Practical Dad

Witnessing the effects of business deregulation was a significant element of my decades-long leftward shift from Centrist Republican to Socialist.  The earliest deregulatory actions of the Reagan Administration and the later capture of the legislative and regulatory functions created the environment for what has become a wholesale pillaging by the corporate sector and the uber-wealthy.  It has been the route by which millions of jobs have been sacrificed to short-term profit goals and the American Middle Class has been strangled.  This progressive regulatory neutering has fertilized the bloom of kudzu-like moral hazard and allowed the return of a corporate culture that was shackled by our predecessors:  the Anonymous Societies.

What exactly is a corporation?  The phrase that sticks with me from a distant business law class – more notable by the presence of a fellow student’s bandana-clad labrador retriever that sat at a desk two rows over – is “fictitious legal entity”, a construct that forms the groundwork for giving a non-breathing, bloodless entity the same standing legal standing as a real person.  There were other descriptions and meanings but the full meaning of a corporation didn’t sink in until years later.  At its core, a corporation is simply a legal mechanism to pool capital to gain the requisite critical mass necessary to fund a new venture to gain wealth.  Jeff Bezos and Sergei Brin might have the financial capital necessary to fund a new venture but the great mass of humanity will have to figure out a way and the corporation is a decent mechanism if you don’t have $25 million in pocket.  You come up with a plan and seed money, sell the idea to a group of interested individuals and in return for a promise to share in the profits, they provide the necessary funding.

Corporations go back to the Middle Ages, when they existed for finite periods of time to raise money for specific purposes such as chartering a school or building a cathedral.  That changed at the beginning of the 17th century when the English king provided a charter to the East Indies Tea Company; that company then raised money for the express purpose of turning a profit for the new shareholders.  These early corporations, including the West Indies Tea Company and the Dutch East Indies Company, not only lived to make money but to assist their respective governments in the colonization of their respective regions.  These companies finally failed by the 1800s when their respective colonial regions either became independent or impossible to administer.  It was only in the early years of the 19th century Industrial Revolution that the modern variant of the corporation came into being, existing in perpetuity (hopefully) to turn a profit for the shareholders.

If you understand the comment that evil is twice around the block before good has even put on shoes, then you have a sense of the relationship between corporate behavior and government oversight.  Throughout history, regulation has largely been behind in responding to the various corporate misbehaviors.  Before any meaningful regulation began in the late 19th and early 20th centuries, men grown so wealthy as to be known as robber barons engaged in such activities as bribing Civil War telegraphers to obtain advance notice of battle results to sell or purchase gold in advance of the public.  They manipulated the price of company stocks like a Duncan Yo-yo.  They engaged in bare-knuckle price fixing to eliminate competition.  They became the earliest lobbyists by camping in the lobby of Civil War Washington’s Willard Hotel to buttonhole Union officials to procure contracts.  They fought – and sometimes killed – labor organizers in disputes about working conditions.  And in one of the more entertaining episodes now known as the Erie Railroad War, two robber barons swindled another by simply printing thousands of new stock certificates to sell to him as he attempted to buy up control of their railroad.  The point being that in the absence of meaningful regulatory oversight, gross illegalities – with significant collateral damage – occurred in the pursuit of profit.

The term Anonymous Society is foreboding, the image evoking shadowy figures moving in the background to satisfy their own ends.  It is also a term explicitly linked to the corporation.  I first learned the term in a college Spanish class when a professor corrected me in conversation, clarifying that the correct Spanish term for corporation was Sociedad Anonima and that any Spanish corporation would carry the identifier SA after its name.  But it was decades later that I learned the history behind the phrase Sociedad Anonima.  Unlike today, where ownership of shares is recorded and reportable, the practice in 19th century Europe was that share ownership was not recorded.  A European corporation of that period didn’t know who owned their shares; the shareholders were literally anonymous and company dividends could only be paid to those individuals who showed up with their certificate chits as proof of ownership.  Corporate directors did not know if the shares changed hands between owners and the early European corporations were literally anonymous societies of shareholders.  Because the practice fed illegalities, most often tax evasion, that anonymity was eliminated but the original terminology, SA, remained.

