May 30th 2020, Revenge of the Digital Luddites

May 30^th 2020, Revenge of the Digital Luddites

Economics Without The B.S.**: 

[**  Double entendre intended.]

Last night while watching the rioting – not to be confused with the peaceful protests earlier in the day about the police abuse of minorities in the George Floyd murder case – I was awakened to one of the street interviews by a reporter from my local area of Los Angeles.  Earlier in the evening reporters had interviewed some of the protestors, not rioters, one a young college educated minority who talked about the inequities of social and racial justice in our society, trying to explain why this rioting, and the looting and destruction of stores was happening.  In another separate interview the reporter had a husband-wife business owner team on mike asking if their business was destroyed as the reporter pointed out the destroyed looted buildings in the neighborhood.  “No” they said, “We are a service company.  We do not sell merchandise, so there is nothing to steal or anything that they [the looters] would want, they skipped us.”  I had to think about that; it struck me.

I am well into being a septuagenarian now, so I am well aware of riots from previous decades where the issues were similar to today; and, being a history major, some that preceded my existence.  The last major riot we had in Los Angeles was in 1992 related to the verdict acquitting police officers in the beating of Rodney King for a high-speed chase;  and that involved the breaking of windows, looting stores, and setting fires.  Breaking windows, interesting analogy?

Breaking Windows in Los Angeles – 2020?

1992?, that was right when Windows 3.1 came out, the first really popular version of a multimedia, graphical user interface program that replaced DOS-based software, and made navigating around the early Internet (prior to web-based search engines) much easier with a browser that could easily take you to a specific web site or bulletin board – this is all prior to Google and the World Wide Web.  1992?, that was right after the collapse of communism in Eastern Europe.  1992?, that was right before globalization would get an impetus from the collapse of communism and really start to take off for linking the world in an economic system that would spread resources more efficiently and productively for the benefit of humankind.  Right???

Well it was during that riot in 1992 where stores were looted and burned.  This time what I noticed was the looting in particular, and the setting fire to, seemed to be more organized on the part of the rioters –   several vehicles would drive up a boulevard in a shopping district, several people would get out dressed in dark clothes and with hoods and masks, go about breaking windows and doors to gain entry, and loot the place and come out with merchandise that was loaded in the vehicles and drive away, and eventually wind up in another shopping district to repeat the scene all over again.  But I wondered, what were they gaining of value to lash out at society this time?  Merchandise/goods?  We’re in a digital economy today.  A service economy today.  An information economy where knowledge-based work is performed and the people who do that work today are by and large handsomely rewarded.  What damage is being done to this society today with this riotous behavior, a society that is still mired in inequities and social and racial injustice?  Is this just a modern day version of the rage and anger of Luddites striking out futilely against inevitable societal changes that perpetuate past grievances and wrongs?

Luddites in England during the industrialization of early 19^th Century

The rioters, and the protestors that defend this defiance, striking out against the material possessions of a modernizing wealthy society are misdirected, because in the intervening time since the Rodney King Riots and 1992, the wealth of a modern society has transmuted into an information age and knowledge-based society where value manifests itself less visibly.  The threat to a democratic society is not in the maldistribution of material possessions but in the inequality of opportunity when a knowledge-based society serves the interests of an oligarchic, aristocratic meritocracy.  These modern day Luddites are digitally duped, deceived, and lost their focus on a remedy, which needs redirection toward participation in our democratic process as well as its institutions, and not breaking windows to get in.

There were two videos last week that highlighted the inequality and social-racial injustice in our society.  What happened to George Floyd at the hands (knee) of the police was just one example.  The other was just as telling although less horrific; bird watcher Christian Cooper, a gentle man who politely asked a young lady walking her dog off leash to tether the dog as posted on signs in that area of Central Park reserved for birders, whereupon the women got on her phone and called police to say she was in danger, and not stopping there but to add that she was being threatened by an African-American.  If there is a problem of White Supremacy in this country, it sure played out more subtly with this example, which is more than just an illustration of class entitlement or poor momentary judgment.

In addition to our digital divide in this country, we also have a political divide.  And that political divide is stoked by a president who uses derision as a strategic weapon to divide and conquer in a nation where all other presidents prior to him used their abilities to broaden their political coalition.  President Trump has used rhetoric, and described situations like the protests in Charlottesville, Virginia, and a literal descent from the escalator ride in Trump Tower to a figurative descent into nativism and White Supremacy when he announced his run for the presidency that day; this to govern a country which is becoming a majority-minority nation.

