Page 3 of 6 THE SHAPE OF US POPULISM, Part 5 Rubin's poisoned chalice
By Henry C K Liu
County Employees’ Retirement System, Employer-Teamsters Local Nos. 175 &
505 Pension Trust Fund, Hawaii Laborers Pension Plan, Greenville Plumbers
Pension Plan, Archdiocese of Milwaukee and Staro Asset Management.
The post-World War I Republican decade
After eight years of Woodrow Wilson as Democrat president, for the following 12
years from 1921 to 1933 three Republican presidents, Warren G Harding, Calvin
Coolidge and Herbert Hoover, administered national policy with a conviction
that the primary function of government was to assist big business in making
maximum profit, rather than to police unsavory predatory
corporate practices for the protection of small entrepreneurs and the consumer
public.
The phony prosperity of the Roaring Twenties provided temporary but false
validation of the conjured correctness of such convictions. Indeed, corporate
profit soared to enable new investment in industrial expansion, increasing
productivity and the national wealth. But much of the prosperity benefited only
the financial elite, albeit that some did trickle down to wage earners in the
form of higher employment, low-cost consumer goods and a generally rising
standard of living.
Although a significant portion of the population was still trapped in poverty,
neither conservatives nor liberals in the 1920s were astute enough to realize
that while the policy of stimulating maximum corporate profit might have been
valid in the age of Alexander Hamilton, when the US was a weak emerging economy
plagued with underdevelopment due to capital scarcity, and even after the Civil
War when the US economy was transitioning from agrarianism to industrialism,
such a policy of condoning the maldistribution of wealth in the name of the
need for capital formation would inevitably lead to structural implosion in the
new era of abundance and overcapacity.
Public spending in education, health and social safety fell behind investment
in the private sector. Regional development was non-existent in government
policy, leaving vast regions of the country in dire poverty, forcing rural
population to migrate to urban areas to create massive problems of unguided
urbanization, resulting in urban slums and the deterioration of central
business districts. A similar policy blunder of neglecting the public sector
was made in the 1990s and 2000s under both Democratic and Republican
administrations.
Bubbles a solution to insufficient demand
To keep the economy growing amid overcapacity due to insufficient demands,
expansion could come only from speculative bubble to speculative bubble fueled
by debt. Policymakers in the 1920s embraced wholesale dismantling of regulation
adopted during the Progressive Era to again let the foxes guard the chickens in
the financial market and to turn to debt/speculation-driven growth, rather than
relying on the fundamental, utilitarian option of increasing wage income to
combat insufficient demand.
Eventually, the debt bubble burst from income being too low to sustain inflated
asset prices or to meet either debt service or to sustain needed consumption,
leading to widespread bank failures and company insolvencies.
Only then did it became apparent to the voting public that government
abdication of its primary role of maintaining fair and equitable wealth
distribution had been the key contributing factor behind the structural
weakness of free market capitalism.
Economic equity is a utilitarian necessity, not just a moral principle.
Fundamentally, the structural weakness of income maldistribution and disparity
behind the 1929 crash also caused the credit crisis of 2007 when debt greatly
outpaced the ability of income to service it. The US, leading the rest of the
world, became the victim of a top-heavy finance sector expanding at a faster
pace than the real economy, with a massive amount of fiat money going to the
places where it was not needed, such as speculation, rather than to rising
wages on which a balance between supply and demand critically depended.
Wealth and the supply/demand imbalance
The economy of the 1920s was not all fluff. Significant growth of production
resulted from new scientific discoveries and technological inventions, new
sources of inexpensive power, and new commercial and financial techniques to
advance market efficiency. By 1929, 69 workers could produce the same amount
produced by 100 workers in 1920, pushing aggregate production up by 45%. In
1929, national income reached $82 billion, an increase of 31% after inflation
from 1919, against a population increase of 11%.
But wage income as a proportion of national income continued to decline.
Production value of basic necessities, such as food and clothing dropped from
58% of the economy to 43%, with sharp increases in new buildings and machinery
and in durable goods such as autos, household appliances and telephones. Real
wealth had been created in the 1920s; the only problem was that the wealth was
not shared equitably, resulting in a supply/demand imbalance. The imbalance was
masked by an overblown prosperity created by debt and speculation. Workers were
encouraged to speculate in the stock market with easy credit and high margin,
pushing up share prices of companies whose profit strategy was to push down
worker wages.
