Mormons

We have almost all had Mormon missionaries visit our door. Usually we come up with some excuse to send them away. Sometimes we are honest and say we do not want to talk. Occasionally, we engage in a brief discussion with them. Rarely do we want to find out what they want to talk about, much less engage in a lengthy discussion with them, though there are exceptions. Some they visit want to learn everything they have to offer, and that is what the Mormon missionaries live for.

However, the Church of Jesus Christ of Latter Day Saints (often called Mormons or abbreviated LDS) represents a big slice of what is now considered mainstream America. The LDS say they have 5.7 million member in the U.S., and 13 million worldwide. That would make them about the 4th largest church body in the U.S. behind the the Roman Catholic Church, the Southern Baptist Convention and the United Methodist Church. Critics say if lapsed and unlocatable members are discounted, the number stands around 1.3 million. It is considered one of the fastest growing churches today.

In any case, the Mormons are part of our American history and experience. Their difficult migration starting in 1846 from Navoo, Illinois to what was then outside of the United States in the Great Salt Basin was epic. Their establishment of a settlement, community, city, and civilization in the midst of a desert then considered a wasteland was breathtaking. And they have gone from being considered outcasts to being considered part of mainstream America in slightly over two generations. Their members occupy prominent positions in our political life, including Senate Majority Leader (Harry Reid) and recently a prominent Republican candidate for President and former Governor of Massachusetts (Mitt Romney.)

A good television show that considers their past and rising role in America is simply called "The Mormons." It has aired on many PBS stations and is produced in partnership by American Experience and Frontline. It is a four hour show on DVD that you can probably find at your local library. You can also watch it online at: http://www.pbs.org/mormons/. It explores the great strengths of Mormonism, along with some of its troubling aspects, and has a fair balance of supporters and detractors. It focuses on the LDS church as part of America, and its unique role as an American religion.

I will be exploring some aspects of Mormonism in future blogs.

Great Depression Spending Maximized

On my January 21st posting (http://rudyrentzel.blogspot.com/2009/01/infrastructure-spending.html), I spoke about how increased spending under both Hoover and Roosevelt at the start of the Great Depression did not end our economic woes. One way to measure this increase in spending is as a percentage of GDP, which gives a better picture than numbers.

In 1930, government spending represented 3.4% of GDP. By 1932, even before Roosevelt entered office, government spending increased to 6.9% of GDP. This increase occurred under Hoover and a Democratic Congress. (See the above link.) By 1934, government spending increased to 10.7% of GDP. From there it hovered up and down around 10% ending up at 9.8% in 1940. Under Roosevelt, the government increased spending by about as much of a increase as a percentage of GDP as it had under Hoover. Under the combination of both Hoover and Roosevelt, government spending tripled as a percentage of GDP from its 1930 level.

On the deficit side, in 1930, the government did not have a deficit, it had a surplus. By 1932, the deficit represented 4.0% of GDP. By 1934, the deficit represented 5.5% of GDP. From there it hovered around 3% of GDP, ending exactly at 3% of GDP in 1940, though it briefly droped to 0.1% of GDP in 1938.

By April 3rd of 2009, both the House and the Senate approved modified versions of President Obama's fiscal year 2010 budget of $3.6 trillion. The Congressional Budget Office projects this spending will represent 25.5% of GDP, more than double the percentage of GDP ever reached in the Great Depression with New Deal spending. On the deficit side, the CBO projects a deficit of near $1.4 trillion, which will represents 9.6% of GDP, almost double the percentage ever reached in the Great Depression under New Deal spending. This represents an unprecedented level of government spending and deficits, with the exception of a war on the level of WWII.

While both the government spending spending and deficit, as a percentage of GDP has risen significantly over recent years, President Obama often reminds us he inherited a fair size spending increase and deficit to start with, since it started under the second Bush. What he doesn't mention is that he is in part to blame. He was a U.S. Senator from Illinois when those budgets and spending plans were passed, and voted for those outlays, including the bank bailout - the TARP. He was part of the majority that controlled Congress starting in 2007, and thus set the budget. He cannot escape responsibility by the simple claim that he inherited this budget.

