The blog 'Breaking Bread' is for a civil general discussion, like you might have at the dinner table with guests. The posts 'Economics Without the B.S.' are intended for a general audience that wouldn't have to know the difference between a Phillips Curve, a Laffer Curve, or a Cole Hamels Curve.
Vic Volpe was formally educated at Penn State and the University of Scranton, with major studies in History, Economics and Finance, and Business; and, is self-educated since by way of books and on-line university courses. His practical education came from sixty years of work experience in the blue-collar trades as well as a white-collar professional career -- a white-collar professional career in production and R&D. In his professional career and as a long-haul trucker, he has traveled throughout the lower forty-eight. From his professional career alone he has visited many manufacturing plants in the United States, Europe and China. He has lived in major metropolitan areas and very small towns in various parts of the United States. He served three years with the U.S. Army as an enlisted man, much of that time in Germany.
There was a time when wealth accumulation – net asset value – was tied to our nation’s productivity – the things we made or services we provided. That was true after WWII and through the 1960s. But things changed after that.
The inflationary ‘70s coupled with the currency challenges to the Dollar System from the Deutsche Mark and Japanese Yen in the 1970s and 1980s, which was trying to enforce discipline on the international market system and capital markets, and establish some type of stability to markets so commerce could flourish, would have the effect of instituting economic and financial policies which would moderate economic growth in the advanced economies while promoting investment in the less developed world.
These policies developed as communism was collapsing in Europe in the 1990s and private wealth pools were arising that could challenge the monetary policy of the G-5/G-7 central banks and had great opportunities for profit in a world where investment was just about boundless. When globalization policies were formed in the mid-1990s it encouraged the free flow of capital internationally.
The disparity in incomes and wealth (net assets equals assets minus liabilities) is due to the change in economic policies that place a greater emphasis on asset appreciation rather than productivity, productivity being the income derived from making things or providing a service. This change becomes evident after the 1980s, where wealth is starting to outpace nominal GDP, and becomes very apparent by the 2000s, which is coincident with the rise of globalization.
And just frankly, the wealthy are in a better position to take advantage of the free flow of capital that was concomitant with the rise of globalization by the mid-1990s. The wealthy have more assets, are better diversified, and in a better position to use advisors. We are in a world awash with wealth; but it is concentrated in a few small hands.
In 2008 the value of credit default swaps (CDS) stood at $45 trillion compared to $22 trillion invested in the stock market, $7.1 trillion in mortgages and $4.4 trillion in U.S. Treasuries. By mid-2010, after the reorganization of the financial markets, the value of outstanding CDS was $26.3 trillion.
The excesses of the financial system which came out of Wall Street and were reported by the Financial Crisis Inquiry Commission for the 2008 diabolical collapse noted that the derivative market had a notional value (the value of the transactions for the underlying assets, not the market value of the assets) of around $600 trillion.
Much of this derivative activity was tied to the mortgage market in the United States and involved a variety of derivatives to set up the positions. What was the total value of the actual mortgage market in the U.S.? Considerably less than $20 trillion. McKinsey reported that the total world’s financial assets – includes stocks, bonds, bank deposits, and real estate – totaled $167 trillion. So, why a $600 trillion casino for the wealthy playground?
This is all to summarize and give indication for the amount of wealth in the world, where and how it is deployed, and for what purpose. It is no wonder we have inequality in the world. I find it amazing when I read an editorial or academic paper that is to the contrary. And the unfairness of the system. And the public and political backlash. And what can we say about the furtherance of democratic governance internationally and right here at home? What public interest is being served with this playground?
[I wrote this in reply to Yuval Levin’s 'American Covenant: How the Constitution Unified Our Nation – And Could Again'. [https://www.youtube.com/watch?v=mBHi_h1ThvE] He was addressing the fracturing in our politics today.]
Our Founders were great, but they were not perfect. They created a governing system in which “The People” were to be represented, while their rhetoric and founding documents talked about the will of the people. While the intent of our Founders was to avoid a direct democracy, as the nation proceeded, succeeding generations made the nation more democratic than the Founders intended.
