Romney Limerick

Airliner windows don't open.
But that's not what Romney is hope'n.
"Let's open them," calmly
Suggested Mitt Romney.
With a brain like that, how is he cope'n?

Seriously;  How has it come to the point where the party of Abe Lincoln and Teddy Roosevelt offers, as its standard bearer,  a man who cannot quite grasp why the windows on a pressurized airliner are not openable?

Perils of Quantitative Easing

            On Sept 13, 2012, the Federal Reserve announced it would begin a third round of “quantitative easing.”   This means they intend to expand the money supply again.   The Fed intends to begin purchasing $40 billion worth of mortgage backed securities per month, and continue to do so until unemployment comes down to an acceptable level.  And at some point, they may begin buying U.S. Treasury Bills again.   In the first round of bond buying, begun in March 2009, the Fed bought 1.25 trillion dollars worth of corporate assets.   And then in November of 2010, the Fed began buying U.S. Treasury Bills, pumping an additional 600 billion dollars into the economy. Where does the Fed get the money to make these purchases?  In effect, they just print it. 

            What are they doing and why are they doing it?  The Federal Reserve, like any central bank system, is simply trying to control the money supply, keeping the availability of dollars at a level which they hope will bring unemployment down to an acceptably low level, while still keeping inflation from rising to an unacceptably high level. These two things are what central banks try to do, and in the U.S., Congress has given the Fed a specific mandate to do both.

            Do I object to this action which the Fed is undertaking?  No—the unemployment rate is way too high, and something has to be done about it.  If it could be brought down to a normal level, then the increased tax collections and reduced welfare expense would, in and of itself, nearly balance the budget.  But I’m disappointed that we are using no tools other than monetary policy to do this, when a combination of fiscal policy and monetary policy would work infinitely better.  Fiscal policy could be used with surgical precision if we had a Congress with the will to do it.  But we don’t, so the whole task of bringing down unemployment is left to poor Mr. Bernanke, who has little more in his tool box besides the “sledge hammer” of monetary easing. 

            Before I explain what my real objection is, let’s take a moment to briefly consider just what monetary policy really is.   If a central bank wishes to add cash to the economy, they simply buy up “commercial paper,” that is, the kind of IOUs that banks and large corporations give to other banks.  By buying corporate bonds for cash, they take these bonds out of circulation and put more cash into circulation. That supposedly expands the money supply.  And if they wish to shrink the money supply, they sell some of the commercial paper from the vast hoard in their portfolio at any given time, and that takes money out of circulation.

               But there is just one problem.  Switching cash for corporate bonds may not change the money supply as much as you may think, because such bonds are in themselves a form of money.   Money is anything that can be used to pay a debt.  And if a bundle of bonds are written on blue chip companies, and are offered at an appropriate discount, most investment banks, in normal times, will accept them as cash.   In fact, an interest-bearing note from a credit worthy company is better than cash, because cash does not pay interest.  And in normal times, the overwhelming majority of the money in circulation is corporate paper—not U.S. currency. 

            Whenever there is a panic—a stock market crash, a war, or whatever--the market freezes up and banks temporarily stop accepting corporate paper for debt payment. They demand cash.  So then these assets cease to be liquid—they stop being money.    Of course, some of them, such as subprime real estate, should never have been money in the first place.  But when the crash of 2008 hit, banks not only stopped accepting questionable mortgages, they didn’t want good ones either.

             So this produced a liquidity crisis, as a lot of the money in circulation just stopped being money and stopped circulating. About 3 trillion dollars worth of liquidity instantly ceased to exist.  But the instruments, the bonds, mortgages, promissory notes, etc, still exist somewhere.  And if the economy ever fully recovers, banks will start trading them.  And all 3 trillion bucks worth will become part of the money supply.  And that’s why I get a little nervous about quantitative easing.  Just about the time that unemployment gets down to normal, all of the dollars that Mr. Bernanke has added to the economy will have some unexpected company, as this slug of commercial paper suddenly becomes liquid again.

            At that point, the Fed will try to shrink the money supply by selling off commercial paper in exchange for cash.  As they trade bonds for cash, this removes cash from circulation, but it might not really remove much money, because by then the bonds put back into circulation will have become money again.  And every month, even more of this money will be created as every corporation in the country begins issuing more corporate debt.   And it isn’t just corporations that do this. You and I can expand the money supply.  Some years back, my brother took out a home improvement loan, secured by a mortgage.  Over the time he paid it back, he ended up mailing interest and principle payments to a different bank every month.  He originally borrowed it form a local bank, but that note was traded to banks all over the country.  He had, in effect, increased the money supply.  