The increased government spending and deficits will tend to keep investors from investing as occurred at the start of the Great Depression, and prevent the recovery that normally kicks in after a recession, or at least stagnate it as occurred in the 1970s. The money the government spends comes out of the private sector, and is not available for invstors to invest. Investors will tend to keep money they have on the sidelines there until they see a government that controls its spending and debt (even China is now concerned about our level of government spending and deficit), though they will invest some as they see the economy improve. They will be concerned that such spending will inevitably lead to higher taxes, and they will tend to seek countries to invest that they believe will keep the tax burden lower which will leave them with more profits. Until they wholeheartedly invest in our economy, any recovery will tend to only limp along.

The Road to Serfdom

In 1944, during World War II, Frederick Hayek wrote The Road to Serfdom in England. Hayek was an Austrian economist who started teaching in England in the 1930s. He remained in England after Germany took over Austria in 1938, initially as a refugee, and then became a British subject. Starting in the 1920s, central planning, best expressed in socialism, became the rage in academic circles in England, as well as throughout Europe, and especially so in Germany from even before that. Academics believed the use of science in central planning achieved better and more just economic results than the chaotic and random free markets ever could. They thought central planners could gather more information, and thus make more intelligent choices for society.

Hayek challenged the belief in central planning, and thereby socialism, head on. He argued that central planners could never gather enough information to take into account all the numerous and varied factors involved in the production, distribution, and price setting of any one product or service, much less for an entire economy. The free market was much better suited for this. Though no one person in the market could gather the necessary information, the entire market, made of numberless individuals collectively gathered the information and made the decisions to decide what and how much to produce, distribute, and set prices, not only for one product or service, but for an entire economy. Moreover, prices provided the primary means for communicating information throughout the market to individual producers, investors, distributors, and consumers.

In fact, the choices made by individuals continually and inevitably frustrates central planners, since central planning requires the central planners to make decisions and set goals for everyone, regardless of the decisions or goals of individuals. Central Planners would also tire and be frustrated with democratic institutions, where decisions and goals have to be compromised in an often laborious and tedious fashion. At the very least, they would want the democratic institutions to delegate absolute authority to make decisions to the central planning experts. Inevitably, central planners want more and more authority in order to carry out their central planning mandate. The more central planning that exists, the greater the loss of freedom and choices for individuals, and the more democracy becomes endangered. Worse still, the more central planning, the more the markets become distorted, and the more the economy deteriorates, usually leading to the call for even more central planning.

The logical end of central planning is tyrannical government, though Hayek did not claim this would always happen. The forces of freedom could push back in a country depending on the circumstances and background of each country, and if pushed back hard enough, those forces could roll back the central planning. However, Hayek did point out that both Russia and Germany, from a socialist start, did go all the way to tyranny, with the accompanying loss of freedom. Hayek foresaw the inevitable collapse of the Soviet empire at a time when many academicians were singing the praises of the socialist experiment in Russia.

As a result, academicians ostracized Hayek for years. He was finally recognized and won a Nobel Prize in economics in 1974. He was vindicated as both the United States and England made a strong turn back to the free markets in the 1980s with leaders often citing his book as their guide. He was further vindicated not only with the collapse of the Soviet Union in the 1990s, but also as even Communist China started turning to free markets. While the term central planning is no longer in vogue, big government programs have much the same effect to varying degrees. He died in Germany in 1992.

Update Recession Comparisons

On my January 18 post, I made some comparisons of our current recessions, since there was a lot of talk that this was the worst recession since the Great Depression. Some figures have changed, so I decided to update the post.

At that time, the latest GDP figures we had from the 3rd Quarter stood at a 0.5% loss. Since then, we have the revised 4th Quarter GDP numbers at an annualized 6.2% loss - still 4.6 percentage points less than the 1957-58 peak quater loss of 10.8%, but near the 6.4% peak quater loss in the 1981-1982 recession.

At that time, the latest national unemployment rate was at 7.2% for December. Since then, the national unemployment in January went up to 7.6% - still 3.2 percentage points less than the unemployment peak of 10.8% during the 1981-1982 recession.

At this point, I can't agree it is the worst recession since the Great Depression, but I will keep track of the numbers.

Great Depression Income Tax Hikes

In my last blog, I discussed how government inaction concerning bank failures helped to turn the recession of 1929-30 into a Great Depression. This time I want to focus on how tax hikes helped that occur.

Nowadays, almost everyone recognizes that the last thing you want to do in the middle of a recession is raise taxes. However this is exactly what occurred in the 1930s and helped prolong the Great Depression.

