Posts Tagged ‘economics’

Why I liked Coolidge and why we are not recovering

Friday, June 3rd, 2011

I spent the past six months reading about Calvin Coolidge. I was interested in why the 1920s were a period of great prosperity and why the severe recession/ depression of 1920-1921 was so short. At its peak, there was 25% unemployment. Gross domestic product dropped by 6.9% in one report.

The recession of 1920–21 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.[2]

The Harding-Coolidge administration took office in March 1921 and the recession was over in months. Why ? Governments were smaller then and had less influence on the economy. The Wilson Administration has been widely described as the equivalent of a fascist regime with its war time controls and economic meddling. Again from the Wikipedia article:

Interpretations of the end

Austrian School economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Libertarian Austrian School historian Thomas Woods argues that President Harding’s laissez-faire economic policies during the 1920-21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery.[12] Woods argued that, as there existed massive distortions in private markets due to government economic influence related to World War I, an equally massive “correction” to the distortions needed to occur as quickly as possible to realign investment and consumption with the new peace-time economic environment.

Daniel Kuehn’s recent research demonstrates that Woods gets many of the facts of the 1920-21 recession wrong.[13] The most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920-21 recession. The Harding administration raised taxes in 1921 by expanding the tax base considerably at the same time that it lowered rates. Kuehn also points out that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy. Since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was entirely unwarranted.
[edit]

I would tend to doubt the “recent research” that tries to include Keynes’ theories in the explanation. The issue of Fascism is more interesting. The National Recovery Administration was probably the most openly fascist bureaucratic organization that the US government ever instituted. It was eventually overturned by the Supreme Court, prompting Roosevelt’s “court packing” scheme. (A very sympathetic version by PBS).

What then, led to the Depression and what is leading to the present frightening echo of 1933? Here is a very frightening chart.

Here is a chart showing the price/earnings ratios of cyclical stocks vs “defensive stocks.” What it shows is that cyclical stocks, that can be expected to respond to economic conditions, are very, very cheap. That looks like most people do not expect recovery any time soon. Why ?

This is a very frightening chart. It has been for months as no prior recession has shown this deep a fall in employment and this slow a recovery. Now, if you look at the end of the red line, you see that employment is not recovering at all. The line is flat.

Calvin Coolidge has been criticized in history for his pro-business sentiments expressed in words. He is alleged to have said, “The business of America is business.” In fact, that is not an accurate quote but the sentiment he expressed was similar. He was also quoted as saying something like “A man who builds a factory, builds a temple and those who work there, worship there.” He has been widely criticized for those statements, as if praising business was immoral.

What we have now is a president who makes statements like, “So if somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.”

We have a president who tells would-be entrepreneurs that “I do think at a certain point you’ve made enough money.”

Does anyone still wonder why the economy under a president who seems hostile to business is failing while the economy under a president who supported it and wasn’t ashamed to say so, boomed.

Some have blamed Coolidge for the 1929 crash but it is pretty clear that the problem was similar to the problem of the real estate bubble in 2005. The Federal Reserve kept interest rates too low for too long. In 1928, Coolidge did not feel he had the right to intervene with the Fed and Benjamin Strong who was the president of the New York Fed died in October of that year. The Dow doubled in 1929. That was the speculative blow-off that ended in the crash. In 2005, Alan Greenspan still believed that a real estate bubble was preferable to a correction from the 1990 internet bubble. George Bush may have had more ability to intervene but all the safety mechanisms, which had not existed in 1929, still failed.

We are on the path to another Depression. One small indication. I do reviews of workers compensation claims. One would expect that, early in a severe recession, claims would go up as workers anticipate layoffs and try to file claims. There was a bit of that but it is over. Employment in California is down so far that the State Compensation Insurance Fund is laying off doctors and closing offices. Claims are way down because employment is falling rapidly. Workers may be afraid to file claims now.

Coolidge Summing up

Sunday, May 15th, 2011

Coolidge believed that the wedding of government and business would lead to socialism, communism or fascism. Hoover considered Henry Wallace a fascist for supporting the McNary-Haugen bill. Hoover, ironically, was to bring on the Depression by progressive measures that might have been called a form of fascism. The farm bill would be re-introduced under Hoover and die. Only during the New Deal would it find enough support to become law. The summer of 1927 was peaceful and prosperous. It was the summer of Babe Ruth’s 60 home runs. The Yankees would win the World Series and end up with a winning percentage of 0.714, still unsurpassed. In September, Gene Tunney defeated Jack Dempsey in the fight marked by the “long count.” The “Jazz Singer” came out that fall, the first talking feature picture. Charles Lindbergh flew the Atlantic in May of 1927. He and Coolidge were much alike yet different. Both were shy and diffident but Lindbergh was happy to cash in on his fame while Coolidge refused all offers after he left office.

Coolidge arranged for Lindbergh to return to the states aboard a US cruiser, Memphis, where he was met by a crowd and by cabinet members, then there was a huge parade through New York City. Lindbergh and his mother stayed with the Coolidges at the temporary White House where Dwight Morrow, close friend of Coolidge from Amherst, introduced the young aviator to his daughter Ann. Aviation stocks, along with many others, soared and the Dow Jones Average by year end was at 200, the record high.

In his December 6, 1927 State of the Union message, he mentioned an economic slowdown and asked for the same things he had been requesting; sell Muscle Shoals, help farm cooperatives and keep spending down. In May of 1928, he complained to reporters about Congressional spending. “I am a good deal disturbed at the number of proposals that are being made for the expenditure of money. The number and the amount is becoming appalling.” He managed to get another tax cut passed including a cut in the corporate tax rate. The surplus that year was $398 million.

(more…)

The Presidency of Calvin Coolidge- I

Friday, May 6th, 2011

Friday, August 2, 1923 was to be Coolidge’s last day of vacation at Plymouth Notch. He had posed for photographs for the small pool of reporters who covered his doings. They had shown him chopping away rot from a maple tree, wearing his suit pants and vest but bowing to the informality of the occasion by removing his suit coat. He had previously worn a woolen smock that had belonged to his grandfather for such chores but, recently, there had been accusations that it was a costume of some sort. He remarked that “In public life it is sometimes necessary in order to appear really natural to be actually artificial.”

The Coolidge family retired early. A telegram from San Francisco conveying the news of the president’s death reached reporters staying in a boarding house in Bridgewater, Vermont. They hastened the eight miles to Plymouth Notch and knocked on the door of John Coolidge’s house. He awakened his son who then dressed and came downstairs. He was informed in a telephone call from his father’s store to Secretary of State Hughes that the oath of office could be administered by a notary. Coolidge returned home and, at 2:47 am, his father administered the oath of office as president.

The nation’s newspapers carried drawings and painting of the scene the next day. It is still the only instance of a father administering the oath of office of president to his son and of a man taking the oath at home. The house was small and lacked indoor plumbing. It was typical of Coolidge in its lack of pretension and the image was a powerful one to begin his presidency. After the oath was administered, the Coolidges returned to bed, also typical. They arose at 6 am and began the trip back to Washington with a stop at his mother’s grave in a nearby cemetery. These symbols would stand him in good stead when the Harding scandals began to fill the newspapers in the months to come.

Harding’s body was returned to Washington on August 7 where he lay in state in the Capitol. Coolidge issued a proclamation for a day of national mourning and it was apparent that Harding was genuinely liked by the public. The funeral was in Marion, Ohio on August 10.

In 1923, the presidency was very different from what it became under Hoover and Roosevelt. Coolidge greeted White House visitors in person, the last president to do so. He had one secretary and no aides. His telephone was not on his desk but in a nearby booth and unused. He did not know how to drive a car. He had carefully cultivated his image, even to his famous lack of small talk. At a dinner party while vice-president, a woman next to him at the dinner table told him she had a bet with her husband that she could get him to say at least three words. His reply was, “You lose.”

