Our economy Part 2

The great collapse of 1907 wasn’t unique in the annals of stock market collapses. It was caused by rampant speculation with borrowed money as are most collapses of this nature. What set the collapse of 1907 apart was the severity of the collapse. As banks and trusts across the nation began to go bankrupt it started a run on even the soundest of banks that threatened to topple the whole banking system of the US. The only thing that kept the whole country from going bankrupt was the determined efforts of one individual; Mr. J. P. Morgan. Morgan spearheaded an effort to get all the largest banks in New York to inject liquidity in the form of capital in the market to stave off further collapses. Without his efforts the whole system would have likely collapsed and politicians took note. When the whole national economy is only saved from a total collapse by the efforts of one banker, even though Morgan was arguably the most powerful banker in the world at the time, people sat up and took notice.

The next year Nelson W. Aldrich, the chairman of the Senate Finance Committee, set up a commission to study the causes of the collapse and come up with recommendations for preventing it from happening again. Aldrich and his committee studied the records of what had happened and also took it upon themselves to study banking systems in more modern financial systems all over the world. What they soon recognized was that a central bank was needed to stabilize the economy and prevent the type of runs on banks that had happened over and over in the US previously. After much political maneuvering the Federal Reserve Act was passed in December of 1913.

The act itself established a national central bank with powers to create money and make discounted loans to member banks. All nationally chartered banks were required to become members of the Federal Reserve and purchase stock in their regional reserve bank as well as hold a certain amount of reserves in their local reserve bank. While this system has been modified and expanded many times since its formation it is still the central bank that controls US financial policy by setting interest rates and managing the money supply. In 1980 it was expanded so that all banking institutions could become members of the Federal Reserve and enjoy the advantages of discount loans and the security of government banking. It is basically a government guarantee for depositor’s money; a state run entity that controls the banking industry and therefore the US economy.

It is worth pausing here to attempt to define one of the basic economic systems that I started this post with. The great bogey man that conservatives like to use to scare the voting base into supporting their agenda with is socialism. Socialism is the first cousin to communism according to most conservatives and the onset of socialist policies is a sure fire path to communism. A basic definition of socialism would be an economic or political theory advocating public or common ownership and cooperative management of the means of production and or capital. It is the favorite stick that conservatives like to use to beat up upon liberals with as they accuse them of fomenting socialism. The Federal Reserve Act is unquestionably a socialist piece of legislation. It put the banking industry under the control of a state run, publicly owned institution; the Federal Reserve. It is THE entity that controls the US economy and has been since 1913 and it is a socialist entity.

In other words, under President Woodrow Wilson, who is widely regarded as one of the most ardent advocates of free markets that ever sat in the White House, the United States adopted a central banking policy that is the very definition of socialism. The stark realities of 1907 and many other cyclical crashes of the US economic system forced our government to adopt a socialist agenda to cope with market fluctuations that threatened to destroy our economy over and over. We have not been a free market since the inception of the Federal Reserve Act and the reason it was adopted was because the free market itself was so volatile and unpredictable that the country simply couldn’t expand with any certainty. Subsequently, the power of the Federal Reserve has been increased many times to cope with emergencies in our economic system because the simple truth is that unfettered free markets are inherently unpredictable and dangerous.

Let’s consider some other facets of the US economy as well. The public school system that fostered the great explosion of literacy in this country from the mid 1930’s onward is a socialist entity. State, local, and Federal governments own the schools and finance the education of almost every child in this country. We can argue whether these institutions are as efficient and productive as they need to be but no one can argue that they are not socialist entities.

The vast electrical grids that power homes, industrial centers, and businesses all over this country are owned by state, local, and federal governments. They were financed, built, and maintained by these same entities and are inherently socialist institutions. Again, we can argue that they have not been maintained and updated as efficiently as they should have been but it cannot be reasonably argued that they are anything other than socialist entities.

The road systems that our economy depends on to get goods to market are owned by state, local, and Federal governments who built and maintain them. The interstate road system that was built during the Eisenhower administration is the key to most all of our national trucking industry and it was built and financed solely by the Federal government. As in my other examples above we are seeing a slow and gradual degradation of this system as funds to maintain it are steadily shunted into other areas of government but it cannot be argued that our road systems are not socialist entities.

Medicare and Medicaid which provide health insurance for our elderly and those without the means to otherwise do so is controlled, administered, and ran by state and federal governments. There are many problems with the system as it stands today, not the least of which is funding but it is entirely a socialist institution.

Much of this country’s industrial might built since WWII comes from US government support and institutional lending from the government controlled banking industry. Almost all necessary and needed research and development breakthroughs in the major industries in this country since WWII were indirectly funded by government research and development programs in the military and NASA. Drug companies’ research and development projects are largely supported by government grants. I will delve more into this tendency in a later post but suffice it to say that much of our industrial strength goes hand in hand with government support of a socialist nature.

The truth is that we our economy is a capitalist/socialist hybrid that is constantly evolving to meet the needs of consumers here and all over the world. The basic flaw in Karl Marx thinking was that he didn’t see that capitalism could evolve. It is a good thing for all of us that it has. I think we need to keep that in mind when the fear mongers of the Tea Party and other right wing movements bring out the socialist stick. If it weren’t for socialism our economy would have collapsed years ago.

As a matter of fact in every facet of American life mentioned above the conservative movement of Reagan and right wing Republicanism away from socialism towards more free markets has led to a universal degradation of our abilities and efficiency.
Reagan had a line he made famous during his run for the presidency. “Are you better off now than you were four year ago?” Can anyone reasonably argue that any facet of our economy is better off now than it was in 1980 when trickle-down economics came in favor?

What kind of economy do we have?

The first thing we need to understand in dealing with the economic issues we are facing both individually and as a nation is what kind of economy we are dealing with. There are many descriptions having to do with economic theories or methodologies but there are two basic truths that we need to face in order to understand what is going on:

a) The US economy is, like our country itself, a blended version of many different ideologies; none of which can accurately describe the whole picture alone.

b) The US economy is, at least for the moment, the leading economy in what is actually a world economy comprised of many different national and regional economies more or less cooperating in business.

Let’s start with a) above. There are many terms thrown about these days in debates about economic theory. Capitalism, Socialism, Marxism, Totalitarianism, Fascism, and a fairly long list of other “isms” that are never clearly defined but used commonly to describe our economic system are thrown about in such debates with impunity. The truth of the matter is that no one wants to clearly define these terms when using them in a debate because the system we currently have in place is a combination of all of them. None of them are pure systems in existence anywhere in the world today. To be completely accurate, none of them have ever been pure systems but every economy in recent history has been some combination of them.

The purest forms of any of these systems have without fail been the most brutal. Most Americans are at least conversationally familiar with Fascism in Nazi Germany and Communism in Stalin’s Soviet Union but both were actually more accurately totalitarian governments. In any case, the brutality of these systems is sufficiently well known and documented so that I won’t bother to spend a lot of time discussing them. It is worth noting that the practical applicability of these systems seemed to be the downfall that led to the end results but human nature being what it is, it is hard to argue that such results wouldn’t be the same if we were to somehow decide to give them another try.

What is much less widely understood is the pure capitalism is just as brutal a system. It isn’t exactly a secret to anyone who cares to look into it but the societies in our history that veered closest to pure capitalism were also amongst the most brutal as well. Europe in the middle 1800’s is just one example. As the age of industrialization dawned there was a massive shift from rural to urban areas and working conditions for the vast majority of the population were to say the least brutally oppressive. Widespread use of child labor, 18 hours work days, and living conditions where filth caused disease that lowered life expectancy to ridiculously low numbers were the rule rather than the exception. It was against this backdrop that the formations of ideas in opposition to capitalism were born. Karl Marx, Friedrich Engels, and others wrote in reaction to the human devastation that pure capitalism caused all around them daily.

In this country, capitalism led to other less than stellar repercussions as well. African slavery was in some ways the ultimate expression of capitalist theory in that slave owners owned not only the capital and means of production; they owned the labor force as well. While this was abandoned after a brutal war that cost millions of lives the basic ideas of industrial capitalism practiced in the northeastern states was little better for the working class that it utilized to make profits. The closest this country ever came to a pure capitalist system was probably in the late 1890’s when we had many of the same problems that Marx had seen in Europe some 40 years earlier. Children worked 14 hour days in factories; unemployment cycles ran rampant in that large portions of the population of inner cities that were the labor force routinely faced starvation and death by exposure to the elements. Outbreaks of cholera and typhoid were widespread in many inner cities. The nation as a whole went from boom to depression with great regularity and there were basically only two classes of people, the very rich and the very poor. The very rich lived very well; everyone else struggled to survive. This is exactly why the greatest proponents of capitalism have always been those that profited the most highly from it. It has met with decidedly less satisfaction from everyone else who has ever been exposed to it.

In basic terms Capitalism implies individual ownership of the means of production. The system itself relies upon the laws of supply and demand to regulate the market and theoretically maximizes efficiency by allowing the free market to make all economic decisions. In reality Capitalism in its purest forms leads to a gradual separation of classes. The rich get richer while the poor get poorer. It also leads to the antithesis of free markets; monopoly. As an individual or corporation becomes richer and more successful they gradually gain control of a larger proportion of the market until they eventually own a large enough share to force everyone else out of the market. After this happens, a monopoly results and the rules of supply and demand are manipulated by the owner of the monopoly until there is no longer a free market at all. It is the basic flaw of Capitalist ideology that any unrestrained capitalist entity eventually eliminates competition which is the free market mechanism that the ideology depends upon to work properly. Marx understood this. His idea was that these weaknesses would eventually lead to the collapse of the system itself. If you carry the idea of Capitalism to its logical extreme you can easily see that it is a parasitic system in that it depends on constant growth to survive.

The success of a capitalist system is always measured in its growth. It is in large part the only factor that really matters. This is exactly why the most important measurement of the success of the US economy today is the Gross Domestic Product and whether it has increased or not. Our economy is not built upon the idea of sustaining a level of affluence or sustaining a lifestyle, it is built entirely upon the idea that we have to keep growing. It is in fact a logical reality that this is not possible in the long term as there are limits to everything and uncontained growth can only be supported by unlimited resources.

