Category Archives: economy

Awful Aughts

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Awhile back I wrote a post correcting a claim by Fred Thompson that Calvin Coolidge’s tax cuts had been good for the economy. They weren’t. But while I was researching that post I found some other remarkable parallels between the Roaring Twenties and today, an era I like to call the Awful Aughts (as in 00s).

One of those parallels is with our remarkable inability to rebuild the Gulf Coast after Hurricane Katrina. During the Coolidge Administration, the United States experienced several nasty natural calamities. Among these:

On March 18, 1925, a tornado that ripped through Missouri, Illinois and Indiana killed 689 people and devastated many small towns.

On September 18, 1926, a massive hurricane hit Florida and the Gulf Coast. The Great Miami Hurricane (this was before big storms were given people names) killed 372 people and injured more than 6,000. Almost 18,000 were left homeless, and property damage was estimated to be between $80 million and $100 million. That would be something like $2 billion today. But remember there wasn’t nearly as much developed real estate in the region as there is now.

In April 1927, floods along the Mississippi River covered 4 million acres, drowning several thousand people and leaving about 600,000 people homeless. Property damage was in the neighborhood of $300 million.

On September 29, 1927, a tornado tore through St. Louis and destroyed more than a thousand homes.

And if that wasn’t enough, in September 1928 a Category 5 hurricane roared through the Caribbean and the Bahamas, then struck Florida near Palm Beach on September 16. At least 2,500 people were killed when storm surge from Lake Okeechobee breached the dike surrounding the lake, flooding hundreds of square miles. Flood waters covered the land for several weeks, and thousands were left homeless.

As awful as these disasters were, it’s more instructive for us to see how the Coolidge Administration responded. In brief, many of the devastated areas stayed devastated for a long time. This created pockets of economic stagnation in the United States, which became a drag on the entire U.S. economy. Although the Great Depression didn’t officially begin until after the stock market crash of 1929, in actuality large parts of the United States fell into depression in 1926 and 1927.

Please note that I am not saying hurricanes and floods caused the Great Depression. Rather, what we see in the response to these disasters was part of a pattern. Calvin Coolidge believed that cutting taxes and reducing government spending was about all that government needed to do to help the economy. He did cut taxes, and unlike our current “president” he cut government spending, too, and made government regulatory policies much friendlier to business. In short, he did everything the Club for Growth might have asked. But his frugality allowed large parts of the country to rot, economically speaking, and the rot eventually helped bring the whole bleeping house down.

There were other many other drags on the economy in the 1920s, such as a crisis in agriculture. For a number of reasons I won’t go into now, food prices fell and farmers were unable to make a decent living. Millions of farm families lived in abject poverty. Calvin Coolidge himself was from a poor farm family that had suffered deprivation in the 1890s, but in spite of this Coolidge was remarkably unsympathetic. He famously said, “Well, farmers never have made money. I don’t believe we can do much about it. But of course we will have to seem to be doing something.” Whereupon he embarked on a series of tepid, cosmetic “solutions” that didn’t help farmers at all. And he vetoed all bills by Congress that might have given the farmers some relief.

Note that there was little sympathy for farmers in non-farming America. Apparently city dwellers of the time thought it was hilarious that only 10 percent of farm families had running water in their homes or owned a bathtub, which were impossible luxuries to most farmers.

But let’s get back to the disasters. The 1926 hurricane unavoidably killed what had been a booming real estate market as well as tourism in Florida. (The real estate developers were so frantic to downplay the effects of the storm that they actually hindered Red Cross efforts to raise relief funds; bad publicity, you know.) Miami Beach itself was rebuilt fairly quickly with private money, but the region became economically depressed three years before the Great Depression was supposed to have begun.

I want to look in particular at the 1927 floods. Coolidge appointed his commerce secretary, Herbert Hoover, to lead disaster relief efforts. David Greenberg wrote,

Hoover threw himself into his task, but the funds he secured were insufficient. Private philanthropy simply came up short. Public debate swirled around a strong response from Washington—in both dollars and symbolism. Coolidge resisted both. Governors, senators, and mayors asked him to visit the flood zone. “Your coming would center eyes of nation and the consequent publicity would result in securing millions of dollars additional aid for sufferers,” the governor of Mississippi wired. But Coolidge demurred. He declined requests from NBC to broadcast a nationwide radio appeal, and from humorist Will Rogers to send a telegram to be read at a benefit.

To be fair, up to that time it was not considered the federal government’s job to respond to disasters. But people read newspaper accounts of the horrible suffering caused by the floods, and then they look at the federal budget surplus made possible by Coolidge’s frugality, and they put two and two together, as it were.

But Congress had adjourned, and Coolidge declined to convene a special session to pass an emergency appropriation. Only in late 1927, when Illinois’ Frank Reid, the Republican chair of the House Flood Control Committee, held public hearings was Coolidge’s hand forced. In his December 1927 State of the Union message—they were often done in December back then—he endorsed federal flood-control measures. But he insisted that local governments and property owners bear most of the costs. Coolidge’s plan also called for spending hundreds of millions dollars less than the Senate and the House bills. Deadlock ensued. Will Rogers remarked that Coolidge was going to further postpone relief legislation in “the hope that those needing relief will perhaps have conveniently died in the meantime.”

