Today, however, as I was working along, my mind seized on something I had never dwelt upon. Numbers, data checking , mathematical operations—these things are abstract and in themselves completely lifeless, regardless of the human qualities or quantities to which they sometimes relate. One can work on the figures themselves without being drawn, perhaps unwillingly, into reflections on distressing things: loss, disappointment, pain, desperation, sorrow, death. Perhaps this disjunction between the black-and-white of numbers and numerical computations, on the one hand, and the exquisitely varied coloration of human life and death, on the other, explains the origin of the expression “cold, calculating killer.”
At this point in my reflections, I could not help recalling Robert Strange McNamara. (Was it simply a coincidental family oddity – his mother’s maiden name – that denominated him strange, or was his middle name divinely ordained to serve as a warning?) McNamara was a promising young man, but the big impetus to his later career achievements came during World War II, when he impressed his superiors while serving in the air force as a bombing efficiency expert. I wonder if he ever thought, while examining his data on the results of the U.S. incendiary bombing of the highly flammable Japanese cities, about the human beings – the old women, the infants and little kids, and all of the others who had done so little to deserve their fiery fate – who were suffering the unimaginable agonies of being terribly burned or of seeing their loved ones burned to death and torn apart by blasts. Or did the up-and-coming young officer think only about the ratio of X to Y during his working hours, and then stop by the officers’ club for a stiff drink or two before dozing off between clean sheets?
I don’t pretend to know what passed through his mind, or through the minds of countless other men who played similar roles amid the madness of war. I do know that many people have the capacity to keep troubling thoughts out of the forefront of their minds, to avoid dwelling on things they tell themselves they cannot do anything about in any event, and thus to steer clear of speaking or even thinking about exactly what they are doing. This self-protective evasiveness may explain why soldiers so often speak not of causing horrific deaths and destruction, but of “getting the job done” so they can return home for a slice of blueberry pie with their wives or sweethearts.
Data, then, may serve as soporifics — medicinal tablets that keep our minds off things about which we dare not think too hard or too long. Even then, however, we may be left with Hamlet’s ominous worry, for in that sleep, what dreams may come? Whether nightmares disturbed McNamara’s slumber during World War II or later, when he was secretary of defense during the Vietnam War, with responsibility for the B-52s employed to turn immense swaths of land into carpet-bombed hell, I do not know.
I do know, however, that in the 1960s he surrounded himself with “whiz kids” who were devoted to bringing their “planning, programming, and budgeting system” to bear on getting “more bang for the buck.” People who knew McNamara’s background were surely not surprised. “Cold, calculating killers” – can anyone honestly deny that this term applies in an altogether literal way to these men. And who would have expected anything else? Hadn’t they already honed their skills while working for the RAND Corporation, where they had learned to speak “rationally” of megadeaths and to conclude with numerical precision that if in a nuclear exchange with the Soviets, we suffered 100 million deaths and they suffered 150 million deaths, we would have “won the war”?
Data are fine things; I’ve devoted much of my professional life to their examination and analysis. Yet it behooves all of us to realize that data may sometimes clothe madness or veil inhumanity, and to beware the power of numbers to lull us into an immoral sleep.
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In fiscal year 2009, which ended last September, the Pentagon spent $636.5 billion. Lodged elsewhere in the budget, however, other lines identify funding that serves defense purposes just as surely as—sometimes even more surely than—the money allocated to the Department of Defense. On occasion, commentators take note of some of these additional defense-related budget items, such as the Department of Energy’s nuclear-weapons program, but many such items, including some extremely large ones, remain generally unrecognized.
Since the creation of the Department of Homeland Security, many observers probably would agree that its budget ought to be included in any complete accounting of defense costs. After all, the homeland is what most of us want the government to defend in the first place.
Other agencies also spend money in pursuit of homeland security. The Justice Department, for example, includes the Federal Bureau of Investigation, which devotes substantial resources to an anti-terrorist program. The Department of the Treasury claims to have “worked closely with the Departments of State and Justice and the intelligence community to disrupt targets related to al Qaeda, Hizballah, Jemaah Islamiyah, as well as to disrupt state sponsorship of terror.”
Much, if not all, of the budget for the Department of State and for international assistance programs ought to be classified as defense-related, too. In this case, the money serves to buy off potential enemies and to reward friendly governments who assist U.S. efforts to abate perceived threats. About $5 billion of annual U.S. foreign aid currently takes the form of “foreign military financing,” and even funds placed under the rubric of economic development may serve defense-related purposes indirectly. Money is fungible, and the receipt of foreign assistance for economic-development projects allows allied governments to divert other funds to police, intelligence, and military purposes.
Two big budget items represent the current cost of defense goods and services obtained in the past. The Department of Veterans Affairs, which is authorized to spend about $124 billion in the current fiscal year, falls in this category. Likewise, a great deal of the government’s interest expense on publicly held debt represents the current cost of defense outlays financed in the past by borrowing from the public.
To estimate the size of the entire de facto defense budget, I gathered data for fiscal 2009, the most recently completed fiscal year, for which data on actual outlays are now available. In that year, the Department of Defense itself spent $636.5 billion. Defense-related parts of the Department of Energy budget added $16.7 billion. The Department of Homeland Security spent $51.7 billion. The Department of State and international assistance programs laid out $36.3 billion for activities arguably related to defense purposes either directly or indirectly. The Department of Veterans Affairs had outlays of $95.5 billion. The Department of the Treasury, which funds the lion’s share of military retirement costs through its support of the little-known Military Retirement Fund, added $54.9 billion. A large part of the National Aeronautics and Space Administration’s outlays ought to be regarded as defense-related, if only indirectly so. When all of these other parts of the budget are added to the budget for the Pentagon itself, they increase the fiscal 2009 total by nearly half again, to $901.5 billion.
Finding out how much of the government’s net interest payments on the publicly held national debt ought to be attributed to past debt-funded defense spending requires a considerable amount of calculation. I added up all past deficits (minus surpluses) since 1916 (when the debt was nearly zero), prorated according to each year’s ratio of narrowly defined national security spending—military, veterans, and international affairs—to total federal spending, expressing everything in dollars of constant purchasing power. This sum is equal to 67.6 percent of the value of the national debt held by the public at the end of 2009. Therefore, I attribute that same percentage of the government’s net interest outlays in that year to past debt-financed defense spending. The total amount so attributed comes to $126.3 billion.
Adding this interest component to the previous all-agency total, the grand total comes to $1,027.8 billion, which is 61.5 percent greater than the Pentagon’s outlays alone.
In similar analyses I conducted previously for fiscal 2002 and for fiscal 2006, total defense-related spending was even greater relative to Pentagon spending alone – it was 73 percent greater in fiscal 2002 and 87 percent greater in fiscal 2006. In fiscal 2009, the ratio was held down in large part by the reduced cost of servicing the government’s debt, owing to the extremely low interest rates that prevailed on government securities. This situation cannot last must longer. As interest rates on the Treasury’s securities rise, so will the government’s cost of servicing the debt attributable to past debt-financed defense outlays.
For fiscal 2010, which is still in progress, the president’s budget estimates that the Pentagon’s spending will run more than $50 billion above the previous year’s total. Any supplemental appropriations made before September 30 will push the total for fiscal 2010 even farther above the trillion-dollar mark.
Although I have arrived at my conclusions honestly and carefully, I may have left out items that should have been included—the federal budget is a gargantuan, complex, and confusing collection of documents. If I have done so, however, the left-out items are not likely to be relatively large ones. (I have deliberately ignored some minor items, such as outlays for the Selective Service System, the National Defense Stockpile, and the anti-terrorist activities conducted by the FBI and the Treasury.
For now, however, the conclusion seems inescapable: the government is currently spending at a rate well in excess of $1 trillion per year for all defense-related purposes. Owing to the financial debacle and the ongoing recession, millions are out of work, millions are losing their homes, and private earnings remain well below their previous peak, but in the military-industrial complex, the gravy train speeds along the track faster and faster.
National Security Outlays in Fiscal Year 2009 (billions of dollars)
Department of Defense 636.5
Department of Energy (nuclear weapons & environ. cleanup) 16.7
Department of State (plus intern. assistance) 36.3
Department of Veterans Affairs 95.5
Department of Homeland Security 51.7
Department of the Treasury (for Military Retirement Fund) 54.9
National Aeronautics & Space Administration (1/2 of total) 9.6
Net interest attributable to past debt-financed defense outlays 126.3
Total 1,027.5
Source: Author’s classifications and calculations; basic data from U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2011 and U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970.
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Los acontecimientos actuales requieren de los analistas económicos, entre otras cosas, una teoría económica sólida, amplitud de miras y una buena dosis de humildad, para adentrarse en el frondoso bosque de los complejos fenómenos y datos económicos, y salir de él con una aceptable comprensión de lo que está pasando. Pero además, el conocimiento detallado de la historia económica puede ayudar notablemente a tener una mejor y más amplia perspectiva de los hechos recientes. No en vano, la crisis actual ha sido comparada con otros periodos anteriores, como la Gran Depresión de los años 30, o ha sido calificada en más de una ocasión como la crisis más grave desde la Segunda Guerra Mundial.
