Obama and the Stock Market

According to Bloomberg back on March 6,

The Dow Jones Industrial Average fell 20 percent since Inauguration Day through yesterday, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

Obamas enemies duly fastened the Dow Jones millstone around his neck, for example, here,

Well guess what, folks…as ANY economist will tell you, capital markets are forward-looking. The Dow Jones Industrial Average usually rises and falls based on expectations of what will happen, not based on what’s happening right now. In other words, if stocks fall, it is because investors believe the future is looking bleak, not because the present state of the economy is bad. Note that the stock market collapsed in 2001 in anticipation of the recession that followed. The stock market is collapsing now in anticipation of the fact that Obama’s plan will be ineffectual.

and here,

To those critics who claim that Obama can’t possibly “own” the decline in the stock market sincehis election, recall that these indices are a kind of futures market, with investors buying in (or selling as the case may be) based on how they believe the economy will do.

Let’s see, the stock market stood at 7949.09 at the close on Inauguration Day. Today it closed at 9361.61. Is there an economist in the house? Do these arguments work both ways, or are we dealing with what scientists call an irreversable process? Seems like it’s risky to play the stock market, both economically and politically.

On the Wisdom of Committing Suicide to Avoid Population Decline

A lot of people seem to have trouble putting two and two together. They’re concerned about the demographic problem so many developed countries are facing on the one hand, and on the other they’re worried about global warming and environmental degradation. Perhaps it’s a good thing that one of the nations most threatened by both these problems is Japan. As Mark Steyn points out, her population peaked at 127.8 million in 2004, and will drop to 89.9 million by 2055 if current trends continue. She will, therefore, be among the first nations that will be forced to solve the problem one way or another. Her people are conservative and aren’t good at assimilating foreigners. Even if they were, Japan isn’t an easy place for potential immigrants to reach, illegal or otherwise. It may be that’s a good thing, both for Japan and the rest of us. It will be good for Japan because she will likely be forced to solve the problem without inundating her islands with immigrants whose language and/or culture is alien to her own. It will be good for the rest of us because it will demonstrate that, for better or for worse, the problem can be solved without risking cultural, political and environmental suicide.

Clearly, we cannot put off the demographic problem forever. We and Canada can import the entire populations of Central and South America, and Europe can import the entire populations of North Africa and the Near and Middle East, but, eventually, the problem will just come back. No nation can support an infinite population. The problem must be faced, and, if it must be faced, it is better to do so with a population that is not wracked by ethnic tensions and that is not so large that the available environmental resources can no longer safely support it.

Human beings can survive without national health care programs. They can even survive with reduced social security benefits. They will have somewhat more difficulty surviving on the planet if we degrade the environment to the point of collapse. Our environment is already threatened by excessive population. When will it be seriously threatened? Depending on your point of view, it may be now, it may be at some distant date in the future, or it may already have been decades ago. It doesn’t matter. The question is one of risk. How much longer will it behoove us to risk the environment of the planet by forcing the growth of our populations to support government entitlement programs? I suspect we should have abandoned this dubious method of “solving” our problems a long time ago.

Why? Our environmental problems are obvious enough. The environmental impact of increasing the population in developed countries is substantially greater than similar increases in less developed countries. As for the wisdom of tolerating unlimited immigration by culturally alien foreigners, you might want to ask the Serbs how that worked out for them in Kosovo. For that matter, we have legions of subject matter experts right here in the United States who are quite capable of analyzing the potential outcome of the complexities of population dynamics in such cases. You will find them on any Indian reservation.