It must not be forgotten that African Americans bore a disproportionate share of the suffering. To spare New Orleans, the levee at Caernarvon, Louisiana, was dynamited. This was to divert water from the main part of New Orleans and into St. Bernard’s Parish. According to Wikipedia,

During the disaster, 700,000 people were displaced, including 330,000 African-Americans who were moved to 154 relief camps. Over 13,000 evacuees near Greenville, Mississippi were gathered from area farms and evacuated to the crest of an unbroken levee, and stranded there for days without food or clean water, while boats arrived to evacuate white women and children. Many blacks were detained and forced to labor at gunpoint during flood relief efforts.

The flood was a factor in the Great Migration of southern blacks to norther cities. It also soured African American support for the Republican Party, for a lot of reasons that can’t directly be blamed on Coolidge. But that’s huge topic I don’t want to get into now.

Anyway, David Greenburg writes that Coolidge eventually was maneuvered into signing a federal relief bill for the flooded region in May, 1928. That was thirteen months after the flood.

To explain why this is significant, I want to go back to the earlier Coolidge post, about how Coolidge’s tax cuts really didn’t provide the healthy economic growth that conservatives claim it did. I provided this quote —

Even before 1929, signs of economic trouble had become evident. Southern California and Florida experienced frenzied real-estate speculation and then spectacular busts, with banks failing, land remaining undeveloped, and mortgages foreclosed. The highly unequal distribution of income and the prolonged depression in farm regions reduced American purchasing power. Sales of new autos and household consumer goods stagnated after 1926. [Eric Foner, Give Me Liberty: An American History (Norton, 2005), p. 800]

And the stagnation in consumer goods sales was a critical factor in bringing on the Great Depression.

Coolidge did what he thought was the right thing. He cut taxes. He cut federal spending. He refused to throw money around on what we’ve come to call “entitlement” programs. He expected the farmers and the flood and storm survivors to get along without federal government help. He was a good conservative, in other words. And he and Hoover just about flushed the whole country down the toilet.

And I thought of this yesterday when I saw this article in the Washington Post by John Barry — “Our Coast to Fix — or Lose.” I urge you to read the whole article, but for now I just want to point to the ending: “The failure of Congress and the president to act aggressively to repair the coastline at the mouth of the Mississippi River could threaten the economic vitality of the nation.”

And I thought of this when I read at Bonddad Blog that consumer sales are dropping. And that our infrastructure is crumbling from neglect. And on and on.

Coolidge actually had some advantages over Bush. He paid off government debt, and he didn’t get us into a bleeping war that soaked up our bleeping resources. The long-term crisis we face now is not as much with farmers (although they’ve got their problems) as it is with our shrinking manufacturing base.

I’m just sayin’ that in the 1920s most people thought the economy was swell. The stock market went up, up, up. Lots of people made fortunes, The rich got richer. Good times.

But then, as now, income disparity grew. While the rich grew richer, most people didn’t. Many parts of the nation were suffering economically even as the 1920s roared on. Retail sales slowed, then dropped, about three years before the Great Depression swallowed everyone. I’m just sayin’.

Shameless Hustles and Tax Cuts

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Old hustles never die. Fred Thompson writes in the Wall Street Journal [emphasis added]:

President John F. Kennedy was an astute proponent of tax cuts and the proposition that lower tax rates produce economic growth. Calvin Coolidge and Ronald Reagan also understood the power of lower tax rates and managed to put through cuts that grew the U.S. economy like Kansas corn. Sadly, we just don’t seem able to keep that lesson learned.

One of the triumphs of the Coolidge Administration was the passage of his tax program in 1926; the photograph shows him signing it. The Coolidge program “repealed the gift tax, halved estate taxes, substantially cut surtaxes on great wealth, and reduced income taxes for all,” it says here. The photo is dated February 26, 1926. Assuming that is accurate, We Now Know that the Stock Market Crash of 1929 was only slightly over three years and seven months away. The Great Depression followed soon after.

Calvin Coolidge’s tax program is the bad example that won’t die. I remember just after George W. Bush was “elected” in 2000 some eager young folk of the Right wrote giddy tributes to tax cuts that cited the Wisdom of Silent Cal. But mention of Coolidge vanished rather quickly, and I assume there was some frantic back-channel communication explaining that, um, maybe Calvin Coolidge’s economic policies are not something we want to emphasize. I guess Lawnorder Fred didn’t get the memo.

