How Much Do We Need?

House and fruit stand in Houston, 1943 (Courtesy Library of Congress via the Commons on Flickr)

During the Great Depression, in the 1930s and early 40s, the federal government sent photographers out all over the country to document the condition of the people (and to keep a few more photographers employed).  The effort produced some of the most famous images in American photography, as well as scads of seldom-seen photographs, like this one, now available online.

The pictures capture America at a time when the modern consumer society was just beginning.  Americans drank Pepsi and Coke, bought things on credit, and wore factory-made clothes.  In many parts of the country, though, many Americans still used horses, made what they wore by hand, grew their own food, and did without refrigerators or washing machines.  The “March of Progress” hadn’t yet made it to their neighborhoods, and perhaps some were not all that eager to see it arrive.

Life was tough, but the relative simplicity of Americans’ material conditions brought clarity.  It was easy to see the relation between work and the standard of living people enjoyed.  Then, as now, many Americans lived in a precarious state or in out-and-out poverty.  Society was less knit together in a corporate economy, so the solitude of failure was a specter individuals lived with daily.  The wedge between the hard work of getting and the easy work of spending was already there, but there were far fewer goods to buy.

A tension had already developed, between the industrial output of the US and the capacity of individual citizens to consume all of what the nation made.  As early as the 1890s, the government and corporations began pushing to develop markets for our products overseas, producing the kind of globalism that prevails today.  No one has ever figured out what to do when the goods in the world exceed what the human population wants or needs.

Today, in a time of high long-term unemployment, commentators fret about “low consumer confidence.”  We’re told this is the reason American corporations are reluctant to hire.  Yet it’s perverse to hope that Americans will spend when they are in debt, unemployed, and impoverished.  It’s amazing how much more “confident” a consumer feels when he or she has a paycheck or a real wad of money.

Corporations and banks show their contempt by sitting on hordes of cash rather than making it a priority to hire American workers, which would ease our collective difficulties.  Meanwhile, we have lost sight of economic independence as an important goal of a free people.  In the midst of this antagonism, we need to keep asking, how much do we need?

Top image: House and fruit stand in Houston, photographed by John Vachon, 1943,
from this source
.

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Was American Greatness Built on Fiscal Folly?

The US Capitol in the 1830s (Courtesy Cornell University Library via The Commons on Flickr)

Is American greatness based on extravagant decisions that make no economic sense?  I’m pretty sure the answer is yes.

Our history is littered with “go-for-broke” projects that were hailed as sure-fire disasters at the time.  They would never have had a chance if our ancestors had had to defend themselves against the hand-wringers and economic rationalists who control American decision-making today.

Here is a short list of things that would never have happened because they entailed excessive risk, uncertain returns, irrevocable loss, or extravagant outlays.  In some cases, the day of exoneration for these decisions didn’t arrive for decades.  In the meantime, the country and its leaders endured ridicule as well as some terrifying liabilities.

1.  The Revolution.  It should have been a doomed undertaking.  The rebellion was impulsive and deepened into a pitched struggle that lasted eight years.  During that time, the colonies held it together with a more or less powerless committee that they tried to dignify with the name of the Continental Congress.   The war was fueled largely by reckless borrowing and the issuing of funny money.  The country organized under the Constitution largely because the new structure promised impecunious states debt relief.  Burdened from the outset with staggering debts, we became the US because there was no other way.

2.  The Louisiana Purchase.  Jefferson’s famous 1803 purchase was another patent error we wouldn’t think of committing today.  True, he acquired all that land west of the Mississippi, out of which 14 or 15 perfectly good states were made, —but he agreed to pay France an amount of money that was two times our entire federal budget at that time.  How could that be wise?

3.  The founding of Washington, DC.  Another ghastly boo-boo.  Instead of putting the capital near one of the existing states or cities, our frivolous forefathers insisted on mapping out a whole new city, and on a ridiculously grandiose scale, too.  Ignoring the fiscal realities, they threw away dollar after dollar building up an unduly magnificent city—it was all too European.  Yet, lo and behold, the iconic city they built is a global symbol, anchoring a metropolitan region of some 5 million people that is one of the most dynamic in the US today.

4. Seward’s Folly.  The Alaskan Purchase.  Another instance of classic fiscal adventurism.  Another expenditure the US didn’t need, especially not in 1867, when the government was laden with debt from the Civil War.  Critics argued that Alaska was inconvenient, and unnecessary; its only asset was a population of fur-bearing animals, whose value was declining.  That was before the gold was discovered, or the oil.  Purchased for 7.2 million dollars, Alaska today has a $49-billion GDP.