The collective decline of the American Middle Class, since the Reagan Administration, is rooted in the notion of shareholder capitalism.  It was during the first part that I was witness to one of those countless actions in the name of shareholder capitalism.  At that time in the early 1990s, I worked on the corporate staff of a multinational telecommunications company that provided long-distance services.  The firm had an immensely successful marketing program, Friends and Family, which offered lower phone service rates to anyone enrolled who was calling a friend or family who was likewise enrolled.  The program was marketed and sold via phone sales from multiple call centers located across the Midwestern United States.

The call centers were a mix of fixed and variable costs, equipment and labor respectively.  To keep costs down, corporate would place them in economically distressed areas; they would find a locality with cheap property, empty building and a population with higher unemployment.  The farm debt-ravaged Midwest met that criteria in spades.  The company would establish a site, lease and retrofit an unused warehouse or empty supermarket as a call center and then hire the locals to work there as phone bank operators to sell the Friends and Family program.  Understand this about the corporate mindset:  Labor is viewed as an accounting concept, a variable cost.  You cannot just tear up hundreds of miles of fiber-optic cable nor recoup the cost of switching equipment installed in temperature controlled rooms.  Those costs are fixed and woe to the executive who advocated for those decisions if they don’t pan out.  But people can be hired and terminated, in many states at will.

My position was in Risk Management, but my small department was located oddly in the Treasury Operations Group.  A part of the job was to make periodic trips to the division that managed the F&F program and that entailed flights to those call centers.  Senior executives could take the corporate jets to Hong Kong or London, but I caught an evening flight to Minneapolis and a subsequent crop-duster to Iowa or Missouri.  There were instances that I sat as an observer with the call center workers.  The system would auto-dial a number and it would be routed to the employee, who would commence the sales pitch upon being answered.  Upon the call’s ending, often unpleasantly, the employee would have a few seconds to mentally reset before the system repeated the process again.  During breaks, I did what I frequently do:  I chatted with the people.  They were not there for a career but solely to make ends meet in a difficult place at a difficult time.  They were college students, divorced parents and ex-farmers working for second income money and modest benefits, supporting immediate or extended family.  They were real people doing their best to handle real financial situations.

Fast forward to a late-Spring Friday afternoon in the downtown Washington, DC headquarters.  My cubicle was located on the third floor immediately outside the front conference room adjacent to the Treasurer’s office.  As I worked, I overheard him and others entering the conference room, joined shortly afterwards by the CFO and other senior executives and staff.  It was notable because the CFO and those executives typically stayed on an upper floor with a view towards the Washington Monument and the White House.  When everyone had later gone and the day was winding down, I stepped into the office of a cash management director and made a crack about the presence of the gods amongst us mortals.  She didn’t respond at first, unlike other times, but then commented that the senior management was concerned about the share price and that it had been stalled near a particular level.  The executives wanted to make a gesture to the market to demonstrate that they were “serious” about controlling costs and they would announce that they would be shuttering multiple call centers.  I didn’t think that the decision made great sense since this program was a certifiable marketing phenomenon with wide brand recognition and yes, the company was in the black.  Was it as profitable as it could have been?  Probably not.  But the decision was framed within the context of proving a point to the stock market and as executives with stock options, the decision makers in that room had a vested interest in seeing that price rise.

The decision to close centers, with the resultant loss of hundreds of  jobs, was announced the following week.  Like tufts of dried dandelions in stiff breeze, the jobs were simply gone.  Mortgages, health insurance, family circumstances, whatever…all were meaningless to those executives so long as the market understood that they were serious.

Although my own job was safe, the experience was educational.  When we found that my wife was pregnant about a year later, we talked at length and decided that it made more sense if one of us stayed home with the child.  This experience was not the principal reason behind my decision to resign and stay home but it certainly lurked in the background of my thinking.  This act, and the countless others throughout the economy, proved that corporate loyalty to the employee was dead and that I could be unemployed regardless of my competence or job performance.  We would take a significant short-term pay cut but my wife’s long-term employment would be far more stable.

