WNECONOMICS

Lecture on The Book of Daniel

2008-06-25T10:14:00.000-07:00

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

2008-06-25T10:07:00.000-07:00

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]

The Recession is On, but Will It Include Inflation?

2008-05-05T12:21:00.000-07:00

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

2008-05-05T12:18:00.000-07:00

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?

2008-05-05T12:16:00.000-07:00

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?

2008-05-05T12:13:00.000-07:00

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

2008-05-05T12:07:00.000-07:00

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.

What's All the Fuss about the Death Tax?

2008-05-05T12:00:00.000-07:00

THE FOLLOWING COMMENTARY WAS DELIVERED BY MICHAEL MEEROPOL OVER WAMC RADIO IN SEPTEMBER OF 2008

A public relations coup occurred recently. The estate tax has been reincarnated as the death tax. Though this tax is levied on only 2% of the population, millionaires and billionaires, it is one of our most unpopular taxes.

How is it a death tax? Consider the income or payroll tax. One reduces your income. The other reduces your wages. And what does the death tax reduce? What you keep after dying? Are there IRS agents taking a cut as you enter the pearly gates?

The so-called death tax is actually a tax on the value of assets – the estate – left by someone who dies. Those paying the tax are very much alive – they are the heirs.
And – they only have to pay the tax if the estate’s total value is greater than $2,000,000.

What are the pros and cons of such a tax? [1]

First of all the government needs to raise revenue. The estate tax is an almost perfect example of a tax based on ability to pay. What that means is that the people paying the tax can most afford to pay it.[2]

Suppose I were the grand-child of a very rich person. I might be earning $30,000 a year, I might be earning $300,000. I might be earning no income at all. Whatever my income, it is a fact that exists before I get my share of my grandparent’s estate.

Suppose the estate is $3 million. The tax is levied only on the $1 million over and above the $2 million exemption. The tax rate is 45%. The estate loses $450,000 to the IRS reducing it to $2,550,000. If I share with nine other people, I will get $255,000.

My annual income has not been reduced. No harm has been done to me by the tax. It was never my money – it belonged to my grandfather and just landed on me because he died.

According to one estimate, the estate tax would raise $39 billion in 2011 if the law reverted to 2001 rules and $29 billion if the exemption stayed at $2 million.

This is not a lot of revenue when you consider the federal budget will exceed $3 trillion by 2001. However, for every dollar of reduced taxes, someone else has to pay higher taxes or some government service has to be reduced or more revenue has to be borrowed. In other words, there is some impact.

Some have argued that the existence of the estate tax discourages individuals from making investments and building up an estate because they know their heirs won’t get all of it. This argument seems nonsensical to me. Even at a tax rate of 45%, the heirs get to keep 65 cents for every dollar left by grandpa. (after paying nothing on the first $2 million).

Actually, the existence of that tax often convinces wealthy people to donate some of their wealth to non-profit organizations. Wealthy families often create tax-exempt foundations and make donations to colleges and universities. Such contributions reduce the estate tax burden while creating institutions that outlive the founders – think of the Rockefeller and Ford Foundations or Carnegie Mellon University.

A little understood effect of abolishing the estate tax is that it would be terribly destructive of the incentives and self-reliance of those heirs who receive a millions of dollars in inheritance. Pundits and politicians worry about the bad incentives created by our public welfare system – the willingness to work hard is virtually destroyed by the thousand dollars given to poor women with children to just “sit around” and allegedly “don’t work…”

Imagine the disincentive to work or achieve anything if you know from the time you’re born that you’re going to inherit over a million dollars from grandpa. The estate tax reduces that serious disincentive as grandpa gives a lot away and the government takes 45% over $2 million.

The estate tax – we should keep it.

1. For a good summary of the issues relating to the estate tax see the following: “Options to Reform the Estate Tax” by Leonard Burman, William Gale and Jeffrey Rohaly Tax Policy Issues and Options (Urban-Brookings Tax Policy Center) No. 18 March, 2005. It is available on the web at: http://taxpolicycenter.org/publications/template.cfm?PubID=9218

In 2001, President Bush’s first tax cut was passed by Congress. One of its most significant provisions was the phase out of the estate tax. In 2001, the top rate of taxation was 55% and the exemption was less than $1 million. For 2007, 8 and 9, the exemption is set at $2 million with a rate of taxation not to exceed 45%. In 2010 unless the law is changed before then, the estate tax will disappear. However, in order not to appear to be losing the Treasury too much money over the ten years after the 2001 tax cut was passed, Congress provided for the estate tax to return with the exemption at $1 million and the top rate back up to 55% in 2011 (prompting many jokes about people killing off their rich elderly relatives in 2010). It is clear that some compromise will occur so as to create some estate tax with an exemption higher than $1 million before 2010 – though perhaps that one year window without an estate tax will occur with the compromise coming in 2011 to avoid a big increase in the burden. For a brief discussion of different perspectives on the estate tax – and how the idea of calling it a “death tax” caught on – see, C. Eugene Steuerle Contemporary US Tax Policy (Washington, DC: The Urban Institute Press, 2004).

2. There are two basic principles of taxation: One is the so-called benefit principle which attempts to levy a tax so that those that benefit from the government services provided end up paying for the tax. A good example of this tax is the gasoline tax though it is rather imperfect. The tax on the gallons of gasoline you burn in your car is held in a fund to build and maintain highways. The reason it’s an imperfect tax on the benefit one derives from driving is cars have different gasoline mileage. Also, different sized cars have different impacts on the roads. Finally, the benefits of driving cannot be measured by the number of miles one drives. Driving to work has a much higher intensity of benefit associated with it than driving for pleasure. If you stopped driving for pleasure you might be less happy. If you stopped driving to work you’d have a significant reduction in income. The second principle of taxation is called the ability-to-pay principle. Since most government programs do not provide specific services which individuals can “consume” and attempt to measure their personal satisfaction from (as one might do in driving down a highway) it is often impossible to calculate the “benefit” that accrues to this person as opposed to another. (How could I quantify the benefit I get from the existence of the Federal Aviation Administration or the National Parks Service or the Postal Service or the Coast Guard?) Thus, the alternative method of calculating the appropriate tax is based solely on the ability of the taxpayer to pay. Using this principle, the tax should be levied either on a person’s income, wealth or (according to some) consumption. In addition, there is a strong preference for taxes that provide an exemption for certain levels of income, wealth and/or consumption from taxation. The idea here is that if you have a low income or low consumption, all of it is being spent on necessities and it would actually create real hardship to take some of that away. Once one has agreed that some level of income, consumption or wealth should be taxed at a zero rate, then the positive rate on the amount over the exemption means that you have favored a progressive tax system where the higher your income, the higher the RATE at which you are taxed. If there is agreement on this point, there is a significant debate as to whether rates should escalate as incomes get even higher or should stay at the same fixed level once the income exempt from taxation (taxed at a zero percentage rate) has been exceeded. For a discussion of a number of these issues see Steuerle: ch. 2. On the income vs. consumption taxation, see Economic Report of the President, 2004, ch. 6.

Thomas Sowell Defends the so-called "free market"

2008-05-05T11:43:00.000-07:00

THE FOLLOWING COMMENTARY WAS DELIVERED OVER WAMC RADIO in JUNE of 2008.

Thomas Sowell Defends the “Free Market” from “Elites.”

When I appeared on VOX POP last September, one caller said he was a fan of the economist, Thomas Sowell. I responded that every time I read a Sowell column I find something that I disagree with. Take for example his May 21 column in the Springfield Republican. Sowell arrived at a false conclusion from an obvious fact.[1]

The fact was that, “The most knowledgeable person on earth does not have even one percent of the total knowledge on earth.” Sowell’s conclusion was that because of this, “social engineering, economic central planning, judicial activism and innumerable other ambitious notions favored by the political left…are formulas for disaster.” [2]

Note the buzzwords. “Central economic planning” might make you think of Stalin. “Social engineering”-- of Mao and the Chinese communes. In case you missed his point, Sowell reminds us that many people died in Stalin’s collectivization of agriculture and in the famine following Mao’s Great Leap Forward. [3]

Then he brings his point home, and I quote: “… the political left … share … the notion that knowledgeable … people like themselves have … a right and a duty to use the power of government to impose their superior knowledge and virtue on others.” [4]

The danger is in our midst warns Sowell. His solution: “… free markets, judicial restraint and reliance on decisions and traditions growing out of the experience of the many—rather than the groupthink of the elite few – are [very] important.”

Sowell opposes minimum wage laws -- an example of social engineering. He also opposes laws forbidding child labor. [5]

Why do we have a central bank, or Federal Deposit Insurance, which, following his logic, Sowell would oppose. Why have regulatory agencies and laws forbidding child labor and establishing a minimum wage?

It is not because some mini-elite has “thought up” these things. These institutions (excepting the Federal Reserve) are in existence because political movements formed to force the so-called free market to take action – action that market participants would not do if left alone.[6]

Left alone, businesses produce not just products but pollution. Though individual consumers by their decisions to buy cars can “signal” their desires to producers through their purchases (take the example of SUVs vs. smaller cars) there is no way for those individuals to “signal” that they would like commuter rail lines in major cities or a European style railroad system. [7]

Left alone, food producers produce attractive food but may not be concerned about the long term health effects of the additives they use.

A free market for unskilled or semi-skilled labor leads to very low wages unless either a labor union or government limits the ability of employers to pay low wages.

Sowell plays a trick on his readers by asserting that the government policies just described are enacted by a small group of very bright people who think they know better than the collective decision-making of millions of independently thinking and acting economic agents. But this is actually the opposite of the truth. The millions of independently thinking and acting economic agents discovered long ago that without political cooperation to enforce their collective will on the market (through laws like the minimum wage or the prohibition against child labor) a few elites with lots of money and power are able to take advantage of the powerlessness of the individuals they confront as either workers or consumers. [8]

Sowell acts as if the only power that damages the will of the people as expressed through the so-called free market is the government.. Not once in his column does he mention the word corporation -- yet a corporation is a significant center of power. Without government intervention, no matter how imperfect, to counter corporate power, we would be immeasurably worse off.

1. The column in the Republican is entitled “Knowing it all is not enough.” It is available on a web site called TownHall.com dated May 16. There is has the title, “Presumptions of the Left.” http://www.townhall.com/columnists/ThomasSowell/2007/05/16/presumptions_of_the_left

2. Because of the need to compress the text into the time available for a radio commentary, the full text of this section of Sowell’s argument was compressed. Here it is without the ellipses: “If you start from a belief that the most knowledgeable person on earth does not have even one percent of the total knowledge on earth, that shoots down social engineering, economic central planning, judicial activism and innumerable other ambitious notions favored by the political left. If no one has even one percent of the knowledge currently available, not counting the vast amounts of knowledge yet to be discovered, the imposition from the top of the notions favored by elites convinced of their own superior knowledge and virtue is a formula for disaster.”

3. Here is Sowell’s reference to Stalin and Mao: “ …economic disasters, important as they are, have not been the worst consequences of people with less than one percent of the world's knowledge superimposing the ideas prevailing in elite circles on those subject to their power -- that is, on the people who together have the other 99 percent of knowledge. Millions of human beings died of starvation, and of diseases related to severe malnutrition, when the economic ideas of Stalin in the Soviet Union and Mao in China were inflicted on the population living -- and dying -- under their iron rule. In both cases, the deaths exceeded the deaths caused by Hitler's genocide, which was also a consequence of ignorant presumptions by those with totalitarian power.” Note that Sowell cannot quite bring himself to acknowledge that Hitler’s genocide was also the product of a mini-elite running an entire nation. In fact, there is nothing in his column to indicate that he believes there is any such thing as a right-wing or “conservative” elite.

4. The full text is: “Many on the left may protest that they do not believe in the ideas or the political systems that prevailed under Hitler, Stalin or Mao. No doubt that is true. Yet what the political left, even in democratic countries, share is the notion that knowledgeable and virtuous people like themselves have both a right and a duty to use the power of government to impose their superior knowledge and virtue on others.” This is definitely a correct description of the Leninist conception of communist organizations and the way governments controlled by parties calling themselves Leninist have behaved. However, movements of the left, in general, have often been highly democratic in organizational form and in practice. The most obvious examples have been anarchist groups. [Though there have been very few examples where true principles of anarchism have had a chance to be put into practice, one such example was during the Spanish Civil War. The details can be followed in Noam Chomsky’s first major political work: American Power and the New Mandarins in his chapter: “On objectivity in liberal scholarship” where he shows how the story of the Spanish anarchists has been totally distorted by the scholarly community.] In the US, the Industrial Workers of the World (the IWW, known as the “Wobblies”) was a highly democratic bottom up labor movement. Students for a Democratic Society and the Student Non Violent Coordinating Committee which were important organizations in the 1960s were highly democratic in structure as well as in their goals. (SDS has recently revived. You can check out their website at http://www.studentsforademocraticsociety.org/.) Since Sowell and the right-wing echo chamber that he invites [Anyone interested can go to the townhall.com web site and follow any of the discussion threads that respond to Sowell’s postings. With one or two ‘liberal’ interlopers as exceptions, the attitudes of the posters are a pretty predictable example of right-wing groupthink.] include liberals and social democrats in their blanket condemnation of “the left” it is important to note that virtually every “liberal imposition” on the so-called free market that Sowell decries has come from bottom up pressure and not from the top down.

5. Sowell has published a detailed popularized version of his philosophy of economics and economic policy in Basic Economics. (3rd edition, NY: Basic Books, 2007) His attack on the minimum wage is presented on pages 210-221. His attack on Child Labor laws is presented on pages 232-4. (Reading the endnotes to these pages is quite revealing. [see p. 586] Sowell writes [p. 214] “Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise are hailed as having ‘refuted’ this ‘myth’.” In the endnotes Sowell points the reader to articles that support his view and counter “those few studies…” but not to the articles that present the arguments and evidence in support of the view that the minimum wage does not increase unemployment. For a balanced view, and a reference to David Card and Alan Krueger’s summary work Myth and Measurement, the New Economics of the Minimum Wage see an interesting set of exchanges from the blog of N. Gregory Mankiw, a former head of President Bush’s Council of Economic Advisers: http://gregmankiw.blogspot.com/2006/06/sperling-on-minimum-wage.html

6. Minimum wage laws and laws banning child labor have been a demand of the labor movement from the earliest years of capitalism. Today, the labor movement is often characterized as part of the elite because labor leaders are well-paid executives of large organizations. However, the original labor movements (and this applies to the vast majority of union members and organizers and officials today as well) were groups of workers who recognized that they were powerless alone to force their bosses to pay them decent wages but that in unity there was strength. Many years, many struggles, (many deaths) later, they achieved things we take for granted – like the weekend, the eight-hour day, seniority, the ability to bargain over working conditions, and for some – health insurance and a pension. It is true that it took an act of Congress and the signature of a President to transform the minimum wage and a ban on child labor from demands into laws but Congress would never have acted without years of struggle and pressure. Many of the regulatory bodies that exist in the US today (the Food and Drug Administration, the Federal Trade Commission, the Occupational Safety and Health Administration, the National Highway Traffic Safety Administration) were created in response to wide public outrage against abuses documented often by muckraking journalists.

The Federal Reserve System (our nation’s Central Bank) is an exception to this rule. Though there had been a long serious of popular movements in the 19th century who agreed that the control of the nation’s finances by large private banks had a negative effect on the ability, particularly of farmers, to get credit when they needed it and to escape from the rising burden of debt as the currency deflated (yes, the US economy suffered a long run deflation between 1873 and 1897), the solution created with the Federal Reserve Act of 1914 was clearly a product of elite, top-down, decision making. The story is told in William Greider’s masterful work, Secrets of the Temple (NY: Simon and Shuster, 1987): 243-289.

7. In other words, though I can go buy a small fuel efficient car and if lots of other people do that, then businesses will produce less SUVs and more of the fuel-efficient kind, there is no market out there where I as an individual can make a purchase that will cast my “dollar vote” for a light-rail line in the urban area where I live or a national rail system like France’s or Japan’s. Obviously, such a “vote” would have to be a political vote to get a majority of my fellow-citizens to support raising taxes to create such a transportation set-up.

8. For just one example of how real elites operate, check out the documentary “Who Killed the Electric Car” (2006). It argues that GM created and then failed to market the first battery-operated car called EV1. Meanwhile, the California Air Resources Board which had previously mandated the sale of zero-emissions vehicles, caved under pressure from industry lobbyists and removed that requirement. (The federal government had joined private industry in a suit against California to prevent them from enforcing the Zero Emission Vehicle mandate.) It’s a complicated story and obviously subject to debate but the main point of the movie is that we as citizens have no way in the “free market” to “vote” for an electric car so long as oil companies are making lots of money selling gasoline. It requires government activity to make an electric car a viable alternative.

Note that the recent growth of hybrid cars as a share of the market in the context of very high gasoline prices shows that markets can at times accurately signal what people want. However, the price of gasoline at the pump does not reflect the full cost borne by society as a result of the burning of that gasoline. This is an example of what economists call externalities. Sowell’s celebration of the so-called free market [I use the modifier “so-called” because it isn’t really free…] ignores the many situations where the prices charged in the market are actually sending the wrong signals. If the gasoline tax were more in tune to the true cost imposed on society of running a car on gasoline, the demand for SUVs would plummet. But that would cut auto industry profits and the demand for gasoline, so you can imagine how strong the political campaign would be against anyone who advocated a big hike in gasoline taxes. In addition, there would definitely be legitimate differences of opinion about what the “true cost” imposed on society by driving gasoline powered cars actually is.

For a general discussion of the role of private elites in the US, I still believe G. William Domhoff’s work Who Rules America? and The Higher Circles is the best summary. For a summary see Professor Domhoff’s web site: http://sociology.ucsc.edu/whorulesamerica/power/national.html

SUPPLY SIDE ECONOMICS IS NONSENSE

2007-05-14T15:04:00.000-07:00

The following commentary by Michael Meeropol was broadcast over WAMC radio on Friday, May 3, 2007

WHAT IS “SUPPLY SIDE ECONOMICS?”

The debate over the tax cuts that President Bush convinced Congress to pass in 2001, 2002 and 2003 has often centered around the fairness of those cuts[1]. Why do most of the benefits of the cuts accrue to the richest people in the country?

There is an answer and it goes to the heart of one of the great debates in the field of economics, – the debate about so-called supply side tax cuts.[2]

Just last month, Bruce Bartlett, former Reagan Administration economist, published an OP ED piece in the New York Times in which he baldly asserted that history has vindicated the main tenets of Supply-Side Economics.[3] That approach is summarized by Bartlett as follows: " … incentives matter, … high tax rates are bad for growth.”

What he means by this is that raising revenue using a graduated income tax, with rates on high income tax-payers of 70% or 50% will so damage incentives that these individuals will refrain from saving and from investing. The rest of us will suffer from a sluggishly growing economy or, worse, lose our jobs.[4]

Thus, supply siders argue that the way to increase economic growth is to cut income tax rates, especially on high income individuals. That’s why the Bush Administration has supported the abolition of the Estate Tax and the tax on Dividend income received by individuals (not pension funds – those are already tax exempt).

These reduced tax rates will supposedly stimulate economic activity on the part of investors and make more investment funds available to start-up businesses. The alternative approach to stimulating the economy comes from the work of the British economist Keynes. In his major work, written during the Great Depression, Keynes argued that when the economy is growing sluggishly, the appropriate response is to use government fiscal policy (tax cuts or spending increases – both would work) and/or monetary policy (lower interest rates) to stimulate total spending.[5]

Bartlett both caricatures Keynesian economics and blames it for the stagflation of the 1970s.[6] He argues that the supply siders have the right policy prescriptions for the economy as evidenced by the economic successes of the Reagan Administration.[7]

But he does not tell us the actual predictions made by the supply siders in 1981 when the Reagan Administration passed a three year tax cut.

Those predictions were that the cut in individual income tax rates would, 1) stimulate individual activity which would, over time, raise income tax revenue; 2) stimulate a higher rate of personal savings, and 3) reduce the budget deficit over time.[8]

I won’t bore you with numbers but none of these predictions came true. 1983 was the year the full tax cut was phased in and it was also the end of the 1981-82 recession. 1983-1989 were years of recovery. But even by 1989, following those years of recovery, income tax revenue was still a lower percentage of GDP than in 1983. Personal savings fell below 6% of GDP by 1989 – it had been above 6% -- 6.6% of GDP -- in 1983. Finally the Federal Deficit as a percentage of GDP was no lower in 1989 than it had been in 1980 before Reagan was elected – it had ballooned for most of the 1980s. Economic growth and business investment were higher on average in the decades before 1981 and after 1989 even though income tax rates were higher than during 1981-1989.[9]

Meanwhile, the Bush Administration has utilized massive tax cuts and budget deficits to recover from the 2001 recession and the economy still isn’t growing as fast as it did in the late 1990s when the top income tax rates were significantly higher than they are now.

Far from being vindicated, supply side economics has flunked the main test – the test of historical experience.

[1] See, for example, Robert Pollin, Contours of Descent (NY: Verso, 2003): 94-102.

[2] For a short introduction see Surrender: 46-48.

[3] Bruce Bartlett, “How Supply Side Economics Trickled Down” New York Times, 6 April, 2007.

[4] For more details on supply side economics, see Jude Wanniski “The Mundell-Laffer Hypothesis,” Public Interest 39 (spring 1975): 31-57.

[5] Keynes’ work is The General Theory of Employment Interest and Money (London 1935). Virtually all Principles of Economics textbooks have presentations of what they claim are Keynesian economics, but unfortunately these often depart from Keynes’ own approach. A good intermediate level treatment is in Macroeconomics (James Galbraith and William Darity, Jr.): 9—17, 25—40, 84—130.