With one or two brief exceptions, the income tax only got started in 1913. It started with a top marginal tax rate of 7%. It went much higher during WWI to fund the war, but dropped to 25% throughout the economic boom of the 20s.

In 1932, Hoover and a Democratic Congress raised the top marginal income tax from 25% to 63%, more than a double increase. In addition, the income tax was increased at all marginal rates on everyone. The idea was to increase revenues to meet the increased spending the government undertook to meet the economic crises. It didn't do that - as government revenues went down, government spending went up, and the deficit continued rising.

Roosevelt with a Democratic Congress raised the top marginal in 1936 to 79%. This meant if you were in the top income tax bracket, for every extra dollar you made, you had to pay 79 cents to the federal government. In addition, corporate tax rates as well as capital gains rates were raised in drastic measures. An investor has to consider all of these taxes, as well as taxes on the state level, which were also raised during the Great Depression, before making investments.

When the government raises top marginal to such rates, it makes investors much more reluctant to invest in economically efficient investments. Instead, they tend to spend their time and money hiring tax lawyers and accountants to find economically inefficient investment tax shelters so they don't have to pay such high taxes.

Capitalism needs investors who invest capital in economically efficient investments that create wealth, jobs, and goods for the general economy. When the government raises taxes to high rates, it discourages these kinds of investments, and an economy stagnates, eventually hurting everyone in the economy. While the government had good intentions to balance the budget, because of the increased spending to meet the needs generated by the economic downturn, I believe the extraordinary tax increases in peace time helped to turn the recession, along with other government actions or inactions I discussed in this blog, into a Great Depression and prolong it.

Great Depression Bank Failures

In my last blog, I focused on how government attempts to protect the economy from foreign competition helped turn a recession into the Great Depression. Now I want to focus on how government inaction further helped take the economy in this direction. This time I will focus on bank failures. But first I need to explain how the government got involved in this arena.

In 1913, the government established the Federal Reserve Bank to be the lender of last resort. This means that the Federal Reserve stands ready to lend a bank money in an emergency bank run when no one else would. Before this, banks banded together in associations to rescue each other in the event of a bank run. Clearinghouses, which cleared bank checks also took up this role. A bank run occurs when depositors panic all at the same time and run to the bank to withdraw their deposits. Since a bank never keeps all the deposits, and lends out most of the money, a bank run can destroy a bank unless some entity steps in early and provides enough cash to convince depositors that the bank won't close and their deposits are safe. The government took over this role in 1913 when they established the Federal Reserve system.

Now banks fail every year. However, the number of bank failures doubled in 1930, and then doubled again in 1931. On December 10, 1930, a run started on one of the largest banks, the Bank of United States in New York. The next day, December 11, 1930, it failed. The Federal Reserve, still relatively new, did not act to save it. When people heard that a bank as large as the Bank of United States failed, they feared the money in any smaller bank where they held their money could not be safe. It triggered a run on banks across the nation and more and more banks failed. As a result, the money supply across the nation fell by about a third, and the private sector lacked the money to recover from the recession. This is because in economic terms, banks create money as they turn a percentage of deposits into loans. As banks failed, not only deposits were lost, but the money created through loans were lost.

Had the Federal Reserve stepped in and saved the Bank of United States, and then other large banks, it is unlikely the panic that ensued would have happened. The Federal Reserve should have done so because it had taken over this function from the private sector. Had it done so, it could have prevented the large scale bank runs that followed and the fall in the money supply. The economy would likely have recovered on its own as usually occurs in a business cycle. However, this combined with the slowdown in worldwide trade from the increase in tariffs from the Smoot-Hawley Act (see 2/8/08 post) helped to spiral the recession down into the Great Depression.

The bank situation, as well as the money supply began to get better by 1934 after the bank holiday imposed by President Roosevelt in 1933. However, by that time, most of the damage to the banking system and to the money supply had been done and helped to turn the recession of 1929-30 into the Great Depression.

Great Depression Start?

How did the Great Depression start? Most of us learned in school or elsewhere that the stock market crashed one day in 1929, rich investors whose fortunes went into free fall started jumping out of buildings. and as a result the economy tanked in short order - thus kicking off the Great Depression. This proved the free market either did not work, or could not be counted on, or inevitably led to such a disaster sooner or later. The truth is not only more complicated, it starkly different.

