The View From 1776

Liberal/Progressive Economics Pushes Us Off the Cliff

For the first time in our history, we are regularly spending more than we make.  People are not just saving less of their income, they are spending their savings.  This disastrous, hedonistic proclivity was ordained by liberal/Progressivism.

Franklin Roosevelt’s New Deal in the 1930s began the process of killing traditional moral values. 

Among the victims was the idea of saving for a rainy day, the virtue of thrift, Ben Franklin’s “a penny saved is a penny earned.”  Young people since the Pilgrims landed at Plymouth had been raised with the admonition to spend only after working hard and saving more than enough to cover the expenditure. 

Since New Deal days, the Federal government has endorsed the idea that saving is bad and spending is good, both in its own budgets and in its incentives to the public.

Today we have a population of all ages that is juvenile in its expectations that everyone can, and should, have anything he wants from the get-go, without the necessity of earning it with hard work and thrift.  Just put it on the credit card and pay later. 

Gretchen Morgensen’s article in the New York Times’s November 27, 2005, edition tells us what to expect.  She writes:

“DOES a financial train wreck lie dead ahead for American consumers and investors? Paul Kasriel, chief economist at the Northern Trust Company in Chicago fears as much. He reckons that even a mild recession next year could spiral into something ugly, given the combination of rising interest rates, off-the-charts consumer debt and a cooling housing market.

“We have a very accident-prone economy,” Mr. Kasriel said. “We have the most highly leveraged economy in the postwar period, and the Fed is increasing rates. In the past 30 years or so, whenever the Fed has raised interest rates, we’ve quite frequently had financial accidents.”

“..... If a financial blowup occurred, the unhappy fact is that few consumers would be able to walk away unscathed. After all, over most of the last five years, American households have spent more than they earned. In contrast, for almost 30 years beginning in 1970, the opposite was true: households earned more than they spent.

“..... Real trouble could begin, Mr. Kasriel fears, with a decline in property values, the assets backing the enormous debt of consumers and banks alike.”

How have we got ourselves into this perilous financial condition?

There are two major factors.

First is the obliteration of common sense and the rejection of past values that were the essential aspect of the 1960s and 1970s student activism.  Students, remember, seized control of college buildings and demanded that they be the ones to determine what classroom subjects were “relevant.”  A motto of this juvenile age was “Don’t trust anybody over thirty.” 

Those Baby Boomers are today’s profligate, “you deserve it” spenders, who must be supported in their old age by today’s young workers.

Along with this came anti-Americanism.  1960s and 1970s student activists took to the streets to proclaim that the “power elite” in government, the military, education, and business were fascist criminals.  Few Boomers actually understood the nature of Fascism, but it sounded grandly profound.

In the disintegration of society that ensued, President Johnson’s Great Society implemented some of the final stages of true socialism with a vast array of entitlements programs, which stamped in the minds of Boomers that no one need take responsibility for his own actions, because it’s the government’s responsibility to take care of us, no matter how badly we behave.  Can’t pay your credit card debt?  Declare bankruptcy and go on welfare.  Society now looks upon such conduct as normal.

Second, today, whenever the economy slows and some workers are laid off, liberal/Progressive Democrats instinctively call for increased government spending and higher taxes on “the rich.” 

From the beginning of our republic through the 1920s, all political parties (including the Democrats) were careful to economize in Federal spending and reluctant to increase the scope of Federal powers and activities.  Compared to instincts of both Republicans and Democrats today, it was the difference between daylight and dark.

What changed those instincts was our Depression in the 1930s, coming on the heels of what appeared to be highly successful experiments with socialistic collectivism in Soviet Russia and Fascist Italy in the 1920s.  Progressives saw in socialism a utopia in which planning by impartial, highly trained bureaucrats would replace the greed of private property and capitalism.  Under the presumably skilled, scientific management of Federal regulatory bureaus, there would be more than enough to go around when government took ill-got gains from “the rich” and redistributed tax money equitably among the people.

This has become rigid orthodoxy for liberal/Progressives since the appearance of the socialistic economic theories of British economist John Maynard Keynes in the 1930s.

Buried within a barrage of calculus equations was the simplistic conclusion of Keynes’s so-called general economic theory: depressions are caused by people saving too much and not spending enough.

The solution to this “excess savings” problem, the so-called “liquidity trap” that Keynes believed caused economic recessions, was government intervention.  Government was required to spend more, a great deal more, via the welfare state and public works programs.  When Franklin Roosevelt took office, income taxes were more than tripled, from maximum levels of 25% up to 80%, in order to remove control of consumer spending from the hands of individuals across the nation and place control in the hands of bureaucrats in Washington.

Implicit in Keynes’s theory is the presumption that the economy is driven by consumer spending, not by prospects for profitable business activity.  All that mattered, said Keynes, was that the government spend sufficiently large amounts of money to boost consumption expenditures.  What the money was spent for was unimportant.  It would work satisfactorily to pay men to dig holes one day, fill them the next day, dig them again the next day, then refill them, ad infinitum.  On second thought, why bother to work; just give more money to the voters.

Liberal/Progressive theory goes disastrously wrong in assuming that business will not revive and unemployment will not drop unless the Federal Reserve creates more money for people to spend.  This is, by definition, inflationary, because it pushes up the ratio of money to available goods and services.  The money supply increases before production increases.

In contrast, if the business cycle is permitted to run its normal course without inflationary creation of money by the government, excess inventories will be liquidated and businesses will cut costs and eliminate unprofitable activities.  Lower costs enhance prospects for profits, and businesses then can resume production, creating millions of new jobs without inflationary pressure.  Increased spending power from newly hired workers’ wages will be balanced by simultaneous increases in availabilities of goods and services.

Nonetheless, the Federal government, with the all too brief interlude of Ronald Reagan’s presidency, has followed Keynes’s prescription.  The result has been steady inflation every year since 1933, culminating in the 1970s stagflation - rampant inflation coupled with widespread unemployment. 

Ironically, at exactly the time when mainstream socialist media were trumpeting the success of Keynesian economic advisors in fine-tuning the economy to eliminate recessions, 1970s stagflation destroyed the value of middle class savings, nearly doubled the number of women thrust into the full-time work force, and turned the industrial heartland of America into the Rust Bowl of shut-down manufacturing plants.

Keynes’s best known American disciple, Harvard economist Alvin Hansen, went so far as to predict that the capitalistic model based on private property ownership had failed.  As a consequence, he predicted, the private sector of the American economy would never again attain the production levels of 1929.  It would be necessary for the Federal government to fill the gap with spending to employ new workers in the future and to fund investment in new production capacity.

It was this socialistic vision of the world that led Congress to pass the Employment Act after World War II, arrogating to the Federal government the role of managing the economy and guaranteeing full employment. 

We are still flying on auto-pilot with navigation settings established by Professor Hansen’s now obviously misguided perceptions, urging the government and consumers to spend like drunken sailors on shore leave, without a thought to the inevitable rainy day that lies ahead.

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