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Economy

Symbols of Status and the Times


Since the beginning of time, material things have symbolized a persons status in society.
The first Playboy was published and was a sign of the dark desires of Americans starting to emerge.

Cars are symbols of money and power, two things everybody wants more of.
Barbie fit the ideal that Americans dreamed of.

Batman was a symbol of Americas want for a hero.

LEISURE IN THE 1950s


Americans experienced shorter work weeks and more vacation time than ever before Leisure time activities became a multi-billion dollar industry Labor-saving devices added more spare time

Labor-saving devices provided more leisure time for Americans

TV ADS, TV GUIDES AND TV DINNERS EXPAND


TV advertising soared from $170 million in 1950 to nearly $2 billion in 1960 TV Guide magazine quickly became the best selling magazine Frozen TV dinners were introduced in 1954 these complete ready-to-heat meals on disposable aluminum trays made it easy for people to eat without missing their favorite shows

The Good Life?


Consumerism the dominant social theme of the 1950s Quality of life leaves Americans anxious and dissatisfied

Areas of Greatest Growth


Church membership School attendance Television watching

CONGLOMERATES EMERGE
Conglomerates, major corporations that include a number of smaller companies in unrelated fields, emerged in the 1950s One conglomerate, International Telephone and Telegraph (ITT), bought rental car companies and hotel chains

FRANCHISES EMERGE
Another strategy for business expansion was franchising A franchise is a company that offers similar services in many locations Fast food restaurants developed the first franchises in America

McDonalds is one of the leading franchises in the world

SOCIAL CONFORMITY
American workers found themselves becoming standardized Called the Organization Man, the modern worker struggled with a loss of individualism Businesses did not want creative thinkers, rebels or anyone that would rock the boat

Despite their success, some workers questioned whether pursuing the American dream exacted too high a price, as

conformity replaced individuality

THE ORGANIZATION AND THE ORGANIZATION MAN


During the 1950s, businesses expanded rapidly More and more people held white-collar jobs clerical, management, or professional jobs The fields of sales, advertising, insurance and communications exploded

White Collar jobs expanded greatly in the 1950s

The Organization and the Organization Man

By the mid 1950s, blue-collar jobs no longer employ the majority of Americans. American business expands by diversifying and franchising. Conformity replaces individuality among workers.

A Changing Workplace
Automation:
1947-1957 factory workers decreased by 4.3%, eliminating 1.5 million blue-collar jobs. By 1956 more white-collar than blue-collar jobs in the U. S.

Computers Mark I (1944). First IBM mainframe computer (1951).

Corporate Consolidation:
By 1960 600 corporations (1/2% of all U. S. companies) accounted for 53% of total corporate income.

WHY?? Cold War military buildup.

A Changing Workplace
New Corporate Culture: The Company Man
1956 Sloan Wilsons The Man in

the Gray Flannel Suit

RISE OF CONSUMERISM
By the mid-1950s, nearly 60% of Americans were members of the middle class Consumerism (buying material goods) came to be equated with success and status

Consumerism
1950 Introduction of the Diners Card

All babies were potential consumers who spearheaded a brand-new market for food, clothing, and shelter. -- Life Magazine (May, 1958)

Consumerism

Consumerism Unbound
Americans buy more consumer goods in the 1950s than ever before. To encourage spending, manufacturers create new products planned to become obsolete in a short time. To increase sales of consumer goods, advertisers appeal to Americans desire for status and conformity.

NEW PRODUCTS
One new product after another appeared in the marketplace Appliances, electronics, and other household goods were especially popular The first credit card (Diners Club) appeared in 1950 and American Express was introduced in 1958 Personal debt increased nearly 3x in the 1950s

THE ADVERTISING AGE


The advertising industry capitalized on runaway consumerism by encouraging more spending Ads were everywhere Ad agencies increased their spending 50% during the 1950s

Advertising is everywhere today in America

Ad in Context Example
Ads from the 1950s reflected consumers fascination with scientific discoveries
(do you see any subliminal messages here? ) (Clue=there are none)

PPT 3-8

21

Suburban life

America, 8th Edition


Copyright 2010 W.W. Norton & Company

The Automobile Culture


Americans buy cars in record numbers in the 1950s. Access to cars and an interstate highway system make Americans mobile. The car industry creates opportunities and problems.

The Culture of the Car


The U. S. population was on the move in the 1950s.

NE & Mid-W S & SW (Sunbelt states)


1955 Disneyland opened in Southern California. (40% of the guests came from outside California, most by car.)

Frontier Land

Main Street

Tomorrow Land

The Culture of the Car


America became a more homogeneous nation because of the automobile.

First McDonalds (1955) Howard Johnsons

Drive-In Movies

The Culture of the Car


Car registrations: 1945 25,000,000 1960 60,000,000 2-family cars doubles from 1951-1958

1958 Pink Cadillac

1959 Chevy Corvette

1956 Interstate Highway Act largest public works project in American history!

Cost $32 billion. 41,000 miles of new highways built.

THE AUTOMOBILE CULTURE

After the rationing of WWII, inexpensive and plentiful fuel and easy credit led many to buy cars By 1960, over 60 million Americans owned autos

INTERSTATE HIGHWAY ACT 1956


In 1956 Ike authorized a nationwide highway network 41,000 miles of road linking America

The Interstate Highway System

THE INTERSTATE HIGHWAY SYSTEM


Automania spurred the construction of roads linking major cities while connecting schools, shopping centers and workplaces to residential suburbs

IMPACT OF THE HIGHWAY


The Interstate Highway system resulted in: More trucking Less railroad More suburbs, further away

Trucking is the #1 means of moving cargo in the United States today

HIGHWAYS HOMOGENIZE AMERICA


Another effect of the highway system was that the scenery of America began to look the same Restaurants, motels, highway billboards, gas stations, etc. all began to look similar The nation had become homogenized

Anytown, USA

Our new roads, with their ancillaries, the motels, filling stations, and restaurants advertising eats, have made it possible for you to drive from Brooklyn to Los Angeles without a change of diet, scenery, or culture.
John Keats, The Insolent Chariots
1958

DOWNSIDE TO MOBILITY
While the car industry boom stimulated production, jobs, shopping centers, and the restaurant industry, it also had negative effects Noise Pollution Accidents Traffic Jams Stress Decline of public transportation

A mink coat for father

America, 8th Edition


Copyright 2010 W.W. Norton & Company

Critics of the Consumer Society


Social critics of suburban culture

John Keats William Whyte David Riesman

C. Wright Mills criticizes corporations Jack Kerouac, Beat artists promote counterculture

(1) Critics of Consumer Society


Abundance of selfcriticism in the 1950s David Riesmans The Lonely Crowd (1950) -- inner-directed vs. outer-directed Arthur Millers Death of a Salesman (1949) Other literary critiques of the 1950s

(1) Critics of Consumer Society (cont.)


Critique of American business in the 50s The art of Edward Hopper Art becomes increasingly abstract The subculture of the Beatniks Beatniks pursue personal versus social solutions to their anxieties

(1) Critics of Consumer Society (cont.)


Beat poet Allen Ginsberg -- Howl (1956) William Burroughs -- Naked Lunch (1959) Jack Kerouac -- On the Road (1957) Contrast with the Hippies Anti-authority movies The Elvis Revolution

(2) Dynamic Conservatism (cont.)


Eisenhowers heart attack and the election of 1956 Second Term problems Second Term accomplishments --Hawaii and Alaska statehood (1959) Eisenhowers Farewell Address -- military-industrial complex

The Suburban Lifestyle


Affluence, automobiles and highways help many Americans achieve the dream of owning a home in the suburbs. The postwar baby boom creates a youth-centered culture and a demand for products related to children. Many American women become dissatisfied with the role of homemaker.

Life in the Suburbs


Suburbia inhabited by middle class Characteristics of suburbs

dependence on the automobile family togetherness

Traditional feminism discouraged Entrance of more women into workplace stimulates new feminism

Suburban Living
Levittown, L. I.:
The American Dream 1949 William Levitt produced 150 houses per week.

$7,990 or $60/month with no down payment.

Levittown

America, 8th Edition


Copyright 2010 W.W. Norton & Company

Suburban Living
SHIFTS IN POPULATION DISTRIBUTION, 1940-1970
Central Cities Suburbs Rural Areas/ Small Towns 1940 31.6% 19.5% 48.9% 1950 32.3% 23.8% 43.9% 1960 32.6% 30.7% 36.7% 1970 32.0% 41.6% 26.4%

U. S. Bureau of the Census.

Life in the Suburbs (cont.)