Now, he was president. In 1924, he told William Allen White that “A lot of people in Plymouth can’t understand how I got to be president, least of all my father.” He added, “Now a lot of those people remember some interesting things that never happened.” White’s comment was that Coolidge never grinned after his jokes. This misled some people into thinking he was dumb. Rural Vermonters appreciated his wit but many of the intelligentsia did not. He did not suffer fools gladly, for one thing. Once, after a long and animated conversation with financier Bernard Baruch, he asked why Baruch was smiling. The financier replied, “Mr President, you are so different from what people say you are. Your smile indicates both amusement at that and interest — and I hope friendliness.” Baruch added, “Everybody says you never say anything.” “Well Baruch,” Coolidge replied, “many times I say only ‘yes’ or ‘no’ to people. Even that is too much. It winds them up for twenty minutes or more.”

One of Coolidge’s most famous sayings was made to Hoover, who he disliked, on the latter’s ascension to the presidency in 1928. ” You have to stand every day three or four hours of visitors. Nine-tenths of them want something they ought not to have. If you keep dead still they will run down in three or four minutes. If you even cough or smile, they will start up all over again.” Will Rogers appreciated Coolidge’s dry wit. “Mr Coolidge had more subtle humor than almost any public man I ever met. I have often said I would like to have hidden in his desk somewhere and just heard the sly little digs that he pulled on various people that never got ’em at all.”

Another story concerned his wife’s asking about the preacher’s sermon in church that morning. “What did he talk about.” His reply was concise. “Sin.” When asked for more detail, he replied, “He’s against it.” Someone told him the story one day and his reply was “It would be better if it were true.” Still, these stories indicated a warmth toward him that was widely held and that would serve him well. His son, Calvin, inherited the family wit and showed it one day when working at a summer job as a laborer. One of the other boys said, “Gee. If my father was the president , I wouldn’t be working here !” Calvin replied, “You would if your father were my father.”

Harding had held twice weekly press conferences and Coolidge assured the reporters that would continue. He held a total of 520 press conferences in the next five years. The questions were submitted in writing and he answered those he chose to. The answers were to be attributed to a “White House spokesman.” He was genuinely liked by reporters and commented on his excellent relations with the press in his Autobiography. He needed a secretary and was advised well by Congressional leaders to hire C. Bascom Slemp, a 53 year old former Congressman and master political strategist. Coolidge faced a difficult relationship with his Republican colleagues in the Senate. Harding had been one of them and was a friendly man; neither was true of Coolidge.

There was Frank Stearns, an old supporter from Massachusetts. Coolidge liked to have Stearns with him even though both might not say a word. He thought better when Stearns was there. One day, after an hour in which neither said a word, Stearns rose to leave and Coolidge said, “Stay a while longer.” Dwight Morrow, a friend from Amherst and now a partner at JP Morgan was another close friend. Murray Crain was gone but his assistant, William Butler, was there. He was RNC chair, with help from Coolidge, and, when Lodge died, Butler took his place in the Senate. House Speaker Gillett was the fourth of the “Massachusetts gang.” Aside from them, Coolidge had few friends.


Mellon and Hoover with Coolidge

He retained Harding’s cabinet although several left under a cloud by 1924. The last to leave was Hoover, to run for president in 1928. Coolidge respected but did not like Hoover, calling him “Wonder Boy.” His most trusted adviser was Treasury Secretary Mellon. At their first meeting, Mellon told the president he had come to resign. The president said, “Forget it.” Coolidge was the last president to write all his own speeches and they have stood up well over time. He was also the first to use radio in reaching out to the public. When asked for a theme of his administration, he answered “stability, confidence and reassurance.” We are currently seeing how important the lack of those qualities may be in economic recovery, or the lack of it. It is possible (more of this later in a summing up) that his decision to retire in 1928 may have led to the Great Depression as Hoover was an active progressive and Roosevelt followed his lead almost completely. The depression of 1920-21 was the last to be treated with Laissez Faire economics. The 1929 crash and depression might have been short as the country was already emerging in 1932 in spite of Hoover’s misguided policies. We will never know.

One area where Coolidge enjoyed the approbation of everyone was with his wife, Grace. She was witty, attractive and provided a useful contrast to her husband. Their two sons were also attractive and a positive aspect of his presidency although that was to be dashed during the summer of 1924. Coolidge had four months to prepare before he would be obliged to state his policies before Congress. Major problems included the war reparations issue which would eventually lead to the 1929 crash and much of which was out of his hands as Benjamin Strong and the other major central bank leaders were almost immune to political influence. The other members of this small club included the Bank of England director Montagu Norman, Bank of France director Emile Morceau, and Hjalmer Schacht of the Reichsbank. These men controlled world finance and tried to “sterilize” the reparations that France had insisted Germany pay for World War I. Strong was ill with tuberculosis and died in 1928, leaving the Federal Reserve in weak hands.

The Washington Naval Conference of 1923 was considered a success. It had major consequences as Japan was encouraged and England was damaged but Coolidge was a very determined disarmament advocate for fiscal reasons. He had little interest in foreign affairs although he was a mild supporter of the League of Nations and was not an isolationist as Hiram Johnson had been. Relations with Mexico had been poor since the 1911 Mexican revolution and Albert Fall had been expected to help with this but he chose to enrich himself instead. Ironically, the Teapot Dome scandal did eventually have some beneficial effects such as large capacity oil storage facilities in Pearl Harbor.

It also got a beautiful new library for my alma mater, the University of Southern California. Rufus von Kleinschmidt, president of the university, agreed to testify as a character witness for Harry Doheny, one of the principals in the Teapot Dome affair. Doheny donated a magnificent library that is still the center of the campus. It was donated in memory of his son, H L Doheny Jr and the date of his death is given as 1921. Many still probably assume that he was wounded in the war and died of his wounds but, in fact, he was shot by his mistress.

Coolidge’s first address to Congress as president took place on December 6, 1923. He presented a list of requests that continued Harding policies. Immigration was to be restricted for the first time. Railroads needed investment. Highways were to be funded although the states were expected to do much of this. He included other issues, such as civil service reforms and military and naval increases. Harding had been a great Navy president and Coolidge continued almost all his policies. He declined suggestions to cancel foreign debts, they would be canceled eventually anyway in the Depression. He differed a bit from Harding in his enthusiastic support for civil rights for “colored people” and advocated funding for black doctors and colleges. He opposed support for crop prices, which would become a major issue the rest of his presidency. His State of the Union address was the first to be broadcast to the American public. It was well received. The next night, at the annual Gridiron Dinner, he announced that he was a candidate for 1924.

His most important recommendation was for a reduction in the income tax rates, possibly one reason why Ronald Reagan was so fond of him. Wilson had raised income tax rates during the war to very high levels. The federal income tax had only been introduced in 1913. In 1914, only 360,000 tax payers had paid any tax at all. The Progressives who had been behind the constitutional amendment had seen it as a redistributionist measure and expected that only the rich would pay taxes. However, in 1917, Congress passed a surtax as a war measure that affected anyone with more than a $6,000 income. At $100,000 income, the tax was 25%. After the war, the surtax remained in place bringing in $1.3 billion in 1919 and over $1 billion in 1920, years of severe recession, if not depression. In 1920, the top bracket was 70% and while everyone talked about tax cuts, nobody seemed to do anything about it until Harding took office.