The stock market did lose 90% of its value in the Great Depression. However, this did not happen in one day. The Dow went from a high of 381 on Sept. 3, 1929 down to a low of 41 on July 2, 1932 - a span of almost 3 years. A lot happened between then. In fact on June 30, 1930, almost a year after Black Tuesday, the Dow stood at 244 - almost the same level it stood on October 1, 1928 when it stood at 240.

The stock market slide began on October 24, 1929, less well known as Black Thursday. The Dow initially fell 33 points. 11 investors committed suicide. However, large banks intervened, and the Dow only lost 6 points that day.

The following Monday and "Black Tuesday", the Dow fell from 298 down to 230, a 68 point drop known as the Great Crash. By Nov. 13, the Dow had hit a low of 198. However, by April of 1930, the Dow was back up to 291, wiping out the losses back up to the level before Black Tuesday.

During the ups and downs, Congress debated enacting a tariff increase to give American products an advantage in American markets. At first, the tariff was to be limited to farm products. However, on October 24, 1929, Black Thursday, it became clear the tariff would be expanded to many products beyond agriculture. The debate went on, back and forth till June 14, 1930 when President Hoover announced he would sign the Smoot-Hawley tarriff law whereupon the Dow began its steady descent to 41 two years later without recovery.

Economists had begged Hoover to veto Smoot-Hawley. They foresaw that such a protectionist measure would surely only lead to retaliatory protectionist tariffs by other trading partners, which is precisely what happened. Once Smoot-Hawley became law, our trading partners soon followed in retaliation by raising their tariff rates on a host of products they wanted to protect within their borders. World-wide trading came almost to a standstill, greatly contributing to a world-wide depression. Investors, seeing this was coming, began to leave the stock market as well as other types of investments. This in part turned what started as a recession into a full-blown depression, though other causes contributed which I will explore in future blogs.

The great economic expansion of the 1920s had to come to an end at some point as the economy went beyond its own capacity. However, it appears that government action helped to turn what should have been a healthy recessionary correction into a full-blown depression. The stock market anticipated the economic downturn, and then panicked as it became clear that the government would, and then did, take action that while intended to protect the American economy, wound up slowing down world-wide trade which precipitated a world-wide depression.

Out of the Silent Planet

In a previous post, I wrote about the friendship between C.S. Lewis and J.R.R. Tolkien. (Oct. 20, 08.) In 1936, they flipped a coin at Magdalen College. They had decided they themselves had to write the quality adult fairy tales they so wanted to read. Heads and Tolkien would write a time travel and Lewis a space travel. Tails and they would switch. The coin turned up heads. Tolkien eventually wrote The Lord of the Rings trilogy as the time travel tale. Lewis wrote Out of the Silent Planet as the first part of his space travel trilogy.

Up till the 1930s, the most famous science fiction book was H.G. Wells' 1898 book, War of the Worlds. Wells presented extremely scary alien Martians out to invade and take over planet earth, and terminate any human life that got in their way. Orson Wells produced a radio drama broadcast on October 30, 1938, the day before Halloween. The broadcast on the Mercury Theatre on the Air literally scared people to death. Though the broadcast was clearly identified as a radio broadcast four times during the hour long broadcast, people listening believed it was a real event because of the news bulletins in documentary style that Wells innovated as part of the radio play. You can listen to the broadcast at a website devoted to Mercury Theatre broadcasts. http://www.mercurytheatre.info/

In sharp contrast, the aliens in Lewis' Out of the Silent Planet are good, caring, and even altruistic. The book was published in 1938, the same year as the as the War of the Worlds radio drama broadcast. The aliens are also Martian. However, they do not come to earth. Instead, earthlings go out of Earth (the silent planet - called Thulcandra on Mars) and go to Mars (called Malacandra on Mars). Earth is the silent planet because no one has heard from it since its Oyarsa, its spiritual ruler (Satan) led it in rebellion against the "old one" - the creator, a fate Malacandra has not undergone. This explains why the Malacandrans are essentially good - they have not undergone the fall. In contrast, the earthlings come to conquer Malacandra, with the exception of Ransom, the protagonist in the book.

Elwin Ransom bears an uncanny resemblance to Tolkien. He is a philologist and a fellow at Cambridge College. Elwin means elf-friend. Ransom thrills at meeting the Malacandrans, after overcoming his initial fear, and learning their language. Just as Tolkien developed a language for The Lord of the Rings trilogy, Lewis develops a language for his space trilogy. Ransom loathes his fellow earthlings who treat the Malacandrans as native children ripe for colonizing, though he eventually identifies with them enough to choose to make the return trip to Earth with them.

