Why Wall Street Wrecks the Economy

            I read in the papers a few days ago that the OECD, (the Organization for Economic Cooperation and Development) has listed economic inequality as one of the factors undermining the economic recovery in the United States. So how would inequality sabotage the recovery?   Well, when you have a recession, the reason that businesses are shutting down and laying off workers is that too few people are buying their products.  And the reason that sales are sluggish is that the people who would have a need for the goods lack the spendable income with which to buy it.  Either they have no money, or if they do have any, their jobs are so insecure that they are afraid to spend much.

            The usual remedy for such a situation is for government to step in and dump money into the economy.  They can do this by acting as the “buyer of last resort,” and spur demand by hiring people or by buying goods, so as to cause people to be hired.   Or they can also just give tax breaks, assuming that the tax rebates people receive will be immediately spent.  But there is a problem.  What if most of the tax breaks go to those who are so wealthy that they do not need to buy anything?

            Right now, there is actually a lot of cash in the country.  If this cash were spent, we would be out of the recession and we would have full employment. But this cash is not uniformly distributed.  It’s nearly all concentrated in the hands of corporations and very wealthy individuals-- who don’t need anything.  Corporations won’t spend money on new production facilities when they are unable to sell the product of the factories they already have.  And very wealthy individuals can spend only the tiny fraction of their wealth that is actually used to maintain their lifestyle.   Most people, even with a very opulent lifestyle, would eventually run out of ways to spend money if their income was in the tens of millions. So a lot of money simply isn't being spent.

            This unequal distribution of spending power has not always been a problem.  It comes from two sources: one source is the changes in the progressivity of the federal tax curve.  The other is the decline in bargaining power for workers.   In the Eisenhower administration, the top marginal rate for federal income tax was 92.5%.   Only a handful of billionaires, (like Howard Hughes) were subject to this rate, and they generally avoided this tax by giving most of their income to charity. Today the top rate is 35%, the same marginal rate paid by most of the working class.  But today, most billionaires don’t even pay at that rate, because they arrange their affairs so that most of their income exists as a capital gain, currently taxed at 15%. That’s why Warren Buffett can say that he pays tax at a lower rate than his secretary.  And so far, we have considered only the federal income tax. Working people also pay a large part of their income as payroll tax, which has almost no bite on the very rich because it is paid only on the first $110,100 of income.  Workers also pay a lot of sales tax, which applies only to money that is spent, not money that is invested.  Since most workers have to spend almost all of their income—often before they get it, they often pay sales tax on almost everything they earn.

            The other source of inequality is that workers no longer have the bargaining power to demand a fair share of that which they produce.  In the 50s and 60s, productivity rapidly rose, and wages rose along with it.  But since about ‘73, wages have remained stagnant, even though productivity has continued to increase.   Put simply, all of the benefit of this increase in productivity has been confiscated by capital, and none has been shared with labor.  And that is why the wealth has now become so concentrated that the top 1% is hoarding five times as much wealth as the bottom 80%. Besides being a moral outrage, this situation is bad for the economy.  The OECD says inequality is a drag on the U.S. economy, and Warren Buffett says that the trouble with this country that rich people don’t pay enough taxes.

            So, if everyone understands that this situation is bad for business, why is it that the Wall Street Journal and other business journals have an editorial policy of frenzied denunciation of any attempt to even slightly retard the continued concentration of income and wealth?  The reason is that these journals do not really represent the interests of American business—they represent only the interests of the financial sector, which is not the same thing.  The financial sector is best understood as though they were absentee landlords from another planet, or perhaps vampires from another planet.   They are interested in the welfare of the population only insofar as it affects what they can extract from us.

            One might assume that the policy makers of this enclave of spectacular depravity are unusually amoral individuals.  That is indeed a possibility. My own bias would be to make this assumption.  But even if they aren’t the fiends they appear to be, they would behave precisely the same, because they have no choice.  They are a part of a system that requires the ongoing concentration of wealth in order to sell the products which they produce. 

            Imagine a hypothetical situation where you are a yacht salesman. You are not terribly rich.  You are just another working class drudge.  But to earn your daily bread, you have to suck up to extremely rich individuals, to induce them to buy multi-million dollar pleasure boats which they do not need.  Business has been slow, and you are afraid that you might soon be laid off.  Now suppose that the government is considering an increase in deficit spending in order to stimulate the economy.  One way would be to extend unemployment benefits to those whose benefits have run out. The other option is to pass a massive tax cut, with the majority of the benefit going to multi-millionaires.   Which option would save your job?  Allowing 5 million unemployed workers to continue to feed their families would be the more moral option, but would it sell any yachts?  In general, pouring money on the bottom rungs of society is the best way to stimulate the economy as a whole.  If you give money to those who don’t have money, they will spend it on something.  But would it sell yachts?  Probably not!

