The US and cyclical economic theory – Part 3

The US and cyclical economic theory – Part 3

In the 1970s, conservatism movements gained popularity. Libertarians argued that un-regulated capitalism and individual autonomy where the essence of American freedom. They were against the regulatory state that had been created by the New Deal. Other conservatives where not libertarian but moral conservatives, they were ok with the regulatory government but for them, virtue was the essence of America. Both movements were against big governments. 25 years of economic prosperity and expansion came to a grinding hault in the 1970s, replaced by inflation and extremely slow growth. A long term process of gradual decline of manufacturing was one of the explanations in relation to competing manufacturing in the rest of the world. The US started to experience a commercial deficit, which is when the imports are higher than the exports. One of the reasons was because the USD was linked to gold, making it a strong currency but also making American products more expensive abroad. So Nixon took the US off the gold standard, hoping to make American goods cheaper overseas and reduce imports. But that didn’t work because the US was also competing against countries with cheaper labour, and raw materials and more productive economies. This growing competition put American companies that couldn’t compete out of business, especially in manufacturing. Competition led employers to eliminate either high paying manufacturing jobs, or else to increase automation or shift workers to lower wage regions of the US or even overseas.

In 1973 the mid-East suspended oil exports to the US which led to the price of oil quadrupling. Prices of everything went up since oil is used for production or transportation of just about everything. Inflation soured to 10% a year and economic growth soured to 2.4% in what became to be known as “stagflation”. The “Misery Index” was born, as a combination of unemployment and inflation. According to economic theory unemployment and inflation where supposed to be inversely proportional, the so-called “Phillips Curve”. But that relationship broke down with the new concept of “stagflation”: both unemployment and inflation. This gave way to a different way of thinking about the economy that emphasized the economy as an aggregate of individual economic decisions. The main impact of the new way of thinking was on taxes.

In the 1980s, reform and change took place in the US in a period known as “Reaganomics”. Reaganomics refers to the economic policies to promote business in the US. These policies are associated mainly with the supply side. The 4 main points where: to reduce the growth of government spending, reduce the federal income tax and capital gain tax, reduce government regulation and control the money supply in order to reduce inflation. This was the beginning of a period called “New Liberalism”, which was based mainly in the ideas of the previously studied economist Milton Friedman. Supply side economics is the idea that lower taxes is the best way to estimulate growth. High interest rate together with lower taxes especially for wealthy people (business owner), is applied with the goal of fighting inflation. Those rich people then spend more, and invest more in private enterprise which creates new jobs. Lower taxes should also encourage people to work harder since they get to keep more of their money. Inflation dropped from 14% to 4% in the decade, in an expanding economy. However, wages did not rise accordingly. The financial world became a superstar, being more profitable to buy and merge companies than to run them properly. The Star Wars programme was the largest military program in US history, the Strategic Defense Initiative, to defend itself against the Soviet Union. It included space base missiles and lasers for shooting soviet missiles out of the sky. In Clinton’s presidency, liberal economic reforms, such as privatizations, continued. However, a welfare reform was passed in which families would not receive their money not directly, but through state programs that had strings attached, including work requirements and time limits for total benefits. Increased global competition kept wages down, while fuel prices took to lows as world-wide oil production increased. The internet took a central scene, which would have remained as a military communications network if computer scientist and entrepreneurs had not worked out how to sell things.

In the year 2000, the .com bubble burst. At that point in time, investors would jump upon any time of internet based business. But it turned that the business model of selling online dog food at a loss was not a sustainable business model. A new wave of migration arrived, this time coming from Latinamerica and Asia (and not so many from Europe), 40% though had college education. Multicultarism and change created a very tense political environment.  Social differences remain even today between Caucasians, Latinoamericans, Afroamericans and Asianamericans.

It is important then to see how the US has been switching economic policy according to the cycle of the economy and the historical period: from Adam Smith to Keynes to Milton Friedman, there is no “left or right” economically speaking in the US but simply the application of economical theory. Usually, the Social Democrats are associated with Keynes (and the fight for worker rights), and Republicans are associated with Liberal economics. However, consider that Bill Clinton, a Social Democrat, applied pro-business liberal economic theory as well in the New Liberalism period that extended from 1980 – 2008. This model was exported later to Latinamerica with disastrous results. Later on, we will discuss WHY it failed in Latinamerica.