Coolidge had to convince a reluctant Congress about tax cuts. The Simmons-Longworth Bill, the best he could get, cut maximum surtax rates to 40% but raised the estate tax and added a gift tax. He wanted to return to pre-war rates but it was a hard fight. There is nothing new under the sun, least of all Congressional spending. The Coolidges worked on building friendships and entertained more than the Hardings had. One issue that was divisive was Prohibition. It was a Progressive initiative and Gifford Pinchot, a Progressive governor of Pennsylvania and passionate Prohibitionist complained that Coolidge was a weak supporter. The conventional wisdom has come down to us that Prohibition was a cause supported by blue nose Republicans. Nothing could be further from the truth. Pinchot supporters encouraged him to run against Coolidge in the 1924 primaries. They noted that brewery interests had supported Coolidge in Massachusetts. PInchot had already clashed with Coolidge when he asked him to intervene in a coal strike in Pennsylvania. Coolidge declined.

In October, 1923, the Tea Pot Dome scandal began to surface. Coolidge was under suspicion for a while as he had been present at many cabinet meetings where decisions were made. Eventually, he was shown to be clear of any involvement and his reputation as incorruptible kept him out of the scandal. Senator Thomas J Walsh of Montana, a Democrat and maverick, had been leading the investigation. Coolidge then took charge of the investigation, outflanking Walsh by appointing a special counsel. In fact, he appointed two, a Democrat and a Republican. This act took much of the partisan steam out of the scandal and it did not affect the 1924 election.

Harry Daugherty was the next Tea Pot Dome figure to come under scrutiny. He had been Harding’s campaign mastermind but he had no relationship with Coolidge. However, the austere Coolidge resisted efforts to dismiss Daugherty. He said “I will not remove the Attorney General, for two reasons. First, it is a sound rule that when the president dies in office, it is the duty of his successor for the remainder of that term to maintain the counselors and policies of the deceased president. Second, I ask you if there is any man in the cabinet for whom- were he still living- President Harding would more surely demand his day in court?

Tremendous pressure was brought to bear on Coolidge. One evening, February 18, 1924, William Borah, a powerful member of the Senate, was urging the president to request Daugherty’s resignation. As he talked, Daugherty walked into the room. Coolidge had arranged a mano a mano. The next day Burton K Wheeler (who was to incur my father’s bitter enmity by his isolationist antics in 1940), a freshman Democratic Senator from Montana, introduced a resolution calling for an investigation of Daugherty’s Justice Department. It was all based on innuendo. Recent investigation of the entire scandal has suggested that Daugherty, while appearances were not good, bore little responsibility for the crimes committed by some of his associates. In fact, some (including Coolidge’s biographer Robert Sobel) have concluded that the real target was Coolidge. He was well liked by the public but had little support within the GOP, especially the bosses.

Coolidge stood firm and many of the attacks on him by Democrats backfired. On February 29, the Democrats called upon him to release the tax records of Doheny, Fall and Sinclair. He refused noting this was prohibited by law. Slemp, his secretary, appeared before Congress as a witness and was questioned about telegrams he had seen. Nothing of consequence resulted. Burton K Wheeler then accused Daugherty of criminal activities. Daugherty retaliated with an accusation that Wheeler, a Democrat, was involved with the Industrial Workers of the World, the “Wobblies,” a radical socialist group. Eventually, the entire matter deteriorated into a series of accusations directed at each side. Daugherty refused to provide Justice Department records to the Senate committee and, eventually, this provided Coolidge with a justification to request his resignation and end the controversy.

For Daugherty’s replacement, Coolidge chose an Amherst alumnus (naturally), named Harlan Fisk Stone, former Dean of Columbia Law School and a distinguished judge. To replace Denby, Borah suggested Curtis Wilbur, an Annapolis graduate and Chief Justice of the California Supreme Court. Both were outstanding nominations and they were quickly confirmed. First, Coolidge had to ease Daugherty out and he asked Chief Justice Taft, with whom he had a close relationship, to bring Daugherty around to reality. Coolidge replied to Daugherty’s protests with ” I am not questioning your fairness or integrity. I am merely reciting the fact that you are placed in two positions; one is your personal interest, the other your office of attorney general, which may be in conflict. How can I satisfy a request for action in matters of this nature on the grounds that you, as attorney general, advise against it, when you are the individual against whom the inquiry is directed necessarily have a personal interest in it?” Daugherty protested but resigned the next day.

Harlan Stone was easily confirmed as Attorney General and the entire matter faded from public view, especially after Senator Wheeler was himself indicted on a bribery charge. He was eventually exonerated but the public lost interest in the committee and the scandal. The only people actually tried were Fall, Doheny and Sinclair. Later, after the matter had faded from the press, Wheeler and Walsh had occasion to meet with the president to plead for a road project in Montana. He listened to their presentation then commented dryly, “Well, I don’t want to see any scandal about it.” Wheeler told the story on himself

The entire matter had left Coolidge a popular president with the country but not in Washington. The politicians had not wanted him on the ticket in 1920 and they did not want him in 1924. His legislative agenda, some thirty recommended pieces of legislation, was defunct with only one item passed. That was a minor bill reorganizing the diplomatic service. The Soldiers’ Bonus Bill passed both houses of Congress and was vetoed by Coolidge as it would be by Roosevelt. It passed over his veto in the form of a paid up insurance plan which cost the government $2 billion. Coolidge signed the immigration bill with reluctance because it singled out Japanese immigrants for a total ban. This would have repercussions later in foreign policy with Japan. Newspapers commented on the record of Congress ignoring Coolidge’s agenda in legislation. However, the public was behind Coolidge. The 1924 election was coming quickly.

This is becoming too long for a single post and will be continued this weekend.

The Budget Deal

Saturday, April 9th, 2011

I think John Boehner struck a wise deal with the Democrats last night. First, the $38.5 billion in cuts is not just a symbol but does begin the process of reducing government. Since only 5 months remain of the fiscal year, it is the equivalent of the $100 billion that was promised last fall to the tea party. More important is the coming debate about the Paul Ryan budget for 2012 and it is time to begin that debate.

The funding of Planned Parenthood was always a hostage for the Republicans to use in negotiations, just as the President used the military as his hostage. The agreement establishes a bill that will have to be voted on by the Senate along with a companion agreement to defund Obamacare. Both of these votes are going to be painful for the 23 Democratic Senators who must stand for re-election next year.

It was a reasonable compromise and now it is time to move on to the Ryan budget.

Calvin Coolidge

Friday, March 18th, 2011

Calvin Coolidge is one of our least understood, and certainly least appreciated presidents. Here is what the hip (for the times) writers had to say.

Apart from that, he did little, and believed that the surging stock market vindicated his minimalist approach. He showed as little concern for the idea that the boom might be unsustainable as he did for the fact that, during his presidency, membership of the Ku Klux Klan exceeded 4 million. Instead, he developed, and encouraged a reputation for being a man of few words. Commentators approved. “This active inactivity suits the mood and certain of the needs of the country admirably,” wrote Walter Lippmann in 1926. No one imagined the economic catastrophe that lay ahead.

I have just read Coolidge’s autobiography and have another thought. First, all the clever quips about him show no understanding at all of his nature and experience. Second, would the “economic catastrophe that lay ahead” have occurred if he had chosen to run for another term ? Was the boom “unsustainable” ?

There is a thread of self hatred in all the discussion of the “Roaring 20s” and The Depression. We deserved the Depression, as best I can tell from the writings of the Roosevelt supporters after 1932.

Here is Coolidge in some of his own words. First, everyone should read this book to get an understanding of what America was like before the Welfare State. John Calvin Coolidge was raised by a father who taught him industry and thrift. His grandfather, Calvin Galusha Coolidge, died when his grandson was six years old. Here is the impression he made on his grandson.