            By choosing yachts, I deliberately chose an example of such an extreme luxury item that its market only affects the very, very rich.   A huge pleasure boat is not particularly useful, and no one would ever buy one until their needs for useful things were totally sated.   But there is one type of purchase that is even more of a luxury item than a big yacht—the purchase of financial instruments.  While it’s true that even working class people may have a small retirement nest egg, the overwhelming majority of stocks and bonds are held by the 1%.   And few additional sales of these securities are possible without more of the wealth being transferred to this group.

            An employee of Wall Street, or any person who derives his living from the financial sector, is like one of the craftsmen hired to build the palace for Louis XIV at Versailles. If the Ancient Regime had been fair to workers, such a place could not have been built.  As a worker, this craftsman might resent the unfairness.  But if the unfairness ever stopped, he would lose his job building the palace.  

Poem of the Day, Jun 27/12

The Cat's Advice to Margaret, or

Margaret, quit your bitching over Golden Grove unhitching. 

Entropy,  entropy--things running down,

Like an aging mechanical toy.

Margaret, Margaret, please do not frown.

These things should be greeted with joy.

Like grist mills installed on the side of a slope,

Where the water runs down to the base,

The wheels of our being would cease to revolve,

If the water remained in its place.

We each play the game, and we each strike out,

And all of us have our own innings.

Yet the process that brings human life to an end,

Is the process that brought its beginnings.

Oh Margaret, relax! And please don’t despair,

As you’re carried along with the tide.

Universal decay is no reason for care.

Just relax!  It’s a wonderful ride.

This was inspired by Gerard Manly Hopkins' poem, Spring and Fall:  To a Young Child.  He wrote this for a little girl called Margaret, who was sad about the passing of summer and the trees shedding their leaves.   You may recall this poem.  It begins:  "Margaret, are you grieving over Golden Grove un-leaving?"  Hopkins goes on to suggest  to Margaret  that we are sad because  the seasonal death of summer plants reminds us of our own mortality.  But he says that death is inevitable, and we must accept it.  He concludes: "It is the blight you were born for--It is Margaret that you morn for."  This has been my favorite poem for many years.  Yet I suddenly decided that I needed to respond to it--to give Margaret some advice of my own.   I have changed the meter from the original, and this was deliberate. I wanted a tempo that was more upbeat--less like a funeral dirge.  But I still regard Hopkins' work as some of the best English language poetry ever written.  Check out this link.

                                    

U.S. Debt Not A Problem

There has been a lot of political hype lately about the U.S. national debt level. Once every four years, the party out of power tries to convince us that we have some kind of debt crisis.  This, of course, is nonsense.  One of the best explanations as to why it is nonsense was printed in an opinion piece in the June 24, 2012 Waterloo Courier.   This piece, entitled Don’t Lose Any Sleep Over Debt, was written by Fred Abraham, a professor of economics who teaches at the University of Northern Iowa.    Abraham points out that we have had a national debt for over a century.  No administration has ever tried to pay it off—and, he says, none ever will. Of course, each individual Treasury note will be paid off as it matures. But it will be replaced by the issue of another note. (I’m sure that the reason that Prof. Abraham is so certain that no administration will ever attempt to pay off any part of the debt, is that to do so would be a disaster. The only way that we could pay down any of this debt is by taking in more money, through taxation, than we spend. But if deficit spending, i.e., spending more than we tax, is how we get out of a recession, then wouldn’t the reverse put us into a recession? Yes, of course it would.)  Only twice since WWII has any president had a balanced budget--once under Eisenhower, and once under Clinton.  And in both cases, the country immediately started to slide into a recession, and heavy deficit spending was required to pull it out.  And that’s why no one who understands the economics of the situation is even slightly concerned about our continued, inter-generational rollover of this debt.   The same conservative bankers who complain that the U.S. has a “debt crisis” are now purchasing U.S. Treasury bills so aggressively that they often accept negative real interest rates. Yet once every four years, candidates from the party out of power will pretend to be concerned about our national debt level, because it is a convenient political issue. If you want to get people in a panic about something, it helps to begin by waving some astronomical numbers at them.  And any numbers concerning any aspect of the national economy are suitably astronomical.  They sadly ask, how can we leave all this debt to our children? Well, the same way our parents left it to us, and our grandparents left it to our parents. No previous generation had to pay it off, nor will any subsequent generation.

            While the debt seems to continuously grow, so does the economy. The only important number is the debt to GDP ratio, which could be kept pretty constant.  When we have more growth and less spending, the ratio goes one direction a bit. When we have less growth and more spending, it goes the other. Over time, it averages out. But if we were really worried about  this ratio, then we’d spend some serious stimulus money and get out of this recession. 

Quote of the Day, June 23/12

Though much money is made
In the dark of the moon,
He who sups with the devil
Should have a long spoon.

