Economics: Repeating Rhymes

by John on February 13, 2012

 Harpers Weekly,  1871

As Mark Twain famously didn’t say: “History may not repeat itself, but it certainly rhymes.”  There is something unfortunately close to doggerel here, when considering the nostrum that tax cuts and bailing out the wealthy improves the economy. Reviewing the Bush tax cuts and the current Republican candidate’s positions, recall Treasury Secretary Andrew Mellon’s policies prior to the Great Depression. Not only did Mellon, then one of America’s riches men, cut the maximum individual tax rate from 77 to 25 percent, but he also cut corporate taxes. He then engaged in an extraordinary program of refunds, rebates and remissions totaling another $6 billion (in 1930 dollars) during his nine years in office. To top it off, he proposed “replacing the lost revenues with a regressive national sales tax on all articles of retail trade”.

As the Depression began, Mellon stated: “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High cost of living and high living will come down. People will work harder, live a more moral life.” (1)  If this doesn’t rhyme with Bush’s tax cuts and Romney’s position on not bailing out GM and letting the housing market continue to fail, what does? In Mellon’s favor, he believed that earned income should be taxed at a lower rate than capital gains, a far cry from the current carry-tax breaks for private equity. But this is all mere doggerel compared to the epic poem of the successive decline of the three main financial empires that preceded the U.S: Spain, Holland and England, who all repeated essentially the same stanzas of economic rise and fall, none learning from its predecessor.

Each country became, in turn, the world financial center. In the early 1500s, Spain became the world’s leading economic force as New World gold and silver flooded into their economy, creating an empire under Charles V that stretched from Antwerp, in the Lowlands, all the way to Italy. But by  the 1580s the largest segment of Spanish industry, textiles, had peaked. Industry continued to decline as capital fled for investments in the debt instruments of an increasingly profligate monarchy, creating a financial market focused on money at interest, and rents. The financial commentators of the time noticed.  Writing in 1600, Gonzalo de Cellorigo,  observed “an extreme concentration of rich and poor and there is no means of adjusting them one to another. Our condition is one in which we have rich who loll at ease, or poor who beg and we lack people of the middling sort, whom neither wealth or poverty prevents from pursuing the rightful form of business enjoined by natural law.” (2)

The Thirty Years War finally put paid to Spanish ascendancy, along with the expulsion of Protestants from the Spanish Netherlands, with many of the merchants and skilled craftsmen fleeing north to Amsterdam. By 1600, the Dutch soon had the largest merchant fleet and developed a significant technological edge in many industries, especially ship-building, textiles and specialized manufacture, as well as developing the precursor to modern banking. They held an edge from the 1600s to the late 1700s, when once again capital fled industry for the financial sector. Stunningly, much of that capital was invested in the next emerging financial empire, England. At their peak, the wealthy of Holland owned one quarter of England’s public debt, along with one third of the shares of the Bank of England and the British East India Company, while their manufacturing mostly peaked in the 1720s. Earlier, travelers had commented on the wealth of the Dutch middle class, but in 1764, English writer James Boswell noted: ”Most of their principal towns are sadly decayed, and instead of finding every mortal employed, you meet with multitudes of poor creatures who are starving in idleness.” (3)

England followed almost exactly the same path as Spain and Holland, with the rise of trade and the Industrial Revolution, an increasingly wealthy middle class and the celebration of manufacturing by the early Victorians, followed by the rise of the financial sector and investments abroad from the Argentine to Australia and America. As in Holland, capital fled England’s productive economy. Yet, like the Dutch, the British claimed that the substantial income from their global investments would offset the decline in Britain’s internal economy, with its ever-growing wage inequality. By the late Victorian age, lack of investment had rendered much of England’s manufacturing economy obsolescent. Yet the share of wealth of the top one percent continued to increase to 69% while, at the same time, Britain’s share of world manufacturing declined from 32% in 1870 to 15% in 1910. During this period, the U.S. share of manufacturing rose from 23% to 35% as America started the same historical cycle all over again.

Romney, Gingrich and Santorum are beyond intellectual redemption with their pandering and pimping in an attempt to procure the Republican base, and the 4th estate is never going to insist that they answer difficult fundamental questions.   However, for pundits such as David Brooks and those who call for moral rectitude and other nostrums to save us by restoring American exceptionalism, consider the preceding brief economic history. Then, with the current levels of inequality in an America that assigns up to 40% of corporate profits to the financial sector, look at Neil Degrasse Tyson’s excellent video graphic (4) on the decline of U.S. science .   Next, please explain, to borrow the title from Carmen and Rogoff’s excellent book on eight centuries of financial crisis, why ‘This Time is Different.’