Age of the credit card arrived Leisure hours increased Growth of the middle class white-collar sector Big business kept getting bigger

Suburban Living:
The New American Dream
k 1 story high k 12x19 living room k 2 bedrooms k tiled bathroom

k garage
k small backyard k front lawn

By 1960 1/3 of the U. S. population in the suburbs.

The new household

America, 8th Edition


Copyright 2010 W.W. Norton & Company

Population Shifts
Middle-class families move to the suburbs.

Middle class to the Suburbs


Between 1950 and 1956, the number of Americans living in suburban communities increased by 46%. Suburbanites were largely white and middle-class. In many places, homes in the suburbs were to sold to African Americans. (Discrimination)

Migrations to the Sunbelt


Many people moved from cities and states of the North to warmweather states which stretched across the southern third of the US from Florida to California.

First Computers!
In 1946 two engineers from the University of Pennsylvania developed the earliest electronic digital computer (it was as large as 2 small houses). By 1959 transistors replaced bulky unreliable vacuum tubes, and it became a reliable system to store data. As they shrank in size, record keepers, such as librarians and tax collectors.

Economic Advance
Economic stimulation
increased space, defense spending informal wage and price guidelines

1962--U.S. Steel forced to lower prices 1963--tax cut spurs one of the longest sustained advances in U.S. history Kennedy's economic policies double growth, cut unemployment

Nixon in Power
Apparent success in first term Triumphs in foreign affairs Nixon cuts himself off from Congress, his own cabinet, and the nation

Reshaping the Great Society


Nixon and the Great Society
more efficient administration shift responsibility to the states shift school desegregation to the courts

Shift to conservative Supreme Court


appointment of conservatives and moderates Burger Court similar to Warren Court

Pace of change slows but continues

Nixonomics
Nixon and inflation
inflation spurred by Vietnam federal spending cuts interest rates forced up

1970--Nixon-induced recession 1971--wage and price controls Economy revives

Energy and the Economy


U.S. way of life based on cheap energy 1970s energy crisis sparks inflation

The Oil Shocks


Effects of soaring oil prices
consumer spending plunges recession by 1974 inflation persists through 1970s

Tax cut aids recovery 1979--Iranian Revolution causes second surge in oil prices

The Oil Shocks: Price Increases of Crude Oil and Gasoline, 1973-1985

The Search for an Energy Policy


Ford tries to encourage production Carter tries to encourage conservation Congressional legislation to
encourage production, e.g. Alaska pipeline encourage conservation, e.g. gas rationing

Energy problem persists

The Great Inflation


Oil prices drive inflation
price of goods soars real income declines

Attempted government controls result in record high interest rates

Reaganomics
Reagans reductions in spending and taxes prompt conflicting expectations Supply-side economists expect economic growth Reagans critics expect massive deficits, economic stagnation

Recession and Recovery


1981-1982--unemployment hits 10% 1983--economic recovery

rise in consumer spending prices remain level worldwide decline in energy prices

Cutting Spending and Taxes


Reagans premise: cut spending to encourage private investment Reagan cuts over three years
federal spending by more than $40 billion social services included in cuts taxes cut by 25%

Limiting the Role of Government


Environmental regulations relaxed Attempted cuts in Social Security Neglect of interest-group opponents
labor hurt in air traffic control firings lack of support for civil rights legislation women ignored in judicial appointments

The Growing Deficit


Basis for the Reagan prosperity includes

massive deficit spending massive inflows of foreign investment

1983--federal budget deficit $200 billion Spending caps on defense, services 1985--U.S. becomes a debtor nation

The Rich Grow Richer


Gains of Reaganomics
inflation reduced to 4% employment grows after 1982 growth in service sector jobs

Losses of Reaganomics
high-paying manufacturing jobs decline increasing social inequality

wealthy benefit poor left in poverty middle class hurt

Share of Aggregate Household Income by Quintiles, 1975-1995

The Shifting American Economy


U.S. share of world markets declines U.S. heavy industry declines High technology prospers Businesses tend to diversify

Bushs Domestic Agenda


Problems of 1989
savings and loan industry facing collapse ballooning federal deficit

Bushs deficit reduction


raise taxes cut military expenditures

Economic recession increases deficit

Republican Economic Woes


1990 budget deal violated Bushs no new taxes pledge Also failed to reduce budget deficits Economic recession prolonged

Economic Recovery
Clinton abandons campaign promises

no middle-class tax cut no jobs program for the unemployed

Allies with Alan Greenspan to reduce deficit

From Deficit to Surplus


1990s mark the longest sustained period of economic growth in American History Causes
increased productivity increased consumption Federal Reserve keeps inflation in check

Federal budget transformed from deficit to surplus Political parties divided on how to spend
Republicans argue for tax cuts Democrats argue for shoring up federal programs

The New Millennium


2000--fears of Y2K problem prompted great anxiety 2001--NASDAQ crash causes brief recession Terrorist attacks prompts debate over domestic security and civil liberties

Bushs Domestic Agenda


Persuades Congress to cut taxes by $1.35 trillion over ten years Education reform increased federal aid to schools that meet performance requirements Recession returns in 2001 fueled by:
glut of unsold goods September 11 attacks scandalous collapse of major corporations

U.S. Budget Deficits, 1980-1997

ECONOMIC AND DEMOGRAPHIC CHANGE


Economy was volatile in the 1980s and early 1990s
Patterns of employment changed in an increasingly mechanized workplace

THE CHANGING NATURE OF WORK


Technological advances, primarily in the field of automation, had significant impact on the workplace The introduction and spread of computers undermined a number of production jobs and left those who worked full time in front of a computer with a number of other difficulties
Digital divide

Although work became less labor intensive, Americans worked longer hours

THE SHIFT TO A SERVICE ECONOMY


Restructuring of economy in the 1980s led to a scarcity of good jobs as U.S. continued its move to a service base Decline of industrial sector productivity resulted from widespread and systematic failure on the part of the US to invest sufficiently in its basic productive capacity, the energy crisis and rising oil prices, and the diversion of federal funds from research and development as a result of the Vietnam War Meanwhile, other nations, such as Germany and Japan, moved forward and modernized

The Computer

WORKERS IN TRANSITION
The trade union movement, always an integral part of American business, faltered as the economy changed to a service-based system
Increases in women and young people in the workforce eroded unions even more Also hurt by more forceful opposition to unions by managers Union organizing efforts fell off significantly Many companies, hit by hard times, sought to dissolve union agreements

Farmers were hurt by growing consolidation which resulted in fewer farms and more income concentrated in fewer hands
Farmers were caught in a cycle of overproduction, heavy indebtedness, and falling prices which often resulted in foreclosures

THE ROLLER-COASTER ECONOMY


Reagan years began with a recession that lasted several years then an economic boom from 1983 to 1990 gave way to another recession Recession in the early Reagan years: unemployment rate climbed to 10.8 percent (more than 20 percent among African Americans); one-third of industrial capacity lay idle; 12 million Americans were out of work
Inflation continued to be a problem Affected every part of the country

Economic conditions, especially for the middle and upper income ranges began to improve in 1983 and 1984
Tax cut encouraged spending and huge defense expenditures had a stimulating effect Reduction of restrictions encouraged business confidence while a voluntary Japanese quota on cars helped the ailing automobile industry Stock market climbed and inflation remained low Though unemployment declined, many of the new jobs were low paying

THE ROLLER-COASTER ECONOMY


Economic upswing masked a number of problems Millions of Americans remained poor and others only maintained a middle-class lifestyle by having two incomes and by going deeply in debt Huge and growing budget deficits reflected the fundamental economic instability Another recession hit in the early 1990s as massive military spending, growth of entitlement programs and tax cuts sent budget deficits skyward even as the productive structure of the country continued to decline Huge increase in national debt eroded business confidence American firms suffered a serious decline and slashed their workforces causing unemployment to rise State governments were only able to balance their budgets with massive spending cuts The economy began to recover in mid-1992

Beginning at the End

In 2011 the Economy was: A Glass HalfEmpty


Weak GDP growth, particularly for this stage of the business cycle Weak but noticeable employment growth Deleveraging of the household balance sheet A new age of limits for state and local governments Federal government unable to make substantive progress in addressing imbalances Economic headwinds from events overseas

In 2012 the economy will be: A Glass Half-Full


Weak GDP growth, particularly for this stage of the business cycle Weak but noticeable employment growth Deleveraging of the household balance sheet A new age of limits for state and local governments Federal government unable to make substantive progress in addressing imbalances Economic headwinds from events overseas

But Employment Doesnt:

Source: Bureau of Labor Statistics

Source: FactSet Charts are use with permissions.

