Monday, January 14, 2013

The Cause That Shall Never Be Mentioned

John Mauldin has published a piece by George Friedman, entitled “The Crisis of the Middle Class and American Power.”   George Friedman is the Chief Executive Officer of Stratfor, providing analysis in the field of global geo-political intelligence.

In Freidman’s article, he outlines the case of the Middle Class in America (emphasis added):

The median household income of Americans in 2011 was $49,103. Adjusted for inflation, the median income is just below what it was in 1989 and is $4,000 less than it was in 2000…. It is also vital to consider not the difference between 1990 and 2011, but the difference between the 1950s and 1960s and the 21st century. This is where the difference in the meaning of middle class becomes most apparent.

Freidman notes that it is vital to consider the time since the 1960s and the 20th century.  Economically and politically, there was one significant event directly at the point in time Freidman suggests was vital. 

The government was fully unbound from any economic discipline by Nixon’s default as evidenced by his abandonment of backing the dollar internationally with gold.  This occurred in 1971.  This gave the federal government free-reign on spending.  It made ineffective the naturally balancing aspects of international gold flows.  Most importantly, it un-leashed the Federal Reserve from any discipline when it came to the dollar.

This doesn’t appear to be where Freidman will look.  Instead, Freidman uses as a theme the idea of the possibility of upward mobility that is part of the American dream.  He believes the reason for the real estate bubble and subsequent defaults were because of this belief in upward mobility – that incomes would catch up with debt – and when the dream didn’t pan out, the bubble burst. 

This seems a rather shallow explanation.  No central banking?  No booms and busts?  No housing policies by the government?  No Fannie Mae and Freddie Mac?  No money-center banks creating artificial demand for credit instruments due to the unlimited backstop by the Fed?

No lack of discipline brought on because of the abandonment of the (admittedly feeble) gold standard of Bretton Woods?

No.  Just that the dream failed.  Somehow.  All at once, and everywhere.

Freidman goes on to describe the median household income from the 1950s and lifestyle that this brought, with a single-earner in the family.  He contrasts this with today, where even with two income-earners in the household, the same lifestyle is difficult to achieve.  He does this without mentioning the single greatest invention ever discovered to strip the middle class of wealth – the central bank.

He then goes into standard Keynesian explanations of American economic history, implying that World War Two helped to cure the Great Depression:

The Great Depression was a shock to the system, and it wasn't solved by the New Deal, nor even by World War II alone.

Many seemingly intelligent people continue in this fairy-tale belief that World War Two provided relief to the American economy.  Bombing, destroying, conscripting, killing, all on levels never before seen on earth…events so completely devastating to the micro-economy are believed to somehow be beneficial to the macro-economy.

He cites as a cause for the post-war upturn a list of various government programs, enabling and supporting a growing middle-class:

The next drive for upward mobility came from post-war programs for veterans, of whom there were more than 10 million. These programs were instrumental in creating post-industrial America, by creating a class of suburban professionals. There were three programs that were critical:

1. The GI Bill, which allowed veterans to go to college after the war, becoming professionals frequently several notches above their parents.
2. The part of the GI Bill that provided federally guaranteed mortgages to veterans, allowing low and no down payment mortgages and low interest rates to graduates of publicly funded universities.
3. The federally funded Interstate Highway System, which made access to land close to but outside of cities easier, enabling both the dispersal of populations on inexpensive land (which made single-family houses possible) and, later, the dispersal of business to the suburbs.

Freidman doesn’t cite government spending and deficit data from this same time period.  He ignores it, as do all economists who do not want facts to get in the way of the approved narrative.  It doesn’t take much work to find this data – I would think a man who makes his living in intelligence could find it easily enough if he wanted to look.  From the Office of Management and Budget, the following are the spending and deficit amounts for the years 1945 and 1948:

1945: $92.7 billion spending, $47.6 billion deficit
1948: $29.8 billion spending, $$11.8 billion surplus

Following standard Keynesian orthodoxy, the economy should have cratered following the war, what with spending cut by two-thirds and a $60 billion swing (representing two times the annual budget) from deficit to surplus.  Is it possible that the roots of the post-war boom might at least be partially explainable by this drastic decrease in government control over the economy?  Maybe a little?  Not in the world according to Freidman.

Instead, Freidman focuses on government action as the cause for the economic upturn following the war: spending for college, funding for mortgages, highways for commuting to and from the new suburbs.  These three programs helped fuel the belief in upward mobility that had its roots in America from the beginning.  The American dream apparently required turbo-charging by the government.