I’m not saying that the Coolidge tax cuts were the direct cause of the Great Depression. But that decade wasn’t called the “Roaring Twenties” for nothin’. Coolidge paid for his tax cuts by being a scrooge on domestic spending, including vetoes of flood control and agricultural programs for which many folks had dire need. What happened next is right out of the history textbooks [emphasis added]:

Even before 1929, signs of economic trouble had become evident. Southern California and Florida experienced frenzied real-estate speculation and then spectacular busts, with banks failing, land remaining undeveloped, and mortgages foreclosed. The highly unequal distribution of income and the prolonged depression in farm regions reduced American purchasing power. Sales of new autos and household consumer goods stagnated after 1926. [Eric Foner, Give Me Liberty: An American History (Norton, 2005), p. 800]

If the Coolidge tax cuts of 1926 “grew the U.S. economy like Kansas corn,” as Fred suggests, one wonders why sales of new autos and household consumer goods stagnated after 1926.

The stock market did indeed go up a lot during the Coolidge Administration, but much of that was from overheated speculation. It was a bubble, in other words. And when the bubble burst, it burst big.

Fred writes glowingly of the soaring tax revenues and the shrinking budget deficit given us by Dear Leader’s glorious tax cuts. If you want to see what a crock that is, just look at this chart via Ezra Klein.

The other myth cited by Fred Thompson is, of course, the myth of the Reagan tax cuts. The fact is that in 1982, when he realized his tax cuts weren’t growing revenue as promised, Reagan raised some taxes considerably to make up for the shortfall. He also raised taxes in 1983, 1984, 1985, 1986, and 1987. Bruce Bartlett patiently explained this in a National Review article written in 2003. In this article the hapless Bartlett wrote that prudent management of the economy required some tax increases. Like anyone on the Right would listen to that.

A few days ago Bartlett wrote an op ed in the New York Times complaining that most of the people pushing “supply-side economics” these days have no clue what it actually is.

AS one who was present at the creation of ”supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy.

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.

The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate.

But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, ”You cut taxes and the tax revenues increase.” Senator John McCain told National Review magazine last month that ”tax cuts, starting with Kennedy, as we all know, increase revenues.” Last week, Steve Forbes endorsed Rudolph Giuliani for the White House, saying, ”He’s seen the results of supply-side economics firsthand — higher revenues from lower taxes.”

Those of you who want a meatier discussion of this issue can find it at Economist’s View (Bruce Bartlett joined in). My only quibble with what he wrote is that, as I remember, the Reagan-era supply siders were not the sober and cautious crew that Bartlett describes.

Naturally, a number of rightie bloggers are linking to the Fred Thompson article with warm approval. I guess anyone dumb enough to think Larry Kudlow is an economist is dumb enough to admire Calvin Coolidge’s tax policy. Sadly, we just don’t seem able to keep that lesson learned.

Update: For an explanation of why JFK was not a supply sider, see David Greenberg, “Tax Cuts in Camelot?” (Slate, January 16, 2004). For sharp commentary on Fred Thompson, see Taylor Marsh, “Desperate After Dubya?”

Privatization Gone Wild

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First off, let me assure you I will not be writing an “April Fool” post today. As long as George Bush is in the White House, every day is April Fool’s Day in America.

Raw Story reports (via Gun Toting Liberal) that the Bush Administration’s fixation on privatization is causing long-term damage to our government.

Due to its increasing practice of contracting out to private firms and agencies, the U.S. government is quickly losing its expertise and competence in vital national security and defense programs, according to a Wall Street Journal report.

“Since the 2001 terrorist attacks and wars in Afghanistan and Iraq, the federal government’s demand for complex technology has soared,” writes by Bernard Wysocki, Jr. for the Journal. “But Washington often doesn’t have the expertise to take on new high-tech projects, or the staff to oversee them.

“As a result,” he continues, “officials are increasingly turning to contractors, in particular the hundreds of companies in Tysons Corner and the surrounding Fairfax County that operate some of the government’s most sensitive and important undertakings.”

The supposed superiority of private enterprise over public bureaucracy is a cornerstone of right-wing ideology. Privatization, along with tax cuts and deregulation, is one of the Right’s favorite knee-jerk answers to all of life’s problems.

Googling around this morning I came across the Reason Foundation’s Annual Privatization Report 2006: Transforming Government Through Privatization. Much of the “report” reads like alternative historical fiction; thanks to privatization, since 1990 government has been getting better and better, it says. Sure.

I particularly like this brilliant bit of satire called “Advancing Limited Government, Freedom, and Markets” by Mark Sanford, Governor of South Carolina. Here’s just the first two paragraphs —

Any read through history demonstrates how essential limited government is to preserving freedom and individual liberty. What life experience shows us is that limited government is equally important in both making your economy flourish and in enabling citizens to get the most for their investment in government.

Let me be clear up front that in the long run the only way to make government truly efficient is to make it smaller, and this seems to me to be the real clarion call in highlighting the importance of privatization efforts. Efficiency and government are mutually exclusive in our system, and if our Founding Fathers had wanted efficiency I suppose they would have looked more closely at totalitarian systems. They wanted not efficiency, but checks on power in our republic.