Recessions vs. Panics


The symptoms of an approaching panic are wonderful prosperity by a rise in the price of all commodities, of land, of houses, etc, etc.a lowering of interest, by the gullibility of the public, by a general taste for speculating in order to grow rich at once, by a growing luxury leading to excessive expenditures, a very large amount of discounts and loans and bank notes and a very small reserve in specie and legal-tender notes and poor and decreasing deposits [leverage].

The Vicious Cycle of Long-Term Unemployment


Average Duration on Unemployment in the U.S.

Long-term unemployment leads to long-term unemployment Weak housing lessens labor mobility Hiring intensity stays weak

(weeks, seasonally adjusted)

Source: BLS
Source: FactSet Research System charts are use with permission.

Global Impacts in 2012

Now the downside of the U.S. Economy: While real household incomes have risen since the 1960s, most of the increases have been in upper income households.

And Median income has grown the slowest among younger households in comparison to others. Younger households face rising child rearing expenses at a time when relative incomes are growing more slowly.

Slower growth in income among younger households translates in part to lower household equity, a key determinant in consumer spending.

If we exclude housing equity, the gap in median net worth by household age is even greater

With lower equity and income, younger households are experiencing a rising incidence of poverty, whereas older households have enjoyed a continuing decline.

In the aggregate, changes in income and household wealth are producing rising levels of inequality in the United States, surpassing those of the late 1920s before the onset of the Great Depression.

Economic growth that could reduce poverty and income inequality has been hampered by mismanagement in the financial sector, with nonperforming loans accounting for rising default rates on mortgages and other forms of lending. Moreover, current incentives portend a return to the excess leverage that unfolded in the financial collapse that began in 2008

In the short-run, fiscal policy stimulus often exceeds monetary policy expansion in an effort to offset a recession. Yet tax receipts that would fund a fiscal stimulus tend to fall as overall GDP either slows in growth or moves in contraction. All of this generates a regular debate on the optimal size of government in the economy, and spills over into any given election cycle.

For the United States, not only is the size of overall government in decline. It also is in a reversion to state and local government displacing the role of the federal government. This pattern has not been seen since the late 1930s when the Great Depression was still in force. Thus, nothing on the order of a federal government New Deal or Great Society is in the offing as a solution to the current recession.

What, if anything, is the relationship between the size of government and per capita income? If we look at a 2009 sample of 34 OECD countries, we find that the correlation between taxes and per capita GDP is weakly positive. That means that there is some positive association between the size of government and GDP. Yet the weak association suggests that incentives matter greatly as to the kinds of functions that governments undertake, with some governments doing much to foster economic growth while others create and prolong economic stagnation.

For the United States, it is clear that the overall size of government has been generally increasing since the 1920s, with revenues as a ratio to GDP reaching a peak in the late 1990s. Ironically, this took place at a time when the U.S. economy was growing at significant rates, whereas the smaller size of government today has emerged as economic growth has declined. The key here is not that more (or less) government is the answer to economic growth, but what kinds of government incentives are needed to produce robust and sustainable growth over time.

If governments engage in deficit spending that does not produce an economic base from which job creation can unfold, debt levels not only increase but they weigh heavily on liquidity, and ultimately, the solvency of sovereign governments. Today, Greece is the poster child of an insolvent government, but the U.S. faces a rising ratio of central government debt to GDP that is unsustainable for the future. Thus while size matters, more importantly is what kinds of incentives are being applied.

What the U.S. now faces is a set of difficult fiscal policy adjustments, with the Congressional Deficit Reduction Committee looking to make over $1.2 trillion in reductions before mandatory formula-driven reductions take place. The question is whether any of these reductions will result in job-creating incentives that will revive the housing market, bank lending, and consumer an investment spending at rates that will bring the U.S unemployment rate back to historical levels while at the same time avoiding rising inflation. Unfortunately, the level of partisan politics in Washington is not likely to lead to an informed debate on these choices.

Three distinct US fiscal problems


The long-term debt problem
warrants a return to fiscal discipline.

The medium-term economic problem,


slow recovery in aftermath of the 2007-08 financial crisis,
warrants demand stimulus; which fiscal policy would have been suited to deliver,
far better than monetary policy.

The short-term political problem:


A succession of artificial cliffs & shutdown deadlines, each threatening disaster. Next up, March 1: the sequester.

The US has a long-term debt problem..


National debt/GDP is the highest since WWII spike.
Source: CBO, March 2012

The US has a long-term debt problem, continued

Long-term in the sense that debt/GDP will rise alarmingly after the 2020s
unless entitlements are put on a sound footing:
Social Security & Medicare are due to run big deficits
as the baby-boomers retire (predictably) and the cost of health care rises rapidly (less predictably).

Definition of debt sustainability:


regardless the level of the debt, it is sustainable if the future debt/GDP ratio is forecast to fall indefinitely.

Long-term debt problem, continued

Federal

Not sustainable

Long-term debt problem, continued

There is not a short-term problem:


Far from tiring of absorbing ever-greater levels of US treasury securities, global investors continue happily to lend at record-low interest rates (2008-13):
The US enjoys safe-haven status; the $ enjoys exorbitant privilege.

There is no fiscal crisis. The US is not Greece,


though we want to be sure not to become Greece in 20 years.

Indeed the federal budget deficit is now coming down


from 10 % of GDP in FY 2009 to 7 % in FY 2012.
despite the continued weakness in the economy.

Recent steps will bring debt/GDP down over 2014-18.


2011-13 $1.5 trillion in spending cuts + $0.6 tr. 1/1/2013 tax increase (relative to having let all Bush tax cuts expire).

Long-term debt problem, continued

The debt problem is also long-term in the sense that we have known about it a long time.
E.g., when Ronald Reagan, took office:
"For decades we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present We must act today in order to preserve tomorrow. And let there be no misunderstanding: We are going to begin to act, beginning today.
Inaugural address, Jan. 20, 1981

The US public discussion is framed as a battle between conservatives who philosophically believe in strong budgets & small government, and liberals who do not.
Democrats, Republicans, & the media all use this language.

It is not the right way to characterize the debate.

[1]

(1) The right goal should be budgets that allow surpluses in booms and deficits in recession. (2) The correlation between how loudly an American politician proclaims a belief in fiscal conservatism and how likely he is to take genuine policy steps < 0.
[1] Never mind that small government is classically supposed to be the aim of liberals, in the 19th century definition, not c onservatives.
My point is different: those who call themselves conservatives in practice tend to adopt policies that are the opposite of fiscal conservatism. I call them illiberal. Republican & Democratic Presidents Have Switched Economic Policies Milken Inst.Rev. 2003.

Brief US fiscal history: The 1980s


The newly elected Reagan complained of the inherited debt:
Our national debt is approaching $1 trillion. A trillion dollars would be a stack of 1,000-$ bills 67 miles high.
address to Congress, Feb. 18, 1981.

Reagans actions: sharp tax cuts & rise in defense spending. The claim: budget surpluses would result.
The reality: record deficits that added to the national debt a 2nd trillion in his 1st term a 3rd trillion in his 2nd term a 4th trillion when G.H.W. Bush initially continued the policies. (Read my lips, no new taxes.)

US fiscal history, continued: The 1990s


The deficits were gradually cut, and then converted to surpluses by the end of the 1990s.

How was this accomplished?


Regime of Shared Sacrifice -- 3 key policy events.
1990: GHW Bush bravely agreed spending caps, taxes & PAYGO 1993: Clinton extended the policy. 1998: As surpluses emerged, Save Social Security 1st.

Strong growth in late 1990s.

Fiscal history, continued: The 2000s


The Shared Sacrifice regime ended on the day G.W. Bush took office in Jan. 2001. He returned to the Reagan policies:
Large tax cuts

together with rapid increase in spending (triple Clintons)


not just in military spending (esp. Iraq & Afghanistan), but also domestic spending: discretionary + Medicare drugs benefit.

Just like Reagan, he claimed budget surpluses would result. Just like Reagan, the result was record deficits: The national debt doubled.
I.e., GWB incurred more debt than his father + Reagan + 39 predecessors

How far can we get by cutting spending?