            I would suggest that we don’t even have a general agreement as to what “money” is.  If a credit card company informs you that you have an additional $10,000 line of credit, is that money?   Well, it would spend the same as money—wouldn’t it?  So how much control does the Fed have over the money supply when every man Jack can create the stuff?

            So far, monetary policy has not produced much result.  The stimulus did produce results. It is the reason that unemployment never got much above 10% rather than ballooning to 25%, as it did in the Hoover administration.  If we had a million businesses that had no access to credit but had customers banging on the door, then monetary policy might create a few jobs.  But right now, American corporations are sitting on 3 trillion bucks and they aren’t spending any of it. They do not need cash or credit—they need customers.  Business needs a whole generation of young people to begin entering the middle class, and not a generation of middle aged consumers falling out of it. Business needs the unemployed to have jobs—jobs secure enough that the workers are not afraid to spend what they earn—but even more important, business needs the underemployed to earn more discretionary income.

             The stimulus was large enough to keep unemployment from becoming disastrously worse, but not large enough to really cure it.  And none of the quantitative easing has cured it either. I suppose that if we were to dump enough dollars on the market, we would eventually bid down the value of the Dollar to where those who hold dollars would start panic buying, hoping to unload dollars while dollars can still buy something. But this is a pretty dangerous game. The main peril of relying on monetary policy alone, aside from the fact that it doesn’t work, is that it’s a lot easier to throw those dollars out there than to ever call them back.

Oil, Imperialism, and the Real Causes of WWI

       

            This post is the Cat’s rather long book review of A Century of War, by Wm. Engdahl:            Engdahl, a German historian, makes a persuasive case that all wars of the Twentieth Century were about oil.   He explains that the British and Americans have never been told the truth about why WWI was fought.  We are told that it was all some kind of silly mistake.  But the real struggle was over oil, and the military and industrial dominance that flows from control of that oil.  Although the fields of France and Russia were where most of the killing took place, the real prize was the oil fields of Iraq, and whether England or Germany would control those oil fields.  Forget about the Red Baron—it was Laurence of Arabia who grabbed the real estate that mattered.

            But to explain the conflicts of the 20^th century,  Engdahl needs to explain the economic order of the 19^th and how that order came into being.  So he begins his narrative with The Congress of Vienna, in 1814, at the end of the Napoleonic wars. The outcome of this congress was that Britain got what she wanted—the right to dominate the seas and with it, world trade. The concessions she granted to Austria were actually self-serving, in that it divided Europe in such a way that no one power would be large enough to rival Britain in trade or war.

  FREE TRADE-- THE ULTIMATE CAUSE OF WAR.            

            In 1815, Britain began moving toward a free trade strategy, with the adoption of the gold standard.  At that time, British industry was far superior to anything in Europe.  But to maximize that advantage, Britain had to pry open foreign markets. So Britain talked Europe into free trade agreements.  The culmination of this free trade strategy was the repeal of the Corn Laws in 1846.            Most people think that the repeal of the Corn Laws was a victory for workers at the expense of landowners.  Actually, workers lost.  Allowing duty-free importation of grain lowered the price of bread, but welfare payments were pegged to the price of bread, and so were most working class wages.  When the price dropped to half, so did income.  Also, farm laborers forced off the land had to compete for urban jobs, which depressed wages even further.  And that was the whole idea—to make British industry competitive by depressing wages.

            The worst victims of the Corn Law repeal were the Irish tenant farmers.  Irish farmers grew potatoes, but they mainly grew wheat. They had used half the wheat crop to pay rent, and lived off the other half, plus they had the potatoes.  But when the grain price dropped to half, they had to use the entire wheat crop to pay rent.  So when the potato crop failed, they starved to death.  During the worst year of the famine, they had a bumper crop of wheat, which could easily have fed everyone in Ireland.  But it was all confiscated by the landlords for rent, and millions were left to starve.            Free trade radically lowered the standard of living of every worker in England and Ireland.  But factory owners grew rich, and so did bankers and shippers.