What happened to change things after 1893 in this country? Was Marx right in thinking that capitalism couldn’t survive, that it would collapse on its own flawed basis? The answer to the first question contains the answer to the second as well. Let’s take a more detailed look at what was going on in 1893. I have already pointed out that the problems in industrialized areas were severe but what I haven’t touched upon yet is that the problems in rural America were just as bad under this pure capitalist system.

Farm prices were in constant flux from the 1860’s on with periodic rises and falls that routinely devastated farmer’s ability to make a living. Almost all farming done at that time was by small independent farmers who were at the mercy of market fluctuations that were basically uncontrollable. To make matters worse, the banking industry was beginning to become more organized as the laws of capitalism led to the inevitable situation where larger banking interests were gobbling up smaller banking interests. This led to a situation of more centralized control of money which essentially meant that large banking interests began to gain a monopoly on the market of lending money. This led to ever increasing interest rates and less available money at the same time that farmers were more dependent on bank loans to get by from year to year as crop prices fell.

The situation got bad enough so that farmers began to organize into cooperatives and form political parties. In an effort to increase the money supply the movement advocated greenbacks based upon silver which was in more plentiful supply. A combination of events occurred to guarantee the movement was unsuccessful in this endeavor but it did serve to push the country towards an understanding that more liquid credit capabilities were needed to smooth out the cyclical nature of the farming industry. The point is that this more pure form of capitalism which existed during the latter half of the 1800’s and the start of the 20th century was undeniably a failure as far as the average American was concerned. Farmers suffered, factory workers suffered, and small business owners suffered. The only people who benefitted from this system were the bankers themselves as Adam Smith had pointed out some 150 years earlier.

It is worth mentioning here that the great fear of inflation which drives the financial markets today is the same fear that kept bankers from increasing the credit supplies that farmers and small business owners so desperately needed in the early part of the 20th century. In reality it is basic common sense that a little bit of inflation is in fact a good thing for the vast majority of consumers. If the value of money goes down while the value of goods go up who is gaining in the market; the person trading money for goods or the person trading goods for money? It is simple really. If you own more money than goods inflation devalues the commodity you own. If you own more goods than money it inflates the value of what you own. This is a nasty little secret that bankers and financial market people go to great lengths to disguise for the simple reason that inflation hurts them where they live even though it actually improves the standard of living of the vast majority of working people. It is also worth noting that every major collapse of our economy has been preceeded by a period of financial speculation by this same class of people.

The final straw the broke the camel’s back came in 1907 as far as pure capitalism in the US is concerned. In 1907 the stock market nosedived some 50% in October. As is usually the case in such collapses there were some very greedy individuals involved in rampant speculation of large amounts of borrowed money which I will go into in more detail a little later but the important point I want to make right now is that this event precipitated a nationwide depression on a vast scale. It was a depression wherein numerous state and local banks collapsed, untold businesses went bankrupt and the US economy itself came very close an actual bankruptcy on the part of the Federal Government. It was in reaction to this depression that American political leaders realized that we HAD to make a basic change from a purely capitalist system and it was a result of this realization that the US government formed the Federal Reserve System.

The Federal Reserve System is a bone of contention for many to this day. Many believe it is the basic flaw in our system but the reality is that it was formed in reaction to the fact that without a central banking system there was no way to control our economy. The Free market had basically collapsed our whole economy and everyone recognized that we simply couldn’t afford to keep going down that path. The Federal Reserve was formed to stave off the absolute collapse of our economic system, yet it was a definitive step in the direction of socialism, a direct admission that Marx was indeed right; a purely capitalist system cannot survive without devouring itself.

To be continued……

CRA and the Collapse Part 2

The Community Reinvestment Act of 1977 is often tossed around these days as the source of the economic collapse we are still experiencing in this country. If you think it sounds a little strange that an act passed in 1977 caused an economic collapse in 2008 you are correct. It would be strange if that is what happened but the truth of the matter is that it isn’t that strange because that is not what caused the recent collapse no matter what Sean Hannity and Rush Limbaugh would have you to believe. In my last post, I pointed out that the actual numbers concerning the real estate mortgage industry didn’t add up to the collapse we experienced and I will go further into what actually happened in later posts on this subject but I thought it would be worthwhile to look at what actually did happen to the real estate market first.

The Community Reinvestment Act was passed with the express intent of eliminating unfair lending practices in inner cities. As far back as the thirties when the government became involved in assistance for home mortgages the mortgage industry has discriminated against one factor, perceived risk. In the early years of government involvement there were maps drawn up wherein were lined off with colored lines based upon the projected amount of risk associated with mortgages in different areas. Historically, the inner cities which were largely populated by minorities were “redlined” or outlined in red as the highest risk areas to loan money. Up until the early sixties such maps were the rule in the industry and it was very hard to convince mortgage companies and banks to loan money in these areas for the simple reason that there were plenty of other areas considered less risky in which to loan their money.

In 1968 the Fair Housing Act was passed to fight this problem. This act prohibited the policy of redlining areas based upon race, religion, gender, familial status, or ethnic origin. While the act was aimed at specifically limiting the ability of lending institutions to discriminate based upon these criteria the industry continued to be slanted away from lending in these areas because of perceived risk. While the Fair Housing Act specifically made it illegal to discriminate based upon these factors the lending institutions simply had to avoid having it proved that their bias was based upon these factors to fall outside of the control of this act.
The Community Reinvestment Act was passed to encourage investment in these areas. What the act does in effect is to require banks under the FDIC to maintain equal opportunity for loans in all areas where they are chartered to do business including lower income areas. In other words, if a bank has depositors in low income areas it is required to offer equal opportunity for loans in these same areas. There were no specific requirements to how this was to be effected but it was to be enforced by the same FDIC auditors who take care of making sure that such banks do safe and legal business under the protection of the FDIC. The Act specifically states that all such banks are to maintain due diligence and follow accepted criteria for determining that loans made under this act are fiscally sound. As with the other constraints in the act, these decisions are to be audited and enforced by the FDIC auditors.

The teeth of the enforcement of the act came from the FDIC’s recommendations as to how member institutions were graded according to their compliance with the provisions of the act. In other words, the FDIC would either give thumbs up or thumbs down to member institutions who applied for mergers and acquisitions with other banks based upon their compliance with the CRA. A good rating for compliance was the carrot on the end of the stick and member banks were to respond accordingly. The specific regulatory agencies who made these judgments were the Office of the Comptroller of Currency, the Office of Thrift Supervision, and the FDIC. The Federal Financial Institution Examinations Council was charged with coordinating these reports and publishing the findings for a bank’s compliance with CRA regulations.

While that Act itself was aimed at increasing the ability of people in lower income areas to attain financing for buying homes in these areas it was not very successful in changing the status quo. The Act itself was continuously modified to make it more effective. Changes in 1989, 1992, 1994, 1995, 1999, and 2005 were made to the Act to make it more effective in increasing this ability by giving the regulatory agencies more teeth in enforcing the act. Still, as late as 2007 there were conversations in government about further strengthening the Act to increase the amount of access to such loans for the simple reason that it never successfully impacted the markets in large numbers.

According to independent studies by the Cato Institute, and the Competitive Enterprise Institute the Act itself could never be shown to improve home ownership in low income areas. There are those who disagree of course but the reality is that the Act itself played a very small part in the growth of loans in low income areas. The overwhelming consensus of such studies is that the loans that were made under the CRA were loans that to a large extent held to term and were much less likely to threats of foreclosure than those made by private entities which were not under the jurisdiction of the CRA. As a matter of fact, some 80% of the loans that came into foreclosure during the 2007 crisis and later were made by private mortgage companies that were not in any way associated with the Community Reinvestment Act because they were not under its jurisdiction in any form.

Sub Prime Mortgages and other exotic entities that actually led to the housing bubble collapse were the overwhelmingly the creation of private enterprise mortgage companies. Why? For the same reason that all such schemes are hatched; PROFIT.

In the recent past in this country the overwhelming majority of home mortgages that were made were simple financial agreements wherein one party made a loan and the other party held onto the loan as an investment. The profit was in collecting the interest rate over a long term and it was a pretty handsome profit at that. The standard rule of thumb for such mortgages is that a 30 year note usually pays off some 300% over the term of the loan. As most homeowners understand this means that a $50,000 dollar mortgage usually costs some $150,000 by the time it is paid off if it goes the full term of the loan. Obviously, a loan that defaulted was bad business for everyone. The homeowner lost his home and the money he had invested up to the point of foreclosure and the mortgage holder lost the projected profits of the long term interest payments so it was in no one’s best interest to make bad loans.

Securitization changed the whole industry in a drastic way in the late 1990’s. Just as the Dot Com collapse of the late 90’s started to crash the financial markets securitization of mortgages began to take over these markets which is basically the way we avoided an economic collapse at that time. I will go more into the details of Securitization and how it works in a later post but for now I will give the short version explanation.

Basically, Securitization involves bundling groups of mortgages into bond type instruments that are traded on the market as assets. In other words, it is a little bit of hocus pocus magic whereby a Debt in the form of a mortgage is changed into an Asset in the form of a Collaterized Mortgage Obligation (CMO). Of course the rules and regulations for this little bit of magic are hazy and open ended which is exactly why such regulations are needed but for now it is worth noting that this industry grew at an astronomical rate in the late 1990’s and early 2000’s.

Securitization instantaneously created a market for mortgages, lots of mortgages. The people producing the mortgages sold them immediately after creating them to a group who would bundle them into CMO’s and sell them again. Each transaction created a profit margin so that such mortgage bundles often actually increased in value with each trade, sometimes in margins that ended up being in the range of 50 to 100 times over the initial value. It was magic. A debt instantaneously becomes an asset and then multiplies in value and everyone was making lots of money. Of course there is really no such thing as magic. A debt is still a debt, no matter how you bundle it or what you name it but that is something we still don’t seem to recognize as a nation and another point for another post later on.