He then transitions to the corporation, with very broad generalizations about losing focus, no more lifetime employment, and the like.  Somehow, all of this mysteriously came to a head in the 1980s, with restructuring and re-engineering becoming the norm, throwing the middle class into disarray:

As the permanent corporate jobs declined, more people were starting over. Some of them were starting over every few years as the agile corporation grew more efficient and needed fewer employees. That meant that if they got new jobs it would not be at the munificent corporate pay rate but at near entry-level rates in the small companies that were now the growth engine. As these companies failed, were bought or shifted direction, they would lose their jobs and start over again.

No mention about why this suddenly came to a head in the 1980s.  Perhaps it was triggered by the events in the 1970s that Freidman also ignored?  In the post-gold-window world, price inflation soared.  This was eventually tamed by Volker’s Fed.  Beginning in the early 1980s, the American economy was blessed with a great moderation – ever decreasing interest rates, credit subsidized by the Federal Reserve.  Cheap credit destroyed the value of capital in place and made it affordable to invest new capital.  The new capital would be invested in the most efficient locations – these being found less and less to be in the United States.

No.  Freidman has another answer:

What we are facing now is a structural shift, in which the middle class' center, not because of laziness or stupidity, is shifting downward in terms of standard of living. It is a structural shift that is rooted in social change (the breakdown of the conventional family) and economic change (the decline of traditional corporations and the creation of corporate agility that places individual workers at a massive disadvantage).

I guess stuff just happens.  The breakdown of the conventional family is a random event, causes unknown and unknowable.  It would have nothing to do with government policies that subsidize non-conventional family arrangements.  The economic change is because corporations (with a mind of their own) decided to restructure, all at the same time – with no underlying cause that might explain why all corporations had to act in the same way at the same time.

And of course, an efficient economy is a terrible economy – just ask Mr. Freidman:

The inherent crisis rests in an increasingly efficient economy and a population that can't consume what is produced because it can't afford the products.

This would be laughable, except too many people swallow this nonsense.  If he would spend a few minutes understanding the manner in which prices are discovered, he would never write such a sentence again.

One thing Freidman knows for sure.  The government had nothing to do with creating any of this mess, and can do even less to get out of it:

Obviously, this is a massive political debate, save that political debates identify problems without clarifying them. In political debates, someone must be blamed. In reality, these processes are beyond even the government's ability to control.

This just isn’t so.  1) Take a page from the spending and deficits post World War Two.  2) Allow for free-market money and credit, instead of the centrally-planned system of central banking.  Individuals who work in government could easily control these two tasks if they chose to do so.

He then goes on to outline the long-term threat:  the increasing pie is not available to all, with the rich getting richer and the poor staying poor.

The greatest danger is one that will not be faced for decades but that is lurking out there. The United States was built on the assumption that a rising tide lifts all ships.

If we move to a system where half of the country is either stagnant or losing ground while the other half is surging, the social fabric of the United States is at risk, and with it the massive global power the United States has accumulated.

He then goes on to frame the debate in acceptable – and misleading – terms:

The left would argue that the solution is for laws to transfer wealth from the rich to the middle class.

The right will argue that allowing the free market to function will fix the problem.

He is correct as far as the prescription from the left.  He is wrong about the prescription from the right.  The right (as it exists) does not want free-markets.  Where is the call from the right for a free market in money and credit – the single most important building block in a free market economy?  The only person on the national stage to mention this is the now-former-Congressman-from-Texas-who-shall-be-ingored-whenever-possible.

But it serves to pretend that this is the debate.

It is unclear how the private sector can deal with the problem of pressure on the middle class.  Government programs frequently fail to fulfill even minimal intentions while squandering scarce resources. The United States has been a fortunate country, with solutions frequently emerging in unexpected ways.

The private sector cannot deal with it – not the truly private sector, anyway.  These are problems caused by actors in government.

He then suggests that “luck” is the only way out of the mess, a mess with geo-political risks for US power:

It would seem to me that unless the United States gets lucky again, its global dominance is in jeopardy.

There is the answer.  Luck.  (It worked for Indianapolis, maybe it will work for the rest of the country.)

He closes by looking for others to find the solution:

People who are smarter and luckier than I am will have to craft the solution.

Of course, no solution will be found if the problem is framed as Freidman has done here.

I am simply pointing out the potential consequences of the problem and the inadequacy of all the ideas I have seen so far.

I will suggest, for a man who makes his living in the field of intelligence, he hasn’t done much work to find the easily identifiable answers.

Maybe he can look here.

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