[6] Here is Bartlett’s caricature: “Among the beliefs held by the Keynesians of that era were these: budget deficits stimulate economic growth; the means by which the government raises revenue is essentially irrelevant economically; government spending and tax cuts affect the economy in exactly the same way through their impact on aggregate spending; personal savings is bad for economic growth; monetary policy is impotent; and inflation is caused by low unemployment, among other things.” I will comment on each assertion one at a time:

1) “Budget deficits stimulate economic growth.” Traditional Keynesian theory argues that when the economy is producing below its capacity, any boost to total spending (whether from budget deficits, increases in consumption, increases in investment or increases in exports) will raise total income by putting previously unemployed resources – people and factories and farms – to work. This was proven in 1935 when the Germans built the Autobahns putting many unemployed workers to work and giving them incomes to spend putting still other people to work. (This illustrated the principle of the multiplier which is at the heart of Keynesian economics. For one example, see Campbell McConnell and Stanley Brue Macroeconomics (17^th edition): 158-162. The original multiplier effect was introduced into economic theory in 1931. See R. F. Kahn, “The Relation of Home Investment to Unemployment,” Economic Journal (1931): 173-93.) Keynesians, however, have always argued that if the economy is utilizing its labor force and capital stock fully – in other words if we are at “full”employment – then any increase in aggregate spending (including as a result of budget deficits) will not increase economic growth but merely accelerate inflation. Keynesians, therefore, argued in 1967 that it was essential to raise taxes in order to reduce inflationary pressure because the US economy had driven the rate of unemployment down to 3.8% (below the target of 4% which was judged to be “full”employment at that time).

2) “The means by which government raises money is essentially irrelevant economically” and “Government spending and tax cuts affect the economy in exactly the same way through their impact on aggregate spending” actually are making the same point. Bartlett wants to highlight the fact that because Keynesians focus on aggregate spending, they ignore the incentive effects of the TYPES of taxes imposed on individuals and businesses to raise funds for government spending. Bartlett and other supply siders want to argue that you can raise income by stimulating more effort, savings, investment and innovation and that will produce more rapid economic growth than when you stimulate output by increasing spending. The main way to stimulate more effort, etc. is to cut the marginal tax rate on income. It is true that Keynesians believe that the surefire way to increase output when the economy is producing short of potential is to increase spending. It is also true that Keynesians have believed that the incentive effects of different kind of taxes are probably relatively small. (The period of very rapid growth for the US economy in the post World War II period featured very high marginal tax rates – the period of much lower marginal tax rates featured slower economic growth. For details see Surrender: 150-168.) However, Bartlett’s extreme statement would probably not be supported by any Keynesian today.

3) “Personal savings is bad for economic growth,” is one of the worst caricatures of Bartlett’s article. This actually refers to a specific problem that Keynes recognized that has come to be called the “paradox of thrift [or savings].” This concept is considered so archaic that current editions of Principles of Macro textbooks fail to refer to it. (For a reference see O. Blanchard, Macroeconomics, 4^th Ed. (Upper Saddle River, NJ: Pearson Prentice Hall, 2006]: 60. It is a very simple statement. If the rate of personal savings goes up and private investment does not go up to match that increase in personal savings, then because consumption falls when savings rises the resulting decline in spending will, indeed be “bad for economic growth.” Of course if investment goes up to match the increase in savings, then savings are NOT “bad for economic growth.” Any textbook in Principles of Economics from previous years when the paradox of thrift/savings was regularly taught would have this presentation. For Bartlett to write it the way he did is fraudulent. The real issue between supply siders and Keynesians is which way does causation go? Do decisions to raise savings create more investment (some supply siders are explicit that this happens) because the rise in savings lowers interest rates which stimulate investment? OR, as Keynesians would argue, do decisions to raise investment create more savings because the rise in investment raises incomes via the multiplier and thus increases savings?

4) “Monetary policy is impotent,” was the original view of some Keynesians during the 1940s and 50s. They looked at the experience of the Great Depression when interest rates were below 1% and decided that as a depression fighting tool, monetary policy was likely to be ineffective. The Central Bank could lower interest rates but couldn’t force businesses to borrow and invest. (There was a saying to describe this: “You can lead a horse to water, but you can’t make it drink.”). In the context of the post World War II period, Keynesians all agreed that manipulation of interest rates was an important component of any coherent policy to stimulate economic growth, reduce unemployment and restrain inflation. Actually, it is the right-wing MONETARIST economists who argued that discretionary changes in monetary policy by the Central Bank would be ineffective – and thus they recommended taking discretion away from the Central Bank and forcing it to raise the supply of money a fixed amount every quarter no matter what. (For details see Surrender: 42-3 and the footnote references). Again, Bartlett is incorrectly characterizing the position of Keynesian economists.

5) Finally, Bartlett argues that Keynesians believed that “Inflation is caused by low unemployment.” Actually, Keynesians believed that inflation occurs when there is an attempt to increase total spending when unemployment is very low (at the “full” employment level). Thus, they recommended wage and price controls during World War II, high taxes during the Korean War, and a tax increase to finance the Vietnam War after 1967. Keynesians also acknowledged, however, that there was such a thing as “cost-push” inflation that could occur even when unemployment was well below the full employment level. For a very Keynesian interpretation of the combination of cost-push inflation and unacceptably high unemployment (called “stagflation”) in the 1970s, see Alan Blinder Economic Policy and the Great Stagflation (NY: Academic Press, 1979). See also, Surrender: 51-57. Once again, Bartlett unfairly caricatures Keynesian analysis.

Blaming Keynesian economists for the stagflation of the 1970s is partially correct. Since Keynesian economics’ tool for dealing with the economy is to raise or lower spending, it is incapable of combating both inflation and unemployment at the same time. That is why President Richard Nixon imposed wage and price controls in 1971 and why President Gerald Ford flip-flopped from recommending a tax increase to fight inflation in the Fall of 1974 and a tax cut to fight recession in the Winter of 1975. But Keynesian economics didn’t cause the problem – it just had no way to simultaneously solve both parts of that problem.

[7] And what were those correct policies? Here is Bartlett again: “Based on insights derived from the Nobel-winning economists Robert Mundell, Milton Friedman, James Buchanan and Friedrich Hayek, the supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth.” What he left out was the fact that it took a fifteen month recession associated with the tight money policies to “stop inflation” between August of 1981 and January of 1983. Though inflation was already below 4% in 1982, unemployment stayed above 9% through 1983. Supposedly, the tax cuts were supposed to usher in an era of explosive growth but in fact, though the tax cuts finally ended the recession (with help from rising government spending as well), the unemployment rate did not fall below 6% till 1988 and the average rate of growth of the economy from the bottom of the recession in 1983 to the end of the recovery in 1990 was lower than in the recovery between 1974 and 1980 – during the “bad old days” when according to Bartlett, Keynesian economic policy had caused stagflation. In other words, Barlett’s assertion is flatly wrong. The policies did not cure stagflation. First they made the economy worse in order to cure the inflation (any depression or prolonged recession will do that) and then they did not permit the economy to grow very fast during the recovery in order to keep inflation “tamed” and thus, unemployment stayed quite high and growth, as a result, was relatively slow.

[8] This is the theory of supply side economics. Bartlett attempts to fudge the issue by presenting his version of the conclusions of supply side economics: " … incentives matter, … high tax rates are bad for growth, and … inflation is fundamentally a monetary phenomenon.” On the first point, the question is – how much do incentives matter? The evidence from the 1980s indicates – not so much. On the second point, the comparative data for the various ups and downs of the economy between 1960 and 2000 indicates how much this assertion has been disproven by historica. experience. Finally, the last point is either a meaningless tautology or false. Inflation occurs as a result of a variety of causes. Once inflation begins, monetary growth occurs with it. In other words, there is a correlation. The argument between monetarists and Keynesians is about the direction of causation.

[9] In response to the Bartlett OP-ED piece, I submitted the following letter to the Editor of the NY Times. It was not published. I include it here with the references to the data on the bottom:

The predictions of supply side economics were that a cut in marginal individual income tax rates would 1) stimulate individual activity causing an increase in individual income tax revenue over time, 2) stimulate a higher rate of personal savings, and 3) reduce the federal
budget deficit over time.

The following table shows none of these came true. 1982 was the first year the tax reductions were felt. 1983 was the year the full tax cut had been phased in. 1983-1989 were the years of recovery from the recession. Where is the increased savings? Where is the increased
government revenue from the income tax? The budget deficit finally comes down but in 1989 it is no lower than it was in 1980 (it was 2.7% of GDP then).

Year Individual In- Personal Sav- Federal Deficit

come taxes as ings as a per- as a percen-

a percentage centage of tage of GDP

of GDP GDP

1982 9.5 8.3 4.0

1983 8.9 6.6 6.0

1984 7.6 8.0 4.8

1985 7.9 6.6 5.1

1986 7.8 6.0 5.0

1987 8.3 5.1 3.2

1988 7.9 5.3 3.1

1989 8.1 5.2 2.8

Sincerely,

Michael Meeropol

Every number in the table is from the ECONOMIC REPORT OF THE

PRESIDENT, 2004. GDP from p. 284. Federal Income Tax receipts from p.

379, Personal Savings from p. 320, the Federal Budget Deficit as a

percentage of GDP from p. 378.

Why becoming an EMPIRE is so costly...

2007-05-14T14:59:00.000-07:00

The following commentary was broadcast by Michael Meeropol over WAMC radio on April 6, 2007.

DO THE BUSH ADMINISTRATION’S MILITARY ACTIONS IN AFGHANISTAN AND IRAQ HARM OUR MILITARY CAPABILITIES?

On March 19, the Washington Post reported that top military leaders were concerned that the demands of the wars in Iraq and Afghanistan have created serious problems. Quote:

“… the high and growing demand for U.S. troops … has left ground forces in the United States short of the training, personnel and equipment that would be vital to fight a major ground conflict elsewhere, …”[1]

In economics classes we note that even resources for the military are not infinite – choices must be made.[2] One of the reasons many members of Congress are critical of the Bush Administration’s decision to go to war in Iraq is that they fear it has reduced our country’s ability to wage the war on terrorism in Afghanistan. In other words, the resources are being spent in the wrong place to reach our goal which is finding and defeating the people who attacked us on September 11, 2001.

The evidence from the article suggests that other goals of our nation’s military have been slighted because of the failure to win the War in Iraq decisively, quickly and as cheaply as promised by the leaders of the Administration. General Peter Pace addressed Congress about this problem.

" ‘You take a lap around the globe -- you could start any place: Afghanistan, Iran, Iraq, Syria, Lebanon, Yemen, Somalia, Sudan, Venezuela, Colombia, Philippines, Malaysia, Indonesia, North Korea, back around to Pakistan, and I probably missed a few. There's no dearth of challenges out there for our armed forces,’ … He [Pace] said the nation faces increased risk because of shortfalls in troops, equipment and training.”[3]

Some of you listening may see this as another example of the “incompetence” of the Bush Administration but that is not the focus of my comments today.

My concern is with the implications of General Pace’s testimony – with his characterization of these shortfalls in troops, equipment and training as creating “increasing risk” for the nation.

Let me ask a question: How does our nation face increasing risk because we cannot move our armed forces rapidly to fight wars in all these countries?[4]

Not one member of Congress suggested to General Pace that it is wrong for the US to consider the ability to invade countries who have never attacked us and who have never behaved in a hostile manner towards us as essential to our nation’s survival. That is the language of an Empire like Rome talking about its restless barbarian populations, or the Soviet Union talking about its satellites, not a Democratic Republic such as the United States.[5]

Every May, my college’s ROTC graduates take an oath upon enlistment into the armed forces. They promise to “support and defend the Constitution of the United States against all enemies, foreign and domestic.” Unless Syrians, Lebanese, Yemenis, Venezuelans, etc. suddenly make a military effort to destroy the Constitution of the United States by making war upon us, I personally do not think it matters that the US military cannot “meet challenges” in these countries.

That should NOT be their job.

Here’s a troubling thought.

Maybe the fact that Bush is misusing the Army and Marine corps so much that they cannot fulfill what General Pace thinks is their world wide mission is a GOOD THING.

Maybe replacing Bush with someone who “fixes” the ability of the military to invade all 14 of the above countries would actually be a bad result.[6]

We the American people have to answer a question. Do we want to abandon the American Republic and embrace our role as a Global Empire with all its costs in terms of military preparedness and military casualties?

I would like to see a serious national dialog about that issue.

[1] Military Is Ill-Prepared For Other Conflicts

By Ann Scott Tyson
Washington Post, March 19, 2007; Page A01

[2] Virtually all economics textbooks introduce the problem and scarcity and choice right at the beginning. See, for example, Campbell R. McConnell and Stanley L. Brue Microeconomics (17^th ed): NY: McGraw-Hill Irwin, 2008, pp. 10-13. There they note that if society had only two choices, Pizza and Robots to the extent that the society used all its resources at maximum efficiency, the only way to have more of one good, say, more Robots, would be to give up some of the other good, in this case, Pizza. Sometimes in class we switch the choice to national defense goods and civilian goods. We can try to minimize the amount of civilian goods produced so as to maximize military goods – as the US and other combatants did during World War II – but we cannot produce ONLY military goods (if we tried all the soldiers would starve!) and even if we could that would be a finite amount.

[3] Washington Post (same as note 1)

[4] I was inspired to do this commentary and ask this question by an article by Chris Floyd: “Hard Truths for Hard Times” posted on the “Global Research” web site on March 21, 2007. http://www.globalresearch.ca/ After going to this web site, type in Chris Floyd in the “search” box about 2/3 of the way down on the left and you will be directed to all of his articles. Floyd presents detailed arguments as to why General Pace’s comments and the response from both the members of Congress and the media are much more worrisome than the alleged fact that President Bush’s policies have “depleted” our armed forces. If we leave out Afghanistan, Iran, Iraq, and North Korea, that still leaves Syria, Lebanon, Yemen, Somalia, Sudan, Venezuela, Colombia, Philippines, Malaysia, Indonesia, and Pakistan, as areas where according to General Pace it is important that the US military be able to invade. And note, he stated “I probably missed a few…” Do we really believe that the United States will be HARMED if we do not have a military capable of invading and conquering all of these countries? How do most other countries in the world survive with tiny militaries compared to us – or is it only us who are the object of such universal world-wide hatred that we need to be able to conquer virtually every poor country on earth? The logic of global empire truly escapes me.

[5] For some extremely valuable historical background, see the following works by and about William Appleman Williams: The Tragedy of American Diplomacy, America Confronts a Revolutionary World, 1776-1976, Empire as a Way of Life (1980). For an excellent biography see Edward Rice-Maximim and Paul Buhle, William Appleman Williams: The Tragedy of Empire. (1990).

[6] Before anyone complains, I want to make it clear that I, too, believe that the Bush Administration’s neglect of our military personnel in terms of care and equipment in the field is virtually criminal. That is not my point. My point is, a smaller military with a mission consistent with a democratic republic not a worldwide empire is what we should all prefer. Not only will it cost less for taxpayers – it will also cost less in terms of world wide resentment and hatred for us as a country. And the most important point I would like to make is that we as a society LOSE on balance by attempting to become a world wide empire. True, some individuals and businesses gain dramatically but the average taxpayer pays more, the average citizen (potentially) sacrifices more (in terms of being wounded, killed or having a family member be a casualty) than would be the case if we remained true to our ideals as a republic and eschewed Empire.

The Iraq War -- Where Do We Go From Here?

2007-02-27T09:52:00.000-08:00

On February 28, 2007, Professor Michael Meeropol participated in a panel at the Storrs Library in Longmeadow, Massachusetts.

At that talk, he promised to have lots of material available for those who wished to follow through on some of the material he described. This blog entry will include the text of certain interviews and other writings mentioned in his speech as well as some web links.

I WELCOME COMMENTS THAT CONTINUE A VERY FRUITFUL DISCUSSION THAT WE HAD WEDNESDAY EVENING. (If time permits, I may publish a more detailed version of my comments from Wednesday night sometime in the future.)

WHAT FOLLOWS IS THE TEXT OF A COMMENTARY DELIVERED BY MICHAEL MEEROPOL OVER WAMC RADIO on March 2, 2007:

How much is the Iraq war really costing?

In 2002, before the war began, Lawrence Lindsey, President Bush’s chief Economic Adviser, estimated the total cost at about $200 billion. Budget director Mitch Daniels asserted that this was a gross overestimate.[1] Mr. Lindsey was fired.[2]

In January of 2006, Nobel Prize winner Joseph Stiglitz joined with Harvard budget expert Linda Bilmes to estimate both the direct and indirect costs of the war. Their work shows that Lindsey underestimated the cost.

Stiglitz and Bilmes begin with a Congressional Budget Office estimate of $500 billion for the direct costs of the war over the next decade. But this number doesn’t include some major long run costs. As a result of improvements in battlefield medical care, a much higher percentage of military casualties survive injury than in previous conflicts.[3] Thus, many injured veterans require a lifetime of medical care. Adding up increasing expenditures by the VA, specific expenditures to treat brain-injured veterans, and disability payments to wounded veterans, Stiglitz and Bilmes estimate a $90 billion cost above the $500 billion assuming all troops leave Iraq by 2010 and a $200 billion cost if some remain till 2015. They estimate all direct costs at $800 b. if troops are out by 2010 and over $1 trillion if they stay till 2015.

There are indirect costs as well – costs imposed on the rest of the economy. These are the higher price of oil over the next 5 or 10 years and other effects on economic growth. Estimates range from a low of $187 b. to a high of $1 trillion. Thus, their total estimates of all costs to the US economy range from $1 to $2 trillion.[4]

This sounds like a lot of money but how much of our total income is this?

Over the next ten years $2 trillion represents less than 2% of our total Gross Domestic Product.[5] The direct costs to the US taxpayer (between $800 b. and a trillion dollars) represent a higher proportion of the federal budget (3.5%)[6] but one could legitimately make the case that if this were a war for the very survival of our society (as was the case during World War II) it would be a relatively small price to pay.[7]

Here is where common sense has to take over. No matter how horrendous the events of September 11, 2001, our survival as a society cannot be threatened by Osama Bin Laden and his insane followers. The British endured decades of Irish nationalist terrorism, the Spanish have endured decades of Basque separatist terrorism. Our survival was truly threatened by the danger of Nuclear War with the Soviet Union during the Cold War. One could legitimately claim infinite value for the benefits of preventing a nuclear war.

This is not the case in Iraq. There is no benefit from fighting that war.

Stiglitz and Bilmes end their presentation by listing the costs of the Iraq War that they did not attempt to quantify. These include all costs borne by other countries including Iraq. Tens of thousands of Iraqis have been killed, hundreds of thousands wounded. [8] Thousands including the most educated and talented members of the population have either been forced from their homes or fled the country. Iraqi infrastructure has been destroyed and not rebuilt. These costs are clearly difficult to quantify but there is no question that they are significant.

Loss and destruction in Iraq have created more terrorist opportunities – they’ve made terrorist recruitment easier and have probably reduced the effectiveness of our global anti-terrorism efforts. So where do we find any benefits of the war? Most experts agree that the dangers from international terrorism have been increased due to the US invasion and occupation of Iraq.[9]

Stiglitz has noted in an interview that $2 trillion over 10 years would represent (at $200 billion a year) four times the amount that the whole world (not just the United States) spends on foreign aid.[10] Spending the money on foreign aid rather than a misguided foreign adventure would do a lot more for the national interests of our country than the tragically lost American lives in Iraq along with all the wasted money.

[1]Wall Street Journal “Bush Economic Aide Says Cost Of Iraq War May Top $100 Billion,” Davis 09/16/02; NYT, “Estimated Cost of Iraq War Reduced, Bumiller, 12/31/02; Reuters News, “Daniels sees U.S. Iraq war cost below $200 billion,” 09/18/02. There is a fascinating web site that has collected a number of administrative statements about the cost of the war and the projected reconstruction costs. Here is the link:

http://www.house.gov/schakowsky/iraqquotes_web.htm.

[2] See: Cost of Iraq war could surpass $1 trillion. Estimates vary, but all agree price is far higher than initially expected http://www.msnbc.msn.com/id/11880954/ The reference to Lindsey is as follows: “White House economic adviser Lawrence Lindsey was the exception to the rule, offering an "upper bound" estimate of $100 billion to $200 billion in a September 2002 interview with The Wall Street Journal. That figure raised eyebrows at the time, although Lindsey argued the cost was small, adding, "The successful prosecution of the war would be good for the economy.”

… Back in 2002, the White House was quick to distance itself from Lindsey's view. Mitch Daniels, director of the White House budget office, quickly called the estimate "very, very high." Lindsey himself was dismissed in a shake-up of the White House economic team later that year, …”

[3] The ratio of wounded to dead among all casualties for the current Iraq War is 7.4 to 1. By contrast, in the Vietnam War, the ratio was 1 to 2.6 and World War II was 1 to 1.6. This Defense Department data was published in the Springfield (Massachusetts) Republican, February 28, 2007, p. A6.

[4] For the Stiglitz and Bilmes study go to: http://www2.gsb.columbia.edu/faculty/jstiglitz/cost_of_war_in_iraq.pdf.

The title is The Economic Costs of the Iraq War: An Appraisal Three Years After the Beginning of the Conflict. There is an interesting interview given by Stiglitz to the German Magazine Spiegel which is available at http://www.spiegel.de/international/spiegel/0,1518,409710,00.html in which Professor Stiglitz summarizes some of his results.

[5] Using Congressional Budget Office estimates (at cbo.gov) for GDP for 2007 through 2015, I came with an approximation of $150 trillion in GDP over those years. $2 trillion is 1.3% of that.

[6] CBO expenditure projections from 2008 through 2015 add up to approximately $28.7 trillion. $1 trillion is 3.5% of that.

[7] Just to give an idea, in 1943, 44 and 45, expenditures on National Defense averaged 37% of GDP. See Economic Report of the President, 2004: 378.

