Friday, March 6, 2009

Three Excerpts That Explain Our Economic Plight


The first excerpt comes from the memoirs of Marriner Eccles, who served as Chairman of the Federal Reserve for fourteen years (1934-1948) and was an early fiscal liberal whose advocacy of stimulus spending in times of economic distress predates that of the better-known John Maynard Keynes. The parallels between the origins of the Great Depression and the catalysts of our current "mini depression" are, to say the least, sobering. Before you read it, however, candor behooves me to confess I did not discover this passage, but instead stumbled upon it while browsing through the blog of former Secretary of Labor Robert Reich:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under-consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.


The next article was written by the aforementioned Robert Reich, the former Secretary of Labor under President Bill Clinton. As a Jew, I must admit that I am quite proud of the long history my co-religionists have of serving in that office with abundant distinction, tracing back to the very first Secretary of Labor, Theodore Roosevelt’s Oscar Straus (also the first Jew to serve in any presidential cabinet, unless you include Judah Benjamin, who served as the Attorney General, Secretary of War, and Secretary of State under Jefferson Davis). This article, and many others of equal lucidity and insight, can be found at his blog,

Why is this recession so deep, and what can be done to reverse it?

Hint: Go back about 50 years, when America's middle class was expanding and the economy was soaring. Paychecks were big enough to allow us to buy all the goods and services we produced. It was a virtuous circle. Good pay meant more purchases, and more purchases meant more jobs.

At the center of this virtuous circle were unions. In 1955, more than a third of working Americans belonged to one. Unions gave them the bargaining leverage they needed to get the paychecks that kept the economy going. So many Americans were unionized that wage agreements spilled over to non-unionized workplaces as well. Employers knew they had to match union wages to compete for workers and to recruit the best ones.

Fast forward to a new century. Now, fewer than 8% of private-sector workers are unionized. Corporate opponents argue that Americans no longer want unions. But public opinion surveys, such as a comprehensive poll that Peter D. Hart Research Associates conducted in 2006, suggest that a majority of workers would like to have a union to bargain for better wages, benefits and working conditions. So there must be some other reason for this dramatic decline. But put that question aside for a moment. One point is clear: Smaller numbers of unionized workers mean less bargaining power, and less bargaining power results in lower wages.

It's no wonder middle-class incomes were dropping even before the recession. As our economy grew between 2001 and the start of 2007, most Americans didn't share in the prosperity. By the time the recession began last year, according to an Economic Policy Institute study, the median income of households headed by those under age 65 was below what it was in 2000.Typical families kept buying only by going into debt. This was possible as long as the housing bubble expanded. Home-equity loans and refinancing made up for declining paychecks.

But that's over. American families no longer have the purchasing power to keep the economy going. Lower paychecks, or no paychecks at all, mean fewer purchases, and fewer purchases mean fewer jobs.

The way to get the economy back on track is to boost the purchasing power of the middle class. One major way to do this is to expand the percentage of working Americans in unions. Tax rebates won't work because they don't permanently raise wages. Most families used the rebate last year to pay off debt -- not a bad thing, but it doesn't keep the virtuous circle running. Bank bailouts won't work either. Businesses won't borrow to expand without consumers to buy their goods and services. And Americans themselves can't borrow when they're losing their jobs and their incomes are dropping.

Tax cuts for working families, as President Obama intends, can do more to help because they extend over time. But only higher wages and benefits for the middle class will have a lasting effect.

Unions matter in this equation. According to the Department of Labor, workers in unions earn 30% higher wages -- taking home $863 a week, compared with $663 for the typical nonunion worker -- and are 59% more likely to have employer-provided health insurance than their nonunion counterparts.

Examples abound. In 2007, nearly 12,000 janitors in Providence, R.I., New Hampshire and Boston, represented by the Service Employees International Union, won a contract that raised their wages to $16 an hour, guaranteed more work hours and provided family health insurance. In an industry typically staffed by part-time workers with a high turnover rate, a union contract provided janitors with full-time, sustainable jobs that they could count on to raise their families' -- and their communities' -- standard of living.

In August, 65,000 Verizon workers, represented by the Communications Workers of America, won wage increases totaling nearly 11% and converted temporary jobs to full-time status. Not only did the settlement preserve fully paid healthcare premiums for all active and retired unionized employees, but Verizon also agreed to provide $2 million a year to fund a collaborative campaign with its unions to achieve meaningful national healthcare reform.