As Securitization grew mortgage companies became more and more creative with the types of loans they created. They also pushed harder for approval of higher risk loans. After all, the mortgage company wasn’t going to hold the loan to maturity and the next person in line who was doing the securitization wasn’t either. Instead of long term profit on sound loans the real money was now in short term profits on large volumes of loans and no one really cared how safe the loans themselves were. After all, as the market boomed the home values increased so that a person could always just refinance if they couldn’t pay the mortgage. It was the classic case of paying the piper later and the US economy boomed.

The Housing industry became a pyramid scheme and as long as the home values kept increasing there was no end in sight. As in most such schemes the jig is eventually up. Someone notices that the emperor isn’t actually wearing any clothes and reality starts to set in. As in all pyramid schemes that inevitably collapse the people on the bottom lose and we are seeing the effects of this one now. It wasn’t the fact that the government forced banks to make bad loans it was the fact that banks found a way to make it profitable to make bad loans. Through control of Congress and the gradual dismantling of the regulations put in effect after the last great collapse in 1929 from rampant speculation greed found a way to create even more rampant speculation in the last 15 years.

Casinos make a lot of money off of people’s belief that they can beat statistical certainty but at least most people who play in Casinos have to use their own money. The banking industry in the US has created their own Casino but they are using our money to gamble with. As long as the general public doesn’t understand what just happened to our economy we have no way to prevent it from happening again. It doesn’t really matter if the economy comes back or not if we don’t fix the problems that caused it to collapse in the first place and we simply have not done that so far.

We have allowed a system to be created where it was profitable to make bad loans and it was the pursuit of these profits that crashed the economy. Don’t expect the people who made all the money to abandon the system that was so profitable for them any time soon. It is fairly easy to just buy media outlets if you have a lot of money and spread propaganda that blames everyone but the people who created the problem. After all, most Americans are so stupid that they can be convinced that poor people buying homes they couldn’t afford crashed the world economy. Oh how those poor bankers must have anguished over being forced to make loans to people they knew couldn’t pay them back by the big bad government. As my dad used to say, “they must have cried all the way to the bank.”

Economic Collapse Part I

What happened to the economy in 2008? Obviously, we went into a recession or maybe even a depression but what happened to cause this to happen? Lots of people want to know the answer to that but I am afraid that for the most part we are listening to the wrong sources to figure it out. What we really need to do is understand what kind of economy we actually have in the US today to be able to understand what just went wrong with it. Unfortunately, I don’t see a lot of people taking this approach as it is always easier to continue a bad policy than to understand what is wrong with it in the first place.

Maybe we should start with some of the currently accepted ideas as to what went wrong with the economy. If you listen to Rush Limbaugh or Sean Hannity or any of their carefully cloned copies currently filling the talk radio airwaves you will hear that government is at fault. In their view, the government began to interfere with the free market and this caused a lot of loans to be made that were not secure loans. When these loans inevitably went into default, the market began to collapse and voila; we have a recession on our hands. Big government, in its infinite ignorance of the free market, basically caused the whole thing. To be even more explicit, liberal politicians in their effort to take care of their entitled voter base began to force the free market to loan money to people who couldn’t afford to pay it back.

If this sounds familiar, it is because we have heard it before. Ronald Reagan used similar logic to get himself elected in 1980. We had a recession during that time too. Jimmy Carter, the incumbent president went on TV and began asking Americans to cut back, to conserve, to consider the possibility that we might all have to do things differently to continue to lead the free world in economic growth. Self sacrifice and a calling to a greater good were his solution to the problems we were facing at the time. Reagan took the opposite tact and began excoriating government as the source of the problem. In Reagan’s view it was the government and its entitlements programs to those undeserving that were dragging the economy down. Welfare queens who lived better than the average working man were the topic he continually wanted to dote upon whether it actually had anything to do with the problems we were facing or not.

Reagan knew what we really needed. A scapegoat to blame all our problems on; especially one that would resonate so thoroughly with working class Americans and he found it in the welfare queens and the liberals in government who fostered them. Unfortunately, this recipe for fixing the problem didn’t work then and it won’t work this time either. In point of fact, the government might have been part of the problem in that it has blindly supported the corporate entities that have been feeding it money for the last half of the 20th century but that is like blaming the cow for giving bad milk when you feed it onions all day.

Let’s take a look at the actual numbers of what was going on in 2008 when the government publicly admitted that it was going to have to bail out the private banking concerns in this country. On September 18, 2008 Ben Bernanke (head of the Federal Reserve) and Treasury Secretary Henry Paulsen met with key Congressional legislators with the message that they needed 700 Billion dollars to avoid a financial catastrophe. This wasn’t some cry in the wilderness from a lunatic fringe; this was the head of the Federal Reserve and the head of the US Treasury telling US congressmen that they had to do something quick. In Bernanke’s words,

“If we don’t do this, we may not have an economy on Monday.”

In order to understand the magnitude of this statement it is necessary to look back a little bit. The George W. Bush administration, the Bill Clinton administration, the George H. W. Bush administration, and the Ronald Reagan administration have been in power in Washington since 1980. There is little doubt that they have been the most business friendly, corporate sponsored administrations in the history of this country. With the exception of the first term of the Clinton presidency we had seen 28 years of pro business government without respite. They have gradually dismantled or defanged every financial regulatory agency, every economic control that was put in place after the Great Depression. These agencies and laws were put in place after the Great Depression for the express reason that some very bright men took a look at what happened then and decided they needed regulations to keep from having a repeat performance. Not surprisingly, we are now getting that repeat performance and for many of the same reasons that the last collapse happened.

The George W. Bush administration was arguably the friendliest to corporate interests and de-regulation of the industry. Imagine what it took to convince a president extraordinarily concerned with his public image and how he would be viewed by history to completely reverse his field on how free markets are supposed to work in his last 4 months in office. I would like to have been a fly on the wall in the meeting when Bernanke and Paulsen proposed to him that in order to stave off total economic collapse; he was going to have to nationalize the US banking system by doing a government bailout. I wonder what it took to convince him that his whole laissez-faire approach to economics was wrong; that he was going to have to socialize the US financial system to avoid a worldwide economic collapse. Everyone seems to miss that this occurred; that a notoriously stubborn and self serving US President who had built his whole career around the idea that we need less government suddenly decided the government was the only solution. What did they actually show him in that meeting?

Let’s look at some numbers to see if the current ideas about home mortgage defaults explain the problem. In September of 2008 there were some 760,000 homes in danger of foreclosure according to data released by the US Foreclosure Market report. While this is a high number it doesn’t explain the collapse. In 2008 the average home mortgage total value was 167,000 dollars. If you multiply 760,000 by 167,000 which is the worst possible scenario because it assumes that each and every house in danger of foreclosure instantly becomes a total loss you come up with a little less than 127 billion dollars. Keep in mind that this is the worst possible case in that most home foreclosures actually result in much lower losses after all the paperwork is done and the lawyers are paid. According to most estimates I have found the highest average is quote by Freddie Mac officials as 60,000 dollars. Using this number which is actually quite a bit higher than most estimates and multiplying it by 760,000 we come up with somewhat less than 46 billion dollars. In other words, if worse came to worse and every single home that was in danger of foreclosure in September of 2008 actually occurred all at once the industry would be looking at a 45.6 billion dollar loss. Remember, this is the worst case scenario and assumes that all these homes were foreclosed upon at once. Where did the 700 Billion dollar numbers that Paulsen and Bernanke were talking about come from? Clearly, there is something else going on that we aren’t discussing on a public level and I will get back to that in a later post but for now I just wanted to point out that if the foreclosure market was the problem we could have completely solved that with a 46 billion dollar injection into the market and I heard no one in power making that suggestion.

In my next post on this subject I will begin to explore the Community Reinvestment Act and how it supposedly led to the collapse of the housing bubble.

Drill baby, Drill!

Drill baby drill! The last presidential election this was one of the mantras of the imbecilic Sarah Palin who somehow managed to get on the ballet as the Republican Vice Presidential candidate. While hardly anyone mistakes Palin for an intelligent politician with actual ideas for how to solve some of our problems as a nation she is from Alaska where some of the biggest oil reserves that the US owns exist. Unfortunately, this reserve is now past its peak production and the supply curve on the way down is pretty steep. However, Alaska as a state has done very well with oil as a source of income with Alaskan citizens receiving a rebate check from the state every year from the profits that the State sees from oil drilling. Unfortunately, the rest of the nation doesn’t get one of those checks so the idea that more oil drilling in Alaska will somehow help the rest of us requires a suspension of the fact that oil reserves there are dwindling as well.

Behind Palin’s rhetoric is a growing number of conservative talk show hosts and politicians who seem to think that we can remove our dependence on foreign oil by simply drilling enough of it here to make up for it. Similar to most cures for our ills that the far right comes up with, it makes some sense in a very simple minded way. After all, if we own oil reserves why should we be buying oil from overseas? Let’s take a look at this in a little more detail and see if it actually makes any sense.

Oil, like any other commodity, is bought and sold in the market place according to the laws of supply and demand with few exceptions. In other words, the cost of finding, harvesting, and transporting the oil to the market all combine to make up the expense required in selling it. As long as all of these costs can be met and the product is sold a little higher than these costs a profit is made. These are the basic rules of any such market and since oil is bought and sold all over the world any oil that is harvested here is in direct competition with oil that is harvested anywhere else. The US is a large producer of oil but the fact of the matter is that we passed our peak production levels in the late 1960’s for the simple reason that oil reserves are not unlimited and we had by that time depleted the amount of oil in the existing wells. It isn’t a matter of simply drilling more wells as the oil reserves themselves are depleted. In other words, the oil we have remaining is harder to find, in smaller fields, and much more expensive to get out of the ground.