By the 1820s this became evident as the electorate was increased tremendously beyond the property interests of white males; and would continue to be increased to former slaves and “non-whites”, women, and the native (Indian) population. In addition, things like the recall of elected officials and popular sovereignty ballot measures which could bypass the objections of state legislatures and governors and greatly diminish the revenue collection of local governments (California Prop 13 being one example) would be enacted by some states; none of these things were ever considered in the Constitutional Convention and are not specifically mentioned in the Constitution nor any amendments.
You have to remember, when you see so many countries struggling with democracy today, that our democratic traditions come somewhat from our English governance, where most countries in the 20th century had no democratic tradition to build on. But also in the first fifty years of our existence we had several changes of governance which had relatively “peaceful” transitions – from Federalist in the 1790s, to Jeffersonian Republicans in the early 1800s, to Jacksonian Democrats in the 1820s/1830s, to the Whigs in the 1830s/1840s. These changes from one political party to another helped to bond and stabilize our democratic process.
You also have to remember that our society is more than just our political system. We co-exist with an economic system that also promotes our ideals – free enterprise – and thrives on the basic principles of governance proclaimed by the Founders. And while our founding was in the 18th century, very quickly in the early 19th century our system underwent a rapid industrialization beyond the awareness of our Founders, which in itself was a revolution evolving out of agrarian and mercantile cultural societies with landed, aristocratic economic interests. The uneven nature of the rapid industrialization of the country is one contributing factor to the Civil War due to the diminishing political influence that slave-holding interests of the Southern states retained in the national government after many decades of continental expansion and greater commercial ties between the North and West vis-à-vis the South and West.
Which brings me to the third point not recognized by our founding generation, the impact of the continental westward expansion of our nation. Even Jefferson who was responsible for it could not envisage what would develop, which was not Jeffersonian yeomen. The Northwest Ordinance of 1787 became a model for some of the new territories as they developed.
When the Erie Canal came into use by the 1820s it not only connected the Great Lake interiors to the Atlantic Ocean coastal states, but the building of canals especially in Ohio, but also in Indiana, connected the Great Lake states to the Ohio River and downstream to the Mississippi. The connection was not just to New Orleans, but to St. Louis and Missouri. St. Louis and western Missouri (Independence and Saint Joseph) became gateways for that westward expansion, later railroads replaced the trails. In effect, these developments helped to connect the interiors of Ohio and Indiana manufacturing and agricultural interests to the greater nation expanding westward.
Texas was the last slave state to come into the union in 1845. After Texas, but before the outbreak of the Civil War in 1860, five more states will come into the union, and none of them come in as slave states even though some have slave interests in their state.
When California comes into the union in 1850, after the Gold Rush of ’49, it has a population of about 90,000, and is pretty isolated from the rest of the country and must resort to self-reliance as it waits on lengthy logistic connections. By 1860, still somewhat isolated, its population has grown to almost 400,000; and over the course of several decades it has many more miners and merchants in its census count than farmers, unlike most states that came into the union earlier.
This is all to say that the “progress” of the nation has not always tracked with its political development. We developed into one vast, diverse continental nation – with one market system to serve that nation.
Pennsylvania, Mississippi, Texas, and California all conducted commerce back in the late 19th century in the same marketplace with the same currency after the Civil War, and a banking system with national correspondence among the many local and regional banks.
We were diverse, and divisiveness reflected our politics. Once you get past the Virginia dynasty of presidents by the 1820s, there are no landslide elections where one political party has its way with governance. Compromise is in order, and the coin of the realm.
Now by landslide election I mean a presidential election in which the presidential candidate takes 60% of the popular vote, and his party takes a great majority of the Senate seats to completely control the Senate, and also has a large majority in the House to completely control the business in the legislative branch. I say 60% of the popular vote, but it is the 40% of the opposition that is important – it is not enough to be a factor in stopping what the president’s party will do, but it is still present in the political framework.
