The View From 1776

President Obama notoriously promised to bring change to our foreign policy relations.  His presumption, shared by most liberal-progressives, was that every nation in the world truly desires to eschew war as a policy instrument. 

Liberal-progressives take their cue from Auguste Comte’s writings in the 1820s.  Comte was supremely confident that international socialism, under the rubric of his Religion of Humanity, would bring people from all over the world to learn from French intellectuals the means for restructuring political society.  Restructured societies, with socialistic redistribution of wealth, would no longer experience crime, aggression, or war.  Acting as moral judges, intellectuals would dictate appropriate rules for personal and international relations.

The way to realize those presumed universal peace desires, in the liberal-progressive scenario, is to be sensitive, even obsequious, and never to take military or diplomatic action unilaterally.  To show its faith in the promise of world peace and benevolence under international socialism, the United States is to set an example for the world by disarming itself and reducing its economic and military power to rough equality with such powers in the rest of the world. 

This diplomatic paradigm, faithfully followed by President Obama in his dealings with our self-declared enemies, has so far produced nothing more than promises. 

On the domestic front, the president also is pursuing the ideology of international socialism by ballooning Federal debt to devalue the dollar, bringing large portions of industry and the financial community under direct Federal supervision, and by imposing cap-and-trade green regulation and National Socialistic healthcare, both of which will greatly increase business costs and diminish international competitiveness of American industry.

The question now confronting the president is whether he will persist in negotiating with our enemies without useful results, or whether he will implement his vaguely implied sanctions to compel good-faith negotiations by our foreign adversaries.  Time to curb Iran’s nuclear weapons ambitions is running short.

Are we reverting to liberal-progressives’ 1960s “better Red than dead” rationalization for doing nothing for fear of offending the Soviet Union?

Forbes Magazine columnists Brian S. Wesbury and Robert Stein report on a study by Northwestern University economist Robert J. Gordon. 

Professor Gordon’s analysis corrects for statistical errors imbedded in the Democrat/Socialist version, and the numbers reveal no significant gap between productivity increases and income growth.  Moreover, when the apples-to-oranges comparisons of household incomes employed by liberal-progressive propagandists is replaced with individual income statistics, even more of the putative gap disappears.  The reason is that, in the earlier periods used by liberal-progressives as a base for comparison with more recent numbers, households had several times more members on average than today.  In recent years, households have become much smaller: more young workers live alone in apartments; the number of single-parent families has mushroomed; and the growing proportion of the population constituted by the elderly mostly live as one or two people per household.

Most workers now work fewer hours than during the Democrat/Socialist base period, which means that average hourly income has increased more than liberal-progressive allow. 

The consumer price index (CPI) is not uniform from the top to the bottom of the income scale.  Average prices for the lower income ranks have increased much less than at the top, because of what may be called the Wal-Mart phenomenon, which has kept price increase of non-fashion staples well below the increases for higher-income fashion items for the upper income levels.  This means that lower tier workers’ incomes have greater effective purchasing power than do the incomes of the higher tiers, who disproportionately live in much higher-cost cities on the East Coast, upper Midwest, and the Left Coast.

Finally, Professor Gordon observes that the much faster growth of top tier earners’ incomes is partly the result of Clinton administration regulations that limited the tax deductibility of executives’ high cash salaries.  The result was a general switching from cash compensation to granting of stock options, which became bonanzas as the Fed-inflated money supply boomed the stock market.

Professor Gordon’s analysis can’t be dismissed as uninformed opinion.  According to Wikipedia:

From 1995 to 1997, Robert J. Gordon served on the Boskin Commission to assess the accuracy of the United States Consumer Price Index (CPI), having written the definitive criticism of CPI inflation overstatement in 1990. He is also a member of the Business Cycle Dating Committee of the NBER, which determines when recessions start and end.