In the oil industry there is a term for the costs associated with oil production. “Lifting costs” include all of the costs associated with harvesting oil. These include buying the property the oil reserve is situated underneath, the exploration costs expended locating the oil in the first place, and the actual production costs of removing the oil from its reserve. As our supplies grow smaller and smaller the exploration costs grow in the opposite direction at roughly the same rate and oil in smaller fields is less economical to harvest. Since we have depleted all the reserves that are easily removed from the ground first, we are left with oil reserves that are technically more expensive to harvest. This has been the reality for many years in this country and it is not a picture that is getting rosier as time passes. The largest reserves the US has left are in offshore deposits. Over the last 20 years the US has been forced to turn to more expensive drilling projects on the ocean floor because it is where the vast majority of our remaining oil reserves are.

The world average for lifting costs is around 25 dollars a barrel. In the largest and most available oil reserves in the world in the middle east this number drops even more; to around 14 dollars a barrel. In the US in shallow water oil drilling the price is somewhere in the neighborhood of 40 dollars a barrel depending on the field, where it is and what kind of weather and climate conditions prevail. It isn’t hard to figure out that when we are spending 40 dollars a barrel it precludes the possibility of competing with someone who is spending 14 dollars a barrel unless they are taking a very large markup due to market conditions such as a shortage. This is the position that US oil companies have been in for quite a few years now which is exactly why they are not drilling enough wells to meet our demand; they can simply buy the oil cheaper than they can harvest it. This sounds bad but the situation is actually worse than what I have covered so far. Most of the shallow water offshore reservoirs have already peaked in production; they are now on the steep downside of the supply curve. This means that we are now looking at even steeper lifting costs to tap into the remaining reserves in deeper waters. Most estimates put these numbers in the 65-75 dollar a barrel range. This is the little secret that never enters into the political discussions wherein conservatives respond to alternate energy requests by insisting that we just need to release the oil companies to tap into our reserves. It is economically unfeasible and the oil companies know it.

Let’s look at the economical reality of the situation. The only way US oil companies can invest the large amounts of capital in specialized rigs and new technology drilling equipment needed to do more deep water drilling they have to either know the oil prices are going to stay at ranges around 90-100 dollars a barrel or else they are spending money harvesting a product they can’t make a profit selling. Any time the owners of larger and therefore cheaper oil reserves to harvest decide to flood the market with this oil the US companies heavily invested in expensive technologies to harvest deep water oil will take a huge loss and oil companies are fond of profit. Since the whole thing is an economic pariah it is worth taking notice who is pushing the argument that we should simply drill more and why.

Oil companies are like any other large bureaucratic entity; they are mainly interested in their own survival. Presently, the oil companies own the distribution of the energy source our country depends on. I won’t bother to explain why cornering the market on any commodity is profitable but I will point out that US oil companies have owned the energy market in this country for much of this century and they are not anxious to give it up now. Since they own or are leasing these deep water reservoirs which they bought with the understanding that their monopoly would continue, they are not willing to see it threatened from any quarter; whether it makes economic sense or not. Every time the government starts making noises about alternate energy and subsidizing infrastructure to make such ideas feasible the oil companies see this as a direct threat to these investments. Oil company lobbyist in Washington are pushing very hard for increased government support to subsidize the costs of deep water drilling, shale oil removal projects and other economically unfeasible ideas because any other alternative is a threat to their control of energy policy in this country.

Two things are key part to the oil company’s strategy; maintaining high demand and maintaining high prices. Without the high demand they can’t maintain the high prices and without the high prices they can’t even make the argument that higher lifting costs are in any way economically feasible. It is a little amazing that such supposed supporters of free markets don’t understand the logical fallacy of the position they are in. As prices go up demand decreases; it is one of the basic laws of economics. This has happened several times in the last few years in this country. When supposed shortages raised prices so high in 2008 people cut back on their consumption which is why the prices came back down. The oil companies can’t make the argument that more expensive technologies to harvest oil make any sense whatsoever if the demand for oil starts to dip which is why they are so adamantly opposed to alternative energy of any kind; it will necessarily lessen demand.

In short, energy policy in this country like most everything else is built around money. I won’t bother to go into environmental costs associated with these more expensive harvesting methods but as we saw this last summer in the Gulf they are not minor. The people who have the money set the policy and right now that is oil companies. Never mind that the reality of the situation is that an oil based energy policy is completely unsustainable. Never mind that this is true not only in the US but all over the world as well. Demand for energy is outpacing the world’s supply of oil and all signs are that the emergence of industrialization all over the world promises to increase this demand in the next century.

We are faced with a clear cut choice in this country. We can continue to support an industry that is doomed to inevitable failure because we simply don’t own the oil that we need for energy and it is getting more expensive in every possible way to get it; or we can use our resources to get ahead of the curve and be the leader in finding an alternative.

The US has been the leader in innovation for much of this century. It is amongst our greatest strengths as a nation, both technological and intellectual innovation. We are now faced with a clear cut choice as to whether we will squander everything we have worked for maintaining an industry doomed to inevitable collapse or find a better way. Reality is knocking at the door and no matter how many oil company lobbyists funnel money into congressmen’s pockets in Washington the message it has for us about our dependence on oil will be delivered.

The Energy Policy of Oil

It is always a little amazing to me to realize how little Americans understand about energy policy and how it is orchestrated in this country. The fact of the matter is that our country is in danger of becoming a third world country in terms of economic development and much of the reason for this fall can be traced to our energy policy. The rise of American power during and after WWII is closely related to the fact that we utilized and owned the most efficient energy source in the world at the time; Oil. It is worth remembering that our actual involvement in the war itself came about as a direct result of our energy policy.

In the early months of 1941 the United States was trying to steer clear of conflicts in Europe while at the same time keeping a wary eye on developments. At the same time Japan, still incensed over what it considered to be slights at the end of WWI, was steadily striving to increase its security in the Far East and the Pacific Rim. Japan had been one of the Allies during WWI but at the end of the war had initially been denied the gains that it had made in China and other areas of the Pacific Rim. When Japan threatened to walk out of talks with the Allies as they were dividing up the spoils of the war, Britain had intervened on her behalf. Still, the American contingent under Wilson was not happy with the whole scenario and steadily pressured Britain after the war to drop support for Japan as a partner. Japan saw American opposition as very threatening, more especially since Japan had earned the enmity of some powerful enemies in supporting the Allies in WWI. China and the Soviet Union were very close and very powerful in Japan’s eyes and without allied support as trading partners and suppliers of raw materials needed to keep building up their defensive powers Japan felt ever more exposed with each effort by Americans to isolate them.

Unlike the United States, Japan was wholly without the raw materials of steel and iron needed to build a navy or an army. It was also completely without the oil that it needed to keep its basic economy going without importing it from outside sources. American efforts to isolate Japan were seen by the Japanese as threats to its very existence and it reacted accordingly. As the rest of the world became enthralled with watching the exploits of Nazi Germany in Europe, Japan began expanding her borders and subsidizing her military buildup by colonizing the far east just as Western powers had done for much of the preceding century. Japan saw it not in the light of economic development but in the light of survival of their nation. As Japan began to invade Manchuria and then later China itself, the western powers became more concerned with Japanese ambitions. These concerns were sharpened further by the abject brutality of Japanese invasions which often included the wholesale slaughter of civilians.

By early 1941 relations with Japan had reached a crucial stage with Roosevelt and the American government determined to discourage further Japanese military expansion and Japan just as determined to continue what it considered to be tactics necessary for its survival as a nation. The American government decided to set up an embargo on industrial products that Japanese needed to continue their expansion. These included steel and other raw materials but even more critically, they included oil. The Japanese were dependent on foreign sources for fully 80% of their oil supply. This oil supply not only powered the Japanese military but also the whole Japanese economy. Without this critical oil supply the whole economy would collapse internally and Japan would no longer be able to feed or clothe its people.

Naturally, the Japanese reacted to this oil embargo with great alarm. They first tried to cut a deal with the American government. Japan offered to give up part of its expansion plans in return for American support of many of it conquests already achieved. With publicity of Japanese atrocities in the Pacific Rim and China getting more exposure daily these requests for compromise fell on deaf ears with the United State government insisting that all expansion activities cease as well as the return of lands the Japanese had already conquered. Facing the prospect of a total collapse and realizing that there was no compromise position that the US would agree to that would be palatable to the Japanese public the war hawks in Japan took over the government and began making plans of how to neutralize American power in the Pacific Rim until Japan could seize control of the supplies that it needed from the region.

Pearl Harbor was the almost inevitable result of this oil embargo. Japan had no delusion of being able to conquer the United States but it did believe it could cripple American power in the Pacific Rim long enough to seize control of the area and assure Japan’s access to oil and other raw materials it needed to survive. With the choice between collapse and war, Japan chose war and the United States was involuntarily dragged into the middle of WWII. With hindsight it is easy to see the chain of events that led to Japan attacking Pearl Harbor. In 1941 of course, this chain of events was much harder to see and very few people believed that events would lead to such an attack. However, it is without question that it was the Japanese need for oil that was at the core of the reasons for the attack. Japanese sources within the government at the time point this out repeatedly in their explanations for the attack. A country dependent upon foreign oil for its very survival will often be forced to make decisions that are antithetical to its basic moral views and the United States is no exception.

In 1940 the US was one of the main producers of oil in the industrial world. US oil companies operated in the world market with great freedom and the US still owned a large portion of the world’s known supply of oil. However, since that time with the exponential growth of the usage of oil for agricultural production and an industrial sector that was the envy of the rest of the world the US gradually used up its own supply of oil and began being more dependent on other sources of oil. Along with this change, smaller third world countries that had up to this point welcomed US expertise and US oil companies into partnerships to produce oil in their countries began taking over ownership of their own oil reserves. This is a pattern that repeated itself in South America, Indochina, and the Middle East with unerring accuracy.

By the late 1960’s the US found itself in the unenviable position of being the biggest consumer of oil while its own reserves were steadily being used up. By 1970 most US sources of oil were peaking in production with a sharp downside to the supply curve that spelled major economic problems for an economy completely dependent on oil for survival. While this was not unpredictable and the US had foreseen the necessity of maintaining a presence in the largest oil reserve area of the world after WWII, it soon became obvious that even minor disruptions in this supply would cause major upheavals in the US economy. The Oil Embargo of OPEC nations of the Middle East in the early seventies were a precursor to what the US government understood to be a deadly source of destruction for US economic concerns.

