non-defense spending rose from around 22% of all federal outlays to 74%.  An increase of 223%.  While defense spending fell from 76% to 22%.  A decline of 245%.  While the federal debt rose 619%.  And interest on the debt soared 24,904%.  The cost of favoring butter in the guns vs. butter debate.  The federal government has been gutting the main responsibility of the federal government, defense, to pay for something that didn’t enter the federal government until the 20th Century.  All that non-defense spending.  Which doesn’t even include the postal service today.

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Why the Democrats won’t Privatize Social Security

Posted by PITHOCRATES - January 24th, 2013

Politics 101

FDR Transformed the Country because he had a Great Crisis to Exploit like the Great Depression

Once upon a time in a place that seems far, far away there was once a people that saved for retirement.  The savings rate was so high in this mystical land that businesses were able to borrow money at low interest rates to expand their business.  And there was great employment.  Then came an evil ogre who hated savings.  And responsible behavior.  He saw money saved as money leaked out of the economy.  Hurting economic activity.  His motto was spend don’t save.  And don’t worry about how you will take care of yourself in retirement.  So this evil ogre set out to destroy savings and responsible behavior.

That evil ogre’s name was John Maynard Keynes.  Who empowered governments with his inflationary monetary policies.  Allowing governments to spend a lot of money.  Giving them a lot of power.  By getting as many people dependent on the government as possible.  Keynes met with Franklin Delano Roosevelt during the Great Depression.  To offer him ideas of how to spend his way out of the Great Depression.  FDR didn’t think much of Keynesian economics.  For he did try to maintain the gold standard.  But he loved spending money.  And getting people dependent on the government.

FDR gave us Big Government.  He did the things Woodrow Wilson wanted to do.  But Wilson couldn’t because he didn’t have a crisis like the Great Depression to exploit.  FDR did.  And he was able to transform the country because of it.  People saved less.  And government spent more.  Which led to deficit spending, massive debt and inflation.  And perhaps the cruelest thing he did was impoverish the retiring class.  By taking their wealth through taxes and inflation.  And making them dependent on a meager Social Security benefit.

Social Security Contributions would create a Bigger Nest Egg if Invested in the Private Sector

After seeing so many poor, hungry, homeless, etc., during the Great Depression government did something.  They punished those who saved responsibly for their retirement.  By redistributing their wealth to those who didn’t.  It seemed fair and just and kind.  And there was an element of that in providing a social safety net for our most vulnerable people.  But that wasn’t the intent of Social Security.  FDR wanted to transform the country.  Which he did.  And today they forecast Social Security will go bankrupt in the coming years.  Requiring ever more wealth redistribution.  All while making Social Security recipients live a more impoverished retirement than they would have.  Had they saved for their own retirement.  A true transformation of the richest country in the world.

So let’s look at the numbers.  Your Social Security contributions are technically saved in a ‘retirement account’ that accrues interest.  Each payroll period both employer and employee contribute to this ‘retirement account’.  Via a tax rate on a person’s gross pay up to a maximum amount (see Historical Payroll Tax Rates).  So let’s see what this would have done in the private sector.  Year by year.  With the following assumptions.  The worker enters the workforce at 18 and works until retiring at age 65.  The worker earns the maximum amount for Social Security taxes.  So all of his or her earnings are subject to the Social Security tax.  With each successive year we add the current contribution to the running balance in his or her retirement account.  The annual balance earns interest at 6% (including anywhere from 2-4% real return on their retirement investment and the rest of that 6% accounts for inflation).  The following chart shows the beginning 5 years and the final 5 years.

Here we can see the power of compound interest.  As we earn interest on both our contributions and the previous interest we earned.  Note that the total contributions for 48 years of work total $282,608.38.  Which earned a total of $540,413.12 in interest.  Bringing the retirement nest egg up to $823,021.50.  Again, this is assuming that the Social Security contributions were actually private retirement savings.  That thing John Maynard Keynes hated.  So this is what a retiree would have to live on in retirement.  Had his or her money not gone to the government.