It would be wise for the developed nations to severely curtail immigration, accept the natural declines in their populations, and reduce entitlement benefits to sustainable levels. If they don’t now, they will eventually be forced to under much less favorable conditions, and that in the not too distant future. So much seems obvious to me. However, I realize that, at least in the United States, there are powerful blocs of opinion on both the right and the left that, whether they worry about possible declines in our economic and military power, or are concerned their “progressive” social programs will be threatened, are prepared to deny the obvious indefinitely as we stumble into an uncertain future. As a result, for the time being, rational action along the lines I’m suggesting is probably out of the question. One can only hope that Japan, fortuitously protected from the worst of these threats in spite of herself by miles of ocean and cultural taboos, will serve as a role model for the rest of us in the way she solves her demographic problem. Perhaps her solution will be sufficiently elegant to convince the rest of us to follow her example rather than continuing to risk cultural and environmental suicide.

GM and Profitability in the Emerald City

I suspect GM will need to do something more drastic than change its logo to return to profitability. They might start by seeking to recover the lost art of making head gaskets and intake manifold gaskets that don’t leak. My Mom just had to fork over $700 to fix a leaky gasket on the lemon they sold her. The mileage, you ask? 30,000!

All the evidence I can gather on this issue seems to indicate that the ancients actually found a solution to this problem, but the knowledge was lost during the ensuing decades. I recommend an archeological expedition to recover it. New generations of highly sensitive metal detectors could be used to find ancient dump sites. If an intact fossil of a Model T could be found, the key to the gasket riddle might be rediscovered via reverse engineering. GM would truly have taken a giant step back on the road to economic recovery.

Going Bust Today and Yesterday: Recurring Anecdotes

On the Panic of 1837, from the “Democratic Review,” 1840, when England called the tune:

“Give (our merchants) credit at home, they take the money and make still greater purchases on credit in England. And this credit is renewed and maintained at the pleasure or the fortune of the creditor people; and it may be arrested or contracted by their fears, their caprice, or their disasters. And a contraction of this credit there is followed, as we have lately seen, by panic, convulsion, prostration, paralysis of credit, commerce, property and labor here.”

On the Depression of 1893 in Kansas by the great American journalist William Allen White in his Autobiography:

“Money was easy. The farmers were borrowing up to their ears. The mortgage companies and trust companies had money to lend. No one cared what interest he paid – or promised to pay. Kansas was plastered with farm mortgages. Crops were good, and prices reasonable; times on the boom, and no one watched how the wheels of plutocracy were whirring and grinding, generating the power that ran the land. I was a part of it and never remotely dreamed its significance… Through 1893 and 1894 the depression held its blighting hand over the country and especially over the Missouri Valley. Railroads were going through bankruptcy, the big ones swallowing the little ones. Financial institutions were reorganizing after failure, or to avoid it. The whole structure of American business and finance was being recast before our eyes.”

On the Great Depression by sociologist Frederick Lewis Allen as set forth in 1952 in his book, “The Big Change:”

“What was destined to halt the forward progress of business was the fact that the businessmen of America had become bemused with paper values – with the piling up of speculative or artificially generated wealth which had little relation to the production of goods… there developed a speculative mania which benefited immediately only those who could lay their hands on capital; and in addition, there were invented or improved a series of devices for distributing the fruits of prosperity – or what looked like them – into the pockets of the few.

“These devices included company mergers at inflated prices which gave insiders a chance to line their own pockets; the piling of holding companies one upon another until… they were sometimes five or six or seven deep, with the result that the heaviest cream of the profits of the concerns at the base of such a pyramid could be drawn off by the owners of the concern at the top; the formation by banks of “security affiliates” which in effect used the depositors’ funds to make investments, in securities and in real estate, such as wsere denied to the banks themselves by law; the frequent practice of inflating corporate profits by selling properties back and forth among a group of companies at rising prices; and the formation of stock-market pools in which the officers of a company would join with brokers and well-heeled speculators to push up the price of the company’s stock – and then unload the stock on a new lot of buyers, thus making making money at the expense of those officers’ own stockholders.”

Sounds familiar, doesn’t it?