I don’t believe “efficiency” was much of an issue in the 18th century, but let’s continue — Gov. Sanford goes on and on about the glories of privatization and “marketbased solutions” for problems in education and health care. He uses the word freedom a lot, although he doesn’t explain how privatization and small government protect civil liberties. (I argue here that the “small government equals freedom” notion made sense before the Industrial Revolution, but not so much after. Righties are a tad slow.)

Let’s go back to Raw Story:

The number of private federal contractors has now risen to 7.5 million, which is four times greater than the federal workforce itself, the report indicates. Such a trend is leading the government to what Wysocki calls the “outsourcing [of] its brain.”

The shift to private firms has not been without its problems, however, with faulty work and government waste becoming rampant.

“Today, the potential pitfalls are legion,” writes Wysocki. “Big contracts are notorious for cost overruns and designs that don’t work, much of which takes place under loose or ineffective government scrutiny.” The outsourcing of these government programs “can be a prescription for enormous fraud, waste and abuse,” Rep. Henry Waxman (D-CA), chairman of the House Oversight and Government Reform Committee, is quoted as saying during a hearing.

Linda Bilmes wrote for Nieman Watchdog last year about the cost of the Iraq War.

Q. Why is this war so expensive?

One reason is the huge reliance on private contractors to do basic military tasks. … Contractors charge many times more than it would cost to have the military do the work. For example Blackwater Security, which provided security to the Coalition Provisional Authority, paid some of its security guards over $10,000 per week.

(For the past 30 years American business has been keen on outsourcing as a cost-saving measure, and in many industries all manner of functions that used to be performed in-house are now contracted out. This may work nicely in some circumstances, but in my experience companies pay — probably more than the CEOs realize — in inefficiency and loss of quality control. Someday they’ll figure this out, and the New New Trend will be insourcing. Just watch.)

There’s a book reviewed today in the NY Times called Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement by Brian Doherty, an editor at Reason magazine. The reviewer, David Leonhardt, is lukewarm about the book. I just want to quote this bit from the review:

Libertarianism has its roots in the writings of a pair of major 20th-century Austrian economists, Ludwig von Mises and F. A. Hayek. Both opposed economic planning and argued that only the forces of supply and demand could allocate re sources fairly and efficiently. If an item becomes scarce, its price will rise, ensuring that people who place the highest value on it — those who can use it most productively — will be able to get it. To this coolly economic argument, Rand and other writers added a moral one: laissez-faire capitalism equaled freedom.

This was a tough sell in the wake of the Depression and the war, but the ground began to shift in the 1970s. As the Vietnam War sputtered to a close and the economy stagnated, the wise men who built “big government” began to look ineffectual. In 1980, Ronald Reagan would win the presidency by campaigning on laissez-faire rhetoric. The day after his election, he was photo graphed on an airplane reading The Freeman, the flagship libertarian magazine, while Nancy Reagan rested her head on his shoulder.

In the nearly three decades since, libertarian arguments have enjoyed a nice run. Tax rates have been reduced; once-regulated industries have been opened to competition; any two consenting adults, including those of the same sex, can now marry in some places. One of today’s most fashionable political labels, “socially liberal and fiscally conservative,” Doherty shrewdly notes, is “the basic libertarian mix.”

Actually, faith in laissez-faire economic policies as the key to salvation goes back to the 19th century; from time to time I rant about how “free market” ideology caused a million Irish to die in the Famine, which began in 1845. American history since the Civil War can be read as a tug-of-war between progressivism and the “free market” fetishists. When people get tired of being ripped off and exploited by the malefactors of great wealth, they turn to government for help. But sooner or later they forget being ripped off and exploited and get taken in by “free market” hype again. Thus the Gilded Age was followed by the Progressive Era, which was followed by the Roaring 20s (also called the Republican Era), which was followed by the Great Depression and New Deal. And when memory of the Great Depression had sufficiently faded, we got Ronald Reagan.

Like I said; every day is April Fool’s Day in America.

Why Limited Government?

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Michael Gerson’s essay on “The Republican Identity Crisis” makes a fascinating point about “limited government” ideology.

One Republican Party—the Republican Party of movement conservatives on Capitol Hill and in the think-tank world—will argue that the “big government Republicanism” of the Bush era has been a reason for recent defeats. Like all fundamentalists, the antigovernment conservatives preach that greater influence requires a return to purity—the purity of Reaganism.

But the golden age of austerity under Reagan is a myth. During the Reagan years, big government got bigger, with federal spending reaching 23.5 percent of GDP (compared with just over 20 percent under the current president). …

… And the critics believe in a caricature of recent budgets. Well over half of President Bush’s spending increases have gone to a range of unexpected security necessities, including military imminent-danger pay, unmanned aerial vehicles and biological-weapons vaccines. … Why don’t anti-government conservatives mention spending increases on defense and homeland security when they make their critique? Because a minimalist state cannot fight a global war—so it is easier for critics to ignore the global war.

Most rightie rhetoric about “big government” fails to make a distinction between big government that is bad because it costs a lot of money or big government that is bad because it intrudes on personal liberty. And these are two entirely separate types of bad.