[8]There is a web site IRAQI BODY COUNT http://www.iraqbodycount.org/database/

which gives an up to the date estimate of civilian dead. As of Tuesday, March 6, 2007 the range was from 57,800 to 63,500. This is undoubtedly a serious undercount because it is restricted to explicitly recorded deaths (morgues, press). A study published in the British Journal the LANCET estimated the deaths at over 650,000 directly and indirectly caused by the US invasion and the subsequent violence. This estimate has been vigorously debated in an Australian journal.

See http://www.theaustralian.news.com.au/story/0,20867,21338505-2703,00.html. Regardless of how high the casualty figures, even if we go with the numbers from Iraqi Body Count, the result is horrific.

[9]Karen De Young of the Washington Post reported that the National Intelligence Estimate in 2006 had concluded that the War in Iraq had damaged the war against the jihadist terrorists rather than being part of its successful prosecution. The article was from September 24, 2006 on p. A 01. The link is

http://www.washingtonpost.com/wp-dyn/content/article/2006/09/23/AR2006092301130.html.

In the language of economics, this translates that the “benefits” from fighting the war in Iraq have been NEGATIVE. Since there were no weapons of mass destruction, the only benefit from the war would involve a positive step towards successful conclusion of our nation’s war against the terrorists who attacked us on September 11, 2001. That is the crucial point of the conclusions of all the various governmental intelligence agencies who together prepared this National Intelligence Estimate.

[10] See the Stiglitz interview with Der Spiegel referenced in note 4 above. The entire interview is available below.

What follows are two texts: An interview with Nobel Prize Winner Joseph Stiglitz about the costs of the Iraq War and an excerpt from a new book by Chalmers Johnson called NEMESIS: THE LAST DAYS OF THE AMERICAN REPUBLIC.

First Stiglitz:

"The War Is Bad for the Economy"

Nobel Prize winning economist Joseph Stiglitz, 63, discusses the true $1 trillion cost of the Iraq conflict, its impact on the oil market and the questions of whether the West can afford to impose sanctions on Iran.

SPIEGEL: Professor Stiglitz, at the beginning of the Iraq war, the United States administration was hoping to almost break even in terms of the costs ...

Stiglitz: ... they truly believed the Iraqi people could use their oil revenues to pay for reconstruction.

SPIEGEL: And now you are estimating the cost of war at levels between $1 trillion and $2 trillion. How do you explain this difference?

Stiglitz: First, the war was much more difficult than President Bush and his government expected. They thought they were going to walk in, everybody would say thank you, and they would set up a democratic government and leave. Now that this war is lasting so much longer, they constantly have to adapt their budget. It rose from $50 billion to $250 billion. Today, the Congressional Budget Office talks about $500 billion or more for this adventure.

SPIEGEL: That's still by far lower than your own calculations.

Stiglitz: The reported numbers do not even include the full budgetary costs to the government. And the budgetary costs are but a fraction of the costs to the economy as a whole. And compare this to Gulf War number one, where America almost made a profit!

SPIEGEL: Because Germany paid for it?

Stiglitz: Because Germans paid, because everybody paid. We got our allies to pay full price for used equipment, and we got to refurbish our military. This time, most of the other countries were not willing to do so again.

SPIEGEL: Did Bush just miscalculate, or was he misleading the public about the true costs of war?

Stiglitz: I think it was both. He wanted to believe it was not going to be expensive, he wanted to believe it would be easy. But there's also enormous evidence now that information channels into the White House were distorted. Bush wanted only certain information, and that's mostly what they supplied him with. Larry Lindsey ...

SPIEGEL: ... the White House's former top economic adviser ...

Stiglitz: ... gave -- back in 2002 -- a number of up to $200 billion. I think that was the most accurate inside information at the time. He was dismissed. They didn't want to hear it.

SPIEGEL: In the US, the financial costs of war are seldom discussed. It used to be considered a sacrifice to achieve common goals. Why is it different today?

Stiglitz: This is not like a world war where you're attacked. We were attacked in Pearl Harbor, we had to respond. This time, we had a choice, we had to decide how and who we are going to attack ...

SPIEGEL: ... and if you can afford it.

Stiglitz: Well, we can afford it, that's not the issue. The issue is: $1 trillion or $2 trillion is a lot of money. If our objective is to have stability in the Middle East, secure oil, or extend democracy, you can do a lot of democracy buying for this sum. To put it in context: The whole world spends $50 billion a year on foreign aid. So what we're talking about is multiplying the foreign aid budget 20-fold. Wouldn't you say this could do more for peace and stability and security?

.SPIEGEL: Bush would argue it's worth spending that much to decrease the probability of a major terrorist attack on the US.

Stiglitz: Nobody takes that seriously. Instead, most people think the Iraq war has increased the probability of an attack. However, it's difficult to put this aspect into financial terms.

SPIEGEL: How did you calculate the costs of the war?

Stiglitz: The official figures are only the tip of an enormous iceberg. For instance, one of the costs of the war is that soldiers today get very seriously injured but stay alive, and we can keep them alive but at an enormous price.

SPIEGEL: Is this the biggest item in your calculations?

Stiglitz: It's very important. The Bush administration has been doing everything it can to hide the huge number of returning veterans who are severely wounded -- 17,000 so far including roughly 20 percent with serious brain and head injuries. Even the estimate of $500 billion ignores the lifetime disability and healthcare costs that taxpayers will have to spend for years to come. And the administration isn't even generous with veterans, widows and their kids.

SPIEGEL: What does that mean?

Stiglitz: If you're injured in an automobile accident, and you sue the driver, you get much more for your injury than if you're fighting for your country. There's a double standard here. If you happen to put your life at risk fighting for your country, you get a little. If you walk across the street and get injured, you get a lot more. Similarly, payments for a dead soldier amount to only $500,000, which is far less than standard estimates of the lifetime economic cost of a death. This statistical value of a life in the US amounts to circa $6.5 million.

SPIEGEL: How much will a severely brain-damaged soldier cost the US government?

Stiglitz: My moderate estimate is about $4 million. For this group alone there will be a total cost of $35 billion that nobody is talking about. But look at the broader picture: The Veterans Administration originally projected that roughly 23,000 veterans returning from Iraq would seek medical care last year. But in June 2005, it revised this number to an estimated 103,000. No wonder the Veterans Administration had to appeal Congress for emergency funding of $1.5 billion last year.

COSTS OF WAR: With a troop withdrawal by 2010: $839 b. in direct costs [explicit military expenditures, veteran care, debt servicing…] – for withdrawal by 2015 that cost rises to $1.189 b.

The indirect costs of the war to the economy (increased oil prices, slower economic growth) are: Withdrawal in 2010: $187 b. – withdrawal in 2015: $1.050 b.

TOTAL: 2010 withdrawal: 1.0 trillion; 2015 withdrawal: 2.2 trillion

SPIEGEL: If this is a $1 trillion war, why couldn't the US provide its soldiers with safer body armor and better protected vehicles?

STIGLITZ: Obviously, the US can afford to pay for body armor. Rumsfeld, our Secretary of Defense, said you have to fight with the armor you have, but that's unconscionable. The military is focusing only on the short run costs. If they don't provide appropriate body armor, they save some money today, but the healthcare cost is going to be the future for some other president down the line. I view that as both fiscally and morally irresponsible.

SPIEGEL: This war could have been both safer for the troops and cheaper for the country?

Stiglitz: Exactly.

SPIEGEL: Is war no longer affordable even for countries as rich as the United States?

Stiglitz: You have to remember we are an economy of $13 trillion a year. The issue is not whether you can afford it but whether this is the way you want to spend your money. In using the limited resources that we have for fighting this war, we have less resources to do other things. You saw on your TV what happened in New Orleans after Hurricane Katrina. The Reserves or National Guard are usually the people we use for those national emergencies. They weren't here, they were over in Iraq, and so we were less protected.

SPIEGEL: Before the invasion of Iraq, the US administration said the best way to keep oil prices in check is a short and successful war. A barrel was at $25 at that time, and now it's over $60. What of this increase is due to Iraq?

Stiglitz: In our analysis about the cost of war, we only assumed a modest $5 to $10 caused by the war. We wanted to keep our study conservative, so no one would dispute our numbers, and no one did. But I believe that's a vast underestimation of the true cost.

SPIEGEL: But why? China and India are increasing their demand, real global growth has been going on. This is driving the prices.

Stiglitz: When demand rises so does supply -- that's how markets usually work. Now we're seeing that demand for oil is rising but we're not getting a commensurate increase in supply. And there's a simple answer, it's Iraq. But it's not just because it production has been down.

SPIEGEL: Why else?

Stiglitz: The Middle East is the lowest cost producer in the world. They can produce oil for $10, $15 or $20 a barrel. Now we have the technology to produce oil elsewhere for $35 to $45. But who wants to develop fields or invest in new technologies elsewhere if they know that in five years' time, the Middle East may be supplying oil at previous prices?

SPIEGEL: In other words, were peace and stability re-established in the Middle East, the oil price would be back to maybe $25, despite the huge global hunger for energy?

Stiglitz: Yes. By the way that's the price level oil traders were speculating on in futures trading before the outbreak of war.

SPIEGEL: There should be huge economic pressure on Bush to end this conflict.

Stiglitz: The only people benefiting in this war are Bush's friends in the oil industry. He has done the American economy and the global economy an enormous disfavor, but his Texan friends couldn't be happier. The price of oil is up, and they make money when the price of oil goes up. Their profits are at record levels.

SPIEGEL: You don't like this president very much.

Stiglitz: Oh, it's nothing personal. It's all about his politics.

SPIEGEL: There is an old saying: War is good for the economy.

Stiglitz: Listen, World War II was really unusual, because America was in the Great Depression before. So the war did help the US economy to get securely out of this decline. This time, the war is bad for the economy in both the short and long run. We could have spent trillions in research or education instead. This would have led to future productivity increases.

SPIEGEL: So is the economical mess of the Iraq war even bigger than the political?

Stiglitz: Well, we are so rich, we are able to withstand even this level. Crowding out other investments, weakening the economy in the future, that's not a crisis yet. But it's an erosion. It becomes an issue for our legislators. And don't forget the serious issues of nuclear proliferation in Iran and North Korea. We used up our ability to deal with something serious by dealing with something that was less serious.

SPIEGEL: What's your economic view on Iran?

Stiglitz: We are helping the people that Bush says are evil. Teheran couldn't be happier about the high oil prices resulting from the Iraq war.

SPIEGEL: If the UN Security Council votes for sanctions over Iran and its oil exports, what would that mean for the world economy?

Stiglitz: It would mean an enormous disruption, as oil prices might rise over $100. You can increase the price from $25 to $40, and people can absorb it. If the price rises above $60, they become unhappy. They start to adjust, they move to smaller cars, drive a little bit less. At $100 or $120, there are major changes in lifestyle. The sales of cars will plummet. Poor people will be facing real problems of heat versus food.

SPIEGEL: The world can't afford sanctions at this time?

Stiglitz: We talk about not allowing their officials to get visas to visit our countries.

SPIEGEL: That's not a harsh measure.

Stiglitz: It's no sanction. So the answer is, yes, we have no effective sanctions.

SPIEGEL: Professor Stiglitz, thank you for this interview.

NOW JOHNSON:

737 U.S. Military Bases = Global Empire

By Chalmers Johnson, Metropolitan Books

The following is excerpted from Chalmers Johnson's new book, "Nemesis: The Last Days
of the American Republic" (Metropolitan Books).

Once upon a time, you could trace the spread of imperialism by counting up colonies.
America's version of the colony is the military base; and by following the changing
politics of global basing, one can learn much about our ever more all-encompassing
imperial "footprint" and the militarism that grows with it.

It is not easy, however, to assess the size or exact value of our empire of bases.
Official records available to the public on these subjects are misleading, although
instructive. According to the Defense Department's annual inventories from 2002 to
2005 of real property it owns around the world, the Base Structure Report, there has
been an immense churning in the numbers of installations.

The total of America's military bases in other people's countries in 2005, according
to official sources, was 737. Reflecting massive deployments to Iraq and the pursuit
of President Bush's strategy of preemptive war, the trend line for numbers of overseas
bases continues to go up.

Interestingly enough, the thirty-eight large and medium-sized American
facilities spread around the globe in 2005 -- mostly air and naval bases for our
bombers and fleets -- almost exactly equals Britain's thirty-six naval bases and army
garrisons at its imperial zenith in 1898. The Roman Empire at its height in 117 AD
required thirty-seven major bases to police its realm from Britannia to Egypt, from
Hispania to Armenia. Perhaps the optimum number of major citadels and fortresses for
an imperialist aspiring to dominate the world is somewhere between thirty-five and
forty.

Using data from fiscal year 2005, the Pentagon bureaucrats calculated that its overseas
bases were worth at least $127 billion -- surely far too low a figure but still larger
than the gross domestic products of most countries -- and an estimated $658.1 billion
for all of them, foreign and domestic (a base's "worth" is based on a Department of
Defense estimate of what it would cost to replace it). During fiscal 2005, the
military high command deployed to our overseas bases some 196,975 uniformed personnel
as well as an equal number of dependents and Department of Defense civilian officials,
and employed an additional 81,425 locally hired foreigners.

The worldwide total of U.S. military personnel in 2005, including those
based domestically, was 1,840,062 supported by an additional 473,306
Defense Department civil service employees and 203,328 local hires. Its
overseas bases, according to the Pentagon, contained 32,327 barracks,
hangars, hospitals, and other buildings, which it owns, and 16,527 more
that it leased. The size of these holdings was recorded in the inventory as covering
687,347 acres overseas and 29,819,492 acres worldwide, making the Pentagon easily one
of the world's largest landlords.

These numbers, although staggeringly big, do not begin to cover all the
actual bases we occupy globally. The 2005 Base Structure Report fails, for instance,
to mention any garrisons in Kosovo (or Serbia, of which Kosovo is still officially a
province) -- even though it is the site of the huge Camp Bondsteel built in 1999 and
maintained ever since by the KBR corporation (formerly known as Kellogg Brown & Root,
a subsidiary of the Halliburton Corporation of Houston.

The report similarly omits bases in Afghanistan, Iraq (106 garrisons as of May 2005,
Israel, Kyrgyzstan, Qatar, and Uzbekistan, even though the U.S. military has
established colossal base structures in the Persian Gulf and Central Asian areas
since 9/11. By way of excuse, a note in the preface says that "facilities provided by
other nations at foreign locations" are not included, although this is not strictly
true. The report does include twenty sites in Turkey, all owned by the Turkish
government and used jointly with the Americans. The Pentagon continues to omit from
its accounts most of the $5 billion worth of military and espionage installations in
Britain, which have long been conveniently disguised as Royal Air Force bases. If
there were an honest count, the actual size of our military empire would probably top
1,000 different bases overseas, but no one -- possibly not even the Pentagon -- knows
the exact number for sure.

In some cases, foreign countries themselves have tried to keep their U.S. bases
secret, fearing embarrassment if their collusion with American imperialism were
revealed. In other instances, the Pentagon seems to want to play down the building of
facilities aimed at dominating energy sources, or, in a related situation, retaining
a network of bases that would keep Iraq under our hegemony regardless of the wishes
of any future Iraqi government. The U.S. government tries not to divulge any
information about the bases we use to eavesdrop on global communications, or our
nuclear deployments, which, as William Arkin, an authority on the subject, writes,
"[have] violated its treaty obligations. The U.S. was lying to many of its closest
allies, even in NATO, about its nuclear designs. Tens of thousands of nuclear weapons,
hundreds of bases, and dozens of ships and submarines existed in a special secret
world of their own with no rational military or even 'deterrence' justification."

In Jordan, to take but one example, we have secretly deployed up to five thousand
troops in bases on the Iraqi and Syrian borders. (Jordan has also cooperated with
the CIA in torturing prisoners we deliver to them for "interrogation.") Nonetheless, 
Jordan continues to stress that it has no special arrangements with the United States,
no bases, and no American military presence.

The country is formally sovereign but actually a satellite of the United States and
has been so for at least the past ten years. Similarly, before our withdrawal from 
Saudi Arabia in 2003, we habitually denied that we maintained a fleet of enormous
and easily observed B-52 bombers in Jeddah because that was what the Saudi government
demanded. So long as military bureaucrats can continue to enforce a culture of
secrecy to protect themselves, no one will know the true size of our baseworld, least
of all the elected representatives of the American people.

In 2005, deployments at home and abroad were in a state of considerable
flux. This was said to be caused both by a long overdue change in the
strategy for maintaining our global dominance and by the closing of
surplus bases at home. In reality, many of the changes seemed to be
determined largely by the Bush administration's urge to punish nations and domestic
states that had not supported its efforts in Iraq and to reward those that had. Thus,
within the United States, bases were being relocated to the South, to states with
cultures, as the Christian Science Monitor put it, "more tied to martial traditions"
than the Northeast, the northern Middle West, or the Pacific Coast. According to a
North Carolina businessman gloating over his new customers, "The military is going
where it is wanted and valued most."

In part, the realignment revolved around the Pentagon's decision to bring home by
2007 or 2008 two army divisions from Germany -- the First Armored Division and the
First Infantry Division -- and one brigade (3,500 men) of the Second Infantry
Division from South Korea (which, in 2005, was officially rehoused at Fort Carson,
Colorado). So long as the Iraq insurgency continues, the forces involved are mostly
overseas and the facilities at home are not ready for them (nor is there enough money
budgeted to get them ready).

Nonetheless, sooner or later, up to 70,000 troops and 100,000 family
members will have to be accommodated within the United States. The
attendant 2005 "base closings" in the United States are actually a base
consolidation and enlargement program with tremendous infusions of money and
customers going to a few selected hub areas. At the same time, what sounds like a
retrenchment in the empire abroad is really proving to be an exponential growth in
new types of bases -- without dependents and the amenities they would require -- in
very remote areas where the U.S. military has never been before.

After the collapse of the Soviet Union in 1991, it was obvious to anyone who thought
about it that the huge concentrations of American military might in Germany, Italy, 
Japan, and South Korea were no longer needed to meet possible military threats. There
were not going to be future wars with the Soviet Union or any country connected to
any of those places.

In 1991, the first Bush administration should have begun decommissioning or
redeploying redundant forces; and, in fact, the Clinton administration did close
some bases in Germany, such as those protecting the Fulda Gap, once envisioned as
the likeliest route for a Soviet invasion of Western Europe. But nothing was really
done in those years to plan for the strategic repositioning of the American military
outside the United States.

By the end of the 1990s, the neoconservatives were developing their
grandiose theories to promote overt imperialism by the "lone superpower" -- including
preventive and preemptive unilateral military action, spreading democracy abroad at
the point of a gun, obstructing the rise of any "near-peer" country or bloc of
countries that might challenge U.S. military supremacy, and a vision of a
"democratic" Middle East that would supply us with all the oil we wanted. A component
of their grand design was a redeployment and streamlining of the military. The
initial rationale was for a program of transformation that would turn the armed
forces into a lighter, more agile, more high-tech military, which, it was imagined,
would free up funds that could be invested in imperial policing.

What came to be known as "defense transformation" first began to be
publicly bandied about during the 2000 presidential election campaign.
Then 9/11 and the wars in Afghanistan and Iraq intervened. In August 2002, when the
whole neocon program began to be put into action, it centered above all on a quick,
easy war to incorporate Iraq into the empire. By this time, civilian leaders in the
Pentagon had become dangerously overconfident because of what they perceived as
America's military brilliance and invincibility as demonstrated in its 2001 campaign
against the Taliban and al-Qaeda -- a strategy that involved reigniting the Afghan
civil war through huge payoffs to Afghanistan's Northern Alliance warlords and the
massive use of American airpower to support their advance on Kabul.

In August 2002, Secretary of Defense Donald Rumsfeld unveiled his "1-4-2-1 defense
strategy" to replace the Clinton era's plan for having a military capable of
fighting two wars -- in the Middle East and Northeast Asia -- simultaneously. Now,
war planners were to prepare to defend the United States while building and
assembling forces capable of "deterring aggression and coercion" in four "critical
regions": Europe, Northeast Asia (South Korea and Japan), East Asia (the Taiwan
Strait), and the Middle East, be able to defeat aggression in two of these regions
simultaneously, and "win decisively" (in the sense of "regime change" and occupation)
in one of those conflicts "at a time and place of our choosing." As the military
analyst William M. Arkin commented, "[With] American military forces ... already
stretched to the limit, the new strategy goes far beyond preparing for reactive
contingencies and reads more like a plan for picking fights in new parts of the
world."

A seemingly easy three-week victory over Saddam Hussein's forces in the
spring of 2003 only reconfirmed these plans. The U.S. military was now
thought to be so magnificent that it could accomplish any task assigned to it. The
collapse of the Baathist regime in Baghdad also emboldened Secretary of Defense
Rumsfeld to use "transformation" to penalize nations that had been, at best,
lukewarm about America's unilateralism -- Germany, Saudi Arabia, South Korea, and
Turkey -- and to reward those whose leaders had welcomed Operation Iraqi Freedom,
including such old allies as Japan and Italy but also former communist countries
such as Poland, Romania, and Bulgaria. The result was the Department of Defense's
Integrated Global Presence and Basing Strategy, known informally as the "Global
Posture Review."

President Bush first mentioned it in a statement on November 21, 2003, in which he
pledged to "realign the global posture" of the United States. He reiterated the
phrase and elaborated on it on August 16, 2004, in a speech to the annual convention
of the Veterans of Foreign Wars in Cincinnati.  Because Bush's Cincinnati address
was part of the 2004 presidential election campaign, his comments were not taken
very seriously at the time.  While he did say that the United States would reduce
its troop strength in Europe and Asia by 60,000 to 70,000, he assured his listeners
that this would take a decade to accomplish -- well beyond his term in office – and
made a series of promises that sounded more like a reenlistment pitch than a
statement of strategy.

