Monday, September 5, 2011

Were we in paradise, but failed to realize it?

Progressives have a narrative that just won't quit, even when the facts contradict them. Whether it is Paul Krugman or Robert Reich or an editorial writer of the New York Times, the narrative goes like this: From the New Deal to 1981, America was a virtuous, prosperous country that flourished on unionized industries and high tax rates, with many key industries heavily regulated by government.

The economy was in perpetual motion, jobs were easy to find, and life was good. Then the ideologues somehow managed to convince prosperous Americans that they really were bad off and that perhaps we needed to change the tax rates and regulatory structure. That was the beginning of the end, and from 1981, the economy continually spiraled into Hell, with a brief respite coming in the Bill Clinton administration, with the economy booming because the top tax rates were raised from 33 percent to 39.6 percent.

Alas, the Evil People took over in 2001, after stealing the presidential election, and the proceeded to lower the top rates from 39.6 percent to 35 percent, and that caused the economy to collapse, first in 2001, and then in 2008, and now it is tanking further because the Evil People don't want high rates of inflation and are against raising the top tax rates to 70 percent.

Thus, if one receives a steady diet of the NYT, the solution to our problems is as follows:
  • Raise the top income tax rates at least to 40 percent and preferably back to 70 percent;
  • Unionize all American industries, and if workers don't want a union, force one on them, anyway;
  • Get the Federal Reserve System to manipulate the monetary transmissions until the rate of inflation reaches at least 6 to 8 percent, with goals of pushing it into double-digits;
  •  Create more highway-building schemes with the hopes that middle-class people will be employed, which will enable them to get more money, which means they can spend us into that "virtuous circle" of job creation.
Lest anyone think I am kidding, read the latest op-ed in the NYT from Robert Reich, the former U.S. Labor Secretary and full-time crank. Declares Reich:
Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs.
Yes, ladies and gentlemen, blame cutting tax rates and...Steven Jobs. That's right, read what Reich says. He actually blames the entrepreneurs for increasing wealth through new capital.

So, it seems that economically speaking, we have come full circle. The Golden Age of which Reich speaks was one in which post-World War II, the USA had the capital advantages, but as other countries began to rebuild their economies, like Japan, and also adopt superior capital and production methods, the U.S. advantage began to wane.

The big warning should have been the currency crisis of 1971, but notice that people like Reich consider this to have been a triumph, since the 1970s was a decade of inflation, and Reich and his fellow Keynesians are champions of destroying the value of money. An economy, in their view, is nothing more than a big circle in which people spend and spending creates jobs and jobs allow us to spend, and the circle continues.

So, if all it takes is spending, I have a better idea, one that I am sure that Reich, Krugman, and the NYT would support: Just give everyone lots of money. Don't worry about jobs at all. Just give people money, and since production is automatic, the goods will be there as long as the government puts money into the hands of everyone.

Such a scheme should not be difficult, and we need not worry about the costly monetary transmission mechanism of "the job." Why bother when all that is needed is more spending?

So, why don't we see Reich, Krugman, and others promoting this scheme? After all, it is consistent with what they are demanding whenever they take to print or the airwaves. I mean, jobs are dangerous, bosses can be mean, and they are so, so unnecessary when all that is needed is spending.

And please don't pull a "work ethic" line on me. Progressives for years have denigrated the world of work, speaking of "dead-end-jobs" and accusing employers and business owners of exploitation of workers -- and worse. Krugman, Reich, and the NYT editorial writers and other Progressives see "jobs" mainly as transmission devices for providing incomes to the middle class, so that those people can spend us back into prosperity.

Apparently, that is what they wanted us to believe was the case in post-war America. The government taxed the rich at very high rates, unions forced up wages, and people spent like crazy, creating Reich's "virtuous circle." As one who was working in the late 1970s, I don't remember the U.S. economy being in the great shape that Krugman and Reich claim it was.

Furthermore, for all of the talk about ideology and deregulation, it was the liberal Democrats like Ted Kennedy, Jimmy Carter, and Alfred Kahn that were at the forefront of those initiatives. However, that narrative doesn't fit the current set of false facts, so like everything else, it must be shoved into the Orwellian Memory Hole so that Americans can be told by Progressives that giving the state more regulatory powers, high tax rates, and lots of inflation will bring back prosperity.

18 comments:

Dr Mohammed Ali Khan said...