“He was a spare man over 6 feet tall, of a nature that caused people to confide in him, and of a character which made him a constant choice for public office.”

“He and my grandmother brought up as their own children, the boy and girl of his only sister, whose parents died when they were less than two years old. He made them no charge, but managed their inheritance and turned it all over to them with the income, besides giving the boy $800 of his own money when he was eighteen years old, the same as he did my father.”

“In his mind, the only real respectable way to get a living was from tilling the soil. He therefore did not exactly approve having his son go into trade.

In order to tie me to the land, in his last sickness he executed a deed to me for life of forty acres, called the Lime Kiln lot, on the west part of his farm, with the remainder to my lineal descendants, thinking that, as I could not sell it, and my creditors could not get it, it would be necessary for me to cultivate it.”

Coolidge’s father kept a store and was elected to the state legislature. He chose the law for his son although it was very hard for him when his son left for Massachusetts to follow his desires. The account of Calvin’s boyhood is one of hard work but simple pleasure. He drove a team of oxen for plowing when he was 12 years old. Anyone who assumed airs were held in contempt. If the hired girl or man needed to go to town with the family, Calvin surrendered his seat in the wagon. His mother was an invalid although a strong personality. She died at 39 when he was a boy.

At the age of 13, he was sent to an Academy to further his schooling and prepare him for college. Both boys and girls attended and several of his family were graduates. He worked part time in a cab shop in the town where the Black River Academy lay. Vacations were from May to September to allow time for farm work. His father paid for his school expenses but any extra money he earned was deposited in a bank for him by his father. The principal and his assistant both lived to see Coolidge President.

In March of his senior year, his younger sister died of appendicitis. This was 1890 and knowledge of appendicitis was very recent. He carried this heartbreak with the discretion common for the time. After graduation, he moved on to Amherst College. His education was delayed a year as he became ill and had to spend time recovering; time he spent painting the interior of his father’s store. In the fall of 1891, he finally began at Amherst. His father remarried the year he began college and he was very fond of his stepmother, a school teacher.

In college, Coolidge excelled in mathematics, including calculus. He was not so strong in languages. His studies in History and Philosophy were also favorites. His grades improved with time and he graduated cum laude. From there, he entered into the study of law. He served as clerk for a firm whose partners he greatly respected. He dryly comments on the two methods of learning the law, by schooling and by experience. He prefers the latter and writes, “I think counsels are mistaken in the facts of their case about as often as they are mistaken in the law.” He also comments, “It is one thing to know how to get admitted to the bar but quite another to know how to practice law. Those who attend a law school know how to pass examinations, while those who study in an office know how to apply their knowledge to actual practice.”

He lived within the frugal limits of the funds his father provided for his upkeep, $30 per month. This left little for “unnecessary pleasantries of life.” In June of 1897, he felt adequately prepared for the bar exam and took it, passing as of July 4. 1897. He then entered the practice of general law. Since he had completed his preparation in less time than he had expected, he remained in the same law office for seven months after being admitted to the bar before he settled in an office in Northhampton. Here, he was to remain for 21 years until elected Governor of Massachusetts. His rent for his office was $200 per year.

He became involved in local politics, natural for a lawyer, and was elected to the city council, then became City Solicitor, which came with a salary of $600 per year. He held this office until 1902. In 1903, he was appointed Clerk of the Courts for Hampshire County by the Supreme Judicial Court. He considered this the highest honor he received as a lawyer. In 1904, he met Grace Goodhue who had graduated from college and came to the Clarke School for the Deaf to teach.

They were married in October of 1905. In 1906, they rented the home, half of a two family house, they were to have for 31 years. Their first child was born in September 1906. He was elected to the Massachusetts House of Representatives and served two terms, after which he declined renomination, something of a tradition in Massachusetts politics. Their second son was born and Calvin decided to devote all his time to his law practice. In 1910, he was elected Mayor of Northhampton. This was a local office and would not interfere with his law practice. In 1911, he was elected to the Massachusetts state Senate. He was re-elected in 1912 and became something of a force, interested in the western part of the state and its issues, especially transportation which at the time meant trolleys and railroads. In 1914, a bad year for Republicans, he became President of the Senate with the support of most of the Democrats as well as his own party.

The World War began the following summer. The Republicans were able to unite and became the legislative majority in the following election. The Governor was a Democrat but he and Coolidge cooperated well. Some of Coolidge’s later philosophy began here as he shows pride in reducing the volume of legislation and regulations in each year he served as President of the Senate, an office second only to the Governor. After the 1915 legislative session, he had intended to return to his law practice but found that he was being widely supported for Lieutenant Governor. He dryly comments that he was widely considered a liberal but even the businessmen came to him to offer support. As a result, he offered his name for the office but did not campaign.

He was elected Lieutenant Governor in 1915 by 75,000 to 50,000. He had spent the election season campaigning for the candidate for Governor, Samuel McCall. Since the office did not include presiding over the state Senate, Coolidge thought he might have time for his law practice but this was not to be and he took in an associate who, in time, took over the law practice. He mentions that the public expects Chief Executives in all levels of government to conduct themselves as an “entertainment bureau.” For this reason, he spent much time speaking on behalf of the Governor.

In 1917, the US entered the war and the Governor, who wished to become a US Senator, suggested that Coolidge announce for Governor. He was elected and, shortly after the election, the Armistice was signed, ending the War.

I will continue this in the next post. I think Coolidge will become a more important historical figure as we see how Barack Obama is duplicating the pattern of Hoover/Roosevelt in turning a severe recession into a depression. Had Coolidge been president in 1929-30, history might be very different. In the next post, I will go more into his political philosophy as VP and President.

The USA as a fiscal system.

Monday, March 14th, 2011

Powerline today has an analysis of the USA as if it were a firm applying for funds from Kleiner, Perkins. The presentation has a number of slides, which I will reproduce here.

The net worth of the US is on the right side scale. The trend is pretty obvious. The small improvement is probably a sign of some recovery in the past year.

Spending has followed historical events, such as World War II. The trend, however, is not good. After 1930, spending on entitlements began and has grown out of control.

Defense spending is blamed by leftists but there has not been a lot of defense spending since Vietnam.

Taxes have followed a steady trend line until Obama was elected. The sharp rise has not helped as costs far outstrip revenue.

What, then, is the problem ?

Entitlements.

Entitlements plus interest alone will exceed revenue by 2027. That’s 6 years from now.

The left wants to raise taxes.

How high must tax brackets go ?

How do we compare to other countries ?

Better than some and not so good as others.

Can the left stop denying reality and start to discuss the reality ?

The Stand at Madison

Friday, February 18th, 2011

This week has seen the most amazing events unfold in Madison Wisconsin. Most of us have considered Wisconsin sort of a lost cause. The Progressive Party began there with the La Follette family and Robert La Follette who broke with Teddy Roosevelt in 1912 and later ran for president on a Progressive ticket in 1924. His family dominated Wisconsin politics, although Senator Joe McCarthy showed the odd character of their politics, too. The German socialism that influenced the Progressives has waned but the shock of the first real stand against the public employee unions has highlighted the recent changes in Wisconsin.

The Republicans swept the state as part of the 2010 electoral route of Democrats and the political left. Governor Scott Walker is not well known but his stand against the unions will make him a national figure by this weekend. The legislation he has introduced will limit the unions to bargaining for salary only. Benefits will not be subject to collective bargaining. In addition, teachers and other state employees, except those in police or firefighter unions, will be required to contribute small amounts to their pension and health care plans. My brother-in-law is a retired policeman in Chicago. My sister tells me that they have always had to contribute to his pension and the health plan. In Wisconsin, up to date, none of these employees have been required to contribute anything. Zip ! Zero !