The Purpose of Social Security was to make People Dependent on Government and Redistribute Wealth

Now let’s look at what kind of retirement that nest egg will provide.  Starting with some more assumptions.  Let’s say the retiree lives 35 years in retirement.  Reaching a grand old age of 100.  Not your typical retirement.  But one this retirement nest egg can provide.  For someone with fairly modest means.  Each year the retiree lives on $53,553.  At the end of the year they earn interest on their remaining balance.  Which helps to stretch that $823,021.50 over those 35 years.  The following chart shows the beginning 5 years and the final 5 years of that retirement.

Note how that $282,608.38 in retirement contributions can provide $1,874,355 in retirement payments.  Again, that’s the miracle of compound interest.  So what kind of retirement would Social Security have provided?  Someone who retires after working till age 65 who was earning $110,100 near retirement will receive approximately $24,720 annually in retirement.  Over 35 years of retirement that comes to $865,200 in retirement benefits.  Which is $1,009,155 less than someone would get investing in a private sector retirement plan.  Or a reduction of 53.8%.  Which is what people lose when letting the government provide for their retirement.  So Social Security is a very poor retirement plan.  Besides going bankrupt.  Which is why the Republicans want to give younger workers the option to opt out of Social Security and provide for their own retirement.  Which makes sense.  And would probably increase their quality of life in retirement.  As shown above.  So why are the Democrats so opposed to privatization of Social Security?

Because the purpose of Social Security was not to provide a quality retirement.  It was to make people dependent on government.  To redistribute wealth.  Increasing the power of government.  And for those things Social Security is a resounding success.  But there is one other thing why Democrats oppose privatizing Social Security.  What would happen if the person that built up that $823,021.50 nest egg died 5 years into retirement?  Who would get the remaining $781,392.18?  The retiree’s family.  Whereas if a Social Security beneficiary dies 5 years into retirement the government keeps their money.  To spend as they please.

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Woodrow Wilson, FDR, Progressivism, Great Depression, Creeping Socialism, Social Security, Baby Boom and Baby Bust

Posted by PITHOCRATES - January 15th, 2013

History 101

The Policies of Herbert Hoover and FDR caused and prolonged the Great Depression

Franklin Delano Roosevelt (FDR) took Rahm Emanuel’s advice.  Long before Rahm Emanuel gave it.  FDR did NOT let a good crisis go to waste.  And as far as crises go, none were better than the Great Depression.  After the government’s bad policies (wage and price controls, higher taxes, Smoot-Hawley Tariff Act, etc.) caused the Great Depression and then their monetary contraction caused the massive bank failures the poverty rate soared for senior citizens.  FDR saw that suffering and thought here was a way to forever lock in the senior vote.  Give seniors a government pension.  And put the fear of God in them that the opposition wants to take it away.

At the turn of the Twentieth century the new thing in politics was progressivism.  Smart government people intervening into our private lives to make things better.  The size of the federal government exploded during the presidency of Woodrow Wilson.  He gave us the Federal Reserve System.  America’s central bank.  That would prevent anything like the Great Depression from ever happening.  Which it failed to do.  As the Great Depression happened on their watch.  He gave us a permanent federal income tax.  He attacked the U.S. Constitution.  Making the case for expansive presidential powers.  And used the courts to get around Congressional opposition.  As well as the U.S. Constitution.

The political opposition fought back against Wilson’s power grab.  Defeating the progressive successor in the next election.  And returning the country to normalcy.  Warren G. Harding and Calvin Coolidge undid much of the anti-business policies of the Wilson administration.  Returning the nation to prosperity.  And giving us the Roaring Twenties.  Where the nation modernized with electric power, the automobile, radio, etc.  Unlike the speculative dot-com bubble of the Nineties.  Where investors poured money into dot-com companies that never made anything to sell.  The Federal Reserve was a little loose with their monetary policy causing some inflation in the Twenties.  But the economic activity was so robust that it absorbed that inflation.  Then the progressives got back in power.  First the Republican Herbert Hoover.  Then the Democrat FDR.  Whose policies caused and prolonged the Great Depression.