Total federal spending = $3 trillion in round numbers.

That spending minus tax revenue left a budget deficit of $1.1 trillion in FY 2012,
down from $1.4 trillion in 2009.

Most Republican congressmen want to cut only non-defense discretionary spending,


to exempt defense & senior-related spending (Soc. Security & Medicare).
That was their official platform in the 2010 election.

How much would we have to trim non-defense discretionary spending to balance the budget?

How far can we get by cutting spending? continued


Start by eliminating PBS funding
=1/10,000 of spending

Then all foreign aid.


= 1 % of total outlays, not 25% as Americans think.

Next, veterans benefits.


The same. We are now up to a total of 3 % of outlays.

Next imagine zeroing out all federal spending on agriculture, science & environment, education & transportation,
which includes programs too popular for congressmen to vote for.

That is a total of $364 b = 1/3 of the 2012 deficit. Conclusion: Domestic discretionary spending is not where the big bucks are. Would would also need to eliminate either all of defense,
or all medicare payments or all social security payments while still collecting the social security taxes that are supposed to pay for it!

Eliminating all non-defense discretionary spending


(including also parks, weather service, food safety, SEC, FBI, border patrol, politicians salaries everything !)

would not come close to eliminating the budget deficit

$92 b $86 b

Total deficit
$61 b $59 b $56 b

$35 b

$30 b
$17 b $6 b

Concord Coalition. Data Source: CBO, Jan.2012

3 biggest spending categories:


Health, Social security, & Defense

{ Medicare & medicaid

Concord Coalition. Data Source: CBO, Jan. 2012

Breakdown of federal spending


Even if one could somehow eliminate all domestic spending, it would not come close to eliminating the deficit
Budget deficit was $1.1 trillion in FY 2012

Outlays: $3.5 trillion Deficit $1.1 tr. Tax revenue $2.5 tr.

Concord Coalition. Data Source: CBO, Jan. 2012


Updated: http://cbo.gov/sites/default/files/cbofiles/attachments/2012_09_MBR.pdf

12 years ago, if the country thought it important enough to protect any single category against belt-tightening in the long run -- say military or social security or tax cuts for the rich -it would have been arithmetically possible, by making the cuts elsewhere.
But we no longer have the luxury of such choices after the legacy of the last decade
after the effects of mammoth tax cuts (2001 & 2003), two wars (2001, 2003), the Medicare prescription drug benefit (2003), and the severe financial crisis & recession (2008).

Starting from our current position, each of the 5 components must play a role, along with taxes.

If there were no political constraints What steps should be taken today to lock in future fiscal consolidation?
Not by raising taxes or cutting spending today (new recession); nor by promising to do so in a year or two (not credible).

There are lots of economically sensible proposals


for spending to eliminate over time, more efficient taxes to phase in, and tax expenditures to phase out.

How to reduce the budget deficit


The only way to do this is both reduce spending & raise tax revenue, as we did in the 1990s.

Spending.
Examples:
Eliminate agricultural subsidies.
Cut manned space program. Trim National Guard & Reserves, Close unwanted military bases Cut unwanted weapons systems

A rare success: the F22 Raptor fighter. Now F-35 Joint Strike Fighter? ($600b/10 yrs.) Global Hawk Block 30 drone program? The C-27J Spartan cargo aircraft? Upgrades to the M1 Abrams tank
Virginia-class submarine? ($2.6 b)

How to reduce the budget deficit The only way is both reduce spending & raise tax revenue, continued.

Tax revenue options


We could have let G.W. Bushs tax cuts expire in 2013. Can still curtail expensive & distorting tax expenditures
E.g., Tax-deductibility of mortgage interest, & of health insurance Subsidies to oil industry, low tax rate on carried interest,

Or launch more ambitious tax reform:


Introduce a VAT, sales, or consumption tax or phase in an energy or carbon tax
or auctioning of tradable emission permits

Distortionary subsidies hiding as tax expenditures

$128 b

$305 billion
$93 b $84 b

Joint Committee of Taxation, Jan. 2012

The long-term problem is entitlements

Concord Coalition. Data Source: CBO, Jan. 2012

Social security
Raise retirement age just a little,
perhaps exempting low-income workers.

Progressively index future benefit growth to inflation. Optional options:


To please Democrats: Raise the cap on social security taxes. To please Republicans: encourage private accounts
though they contribute nothing to closing the gap.
135

Health care
Encourage hospitals to standardize around best-practice medicine.
Pay health providers for value, not per medical procedure. Standardize around best-practice treatment:
evidence-based (to be facilitated by electronic health records). E.g., pursue the checklist that minimizes patient infections, and avoid unnecessary medical tests & procedures. That is not death panels.

Levers to get providers to follow best practices:


make Medicare payments conditional or protection from malpractice litigation.

Curtail corporate tax-deductibility of health insurance,


especially gold-plated.

136

Cyclicality & Fiscal Policy:


The question What is the best fiscal policy, Austerity or Stimulus? is as foolish as the question Should a driver turn west or east?
It depends where he is in the road.
Sometimes left is the answer, sometimes right.

The boom, not the slump, is the right time for austerity at the Treasury. - John Maynard Keynes (1937)

Collected Writings

Cyclicality of Fiscal Policy, continued

During a period when some EM governments finally learned counter-cyclical fiscal policy (2000-12) , many Advanced-Country politicians forgot how to do it.
Most conspicuously, Greece & other euro members failed to reduce budget deficits during years of growth, 2001-08
and were then forced to cut spending & raise taxes during the euro debt crisis of 2010-12,
exacerbating recessions, even raising Debt/GDP.

But the United Kingdom did the same,


despite no euro-constraint forcing austerity in 2010-13.

Some US politicians have pursued pro-cyclical (i.e., destabilizing) fiscal policy

1st cycle:
Recession: austerity.
1980-81: Reagans speeches pledging action to reduce the national debt beginning today came during a period of severe recession.

Boom: profligacy.
1988: As the economy neared
the peak of the business cycle, candidate George H.W. Bush was unconcerned about budget deficits:

Read my lips, no new taxes.

Some US politicians have sought pro-cyclical fiscal policy,

continued

2nd cycle
Recession: austerity.
1990: The first President Bush summoned the political will to raise taxes & rein in spending (PAYGO) at precisely the wrong moment -- just as the US entered another recession.

Boom: profligacy.
1993-2000: Despite the most robust recovery in US history,
1993: all Republican congressmen voted against Clintons legislation to continue PAYGO etc. 2000: Even after 7 years of strong growth, with unemployment < 4%, G. W. Bush campaigned on tax cuts.

2003: After his fiscal expansion had turned the inherited surpluses into deficits, GWB went for a 2nd round of tax cuts & continued a spending growth rate > Clintons.
VP Cheney: Reagan proved that deficits dont matter.

Some US politicians have sought pro-cyclical fiscal policy, continued

3rd cycle
Recession: austerity.
2007-09: Predictably, when the new worst recession since the Great Depression hit, Republican congressmen suddenly re-discovered the evil of deficits, deciding that retrenchment was urgent.
They opposed Obamas initial fiscal stimulus in February 2009.

2011: Subsequently, with a majority in the House, they blocked further efforts by Obama when the stimulus ran out, despite still-high unemployment.

Thus, through 3 cycles, the efforts at austerity came during recessions, followed by fiscal expansion when the economy was already expanding.

Why do leaders fail to take advantage of booms to strengthen the budget?


People dont see the need to fix the hole in the roof when the sun is shining.
They do see the mistake when the storm hits,
but then it is too late.

Official forecasts are over-optimistic in periods of expansion, rationalizing the failure to act.

Failure to take advantage of booms to strengthen the budget,

continued

Budget balance rules are in fashion.


EU: SGP, Debt brake, Fiscal compact. US: State budget limits; Debt ceiling, Proposed Balanced Budget Amendment.

But they worsen the problem of over-optimistic forecasts.


E.g., when euro members go above the 3% deficit ceiling,
they adjust their forecasts, not their policies.

The US has its own version of biased forecasts.

Failure to strengthen the budget in booms,

continued

Official US forecasts in the 2000s


White House forecasts were over-optimistic all along.
OMB in Jan. 2001 forecast rapid rise in tax revenue,
in effect assuming there would never be a recession.

Four tricks to justify tax cuts, dating from the 1980s:


The Magic Asterisk Rosy Scenario Laffer Hypothesis Starve the Beast Hypothesis

Congressional Budget Office forecasts are honest.