5. Ending slavery.  This, surely, was the most economically reckless action in American history.  For in putting an end to slavery, the US deprived one class of white Americans of millions of dollars of “property” and put an end to a convenient labor system they were accustomed to.  The gradual recognition that the slaves in our midst had a moral and political claim to be treated differently—that, in fact, Americans of all races are entitled to full civil and political equality—is one of the costliest convictions at which we’ve ever arrived.   Yet like many of our other decisions that “made no sense,” this one was essential to our national integrity.  And it highlights, in a way that the other items on my list do not, why economic rationality alone has never been, and should never be, the transcendent value in a republic like ours.

So, to my contemporaries I say—yes, cut away the waste and the unnecessary—but never disavow that go-for-broke mentality.  It’s part of the folly that made us great.

Image: The U.S. Capitol in 1830s Washington, D.C.
from this source.
  For a photograph of the Capitol from this period, click here.

The European Muddle

Like many great issues of the day, the euro mess is difficult to conceptualize.  Why not take a stab at it, though, since it’s something that could cause the US economy to collapse?

Here are links to a few graphics encapsulating different aspects of the European problem.  A few insights can be gained by interpreting them with our own 2008 financial crisis as a point of comparison.

The European Union faces at least two complex interrelated problems.  The first has to do with the condition of banks; the second has to do with the indebtedness of member countries.  There is also a third problem, which is more political.  It has to do with the structure of the EU itself and the poor tools it has for redressing “state-level” problems (critical weaknesses within member-nations like Greece and Spain) that threaten the euro’s value and stability.

Credit imbalances within the euro zone
The integration of nations within the eurozone encouraged capital flows within the community, while creating imbalances that threaten it, should the banks within one of the weaker countries fail.

This wonderful set of graphs published by the New York Times shows the interrelation among creditors and borrowers by country.  Done in late 2011, the graphs offer a general idea of how the stronger European economies—France’s in particular—would be affected if the banks of Greece and Italy were to go down.  French banks have many loans outstanding there and would incur grave losses, possibly fatal ones, were their weaker counterparts to fold.

Unlike in the US, the euro-zone lacks a mechanism like the Federal Reserve, which capably intervenes to stabilize and close or sell ailing US banks if necessary.  In 2008, the Treasury and Federal Reserve averted a general financial meltdown in the US this way.  They intervened directly in the affairs of troubled banks in the interest of keeping the whole banking system operating.  The panic of failing banks was mitigated;  otherwise, it would have spread like a contagion.  Our banking system was supported, and the problem was treated as a matter quite separate from that of the federal government’s own indebtedness or patterns of borrowing.

Until recently, the European Union could not behave similarly: it could not act to help banks, it could only give money to sovereignties.  On June 28th, however, the EU’s member-nations agreed to begin lending money to banks directly, a measure that untethers these two problems and allows a more flexible approach aimed specifically helping banks that might fail.  Nonetheless, it remains to be seen whether this will be much help, as the level of capital needed to stabilize the banks is very large.

Rising sovereign debt
Which leaves the other big problem: the rampant government spending in many EU countries, illustrated in this set of maps, also published by the New York Times.  The maps indicate the significant variation in the spending habits of the governments that make up the European Union.  In many of the EU countries, however, including some of the strongest—such as France and Germany—sovereign debt as a portion of GDP has been growing dramatically.  The difficulty of reining in spending and bringing the most profligate governments in line has led to popular unrest as well as political conflict over austerity measures and proposals for stringent fiscal reform.

It’s not clear, though, whether these disproportionately high debt burdens pose a threat to the long-term health of many of the stronger EU countries.  The more that the elements of the crisis can be differentiated and handled pragmatically on a case-by-case basis, the better the prospects for amelioration will be.  This is definitely a case where what’s good for the goose is NOT good for the gander–or in this case, more fitly, for the PIIGS (the acronym for Portugal, Italy, Ireland, Greece, and Spain).  Helping the most distressed banks may at least buy the EU time to address the more politically fractious issue of how to restore fiscal balance—a very different proposition in Greece than it is in France or Germany, and a more sensitive issue still for the euro zone as a whole.

RELATED:
The Sovereign Debt Exposure of the EU’s 10 Strongest Banks
, Forbes.
Paul Taylor, Euro Zone Fragmenting Faster Than the EU Can Act, The Independent (Dublin).