When FDR gave us Social Security it only cost Employer and Employee each 1 Cent of every Dollar up to $3,000

FDR was picking up where Wilson left off.  Expanding the federal government.  And the power of the presidency.  Using the federal courts like Wilson to bypass Congress.  And the U.S. Constitution.  Marking yet another departure from the free market capitalism that founded the country.  And made it the world’s number one economy.  It was a creeping socialism.  At least, that’s how the political opposition saw.  Especially with Social Security.  Which helped tip the power from the states to the federal government.  Just as Thomas Jefferson feared a strong executive would do.

Of course, the progressives played on our emotions.  These were, after all, destitute seniors.  We had to take care of these people.  Our fathers.  Our mothers.  Our grandparents.  Who sacrificed for us.  Now it was time to sacrifice a little for them.  And they promised it would be a little.  Both employer and employee would only pay 1 cent on every dollar earned up to $3,000 a year.  That’s all.  Only $30 a year (about $483.58 today).  And how could such a small amount be socialism?  The problem was that it didn’t stay only 1 cent on every dollar earned up to $3,000 a year.  The tax rate went up.  As well as the maximum taxable earnings.  The government has increased them both.  Often.

(source: Historical Social Security Tax Rates)

That low tax rate lasted barely a decade.  Then they started raising the maximum taxable earnings.  Not much for the first 30 years or so.  But once the Seventies arrived that maximum amount grew at an accelerated rate.  Despite the increasing tax rate.  Thanks to President Nixon decoupling the dollar from gold.  And ushering in the era of out of control Keynesian economics.  Where the government inflated the money supply like there was no tomorrow.  Devaluing the dollar at an alarming rate.  Which is why they increased the maximum amount of earnings at an accelerated rate.  Because constantly devaluing the dollar reduced what those Social Security checks could buy.  So they had to keep making those checks bigger.  And that required more tax revenue.

The Social Security Tax Rate held Steady during the Nineties thanks to the Dot-Com Bubble and Japan’s Lost Decade

But it’s worse than that.  For it’s just not bad monetary policy forcing the increases in the tax rate as well as in the maximum taxable earnings.  Something else happened during the Seventies.  Birth rates fell.  The baby boom ended in the Sixties.  But not the baby making activities.  They just continued along without producing new taxpayers.  Thanks to birth control and abortion.  Also, over the years they expanded the Social Security program to provide for more than just those destitute seniors.  So the benefits of the program greatly increases just as the falling birth rate reduce the growth rate of tax revenue.  As the number of people leaving the workforce grew at a greater rate than those entering the workforce.  Which is why when you convert the dollars into constant dollars the graph doesn’t change much.

We finance most wars with inflation.  By printing money to expand the money supply.  To give the government all the cash they need to buy the instruments of war.  And to pay, feed and clothe their military personnel.  We can see this rapid inflation during World War II as the real dollar amount of the maximum taxable earnings fell.  That changed in 1951.  When they started to increase that maximum amount.  That and the higher tax rate stabilized things for awhile.  Then the Seventies came along.  Where both the tax rate and the maximum taxable earnings amount continued to rise.  Even in real dollars.  Reflecting the growth in benefits.  And the fall in tax revenue.  Thanks to the baby bust following the baby boom.

The tax rate held steady during the Nineties thanks to the surpluses of the Clinton administration.  Due to that dot-com bubble.  And Japan’s Lost Decade.  Whose bad economic times helped boost the American economy.  Still they had to keep raising the maximum earnings amount.  As the baby boomers started retiring.  Then Clinton’s dot-com bubble burst.  Giving George W. Bush a recession to start his presidency.  His tax cuts pulled us out of that recession.  Then Bill Clinton’s revamping of the Community Reinvestment Act caught up with us.  Giving us the subprime mortgage crisis in 2008.  And the Great Recession.  Which President Obama tried to ameliorate by reducing the employee’s Social Security tax rate from 6.2% to 4.2% in 2011.  For his near trillion dollar stimulus bill failed to end the Great Recession in 2009.  As his Social Security tax cut failed to do in 2011.  Which was not enough to overcome his anti-business policies (such as Obamacare).  All he did was starve Social Security of hundreds of billions in revenue.  Making the Social Security funding problem worse in the long run.  Requiring even higher tax rates than that once promised 1% (for both employer and employee).  On earnings more than that promised $3,000 (about $48,000 today).