After WWII the Allied powers basically split up and reordered the landscape in the Middle East based upon their own individual needs for oil and the fact that this area of the world happened to be the largest known supply of the commodity. Almost all political decisions in the Middle East since that time have been based upon the underlying fact that western economies are dependent on a steady supply of these reserves of oil. The US found itself forced to deal with governments in the region that were both antithetical to our moral values and some of the worst violators of their own people that the world has ever seen. How else can one justify America’s undeniable support of regimes in Saudi Arabia, Iran, Iraq, Afghanistan, Jordan, Syria, and Egypt that were both brutal violators of basic human rights and at different times dangerous and tribal based aggressors in both internal and external wars that have consumed the area for much of the last seventy years. We have installed dictators, fomented wars, and supported brutality in the area since WWII that is as bad as has ever been seen on the planet. Even today, we lament the brutality of Saddam Hussein while forgetting that we helped put him in power to act as a buffer against radical Islamic groups in Iran. We support brutal dictatorships in Kuwait and Saudi Arabia who regularly fund terrorist organizations that mindlessly attack innocents all over the world. We rage against Iran for her own abuses while at the same time that we support governments in Jordan, Pakistan, and Egypt with equally appalling records of human right violations against their own people.

Any real accounting of the cost of this oil dependency has to include the military costs that we have expended in the region in 3 separate wars in the last 20 years. If we add the cost of these wars to the cost in dollars per gallon in oil that we import; is oil still the most efficient energy? I don’t understand why Americans would continue to insist that we have no energy alternative when faced with the real costs in military incursions and increased national security measures that became necessary after 9-11. We must remember that it was our need for oil that got us involved in the area to begin with. It is our need for oil that keeps us embroiled in political issues in the area that should be reprehensible to every American. Without oil we have no need to have a presence in Saudi Arabia, Iraq, Iran, or Afghanistan. Since we are the biggest consumer of oil in the world we have the ability to bring about the collapse of these regimes. We can easily remove their ability to afford war by simply removing ourselves from the equation. We cannot do away with demand for oil in the rest of the world but we can devastate the demand markets by simply finding other sources of energy; sources that don’t force us to support brutal dictatorships or tribal based hatreds.

All of this leads us to the place where I started this post. We are now in the same position that Japan found itself in previous to WWII. We are completely dependent on oil from foreign sources. The only difference is that we are dependent not upon the United States or Great Britain, we are dependent upon brutal regimes that we would not otherwise do business with for any amount of money. While we don’t import 80% of the oil that we use, we do import 55% of the oil that we use from outside sources. What that means of course is that we are extremely dependent on outside sources for the well being of our economy and that in itself should be enough to convince Americans that we need to find a better solution without even bringing up the fact that many of these outside sources are diametrically opposed to our moral viewpoints. There was a commercial on TV when the government was trying to drum up support for the war against terrorism that suggested that Americans buying drugs were inadvertently and indirectly supporting terrorism. A more accurate statement would be that Americans support terrorism by directly funding its sponsors every time we fill up our SUV at the gas pump.

Tea Party to the Rescue.....

I sometimes wonder if the Tea Party is more dangerous for the naive ignorance its supporters and candidates or the wholesale buying of elections that is currently underway by Corporate America under the guise of a grassroots movement. In either case it is abundantly clear that the Tea Party itself is actually a multi-headed organization that is being used as a tool to get out the vote for conservative ideas while at the same time disguising itself as a movement of the people. I am quite sure there are many people who are ardent supporters at the grass roots level but these people don’t even seem to realize who is pulling the strings and providing the money at the top. It is almost the perfect storm for political conservatives with the recent unfathomable ruling by the Supreme Court that corporations can take money from their operating coffers and put as much as they want into political campaigns aligning with this phantom movement that has no real leadership. I think we will see the results in the upcoming election in the form of even more corporate control of government policy which is after all the real goal to begin with.

While all of this is disturbing and somewhat depressing it isn’t exactly surprising. The recent economic collapse hurt a lot of mainstream Americans where they can feel it the most; in their pocketbook. It isn’t surprising that they would react with anger at the establishment that brought this about but it is a little surprising that these same people could be so naïve as to throw their support behind the party that caused it to happen in the first place through de-regulation of the banking industry and support of fiscal Ponzi schemes. Propaganda has always been a powerful tool and since Americans lost what was implicitly their ownership of the airwaves where most Americans get their news under the Telecommunications Act of 1996 without even noticing a takeover was in process it has become a reality in this country. No one should be surprised that the “Free Market” that news media outlets were clamoring for has turned into a monopoly since government regulations about who owns such outlets were abandoned. If you own all the media outlets you have a great deal of control over what kind of news they broadcast so there is little wonder that such a takeover was attempted but it is a little surprising that such an attempt was successful and it is even more surprising that more people don’t see the problems it is presently causing.

If that isn’t bad enough we now have evidence that TARP money that was given to financial concerns in this country is now being used to leverage political campaigns by these concerns. This would be comedic if it wasn’t so tragic. In other words, companies that CAUSED the economic collapse and were bailed out by taxpayers are now using taxpayer money to try to buy elections. I wonder how long after the elections it will be before they attack the recent regulations put in place to keep this from happening again. It doesn’t matter that the regulations themselves were toothless and didn’t go far enough to change the policies that caused the collapse; they are an irritant to the people who were stealing all the money and they will be done away with as soon as possible. Expect to see them high on the agenda of incoming Republicans.

In recent days as campaigns wind to a close we are seeing the effects of aligning ideals with fringe groups; groups that under normal circumstances are distanced from the central arena of political discourse. The Tea Party movement in its efforts to show numbers of supporters has done two things that are relatively dangerous in any political movement. They have heated up the rhetoric to a fever pitch while at the same time invoking imagery aimed at stirring up people’s anger at targets of their choosing. As a citizen of Alabama I am not a stranger to asinine and illogical fundamentalist religious rhetoric and its usage by corporate entities to support their real agenda but we are seeing it across the country this election and it is just as ugly there as it has always been here.

A candidate for the Senatorial seat in Alaska closely aligned with the Tea Party reacts to questions that bring into doubt his integrity by having para-military type private security forces handcuff a reporter and physically remove him from the event. It sounds strange but in reality it is even stranger than it sounds. The private security firm he hired, Drop Zone, is closely aligned with the Alaskan Militia which was founded by the Michigan Militia leader who was forced out of that state for his alignment with Timothy McVeigh of Oklahoma City fame. Miller, the candidate who hired Drop Zone, asserts that he was forced to hire private security because the function was on public property. Never mind that this excuse is complete and utter nonsense according to local officials, the hiring of Drop Zone actually corresponds with Miller’s decision that he is not going to answer any more personal questions for the remainder of the campaign. With his lead slipping in the polls and more and more evidence from his past coming to light that he is indeed nothing like he campaigns to be he decided that he just wasn’t going to answer such questions. It is his prerogative to decide what questions he will or will not answer but it is not his prerogative to decide to put people in handcuffs and physically remove them if they decide to ask them anyway. This is the same candidate who earlier responded to questions as to the veracity of the effectiveness of building a fence at the Mexican Border by responding that it worked pretty well in Berlin.

Perhaps he doesn’t understand the difference between keeping oppressed people in a country and keeping economically oppressed people out. In any case, he leaves out the fact that the wall itself didn’t keep people in Berlin, it was the machine guns and guards on top of it that were effective deterrents.

Mr. Miller's official response to the handcuffing incident was that the Drop Zone security people didn’t realize the man they handcuffed and restrained was a reporter. This leads one to believe that Mr. Miller believes such tactics would be acceptable if he was just a private citizen asking questions the candidate didn’t want to answer. While this would be perfectly acceptable behavior in East Germany where the wall Mr. Miller seems to have admired so much existed it isn’t acceptable in this country; at least not presently. That could all change after the Tea Party gets in power, especially if they continue to seek the support and muscle of groups like the Alaskan Militia.

Meanwhile, in Kentucky previous to a scheduled debate pitting the Tea Party candidate for Senate, Rand Paul, against his opponent there is a scuffle between a political activist from the Move on.org group and some of Mr. Paul’s supporters. It turns out that the activist was intent upon handing Mr. Paul a mock award for his achievement of vast economic support from corporate entities as he got out of his car at the event. Paul’s supporters, sensing something was up with the woman attempted to get the police to remove her from the scene. Unfortunately, the police officers happened to understand that the right to free speech trumps the innate sense of future embarrassment that Paul’s supporters seemed to possess so they declined to intervene. Maybe Paul’s supporters should have actually read one of those copies of the Constitution they are so proud of carrying in their back pockets before deciding to attack someone who might embarrass their candidate but that would assume they would take the time to read anything instead of letting Rush Limbaugh and Shaun Hannity pour half truths straight into their heads through their self anointed halos for many hours each day.

In any case, two of the more heroic Rand supporters ripped her wig off, forcibly tackled her and pinned her to the asphalt against the curb. Just to make sure she couldn’t utter something to embarass Mr. Paul while she was crammed into a fetal position with one man on top of her another man proceeded to put his foot on her neck and roughly stomp down on her. It was a perfect metaphor, the angry Tea Party advocate with his foot on the neck of someone with differing views. Unfortunately for Mr. Paul and his Tea Party supporters there happened to be a camera rolling at the time.

This is just the latest example of how Mr. Paul’s association with radical fringe elements has come around to embarrass him as there have been several others already. It is worth noting that the man who literally stomped on the woman to protect him from possible embarrassment is not exactly that much of a fringe element as far as Mr. Paul is concerned. He was in fact the head of Mr. Paul’s organizing committee in that part of Kentucky and a man Mr. Paul had proudly brandished the endorsement of previously. As it turns out, both he and the man who tackled the woman were senior officials in the Tea Party movement Mr. Paul is so proud to receive support from.