Todas estas cualidades son las que cumple a la perfección el economista e historiador norteamericano Robert Higgs, a quien entrevistamos en exclusiva. Él es investigador sénior en economía política del think-tank californiano The Independent Institutea, y es autor de numerosas obras relacionadas con la historia económica norteamericana y la evolución y desarrollo moderno del gobierno estadounidense, de entre los que destacan Crisis and Leviathan (“Episodios críticos en el crecimiento del gobierno norteamericano”) y Depression, War, and Cold War (“Cuestionando los mitos sobre el conflicto y la prosperidad”).
PREGUNTAS
Orígenes de la crisis
P. Los analistas no se ponen de acuerdo sobre las causas de la crisis. Unos culpan a la política monetaria demasiado laxa de la Fed, otros a políticas gubernamentales de fomento de la propiedad inmobiliaria, al exceso de ahorro de países asiáticos o a la desregulación financiera, los complejos derivados… ¿Qué interpretación encuentra más sólida? ¿Por qué?
No consensus on the causes and origins of the crisis. Some blame the Fed’s expansionary monetary policy, government policies on fostering homeownership (Fannie, Freddie, CRA…), others the Asian savings glut, others financial deregulation and complex derivatives… Which position, if any, is the most solid? Why?
The crisis has multiple causes. In the United States, the most important were the Fed’s easy-money policy between 2001 and 2005, which fueled the housing boom; the pressures many different government officials and agencies brought to bear on banks and other lenders to lower their mortgage-lending standards so that they would lend more to home buyers who lacked the qualifications to receive loans under traditional underwriting standards; the rapid growth of the highly leveraged government-sponsored enterprises Fannie Mae and Freddie Mac as secondary mortgage purchasers and as issuers of securities to fund their own operations; the failure of the (officially privileged) ratings agencies to identify the actual risk associated with many of the financial derivatives based on the expected flow of future mortgage-loan repayments; and the failure of many financial institutions to recognize the actual risks of their investments and to avoid those risks or to hedge or insure against them properly. Of these causes, the first two—bad Fed policy and government’s various interventions in the housing-finance industry—were probably the most critical.
¿Rescates gubernamentales para salvar al capitalismo?
P. Se han justificado las masivas intervenciones públicas con el pretexto de salvar al capitalismo. El sistema financiero hubiera colapsado de no haber rescatado e intervenido el gobierno en numerosas entidades financieras, tal y como nos muestra la quiebra de Lehman Brothers; ello hubiera desencadenado un proceso de quiebras sistémicas, argumentan. ¿Hay algo de cierto en todo esto?
Massive public interventions have been justified on the grounds of saving capitalism. The financial system would have collapsed, many banking institutions would have gone bust, which would have brought about some disastrous consequences for the American people (as Lehman’s failure has shown). Is there some truth in all this?
Capitalism has not existed in the United States since the early twentieth century, so whatever the government might have imagined itself to be saving, it certainly was not capitalism. In fact, the government’s various interventions have focused on saving the insurance giant AIG, Fannie Mae and Freddie Mac, big commercial banks and big investment banks, and the automobile manufacturers General Motors and Chrysler—all of which ought to have been liquidated—and on enriching members of the United Auto Workers Union, various government-employee unions, and other supplicants with political clout.
Systemic risk is greatly overblown, as a lobbying ploy; the entire system as such was never at substantial risk. If a market sector of the economy is to be preserved, it must be a system of private profit and private loss, not a system of private profit and public loss. The government’s interventions have created a large number of zombie firms, which are actually bankrupt but are kept in operation by infusions of government-supplied funds.
Deuda pública
P. Los niveles de deuda y déficit públicos parecen haber llegado a niveles insostenibles, gracias a los estímulos fiscales. Está la cuestión de Grecia. ¿Cómo cree que puede evolucionar esto? ¿Conseguirá la administración Obama reducir significativamente su déficit en el corto-medio plazo?
Public debt and deficits seem to have reached unsustainable levels, due to fiscal stimulus. There is Greek question. How do you think this situation might evolve? Will Obama reduce significantly the debt and deficit in the short-medium term?The current debt and the projected deficits create a substantial risk of default on the U.S. government’s debt service. Even if the current crisis had not occurred, the government’s promises to provide benefits for retired people and for health care cannot be kept much longer. The government will probably deal with this unsustainable situation by taking a series of marginal, often hidden steps to raise taxes and to chip away the promised benefits. Another possibility is rapid inflation, which would reduce the real value of the government’s interest payments on its debt and amount to a form of indirect default. Outright default is the least likely outcome, but it is conceivable. After all, the U.S. Treasury defaulted before, when the government abandoned the gold standard in 1933 and the Treasury refused to keep its promises to repay bond purchasers in gold as promised.
Deflación
P. Los políticos, autoridades monetarias y buena parte de economistas temen la deflación como el peor mal posible, y actúan para evitarla casi a cualquier coste, apoyándose en lo que ocurrió en los 30 en EEUU y en la deflación japonesa para defender los estímulos monetarios. ¿Es la deflación tan peligrosa? ¿Se sostiene su evidencia empírica/histórica?
Politicians, monetary authorities and many economists are very fearful of deflation, claiming it is much worse than inflation, which has prompted them to act accordingly at almost any cost. They seem to base their opinions on what happened in the 1930s contraction (monetarist story), and in the Japanese deflation. Is deflation so dangerous? Is the empirical/historical evidence correct?
The modern fear of deflation is irrational. Gradual deflation that reflects ongoing improvements in productivity is for the most part a desirable condition. Between 1865 and 1897 gradual deflation reduced consumer prices by about 50 percent. During the same years, the United States experienced very rapid growth of real GDP per capita. Prices fell greatly between 1920 and 1922 and would have fallen further, had the Fed not acted (unwisely) to stabilize the commodity price level for the rest of the 1920s. However, rapid unexpected deflation caused by changes in the demand for or supply of money are not desirable and may cause substantial harm, as they did in the United States between 1929 and 1933. Nevertheless, constantly erring on the side of inflation, as the Fed has done since the 1930s, is bad policy because it results in secular loss of the dollar’s purchasing power. Since the Fed’s creation in 1913, the dollar has lost more than 95 percent of its purchasing power.
Gran Depresión
P. Hablando de la recuperación económica y las previsiones, usted elaboró el concepto de “incertidumbre de régimen” para explicar por qué la Gran Depresión se prolongó durante tantos años. ¿Podría explicar el concepto? ¿Puede estar pasando algo parecido actualmente con las políticas de Obama?
Talking about the economic recovery and future forecasts (which I know you are rightly very skeptical about)… you elaborated the concept ‘regime uncertainty’ to explain why the Great Depression lasted so long. Could you explain it? Could that be happening again with Obama?
“Regime uncertainty” is the name I give to widespread fears that the nature of the economic order will be changed. This has to do mainly with fear that private property rights will be altered for the worse by higher taxes, more costly regulation, more hostile treatment by government functionaries of all kinds, and perhaps outright confiscation of private property. When investors feel regime uncertainty, they are reluctant to make long-term investments because they fear that they will be unable to receive the income those investments will generate and may even lose the capital itself. Between 1935 and 1940, many U.S. investors feared that the market-oriented U.S. economy was going to be transformed into fascism, socialism, or some other system dominated by the government. During the past two or three years, similar fears have arisen because of the many large-scale government interventions (or likely future interventions) into the financial markets, the health-care system, the regulation of carbon emissions, and the automobile industry, besides the imposition of higher taxes and more onerous regulations in general. However, because the U.S. economy is already subject to pervasive government intervention of many kinds, the present situation is not fully comparable to the situation in the late 1930s.
Reforma sanitaria
P. Entre estas políticas, Obama ha dado gran importancia a su reforma sanitaria. ¿Cuáles pueden ser las consecuencias de esta medida? ¿Ha tomado Obama una vía adecuada para incrementar la cobertura médica a los más necesitados y mejorar la eficiencia del sistema?
Amongst these policies, Obama has attached much importance to his healthcare reform. What can be the consequences of such a reform? Has Obama taken the good path to address the problems of the current American healthcare system (allegedly, high costs, low medical coverage for the poor…)
The health-care law just enacted will prove disastrous, both for the operation of the health-care industries and for the government’s finances. It will also lead to a great loss of freedom for the American people, tens of millions of whom will be forced to purchase health-care “insurance” that they do not want to purchase, or to pay large fines. Insurance companies will benefit in the short term by gaining millions of unwilling customers, but in the long run, the entire health-care insurance industry is likely to be taken over by the government because the “mixed” (fascist) arrangement will not work well and will lead to tremendous public dissatisfaction – which, strange to say, will be blamed on” the market system,” an institutional arrangement that has not existed in this area for decades because of pervasive interventions by state and federal governments.