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2012 Endorsements: Woodrow Wilson, FDR and Joseph Stalin

Posted by PITHOCRATES - October 30th, 2012

2012 Election

A Strong President and a Few Judges could defy Congress and the State Legislatures and Govern as They Please

Woodrow Wilson became president in 1913.  He was a progressive.  And didn’t much care for our Founding Fathers.  Or our Founding Documents.  The Declaration of Independence.  And the Constitution.  He referred to our inalienable rights as a “great deal of nonsense.”  Preferring to think of them as privileges granted by the government.  Like kings once did.  And as kings did not like limits on their power so did Wilson not like limits on his power.  For government was a living thing that could grow and do great things.  But to do great things it needed great men in leadership positions.  Like him.  Not hindered by the checks and balances of the Constitution.  Or state legislatures.  Or people clamoring about their inalienable rights.

This was the age of progressivism.  When smart people were in government.  Smarter than they ever were before.  People who graduated from the finest institutions of higher learning.  Or ran them.  Like Wilson.  Who was president of Princeton.  Progressives were smarter than the average American.  Who could take America to such great heights.  If they could only keep the dumb people from interfering with their vision.  And foolishly try to limit the power of the federal government.  So, as president, Wilson got a lot of legislation passed that helped make the federal government more powerful.  Such as creating the Federal Reserve System.  A central bank that could print money as the government needed it.  And enacting the first federal income tax since the American Civil War.  With this new found wealth the federal government only needed one other thing to take America to great heights.  Getting rid of the Constitution.

As much of what Wilson wanted to do exceeded his Constitutional authority he needed a way around that particular nuisance.  The checks and balances of the Constitution.  Especially after the Framers made it so difficult to add amendments.  Requiring a 2/3 supermajority in both houses of Congress.  And then ratification by three-fourths of the state legislatures.  Not a promising way to make radical changes in the structure of the federal government.  So Wilson’s solution was not to amend the Constitution.  But to go around the Constitution.  With judicial activism.  The president should appoint federal judges who share his views of abandoning the intent of the Framers.  Thus consolidating power into fewer hands.  So they could do more of what they wanted and less what the people wanted.  A strong president and a few judges along the way could defy the Congress and the state legislatures and govern as they please.  Reshaping America into their vision.  Not the Founders’ vision.  A progressive vision.  Where these few enlightened and very smart individuals would do what was best for us.  Even if we didn’t know what that was.

The New Deal was a Revolution made not by Tanks and Machine Guns but acts of Congress and Decisions of the Supreme Court

Franklin Delano Roosevelt (FDR) saw things the way Wilson did.  FDR was all for radical change.  And breaking away from the constraints of our Founding Documents.  And his New Deal did just that.  A radical change and expansion of the federal government.  And to help get the people to embrace these changes in the long-term he introduced Social Security.  To get even more people dependent on the federal government.  A program so convoluted he reportedly said that it would be impossible to overturn.  He empowered unions.  He introduced payroll taxes to fund Social Security.  He raised income taxes.  Even tried to implement a heavy progressive tax that topped out at 100% for the very rich.  And he introduced the withholding tax.  As people’s tax bills were to grow so large there would have been push back had they had to write a check at the end of the year for the full amount.  But if you took a little bit each pay period the total tax bill didn’t seem so high.

In FDR’s 1944 State of the Union speech he proposed a Second Bill of Rights.  However, when talking about our Constitutional rights he called them “inalienable political rights.”  By inserting the word ‘political’ those God-given rights of the Declaration of Independence became privileges granted by the government.  Which was similar to the way Wilson saw those rights.  As privileges granted by government.  And privileges that government could take away.  Thus emphasizing the power of the federal government over the individual.  Making it easier to impose those new federal taxes.  So what were those new rights?  A good-paying job, adequate food and clothing, recreation, high farm prices for farmers, freedom from unfair competition, a decent home, medical care, a pension, unemployment insurance and a good education.  Sound familiar?  If you’re an old Soviet communist they do.