But the Bush Administration adopted new tricks, so that current-law budget would show future surpluses:
continuation of Iraq & Afghan wars treated as a surprise each year phony sun-setting of tax cuts

The Global Capitalist Crisis:


Its Origins, Nature and Impact

Prof. Berch Berberoglu Department of Sociology University of Nevada, Reno

Copyright 2011 by Berch Berberoglu No part of this power point presentation can be used for any purpose without prior written authorization and permission obtained from the author.

Introduction

The U.S. and the global economy have been and continue to be in serious crisis, and the current global recession is the worst economic downturn since the Great Depression of the early twentieth century
The Dow Jones plunged more than 50 percent from its highs of 14,000 in late 2007 to below 6,500 in early 2009, with more than a trillion dollars of value lost in the stock market in little over a year Although the Dow rose to around 12,500 a little over two years after its worst decline, the recent turmoil on Wall Street over the past two weeks, which pushed the Dow down to the the 10,000 level could make things worse a double-dip recession turning into a depression

Clearly, the global capitalist economy is going through its deepest crisis since the Great Depression of 1929, and this signals serious challenges for global capital over the next decade, especially for the United States
The best example of this impact, and what is in store for us over the next few years, is what has been happening with the sovereign debt crisis in Greece, Portugal, Spain, Ireland, and Italy, as well as the United States (and with what has happened to the icons of U.S. big business General Motors, AIG, Citigroup, and other big corporations and banks) Lets take a brief look at these once-powerful icons of the U.S. economy to assess the magnitude of the damage

Figure 1. Lehman Brothers stock, 2007-2011 (in dollars and volume traded)
$80

$18

4 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 2. General Motors Corporation stock, 2007-2011 (in dollars and volume traded)

$40

$5

$1 4 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 3. Citigroup, Inc. stock, 2007-2011 (in dollars and volume traded)

$55

$26

$2.68

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 4. American International Group stock, 2007-2011 (in dollars and volume traded)

$1,450

$1,000 0

$600

$22

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 5. Fannie Mae stock, 2007-2011 (in dollars and volume traded)

$50

$22

20 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 6. Freddie Mac stock, 2007-2011 (in dollars and volume traded)

$70 $63

$32

31 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Origins of the Crisis


The periodic crises resulting from the capitalist business cycle now unfolds at the global level The current crisis of the world economy is an outcome of the consolidation of economic power that the globalization of capital has secured for the transnational corporations This has led to a string of problems associated with the financial, banking, real estate, and productive sectors of the economy that have triggered the current economic crisis

Nature of the crisis The central problem of our present capitalist economic system is the recurrent business cycle which is now operating at the global level. It manifests itself in a number of ways, including: The problem of overproduction/underconsumption Increasing unemployment and underemployment Decline in real wages and rise in super-profits The sub-prime mortgage and credit card debt Speculative corporate financial activities Increased polarization of wealth and income

Table 1. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, 1975 to 2009 (in percentages) _____________________________________________________________________ Lowest Second Third Fourth Highest Top Year 20% 20% 20% 20% 20% 5% _____________________________________________________________________

1975
1980 1985 1990 1995 2000 2005

4.3
4.2 3.9 3.8 3.7 3.6 3.4

10.4
10.2 9.8 9.6 9.1 8.9 8.6

17.0
16.8 16.2 15.9 15.2 14.8 14.6

24.7
24.7 24.4 24.0 23.3 23.0 23.0

43.6
44.1 45.6 46.6 48.7 49.8 50.4

16.5
16.5 17.6 18.5 21.0 22.1 22.2

2009 3.4 8.6 14.6 23.2 50.3 21.7 ______________________________________________________________________ Source: U.S. Bureau of the Census, Current Population Reports, P60-235, August 2008; Statistical Abstract of the United States, 2012, Table 694, p. 454.

Table 2. Distribution of Wealth in the United States, 2007, by Type of Asset (in percentages) __________________________________________________________________ Investment Assets Top 1% Top 10% Bottom 90% __________________________________________________________________ Stocks and mutual funds 49.3 89.4 10.6 Financial securities 60.6 98.5 1.5 Trusts 38.9 79.4 20.6 Business equity 62.4 93.3 6.7 Non-home real estate 28.3 76.9 23.1 __________________________________________________________________ Total for group 49.7 87.8 12.2 __________________________________________________________________ Source: Edward N. Wolff, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle Class Squeeze, Working Paper No. 589 (March 2010), p. 51.

How Did All This Happen?


According to Prof. Richard D. Wolff Department of Economics, University of Massachusetts at Amherst Richard D. Wolff, Capitalism Hits the Fan, in Gerald Friedman et al. (eds.), The Economic Crisis Reader (Boston: Dollars & Sense, 2009). From 1820 to 1970, every decade U.S. workers experienced a rising level of wages In the 1970s this came to an end; real wages stopped rising and they have never resumed since U.S. workers became more productive, but got paid the same; wages began to stagnate and decline The gap between labor and capital grew bigger

1859 69

79

89

99

1909 19

29

1939

1947

1955

1965

1975

1985

1995

2005

The large corporations made huge profits and had much money at their disposal They bought other corporations (mergers and acquisitions) and they put their money into banks The banks loaned that money (with interest) to workers who didnt have money to consume This was done to raise their purchasing power because their wages werent enough to buy things

Then What? Since employers no longer raised workers wages, the workers had to go into debt to survive Debt went up and up and things got out of control The banks continued to loan money through new loans (secondary mortgages) at high interest rates, and this was a profit bonanza for the banks As corporations increasingly began to invest abroad (outsourcing production and services), U.S. workers lost their jobs, and this led to greater unemployment and underemployment

Unemployed workers with a lot of debt were unable to make their mortgage and credit card payments, and this led to foreclosures and bankruptcies This, in turn, led to the collapse of the banking system, necessitating a government bailout of the banks It is only through the nearly trillion dollar stimulus funds that the U.S. government poured into the economy to save the banks from default that a financial collapse was averted

Heres a view of the housing bubble in 2006 by looking at the stock chart of one home builder Hovnanian Enterprises (HOV)
Stock price: $70 per share in 2006; $1.30 per share in 2012.

$ 70

Source: http://finance.yahoo.com retrieved on December 28, 2011.

Extent of the Crisis


The current economic crisis has been deep and widespread on a global basis, especially in the U.S. In the epicenter of the crisis, in the United States, unemployment increased from 7 million in December 2007 to 16 million in October 2010 Counting the discouraged and part-time workers, the unemployment rate reached 18% in 2010 Foreclosures have been running over 1 million a year Poverty is on the rise (now 44 million Americans 1 in 7 live at or below the poverty line)

With the steady decline of the manufacturing sector in the United States through outsourcing of production to cheap labor areas abroad, 2.9 million well-paying manufacturing jobs have disappeared in the period 2005-2008 alone. And thats on top of a loss of more than 3 million jobs in manufacturing from 1998 to 2003, with millions more lost in the entire postwar period.

Long-term Unemployment and Underemployment (as of January 2011) The mean unemployment duration was 36.9 weeks, and the median was 21.8 weeks. The share of unemployed workers who have been without work for over six months was 43.8%, one of the highest on record. A total of 6.2 million workers have been unemployed for longer than six months. There were 25.1 million workers who were either unemployed or underemployed.

Average Annual Unemployment Rate, 2007-2010 (in percent)

Source: Bureau of Labor Statistics.

Today, the labor market remains 8.1 million jobs below where it was at the start of the recession over three years ago in December 2007. This number vastly understates the size of the gap in the labor market because keeping up with the growth in the working-age population would require adding another 3.4 million jobs over this period.
Thus, with the above 9% unemployment rate today, the labor market is now 11.5 million jobs below the level needed to restore the pre-recession unemployment rate of 5.0% in December 2007.

So, to achieve the pre-recession unemployment rate in five years, the labor market would have to add 285,000 jobs every month for the next 60 months. But, more importantly than that, beyond the impact of the great recession and the slow recovery in the years ahead, the big issue is the impact of globalization on the labor force structure and job creation in the United States And that will depend in large part how the problem of outsourcing is addressed in conjunction with the role of the state in providing stimulus funds to create jobs in the public sector jobs that private industry is unable or unwilling to create in the era of neoliberal globalization.

