Wednesday, June 25, 2008

Lecture on The Book of Daniel

THE BOOK OF DANIEL: FROM THE OLD LEFT TO THE NEW

-- text of lecture delivered by Michael Meeropol, March 6, 2008 at the Western New England College colloquium devoted to the work of E.L. Doctorow

A couple of years ago, Edgar Doctorow was giving a talk at Fordham University Law School about the genesis of The Book of Daniel. He had grown up in a family of New Deal Democrats but he had been exposed to all manner of people known generically as the “Old Left.” That terms encompasses communists, communist sympathizers, socialists, Trotskyists. Not all of them liked the Soviet Union but they all were highly critical of American capitalism.

This is especially true in the context of the Depression when many of these individuals came of age.

Beginning first in the South with the sit-in movement in 1960 (which itself was stimulated by the successful Montgomery Bus Boycott of 1955) and expanding to mostly white college campuses in the mid to late 1960s, a New Left emerged.

Remember Dr. Beagle’s quote: History tells you how it was – Historical fiction tells you how it felt.

Edgar Doctorow wanted to write about the New Left – but he wanted to give it the perspective of history that many of its participants – being young and arrogant and disrespectful of their elders! -- did not have. He chose as the vehicle for this exploration, the quintessential child of the Old Left – the orphaned son of a couple executed as spies in 1954. Much of the novel takes place in 1967 when the son is now a 25 year old graduate student, married with an eight-month old son ---

In the novel, Daniel Lewin (nee Isaacson) attempts to understand the story of his family but also to sort out his role in the middle of the turmoil of the 1960s.

As with my lecture about the historical and economic background to Ragtime, I want to focus on some of the discussions of the “old left” and the “new left” that are scattered throughout this wonderful novel.

Just in case anyone was curious – I am not going to be talking about the book’s relationship to the real life story of Julius and Ethel Rosenberg, a couple who were executed in 1953 allegedly for stealing the secret of the Atom Bomb. I have chosen this course in large part because I want to be true to Ed Doctorow’s vision for his novel. Though many have remarked on the close modeling of The Book of Daniel on the Rosenberg case the point is that these characters are not Ethel and/or Julius Rosenberg – and Daniel and Susan Isaacson are not the Rosenbergs’ two sons. Instead they are fictional characters who were part of the Old Left (communists in fact) and whose children joined the new left in the 1960s.

So what was the “old left”?

Perhaps I can get at an understanding of that term by taking off from Professor Baick’s discussion last week. Remember, he placed the novel Billy Bathgate in the context of the Great Depression and he noted that having a job and doing it well was really important for people during the depression. Equally important was the desperation to survive and succeed – symbolized by the scene where “Billy” is given a ten dollar bill and determines he has less than a minute to get away before a bunch of kids where were his friends literally seconds ago would jump him to “share” his money – and maybe even kill him in the process. In other words – if you have a chance to get ahead – take it – and the Hell with everyone else.

To that individualistic response – the extremity of which was to engage in crime – often crime that victimizes people just like yourself – was counter-posed the collective, political response.

Professor Baick noted in passing that the reason why the gang of friends would most likely jump Billy for the money was that “we are all in this [the depression] together” –

Professor Baick was implying that the people likely to jump Billy for the money believed that every gain for every individual had to be shared!

I am not an expert on the totality of Doctorow’s writing, but I am impressed by what I have read in Ragtime and The Book of Daniel and excerpts of other novels (including Billy Bathgate and The March) that he focuses on individual actors in history and not so much on “social movements” -- the activities of people in groups.

In fact in both the book and the movie Daniel, the glimpse we have of the Old Left social movements – namely the movement to free Daniel and Susan’s parents – is of total insensitivity to the children. This occurs very early in the book – pp. 21-22 in the edition in the library. They are terrified as they are lifted through a crowd so they could be displayed on stage as the crowd yells “Free Them Free Them.” The children are, of course, traumatized. We, the readers are left with nothing but revulsion for the so-called “movement” that would so exploit innocent children for political ends – even if the ends are laudable, freeing those children’s own parents.

Back to Professor Baicks point –

The depression definitely was a period of gangsters and crime – but it was also a period of intense organizing of unions and the growth of both the Communist and Socialist Parties. This trend was based on a conception of solidarity– that to return to Prof. Baick’s statement: “We are all in this together …” The solution was not to try to become successful as an individual but to change the system so that all could benefit from the productivity of society.

There are two versions of today’s (with hindsight) view of the “Old Left.”

The one that dominates political discourse today is a very harsh condemnation of the Communist Party which was the largest and most influential grouping within the Old Left. The condemnation is that they were a group of traitors or would-be traitors whose loyalty was to the Soviet Union. If this organization and its members ever did anything to advance positive things in the US it was purely to manipulate people. Individuals who were members who did not participate in traitorous activities and would not have supported such activities were dupes – manipulated by their cynical “leaders.”

The other version is the version I support ---

The Old Left believed Socialism (even Soviet-style socialism) was superior to capitalism – even US style capitalism – The communists went further -- they believed that the Soviet Union was the hope of the world – and they therefore believed that it was important that the Soviet Union survive.

Some of them who were in a position to help – such as the scientist Klaus Fuchs, the scientist Theodore Hall – actively helped the Soviet Union during World War II.

However – the vast majority of communists were never in a position to help the Soviet Union as spies… they “helped” by publicizing positive things about the Soviet Union and arguing against negative information about the Soviet Union.

However, they mostly spent their active political lives fighting for a number of things that lots of non-communists also fought for – civil rights for blacks, the right of unions to organize, against the nuclear arms race and the various post-WW II wars (Korea, Vietnam).

Though I believe most communists were not spies it is definitely true that most Communists were “pro-Soviet” – what that meant was they thought the idea of a country calling itself socialist and attempting to build communism was very important

By the way, the terms “socialism” and “communism” meant different things to communists in the 1930s than they mean now.

In the context of the 1930s, 40s and 50s, “Socialism” meant an economic system which produced and distributed goods and services according to the following rule: – from each according to his ability, to each according to his work. (Where “his” referred to both men and women!)

Communism was the goal which could only be achieved after a long period of time under socialism. After developing the ability of society to produce so much that in effect the problem of “scarcity” would be banished, the society could then be organized according to a different rule: – from each according to his ability, to each according to his needs

Note that most of us in this room would probably deny that it was possible to banish scarcity but communists did believe that.

For American communists and communist sympathizers, the idea was that a country building socialism and aiming towards communism (as defined above) was a better country than the US.

Now – some communists would no doubt have agreed that the Soviet style one-party state and the absence of American style civil liberties would not be good for an American version of socialism … and many would have probably been a bit confused if forced to explain how the so-called “dictatorship of the proletariat” would work in the American context. Nevertheless, I do believe that many of the gut feelings of the individuals who were in the American Communist Party would and could be summarized by the following statement:

They wanted Jefferson and Lincoln plus a planned economy. (Jefferson because of the Bill of Rights – Lincoln as a shorthand for full citizenship for ex slaves -- a planned economy to create economic justice).

However, they were very much in the mold of Americans participating in the political process and the mainstream of culture. Thus, unlike the anarchists such as Emma Goldman and Mother’s Younger Brother who we met in Ragtime, there was no free love and “living in sin…” Communists got married, served in the military, were actually quite staid in their personal lives. Some artists who were communists practiced what came to be known as the “bohemian lifestyle” but in general communists were critics of anarchism, avant garde art, drugs, homosexuality, etc. Writers for example had to conform to principles of so-called “socialist realism.”

It is important to understand that in the context of the Great Depression and World War II, Communism was very attractive to idealistic young people. Here was a system – a proposed way of organizing society -- that promised to abolish poverty and the unfairness of workers working 10 hours a day so their bosses could get rich. Here was a system that in the middle of the world wide depression was building dams, steel mills, collective farms and creating universal education and health care in the Soviet Union.

Old leftists could look back on American history (from the vantage point of the 1940s and 50s) at the struggles of abolitionists to fight slavery – the struggles of freed slaves after the Civil War to keep their rights in the face of the intransigence of white Southerners who (with the terrorism of the Ku Klux Klan and the withdrawal of Northern troops) ended up disenfranchising the freed slaves and relegating them to approximately 90 years of second class citizenship (depending on what state we’re talking about) –

They could look back on the struggles of workers to organize unions in the face of violence against strikers – from the 19th century right up to the sit down strikes of the 1930s – and they could also look with pride on the role of Communists in World War II.

Old Leftists would see the march of progress from the American Revolution to the spread of democracy (removal of property qualifications for voting) to the Civil War and Reconstruction to the struggles of farmers in the populist movement – to the struggle for union recognition which led to the creation of the CIO – Old leftists could claim that America had moved almost in a straight line from less democracy to more democracy from slavery and oppression to freedom and a move towards equality --- they could see the rise of unions as part of this march and the role of blacks in American culture as part of this march – and even in the late 1940s the integration of both baseball and the armed forces could be seen as part of this march towards progress.

Old leftists also celebrated their favorite playwrights, poets, authors, artists -- Clifford Odets (Waiting for Lefty), Richard Wright (Native Son), Langston Hughes (Harlem – the poem that inspired the play and movie A Raisin in the Sun), Paul Robeson, Pete Seeger, Woody Guthrie – not all of them communists but all of them pro-communist ….

At the same time, old leftists warned about repression that occurred in many periods of US history: the alien and sedition acts during the John Adams administration, the rise of the Ku Klux Klan after the Civil War and again in the 1920s, the repression of labor unions throughout the 19th and early 20th centuries, the Palmer Raids after World War I and the witch-hunts – what came to be called McCarthyism -- after World War II.

What was the difference between the old left and the new left?

Perhaps the most important difference was that the new left did not feel the need to either defend or embrace the Soviet Union --- for the most part, they considered the Soviet Union irrelevant.

People in the new left were not very ideological in the middle years of the 1960s decade. They were explicitly socialist (even communist) members of various new left groups but they mostly were interested in action rather than theory.

In the early 1960s the Civil Rights movement in the South inspired northerners to offer their support – either by picketing of local Woolworth stores in support of the Southern students engaging in sit-ins or with actual trips to the South – as in the Mississippi Freedom Summer of 1964.

In 1962, the Port Huron Statement was adopted by SDS. In it you can see how different the New Left was from the Old Left.

