Friday, July 08, 2011

The strange economics of American politics; and a layman’s history of the Great Depression

I’m having trouble figuring out how the current plans for recovery are supposed to work. I’m not an economist but it seems to me that the plans in some general way should add up, and so far I can’t figure it out.

What I hear from both parties is that the real issue is “Jobs, jobs, jobs”. We all expect we will be hearing about that in the forthcoming election. Also, we are told that for this reason the government must reduce spending. The deficit ceiling plans are not settled but we are getting a sense of some of the way they plan to work it out, and what appears to be happening is that both parties are going to agree to cutting back government spending. Maybe they will ask the super-rich to pay a few more taxes but as we all know the Republicans have been fighting that prospect tooth and nail; they don't even bother to conceal whose side they are on. For me, a non-economist on the sidelines, it’s hard to make sense of all this.

Here is the plan, as I understand it.
• The government will cut back: that is, it will reduce the number of government employees and also reduce the number of contracts with private industry.
• The government will cut back on Medicare and Medicaid, thus reducing the safety net for the most financially vulnerable sector of the economy.
• Also, the plan is to bring our troops home; the sooner the better. So, our troops will be brought back to join the labor force.

Now, lets add this up: fewer government jobs, less money to employ the lower income segment of our society, more unemployed veterans: That means, voila!, More Jobs! If there is a logic here I don't get it. How do we add layoffs, starving the poor, bringing in more unemployed from the military and get a bump in the economy?

These policies sound much like the policies that got this country into trouble during the Great Depression – that’s the way I remember it (but remember I’m not an economist). At a time when the stock market tanked and the banks failed the government cut back on expenditures. And as the world economy collapsed other countries did the same. To me that sounds like what has been going on in our time: Britain has cut back, the US is cutting back, the EU is struggling to right itself owing to the debt in several countries.

So how do we know we are not on the verge of another Great Depression? That is a terrifying prospect.

To emphasize the point, I will rehearse what the Depression meant for my family. My father grew up in a wealthy Oklahoma family. Six sons. All went to college in the 1920s. But my grandfather lost everything in 1930. Everything; he was a pauper for the rest of his life. My father and mother had married just before the collapse, and although a graduate in Chemical Engineering he could not find work, although my mother got some income by teaching music in a small town. During the day my father carried ice for an ice factory (few people had refrigerators then) and at night he worked on a correspondence course in accounting. When he finally qualified as an accountant he looked for jobs keeping books for small companies. All of the companies were struggling to survive, and a couple times, when he finally got a company's books in order, he found out it was broke; there was no money even for him to be paid. He moved from job to job. We moved from town to town. When he got a job in Wichita he was able to take in one of our cousins, a teenager whose parents had no money. But that job disappeared and we had to live with a distant relative on an oil reservation, a man who was a gruffy old geezer who didn’t like kids (like me).

It was the war that brought the country out of depression. Roosevelt had started a number of national work projects in order to put people to work – Work Projects Administration, the CCC (I don’t remember what that stood for, but they built many of the facilities in national parks that are still in use). The government didn’t have much income so FDR had to borrow by issuing government bonds – all the while wondering whether it was a good idea to borrow from ourselves. Anyway, his administration started many of the safety-net programs like Social Security that the Republicans, who hated them then, are now trying to dismantle. And when war started in Europe Roosevelt borrowed more so that our country could support the Allies in Europe. When we entered the war the American government went into full press mode, mostly with borrowed money. And when the war was over the US Congress invented an amazing new idea – can anyone imagine a congress that would do this now?: they would pay the veterans to go to college. The GI Bill was opposed by the major universities of America. They thought it would bring the ordinary riff-raff into our institutions of higher learning, which saw them selves as serving the upper class (which of course no one wanted to admit existed in this country). It didn’t take even those universities long to discover there was money in this program for them so they finally went along with it -- and discovered that the veterans were better students than the usual college students.

All this took place because the government borrowed money. The more they spent on national projects the stronger the middle class got and were able to pay the taxes that kept the country going.

So much for what a non-economist remembers about how the world works. That’s why I at least can’t figure out how the plans being talked about in Congress today could add up to anything but disaster.

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