Guerra contra el terrorismo
P. Usted también ha estudiado con detalle la cuestión de la guerra, tanto históricamente como en los episodios actuales, y es muy crítico con la política exterior norteamericana actual. ¿En qué se basa? ¿Había alternativa tras los ataques del 11S? ¿Es una estrategia de salida sensata salir inmediatamente de Iraq, como defiende Ron Paul, o ello generaría un ambiente de guerra total entre los iraquíes?
You have also worked on war issues, both in the past and recent events. You are very critical of the American foreign policy. What are your opinions on this based on? Was there an alternative to the 9/11 attacks? Is a sensible exit strategy for Iraq to leave it immediately, as for example Ron Paul defends, or would that create a horrible scenario of conflict for Iraqis at home?
Aggressive U.S. foreign policies have always been damaging to the interests of most Americans, but important political elites and crony capitalists have benefited from U.S. military engagements abroad and have promoted them as essential for U.S. national security. Since World War II, the U.S. government has maintained a vast, worldwide military presence, which it uses to intimidate various groups and governments and to create favorable conditions for the operation of foreign investors with close ties to the U.S. government, especially in the financial and petroleum industries. These foreign engagements create enemies, who occasionally strike back at the United States by terrorist acts, such as the attacks of 9/11. Those attacks ought to have been treated as criminal acts, not as excuses for a “war on terrorism” (a senseless concept in any event, because terrorism is a kind of action, not an enemy who can be killed). Police (of various countries) and private bounty hunters authorized by the government should have sought to capture the perpetrators and bring them to justice. Instead, the Bush administration used the 9/11 attacks as a pretext for attacking Afghanistan and Iraq, the latter of which had nothing to do with the attacks. These wars, which continue to drag on and on, have been disastrous for the people of Afghanistan and Iraq and a terrible burden, both economic and moral, for the American people. The sooner the U.S. government withdraws its military forces from Afghanistan and Iraq, the better the situation will be for almost everyone.
1. Under the passed legislation, what does it mean that “every American having health insurance”? How much shall be paid by the federal government and how much by the states to gain this objective?
The new law forces everyone to buy health-care insurance. Many people already have such insurance, most of them as part of the compensation they receive from their employer. In general, these people will be able to keep their current coverage. People who do not buy health-care insurance acceptable to the government will be fined heavily, so besides having no health-care insurance, they will be punished by the government!
2. It looks unlikely that this “reform” will result in a better health care for Americans. However, can you think of at least one example where it might actually help someone?
In general, the new system will make health care worse in the United States, for many reasons. However, some persons will benefit. The major beneficiaries will be those with pre-existing conditions who are currently rejected by insurance companies (the companies do not wish to sell fire insurance to people whose houses are already on fire). The new law forbids insurance companies from rejecting any applicant because of a pre-existing condition. Owing to this new legal requirement, health-care insurance will no longer be true insurance, but merely a third-party payment system for health-care expenses.
3. Will the price of health insurance be kept down by state force? Will Americans be forced to buy health insurance – subsidized by the state? Will Americans be forced to pay premiums, as, if I remember correctly, Dr. Ron Paul has once indicated?
Premiums and benefits of health-care insurance plans are already heavily regulated by the state and federal governments. The new law places many new requirements and restrictions on the companies. It also regulates the difference between the amount they may charge older people and the amount they may charge younger people. The result will be that younger people will have to pay greater premiums than they would pay under a fair insurance scheme in a free market; that is, younger people will be forced to subsidize the health-care expenses of older people (who demand much greater amounts of health care).
4. What, in your opinion, will be the long term effects for American health care? Do you expect deterioration in the quality of services, as is often the case in Canada and in Europe?
This system will almost certainly prove to be much more costly than now projected. Pressure will be created to increase the prices of care and the amount of insurance premiums needed to cover the costs of care. The government will respond by measures that amount to price controls and by selective subsidies to lower-income people and to those with the most political clout. Shortages will increase; waiting times for care will increase; the quality of services will decrease. The overall health care system will cost more and more while delivering worse and worse care. Ultimately, the government will probably throw up its hands and nationalize the entire system because it will have become such a terrible mess.
5. Could you say that the Americans are, as a majority, in favor of this legislation? Not even all Democrats supported the bill…
Polls show that a majority of Americans oppose the law just enacted. These poll results seem plausible to me. In truth, however, few Americans have much real knowledge about the present law, which occupies more than 2,000 pages, and even less understanding of the economics and political science required to understand its likely consequences. The law is not simply a shot in the dark, it is a barrage in the dark.
Because the full substance of the government’s actions is much too vast for any single person to grasp, I have sometimes found it helpful simply to list government agencies, laws, or regulations that contribute to the enormous aggregate that composes the state (see, for example, the appendices of my book Crisis and Leviathan). This tactic recommended itself to me recently as I was tracking down a statute in the U.S. Code, the official compilation of all federal laws currently in force.
The U.S. Code consists of 50 “titles.” It is published every six years, and in the interim between editions an annual cumulative collection of supplements is published to keep it up to date. Here is the present makeup:
Read the rest here.
I am being quite serious: no single human being knows ― no one can know ― what provisions the statute’s more than 2,000 pages contain. Even if someone had the power to read and remember everything in this massive legislative enactment, he would still harbor a multitude of uncertainties about: how the courts will interpret the law’s general provisions; how the various administrative agencies will flesh out the statute with new regulations; the precise way in which each provision will be implemented; how, when, and in what amounts funds will be made available for carrying out the law’s many stipulated actions; how much resistance the law will meet, both in the courts and among the public, and how these conflicts will be resolved; and countless other matters of critical importance to those directly and indirectly affected by the massive statute ― which is to say, virtually everybody in the United States and a considerable number of people elsewhere, as well.
Already, however, we can say a few things with certainty. One is that this statute, like any other of comparable size, amounts to a Christmas tree for politically favored interests. For months, maybe for years, people will be discovering little provisions tucked into the bill, each of which provides some sort of privilege, protection, subsidy, or other benefit to a particular firm, industry, profession, or other beneficiary. Anyone who has ever toiled through the pages of statutes of comparable length and complexity, as I have for a number of defense authorization and appropriation acts, knows that each such law comprises a host of special-interest provisions. If you would care to see some appalling examples laid bare, read chapters 7 and 8 of my book Depression, War, and Cold War or, if you cannot gain access to this book, see the original version of chapter 7, which was published in the Cato Journal in 1988.
We also know that this statute will not be the end of the story of health-care politics in this country. It is, for the current phase, only the end of the beginning. The ink will scarcely be dry in the revised U.S. Code when political factions will undertake to alter or to overturn the provisions just enacted. Thus, within the act’s great expanse, hundreds of little sub-conflicts will rage, as competing interests struggle for control of the state’s coercive power in their area of contention. Politics, in general, is an endless struggle, and the politics of the federal government’s health-care intervention is no exception. Stay tuned.
Finally, because health-care-related economic activity is such a huge part of the overall economy, what happens in this sector will have significant consequences for the operation of other sectors. For example, when Obamacare turns out to be much more costly than the government has claimed it will be, the government’s demand for loanable funds will be greatly increased, with far-reaching effects on interest rates, investment spending, economic growth, and even the U.S. Treasury’s creditworthiness. It is not inconceivable that the burden of supporting this health-care monstrosity will prove to be the (load of) straw that breaks the back of the government camel in the credit markets, where the U.S. Treasury has long been able to borrow the greatest amounts at the lowest rates of interest because its bonds were considered virtually riskless. Indeed, that status as the lowest-risk borrower seems already to be approaching the breaking point, even before the new health-care legislation has taken effect. Implementation of this law can only worsen the Treasury’s plight.
However, during the past year, so much attention has been focused on the financial debacle in its various dimensions, and on the Fed’s and the Treasury’s efforts to deal with it, that the growing unemployment - now amounting to approximately 15 million persons - has become almost a footnote to the welter of troubles besetting the economy, and the labor market itself has received relatively little attention. Of course, the government’s “stimulus” spending programs purport to be aimed at restoring employment, and, if we subscribed to vulgar Keynesianism, we might expect them to do so.
Sound economists know, however, that, as some of them like to say, the labor market clears in the labor market, not in the product market or the bond market. When we seek to understand changes in the volume of employment (and by loose implication, the amount of unemployment), we are well advised to pay closest attention to what is happening in the labor market.
When we shift our gaze there, we behold an interesting, almost totally neglected, yet critical fact: while unemployment has been rising steadily, the real hourly wage for all workers employed in private industries has also been rising. According to the Bureau of Labor Statistics, the average hourly earnings of workers in all private industries rose from $17.23 in March 2007 (when the rate of unemployment was 4.4 percent) to $18.59 in July 2009 (when the rate of unemployment was 9.4 percent). During this same period, the consumer price index for all urban consumers rose by about 5 percent. Using this index to adjust the earnings data, we find that real hourly earnings rose by 2.8 percent during this 28-month period of deepening recession.