Chapter X of the 1936 Soviet constitution included a list of Fundamental Rights.  Which included a right to a good-paying job, adequate food and clothing, recreation, medical care, a pension, and a good education.  Among others.  No surprise, really.  As FDR was a fan of Joseph Stalin and what he was doing in the Soviet Union.  The same kind of things he wanted to do.  But he didn’t have the same freedoms Stalin had.  There were such similarities that Whittaker Chambers, a Soviet spy in the US during the time of the New Deal wrote in his book Witness “the New Deal was a genuine revolution, whose deepest purpose was not simply reform within existing traditions, but a basic change in the social and, above all, the power relationship within the nation.  It was not a revolution of violence.  It was a revolution by bookkeeping and lawmaking…made not by tanks and machine guns, but acts of Congress and decisions of the Supreme Court…”  Just like Wilson envisioned.

If Woodrow Wilson, FDR and Joseph Stalin were Alive Today they would likely Endorse Barack Obama and Joe Biden

Alexander Hamilton believed in a strong central government.  Partly because he saw what a weak central government did to the Continental Army during the Revolutionary War.  And partly because he admired the greatness of the British Empire.  He wanted an American Empire.  Trusting that only men of virtue would serve in a republican government, he did not fear a federal government from overreaching, and abusing, their power.  Thomas Jefferson and James Madison thought Hamilton was mad.  And fought against him with every last fiber of their bodies.  Because they knew that they couldn’t trust future members of their republican government to be men of virtue.  As proven by Aaron Burr.  Who lived during the time of the Founding Fathers.

The modern Democrat Party traces its roots back to Woodrow Wilson and FDR.  Men hungry for power.  And having little virtue.  Today we call people like them Big Government liberal Democrats.  Who have continued to advance the growth and power of the federal government.  Approximately 20% of the population identifies themselves as liberals.  And yet the liberals have greatly advanced their agenda.  How?  In large part through judicial activism.  Using the courts to give them what the state legislatures or Congress won’t.  Such as when a state passes a referendum on a liberal issue, such as redefining gay marriage, the liberals use the courts to overturn that act of democracy.  Or any other that they disagree with.

Now that’s the kind of governing that Wilson and FDR would approve of.  Even Joseph Stalin.  More and more power centralized in the federal government.  The ability to overturn legislation you don’t like.  A revolution without violence.  It doesn’t get any better than that.  If Woodrow Wilson, FDR and Joseph Stalin were alive today they would likely endorse the Democrat candidates Barack Obama and Joe Biden.

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LESSONS LEARNED #32: “America is great but it can’t make bad ideology good.” -Old Pithy

Posted by PITHOCRATES - September 23rd, 2010

Hamilton vs. Jefferson

So what was the deal with these two Founding Fathers?  Why did they hate each other so?  They were exceptionally bright, among the best read of the founders.  They each had impeccable revolutionary credentials.  And, prior to 1787, they had similar visions for their new country.  So what happened?

Despite their similarities, they were two very different men.  Hamilton was a bastard child whose father left him at a young age.  His life was hard.  He had a job while still a child.  Anything he had he had to earn.  Jefferson, on the other hand, was born into the planter elite of Virginia.  His life was not quite so hard. 

A bit shy, Jefferson buried himself in books.  He loved to read.  And to think.  To ponder the great questions of life.  While Hamilton worked in and learned the import/export business in the Caribbean.  As Jefferson pondered about what might be, Hamilton mastered commerce.  Understood capitalism.  Pondered what was.  And could be.  If he ever got off of that godforsaken island.

Eventually, he did.  He came to the colonies and went to college.  And gave Jefferson a run for his money in the smarts department.  And in one area, he simply left Jefferson in the dust.  Hamilton could understand things if you put dollar signs in front of them.  Jefferson could not.  For all his genius, Jefferson couldn’t make a buck.  He was forever in debt.  Because he struggled in these areas, he distrusted banking and commerce.  And the big cities that they corrupt.  Hamilton, though, understood banking and commerce.  He understood capitalism.  And what it could do.