Just a few years ago, almost twenty-five years after the closures, I wandered the local high school auditorium lobby during a play’s intermission.  I was perusing the plaques honoring notable alumni and stopped abruptly at one plaque, which honored the CFO of that corporation for his contribution to establishing a gift to the school.  I looked him up upon returning home and found that he had left the company a few years after me and was now a principal at an established investment firm.  He had managed to avoid the final implosion of the company after it was purchased by Worldcom, which itself ceased to exist because of a massive accounting scandal.  The Treasurer was himself established as the CFO of an oil company and the CEO, who wasn’t in the room but would certainly have signed off on the closure decision, was now an independent investor specializing in tech start-ups.  My thought now, as it was that night?  You got yours, you Bastards.  What about everyone else?

A corporation is a valuable tool but in the end, it is only that, a tool.  There are certainly decent corporate leaders who abide by the rule of law, but the cumulative acts of the others are sufficiently damaging that we can no longer allow the conflicts of interest arising through stock options.  We can no longer accept them at their words that the books weren’t cooked (Enron and Worldcom), their scientific research wasn’t flawed (Theranos), their actions weren’t damaging to the marketplace (Amazon).  I am sure at this point that you can identify any number of other corporations which can fit the bill here.

People, many being supporters of President Trump, fear the impact of a Democratic party victory upon shareholder capitalism.  They neither recall nor understand that much of the damage to their middle class is a result of shareholder capitalism, a Randian and morally bankrupt conceit that serves as window dressing to justify the legalized looting and pillaging by corporate elites for decades.  Without the re-imposition of government oversight and regulation, the pillaging will continue until the Anonymous Societies succeed as neo-feudal lords amongst hundreds of millions of American serfs.

“To admire, and almost to worship, the rich and powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith, The Theory of Moral Sentiments (1759)

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.  We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.”

Adam Smith, The Wealth of Nations (1776)

“Follow the money.”

Deep Throat to Bob Woodward, 1973

If you want to understand why I shifted from Centrist Republican to Socialist, you need to think about Adam Smith and Capitalism.  What we presently call Capitalism has spawned a massive division of wealth – gutting an entire Middle Class – because it leans upon a bastardized propaganda version of Smith.

Capitalism is a young concept relative to the history of the world.  First elucidated by Smith in his 1776 The Wealth of Nations, it gained traction during the early 19th century with the Industrial Revolution.  It spawned fortunes to a very few at the expense of the many.  Early capitalism grew explosively during the technological upheaval of that period, fostered by weak legislative and judicial systems which not only permitted, but supported, a system free of any regulation.  Toss in Western Civilization’s social and religious structure, recognizing and reinforcing class distinctions, and it was off to the proverbial races for the wealthy few.  It was only through decades of muck-raking journalism, labor unrest and early legislative efforts that society’s ball was slowly moved forward on the field against the power of concentrated wealth.  In the United States, these efforts largely failed during what we know as The Roaring Twenties as public sentiment bowed to the supposed acumen of the business and corporate class.  When Great Depression congressional hearings uncovered just how badly that class screwed up, it was a series of regulatory actions and social programs that set the stage for the version of mid-20th century American Capitalism that most reflected the full range of Adam Smith’s work.

According to the International Monetary Fund, “Capitalism is an economic system in which private actors own and control property in accord with their interest, and demand and supply freely set prices in markets in a way that can serve the best interests of society.”  In the event that you think that in the best interests of society is a socialist term added by some IMF pinko leftist, just remember that Adam Smith was a strict Scot Presbyterian who wrote The Theory of Moral Sentiments almost two decades before he penned The Wealth of Nations.  While everyone gloms onto his phrase about the rational self-interest of the butcher and baker as justification for the inherent success of capitalism, they ignore the fact that in a sense, Smith was using the idea of capitalism as a means of raising the proverbial tide of all boats in the waters of society.  Fine, says Smith, the best way to make money and improve their condition is to understand that people will act in their own best self-interest.  But understand that fixating upon the accumulation of wealth is self-corruptive and ignores the larger obligations that we owe to society.  

How did we manage to divorce capitalism from any concern for the welfare of society at large?