A boom in corporate profits, a bust in jobs, wages Economic disconnect: Corporate profits surge while jobs and wages remain at recession levels Paul Wiseman, AP Economics Writer, Friday, July 22, 2011. WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric and Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to leave the Great Recession far behind. But millions of ordinary Americans are stranded in a labor market that looks like it's still in recession. Unemployment is stuck at 9.2 percent, two years into what economists call a recovery. Job growth has been slow and wages stagnant. "I've never seen labor markets this weak in 35 years of research," says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University. Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after economists declared that the recession had ended in June 2009, according to Sum and other Northeastern researchers. In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50 percent after the 1991-92 recession and 25 percent after the 1981-82 recession. Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during those first 18 months. That's compared with 53 percent after the 2001 recession, nothing after the 199192 recession and 28 percent after the 1981-82 recession. (For full text of this article, see the appendix at the end of this power point presentation).

A Second Great Depression, or Worse?


SIMON JOHNSON, Thursday, August 18, 2011
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers." With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression? The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction. The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007. First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent. Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site). Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression. (For full text of this article see the Appendix at the end of this power point presentation).

Which Way Out of the Crisis?


Economic remedies to save the system from collapse are bound to fail so long as they remain within the framework of the existing capitalist system Changes that are required to revitalize the economy and turn things around point to a redistribution of wealth and income to increase mass consumption This would increase demand for consumer goods, hence increase production, and create jobs for the unemployed, as well as raising revenue for the state through corporate and individual income taxes

All these would require a restructuring of the economy away from failed neoliberal corporate capitalist policies and toward a new set of priorities that promote the interests of working people Such restructuring requires the transformation of our current capitalist economic system and the existing social order in the direction of providing greater rights and benefits to working people And this would, in turn, benefit society greatly and set us on a prosperous course that would vastly improve living standards and pull us out of the economic crisis

But, who listens ?

US beliefs, values
We're NUMBER ONE, above reproach, moral authority History: pilgrims escaping oppression Did not want government to rule their lives Pride in individualism, and ability to pull selves up by bootstraps Took care of our own Founding fathers:SMALL WEAK GOVERNMENT Federalism (national, state and local gov'ts) Legislative, Judicial and Executive Vote limited to those with property

Non-proportional representation (unlike any parliamentary democracy)


Bicameral Congress (Senate has power)

US beliefs, values

Weak political parties


Individual candidates raise own funding, make own decisions, run own campaigns Candidates communicate through media, not through party organs

20th century deliberate weakening of gov't


1920s progressive movement,attacking politically powerful and corporations Constitution amendments for women's suffrage and direct election of senators

20th century direct primary elections took power from hands of party leaders
Presidential nominating conventions became meaningless as candidates chosen in primaries Campaigns became more candidate and less party-centered Polyarchy:

US beliefs, values

Party doesn't vote together as in other countries Public Policy: federal, state, local (cf Europe)
medical care transportation utilities welfare early life housing

Little gov't regulation, instead have day in court Litigious 1990: 20 times # lawyers/cap as Japan, 10 times as Sweden, 3 times as Germany
Tort costs 2.3% of GDP in 1991 cf 1.2% for Germany, 0.9% France, Canada, Australia, 0.7% for Japan, 0.6% for UK "There is hardly a political question in the US which does not sooner or later turn into a judicial one"
Tocqueville

US beliefs, values

Public Sector (federal, state, local) %GDP 1995 (including the military)
US 33% UK 43% Germany 50% Denmark 61% Sweden 66%
50% for all EU countries, and without US military gap would be even bigger

US beliefs, values

Tax Receipts 1995 % GDP


US 31, EU 45, UK 38, Sweden 58

Individualism, goals, advancement

US beliefs, values

NOT community goals or public advancement

Liberty (but 1/4 world's prisoners) Equality of opportunity (not there, but belief is)
Poorer people are not able to compete

Migrants seeking escape, economic advancement Never had a democratic socialist movement US states with own power to tax & spend resist national initiatives Labor unions only interested in their own and not for ambitious welfare state as in Europe Frontier "land of opportunity," could always go west WWII disrupted US much less than Europe

US beliefs WHY?

Reich: Supercapitalism

Reich: Supercapitalism

NYT June 13, 2004

Qualities Children Should Learn at Home


US male
100 90 80 70 60

US female

Canada male

Canada female

Norway male

Norway female

50 40 30 20 10 0

Hard Work

Responsibility

Religious faith

Poverty Attitudes
US male US female Canada male Canada female Norway male Norway female

60

% World Values Survey 1994

50

40

30

20

10

be cause they a re unlucky

be cause of lazines s and lack of w ill pow er

Be caus e there is inj ustice in our soc ie ty

Beliefs in equality WB2005 World Development Report 2006 Fig 4.2 Ingelhart World Values Survey representative samples of 69 countries

CULTURE OF FEAR
"It is always simply a matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. The people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country."
Herman Goering Hitler's propaganda chief said to Gustav Gilbert during an Easter recess in the Nuremberg Trials on April 18, 1946

"The short answer to why Americans harbor so many misbegotten fears is that imminent power and money await those who tap into our moral insecurities and supply us with symbolic substitutes.
(Barry Glassner) The Culture of Fear pg xxviii

CULTURE OF FEAR

Oderint dum metuant:


let them hate so long as they fear (Roman maxim)

"Our job is to give people not what they want, but what we decide they ought to have."
Richard Salant, former President of CBS News

'I know the secret of making the average American believe anything I want him to. Just let me control television.... You put something on the television and it becomes reality. If the world outside the TV set contradicts the images, people start trying to change the world to make it like the TV set images.....'
Hal Becker, media 'expert' and management consultant, the Futures Group, in an interview in 1981

Media in World War I


Woodrow Wilson elected President in 1916 on platform Peace without victory since population extremely pacifistic and didnt want to be involved in a European War, but Wilson administration was actually committed to war and had to do something about it They established the Creel Commission, a government propaganda commission, which in 6 months turned the pacifist population into a hysterical warmongering population, which wanted to destroy everything German, tear the Germans limb from limb, go to war and save the world. Edward Bernays Creel Commission member and founder of public relations industry

Edward Bernays Propaganda 1928


The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. . . . Clearly it is the intelligent minorities which need to make use of propaganda continuously and systematically. In the active proselytizing minorities in whom selfish interests and public interests coincide lie the progress and development of American democracy.

EDUCATION
Schools as an indoctrination system Curriculums tolerated as long as perform institutional role Today: Commercialism in schools eg. vending machine contracts in Seattle schools, Channel 1 Derek Bok: former president of Harvard writes in 2003 Once confined to athletics (paying coaches $500,000, recruiting students only for athletic ability), now booming in medical schools and research labs "commercialization threatens to change the character of the university in ways that limit its freedom, sap its effectiveness and lower its standing in society" "Company officials regularly insist that information concerning the work they support be kept secret while the research is going on and for a long enough time thereafter to allow them to decide whether to file for a patent" (Universities in the Marketplace: The Commercialization of Higher Education) Courses, passing exams, imposing discipline rather than fostering independent thinking Encouragement to get credit ratings in middle school, Medical Harm, population health in medical school, public health school

EDUCATION
William E. Simon, Secretary of the Treasury under Presidents Richard M. Nixon and Gerald R. Ford [and President of the conservative Olin Foundation]. "Why should businessmen be financing left-wing intellectuals and institutions which espouse the exact opposite of what they believe in?" he asks, referring to the fact that many corporations give grants to universities or institutions whose scholars may be critical of business.
Ann Crittenden, "Simon: Preaching the Word for Olin," New York Times, July16, 1978

"The business community needs peace to see economic growth. They need kids to be educated to be consumers and workers." Carol Bellamy director of UNICEF quoted in NYT September 3, 2000

Advertising for Children


Advergaming
viral marketing buzz marketing orchestrated word of mouth consumer generated marketing (best sales person is friend rather than an ad) "slumber parties" for 8-13 year old girls" (GIA: Girls Intelligence Agency--"you and your 10 best buds hangin out all night with the hottest, yet-tobe-seen-in-stores, stuff for chicas like you"

Advertising for Children


Which emotions to attack? -hire child psychologists -ads play on insecurities and need to fit in with peers "It's the fear of social failure. You have to have the latest. You don't want to feel like an outcast" Sean Brierley Advertising Handbook
"Advertising at its best is making people feel that without the product you're a loser. Kids are very sensitive to that." Nancy Shalek president Shalek Agency

The Nag Factor

"The child exerts a certain amount of pressure, the effectiveness of which depends on his (or her) ability to argue sensibly with an adult. The toy advertiser can help the child by providing him (or her) with arguments which will satisfy mother."
report to Mattel on how to sell Barbie to mothers (who hated the doll)

Never too young


"I guess when I started they thought the youngest child you could advertise to and get a result was five; now they think it is somewhere between two and three"
Bob Moehl, advertiser

Targets- now birth to 3 years--hot demographic - "if you own this child at an early age, you can own this child for years to come. Companies are saying, 'Hey, I want to own the kid younger and younger.'"
Mike Searles president of Kids R US

83 percent of all U.S. stocks are in the hands of 1 percent of the people.