Finally, 2008 sees a new economic period under the Obama administration, submerging in a period of “New Keynesianism”. A mixture of private and public economic thinking twisted towards speculation and irresponsible spending. With low interest rates, housing bobble burst in 2008. When banks stop lending, business can’t function, so the stock market collapsed. American cut back on spending impacting consumption. Millions of jobs were lost, mainly in construction and manufacturing. The banks were bailed out to avoid a total stop of the financial system, but this did not help the house-owners. Obama’s signature act has been Obamacare. The affordable medicare seeks to move the US into the ranks of countries with universal healthcare. It aims to make it easy for the insured to buy private healthcare. The government will subsidize those who can’t afford insurance. Besides having appeal towards the latino and afro-american communities, Obama brought back typical Keynesian values into the economy. “For everywhere we look there is work to be done. The state of our economy calls for action, bold and swift. And we will act, not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed out commerce and bind us together. We’ll restore science to its rightful place, and world technology’s wonders to raise health care’s quality and lower its costs. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do, and all this we will do”. ‘Nuff said!

Don’t go anywhere, soon... THE EYE OF THE BIG BROTHER is watching us. Uhhh, creepy.

Your friendly economist,

Cristian “Nash” Bøhnsdalen.

  

The US and cyclical economic theory – Part 2

The US and cyclical economic theory – Part 2

The New Deal changed the rules of economics, but it was the World War 2 that catapulted the US to superpower category. Consider that before WW2, the US was a developing country. Government spending reached it’s climax with all the money invested in the Army. This lead to industrial as well as technological development. As George W. Bush once said “America has always grown based on warfare”. After WW2 several wars or interventions followed: Korea War, Vietnam War, the Gulf War, Invasion of Afghanistan. War is a lucrative business that the US Government understands very well.

But let’s continue with economics. After WW2, the world was divided in two: The western bloc, including western Europe, the US and Latinamerica, and the Eastern Bloc: the Soviet Union. The two models represented very different values and views of the world. Whereas capitalism stressed the achievement of the individual and freedom, communism focused on group efforts and the sacrifice of individual interest in pursuit of a common goal. We will continue discussing that later. The 1950s was a great period for American history, at least for the white American. It also saw the greatest invention in history: Television. The Civil Rights movements looked forward to make America more inclusive. Between 1945 and the 1960s Americans experienced a period of economic expansion that saw standards of living rise and gross national products more than doubled. This prosperity was shared by ordinary people who saw wages rise. By 1960, 60% of Americans enjoyed middle-class standard of living. Most Americans where happy because they had televisions, dishwashers, indoor plumbing and electricity! Urbanization lead to the growth of the construction sector, and people living outside the city led to the growth of the car industry. Most people agreed on American values: individualism, respect for private property and belief in equal opportunities. However, African Americans where terribly discriminated. Segregation was horrible, in the 1960s, black people had to stand up and give their seats on the bus to white people. In the 1990s, nearly 90% of suburban whites lived in communities with non-white populations less than 1% of the population. In the 1950s, half of black families lived in poverty. In California, discrimination was against Latinos. Segregation of white and coloured children at public schools had a detrimental effect upon coloured children. The impact is greater . The policy of separating the races is usually interpreted as denoting the inferiority of the negro group. A sense of inferiority affects the motivation of a child to learn, tending to slow the educational and mental development of negro children and to deprive them of some of the benefits they would receive in a racially integrated school system. There was widespread systemic inequality spread in the decade that showed how far away Americans were of living the ideal of equal opportunities. In the 1960s, gay people, woman and latinos added their voices to the claim.