"Over the coming decade, we'll deploy a more agile and more flexible
force, which means that more of our troops will be stationed and deployed from here
at home. We'll move some of our troops and capabilities to new locations, so they
can surge quickly to deal with unexpected threats. ... It will reduce the stress on
our troops and our military families. ... See, our service members will have more
time on the home front, and more predictability and fewer moves over a career. Our
military spouses will have fewer job changes, greater stability, more time for their
kids and to spend with their families at home."

On September 23, 2004, however, Secretary Rumsfeld disclosed the first
concrete details of the plan to the Senate Armed Services Committee. With
characteristic grandiosity, he described it as "the biggest re-structuring of 
America's global forces since 1945." Quoting then undersecretary Douglas Feith, he
added, "During the Cold War we had a strong sense that we knew where the major risks
and fights were going to be, so we could deploy people right there. We're operating
now [with] an entirely different concept. We need to be able to do [the] whole range
of military operations, from combat to peacekeeping, anywhere in the world pretty
quickly."

Though this may sound plausible enough, in basing terms it opens up a vast
landscape of diplomatic and bureaucratic minefields that Rumsfeld's militarists
surely underestimated. In order to expand into new areas, the Departments of State
and Defense must negotiate with the host countries such things as Status of Forces
Agreements, or SOFAs, which are discussed in detail in the next chapter. In addition,
they must conclude many other required protocols, such as access rights for our
aircraft and ships into foreign territory and airspace, and Article 98 Agreements.
The latter refer to article 98 of the International Criminal Court's Rome Statute,
which allows countries to exempt U.S. citizens on their territory from the ICC's
jurisdiction.

Such immunity agreements were congressionally mandated by the American
Service-Members' Protection Act of 2002, even though the European Union
holds that they are illegal. Still other necessary accords are acquisitions
and cross-servicing agreements or ACSAs, which concern thesupply and storage of jet
fuel, ammunition, and so forth; terms of leases on real property; levels of bilateral
political and economic aid to the United States (so-called host-nation support);
training and exercise arrangements (Are night landings allowed? Live firing drills?);
and environmental pollution liabilities.

When the United States is not present in a country as its conqueror or
military savior, as it was in Germany, Japan, and Italy after World War II and in
South Korea after the 1953 Korean War armistice, it is much more difficult to secure
the kinds of agreements that allow the Pentagon to do anything it wants and that
cause a host nation to pick up a large part of the costs of doing so. When not based
on conquest, the structure of the American empire of bases comes to look exceedingly
fragile.

>From the book NEMESIS: The Last Days of the American Republic by Chalmers  Johnson.
Reprinted by arrangement with Metropolitan Books, an imprint of Henry Holt and
Company, LLC. Copyright (c) 2006 by Chalmers Johnson. All rights reserved.
Chalmers Johnson is president of the Japan Policy Research Institute


FOR A LINK TO WORKS OF JOSEPH E. STIGLITZ go to this web address:


http://www2.gsb.columbia.edu/faculty/jstiglitz/newworks.cfm


Scroll down to The Costs of the Iraq War -- NBER working paper by Joseph Stiglitz
and Linda Bilmes.

For evidence that the Bush Administration is planning an attack on Iran see:

http://www.telegraph.co.uk/news/main.jhtml;jsessionid=HDZB2432Z4F1LQFIQMGSFFWAVCBQWIV0?xml=/news/2007/02/25/wiran25.xml

What's Wrong With President Bush's Health Insurance Proposals?

2007-02-05T11:38:00.000-08:00

The following commentary was delivered by Michael Meeropol over station WAMC on Friday, February 2, 2007.

HEALTH CARE: What Did President Bush actually propose and why what he proposed won’t work.

In the state of the Union speech last month, President Bush said his goal was to help the uninsured buy health insurance.[1] His plan offers tax breaks to families to help them purchase it. However, at the same time, he will make all employer-provided health insurance taxable. In other words, if your taxable income is $50,000 and your employer provides you with health insurance worth, say, $15,000 a year, your taxable income will now be $65,000. Then, you will get to deduct $15,000 from your taxable income. The goal is to give individuals an incentive to purchase a health insurance policy that costs $15,000 or less.[2]

Since many health insurance plans cost more than $15,000, some families will see their taxes go up. This, according to President Bush, will raise funds necessary to give tax deductions to those with no employer-provided health insurance.[3]

So imagine a family that pays $1500 a month out of pocket for health insurance. That comes to $18000 a year. The family will get a $15,000 tax deduction. Here’s where the complications begin. If the family is very well off and pays income taxes at the rate of 35%, the tax deduction will be the equivalent of a discount of $5250 off the $18,000 premium. If the family is not so well off and pays income tax at the rate of, say, 10% that tax deduction will represent a $1500 discount on the same policy.

For some people the discount might make it possible to purchase health insurance – especially those with relatively high income where the tax deduction really saves money. For those with low incomes the savings are less. Taxpayers whose gross income is so low that they don’t owe any federal income tax, will get a ZERO discount for any policy they purchase.[4] Thus, the higher your income, the greater your discount for the same premium paid.[5]

There is a much bigger problem with President Bush’s proposal beyond the fact that using a tax deduction to create a discount for those who buy health insurance coverage as individuals is an unfair way to do it.[6]

The BIG problem is that insurance companies are in business to earn profits for their share holders not to guarantee that people get the health care they need. Accordingly, they try not to insure people who are at high risk of costing them a lot of money. Thus, companies routinely fail to cover people who have a “pre-existing condition.” In other words, the more insurance companies succeed in insuring healthy people who don’t file claims -- and the more insurance companies succeed in weeding out the sick who will undoubtedly file many claims, the more successful these companies will be.

When insurance companies make a deal to cover employees in a business, they make a judgment as to how much risk they are taking with the group as a whole. Over time, as their payouts increase, so do premiums – this is called “experience rating.”

When individuals buy their own private insurance, the companies are happy to insure the healthy. When someone who they’re insuring gets sick, there is no question that they will raise that person’s premium because the risk of insuring that person had gone up. Thus, a tax deduction to subsidize individual purchases of insurance will not make that insurance affordable and it will not protect sick people from being priced out of the market.

As I’ve said before. There is only one way to insure the entire population --- and that is to actually insure the entire population with the same rules. Either we force the private sector to insure everyone and mandate affordable rates or we utilize the principle of social insurance and do it ourselves through the government.[7]

[1]“Bush Touts Health-Care Plan as Cost Control,” Michael Fletcher and Christopher Lee, New York Times January 26, 2007

[2] Thus, people who buy health insurance worth $15,000 will see no change to their taxes. Those whose health insurance policies cost less will actually see a decline in their taxes.

[3] The way the incentive would work, when workers see their taxes going up because they are choosing a relatively expensive plan from their employers, they will switch to a less expensive plan. Those who choose to stay with the more expensive plan will, in effect, have to pay more for it because it will not be tax-free income. That extra income for the federal government will be put towards reducing government revenue by giving everyone who purchases insurance as individuals in the private market a tax deduction of $15,000. Obviously, the revenue has to come from somewhere. By the way, many economists have long opposed the tax-free status of employer-provided health insurance. They argue that just because one doesn’t actually receive a check for the amount spent by the company to pay your health insurance premiums that doesn’t mean it isn’t in every real sense income. If it’s income, they argue, it should be taxed. The problem with this reasoning is that it ignores the fact that making health insurance available to people is an important positive contribution to all of society's well being. Thus, it is worthy of tax subsidy. The problem is not that people are subsidized in the purchase of health insurance – the problem is that not all of the people are subsidized in that purchase – and many are subsidized unequally.

[4] Bush also made a passing reference to the fact that he was proposing that the first $15,000 of income would be exempt from Social Security Payroll taxes as well. The examples in the commentary do not include this because the details of how this would interact with a deduction from federal income taxes has not been spelled out. However, there is a serious complication here. Will reducing the social security payroll tax liability of a worker buying health insurance out of pocket mean that the individual’s social security pension will be lower because that person is paying less in payroll taxes? At this stage of the proposal we don’t know the answer to that question.

[5] On the face of it, this seems grossly unfair. If I am spending $18,000 out of pocket for a policy and you are spending the same amount, why should our discount be different? It is especially unfair if the higher discount is given to the person with the higher income.

[6]It is also highly inefficient to give people a tax deduction to stimulate their purchase of a particular item – whether it’s health insurance or a house. A much better way to directly subsidize the purchase of something like health insurance is to give people a tax credit which will finance dollar for dollar the health insurance premiums paid. A tax credit would also avoid the fact that higher income people are given a bigger discount on their out-of-pocket purchase than lower income people.

[7] In my March Commentary (available on the WAMC web site and also at the WNECONOMICS Blog) I wrote the following:

[begin quote]

Health care would be best delivered as a form of social insurance.

What is social insurance? It is a system where everyone insures everyone else against potentially serious costs associated with sustaining life. Social security already insures the entire working population against outliving their savings (that’s the pension) or becoming disabled or unemployed.

It also insures retirees through Medicare. What it doesn’t do is extend that insurance to the entire population, which is why medical cost inflation is so much higher in the US than elsewhere.

Though Medicare strives mightily to contain the costs of the procedures it subsidizes, hospitals, nursing homes and other medical facilities are able to raise prices charged to insurance companies who then of course raise premiums charged to employers.

If we were to re-organize our system in conformity with social insurance principles, then the system could be integrated institutionally (at either the federal or state level). It would be much easier to contain costs.

The basic principle of social insurance is – we all pay to guarantee health care to everyone who gets sick.

When a healthy person gets sick, he or she gets to dip into the revenue stream being contributed by fellow citizens.

If you “lose” by never getting to spend any of that money because you never get cancer or need a heart transplant, you WIN by being healthy.

Those who must have recourse to the insurance fund can rest easy knowing their needs will be met without bankrupting them and their families

MY SOLUTION TO THE HEALTH CARE PROBLEM: Extend Medicare to the entire population. Social insurance is the answer to our health care crisis.

[end of quote from the previous commentary]

The Great Divide in the Democratic Party on Economic Policy

2007-02-05T11:10:00.000-08:00

The following commentary was delivered by Michael Meeropol over WAMC radio in December of 2006

When it comes to economic policy issues, there are two separate and antagonistic wings to the Democratic Party. One is associated with the policies of the Clinton Administration while the other is represented most strongly by Senator-elect Sherrod Brown of Ohio.[1] That divide was most apparent during the debate over ratifying NAFTA in 1995. Had Clinton not garnered support from a majority of House Republicans, NAFTA would have been defeated. More on the Brown wing later.

As I see it, the Clinton wing represents only a slightly less virulent version of the Republican Party’s neo-liberalism.[2]

Take the minimum wage issue. Clinton supported a rise in the minimum wage as a way of embarrassing the new Republican majority in Congress in 1995, but neither he nor any in the Democratic leadership in Congress had sought to pass such an increase during the two years between his inauguration and 1995.

Clinton’s priorities were elsewhere. He focused on reducing the federal budget deficit and passing NAFTA.[3]

The failure to fulfill his campaign promise to pass universal health insurance is usually blamed on an extremely liberal proposal involving a government takeover of the health care industry. In fact Clinton’s proposal failed because it attempted to satisfy both the insurance industry and the public’s clear desire for a universal system. This effort made the proposal so complicated that it could easily be misrepresented by its opponents. Congress could not even agree on a bill to consider, let alone vote on it.[4]

Looking at Clinton’s 8 years, we can be pleased that the economy grew, creating millions of jobs and that at least between 1996 and 2000 the downward trend in the purchasing power of typical workers’ wages was reversed.[5]

However, NAFTA-style globalization, the repeal of the federal guarantee of a cash benefit to children living in poverty, and the single-minded commitment to budget balance were the major enterprises of that administration.[6]

Even the best anti-poverty program of the Clinton era, the earned income tax credit, has its negative side. It helps businesses get away with paying low wages because the general taxpayer (through the credit) makes up part of the difference between the poverty level wages paid and a minimum income necessary to survive. Meanwhile, welfare reform has thrown thousands of unskilled single mothers into the labor force creating more downward pressure on wages.

I have said it several times in my commentaries and I’ll say it again here. The best way to fight poverty and improve general prosperity is for wages to rise. The best way to fight against the polarization of incomes in the population is for workers to form unions and push for those higher wages.

But in the words of economist Robert Pollin, “[T]he Clinton Administration did almost nothing to advance the interests of organized labor or working people more generally.”

As a result “… union membership continued its long decline during the Clinton presidency, standing at 13.5 percent of the total workforce when he left office …”[7]

Opposition to Clintonomics was showcased this past Sunday in the New York Times by Lou Uchitelle’s, article “Here Come the Economic Populists.” He specifically identified Senator-elect Brown as a member of the new group. [8]

These populists argue that the trade agreements beginning with NAFTA and continuing through the various World Trade Organization negotiations have failed to protect workers’ rights to organize unions and thus raise wages in the low-wage countries. Instead, wages in high wage countries have continued to stagnate or drift downwards in real purchasing power. They also insist not only on an increase in the minimum wage but on tying it to the cost of living so that future inflation will not erode its real value.

For the minimum wage to have the same purchasing power it had in 1968, it would have to be $7.71 today.[9] Raising it to $7.25 immediately is the most just thing to do. I believe it is unacceptable to compromise with Republicans and so-called pro-business democrats by delaying implementation till 2009. (By the way, why is it “pro-business” to impoverish the average worker? Who is going to buy anything if wages keep stagnating? A business which pays its workers very little and has no customers is guaranteed to go out of business soon!)

Let’s watch closely while these populists and Clintonites duke it out for the soul of the Democratic Party.

[1] In addition to Senator-elect Brown, others who have been mentioned are Senator-elect Jon Tester of Montana and Senator-elect James Webb of Virginia. Senator-elect Webb published an extremely strong populist statement in the November 15 Wall Street Journal entitled “Class Struggle: American Workers have a chance to be heard.” It is readable on his Web Site at http://www.jameswebb.com/articles/highlighted_articles.htm. Meanwhile, Senator-elect Brown had authored Myths of Free Trade: Why American Trade Policy Has Failed, Revised and Updated Edition (Paperback) which was published October 1, 2006 when he was a member of Congress and ran a strong campaign highlighting his economic differences with the Republican majority in Congress and President Bush but also former President Clinton.

[2] There is an excellent book that develops this point quite clearly, It is Contours of Descent by University of Massachusetts Economist Robert Pollin (NY: Verso, 2000 [pbk]). This book clearly shows that the trend towards increased inequality and insecurity for the majority of people in the US (in fact the world) continued under the Presidency of Bill Clinton with a short cessation of the inequality trend between 1996 and 2000. See particularly pp. 42-47.

[3] For Clinton’s first term policies see Surrender: 227-258.

[4] For a discussion of Clinton’s Health Care proposal, see Surrender: 245-247. See especially the endnotes on p. 340. For the details presented by the Clinton Administration, see Economic Report of the President, 1994, ch. 4. Historian Theda Skocpol has written an analysis of the Clinton Administration’s failure to get its reform through Congress: Boomerang: Clinton’s Health Security Effort and the Turn Against Government in US Politics. (NY: Norton, 1996). She argues that the simple more radical Canadian-style alternative would have been “easily caricatured.” My response is Clinton’s proposal was similarly caricatured and its lack of simplicity made it harder for people to understand and defend.

[5] See Pollin, p. 43.

[6] There is a tremendous literature around NAFTA and the WTO. For a good critique of the arguments as to how wonderful NAFTA is because it opens markets to competition, see Meherene Larudee, “Integration and Income Distribution under the North American Free Trade Agreement: The Experience in Mexico,” in Dean Baker, Gerald Epstein and Robert Pollin (eds.) Globalization and Progressive Economic Policy, (Cambridge: Cambridge University Press, 1998). For a generalized critique see Joseph Stiglitz Globalization and its Discontents. The repeal of the federal guarantee for children of single parents in poverty has been touted as a great success – so-called “welfare reform.” For a brief discussion, see Surrender: 247-249. The law is mis-named the Personal Responsibility and Work Opportunity Act of 1996. What it does is replace the old AFDC program with a new one, Temporary Assistance to Needy Families (TANF) with a nominally fixed federal grant to states at the level of spending in 1995. The states basically had carte blanche to create their own new programs within the following constraints: No family may receive more than five years of these benefits in a lifetime and for no more than two years in a row. Adults receiving cash assistance must be involved in a work program, an education program (but only up to achieving a high school GED) or an active job search. The law has been considered a great success because the percentage of the population receiving TANF fell dramatically from the percentages receiving the old AFDC program in the early 1990s and many of the people leaving the welfare rolls ended up getting jobs. In my personal opinion the main impact of the creation of TANF was to transform many women who received welfare and took care of their children at home into working single parents who were still poor. The disaster some of us feared did not occur because there was tremendous job growth and thus reduction of poverty in the period from 1996 to 2000. However, the percentage of people who left the rolls was much higher than the percentage of people who raised themselves out of poverty. In other words, many people who left welfare became quite destitute. In the period since 2000 when the percentage of the population in poverty has risen and when some families have reached their five year lifetime limit, I think the impact will begin to be quite negative. For a fascinating journalistic account of the situation since TANF was introduced see Jason DeParle, American Dream: Three Women, Ten Kids, and a Nation's Drive to End Welfare. (NY: Viking Penguin, 2004). For a discussion of budget balance, see Pollin: 68-75, and Surrender: 249-264.

[7] Pollin: 24-5. In 1973, 24% of the workforce was organized into unions. See http://www.trinity.edu/bhirsch/unionstats/.

[8] New York Times, November 26, 2006.

[9] The Economic Policy Institute (www.epinet.org) maintains a data base showing the real purchasing power of the minimum wage going way back to its origins.

Economic Change if the Democrats take Congress

2006-11-06T09:38:00.000-08:00

The following commentary was delivered over WAMC radio by Michael A. Meeropol on Friday, November 3, 2006.

“FIRST, DO NO HARM”

What does the admonition, “First do not harm?”[1] have to do with economic issues in the current election? Well, if the Democrats take one or both houses of Congress, the divided government will be gridlocked and the policy-makers won’t be able to do any more harm to the US economy.[2]

But what is the “harm” that allegedly has been done to the US economy under the leadership of President Bush and the Republican majority in Congress?

Most Democrats emphasize the budget deficit as a failure of the Bush Administration. Listeners to this station who have heard my commentaries, know that I am on record arguing that there is nothing inherently wrong with budget deficits – that borrowing money to, for example, rebuild the infrastructure destroyed by hurricanes Katrina and Rita is extremely worthwhile both for economic and humanitarian reasons.[3]

I believe that the focus on budget deficits is a diversion. The deficits of the past five years have actually done more good for the economy than harm.

Imagine the economy since the spring of 2001 (when the last recession began) with a budget deficit half the size. That’s either hundreds of billions of dollars in less spending by the Federal government OR more taxes collected or some combination of the two. The higher taxes would have meant less consumption by at least some of the affected taxpayers and therefore lower incomes and less job growth for the economy.

Less spending by government would have meant fewer people employed by government, fewer roads built, lower grants to state and local governments, and yes, less interest paid to individuals both at home and abroad who hold US government bonds. Aside from the decline in interest payments, all declines in government spending would have translated into lower incomes and lower employment for somebody.

I happen to believe that the tax cuts approved by Congress under the Bush Presidency and the expenditures voted by that same Congress were very poor routes to increasing employment and increasing economic growth. But they didn’t have a ZERO effect. Since 2001 these deficits have made unemployment somewhat lower than it would have been without them.

The main counter-argument is the claim that budget deficits produce high interest rates reducing the amount of investment activity by businesses. This then reduces both incomes today and growth in the future. Therefore a lower deficit would have meant higher investment and faster growth.[4]

Even though this may be an appealing supposition, the facts are that between 2001 and 2004, the Federal Reserve made sure that interest rates fell to rock bottom.[5] In fact, many economists have criticized the Greenspan Fed for pushing interest rates so low they set off the housing bubble that is now painfully deflating before our very eyes. Interest rates have been rising in the past year, but interestingly enough the deficit has been falling.[6]

I would argue that the most significant “damage” done by the Bush Administration and its Congressional allies has been to skew the tax cuts and expenditures and other policies in such a way as to significantly increase inequality in our country. The increased inequality made for a very slow recovery from the recession – economic growth and job creation have been disappointing.[7]

I note with approval that the Democrats promise to raise the minimum wage should they take over one or both houses of Congress. They should also be able to block one of the most ridiculous tax cuts of the Bush Presidency, the complete abolition of the Estate Tax.[8]

More importantly – ideas that Bush and his allies have been pushing – privatizing social security,[9] pressuring Seniors in the Medicare program to enter for profit HMOs, changing from an income tax to a consumption tax[10] [all these were ideas very much in play once Bush won re-election in 2004]. These terrible ideas will die a deserved death.

Also, the Committee on Capital Markets Regulation won’t be able to get their pet proposals through Congress – such as making it harder for shareholders to sue corporate managers for defrauding them.[11]

Unfortunately, stopping the worst Bush policies in their tracks will not create a reasonable health care system, nor will it put the unemployed back to work or make college more affordable. But first things first – DO NO MORE HARM!.

For this reason, I have to hope that the Democrats take over one or both houses of Congress next Tuesday.

[1]This statement is often thought to be a line in the Hippocratic Oath. In fact this line is derived from a passage in Hippocrates’ work EPIDEMICS. The third line in the original Hippocratic oath promises to, “… never do harm to anyone.”

[2] This is the view expressed by Stephen Slivinski of the right-wing CATO Institute the “The main value of divided government is the fact that not much will get done … things won’t get any worse.” [New York Times, “The best of this may be gridlock” Daniel Altman, 10/29/06 Section 3, p. 4]

[3] See my second commentary, delivered in October of 2005, available both on the WAMC web site and at the WNECONOMICS blog available at http://wneconomics.blogspot.com/

[4] This is an economic theory known as “crowding out.” You can follow the argument about crowding out and even read a bit of a test as to whether the large deficits of the 1980s caused crowding out in Surrender: 43-44, 162-265.