61 percent of Americans "always or usually" live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.

66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.
36 percent of Americans say that they don't contribute anything to retirement savings. A staggering 43 percent of Americans have less than $10,000 saved up for retirement. 24 percent of American workers say that they have postponed their planned retirement age in the past year. Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.

Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975. For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together. In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.
The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nations wealth. Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008. In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.

The top 1 percent of U.S. households own nearly twice as much of America's corporate wealth as they did just 15 years ago. In America today, the average time needed to find a job has risen to a record 35.2 weeks. More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying. or the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.

This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.
Approximately 21 percent of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years. Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.

The top 10 percent of Americans now earn around 50 percent of our national income.

The Economic Crisis of 2008

Cause and Aftermath


James Gwartney

Prepared by Meghan E. Walker

U.S. housing policies are the root cause of the current financial crisis. Other players-greedy investment incompetent bankers; rating foolish

investors;

imprudent

bankers;

agencies;

irresponsible housing speculators; short sighted homeowners; and predatory mortgage brokers, lenders, and borrowers--all played a part, but they were only following the economic incentives that government policy laid out for them.

- Peter J. Wallison

rev200902

The Economic Crisis of 2008: Cause and Aftermath

Slide 216 of 31

Key Events Leading up to the Crisis


Housing price increase during 20002005, followed by a levelling off and price decline Increase in the default and

foreclosure rates beginning in the


second half of 2006 Collapse of major investment banks
rev200902 The Economic Crisis of 2008: Cause and Aftermath Slide 217 of 31

Exhibit 1: House Price Change

Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade. Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent. The boom had turned to a bust, and the housing price declines continued throughout 2007 and 2008. By the third quarter of 2008, housing prices were approximately 25 percent below their 2006 peak. Annual Existing House Price Change
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%

Source: www.standardpoors.com, S and P Case-Schiller Housing Price Index.

rev200902

19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

The Economic Crisis of 2008: Cause and Aftermath

Slide 218 of 31

Exhibit 2a: The Default Rate


The default rate fluctuated, within a narrow range, around 2 percent prior to 2006. It increased only slightly during the recessions of 1982, 1990, and 2001. The rate began increasing sharply during the second half of 2006 It reached 5.2 percent during the third quarter of 2008.
Default Rate
6% 5% 4% 3% 2% 1% 0%

rev200902

19 79 19 80 19 81 19 82 19 84 19 85 19 86 19 87 19 89 19 90 19 91 19 92 19 94 19 95 19 96 19 97 19 99 20 00 20 01 20 02 20 04 20 05 20 06 20 07
Source: mbaa.org, National Delinquency Survey.

The Economic Crisis of 2008: Cause and Aftermath

Slide 219 of 31

Exhibit 2b: Foreclosure Rate


Housing prices were relatively stable during the 1990s, but they began to rise toward the end of the decade. Between January 2002 and mid-year 2006, housing prices increased by a whopping 87 percent. The boom had turned to a bust, and the housing price declines continued throughout 2007 and 2008. By the third quarter of 2008, housing prices were approximately 25 percent below their 2006 peak. Foreclosure Rate
1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

Source: www.mbaa.org, National Delinquency Survey.

rev200902

19 79 19 80 19 81 19 82 19 84 19 85 19 86 19 87 19 89 19 90 19 91 19 92 19 94 19 95 19 96 19 97 19 99 20 00 20 01 20 02 20 04 20 05 20 06 20 07

The Economic Crisis of 2008: Cause and Aftermath

Slide 220 of 31

Exhibit 3: Stock Market Returns

As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year. This is nearly twice the magnitude of any year since 1950. This collapse eroded the wealth and endangered the retirement savings of many Americans.

S and P 500 Total Return


60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%

19 50

19 53

19 56

19 59

19 62

19 65

19 68

19 71

19 74

19 77

19 80

19 83

19 86

19 89

19 92

19 95

19 98

20 01

20 04

Source: www.standardpoors.com

rev200902

The Economic Crisis of 2008: Cause and Aftermath

Slide 221 of 31

20 07

Key Questions About the Crisis of 2008


Why did housing prices rise rapidly and then fall?

Why did the mortgage default and housing foreclosure rates begin to
increase more than a year before the recession of 2008 started? Why are the recent default and foreclosure rates so much higher than

at any time during the 1980s and 1990s?


Why did investment banks like Bear Stearns and Lehman Brothers run into financial troubles so quickly?

Four factors provide the answers to all of these questions.

rev200902

The Economic Crisis of 2008: Cause and Aftermath

Slide 222 of 31

What Caused the Crisis of 2008?


FACTOR 1: Beginning in the mid-1990s, government regulations began to erode the conventional lending standards. Fannie Mae and Freddie Mac hold a huge share of American mortgages. Beginning in 1995, HUD regulations required Fannie Mae and Freddie Mac to increase their holdings of loans to low and moderate income borrowers. HUD regulations imposed in 1999 required Fannie and Freddie to accept more loans with little or no down payment. 1995 regulations stemming from an extension of the Community Reinvestment Act required banks to extend loans in proportion to the share of minority population in their market area. Conventional lending standards were reduced to meet these goals.

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Exhibit 4: Fannie Mae/Freddie Mac Share


The share of all mortgages held by Fannie Mae and Freddie Mac rose from 25 percent in 1990 to 45 percent in 2001. Their share has fluctuated modestly around 45 percent since 2001.

Freddie Mac/Fannie Mae Share of Outstanding Mortgages


50% 45% 40% 35% 30% 25% 20%

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

Source: Office of Federal Housing Enterprise Oversight, www.ofheo.gov.

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20 08

Exhibit 4.1: Subprime Mortgages


Subprime mortgages as a share of total mortgages originated during the year, increased from 5% in 1994 to 13% in 2000 and on to 20% in 2004-2006.

Subprime Mortgage Originations as a Share of Total


25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Subprime (FRB)

Subprime (JCHS)

Source: Data from 1994-2003 is from the Federal Reserve Board while 2001-2007 is from the Joint Center for Housing Studies at Harvard University

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Exhibit 4.2: Subprime, Alt-A, and Home Equity


Like subprime, Alt-A and home equity loans have increased substantially as a share of the total since 2000. In 2006, subprime, Alt-A, and home equity loans accounted for almost half of the mortgages originated during the year.

Subprime, Alt-A, and Home Equity as a Share of Total


50% 40% 30% 20% 10% 0% 1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Subprime (FRB)

Subprime (JCHS)

Subprime + Alt-A

Subprime + Alt-A + Home Equity

Source: Data from 1994-2003 is from the Federal Reserve Board while 2001-2007 is from the Joint Center for Housing Studies at Harvard University

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What Caused the Crisis of 2008?


FACTOR 2: The Feds manipulation of interest rates during 2002-2006 Fed's prolonged Low-Interest Rate Policy of 2002-2004 increased demand for, and price of, housing. The low short-term interest rates made adjustable rate loans with low down payments highly attractive. As the Fed pushed short-term interest rates upward in 2005-2006, adjustable rates were soon reset, monthly payment on these loans increased, housing prices began to fall, and defaults soared.

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Exhibit 5: Short-Term Interest Rates


The Fed injected additional reserves and kept short-term interest rates at 2% or less throughout 2002-2004. Due to rising inflation in 2005, the Fed pushed interest rates upward. Interest rates on adjustable rate mortgages rose and the default rate began to increase rapidly.
Federal Funds Rate and 1-Year T-Bill Rate
8% 7% 6% 5% 4% 3% 2% 1% 0%

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19 95 19 95 19 96 19 96 19 97 19 97 19 98 19 99 19 99 20 00 20 00 20 01 20 02 20 02 20 03 20 03 20 04 20 04 20 05 20 06 20 06 20 07 20 07 20 08
Federal Funds
Source: www.federalreserve.gov and www.economagic.com

1 year T-bill

The Economic Crisis of 2008: Cause and Aftermath

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Exhibit 5.1: ARM Loans Outstanding


Following the Fed's low interest rate policy of 2002-2004, Adjustable Rate Mortgages (ARMs) increased sharply. Measured as a share of total mortgages outstanding, ARMs increased from 10% in 2000 to 21% in 2005.