Trotsky as Cassandra: The End of the Marxist Dream

Trotsky was the best and brightest, and probably also the most readable, of the old Bolsheviks. He was also the Cassandra of the “Dictatorship of the Proletariat.” Here’s what he had to say about the historical fate of Communism in “In Defense of Marxism,” a collection of his letters and articles published shortly after he was murdered by Stalin in 1940.

“If, however, it is conceded that the present war (WWII) will provoke not revolution but a decline of the proletariat, then there remains another alternative: the further decay of monopoly capitalism, its further fusion with the state and the replacement of democracy wherever it still remained by a totalitarian regime. The inability of the proletariat to take into its hands the leadership of society could actually lead under these conditions to the growth of a new exploiting class from the Bonapartist fascist bureaucracy. This would be, according to all indications, a regime of decline, signalizing the eclipse of civilisation.”

“Then it would be necessary in retrospect to establish that in its fundamental traits the present USSR was the precursor of a new exploiting regime on an international scale.”

“If (this) prognosis proves to be correct, then, of course, the bureaucracy will become a new exploiting class. However onerous this perspective may be, if the world proletariat should actually prove incapable of fulfilling the mission placed upon it by the course of development, nothing else would remain except only to recognize that the socialist program, based on the internal contradictions of capitalist society, ended as a Utopia.”

Too bad Mao, Castro, Pol Pot, et.al., didn’t listen to him. It would have saved us all a lot of grief.

Milovan Djilas, one of the great political thinkers of the 20th century, wrote a postscript for Trotsky in his seminal work on Communism, “The New Class.” An excerpt:



“The movement of the new class toward power comes as a result of the efforts of the proletariat and the poor. These are the masses upon which the party or the new class must lean and with which its interests are most closely allied. This is true until the new class finally establishes its power and authority. Over and above this, the new class is interested in the proletariat and the poor only to the extent necessary for developing production and for maintaining in subjugation the most aggressive and rebellious social forces.”

Those who would elevate the likes of Chavez and Zelaya to the rank of great heroes of democracy should take note and think again.

Trotsky and Djilas are both well worth reading. Djilas, in particular, is one of the most brilliant and under-appreciated thinkers of the last hundred years. See, for example, in addition to “The New Class,” works such as “Land Without Justice” and “Wartime.” You can find them on eBay, Amazon, Barnesandnoble, etc.


Supply Siders, Redistributers, and the “All American Standard”

There are legions of sages on the Internet who all know exactly what needs to be done to cure the economy.  Their theories are simple, easy to grasp, and certain to work.  The only problem is, they don’t agree with each other.  Half the sages tell us to cut taxes and government spending.  The other half calls for a bigger government that would tax more and oversee a “just” redistribution of the loot.  To sort things out, it sometimes helps to escape the narratives of today and have a look at those of days gone by.  It turns out there have been a couple of quantum flips in the narrative(s) within living memory. 

During the Great Depression, there were many converts to the narrative of the left, especially among the “well-informed” of society, and that narrative became quite extreme.  Its adherents were, if anything, more cocksure they had a monopoly on the truth than those of either the right or the left today.  In those days, opinions that would be considered dangerously radical today were a commonplace in the intellectual journals.  The American Mercury is a good example.  Started in 1924, by H.L. Mencken, the great sage of Baltimore, and his pal George Jean Nathan, the Mercury was taken over by Charles Angoff late in 1933, following Mencken’s resignation.  As will be seen in his contribution below, Angoff was decidedly to the left of Mencken, and would steer the journal sharply in that direction.  A similar, if less extreme, lurch to the left can be discerned in The New Republic, the Nation, Century, and many another “serious” publication of the day.  Here are some examples, all from the Mercury.  Remember, they appeared in a highly respected journal, and not some transient occupant of a socialist bookstore:

 “Under the present economic system it is impossible for our farms and factories ever to absorb all the millions of unemployed… When the government can grant no more concessions to appease its hungry, then revolt on a national scale will be inevitable, with its ensuing chaos, during which some group, knowing what it wants to do, will seize control.  At present the only political party which seems to know what it wants is the Communist Party.”  John L. Spivak, “Bitter Unrest Sweeps the Nation,” August 1934.

