Eric Hare over at one of the blogs on WordPress had written about the broken social contract here in America. We will hear quite a bit about broken social contracts and broken American dreams in the months and even the years to come. Somehow the idea that there is an American Dream that is promised to most individuals if not all portend the stupidity of wishful thinking as reality. As far as the “social contract” that is more about how we agree to be governed as individuals in a nation, a political entity than it is about the fulfilling of some economic promise because we are all entitled by virtue of being citizens of this political entity. His analysis raises several points, most of which have to do with false assumptions on his part. He wants to point out that something happened in 1973 to cause a decline in wages as a percentage of GDP from 50/50 to 60/40, wages being the latter number. He also cites an eight year lead time for this “thing” to occur. Well, I suppose, but that is a false assumption.
But just to humor this eight year time event let us go back to 1965 and take a look at what was happening. Ah, the Go-Go years of corporate governance was reaching its peak. Mergers were the rage then. A man by the name of Ling was busy collecting corporations through buyouts. Now unlike the eighties the age of over leveraged buyouts had not come to pass. But Mr Ling had bought a few companies, one of which was the aircraft manufacturer Chance Vought and its airframe company, Temco. The corporation was know as Temco-Vought to the defense industry. Unfortunately they lost the Navy fighter contract to McDonald who would merge with Douglas of DC-3 fame. The new firm was called Ling Temco Vought and was rumored to be in the market to buy ITT. The joke on the street was that the new corporation would be known as Ting-A-Ling. But in 1965 NASA’s space program was in full swing and would see us land men on the moon several years later. President Johnson’s war on poverty called The Great Society, saw the rise in welfare expenses as well as the destruction of the Black American family. And the Vietnam War was sending more and more troops to Vietnam. Government spending was very high as inflation was reaching five percent back then. Meanwhile consumer spending was increasing with the purchases of housing, automobiles, and household goods. Colleges were full of students and suffering from overcrowding. The interest on passbook savings was as high as four percent at savings and loan institutions. Employment was high since women had not entered into the workforce in great numbers. That would come by 1973-75 through the necessity of women needing incomes because of no fault divorce legislation, which made it harder for the woman to collect alimony. The one constant factor is the creation of greater amounts of credit, both for the consumer, the corporation, and the governments.
This should be a no-brainer for any economist, but the extensive creation of credit caused inflation and the dislocation of resources. We would see inflation hit with a vengeance in the early seventies and reach a climax in the mid eighties, finally pushing interest rates to sixteen percent at the Federal Reserve. Now I credit Eric for using one of the three graphs he pulled from the St Louis Federal Reserve Bank because it had been adjusted for inflation. The other two were not adjusted for inflation and over that length of time from 1973 to 2015 the data is highly distorted. One mast pay attention to the statistical date being used lest one fall afoul of great distortions. Has the middle class lost so much of the American Dream and is the social compact really broken as so many liberals and progressives want to argue? Well, yes, one can say that. Of course the American people were never promised a rose garden. There are many problems which should be obvious but which the average individual does not see.
The first is that thing we call the college education, the one that is suppose to lead to that good job and maybe meaningful work. Back before the turn of last century an individual who could graduate from high school, public or private, could be assured, on average, a decent paying employment with prospects for advancement. College education was more for the well-to-do. It has two functions, a place to put junior for four years in the hopes that he might grow up and the second is that junior might actually learn a white collar “Trade” and thus become self sufficient. One might come from a poor family and work one’s way through college and thus achieve that middle class life, but few could actually accomplish that miracle. The end of World War Two saw the chances for those who had come from limited financial and social backgrounds to acquire a college education or to a lessor extent extensive vocational training and thus move up the ladder to financial success. And with the other benefits the GI Bill brought, one could buy a house with no money down, the mortgage was guaranteed by the federal government. This represents an inflation in the job market and the housing market. Imagine having more engineers or accountants than you might need. Imagine needing to buy more raw land and build more housing units that had been previously forecast. There were several recessions during the late forties and fifties and early sixties. Higher taxes kept a great deal of inflation in check, but with the early sixties came the changes in taxes laws and the rates fell greatly form a high of ninety percent at the top end to thirty-five percent. That mean more money in circulation for the consumer and less for the government. Another source of inflationary pressure. Meanwhile unions pushed wages upward on a continuing basis. Government workers were being paid more although their compensation was still below that of the private sector.