[5] The interest rate that indicates the direction of monetary policy is the Federal Funds Rate (the interest rates banks charge each other for overnight loans). This is the short term rate that the Federal Reserve directly controls by their actions of buying and selling government securities on the Open Market. The regular meetings of the Federal Open Market Committee are immediately followed by an announcement of the new level to which they wish to move the Federal Funds Rate. In 2000 that rate averaged 6.24%. That was the year the stock market bubble burst and by the end of the year there was great fear of a new recession (which in fact arrived in April of that year). Anticipating the danger of recession, the Federal Reserve began an aggressive policy of rate cutting that brought the rate down to 3.65% by the end of August of 2001 and then to 2.49% by the end of October and finally to 1.82% by the end of the year. The rate stayed close to 1.75% for most of 2002 and was cut to 1% by the second half of 2003. The Fed began to slowly raise rates by July of 2004 and they reached 4.26 per cent by the end of 2005. (Economic Report of the President 2004: 370-371 and Economic Report of the President 2006: 369)

[6] The budget was in surplus for fiscal year 2001 (which ended October 1) and the deficit rose beginning in 2002 till it reached 3.6% of GDP in 2004. Then it fell to 2.6% of GDP in 2005. [Economic Report of the President, 2006: 376] The Treasury originally estimated that the deficit would grow in 2006 to $423 billion (or approximately 3.2% of GDP) but the press release for October 11, 2006 with a preliminary estimate of what happened in the fiscal year just concluded (FY 2006) stated that the deficit was actually $248 b. which is clearly a lower percentage of GDP than the deficit in the previous year. See http://www.fms.treas.gov/mts/index.html and click on the Oct 11 release.

[7] Employment in 2000 was 136.89 million. Employment in 2005 was 141.73 million. That’s total job creation of less than 5 million or less than 1 million net jobs created per year. By contrast, job creation between 1990 and 1995 was 6.1 million for an average of 1.2 million per year. Both periods included recessions. Even 1980 to 1985, which included an incredibly deep recession that lasted longer than the 1990 and 2001 recessions saw a net job creation of 7.8 million. See Economic Report of the President, 2006: 326. Median family income (in real terms) was $54,857 in 2001 and it was actually lower -- $54,061 in 2004. By contrast, median family income was $48,608 in 1991 and was a tiny bit higher in 1994 ($48,895). See Economic Report of the President, 2006: 322. For details on the Bush presidency, see Robert Pollin, Contours of Descent (NY: Verso, 2004) paperback edition. (see especially, Chapter 4 and the added material in that edition).

[8] It is hard for me to take seriously anyone who claims they believe that only hard work should be rewarded (that giving allegedly lazy people handouts from the government would damage their character) and who then turns around and supports the idea of letting sons and daughters of multi-millionaires inherit all of daddy’s wealth for doing absolutely nothing – talk about a way to destroy incentives with handouts! The Estate Tax affected only two percent of the population before the estate size that escaped taxation began to be raised. It is true the estate tax does not raise much revenue (all taxes other than income and payroll taxes accounted for approximately 6 % of federal revenue in 2004 and that includes all excise taxes) but even $1 trillion dollars over 5 years has to be raised from some other source or be cut from expenditures. If I had the ability to make policy I would raise the estate and gift taxes and impose a wealth tax. Then I would cut payroll taxes and raise the earned income tax credit. That would be a much fairer way to tax people.

[9] See Economic Report of the President, 2004: ch. 6. Here they note that the only way to solve the alleged financing problem of Social Security is to cut benefits (p. 142). The “personal accounts” are a way of “promising” more income from successful investment in the stock market to supposedly more than make up for the cut in guaranteed benefits. I call that trading in a guarantee for a lottery ticket!

[10] See Economic Report of the President, 2006: ch 5. See especially p. 120-122 where they approvingly quote the President’s Advisory Panel on Tax Reform’s two proposals that “lower the effective tax ratet on capital income…”

[11] See Ben Stein, “Has Corporate America No Shame? Or no Memory?” NY Times, 10.29.06 sec 3, p. 3. What columnist Stein was most angry about was the association of the new Secretary of Treasury, Mr. Henry Paulson, with the goals of this committee. As Stein argues, “It is fine for corporate bosses to be lobbying to kee0 themselves at the trough. That’s what we expect of them. But Mr. Paulson is sworn to represent all of the people, not just the powers that be on Wall Street. He is way, way too high up the pay scale to be their lackey.” I might add that Ben Stein was a staunch supporter of the re-election of President Bush believing his macro-economic policies had been quite successful.

Why are some members of Congress opposed to investigating and punishing war profiteering?

2006-10-25T13:39:00.000-07:00

The following is the text of a commentary delivered by Michael Meeropol over WAMC radio on October 6, 2006.

Did you know that the US Congress has rejected efforts to punish, investigate and criminalize war profiteering?

Yes, that’s right. This past February, the House on a mostly party-line vote rejected an effort to forbid expenditures from going to any contractor, “…if the Defense contractor audit agency has determined that more than $100,000.000 of the contractor’s costs involving work in Iraq … were unreasonable.”[1]

Meanwhile, the Senate on an equally party-line vote, rejected an amendment to an appropriation bill “to prohibit profiteering and fraud relating to military action, relief and reconstruction…”[2]

What’s going on here?

The key to understanding this issue is in attempting to define the term “war profiteering.” Can we be precise or must we accept an “I know it when I see it” position as did former Supreme Court Justice Potter Stewart, about pornography?[3]

Whenever a nation goes to war and buys supplies and equipment from private businesses, unless the government forces businesses to sell at a loss, the deal will lead to increased profits. But profiteering and merely profiting are different concepts. Profiteering implies that profits are too high. But how is that possible? How can a price voluntarily arrived at between two parties – one party the US government – be too high?

Well – one way is if the business fails to deliver the product promised. The business gets its money and the government gets little or nothing of what was promised. Anecdotal evidence abounds in any war -- [4]

This is clearly fraud – and should be punished severely.

But what if the product paid for is actually delivered – how do we define war profiteering then? The only economic argument would be that the price charged and the profit earned is much higher than the price and profit that would have been high enough to induce the business to supply the particular product --- In other words, if there were no war, the business would be satisfied to get, say, a 20 % profit – but now they’re getting 40%.[5]

Why does a business gets such a great deal? Because there’s little or no competition – and because the government is very anxious to get production started quickly. Because the stakes in wartime are so high, these extra costs don’t seem to matter at the time – But of course they do.

The House Bill proposed to allow the Pentagon’s own internal audit agency to investigate whether any defense contractor was either padding costs in order to commit fraud or overcharging in other ways. Note that each contractor under that proposed bill would have $99 million in “wiggle room” --- only “unreasonable” charges over $100 million would trigger sanctions.

During the Korean War Congress decided that all businesses were probably going to earn quite high profits and an excess profits tax was imposed. They didn’t even bother to discriminate between unreasonably high profits and just high profits. That made some sense because it is difficult to prove that a specific cost charged is “unreasonable…” Such an allegation would certainly be contested and the time it would take to settle the matter would be time wasted and remember there’s a war on![6]

So there was an excess profits tax during the Korean War. By the way, this very high tax did not interfere with procurement – there is no evidence that Korean War soldiers were short on equipment.

Given the Bush Administration’s unwillingness to support any tax increase, the Korean War solution was never an option during this war. So why weren’t the proposals aimed at punishing and investigating specific acts of war profiteering unanimously approved? -- Why were they defeated in partisan votes?

The answer lies in the difficulty of proving the existence of war profiteering. What Republicans probably feared was that efforts to punish war profiteers would degenerate into a partisan effort to make the President and his big business buddies look bad – with lots of charges and no real resolution of the problem. An effort ostensibly to pursue war profiteers would in the end contribute to reducing the public’s support for Bush’s war.

I would guess that’s why Republicans including NY State Republicans voted against it.[7]

[1] The references is to an amendment to a Defense Appropriations bill. The bill was H.R. 4939. The amendment was H.AMDT.746: The amendment called for inserting the following: \ SEC. __. None of the funds appropriated or otherwise made available by this Act shall be obligated or expended by the Secretary of the Army or his designee to award a contract to any contractor if the Defense Contract Audit Agency has determined that more than $100,000,000 of the contractor's costs for contracts involving work in Iraq under one or more Army contracts were unreasonable.

[2] Even more significantly, a proposal by Senator Byron Dorgan of North Dakota to establish a system for investigating fraud and abuse has never even made it out of committee. (S. 2361)

[3] One can find the quote at the following web site: htp://www.brainyquote.com/quotes/quotes/p/potterstew117308.html
The actual full quote is “I shall not today attempt to define this kind of material but I know it when I see it.”
For a full background discussion see Movie Day at the Supreme Court or "I Know It When I See It": A History of the Definition of Obscenity by Judith Silver at http://library.findlaw.com/2003/May/15/132747.html#Scene_1
[4] During World War II, a Senator from Missouri, Harry S. Truman made a name for himself by driving, “…thousands of miles around the country going from one defense plant to another documenting waste and fraud. [Truman] then headed the Senate Special Committee to Investigate the National Defense Program -- the Truman committee, for short. The process saved American taxpayers $15 billion (in 1940s dollars). And by uncovering faulty military equipment, he prevented the deaths of hundreds if not thousands of U.S. soldiers.” The quote is from an OP-ED piece in the St. Louis Post-Dispatch entitled Fighting War Profiteering, Truman Style by Sarah Williams posted on the AlterNet web site on March 6, 2006March 6, 2006http://www.alternet.org/story/33131/ Unfortunately, there is much evidence that a lot of the same is happening in Ira q. The article goes on to mention a few examples. For more details, there is a new documentary by Robert Greenwald called IRAQ FOR SALE. At their web site, iraqforsale.org there are a number of links and a number of references to books that specifically relate to war profiteering in the current war.

[5]Economists call this return “rent.” For economists rent is not what you pay the landlord. Instead it is a payment over and above the payment that would induce you to sell a product or provide a service. Imagine you own a house on a small (1/2 acre) piece of land overlooking the ocean and you want to sell it. You bought it ten years ago for $200,000 and if you had invested the $200,000 in the stock market you would have averaged a rate of return of, say, 10% a year. That would have doubled the value of your $200,000 investment. One might say that any payment above $400,000 (let’s fix on $420,000) for that piece of land would be sufficiently high enough to induce you to sell. However, this year, there are 3 or 4 millionaires anxious to buy that house. You know if because a house right next door to you sold for $1 million. So you get them bidding against each other and you end up getting $1.2 million. The difference between the $420,000 you would have been willing to sell for and the $1.2 million you received is called “rent.” It is a pure return to scarcity and does not reflect what economists call the opportunity cost of the land and house. In the case of military contracting – the company would make a fine profit at a much lower price but the government is in a hurry and does not carefully scrutinize the details of the bid and does not put enough fine print in their to control the behavior of the military contractor and the result is that the government pays much more than it had to pay and the company makes more than the product is actually worth in terms of real costs.

[6] The Korean War began in the summer of 1950. During the fiscal year 1951, individual income tax revenues rose from 15.8 to 21.6 billion dollars while corporation income tax revenues rose from 10.4 to 14.1 billion. Total federal receipts rose from 14.4 percent of GDP in fiscla 1950 to 16.1 percent in fiscal 1951 to 19.0 percent in fiscal 1952. In fiscal 1953 which was the year of prolonged negotiations till the armistice was signed that summer, receipts fell to 18.7 percent of GDP. The tax increases were so significant that in fiscal 1951, even though defense expenditures rose from 5 to 7.4% of GDP the budget went from a small deficit (-1.1% of GDP) to a small surplus (1.9% of GDP). [See Economic Report of the President (any year) Tables B-79 and B-80.]

[7]You can inspect the votes of Representatives at the following site: http://home.ourfuture.org/straighttalklive/war-profiteers_house.html
A quick check shows one NY State Republican, Representative John Sweeney as not voting. The New Hampshire Republicans split with Jeb Bradley voting yes and Charles Bass voting no. New Jersey members of Congress split perfectly along party lines while Rob Simmons was the only Connecticut Republican to vote yes.

THe Housing Bubble is Deflating

2006-10-25T13:36:00.000-07:00

The following is the text of a commentary delivered over WAMC radio by Michael Meeropol on September 1, 2006.

WHAT DOES THE HOUSING BUBBLE MEAN FOR US?[1]

Have you been worrying about being able to afford to buy a house? Or worrying about how long it’s taking you to sell your house? Or worrying that your house has been losing value on the market? Welcome to the world of the housing bubble.

Last week, on Friday and again on Sunday, the New York Times in four separate pieces weighed in on the question.[2] There was unanimous agreement that there is, indeed, a bubble in the value of real estate that has started to deflate but is that bubble in danger of popping?

Let’s start at the beginning. What do we mean by a “bubble in the value of real estate?”
We start with “supply and demand.” The price of housing depends on the supply of newly built homes and those placed on the market by individuals wishing to move. The demand is the desire of those with sufficient income to purchase these homes.[3]
If a price is determined by the interaction of supply and demand with a large number of buyers and sellers (so as to ensure competition), most economists would argue that this market price is the “right” price. So what’s a bubble?

The term “bubble” describes a situation where the price of something rises way out of proportion to its “real value.” So when is a market price not the “right” price but a “bubble” price?

Recall the demand side of supply and demand. Demand includes the ability to purchase (you have to have sufficient income to offer cash or to qualify for a mortgage as in the case of most real estate transactions) coupled with a desire to purchase.

Suppose your desire to purchase is based on the fear that if you don’t buy now, the price will go up so much that you won’t be able to afford to buy later. Suppose your desire to purchase is based on the speculative assumption that no matter how high the price is, it will keep going up and you’ll always be able to sell it at a profit in the future? If enough people believe that prices will continue to go up, then they will pay a high price today in anticipation of having to pay an even higher price tomorrow.[4]

Also, the phenomenal increases in incomes recently achieved by the top 10% of the population allow those individuals to pay rising astronomical prices.[5]

Note, in these cases, demand is based not only on the desire to buy a house to live in it but on those wild expectations of ever increasing prices. This creates a speculation in real estate and the momentum feeds on itself. This can go on for years. Robert Schiller, the man who helped coin the phrase “irrational exuberance” made famous by Alan Greenspan, calculates that this bubble has driven existing home prices to unprecedented heights since 2000.[6]

It is clear, now, that the bubble is contracting. Those wildly optimistic expectations have now been replaced by more realistic ones.

The question is, will prices fall slowly or precipitously – and will the fall affect the entire economy or be restricted just to the real estate industry?

The fear is that as prices fall and construction activity slows, not only will the economy take a hit as construction spending declines, but people will stop taking out home equity loans and thus slow down their personal consumption expenditures. The resulting decline in spending is something we all need to worry about.[7]

Since 2000, the housing bubble has carried the economy – real estate has accounted for 44 percent of all the jobs created.[8] Those who believe the deflation of the bubble will do no harm to the rest of the economy are counting on private business investment to pick up the slack.

But investors need to believe there will be consumers for their increased production and if people carrying big mortgages experience declining home equity and decide to slow down spending, then investors will not invest. The deflating bubble could mean trouble for all of us, not just those who can’t sell their houses.

[1] I would like to acknowledge by debt to Dean Baker, director of the Center for Economic Policy Research for alerting me to the existence of the housing bubble years ago. I urge anyone interested in this issue to check out the CEPR www.cepr.net where there are numerous articles on the housing bubble.

[2] On the OP-ED page, columnist Paul Krugman wrote “Housing Gets Ugly” (New York Times, 8/25/06: A23) in which he asserted that there is now no question that there has been a housing bubble and the only remaining question is whether the deflation will be slow enough to create a “soft landing” or whether the bubble will “pop” leading to a precipitous decline in housing prices which would produce at the very least a “housing led recession.” Two news articles complemented his column that same day. “New-Home Sales and Goods Orders Fall Markedly” (New York Times, 8/25/06: C-3) stated that in July new home sales fell at an annual rate of 4.3%, home sales (all homes) fell below the pace initially predicted and inventories (homes waiting to be sold) “jumped to a 10-year high, pointing to a rapidly cooling housing market.” As if that weren’t enough evidence, the article also reported that “The supply of homes available for sale … rose to 6.5 months, the highest since a 6.8 month supply in November 1995.” The other article described in detail the various “sweeteners” that sellers in the high end market (over $1 million) were adding to their homes in order to sell them without reducing the published price. (“Homes for Sale, By Anxious Owner: Sweetened Deals in a Slow Market” by V. Bajaj and D. Leonhardt, New York Times, 8/25/06: C1). On Sunday, August 27 there was a detailed article about the deflation of the housing bubble asked whether the result will be “A soft landing, a long slump, or a hard crash?” (See D. Leonhardt and V. Bajaj, “Read Between All Those For-Sale Signs” New York Times; Section 4, p. 1)

[3]Technically, supply and demand are a series of price-quantity alternatives in the minds of all the buyers and sellers in any given market. In the case of housing, sellers are all those who might potentially sell their house (in other words supply in the economists sense is not just those homes on the market – the number of homes currently on the market represents some “points” on the total supply curve). However, in the real world, people usually think of the supply of something as the actual number being offered for sale. Those who “demand” housing are those currently in the market to buy housing. Unlike the inventory of houses for sale, this number is harder to estimate. It would require reading the mind of virtually everyone who could afford to buy a house!! Nevertheless, it is often indirectly measured by how long houses stay on the market and what is happening to the price of houses. If homes stay on the market a short period of time and their prices are rising, we can say there is “strong demand” for housing. By contrast, if homes stay on the market a longer period of time and the prices are falling, we say there is “slack demand” or even “falling demand” for housing.

[4]The demand side of the market is obviously based on the incomes of the individuals who might consider purchasing a particular product as well as their tastes and preferences (Americans, for example, have a much greater desire to own their own homes than many Europeans which is why homeownership is so widespread in this country as opposed to equally affluent countries in Europe) and the prices of alternative things they might buy. In addition, expectations of future price movements and future income play a major role, especially in a “big ticket” purchase like a home. (For most Americans it is the largest single purchase they will make in their lifetime.) A rise in positive expectations will increase the number of people willing to buy a house at the current price and even increase the desire of people to buy houses at a higher price than today. This latter phenomenon explains why prices of houses can have risen so rapidly since 2000 and yet the sales of new and existing homes has also risen rapidly.

[5]Most commentators have not focused on this point but it is extremely important. Median incomes have not grown very much. Median real wages have actually not grown at all during the current recovery. (See S. Greenhouse and D. Leonhardt, “Real Wages Fail to Match a Rise in Productivity” New York Times, 8/28, 06: A-1. See the table on p. A-13 for details. “Even for workers in the 90th percentile of earners – making about $80,000 a year – inflation has outpaced their pay increases over the last three years …”) Though much of the earnings of the super-rich come in the form of income from the ownership of property – particularly stocks but including real estate – wages received by the top 10% and 1% of salary and wage recipients have grown much faster than average wages so that the share of wages going to these top groups has also risen significantly. When high income individuals bailed out of the stock market after the stock market bubble burst beginning in June of 2000, many of them chose to invest in real estate which created the white hot “high end” market. This market was featured in a New York Times Magazine story in the Fall of 2005 about the largest company specializing in building what have derisively come to be called “McMansions”. At that time, Robert Toll, the CEO of Toll Brothers argued that the boom would go on forever. He noted that when it comes to supply and demand for housing for millionaires, his company had the supply and the millionaires were creating the demand. In answer to a question about why he was so optimistic about the luxury home market, he told the University of Pennsylvania Law School Alumni Magazine: “I don’t see any reason for it not to continue to be a good market. The doomsayers are predicting that there will be an implosion that will come from the recognition that the market is just floating on air and not sustainable and that it’s going to wreak havoc on the economy. I think that’s a lot of bull. I think housing price escalation will continue. It won’t be as fast as it’s been in some markets but it’s not going to be as slow as it was. The creation of wealth has been phenomenal. Families making $100,000 or more have grown six times faster than the general population. The population has grown by 80 million in the last 30 years. (Yet) we’re building fewer homes on average this decade than we did in the 1970s. So with this tremendous growth in population, tremendous growth in wealth and slackening supply, you get a great imbalance, and when supply dwindles and demand grows what gives is price.” (See http://www.law.upenn.edu/alumnijournal/fall2005/alumni_briefs/page03.html) However, on August 22, 2006 we discover from Business Week online that:
“Luxury home builder Toll Brothers Inc. said Tuesday [August 22] that its third-quarter profits fell by 19 percent as the housing-market malaise weighed on sales and caused the company to abandon some building locations. The Horsham, Pa.-based company also cut its earnings estimate for the full year, signaling that it doesn't expect the housing market to stabilize soon. Investors have given up on flipping properties for a quick profit and builders have slashed prices to move homes, especially on the luxury end.Robert Toll, chairman and chief executive, told analysts during a conference call that he doesn't yet see signs of improvement nationwide. ‘I don't see a turnaround in any of the markets,’ he said. ‘I don't see any forming a bottom’."
(http://www.businessweek.com/ap/financialnews/D8JLMKV80.htm?sub=apn_home_up%26chan=db). In other words, despite Mr. Toll’s assertions last October, the demand at that time was in fact “floating on air” – the hot air of unrealizable speculation – a classic case of a bubble.