Thus the divide between these two men.  Hamilton, a champion of capitalism.  And Jefferson, a champion of the yeoman farmer (a farmer who owns and works his own land.).  Of course, Jefferson was anything but a yeoman farmer.  He had others (i.e., slaves) work his land.  Here he was like the contemporary liberal.  Do as I say.  Not as I do.  For wealth and luxury obtained from the labors of others is okay for me and my fellow planter elite.  But not for you.  Especially when the ‘black arts’ of commerce and banking are concerned.

London, Paris/ Versailles and Madrid

The old world capitals had many things in common.  They were the homes of powerful monarchies.  They were the financial capitals of their countries.  And they caused a lot of mischief in the world.  Jefferson saw the connection between money and power.  More money, more power.  More power, more mischief.  Another good reason to hate commerce and banking in Jefferson’s book.

Of course, Hamilton saw it differently.  He saw one empire in ascent.  And two in descent.  And it was no coincidence that the better practitioner of capitalism was also the empire in ascent.  Great Britain.  He may have fought against her in the Revolutionary War, but he still admired her.  Where Jefferson feared the combination of money and power, Hamilton saw the Royal Navy.  Great wooden walls (as John Adams called them) that had protected the empire since she became an empire.  Grew her empire.  Increased her wealth.  And her power.  In fact, losing her British colonies was the only real defeat this empire had suffered.

When the Founding Fathers looked west they saw great potential.  Jefferson saw farms.  Hamilton saw empire.  One greater than Great Britain.  For after all, the Americans did what no other European nation could.  They defeated her in war and took huge chunks of her empire.  (Of course, our Revolutionary War was but one theater in a world war Great Britain was fighting at that time.)  Hamilton saw great potential for his new nation.  If only business and government partnered to harness that great potential.

Money + Power = Corruption

When business partners with government we don’t get capitalism.  We get mercantilism.  Or crony capitalism.  But you have to understand things were different in Hamilton’s day.  A good politician then went to great lengths NOT to profit from his time in public service.  It was expected.  Selfless disinterest.  In fact, it was unseemly to even campaign for public office.  That was just something a gentleman of the Enlightenment wouldn’t do.  And if anything was important in those days, it was showing how much a gentleman of the Enlightenment you were.

That said, business partnering with government would NOT lead to corruption.  At least, in Hamilton’s eyes.  With the right men in power, only good would result.  Though Jefferson, too, was a gentleman of the Enlightenment, he had no such faith in government.  To him, it was simple arithmetic (as long as there were no dollar signs involved):

                Money + Power = Corruption

So the new American capital wouldn’t be in a big American city.  Not in New York City.  Not in Philadelphia.  It would be in a swamp.  On the Potomac.  In Virginia’s backyard.  So Jefferson and his planter elite brethren could make sure the new American government would speak with a southern accent.  So much for that enlightened disinterest. 

Both Right.  Both Wrong.

No man is perfect.  Not even me.  No, really.  It’s true.  I’m not.  And neither were Hamilton nor Jefferson.  Hamilton may have wanted to conquer the world.  And Jefferson may have been such a good liar that he even fooled himself.  But the Hamilton treasury department gave this nation international respectability and allowed her to service her debt.  Which allowed her to borrow.  Which allowed her to survive.  And Jefferson fully understood what Lord Acton would say a century later:  Power corrupts.  Absolute power corrupts absolutely.

However benign a government may be, however it may look out after the people’s interests, government is still a body of men.  Jefferson understood this.  The Founding Generation was special.  They knew it.  They knew they were making history.  But were they unique?  Would this moment of selfless disinterest in time prove to be fleeting?  (As it turned out, yes.)  And, if so, what would happen to later generations?  When men of lesser character assume offices of sweeping powers?  What then?  Well, they would abuse their power.  So what to do?

Simple.  You prevent such a scenario from happening.  By not giving government sweeping powers.  And by not letting them accumulate great wealth.  Because bad things happen when you do.

The French Revolution

France was the cradle of the Enlightenment.  In the 18th century, anyone who mattered spoke French.  France was the dominate European power.  And some in France lived very well.  Most did not.  The majority were still feudal peasants.  Or poor laborers, artisans and craftsmen.  And they were hungry.  Poor.  And without breeches (those fancy knee-length pants the rich people wore).