Although America and its economy need unions, it's become nearly impossible for employees to form one. The Hart poll I cited tells us that 57 million workers would want to be in a union if they could have one. But those who try to form a union, according to researchers at MIT, have only about a 1 in 5 chance of successfully doing so.

The reason? Most of the time, employees who want to form a union are threatened and intimidated by their employers. And all too often, if they don't heed the warnings, they're fired, even though that's illegal. I saw this when I was secretary of Labor over a decade ago. We tried to penalize employers that broke the law, but the fines are minuscule. Too many employers consider them a cost of doing business.

This isn't right. The most important feature of the Employee Free Choice Act, which will be considered by the just-seated 111th Congress, toughens penalties against companies that violate their workers' rights. The sooner it's enacted, the better -- for U.S. workers and for the U.S. economy.

The American middle class isn't looking for a bailout or a handout. Most people just want a chance to share in the success of the companies they help to prosper. Making it easier for all Americans to form unions would give the middle class the bargaining power it needs for better wages and benefits. And a strong and prosperous middle class is necessary if our economy is to succeed.


The final excerpt comes from a speech delivered by Adlai Stevenson (not coincidentally my political role model) at the University of Wisconsin-Madison during his 1952 campaign for the presidency. While election oratory is not usually considered to be the right place to go for scholarly ideas (Book VII of Plato's Republic be damned!), Stevenson was noteworthy for his stubborn refusal to lower the quality of his speeches in the name of accommodating what his advisors felt were the limited intellectual capacities of the voting public. Whether his intellectualism did indeed cost him the presidency is a matter for others to debate (I for one would like to believe that Stevenson’s sole mistake was that of having the bad luck of running against a popular war hero, Dwight D. Eisenhower). My purpose here is to show you an excerpt from the talk he gave to those college students in Wisconsin on October 8, 1952. In it he reminds the generations that grew up with the advantages of the New Deal to never forget that the economic opportunity and prosperity which they could now take for granted had not always been a part of American life, and admonishes them against ever supporting politicians who would use oratorical tricks to turn them against the New Deal, and who upon rolling it back might make America as vulnerable as it had been before its arrival:

Most of you students were born, I suppose, in the early thirties and do not remember the state of the world at that time. Looking back, it must be hard for most of you to realize that such a world ever existed. Your world has troubles of its own - perhaps greater troubles than those of twenty years ago. But one worry you are spared is the worry of finding a job. When you finish college and military service, you will enter a world which wants and needs you.

This seems a natural thing - when you have it. It is a terrible thing when you don't. As we look around our booming country, it is almost incredible to think that mass unemployment was ever a problem. Yet a short twenty years ago millions of people were engaged in a desperate search for work...

It was a sullen and hostile world - a world which little for youth of opportunity, of hope, of a future. The system was running down, like a broken clock. The wonder is, not that so many young men and women turned to socialism or to communism, but that there were so few.

The election of 1932 was, in a way, a last chance for a free America. Nearly a million votes were cast against capitalism that year. That million might well have swelled to ten million by 1936 if the economic paralysis had continued.

But, as you all know, the election of 1932 brought Franklin Roosevelt and the Democratic Party, and also the vitality and guts to tackle our economic problems within the framework of the democratic system. The growth of extreme radicalism was arrested by bring an end to human distress and economic chaos. In 1936, not ten million but a bare 250,000 people voted for socialism and communism. I firmly believe, therefore, that the man who was more responsible than any other for checking the spread of communism in America was Franklin D. Roosevelt...

I go into this because it is something more than ancient history. I would have hoped that all Americans could accept the gains we have made in the last generation, and that on this basis we could move forward together. But I fear the struggle is not over. The minority which fought this effort at every step along the way is still fighting. Senator Bricker spoke for them when he cried at the Republican convention this year that the "last vestige of the New Deal" must be "destroyed".

I hope this was just partisan elocution, but the record is not reassuring that the constructive work which has been done is secure. And it is well for you who can't remember where we have been to know where we are. This freedom and this security are part of the landscape of your world. But they have only been part of that landscape for a short time.

*Note: There were two segments that I excised from this passage in the speech. The first was a rather poetic survey of the cultural and political attitudes of the 1920s, which though fascinating would have taken attention away from the relevant portions of the text. The second went into detail about agricultural policy (a necessary topic for any politician soliciting the votes of Wisconsinites), which was equally irrelevant to the main theme of the speech.

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