[6]Shiller is a Professor of Economics at Yale University and he was briefing Alan Greenspan in December, 1996 about the danger of a stock market bubble. He described the markets at that time as “irrational” and two days later Greenspan shocked the stock market by using the term “irrational exuberance”in a speech delivered before the American Enterprise Institute. [See Robert Shiller, Irrational Exuberance (Princeton, Princeton University Press, 2005): 1 and the endnote on 231] Unfortunately, in order to reduce the danger of a market slump in response to his statement, Greenspan began to backtrack and for the rest of the 1990s was actually a cheerleader for the stock market gains, refusing to support, for example, the raising of margin requirements on the sale of stock to calm down the speculative mania that ultimately led to the dot-com bust. Shiller’s book Irrational Exuberance was initially published in 2000 and fortuitously it came out just as the stock market peaked and began to slide. In 2005 he published a second edition in which he wrote a new chapter focusing on the real estate bubble. (See Ibid: 13)

[7]Much of the mortgage refinancing since 2001 has been a result of lower interest rates. But often what comes with it is a utilization of the equity built up in a home as a result of the rise in its sale price to increase current consumption. If home prices stop rising, then people will not be able to re-finance and turn their accumulated equity into current consumption. We can see how this has affected consumer behavior by measuring consumption outlays (personal consumption expenditures plus interest payments and transfer payments to other individuals) against disposable personal income. For most of the decade of the 1990s, the ratio was between 93 and 95% but in the last three years of the 20th century as a result of the stock market boom, many people felt secure enough to increase their personal consumption expenditures so that in many cases it exceeded their current incomes. This is an example of what economists call the “wealth effect,” the idea that if the stock you own goes up in value you don’t have to save as much so you can consume all of your current income and even increase your indebtedness. This led to personal outlays over 96% in the last three years of the 20th century. The same principle is on display during the early years of the 21st century when people see the values of their houses increase and they therefore borrow that equity and spend it. The ratio of personal outlays to disposable personal income was above 97% for the first years of the decade and over 100% (leading to a negative personal savings rate) in 2005. [See Economic Report of the President, 2006: 318]

Unfortunately, when the value of housing stops rising and interest rates rise so that refinancing is no longer attractive, that increase in consumption virtually stops. That is what is beginning to happen now (Fall, 2006).

[8] See D. Leonhardt and V. Bajaj, “Read Between All Those For-Sale Signs” New York Times; August 27, 2006: Section 4, p. 1.

Can we make moral judgements about prices?

2006-08-14T12:33:00.000-07:00

The following commentary was delivered by Professor Michael Meeropol over WAMC radio on July 7.

CAN WE MAKE MORAL JUDGMENTS ABOUT PRICES?

It’s summer. People are talking about the price of gasoline. Last month, both Senators and Congressmen debated increases in the federal minimum wage. Discussion about both of these issues reveals an interesting disconnect between the way Economists look at prices and how ordinary people do.

My students respond to rapidly rising gasoline prices by arguing that those prices are “outrageous” --- meaning they are too high. We often hear bitter complaints about “price gouging” when periods of emergency produce rapid increases in the price of some necessity, like bottled water or gasoline.

Both of these sentiments reflect a moral approach to prices that most trained economists find, well, let’s say “unscientific” though privately many dismiss it as IGNORANCE.

Why do I say this?

When economists are confronted with prices that are freely paid for products offered for sale in the market by firms that in some way or other are competing for the consumer’s dollar they argue that such prices cannot be either too high or too low.

Prices are neither moral nor immoral -- they just are. The world of supply and demand describes the interaction between the desires of consumers to buy something (coupled with those consumers’ ability to pay) and the scarcity of the resources used in the production process.[1]

By this standard, the recent rise in the price of gasoline is a result of natural forces: rising world demand for oil-based products (especially gasoline) coupled with a very slow growth in supply. The only exception to the rule that prices are part of the “natural order of things” is when some entity (like the government) interferes with the process and mandates a higher (or lower) price than the market would produce if left alone.[2]

Also, when one business corners the market and asserts monopoly power it artificially restrains supply, causing the price to rise above the “appropriate” level.[3]

The usual response from economists to the argument that the price of gasoline is too high is to remind us that even though oil corporations are gigantic, there are enough of them in the world to make the oil market “competitive.”[4]

To turn briefly to minimum wage legislation, the rationale for a minimum wage is that the market price for labor created by supply and demand -- supply being the willingness and ability of people to offer themselves as potential workers to potential employers while demand is the desire of businesses and government agencies to hire people for various jobs) -- leaves some low skilled workers with a wage that is too low.

President Franklin Roosevelt said when he signed the nation’s first minimum wage law that “No business which depends for its existence on paying less than living wages to its workers has any right to continue in this country.”[5] In this particular case, the moral imperatives of society insisted on overruling the forces of supply and demand.

And, despite what passes for economic science today, the desire to subject market prices to a moral test has a long, distinguished history in the field of economics. Adam Smith, the father of the field of economics for the English-speaking world, was himself a Professor of Moral Philosophy.[6] Before Adam Smith, we find the moral approach to prices in the work of medieval philosophers like St. Thomas Acquinas.

In the non-western world, the Koran is explicit in describing the right and the wrong ways to conduct business. Interestingly, in both the Koran and in the writings of the Christian philosophers known as the Schoolmen there is a prohibition on the charging of interest on loans. It was considered unjust.[7]

Central to the philosophical discussion of price was the idea of a just price – To a modern economist, this is a moral, ethical concept having no scientific meaning.[8]

When my students assert that the price of gasoline is too high they are joining with that long line of philosophers in believing that just because the “market” produces a particular outcome, we are not required to accept it. We can intervene to alter what the market would do if left alone. Obviously, we have to recognize how the participants in the market would respond to such intervention (I referred to the impact of minimum wage increases in an earlier commentary) but there is absolutely no reason not to subject what happens in the economy to moral judgments.

The average citizen’s inclination in correct. Most people have a moral compass by which they measure things --- even prices. Today, the economics profession is trying to take that away in the name of science – but they’re wrong.
[1] “Economists usually are opposed to any form of price control. Economics textbooks attempt to show that minimum-wage laws, rent control, price controls on gasoline, “usury” laws (which put a caps on interest rates), and so forth result in an artificial shortage of, and an inefficient distribution of, the good or service with the controlled price.” Meeropol, Surrender, How the Clinton Administration Completed the Reagan Revolution: 75. For more details of the argument, see pp 75-76 and the endnotes on pp 299-301.

[2] Government interventions creating rent control or minimum wage laws are obvious examples, but there could also be negotiated contracts (absent government intervention) which create wages that are higher than one that would be achieved by the free inter-play of supply and demand in the market, say, for Law Professors [the ABA requires a specific salary scale in return for accrediting Law Schools].

[3] In previous commentary I have written about the high prices charged for patented pharmaceuticals. See Merrill Goozner The $800 Million Pill.

[4] This argument is very imprecise. How many gigantic international firms do there have to be in order to keep them from being able to “administer” a price (that is offer a specific price and be able to hold the line on it)? In truly competitive transactions (farmers selling corn, individuals and institutions selling shares of stock) the seller basically inquires as to the current price and either accepts it or withdraws the items offered for sale. In most businesses, by contrast, they are able to quote a price and at least hold it for some time while they wait for the reaction of “the market.” Oil companies can do this and that is why their rates of profit can be quite high at times. I would argue that while the international oil companies do not collude as does OPEC, they have been able to control their prices significantly over the years and thus have higher than average rates of return on their invested capital.

[5] “Franklin Delano Roosevelt, Quotations Compiled by GIGA” available on-line.

[6] Adam Smith is known to economists for his work An Inquiry Into the Nature and Causes of the Wealth of Nations. Before writing that book he wrote The Theory of Moral Sentiments in which he made numerous arguments about the nature of humanity and its interactions – even in the economic sphere (though he did not develop those ideas until much later).

[7] This was, by the way, one of the reasons that Jews were involved in money-lending during the Middle Ages – Christians were forbidden to engage in it. In Islam, interestingly, it was okay to make deals and charge interest to non-Muslims. If you wanted to invest in the business of a fellow Muslim you could join as a partner with the promise of receiving a share of the profits but you could not lend at a fixed rate of interest. The rationale here was that it was immoral to put all the risk of repaying the loan onto the borrower – you had to share the risk by becoming a partner. For Muslim prohibitions of interest (translated as “usury” in the Penguin edition) see: Koran 2:275, 278-9. “Those who live on usury shall rise up before Allah like men whom Satan has demented by his touch; for they claim that usury is like trading. But Allah has permitted trading and forbidden usury… Allah has laid His curse on usury … Believers, have fear of Allah and waive what is still due to you from usury, if your faith be true; or war shall be declared against you by Allah … If you repent, you may retain your principal, suffering no loss and causing loss to none.” [Koran tr. N.J.Dawood Penguin Books: 354-355] For the “Sin of Usury” as described by the medieval philosophers (he specifically refers to Acquinas) see Henry W. Spiegel The Growth of Economic Thought (Prentice-Hall, 1971): 63-64.

[8] On the “just price” see ibid: 60-61. It is not that economists think ethical issues are unimportant – for the most part they argue that such issues cannot be dealt with “scientifically.” Virtually every economics textbook introduces students to the distinction between “positive” and “normative” economics. “Positive economics focuses on facts and cause-and-effect relationships. It includes description, theory development, and theory testing. … Positive economics avoids value judgments, tries to establish scientific statements about economic behavior, and deals with what the economy is actually like … normative economics incorporates value judgments about what the economy should be like or what particular policy actions should be recommended … Normative economics looks at the desirability of certain aspects of the economy … “ Macroeconomics 16th ed. By McConnell and Brue (McGraw-Hill, Irwin: 2005): 10. In other words, you can “prove” right or wrong a proposition in positive economics (at least in principle – often we don’t have enough facts to do it!) but you can “argue forever” about issues that are normative because they are based on value judgments (such as whether a price is “too high” or a wage “too low”!).

Do Programs like Unemployment Insurance attempt to repeal the "laws" of economics?

2006-06-14T08:14:00.000-07:00

The following is a commentary that was delivered on WAMC radio by Professor Michael Meeropol on June 2, 2006

EXTENDING UNEMPLOYMENT BENEFITS: IS THE HUMANITARIAN IMPULSE IN CONFLICT WITH ECONOMIC REALITIES?

Today, June 3, unemployment compensation specifically targeted at survivors of hurricanes Katrina and Rita will run out.[1] That gives me an opportunity to discuss this issue as a case study of how hard-headed economic understanding often appears to collide with humanitarian instincts.

To illustrate the humanitarian point of view, I quote from a recent e-mail from the AFL-CIO’s Working Families activist e-network encouraging people to write to members of Congress in support of an extension:

They suggest the following text for such a letter:

“Jobless benefits for tens of thousands of survivors of hurricanes Katrina and Rita will run out beginning June 3 unless you act before the Memorial Day recess to extend them.
As the Gulf Coast slowly recovers from last year's tragic hurricanes, 80,000 residents are still relying on unemployment benefits to help them get back on their feet. Failing to extend those benefits will make it impossible for many of them to escape abject poverty.”

Quite straightforward: People are out of work, they need these benefits, and thus we have a moral duty to help them. This point of view sees spending to provide unemployment compensation payments as a simple matter of justice. Interestingly enough, I would venture to guess that most Americans see it that way as well.

In contrast to this humanitarian point of view, many economists believe that unemployment benefits create bad incentives. Rather than feeling pressure to pursue all leads to decent jobs or to consider geographic relocation or retraining, the newly unemployed person is guaranteed a check for 13 or 26 weeks --- and when there are special laws passed such as those in the wake of Katrina and Rita that guarantee is extended.[2]

This creates precisely the opposite effect than what would be best for all concerned, especially the newly unemployed. They need to find a new job not sit back and collect a check hoping for a miracle that will get them their old job back.

So there you have it -- the bleeding heart liberal appeal to “social justice” vs. the hard-headed tough love conservative appeal to economic science. The hard-headed economics approach was typified by Rep. Dick Armey right after the September 11 atrocity when he opposed extending unemployment benefits, saying "The model of thought that says we need to go out and extend unemployment benefits … is not one that is commensurate with the American spirit here."[3]

Without for a second denigrating the fair-mindedness exhibited by the “social justice” approach, I want to interject a little hard-headed economic analysis in support of extending unemployment benefits. Put very simply, if the unemployed are able to maintain their level of consumption spending (paying the rent or the mortgage, keeping up on car payments, keeping ahead of the credit card company) then every business or individual who makes a living by in part selling something to these people will benefit. Unemployment payments do not just benefit the unemployed – they benefit all of us because for the most part every penny distributed is spent by the recipients.[4]

The argument that unemployment insurance slows the search for that next job is based on the false implication that there are plenty of jobs out there and the unemployed simply refuse to take them because unemployment insurance is such a good deal. In fact, most of the unemployed are involuntarily unemployed.[5]

By putting income into the hands of the unemployed, a downward spiral of loss of jobs, reduced incomes and reduced spending and further loss of jobs can be stopped. Extending unemployment benefits when unemployment rises is almost always good policy.[6]

If you’re listening to this commentary try to get your Representative or Senator to support the unemployment benefits extension. In the House it’s HR 5392 in the Senate, it’s S. 3030.

ENDNOTES:

[1]On May 16, a bill was introduced in the House (H. R. 5392). It was referred to the Committee on Transportation and Infrastructure. It read as follows:

. . . Notwithstanding any other provision of law, in the case of an individual eligible to receive unemployment assistance under section 410(a) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5177(a)) as a result of a disaster declaration made for Hurricane Katrina or Hurricane Rita on or after August 29, 2005, the President shall make such assistance available for 52 weeks after the date of the disaster declaration.

[one can find any law before either House of Congress by going to www.house.gov or www.senate.gov. The direct link to a law is at the following site: (http://thomas.loc.gov/cgi-bin/thomas)].

The Senate version was introduced May 24.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled

. . . Section 2 of the Katrina Emergency Assistance Act of 2006 (Public Law 109-176) is amended by striking `39' and inserting `52'.

The normal period for the receipt of Unemployment Insurance is 13 weeks, often extended to 26 weeks. The original bill to help Katrina victims was to extend unemployment benefits to 39 weeks which in fact ends June 3, 2006.

[2] See for example, Martin Feldstein, former Chairman of President Reagan’s Council of Economic Advisers and a Harvard Economics Professor: “There is no such thing as a Jobless Recovery” a commentary from the Wall Street Journal, October 13, 2003. This commentary is available at the National Bureau of Economic Research’s web site
http://www.nber.org/feldstein/wj101303.pdf. The crucial assertion is contained in the following sentences:

“A negative influence on the rate of new hires in every recovery is the distorting effect of unemployment insurance. The increase in the maximum duration of unemployment benefits that Congress enacted last year [in 2002] has delayed the current [2003] employment recovery even more than usual.

Unemployment benefits typically equal about half of the pretax wage that the individual earned before becoming unemployed. When taxes are taken into account, net-of-tax unemployment benefits replace about 60% of the previous net-of-tax wage.

Because of the combination of taxes and unemployment benefits, an individual whose pretax wage before becoming unemployed was $600 a week loses less than $200 of spendable income by remaining unemployed for an additional week. While some unemployed individuals try to find a new job as quickly as possible, others respond to the low net cost of remaining unemployed by spending more time searching for a better job or simply using the time for household activities.

Statistical studies show a substantial effect of unemployment benefits on the duration of benefits and a significant surge in job finding in the weeks just before benefits run out. When Congress extended the maximum duration of benefits from the usual 26 weeks to 39 weeks, it slowed the rate at which the unemployed found jobs. While no one should begrudge unemployed workers the protection of unemployment benefits it is important to recognize that those benefits raise the unemployment rate and delay the rise of employment in every economic recovery.”

[3] “A Nation Challenged: The Benefits; House Republican Leaders Balk at Any Help for Laid-Off Workers” The New York Times, September 26, 2001: Section C, p. 6. The context was an argument between Democrats and Republicans as to whether the $15 billion bail-out bill for the airlines industry in the wake of the September 11 attacks should be followed by an effort to extend unemployment benefits to cushion of the blow of layoffs suffered in the wake of those attacks.

[4] Except for very high income individuals who find themselves unemployed, the average unemployed worker suffers a significant decline in income (even using Professor Feldstein’s numbers from above) when she/he loses their job. People usually attempt to maintain their previous level of consumption spending in the face of what they hope will be a temporary income decline. Thus if we assume that someone was saving close to 20% of her or his income before being laid off, the 60% replacement of lost wages (per Professor Feldstein) would almost certainly all be spent.

[5] This was actually the centerpiece of the work of John Maynard Keynes in The General Theory of Employment Interest and Money which launched what has come to be known as the “Keynesian revolution” in economics. Prior to the publication of Keynes’ book in 1935, the majority of the economics profession believed that in equilibrium there was no such thing as involuntary unemployment – unless wages were kept artificially high by minimum wages or union contracts. (This is the root of the argument addressed in a previous commentary that a rise in the minimum wage will increase unemployment.) Keynes showed that it was perfectly possible for workers to be ready, willing and able to work at the prevailing wage but for businesses to not feel it was profitable enough to hire them. Keynes and his followers also showed that if businesses were to respond to declining sales by cutting wages across the board, the resulting declines in income by workers will lead to further declines in business sales which will cause businesses to have to cut back output and lay off even more workers.

[6] This is probably as good a place as any to respond to Professor Feldstein’s assertions in the Wall Street Journal opinion piece from 2003. Such arguments can be found all over the writings of many prominent economists. I believe there is actually a way to test that assertion over the historical record and I engaged in such an activity with a class a year or so ago. What follows is a shortened version of a handout that I submitted to my students entitled:

DOES UNEMPLOYMENT COMPENSATION ENCOURAGE MORE UNEMPLOYMENT?

I would like to discuss this issue with the help of two tables – the first from p. 284 in the 2000 GREEN BOOK shows monthly percentages of the unemployed who were actually receiving unemployment compensation for the years 1967 – 1999. [The Green Book is a publication of the House Ways and Means Committee with a more elaborate title “Overview of Entitlement Programs.” It is published every two years by the Government Printing Office and provides a wealth of information] The second table is from the Bureau of Labor Statistics’ monthly unemployment rates for the same years. [To get this information, first go to http://www.bls.gov/webapps/legacy/cpsatab7.htm. This will put you at a table where you can click on any demographic group to either get total number of unemployed or the unemployment rate. I clicked on all persons 16 years and older and was taken to a table where monthly data was available. I then chose the years of coverage I wanted.] Thus, anyone who wants to check my numbers from the argument below will need both the GREEN BOOK and the specific BLS table.

MY ARGUMENT AGAINST THE FELDSTEIN APPROACH

First of all – unemployment has a supply side AND a demand side. While the decision to offer oneself for work in the labor force is definitely a voluntary one, the decision of whether or not to hire more people (or lay people off) is also a voluntary one. If Professor Feldstein is going to emphasize the “voluntary” nature of unemployment, then we are actually talking about voluntary withdrawal from the labor force. In that case, the person who voluntarily withdraws is not counted as unemployed. The counter-argument is that because of the presence of unemployment compensation, people who would normally voluntarily withdraw from the labor market come into the labor market solely for the purposes of collecting unemployment – thereby artificially inflating the unemployment numbers.

It has been the contention of Keynesian economists that the fluctuations in the unemployment rate are almost completely dependent on decisions of businesses to expand, contract or continue the level of business activity. Since unemployment compensation is a constant (with extended benefits being voted for discreet years), it does not make much sense to contemplate fluctuations in the “desire” to work based on a non-fluctuating benefit. The alternative view is that because unemployment is subsidized by the unemployment compensation system, it will increase. If the subsidy becomes more generous (say, when Congress votes an extension of the number of weeks one can collect), unemployment will increase even more. An important corollary of this is that, if the benefits are reduced, unemployment will decrease.

Taking the latter view, it is clear that the very existence of unemployment compensation (or welfare programs in general that “reward” non-work) will reduce the supply of labor. The former (Keynesian) view reminds us that unemployment compensation also puts purchasing power into the hands of people who are very likely to spend it all. To the extent that spending money subsidizing the unemployed also increases aggregate demand, whatever it does to the supply of labor it will undoubtedly increase the demand for labor.

Because these forces are contradictory (reduces supply, increased demand), it boils down to an empirical question: Does the “generosity of unemployment benefits” raise or lower overall unemployment?

That is where the data comes in.

How would one utilize the evidence in the two tables to determine whether the assertion that unemployment compensation increases the level of unemployment is true or not?

I propose that if there is a high percentage of the unemployed receiving unemployment insurance payments, that would lead to people voluntarily remaining unemployed for longer periods of time and thus a higher (on balance) level of unemployment. [Precisely Professor Feldstein’s assertion.] In effect, I am arguing that the numbers on the chart labeled Insured Unemployment as a percentage of the unemployed is a useful proxy for the “subsidy” of unemployment. If we see high percentages of the unemployed receiving benefits when unemployment is, say, above 6%, that might suggest a positive relationship.

Unfortunately, it’s not so simple. Just a quick look at the tables will show that the recession periods (1970, 1974-75, 1981-83, 1990-91) seem to have [with one major exception] increased percentages of the unemployed receiving benefits AND increased levels of unemployment. However, this is actually the result of Congressional action extending the number of months people could receive those payments [except during the recession of 1981-83 when unemployment compensation was not extended as in other recessions]. Thus, sorting out the causation actually becomes rather tricky.

What we want to see is if the periods following the liberalization of unemployment benefits (periods where the participation of the unemployed jumped – such as 1975 and 1992) were followed by an increase in the overall rate of unemployment. We also want to see if the one recession when unemployment insurance was not extended so that there were rather low percentages of the unemployed receiving benefits exhibited a different pattern of unemployment – a more quick reduction in unemployment rates overall as opposed to other recessions.

Let us compare the experience during the 1974-75 recession to the experience during the 1981-83 recession.

In 1974, the recession began in the first quarter and did not reach its trough until the first quarter of 1975. Unemployment reached 9% in May of 1975 and did not fall below 7% until late 1977. This was the recession where the percentage of the unemployed covered by unemployment compensation was at the maximum for the entire period covered by this data. From January of 1975 till August of 1976, more than 65% of the unemployed were covered by unemployment insurance.

In 1981, the recession began in the third quarter and reached it’s trough in the fourth quarter of the next year. Unemployment peaked at 10.8% in November and December of 1982 and did not fall below 7.5% until the fall of 1984 (not below 7% until 1986). In marked contrast to the recession of 1975, the percentage of the unemployed covered by unemployment insurance did not rise above 50% in the year of 1982 and was never more than 53% during the first five months of 1983 after which it fell to 40% and below.