 

Notes:   There’s nothing really new in this piece, and even the sources have been used repeatedly in both the academic and popular press.  What is really depressing is that they are so readily available, yet we get so little historical context in the current economic debates.   I’ve just listed the main sources with some comments.

1. Hoover, The Memoirs of Herbert Hoover. Vol.III  (McMillan 1952)  p. 30.  This quote fromHover’s Memoirs can be found on-line in the original McMillan version at: http://www.ecommcode.com/hoover/ebooks/displayPage.cfm?BookID=B1&VolumeID=B1V3&PageID=41 and it is very informative to read it in the context of Hoover’s views at the time, and how they were influenced by Mellon.

2. Elliot, Imperial Spain, 1479-1716. (Penguin, 1970)  p. 310  The full  quote, well worth reading,  is available on-line at:  http://www.amazon.com/Imperial-Spain-1469-1716-J-Elliott/dp/0141007036 if you ‘search inside the book for ‘arbitristas’

3.  Boswell’s comments regarding Holland in his letter of 17 June 1764, to Temple are most instructive. “Utrecht is mostly ruined….” It’s on line with a little scrolling to page 288 at: http://www.archive.org/stream/boswellinholland027081mbp/boswellinholland02

4.  Recorded 2011/05/12 during Tyson’s lecture at the University of Washington entitled “Adventures of an Astrophysicist” http://www.youtube.com/watch?v=NXIR9ve0JU0

0 comments

The Tea Party Gets it Right (Well…sort of….)

by John on September 8, 2011

 

  Photo credit: Reuters/Brian Snyder

 

Much is correct in the Tea Party’s position, but it lacks historical perspective. To clarify, consider the name of Wilkes-Barre, the Pennsylvania town, founded 1769. The name comes not from its founders but rather honors two men who fiercely supported the rights of Americans (who were then Englishmen) in Parliament. Col. Barre was a hero of the French and Indian Wars in which one Lt. Col George Washington also played a significant role leading government intervention to protect the settlers along the frontier from raids by the Indians and French. As a Member of Parliament, Barre delivered a rousing but unsuccessful speech against the Townsend Acts, recorded in a February 11, 1765 letter from a colonial representative in London to Thomas Fitch, former governor of the Connecticut Colony. In his speech, Barre described the colonials as “Sons of Liberty,” a name the colonials readily adopted.

John Wilkes campaigned against the fact that over half of Parliamentary Seats came from ‘rotten boroughs,’ where landed gentry so controlled them that they were often bought, sold or given to family and supporters. Wilkes was elected to Parliament, expelled by the powers that be, and ran again, only to have the government disqualify his votes. People rioted in the streets of London, crying “Wilkes and Liberty,” which became a toast from New England to South Carolina. His dismissal was reversed and he became an even stronger advocate of liberty and personal rights, both in England and America. Usurprisingly, the colonials he had supported against the British ruling classes honored him and Barre by naming their town after them. It also shows us where the current Tea Party has gone badly astray.

History lets us define what would become the roots of American Independence, not as the colonials versus England but as a shared battle for the common man’s rights against a corrupt and, as it turned out, incompetent British ruling class. The aforementioned Townsend Acts were an example, designed primarily to raise revenues and make colonial administrators and judges beholden to the Crown, not the colonists. The Acts attempted to establish the right to tax the colonies, though the law clearly held that British subjects could not be taxed without permission of their Parliamentary representatives. This stupidity led directly to the Boston Massacre of 1770. Townsend, then Chancellor of the Exchequer, needed revenues because Parliament had voted a huge tax cut for the wealthy, reducing their Land Tax—a principal source of income—by 30%. Things were becoming startlingly similar to present-day America.

The American colonists were not the only victims of the resulting deficit caused by tax cuts for the wealthy. England’s common man was also preyed upon. Parliament imposed a cider tax, enacting laws that let revenue agents  enter any establishment where they thought cider might be sold or made. William Pitt, whose House of Lords arguments led to the law’s repeal, thundering against this invasion of liberty with his famous reaffirmation of the law, first established in 1628, that an Englishman’s home is his castle (right: Pittsburgh is named after him). The colonials, subject to invasive measures similar to the cider tax, had—according to Wilkes, Barre, Pitt, and many others in England—the identical rights of representation.

Another direct parallel with the present caused the 1773 Tea Party. England had its own ‘Too-big- to-fail’ financial behemoth, the British East India Company, with its own navy and an army in India, so closely tied to the Government as to be almost indistinguishable. It accounted for a significant percentage of London traders’ and financial firms’ income, not to mention incomes of Members of Parliament and the House of Lords, who held much of its stock.  History repeats. As with all such endeavors, the East India Company had got itself in trouble. To insure that the company could pay its dividend to its wealthy shareholders, it received a massive tax ‘refund’ on the tea it already owned. This should have enabled it to undercut the tea market in Boston and elsewhere for a huge profit, harming many New England merchants.  The British elite bailed out their financial sector while harming main street, just as today.  Dumping the tea into Boston harbor prevented immediate damage, but independence was clearly the only permanent solution.