The New Left was more anarchist -- definitely not Marxist-Leninist. As such it was quite attractive to certain libertarians. Senator Barry Goldwater who ran for President as a libertarian conservative in 1964 stated explicitly that he had a lot in common with the “anarchist wing of the New Left.” His campaign manager Karl Hess actually became a New Leftist and wrote quite approvingly about the libertarian tendencies within SDS and other organizations.

One of the most celebrated individuals by the New Left was (is) the linguist Noam
Chomsky. He opposes the Communist view of the need for hierarcy and strong governments.

Why do I bring him up? Because he is above everything else an individual. He is the exact opposite of an organization person. He celebrates the actions of ordinary people acting in groups – those who demonstrate, who commit civil disobedience, who actively oppose illegitimate authority – but he does not join organizations. He opposes most political parties especially old left political organizations.

He would probably identify himself as a “libertarian socialist” because he believes private ownership of wealth-producing property creates imbalances of power that are always exploited by the owners and the already powerful to enhance their positions versus the people with less power and less wealth.

By the way, the organization that Susan Isaacson is involved with, the Boston Resistance is an outgrowth of a document signed by Chomsky among others called “A Call to Resist Illegitimate Authority” – those who burned draft cards, refused induction into the armed forces, fled to Canada or went to jail were all followers of The Resistance and Susan Isaacson ends up involved with that particular organization.

The New Left was composed of privileged individuals. They were mostly college students or recent graduates. The blacks who launched the sit-in movement in 1960 and who founded the Student Non-Violent Coordinating Committee were not sharecroppers – they were college students (albeit in the segregated South for the most part). The students who drafted the Port Huron Statement and then engaged in acts of civil disobedience at the Pentagon in 1967 (where the Daniel Isaacson character participates on pages 250-257 in the book) were different from the people who organized unions and participated in the sit down strikes of the 1930s.

Whereas one could argue that many communists and fellow travelers were poor and working class themselves trying to make a better world for themselves – many of the individuals of the New Left (the black college students who gave up the comforts of their academic opportunities to work with rural sharecroppers trying to get the right to vote – the white college students who went to Washington to demonstrate against the Vietnam War – who burned their draft cards even though they had student deferments) were taking action on behalf of others.

Certainly, the character of Daniel in The Book of Daniel is quite diffident about engaging in action at the beginning of the book.

That’s the point of the very angry exchange over Christmas dinner between himself and his sister.

When we experience this argument we already know that Daniel’s sister Susan has made a suicide attempt and is currently in a mental hospital. Daniel remembers the previous Christmas on pp. 79-82. In that passage we learn of Susan’s political involvement and her proposal to use the money raised for Daniel and herself (which would become theirs at the time of her 21st birthday) to start a foundation in their parents’ name that would give money to “the movement.”

Daniel argues against it – making Susan so mad that in a letter she writes to him, she states “Some day Daniel following your pathetic demons you are going to disappear up your own asshole. To cover the time until then I am writing you out of my mind. You no longer exist.”

Daniel concludes a couple of pages later that Susan was driven to eradicate him [Daniel] from her consciousness by the radical means of eradicating her consciousness – that is, attempted to commit suicide.

Though Daniel appears very much opposed to taking the actions Susan endorses, for the rest of the novel he begins to follow up on Susan’s desires. Because she is incapacitated in the mental hospital, he becomes active.

He claims (in the book) that he has ultimately achieved what he calls satisfaction when he puts his body on the line at the Pentagon in the 1967 demonstration.

Please note that the entire structure of the book is Daniel’s individual quest – identifying the new left as highly individualistic and discovering the real shortcomings of the old left.

It begins on p. 34 where Daniel remembers his father –

“What I remember is the lectures.”

Beginning with that sentence, we get almost a complete summary of the ideology of the old left in these pages.

One of Daniel’s lessons from these lectures are not the ones that his father wanted him to learn. While Paul was stating “The battle is not finished, the struggle of the working class is still going on. Never forget that, Danny,” Daniel has decided that “… it seemed to me then that I was marked. Because they had a lot more power than we did.” (p. 36)

By the way, this idea that “they” had a lot more power than “we” had was the opposite of the new left view – The new left view was that the power of the people would ultimately prevail. That if enough people demanded change – whether it was in the South against official racial discrimination and second-class citizenship or on College campuses where the draft created cannon fodder for an imperialist war – the idea that if enough people opposed bad policies, they would be forced to change.

The Old Left after WW II was not optimistic – the new left during the 1960s was wildly optimistic!!

On p. 40 we are introduced into a very interesting contradiction within the Old Left. Daniel (or the author) is describing Rochelle (his mother) as a better radical than Paul, ELD (through Daniel) points up a rather ridiculous contradiction in the old left.

“ …the implication of all things he used to flagellate himself was that American democracy wasn’t democratic enough. He continued to be astonished, insulted, outraged, that it wasn’t purer, freer, finer, more ideal … Why did he expect so much of a system he knew by definition could never satisfy his standards of justice? [Rochelle’s argument] A system he was committed to opposing because he had a better one in mind.”

Later on, on p. 85 and 86 we see Paul Isaacson being upset that America wasn’t living up to its democratic ideals. A communist functionary – obviously someone high up in the organization – patronizingly marvels at Paul Isaacson’s naivete about the US. Whereas Paul is shocked and angered by the anti-democratic actions of the US government, the man says that it’s obvious that this is the logical result of capitalism – why should Paul Isaacson be surprised?

E.L.Doctorow wants us, the readers, to be outraged by our country’s betrayal of our ideals. He does not want us, the readers, to be convinced by the cold, calculating Communist leader who accepts it as a matter of course. We don’t like his cynicism and to make sure we aren’t convinced, the child Daniel observing the conversation “doesn’t like” the man either.

A bit later in the novel, on p. 104, Paul Isaacson has apparently learned that lesson – or at least he’s learned to “parrot” that lesson. When Paul informs his wife, Rochelle, that their friend, a Dentist named Selig Mindish, has been arrested he says, “It’s only the coming of fascism so why should we be surprised?”

Communists feared “the coming of fascism” because they know that in Europe when fascism came, the communists were the first to be arrested and killed and put into concentration camps. In 1950, a security index was created and a law was passed that provided for detention without trials of anyone on that security index should the President declare a national emergency. The Communist leaders were tried and convicted under the Smith Act in 1950 for “teaching and advocating the overthrow of the US government by force and violence…” And of course there were spy trials as well.

On p. 134, we are in 1967 where Daniel meets up with the New Left counter-culture in the person of Artie Sternlicht. He is an Abbie Hoffman/Jerry Rubin type – two of the three who founded the “Youth International Party” known as the Yippies …

The three pages of Sternlicht “rapping” are in fact a neat summary of the audacity of the New Left and the contrast with the old left (with their organizations and rules and hierarchy).

Listen to Sternlicht a bit …

“So how do you bring change to something this powerful. The same way a skinny little judo freak throws a cat three times his size. You don’t preach. You don’t talk about poverty and injustice and imperialism and racism. That’s like trying to make people read Shakespeare, it can’t be done. Look there, what do you see? [out the window at other apartments] Little blue squares in every window. Right? Everyone digging the commercials. That is today’s school, man. In less than a minute a TV commercial can carry you through a lifetime. It tells the story from the date to the wedding. It shows you the baby, the home, the care, the graduation. It makes you laugh and makes your eyes water with nostalgia … Commercials are learning units. So like when the brothers walk into the draft board down in Baltimore and pour blood all over the induction records – that’s the lesson. And the Yippies throwing money away at the stock exchange…. Society is a put on so we put on the put on. Authority is momentum. Break the momentum. Legitimacy is illegitimate. Make it show its ass. Hit and run. … Next month we’re going to Washington and exorcizing the Pentagon. We’re gonna levitate the Pentagon by prayer and incantation and blowing horns and throwing magic invisibilities at the Pentagon walls. We’re gonna lift it up and let it down. We’re gonna kill it with flowers. Be there! We’ll be on television. We’re gonna overthrow the United States with images.”

Earlier in the book, Doctorow had said it more succinctly—“So the Trustees of Ohio State were right in 1956 when they canned the English instructor for assigning Catcher in the Rye to his freshman class. They knew there is no qualitative difference between the kid who thinks it’s funny to fart in chapel and Che Guevara. They knew then Holden Caulfield would found SDS.”

And Daniel is there in Sternlicht’s apartment because Susan had previously come there to add a poster of her parents to a big collage on the wall

On p. 151 Sternlicht attacks the old left – and Daniel’s parents …

I read Doctorow as being appalled by Sternlicht’s insensitivity to both Susan and Daniel, but he wants the reader to at least think about what Sternlicht is saying …

“Your folks didn’t know shit. The way they handled themselves at their trial was pathetic. I mean they played it by THEIR rules. The government’s rules. You know what I mean? Instead of standing up and saying fuck you, do what you want, I can’t get an honest trial anyway with you fuckers—they made motions, they pleaded innocent, they spoke only when spoken to, they played the game. …someday they’re gonna really off me. When the Federales wake up and they see I’m not just some crazy acid-head when they see that all the freaks are together and putting it together we will be set up for the big hit or the big bust or both, which is all right because I don’t give a shit about ding, when you’re into revolution you have to die, and you can’t be a revolution unless you’re willing to die. But man, if they ever put me on trial my action will be to show them up for the corrupt fuckers they really are. That trial will be my chance. I will turn that courtroom on, and what I say and do in the courtroom will go out on the wire, and the teletype, and kids all over the world will be at that trial and say, “Man, who is that dude, dig the way he’s got his shit together!” And if they find me guilty I will find them guilty and if they find me innocent I will still find the guilty … And they will be on trial not me. You see?”

Doctorow was actually describing tactics that had already occurred …

When a bunch of radicals were put on trial for inciting a riot at the Democratic Convention in 1968, the defendants turned the trial into a trial of the system and a celebration of their revolutionary zeal.

Though the defendants in the Conspiracy Trial of 1969 were all convicted, they exposed the unfairness of the system and actually used the trial to radicalize more people.

By contrast, in the Communist trials and the spy trials of the 1950s, the passivity of the defendants and their taking of the Fifth Amendment in effect said to the rest of America that they had something to hide.