Even introductory economics courses teach students that the quantity of labor services demanded is a negative function of the real wage rate. If the real wage rate rises, other things being equal, employers will demand a smaller quantity of labor services. Thus, in view of the rise in the real wage during the past 28 months, we might well have expected employment to fall - and hence the unemployment rate to rise - simply because labor services were becoming more expensive.
However, other things were not equal during this period. Because the demand for labor services is derived from the demand for the goods and services that the laborers produce, and because that final demand has declined recently, the effect of the increase in the real wage has been magnified. The obvious question: why, in a situation of falling demand for labor services, has the real wage risen? This outcome is not what we would expect to see in a freely functioning labor market. Economists have advanced a variety of explanations to account for this anomalous occurrence (as observed on other occasions), but they have yet to agree on how it may be understood best.
We might well note, however, that an increase in the real wage at a time of deepening recession is an occurrence first observed in the United States between 1929 and 1933, during the Great Contraction. Economists from that time onward, including C. A. Phillips, T. F. McManus, and R. W. Nelson (1937), Murray Rothbard (1963), Lowell Gallaway and Richard Vedder (1993), and most recently Lee Ohanian (2009 unpublished), as well as yours truly (1987 and later works), have attributed a large part of the responsibility for the depth of the Great Contraction to this failure of the real wage rate to fall - as it invariably had fallen in economic downturns before 1929, including the sharp but brief contraction of 1920-21. It is scarcely reassuring to see that in the present contraction, the labor market is, in this regard, mimicking its behavior during the Great Contraction.
In 1937, Phillips, McManus, and Nelson wrote: “The brutal truth is that the standard of life for the American people has fallen drastically since 1929 for the simple reason that the policy of maintaining high wage rates has resulted in reduced employment and decreased production of the goods and services that constitute ‘real income’” (p. 225). Today, although we have not yet suffered the same reduction in living standards that our forebears suffered during the Great Depression, essentially the same brutal truth is haunting us again. Whether the increased real wage rate of the past two years reflects government policies or other causes, it has exacerbated the decline of real output. A reduction of the real wage rate would hasten a recovery from our present economic misfortunes.
Please note: For security purposes, you will be asked to provide a valid government or state-issued photo ID at check-in.
I cannot recall ever having been required to show official identification papers merely to register at a hotel — a credit card, yes, but not a government-issued photo ID. Though offended, I cannot say that I am surprised by this turn of events. I wonder whether some law or regulation now requires the hotels to check their guests’ official papers.
Anyone who has paid the least attention over the years has noticed that more and more businesses and government agencies have required that one show his official — that is, government-issued — identity papers in order to be served or admitted. Airlines, of course, have required such identification for many years, although I can remember a time when they did not do so — indeed, a time when one simply walked, with freinds and relatives if one wished, to the departure gate and boarded the airplane without any interception for security screening at all. Auto rental companies demanded an official driver’s license. Now, even hotels treat their customers as suspected terrorists.
Who’ll do so next — the dry cleaners, the grocery store, the bank, the gas station? Will the gestapo lurk outside my front gate to make sure that I identify myself properly before driving my automobile onto the highway? Will the church demand my papers before administering the Holy Communion?
Most Americans, of course, will take such new impositions in stride, just as they have accepted the outrageous treatment they must suffer at the airports. If you have nothing to hide . . . la, la, la. One who protests or complains will be viewed as paranoid or as a troublemaker.
The slope toward totalitariansim is slippery, indeed, but sometimes the slope is so gradual that one scarcely notices that one is sliding downward. Ask the ordinary Germans who slid down that slope after 1933; heed the voice of those who can still recall, with a chill, the horrible sound of those dreaded words, “Papiere Bitte!”
What of any consequence remains beyond the state’s reach in the United States today? Not wages, working conditions, or labor-management relations; not health care; not money, banking, or financial services; not personal privacy; not transportation or communication; not education or scientific research; not farming or food supply; not nutrition or food quality; not marriage or divorce; not child care; not provision for retirement; not recreation; not insurance of any kind; not smoking or drinking; not gambling; not political campaign funding or publicity; not real estate development, house construction, or housing finance; not international travel, trade, or finance; not a thousand other areas and aspects of social life.
One might affirm that the state still keeps its hands off religion, but it actually does not. It certifies certain religious organizations as legitimate and condemns others, as many young men discovered to their sorrow when they attempted to claim the status of conscientious objector during the Vietnam War. It assigns members of certain religions, but not members of others, as chaplains in its armed services.
Besides, isn’t statism itself a religion for most Americans? Do they not honor the state above all else, above even the commandments of a conventional religion they may embrace? If their religion tells them “thou shalt not murder,” but the state orders them to murder, then they murder. If the state tells them to rob, to destroy property, and to imprison innocent people, then, notwithstanding any religious strictures, they rob, destroy property, and imprison innocent people, as millions of victims of the wars in Iraq and Afghanistan and millions of victims of the so-called Drug War in this country will attest. Moreover, in every form of adversity, Americans look to the state for their personal salvation, just as before the twentieth century their ancestors looked to Divine Providence.
When the state produces unworkable or unsatisfactory conditions in any area of life, and therefore elicits complaints and protests, as it has for example in every area related to health care, it responds to these complaints and protests by making “reforms” that heap new laws, regulations, and government bureaus atop the existing mountain of counterproductive interventions. Thus, each new “reform” makes the government more monstrous and destructive than it was before. Citizen, be careful what you wish for; the government just might give it to you good and hard.
The areas of life that remain outside the government’s participation, taxation, subsidization, regulation, surveillance, and other intrusion or control have become so few and so trivial that they scarcely merit mention. We verge ever closer upon the condition in which everything that is not prohibited is required. Yet, the average American will declare loudly that he is a free man and that his country is the freest in the world. Thus, in a country where more and more is for the state, where virtually nothing is outside the State, and where, aside from pointless complaints, nothing against the State is permitted, Americans have become ideal fascist citizens. Like the average German during the years that Hitler ruled Germany, most Americans today, inhabiting one of the most pervasively controlled countries in the history of the world, think they are free.
Although macroeconomists, especially in theoretical work, tend to equate the economy’s aggregate output and its aggregate income, this equation does not hold when output is measured by GDP. To arrive at the concept known as national income (or net national product at factor cost), one must deduct several items, the most important of which is the capital consumption (or depreciation) allowance on the fixed capital stock. In 2008, for example, GDP was $14,441 billion, and national income was $12,635 billion. Even then, one has not arrived at personal income, and getting there requires several additional deductions. In 2008, personal income was estimated to be $12,239 billion.
Personal income includes the various “factor returns”―wages, salaries, rents, interest, dividends, and proprietors’ income―plus transfer payments that individuals receive from the government. All of these items together constitute the income available to individuals for use in purchasing consumption goods, paying taxes, and saving. Personal income is much superior to GDP as a measure whose variations tell us something about changes in people’s economic well-being as the economy ebbs and flows.
In the fourth quarter of 2007, which the National Bureau of Economic Research has identified as the peak of the previous business expansion, personal income was running at an annual rate of $12,100 billion, but it did not reach its own peak until the second quarter of 2008, when it was $12,293 billion. After three quarters of decline, it reached a trough in the first quarter of 2009 at $11,953, having fallen by 2.8 percent. Its rise during the final three quarters of last year brought it back to 99.3 percent of its previous quarterly peak and placed it within hailing distance of what on its face might appear to be a complete recovery.
Examining how the components of personal income have changed, however, we see that the recovery so far has been somewhat ambiguous, even apart from its “joblessness.” For example, private wages and salaries, which peaked in the third quarter of 2008 at $5,419 billion and then fell during the next three quarters to $5,129 billion, or by 5.4 percent, regained only a small fraction of their loss and ended the year at an annual rate of $5,179 billion, still 4.4 percent below their previous quarterly peak. It seems unlikely that the current shortfall will be eliminated within the next two years, even if the economy continues to recover steadily. Absent a turnaround in private employment, the prospects for a return to the previous high rate of wage and salary payments seem even less encouraging.
While private wage and salary income was falling, the disbursement of government wages and salaries was ascending. Between the fourth quarter of 2007 and the fourth quarter of 2009, such government payments (at an annual rate) increased from $1,106 billion to $1,189 billion, or by 7.5 percent in just two years. This increase is a development that most private workers can only lament, considering that their taxes (present and future) must fund such enriched largess for government hirelings to enjoy at a time when private labor earnings have fallen substantially.
Several smaller components of personal income also remain well below their levels in the fourth quarter of 2007. In the fourth quarter of 2009, proprietors’ income was still down by 3.3 percent, and interest-and-dividend income was down by almost 14 percent.
An exception to these patterns, however, pertains to personal rental income, which rose steadily after the first quarter of 2007 and ended up a whopping 137 percent higher in the fourth quarter of 2009. Most likely this oddity reflects many people’s shift from owner-occupied housing to rental housing as the ongoing real-estate bust caused them to lose the titles to their homes and, in most cases, required them to resort to rental housing―sometimes to rental of the same house they formerly owned. Although this incongruous occurrence may be good news for landlords, it cannot be taken as a good sign of recovery for the overall economy. On the contrary, it merely manifests a continuing adjustment to mistakes and foolish bets made during the housing boom, a process that still seems far from complete.