Similarly, the economy of the 1990s was highly innovative. Epoch-making
inventions and technical advances greatly increased productivity and vastly
improved efficient use of resources. Communication made big leaps in speed,
capacity, mobility and cost reduction. The digital revolution enabled
exponential gains in information processing and data management, making the
management of vast, complex systems over long distances routine. These advances
required new regulations and standards to guide evolving systems toward paths
of common good and away from paths destructive of sustainable growth. But while
obsolete regulations were discarded, new relevant regulations were resisted for
fear of hampering further creative innovation.
Within an unprecedented short time, the financial forces that commanded the
rapid growth of profit from human intelligence managed to exploit deregulation
to structure a socioeconomic regime that took on the appearance of natural law.
Under neo-liberal ideology, the economy was encouraged to mimic the law of the
jungle to favor the financially strong, rushing towards self destruction as the
bottom of the food chain thinned out from over-hunting and the top of food
chain suffered from liver failure caused by an excessively rich diet. The
problem was exacerbated by an unsustainable debt bubble and wild speculation.
Easy access to debt replaced even the need for capital, transforming capitalism
into a debt-o-mania orgy.
In the 1920s, the middle class for the better part of a whole decade was able
to enjoy a standard of living previously available only to the very rich. A new
service sector of the economy emerged, giving rise to white collar workers as
blue collar workers in manufacturing declining in proportion faster than in
number. By 1930, only 58% of the workforce was engaged in production as between
1920 and 1929 industrial workers declined by 500,000 and farm workers declined
by 250,000. Over 30% of the workforce was engaged in the service sector, much
of it devoted to serving speculative needs of the finance sector.
Henry Ford: Populist industrialist
While the expansion of the late 19th century was centered on railroads, steel
and oil, the expansion of the 1920s was dominated by a building boom related to
the manufacturing of automobiles. Henry Ford, who formed the Ford Motor Company
in 1901, was the first and perhaps the only populist industrialist in US
history. His Model T automobile, introduced in 1908, was produced with
innovative assembly-line technology to achieve a selling price for a quality
product that was affordable by Ford workers, thus transforming the automobile
from an expensive hand-made toy for the rich to a massed-produced utilitarian
machine that transformed the transportation pattern of the nation and the
world.
Ford also introduced the 40-hour week, giving workers leisure to enjoy outings
with their families in his cars. Ford was able to carry out his populist idea
of paying high wages to create buyers who could afford to buy the cars they
built because he refused to surrender his control and independence to bankers
and institutional investors, who would insist on keeping wages at subsistence
level to maximize corporate profit every quarter.
Fordism spread to the entire manufacturing sector, producing household
appliances, such as washer/driers, dishwashers, refrigerators, radios, and so
forth at falling prices with rising wages that directly improved living
standards. Fordism was one of the key factors in propelling the US into world
power status.
In 1904, William Capro "Billy" Durant at age 43 gained control of the Buick
Motorcar Company, which fell into financial difficulty selling luxury cars.
Turning Buick into a successful mass production company of upscale vehicles for
a mass market, Durant use the resultant profit to acquire other obsolete car
producers and part suppliers such as Oldsmobile, Pontiac and Cadillac in quick
order and turn his company into a giant corporation called General Motors (GM).
Overextended financially during the recession of 1910, GM was taken over by its
bankers and control passed from Durant through a voting trust for five years.
Durant then went on to establish Chevrolet in September, 1915 to produce a car
that would compete in price and volume with the Ford Model T, but offering more
sale-inducing amenities such as a choice of colors against the black Model T.
When the bankers' voting trust expired, Durant regained control of GM with
financial support from the E I Du Pont family, which had made a fortune with
its exclusive patent on dynamite production during World War I.
In the spring of 1934, five and a half years before Germany's invasion Poland
in September 1939 and the beginning of World War II, Fortune magazine ran an
article entitled "Arms and Man", a cheap expose unworthy of its lofty title.
Among other things, it claimed that while it cost the War Department $25,000 to
kill an enemy soldier, Chicago gangsters were doing it for $100 a head. Senator
Gerald Nye (Republican, North Dakota), chairman of a special committee to
investigate illegal links between business and armament, entered the article
into the Congressional Records, remarking that "there has not been published in
ages anything so enlightening". The Nye investigation exposed a few well-known
"surprises" about the international arms trade such as that bribery occurred in
Latin America and Asia - without linking the observation to the fact that most
arms purchasers at the time were located in those two turbulent regions, that
home governments were enlisted to secure foreign sales, that arms manufacturers
always sold to any customer paying cash or with good credit regardless of
morals or politics, and often to both sides of the same conflict, and that arms
embargoes were
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