How did such a person get to be the leader of the Free World I will leave to others to analyze.  His inadequacies as a national leader are very apparent, especially as we deal with an international pandemic with  national proportions which strikes at people of color members of our nation disproportionately to their representation.  He is unable to provide leadership to a great nation because of a strategy that only appeals to half of the nation; so that when an issue like the pandemic requires a unified response, he has neutered himself in trying to rally all the troops. 

President Trump has proven inept at managing our vast bureaucracy; but, he has managed to overcome this by being legitimized by a Right Wing faction out to serve their own political agenda by working with and enabling this person with so many leadership deficiencies while undermining our professional civil service and the one and only institutional business mentioned in the Constitution to protect our liberties, the media, which he has repeatedly called “the enemy” and the Right Wing faction has embraced the criticism with references to the “Deep State”, previously  known as our democratic institutions.

I do not know what President Trump’s personal motivation was for seeking the presidency, a role of leadership for the Free World that has been used to advance democratic values.  No society is perfect, but the one example that the American system of democracy has over others, is that we have been malleable to change, right from our founding, so that whatever the issues are that plague our society, like racism, can be institutionally addressed and self-corrected.  However, only so much can be done with the passing of laws; to change what is in the hearts and minds of people will require something not found in any historical document or proclamation or utterance from any official. 

If America is to advance the cause of liberty and democracy to itself as well as other nations and fulfill the quest of the founding fathers as symbolically represented by Lady Liberty in the New York harbor, given to us by the French as a beacon for others, that used to greet newly arriving immigrants and still manages to be an inspiration for visitors as well as foreigners in their own land, it must find a way to be inclusive in its social fabric.

Tiananmen Square Protests in China – 1989

What We Learn From FDR's New Deal?

What We Learn From FDR's New Deal?

Economics Without The B.S.**: 

[**  Double entendre intended.]

The biggest lesson from FDR’s years as president are two, outlined by David Kennedy in his history ‘Freedom From Fear’; they are: (1) that the federal government has a much bigger role to play in the affairs of the nation and that the people must be involved with that role the government plays; and (2) with the outbreak of hostilities in Europe in particular, but also in Asia, the United States would have to be a more active participant in world affairs and have a role in securing democracy’s standing internationally.

It was FDR’s intent right from the start in 1932 when he was running against President Hoover to make those domestic changes, although he did not make any specific public announcements to that effect.  After the election he had a long period until he took office, about four months (from the November election to the first week in March when he was sworn in) and that was plenty of time for his Brain Trust to go to work and design the architecture of the New Deal. 

One of the very first things the new administration did was address the outflow of gold from government reserves, the gold standard, and the effect on the banking system.  They did this by delinking the dollar to gold, eventually taking the country off the gold standard, devaluing the dollar to other currencies while raising prices domestically when the government bought farm commodities and provided subsidies to farmers.  These inflationary actions at a time of a deflationary spiral had the effect of raising a pricing level that had deteriorated during the depression and re-establishing a pricing level closer to what existed in the mid-1920s.  These actions were done in series with new legislation introduced during the first one hundred days and with executive action that required no new legislation.  It was subsequently followed by further action over the next few years.

Another very important measure taken was to reinforce authority the government already had but was not used by the prior administration – namely giving the Reconstruction Finance Corporation (RFC) a much broader mission to bail out the collapsing banking system and to buttress the sagging industrial production.  President Hoover created the RFC in his last year, 1932, and even appointed a Democrat, Jesse Jones, to head the agency; but, Hoover gave it no charge to do anything.  FDR saw the opportunity, kept Jones on board (from 1933 to 1945), and the RFC under FDR/Jones pumped tens of billions of dollars (in then current dollars) into the economy reviving the banks, rebuilding the industrial sector, and getting it into war production when war broke out.

The use of Jesse Jones is illustrative of way FDR handled people and empowered federal agencies.  Jones started in business in the 19^th Century, moved to Houston at the turn of century and became a successful entrepreneur and industrialist/builder, eventually becoming a leading banker and civic leader.  He lived through the 1908 Panic and participated in the World War I mobilization.  President Hoover never took advantage of this talent and experience, FDR had him as a close advisor, one who visited President Roosevelt each morning in his residence before he started his day in the Oval Office to go over business, like fixing the dollar’s value to gold; or, what bank to save, what bank to let go, or what bank to consolidate with another.  FDR trusted Jones’ arbitrary judgement.  Jones understood the consequences of economic and public policy making in a democratic society composed of various income groups and the vicissitudes of economic behavior during good times as bad.  He was an avid supporter of the President and could articulate FDR’s policies to the business community.