In the run-up to the American Revolution, the colonists may have been unruly but—vs. the modern Tea Party—acted in their own considered self-interest. Such is not the case today, as the Tea Party supports candidates who deny science, economic reality and a common sense of fairness.  They caused the election of people like Walker in Wisconsin and Kasich in Ohio, who turn around and try to take away the very freedoms that the colonials so cherished, and invoke the great names from American history (not Reagan) as supposed supporters of their cause.  Such behaviour would have sorely puzzled the founding fathers. Leaders like Franklin and Jefferson were active in the Enlightenment, seeing the value of science and logical reasoning, a capability also lacking in much of the modern Tea Party movement. They would also have puzzled at the lack of cogent understanding of trade, taxation and technology, but in all fairness, that weakness is endemic to far too much of our elected ‘leadership’.

I wonder what questions Jefferson and Franklin would have asked the man in the illustration about his cell-phone technology vs. his yearnings for an ahistoric past, not to mention that large bus in the background that apparently spends so much time traveling on the federal interstate highway system, built by the government that they founded.  One can only hope that  the Tea Partiers, riding in their slogan laden busses which were no doubt funded by the Koch brothers and their ilk, hit enough potholes in our decaying infrastructure to jar them into turning down the path that leads to the common good and shared freedoms, as the founding fathers intended.

Creative Commons Attribution 3.0 Unported This work is licensed under a Creative Commons Attribution 3.0 Unported.

1 comment

Dam the Economists!

August 17, 2011

  John Cochrane, meet the Hoover Dam I wonder if some economists, like some meteorologists, ever look out the window at the real world. Most of the time, there’s a lot of saltwater-vs.-freshwater-school-of-economics sniping going on, especially in the current crisis. Not much practical work is being done and the Chicago/freshwater economist folks are particularly [...]

Read the full article →

Republicans raise taxes, increase spending and create thousands of jobs

June 13, 2011

I’m going to turn over most of this commentary to President Reagan.    I’d previously suggested that we need a government agency to protect historical integrity, but many members of Congress have gone too far in their obsession with deficits with total disregard for job creation, let alone maintaining national infrastructure.   In the current [...]

Read the full article →

The Light in Rand Paul’s Bathroom

April 16, 2011

At a recent Department of Energy hearing, Rand Paul trashed fluorescent light bulbs and low-flush toilets. This provoked widespread media coverage, mostly ‘cute’ rather than analytical, as in a NY Times op-ed “Rand Paul Blames Energy Department for Faulty Toilets, Amongst Other Things.” Congressman Paul’s comments establish him as a leader among the ill-informed and [...]

Read the full article →

Our half of the deal

March 4, 2011

The current budget debate is stunning: we, as a nation, are negotiating only one side of the transaction. Everything is to be ‘balanced’ on the backs of individual citizens, while the plutocracy, Wall Street and private equity sit across the table, expecting to buy at foreclosure-sale prices the remaining 20% of the country they don’t [...]

Read the full article →

Politicians, perspicacity and paintball

January 26, 2011

Picking a logical path through the uplifting but unfundable State of the Union speech,  followed by the economic meadow muffins scattered in rebutting Republican Ryan’s Roadmap for America, perhaps more appropriately entitled Roadblock for Americans,  a scientist can only hope that politicians will eventually back themselves into a corner were it becomes possible to perform [...]

Read the full article →

Wrapping Up the Year

December 24, 2010

Wrapping up the Year ‘Tis the season for journalists, pundits and TV hosts to serenade us with their solipsistic summary of the year’s events.  These annual wrap-ups have much in common with Charles Dickens’ A Christmas Carol; the opinionator serving the role of Marley’s Ghost, leading the audience through that which has been lost from [...]

Read the full article →

An Elementary Federal Budget Planner

November 11, 2010

There’s been so much talk about deficits and the budget, I’ve decided to come up with a visual Federal Budget Planner, using basic stuff you can find around the house so that children and students can understand what the grownups, especially those people who wear tea bags and tri-cornered hats, are so upset about. It [...]

Read the full article →

Contempt at the Speed of Light

October 18, 2010

High speed trading, the foreclosure mess, derivatives and deleveraging Will we all walk away this time?  A deleveraged Airbus in the Hudson. In a business transaction, which is more important; selling your deal, or delivering on what the deal promised?  Wall Street has made its position clear.  Hundreds of millions of dollars are being spent [...]

Read the full article →

← Previous Entries