  FREE TRADE’S SHORT-LIVED ADVANTAGE

            In the mid-nineteenth-century, free trade worked very well for British factory owners, bankers, and ship owners.  But it did not work well for British workers, nor did it work well for the countries Britain was trading with.  By 1850, some countries had begun to notice that.  So the German states had united into a customs union, or “Zollverein,” and had begun to follow the protectionist policies of Frederich List.            The Germans complained that the British free trade argument had always been a fraud.  In 1815, the British had said, in effect, “We have the most efficient industry in the world, and we have a free trade economy; so imitate us and you too will prosper.”    But Britain hadn’t always been a leader in industry, and they hadn’t always had free trade.  As late as 1690, they had trailed far behind Europe in every technology. Yet in the 18^th century, they caught up with Europe and surpassed them. But they did so by creating the most absolutely protectionist economy in history.

            During this time, with imports severely restricted, local industries had a good potential for profit, so it became profitable to invest capital in them.  British wealth was eagerly invested and re-invested in British industry, and innovation of every kind was fully financed.  It was in this protectionist environment the British industry surpassed Europe.  Then, England did an about-face and abruptly opened her markets, as a way of inducing Europe to open its markets, so as to gain maximum leverage from the technological lead they had then gained. But by the 1850s, Europeans had decided that they would gain nothing from this arrangement. Since their own factories lagged far behind the British, they would be unable to compete and would fall even further behind and eventually cease to exist.  So the Europeans opted for the protectionist strategies of Frederich List.

   THE FREE TRADE PARADOX.

            There was, from the beginning, a paradox to the British plan. It contained the seeds of its own destruction.  Through a century of extreme protectionism, they had gained a tremendous technical lead.  But to make any use of this lead, they needed open markets, and the open markets in themselves would eventually erode that technical lead. You can’t induce other countries to open their markets to you unless you open yours.  But as soon as you do this, capital investment can flow to other countries, rather than be invested locally. If some other country, i.e. India, has wages even lower than Britain, then it will be more profitable to build new factories in India, rather than in Britain.   Even if a new British factory could manage to stay in business, the wage cost would always be higher, so profit would be lower. There would always be a strong disincentive to re-investing British profits in Britain.  And there would be little interest in trying to have a better trained workforce as a way of remaining competitive, since education would require tax expenditure, and taxes would cut into profit.  But as British industry was stagnating and British workers were reduced to serfdom, banks still made profit and no one in power saw any need to change anything.

   A BOOM IN EUROPE.

            As Britain headed downward, Germany was booming.  Under the Zollverein, imports were restricted and capital flows were tightly controlled.  Any outside investment in Germany required government permission, as did German investment abroad.  German investment was directed toward improvement of German industries, and these investments were profitable, due to a protected markets price for the products of those industries.   

            German consumers paid a high initial cost for this. They paid higher prices for everything they bought, but only for one generation.  As German industrial output doubled every decade, innovation flourished, productivity increased, and wages rose sharply. The German plan also called for heavy investment in education.  The first push was for universal literacy, quickly achieved through a nationwide system of tax-supported primary schools.  They then built technical high schools and polytechnical colleges.  By the end of the 19^th century, Germany had the best trained work force in the world.  German agriculture had also improved, so that as Germany became self-sufficient in food, their workers were better fed than the English.

  And  German colleges were turning out scientists and engineers by the tens of thousands—some of them world-class.    

            In the 1870s, Britain went into a depression that lasted over 20 years.  But Germany continued to boom.  In 1850, when Germany began to shift away from free trade, they produced only insignificant amounts of iron.  By 1900 they passed Britain, and by 1910 their output was 50% higher than Britain, at 15 million tons. Between 1880 and 1900, their steel output rose over 1000%.  The situation was the same for coal, textiles, electric power, and especially for chemicals.  In fact, Germany practically invented the modern chemical industry, with the huge Bayer and BASF plants leading the way. They also took the lead in chemical research, inventing aniline dye, aspirin, and several plastics.  And the German merchant fleet went from half a million tons in 1870, to 13 million in 1909.  (And, though Engdahl doesn’t mention it, in 1903, Fritz Haber, a chemist at BASF, developed a process for extracting nitrogen from the air.   This discovery alone radically altered the balance of power.   Germany had poor soil that was never very productive without added nitrates.  Munitions also require nitrates. The only available source had been bat guano from Bolivia. This was very expensive, and Germany could never have afforded enough for high output agriculture and high munitions production at the same time.  Besides, the Bolivian shipments had to get past the British Navy.  So war between Britain and Germany would not have been a possibility.  But Haber changed all that.)