After the visit with Sternlicht (p. 153) Daniel realizes that Sternlicht’s contempt for Susan’s idea was probably what pushed her “over the edge.” He concludes that Susan despaired because she learned her parents “were nothing” to the New Left. As the New Left in the person of Sternlicht had contempt for the Old Left, they also had contempt for the Isaacsons.

And that certainly is a fair appraisel of many members of the New Left. Many felt that the old left had failed miserably and they weren’t going to make the same mistakes

Daniel does not merely investigate the Old Left (via his personal memories) and the New Left (his encounter with Sternlicht, his participation in the march on the Pentagon). He also seeks to understand his parents’ case and US foreign policy after World War II.

We see this from p. 211 on.

In one section, Doctorow gives us six pages he calls “True History of the Cold War, A Raga.” He quotes approvingly from two authors of what came to be known in American Historiography as Cold War Revisionism.

I don’t know what you read in your history classes but before the 1960s, most historians of the Cold War saw it as the US standing up to expansionist totalitarian Soviet Russia and protecting the Free World from Communism …

Yet, some historians wouldn’t buy it. The most influential was William Appleman Williams -- a young veteran of World War II and (amazingly) a graduate of the US Naval Academy who wrote The Tragedy of American Diplomacy in 1959 and then revised and expanded it in 1962. By the mid to late 1960s, as one of his biographers noted:

“Orators against the Vietnam War on campus and in the community … crammed the Tragedy of American Diplomacy before mounting the stage and calling for the nation to consult its sleeping conscience … “

It is at this point in the novel that Daniel goes to the Pentagon demonstration in October of 1967. He is beaten and arrested – tastes his own blood and bits of broken teeth. He starts to make connections – achieves an understanding of what lots of New Leftists were understanding. That’s the point of the references to the work of William A. Williams.

He also refers to Norman Mailer’s presence – Mailer’s book The Armies of the Night had already been published when Doctorow wrote this book.

Doctorow has commented on his conception of Daniel’s “journey” that he believes Daniel has developed a true understanding of the interconnections between the Old Left and the New Left and the American reality. He has become a true radical. (This is my recollection of a letter I received from Doctorow back in the mid-1970s. Unfortunately, I cannot find that letter at this moment so my memory will have to suffice!)

I will close with a fantastic gem on p. 283:

Daniel is trying to persuade the daughter of the man who was the main witness against his parents to allow him to see her father. He is trying to impress her that he’s not afraid to learn that his parents were guilty. He is arguing that if his parents had given the Soviet Union the Atom Bomb, he would be proud of it and not trying to deny it:

“When the Russians got the bomb what happened? There were changes, right? The situation stabilized, the superpowers cooled it. And that gave the rest of us a little time. And the bomb took Russia out of the revolution. She was dragging it down, man. She was dumping on it. So that was a good thing too. A whole new possibility of action, the guerrilla, guerrilla warfare, the restoration of ancient revolutionary possibilities [NOTE: Vietnam had not yet defeated the US but by the time Doctorow was writing the leadership of the US knew they could never “win”] that’s what happened, man. The revolution went back to the people. And look at the world today. It is aroused to its own education. It is aroused, man … Now if my own parents did their thing in their day, and that is the result of the thing they did – do you really think I’d be trying to talk myself out of it?”

I use this quote which is very near the end of the book because one of the things that distinguished the New Left from the Old Left was that the New Left saw in Che Guevara (the guerilla side-kick of Fidel Castro who died trying to spread revolution to South America) and the Vietnamese Communists who defeated the US the new hope for world revolution. The New Left considered the Soviet Union irrelevant if not a negative influence.

That was another one of those crucial differences, and Doctorow wants us to be clear about that.

I will close by re-iterating two major differences between the Old Left and the New.

The Old Left was rooted in the labor movement – in the injustices of an unequal class society. The New Left was rooted in a dismay at the failure of America to live up to her ideals.

The Old Left looked to the Soviet Union as a “model” of what might be, what could be. The New Left considered the Soviet Union irrelevant – or worse.

Thus, in many ways the New Left was free of the taint of association with the Soviet Union – but they were also disconnected from a lot of the interests and struggles of ordinary people.

[for a footnoted version of this lecture, please contact Michael Meeropol at mameerop@wnec.edu]

Lecture on Ragtime

THIS IS THE TEXT OF A LECTURE DELIVERED BY MICHAEL MEEROPOL AT WESTERN NEW ENGLAND COLLEGE AS PART OF A SPRING SEMESTER COLLQUIUM examining the historical fiction of E.L. Doctorow.


E. L. Doctorow was once asked why he situates his novels in a historical period. He answered that:

“A historical period gives you closure. In other words, you can write about a region, take an area to write about … or you can take a period of time to write about, and it's the same nice kind of enframing of facts for you to build with. I don't have any particular affection for any period. Whatever images move me or evoke something within me is usually the reason for the books getting done.”
The book, Ragtime, is clearly enframed by the period of time it covers – roughly from 1900 to 1917. Please note the double-meaning of the title. Ragtime is a musical form and it plays an important role in the novel. But it is also a time in American history – a time where change and struggle were central.
My role in this presentation is to give you my sense of some of the historical background to the novel – to elaborate on some of the themes that Doctorow introduces us to.
TWO EMPHASES FOR THIS LECTURE
I have chosen to focus first, on the economic transformations represented by Henry Ford and J.P. Morgan, and, second, on the demographic and cultural transformations represented by the story-line around Coalhouse Walker, Jr., the black ragtime pianist. I could just as easily have focused on labor struggles, feminism, anarchism and imperialism – all of which play an important role both in that period of American history and in the novel. However, I only have 50 minutes!
Last week, Professor Beagle ended his lecture on The March by suggesting that despite the victory of the Union Army and the defeat in the Civil War of what the northerners called the slave power, we, the United States, are still on that march over 100 years later --- the “march” to expunge the sin of slavery from our nation’s DNA. I have put the text of Lincoln’s Second Inaugural onto the course’s web site and want to begin my presentation where Dr. Beagle’s ended his.

Lincoln hoped the war would end but when he delivered that inaugural, it hadn’t ended yet. And so he said that if the war would go on
“until all the wealth piled by the bond-man's two hundred and fifty years of unrequited toil [-- meaning unpaid labor] shall be sunk, and until every drop of blood drawn with the lash, shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said the judgments of the Lord, are true and righteous altogether"
In an extremely prophetic statement in Notes on Virginia, Thomas Jefferson had written:
“There must doubtless be an unhappy influence on the manners of our people produced by the existence of slavery among us. The whole commerce between master and slave is a perpetual exercise of the most boisterous passions, the most unremitting despotism on the one part, and degrading submissions on the other….. With the morals of the people, their industry also is destroyed. For in a warm climate, no man will labour for himself who can make another labour for him. ... And can the liberties of a nation be thought secure when we have removed their only firm basis, a conviction in the minds of the people that these liberties are of the gift of God? That they are not to be violated but with his wrath? Indeed I tremble for my country when I reflect that God is just: that his justice cannot sleep for ever: …”

One can read this as having predicted the bloody Civil War – the “true and righteous judgment of the Lord” in Lincoln’s words.

And yet Professor Beagle asserted that in the various ambiguities introduced in The March – particularly the failures on the part of some white unionists to fully embrace the complete humanity of the freed slaves, the successful assassination of President Lincoln and our knowledge with 20-20 hindsight that the promise of, to use Lincoln’s words at the Gettysburg Address, “a new birth of freedom” – all of those hopes were dashed in the decades following the Civil War.

The opportunities for the ex slaves in the post Civil War era at first seemed boundless. Guaranteed the rights of citizenship by the 14th Amendment and the right to vote by the 15th Amendment – their ability to buy property, hold elective office, exercise political power through the Republican Party (yes – the Republican party was once the party of black ex-slaves as well as business entrepreneurs and small independent mid-western farmers!) led to great advances in the South – advances which were stopped and crushed by an alliance between domestic terrorists known as the Ku Klux Klan and the racism that Doctorow so clearly portrays in The March and which is so clearly evident in the longer quote from Jefferson which I posted to the internet over the weekend.

I do not want to walk us – or march us if we want to continue the metaphor from Professor Beagle’s lecture -- through the history that African Americans endured between the end of the Civil War and the events described in Ragtime but I want to
describe for you briefly the situation – the context – if you will for the section of the novel devoted to the reaction of Coalhouse Walker, Jr. to the indignities heaped upon him by the volunteer fire-fighters of New Rochelle under the leadership of one Will Conklin.

By the time 1900 rolled around, African Americans had been consigned to second class citizenship in the South while northern politicians had completely abandoned their cause. The white population had come to accept racist stereotyping – perhaps it was more virulent than it had been at the time of the Civil War –

For example: In 1914, a movie was made: Birth of a Nation. (We have it in our library – though it takes a strong stomach and spirit, I believe it would be valuable for most people to watch it) This film was wildly popular and it was shown to President Woodrow Wilson at the White House – where he gave it his full political and professional imprimatur. To quote one description: “President and former history professor Woodrow Wilson … proclaimed it not only historically accurate, but like ‘history writ with lightning’." In that movie the heroic southern whites after being defeated in the Civil War win back their rights from lascivious freed blacks who are dominating the post-Civil War governments with corruption --- the heroic southerners create the Ku Klux Klan to free the South from post-Civil War bondage ---

Thus, the true “birth of a nation” – The Civil War ends slavery and solidifies the union – while the second half of the movie frees southern whites, solidifying white supremacy. The last scene in the film is on election day. Blacks emerge from their shacks to see a group of Klansmen in full regalia ready to take care of them … They look, and give up their right to vote by going back into their shacks!

So that’s one context of the novel Ragtime – the second class citizenship of African Americans and the virulent racism of the white population.

But there was a lot of other history that America experienced between the end of the Civil War and 1900.

The major economic transformation was from a nation of farmers where the majority of the population was employed in agriculture to a nation where the majority of the population worked outside of agriculture and industry was “coming of age…”

The coming of age of industry between the Civil War and the end of the century meant a significant increase in the percentage of the population who worked for wages – The Jeffersonian ideal at the end of the 18th century was for a nation of independent farmers and independent craftsmen. And certainly, aside from slaves and newly arrived immigrants, the male population earned their living mostly by way of these independent activities. In fact, according to Eric Foner’s book The Story of American Freedom, the 18th century conception of freedom revolved around such economic independence. The idea of working for someone else – even for a wage – was considered a state of relative “unfreedom…” That supposed unfreedom was the basis of the original laws in most State Constitutions which gave only owners of property the right to vote because they were the ones who were truly free to exercise the franchise and they were the ones with a true stake in the well-being of society.