The man who infamously stomped the woman’s head into the concrete curb had several excuses for his actions. The first one was that he had tried to get the police to remove her before it “came to that.” Maybe he should have hired Drop Zone for security instead of trying to depend on the police who are actually familiar with the Constitution his party claims to be protecting. His second excuse was that it wasn’t as bad as it looked on camera and had a lot to do with the fact that he has a bad back. Presumably, if he hadn’t had a bad back he could have bent over far enough to punch her in the face or physically apply a gag in her mouth instead of having to rely on just stomping her head into the curb to keep her quiet.

Tribalism

I was recently visiting in Chicago and had occasion to spend several days in the city seeing the sites and enjoying the wide array of locally prepared ethnic foods. Chicago is an interesting place; a true melting pot of different ethnicities that still manages to retain a certain amount of personal hospitality. I have always found that the crowded conditions of larger cities tend to change people’s attitudes about their fellow human beings. One would be tempted to think that such constant up close interactions would lead to greater understanding and more empathy but that doesn’t always seem to be the case. As a matter of fact, it seems that in most cases the exact opposite happens and humans begin to take on the importance and status of inanimate objects, a kind of flowing scenery devoid of personal feeling of any kind. I have always been a little curious why this should be so.

What is it about our nature that makes us prone to dehumanizing each other? Perhaps we are like locusts, the continual contact and rubbing against each other maddening us and sending us into some kind of uncontrollable frenzy behavior. This may explain some of the violence historically associated with large crowds that turn into angry mobs but it hardly explains the paralyzing apathy that seems to manifest itself in big city dwellers. As we rode the public transportation system of buses and elevated trains I noticed something new in this scenario; the proliferations of electronic devices that allow people to create their own small environment separate from everyone else. It seems that everyone was either on their phone, texting, or listening to I-pods with earpieces. It is like imaginary walls erected quite purposefully. I am an avid people watcher but it is something that I have never put together until this recent trip; the dependence on electronic devices to separate us emotionally from our physical environment. Thinking back, I see the same things on airlines and in terminals. I always equated it to the rush and stress of airports and the inherent uncertainties of airline travel but maybe it is more basic to our nature; a need for isolation from the great mass of humanity we see all around us.

Having been raised in a rather rural environment, I am well aware of the negatives that isolation can tend to enforce. It is the contact with other people, other ideas, that stimulates our growth as human beings. In isolation our views tend to molder. Without the injection of different perspectives and the variety of different viewpoints we never really evolve at all but become petrified or fossilized in partial truths that are supported with the narcotics of religion and tribal laws of inclusion. Small communities bond into tribal type factions where belonging is both a necessity and an impediment to free thought. The relative value of this inclusion is inversely proportional to the amount of isolation the community enforces. It isn’t really a matter of deciding who belongs as much as it is a matter of deciding who does not. The power to exclude is both the source of comfort that sanctions malaise and mental laziness and the article of faith that isolated communities have been built upon since the first civilizations came into being.

The opposite of this form of civilization has always been the large city; a place where ideas and cultures are endlessly varied and vibrant. The melting pots where different nationalities, people from varied backgrounds and cultures come to co-exist and live beside each other as they go through their daily lives. Chicago is an interesting example of this type of melting pot. Small communities based upon ethnic origin have gradually evolved into mixing pots for all cultures. Each area is marked with both its ethnic origin and the unmistakable imprint many other cultures at the same time. It is more a group of small communities stacked upon top of each other than a large cosmopolitan city. I was surprised the first time I visited at the amount of hospitality evidenced by the people one meets on the street, in the local businesses and restaurants.

Unfortunately, the human tendency towards tribal behavior is very strong and even in large cities one will find examples of group identification that overrides all other factors. Gangs are probably that most perfect example of this phenomenon but there are many others less starkly evidenced but still existent. It is manifested in varying degrees all the way from corporate levels to the homeless; the reality that there is both the safety of inclusion and the power of exclusion for each that lead to all sorts of assumptions that shape our lives. I am curious how and more precisely why people who live so closely with each other still choose to isolate themselves by race, religion, or ethnicity. On the one hand there is more diversity and a wider range of influences that in rural areas yet on the other there is still this tendency to isolate ourselves and identify with a small subset of the larger group and exclude everyone else as less important; less human.

While in Chicago we were taking a train back to my daughter’s apartment after an agreeable dinner at a nice Italian restaurant downtown. It was around 8:30 or 9:00 when we got on the train so it wasn’t very crowded with our small party of three women and a man and maybe six or seven other people who were mostly involved in isolating themselves. As we got on the train I noticed most of the people were concentrating very hard on ignoring their surroundings and all seemed intent on maintaining their own self imposed electronic isolation. Then I noticed a guy sitting across from us who was drinking from a bottle in a brown paper bag. The train was rather noisy at the time so I couldn’t exactly hear what he was saying but he appeared to be singing out loud and very drunk at the same time. He looked to be Hispanic and was wearing nice dress slacks and a white chef’s shirt. He had a very short crew cut and several gang tattoos on display. He was generally trying to give the appearance of being a very rough person and succeeding admirably if that was his intent. He was also very drunk. As the train passed through a quieter section of tracks I could hear him ranting rather aimlessly, talking about God and how he knew what we were all doing and appearing to lecture everyone on the train about what God had in mind for them, slipping back and forth between English and Spanish and generally making an ass out of himself. It was an uncomfortable situation for everyone on the train except for him, who was rather oblivious to the fact that he was disturbing everyone else.

I noticed everyone else on the train doing their level best to ignore him completely; not a bad methodology in dealing with drunks who usually have a pretty short attention span to start with. My experience with alcohol and how it affects people is that they almost always become more and more self-centered the more they drink. It is a kind of tunnel vision wherein you not only don’t notice other people or their actions, they eventually become inconsequential in the increasingly primary theme of your own importance. I could tell he was close to this stage of becoming omnipotent in his own mind with no regard for anyone else. It was rather interesting to watch the other people on the train and their reactions to this one guy. It was kind of a group experiment in alternate reality where everyone is determined that if they don’t notice him, he really doesn’t exist. We had several stops to go through before we got to our stop so I settled in to the idea that we would just ignore him until we got off the train and watched the scenery out the windows as we rushed across the city.

At some point he took notice of our little group and alternately made comments that seemed rude or just curious but there were no overt actions taken and I continued to ignore him for the most part but my sense of caution was alerted and I was starting to get angry. It was the indignant kind of anger bred from disgust with the idea that a medium sized group of people were having their evening disturbed by one person’s drunken rudeness; the kind that grows with time. It wasn’t long before he was serenading a woman sitting on the front part of the car with what I assumed were some rather explicit lyrics in Spanish based upon the gestures that went with the lyrics in his performance. Preaching God’s terrible justice one minute and making lewd animalistic gestures the next is not a big leap for a drunk; it wasn’t the first time I had seen such mental gymnastics but it only added to my disgust with him and the situation in general.

My daughter’s friend got off at the next stop and as I hugged her and told her goodbye I could tell his focus was narrowing again as he eyed the empty seat next to my daughter. Sure enough as the train started again, he lurched across the aisle and leaned over to say something to her that I was quite sure none of us wanted to hear. By this time I had reached the limits of my patience. I grabbed his arm and told him he needed to get back on the other side of the train and he needed to do it NOW. I was trying to be calm but as the anger started to come out I could feel it swelling and growing in force and the “NOW” came out very loudly. I have struggled with a very bad temper for most of my life and I could feel it starting to gain control at that moment. It wasn’t a conscious decision but I immediately went from trying to articulate to wanting to explode, the way a tiny hole in a pressurized vessel will unleash explosive forces that instantaneously destroy everything in its path. I could feel it happening in slow motion and I no longer wanted to be rational, I wanted to feel his nose smash underneath my fist and I was going to enjoy it while it happened.

He was surprised. I could see it in his eyes which mine were locked onto now and there would be no more looking away.

“NOW” he asked? As if he couldn’t believe either the demand or the tone with which it was delivered but he saw it then. He saw the look in my eyes and suddenly he wasn’t the only thing the mattered in the world anymore. He was still drunk but he suddenly remembered there were other people in his world; he wasn’t the only one.
The whole incident died down after that. He didn’t exactly apologize but looked at me and said “God bless you” several times. I was still seething and not sure what would happen next but we got off the train without incident. Thinking back on it later, I don’t think he was afraid but suddenly saw me as part of his group, his species, and another viable human being who didn’t deserve to be treated with disrespect.

I wonder if we will ever get past our tribalism; the idea that OUR little group are to be treated differently from others. It seems to be so inherent in our species that we don’t even realize how much it affects everything we do. We enforce our separatism with all sorts of isolation techniques; religion, ethnicity, social status, geography, language, and even politics. As a species we seem to be extraordinarily and unhealthily focused on group dynamics and the power struggles that spring from separatism. Are we any closer to solving these problems with all out technological advancement or is technology in fact being utilized to widen and enforce separatism?

Can you hear that whistle?

I live in what is quite literally the edge of the Bible belt. For those of you unfamiliar with the term, the community where I live is dominantly conservative, protestant, and for lack of a better term; narrow minded. I often think of it as a literal belt cinched tightly around the general public’s windpipe to make sure that they don’t get any strange ideas about freedom of thought. Don’t get me wrong, I love living here and will always think of this as home. The climate, the mountains, the rivers and lakes, and the red clay itself are deeply attached to my very core. I have breathed this air and pulled nourishment from the earth itself since I was very small and it is so ingrained in me that I miss it when I am gone for very long. I feel it when I dig in the earth and smell it in the vegetables in my garden. There is a connection… deep, innate, and unbreakable. I love the generosity of the people, the kindness to strangers, and the general feeling of hospitality that is so much a part of people’s character here in the south. Unfortunately, all of this is offset by a dogmatic attachment to fundamental religion and cultural bias that is stark and ignorant at the same time. It takes a while to see it if you live here; it isn’t necessarily obvious or easy to detect. It is just below the surface and carefully out of sight, like an ugly wart carefully disguised or a rumor of a crazy brother that the family keeps hidden in the root cellar to avoid embarrassment.