Start with the question, what exactly is Capital?  We have an entire economic system predicated upon the word and I frankly doubt that many have even thought about it.  Google the question what is capital? and the response can vary by site.  Investopedia is the first response and defines capital as “…financial assets such as funds held in deposit accounts and/or funds obtained from special financing sources…Capital assets can include cash, cash equivalents, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities.”  Wikipedia (yeah, I know, I know…) defines capital as “human created assets that can enhance one’s power to perform economically useful work.”  Most sites ignore the concept that people can also be capital; the Corporate Finance Institute notes that capital has a human component including social, intellectual, physical and talent skills.  And this is the crux of our present issue.  There is supposed to be a degree of balance between the various aspects of capital, a general equilibrium between the human, financial and physical assets with all of them coming together to create wealth and grow the economy.  But in the four decades since the election of Ronald Reagan, that equilibrium has vanished and those who view capital as solely the purview of financial instruments have gained control of the economy.

The wealthy are like the poor in that they have always been with us, their power flowing and ebbing over the political events of generations and constrained by taxation, regulation and occasionally, the guillotine.  Their most recent ebb came after the Great Depression, when Congressional inquiries revealed the depth and extent of their financial misbehavior.  But they didn’t leave and they continually lobbied over decades for the lowering of taxes and the repeal of the regulations that held them in check.  My kids have heard me say on multiple occasions that the seed for our era was planted by Ronald Reagan, who rode the promise of a renewed America and lower taxation into office in a landslide.  Tax rates were cut and that freed money to sustain the pent-up demand unleashed after the problematic 1970s.  But there were two singular changes in Reagan’s first term that set the stage for what has happened since.

Like an Amazonian butterfly whose flapping wings spawn a Bangladeshi monsoon, the first of these changes was notable only in the stunningly dull pages of the B section of the Wall Street Journal.  As a college business/economics student during that term, I was required to subscribe to the WSJ and read it regularly.  My morning routine consisted of early classes followed by a walk to the post box for the paper and mail, and then to the cafeteria for a coffee and morning read.  That read began with the stock results in the C section and then onwards to what I now recognize as the utterly schizophrenic A section editorial page, then the print counterpart to today’s Fox News.  In each case, the news side was essentially reliable but the Editorial side was highly conservative and occasionally batshit crazy.  What popped out one morning in the B section was a wonkish accounting article discussing a proposal to alter CEO pay packages to allow stock options in addition to the standard salary.  The rationale was that the presence of equity options would provide a greater sense of ownership in the company and by extension, a greater willingness to accept risk.  It was a shift of philosophy from company steward to company owner.  There were a few articles afterwards and the practice was quietly adopted.

Score an early point for potential conflict of interest.

The second change was the innocuously sounding passage of SEC rule 10b-18  in 1982, which again legalized the practice of corporate stock buybacks.  Buying back one’s stocks was once legal, but was abolished with the passage of the Securities and Exchange Act in 1934 when Congressional inquiries discovered that more than a few high-flyers of the 1920s markets used the practice to manipulate their share price upwards.  The rationale behind the 1982 allowance was rooted ostensibly in the high interest rate environment of that period.  In corporate finance, the idea is to invest in those projects which provide a sufficiently large rate of return relative to the cost of money or whatever management deemed the appropriate internal rate of return.  In an environment where the cost of money was 15% and higher, there were few projects which could even come close that benchmark.  The proposal was that instead of companies just sitting on cash, it was better to simply return it to the shareholders and let them use it to their own best advantage.  The optimal way to do that would be the buyback of stock instead of paying higher dividends to gain the tax advantage of the buyback’s capital gains rate versus the dividend’s higher income tax rate.

Score another point for potential conflict of interest and manipulation.

After these two early acts set the stage for the later triumphant looting, events took place in distinct strands that ultimately came together to literally throttle the American Middle Class and contribute to our immense wealth gap.