“Small government” conservatives tend to focus on economic freedom; they want freedom from taxation and government regulation, for example. But government intrudes in private lives in many ways. The Comstock laws, for example, came into being in the 1870s — exactly the same time that laissez faire reached its apex in the U.S., “during the age of industrialization as American factories operated with a free hand.” So a factory owner in 1874 enjoyed complete freedom to exploit his employees, but at the same time the government would not allow information on birth control to be mailed to him.

Gerson continues,

As antigovernment conservatives seek to purify the Republican Party, it is reasonable to ask if the purest among them are conservatives at all. The combination of disdain for government, a reflexive preference for markets and an unbalanced emphasis on individual choice is usually called libertarianism. The old conservatives had some concerns about that creed, which Russell Kirk called “an ideology of universal selfishness.” Conservatives have generally taught that the health of society is determined by the health of institutions: families, neighborhoods, schools, congregations. Unfettered individualism can loosen those bonds, while government can act to strengthen them. By this standard, good public policies—from incentives to charitable giving, to imposing minimal standards on inner-city schools—are not apostasy; they are a thoroughly orthodox, conservative commitment to the common good.

Campaigning on the size of government in 2008, while opponents talk about health care, education and poverty, will seem, and be, procedural, small-minded, cold and uninspired. The moral stakes are even higher. What does antigovernment conservatism offer to inner-city neighborhoods where violence is common and families are rare? Nothing. What achievement would it contribute to racial healing and the unity of our country? No achievement at all. Anti-government conservatism turns out to be a strange kind of idealism—an idealism that strangles mercy.

I’d say it’s an idealism that strangles self-interest as well. “Small government” ideology is not just opposed to programs for the poor. It is opposed to programs that would help most Americans, like universal health care. It’s essentially an ideology that insists We, the People, should not use government to “form a more perfect Union, establish Justice, insure domestic Tranquility … promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” Providing for the common defense is OK, however.

Andrew Sullivan took offense at Gerson’s essay.

Gerson, like many big-government and left-wing types

Translation: Gerson was a speechwriter and policy adviser to President G.W. Bush.

seems to believe that all small government conservatives are libertarians and all libertarians are swivel-eyed loons. Sign me up for that then. But a belief in the ineffable goodness and efficiency of government is every bit as ideological an attitude as thinking markets can provide a better way. It’s not just a belief in free markets per se that persuades libertarians, it’s that markets can also lead to better outcomes. In other words, there’s a happy marriage between principle and pragmatism.

If a belief in republican (small r!) government requires “a belief in the ineffable goodness and efficiency of government,” sign me up for that then. But respect for the virtues of self-government as provided by the Constitution does not require blind faith in the “ineffable goodness and efficiency of government.” Quite the opposite, actually. Citizens should understand that government can become corrupt and inefficient, because it’s up to citizens to pay attention to government and make informed choices in the voting booth.

In other words, a respect for republican government is not about trusting government, but about trusting We, the People. It’s true that the people can be fooled into making bad choices, but our form of government provides means for We, the People, to correct our mistakes eventually. Most of ’em, anyway.

But putting your trust in free markets is putting trust in … what, exactly? Chance? Greed? The benevolence of the monied classes? And if those free markets stampede off in a bad direction (as they did in the 1920s, for example), what remedy do We, the People, have?

In fact, the weight of empirical evidence that history provides us reveals that when markets and business and securities are allowed freedom from government regulation, what follows is plutocracy, exploitation of labor, corruption, and economic instability. A “happy marriage between principle and pragmatism” my ass.

The Carpetbagger thinks Gerson isn’t seeing the big picture.

Hasn’t this chasm existed in GOP politics for the better part of a generation? The libertarian wing demands less government, Republican candidates say the right things, they win, they increase the size of government anyway, and libertarians complain and demand less government again. It’s a beautiful little cycle.

What makes now different? We have a few more leading GOP voices than usual suggesting that the party lost its majority status in Congress because it wasn’t libertarian enough to inspire the base, but the facts speak for themselves — the base turned out exactly as it did the last couple of cycles. Frustrated “true” conservatives didn’t stay home in protest on Election Day; they did exactly what they’ve been doing. In 2006, it wasn’t enough, but you don’t hear anyone in leadership positions suggesting that party activists and insiders settle the broader debate “once and for all.” They’ll tinker with the message, turn Pelosi into some kind of money-generating boogeyman, and try again in ‘08. …

… The Republicans’ problems are far broader than an ideological squabble — they have an unpopular and hard-to-defend policy agenda, unpopular and weak leaders, and a record of scandal, incompetence, and mismanagement.

I still say that libertarianism and “limited government” ideology is essentially anti-democratic. It deprives We, the People of the ability to use government in our own interests. Certainly the powers of government must be limited — the power to censor, the power to search and seize property, the power to intrude on citizens’ private lives generally — but placing artificial limits on the size and functions of government doesn’t restrict government as must as it restricts the will of the people. I’m not calling for “big government” for its own sake. I’m just saying that a government should be as big (or as small) as its citizens require.