I submit that these contrasting experiences indicate that the high percentage that was receiving unemployment did not cause unemployment to remain high any longer than the much more “modest” (stingy would be a better word) benefits levels of the 1981-83 recession. In fact, one could see an inverse relationship utilizing the two recessions – the recession where unemployment insurance was less generous was deeper and maintained unemployment at a much higher level longer into the recovery.

Finally, let us consider the recession of 1990 – 1991 (and the jobless recovery for much of 1992 as well). Unemployment insurance was only extended at the end of 1991 (By twelve states -- see the jump from the percentages between June and November and the percentages from December, 1991 and through May of 1992). Despite no extension of unemployment insurance before December of 1991, the unemployment rate climbed from June of 1990 (the recession began in the third quarter) till July of 1992. The extension of unemployment insurance beginning in January of 1992 did not seem to have stopped the unemployment rate from beginning its (albeit painfully slow) descent in July of 1992. There was no up tick in unemployment at all during early 1992 when unemployment benefits were in extended mode and were covering a higher percentage of the unemployed than in the first eleven months of 1991.

Full Employment will solve all our problems

2006-05-15T12:05:00.000-07:00

The Following Commentary was delivered by Professor Michael Meeropol over WAMC radio in May of 2006.

THERE’S ONE POLICY THAT IS THE KEY TO SOLVING MOST OF OUR ECONOMIC PROBLEMS.

Are you worried about illegal immigration? Are you worried about global warming? … Worried about high gasoline prices? … About the trade deficit with China, the budget deficit, the unequal distribution of income and wealth? Are you worried about the lack of affordable housing and health care? I have a solution to all of these problems.

The solution is full employment.

You ask, how can one policy, even one you might agree with solve all these problems?
My answer is that every issue I have mentioned has a technically feasible economic solution. Unfortunately, every one of those solutions meets strong political opposition because of the potential cost to the economy – a cost that would be borne by people paying higher taxes and perhaps losing their jobs. Full employment – a situation in which the unemployment rate is never higher than four percent and is often lower – can permit us to adopt the technically feasible solutions without fear that those solutions will ruin people’s lives.[1]

Full employment, it may surprise you to know, is the law of the land. Passed in 1978 – it is called the Humphrey Hawkins Full Employment and Balanced Growth Act. This is a law that the recently deceased outstanding economist-citizen John Kenneth Galbraith embraced whole-heartedly when it was first considered over 30 years ago.[2] He embraced it for the same reason that he embraced Keynesian economics as a young Harvard instructor back in 1935, because he believed it was the right and proper role for government to correct for market failures, and the worst market failure of the 20th century was the Great Depression for which Keynes proposed a workable solution – government spending.[3]

AN EXAMPLE:

Since we have just experienced nationwide demonstrations around the immigration issue let me begin here. As I’ve said in previous commentary,[4] most Americans who fear immigration do so because of the downward pressure these immigrants allegedly create on the wages of low skilled workers. My solution is to raise the minimum wage dramatically and use the promise of full employment to create sufficient numbers of jobs so that the higher wage will not translate into higher unemployment.

If it’s environmental reform you’re most worried about – if you want to change our energy policies to stem the dangerous increases in greenhouse gases in our atmosphere,
but if you also fear that making those changes will put our very lifestyle in danger, a full employment policy guarantees that will not happen.[5] If government has to fund a crash program of research similar to that which created the first Atom and Hydrogen bombs and which put a man on the moon full employment will guarantee that people losing their jobs in one part of the economy will find similar good jobs in the new areas.

Or maybe you’re concerned about how much it would cost to guarantee that every American has health insurance. If taxes go up, how will businesses be able to continue creating jobs? The answer is that if taxes and government spending both rise the same amount, the result is an increase in total employment.[6] People have absolutely no problem paying more in taxes if their incomes rise more than their taxes do. That creates an increase in after tax income – take home pay.

The problem is that there has been less than full employment for most of the past 36 years, causing downward pressure on wages.[7] With very low unemployment (4% or less) wages will rise not fall and everyone will be able to afford to pay the higher taxes necessary to guarantee health insurance for all.

I could go on with examples.[8] All problems in our economy that need fixing can definitely be fixed if we keep alive a government policy which is actually supposed to be the law of the land – namely that the unemployment rate should be kept at 4% or less.

How do we do it? One good place to start is with your member of Congress. Ask him or her why there has been no effort to enforce the Humphrey-Hawkins Full Employment and Balanced Growth Act?

[1] First a definition. Full employment does not mean that everybody has a job. The common sense concept involves attempting to come up with an approximation of a situation where there is NO WASTE in the utilization of human resources. Clearly, someone who makes the choice to make her/his contribution to society by working full time in the home or doing volunteer work in a religious or civic organization should not be counted as “unemployed.” By convention, we don’t count anyone who is under 16 years of age as unemployed even though people aged 14 and 15 could undoubtedly make productive contributions by working at one job or another (and probably many do in family businesses even though we have officially banned child labor). Similarly, someone who has retired is not potentially part of the labor force unless he or she chooses to be. So the first thing to understand is that what we call the labor force is different from the population. [For an annual series of the Labor Force Participation Rate that shows the total population, the labor force, the employment ratio of the population, and, finally the unemployment rate, see the Economic Report of the President, 2006, p. 324-325.]

Once we know the labor force, those who are not working but “actively seeking work” are identified as unemployed. In 1961, the President’s Council of Economic Advisers argued that a four percent unemployment rate was as good an approximation of “full employment” as we were likely to get.

[2]I have already recommended Richard Parker, John Kenneth Galbraith, His Life, His Politics, His Economics (NY: Farrar, Straus and Giroux, 2005). The Humphrey-Hawkins Full Employment and Balanced Growth Act was actually introduced in 1975 as a very strong amendment to the Employment Act of 1946. It provided a mechanism whereby individuals who could not find a job could sue the government for triple damages. Needless to say, such “teeth” to enforce such a “promise” was stripped from the bill as it moved through the Congress. Even with all methods of compelling the government to actually deliver on the promise out of the bill, it faced very rough sledding in Congress and many economists went on record opposing it vigorously. Nevertheless, when that law was passed it provided a goal of four percent unemployment and three percent inflation.

[3]Keynes proposed a graduated income tax as well because he believed that very rich people did not spend as high a percentage of their incomes as did middle and lower income people and that the problem of a depressed economy was that first of all, businesses did not think it profitable enough to make investments and second of all, as people got laid off their incomes fell so consumption spending fell as well. A graduated income tax financing government spending on, say, roads would do two things at once. It would take money from high income individuals who were not spending much and give it to people who would be hired to produce these roads (for example) and those people would spend virtually all of their increases in income. At the same time, the building of the roads would be a useful addition to society’s infrastructure. In 1935, before he actually rearmed Germany, Hitler proved Keynes right by ending the depression when he hired lots of unemployed people to build the Autobahns. In the US, it took the high spending on World War II to end our depression.

The public works expenditures in Germany and the experiences of all industrialized countries during World War II proved that Keynes’ insight was correct. When private spending is too low to generate sufficient total demand to employ the workforce, government spending can take up the slack.

[4] See my commentary from April 7.

[5] In a rapidly growing economy, such significant changes occur without government intervention. Consider one simple example from the 20th century. As the automobile replaced the horse and the horse and buggy method of transportation, there was a significant decline in the job opportunities for people associated with that complex of businesses and services involved in raising, maintaining and utilizating “horse-power.” Because the economy was growing rapidly, the growth of jobs in automobiles and associated industries (rubber, servicing, etc.) as well as construction more than compensated for the loss of jobs in the “horse-related” industries. In the context of retrofitting our harnessing of energy, it will be the government’s responsibility to see that sufficient numbers of good jobs are created as certain industries shrink and even disappear. I believe it is much better to work our way through this using the political process than to HOPE that the natural economic processes will do it better. This is especially true because established industries often have the power to utilize government to PROTECT themselves from the declines being enforced by the market. This was never more true than now when we are finally beginning to understand the magnitude of the global warming problem and the dangers of continuing to rely on a hydro-carbon based energy system.

[6] Embedded in endnote (3) above is the explanation of this point. In some economics textbooks it is still taught as the concept of the Balanced Budget Multiplier. Basically the idea is that if taxes go up $10 million, that will reduce consumption expenditures on the part of those who pay the tax by some fraction (say 90%) of that $10 million. If that $10,000 is immediately spent to repair bridges, build schools, wire libraries for the internet, or any other useful infrastructure project, the people hired to do this work will spend some fraction (say 90%) of that $10 million AND at the same time, society’s total production will have gone up by the $10 million worth of bridges, schools, etc. that was produced. The usual economic critique of the balanced budget multiplier concept is to say that these government projects are “pork” and the money spent on them is wasted. While there is no doubt plenty of waste in government purchases of goods and services, there is no evidence that government projects are more wasteful than private ones (think of shopping malls built that never get filled by stores, for example! Think of all the fiber-optic cables laid during the dot-com boom – cables that may never be used!). Even if lots of government money is spent unwisely, the solution is more accountability in how government money is spent.

[7] The unemployment rate has been below 5% seven years out of the past 35 and was at 4.5% or less only three. [Economic Report of the President, 2006, p. 324-325]

[8]Very briefly: The trade deficit with China is based in large part on a problem of the growth in productivity in American business. One of the side effects of full employment is higher rates of growth of productivity. We saw that quite dramatically during the years 1997-2000 when unemployment was permitted to fall to 4% [I say permitted because usually the Federal Reserve, our Central Bank, takes steps to stop unemployment from getting “too low” but in 1997 they chose not to take those steps.]. Productivity grew so much that some economists and politicians started talking about “new economy” with a permanently higher rate of productivity growth. See Economic Report of the President, 2001. The budget deficit was also briefly cured in the late 1990s in part because the full-employment associated rapid economic growth increased tax revenues faster than expected. Even though spending rose dramatically, tax revenues rose even more. As to the unequal distribution of income and wealth, periods of low unemployment have been the most significant periods of increase particularly for the incomes of low wage workers. One of the major policies associated with full employment is rising taxation and government spending. Since taxes fall for the most part of higher income individuals and some of the revenue is redistributed to lower income individuals (say with the Earned Income Tax Credit, for example) the more our government pushes low unemployment and faster economic growth through raising taxes and raising spending, the more the inequality of income and wealth is moderated. By the way, there is a cliché out there touted by politicians and pundits which claims that it is “impossible to tax and spend ourselves into prosperity.” That is errant nonsense. There are plenty of examples from our recent past when we in fact DID tax and spend ourselves into prosperity – the most dramatic example of this in fact was the late 1960s and the recently celebrated late 1990s. (In the 1990s, expenditures rose in absolute terms but fell as a percentage of GDP because the economy was growth so rapidly.). For the data, see Economic Report of the President, 2006, p. 376.

IMMIGRATION: What to do?

2006-05-15T11:51:00.000-07:00

The Following Commentary was delivered by Professor Michael Meeropol over WAMC radio in April of 2006.

CUTTING TO THE HEART OF THE IMMIGRATION POLICY DEBATE[1]

I believe we can begin to get a handle on the issue of immigration by describing it in terms of supply and demand. There is a very great supply of potentially hard working individuals who live in countries where opportunities to work hard and rise to comfortable living status is limited.[2] There is a demand on the part of American businesses and individuals for workers who are willing to work at significantly lower wages than the customary wage expected by an average American. This law of supply and demand, trumps the laws against illegal immigration. The result is that there are approximately 11 million people in the US illegally, most of them working.[3]

Allegedly these individuals are in the US working at jobs that according to President Bush and many others “Americans won’t do.” The truth is that there are plenty of difficult, dangerous jobs that Americans routinely do. (Coal mining for example) The problem is that the jobs that these people take don’t pay a wage high enough to attract Americans. Americans would work in laundries or in restaurants for $15 an hour, just as they work in construction, in steel mills and in meatpacking for $15 to $20 an hour. In the 19th century, coal mining and the iron and steel industry were routinely employing the latest immigrants and paid very low wages. That is why both industries suffered through a tremendous amount of conflict over attempts to unionize during that century. By the mid-20th century, with the success of labor organizing, these industries began to pay good wages and they became places where young workers wanted to work. It should be obvious to everyone that if, by some turn of events, the average nurse’s aide in a nursing home, the average dishwasher in a restaurant and the average worker in a laundry were to receive $15 to $20 an hour, American citizens would be flocking to those jobs.

I would like to make a novel proposal. If we really believe there are lots of jobs that Americans won’t do and that we have an absolute shortage of citizen or legal immigrant labor in our country, then let’s make two major changes. Let’s raise our immigration quotas dramatically (starting with legalizing all individuals who can prove they have been working in the United States for five years) and at the same time, raise the national minimum wage to $10 an hour.[4]

Crazy idea, you say? Let me remind everyone that if we just were accounting for inflation and raised the minimum wage today to the same level in purchasing power as it had been in 1968 (when it reached its post World War II maximum), the minimum wage today would have to be $7.44 an hour.5] Since 1968, worker productivity in the United States has basically doubled.[6] Even a $10 an hour minimum wage is a lower cost per unit of output in 1968 for the average employer paying minimum wage.[7] Were American businesses in deep trouble in 1968? No they weren’t. Corporate profits were 10.86% of GDP and the “business failure rate” was actually quite low.[8] In other words, a minimum wage that was the equivalent of $7.44 in today’s dollars coupled with labor productivity that was significantly lower than it is now was not harming American business. [9]

With a $10 an hour minimum wage, immigrant workers would have to compete with American workers for those jobs, but if American workers truly didn’t want to take them, then the immigrants would, along with the higher incomes. Why don’t we make these policy changes? In part because there are powerful interests who like the fact that there is a large and growing group of people in the US who are so desperate that they are willing to work for much lower wages than is customary and necessary for a decent standard of living. This is a trend we should definitely fight against, but not by the punitive “build a fence, keep ‘em out, catch ‘em and deport ‘em” approach which has already proven impossible to enforce. My alternative approach which recognizes the dignity of all workers, immigrant and native is far superior.

[1] In the face of President Bush’s recommendation that Congress adopt an “guest worker” program, there have been conflicting bills in the two houses of Congress. The House of Representatives has actually passed one with an emphasis on punitive efforts to stop illegal immigration and make life more difficult for those that are here. The compromise Senate proposal that appears to be in trouble seems aimed at creating a path to permanent residence and citizenship for many people currently here and working illegally. These two alternative approaches represent the fact that we as a nation appear terribly conflicted about the issue of immigration. We know that our country is a nation of immigrants that has been enriched, and become rich because of the great waves of immigration that have come to the Western hemisphere – both the voluntary and the involuntary immigration (better known as the slave trade). At the same time, there is a sneaking suspicion among many that the current rate of immigration of people not following the rules set out by our immigration laws is a danger to our long run economic and even societal health

[2] We call these lesser developed countries, underdeveloped countries or sometimes just POOR countries – though it’s important to note that even in the poorest of countries there are some very rich people.

[3] The Immigration and Naturalization Service estimated from the 2000 census data that there were approximately 7 million immigrants in this country illegally, but most commentators today are using a figure closer to 12 million for their estimates. See “Estimates of Unauthorized Immigrant Population Residing in the US: 1990-2000. You can find an executive summary of this document as well as a link to that document at http://uscis.gov/graphics/shared/statistics/illegals.htm.

[4] This won’t just affect minimum wage workers. One of the things that occurs when the minimum wage is raised, is that individuals who previously made just a bit more than the minimum wage would also get raises. Thus, people who were making $10 an hour would probably find themselves making, say, $12 an hour. I am indebted to my colleague John Anzalotti, Professor of History at Western New England College for making this suggestion and inspiring me to explore it and its possibilities.

[5] For a table of the real and nominal values of the Federal Minimum Wage, check www.epinet.org and go to the menu on the left identifying their minimum wage research and click on Table 5, The Real Value of the Minimum Wage, 1947-2005.

[6] See Economic Report of the President, 2006: 340. The index of output per hour of labor for the nonfarm business sector went from 66.9 in 1968 to 136.8 in the third quarter of 2005.

[7] This is a little complicated but in the end rather easy to understand. An employer is interested in earning profit on the items produced. Leaving out all sorts of fixed costs, the labor cost of producing a unit depends both on the wage per hour AND on the number of units produced during that hour (the labor productivity). If in 1968, a worker earning $7.44 an hour produced 10 units of some item in an hour, then the unit labor cost of the item would be 74.4 cents. If that minimum wage worker were to improve her/his productivity at the same rate as the national average, then today that worker would produce 20 units in an hour for a unit labor cost of 37.2 cents. A raise to $10 an hour would represent a 50% raise over $7.44 which would raise the unit labor costs to somewhere around 54.2 cents – not even as high as it was back in 1968.

[8] For corporate profits as a percentage of GDP see Economic Report of the President, 2006: 312, 313. For comparison’s sake, in 2004, a quite good year for corporate profits, they represented 10.33% of GDP. For the Business Failure Rate, see Economic Report of the President, 2004: 395. After peaking at 64 per 100,000 enterprises in 1961 at the height of the previous recession it had fallen to 39 in 1968 and continued to fall in 1969 despite the rise in the minimum wage in 1968. The business failure rate is a good measure of how difficult it is for small businesses to stay in operation. Most business failures are in the small business sector.

[9] And, in general, American workers were doing quite well in terms of increases in their incomes and their general standard of living. A much higher proportion of the work force was covered by union contracts, had defined benefit pension plans and significant job security.

A PROPOSAL RE HEALTH CARE.

2006-05-15T11:45:00.000-07:00

The Following Commentary was Delivered by Professor Michael Meeropol over WAMC radio in March of 2006.

HOW DO WE DEAL WITH THE ISSUE OF HEALTH CARE?

Experts predict that by 2015 one dollar in every five spent in the United States will be spent on Health Care.[1] We know that other countries pay less of their GDP for their health expenditures and they get better health outcomes.[2] The important question is, why? Why do we in the US spend so much on health care.

One possible rather positive reason is that we voluntarily buy a much higher quality of care than the rest of the world.[3] However, in fact we as individuals do not really buy our own health care. Our insurance providers guide us to our consumption of health services by covering some treatments and not others. Our medical professionals determine what treatments are advisable for us.

Medical cost inflation is a fact of life in the US because the providers of medical services control the information about their products.[4] As lay consumers we cannot make ourselves expert about relative costs and effectiveness of medical procedures or medical professionals.

Those who believe in the cure-all capabilities of the market argue that the solution is to make more information available to patient-consumers and give them more direct control over how their money is spent. (This is the idea behind Health Savings Accounts). Today, when you go to the doctor or a hospital, your insurance company or the government pays. You only pay indirectly. According to free marketers, if you considered how much it was going to cost to see the doctor or go to the hospital you would become an intelligent consumer just as you are when buying a car, a house, or a vacation trip.

This approach is a recipe for disaster. If everyone were responsible for making their own health care decisions, what would happen when people make the wrong decisions and find themselves very sick with no way to pay for it? We would be back in the days of “charity hospitals” and doctors treating some percentage of their patients for free. Just as “charity” was not a viable solution for the unemployed during the Great Depression and for those forced to work past the age of 65 before the advent of Social Security, “charity” is not a good solution to the current Health Care mess. And charity is a necessary component when you pay for necessities by relying on the magic of the market to deliver. Market-based delivery depends on the ability of the patient-consumer to actually pay.

Is there an alternative? I believe there is. Health care would be best delivered as a form of social insurance. What is social insurance? It is a system where everyone insures everyone else against potentially serious costs associated with sustaining life. Social security already insures the entire working population against outliving their savings (that’s the pension) or becoming disabled or unemployed. It also insures retirees through Medicare. What it doesn’t do is extend that insurance to the entire population, which is why medical cost inflation is so much higher in the US than elsewhere. Though Medicare strives mightily to contain the costs of the procedures it subsidizes, hospitals, nursing homes and other medical facilities are able to raise prices charged to insurance companies who then of course raise premiums charged to employers.

If we were to re-organize our system in conformity with social insurance principles, then the system could be integrated institutionally (at either the federal or state level). It would be much easier to contain costs. The basic principle of social insurance is – we all pay to guarantee health care to everyone who gets sick. When a healthy person gets sick, he or she gets to dip into the revenue stream being contributed by fellow citizens. If you “lose” by never getting to spend any of that money because you never get cancer or need a heart transplant, you WIN by being healthy. Those who must have recourse to the insurance fund can rest easy knowing their needs will be met without bankrupting them and their families

MY SOLUTION: Extend Medicare to the entire population. Social insurance is the answer to our health care crisis.

[1] See Health Spending Projections Through 2015: Changes On The Horizon
Christine Borger 1*, Sheila Smith , Christopher Truffer , Sean Keehan , Andrea Sisko , John Poisal , M. Kent Clemens in HEALTH AFFAIRS, THE POLICY JOURNAL OF THE HEALTH SPHERE, 10.1377/hlthaff.25.w61 (Feb 22, 2006) available on the web at www.healthaffairs.org.

[2] According to the Organization for Economic Cooperation and Development (the OECD) which is comprised of all of the advanced countries in the world, the US spent 15% of its GDP on health care expenditures in 2003 (the journal Health Affairs puts that percentage at 16% for 2005). The countries that came closest to the US were Germany at 11.1% and Switzerland at 11.5%. Countries that have particularly generous government health care programs like Norway and Iceland were over 10% of GDP but the country we often are compared to, Canada, because they have a private system with government acting as a “single-payer” rather than a nationalized system like Great Britain, had a ratio of 9.9% of GDP and that ratio had been unchanged since 1993 (whereas the US percentage had grown from 13.2%). See Health Spending and Resources: OECD in Figures – 2005 Edition – ISBN 926401 3059. This is available on the web at www.oecd.org. Once at the home page click on statistics, once on that page, click on Health. At 79.9 in 2003, US life expectancy was lower than that of EVERY advanced European country and Canada, despite their lower rate of expenditure AND their lower total GDP as well. Our infant mortality rate at 7 per 1000 live births was higher than that of every advanced European country and Canada – in most cases two percentage points higher. Both statistics are also from the OECD.