The first strand was conservatism’s foothold through and after the Reagan years.  Conservatives were no longer stodgy middle-aged lodge members that sold insurance and met for Wednesday league golf.  They became acolytes to a gospel cult of Wall Street and profitability.  I began working in the corporate office of a now-defunct multinational telecommunications firm in 1992.  As a first entered the Treasury Group area, I met the prototype for the Young Republican capitalist:  tanned and handsome with wavy sandy blonde hair, dressed in an impeccable suit with matching red power tie and suspenders.  As he shook my hand and introduced himself, his next words were Y’know, Reagan is a God.  I don’t recall my response apart from a mental note to the effect of well, this is special.  Our subsequent conversation afterwards was an inquiry about my weekend and then a storyline about how wasted he had been at the beach the immediate weekend before.  He was an avatar of what was to follow – supremely self-confident, narcissistic and completely vacuous.

Capitalism during the Reagan years began morphing into what is now termed shareholder capitalism, which was proposed and promoted by Nobel award economist Milton Friedman in the 1970s.  Shareholder capitalism posited that executives were to work at the behest of shareholders to the exclusion of all others, including customers and employees.  I don’t recall anybody pointing out the inherent conflict of interest as top executives were now shareholders as well.  This was the point at which the concept of capital became the purview of financial instruments to the practical exclusion of all else.

Corporate finance shifted with the rise of corporate raiders such as Carl Icahn and firms such as Kohlberg, Kravis and Roberts.  These adhered to the shareholder capitalism principles and readily used large amounts of debt – the so-called Other People’s Money – to acquire companies and dismember them, selling off profitable divisions.  They then took their proceeds and left the surviving portion of the new firm with to deal with their massively increased debt load.  More than a few companies perished because they were unable to cope and more recent examples of this include retailers Toys R Us and Neiman Marcus.

My beach capitalist former co-worker would have felt at home amidst these proceedings.

Assisting in this period was the creation and growth of conservative media, which paved the way with a new attack narrative questioning the role of government and painting the poor as lazy and undeserving.

The key event event for shareholder capitalism however was the 1999 repeal of the 1934 Glass-Steagall Act.  This was the fundamental act which regulated the actions of the banking sector, effectively forcing banks to focus upon commercial banking.  It was actively promoted by Limbaugh and his peers and permitted money center banks such as JP Morgan Chase and Citibank to again become involved in investment banking.  They became active participants in the subsequent use and sale of Mortgage Backed Securities and other derivative instruments which ultimately led to the Financial Crisis of 2008 as they became actual threats to the stability of the entire financial system.  They were now effectively Too Big to Fail.

The next strand was woven within the political arena.  Conservative principles of deregulation also led to the neutering of regulatory bodies such as the SEC via both defunding and executive direction to scale back investigations.  The promise of lucrative private sector careers for cooperative regulatory officials put the cherry on the sundae of what is known as regulatory capture.  The legislative branch was compromised by the failure to control lobbying and campaign financing.  My own personal bugaboo is the growth of the American Legislative Exchange Council, which acts as a conduit of legislation between corporate beneficiaries and legislators, most at the state level.  ALEC was a pre-Reagan entity but came into its own after Reagan came to office.

Score ten points for self-interest.

The third strand was a new attitude towards failure.  A key feature of capitalism is that success is obviously met with reward and failure with loss; more power to you if you succeed but you had better be ready for the consequences of failure.  But remove the consequences of failure and what begins to occur is moral hazard.  Market participants begin to expect that they will be spared the cost of failure and are thus willing to undertake greater and more irrational risk.  Perhaps the first financial event to evoke this was the collapse of a private fund named Long Term Capital Management in 1998.  The gist of the firm’s strategy was to make money arbitraging the differences in interest rates of different instruments, a transaction with a very small profit margin.  To maximize their return, the owners borrowed larger and larger sums of money to create a critical mass of capital to make the strategy lucrative.  But when some of the supporting bonds defaulted, the remaining assets could not support their nosebleed levels.  The government was forced to step in and arrange, through multiple large banks, an orderly winding down of the trades to prevent a collapse that would have likewise destroyed other firms interlocked via a web of financial relationships.  Yes, the firm failed and people lost money but there was a lesson to those few paying attention.