            Besides falling behind in gross output, Britain was also no longer the leader in technical innovation.  When internal combustion engines began to replace steam, it was the Germans who won the race to develop the first practical IC engine, first with the Otto engine, and then with the Diesel.  (Engdahl could also have mentioned that in 1840, Britain was producing the finest steam engines on earth. But by the 1880s, the American made Corliss Engine was so superior that British manufacturers were paying American patent royalties for the privilege of building it. )

            While all this was happening, British bankers just collected the money and re-invested it everywhere except in England, and did nothing as their country went to hell in a hand-basket.  That’s the paradox.  The only reason Britain had pressed for free trade was to take full advantage of their technical lead. But in just over half a century, free trade itself had evaporated that lead.  By the end of the century, British bankers had noticed what was happening in Germany, and it scarred them. Privately, they agreed that something would have to be done about Germany.            Using monopolistic trade practices, Britain nearly ran the whole world during the 19^th century.  And they were still firmly in charge at the end of that century.  But by then the top leaders realized that British dominance would not continue much longer if Britain continued to stagnate, while other countries, particularly Germany, continued to advance.  Yet they failed to see the problem as a British failure, wrought by their own greed and short-sightedness.  They saw it as “the German problem,” and began looking for a way to “do something about Germany.” 

                                    THREE PILLORS OF THE BRITISH EMPIRE

            Engdahl says the British Empire was based on three things:  a monopoly of gold, a monopoly of shipping, and a monopoly of certain raw materials.             To have these monopolies, you need gold, shipping, and raw materials for yourself--but you also need a practical way to deny these things to all potential competitors.  And that’s what the Boer War was about.

            When gold was discovered in the Transvaal, the British seized the area, not out of greed for gold, but to keep any other country from having it. Nearly all of the gold from the California Gold Rush was bought up by British banks to keep it off the market.  For shipping, you need a large merchant marine. But to maintain a shipping monopoly, you also need the world’s largest navy, so that you can deny shipping to any competitor, should it suit your convenience to do so.  And to maintain a monopoly on raw materials----is what the empire was for.  During the Nineteenth Century, using these three monopolies, Britain was able to dominate world trade and dominate the world
INFORMAL EMPIRE

            The Boer War was very nasty and very expensive.  So in the 1890s, the ruling class in England began talking about an “informal empire”---where they would still dominate the world, but use less military leverage, and more financial leverage.  Don’t send in the Army--send in the bankers--and threaten to cut off their credit.  The informal empire relied on a partnership between the British banks, the leaders in Parliament, the leaders of key industries, the military, and the foreign intelligence service, but with the bankers clearly in charge.  These were separate entities, but in dealing with foreign countries, they worked like five fingers of the same fist. If a foreign company applied for a loan at a branch of a British bank, any information disclosed to the loan officer would be immediately forwarded to a foreign intelligence officer, unless the bank employee was a foreign intelligence officer, which he might easily have been. 

             In many countries, if a local political leader caused problems for a British bank, the British Army would be sent in. And any time the British Army had problems gaining cooperation from political leaders, the bankers would be sent in---to cut off credit and topple the regime. Engdahl points out that this tactic, which the U.S. now uses through the IMF, was learned from the British. The whole system was glued together by control of information, gathered by the foreign intelligence service.  And a pliant parliament passed whatever laws were needed to make it work. Countries that Britain dealt with never fully appreciated what they were up against. When the so-called Anglo-Persian Oil Company was formed, the government of Iran had no idea that the company they were dealing with was wholly owned by the British government. Even Royal Dutch Petroleum was a British operation, even though they maintained the fiction of a corporate hdqrs in Holland and employed mostly Dutch workers and management.

   OIL COMES ON THE SCENE

            In the 1890s, a navy captain named Fischer released a study comparing the strategic advantage of oil-powered warships to coal-powered.  The data showed that in any war fought between coal-powered and oil-powered ships, the coal-powered warships would always lose. A steamship with an oil-fired boiler would have only slightly higher speed. But it would have twice the range.  It would also produce little or no smoke, whereas a coal burner would have a plume visible for forty miles.   A coal burner took two days to re-fuel vs. two hours for an oil burner.  And when firing up a cold boiler, a coal burner took 11 hours to come up to full steam, and took four hours to get enough steam just to move the ship.  An oil burner could be at full steam in four hours, and could have enough steam to move the ship in 30 minutes. This was not good news for England--which, as Churchill said, was “an island made of coal”---but had no oil.