But Foner points out that in the context of the Civil War and the growth of wage labor after the Civil War, a new conception of freedom emerged – the idea that working for a wage enhanced the dignity of man – Certainly, the ex-slaves felt that way -- Here is how the runaway slave Frederick Douglass described his feelings after securing employment as a free laborer in New Bedford Mass.

“I found employment, the third day after my arrival, in stowing a sloop with a load of oil. It was new, dirty, and hard work for me; but I went at it with a glad heart and a willing hand. I was now my own master. It was a happy moment, the rapture of which can be understood only by those who have been slaves. It was the first work, the reward of which was to be entirely my own. There was no Master Hugh standing ready, the moment I earned the money, to rob me of it. I worked that day with a pleasure I had never before experienced. I was at work for myself and newly-married wife. It was to me the starting-point of a new existence.”

That transformation from independent farmers and artisans to tenant farmers and wage laborers occurred in the context of the rise of industry and commerce until it came to dominate the American economy. Even before the time period described by Ragtime, the value of manufactures was three times the value of agricultural products in 1890. Between 1880 and 1900, to take a few examples, many industries more than tripled their total value added (the production attributable to that industry net its raw materials cost).

Machinery increased fourfold from 111 million to 432 million.
Iron and Steel from 105 m. to 339. m.
Men’s clothing from 78 m to 262 m.

Another major transformation that actually occurred in a sort of continuous process from the 1870s through the turn of the century was the rise of giant corporations and the end of American industry as a relatively competitive system. A competitive system has lots of small businesses vying for the consumers’ dollars – forced to charge “the market price” because their levels of output were such a small percentage of the entire industry that they could not affect the price by increasing or decreasing their total production. After the Civil War, as railroads knitted the entire nation into the beginning of a national market, businesses that had only sold locally could now sell regionally and even nationally. At first this led to expanded output – but as all previously isolated firms increased output to sell to larger and larger areas they came into competition with each other. At this point, these firms behaved just as in the textbook discussions you have seen in Principles of Economics classes when they describe perfect competition – they were price takers with no control over the price they sold their products at and thus were helpless before the fall in prices as a result of all that new competition.

This led to efforts gain some control over prices --- To make a long story short (and I make this a significantly longer story in my American Economic History class) by the end of the 19th century, many large firms had figured out ways to reduce competition. Usually this involved either merging with competitors or beating them and driving them out of the industry. The rise of the great American companies: Standard Oil of New Jersey, Swift, Armour, American Tobacco, International Harvester, involved not just the creation of giant businesses but a significant reduction in competition by price. The end of the 19th century saw the first billion dollar corporation, the U. S. Steel Corporation, created with the help of the investment banker J.P. Morgan – an important character in Ragtimel. Morgan engineered the creation of this company because Andrew Carnegie who had made his fortune in steel was such a tough competitor he was driving steel prices down and thereby harming the industry. He was persuaded to sell out by Morgan and the result was that for at least 60 years, there was no price competition among steel makers – instead, all of US Steel’s competitors let that company act as a “price leader” – and instead of undercutting the prices charged by US steel, they merely priced so as to “meet” the competition. (This last line is a direct quote from an executive at one of US Steel’s competitors before a Senate committee in the 1950s!)

So when we meet Henry Ford and J.P. Morgan we are meeting individuals at the top of the economic food chain in the first decades of the 20th century. Morgan is the financier, the banker – the fixer – Henry Ford is the man who according to some economic historians put his stamp on the entire century. Some economists even refer to the kind of economy our nation experienced during the 20th century as fordism – a system dependent on mass production techniques to cut costs and spread the opportunities of high wages and high consumption spending to workers.

So the prelude to the events of Doctorow’s novel as far as industry is concerned is that by 1900 the US was an industrial powerhouse – that a group of captains of industry had arisen in the course of the last third of the 19th century – and that American industry had entered a consolidation phase – where the era of many firms competing with none big enough to “rig” the market gave way to the rise of giant firms, many of whom had significant power within their selling markets to be price makers instead of price takers.

Two topics for this lecture:

First and foremost: racism – the “ambiguity” left over from the Civil War and from the novel The March.

On the first page of Ragtime, Doctorow introduces us to the wonderful world of Father/Mother/and the rest of the family in New Rochelle. But, on the very last line of the first page we are introduced to somewhat discordant notes – “there was a lot of sexual fainting” – “there were no Negroes” -- and flipping to the second page, “There were no immigrants.”

Come to find out, of course, that there were “Negro servants” one of whom delivers an illegitimate baby and tries to “get rid of it” – only to have the infant rescued by “Mother” – a rescue that changes the dynamics of the family completely, and ultimately brings the family into contact with one of the truly heroic characters of the novel – Coalhouse Walker, Jr.

The world of immigrants arrives on page 13 of the novel when we are thrust into the world of a central character – tateh (which by the way is the Yiddish word for “father”).

The tide of immigrants into the US – particularly into the urban centers of the US is only one aspect of the transformation of the US between the Civil War and World War I.

I have some data on the handout sheet representing the transformation of the US between 1900 and World War I.


US Population: 1900 – approximately 76 million
1917 – 103.3 million --- population grew by 35% -- averaged 2.1% per year – that’s higher than during the baby boom after World War II.

In 1900, the immigrant population in the US was 13.6% of the population.

By 1910, despite rapid population growth – the immigrant population had grown to 14.7% of the population.

In New York State whose largest city is the center for the action in Ragtime the immigrant population was 26.1% on 1900 and 30.2% in 1910.

New York City’s population was 3.4 m in 1900 and 4.8 m in 1910.

US urban and rural percentages of the population:

1900 – 39.6 to 60.4

1910 – 45.6 to 54.4

1920 – 51.2 to 48.8.

NY State was already 72.9% urban in 1900.

Let me tell you a bit about what I’ve referred to above as fordism.

The transformation of the production process occurred between 1910 and 1914 at the Ford Motor Company’s Highland Michigan Plant.
The principle of “scientific management” had been propounded by Frederick W. Taylor. The key was to divide up the task (say of making a car) into discrete, separate activities.
The next step was for the engineers to design machines to do these activities. The real innovation was the assembly line. Every input into the ultimate car would move [here I’m quoting from the piece I put on the course’s web site]
“… from foundry to machine shop to assembly department, seemingly flowing from tiny streams to small rivers and ultimately to the final assembly line. “
This change was profound for the workers. Work became routinized and monotonous – Adam Smith had warned in The Wealth of Nations that if a workman were to be relegated to doing a small simple task over and over again, he would become as “stupid” as a human being can be.
The introduction of the assembly line changed industrial processes in the direction Smith warned against --- it reduced the role of skilled workers while increasing the control of the speed with which workers worked.
The change was remarkable. Quoting again:

“At the end of the nineteenth century, the all-round craftsman dominated the workshop and represented about 40% of the workforce. The partially skilled machine operators and the unskilled laborers each constituted about 30% of the workforce. After the coming of mass production, the Ford Highland Park factory employed a majority of unskilled (definitely not semiskilled) specialists, both as machine operators and assemblers. By 1917, the unskilled specialists amounted to over 55% of the Ford workforce.”
The speed with which workers worked, and the end of the independence of the craftsmen led to tremendous discontent:
“In 1913, the rates of absenteeism and labor turnover, or quit rate, were staggering. Daily absenteeism averaged 10 percent per day, which meant that around 1,300-1,400 extra workers needed to be hired to keep the integrated production system in operation. With a yearly labor turnover rate of 370 percent, Ford managers had to hire 52,000 workers to maintain Highland Park’s existing workforce. Another indication of worker discontent was the flurry of union activities when both the radical Industrial Workers of the World and the more conservative American Federation of Labor threatened to capitalize on this.”

By introducing the prospect of receiving $5 a day (which doubled the average wage at the time) Ford basically solved the labor problems.

The high wages bought cooperation with the new methods of production.
Ultimately, the main objective of work reorganization, line production, and the social engineering of workers’ lives was to produce more and more Model T Fords to match the enormous and growing popular demand for them. Once Ford officials solved their labor problems, the powerful new production system proved hugely successful and profitable. As a measure of the success, consider the enormous amounts of money Ford invested for Model T production. Between 1910 and 1919, he invested millions of dollars in the new Highland Park factory, he more than doubled the wages of thousands of workers, he reduced the Model T’s price from around $800 to $350, and he became the world’s first billionaire.
This established a pattern which basically persisted (with interruptions such as the Great Depression) right up through the golden age of the post-war Economic expansion from 1945 to the 1970s. Very rapid assembly line work creates tremendous increases in output per hour of work – out of which, business can afford to pay higher wages. These higher wages between 1945 and 1970 ultimately produced the great American middle class …
Social mobility is one of the keys to the 20th century – it represents the success of the “American dream.” But it is essential to remember that it was partial.
In Howard Zinn’s A People’s History of the United States we read the following:
“A study of immigrants in N Y between 1905 and 1915 finds that 32 percent of Italians and Jews rose out of the manual class to higher levels … But it was also true that many Italian immigrants did not find the opportunities inviting enough for them to stay. In one four-year period, 73 left NY for every 100 that arrived. Still enough Italians became construction workers, enough Jews became businessmen and professionals to create a middle-class cushion for class conflict.”
At this point, I want to get to the section of the novel related to the “revolt” by a group led by Coalhouse Walker, Jr.

You have to understand that when the beginning of the novel says “There were no Negroes” to a large extent that was true. To most northerners, blacks were invisible. For example, they represented less that 2% of the population of New York State in both 1900 and 1910 – The great migration north did not begin till around the time of World War I – and after that it was extremely dramatic. In the period covered by the novel, however, they represented a small part of the population.

But they had always been there --- and from time to time (such as in the New York City Draft riots of 1863) they had been subjected to organized violence by the white population and the authorities. In fact, there was what was called in the early years of the 20th century a “race riot” in 1900 in New York City after a black man allegedly stabbed a white plainclothes police officer.