What we’ve got with the Bushies is the World of All Worlds. They’ve given us a government that violates citizens’ rights but doesn’t respond to their needs. The question should not be whether government is big or small; the question should be who does government serve? The people, or something else?

Update: See also Matt Stoller, “The Bar Fight Primary.”

Second Rate Nation

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Who’s number one? Not the U.S. apparently. David Francis writes in the Christian Science Monitor:

The United States is the world’s only military superpower and has the globe’s largest economy. Yet, by some measures, the US is a second-rate industrial nation – at best.

“Compared to other advanced economies, our market-driven model yields highly varied results regarding the living standards of our citizens,” notes a study by the Economic Policy Institute (EPI), a nonpartisan think tank in Washington.

It’s an open question as to whether most Americans are better off than most Western Europeans.

“We leave a lot of people behind,” says Sylvia Allegretto, an economist at EPI.

“We are a dynamic economy,” says Timothy Smeeding, an economist at Syracuse (N.Y.) University. “A lot of people are doing well,” he adds. But for those with median incomes ($40,000 a year) or less, it is a “second-rate” economy. They “are not getting much help.”

Conservatives like to brag about numbers — Gross Domestic Product (GDP) and Gross National Product (GNP) and Purchasing Power Parity (PPP) numbers, for example — and toss in some coefficients and price adjustments, and then they say, ah-HAH. The U.S. is the richest country in the world.

This guy is a prime example. After a dizzying display of numbers, he concludes:

If we accept (as I do) that we do, indeed, need to have a social safety net, and that we have a duty to provide for those incapable or unlucky enough to be unable to do so for themselves, we need to set some level at which such help is offered. The standard of living of the poor in a redistributionist paradise like Finland (or Sweden) seems a fair enough number to use and the USA provides exactly that. Good, the problem’s solved. We’ve provided — both through the structure of the economy and the various forms of taxation and benefits precisely what we should be — an acceptable baseline income for the poor. No further redistribution is necessary and we can carry on with the current tax rates and policies which seem, as this report shows, to be increasing US incomes faster than those in other countries and boosting productivity faster as well.

At the bottom of the article, the author’s blurb: Tim Worstall is a TCS Daily contributor living in Europe. (chuckle)

Compare/contrast with Robert Kuttner, who wrote in April 2006:

Census data show median household income fell 3.8 percent or $1,700, from 1999 to 2004, according to economist Jared Bernstein of the Economic Policy Institute (on whose board I serve.) And this drop occurred during a period when average productivity rose three percent per year.

Moreover, as economist Jeff Madrick has observed in his book ”Why Economies Grow,” , the reality is worse because prices of commodities that make us middle class are rising much faster than inflation generally: housing, college education, health care, and also child care. These very rapid price increases are offset by falling costs of consumer electronics, basic food, and clothing, creating misleadingly low inflation measures.

It’s great that shirts are cheaper than a decade ago, and that we all have cell phones. But that doesn’t exactly substitute for a house, an affordable college education, or health care.

According to economist Bernstein, whose study covers the years 1991-2002, households in the middle fifth of the economy increased their incomes (not adjusted for inflation) by 41 percent. Inflation during that period, as measured by the government’s Consumer Price Index, went up 33 percent. That implies real living standards rose by a not very impressive 8 percent during more than a decade.

But hold on. During the same period, housing, healthcare, education, and child care went up 46 percent, or more than incomes. We cannot afford the big things we need and comfort ourselves with gadgets. The cheaper laptop, plasma TV, and GPS screen in your car make it appear statistically that living standards are not falling as much as they are.

The emblem of the new economy might be a 35-year-old, listening to an iPod, living in a house much smaller than the one he grew up in.

To use a favorite word of my grandmother’s, call it the Tchotchke Economy (a Tchotchke is a small trinket): Plenty of nifty, ever cheaper electronic stuff — and ever more costly housing, education, healthcare. An iPod is swell, but it doesn’t exactly make you middle class.

Why does this describe America in 2006? Don’t blame it on immigrants. Blame it on the people running the government, who have made sure that the lion’s share of the productivity gains go to the richest 1 percent of Americans. With different tax, labor, health, and housing policies, native-born workers and immigrants alike could get a fairer share of our productive economy — and still have the nifty iPods.

Righties pooh-pooh standard of living comparisons as so much socialist hocus-pocus; they prefer numbers. But I would really love to see a side-by-side comparison of how average working people live in several industrialized nations. Take some common occupations, both white and blue collar — e.g., truck driver, cashier, teacher, office administrator — and compare how people in those occupations manage in various countries. Take into account what kind of house they live in; how much of their income goes to pay for housing (mortgage, rent, property taxes); what major appliances they own; how they get around on an ordinary day (car, bus, bicycle) and how much time they spend commuting; how many hours a week they spend on the job; vacation and leisure (how much paid vacation they get, and what they do for fun); the quality of health care they receive and how it’s paid for; how much they spend on child care and education; etc.

