Wednesday, June 11, 2014

TP still alive


is of the loss by Eric Cantor to a Tea Party challenger.

The Tea party lives on. Worldwide. The recent elections in Europe were surprising in the strength of the populist conservatives. (Xenophobes)

The Tea party taps into the unrest in the economy and attempts to lead by laying blame. I ignored the markets for awhile (they are boring lately) and did some writing. I have been wading through Piketty's book, "Capitalism in the Twenty-First Century" lately. The book is mostly a recap of historical research on wealth inequality by a study of tax returns and wealth as related to national incomes. The book is an economists case for most of the things about wealth and capitalism that I have come to intuitively derive over the last couple decades of trying to earn a return on my capital through speculation. I felt if I could think like a rich person I should be able to profit from the actions of rich crowds. Or something crass like that.............



The news in politics this morning is all about the surprise win in Virginia of the Tea Party challenger over incumbent Eric Cantor. And the story line on CNBC is of the worry of the stock markets that increasing wins by Tea Party candidates may presage changes in the United States. Those changes would presumably be related to less govt. spending, lowered taxes, and of course restrictions on immigration, among other items.

I have thought for some time that it is tragic that popular opinion can lag economic reality for extended periods of time. Leaders of political parties must exhort their followers to rally by using radical and sharp language and ideas if they want to keep the movements alive. This is the case with the Tea Party today. The economy is starting to mend. The U.S. economy will likely never return to the heady days of the 80's and the 90's. But those decades were fueled by the debt that the Tea Party abhors. Yet Tea Party leaders demand change in government and taxes. Change that would increase the debt of govt. and would avoid paying for the bills that have been incurred by Social Security, Medicare, and the safety nets in general. I seriously doubt they have any intention of cutting military budgets. The recent VA "scandal" has highlighted the point, to me at least, that the loudest and most vocal proponents of lower government spending are the loudest proponents for more service to veterans. It is a the only position for a red-blooded American populist to take.

The winner in Virginia is on television this morning speaking of his vision for the country. He is an economist. His speech is filled with references to Friedman and Hayek. He longs for a return to free market capitalism. I didn't hear him mention God, I mean of course Ronald Reagan, the god of populist free market Americans. Particularly those who care more for emotion than facts.

This country has had almost 35 years of propaganda to the effect that government is bad, free markets are good, debt is bad (we only hear that when the economy crashes), and that if only we as country would return to free market principles things would return to normal. Meaning that the middle class would prosper, small business would prosper, big business would prosper, the lazy would get jobs, and the Mexicans would stay on their side of the fence. Just like in the good old days.

What were the good years?

The best years for this country were the two decades after WWII. The reason for that, in my opinion, has much to do with the rest of the world being reduced to rubble. We were the supplier of goods and capital for rebuilding. And we had the money to invest after the large government debts run up during the war that were used to put people to work in the war effort. The workers had cash to spend. Demand was worldwide.

Another reason for those good years was the attitude in the country left over from the 1920's and 1930's that was pro-worker. Union membership was strong and labor had the power to demand and recieve a fair portion of the profits. Thus the profits were widely distributed.

Another reason for those good years was that this country had just consolidated it's expansion from east coast to west coast. The previous 100 years capitalist expansion had been fueled by the cheap land and cheap natural resources of an undeveloped continent. There is no better way to stimulate an economy than cheap inputs and the freedom to be greedy that a capitalist system permits. There is nothing wrong with that greed, in it's place. Greed is the motivator of human behavior that continues expansion after basic needs have been met.

In those good decades of the 50's and 60's the U.S. was a strong and still young country. But those were also the years of cheap energy. Energy in an industrial economy is one of the main inputs to the economy. The oil shocks of the 1970's brought forth the importance of low energy prices to an expanding economy as the economy contracted and stagnated in the face of higher energy costs. The government of the time made the decision that the dollar was slowing the economy. Nixon took the country off of the gold standard when he closed the window on British redemptions of gold. The dollar plummeted and inflation took off. But eventually the Federal Resere under Volcker raised interest rates dramatically, shocked the economy and at the same time shocked the oil exporter countries of the middle east with greatly reduced demand, and thus prices, for oil.