ARM Loans Outstanding


25%

20%

15%

10%

5%

0%

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

Source: Office of Federal Housing Enterprise Oversight, www.ofheo.gov.

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20 08

What Caused the Crisis of 2008?


FACTOR 3: An SEC Rule change adopted in April 2004 led to highly leverage lending practices by investment banks and their quick demise when default rates increased. The rule favored lending for residential housing. Loans for residential housing could be leveraged by as much as 25 to 1, and as much as 60 to 1, when bundled together and financed with securities. Based on historical default rates, mortgage loans for residential housing were thought to be safe. But this was no longer true because regulations had seriously eroded the lending standards and the low interest rates of 2002-2004 had increased the share of ARM loans with little or no down payment. When default rates increased in 2006 and 2007, the highly leveraged investment banks soon collapsed.

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Exhibit 5.2: Leverage Ratios


The leverage ratios of loans and other investments to capital assets for various financial institutions are shown here. When Bear Stearns was acquired by JP Morgan Chase its leverage ratio was 33 to 1. Note, this was not particularly unusual for the GSEs and large investment banks.
Leverage Ratios (June 2008)
Freddie Mac Fannie Mae Brokers/hedge Funds Savings institutions Commercial banks Credit unions 0 9.4 9.8 9.1 20 40 60 80 21.5 31.6 67.9

Source: The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Meltdown, Milken Institute

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What Caused the Crisis of 2008?


FACTOR 4: Doubling of the Debt/Income Ratio of Households since the mid-1980s. The debt-to-income ratio of households was generally between 45 and 60 percent for several decades prior to the mid 1980s. By 2007, the debt-to-income ratio of households had increased to 135 percent. Interest on household debt also increased substantially. Because interest on housing loans was tax deductible, households had an incentive to wrap more of their debt into housing loans. The heavy indebtedness of households meant they had no leeway to deal with unexpected expenses or rising mortgage payments.

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Exhibit 6a: Household Debt as a Share of Income


Between 1950-1980, household debt as a share of disposable (after-tax) income ranged from 40 percent to 60 percent. However, since the early 1980s, the debt-to-income ratio of households has been climbing at an alarming rate. It reached 135 percent in 2007, more than twice the level of the mid1980s.
Household Debt to Disposable Personal Income Ratio
140% 120% 100% 80% 60% 40% 20%

Source: www.economagic.com

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19 53 19 55 19 58 19 60 19 63 19 65 19 68 19 70 19 73 19 75 19 78 19 80 19 83 19 85 19 88 19 90 19 93 19 95 19 98 20 00 20 03 20 05 20 08

The Economic Crisis of 2008: Cause and Aftermath

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Exhibit 6b: Debt Payments as a Share of Income


Today, interest payments consume nearly 15 percent of the after-tax income of American households, up from about 10 percent in the early 1980s.

Debt Payments to Disposable Personal Income Ratios


16% 14% 12% 10% 8% 6%

Source: www.economagic.com

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19 80 19 81 19 82 19 83 19 85 19 86 19 87 19 88 19 90 19 91 19 92 19 93 19 95 19 96 19 97 19 98 20 00 20 01 20 02 20 03 20 05 20 06 20 07
Total Debt Mortgage

The Economic Crisis of 2008: Cause and Aftermath

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Exhibit 7a: Foreclosure Rates on Subprime


Compared to their prime borrower counterparts, the foreclosure rate for subprime borrowers is approximately 10 times higher for fixed rate mortgages and 7 times higher for adjustable rate mortgages. There was no trend in the foreclosure rate prior to 2006 for adjustable rate or fixed rate mortgages. Starting in 2006, there was a sharp increase in the adjustable rate mortgage foreclosure rate. Foreclosure Rates on Subprime Mortgages
6% 5% 4% 3% 2% 1% 0%

19 98

19 98

19 99

19 99

20 00

20 00

20 01

20 01

20 02

20 02

20 03

20 03

20 04

20 04

20 05

20 05

20 06

20 06

20 07

Fixed

Adjustable

Source: Liebowitz, Stan J., Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Ch. 13 in Randall G. Holcombe and Be njamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.

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20 07

Exhibit 7b: Foreclosure Rates on Prime


While the foreclosure rate on fixed rate mortgages was relatively constant, the foreclosures on adjustable rate mortgages began to soar in the second half of 2006. This was true for both prime and subprime loans.

Foreclosure Rates on Prime Mortgages


1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

19 98

19 98

19 99

19 99

20 00

20 00

20 01

20 01

20 02

20 02

20 03

20 03

20 04

20 04

20 05

20 05

20 06

20 06

20 07

Fixed

Adjustable

Source: Liebowitz, Stan J., Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Ch. 13 in Randall G. Holcombe and Be njamin Powell, eds, Housing America: Building Out of a Crisis (New Brunswick, NJ: Transaction Publishers, 2009 (forthcoming) We would like to thank Professor Liebowitz for making this data available to us.

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20 07

Fixed vs. Variable Rate Mortgages


Default and foreclosure rates on fixed interest rate mortgages did not rise much in 2007 and 2008. This was true for loans to both prime and sub-prime borrowers. In contrast, the default and foreclosure rates on adjustable rate mortgages soared during 2007 and 2008 for both prime and subprime borrowers. The combination of lower lending standards, adjustable rate loans, and the Fed's interest rate policies of 2002-2006 was disastrous.

Incentives matter and perverse incentives created the crisis of 2008.

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Are We Headed Toward Another Great Depression?


Are the current conditions unprecedented? How do the current conditions compare with the Great

Depression?

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Exhibit 8a: Unemployment in Recent Severe Recessions

At the end of January 2009, the unemployment rate was 7.6 percent and it will surely go higher. This is not unprecedented. The unemployment rate rose to 9.6 percent during the 1974-75 recession, and to 10.8 percent during the 1980-1982 recession. Even during the relatively short recession of 1990-1991, the unemployment rate rose to nearly 8 percent and it remained at, or near, 7 percent for almost two years.
Peak Monthly Unemployment Rates in Recent Severe Recessions
12.0% 10.8% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1973-75
Source: www.bls.gov

9.0% 7.8% 7.6%

1980-82

1990-91

2007-?

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Exhibit 8b: Great Depression Unemployment


The unemployment rate soared to nearly 25 percent during 1933. The unemployment rate was 14 percent or more every year throughout 1931-1939.

Unemployment Rates During the Great Depression


30% 25% 20% 16% 15% 10% 5% 0% 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 25% 22% 20% 17% 14% 19% 17%

24%

9%

Source: Bureau of the Census, The Statistical History of the United States from Colonial Times to the Present (New York: Basic Books, 1976)

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Lessons From the Great Depression

Avoid these policies:


Monetary contraction Trade restrictions Tax increases Constant changes in policy; this merely creates uncertainty and delays private sector recovery.
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This Recession is Likely to be Lengthy


It will take time for the malinvestments to be corrected and for households to improve their personal financial situation. Various types of stimulus packages are not likely to be very effective.

Danger: Frequent policy changes will retard recovery. The recent


policies of the Bush Administration illustrate this point.

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What Needs to be Done?


1. The keys to sound policy are well-defined property rights, monetary and price stability, open markets, low taxes, control of government spending, and above all, neutral treatment of both people and enterprises. 2. Monetary policy is way off track. Since the late 1990s it has been on a stop-and-go course that generates instability. The Fed needs to announce it will follow a stable course in the future. There will be no repeat of the Great Depression, but neither will there be a repeat of the 1970s. 3. President Obama and Congress should announce that: i. The mistakes of the 1930s will not be repeated, including the uncertainty generated by the frequent policy changes that characterized the New Deal. ii. In the future, government spending will be controlled and the deficit reduced.

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Crisis of Markets or a Crisis of Politics?


Are the current conditions unprecedented?

Both the Great Depression and the current crisis are the result of
perverse policies. During the Great Depression era, disastrous policies led to a huge

expansion in the size and role of government. Will the same thing
happen this time? The answer to this question will determine the future economic status of Americans.

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