I stumble on it every so often in conversations with locals who recognize me as an insider, a local product of this environment. There isn’t a secret handshake or any concrete methodology for this recognition. It is more of a nuance of dialect that the practiced ear can hear or a recognition of phrasing configured in just such a way in normal conversation but we locals usually recognize each other after a few moments of conversation. I dread those moments at times because the flash of open honesty that it often inspires uncovers the ugly ignorance that is at bottom of what I detest most about religion; the idea that there are unspoken truths in the world that we can never get past.

These are the truths of the inherited chosen people, the indelible imprint of an undeserved superiority complex based upon race, or sexual preference, and a dogmatic belief in a set of books written by a nomadic tribe thousands of years ago. These books tell us how it will all turn out in the end and how we are supposed to get from here to there. They are necessarily biased and based upon the ignorance of their authors so many years ago no matter how we try to dress them up and explain this away with convoluted justifications. They were the chosen people. Chosen by the greatest God as his favorites and the inheritors of his bounty provided they follow the rules he set down. We are their progeny, the rightful heirs to this same bounty and we KNOW this is true because the Bible tells us so. This is the ugly truth at bottom of our belief system here in the Bible belt. We don’t spread it around like cordial candy; it isn’t fit consumption for everyone else and will only cause discontent and problems. However, amongst the chosen people, comfortably ensconced with our own kind, it flows effortlessly and freely amongst us. Don’t throw pearls before the swine…. they will only get indigestion from trying to eat them. It is always there, always in the background guiding our path like a dog whistle that only we can hear or a light beam in a frequency spectrum that only we can see.

I can’t begin to describe how disgusting this point of view is to me. In point of fact it is only preserved by keeping it hidden. It can’t stand the light of open scrutiny or logical conversation so we keep it buried in the basement of our silence; a crippling mental deformity that we convince ourselves is a badge of honor. Our belief in it is inversely related to our understanding of the world around us; the less we know the tighter we hold to its tenets. The more we read and understand about the world around us the weaker its hold upon us. It has been this way since the first religion’s inception in human society and it will remain this way until we throw the idea behind it out like the rotting cancer that it is. Religion is a mortal enemy of human knowledge and understanding because its power over us is based upon and rooted in our own ignorance.

Suppose we woke up tomorrow and realized we are all one people, that there are no “chosen” ones. Suppose we understood we are not meant to all be the same; that it might be a good thing that we are all different. Suppose we understood there is no Armageddon coming; that the forces of “good” and “evil” are simply different aspects of our own personalities. Would the world be on the same path it is today? Is it possible that we could get past this exceedingly silly and simple minded notion that there is a God somewhere ready to destroy the earth over who lives in Jerusalem? Could we begin to understand that we are all the same? Occasionally, I have these thoughts. I think we might actually be able to overcome the biased ignorant notions of a wandering tribe thousands of years ago and then I wake up to reality and remember I am in Alabama.

I recently heard a campaign commercial for one of our gubernatorial candidates wherein he was ridiculing the fact that the other candidate might have suggested that “there are parts of the Bible that aren’t true”. Imagine that if you will. It was a carefully targeted and accurate slam against the reasonableness of such a statement. Inherent in this commercial was the same knowing smile, the same flash of recognition that I was describing earlier. Obviously, anyone that could make such a statement can’t be “one of us” and can’t be fit to represent us in office. Some people don’t understand that this is a state wherein people born outside of the county they live in are considered foreigners. The ad was effective enough to draw a rebuttal from the candidate accused of making the statement. He recognized he was in danger of being cast out as a member and nothing is quite so important to the members as the ability to decide who doesn’t belong.

Redistribution of Wealth Part II

One of the unintended or unforeseen circumstances of lowering the tax rates so drastically on the upper income levels was the astronomical increase in compensation that CEO’s of large corporations set aside for themselves. In 1980 the average CEO made some 1.4 million dollars a year. In 2008 that number was up some 743% to 11.8 million. Much of this increase was in the form of stock dividends that were not taxable so between that and the lower income tax rates virtually none of this increase showed up in governmental tax coffers. During this same time period the average worker’s income increased less than 5% and if adjusted for inflation it fell dramatically. Throughout the 1960’s and 1970’s the ratio between CEO and average median income of worker was some 44-1. In other words if the average worker made ten dollars an hour the average CEO made 440 dollars an hour or $17,600 a week. It is of course questionable if there is a 44-1 ratio in effectiveness as far as profit is concerned but we will leave that be for the time being. In 2001 the ratio was 525-1. Using the same math if the average worker makes 10 dollars an hour that means the average CEO makes 5250 dollars an hour or $210,000 a week. This is a difference of some $209,600 a week between what the average worker makes and what the CEO of the company makes. I would defy anyone to explain how this is cost effective. Judging from the number of corporate collapses we see all around the country today we might be better off to put the median average employee in charge of the corporations and triple his pay. We could immediately cut a huge amount of overhead while probably losing little in the way of expertise.

One of the reasons the rich are getting richer is our government’s overweening concern with the stock market and financial institutions. The recent bailout of the whole financial system with taxpayer and Federal Reserve money is a case in point. Many Americans are now invested in the stocks and bond markets through their 401 K policies which are most Americans sole source of savings outside of the equity in their homes. Therefore it seems reasonable that the government should be concerned with such problems as it affects a large number of citizens when collapses occur. It is worth looking at the actual numbers here in order to see if this is truly a widespread problem or not. The top 1% of wealthiest Americans own 46% of all the stocks and mutual funds in this country. The next 9% of wealthiest Americans own the next 33% of all the stocks and mutual funds in this country. In other words the top 10% of the wealthiest Americans own 79% of the stocks and mutual funds traded in this country. Think about that the next time we have a financial collapse that threatens our economy. Who is actually getting bailed out with massive injections of taxpayer money and unending Federal Reserve loans made with dollars created out of thin air?

Where are most American’s savings? Most Americans have the vast majority of their savings invested in their homes. 66% of Americans have virtually all of their savings in their principal residence. The top 1% wealthiest Americans have some 7% of their savings in their principal residence while the rest of the top 10% wealthiest Americans have around 17% of their savings in this same principal residence. This means that when housing prices drop some 20% as most have done in the last two years most Americans see 20% of their savings disappear while the richest Americans see theirs fall only about 1.4%. Bearing this in mind it is a little hard to explain why the government is bailing out financial institutions and letting homeowners not only eat the loss of equity but pay for the bailouts with their tax money. Most middle class Americans are caught in this squeeze and don’t even recognize its source. A recent study estimated that the total debt in this country is overwhelmingly absorbed in the middle class. The top 10% of wealthiest Americans owe some 29% of the total debt while the lower 90% owe 71% of it. If we break this down even further we see that the lower 35% of earners actually owe very little of this debt so what it really amounts to is that the middle 45% of earners in this country owe 70% of the debt. We have become a nation owned and controlled by bankers and corporations. It isn’t hard to see how they have managed to buy control of the government but it is amazing to me who they have managed to do it with the support of much of the same working class that is bearing the brunt of the loss of income and buying power. The same middle class that is losing their ability to exist and turning to higher ratios of debt to survive is the base of the Republican Party that has orchestrated this whole fiasco with their deregulation of financial institutions and worship of the almighty corporation.

In my recent reading of Adam Smith’s Wealth of Nations I found an interesting section concerning the relative interests of classes of people and how they correspond to government. We must remember that Smith’s book is the bible of free traders. It is often quoted and used extensively in support of the free market philosophy that Reagan supposedly espoused. Unfortunately, free markets in this country disappeared a long time ago and have been replaced with monopolies that pull the strings that run everything; but that is a discussion for a later post. Let me get back to what Smith wrote. At the end of Book I Smith is discussing the three basic classes of people who make up civilized societies. He breaks them down as follows; those who own land and make their money from rent, those who make their living off of wages, and those who make their money off of profit from investment. Smith goes on to explain that both of the first two classes interests are always tied directly to the interest of society as a whole; that what is good for these two classes of people is always good for society at large. He explains that laborers prosper most when demand for their labor is highest as in the economy is growing such that there is more demand than there is labor. He further explains that renters prosper most when there is demand for their property; as in the economy is growing and there is more demand than there is property. It is basic common sense really but both of these two classes of people have their interest intertwined with the common well being of the community at large. One can carry this analogy a little further and suggest that these two classes of people would make the best elected leaders as their interests are aligned with the interests of society at large. Looking back one can see that these two classes of people were always the source of our best leaders since the founding of this country, no doubt in large part because their personal interests were seldom divergent from the interest of the people at large.

Smith then goes on to warn against the influence of the third class of people; those who make their money from profit. Smith defines these people as Merchants and Master Manufacturers. In his day these were a very narrow and small class but extremely wealthy. I cannot imagine what he would think of their progeny in our world today. Corporate leaders who control the vast majority of income and wealth in this country and now control the government as well. However, let me get back to what Smith wrote about this class in his time:

Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of society, their judgment, even when given the greatest candor (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter. Their superiority over the country gentlemen is not so much in the knowledge of the public interest, as in their better knowledge of their own interest than he has of his. It is by superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest of that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Amazingly prescient was Mr. Smith. Of the three classes of people that make up civilized society there is one that has interests opposed to those of the public according to Mr. Smith. He warns that we should be exceedingly careful in dealing with this class of people for this very reason. I would suggest that he is exactly right. I would also suggest that we have ignored this advice to our peril. We now elect them to office and expect them to rule according to the interest of the public without recognizing it is against their very nature to do so. There is an old saying that you should never put a fox in charge of a henhouse. I would suggest that you also should not put anyone who works for a fox in charge of a henhouse. The next time you hear some Republican or conservative foaming at the mouth and warning against the dangers of the redistribution of wealth I hope you will remember that it has already happened in a clear cut and concise way. The best we can hope for now is a recognition of the fact and a slow, grinding effort to get back to equilibrium. Until that happens we will continue to see the destruction of our economy and the disappearance of the middle class while the class Mr. Smith warned us against continues to accumulate all the wealth and power in this country at our expense.