The Civil Rights Acts brought actual legislated change, against discrimination. Kennedy realized that the US could not declare itself the champion of freedom throughout the world while maintaining a system of racial inequality at home. “The Great Society” was a set of legislations that extended many of the promises of the New Deal, especially in the creation of health insurance like medicare for the elderly and Medicaid for the poor. Despite efforts, the median wealth of white households remained ten times greater than that of African Americans, and nearly a ¼ of all black children lived in poverty. Persistant poverty and continual discrimination in the work place, housing education and the criminal justice system explains the shift away from integration and towards “Black Power”, a celebration of afro-american culture and criticism of white suppression. Latinos organized to claim for their rights, but more specifically linked to labour justice.

A man against war John F. Kennedy switched the country’s focus on warfare towards the Space Race. The US space program committed the nation to the ambitious goal of landing a man on the moon. Besides fighting for world supremacy against the Soviet Union, the Space Race brought a new wave of technological development. Satellite TV, laptops, the dust buster, smoke carbon detectors, telemedicine, the joystick, 3D graphics and virtual reality, non-reflective display, ear thermometers and satellite navigation (GPS), are examples of inventions that came about thanks to government investments in an attempt to reach space. It makes sense, in order to land send a rocket into space, or to equip a space station, technology must be more develop. These developments are later transformed into goods that the final consumer can buy. We can use as an example the iPhone, which uses GPS technology for Google Maps. It is not the private company but the government that must invest in the long term for these developments to take place. The private company will want immediate results, and not a large part of their budget is allocated to R&D. The government, however, can invest in the long term, take the necessary risks and create an environment good for experimentation. The findings of the government programs are later taken into use by private corporations in order to make them a business. On a personal level, my admiration both for the US and the ex-Soviet Union or presently Russia is their understanding that both government and private sector must work together in order for a country to achieve the highest levels of development. Investment in Science & Technology is the most important for long term development. The countries that understand this manage to sustain development in time. The ones that don’t are doomed to periods of booms and bust, many times linked to commodity cycles.     

Last chapter on American history and economy NeXT.

Your friendly economist,

Cristian “Nash” Bøhnsdalen.

The US and cyclical economic theory – Part 1

The US and cyclical economic theory – Part 1

Based on the theories of the mentioned economic thinkers, economical models were developed. The only country though that understood the importance of switching economic model based on cyclical theory has been, in my opinion, the US. We will take an overview of the last 200 years of economic history. In the period of 1800s to 1887 the population had just experienced massive changes in technology and business which gave way to social economic changes which was caused by the 1^st Industrial Revolution. Agricultural advances, steam engines, railways and the factory system gave way for cultural move away from agrarian lifestyle to urban lifestyles and in addition increase the overall productivity of the Nation. Travel across oceans and rivers became easier connecting markets like never before. America became an exporter of cotton to Britain through the cheap expenses of slavery as Britain was the first to enter the Industrial Age by opening textile mills, which America was able to follow through. Financing the development of these technologies was of the upmost importance to advance the industrialization of the Nations. The Market Revolution (based on the the economic liberal ideology of Adam Smith) shaped the way people think in the US. It saw many americans move away from producing things by themselves largely on independent farms and towards producing goods to sale to others. The first thing that enabled this massive shift was new technology, specifically in transportation and communication. In the 18^th century is was difficult to bring things to market and that meant that markets where local and small. New transportation systems changed this, making in cheaper to transport goods. The government build the National Railroad. The steamboat set up a mania for channel building, causing cities like New York to flourish. But the most important innovation was the factory, which more that just a technological development it was an organization. The American system of manufacturing centered on mass production of inter-exchangeable parts grew up steadily. Roads, channals, railroads, factories, they all required massive upfront capital investment. The state also had a big role in development, by passing laws to create corporations, issues bonds for financing, offering good deals to companies that build railroads.

The market revolution changed the landscape of work, which for most of the prior 200 years happened at home. Small scale production of clothes and other goods had been done at home largely by woman, and initially this is how industrial production was done as well. Factory owners would produce some of the products like patterns for shoes and then farmed the finishing out to people working in their houses. Eventually they realized that it would be easier to gather the workers in one place. Americans started “going to work” instead of working from home. Work is now regulated by the clock, instead of by the daylight cycle. The nature of work changed. In the farms, artisans worked for a price which was linked to what they produced. In a factory, workers would be paid a wage according to the number of hours they worked regardless of how much they produced. Migration flowed to the West, to take new land. Since it was difficult to find enough workers for the factories, those jobs where fill in by immigrants. Due to periods of booms and busts in the economy, the workers created unions to protect themselves, calling for higher wages and better conditions. 