While the sans-culottes (those without breeches) went without, the king, nobles and clergy were living large.  All the wealth of the largest European country was concentrated in their few hands.  As was the power.  And, of course, you add money and power and what do you get?  That’s right.  Corruption.  Add to that some crop failures and you get a very unhappy population.  Who overthrow the monarchy.  Execute their king.  And his queen.  And quite a few others before they stopped the bloodletting. 

Note that France’s troubles were the result of the money combining with the power.  The French monarchy incurred a huge debt fighting their perpetual war (it seemed) with Great Britain.  At the end of the world war that included the American Revolution, both saw those great debts grow larger.  Great Britain, an advanced capitalist nation, was able to service her debt and get on with the business of empire.  France, still fundamentally feudal, could not.  This great nation that had sparked the modern age could not even feed her own people.  She had taken all her people could give.  And her people could give no more.

Beware the Do-Gooder

The downfall of most nations results from this combination of money and state power.  This is an ideology that history has proven a failure.  The more money the state accumulates, the more it can do.  And the less you can do.  You go with less.  And the state causes greater hardships for everyone.  It can go to war.  Which it can lose.  Or prolong.  Hitler started out strong but the German people paid a steep price in the long run.  The allied bombers destroyed their homes.  And killed their families and neighbors.  While the allied armies killed their husbands, fathers, brothers and sons.  And those Germans who unfortunately fell within Soviet controlled territory after the war faced possible retribution for the crimes their husbands, fathers, brothers and sons committed against the soviet people.  In that hell on earth know as the Eastern Front.

But war is not the only mischief a state can do.  They can build opulent palaces (like at Versailles).  Or they can create a welfare state.  Where they get as many people as possible dependent on the state.  And the more they do, the more wealth the state transfers from the private sector to the public sector.  The state does well.  Especially the inner-party members.  The few who control the wealth.  And what happens in the long run?  The state gets richer and the people get poorer.  Just like they did in pre-revolutionary France.  In pre-revolutionary Tsarist Russia.  And, ironically, the state that replaced Tsarist Russia; the Soviet Union.  Communist China.  Cuba.  North Korea.  Peron’s Argentina.  Idi Amin’s Uganda.  Saddam Hussein’s Iraq.  Etc.

Whenever the government has large amounts of money and power, they rarely do good things.  What typically happens is that the ruling elite live well while the masses suffer.  And they use fear, intimidation, torture and execution to maintain their power.  What a nation chooses depends on how much they care what the free world thinks of them.  The Communists cared little so they used more brutal force.  Social democracies do care.  So theirs is a much softer tyranny.  These people don’t use force.  They seduce with promises of free stuff and a better life.  Which they never deliver.  Well, not to the people.  They do deliver it to those who hold power.

You Get What You Pay For

It’s bad when we don’t learn from world history.  It’s especially sad when we don’t learn from our own history.  We know what works.  And what hasn’t.  Wilson’s progressivism didn’t work.  FDR’s New Deal didn’t work.  LBJ’s Great Society didn’t work.  These administrations just transferred more money from the private sector to the public sector.  Money plus power equals corruption.  And these administrations were rife with corruption.  When we suffered the stagflation of the 1970s, those in power were still living large. But we never learn, do we?

The Obama administration is transferring more money from the private sector to the public sector than any other previous administration.  Our national debt will exceed our gross national product (GDP).  For all intents and purposes, it will be permanent.  All subsequent generations will work more and more just to service this massive debt.  And pay for all that ‘free stuff’ we were promised.  Sure, we’ll have free health care.  It just won’t be any good.  Nothing free is.  The free toy in a box of cereal is never as good as the toy you pay for.  Because you get what you pay for.  And if the government is going to give everyone free health care, it will have to be ‘free toy inside a cereal box’ quality health care.  For the same reason they don’t put expensive toys in cereal boxes.  If you give something to everyone, you have to give everyone less.  It’s the only way you can afford to give something to everyone.  You have to give everyone crap.

These things have never worked.  Nor will they.  Ever.  Even if the United States does them.  Because bad ideology is just bad ideology.  No matter how great the nation is that tries it. 

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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.

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