            In 1904 Captain Fischer had become First Admiral Lord Fischer, and he began converting England’s fleet to oil. He also convened a committee to study how England might obtain that oil.   Since that moment, oil has been a strategic material.  From that time, British policy has focused on not only obtaining oil, but denying it to any potential competitor wherever possible. As early as 1892, Lord Curzon, later viceroy of India, had written that. “The concession of a port on the Persian Gulf to Russia would be a provocation to war.”

            In 1905, acting through a covert agent, Britain obtained a franchise on the development of     Iranian oil from an engineer named D’Arcy. This franchise had been granted to D’Arcy in 1901 by the Shah.  It happened that D’Arcy was a pious Christian. So the British agent, disguised as a priest, convinced D’Arcy that the new Anglo-Persian Oil Company was a private company run by good conscientious Christians.

   IRAQI OIL, AND THE GERMANS:

            In 1889 some German businessmen formed a plan to build a railway from Berlin to Constantinople. By 1896 1,000 km had been built, and the Turkish government had agreed to allow the line to continue to Baghdad, with plans to extend it eventually to Kuwait and the Persian Gulf.  Such a line would open to Germany a vast West Asian interior market. It would also allow German goods a short cut to India, one that did not need the Suez Canal. The British bankers, who were already extremely concerned about Germany, now became nearly apoplectic. There was only room for one great trading power. If Germany was in, Britain would be out.            But the last straw was when Germany was awarded the full mineral rights to a 20 km corridor on either side of the proposed railway, right through Mosul, which is now at the heart of the Iraqi oil region. Over the next 15 years, Britain did everything possible to stall or prevent the construction of this railway.
      BALKAN WARS

             The route would have to go through Germany, Austro-Hungary, Serbia, Bulgaria, and Turkey. One obvious thing that might obstruct the project would be any kind of destabilizing little war in the Balkans. Conveniently for the British, in the decade leading up to 1914, a series of such wars just happened to occur:  first the Bulgarian war and then the Turkish war.

             Another device for delaying the project was for England to pretend to be interested in jointly financing the project, then canceling at the last minute. The Germans had continually begged Britain to join in the endeavor, as it would be extremely expensive to finance alone. Finally, in 1913, they realized that the British had no good faith intent of ever financing the project, so a bill was introduced in the Reichstag to have the German government fully fund the Berlin to Baghdad Railway. This was the bill being debated when war broke out in 1914.

   THE FINAL SOLUTION

            Obviously, the causes of the First World War are complex.  And some historians argue that the outbreak of war was simply a mistake--a series of unfortunate diplomatic blunders.  But Engdahl claims that a full decade before the war, British government leaders had already concluded that English trade dominance could not be preserved much longer unless a way could be found to wreck the German economy, and that this would probably require a war. The secret three-way alliance between Britain, Russia, and France was in no way a defensive strategy.   If you wanted a defensive pact, it would make no sense to keep it a secret. Instead, it was more like a mouse trap.  If any one ally was attacked, it would spring the trap. The idea was to trick Germany into a war that she couldn’t possibly win, and which would cripple her economy, and then impose post-war conditions that would keep it crippled forever.   Would the British really start a war that would kill 20 million people just to maintain trade supremacy?  Well, they probably didn’t know it would kill 20 million people. They probably thought it would be one of those minor European wars that no one even remembers. With a tiny country like Germany up against Russia, France, and Britain, how could the war possibly last more than a few months?  There were many factors that convinced British bankers that the German economy would have to be destroyed if Britain were to survive. The fact that German industry and shipping would soon eclipse Britain was one factor. And the fact that the Germans were building a huge navy to protect their shipping was another.  And the Berlin to Baghdad Rail route, with a German short cut to the Far East, was perhaps the main factor. According to Engdahl, even with that, the peace might have been saved. But when the rail corridor included access to Iraqi oil--that was it. The battle lines were drawn.