The Republicans took over the majority in the state Senate 19 to 14. Apparently, Wisconsin law requires a super quorum including at least one member of each party to vote on legislation affecting the budget or funding state programs. As a result, the Wisconsin Senate Democrats, all 14 of them, fled the state. It turns out their hideaway was spectacular and they have announced that they may stay away for weeks.

President Obama has intervened by saying “Wisconsin is conducting an assault on unions.” In addition, his “Organizing for America” group, which has become part of the DNC, is now helping organize the demonstrations in Madison.

The state Capitol is occupied by union demonstrators who apparently plan to shut down the government. They are carrying outrageous signs and there may be violence not far below the surface. Where will this lead ?

Here is an estimate of what is at stake and the stakes are high.

It has long been understood that the 2010 elections were just the beginning of the struggle to reverse America’s current decline. It will take at least two or three election cycles to correct decades of bad policy choices. We aren’t staring into the fiscal abyss because of any single policy or event, but rather the cumulative effect of dozens, if not hundreds, of flawed decisions made by fickle politicians who capitalized on the fact that the American public was largely disengaged. In the end, these decisions created a vast political class who live off the fruits of others’ labors.

When a business wants to increase its future earnings, it has to find new markets and sell more of its product. For the political class its the same, only their markets and products are government services. As a result, every year, public sector unions spend tens of millions of dollars lobbying for bigger government and filling the campaign coffers of the politicians who acquiesce to their demands. In addition to bigger government, they’ve won pay packages higher than the private sector, almost 100% job security and the ability to retire in their fifties with lifetime retirement income and health benefits. All paid for by us. Unlike private sector unions, every dollar funding government employees’ pay, pension and benefits comes out of our paychecks.

The moral hazard of public employee unions was known to Franklin Roosevelt who opposed them. John Kennedy permitted government workers to unionize by executive order. Ironically, Wisconsin, in its Progressive era, was the origin of the largest public employee union.

If there is any doubt how important the fight in Wisconsin is, look no further than the left’s reaction to it. Governor Walker’s proposal calls on public employees to pay more into their retirement fund and pay around 12% of their health insurance premiums. It also ends collective bargaining for most public employees, which mostly affects union bosses rather than rank and file members and is an important measure to forestall a future fiscal crisis.

Actually, as I understand it, the collective bargaining is still permitted for salary but not benefits.


For this, tens of thousands of public school teachers called in ’sick.’ So many, in fact, that hundreds of schools across Wisconsin have been closed for days. They pressed school children into service as fellow protesters, most not understanding the issue at hand. They drew up signs comparing the governor to Hitler and called the GOP Nazis. Several GOP Senators have faced multiple death threats. When all of this wasn’t enough to stop the proposal, their allies in the Senate simply fled the state to prevent a vote from happening.

The rest of the nation is starting to notice.

Among key provisions of Mr. Walker’s plan: limiting collective bargaining for most state and local government employees to the issue of wages (instead of an array of issues, like health coverage or vacations); requiring government workers to contribute 5.8 percent of their pay to their pensions, much more than now; and requiring state employees to pay at least 12.6 percent of health care premiums (most pay about 6 percent now) …

In an unusual move, he would require secret-ballot votes each year at every public-sector union to determine whether a majority of workers still want to be unionized. He would require public-employee unions to negotiate new contracts every year, an often lengthy process.

The result has resembled Cairo and the demonstrations seem to be building up into a national showdown with public employee unions. Scott Walker is under enormous pressure but a large part of the nation is behind him. The union tactics may well alienate an even larger share of the public.

The Hitler meme is as common as it was with George W Bush. Democrats seem to have limited imagination.

The Wall Street Journal sees the riots as a European phenomenon brought here.

For Americans who don’t think the welfare state riots of France or Greece can happen here, we recommend a look at the union and Democratic Party spectacle now unfolding in Wisconsin. Over the past few days, thousands have swarmed the state capital and airwaves to intimidate lawmakers and disrupt Governor Scott Walker’s plan to level the playing field between taxpayers and government unions.

Mr. Walker’s very modest proposal would take away the ability of most government employees to collectively bargain for benefits. They could still bargain for higher wages, but future wage increases would be capped at the federal Consumer Price Index, unless otherwise specified by a voter referendum. The bill would also require union members to contribute 5.8% of salary toward their pensions and chip in 12.6% of the cost of their health insurance premiums.

If those numbers don’t sound outrageous, you probably work in the private economy.

This looks to be building up to a national showdown with public employee unions. I hope Scott Walker is safe and keeps his courage in spite of demonstrations on the front lawn of his and other legislators homes. He looks like he is not weakening.

More to come.

UPDATES:

1. John Fund adds some background to the story with an explanation of the issues behind the furious union response.

2. Here is a rebuttal to a false story the Democrats are circulating to the effect there was no deficit until Walker “ginned one up.”

We re-read the fiscal bureau memo, talked to Lang, consulted reporter Jason Stein of the Journal Sentinel’s Madison Bureau, read various news accounts and examined the issue in detail.

Our conclusion: Maddow and the others are wrong.

There is, indeed, a projected deficit that required attention, and Walker and GOP lawmakers did not create it.

More on that second point in a bit.

The confusion, it appears, stems from a section in Lang’s memo that — read on its own — does project a $121 million surplus in the state’s general fund as of June 30, 2011.

But the remainder of the routine memo — consider it the fine print — outlines $258 million in unpaid bills or expected shortfalls in programs such as Medicaid services for the needy ($174 million alone), the public defender’s office and corrections. Additionally, the state owes Minnesota $58.7 million under a discontinued tax reciprocity deal.

The result, by our math and Lang’s, is the $137 million shortfall.

Sorry folks, the head-in-the-sand version is not true. The only state with a surplus is North Dakota.

3. Now, we have a doctor (or a fake) handing out excuse slips for the teachers that called in sick. This is illegal and apparently there are multiple folks in white coats handing out these slips with his name. This is practice of medicine without a license and treating (for him) patients without a good faith exam. How does he know they are or were sick ? Digging deeper and violating the first rule of holes.

4. Here is a new blog reporting on the antics of the runaway Democrat Senators.

5. Here is a video of one of the physicians committing fraud.

She doesn’t seem concerned. I sure hope Walker sets the medical board on them.

6. Here are more local accounts of the standoff. I like this sentence.

The Governor stands firm. I understand that there are strategies in place for next steps which will shake up the stalemate….I have known him for at least 15 years, but he is different now. He is a man who has met his time and his place, and he seems to know it.

Here is a very important comment from a Newsbusters thread on the Wisconsin situation.

Would someone please note that Unions make the great lion’s share of their $ from negotiating “benefits”, not salaries… or collection of dues.

This is why the decoupling of the Salaries and Benefits so important to Unions in Wisconsin. And why the Union’s have countered the way they have. They’ll give up Salary and Jobs for Teachers in a second, but they will fight to death for Benefit negotiation position. In another life as an executive in CA, I used to do administration for two Teamster’s “Health and Welfare” benefit packages. Do your research, but you’ll find I’m correct about motivation of Unions. I also believe that the amount of money kept by Unions will be very interesting to both your viewers, and the tax payers of the US of A. The way it works is that the Unions negotiate with the “Employer” regarding how much money per member/per month they will need to support the benefit options required in Union contract. In the case of WI, they negotiate with each of the 77 counties. Then the Unions negotiate the terms of benefits with “providers”/Ins Co’s, etc. They make the lion’s share of their money off of what is called the “breakage” created by Employees choosing between plan options, and the administration of the programs.

