Tuesday, March 20, 2012

When the economic rules changed

The economic history of the 1930s is probably the most interesting era of them all.  By vastly expanding the means of production, industrialization had destroyed the assumptions of traditional Alfred Marshall economics.  Conventional wisdom made the Great Depression inevitable.  The only question was—what would replace it?  In USSR, a sociopathic killer lurched between schemes for industrialization that could be excused by the (mostly preindustrial) teachings of Karl Marx.  In Italy and Germany the economic rules would be set by the industrialists themselves which proved remarkably successful.

It was the English-speaking world that had the most awkward adjustment to the death of the conventional "wisdom."  Part of this is due to a good thing—the English world was not as prepared to use naked police-state terror to change the economic debate as were the Communists and Nazis.  So the new economics had to win by debate.  And the debate had not been won as late as 1937.  It could be argued that civilized behavior cost the English-speaking world the economic output of a decade.

How the Depression Made Keynesians of Capitalists: Echoes

By Kenneth Lipartito Mar 12, 2012 7:41

Re-elected with 61 percent of the vote in 1936, President Franklin D. Roosevelt told his supporters, "Now I'm going back to do what they call balance the budget." True to his word, he cut spending and promptly sent the nation into a recession -- a sharper decline than in 1929.

The orthodox wisdom in Washington in 1937 remained cutting spending, reducing taxes and balancing the budget to restore business confidence. Punitive taxes on investments and capital gains and "unreasonable restrictions" on finance had put businessmen into "a state of stagnation if not panic," critics of the New Deal argued. Uncertainty was the main reason the economy was in a slump, declared the U.S. Chamber of Commerce. The conservative "Brass Hats" of the National Association of Manufacturers told Roosevelt to end social-welfare policies and get tough with labor if he wanted to reduce unemployment. Chase National Bank President Winthrop Aldrich said it was time to "dismantle the anti-business elements of the New Deal."

Many in the Roosevelt administration also believed business confidence was key. Treasury Secretary Henry Morgenthau Jr., a close friend of the president, promoted the "Treasury view" that government spending merely crowded out private investment. The only way out of the Great Depression, Morgenthau said, "was through restoring business confidence." The liberal Securities and Exchange Commission Chairman William O. Douglas believed that corporate executives were "marking time" and going on vacation rather than investing their firms' cash. Roosevelt himself never completely shook off his view that balanced budgets were a good thing. He had chastised Herbert Hoover for big deficits in the 1932 campaign and cut the wages of federal workers by 15 percent when he took office. His behavior in 1936 was completely in character.

But Roosevelt and his New Dealers would eventually give up conventional thinking on government spending. Business confidence gave way to demand management as the policy of the Democratic Party. That story is well-known. More surprising is that liberal politicians and economists were supported by a range of business leaders. Within five years of the 1937 recession, part of the business community had formed a "growth coalition" centered on the proposition that only government spending could end the Depression -- and thus save capitalism.

One of the more unexpected business voices for growth and spending was a Republican Mormon banker named Marriner Eccles. From a wealthy Utah family, Eccles had taken charge of his father's construction business and diversified into finance and other areas. His company survived the Depression, but he learned that austerity and savings were self-defeating. "In seeking individual salvation," he wrote, "we are contributing to collective ruin." The grim ironies of Depression economics had led him "face to face with the proposition that the only way we could get out of the depression was through government action."

Appointed chairman of the Federal Reserve by Roosevelt, Eccles was unable to get his fellow Fed governors to embrace a more liberal monetary policy. But he was an early supporter of Keynesian fiscal stimulus.

Gradually other business leaders came to conclusions similar to Eccles. Charles E. Wilson, president of General Electric, called for spending to restore full employment. Progressive manufacturer Henry Dennison dismissed businesspeople who clung to laissez-faire ideology as the "lazy fairies." more
When the rollback of Progressive economics began in 1973, the collapse of the new economic assumptions was as rapid as acceptance had been slow.  Some of the advances made during the period of economic enlightenment like Social Security are still with us but that is certainly not because the reactionaries have not tried to destroy it.
Real Wages Remain Below Their Peak for 39th Straight Year
MONDAY, MARCH 12, 2012

The release last month of the Economic Report of the President has elicited a great deal of commentary, but none that I have seen touches on what I consider the best measure of long-term income trends, real weekly wages of production and non-supervisory workers, which is contained in Appendix Table B-47, "Hours and earnings in private non-agricultural industries, 1965-2011." According to a Bureau of Labor Statistics staffer I spoke to some years ago (so the percentages may have changed slightly), this covers 62% of the entire workforce and 80% of the non-government workforce. This lets us focus on average workers and excludes what is happening to high-salary workers. Using weekly rather than hourly real wages takes out the impact of varying hours worked per week over the years. The table below extracts from B-47 to reduce its size. The inflation is adjusted using 1982-84 dollars as its base.

Year Weekly Earnings (1982-84 dollars)
1972 $341.83 (peak)
1975 $314.75
1980 $290.86
1985 $285.34
1990 $271.12
1992 $266.46 (lowest point; 22% below peak)
1995 $267.07
2000 $284.79
2005 $284.99
2010 $297.67
2011 $294.78 (still 14% below peak)

Thus, we have 39 straight years where real wages have yet to get back to their 1972 peak and, indeed, they are a long way from that peak still. This is doubly surprising when we consider that productivity has been increasing steadily throughout that period, approximately doubling from 1970 to 2011, as shown by the Federal Reserve Bank of St. Louis' data:

Due to the convergence of rising productivity with falling wages, we should not be surprised to see that labor's share of non-farm income has fallen:

There are other ways to track the income of average workers. The Economic Report of the President highlights median household earnings in its Figure 1-1, but these data are affected by changes in the number of incomes per household, primarily the result of increased women's labor force participation. The bottom line is that the increase in incomes per household obscures the fall in individual income for most workers. more

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