The Great Republican Flip-flop

             An article in the June 25^th New Yorker Magazine, entitled “Unpopular Mandate”, by Ezra Klein is about why politicians reverse positions on issues.   The particular issue they use as an example is the total flip-flop that Republican politicians have done on the health care individual mandate.  Most Americans seem to have forgotten that this mandate was originally a Republican idea.   In fact, it was the cornerstone of the GOP healthcare policy for two decades. 

            The mandate burst onto the scene in 1989 in a paper written by the conservative Heritage Foundation, entitled Assuring Affordable Healthcare for all Americans.  Stuart Butler, the foundation’s health care expert observed, “Many states require passengers in automobiles to wear seat belts for their own protection. Many others require anybody driving a car to have liability insurance.”  He then went on to suggest that the cost of an illness can be just as catastrophic as a car accident,  yet neither the federal government nor any state requires individuals to buy insurance against it.  In 1993, Republicans in Congress offered this mandate plan, called The Health Equity and Access Reform Act, as a Republican alternative to Clinton’s health care plan.  It was sponsored by John Chaffee of Rhode Island, and supported by 18 influential Republicans, including Senate Minority Leader Bob Dole.

            In 2006, Democrat Ron Wyden joined with Republican Bob Bennett to offer a similar plan called the Healthy Americans Act. It was co-sponsored by nine Democrats and eleven Republicans, and had broad by-partisan support. In June, 2009, speaking on Meet the Press, Mitt Romney, who as governor of Massachusetts had signed a universal mandate plan, said he supported the bill and he thought most Republicans could support it.  But by July 2009, President Obama had changed his mind, and said he could accept the individual mandate, and it was included in the bill. Then in December 2009, when the bill was voted on, Republicans voted against it, denouncing the individual mandate as “unconstitutional.”  This shift--Democrats lining up behind a Republican plan and then the Republicans denouncing it--was absurd.

            But there is a problem. Politics is a zero-sum game.  The only way one party can win is to make the other party lose. And if your party is out of power, if the other party controls the White House, then the only way to make the president’s party fail is to prevent any of his programs from becoming law, or if they ever do become law, to challenge them in court.  The minority party really has no incentive to cooperate or compromise.   If a compromise is reached and becomes law, and if it works, then the public will assume that the president’s party can govern effectively--and will re-elect them.  And the minority party which agreed to the compromise will be rewarded by losing the next election. It doesn’t make any difference whether the compromise which they agreed to was a good compromise or a bad one. Either way, they lose the next election.  As the saying goes, “no good deed goes unpunished.”  So no matter what policies the president proposes, the minority party has to oppose him.

            Obama understood this, but thought he had found an “end run” around the problem.  When the GOP opposed his “government insurance option”, and offered the individual mandate instead, he just accepted it, believing that the GOP could not possibly oppose a policy which they themselves had invented, and had pushed for twenty years.   But he was wrong.  They simply switched sides.  And the same conservative think tanks that had for twenty years churned out papers arguing that an individual mandate was the only answer, now cranked out policy papers denouncing it as unconstitutional, and the mainstream press printed this stuff.

            The article explains why politicians can get away with this nonsense.  When a party does an “about face,” all party members in Congress fall into line and adopt the new party position. How do they explain this to their constituents?   The think tanks crank out positions papers to justify the change, and besides, most voters have pretty short memories.  And what about the rank and file party members?  How do they make the change? Issues have now become so complex that voters do not actually try to do their own thinking on most matters.  They simply assume that their own party has their interests at heart and would not take a position that was not in their interests.  So whatever the party does, they accept it--and begin preaching it as if it were their own idea.  

            Years ago, I heard it said that someone was “so obstinate that he would switch sides just to keep an argument going.”  Today, such behavior is not just some bizarre individual character flaw—it is the Republican national strategy.