            Once the war started, Britain pulled most of its troops out of the front lines in France and seized the Arabian Peninsula.  They told the Arabs that they were liberating them from the Ottoman Empire. But a secret agreement, the Sykes-Picot accord, had carved up the whole Middle East between Britain, France, and Russia, with Britain getting most of the oil. After the Bolshevik revolution, the Leninist government in 1917 found a copy of this accord and made it public. The Arabs realized they’d been duped.  T.E. Lawrence was aware of the fraud, and he wasn’t happy about it.  But he felt if it was a choice between betraying the Arabs and losing the war, he’d rather win the war.  The French were outraged that the British would leave them to fight the western front mostly alone, but they could do little but accept it.  And when the war was over, Britain already had troops on the ground over the whole Middle East, so the French accepted whatever crumbs the British chose to leave them.

            After the war, The British and French insisted on imposing crushing reparations payments, which was the final blow to a German economy already weakened by war. Wilson had objected, arguing that the German economy could never be rebuilt under such a heavy burden. Most of us have been taught that it was out of French and British ignorance that these reparations were imposed--that the incompetent French and British politicians simply did not understand what they were doing. Engdahl says they knew exactly what they were doing--crushing Germany! That had been the whole purpose of the war----to destroy the German economy.           

            How did the U.S. come to intervene?  American banks, through J. P. Morgan, had loaned tens of billions of dollars to Britain to finance the war. If Britain lost, these loans would never be repaid and all large American banks would become insolvent.  And such a bank failure would have taken down the entire American economy, along with the economy of the entire world.

Engdahl goes on to explain:

1. Why the British bankers originally backed Hitler.
2. How Britain made “debt vassals” of third world countries, as a way of controlling them, and why Kissinger used the same strategy, though it nearly wrecked the U.S. economy.
3. Why British banks backed the establishment of the state of Israel
4. Why the U.S. set up conditions to start a war in Kosovo, and sent the Army in to stop it.
5. Which former Soviet states now have U.S. air bases---and which of these states have oil.
6. Which political and corporate leaders were probably assassinated by British MI5 units.

A Keynesian Error

      A Keynesian Error, (and Why Unions are Still Needed. )           
When most people think of Keynesian economics, they think of deliberate deficit spending used to stimulate a sluggish economy and prevent the country from sliding into a recession.  That was indeed a part of the theory of John Maynard Keynes. Another part was deliberately running a surplus to slow down an overheated economy and prevent runaway inflation.  When a country runs a surplus, it removes money from the economy through taxation faster than it injects money into the economy through government spending.  Running a fiscal deficit does the opposite.

            According to Keynes, at any point in time, there should be exactly enough money circulating in the economy to purchase all of the goods which is produced.  If this situation does not occur naturally, then Keynes believed that it is the obligation of government to create such a situation, because if government does not do this—then no one will do it.  And any deficiency in circulating cash will result in some of the goods being unsold.  As unsold goods accumulates, this leads to layoffs and eventually a depression.  But if there is too much cash, that is, too many dollars chasing too few goods, the result will be increasing prices, and eventually runaway inflation.  Yet, at some point in between, there must exist a fiscal policy which would be neutral.  To most people, It seems natural to assume that this point would occur when the budget is balanced.  Originally, even Keynes assumed this.  But this would be a serious error.  The stable, neutral point does not seem to occur with the budget in balance--it occurs with a slight deficit.  But why?  For years, I have struggled to find an answer. I think I now have one.
           The first answer I saw was related to population increase.  A neutral economy might keep everyone working if the number of workers remained constant. But if the number of young people entering the workforce were to exceed the number of old workers retiring, then some expansion of the economy would be required so that the increase in the total number of workers did not radically exceed the number of jobs. So an expansionary fiscal policy, at least a slight one, might always be required.

            You may point out that our population is not expanding much anymore, so this argument has little to say about today, even though it may explain the need for expansion in the 50s and 60s.   But there are ways that an economy can be swamped with new workers without any population expansion at all.  During the 50s, most married women were “stay at home” housewives.  But between 1965 and 1980, millions sought work outside the home.  The increase in female workforce participation in the U.S. in this time period amounted to about 19 million women.   This deluge of excess labor in itself could have caused a severe depression, but since the Johnson administration tried to fight the Viet Nam War without raising taxes to pay for it, we had a wildly expansionary fiscal policy, and so we had runaway inflation instead.

            But today, the number of women working outside the home is probably as high as it’s likely to get, so why is the expansion still needed?   Well, it’s like this:  Just when the supply of labor and the demand for labor is in perfect balance, some no good bastard, (like me) will install a piece of labor saving machinery, which will cause layoffs in that industry.