By the way, it is important to understand that these early 20th century race riots were not what we have become accustomed to seeing on the news in the context of the 1960s or the riot in Los Angeles after the Rodney King verdict – these “race riots” were situations where white mobs would burn businesses owned by African Americans, beat or even kill African Americans that they found on the streets – often attacking residences of African Americans as well. (And of course some blacks would fight back – leaving some white casualties as well).

In fact, the settlement of Harlem after 1910 was the result of significant numbers of blacks being driven out of a neighborhood further downtown.

In 1902 when Ragtime opens, blacks in the United States had reached a kind of “Nadir” of oppression. (In 1901 there were 99 lynchings for example!). I already mentioned disenfranchisement in the South --- in 1895 Booker T. Washington (the man who the authorities called upon to attempt to “persuade” Coalhouse Walker to give up!) had given a major speech at the Cotton States International Exposition in Atlanta. The speech catapulted Washington to the position of leader of African Americans.

In that speech he promised acceptance of the loss of political rights in the South and touted the value of black labor to southern agriculture and industry. His educational philosophy was to train African Americans for “useful work” (as opposed to “intellectual work”) and to attempt to persuade whites that they had no longer to fear blacks --- in one perfect metaphor he stated – “In all things that are purely social we can be as separate as the fingers, yet one as the hand in all things essential to mutual progress.”

However, in fairness to Washington, he was not merely surrendering to white supremacy – he was also charting a course of self reliance – economic achievement – for the black population.

Nevertheless, in the context of the early years of the 20th century, his accommodationist approach coincided with what David Levering Lewis, the great biographer of W.E.B. DuBois described as a descent … “into the caste status of subhumans in the South and into a marginalized mass in the North … “

W.E.B. DuBois was by the turn of the 20th century perhaps the most accomplished African American academic in the US. Having completed a brilliant Ph D at Harvard in 1898, he was appointed by the University of Pennsylvania to do a sociological study of the black population of Philadelphia which was published in 1899 as The Philadelphia Negro.

According to his biographer, Lewis, at the turn of the century DuBois agonized “that the humanity of an entire race was again a serious national question …

“The ethos, science and propaganda of racial dehumanization and Bookerite compromises … unsettled and finally drove DuBois into the ranks of the so-called civil rights radicals.

“It was grim enough that his people were being lynched in the South and ghettoized in the North but there now loomed the even more horrendous prospect that such brutalities would cease to be deplored as un-American and become, … officially sanctioned instruments of racial subjugation.

“With rare exception, noted anthropologists located Negroes somewhere on the frontier between the great apes and hominids. Biologists found their average brain weight less than Causcasians’ … Psychologiests identified a primal sexuality and irrationality in Negroes … The national white consensus emerging at the turn of the century was that African Americans were inferior human beings whose predicament was three parts their own making and two parts the consequence of misguided white philanthropy.”

And so DuBois chose to publish, a rebuttal to Booker T. Washington in a book of essays called The Souls of Black Folk. I recommend highly that anyone interested in this issue have a look at the essay “Of Mr. Booker T. Washington and Others” in that book.

DuBois rejected Washington’s accommodationism –

“In the history of nearly all other races and peoples the doctrine preached has been that manly self-respect is worth more than lands and houses … that a people who surrender voluntarily such respect or cease striving for it are not worth civilizing.”

Lewis elaborated: “Washington would have his people [i.e., blacks] renounce three means of empowerment: political power, civil rights and higher education.”

The publication of that book represented a split with Washington’s accommodationism and foreshadowed the creation in 1910 of the NAACP –

From that point onward, there were fierce black and white advocates for racial equality whose dogged intellectual and political work would finally bear fruit after World War II …

What has this got to do with the Coalhouse Walker, Jr. episodes in Ragtime?

Here I would like to suggest that Doctorow’s genius as a writer takes over from his desire – as quoted by Prof. Beagle – to tell the story of historical experience as “how it felt.”

There is no doubt that the injustice visited upon Coalhouse Walker, JR. – including the virtual murder of his bride to be (and mother of his child) by police who were guarding the vice president -- could have induced the retaliatory rage that led to his taking up arms for justice ---

I propose a slight detour and a question for the group. Was Coalhouse Walker, Jr justified to retaliating with violence for the crimes committed against his property, dignity and family?

That will be one of the potential paper topics I propose for you

Despite the rhetorical differences between DuBois and Washington, the anti-acommodationist positions of people like DuBois were purely political. They may have been agitational, but they were not physically confrontational!! DuBois provided intellectual justification for strong, principled resistance but in the context of 1910 he would have recoiled with horror from activities such as were undertaken by Coalhouse Walker, Jr. and his allies.

I believe that Doctorow was reading backwards from the “rebellions” of the 1960s where there was burning and looting (and sniper fire) in Newark and Detroit. Even though most of the dead were blacks and most of the property destroyed was where blacks lived, these rebellions moved and shocked the nation into awareness. The result was a national commission that produced The Kerner Report and more importantly – a big push for black advancement. Blacks suddenly became much more prominent on television and in movies and in corporate and academic America – and affirmative action actually began to be taken seriously in the early 1970s

Sorry to be so blunt – but it was almost as if the cliché: “The only thing these people [=white America] understand in violence!” had been proven right. White America actually woke up to the plight of northern blacks in the 1960s as a result of the rebellions in Newark, Detroit and elsewhere.

Ragtime was written in the aftermath of these experiences and though I haven’t asked Doctorow about this – I believe he had to have been informed by the responses to those explosions of violence when he imagined Coalhouse Walker, Jr. following his rage wherever it took him --- something that perhaps many aggrieved African Americans felt (here’s that term “how it felt”) but never acted upon in the first decade of the 20th century.

[for a footnoted version of this, please e-mail Michael Meeropol at mameerop@wnec.edu]

Monday, May 05, 2008

The Recession is On, but Will It Include Inflation?

THE FOLLOWING COMMENTARY WAS DELIVERED OVER WAMC RADIO ON MARCH 7, 2008 by MICHAEL MEEROPOL


Last Thursday, Fed Chairman Ben Bernanke1 and President Bush both asserted they did not believe the US economy would fall into recession in 2008.

Then on Sunday the Business section of The New York Times ran three articles that seemed designed to completely contradict Bush and Bernanke. The first of two front page articles asserted that the recent recovery has seen job growth insufficient to reach the levels of employment in 2000.2

"Some 62.8 percent of all Americans age 16 and older were employed at the end of [2007] down from the peak of 64.6 … in early 2000." The second noted that "… a consumer-led recession has already begun, according to a new index that reflects how much money Americans can actually spend right now." 3

While the Federal Reserve has taken strong steps to stimulate the economy with a one and one quarter percentage cut in the Federal Funds Rate over the last two months - and promises more of the same - the federal government for now seems unwilling to provide more fiscal stimulus. President Bush opposed the efforts of some Congressional Democrats to come up with a second stimulus package focusing on infrastructure spending. He stated: "I know there's a lot of, you know [talk about] … - stimulus package II and all that. Why don't we let stimulus package I, … have a chance to kick in?" 4

Meanwhile, the efforts to combat the recession with fiscal and monetary stimulus may be complicated by the potential re-emergence of a problem our economy has not seen since 1980 - and that is stagflation.

What is "stagflation"? It's a combination of too much unemployment - too slow growth - perhaps even a recession and unacceptably high rates of inflation.5

Consider the difference between our situation today in 2008 and the early months of 2001 when the Federal Reserve and the Federal Government combined expansionary monetary policy with significant tax cuts in an attempt to head off a recession.

In 2000 and 2001, the rate of inflation measured 3.4 and 2.8 percent. After the recession began the rate fell to 1.6% in 2002.6 In that situation, the Fed, the President and Congress were able to stimulate the economy without accelerating inflation.

Now, we have a situation where the inflation rate was 3.2% in 2006 and 2.8% in 2007.7 If inflation continues to fall as it did in 2002, policy makers will be free to give the economy as much gas as it needs to reverse the downturn and get us on the road to recovery.

However, there are scary signs that this will not be easy. Gasoline prices have risen dramatically over the last few years and there are predictions of $4 a gallon gas this summer. The preliminary monthly figure on inflation for is .5% per cent which if continued for the next 11 months will bump the year's inflation rate up to 6%.8 (Compare that to 1.6% in 2002.) Bernanke's testimony on Thursday noted that "Consumer price inflation has increased since [July] in substantial part because of the steep run-up in the price of oil. Last year, food prices also increased significantly, and the dollar depreciated…. inflation excluding food and energy prices-- … [increased] toward the end of the year."

He concluded that, "The higher recent readings likely reflected some pass-through of energy costs to the prices of core consumer goods and services as well as the effect of the depreciation of the dollar on import prices." 9

If inflation does not fall significantly, it will make it very difficult for the Fed, the President and Congress to increase the vigor with which they combat the recession. That's because everything they do to combat the recession might increase inflation.10 2008 is not going to be an easy year for any of us - policy-makers included.

Footnotes:

1 See "Is a Lean Economy Turning Mean? Why It's Now Even Harder to Find Job" and "The Buck Has Stopped," The New York Times (March 2, 2008): Business Section, p. 1. See also "The Jump-Start That Hasn't Started," The New York Times (March 2, 2008): Business Section, p. 6. Then, the day after this commentary aired, March 8, 2008, The New York Times had two front page stories that made clear we are already in a recession: "Sharp Drop in Jobs Adds to Grim Economic Picture" and "End to the Good Times (Such as they Were)." The second article concluded with a really dismal picture of the past six years of economic recovery, "The median household earned $48,201 in 2006, down from $49,244 in 1999." [p. A9]. The 1999 figure is at the top of the recent business cycle before the stock market crash of 2000 and the recession of 2001 reduced income. The fact that median household income did not grow over a full business cycle is extraordinary. It means that the recent growth in consumption has mostly been fueled by debt expansion. This means that the decline in consumption will be quite significant because people have already borrowed a great deal and may have little room to borrow more.

2 "Is a Lean Economy Turning Mean?": p. 8.

3 "The Buck Has Stopped": p. 1.

4 See http://www.foxnews.com/story/0,2933,333553,00.html. The full statement from President Bush would have been impossible to really follow without the insertions I put into the text. Here it is verbatim from the transcript: 'It's - I know there's a lot of, you know - here in Washington, people are trying to, you know - stimulus package II and all that. Why don't we let stimulus package I, which seemed like a good idea at the time, have a chance to kick in?"