Go ahead and engage in the excessive risk-taking, the system will be protected should things go south.  I can argue that this was the precursor event signaling to shareholder capitalists that it was a new game.  Hey…we can do all kinds of things now and take our rewards.  The market will be fine and we can make money until then.  We just have to get out first.

The final strand was a new philosophy about interest rates.  The arrival of Ben Bernanke as Federal Reserve Chair in 2006 was a signal moment for the American financial sector.  Bernanke’s academic focus was the study of the Great Depression and his premise was that the 1929 Fed exacerbated the collapse by raising interest rates and siphoning liquidity from the system.  His proposal would be to lower interest rates and flood the markets with liquidity.  The hiring was a tacit acknowledgment of market over-value and that a crash was to be expected.  Any issues with the market would be met with a flood of liquidity.  The 2008 collapse put this proposal to the test and rates were lowered to historic levels.  This was additionally matched by Fed mechanisms, aka “the windows”, to flood the severely damaged financial sector with gob-smackingly stupid amounts of liquidity.

It was here that cheap credit became the new crack.

Significant market issues would be met with rate adjustment downwards and despite efforts in the twelve years since then, rates have not returned to pre-crisis levels.  So how is this crack?  Corporate executives saw the opportunity to use ultra-low rate debt to their advantage:  they began borrowing signficant sums of money on their corporate books and using it…to buy back shares of stock.  Cumulative growth of BBB rated corporate debt rose 400% between 2008 and 2018.  The effect of this on cumulative Earnings Per Share has been a rise more than seven times higher than sales per share over the same period.  Oh, and by the way, the executives are concerned that the market will tank if we ban stock buybacks.

The Federal Reserve has literally become the enabling mother of narcissist sociopaths.

So after Milton Friedman and Ronald Reagan, four strands were woven:

• Inherent conflicts of interest were legalized and allowed;
• A national narrative attacking government regulation occurred and the subsequent financial decline was blamed upon out-groups such as the poor and illegal immigrants;
• The legislative and regulatory processes were seized and neutered;
• Monetary policy and the Federal Reserve were co-opted by the practices of Mutually Assured Financial Destruction brought about by the first three bullet points.

These strands have been woven into the rope that is literally strangling the nation.

The tributes and nods to Adam Smith from the conservative media are a joke.  The conservative movement has seized upon a singular work, cherry-picked it and beaten it like a drum to justify decades-long chicanery, theft and wholesale looting.  They have helped to rig a system that purposefully strip-mines the wealth of large segments of American society and used their media allies to clothe it in respectability.

Smith would be appalled by what has happened and would likely say this:  Read the other book.

The truth is that the consumer-driven model is now functionally dead, an economic zombie shambling along and awaiting the merciful head shot that drops it, allowing it to be kicked into the gutter and out of the way.

PracticalDad, Post-Consumer Parenting (April 8, 2016)

The consumer-driven model that has powered this nation’s economy for three quarters of a century is now officially dead, the head shot delivered by…a virus.  Like any zombie, it was compelled to mindlessly consume yet was malnourished by an increasingly severe lack of purchasing power.  I would have been less surprised by the manner of death than to find that Bette White was cast as the new villain on The Walking Dead.

It starved for years, certainly longer than April 2016, when I wrote the above linked post.  Zombification occurred in stages over the course of decades.  One contributing factor was the effort by corporate employers to shift from pensions to 401k plans, citing the need to cut costs and allow for funding to compete against other companies.  Another was the claimed throttling cost of benefits, consequently cutting back on health care benefits in the face of rising costs.  Yet another was the drive to maximize shareholder value by decreasing labor costs, shipping jobs – even entire plants – overseas or increasing the drive to automate them.  Even with these ongoing hits, the process was accelerated by an economic demand that now mandated a college degree for entry into the fabled American Middle Class.

The condition however, became terminal with the Financial Crisis of 2008, from which it never recovered.