Inflation was broken, energy was cheap again. But in the turmoil of the 1970's inflation the Tea Party idea was germinating. And populist candidate Reagan, after the Nixon betrayal and the malaise of the Carter years, was a runaway winner with his vision of a return to the good old days. But populists and their followers always need a scapegoat and the goats in this instance were the government that had caused the inflation as well as those union workers whose wages had risen along with that inflation. Small government and no unions were the marching orders. So the assault on the federal government began with a move to reduce tax revenues. But the voters, being generally ignorant of the bigger picture, and voting their own pocketbooks kept the entitlement spending, demanded that their Social Security remain strong (SS payroll taxes were increased-a middle class tax hike) and Medicare was not so important to a young country so it was generally ignored. The Cold war remained a force for continued govt. spending on big ticket defence so military spending increased. What is a govt. to do if people demand spending yet refuse to pay more taxes? Borrow, of course.

Reagan's policies caused a sharp increase in government debt. If you are in doubt of this find a chart of government debt over the decades since WWII and notice the sharp angle upwards in the early 1980's.

And not only govt. debt increased. Changes to the banking laws and repeal of Glass-Steagal improved the ability of the banks to create more debt and market that debt to the general public. Buying on credit, once reserved for only one or two big ticket items like house and auto, became commonplace. And the profit margins for banks increased. Increasing competition among banks caused a reduction in lending standards and loans to poorer and less able borrowers resulted. This, combined with the ongoing assault on workers wages, was catastrophic to the balance sheets of middle-class America. Private debt skyrocketed.

As the purchasing power of the consuming middle classes waned in the early 2000's and as the domestic pressure on wages had reached it's limit, and after the third world economies got over the debt crises that the western banks had saddled them with, the western corporations went to the only primary input into the capitalist system left. Namely the cheap labor in the third world. Technology was exported wholesale to China. And China embraced the change and bought US treasuries and kept the consumer and US govt debt load manageable and sustainable with low import prices and low inflation. And the free market voters went along with the scheme. As long as the good times continued it was free market capitalism at it's best.

But here we are in 2014 after the greatest financial debacle in world history just a few years past. Consumer debt levels are largely unchanged. Only replaced by student debt as desperate new workers go for a college education as the only way to have a shot at a middle class standard of living. Even as the jobs go to the cheap and highly educated third world workers in an increasingly technologically oriented world economy. The debt is still there. Public and private. Yet the war on workers wages continues, the war on taxes to control the debt levels continues and the Tea Party candidates continue to promise that austerity will stimulate the economy.

How will austerity heal an economy that is overloaded with debt? If there is one thing I know about free market capitalism it is that markets for goods are needed. There must be demand for goods and services. If there is demand no amount of regulations or taxes will deter a capitalist from turning a profit. It will happen. But with a large class of the population deep in debt there will only be marginal demand. The stimulus that has been a growing feature of the past couple decades of govt. intervention in the economy has been an attempt to put the last primary input into a capitalist system, ie, more money. But that can only be a temporary measure. And as the population has expanded from coast to coast and the cheap resources have been used and as the land for housing is in short supply and water for populations is an issue as environmental change is an increasing reality the era of cheap economic inputs and easy money is over. Capitalists must adapt to lower profit margins. People must adapt to lower standards of living as measured by consumer goods and change to a model of sustainability with a focus on more longer term life choices like accessable heathcare and a diversified choice of retirement savings. The country will have to eventually make the same social choices that the crowded countries of the world made a generation ago. That is a move to a sustainable public/private partnership that promotes saving on a national level by investments in a broad safety net of healthcare and retirement systems at the same time as workers are empowered to get a higher and fairer share of national profits. Most do not consider paying taxes to be a form of saving. It is. A government system that is not in debt has the ability to stimulate when and if needed. But debts must be repaid for the ability to continue. Taxes are necessary and must be just. The only thing to keep in mind is the difference between taxes on small profits and tax rates on large profits. Remember, it is profits that are taxed. If profits are overtaxed business will go elsewhere if they can, so the system must be closed. This means that trade tariffs and restrictions on imports must happen. It is a tragedy that international corporations can move around the world to extract the primary resources of capitalism (labor, natural resources, and energy) and keep the profits and move on. Taxes must be progressive, wages must be robust as a percentage of profits, and business must be protected from international raiders.

This is a socialist system. A socialist and democratic government protects the middle classes and promotes the business that helps organize the workers into productive endeavors. Socialism that is based on the will of the voters will protect the nation and it's inhabitants while saving for the future.

But it all comes down to the will of the people. They must decide. And populism and populist enchanters only decide after a calamity has struck. Unions were popular AFTER the economic crashes of the early 20th century. Social Security and socialism in general were the results of free market capitalism gone awry. Free markets caused the latest great crash. But the Tea Party supports many of the same things that caused the problem. And too many people still drink their Tea Party Kool-Aid.



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