Let me explain with an example: A Union begins by negotiating with the Employer/State. They’ll claim their buying leverage will afford Employer significant savings. They’ll end up with a 3-tiered cost structure which allows the Union a profit even with the highest benefit option available as Union already has a very good idea about what Providers will be charging. But it gets even more lucrative for Unions at this point. Let’s say high-end Blue Cross PPO coverage costs $400 for the Family tier. What a Union will do is require $425 from Employer, plus a loaded in admin fee, as a charge for all Families in the employer group. So far, so fair? But, the Union will also offer a few other plans for Employees to choose from. The Union will also have developed relationships with a few cheaper HMO plans, and lesser PPO benefit structure plans that charge, as an example, $325 and $375, respectively.

At an Open House, employees will choose what fits their needs and the Union is in line for the “breakage“. The left over breakage is then, to my experience, placed in a fund where only the Union has the checkbook. Cars, Vacations and Condo’s, oh my. The Union also makes a “commission” off of things like Pre Legal, Dental and Term Life. As another profit source, the Union also leans on the Administrator for favors I’d rather not list, but usually involving idiocy like buying thousands of dollars of “raffle tickets” and leasing cars for the Union’s Business Agents, not entirely above board. Of course I am relating my experience, and what little I know of others who also did Union administration. I’d expect any simple research by an actual reporter would open up a Pandora’s box of Slush in the Badger State.

Very revealing comment. This is why “benefits” is such a life and death issue for the unions.

Here is more on the lefty physicians writing fake “sick leave” notes for demonstrating teachers. The comments are very interesting and have more on applicable Wisconsin laws.

Afghanistan, Egypt and Obama

Sunday, January 30th, 2011

I have previously posted my opinion that Afghanistan is not worth the cost. I stated my reasons why we should leave here and here and here. Nothing has changed there but a lot is happening elsewhere in the Middle East.

Egypt’s escalating tensions amount to the first real foreign crisis for the Obama administration that it did not inherit. The crisis serves as a test of Obama’s revamped White House operation. Daley, a former Commerce secretary in the Clinton administration, is now running a staff that is briefing Obama regularly on Egypt.

They have handled it badly. This is a very dangerous time for us. The Egyptian Army seems to be siding with the protesters. That may or may not last.

The left-wing Israeli newspaper Haaretz says that Egyptian army officers in Cairo’s central square have tossed aside their helmets and joined the crowd. “The Army and the people are one,” they chanted. MSNBC’s photoblog shows protesters jubilantly perched on M1A1 tanks. The real significance of these defections is that the army officers would not have done so had they not sensed which way the winds were blowing — in the Egyptian officer corps.

And even as Mubarak tottered, the Saudi king threw his unequivocal backing behind the aging dictator — not hedging like Obama — but the Iranians continued to back the Egyptian protesters. The Saudi exchange tumbled 6.44% on news of unrest from Cairo. Meanwhile, the Voice of America reports that Israel is “extremely concerned” that events in Egypt could mean the end of the peace treaty between the two countries. If Mubarak isn’t finished already, a lot of regional actors are calculating like he might be.

But Washington will not be hurried. The San Francisco Chronicle reports that President Obama will review his Middle Eastern policy after the unrest in Egypt subsides. The future, in whose spaces the administration believed its glories to lie, plans to review its past failures in the same expansive place. Yet time and oil wait for no one. Crude oil prices surged as the markets took the rapid developments in. U.S. Energy Secretary Steven Chu observed that any disruption to Middle East oil supplies “could actually bring real harm.”

Of course, Mr Chu should not worry as we have wind and solar to take up the slack. Actually, we get our oil from Canada and Mexico but the price of oil shifts with the world’s supply.

The present Obama commitment to Afghanistan is ironic since he promised to bring troops home but he has declared that Iraq was NOT necessary and Afghanistan is. This is slightly crazy. The Iraq invasion was an example of US power being applied in a critical location; right in the middle of the Middle East. Afghanistan is a remote tribal society reachable only through unreliable Pakistan. It has minimal effect on world events. We went there to punish the Taliban for harboring the people who attacked our country. Thousands of them have been killed. We have little of interest there now. We should have left last year.

With a Shi’ite dominated government in Iraq, Hezbollah in Lebanon, and a Muslim Brotherhood that may keep Egypt in neutral or tacitly accept Teheran’s leadership, how could things possibly get worse?

They can if Saudi Arabia starts to go. And what response can the U.S. offer? With U.S. combat power in landlocked Afghanistan and with the last U.S. combat forces having left Iraq in August 2010, the U.S. will have little on the ground but the State Department. “By October 2011, the US State Department will assume responsibility for training the Iraqi police and this task will largely be carried out by private contractors.” The bulk of American hard power will be locked up in secondary Southwest Asian theater, dependent on Pakistan to even reach the sea with their heavy equipment.

This is not where we want to be. The problem is that Obama and Hillary and the rest of this administration have no concept of strategy.

The Obama administration made fundamental strategic mistakes, whose consequences are now unfolding. As I wrote in the Ten Ships, a post which referenced the Japanese Carrier fleet which made up the strategic center of gravity of the enemy during the Pacific War, the center of gravity in the present crisis was always the Middle East. President Obama, by going after the criminals who “attacked America on 9/11? from their staging base was doing the equivalent of bombing the nameless patch of ocean 200 miles North of Oahu from which Nagumo launched his raid. But he was not going after the enemy center of gravity itself.

For all of its defects the campaign in Iraq was at least in the right place: at the locus of oil, ideology and brutal regimes that are the Middle East. Ideally the campaign in Iraq would have a sent a wave of democratization through the area, undermined the attraction of radical Islam, provided a base from which to physically control oil if necessary. That the campaign failed to attain many of objectives should not obscure the fact that its objectives were valid. It made far more strategic sense than fighting tribesmen in Afghanistan. Ideology, rogue regimes, energy are the three entities which have replaced the “ten ships” of 70 years ago. The means through which these three entities should be engaged ought to be the subject of reasoned debate, whether by military, economic or technological means. But the vital nature of these objectives ought not to be. Neutralize the intellectual appeal of radical Islam, topple the rogue regimes, and ease Western dependence on oil and you win the war. Yet their centrality, and even their existence is what the politicians constantly deny.

Events are unfolding, but they have not yet run their course; things are still continuing to cascade. If the unrest spreads to the point where the Suez and regional oil fall into anti-Western hands, the consequences would be incalculable. The scale of the left’s folly: their insistence on drilling moratoriums, opposition to nuclear power, support of negotiations with dictators at all costs, calls for unilateral disarmament, addiction to debt and their barely disguised virulent anti-Semitism should be too manifest to deny.

Leftism is making common cause with Islamic terrorism. Why ? I don’t really know. Some of it may be the caricature of Jews making money and being good at business. Some may simply be the extension of animosity to Israel extending to all Jews. The people behind Obama are not free of these sentiments. His Justice Department is filled with lawyers who defended terrorists at Guantanamo. Holder seems uninterested in voting rights cases if a black is the offender. He was even unwilling to say that Islamic terrorism was behind 9/11.

Because it will hit them where it hurts, in the lifestyle they somehow thought came from some permanent Western prosperity that was beyond the power of their fecklessness to destroy. It will be interesting to see if anyone can fill up their cars with carbon credits when the oil tankers stop coming or when black gold is marked at $500 a barrel. It is even possible that within a relatively short time the only government left friendly to Washington in the Middle East may be Iraq. There is some irony in that, but it is unlikely to be appreciated.

I would add a bit to this from one of my favorite essays on the topic. It compares Gorbachev to Obama.

Nor are the two men, themselves, remotely comparable in their backgrounds, or political outlook. Gorbachev, for instance, had come up from tractor driver, not through elite schools including Harvard Law; he lacked the narcissism that constantly seeks self-reflection through microphones and cameras, or the sense that everything is about him.