Redistribution of Wealth Part 1

As a somewhat reluctant follower of the talk radio I have noticed this phrase getting a lot more usage in the last couple of years. It is usually tied to some sort of diabolical socialist plot to take money out of the working man’s pocket and give it to a lazy, shiftless group of people who do not work. Supposedly, there is a vast group of people in this country standing around with their hands out waiting on the Democratic Party to send them a check. I suppose this can be traced all the way back to Reagan’s fanciful “welfare queen” that he created from whole cloth as a sort of symbol of encroaching ruin for the country. Even though the people that Reagan spun parables about did not actually exist, they were a caricature that he was able to make stick. Reagan, like all demagogic types, understood that people didn’t want to hear about real problems that might be associated with their own actions. People understood there was a problem. They could see it all around them in unemployment, high interest rates, and a stagnant general economy and Reagan simply gave them a straw man to blame it on. Big government was robbing them to pay people who didn’t want to work. Reagan suggested that cutting taxes would allow people to reinvest their own money in the economy rather than give it to the government who would inevitably waste it. Reaganomics was an idea born of the idea that the American public is basically ignorant of economics in general. Since it was such a successful propaganda tool for Reagan it has since come to be the mantra of the right wing conservatives everywhere in one form or the other. Maybe we should take time to look at how it actually worked out now that we have about 30 years of experience with this philosophy.

The basic philosophy of Reaganomics is that a rising tide floats all boats. In other words, the investment dollars of the rich go directly into creating jobs instead of going to the federal government in the form of taxes. This is underlined with the oft repeated “proofs” that the government will just waste your money anyway; usually with the insinuation that this waste will be in the form of giveaways to people who are basically too lazy to work. Reagan made an art form out of this description and repeated it so often and so persuasively that people began to believe it. It is now accepted fact in almost all right wing conservative movements; the basic core that most of their system is built around. In Reaganomics the cutting of taxes for the rich allows them to invest in the economy and create jobs. As more jobs are created everyone benefits; hence the rising tide analogy. It sounds like basic common sense which is exactly why it is so widely believed.

When Reagan ran for President in 1980 against Jimmy Carter there could hardly have been a wider divergence in their relative beliefs about the American system. Carter was suggesting that Americans should tighten their belts, cut down their thermostats, and be responsible for helping the country pull itself out of the recession that we were all in together. Reagan suggested that the recession and most of our other problems were the direct result of big government. In other words, it wasn’t our fault so why should we suffer for it? He needed a scapegoat of course and he found it in the “welfare queens” who were draining all of our hard earned tax money out of the economy. Everyone could see there was a problem with such systems wherein several generations of families were living off the government dole but Reagan took it to new heights. It was a fitting symbol of the disaster that was the government according to Ronald Reagan. His solution was to cut government spending while at the same time cutting taxes to increase investment.

Reagan won the election and immediately set about implementing his program. The interesting thing about Reagan was that he was a pragmatist first, a conservative second. In other words, he had no problem saying one thing and doing another, it had been his mode of operations for as long as he had been in politics. He did initially cut taxes but raised them numerous times afterwards. The first tax cuts were not very successful at stimulating the economy as unemployment went up after they were enacted. What did stimulate the economy was a massive increase in federal spending through the military and the industrial complex that Eisenhower has warned the country about as he left office. In other words, Reagan’s “miraculous” economic recovery was simply a matter of pouring federal money into defense programs; money that we didn’t have to spend. The national debt when Reagan took office was a little less than 2 trillion dollars. It had been at roughly this same rate since 1945 when adjusted for inflation. By the time Reagan left office in 1988 it was a little over 4 trillion. Reagan more than doubled the national debt in 8 years when it had remained virtually the same for the previous 35 years. The massive buildup for World War II cost a little over a trillion dollars to our national debt yet Reagan and his economic plan cost 2 trillion and we were not fighting a war. Reagan coined the phrase that “government is not the solution; government is the problem” during his run for governor of California in the last sixties. He sold Americans on the idea that he would cut the government but he actually more than doubled the cost of government in just 8 years.

Unfortunately, Reagan proved to politicians everywhere that the truth doesn’t matter; what really matters is how you spin it and what you make people believe. He started a massive upward spiral in government spending that hasn’t stopped yet. In the ensuing 17 years after he left office the federal deficit grew to an astonishing 9 trillion dollars as politicians spent like drunken sailors while espousing the same principals. The key to getting elected it seems is to guarantee the economy is booming and politicians from Bush Sr. to Bush Jr. learned this lesson well. There was a brief downturn in federal spending under Clinton but it was quickly curtailed when the economy started to droop again. Vice President Cheney in a moment of rare clarity pointed out that “Reagan proved that deficits don’t matter” when questioned about it during Bush Junior‘s last term in office. It is a little ironic that the man who was elected on the promise of reducing government actually started a trend in government spending that led directly to a five-fold increase in government deficits over the next 25 years and led directly to the economic collapse the we are experiencing today but I will go into that in a later post. For the moment I would like to concentrate on what the other result of Reaganomics wound up being; the drastic redistribution of wealth in this country from the middle class to the very wealthiest amongst Americans.

Reagan’s basic premise was that by reducing taxes on the wealthy they would invest that money in the economy which would lead to more jobs; thus the infamous “trickle down” theory that one still hears bandied about by those with no understanding of economics. By cutting taxes on the very rich Reagan did two things; he increased the deficit by cutting the amount of money the government took in and he increased the wealth of the wealthiest Americans drastically. You might ask yourself how this happened but it was really a very simple two pronged approach. First, cutting taxes on the wealthy was not simply a matter of cutting income tax it included Estate taxes, and all manner of taxes on accumulated wealth. All the tax cuts since the 1980’s have favored the wealthiest American’s and corporations. Second, the massive federal spending into military and defense corporations wound up stimulating the stock market into frenzy and as I will show a little later, it is overwhelmingly the richest Americans who own stocks and bonds.

Let’s start with income taxes on the richest Americans. Reaganomics says that dropping these taxes increases economic activity. The truth is that in a period from 1940 to 1970 during which the United States saw the greatest increase in economic power ever seen on this planet the income tax rate on the top earners in the United States stayed steady at 70%. During a period of unprecedented growth and economic prosperity that has not been equaled before or since, a period that saw massive growth of infrastructure, schools, electrical grids, highway systems, and nearly every other indices of governmental performance the income tax rate for the highest earners was always above 70%. This was also a period during which dividends from stocks and bonds were taxed at the same rate as all other income, unlike today when it is not taxed in many cases, yet we saw continuous and massive economic growth. In the period since Reagan taxes on the highest income brackets have fell to less than 30% and there are numerous loopholes that allow dividends to be ignored in this accounting. Most estimates of the actual income tax rate that winds up being paid into the system by the wealthiest Americans are now around 17%. Warren Buffet pointed this out in an interview with Tom Brokaw in 2007 when he admitted that he paid tax on only some $97,000 of his 66 million dollar income. Buffet contrasted this with the average member of his staff how paid some 39% of their total income on combined taxes that same year. If Reagan was right we should be in the midst of the greatest economic boom in history. Unfortunately, what we are actually seeing is a wasting away of the infrastructure that was built in this country from 1940- 1970. Electrical grids, schools, roads, and almost every system that the government supports are in a state of collapse these days. The only government sponsored activity that seems to be doing well is the military industrial complex but I guess a 6 trillion dollar increase in the deficit would be nearly impossible to blow without having something to show for it.

Obviously, the cuts in taxes should be stimulating the economy and increasing productivity if Reagan was right. This should have “trickled down” to all of us by now but it seems there is a flaw in the plan. The rich are definitely getting richer but for some reason it doesn’t seem to be trickling down. Between 1947 and 1973 both worker productivity and worker median income doubled. From 1980 to 2005 worker productivity increased some 70% while worker median income increased 19%. This seems impossible until one finds that during this same period from 1980 to 2005 the top 1% of wealthiest Americans increased their percentage of the total income produced in this country from 8.2% to 17.4%. Favorable tax rates on both income and wealth and the massive fluctuations in the stock markets are the simplest explanations. The top 1% of wealthiest Americans owned some 23% of the total wealth in this country in 1979. Today they own around 43% of the total wealth in the country. This isn’t the whole story unfortunately. Not only have income taxes for the very rich dropped but estate taxes and capital gains taxes have fallen drastically as well. As a matter of fact the federal tax burden has shifted dramatically since 1980 with the percentage of tax revenues actually being collected shifting dramatically towards payroll taxes. Since 1980 the payroll tax burden has risen 25% as a share of total tax income. During this same period the percentage of tax revenue generated by capital gains tax on investments has fallen 31% and the percentage of tax revenue generated by estate taxes has fallen 46%. There has been a massive redistribution of wealth in the last 30 years but it isn’t going from tax payers to the indigent; it is going from taxpayers to the wealthiest Americans. Instead of “trickle down” economics what we actually have is “sucking up” economics. It is as if there is a giant vacuum at the top pulling everything that way.

The truth of the matter is that Reagan as president was the same thing he had been before; an unemployed actor who worked as a shill for corporate America. According to studies by the World Institute for Development Economics Research what we have actually seen in the last 30 years is a massive concentration of wealth and earning power in large corporations. Over 40% of the GNP of the United States comes from 500 largest conglomerates in the country. According to studies recently released by this group these companies control over two thirds of total American business sources, employ two thirds of the industrial workers in this country, account for 60% of total sales and collect over 70% of total profits. In 1955 corporate tax income paid some 33% of the total taxes taken in by the Federal Government. In 2007 this number had decreased to 14%. In other words, entities that gobble up 70% of the total profits made in this country pay in 14% of the taxes. No wonder corporate America deifies Ronald Reagan. One can hardly imagine a more favorable climate for corporate growth than such a system yet we are still on the verge of economic collapse in this country.