5 The decade of the 1970s was marred by stagflation. Here is the data:

Date Unemployment Rate (in percent) Inflation Rate (in percent)
1970 4.9 5.7
1971 5.9 4.4
1972 5.6 3.2
1973 4.9 6.2
1974 5.6 11.0
1975 8.5 9.1
1976 7.7 5.8
1977 7.1 6.5
1978 6.1 7.6
1979 5.8 11.3
1980 7.1 13.5
[Source: Economic Report of the President, 2004: 330, 357.]
Note the persistence of high levels of unemployment through much of the decade accompanied by surges in inflation 1973, 74 and 1978, 79 and 80.

6 See Economic Report of the President, 2006: 355. For some strange reason the number I spoke on the air was incorrect. I said 1.5% when I should have said 1.6%.

7 See the Bureau of Labor Statistics Table at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

8 The January figure is on the Bureau of Labor Statistics' front page: http://www.bls.gov/cpi/home.htm

9 See http://www.fxstreet.com/fundamental/interest-rates/ben-s-bernanke-testimony-before-the-committee-on-f/2008-02

On other issues he commented as follows:

Discussion on the housing market: "The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries."
Discussion on the economic outlook: "The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."

10 The tools of monetary and fiscal policy mostly affect aggregate demand - either the consumption spending of individuals, the investment spending of businesses or the government's own spending. Expansionary monetary and/or fiscal policy (reduced interest rates by the FED, a stimulus package passed by Congress) will increase spending if it is effective. However, any increase in spending might make it easier for businesses to raise prices - and in the context of rising oil prices and other business costs, they will have a strong incentive to do that. Should the FED and Congress try to restrain inflation by raising interest rates or cutting government spending (this is what Congress and the FED did early in 1980), that could have the effect of making the recession deeper. During the 1970s, government policy shifted from anti-inflationary to expansionary and back again. There was even a period of direct wage and price controls in 1971 and 1972. For details see SURRENDER, chs. 3, 4, 5.

The Stimulus Package: The Good, the Bad and the Ugly

THE FOLLOWING COMMENTARY WAS DELIVERED OVER WAMC RADIO BY MICHAEL MEEROPOL ON FEBRUARY 1, 2008


On January 29, the House of Representatives passed, a bill called a "stimulus package." 1

According to the politicians, the bill is designed to provide an increase in spending soon so as to either head off a recession or (more likely) help counteract a recession that has already begun. 2Perhaps the most significant thing about this action is a question that too few people have asked - What took them so long?

Politicians, economists and pundits spent last year first denying that the housing bubble was exploding and then claiming that the problem was basically confined to the sub-prime lending market. 3

At the November meeting of the FOMC, the chief policy-making body of the FED, they were still talking about the danger of inflation. 4

But on January 22, they took the extraordinary step of cutting their major policy interest rate by three-quarters of a percent, thereby telegraphing their panic over the dangers of recession. 5

In the wake of stock market gyrations all around the world, the Fed's panic, and the continued free fall in the housing market which has had a very negative impact on consumer confidence, President Bush and Congress are under extreme pressure to "do something." The something they are doing is very little, very late, and focused in part on the wrong people.

First the numbers - The total decrease in Federal tax revenue associated with this package is $146 billion. 6 This is the good part because it will increase total income. Though not insignificant, (it is a bit over 1% of GDP) the change in the fiscal posture of the US government is much smaller than the fiscal stimulus created in 1975 when the economy was battling a deep, painful recession. 7

But unfortunately, the bad part of the package is that a lot of the tax relief will go to individuals and families with relatively high incomes. Families making between $100,000 and $150,000 will get a $1200 rebate. Individuals making that much will get $600. It is unlikely that much of that will be spent immediately. Short term windfalls will not change consumption patterns for well-off people. That is why the director of the Congressional Budget Office told members of Congress that the best way to get money into the hands of citizens most likely to spend all of it immediately would be to extend unemployment benefits and increase the availability of food stamps. 8

The failure to increase unemployment insurance is the worst thing about this bill - the truly ugly part. When people become unemployed, they strive to maintain their previous levels of consumption. Thus, virtually all of their unemployment checks get spent on current consumption items. Extending benefits from 26 weeks to 39 weeks or even longer will permit those laid off workers to keep their consumption spending up.

One of the great values of increasing food stamp availability is that unlike the tax cuts and rebates that will put cash in the hands of consumers - cash that might be spent on imported goods - food stamps can only be spent on food, most of which is produced domestically.

Because the politicians waited so long to act, we are now being told they must rush this compromise through in order to get the rebate checks into people's hands by May or June. Thus, there is tremendous pressure on the Senate not to attempt to amend this bill. I urge you to tell your Senators to resist this pressure. Extending unemployment benefits and expanding food stamp availability will not only be the right thing to do - it will make the bill a more effective stimulus.

Footnotes:

1 See "$146 Billion Stimulus Plan Passes House" Washington Post January 30, 2008; Page A03 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/29/AR2008012901935.html?hpid=topnews

2On January 31, the New York Times reported that the GDP had grown at a disappointing .6% during the fourth quarter of 2007 suggesting that by the end of the year growth might have turned negative thus heralding the start of a recession. Recessions are "called" by the National Bureau of Economic Research many months after they have begun so we will not know for sure for some time. However, with growth slowing to a dead stop, declines in housing sales and prices, rises in unemployment, slowdowns in job creation, huge write-downs by financial institutions there is every indication that a recession is here or almost here. See my most recent commentary.

3 See, for example, the following article in the New York Times in October of 2007. Note that this was already into the last quarter - the quarter that now we find saw growth plummet to .6% after posting a 4.9% rate of growth in the third quarter (see http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.). The New York Times piece described job growth in September as having "bounced back" which combined with a revision in the numbers for August were, "…easing fears of a recession and making it more likely the Federal Reserve will hold interest rates steady when it meets at the end of this month [September]. The news set off a surge on Wall Street, sending the Standard & Poor's 500-stock index to a record close. The economy added 110,000 jobs in September, and the Labor Department reported that employment increased by 89,000 jobs in August, revising an earlier report that showed an unexpected loss of 4,000 jobs. The original figure prompted a stock market sell-off and was followed by a half-point cut in the Fed's benchmark interest rates as investors worried that turmoil in the housing market had bled into the larger economy. Today's report - considered a leading indicator of the nation's economic health - suggests that pain from the subprime lending crisis subsided somewhat in September. Government and education jobs rose sharply, spurring the upward revision for August." http://www.nytimes.com/2007/10/05/business/04cnd-econ.html?emc=eta1 Read that ridiculously optimistic last sentence again!

4 It is sometimes instructive to read the minutes of the Federal Open Market Committee. At the meeting October 30-31 (the commentary called it the November meeting because the results were announced November 1) there were references to the "upside risks to the outlook for inflation" [p. 7] and the following statement as well: "Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully." [p. 4] For the full minutes see http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20071031.pdf 5 Because the level of total (aggregate) demand helps determine both the inflation rate and the unemployment rate - but has the opposite effect of both - it is impossible to use the tool of aggregate demand management (fiscal and monetary policy tools) to fight both problems at the same time. Thus, policy-makers basically have to choose which problem - inflation or unemployment - is likely to pose the most immediate danger. It is clear that between the end of October and January 22, the Fed changed its main focus from fearing inflation to fearing recession.

6 This refers to the House bill passed on January 29. There will no doubt be many changes in the bill before it reaches the President's desk.

7 In March of 1975, Congress pass a significant tax cut at the urging of (Republican) President Gerald Ford. That tax cut was clearly focused on increasing consumption. Marginal rates were not cut, and instead all taxpayers and their dependents received a credit of $30 (over $100 in current dollars). In addition, the standard deduction was increased, and a refundable earned income tax credit was enacted. As a result, some beneficiaries of the 1975 tax cut carried no liability for federal individual income taxes. Here's where the fiscal stimulus difference becomes apparent. The federal budget was nearly balanced in 1974, with a deficit of less than 1% of GDP. That deficit, however, jumped to 3.4% of GDP in fiscal year 1975 and 4.3% in the following year. (See Economic Report of the President, 1998, p. 373.) It is clear that the 1975 tax cut, plus some increased spending in the form of extended unemployment compensation benefits, helped raise the federal deficit and increase aggregate demand. As a consequence, this deficit increase was temporary; both deficits and debt as a share of GDP fell at the close of the 1970s.

8 For the testimony of Peter Orszag, Director of the Congressional Budget Office, see http://www.cbo.gov/ftpdocs/89xx/doc8932/1-22-TestimonyEconStimulus.htm Director Orszag noted that "… tax cuts or increases in transfer payments from the government to people (such as Food Stamps or unemployment insurance benefits) increase household demand by providing consumers with additional spending power. The bigger the chunk of that additional income that consumers are willing to spend instead of save, the more stimulus there will be from a particular tax reduction or increase in government transfer payments. But households do not predictably spend a fixed proportion of the extra income left in their hands when taxes are reduced or transfers

IS RECESSION NECESSARY?

THE FOLLOWING WAS DELIVERED AS A COMMENTARY OVER WAMC RADIO IN EARLY JANUARY OF 2008 BY MICHAEL MEEROPOL


Two days after my last commentary, the New York Times asked six economists about the upcoming recession. One of them, James Grant, asserted that recessions serve a useful purpose:

"They allow the sorting out of boom time error. They permit - indeed, force - the repricing of inflated assets. In a downturn, previously overpriced businesses, houses and buildings are made affordable again." 1

In other words, a recession "corrects" for mistakes made during the previous boom. Grant argued that policy-makers have gotten so good at responding vigorously to recessions, that the correction process gets aborted. Recessions are too short and too shallow.

The result, he laments, is that when, "… a new upcycle does begin, … it's slow off the mark. The world's top economy seems curiously sluggish. And the economists and politicians ask, 'What happened to America's dynamic economy?'"

In Grant's view, the failure to have a real rip-roaring recession such as our economy last experienced in 1981 and 1982, sets the stage for sluggish growth, reduced competitiveness and, in the long run, harm to the economy.