With that said when is our first landslide election? 1920! (Harding 60% to 34%) And what are the others? -- 1928 Hoover has almost 60% (58% to 41%), FDR in 1932 (57% to 40%) and 1936 (61% to 37%), and the last one was LBJ in 1964 (61% to 39%).
That’s it; that’s all there is. We have had no landslide elections since then – contrary to the outbursts of some candidates. Although Nixon did get over 60% of the popular vote in 1972 but had to deal with a Democratic control of Congress. And Reagan had a landslide in popular votes of 59% to 41% in 1984 but had to deal with Democratic control of the House, and his Republican Party did not have complete control of the Senate and Reagan’s “coattails” actually lost two senators.
Harding was a capable politician, but I will not get into the reasons he was unable to pass comprehensive legislation. Hoover of course did not have time, and was dealing with the onset of the Great Depression within seven months of taking office, and I don’t think the concept of a “honeymoon with Congress” during the first days was in effect at that time.
But certainly FDR and LBJ used their landslides to enact all kinds of legislation which were out of the norm, but accepted by “The People”, the great majority of them anyway. But then, there is always that 40% left out. What happens when things reverse?
Do we really need unity when we do not think alike? If compromise is in order and the coin of the realm, what happens when political discussions and debates center around cultural issues as well as economic material well-being issues? In the U.S. you have a mixture of issues -- primarily race, class, gender, education, maybe generation (age); mix that in with religion, nationalism -- and you have the use of cultural issues to drive a wedge between groups for identity for political advantage. It is the use of cultural touchstones that get coupled to the material well-being (economics) of folks, that forments the political unrest.
Our country works best when there is compromise among competing political interests. The problem with cultural issues is that they are strong enough so that people identify their individual values to the cultural issues, and that can result in a distrust of people you do not share your values with. When the issues are economic -- your material well-being -- the personal value system is less of a factor, and so compromise has a more likely outcome of success.
Looking to the political sphere for answers to issues that confront us is not the only way to go about it. The “progress” of our nation has not always tracked with its political development. We have a business community which guides our economic development. We also have civic engagement. Leadership comes from a variety of engagements.
In my opinion our political divisions have more to do with the generations. The Greatest Generation – and they didn’t name themselves; and like our Founders, they aren’t called The Perfect Generation – had a certain cohesiveness sharing the experiences of the Great Depression followed by the war. If you notice they were around through most of the landslide elections (1928 through 1964) which I pointed out were very rare in our history. The zenith for them would have been the 1960s, arguably the best economic performance in our history, during the great economic expansion of 1947 to 1973. Your view of the Sixties probably says something about your views today.
The generations which follow – the Silent Generation and the Boomers – in my opinion, dropped the baton of progress that was handed to them by the late 1960s, and we have been mostly in political disarray since then, and with much slower rates of economic growth. I’ll skip the Gen Xers, they are somewhat similar to their parents. But the younger generations – Gen Y Millennials and Gen Z – have grown up with much different life experiences – high cost of education and life-time training, high cost of housing, a very dynamic work environment, an abundance of consumerism – and what appears to be a great societal transition from an Industrial Age to something else, perhaps an Information Age or Knowledge Economy, and how that would affect the American Dream.
Our Founders gave us a system – both political and economic – which makes us amenable to change; and we have definitely changed over time. Our economic system thrives on competition and is a dynamic one. It gives our society the vitality it needs to confront changing times. Success in the economic sphere concentrates power, while our political sphere was designed by our Founders to be fragmented to diffuse the concentration of power. This interplay between the two spheres of our society creates a tension that feeds the vitality needed for rejuvenation.
There is a trade off between economic stability and economic growth; and since the 1960s our economic growth rates have been in a declining trend line – well below our historic average of over 3.5% annual real GDP. As a world leader, and with our dollar as the reserve currency internationally, so when the Fed sets monetary policy it does so for the rest of the world, and other countries adjust their policies to it. Economic stability is important to avoid disorder which disrupts commerce; but we cannot sacrifice economic growth which is needed to invigorate our society to be innovative and productive to the max. And in a globalized world economically it affects the democratic development of other nations as well as our own.