The symptoms have been there for years in any variety of news articles:

• Personal credit card debt rising from $238 billion in 1989 to almost $1.2 trillion in 2018;
• The decline in assets for Millennials entering the economy compared to preceding generations;
• The lack of retirement assets for Boomers;
• The report that by 2018, 40% of all Americans didn’t have $400 available in cash to cover an emergency expense;
• The realization that by 2019, 78% of Americans were living paycheck to paycheck;
• The rise in the wealth distribution of the top 10% of families from 1989 to 2013, leading to an inequality in the concentration of wealth that has not been seen since the “Roaring Twenties”.
• Most recently, American billionaires saw their wealth increase by $434 billion since the onset of the Covid-19 Pandemic.

To quote Captain America:  I can do this all day.

Understanding the impact of this collapse is helped by understanding how the model came about in the first place and for that, you have to return to the period immediately prior to the Great Depression.  Economists were developing the Expenditures Theory of Gross Domestic Product:  C + I + G +(X – M) to help create a systemic framework for understanding the national economy .  Simply put, a nation’s GDP is a function of the aggregate spending of Consumers (C), Business (I), Governments (G) as well as the aggregate international balance of trade between exports (X) and imports (M).

We might recall the decade as the “Roaring Twenties” but the reality was different.  There was supreme confidence in the business community and many industrialists and financiers bought into the notion that the historic business cycle of boom-and-bust had been eliminated.  But there was an awareness among others that significant problems still existed.  The agricultural sector was mired in an economic depression as crop prices had collapsed years before the Wall Street collapse.  Some were aware of the inequitable distribution of wealth in society and others noted that the lion’s share of the economy’s productivity gains through the decade had accrued to the wealthiest class.  The average American worker saw significant wage gains but the top 5% of wage earners garnered 34% of the disposable income, up from 24% in 1920.  Then came the collapse of 1929.

President Herbert Hoover’s responses to the Great Depression were constrained by the philosophy – along with almost everyone else – that the Federal Government must annually balance it’s budget.  There was plenty of rah-rah jawboning and some effort to run a small deficit and create additional relief programs but in the end, he was bound by his personal belief that it was up to American individualism to find a way out instead of government action.  Relief programs were left to charity and local and state governments but the continued spiral downwards left everyone without money so that by 1932, destitution reigned; the economy was at the point of real collapse and Senators were warning of open revolt by the election of 1932.

Yet debate among economists continued during that period and it was in 1930 that John Maynard Keynes wrote A Treatise on Money, which became the basis for what we now know as Keynesian Economics.  Another economist caught the ear of nominee FDR in that period however, and his name was William Trufant Foster.

The heart of Foster’s concept was that the Depression was ultimately caused by under-consumption, that the average person simply didn’t have the financial wherewithal to support the purchasing power required for all of the economic output produced.  If there was to be renewed growth of output and through it, employment and wage growth, it had to come via increased consumption in any fashion, whether by the individual, the business sector or the government.  Keynes’ work provided the intellectual justification to allow government deficit spending to spur that aggregate demand in economic downturns.

I don’t know that we can now appreciate the level of political and economic chaos in the period between FDR’s election in November 1932 and his inauguration in March of 1933 (the inauguration date was later moved to January).  Farmers were banding together to actively deter farm foreclosures via threat and in some cases, actual violence.  The Soviet government actively supported a rising Communist party and through it all, hundreds of banks across the country were closing their doors, destroying the little savings that were left to the individual.  Two states independently declared bank holidays, temporarily closing all banks within the state for a one or two week period.  Why?  Fear.  The average American had so lost faith in the system and government that, anticipating his or her own bank to collapse, began pulling all their remaining money from banks.  By doing so, they themselves guaranteed a collapse.

Fear.

This was the backdrop for FDR’s now-famous First 100 Days.  It was the backdrop for the creation of new and untested programs to get people working and money once again flowing through the economy.  Fear was the enemy that FDR fought in that early period of his Administration and was the basis for his statement in his first inaugural address, The only thing we have to fear is fear itself.  FDR understood that money must be flow and consumption must be restored and in the short-term was willing to use the government budget to do it.  He also acknowledged the power of the budget and knew that in the longer term, the average citizen would have to step up and this could not happen until fear was lessened and purchasing power grown.