This is an inconvenient view. When students learn Principles of Economics, they are usually taught that the two problems our economy must confront are inflation and unemployment. There is a law on the books called the Employment Act which dates back to 1946 with a significant amendment in 1978. The amended law enjoins the government keep the unemployment rate at 4% or lower while making sure inflation never gets above 3%. 2

The Federal Reserve (our Central Bank) has mostly ignored that unemployment goal in its effort to achieve price stability while stating they also have a goal that the economy will grow "fast enough." In its publications, the FED concedes that pursuit of price stability may require short term slowdowns in growth which justifies them ignoring that 4% goal. 3

So here is the contradiction: while the official goal of US policymakers is to maximize employment and growth, the desire to contain inflation means that that goal has been honored in the breach. To put it bluntly, policy-makers implicitly agree with Grant that recessions are necessary every so often to contain inflation - while refusing to admit it.

This contradiction is not the result of stupidity or dishonesty - it is our economic system - American style free-market mixed capitalism -- with all its successes since the 19th century in terms of economic growth, technological change, economic opportunity, that is a system of contradictions..

To have the good (economic growth) some people must suffer the bad (periodic recessions - where they lose their jobs, businesses, homes, etc.). Since World War II, policies that reduced the length and severity of recessions have also reduced the chances for explosive growth. Between 1945 and the early 1970s, we in the United States thought we could have both explosive growth and short shallow recessions. Since then, even though we've had a couple of rather nasty recessions, the rate of growth has significantly slowed (with a short exception between 1996 and 2000). 4 Worse, the growth in income has been seriously skewed to a very small percentage of the population so that the vast majority of the people have benefited very little from it.

This is very significant. From 1973 to 2005 the 80 per cent of US workers in non-supervisory jobs saw a real hourly wage increase of 2% -- that's over 32 years. Meanwhile, productivity went up 75%. The benefits from that went to the richest Americans. 5

If you don't like this set of alternative choices, -- either periodic depressions as bad as 1981-82 or the sluggish growth since 1975 - and those ARE the two choices --- then you probably don't like US style capitalism - even if you think you do. 6

Footnotes:

1 For Grant's complete op-ed, see http://www.nytimes.com/2007/12/16/opinion/16grant.html?_r=1&oref=slogin. That entire OP-ED page set of articles is quite interesting. It is from the December 16, 2007 edition and available on line at http://www.nytimes.com/2007/12/16/opinion/16recession.html?ref=opinion. The other articles are: You Can Almost Hear It Pop, by Stephen S. Roach, The Facts Say No, by Marcelle Chauvet and Kevin Hassett, Bet the House on It, by Laura Tyson, Not if Exports Save Us, by Jason Furman, and Wait Till Next Year, by Martin Feldstein

2The Full Employment and Balanced Growth Act is Pub.L. 95-523. It was signed into law on October 27, 1978. The relevant passages specifying the goals to be achieved between 1978 and 1983 are as follows:

(b) Interim numerical goals for initial Economic Reports The medium-term goals in the first three Economic Reports and, subject to the provisions of subsection (d) of this section, in each Economic Report thereafter shall include (as part of the five-year goals in each Economic Report) interim numerical goals for- (1) reducing the rate of unemployment, as set forth pursuant to section 1022 (d) of this title, to not more than 3 per centum among individuals aged twenty and over and 4 per centum among individuals aged sixteen and over within a period not extending beyond the fifth calendar year after the first such Economic Report;

(2) reducing the rate of inflation, as set forth pursuant to section 1022 (e) of this title, to not more than 3 per centum within a period not extending beyond the fifth calendar year after the first such Economic Report: Provided, That policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment; See http://www4.law.cornell.edu/uscode/uscode15/usc_sec_15_00001022---a000-.html

To find these sections, you will need to go to the THIRD screen once you click on this link.

3 See, for example a staff report for the Federal Reserve Bank of New York which attempts to measure the so-called "sacrifice ratio" - the output lost due to constraining the economy with monetary policy aimed at reducing inflation. The authors note: "It is generally agreed that permanently low levels of inflation create long run benefits for society, increasing the level and possibly the trend growth rate of real output. There is also a strong belief that engineering inflation reductions involve short-term costs associated with a corresponding loss in output." "Structural Estimates of the US Sacrifice Ratio," Stephen Cecchetti and Robert Rich, Federal Reserve Bank of New York, March 15, 1999 (http://www.newyorkfed.org/research/staff_reports/sr71.pdf): 1

4 The National Bureau of Economic Research identifies the "turning points" of business cycles - the peaks tell us when an expansion ends and a recession begins - the troughs tell us when an expansion ends and a recession begins. See http://www.nber.org/cycles/cyclesmain.html. For rates of growth of GDP (in nominal and in real terms) see http://www.bea.gov/national/index.htm#gdp (on the first screen click on "percent change from preceding period." From 1945 to 1973, real GDP growth averaged 3.33% per year. From 1973 to 2006 that average fell to 2.8% per year. (The average for 1946 to 1973 is much higher because the year 1946 saw so much inflation that real GDP actually fell 11%. The 1946 to 73 average is 3.49% per year.) 5 These numbers all come from the Bureau of Labor Statistics. I found them on an article entitled Our Subprime Economy by Richard D. Wolff of the University of Massachusetts Economics Department. If anyone wants an electronic copy, just write me at mameerop@wnec.edu.

6 I am not trying to be flip here. One of the major aspects of growth in a market economy (a capitalist economy) is that it happens over a boom and bust cycle. The late David M. Gordon penned an article in the New York Times Magazine entitled, "Recession is Capitalism as Usual" on April 27, 1975 which spells out the argument completely. The argument being made in my commentary, following the Grant piece in the New York Times is that the suppression of the role of recessions has a potentially negative feedback onto the rate of growth of the economy as a whole. This point is developed quite forcefully in Michael Perelman's book The Pathology of the US Economy Revisited which was published in paperback in 2002.

WHAT IS A RECESSION AND IS ONE COMING?

THE FOLLOWING WAS DELIVERED AS A COMMENTARY OVER WAMC RADIO IN DECEMBER OF 2007 BY MICHAEL MEEROPOL

You hear a lot these days about fears of a recession -- But what is a recession and why would we want to avoid one? A recession is defined as a period of at least six months when the total output of society declines. 1

During a recession incomes fall for a large percentage of the population. More significantly: some people lose their jobs, some people are forced to work part time when they want to work full time, some businesses fail. 2

However, the loss to the economy affects everyone, not just the unemployed. A recession is a waste of human resources. A person who is unemployed for a year has continued to live and grow older. That year of potential contributions to society (as a factory worker, retail clerk, fire-fighter, social worker, you name it) is lost forever. Economists call this the Gross Domestic Product gap - the output that is lost whenever the economy underperforms. 3

During the 20th century, there were 20 recessions in the US. The economy lost on average the equivalent of three months of GDP in each of them. 4 In 2006, the GDP was 13 trillion dollars. 25% of that is $5.2 trillion. It is this reduction in output that affects everyone. Maybe a person won't lose his or her job but will have reduced overtime. Workers in state or city government won't get raises because revenues are down. Business profits may fall - or, the business may lose money. Remember, the reduced output in a recession is output that can never be recouped.

The fears expressed by policy-makers and experts have focused on three things happening at once, two of which are closely related. The two closely related problems are first the deflation of the housing bubble which is causing a significant reduction in home sales, home prices and construction activity; and, second, a credit crunch which is causing lenders to shy away from granting credit to all but the most trustworthy potential borrowers.5

I have spoken about the housing bubble before and given the nature of the headlines, it is probably unnecessary for me to say anything more than that the current fall is unprecedented. The bad news is the fall in housing sales and prices has just begun.

The credit crunch is caused in part by the nature of the housing bubble. Because mortgages have been securitized the bank that issued the mortgage rarely holds on to it. Because many mortgages (and parts of mortgages) have been rolled into securities and sold as packages, the holders of these securities are beginning to wonder how many of the mortgages represented by those securities are bad. No one wants to buy any more of these securities, and institutions sitting on these assets are already worried about having to write them down - that is reduce the value the owners expect to realize. Fearing that they're already overextended, these financial institutions are worried about making new loans. These two problems are sure to depress both consumption and investment in the coming months.6

The third problem that is making people fear a recession is the volatility in the price of oil. Here in the Northeast we are looking at a 20% or more increase in the price of home heating oil for this coming winter.

Unleaded regular gasoline is consistently at or above $3.00 per gallon and could go higher. Any significant rise in the price of gasoline and home heating oil will cut into consumption spending even further while raising the cost of doing business, thereby dampening profits as well. 7

With consumption likely to decline and investment likely to follow, I am afraid a recession is inevitable. The question is, will the Federal Reserve and the federal government take remedial steps quickly enough to make sure it is short and shallow rather than deep and devastating. 8

Footnotes:

1 See SURRENDER, 284-5 for a discussion of the term recession and the dating of recessions from 1948 through 1991. See pp. 21-22 for a general discussion of the business cycle. Before the 1930s, economists used to divide the business cycle into four phases: The upswing when the economy was doing really well, the recession when it was starting to go down after reaching its peak, the depression when it was stuck at the bottom, and the recovery when it was starting to grow after hitting bottom. The Great Depression of the 1930s was so traumatic for the US economy (and the citizenry as a whole) that after World War II it became fashionable never to use the term "depression" in describing economic activity. Thus, we have used the word "recession" to describe the interruptions in economic growth that have occurred since the war and have (for the moment) shelved the word "depression."

2For a rather typical textbook discussion of recessions, etc. see PRINCIPLES OF MACROECONOMICS by Karl Case and Ray Fair (Upper Saddle River, NJ: Pearson, Prentice-Hall, 2007): 134-143. There is even a reference to the potential benefit of a recession - namely the ability to reduce inflation. This is actually quite a controversial point. There are those that argue that if recession reduces inflation, that might increase economic growth in the future over and above what it would have been if the inflation had not been reduced.

3 Notice that this assertion runs counter to the point mentioned briefly in footnote 2. I am well aware of that argument, I just do not find it convincing.