As individuals we have to open ourselves to these possibilities. We do not want a government which is overbearing. The revolution of our Founders was about establishing and preserving individual liberty. The second revolution, the Civil War, was about equality and the healing that brings us together. It is up to us to confront the issues that divide us and come to some resolution. Our institutions can aid us in our material well-being; but it is our spiritual existence that gives meaning to life and is for us, as individuals, to figure out. That is beyond the province of government.
I am not going to go into describing the various protests that arose when globalization was in formation in the late 1980s, 1990s, and 2000s; but I will list a few.
While not the first sign of protest, but the first protest that was big enough to draw international attention, and set a stage for further protests and how the future WTO (World Trade Organiation) meetings would be held to avoid crowds, would be the Seattle protest in 1999.
There was an earlier protest in Europe in West Berlin in 1988, the year before the Berlin Wall came down which would eventually result in the unification of West Germany and East Germany in 1990.
And of course, in addition to protests there is the World Economic Forum with annual meetings at Davos. The founder, Klaus Schwab, is influential and well connected, and able to attract the top luminaries in politics, finance and economics, academics, business, and media to discuss international issues. While the annual meetings at Davos are just a few days, Mr. Schwab’s organization is at work through out the year. The WEF has been around since 1971, and if you have been following it they have discussed the same issues/problems over several decades.
Do you think these resulted from changes to economic policy from the 1960s, to combating the inflationary ’70s, the disruption which follows with the delinking of the dollar from gold and the currency wars between the $, DM, Yen; Washington Consensus of late ’80s, Globalization taking hold by mid-’90s, and the many financial crises which follow?
When the Index started in 1947 they all had the same reading -- 4.6. Twenty years later, in 1966, with an economy at peak performance:
> maximum output, maximum employment, maximum purchasing power;
With over 90% industrial capacity
*Over 100% in the auto industry, that’s counting working
overtime
*When the auto industry was around 7% of GDP (more than
twice what it is today)
And industrial capacity almost doubling during the decade
The unemployment rate was around 3.5% by the end of the
decade, with the long-term unemployment rate (those
unemployed for over six months) at just below 5%; meaning
that structural unemployment – those not suited for the jobs
available – were just about non-existent. [The long-term
unemployment rate in the 1980s/1990s floated between 10%
and 15% in non-recessionary years; and was between 15% to
20% in the past 25 years during non-recessionary years.]
Twenty years after that, in 1987 the Index reads:
Household Wealth – 7.5
Nominal GDP – 7.6
Real GDP – 6.0
CPI/Inflation – 6.2
Twenty years after that, in 2007, with twenty years of the “Great Moderation”, the Index reads:
Globalization is not working. The full force of globalization went into effect in the 1990s after the collapse of communism in Europe. The WTO (World Trade Organization) went into effect in 1995 as an organization to enforce international trade after the Bretton Woods Agreement of WWII was viewed as being outdated. And this coincides with the rise of private capital for investment and the move to allow the free flow of capital internationally. I believe this failure of globalization is the root cause for many of the political and societal problems we and other countries have faced over the past several decades – democratic countries as well as authoritarian and tradition-bound societies.
There are other economic factors I will not get into here:
(1)Nixon delinking the dollar from gold.
(2)The Black Monday Stock Market collapse worldwide which was a currency war between the $-DM-Yen.
(3)The rise of neo-liberalism from the Washington Consensus of the late 1980s with the prominence of monetary policy over fiscal policy to emphasize economic stability vis-à-vis higher rates of economic growth.