Keynesians repeat a mantra that WW2 "cured" the great depression. But they ignore the fact that during WW2 the government concentrated more on production and less on regulation.

They wanted 100 tanks and planes and did not care whether all their regulations were followed to the letter. They let employers decide how and whom they can recruit, at what pay and at what terms. They were no federal agents raiding companies because they sourced the metal for the tanks and planes by violating some obscure environmental law.

LK said...

"That was the beginning of the end, and from 1981, the economy continually spiraled into Hell, with a brief respite coming in the Bill Clinton administration,"

A laughable caricature - it is well known and admitted by any number of progressive and Keynesian economists that the US had a strong recovery under Reagan from 1982, but this was engineered by Reagan's military Keynesianism:

http://socialdemocracy21stcentury.blogspot.com/2011/02/reaganomics-analysis.html

"Apparently, that is what they wanted us to believe was the case in post-war America. The government taxed the rich at very high rates, unions forced up wages, and people spent like crazy, creating Reich's "virtuous circle." As one who was working in the late 1970s, I don't remember the U.S. economy being in the great shape that Krugman and Reich claim it was.

A stupid rhetorical trick - the classic era of Keynesianism from 1945-1973 is NOT the late 1970s.

"Furthermore, for all of the talk about ideology and deregulation, it was the liberal Democrats like Ted Kennedy, Jimmy Carter, and Alfred Kahn that were at the forefront of those initiatives."

Correct - and well known:

http://economicsisfordonkeys.blogspot.com/2011/02/before-ronnie-there-was-jimmy.html

Rick said...

Hey Lord

Is there an event or policy or something in 1973 that marks the end of this classic era of Keynesianism?

Anonymous said...

Rick, LK's basic rules:

1) Find some remarks from autrians. If you find something that is not "Keynes is the devil", then Keynes was right.
2) Think of the government is a bunch of dust fairies with supreme knowledge. They make the right decisions about a whole country because, well, they are dust fairies, not human beings.
3) The market is composed by a bunch of morons that don't know any better than the LK's Dust Fairies (Gods) from the State. Heck, it's very difficult for an enterprenur to know what, when and how to produce goods. The state, on the other hand, can make the right decicions, because of rule #4.
4) The world is nothing but a bunch of numbers and aggregates. The State Fairies are able to calculate such numbers and make everything magically work. Don't ask how. It's magic. They aren't working, they actually never worked, but the Dust Fairies know what they're doing!

Spanish reader said...

I don't know much about economy but common sense tells me that every side is in part right.

I think what Keynes said makes sense, and that aggregates are useful. He didn't say "get into debt to the limit", he said that running some debt is useful when unemployment is high.

In relation to deficit... Of course, one has to maintain the balance over the economic cycle, save during good times and spend during bad times. That is quite logical.
Common sense tells me that the problem here is that governments have spend too much not only during bad times but also during good times. So now bad times come again and we don't have much margin to grow debt. Keynesians may say "just a little more to get out of the crisis and then we will be prudent and thrifty" but if they do and they don't mention the problem of not saving during the good times, then they are not being reasonable. They should also emphasize the need to control the government so that it does not spend too much and saves when good times come.

In relation to taxes... I also think both sides are partly right. Raising taxes and distributing income increases demand, reduces unemployment and all the costs associated to it. It makes sense to me. On the other side, nobody can assure that the Government will use money better than rich people do. We know how careless they are with other people's money. So critics of raising taxes and making the government more powerful have a very strong point here. And yet, I think that government may put money to a better use if only there were more control over it.

My conclusion is that it is not a matter of which school of thought you believe in, but in making sure that the government does things right. To this end, I think we need more transparency and more citizen participation in the system.

João Marcus said...

I think what Keynes said makes sense, and that aggregates are useful. He didn't say "get into debt to the limit", he said that running some debt is useful when unemployment is high.

The speech can be freely adapted. When is unemployment high? When the people in charge think it is. What is the limit? Oh, an arbitrary value set by the government - BTW: if the limit is always increased, it's not really a limit, is it? How much spending is enough? When the government thinks it's enough. If it's failing, it's because the spending was not enough.

Spanish reader said...

Thank you Joao Marcus.
Actually what Keynes said was "When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product". Which I think means "the cost of having someone unemployed is less than giving him work".

Calgacus said...