Robert J. Gordon’s popular text Macroeconomics was the first to incorporate the rational expectations hypothesis into the analysis of the Phillips curve. Soon all subsequent macro textbooks were expounding the “Expectations Augmented Phillips Curve.” And, now as some twenty years have passed from the first appearance of Gordon’s text, it is still the standard approach to the question of the trade-off between inflation and unemployment in the short and long run.

The writer of the article concludes:

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

A more accurate assessment is that, without massive government spending on the welfare state - which includes health care and education - and the attendant high taxes and strangling regulations, real jobs in manufacturing would have grown robustly.  Other factors associated with expanding government intervention, such as support for labor unions, played a big role in turning the employment picture upside down.

Western New York State, where I now live, is a case study at the state level of the destructiveness of the liberal-progressive lust to restructure society and redistribute wealth.  This area was an inventive and thriving manufacturing region through the 1950s.  Aggressively encroaching liberal-progressivism, manifested in higher taxes, environmental red tape, and suffocating labor union wages and work rules, led to a steady exodus of manufacturing jobs to business-friendly areas in the South and Southwest.

Beginning with Lyndon Johnson’s Great Society in the 1960s, the same economic poison was administered to the whole nation.  Capping these welfare-state toxins with the resulting inflation made American companies increasingly uncompetitive in world markets.  Whence came the necessity to outsource jobs to overseas locations.

We currently are in what Mr. Coxon identifies as the first stage of inflation.  The Fed has pumped enough fiat money into the system to float the entire financial world.  And there is much more to come, as the Obama administration’s huge spending bills for economic stimulus, health care, and green regulation pour more trillions of dollars into the stream.  The Federal deficit, already far past previous levels, will continue setting dangerous records.

The first-phase inflationary effect is evident in the tremendous rise of the stock market so far this year.  Investors have been sitting on the sidelines with tons of money to invest.  The stock market surge (most likely a bear market rally) has led them to leap into the market in anticipation of higher corporate earnings. 

The stock market historically trades at a price/earnings ratio around 12 to 15.  Currently the price/earnings ratio of the S & P 500 is north of 40, which means that, unless corporate earnings soar at an incredible rate, the stock market is much over-priced and due for a sharp correction.

That means also that the stock market surge (the Dow Industrial Index has been flirting with 10,000) is not really an indicator of current economic performance.  It’s just a reflection of too much fiat money seeking an outlet.

Quote:

Dropping large chunks of newly created money into the economy leads to price inflation, because the recipients are likely to find themselves overprovisioned with cash. As they try to unload the excess, they bid up the prices of the things they buy, whether it be stocks, shoes, gasoline, silver coins, or granola. The sellers of those things then find themselves cash rich and start doing some buying of their own, and so the wave of excess money and the bidding it inspires propagate through the economy.

The process isn’t instantaneous. It takes time. Just as each player in the economy has a sense of how much of his wealth he wants to hold in the form of money, everyone will move at his own speed to make adjustments when his actual cash holdings seem to be off target.

And the process can seem to stall, especially when fear is growing. When people are worried or otherwise feel a heightened sense of uncertainty, they will gladly hold on to abnormally large amounts of cash – for a while. But when fear abates, as it will when the economy begins to recover from the recession, that temporary demand for extra cash will also fade, and the hot-potato process of trying to pare down cash balances will emerge to do its inflationary work.

But when?

The speed at which the public tries to unload excess cash and the timing of the effects have actually been measured, in the work of the late Milton Friedman and his monetarist colleagues. The method was indirect and roundabout, and so the results, unsurprisingly, were nothing as precise as nailing down the value of a physical constant.

What the monetarists (or the first of them to be equipped with computers) found was that when the growth rate of the money supply rises:

- The initial effect is on the prices of bonds and stocks, an effect that comes within a few months.

- The peak effect on the growth rate of economic activity comes about 18 to 30 months after the pick-up in the growth rate of the money supply.

- The peak effect on the rate of consumer price inflation comes about 12 to 18 months after that, which is to say it comes 30 to 48 months after the peak growth rate in the money supply.