(4)A number of financial crises:
(a)the Nordic countries in the early 1990s,
(b)and Mexico in the early 1990s, with a remedy that avoided negative consequences for the U.S. investors in Mexican activities,
(c)the Russian default on domestic debt and devaluation of the ruble,
(d)the Russian problems also triggered the collapse of LTCM (Long Term Capital Management) hedge fund in the United States with the bail out of fourteen major banks to stop the spread of a potential disaster. The financial “geniuses” at LTCM had taken equity of about $5 billion and leveraged that to over $1 trillion before the collapse. The banks who were among the investors in the hedge fund were restricted to opaque relationships with the financial “masterminds”, never having full transparency until they had to come up with $3.6 billion to unwind the dark convoluted machinations of the LTCM “financial sorcerers”.
(e)the Asian Financial Crisis of 1987 which will eventually negatively affect manufacturing in the U.S.
(5)And China getting WTO recognition in 2001, which will also affect manufacturing and trade imbalances between “surplus countries” and “deficit countries” with the U.S. being the largest deficit country and becoming the receptive market for the rest of the world.
(6)The supremacy of the Dollar System as the reserve currency for the rest of the world, where American-style commerce, and not American military interventions, are the real drivers for maintaining or disrupting political and societal stability.
But it is the Financial Crisis of 2008, an international event, that highlights the inadequacies of globalization. It was the greatest economic contraction since the Great Depression of the 1930s, which was also international in scope. Everybody is doing better with globalization, but the Upper 1% is benefiting more because they are in a better position to capitalize on the expansion of economic activity that results from implementing globalization policies. The manner in which democratic countries address the recovery from the Crisis highlights the inequalities of how people are treated. In America the feeling is, "Wall Street gets bailed out, Main Street is left out", because of the weak recovery that most people experienced while Wall Street still managed to eke out bonuses while avoiding recriminations from their misdeeds. Worldwide you have a populist backlash, from the political Left and Right. The Tea Party movement in the U.S. coupled with the Occupy Wall Street movement. Similar things happen in Britain, France, Germany, and Italy, as well as others like Poland, Hungary, etc.
Concurrently you have democratic countries as well as authoritarian countries dealing with social and political unrest that affects immigration, refugees, and asylum seekers. Europe and the U.S. will be the main outlets for this flow; but, you still have smaller countries like Jordan, Turkey, Columbia that are also dealing with huge flows of people. This unrest becomes a playground for demagogues to take advantage of the situation -- and I would put Trump in that category. In the U.S. you have a mixture of issues -- primarily race, class, gender, education, maybe generation (age); mix that in with religion, nationalism -- and you have the use of cultural issues to drive a wedge between groups for identity for political advantage. It is the use of cultural touchstones that get coupled to the material well-being (economics) of folks, that forments the political unrest.
Our country works best when there is compromise among competing political interests. The problem with cultural issues is that they are strong enough so that people identify their individual values to the cultural issues, and that can result in a distrust of people you do not share your values with. When the issues are economic -- your material well-being -- the personal value system is less of a factor, and so compromise has a more likely outcome of success.
When the architecture of globalization was put in place, after the fall of communism in Europe, the interests of the major players were addressed right on down to the rights of individual proprietary intellectual property while excluding the interests of labor, workplace safety, and the environment. Over several decades those imbalances have persisted and have resulted in a growing inequality in power relationships that propel societies toward progress. The rescue to stabilize the economic and social order during the 2008 financial crisis and the pandemic of 2020 have highlighted the disparities in the power relationships. The populist backlash has been the result, questioning the sustainability of democratic governance.
For democratic governance to prosper, whether it is representative or more direct, it must be inclusive with broadly endowed benefits. All interests in society need self-representation to avoid the governance of elites. As well educated and “advanced” as we have become, we have not overcome the self-serving interests of the few with regard to the many. Don't get rid of globalization. Increasing economic activity internationally should be a huge benefit, by expanding markets – look what happened to the United States as it experienced its westward expansion in the 19th Century, one huge continental nation with just one market system to deploy capital expansion and create wealth and improve the lives of ordinary people. So, don’t get rid of globalization; reform it to make it work, work for all and not just the few.