Another such troubling sign has to do with the flow of government transfer payments to individuals, which have increased greatly since the recession’s onset. In the fourth quarter of 2007, they were running at an annual rate of $1,721 billion; by the fourth quarter of 2009, they had reached $2,130, having risen by an astounding 24 percent in just two years. Of course, unemployment insurance payments (a subset of all government transfer payments to individuals) ballooned even faster, increasing from an annual rate of $34 billion in the fourth quarter of 2007 to $127 billion in the fourth quarter of 2009, or by 274 percent. In 2007 as a whole, total government transfers to individuals amounted to 14.2 percent of personal income; late in 2009, they constituted 17.5 percent. This rapidly growing dependence on the dole does not portend a healthy recovery. Indeed, it heralds the exacerbation of what was already a serious problem for the U.S. political economy.
In sum, when we disaggregate the recent increase in personal income, we find signs that the recovery has been weaker and less sustainable than many observers have taken it to be. Not all sources of personal income are created equal, and in the present circumstances, not even the rise in personal rental income counts as grounds for optimism. Because the recovery, such as it is, has begun only recently, it may acquire a healthier tone as it proceeds, if indeed it does. For the moment, however, we must recognize that recent changes give little warrant to the expectation of a full, sustainable recovery in the near term.
(Data discussed in this article come for the most part from Table B-29 of the statistical appendix to the 2010 Report of the President’s Council of Economic Advisers, pp. 365-366. A few items have been taken from other tables in this report. All dollar figures are given in nominal dollars. Between January 2008 and December 2009, the consumer price index increased by 2.3 percent, and between June and December 2009 it remained virtually unchanged, so correction for price inflation would have only a slight effect on the nominal dollar data for the period since the recession began.)
We’ve all been told, of course, that the real gross domestic product has fallen from its peak in the second quarter of 2008. The data show a fall of nearly 4 percent by the second quarter of 2009. Although this drop bears no serious comparison with the precipitous decline of real GDP during the Great Depression—about 30 percent between 1929 and 1933—it has certainly entailed a great deal of difficulty and frustrated expectations in a situation where many people had made plans based on their anticipation of ongoing economic growth. Between the second quarter and the fourth quarter of 2009, real GDP grew by about 2 percent, making up for roughly half of the preceding decline.
To see why the recession has brought out the doomsayers in such great numbers during the past two years, notwithstanding the rather slight decline in national output, we must examine, among other things, the national product’s components. Doing so, we find, for example, that as usual in an economic slump, private consumption spending has held up much better than private investment spending: the former fell by less than 2 percent, and most of the decline was erased during the third and fourth quarters of 2009, so that by the final quarter of last year, real private consumption spending was less than 1 percent below its previous quarterly peak.
So, judging by what has happened to GDP and to private consumption, one might conclude that the recession has been only a minor dip—how much difference can it make in our style of life if our consumption falls by 2 percent for a short while?—and we might be tempted to conclude that getting out of the present troubles will be a task easily accomplished in the next few quarters.
Reaching such a conclusion, however, would be a mistake, because despite what the news media are always telling us about the preeminent importance of consumption spending in the determination of GDP, consumption does not drive genuine economic growth except in the very short run in a depressed economy. Real economic progress turns on a high rate of investment—primarily business purchases of structures, equipment, software, and additions to inventories—and on this front the news has been much bleaker and the prospects for quick recovery much less encouraging.
Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell by almost 34 percent. During the following two quarters, it rose by only 10 percent, so that late last year it was still (when measured at an annual rate) running about 29 percent below its level early in 2006. Such a huge shortfall in investment spending portends an extended period of slow economic growth in the next few years, and perhaps in an even longer run. Worn-out equipment, obsolete software, ill-maintained structures, and depleted inventories are not the stuff of which rapid, sustained economic growth is made.
The current investment drought does not simply reflect the housing bust consequent to the boom that drove residential investment to a peak in 2005. To be sure, real residential investment has fallen tremendously, by almost 53 percent between 2005 and 2009, with especially rapid declines during the past three years. Yet, real nonresidential investment also fell greatly last year, by 18 percent from its peak in 2008. Even real investment in equipment and software—a category only loosely connected to the housing boom and bust—declined last year by 17 percent, after occupying a high plateau during the preceding three years. Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009, after lopping off $35 billion in 2008.
If real investment spending has taken a huge hit, however, federal government spending has raced ahead in high gear. Between 2007 and 2009, federal purchases of newly produced final goods and services—the federal government’s “contribution” to GDP—increased by more than 13 percent in constant dollars. Unfortunately, whereas private investment is the engine of economic growth, government spending (despite what generations of Keynesian economists have asserted) is the brake. Although increased government purchases by definition increase the measured national product, their substantive effect on the process of sustained economic growth is decidedly detrimental.
To understand this negative relationship, we need only to scrutinize how the federal government’s spending is determined, namely, by political processes devoid of economic rationality, and to examine the overwhelmingly adverse effect of government’s growth on the private economy’s functioning. In this light, we can appreciate that enhanced government spending does not actually bulk up the economy—it does not simply compensate for “leakages” from the circular flow of income generation, as the Keynesians imagine. Nor does it merely crowd out worthwhile private activity. Instead, it undercuts, penalizes, and distorts everything that private parties attempt to do to create genuine wealth. Beefed-up regulations, additional taxes, and government takeovers are the known killers of the economic growth process.
Much of the government’s “contribution” to GDP, of course, is pure waste, even if the recipients of the payments do nothing more to stand in the way of real progress: the government simply increases the compensation of its legions of drones and wreckers, or it spends money on items for which no private person, if he had any choice in the matter, would pay.
Worst of all, the investors’ famine and the government’s feast are not merely coincidental, but causally connected. The explosion of the federal government’s size, scope, and power since the middle of 2008 has created enormous uncertainties in the minds of investors. New taxes and higher rates of old taxes; potentially large burdens of compliance with new energy regulations and mandatory health-care expenses; new, intrinsically arbitrary government oversight of so-called systemic risks associated with any type of business—all of these unsettling possibilities and others of substantial significance must give pause to anyone considering a long-term investment, because any one of them has the potential to turn what seems to be a profitable investment into a big loser. In short, investors now face regime uncertainty to an extent that few have experienced in this country—to find anything comparable, one must go back to the 1930s and 1940s, when the menacing clouds of the New Deal and World War II darkened the economic horizon.
Unless the government acts soon to resolve the looming uncertainties about the half-dozen greatest threats of policy harm to business, investors will remain for the most part on the sideline, protecting their wealth in cash hoards and low-risk, low-return, short-term investments and consuming wealth that might otherwise have been invested. If this situation continues for several years longer, the U.S. economy may well suffer its second “lost decade” for much the same reason that it suffered its first during the 1930s.
Not for nothing is this book a standard source for New Deal historians. Moley was the leading figure in the “Brains Trust” that guided Franklin D. Roosevelt’s policy thinking and speaking during the 1932 campaign and, to a lesser extent, during the interregnum between Roosevelt’s election and his inauguration as president and, to a still lesser extent, even later (but then not as an organized group). Although Moley’s association with FDR grew somewhat strained after the president’s first year in office, he continued to work as a close adviser and speechwriter for several years until, in 1936 and 1937, he could no longer countenance the direction in which Roosevelt was taking the New Deal.
Had I read the book before the mid-1990s, I would have recalled then that Moley gave one of the clearest, best informed accounts ever written of the problem of regime uncertainty in the 1930s, an account all the more valuable and weighty because he was the ultimate insider, a man who had worked at the heart of the New Deal from its inception (he even lays claim [p. 23, fn. 6] to having given this political program its name). As I noted in my own article (see Depression, War, and Cold War, p. 8), my “hypothesis is a variant of /an old idea: The willingness of business people to invest requires a sufficiently healthy state of ‘business confidence.’” Moley’s discussion proceeds under this well-worn rubric.
In the following long quotation, I present Moley’s most sustained and complete account, which appears on pp. 370-72 of the volume published in New York by Harper and Brothers in 1939. He begins this account by faulting the president for, among other things, “a failure to understand what is called, for lack of a better term, business confidence.” He then goes on to write (I omit here one small footnote giving publication details for a book cited):
This, Roosevelt refused to recognize. In fact, the term “confidence” became, as time went on, the most irritating of all symbols to him. He had the habit of repelling the suggestion that he was impairing confidence by answering that he was restoring the confidence the public had lost in business leadership. No one could deny that, to a degree, this was true, The shortsightedness, selfishness, and downright dishonesty of some business leaders had seriously damaged confidence. Roosevelt’s assurances that he intended to cleanse and rehabilitate our economic system did act as a restorative.