Take your numbers and shove ’em, in other words. Show me how ordinary working folks live. I suspect the U.S. would look pretty average in such a comparison — better in some ways, worse in others.

Of course, in the United States there are huge disparities from region to region. Housing is a lot more affordable in most of the South and Midwest than it is in the megalopolis northeast, for example. It might take some doing to figure out what the real “average” is in the U.S.

See also this article from the August 19 Guardian: “Balance of power ebbs away from the US.”

… the US economy has already slowed, expanding at an annual pace of only 2.5% in the second quarter. With news this week that the 12-member eurozone expanded at an annualised rate of 3.6% in the April to June period, Europe is suddenly growing faster than the US. Britain, too, has recovered from last year’s slowdown and expanded at an annualised 3.2% in the second quarter.

In the last post I wrote about how the nation’s infrastructure is rotting away. This is not from a lack of wealth; certainly we got wealth up the wazoo in America. No, our infrastructure is rotting away because of a lack of will, as well as greed. A small portion of our citizens are sitting on most of the wealth and don’t want to share it. And the politicians are too corrupt or clueless to insist that infrastructure be maintained. Eventually we’ll have more and more power failures and maybe some spectacular and deadly bridge collapses, and then citizens will want to know why.

Face it; the whole nation is being Katrina’ed. The only difference between the Gulf Coast and the rest of us is time. Hurricanes work fast; rot and rust take longer. But they get the job done eventually.

Update: Via DemFromCT at The Next Hurrah, Steven Greenhouse and David Leonhardt write in today’s New York Times, “Real Wages Fail to Match a Rise in Productivity“:

With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.

That situation is adding to fears among Republicans that the economy will hurt vulnerable incumbents in this year’s midterm elections even though overall growth has been healthy for much of the last five years.

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.”

Here’s an eye opener:

In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important  contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” Low interest rates and the moderate cost of capital goods, like computers, have also played a role, though economists note that an economic slowdown could hurt profits in coming months.

Is that saying that corporations are making profits by squeezing workers? I do believe that’s what it says.

The most recent recession ended in late 2001. Hourly wages continued to rise in 2002 and peaked in early 2003, largely on the lingering strength of the 1990’s boom.

Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers. Even for workers at the 90th percentile of earners — making about $80,000 a year — inflation has outpaced their pay increases over the last three years, according to the Labor Department.

I’d like to know what Tim Worstall, TCS Daily contributor living in Europe, has to say about that.

Update: Maxspeak, who understands numbers better than I do, explains why Tim Worstall (TCS Daily contributor living in Europe) is wrong.

So Much for Sovereignty

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This doesn’t sound good —

Roads and bridges built by U.S. taxpayers are starting to be sold off, and so far foreign-owned companies are doing the buying.

On a single day in June, an Australian-Spanish partnership paid $3.8 billion to lease the Indiana Toll Road. An Australian company bought a 99-year lease on Virginia’s Pocahontas Parkway, and Texas officials decided to let a Spanish-American partnership build and run a toll road from Austin to Seguin for 50 years.

Few people know that the tolls from the U.S. side of the tunnel between Detroit and Windsor, Canada, go to a subsidiary of an Australian company — which also owns a bridge in Alabama.

Some states and large cities are selling or leasing roads and bridges to private firms also. The “proceeds will pay for urgent projects such as road and bridge improvements.”

Washington is not likely to produce more money to build roads. The federal highway fund — which will have a balance of about $16 billion by the end of 2006 — will run out in 2009 or 2010, according to White House and congressional estimates.

About half the states now let companies build and operate roads. Many changed their laws recently to do so.

Maybe this is a good idea, but it feels like more evidence that our country is coming apart at the seams.

Bushonomics

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Taking a break from blogging World War III — Paul Krugman describes a typical “debate” on the economy with a rightie:

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”

Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.”

Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”

Ain’t it the truth?

“To a large extent,” Krugman continues, “this dialogue of the deaf reflects Upton Sinclair’s principle: it’s difficult to get a man to understand something when his salary depends on his not understanding it.” But there is data showing that, in fact, most people are not enjoying the benefits of our wondrous economy.

Here’s what happened in 2004. The U.S. economy grew 4.2 percent, a very good number. Yet last August the Census Bureau reported that real median family income — the purchasing power of the typical family — actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. … growth didn’t just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. The big increases went only to people who were already in the economic stratosphere.

Even the real income of college graduates fell in 2004; a college degree is no guarantee of shelter from a failing economy. Bottom line, it’s only a great economy “if you’re a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport.”

Ezra Klein provides an interesting analogy to describe what’s happening to our economy:

Growth is almost a misleading word for this phenomenon: When we think of growth, we imagine what happens to us during adolescence — we get bigger. But imagine if all the growth happened in your forehead. Limbs, torso, weight — all the exact same. But your forehead was now six inches long. Would you be excited about that change? Would you celebrate your newfound height? Would you categorize that as normal “growth”? …

…In fact, it’s no longer just the middle class and the poor who’re falling behind. The distribution has grown so uneven that the 95th percentile is making meager headway — even the merely rich are falling behind. It’s the richest of the rich making headway. But they now account for so much wealth and holdings that their acceleration can effortlessly outweigh everyone else’s deterioration.