Then came the eighties and more changes in tax law, changes in regulations, changes in laws governing interest rates. I remember when one could, when itemizing deductions, deduct the interest paid on personal loans. The credit card companies could not charge more than ten percent per annum. And changes in regulations for credit unions who lobbied to become more like banks and provide more services. We saw the leveraged buy out of businesses, the mergers for little more reason than to kill off competition, and the creation of more and more credit. Banks could lend more of their capital and their depositors funds. Fractional lending was permitted. Hypothecation is when an asset is pledged for a loan. Rehypothecation is when that loan, backed by an asset is now considered an asset instead of a liability and used as collateral for chains of loans. This is what happened to all that iron ore, copper, and other raw and unfinished materials that sat in warehouses in China. Fat too often that same amount of copper ingots was pledges for multiple loans and those loans were pledges by lenders for multiple loans from other lenders. The investigations still continue several years later in trying to tract down those who defrauded so many others. Well, let me tell you, we have done some of that here in America. Of course the selling of real estate at vastly inflated prices to people who really never could afford the payments and whose loans would be underwater a few years later is really criminal, but it is inflationary. A thirty year mortgage at six percent will cause you to pay about three and a half times what the house you bought sold for. To think that in thirty years that same house, let’s say that it is a new build, will be worth well over three times its original price is insane.
Well, now comes our Federal Reserve who wants to prop up failing banks because they are perceived as “too-big-to-fail”. So through them and Congress bailouts are done, keeping alive these zombies. The the Fed goes one better. it lowers interest rates to zero or near zero. Why bother with passbook savings accounts, you wan’t get paid any interest on your savings. Ah, then comes Quantitative Easing, you know, where the Fed buys assets like treasuries and mortgage backed securities, and other financial instruments. This means that those who sold such investments now need to find new one to place the money for growth. But the problem is that all one can find is high risk high yield financial investments. This too is a source of inflation. The problem is that all these types of inflation aren’t measured the way one measures changes in consumer goods prices. True, many economists will tell you that credit is not money, Except that it spends the same way. The only thing you can’t do with a credit card is give money to the bums on the freeway ramps and street corners. Credit works the same way as money. The kicker is, once you use that credit, it becomes debt and debt is a claim on future earnings. Fail to pay your monthly balance and the credit card companies/banks come after you wanting money, not credit.
This is what has happened, Eric. We, the people, killed the dream, we broke the social compact. We did it through credit, That credit for advanced education for the good job and life, that credit for all the good things in life, that credit we needed for increasing our wealth. And in using those various credit accounts, we drove up inflation is ways that we never dreamed would affect us. We voted for those who would become millionaires and yet we thought they had our best interests at hand. Hillary Clinton take the cake. A grasping woman who clamors after wealth by selling influence now wants to convince us that she is a humble middle class worker for the good of mankind. How many of you will swallow that tale hook, line, and sinker? Do you really think Bernie Sanders has the answers? We have erected a dysfunctional system and Bernie’s answer is that we need to spread the dysfunction around so that everyone has a chance to be equally dysfunctional. Oh please, tell me you don’t really believe that crap. That’s like saying that sustainable growth has no limits. Want to bet?
Eric, you can trot out all the graphs and statistics you want but they will fail to tell us the big whys of how we got here. “This graph shows inequality.” So what, there is always inequality. Show me how when banks become far too large through mergers they become more stupid. Why would a bank choose to buy tranches of a group of high risk mortgages that have been bundled together as a security? Oh, the risk is spread around investors. But it’s still high risk. When GE went on its mergers and acquisitions spree under the idiot Jack Welch, over the spread of a decade the investors did not make great profits. The best GE could do for all that cost cutting (layoffs) was an average of ten percent profit. The savings and loan scandal was brought about through changes in regulations that the larger institutions wanted. Those regulations had been in place to prevent high risk ventures, to prevent mergers and acquisitions that eventually lead to default. We were the ones who broke the social compact. We were the ones looking for the short cuts to success in life. It was NAFTA that sent so many jobs overseas. We, the people only benefited through lower prices. But what good are lower prices at Walmart when you’ve lost your job? We voted for idiots who made promises that would not be kept or if they were, passed legislation that did stupid things. Our children can’t walk to school or back home alone or in pairs without the charge of child neglect leveled at their parents. The institutions that shows the problem of inflation and how it is not just an economic problem is our governments, local, state, and federal. Go find a graph that tells you what the percentage of the working population, the ones with jobs, are government employees. Government has become big business. Last general election the only congressmen and women who weren’t millionaires were those who were elected for the first time. And why are their staffs, who are government employees, so incredibly large? This inflation of government will eventually bankrupt the country. Why does the Federal Reserve System have its own police force? Do yo have any idea how man different law enforcement agencies we have in this country? And why did all these combined law enforcement agencies need to buy several hundred million rounds of ammunition? All this craziness was passed by the various governments and guess what, the majority of the people voted for these idiots. That’s right, the fault is ours. We keep voting for our own special interests and forget that there are others in the country who do not share our views, our wants, and our desires. But every two years we keep voting for these idiots who profit greatly from our stupidity. Yep, we broke our own social contract and electing Bernie or Hillary will never get it back. I have no hope for the republicans, either.