Fan Fiction Goes Mainstream

   When does a cultural sub-current become mainstream?   In the U.S., I would say it becomes mainstream when it appears of the cover of Time Magazine,  or when the Wall Street Journal does a two page spread on it, complete with interviews and beautifully drawn illustrations.  On Friday, June 15, 2012, WSJ did exactly that.   An article by Alexandra Alter, entitled "The Weird World of Fan Fiction"  attempts to introduce outsiders to a vast and growing phenomenon that until now has flown under the radar for most of the mainstream press.  But WSJ is a business journal, and it only takes note of that which has become important to the economy.    Fan Fic writers take note:  You are now a targeted demographic entity.
       I neither write fan fiction nor read it.  In fact, I don't even read much fiction of any kind.  I read quite slowly, so for all of my life, I am still trying to get caught up on reading the facts. But in case anyone reading this post has never heard of fan fiction,  it is the writings of amateur  authors who write stories within the framework of some established genre of fiction, using most of the same characters and settings  as the original work, but with their own twist.  They write original stories, using someone else's characters, and then post them free on the web, to be read and critiqued by the rest of the fan-fic community. These writings are usually in some sci-fi or fantasy genre, but not always.  The beauty of the idea is that anything can be changed to suit the whims of the fans: The gender of the characters can be changed; (WSJ gives the example of a Sherlock Holmes story where Dr. Watson is a woman.) The sexual orientation of the characters can change; (In Star Trek,  Kirk and Spock can be lovers.)  This is a sub-genre called "slash" as in Kirk/Spock.  The time period can be changed.  You could have Beowulf accidently time-transported into the 25th century.  In fact, anything can be changed--that's the idea.   As to why people write perfectly good fiction in someone else's genre is a good question, and I'm sure there are as many answers as there are  fan-fic writers.  My own take on this is that it saves time.  Instead of taking the time to create your own brave new world and people it with such wondrous creatures, you just cut to the chase and use characters which are already on the stage and give them different lines.
      The legal status of this practice is a bit murky, but if the stories are different from the original and nothing is sold for profit, most legal scholars feel that it is fair game, though not all authors agree.  But over the years that this has been going on, most authors have come to the view that this fan fiction is the best free advertising they could ever get, and those who write it and read it are their best customers--and it would be foolish to antagonize them.   The link I have provided may or may not hit a pay wall. But even if you have already read this online,  if you are really a fan of this stuff, you might wish to buy a hard copy of that issue of WSJ while you can get one.  The print article includes over a dozen beautifully drawn  comic book style illustrations, and the online article cuts out all but one. If you are a true fan, you might want to archive this.

Old Steamboats on Display

Old Steamboats on display.

            If your travels ever take you anywhere near Dubuque, Iowa, then do not leave the area without visiting the National Mississippi River Museum and Aquarium.  Located in the Ice Harbor on the Mississippi in Dubuque, this museum has some amazing displays.  There are aquarium specimens of nearly all fresh water fish and amphibians found in the river systems of North America, all shown in a realistic habitat.  There are blue catfish as large as some of the people who come to view them.  And there are displays which re-create the history of this river, and show the part the river played in the early settlement and development of the interior of the continent.

            And they also have on display a 300 ft, steam-powered, side-wheel steamboat, which was used by the Army Corp of Engineers to dredge the channel of the Mississippi.   This boat, the Wm. M. Black, was one of a small group of such dredges built in the 1930s, and used till the early 1970s, when the rising price of crude oil made this kind of unit uneconomical.  (The two boilers on the Wm Black used several thousand gallons of bunker oil per hour.)  This ship is not actually operational. One paddlewheel was removed and placed on display on dry land, so that the public could get a better look at it.  But the ship is mostly intact, and your museum ticket buys you admission to tour this craft at your leisure.  When you walk through the lowest deck, you are surrounded by the working parts.  There are two huge, in-line, double expansion engines, one hooked to the crank pin of each paddle wheel shaft.   These are truly massive engines; the connecting rod is twenty feet long.  A third engine, the one which powers the ten-foot-diameter impeller which sucks water and mud up from the dredge scoop, is a three-cylinder, triple expansion engine.  You can inspect all of this at close range.  When you walk through this area, it’s as though you are actually “in the crankcase of the engine.”  One of the more ingenious things you’ll notice on the engines which power the paddle wheels is the “Stevenson Link.”  This is a simple mechanical linkage which connects two different cam-followers to the valve assembly in such a way that you can reverse the direction of rotation of the engine while it’s running.  There is a 22 inch long yoke which is connected on one end to the rod from the forward cam, and on the other end to the rod from the reverse cam.  The link to the valve box is hooked to a spool that can slide down the yoke, from one end to the other.   The reason that this steam driven, side wheel propulsion system was chosen was extreme maneuverability.  By having one paddlewheel turning forward and the other in reverse, the ship could turn 180 degrees in place.

             The entire museum is well worth seeing.  I’ve lived in the Mississippi valley all of my life, and I know of no tourist attraction more worth seeing—except the Mississippi itself.  If you are visiting the U.S. from some other continent, there are three things you must see before leaving:   The Grand Canyon, The Mississippi, and the fertile farm land found for hundreds of miles on each side of this river.  What is so interesting about driving across fairly flat land and seeing beautiful, green, productive fields of maize for as far as the eye can see, on both sides of the car?  Nothing, except that there is nowhere else on the planet that you can do this continuously for a thousand kilometers.  Just flying over the “corn belt” by jet would take you nearly two hours.  If you are from someplace where a farm field is a narrow strip of land in a valley bounded by mountains on both sides, then perhaps you need to see this.  The upper Midwest not only provides most of the calories consumed in the U.S.,  it also produces a significant fraction of all food consumed anywhere.