A third thing we can learn from FDR in our present time of a great political divide, is how to garner the strength of the American democratic process.  In 1932 when FDR first ran for president, the Democratic Party was not a unified national party.  It was the Republican Party that was supreme nationally, except for the South.  The Republican Party dominated national politics at the presidential level and in the Senate from the post-Civil War up until 1932; while splitting control of the House of Representatives half the time with Democrats.  It was the failure of Hoover and Republican ideology during the Great Depression that opened the possibility for the Democrats; and, FDR was a master politician who formed a new broad national coalition that made the modern Democratic Party that we still can recognize today with some semblance of the past -- a broad coalition of labor, some business, urban big city populations, rural populist leaning populations, farmers especially small farmers, and even attracting some African-Americans away from the Party of Lincoln.

I like to compare the transition from Hoover to FDR as a transition for Americans from the 19^th Century to the 20^th Century – more specifically the role of the federal government in our society and its connection to the people.  The best example I can think of is the horrendous flooding of the Mississippi River in 1927 wreaking havoc on several states, one of the worst natural disasters of all time even up to today.  Coolidge was president at that time.  His attitude, typical for the 19^th Century, was that the federal government had no role at all in disaster relief or recovery; that it was up to property owners and local governments to take charge.  The Congress at that time did step in and President Coolidge signed the legislation without fanfare.  Oddly enough it was Herbert Hoover, as Coolidge’s Secretary of Commerce, who stepped in the role of providing relief, much like he did after World War I.  But during the Great Depression, President Hoover was a minimalist up until his last year, and then as contemporaries said “He was too little; too late” – and that included what Jesse Jones said of Hoover as his head of the RFC comparing it with his job with FDR.

Nineteenth century Americans viewed success and failure in business and life with some sort of moral narrative and saw the charity system there to provide a backstop during times of need.  The Great Depression overwhelmed our charity system beyond where it could function.  It took Franklin Roosevelt, and Eleanor, to see that the 19^th Century pioneering spirit of Americans was still there in the 1930s and the people just needed a little help to get back on their feet.  And so a social-welfare function of the federal government was created to meet that national calamity.  It took a president stricken with polio in the prime of his life through no fault of his own, to show empathy and bring resources for average working class folks and businesses, who through no fault of their own experienced the personal failure or misfortune during the Depression not as a moral lapse but as a chance happening deserving of another chance to do good once again.

What did we learn from the New Deal?  Well, a lot of mistakes were made in implementing the New Deal; but, overall it provided a blueprint for how the federal government can take a more active role in providing guidance and some degree of regulation in a free enterprise system that values the creativeness and contributions of individual effort in a modern democratic society.  The very best example of this is not the 1930s, but the post-war period of 1947 to 1974 where the Greatest Generation, those who grew up with FDR were in their prime of political leadership.  It is especially the 1960s that will be the most productive period in American history with the lowest gap in income inequality, rates of GDP growth that are double what we have experience in the last twenty years if you just take the good years and leave out all the recessions (2001, 2007 to 2009, and present), and with unemployment numbers that are even better than today (approximately 3.5% during both periods, but an unemployment rate for folks unemployed six months or more which was around 5% back then and is still around 20% as of last year); and a Debt-to-GDP Ratio back then that was declining from 70% to 40% over the ten years of 1960s spending (which included the Vietnam War and Great Society Programs), whereas we are increasing our indebtedness.  By the mid-1960s, the economy was performing at near peak performance; whereas, as good as we have been doing up till this year, we still had a lot of slack in the economy and a continual growing gap of income inequality.  So you be the judge.

Warren Buffett only gets it half right

Warren Buffett only gets it half right

Economics Without The B.S.**: 

[**  Double entendre intended.]

Warren Buffett explains the simple reason why the U.S. will never default on its debt.

He is half right about the U.S. never going into default because its prints its own currency and sells bonds in its own currency -- but, Why can the U.S. borrow in its own currency when Argentina cannot?

The other half: Because the U.S. throughout its history has always been a productive nation; its productivity rate of growth has always been greater than the debt load; SO, its bonds/treasuries have always been looked upon as a risk free investment and therefore always in demand.

