Thursday, November 20, 2008

"Obama Hears a Giant Sucking Sound"

Holman Jenkins in Wednesday's Wall Street Journal, "Obama Hears a Giant Sucking Sound". Excerpt:

His friends advise Barack Obama to launch a "New" New Deal. Maybe that's because the old New Deal is sinking fast.

Mr. Obama's one deeply false note during the campaign was his harping on "deregulation" as if that were the source of current troubles. His real problem is the crack-up of the world FDR built.

Fannie Mae was a New Deal creation, subsidizing the securitization of mortgage debt. FDR's successors piled on the subsidies for housing debt and incentives directed at low-income borrowers. Kaboom.

Then there's the UAW, born in 1935. For decades the UAW steadily traded away domestic auto market-share to imports and transplants to keep its aging membership toiling away toward their golden pensions and collecting wages and benefits twice those of their competitors. It worked for a while . . .

Mr. Obama must be looking around and beginning to suspect he will be pouring his political capital, along with considerable taxpayer capital, down bottomless holes for the next four years. He won't be building a legacy as the new FDR, but cleaning up after the last one.

Jenkins mentions AIG in this column too, and makes a point that most in the mainstream media seem to have missed: the notorious lavish retreat for independent insurance agents is part of how insurance companies get those agents to sell their products. Similar events are held all the time by mutual fund companies wholesaling their funds to financial planners or pharmaceutical companies marketing their drugs to physicians. It's how business is done, and now that the U.S. government essentially owns AIG, it is in the taxpayers' interest for AIG to get agents to sell its insurance policies.

The photo above, of Obama touring an auto plant, ran alongside the Jenkins's column.


db said...

Similar events may be held all the time, but that doesn't mean they are right. The reason that they seem so egregious to the average person is because they are. That industries with too much money sloshing around (the three you mention are good examples) do business by quid pro quo (you buy my goods, I'll put you up at a resort for the week) is corruption by another name. It's the antithesis of capitalism- it's commerce through relationships.

DaveinHackensack said...

That's not exactly the quid pro quo. It's part of it, but mostly it's you buy us lunch, and we'll sit still for your presentation. Or, you pitch in part of the cost of our continuing education class, and we'll let you give us a 5 minute 'commercial' for your company's product. You give us free pens, mugs, and golf balls, and we'll let you put your company's name on them. The financial planner, or the physician, is ethically and legally bound to recommend/prescribe whatever products he determines are best for his client's/patient's situation.

The wholesalers/pharmaceutical sales reps expose the planners/physicians to new products with different features and subsidize the cost of industry experts who provide general continuing professional education. A lot of it is of value for the retail investor/patient.

Building relationships has been an essential part of capitalism from the beginning. It isn't antithetical to capitalism.

Daniel said...

I find it weird that the article claims Social Security worked for a while--but perhaps they mean it didn't have disastrous effects in the medium term.

(Though even here, it established the principle that one generation would be a slave to the next. That is a disastrous policy that would never "work"--only take some time to prove its monumental stupidity, from an economic and political perspective.)

Although my history of the period is a little fuzzy, I believe the implementation of SS was one of the two big reasons that led to the Roosevelt Recession.

Over the long-term I think pretty much everyone with a brain can see that it was and is not much different from a Ponzi scheme.

As for new deals, and change, I think (sadly) the old French saying is likely to be particularly apt in the case of Obama. We might have new names but it will be the same old statism.

DaveinHackensack said...

Social Security worked in the sense that it reduced abject poverty among the elderly, but the 'pay as you go' system wasn't sustainable in the face of longer life expectancies and worsening demographics (fewer workers and more retirees).

I've never heard the claim that the implementation of Social Security led to a recession. I'm a little skeptical because the payroll tax used to fund it at the time was pretty low -- 2% on wages of up to $3,000, split equally between employee and employer (1% each).

As I've mentioned before in our correspondence, I don't think it's realistic or desirable to scrap the social contract in modern societies -- even in non-Democratic first world countries such as Singapore and Hong Kong the government plays a role in social insurance. I do think that a social security system based on personal accounts, along the lines of those in Singapore, Hong Kong, or Chile would make more sense here. It would be difficult politically to pass something like that though. Chile, of course, wasn't a democracy when it transitioned its social security system to private accounts.

Daniel said...

"I've never heard the claim that the implementation of Social Security led to a recession."

I'm pretty sure it was the common view at the time--on the right at least. I don't know that it's a prevalent view at all today...I'd be somewhat surprised, in fact, if more than 5% of the US populace ever even heard of the Roosevelt Recession.

I just did a quick Google search to see if any names popped up that jogged my memory.

Wiki has historian Edward Berkowitz, who specializes in this area, saying that it was the cause. Nothing there. (I read so little of modern historians...)

My thinking here might have come from The Roosevelt Myth by Flynn, anything by Mises, or Capitalism by Reisman.

In any case, raising the cost of labor and pulling a large amount of money out of the economy (into government coffers) while at the same time decreasing government spending is more precisely what I had in mind.

Of course, the above authors would qualify the latter point--and I would too--and all of us wouldn't limit ourselves to faulting Roosevelt on only two points...

...unless we said that politically he was an enemy of freedom and that economically he was an enemy of capitalism. (Even that might be giving him the credit of assuming he actually had an established position on these issues.)

db said...

Spoken like a guy who doesn't pay for a lot of his own lunches. ;-)

The outrage over AIG (and GM/Ford/Citi etc) isn't about a couple of power lunches and golf balls. It's the ongoing profligacy in spite of the fact that they went to Congress, hat in hand. AIG spent almost a half million dollars on a luxury retreat days after getting $85B from Congress. Wall Street banks spend their bailout on bonuses. BONUSES! For a job poorly done. That's not business- that's larceny. To quote SNL, even the mob knows enough to lay low after a heist like that.

DaveinHackensack said...


Bonuses for a money-losing company's employees and incentives for independent agents who pay the company's bills are two different things. I'm with you on the bonuses, but as long as we as taxpayers effectively own most of AIG, it's in our interests for insurance agents to sell AIG's products, and to that end it makes sense for the company to reward those agents who sell its policies and encourage them to sell more.

BTW, it's been a while since I've had my lunches paid for.

DaveinHackensack said...


Check out the NY Times column by Tyler Cowen that I linked to in a post today. He mentions that Roosevelt increased reserve requirements for banks prior to the downturn of '37-'38; given the multiplier effect that would have had on credit (due to the leveraged nature of banks) that seems more plausible as a proximate cause of the downturn than the imposition of the (at that time) 2% payroll tax, particularly since the effective doubling of the payroll tax (on a higher wage base) in 1983 didn't lead to a recession.