Bringing Back the (Nonexistent) Golden Days

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I admit to reading the "God’s Politics" blog every now and then, not because I think that Jim Wallis and his friends from the Sojourners cult actually are channeling the voice of God, but rather to see how people continue to politicize the Gospel in the name of politics. Claiming to be speaking for God is something that one must approach with some fear and trepidation, and, if one really is speaking for God, then perhaps the first thing in order is to tell the truth.

Instead, we are given a world of make-believe. These are heady times for Wallis and others in his group, as they believe they are on the cusp of a Great Movement in which capitalism forever is to be overthrown and replaced by utopian socialism, or at least a regime of which they approve. Thus, if one believes that a "Biblical" economy is one which is heavily regulated and favors organized labor, then one looks to an era in which that was the case.

Chuck Collins of the Institute for Policy Studies reminds us that once upon a time, there was wealth, happiness, and economic security in that regulated economy:

In the three decades after World War II, 1947—1977, wages doubled for every strata of the society. This was no accident.  Expanding unionization and government policies encouraged broadly shared prosperity and healthy economic growth.

"Spread the wealth" policies led to the greatest middle class expansion in U.S. history, especially for white Americans.  Wealthy earners were taxed at progressive rates, and funds were invested in initiatives like the GI Bill, poverty reduction, universal education, and low-interest home mortgages. Elder poverty and homelessness were virtually abolished. Tens of millions of families purchased their first homes and became the first in their generation to graduate from high school and college. 

Unfortunately, those good days had to end, as the Bad People took over:

Since the late 1970s, however, we’ve had a bipartisan "concentrate the wealth" program.  The rules of the economy — trade, tax, and regulatory policy — have been tilted in favor of large asset holders at the expense of wage earners.  As a result, income gains and wealth have pooled in the bank accounts of the richest one percent of households.

We are now getting an unfortunate crash course in the downside of "concentrate the wealth" economic policy.  When wages fall or are stagnant for 70 percent of the population, folks pay the rising costs of food, fuel, and health care by working more hours and borrowing with credit cards and home equity (if they have one).  The economic growth of the last decade has been built on a shaky foundation of bubble consumption and debt, not real wage expansion. 

Meanwhile, at the tippy-top of the economic pyramid, concentrations of wealth also destabilize the economy through speculation.  After parking some of their wealth in stable low-risk investments, most wealthy investors go in search of the high stakes gains.  You can’t earn 25 percent profits in the real economy.  For that, you have to enter the casino — which explains the rapid expansion of the unregulated shadow financial sector of hedge funds and other speculative investments. 

I hardly am surprised to read these comments on the pages of Sojourners or even a blog that claims to be the Voice of God. However, I must express some surprise that even God Himself apparently does not remember history, given that the blog speaks for Him.

First, and most important, this Happy History of "Share the Wealth" is missing a few key events. We forget that following World War II, the United States enjoyed a virtual monopoly in the production of goods while Europe and Japan recovered from the fact that their cities and towns served as battlegrounds and bombing targets. Furthermore, as postwar Europe and Great Britain dove headlong into socialism, making it even more difficult and costly for their economies to be productive, firms from the USA had little competition.

Second, even the True Believers realized that marginal tax rates of 90 percent and more were having a corrosive effect upon capital investments and Congress, at the urging first of President Kennedy and later President Johnson, in 1964 lowered the top rates to 70 percent. Third, all through the late 1960s, there were dollar crises as it became clear that much of this "investment" of which Collins speaks was being created by the government’s printing presses.

In 1971, the party effectively was over, as the Bretton Woods agreements collapsed under the dollar’s demise. It is interesting that Collins fails to mention the fact that during the 1960s, the United States squandered whatever advantages it had gained from the years after World War II, as government spending rose and the most important parts of the manufacturing sector, including steel and automobiles, did not keep up with capital needs as labor unions ran off with those funds.

Indeed, what Collins suggests as being a golden age of the American economy actually was a time when the country lived off its post-war capital advantage and simply consumed. Government policies destroyed the dollar and politicians at all levels went wild with spending. By 1975, New York City essentially was bankrupt, as the city illegally sold municipal bonds to pay for previously issued municipal bonds, which is financial fraud. (No one was indicted; financial fraud prosecutions are reserved only for people in private business, as government agents protect their own.)

You see, Collins labors under the belief that no one has to produce anything; if government taxes one group of people and "spreads the wealth," then everyone can consume, consume, consume. (I always find it interesting that the God’s Politics blog, which claims that "consumerism" is bad, seems to advocate policies that attempt to block production while at the same time promoting even more consumption.)

The whole thing ground to a halt by the end of the 1970s. While Collins would claim that ideological free marketers who were unhappy that society was doing well appeared on the scene and bamboozled everyone else, the reality was much different. In 1980, we were wondering if there would be an economy worth saving. American productivity was down, inflation was in double-digits, unemployment was rising, and the Keynesian prescription of more inflation no longer had even short-term (and illusory) benefits.

We were not concerned about the standard of living doubling; we were hoping that our children could enjoy a standard that we had at that time. Already, the steel mills and U.S. auto plants were closing or downsizing, and all we could see in the future was more of the same. Very few of us could envision an age of the Internet, broadband, personal computers, digital communications, and HD television, yet it came after some of the more destructive New Deal policies finally were abandoned.

As for "deregulation," it was not begun by ideological free market conservatives. No, the most important presidency for deregulation was that of Jimmy Carter, who saw himself as a liberal "progressive," but who nonetheless realized that an economy of 1980s technology could not exist in a regulatory shell of the 1930s.

But, to follow Collins’ line of reasoning, do free markets lead ultimately to speculation and financial bubbles? Clearly, the answer is no. Collins does not point out that the government-created Federal Reserve and government-created "mortgage giants" Freddie and Fannie gave us the speculative bubble. Furthermore, the Fed also gave us the stock market bubble during the Clinton administration.

The problem has been that the march of government control and regulation has grown immensely. Economists like Paul Craig Roberts may decry the use of off-shoring for the purpose of manufacturing goods, but the present manufacturing and overall employment climate in the USA is not favorable to new investment, as government, not to mention the ubiquitous plaintiffs’ bar, stand to confiscate earnings and future capitalization. Better to make goods in China, where at least the "communist" government there is less likely to seize one’s property than in the so-called capitalist United States, where no one’s property is safe, anymore.

In other words, when government discourages real production and encourages the kind of speculation we recently saw, and then promises to backstop the losses, should anyone be shocked when we see the very behavior that gave us the bubbles in the first place? To return to those New Deal policies of re-regulation and even more labor union favoritism only will make things worse.

Unfortunately, no one in the media and certainly no one in Congress (except for Ron Paul) will challenge Collins’ statements. After all, he speaks for God, right?

October 30, 2008

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services.

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