Why Democrats Should Embrace Simpson-Bowles

After writing about the federal budget the other day, I experienced what can only be called “a tea-party moment.”  By which I mean, a momentary but passionate longing for an end to deficit spending.  It doesn’t have to happen tomorrow, and it couldn’t have happened yesterday, but we have to have a plan for getting the federal budget back on a sustainable footing.  Democrats—all Democrats, as a party—need to embrace this goal.  If they can lead on this issue and bring the electorate to see how deficit reduction can be accomplished responsibly, they’ll find themselves enjoying renewed dominance nationally.  Endorsing the widely respected bipartisan recommendations of the Simpson-Bowles commission is the best way.

What’s clear from the budget graphic I wrote about last week is that the entitlements—Medicare, Medicaid, and Social Security—, are growing at annual rates that will continue to put the squeeze on the discretionary spending that Congress determines.  That’s why deficit spending will continue, and probably at a rate much higher than the $900 billion that President Obama has been proposing.  As the mandated portions of federal spending increase, there will be less and less scope for spending that addresses topical but often urgent contemporary needs.

To the extent that Democrats in the House and Senate have cast themselves as defenders of the status quo when it comes to entitlements, they have taken up an untenable, self-immolating position that will weaken them as a party.  Most Americans understand that the structure of entitlements will have to change, and, if they don’t already, they can be made to.  Today’s entitlements are simply too good to be true.  Originally intended to aid the ill and elderly who would otherwise be destitute or cut off from care, entitlements must be preserved to fulfill their original function of assisting the most needy.  But these programs must be modified in light of experience and changing social and economic conditions.  Social welfare is an important principle that we can best honor by re-tailoring these programs to fit the 21st century.  Simpson-Bowles, which calls for substantial but gradual changes to these programs, shows us the way.  It may not be the perfect plan, but you know what?  Its huge merit is that it was arrived at, and has already been vetted in, a bipartisan way.  With its provisions for thorough-going tax reform and modifications to the sacred cow of Social Security, it represents the deep sort of compromise that can be liberating.

The approach of the Democratic convention and the November election provide Democrats with a golden opportunity.  Look at the Republican primary contest and ask yourself, what’s holding together the Republican Party?  The alarming strength of candidates like Rick Santorum, Newt Gingrich, and before them Rick Perry attests to the party’s troubling divisions.  Were I a moderate Republican, I would be desperately seeking an alternative to a party whose constituents are proving themselves to be so provincial, chauvinistic, and bigoted.  Now is the time for Democrats to take the lead.  Democrats need to become champions of efficient, compassionate government—not the backward-looking defenders of a lost society that they often seem.  Making deficit reduction and tax reform their rallying cries would leave Republicans without productive ground to occupy.  The Democrats would win many converts among disaffected Republicans and the unaligned.  Democrats cannot continue to defend government spending simply because that’s what they’re comfortable doing.

The Times this week published an amazingly convoluted analysis arguing that it has been politically necessary for President Obama to avoid acknowledging any allegiance to the deficit-reduction plan that Bowles-Simpson produced—even though his current ideas about deficit reduction mirror theirs.  The fact is: the burden of deficit reduction isn’t the President’s.  The deficit problem belongs to Congress, and Congress alone.  That’s why it’s so important that the Democratic Party as a whole take responsibility.  Take the lead.  Admit that recent economic trends give us the breathing room to tackle the deficit issue, and take up a position in the center field.  It’s not just good politics.  At bottom, it’s what’s prudent and responsible: a balanced budget—or a nearly balanced one—is what the country needs.

Help Understanding the Budget

I have trouble thinking about the federal budget.  The numbers are too big.  I have pretty good math ability, so if I have trouble with it, I suspect a lot of other people do, too.  Maybe even many of our legislators in Congress!  (I would not want to be on the budget committee.)

So I was really glad to find this cool interactive graphic on the New York Times website showing President Obama’s proposed budget for 2013.  The graphic shows all the huge and tiny (relatively tiny that is–even a tiny part of the budget can have $1 billion in funding) expenditures the government makes yearly.  The colors of the bubbles show the cuts and increases that are proposed.  There’s also an empty circle representing the size of the deficit we’re running, so you can see it in relation to the budget as a whole.

If you click on the buttons above the graph, the bubbles regroup to show the parts of spending that the budget can’t control.  Looking at the graph makes you realize that nearly 70 percent of our budget obligations are mandated, while 30 percent are discretionary.  It’s interesting to see that President Obama is asking that many discretionary parts of the budget be increased, instead of being frozen.  According to this article from US News, Congress has already established that it may run a deficit of up to $1.047 trillion in 2013.

I’m far from being a budget radical, but I can understand why people are in revolt about the size and complexity of the government’s activities.  When you move the cursor over this picture of the government and look at the different obscure programs and how much they cost, you do start to wonder whether they are all necessary.

Click here for the graphic discussed: Four Ways to Slice President Obama’s 2013 budget.