When is unemployment high? When the people in charge think it is. Unemployment is high when anyone is out of a job. Ordinary people should be in charge in a democracy. The unemployment rate should be zero. Austrian misunderstanding of money, their fairy tale history, is at the root of all their errors. Governments have a duty to their citizens to provide them with a job, because the monetary economy created by governments through taxation is the cause of unemployment.

Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies Reich is crazy. Wages began flattening because of policies intended to flatten them, to rob from the poor to give to the rich.

Bob Roddis said...

Neither Keynes nor any subsequent Keynesian has ever provided a well-thought-out argument, much less real evidence, for thinking stimulus would work. Keynes said that for every $1 of stimulus, we should get as much as $12 of economic growth, and at least $3. He also said that the stimulus would pay for itself out of tax revenues. But he didn't bother to offer either logic or evidence to support these claims. They were tossed out as intuitions, really no more than "hunches," and they have remained "hunches" ever since.

http://mises.org/daily/5616/Is-the-Need-for-Stimulus-Undeniable

Of course, there is nothing in fact or logic to support the idea of "stimulus" as doing anything other than inducing unsustainable and wasteful economic activity. It's primary true purpose is to pay off voting constituencies as part of the "miracle of democracy".

Anonymous said...

Robert Reich the Third.

nimrod said...

@ Bob Roddis, September 5, 2011 9:08 PM

Logic dictates that this is sometimes true, sometimes not.

Paying off welfare queens to do nothing but spend seems wasteful.

Paying for the Interstate Highway system, which created major spin off businesses, such as transportation, suburban home construction, lawn and garden products, and all the stuff people can fill their much larger residences with... seems more like an investment.

Sam said...

Post war suburbs were growing rapidly well before the Interstate Highway system was even started.

The Interstate Highway system was not even started until 1956.

nimrod said...

I stand corrected.

Without I-15 and Hoover Dam, Las Vegas would have been built in a better place.

Perhaps on Route 66?

Sam said...

I forgot there were no roads before interstates, Lake Mead is overflowing the Hoover Dam, and gambling has always been legal everywhere in the U.S.

Anonymous said...

There can be food and housing for everyone, but some do not have the money to buy it. Then the government collects taxes and puts these people to build a highway. Money is being redistributed. Some will have less luxury and others will have a minimum to live. After the highway is built, wealth seems pretty much the same, only it is better distributed and now transport costs will be a little lower, thus enhancing productivity.

The problem today is that we do have a lot of highways already, and road transport is dirty. We only have to find better things in which to invest our money.

There is too much debt and too little hope for the future. Nobody gives credit to credit anymore. And yet, there is still a future. There are many things to be done. Growth may still be negative for years, but if only we had the right picture in mind we could generate confidence, resist bad times and start investing in a better future.

Which is the right picture for the future? For me it is renewable energies, railroad, recycling, immaterial services, ethical banking, participatory democracy...

Anonymous said...

It's shortsighted to think highways would not have been created by free enterprise. Gov spending on highway projects is a miss-allocation of capital because the Gov built the highways before the market saw the need. If the need met the cost then a private company would have built the highway at a far greater efficiency than the Gov. The difference in cost is lost productivity. This lost productivity is tax on all humanity that can never be recovered.

Rami E said...

About wealth creation

'After the highway is built, wealth seems pretty much the same, only it is better distributed and now transport costs will be a little lower, thus enhancing productivity.'

Wealth is not the same. Government has just seized wealth and turned it into a highway. Granted, the highway propably serves some user's and so it must have some positive value, but is the actual value of the highway bigger or smaller than the wealth spent to create it? If it's smaller then wealth was not created but destroyed and society is now poorer than before the highway was built.

Another question is, what would have been the use of that wealth if gvt had not seized it? What investments or consumption would have taken place if gvt had not interfered? Fundamental question being: Is the gvt better at making profitable investments than private sector?

Anonymous said...

Is the government better at making profitable investments than private sector?

That is a tricky question.

If all costs and benefits were adequately represented in prices, and if market actors had all the relevant information and equal power, then no doubt the private sector would be better.

If governments acted in the public interest and government actors had all the relevant information, then no doubt government would be better.

Since none of these conditions are met, there is no straightforward answer to the question.

Markets and governments are far from perfect, but we tend to give them too much responsibility for their actual capabilities. We should rather keep them both on a tight rein.