The Civil War helped boost industrialization by giving massive contracts to army related businesses. Communications where also improved significantly (the telegraph). Immigration flourished, New York City becoming the center of finance and commerce. At the time, the US was seen by Europe as a developing economy, and investments in the US had a much higher return than in Europe. Railroad were one of the keys to the countries’ 19^th century success. Consider that, in the beginning of the 20^th century, 7 out of the 10 top companies in the Dow Jones where railroads. They also developed organizational management systems to organize themselves. Rockefeller established Standard Oil, becoming the richest person in the world. Vertical integration was another innovation. Firms bought up all aspects of the production process from raw material, to production to transport and distribution. Horizontal integration was when big firms bought up small ones. Unions flourished and organized themselves better. Unions continued to grow and fight for better conditions, sometimes violently.

In the 1920s, there was large scale consumption of relatively new consumer products which was good for American industry. But much of this consumption was fueled by credit and instalment buying which was unsustainable. When economic uncertainty increases, credit bubble burst. Signs of economic slowdown already started to appear in the mid 1920s. The stock market crash in 1929 and the Great Depression were not the same. People lost a lot of money in the market crash, but it was massive unemployment which led the main depression. In 1930 a wave of bank failures spread (due to the fact that they did not have enough reserves) as depositors lined up to take the money out before the banks went belly up, banks call in loans and sold assets. This meant that credit froze up, what really destroyed the economy. A frozen credit system meant that more money was in circulation and that led to deflation. When prices drop businesses cut costs mainly by laying off workers. These workers then can’t buy anything, inventories continue to build up and prices drop further. Banks weren’t lending money so importers couldn’t borrow it to make payroll to pay their workers, making more and more businesses go bankrupt, leaving more and more workers unable to purchase the goods and services that would keep the businesses open. Although no-one starved, people were forced to search trash-cans for food and had to ask for unemployment relief.

The response to the Great Depression was called “the New Deal”. The New Deal meant that it was the government’s responsibility to guarantee every man the right to make a comfortable living but he didn’t say how he meant to accomplish this. It meant a series of programs whose objevtive was to fix the depression and prevent future depressions. The New Deal consisted of: a relief program, gave money to people in need; recovery programs, where intended to fix the economy on the short run, and put the people back to work; and lastly, reform programs defined to regulate the economy in the future to prevent future depressions. The National Recovery Administratio was defined to be business leaders working together to create industry standards for production, standard and working conditions. One section of the NRA, the Public Works Administration employed 4 million people building bridges, schools, and airports. The crisis has been caused by under consumption and the best way to combat this was to raise workers wages, so that they could buy lots of goods. The thinking was that if people experienced less economic insecurity they would spend more of their money, so there were wide-spread causes for public housing and universal health insurance. The crowning achievement was the Social Security Act of 1935. Social security included unemployment insurance, aid to poor families with children and of course retirement benefits. This is funded by payroll taxes rather than general tax revenue. This was a transformation between the federal government, and the American citizen. Before the New Deal American did not expect them to help them in times of trouble. After the New Deal, the question was not IF the government was going to intervene, but HOW. This is Keynesian Economics, the idea that the government should spend money even if it means going into deficits in order to prop up demand. The State was now much more present in people’s lives. For some people it meant relief and social plans, for others it meant jobs and employment programs. It paid paintors to make murals, it paid actors and writers to put together plays, it employed 3 million Americans until it ended in 1943. The program got the support from most of the population bringing the people from different social classes together.      

The New Deal changed the way of thinking about economics. Liberalism in the 19^th century meant limited government and free-market economics. The New Deal changed the people’s expectation about the government. Now when things go sour we expect the government to do something. The New Deal made the government an institution directly experienced in american’s daily lives and directly concerned with their welfare.

More American history and economy to come in our next chapter.

Your friendly economist,

Cristian “Nash” Bøhnsdalen.