If there were no demand for U.S. bonds/treasuries, the United States would have a debt problem.  It is our productivity, over our long history, that fuels the demand for our assets and our currency and our debt/credit instruments.

In summary, there are four ways for the U.S. government to pay its national debt:

    1.  It can default on the debt -- the United States has never done this in its history.

    2.  It can inflate away some or all of its debt, by paying for its debt in devalued dollars.  The United States has done this in the past, but it is a very rare occasion.  Recent examples would be when FDR became president during the Great Depression and through a series of actions took the price of gold from around $22/ounce to over $30/ounce.  President Nixon also used this when he took the United States off the Bretton Woods system/gold standard and let the price of gold float rather than be fixed to the dollar ($35/ounce).

    3.  The United States can take in more revenue than it spends.  It did this in the post Andrew Jackson period up to the Civil War.  We also reduced our public debt load during Bill Clinton's administration, mainly due to the excess collections on Social Security compared to the dispensions of Social Security.

https://fred.stlouisfed.org/graph/?g=BbZr

    4.  And the usual way we pay for our national debt is by rolling over the debt, that is, issuing new debt to pay the old debt.

https://fred.stlouisfed.org/graph/?g=BbZK

        

Where to get productivity?

Where to get productivity?

Economics Without The B.S.**: 

[**  Double entendre intended.]

Total Factor Productivity is a measure of our productivity due to innovation -- tech innovation, improved management processes, investment improvements other than in plant equipment, an educated workforce, etc.

Note from the 1950s to the mid-1960s (I would consider the mid-1960s peak performance for that economy) as a good run up; then from the early 1980s to about 2004 another good run up. After 2004 it has been positive but lackluster.

Also note that Labor Productivity coincides with overall productilvity. Lower rates of GDP productivity, lower rates of labor productivity, lower rates of total factor productivity.

This is one of the things we have to improve to raise our productivity -- tech innovation, improved management processes, educated workforce -- along with a greater emphasis on technical aspects of a service-based economy.

Raising our productivity reduces the debt burden we have built up, and helps to finance the social-welfare function of government, as well as the other benefits that come with a more productive society.

For the Three Rs -- this is the [New] Recovery and the Reform that is needed.

The Three Rs: Relief, Recovery, Reform -- the New Deal Playbook from the 1930s

The Three Rs: Relief, Recovery, Reform:

The New Deal Playbook from the 1930s

Economics Without The B.S.**: 

[**  Double entendre intended.]


The playbook if from the New Deal -- the Three Rs: Relief, Recovery, Reform. The Trump Administration and Congress got the first one down -- Relief.

I think they are weak on Recovery. They are talking about resurrecting the old economy and getting us back to where we used to be. I don't think that will work.

I've heard very little from anyone on either side about Reform.

During Obama's Administration, the Relief was weak -- and we had a weak recovery. We had a $2 trillion hole in the economy from the Great Recession/Financial Crisis and it took years to get back just close to even, if we ever got there. FDR's New Deal economic growth from 1933 to 1938 (before the outbreak of WWII in Europe in 1939; and this includes the mini-depression of 18-months in 1937/1938) -- over 7% per year; Obama -- about 2.2% per year. We have Democrats today who don't follow the playbook of the greatest modern Democrat, and who formed the Modern Democratic Party, which did not exist as a nationally functioning party prior to his election in 1932.

We have learned nothing from the Great Depression.  When you have a massive economic collapse of a well-functioning (I said “well-functioning” not perfect) economy, somebody is going to take the loss.  Who do you want to take the loss? – the private sector of people/individuals, businesses large and small; or, the public sector, in particular, the federal government.

In the end everybody is going to take some loss, but it is the federal government that can weather the loss the best.  It is easier for the federal government to borrow money, extend credit, and print new money.  The debt that will pile up can be repaid over future decades with a good recovery that gets us back to higher levels of productivity.  Plus, the federal government has the ability to rollover that debt into the future.

We piled up a lot of debt when fighting World War II, the debt-to-GDP ratio was well over 100%, the highest in our history up to that time.  That debt was handled by very high levels of economic productivity and prosperity from 1947 to 1974, reducing the debt-to-GDP to around 40%.  We can do the same thing.  Make yourself more productive and we will get out of this like the Greatest Generation got past WWII and into some of the most productive years in American history.