Some of the best economic blogging on the web goes on at The Blogging of the President, provided by Stirling Newberry, Ian Welsh, and Hale Stewart. Last week Hale posted “Income Inequality In the US: A Primer.” He quotes the CIA World Factbook:

    “Among countries with modern economies, the United States is the clear leader in income inequality under the gini measure. Income inequality in the U.S. is more comparable to the third world.”

According to the CIA Factbook, the US has a Gini index of 45. By way of comparison, a large number of countries with a higher gini number are in South America and Africa. From South America: Argentina, Bolivia, Brazil, Chile, Columbia, Honduras, Nicaragua and Paraguay. From Africa: Botswana, Central African Republic, Lesotho, Namibia, Niger, Sierra Leone, Zambia and Zimbabwe.

FYI, according to the chart linked in the paragraph above, Hungary, Sweden, Norway, and Belgium have the least income inequality. Eastern Europe and Scandinavia generally are less economically unequal than most other parts of the planet.

In the United States, income inequality declined from 1947 to 1968; since 1968, inequality has increased. As these graphs show, however, inequality increased dramatically during the Reagan and Bush I Administrations (especially the Bush I Administration) and leveled off during the Clinton Administration.

(Remember “It’s the economy, stupid“? Republican folklore says that Bush I lost the 1992 election because he had reneged on his “no new taxes” pledge, but I have never believed that. The income shift from 1989 to 1992 was palpable, and Poppy clearly was oblivious to people’s concerns. I don’t think most folks who were not movement conservatives gave a hoohah about the tax increases.)

Via Economist’s View, a report from the Center on Budget and Policy Priorities discusses recent trends:

The data show that income gains between 2003 and 2004 were particularly large for those at the very top of the income spectrum, resulting in a nearly unprecedented one-year increase in income concentration. …

  • From 2003 to 2004, the average incomes of the bottom 99 percent of households grew by less than 3 percent, after adjusting for inflation. In contrast, the average incomes of the top one percent of households experienced a jump of almost 17 percent, after adjusting for inflation. (Census data show that real median income fell between 2003 and 2004. …[T]he 3 percent rise among the bottom 99 percent seems to largely reflect gains by households in the top quintile of the income spectrum…)
  • The top one percent of households garnered 36 percent of the income gains in 2004.
  • This disparity produced an exceptional jump in income concentration in 2004. The share of the pre-tax income in the nation that goes to the top one percent of households increased from 17.5 percent in 2003 to 19.5 percent in 2004. Only five times since 1913 (the first year that this data set covers), and only twice since World War II has the top one percent’s share risen by as much in a single year (in percentage point terms). Each percentage point of income is equivalent to $68 billion in 2004.
  • The share of total U.S. income that the top one percent of households received in 2004 was greater than the share it received in any prior year since 1929, except for 1999 and 2000.

    • Income gains were even more pronounced among those with the very highest incomes. The incomes of the top one-tenth of one percent of households grew more rapidly than the incomes of the top one percent of households. The share of the national income received by the top one tenth of one percent of households increased by 1.3 percentage points from 2003 to 2004; in other words, more than half of the increased share of income going to the top one percent of households actually went to the top one-tenth of one percent of households.

    Here’s the punch line:

    In May 2006, CBO suggested that continued growth in income inequality may be one cause of the recent rapid growth in federal revenues. Increases in income inequality boost revenue growth, in part because high-income households are subject to higher federal income tax rates than are households of lesser means.

    In other words, the revenue increases Dubya is so proud of are a symptom of economic pathology.

    Finally,

    It should be noted that wage and salary growth has been unusually weak during this recovery, while the growth of corporate profits has been exceptionally strong. This contributes to growing income inequality, since high-income households own a highly disproportionate share of corporate assets and derive significant income from those assets. With weaker-than-normal wage growth and stronger-than-normal growth in corporate profits having continued into the first part of 2006, it is likely that the increase in income inequality that Piketty and Saez have documented through 2004 has continued since that time and that the nation’s already-large disparities in income are growing yet wider.

    As Hale points out, income disparities are a major cause of civil and political instability. “[N]ot only is the US a debtor nation in the tradition of Latin America circa the 1980s,” he says, “we are also following a similar path in the area of income distribution. It’s very important to ask ourselves: is this what we want?”

    This is not what most of us want, I suspect, but discussion of this issue by the MSM mostly consists of Chris Matthews chirping about how great the economy is. We as a nation aren’t exactly being asked what we want, are we? We’re just being told what we want by the VRWC echo chamber.

    See also: Hale Stewart, “Bush’s Historic Tax Revenues Aren’t So Historic” and “If the Deficit’s Decreasing, Why Is Total Debt Increasing?“