But beyond that, what had been done? For one thing, the confusion of the administration’s utility, shipping, railroad, and housing policies had discouraged the small individual investor. For another, the administration’s taxes on corporate surpluses and capital gains, suggesting, as they did, the belief that a recovery based upon capital investment is unsound, discouraged the expansion of producers’ capital equipment. For another, the administration’s occasional suggestions that perhaps there was no hope for the reemployment of people except by a share-the-work program struck at a basic assumption in the enterpriser’s philosophy. For another, the administration’s failure to see the narrow margin of profit on which business success rests - a failure expressed in an emphasis upon prices while the effects of increases in operating costs were overlooked - laid a heavy hand upon business prospects. For another, the calling of names in political speeches and the vague, veiled threats of punitive action all tore the fragile texture of credit and confidence upon which the very existence of business depends.
The eternal problem of language obtruded itself at this point. To the businessman words have fairly exact descriptive meanings. The blithe announcement by a New Deal subordinate that perhaps we have a productive capacity in excess of our capacity to consume and that perhaps new fields for the employment of capital and labor no longer exist will terrify the businessman. To the politician, such an extravagant use of language is important only in terms of its appeal to the prejudices and preconceptions of a swirling, changeable, indeterminate audience. To the businessman two and two make four; to the politician two and two make four only if the public can be made to believe it. If the public decides to add it up to three, the politician adjusts his adding machine. In the businessman’s literal cosmos, green results from mixing yellow and blue. The politician is concerned with the light in which the mixture is to be seen, the condition of the eyes of those who look.
Mutual misunderstanding and mutual ill will were, of course, unavoidable in the circumstances, and the ultimate result was a wholly needless contraction of business [in 1937-38] - a contraction whose essential nature was so little understood that it was denounced in high governmental quarters as a “strike of capital” and explained as a deliberate attempt by business to “sabotage” recovery. After Seven Years contains many more nuggets of valuable information for the student of the New Deal or of Franklin Roosevelt himself. If you are at an early stage of your learning, do not wait as long as I did to read it.
Confidence consists, on the one side, of belief in the prospect of profits and, on the other, in the willingness to take risks, to venture money. In Harry Scherman’s brilliant essay on economic life, The Promises Men Live By, the term is, by implication, defined much as Gladstone defined credit. “Credit,” Gladstone said, “is suspicion asleep.” In that sense, confidence is the existence of that mutual faith and good will which encourage enterprises to expand and take risks, which encourage individual savings to flow into investments. And in an age of increasing governmental interposition in industrial operations and in the processes of capital accumulation and investment, the maintenance of confidence presupposes both a general understanding of the direction in which legislative and administrative changes tend and a general belief in government’s sympathetic desire to encourage the development of those investment opportunities whose successful exploitation is a sine qua non for a rising standard of living.
I will admit, however, that some of my friends seem mightily inclined toward such doomsaying. It’s almost as if they can’t wait for the catastrophe to arrive – perhaps because it will demonstrate beyond cavil that the existing order is too corrupt, irrational, and evil to maintain itself. Some people who write or speak along such lines, though, clearly have a vested interest: they are selling something — often precious metals, investment advice, “survival” goods, or “bearish” publications — that they expect to sell more readily to consumers who have acquired a heightened fear of impending economic doom.
Other doomsayers, especially those in the Austro-libertarian camp, may have absorbed their dire expectation from an expression Ludwig von Mises used, “the crack-up boom.” By this term, Mises refers to the penultimate stage of hyperinflation, when each acceleration of the money supply only drives the velocity of expenditure higher as people try to exchange any money they hold for real goods as quickly as possible. The culmination occurs when, as Mises writes in Human Action (p. 427), “The monetary system breaks down; all transactions in the money concerned cease; a panic makes its purchasing power vanish altogether.” Mises was not simply imagining or theorizing about this sort of development, however; he had seen it with his own eyes in Austria and Germany after World War I. And similar crack-ups have occurred in many other places at various times, including the Confederate States of America during the final year or so of the War Between the States.
Austro-libertarians should note, however, that Mises did not argue that a crack-up boom destroys all economic life. Instead, as he immediately explained, “People return either to barter or to the use of another kind of money.” Indeed. Austria, Germany, and the U.S. South did not disappear as a result of their currency’s ruin. Although their people suffered grievously from the destructive effects of hyperinflation, most people found a way to survive, and life went on. Eventually, economic life resumed on a new basis after the adoption of a “reformed” or foreign medium of exchange not subject to such rapid increases in supply. Indeed, some people survived even the recent hyperinflation in Zimbabwe, notwithstanding the Mugabe government’s best efforts to starve most of them.
Not every forecast of economic catastrophe involves hyperinflation, of course. Some breakdowns are expected to grow out of runaway government spending, growing taxation, oppressive regulation, food shortages, fuel shortages, or natural disasters, such as deadly pandemics or lethal changes in the world’s climate. I have yet to encounter a claim that we are all doomed because of an impending beer shortage, but I am a patient man, and I am confident that sooner or later such a scenario will be bruited about.
One aspect that virtually all tales of impending mega-woe have in common is that they end with the catastrophe itself. Bam, crunch, rip, smash, crash: the day of reckoning finally arrives, the dreaded event occurs, and the story ends. Alles ist kaput. Maybe somewhere out there in the woods a few cruelly smirking survivalists remain alive, clutching their beloved firearms and muttering, “I told you so.” If life continues at all, however, it does so only under conditions that leave the survivors solitary, poor, nasty, brutish, and short of all decent goods and services.
I’m not saying that this sort of thing is impossible. We are talking about human beings and their social interrelations, and from such screwball raw materials, virtually any outcome might conceivably be produced. But such scenarios are dreadfully far-fetched. After all, during the time of the Black Death in the fourteenth century, 30-60 percent of the entire population of Europe died, and hundreds of towns simply disappeared after their inhabitants perished or abandoned them in a futile flight from the incomprehensible killer (inadvertently spreading the disease everywhere they went). Yet Europeans did not die out, and indeed European civilization continued to make slow progress over the long haul, even though the disease became endemic (and episodically epidemic) for centuries.
So, supposing that I accept a horrifying forecast as a point of departure for discussion, my general question for the doomsayers of whatever stripe is: Then what? Do they really believe that when the government can’t pay all the pensions and medical bills that it has promised to pay, life will come to an end? Do they believe that when the government defaults on its debt, the economy will cease to function? Do they believe that when the U.S. dollar loses all of its purchasing power, people will not find a new and better medium of exchange for their transactions? And so forth.
One needs to have – and in saying so I feel almost as if I’m having an out-of-body experience – a modicum of faith in people’s common sense, creativity, and will to survive and prosper, even in the face of great difficulties and obstacles. If people could keep society running in the aftermath of the Black Death, they surely can keep it running after the U.S. government defaults on its debt. I am not saying that no suffering will occur. Vast socio-economic adjustments are painful even in the best of circumstances. But people will find a way, life will go on, and eventually some progress will be attained – before governments once again strangle freedom so severely that another calamity occurs. (After all, I cannot imagine that the people who are building the latest Tower of Babel will ever succeed in reaching heaven.)
Years ago, when I lived in Seattle, I sometimes encountered people who seemed terribly worried that because the Northwest’s old-growth trees were being cut, the so-called Northern Spotted Owl (a bird genetically indistinguishable from the abundant spotted owls in the Rockies, yet somehow imbued with a sacred status) was sure to perish. Try as I might, I could not resist the urge to say to them. “Look, suppose you were a Northern Spotted Owl, and the loggers came along and cut down the tree you were occupying. Would you fall down and die, or would you simply fly to the nearest not-so-old-growth tree and go on living as usual?”
I would be pleased if today’s doomsayers felt an obligation to answer a similar question in regard to their own forecasts.
Mindful that both the public and the policy makers place heavy emphasis on “jobs, jobs, jobs,” I have been thrashing about in the employment data collected, organized, and distributed by the Bureau of Labor Statistics. At this point in the recession, everyone knows that the standard rate of unemployment, for what it is worth, has risen greatly since 2007 and lately has been stuck in the neighborhood of 10 percent. Because of this statistic’s various ambiguities (which I have discussed elsewhere), however, I am concentrating here on a more unequivocal indicator—employment.
There is no happy news on this front, of course. Total employment peaked in 2007 at 137.6 million persons on nonfarm payrolls, fell slightly in 2008, and then dropped precipitously in 2009 to 132.0 persons, for a two-year loss of 5.6 million jobs. In 2009, total employment was approximately equal to its magnitude in 2001, even though the labor force had grown substantially in the interim. The sharp recent decline in employment, which normally increases from year to year along with the labor force, has been bad enough, but when we examine the components of aggregate employment, we discover even worse news.
We find that the loss of employment has occurred entirely in the private sector: employment fell from 115.4 million persons in 2007 to 109.5 million persons in 2009, a decline that took private employment back to its level at the end of the 1990s. As private employment has collapsed since 2007, however, the government payroll has actually grown slightly from 22.2 million persons in 2007 to 22.5 million persons in 2009, which puts this class of employment roughly 1.7 million persons above its magnitude in 2000.