On the other hand, some interesting comparisons could be made between the thuggish party machine of Chicago, which raised Obama as its golden boy; and the thuggish party machine of Moscow, which presented Gorbachev as it’s most attractive face.

Both men have been praised for their wonderful temperaments, and their ability to remain unperturbed by approaching catastrophe. But again, the substance is different, for Gorbachev’s temperament was that of a survivor of many previous catastrophes.

Yet they do have one major thing in common, and that is the belief that, regardless of what the ruler does, the polity he rules must necessarily continue. This is perhaps the most essential, if seldom acknowledged, insight of the post-modern “liberal” mind: that if you take the pillars away, the roof will continue to hover in the air.

In another passage:

There is a corollary of this largely unspoken assumption: that no matter what you do to one part of a machine, the rest of the machine will continue to function normally.

A variant of this is the frequently expressed denial of the law of unintended consequences: the belief that, if the effect you intend is good, the actual effect must be similarly happy.

Very small children, the mad, and certain extinct primitive tribes, have shared in this belief system, but only the fully college-educated liberal has the vocabulary to make it sound plausible.

With an incredible rapidity, America’s status as the world’s pre-eminent superpower is now passing away. This is a function both of the nearly systematic abandonment of U.S. interests and allies overseas, with metastasizing debt and bureaucracy on the home front.

The turmoil in Egypt is a test that, I fear, Obama and his Secretary of State, will not pass.

UPDATE: The situation in Egypt festers with an ambiguous statement by Obama no help. Here is an example of how Reagan handled the Philippine overthrow of Marcos. A very different approach.

UPDATE #2: A column by Charles Krauthammer is indispensable reading today.

Elections will be held. The primary U.S. objective is to guide a transition period that gives secular democrats a chance.

The House of Mubarak is no more. He is 82, reviled and not running for reelection. The only question is who fills the vacuum. There are two principal possibilities: a provisional government of opposition forces, possibly led by Mohamed ElBaradei, or an interim government led by the military.

ElBaradei would be a disaster. As head of the International Atomic Energy Agency (IAEA), he did more than anyone to make an Iranian nuclear bomb possible, covering for the mullahs for years. (As soon as he left, the IAEA issued a strikingly tough, unvarnished report about the program.)

Worse, ElBaradei has allied himself with the Muslim Brotherhood. Such an alliance is grossly unequal. The Brotherhood has organization, discipline and widespread support. In 2005, it won approximately 20 percent of parliamentary seats. ElBaradei has no constituency of his own, no political base, no political history within Egypt at all.

He has lived abroad for decades. He has less of a residency claim to Egypt than Rahm Emanuel has to Chicago. A man with no constituency allied with a highly organized and powerful political party is nothing but a mouthpiece and a figurehead, a useful idiot whom the Brotherhood will dispense with when it ceases to have need of a cosmopolitan frontman.

The Egyptian military, on the other hand, is the most stable and important institution in the country. It is Western-oriented and rightly suspicious of the Brotherhood. And it is widely respected, carrying the prestige of the 1952 Free Officers Movement that overthrew the monarchy and the 1973 October War that restored Egyptian pride along with the Sinai.

The military is the best vehicle for guiding the country to free elections over the coming months.

El Baradei also attempted to intervene in the 2004 US elections by releasing a letter that alleged US forces had allowed radicals to steal hundreds of pounds of explosives in Iraq by failing to guard the facility. After the election, it was proven that the letter was not true. The man is anti-American and a liar.

Where did the stimulus go ?

Tuesday, January 25th, 2011

Two distinguished Stanford professors of Economics have published an analysis on where the stimulus money went. The results are not surprising but the details are interesting.

During the recent recession, the U.S. Congress passed two large economic stimulus programs. President Bush’s February 2008 program totaled $152 billion. President Obama’s bill, enacted a year later, was considerably larger at $862 billion. Neither worked. After more than three years since the crisis flared up, unemployment is still very high and economic growth is weak. Why have such large sums of money failed to stimulate the economy? To answer this question, we must look at where the billions of stimulus dollars went and how they were used.

Keynesian stimulus packages come in three basic types. In the first type, the federal government puts money directly into the hands of consumers. The hope is that consumers will use the money to increase their purchases of goods and services. In the second type, the federal government directly purchases goods and services, including infrastructure projects, equipment, software, law enforcement, and education. In the third type, the federal government sends grants to state and local governments in the hope that those governments will use the funds to purchase goods and services.

In each case, according to Keynesian theories, the increase in purchases will stimulate additional economic activity over and above the initial increase in purchases. The 2008 stimulus was mainly of the first type, while the 2009 stimulus was a mix of all three types.

The 2008 (Bush) stimulus was of the first type. The Obama stimulus was mixed.

Take a look at Graph 1, which shows both income and consumption in the economy as a whole from the start of 2007 to the present. You can see the big blip in disposable personal income in the spring of 2008 as checks were sent out. But consumption did not increase at all around the time of the stimulus payments. What happened to the money? It went to pay down some debt or was simply saved rather than spent on consumption.1

This should not have surprised anyone. Long ago, the Nobel Prize–winning economists Milton Friedman and Franco Modigliani explained that individuals do not increase consumption much when their income increases temporarily. Instead, they save most of the funds or use the money to pay back some of their outstanding debts. Friedman and Modigliani demonstrated that most people, when deciding how much to consume, consider more long-lasting, or permanent, changes in income. Because one-time increases in transfer payments and temporary tax rebates are, by their very nature, temporary, people should not have been expected to alter their consumption patterns. The Friedman-Modigliani theory, called “the permanent income” or “the life-cycle” hypothesis, profoundly influenced macroeconomic thinking for decades. It was, oddly, ignored in the development and enactment of the stimulus of 2008.

The Bush stimulus was a waste but, at least, it went to taxpayers and was relatively modest compared to what followed.

The American Recovery and Reinvestment Act of 2009 (ARRA) repeated this mistake. The amount paid out to households was smaller and delivered over a longer period of time than the 2008 stimulus, but the largest portion of increased payments was made in the spring of 2009. You can see the resulting blip in income in Graph 1.

Again, there was no noticeable effect on consumption. Instead, individuals used the money to shore up depleted bank accounts or pay off overextended credit card bills. As had been true a year earlier, the temporary cash payments failed to create consumption and, as a consequence, failed to increase production and employment.

Graph 1 also illustrates the failure of another recent stimulus attempt: the 2009 “cash for clunkers” program. For a temporary period, this program provided a one-time subsidy if individuals purchased a qualifying new car and simultaneously traded in their old car. The program’s objective was to increase the demand for new cars to spur production and employment.

By definition, a one-time subsidy cannot cause a permanent increase in consumer demand. So what happened? Consumers merely shifted forward in time the purchase of a new car by a few months. This behavior is evident in the lower-right-hand part of Graph 1. Consumption rose sharply as consumers responded to the temporary subsidies, then came right back down. There was no net increase in consumption to bolster the recovery.2

Read the rest.

To sum up:

To sum up: the federal government borrowed funds that it mainly sent to households and to state and local governments. Only an immaterial amount was used for federal purchases of goods and services. The borrowed funds were mainly used by households and state and local governments to reduce their own borrowing. In effect, the increased net borrowing at the federal level was matched by reduced net borrowing by households and state and local governments.

So there was little if any net stimulus. The irony is that basic economic theory and practical experience predicted this would happen. If policymakers had only remembered what Milton Friedman, Franco Modigliani, and Ned Gramlich had said, we might have avoided these two extremely costly policy failures.