4 In an article entitled "When the Economy Goes South" by Jane Katz in the Regional Review published by the Federal Reserve Bank of Boston (http://www.bos.frb.org/economic/nerr/rr1999/q3/katz99_3.htm) there is a table identifying 20th century recessions in the US with a column for production lost in months. These recessions averaged 11 months and lost on average 3.1 months of output. The recession in the 21st century began, according to the National Bureau of Economic Research in March of 2001 and ended in November of 2001. See http://www.nber.org/cycles/cyclesmain.html.

5 There are so many references to these issues that the best advice I can give is to use Google to search for articles about "the Housing bubble" and "the credit crunch." Here are a couple of examples: "3 Big Banks See No Relief as Write-Offs Mount" The New York Times Dec 13, 2007: C7. "Central Bankers to Lend Billions in Credit Crisis" The New York Times Dec 13, 2007: A1 "Big Banks Scale Back Plan to Aid in Debt Crisis," The New York Times Dec 10, 2007: C1. For a recent summary see Paul Krugman, "After the Money's Gone" The New York Times Dec 14, 2007: A35. 6 Consumption has been very strong since the 2001 recession in large part because the increased value of homes made it possible for individuals to take out loans using that increased value as collateral. Thus, consumption as a percentage of GDP held steady at 70% as GDP grew after the recession. If consumption growth slackens, which is virtually inevitable, GDP will also. Meanwhile, investment as a percentage of GDP rose from 15% in 2002 to 16.7% in 2006. (This 1.7% change is quite significant - it represented over $132 billion!). See http://www.bea.gov/national/nipaweb/TableView.asp#Mid. For discussion of how this will negatively affect the economy, see Mark Weisbrot: "Housing Crash Still Weights Heavily on the Economy" Center for Economic Policy Research, December 12, 2007.

7 Any decline in profits will reduce investment incentives. In addition, any decline in profits will cause businesses to reduce their predictions of future profits. It is these dampened expectations of future profits that have even more of an impact on investment decisions.

8 For the behavior of the FED see "Credit Crisis Prompts FED to Roll Back Rates Again," The New York Times, December 12, 2007, p. C1. Unfortunately, many investors felt that the Fed's action was too little too late as evidenced from the stock market decline that very day. That was why the world Central Bankers stepped in - see "Central Bankers to Lend Billions in Credit Crisis" The New York Times Dec 13, 2007 from footnote 5 above. In this context, the recent Republican debate where all candidates spoke of the need to cut government spending was very disappointing. Equally disappointing were some Democrats who insist on maintaining the "PAYGO" rules regarding government expenditure. As anyone who has taken one course in economics ought to know, during a recession the important role of government is to INCREASE its spending and/or DECREASE it's taxation to counter the declines in consumption and investment that are causing the recession.

A Proposed Solution to the Credit Crunch in Housing That You Won't Read in the Mainstream Media

THE FOLLOWING COMMENTARY WAS DELIVERED OVER WAMC RADIO BY MICHAEL MEEROPOL on SEPTEMBER 7, 2008


On Friday, August 31, three important news items dealt with the current housing crisis. In one, Ben Bernanke, the Chairman of the Federal Reserve Board, stated that the central bank "stands ready to take additional actions as needed" to prevent, "the chaos in mortgage markets from derailing the broader economy." 1

Bernanke was promising lenders and borrowers that the FED would turn on the money spigot to counter the market jitters. Meanwhile, President Bush offered a series of steps to "help … Americans with credit problems avoid losing their homes ..." 2

Implicit in both Bernanke's promise and Bush's proposals was the goal of avoiding foreclosure by helping borrowers continue to make payments. Unstated was the corollary that this would make it more likely that the lenders who made these poor investments would get their full rate of return.

The third item was an OP ED piece in the Providence Journal.3 In it, Dean Baker and Andrew Samwick begin with the following premise:

"It is important that policy be focused on assisting financially strapped homeowners, not lenders that issued deceptive mortgages or investors who foolishly speculated in mortgage-backed debt." They want to "allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators."

Their key recommendation is for Congress to pass a law capping the monthly payments at a home's fair market rent. Deceptive advertising has led homeowners to purchase houses at prices they cannot truly afford. New markets in liquid mortgages have made lenders less careful about buying securities containing those mortgages.

A typical economist's response is that both parties must accept the consequences of their "poor choices" - the homeowner must be forced out of his/her home and the mortgage holder must take a loss.

Baker and Samwick argue that the important group to rescue is the homeowners not the lenders.

Their solution does not reward lenders -- it punishes them by forcing them to accept a loss on the mortgage securities they've bought while protecting homeowners from foreclosure.

Why is this a better solution than the ones we are reading about coming out of Washington? The answer is in an understanding of why the situation has become so dire.4 The current problem to a large extent stems from the emergence of the housing bubble. Bubbles work on the principal of the "bigger fool" theory - I know I'm buying something that's costing much more than it's really worth but I also know that when the time comes I can sell it to a "bigger fool" than I am.

Sooner or later speculators discover that they are the "biggest fools" -- they cannot find a buyer -- they have to sell at a loss. This is true for money managers who have bought securitized mortgages as well as for homeowners who bought a house they truly couldn't afford at a mortgage whose terms they didn't really understand.5

Bailing out lenders sends a message that they can behave irresponsibly in the future and get away with it.

The Baker-Samwick solution has the great virtue of penalizing them for their bad investments by significantly cutting their rate of return.

I fear that Congress and the President will respond with something much more to the liking of the speculators and the Federal Reserve will do the only thing it knows how to do, cut interest rates.

Too bad. The Baker-Samwick proposal is a good one. Maybe you can suggest that your member of Congress support it?

Footnotes:

1 The New York Times: September 1, 2007: "Bernanke Says Fed is Prepared for More Action" (p. 1) Since then, there appears to be a consensus among financial and economic prosnosticators that the Federal Open Market Committee will lower the federal funds rate, it's benchmark short term interest rate, by either ¼ or ½ of a percent.

2The New York Times: ibid. "On Mortgages, Bush Plans a Limited Intervention." [B1]. In this article, President Bush quite rightly notes that "A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." It is in his last sentence where President Bush erroneously creates an equivalence between the victims of shady lending processes and the perpetrators. Obviously no one buys a home knowing "they could never afford"(emphasis added) it. They were tricked into believing they could afford that home by deceptive lending practices. According to the article (p. B6) a half a million homeowners are in danger of foreclosure because of already missed payments. The Bush proposal will make it easier for some low income mortgage holders to get federal mortgage insurance - that would help about 80,000 but it would really help the very speculators Bush said he didn't want to help. If these folks get federal mortgage insurance, then the speculators who bought those mortgages won't lose money on them. Much worse, by the way, are some proposals by Congressional Democrats that would use Fannie Mae and/or Freddie Mac to come to the rescue of hard-pressed homeowners and thus, on a much larger scale, validate the bad investment choices of speculators.

3 This article ran in the Providence Journal on September 3. I consider it so valuable that I recommend that it be read in its entirety. Read the article

4 And it has become so dire not just for the homeowners who are in danger of losing their homes but for the economy as a whole. As home prices across the country fall, construction activity falls. The construction industry is an important component of investment. As it declines, job growth slows. (The August job figures were quite disappointing - a predicted increase turned into a decline.). Another important fact is the the rising values of homes had been a major source of consumer spending. In effect, consumers who owned homes were using the rising equity in their homes as an ATM machine to increase consumption spending. That has stopped --- and as home values fall, homeowners will have to cut back on spending just to stay in their homes. As we move through September, economists are recognizing the possibility of a recession sometime before the year is over.

Dean Baker goes much further. He put it this way in an on-line commentary ("Alan Greenspan and His Bubbles" By Dean Baker CENTER FOR ECONOMIC POLICY RESEARCH September 18, 2007:)

"[T]he biggest effect will be the impact that the loss of housing wealth will have on consumption. As the bubble expanded, people borrowed against housing equity almost as rapidly as it was created. The Fed estimated that a dollar of housing wealth translates into 5 cents of additional consumption. This story works in reverse also. A loss of $4 trillion in housing wealth will lead to a reduction of approximately $200 billion in annual consumption. This drop in consumption, coupled with the downturn in the housing sector, virtually guarantees a recession, and quite likely a very severe recession."



5 One example of fine print coming to bite homeowners was highlighted in the New York Times of September 13. "A Home Loan Trap." (C1). The article notes that individuals who bought mortgages at initial low rates with the hope of paying them off when the rates rose are finding themselves hit with so-called "exit fees." These are penalties for paying off the mortgage earlier or refinancing. In other words, many people who were induced to buy homes with low "teaser" interest rates were under the impression that they could just pay off the loan when the rates started to adjust upwards. On the contrary, they are begin hit with large penalties - so large that selling the house and paying the penalty will actually consume all the equity they have. The problem for the money managers is spelled out in an excellent article by Roger Lowenstein in the New York Times Magazine on September 2. ("Subprime Time: How did Homeownership become so rickety?" pp. 11-12). Lowenstein describes the process of turning illiquid assets, mortgages on homes, into liquid assets, securities backed by mortgages on homes. "Even though each unit of real esates continued to be a slow-moving, illiquid asset, … the underlying mortgages could be traded as rapidly as stocks and bonds. Instead of keeping his mortgages in a drawer, the banker on Main Street could unload his risk by selling them to Salomon [Brothers]. The banker was thus converted from a long-term lender to a mere originator of loans. Salamon and other institutions would take the mortgages sold by banks and stitch together bonds backed by the payments of many mortgagees, which they dsold to investors. … a group of inert mortgages [were now] a tradable security. … Once the mortgage originator became, in effect, a supplier to Wall Street, new, often unregulated nonbanking companies jumped into the game of brokering and also issuing mortgages. Over time, this weakened lending standards…" Lowenstein concluded, "What happened over the last generation is that housing was turned from a market that responded to consumers to one largely driven by investors." The bubble that fueled the dot.com boom of the late 1990s was replaced by a similar bubble in homebuilding and investing since 2002. The second bubble was why the recession of 2001-2002 while experiencing a significant decline in investment spending, saw no drop in consumer spending. Unfortunately, that situation is ending now. One other impact of the housing bust is that lenders are now doubly shy of getting caught investing in securities of dubious value. This may lead to a credit crunch similar to the one that caused a very sluggish housing and construction market after the Savings and Loan meltdown of 1989 and beyond. A credit crunch will mean even legitimate investors will find it difficult to borrow funds for new investments, compounding the negative impact of the fall in consumption spending.