“The belief that capitalism is immortal is as superstitious as the belief in witchcraft…  The world, as I have said, is moving in the direction of collectivism…  As for Germany, the disillusionment of the people there with Hitler’s brand of Fascism is widespread and rapidly becoming more articulate.  It is by no means impossible that soon after these lines reach your eye, the lunatic house-painter will be fleeing for his life.  In a way, his insane regime will have done his country good:  it will have hastened the coming of genuine socialization…  What of the United States?  The New Deal is bankrupt.  It was impossible for it to succeed.  Socialism cannot be made to work in a capitalistic society, as any schoolboy could have told Mr. Roosevelt.  The New Deal will inevitably have to move in the direction of Fascism, however much Mr. Roosevelt personally may dislike the Mussolini-Hitler brand of governing.  If the Republicans win in 1936, there will be no more camouflage.  There will then be open and above-board Fascism.  The Republican party, like the economic system it so well represents, will not give up the battle easily.  But its brand of Fascism will be no more immortal than Mussolini’s or Hitler’s…  The Americans are in a rebellious mood…  They will demand, and I believe they will get, some form of real collectivism.” Charles Angoff, “The End of an Epoch,” August 1934.

“Collectivism has made the army and the navy of the United States.  Why should the spirit that inspires it be anathema?”  Ernest Boyd, “Drugged Individualism,” November 1934.

Not everything that appeared in the Mercury would seem so novel today.  Here are some remarks about taxes that have a decidedly modern ring:

“But now the United States Federal government and most of the States and their subdivisions are confronted with another financial crisis in many ways more serious than the one we went through in 1917-18.  Can we provide the revenue to meet the new social obligations which have been thrust upon us by the depression and avoid run-away inflation in the process?  Can we find the ways and means of raising money which will help us out of the depression instead of pushing us further back into the mire.”  Harold M. Groves, “Taxation in America and England,” June 1934.

Fast forward 18 years.  The Soviet purge trials and a World War had intervened to upset the apple card for the sages of 1934.  Prosperity had, after all, returned, and a new hubris pervaded society.  Now it seemed, we were marching forward to a bold new capitalist future, moderated by unabashed redistribution of wealth, in which the gap between rich and poor was shrinking, and becoming increasingly insignificant.  Class economic standards were falling by the wayside, and would be replaced by what Frederick Lewis Allen, a sociologist of that era, called “The All-American Standard.”  Allen caught the spirit of the times in his book, “The Big Change.”   After reviewing statistics on the distribution of wealth and income at the time, he wrote:

 “What do these figures mean in human terms?  That millions of families in our industrial cities and towns, and on the farms, have been lifted from poverty or near-poverty to a status where they can enjoy what has been traditionally considered a middle-class way of life:  decent clothes for all, an opportunity to buy a better automobile, install an electric refrigerator, provide the housewife with a decently attractive kitchen, go to the dentist, pay insurance premiums, and so on indefinitely…  At the top of the scale there has likewise been a striking change.  The enormous lead of the well-to-do in the economic race has been considerably reduced…  Let us see what has happened to the top five per cent of the population, income-wise…  According to the elaborate calculations of Simon Kuznets of the National Bureau of Economic Research, during the period between the two wars the people in this comparatively well-off group were taking a very big slice of the total national income – no less than 30 per cent of it, before taxes; a little over 28 per cent after taxes.  But by 1945 their slice had been narrowed from 30 to 19.5 per cent before taxes, and from 28 to 17 per cent after taxes.  Since 1945 this upper group has been doing a little better, relatively, but not much…  A question at once arises.  Have we, in reducing the slice received by these upper classes, and increasing the slice received by lower groups, simply been robbing Peter to pay Paul?  The answer is that Peter has been getting a smaller relative slice of a much larger pie.  Even after one has made allowance for rising prices, one finds that the total disposable income of all Americans went up 74 per cent between 1929 and 1950.  That is a very considerable enlargement.  So that although the well-to-do and the rich have suffered relatively, it is much less certain that they have suffered absolutely.”