There is nothing new under the sun.

H/T Powerline

The crisis of the intellectual

Saturday, December 11th, 2010

I was directed to an excellent post by Walter Russell Mead today. It is on the subject of the American social model and the coming era of tumultuous social unrest as the old welfare state model collapses. Europe is already seeing this collapse as nations like Greece face bankruptcy and England deals with the consequences of severe cutbacks in social spending to avoid it.

The US is facing similar economic consequences if the level of spending is not addressed soon. The 2010 elections show that the people recognize the crisis but the “political class” seems less concerned.

“It’s telling to note that while 65% of mainstream voters believe cutting spending is more important, 72% of the Political Class say the primary emphasis should be on deficit reduction,” Rasmussen said.

“Deficit reduction” is code for raising taxes. Spending is heavily embedded in the culture of the political class.

Mead is concerned that the intellectual demographic, those with advanced degrees and careers denominated by thinking rather than doing, is unable to cope with the new situation.

There’s a lot of work ahead to enable the United States to meet the coming challenges. I’m reasonably confident that we remain the best placed large society on earth to make the right moves. Our culture of enterprise and risk-taking is still strong; a critical mass of Americans still have the values and the characteristics that helped us overcome the challenges of the last two hundred years.

But when I look at the problems we face, I worry. It’s not just that some of our cultural strengths are eroding as both the financial and intellectual elites rush to shed many of the values that made the country great. And it’s not the deficit: we can and will deal with that if we get our policies and politics right. And it’s certainly not the international competition: our geopolitical advantages remain overwhelming and China, India and the EU all face challenges even more daunting than ours and they lack our long tradition of successful, radical but peaceful reform and renewal.

No, what worries me most today is the state of the people who should be the natural leaders of the next American transformation: our intellectuals and professionals. Not all of them, I hasten to say: the United States is still rich in great scholars and daring thinkers. A few of them even blog.

His concern is that the intellectuals seem caught in a mind set that goes back to the 19th century and the Progressive Era.

Since the late nineteenth century most intellectuals have identified progress with the advance of the bureaucratic, redistributionist and administrative state. The government, guided by credentialed intellectuals with scientific training and values, would lead society through the economic and political perils of the day. An ever more powerful state would play an ever larger role in achieving ever greater degrees of affluence and stability for the population at large, redistributing wealth to provide basic sustenance and justice to the poor. The social mission of intellectuals was to build political support for the development of the new order, to provide enlightened guidance based on rational and scientific thought to policymakers, to administer the state through a merit based civil service, and to train new generations of managers and administrators.

It’s interesting that one of the comments, a lengthy one, exactly restates this issue but supports this model and argues with Mead that it is still superior.

Second, there are the related questions of interest and class. Most intellectuals today still live in a guild economy. The learned professions – lawyers, doctors, university professors, the clergy of most mainline denominations, and (aspirationally anyway) school teachers and journalists – are organized in modern day versions of the medieval guilds. Membership in the guilds is restricted, and the self-regulated guilds do their best to uphold an ideal of service and fairness and also to defend the economic interests of the members. The culture and structure of the learned professions shape the world view of most American intellectuals today, but high on the list of necessary changes our society must make is the restructuring and in many cases the destruction of the guilds. Just as the industrial revolution broke up the manufacturing guilds, the information revolution today is breaking up the knowledge guilds.

He goes on to criticize medicine as a guild but I think he is unaware of the rapid changes going on in medicine today. The image of the family GP is quickly shifting to the multispecialty group with primary care provided by nurse practitioners and physician assistants. Those who want a personal relationship with a primary care physician, or even a favored specialist, will increasingly be required to pay cash for the privilege as many doctors who want to continue this model of practice are dropping out of insurance and Medicare contracts because of the micromanagement and poor reimbursement.

In most of our learned professions and knowledge guilds today, promotion is linked to the needs and aspirations of the guild rather than to society at large. Promotion in the academy is almost universally linked to the production of ever more specialized, theory-rich (and, outside the natural sciences, too often application-poor) texts, pulling the discourse in one discipline after another into increasingly self-referential black holes. We suffer from ‘runaway guilds’: costs skyrocket in medicine, the civil service, education and the law in part because the imperatives of the guilds and the interests of their members too often triumph over the needs and interests of the wider society.

Almost everywhere one looks in American intellectual institutions there is a hypertrophy of the theoretical, galloping credentialism and a withering of the real. In literature, critics and theoreticians erect increasingly complex structures of interpretation and reflection – while the general audience for good literature diminishes from year to year. We are moving towards a society in which a tiny but very well credentialed minority obsessively produces arcane and self referential (but carefully peer reviewed) theory about texts that nobody reads.

Once again, costs in medicine are a subject by themselves but the solution does not lie in controlling doctors incomes. With respect to the academic institutions, I have personal experience here and will describe some of it. The Humanities have been hollowed out by a trend to both politicize and to leave the subject behind as “critical thinking” goes on to analysis that has little to do with it. The Sokol Hoax is but one example.

The Sokal affair (also known as Sokal’s hoax) was a publishing hoax perpetrated by Alan Sokal, a physics professor at New York University. In 1996, Sokal submitted an article to Social Text, an academic journal of postmodern cultural studies. The submission was an experiment to test the magazine’s intellectual rigor and, specifically, to learn if such a journal would “publish an article liberally salted with nonsense if it (a) sounded good and (b) flattered the editors’ ideological preconceptions.”[1]

The hoax precipitated a furor but did not result in much improvement in such publications. My daughter had personal experience when her freshman courses in English Composition and American History Since 1877 both contained numerous examples of political and “social justice” alteration of the subject matter. For example, she was taught that the pioneers in the west survived by “learning to live like the Native Americans.” The fact is that the pioneers were mostly farmers and ranchers and the Native American tribes of the southwest were hunter gatherer societies who did not use agriculture or animal husbandry. She was also taught that the “Silent Majority” of the 1960s were white people who rejected the Civil Rights Act of 1964. Thus they were racists. Even Wikipedia, no conservative source, disagrees:

The term was popularized (though not first used) by U.S. President Richard Nixon in a November 3, 1969, speech in which he said, “And so tonight—to you, the great silent majority of my fellow Americans—I ask for your support.”[1] In this usage it referred to those Americans who did not join in the large demonstrations against the Vietnam War at the time, who did not join in the counterculture, and who did not participate in public discourse. Nixon along with many others saw this group as being overshadowed in the media by the more vocal minority.

She has since transferred to another college.

The foundational assumptions of American intellectuals as a group are firmly based on the assumptions of the progressive state and the Blue Social Model. Those who run our government agencies, our universities, our foundations, our mainstream media outlets and other key institutions cannot at this point look the future in the face. The world is moving in ways so opposed to their most hallowed assumptions that they simply cannot make sense of it. They resist blindly and uncreatively and, unable to appreciate the extraordinary prospects for human liberation that this change can bring, they are incapable of creative and innovative response.

I think this is the source of the “media bias” so prominently referred to by the Right and by many who are not politically focused. This is why talk radio and Fox News have been such huge successes to the consternation of the political class and their supporters. Charles Krauthammer famously said, “Rupert Murdoch (owner of Fox News) found a niche market that contained 50% of the population.”

The Tea Parties are another manifestation of the frustration of the general population with the political class but also with the intellectual class that seems to be wedded to the first. The university community is, at least in the non-science segment of it, to be increasingly isolated from the concerns of the society that supports them. CalTech has for many years had a Humanities program to expose science and engineering students to culture. Unfortunately, a student in a large university will find much less culture and much more politics in Humanities departments these days.

A couple of other blog posts are worth reading on this subject. One is here and the other is here. They are both worth reading in full.