             Mind you, the specific company where the layoffs will occur will probably not be the firm where the labor saving equipment was installed.  More likely, the firm with the new equipment will lower its labor cost enough to expand its share of the market, and layoffs or plant closings will occur at the firm of a competitor who could not afford to buy such equipment.  But for the industry as a whole, more labor saving equipment equals fewer workers, unless total demand increases.   And what increases total demand?  An expansionary fiscal policy, of course!

            So what is the exact relationship between increased labor productivity, and the deficit required to keep the country out of severe depression?  It depends.  What it depends on is the strength of labor unions.   During the 40s, 50s, and 60s, we had rapid increases in productivity, but we also had tough, effective unions.  So whenever a firm installed equipment which decreased the hours required for a unit of production, the unions demanded, and usually got, a raise in hourly wage.  They were simply demanding that some of the benefit of the increased productivity per worker be shared with the workers who made it possible.  Because the average wage per hour increased as the hours per unit of production decreased, there was little or no net depressive effect on aggregate demand.  Put another way, if the workers in the firm with the new equipment were paid a high enough increase in wages, this would help compensate for the reductions in national buying power caused by the layoffs from the firm which closed its doors. In fact, this increase in spending power given to workers as a group could cause the economy as a whole to expand enough to provide jobs for all of the workers who were squeezed out.  So only a very modest deficit was required to keep the economy humming along. 

            But today, industrial unions do not usually have the power to force corporations to share the benefits of productivity increases with workers.  So those workers who are squeezed out will not be rescued by the boom caused by the increased buying power of other workers.  Either the boom to provide the required jobs will be produced by substantial deficit spending, or else we will have a depression.  I know there are many conservatives who do not much care for big unions--or for big deficits either.  And they will not be happy to learn that, over the long run, they may have to choose one or the other. But remember, when you have a real depression, it isn’t just workers who go broke. 

The Car Sales Boom of 2015

                  According to an article in the Aug 5, 2012 issue of The New York Times Magazine, auto makers are betting that 2015 will be an all time record sales year.  According to Adam Davidson’s article, 2015 IS GONNA BE THE YEAR, Volkswagen just opened a new plant in Chattanooga, Honda is expanding production in Indiana, Kia in Georgia, and Hyundai in Alabama.  Why do they think a boom is coming? Do they suspect that we will all be rolling in money then?  No, they just think that income and consumer confidence are slowly improving and will continue to improve.  But mainly, they think that most of the current fleet of American cars will be un-repairable by 2015.   Today, the average American car is 11 years old.  That’s an all time record. And if 11 years is the average age, then millions of cars must be much, much older than 11 years--and sooner or later, all things die. 

                  Right now, there is enough cash and unused credit in the economy to support a much higher level of consumer spending than we are seeing.  While 10% of the work force is still unemployed and another 10% is underemployed, we can assume that 80% are still earning a paycheck--but aren’t spending much of it.   For the last three years, they have been paying down their credit card debt, making payments on their houses (so that they now have equity), and some of them are saving cash.  Most of them now have good enough credit so that they could drive home a new car at any time—but they are too scared to do it.  But when their old junker finally dies, they will certainly have to buy something.  So, can’t they just buy another old car?   From whom?  This time, when your old junker bites the dust, most of the other old cars will be ready to junk too. 

                  For those who would never consider buying a brand new vehicle, the demand  in 2015 will be for used, low mileage cars. In order to fill that future demand, auto makers are now offering attractive rental deals, figuring that in three years, there will be a strong market for the rentals being returned at that time.  

                  To me, the really amazing thing is that the average American car has been on the road for 11 years.  In the 1950s, people who bought new cars traded every two or three years. Those who bought used cars bought these trade-ins and kept them for another two or three years. When I got out of high school in 1957 and got my first job, I immediately bought my first car.  It was a 1950 Plymouth Business Coupe.  It was 7 years old, had 40,000 miles on the clock, and the body was in flawless condition.  I paid $160 for it.   A dollar then was worth a lot more than a dollar today, but that still wasn’t a lot of money.  It was about two weeks pay.  I remember marveling that it was possible to buy a car that still looked and drove like a new car--for only two weeks pay.  Someone replied, “Yes, but who would want to be seen driving a 7 year old car?”