Monthly data for the most recent year display this difference starkly. From December 2008 to December 2009, total employment fell from 135.1 million persons to 130.9 million, while government employment remained essentially constant at 22.5 million persons. The government employees also enjoyed increased compensation during recent years. Nice work if you can get it: no risk of losing your job, plus practically iron-clad prospects of rising real compensation, notwithstanding that millions of former private-sector employees now find themselves without jobs.
Of course, much of the Obama administration’s “stimulus” spending has been directed toward ensuring that state and local government workers do not lose their jobs, and federal employees, as usual, have not had to fear joining the unemployment line, owing to the rapidly growing appropriations for practically every department and agency in the recent, skyrocketing federal budgets.
This situation bears an eerie resemblance to the employment situation during the Great Depression, when private nonfarm hours worked fell steeply from 1929 to 1932 and did not get back to the 1929 level until 1941, notwithstanding (or perhaps because of) the millions of persons added to government payrolls during the New Deal period. In both cases, the possibility that government employment crowds out private employment, rather than stimulating it, cannot be dismissed out of hand.
Unless private employment growth resumes soon, the United States risks falling into the same long-term economic “sclerosis” that has plagued the welfare states of western Europe for decades. Already it appears that the past ten years may prove to have been America’s second “lost decade” (the 1930s having been the first), an interval of little or no net economic gain, owing to destructive government policies that produced only unsustainable booms followed by inevitable busts, along with such huge, frequent, and unsettling changes in government policies that private planning, especially for long-term investment, has become too risky for private investors to bear—a situation I call regime uncertainty.
Vulgar Keynesians like to suppose that whenever the government undertakes new spending to augment the ranks of its employees a multiplier effect will result, causing private economic activity and employment to follow the same upward course. Here again, however, a closer examination of what the government does and how it goes about doing it may serve to shield us from the fallacies of overly aggregative economic analysis.
I have been promoting this idea publicly since 1997, in articles, songs, dances (without wolves), stand-up comedy, performance art, and blog posts, not to mention my tedious lectures and my boring 2006 book Depression, War, and Cold War. I cannot say that the world has beaten a path to my door as I’ve sought to convince my fellow economists that this phenomenon was important in retarding recovery from the Great Depression and, in all likelihood, in retarding recovery from the present recession (although, to be fair, I must acknowledge that a few of my fellow economists and others have taken note).
Before I could write anything about the WSJ article, however, Brooks Wilson wrote a nice post about it at his blog, which I recommend. Wilson has artfully combined my crisis hypothesis on the growth of government with my regime-uncertainty argument to produce what he calls “the crisis paradox” — “crisis is the best time politically and worst time economically to enact fundamental economic reform.” Indeed. But, of course, that is precisely how things tend to happen, making political entrepreneurship the mortal enemy of economic prosperity.
The twist is that I cannot in good conscience represent my list as one that contains the best books of the past decade. My reading is much too limited for me to make up such a list, and I have no doubt that many excellent books were published that I did not read. However, I have read some excellent books that were published between 2000 and 2008, and I list them here with brief notations in order to bring them to the attention of readers who may not have read them. I present them not with an endorsement of everything they assume, affirm, or argue, but as the works of intelligent, thoughtful, and careful authors. Most of these books are works of exceptionally deep scholarship.
I list them chronologically, but I do not order or rank them here in any other way.
1. Robert B. Stinnett, Day of Deceit: The Truth about FDR and Pearl Harbor (New York: Free Press, 2000). Stinnett carried out an extraordinarily dogged search, involving many interviews with people directly involved and many years of digging in archives, formerly classified documents, and other sources, for answers to the two great questions: who knew what, and when did they know? Members of the Establishment will not like his answers, but they cannot accuse Stinnett of bias against Roosevelt: even after finding compelling evidence that U.S. leaders knew the Japanese attack of December 7, 1941, was coming, he continues to believe that the president acted properly by deliberately bringing the United States into World War II through the “back door.”
2. Aaron L. Friedberg, In the Shadow of the Garrison State: America’s Anti-Statism and Its Cold War Grand Strategy (Princeton, N.J.: Princeton University Press, 2000). I have argued that the crisis of World War II did much to promote statism in the United States. Friedberg argues, with impressive scholarship, that this outcome might have been much worse, and he explains in great detail why it wasn’t.
3. Chris Matthew Sciabarra, Total Freedom: Toward a Dialectical Libertarianism (University Park, Pa.: Pennsylvania State University Press, 2000). Sciabarra’s deeply-learned book ranges from Aristotle to Murray Rothbard. If you think of dialectics as grist only for block-headed Hegelians and other odd ducks, this book will change your mind. The greater part of it is given over to what is arguably the most sophisticated analysis ever made of Rothbard’s oeuvre.
4. Thomas Fleming, The New Dealers’ War: F.D.R. and the War within World War II (New York: Basic Books, 2001). War, said Clausewitz, is the continuation of politics by other means, but war does not bring politics by the usual means to an end. Indeed, if anything, it sharpens and enlarges normal politicking because the stakes are greater than during peacetime. Because Fleming is not a Roosevelt idolater, but he is an exceptionally good historian, his book offers a refreshing antidote to the countless hagiographical works that have glorified Roosevelt and his lieutenants for their actions during the greatest of all wars.
5. Derek Leebaert, The Fifty-Year Wound: The True Price of America’s Cold War Victory (Boston: Little, Brown, 2002). A highly informed, wide-ranging survey by an author who writes with an insider’s familiarity and an outsider’s detachment. Even if you disagree with his interpretation from time to time, as I did, you are certain to learn a great deal.
6. Charlotte A. Twight, Dependent on D.C.: The Rise of Federal Control over the Lives of Ordinary Americans (New York: Palgrave Macmillan, 2002). How exactly did the politicians bring us during the past century into our current inextricable entanglement in the welfare state? The road was paved with a great deal of lying and scheming by self-serving politicians. Twight’s forte is extraordinarily careful and complete documentation, combined with a novel analytical framework of her own design.
7. Randall G. Holcombe, From Liberty to Democracy: The Transformation of American Government (Ann Arbor, Mich.: University of Michigan Press, 2002). The Americans of the late eighteenth century fought a revolution for liberty, but during the centuries that followed, the revolutionaries’ descendants tended to substitute democracy for liberty, until, in our day, they had greatly expanded the former and greatly diminished the latter. Holcombe’s account carries us smartly from the colonial era to the twenty-first century.
8. Chris Hedges, War Is a Force that Gives Us Meaning (New York: Random House, 2002). Journalist Hedges spent a great deal of time at the scene of wars. What he saw, though occasionally relieved by acts of humanity, was for the most part vile and disgusting, and hardly any different from vicious criminality writ large. If you’ve ever imagined war as glorious or uplifting, you need to read this book.
9. Thomas Fleming, The Illusion of Victory: America in World War I (New York: Basic Books, 2003). The prolific Fleming brought out this book only two years after the publication of his book on World War II, but it rests on reading and thinking that must have been done over a long period. Of all of the great mistakes that American “statesmen” have made, plunging the United States into the cauldron of the Great War was arguably the worst, because of the horrible train of events it set in motion in many parts of the world.
10. Bruce Caldwell, Hayek’s Challenge: An Intellectual Biography of F. A. Hayek (Chicago: University of Chicago Press, 2004). Hayek’s interpreters tend to be disciples or opponents. Caldwell, in contrast, approaches Hayek’s thought with a true scholar’s outlook. His book is replete with detail, context, and nuance. To my knowledge, it is by far the best work available for conveying an understanding of what Hayek accomplished and failed to accomplish as a social thinker.
11. Andrew Bacevich, The New American Militarism: How Americans Are Seduced by War (New York: Oxford University Press, 2005). A retired Army officer with a Ph.D. in history from Princeton, Bacevich combines an insider’s understanding with adherence to scholarly standards and a genuine passion for saving the country from the disasters that spring from its current love affair with militarism and from the U.S. military’s global interventions. Although his misunderstanding of the international economics of oil demand and supply leads him astray in places, he has for the most part an excellent grasp of the socio-political role the military now plays in American life.
12. Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, Ala.: Ludwig von Mises Institute, 2007). If I said I don’t love this book, I’d be lying. Not only do I wish I had written it; I wish that I had the talents and intelligence to have written it. Alas, I can only recommend this beautifully written volume to everybody as one of the very best books I’ve ever read: the product of deep and wide scholarship, it presents a fascinating account of the life, times, and intellectual activity of the twentieth century’s greatest economist. You can also learn a great deal from the book besides what it teaches you about Mises himself.