Why the introduction of bank deposit insurance via the FDIC?  To lessen the fear of bank collapse with the resulting loss of savings.

Why the introduction of Social Security?  To lessen the fear of poverty in old age.

Why the creation of multiple job and agricultural programs?  To lessen the fear of poverty, bankruptcy and ultimately, starvation.

And why the creation of multiple public authorities such as Rural Electrification and the Tennessee Valley Authority?  To spur the development of the physical infrastructure necessary for future growth and keep it out of the hands of the private sector, most particularly the financiers.

All of this was undertaken to rebuild the purchasing power of the American citizen and ultimately, to diminish fear because fear eroded faith in the system.

Remember that phrase:  purchasing power.

Government spending alone was insufficient however, and it was clear by the severe recession of 1937 that something new had to be tried.  This was interrupted by the Second World War and any other activity was shelved for the duration.  What happened through the post-war period however, was a series of measures that, by design or happenstance, assisted not only the economy and purchasing power of the American consumer but diminished the fear that kept it from being exercised.

• The wide-spread availability of health insurance from employers meant that Americans were relieved of the fear of crippling medical bills.
• Higher education was made more available to the large number of returning veterans via the GI Bill of 1944 and the quality of that education was increased with significantly higher public funding for facilities at state universities.
• The existence of Social Security and the availability of company sponsored pension plans meant that Americans were, to a considerable extent, relieved of the fear of poverty in their old age.

This is where we find ourselves today.  The Consumer-driven economic model was predicated not just upon the wealth and incomes to support reasonable purchasing power, but also the assurance that there was a sufficient safety net to protect the constituent consumers.  The high cost of healthcare via premiums, deductibles and co-pays has shifted to the family with a subsequent loss of purchasing power.  The high cost of the college degree that is now a prerequisite to a job that at least promises stability has shifted first to the family, and then to the youth, with a subsequent loss of purchasing power.  The decrease of pension plans and the rise of self-funded retirement has shifted that to the family as well, with a subsequent loss of purchasing power.  Couple these with the disproportionate rise in the actual costs for healthcare and higher education?  Disaster.

There is a terminal lack of purchasing power.  That the average American had nothing upon which to rely when social distancing shutdowns occurred with no economic support forthcoming while the financial system and corporations were backstopped fed a smoldering anger.  That small business was forced to shutter while certain large retailers were declared essential spiked that anger.  People can talk all that they want about the pandemic measures impinging upon their rights, the underlying fear is that they face economic ruin unless they can return to their jobs.  Regardless of where you are on the political spectrum, it is ultimately an anger built upon the practical implications of economic inequality that we have allowed to take root.

Perhaps the only remote silver lining to this freakishly misbegotten shit show is that it is occurring in an election year.  What we have known as an economy is functionally dead.  The national savings rate has spiked to 33% in April 2020 and the economic establishment states that we are hoarding cash.  Do you know what I say?

Good.

Why should we now spend for anything other than necessities?  Why should we spend when government and corporate policies make it clear that our families will receive no meaningful support?  Why should we upgrade and consume when the products, although ostensibly American, are built overseas and profits are disseminated only to shareholders and senior executives?

There is now a debate brewing in Washington as to whether the temporary additional weekly unemployment benefits of $600 should be extended past their July 31, 2020 expiration.  This is occurring because research finds that fully 68% of American workers now have UI benefits greater than their weekly wage.  Conservative legislators fear – understandably – that there is no longer an incentive to work and that such benefits constitute a moral hazard.  Yet they oppose an increase in the minimum wage.  They oppose any public sector financing for healthcare.  They oppose any increase in public funding for higher education and some even support decreasing funding for elementary and secondary education.  And they support a President whose 2020 budget proposal called for Medicare and Medicaid cuts to address a trillion dollar deficit.

And they do not answer the underlying question:  How have we come to this juncture that the wages are so disproportionate to what is required to survive in America today?

This is why the election year timing matters now.  There must be clear and progressive – even radical – policy choices made to help create a new model driving economic growth, one that is not piled upon the back of an American citizen again bereft of purchasing power and crippled by fear.

And yes, one that actively encompasses a real core of social justice.