Is
the Age of Easy Money over? It appears that way. The Real Interest Rate is the
Interest Rate minus the Inflation Rate. Notice for the past year the three
rates have converged, which is a good thing; but the rates are inverted, short
term rates are higher than long term rates.
Greenspan took over the Fed from Volcker in mid-1987, and it
took him till the mid-1990s to get the rates in sync. Then the rates fell apart
after 2001, leading up to 2008. Through Obama and Trump the Fed has had an easy
money policy -- not good. Let's see what happens now?
Saturday, June 29, 2024
Five of America’s Most
Important Foundational Values
Economics Without The B.S.**:
[** Double entendre intended.]
I was responding to a post where someone asked what are America's five most important foundational values. So with the holiday for the Fourth coming up, this is what I came up with.
1. Our Founders redefined democratic
governance. We are not on the model of
an Ancient Greece democracy, not a one hundred percent democracy; but,
incorporate democratic elements mixed in with some non-democratic elements so
that the will of the people can be formed and expressed in a fragmented society
composed of economic and civic behavior which affects the governing process. Where Ancient Greece defined a direct
democracy, we have the indirect participation of the populus in the manner of
which we are governed. In other words,
we are dynamic society, not a status quo society.
2.With
that said, our Founders created a fragmented governing structure which avoided
the concentration of power in one or two bodies – a federal system composed of
the national government with state and local governing bodies, defining a
constitutional republic, a representative governing system – to complement that
democratic governing process that makes it subject to change; thus inhibiting
status quo thinking.
3.Ideally
our primary values are an interplay between individual liberty and
equality.These values can complement
one another, but they can also come into conflict with one another.In other words, the individual, and not the
family, is at the core of our basic values.We do cherish family values, but those are decided by individuals. I might add with regard to the second point –
our fragmented federal government structure between the national, state, and
local governments – that the individual has rights, natural rights recognized
in the Constitution, that are beyond the reach of government bodies and these
individual rights come into play as individuals participate in civic affairs as
well as their economic endeavors.
4.Our
Founders permitted an economic system – free enterprise, including the right to
property – which allowed for individuals to build collateral and wealth, but
also in which successful business outcomes tend to concentrate power.Our free enterprise economic system co-exists
vis-à-vis with a fragmented governing structure that makes it difficult to
concentrate power.This is one other
aspect of our dynamic society.
5.Unknowingly,
and unintentionally, but never-the-less still somewhat visionary, many of our
founding generations viewed the countryside [rightly or wrongly] as their
tabula rasa for creating a “New World”. In
a short time we would come to view ourselves as a vast continental nation with
a manifest destiny. And as destiny would
have it, shortly after our constitutional founding we found ourselves
undergoing the fortunes of industrialization (which was just beginning to be
experienced by other nations) while we expanded over the continent. Being one vast continental nation undergoing
industrialization (unlike Europe, and not similar to China, India, or Russia) allowed
us to prosper as one market system which benefited from the formation and
deployment of capital wealth. Couple
this with our democratic values, a dynamic political process and society, some
struggle, and you have a society with an enormous material well-being, and
still viewing itself as a creative leader in the vanguard among others.
Comments:
1. I agree those could be argued as 5 of the most
important. What I find surprising is that there was no mention of God or
Judeo-Christian values, other than the mention of Manifest Destiny, and there
was no mention of how Natives and Africans fit into America’s founding values.
My response:
No you did not find
those things in my comment. What you find is the mention of individual liberty
and equality; and over the course of our history that writ has been extended to
include those left out by the Founders. That concept of individual liberty includes
how we worship.
I think we are all aware of the shortcomings of our Founders,
they were not perfect. I have mentioned many, many times before that by the
1820s the country was changing and becoming more democratic than what the
Founders intended. Never the less, as the country liberalized to extend the
writ of justice, it was based on what the Founders originally said and
reinterpreted to bring it up to “modern” standards. This is the dynamics in our
system established by the Founders. We have a system that is open to change. We
are not a status quo society.