Here is supply side economics turned on its head!  Instead of wealth trickling down from the upper classes, Allen sees it trickling up to them from the classes below.  Allen continues: 

“Much more impressive, however, than the narrowing of the gap in income between rich and poor has been the narrowing of the gap between them in their ways of living…  the rich man smokes the same sort of cigarettes as the poor man, shaves with the same sort of razor, uses the same sort of telephone, vacuum cleaner, radio, and TV set, has the same sort of lighting and heating equipment in his house, and so on indefinitely…  The differences between his automobile and the poor man’s are minor…  What has been responsible for this convergence between the ways of living of rich and poor?  The causes are numerous and complex…”

That is certainly true, and the keepers of the narratives in our own day would hardly agree on them.  Allen wrote those words in 1952, when the upper bracket tax rate had been hovering between 88 to 90 percent for some time.  Still, US manufacturing and productivity were both at unprecedented levels, and showed no sign of turning back.  The expected post-war recession that had been a feature of WWI had not materialized, and there seemed to be no turning back for the economy.  High taxation seemed nearly irrelevant to economic expansion.


Come our own day.  As the graph taken from Visualizing Economics shows, the gap between rich and poor began widening again shortly after Allen had published his book, and the “All American Standard” is a thing of the past.  The explanation for this in our own day will vary, of course, by which flavor of the narrative the explainer prefers. 

And the moral of the story?  Narratives change.  Facts, events, and experience render old ones obsolete, and bring new ones to the fore, and that in relatively short order, depending on how quickly real economic and social conditions, the facts on the ground, or “experiment,” if you will, changes perceptions.  Old certainties become new delusions.  We learn, if we have the capacity to learn, that we are not as smart as we thought we were.

Dynamic Detroit: The Decline and Fall of the US Automotive Industry

Diego Rivera Detroit Mural
Diego Rivera Detroit Mural

Detroit hasn’t always been on the ropes. Back in 1935, when we still hadn’t completely recovered from the Great Depression, an article appeared in “The American Mercury” entitled “Detroit the Dynamic.” In those days, morale in Motown was high. The workers were the best in the country and knew it. America was leaving the hard times behind, and Detroit was leading the way. Optimism prevailed, and “Detroit the Dynamic” reflected it. Some excerpts:

“This life, to be known and appreciated, must be experienced as Detroit commoners live it, and witnessed with their vision. Then it appears as the best that America has to offer.”

“Detroit calls up the most intelligent and energetic laborers of the land, even as California lures the bums. Candidates for jobs are rigorously culled in the great shops. The survivors are, beyond question, the pick of plain Americans.”

“…Detroit was agitated by the Dionne quintuplets to a degree reached by the folk of no other region. The appeal was simply to Detroit’s ruling spirit – mass production.”

“This is the Detroit of the Detroiters: first, of course, the automobile capital of the world; then, the city of champions – Joe Louis, the Tigers, the Redwings; …the patriotic community that put on the most monstrous of American Legion parades; the music capital that presents Gargantuan outdoor festivals of song; the financial center that produced the most prodigious banking crash of the Depression;… the scene of the colossal spectacle and the nations’s hugest crowds; the city that calls itself Detroit the Dynamic.”

You can read the whole article here. It makes you think. Times change. The changes aren’t always in the direction of “progress.” If what’s happened to Detroit is what Greenspan refers to as “creative destruction,” then the destruction part has spun out of control. The last time I was driving through the area, I heard a radio announcer scornfully proclaim there was no one left in Detroit now but the mice. May the day never come when a radio announcer can say that about America.