[3] We are richer than the rest of the world and thus can choose how to spend that discretionary income. We choose to buy very high quality, quite expensive health care to, for example, prolong life with high quality treatments for cancer, emphysema, etc. We use the most advanced surgical techniques to save lives and prolong lives. We, in other words, are choosing to spend this money – we are voluntarily allocating a higher percentage of our national income to health care than do our not-so-rich fellow members of the OECD (France, United Kingdom, Canada, etc.).

[4] Medical Cost inflation is measured by the Bureau of Labor Statistics as one of the components of the Consumer Price Index. It is neatly collected in Table B-64 of the Economic Report of the President. From 1990-1993, medical cost inflation was twice the rate of inflation in the general consumer price index (CPI). In 1994 and 95, medical cost inflation was two percentage points higher than the inflation in the CPI. In 1996, in the wake of intense pressure from insurance companies to move more people into managed care plans, the rate of medical inflation was 3.5% while overall inflation was 3.3%. In the next two years as overall inflation fell below 2% medical cost inflation was a bit more than one percentage point higher. Since then, medical cost inflation has risen, reaching 4.7% in 2002. From 2001 through 2003, medical cost inflation was twice the rate of overall inflation and has remained over 4% (1.7 and 1.8% higher than overall inflation) for 2004 and 2005.

ADVERTISING AND FAST FOOD, WHAT SHOULD WE DO?

2006-05-15T11:41:00.000-07:00

The Following Commentary was delivered by Professor Michael Meeropol over WAMC radio in February of 2006:

Advertising and Fast Food: What should we do?

I recently saw the movie Supersize Me. In it, a 30-something man decides to eat his three meals a day at McDonalds for 30 days. He gained 25 pounds, his blood pressure and cholesterol rose dramatically and his liver was seriously affected. After 22 days, his doctors told him to stop but he persisted for the full period.[1]

The film contains interviews with experts, spokespeople for the food and beverage industries, workers at fast food restaurants and public school cafeterias, persons on the street and medical personnel. At various points during the movie, we see segments of a press conference featuring the Secretary of Health and Human Services talking about increased obesity and the dangers of the rising incidence in Type 2 Diabetes.[2]

This movie intersects with economics when it examines the role of advertising as it habituates children and young people into accepting fast food consumption as normal.
McDonalds and other fast food restaurants whose food selections are heavily laden with fat and sugar (even their salads are unless you eat them without the dressings) spend hundreds of billions of dollars while advertising spending that promotes nutritional eating is in single-digit billions.[3]

According to economics textbooks advertising is a tool used by companies to compete for customers. Some advertising is informative but the goal of much advertising is to merely remind the viewer that the product is available. The general consensus within the economics profession is that advertising cannot make anyone buy a particular product. Economists argue that McDonalds, Burger King and Wendys’ advertising merely cancels itself out.[4]

A counter-argument is that the sum total of all such advertising persuades us to alter our consumption patterns – creating wants where none existed. If this is true, it makes a mockery of the economics profession’s view that the economic process is governed by what is called consumer sovereignty. If advertising can actually create wants, then in fact there is producer sovereignty.[5]

A most dramatic example of creation of wants occurred in the 1920s when public relations expert Edward Bernays developed a strategy to promote smoking among women. The tobacco companies were looking to expand their potential market to the entire population and it was Bernays’ genius that he figured out ways to create an advertising campaign that significantly increased the percentage of women who smoked. For example, Lucky Strikes were created specifically for women and touted as part of a weight reduction regimen.[6]

Today we see rising obesity and the potential for a serious epidemic of type 2 Diabetes directly linked to increases in the percentage of our meals consumed at fast food restaurants. In Supersize Me, even the spokesperson for the food and beverage industry’s trade association admits that it is “part of the problem…” [He had lost that job by the time the film was released.]
If those who see advertising as capable of creating wants (even for things that are downright harmful) are correct, then there is only one remedy, one that economists don’t particularly like but which is probably the only solution: government regulation.

For starters (and this example is presented in the film) all public schools could ban soft drink vending machines and demand that all school lunch contracts be given to companies that prepare lunches on site with emphasis on fresh vegetables and fruits.[7] If we truly want to take this seriously we should ban all fast food advertising from television and radio just as we banned cigarette advertising many years ago.[8]

It’s a matter of life and health – and the costs will be paid by all of us as taxpayers if we don’t take preventive measures now.

[1] Supersize Me, (2004) directed by Morgan Spurlock is available for rental from Netflix and no doubt other DVD rental companies as well as from many libraries. The doctor actually begins to plead with Mr. Spurlock that he is doing much more damage to his liver in a much shorter time period than he (the doctor) ever would have imagined. The doctor argues that his liver is betraying the evidence of alcohol abuse.

[2] Dr. Francine Kaufman has written a book called Diabesity: The Obesity-Diabetes Epidemic That Threatens America—And What We Must Do to Stop It (Random House, 2005 – also available as a Bantam Paperback, January 2006). “Experts now predict that more than one-third of American children born in 2000 will develop diabetes in their lifetime. Once a disease of the elderly, type 2 diabetes now strikes adults in their prime–and, increasingly, children. It has nearly doubled in the last decade. The cause? Our soaring rates of obesity.” (from a review at RandomHouse.com).

[3]The actual numbers are in the film but I didn’t write them down. I remember a ratio of something like $200 billion to $2 billion.

[4]To take just one example, Campbell McConnell and Stanley Brue, Microeconomics, Principles, Problems and Policies, (Boston: Irwin/McGraw Hill, 1999) provides a typical “on the one hand,….on the other hand….” discussion of the two sides of the advertising debate (the kind of discussion that led former President Harry Truman to demand a “one handed economist” so he could get a straight answer to his policy questions). “Consumers need information about product characteristics and prices to make ration (efficient decisions). Advertising can be a low-cost means of providing that information … advertising is frequently associated with the introduction of new products designed to compete with existing brands … Viewed this way, advertising is an efficiency-enhancing activity.” P. 254-5. But, they go on to say, “…advertising is sometimes based on misleading and extravagant claims that confuse consumers rather than enlighten them … in some cases advertising may well persuade consumers to pay high prices for much-acclaimed but inferior products … Firms often establish substantial brand-name loyalty and thus monopoly power via their advertising …” (255). Finally, the book concludes that advertising may be self-canceling raising costs but not increasing consumption. Paul Krugman and Robin Wells in their work Microeconomics (NY: Worth Publisher, 2005) argue that “… ads can serve as indirect ‘signals’ in a world where consumers don’t have good information about products. … ads feature celebrities [because] … the fact that the … manufacturer is willing and able to pay her fee tells you that it is a major company that is likely to stand behind its product. According to this reasoning, an expensive advertisement serves to establish the quality of a firm’s products in the eyes of consumers.” (401).

[5]On consumer sovereignty see any Principles of Economics textbook. The McConnell/Brue book alluded to in note 4 defines it as: “Determination by consumers of the types and quantities of goods and services which will be produced with the scarce resources of the economy; consumer direction of production through dollar votes.” (G-3,4) The idea of “dollar votes” is that whenever a consumer buys something the dollars she/he spends on it constitutes a “vote” with producers and potential producers guiding them with positive reinforcement to produce more of that good. The idea that producers can actually “produce” customers dates back at least to the work of Thorstein Veblen. (See his The Theory of Business Enterprise [1904]). It finds excellent expression in the work of John Kenneth Galbraith. “The consumer is not sovereign if he or she is subordinate, or partly subordinate, to the will of the producer. … “Economics and the Public Purpose (Boston: Houghton Mifflin, 1973): 134. He goes on to detail the variety of ways that large industrial concerns in the US “manage” consumption both by government (military, other contracts) and by consumers. IN the latter case he notes that far from canceling itself out, advertising by competitors say in the auto industry, the beer industry and, yes, the fast food industry combines to develop a generalized view that this product in general is important: “... the aggregate of all such persuasion affirms in the most powerful possible manner that happiness is the result of the possession and use of goods and that, pro tanto, happiness will be enhanced in proportion as more goods are produced and consumer.” (140) As to the argument that advertising cancels itself out, Galbraith retorts: “Were this the case, steps would long ago have been taken to limit advertising outlays by common agreement.” (141).

[6]Edward Bernays is known for his long service in public relations (which actually was officially called “propaganda” until World War II gave that word a bad connotation because of its association with Nazi misinformation) having begun his career in Woodrow Wilson’s war cabinet and concluded it late in the 20th century. In 1928, he was recruited by the American Tobacco Company to help them increase the number of women who smoked. The green Lucky Strike package initially clashed with the clothes women were wearing so Bernays sponsored several high society events in New York City featuring green colored themes. “[He] arranged for women’s society elite to smoke Lucky Strikes in the New York City Easter Parade of 1929.” (“A Primer on Women and Tobacco: The Leading American Epidemic” Jamie P. Morano, (American Medical Student Association, Reston, VA) available at www.amsa.org/pdf/womentobaccoprimer.pdf): 4.

[7]The film presents a contrast between what we are led to believe is a “typical” high school lunchroom where there is lots of fried food available – in fact some students are seen taking nothing but French fries – with the lunch room in an Appleton, Wisconsin school which contracts with a healthy meals firm that serves no meat whatsoever and prepares every meal fresh that day emphasizing fruits and vegetables. The film notes that the cost per meal is virtually the same as the more mass produced often pre-prepared and flash frozen meals at more traditional schools. No data is presented on how many schools make a concerted effort to ban high fat, high sugar content food but it would definitely be a useful first step for State Legislatures to ban them all outright. If families want their kids to eat junk food, let them do it on their own time and their own dime. A number of state governments have taken a good step forward by making sure that all vending machines in pulbic schools dispense only juices and water and athletic drinks (with electrolytes) not soft drinks, but they could obviously go a lot further.

[8]Please note: If the economists are right that much of that advertising cancels itself out, then there actually will be no harm done to the companies at all from such a ban. However, if the opponents are correct, that all this fast food advertising habituates generation after generation to wanting and expecting to eat this food on a regular basis, then banning the advertising will be a useful part of a comprehensive program (that will need to include lots of counter-advertising just as in the anti-smoking campaigns) to begin the process of reversing the rise in obesity among our youth with the subsequent danger of a type 2 Diabetes epidemic.

IS THE SUCCESS OF MAJOR CORPORATIONS THE KEY TO SUCCESS FOR THE US ECONOMY?

2006-05-11T10:26:00.000-07:00

THIS COMMENTARY WAS DELIVERED OVER WAMC RADIO BY PROFESSOR MICHAEL MEEROPOL in JANUARY of 2006.

Back in the 1950s Charles Wilson, head of General Motors (also President Eisenhower’s Secretary of Defense) was quoted as saying”What’s good for General Motors is good for America.”

Often ridiculed for displaying such corporate self-centeredness, Mr. Wilson was misquoted. What he actually said was. “What’s good for the country is good for General Motors and vice versa.”[1]

His point was that GM, which made most of its income selling to Americans while employing American workers (remember we’re talking the early1950s), depended for its success on the health of the American economy. He added “vice versa” to demonstrate that a healthy GM helps create a healthy US economy. If GM made profits, invested in new plant and equipment, hired more workers, and paid them well that was good for the American economy as a whole.

This prompts a question. Is it true that the profitability and success of major American corporations is the key to the health and success of the US economy?[2]

Between 1945 and 1973 the answer was yes. As President Kennedy put it, “a rising tide lifts all boats.” This understanding of how the world works led and indeed still leads to support for tax cuts to encourage savings and investment – much of the benefit of which goes to the people likely to have high enough incomes to save and invest.[3]

Unfortunately, since 1973 things have been very different. Economic growth has been slower and the benefits of that growth have been much more unequally shared.[4] The industrial corporations of the 1950s and 60s within which workers anticipated good wages and benefits for their entire working lives with the probability that their children would be able to do the same NOW employ a much smaller fraction of the work force.[5]

Today, Wal-Mart is the nation’s biggest employer -- its average wages are lower in real terms than the wages of industrial workers in the 60s.[6] Except for a brief blip upwards in the late 1990s, the typical worker’s hourly wage has fallen in purchasing power over the past 25 years.
Meanwhile, job security exists for very few workers.

Let’s revise Mr. Wilson’s statement. How about “what’s good for average wage earners is good for America AND VICE VERSA”?

Why is the economic health of the American worker good for America?

First and foremost -- American businesses profit from the consumption spending of American citizens, the vast majority of whom work for a living and earn most of their incomes from wages and salaries. When American workers’ wages are not rising it is difficult for them to consume more.[7] Also, productivity depends on more than the machines that businesses buy. The workers’ knowledge, care and commitment to doing the job well are crucial for the successful introduction of new technology into the work place. Thus, economic growth has often been fostered not by new equipment but by increasing the capability of workers – “getting better” at what they are doing.

Clearly, “getting better” only happens if the workers want it to happen…and that requires that they be RELATIVELY CONTENTED on their jobs. It is this last point that strongly supports the idea that the key to American economic health is the economic health of American workers. When wage earners do well, we all do well, when they don’t, we’re all in trouble.

Since 1973, the economy as a whole has grown sluggishly.[8] While corporate America’s bottom line has done quite well, the rest of us are not doing so well – especially American wage workers.
I believe corporate profits will not cause President Kennedy’s tide to rise anymore. Instead, rising wages will be necessary to lift all boats.

[1] In fact the full statement was, “I’ve always thought that what’s good for the country is good for General Motors, and vice versa.” It was the “vice versa” part which of course means “What’s good for General Motors is good for the country” that got quoted. Clearly from context, Mr. Wilson was emphasizing the importance for General Motors of a healthy American economy in general. Here is the entry from “Charles E. Wilson” available on www.nndb.com/people/098/000057924: “He [Wilson] was still head of General Motors when President Eisenhower selected him as secretary of defense in January 1953.
Wilson's nomination sparked a major controversy during his confirmation hearings before the Senate Armed Services Committee, specifically over his large stockholdings in General Motors. Reluctant to sell the stock, valued at more than $2.5 million, Wilson agreed to do so under committee pressure. During the hearings, when asked if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa." Later this statement was often garbled when quoted, suggesting that Wilson had said simply, "What's good for General Motors is good for the country."

[2] On one level it appears obvious. Our economy grows as a result of improvements in the productivity of our work force and much of that productivity depends on businesses investing in new technology. Though they do this to increase their profits, economists assert that the result benefits all of us. The new technology reduces costs and thus businesses charge us less. At the same time, as the reduced costs increase their potential profit margins, they can also afford to raise their workers’ wages. In fact, this is a story that accurately describes the US economy between World War II and approximately 1973.

Those years of successful American corporations and a rising standard of living for average Americans resulted in the creation of the great working American middle class. Steel workers, auto workers, miners, police officers, firefighters, teachers, even retail and clerical workers all shared in the rising incomes that were generated by rising productivity – and of course corporate America did very well. “[S]tarting in 1953, median family income doubled.” J. Madrick “The Way to a Fair Deal” The New York Review of Books, Jan 12, 2006: 37. Average hourly wages corrected for inflation peaked in 1972 and 1973 at $8.99 in 1982 dollars and fell to $7.52 in real terms in 1994. After that, average hourly wages rose but were still only $8.29 in 2003. (Economic Report of the President, 2004: 340). For some data covering 1960 through 1979, see Surrender (Meeropol): 26-27. Median income identifies the typical income-receiver because half the population makes more while the other half makes less. The “average” income is not typical because it is pulled upwards when there is unequal distribution of income and a small percentage of the population has very high incomes. Thus, the data on “average” wages overstates what was happening to the typical wage earner.

[3]Until about 1970, tax cutting was focused for the most part on putting more income into the hands of consumers so they would spend more, thereby raising total income. You can see this argument developed in the justifications of President Kennedy’s Council of Economic Advisers in 1962 and 63 for what was passed in 1964 as the “Kennedy” tax cut (even though Lyndon Johnson was President at the time). However, even as early as 1962, there was a targeted tax cut which reduced taxes on all businesses that invested in new equipment. This benefit, called the investment tax credit, actually existed in one form or another until 1986. Beginning in 1978, there was an explicit emphasis on using tax cuts to stimulate savings and investment. In addition to stimulating aggregate demand by putting more money into people’s pockets, these tax cuts were supposed to stimulate increased “aggregate supply” by improving incentives to in the words of their supporters “work, save and invest.” This type of tax cut was exemplified by the Economic Recovery Tax Act passed in the first year of the Reagan Administration and has been the basis of all the tax cuts passed under the current Bush administration. It is important to understand that one result of such an emphasis is that the benefits of the tax cuts accrue disproportionately to those with the highest incomes. A most obvious example is the Bush Administration’s successful push to abolish the Estate Tax which is only paid by the top 2% of all estates. One can make similar (though not as stark) judgments about the effort to abolish taxes on dividends and increase preferences for income derived from the sale of existing assets (capital gains). On the Reagan tax cut and its underlying philosophy, see Surrender (Meeropol): 46-48, 79-81. On the Bush tax cuts, see Robert Pollin Contours of Descent (NY: Verso, 2003): 94-102. For a comprehensive treatment, see C. Eugene Steuerle, Contemporary U. S. Tax Policy. (Washington: Urban Institute Press, 2004).

[4] For details of the difference between the period before 1973 and after, check out Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 58-76.

[5] Total employment in manufacturing peaked in 1979 at 19.4 million workers which represented 21.6% of the total non-agricultural labor force. In 2000 at the peak of the last business cycle, manufacturing employment had fallen to 17.3 million which represented only 13.1% of the non-agricultural labor force. See Economic Report of the President, 2004: 338.

[6] Though there is dispute as to how much the “typical” Wal-Mart “associate” earns, a figure close to $8.50 has been mentioned in some of the “pro” Wal-Mart literature. Let’s grant that Wal-Mart wages were approximately $9 an hour in 2003. This gives us an excellent basis for comparison. Even in 1947, real average hourly earnings (in 2003 dollars so they compare with the hypothetical Wal-Mart wage in that same year) for the entire economy were at $8.47 an hour. By 1967, they had jumped to $13.30 an hour and despite falling from 1973 to 1995, were still at $13.95 an hour in the latter year. (Data from Lawrence Michel, Jared Bernstein and Sylvia Allegretto, The State of Working America, 2004/2005 An Economic Policy Institute Book (Ithaca, NY: ILR Press, an imprint of Cornell University Press, 2005): 119.) Clearly as Wal-Mart becomes a more significant employer, its lower wages act to bring down the average wage.

[7] Note I said difficult. In fact it is not impossible for their consumption to rise because of a number of things that workers can do if their hourly wages do not rise. First, they can put in more hours. As documented over a decade ago by Juliet Schor in The Overworked American (NY: Basic Books, 1992), the average number of hours worked per year by American workers had risen from the 1940s through the 1980s. Second, they can send more family members out into the work force. This is the well known transformation of the 1950s American family with a stay at home mom into the two earner family of the 1970s and since. Finally, they can borrow to spend. The amount of personal credit taken on by Americans in the past 20 years has been increasing. In 1973, combining consumer and real estate credit Americans borrowed $217.4 billion and that was almost 20% of personal income (15.7% of GDP). By 2000, that borrowing had reached $2.2 trillion which was a bit over 26% of personal income (22.3% of GDP). Note this is for the entire economy so one can imagine that the middle class was borrowing much higher percentages of their incomes. Every so often the experts tell us that a LIMIT has been reached and Americans cannot continue to borrow an even higher percentage of their incomes. So far it hasn’t happened and the recent bubble in housing prices has given more and more middle class Americans greater opportunities to borrow to expand their consumption. However, even though we don’t know what that limit is, there definitely is some kind of limit. (In this context the rise in personal bankruptcies and the “reform” of bankruptcy law to make it more difficult for individuals to protect themselves is significant.)

[8] For details, see Madrick’s article in the New York Review of Books.

The Conservative Nanny State

2006-05-11T10:19:00.000-07:00

THIS COMMENT IS POSTED BY PROFESSOR MIKE MEEROPOL RECOMMENDING THE READING OF THE E-BOOK, THE CONSERVATIVE NANNY STATE, BY DEAN BAKER

In discussions among Economics students and faculty here at Western New England College we have often found ourselves arguing about the appropriate level of government intervention into the economy. The argument is often framed as “freedom” vs. “government intervention” where freedom involves the “natural” functioning of the market constrained only by competition subject to the “dollar votes “ of consumers and business firms as they offer to purchase factors of production or products.

Every Fall, Western New England College hosts a conference where people from the Foundation for Economic Education, a libertarian educational foundation, come to the college to debate the proposition that free markets with virtually no government intervention produce better results that all versions of market intervention from the modern welfare state to the centrally planned economies of the Soviet Union and its allies. These debates have been very fruitful and have carried over to many discussions both in class and on our Economics Club Manhattan Classroom.

I make this introduction because I am posting a link here to a new intervention into the argument. Economist Dean Baker from the Washington, DC based Center for Economic Policy Research has just published an e-book (that means it’s free on line) entitled THE CONSERVATIVE NANNY STATE. He argues that in the realm of reality rather than the theoretical role of our discussions, the arguments in favor of the “free market” vs. the “intrusive government” are not in fact what so-called conservatives are arguing about with so-called liberals. Instead, according to Baker, the conservatives want one kind of government intervention (one that favors those with property, high incomes and power) while the liberals (sometimes) favor another kind of government intervention (one that levels the playing field somewhat by curbing the power, high incomes and wealth of those who already have a lot of them). Baker argues that the modern conservative movement favors lots of government intervention – protection of copyrights and patents, even across international borders, freedom for high-income professionals from international competition, activities by the FED to make sure unemployment doesn’t get too low so wages don’t get too high, etc.

These chapters are quite provocative and quite readable. I recommend them highly.