13. Nicholson Baker,Human Smoke: The Beginnings of World War II, the End of Civilization (New York: Simon & Schuster, 2008). Few books have moved me as deeply as this one. An unusual work, it is a sort of organized scrapbook of brief news accounts, excerpts from letters, and other contemporary sources in which the actors, great and small, speak for themselves. Baker intrudes only occasionally to set the scene. As the reader goes along, he comes to appreciate the great extent to which the horrible tragedy we call World War II was driven almost willfully by “statesmen” on both sides whose distinguishing qualities were viciousness, foolishness, vanity, overweening lust for power, utter irresponsibility, and recklessness. Some say that we get the leaders we deserve, but I refuse to believe that, on the average, we the people are nearly as evil as the “great men” who lead us.
I have no desire to claim that the government never hides bad news—indeed, the extent of its blatant lies and outrageous propaganda ought to have provoked public outrage a long time ago—but in the present instance, I believe the critics are the ones who are misrepresenting the situation.
If the government is hiding the bad news about unemployment that the critics are courageously “revealing,” it is hiding that bad news in plain sight. Since 1940, the Bureau of Labor Statistics has provided a variety of information on the population’s employment status derived from the Current Population Survey, a rather complicated, stratified random sample of approximately 60,000 households conducted each month. A BLS website explains how the data are collected. From these data, various measures of the rate of unemployment may be, and routinely are, computed. Again, a BLS website lays out these measures for all the world to see, and it makes available the component figures for anyone who wishes to compute a differently defined rate.
Thus, in October 2009, the most recently reported month, the rate designated U-3, which is defined as “total unemployed, as a percent of the civilian labor force (official unemployment rate),” stood at 10.2 percent. The persons classified as unemployed in this measure, the most commonly reported one, are basically those who are not currently working but who have made an attempt to find a job in the past four weeks. By adding other categories of persons to those regarded as unemployed in the U-3 measure, one may arrive at greater rates.
The broadest such measure, designated U-6, is defined as “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.” This rate stood at 17.5 percent in October 2009. A note attached to the BLS table of unemployment rates explains: “Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.”
One does not need to devote a lifetime to studying how these statistics are defined and measured to realize that in many ways they tend to overstate how dire the unemployment situation really is. For example, the persons classified as in the labor force but currently unemployed must have actively sought a job during the past four weeks, but a wide variety of actions qualifies as evidence that they have actively sought a job, including: (1) “contacting: an employer directly or having a job interview; a public or private employment agency; friends or relatives; a school or university employment center”; (2) “sending out resumes or filling out applications”; (3) “placing or answering advertisements”; (4)”checking union or professional registers”; and (5) “some other means of active job search.” So, if you are out of work and tell the CPS data collector that three weeks ago you asked Uncle Charlie whether he knew of any job openings, then you qualify as officially unemployed, even though you made no other effort to find employment. Many of those classified as “marginally attached workers” and included in the U-6 measure are even more questionable. After all, they admit that they are neither working nor doing anything to find work. Merely saying that “they want and are available for a job and have looked for work sometime in the recent past,” though not in the past four weeks, does not evince much genuine interest in employment.
Strange to say, many commentators have insisted, from the very onset of the current recession, that we are plunging into a second Great Depression. Perhaps we are, but the evidence to date does not confirm such a plunge. Yes, by taking an extremely loose view of what constitutes unemployment, we can say that perhaps one worker in six is now out of work. But in 1933, the official rate of unemployment was nearly 25 percent, and perhaps another 25 percent of the labor force comprised persons working part-time who wanted to work full-time, so the U-6 rate at that time (long before the requisite data for such an estimate were routinely collected) was in the neighborhood of 50 percent—and that at a time when workers’ earnings and assets were much less than they are now and hence long spells without work correspondingly more frightening. Small wonder if a typical scene from the early 1930s shows dejected workers standing on the sidewalk in a soup line, whereas the typical queue nowadays is more likely to show cheerful customers waiting to be seated in an upscale restaurant. The year 2009 may not be the best of years, but it’s miles away from 1933.
Snow in Louisiana
Turn up thermostat
Health care reform hoax
Splendid investment they say
Fog will lift next year
Afghanistan war
Soldiers in cold winter fight
Widows wearing black
Change you can believe
Dark clouds on the horizon
Night comes on quickly
Frightened birds take flight
False hopes fall down suddenly
Foolish citizens
Democrats on throne
Republicans hunker down
What goes round comes round
Global warming soon
Peer review makes no mistakes
Cold winter this year
In truth, any “constitutionally protected rights” you are now exercising exist solely at the pleasure and convenience of the rulers. The minute the continuation of your life or liberty no longer pleases them, they will, as the Court’s decision makes clear, simply declare you an unperson to be dealt with as they choose, whether they choose to torture you, confine you in a steel cage for the rest of your life, or peremptorily kill you. They recognize NO rights in anyone (except themselves, of course) that they are bound to respect.
This horror is the end to which a brave experiment has come. If the rulers can, at their pleasure, declare ANYONE THEY SELECT a legal unperson, the notion that the United States is a free country is nothing but the sickest of sick jokes.
Don’t tell me I’m hysterical because most people don’t have their doors kicked in and suffer having themselves or their relatives dragged off into legal oblivion. The USSR and Maoist China did not drag away most people, either. The government, for its own support, needs most people to continue producing goods and services. The point is the principle on which the government will act, and that principle is now plainly that the rulers will act however they wish. Those who resist may simply be “disappeared.”
Congratulations, fellow Americans. Your beloved country has now become Argentina at its worst.
Not that this information differs in its general contours from the information in scores of similar reports I have read over the past three decades. In the field of military and foreign-policy-related contracting, only the criminals’ identities change (although some do persist); the crimes remain the same. The general rule in this area of government action is: no misfeasance or malfeasance goes unrewarded.
Please do not take my word for these things; read the report for yourself. It’s available online. Because it was prepared by the subcommittee staff, you won’t have to worry about the kinds of biases that unfriendly commentators such as I might bring to the matter. The situation is bad enough even when described in the usual bland language beloved by all government flunkies.
Here are the first three items of the summary:
Wasteful Spending on Defense Department Contracts Nears $1 Billion. According to federal auditors, approximately $950 million in questioned and unsupported costs has been submitted by Defense Department contractors for work in Afghanistan. This represents 16% of the total contract dollars examined.Afghanistan Contract Spending Exceeds $23 Billion. According the Federal Procurement Data System (FPDS), the United States has spent more than $23 billion on contracts performed in Afghanistan since 2002.
Number of Defense Department Contractors in Afghanistan May Reach 160,000. There are currently 104,000 Defense Department contractors currently [sic] working in Afghanistan. The increase in troops may require an additional 56,000 Defense Department contractors, bringing the total number of Defense contractors in Afghanistan to 160,000.
The 104,000 military contract workers in Afghanistan as of September 30, 2009, compares to approximately 64,000 uniformed U.S. military personnel there at that time. Thus, the contract workers made up 62 percent of the total force. With the number of uniformed personnel scheduled to increase by 30,000 during the next six months, and assuming that the contract workforce increases by the projected maximum of 56,000, the contract workers will make up 63 percent of the total U.S. force in mid-2010.
The contractors perform a wide variety of tasks for the military, including feeding the troops, doing their laundry, building and maintaining their housing, taking care of warehousing and other logistical needs, administering contracts, making translations, and providing security. The final two items are especially interesting in that they call our attention to the facts that (1) the American soldiers―men and women from places such as Sioux City, Newark, and Chattanooga―are somewhat at a loss to understand Pashto and other local languages and hence are completely clueless as to what’s going on in the country they’re trying to control; and that (2) the U.S. uniformed personnel, armed to the teeth, feel the need for more than 10,000 armed civilian workers to provide security.
The report proceeds under such headings as “Failure to Apply Lessons Learned from Iraq,” “Poor Coordination of Interagency Efforts,” and “Continual Personnel Turnover.” Its third major section is titled “Waste, Fraud, Abuse, and Mismanagement Mar Afghanistan Reconstruction and Development.” Subheadings include “Inadequate Contracting and Program Management Practices” and “Contractors Overseeing Contractors.” I’m sure you are beginning to get the picture. I don’t want to spoil your reading by giving away all the details. Trust me, however: it’s a pretty juicy story, even when expressed in dry bureaucratese.
Over the years, I have noticed that such orgies of military waste, fraud, and abuse are always attributed in large measure to mistakes, oversights, inadequately trained personnel, poor planning, and so forth—that is, to incompetence, rather than to criminal intent. But ask yourself: if these same “problems” have infected a contracting system for almost seventy years, can they possibly be honest mistakes? These attributes of government contracts are hardly secrets. They have been spelled out in countless official reports and analyzed by hundreds of academic experts and others. Why haven’t the problems been fixed?
The answer is all too obvious: one man’s waste, fraud, and abuse and another man’s road to riches. The military contracting system works in this seemingly atrocious way precisely because that’s how the powers that be want it to operate. When the dust settles, hundreds of billions of dollars will have been relocated from the taxpayers’ pockets to those of the officially contracted pirates who habitually infest these waters, persons associated with firms such as KBR, Fluor, DynCorp, and Xe. Of course, a portion of the loot returns in various forms to the members of Congress and the executive-branch officials who authorize and purport to oversee the whole predatory apparatus.