While traveling between planets, Ransom finds that instead of space being a cold, empty void, he feels invigorated and that it is full of light and energy. The side of the spacecraft facing the sun is in fact very warm. I find this interesting because scientists today think of space being full of dark matter instead of void space.

In this book, Lewis fully explored his imagination, his faith, and his desire to challenge modernity, and took us along for the magnificent journey of discovery.

How Does an Economy Turnaround?

How does an economy turnaround? That is the big question in Washington D.C. and around the country. Some say it is infrastructure spending while others say it is tax cuts. Usually the entire debate is focused around what will stimulate the economy enough to lift it out of the recession we are in. Of course this assumes the government must do something to turn the economy around, and that without government action, the economy would simply continue in a downward spiral. At least that is how a lot of the discussion goes.

Of course the flip side of the question is how does an economy go into a recession in the first place? If the question is asked at all, the answer usually finds a nefarious actor to blame. During the recent political campaigns, the candidates usually blamed greedy Wall Street types. Many blamed the former President and his political party - usually ignoring that the other political party controlled the Congress since 2007 - which actually sets the federal budget and makes law. It sort of begs the question whether a nefarious actor has to be found to blame at all for the variations of the economy. Do those nefarious actors get credit when the economy does well? Usually not. Besides, different parts of the political spectrum have their own nefarious actors to blame, lambast, and ridicule. It usually only adds to the acrimony in politics rather than help to solve any problems.

Another way to look at recessions, recovery from recessions, as well as expansions of the economy is the business cycle. Just as there are cycles for many things, including the seasons, there is a business cycle for an economy. In general, economies tend to expand for a certain time, peak, then start to contract, bottom, and start recovering. Sometimes the cycles are longer and sometimes they are shorter. Usually when economies are expanding, they reach a point when they have outpaced the capacity of that economy to continue expanding, and the economy has to contract. It usually contracts until the forces in that economy are in a state to expand again, which is usually called a recovery. Hopefully, the economy continues to rise overall from one cycle to the next. The business cycle usually occurs without any action from the government. This means the government does not have to do anything for an economy to recover. It usually happens all on its own.

Of course politicians do not like to say this. They are elected to do something, especially when an economy takes a downturn. They like to indulge in big talk about how they are going to take action to turn the economy around, even though it will likely do so all on its own. I think the government can help in an economic downturn, as long as the actions it undertakes helps the recovery that usually already occurs all on its own. The government can also help those hurt by the downturn, since the churches, charitable organization, communities and families who usually help are also hurting. This is similar to the field of medicine where the best cures work with the natural ability of the body to heal itself. What I worry about is that action by the government can work against the natural ability of the economy to recover from a downturn and thereby extend the downturn -possibly even turning a recession into a depression, which is simply an extended recession.

A lot of scholars are reexamining the Great Depression to determine if this happened. They are examining actions by the government under both President Hoover and President Roosevelt to determine whether government action extended the Recession of 1929-1930 into the Great Depression which did not end until the start of World War II. I think this is a worthwhile study that is very relevant to our current situation. I will discuss their research and conclusions in a following post, perhaps the next one, though I have wanted to do one about Out of the Silent Planet for a while.

Infrastructure Spending

Many currently advocate spending on infrastructure projects in order to recover our economy from the Recession it is in, and to prevent it from getting worse. Traditionally, States and local governments fund most infrastructure projects. I favor such spending by State and local government, often financed by government bonds. However, from a historical perspective, Federal infrastructure spending has not recovered an economy from an economic downturn. The Great Depression provides a classic example of this.

As the Recession started around 1930, the government under President Hoover, started spending more on infrastructure programs such as the Hoover Dam, among others. By 1932, government spending increased by 50%, a huge increase. However, this increased spending did not turn around the Recession, which then became the Great Depression.

When Franklin Roosevelt became President in 1933, he launched many infrastructure projects under various new federal programs. He increased federal spending even higher in an attempt to bring unemployment under control. Even with all that spending, unemployment never fell below around 15% until 1941, well into World War II - a rate we today would find an unacceptable tragedy.

1929 - 3.3% 1930 - 8.9% 1931 - 15.9% 1932 - 23.6% 1933 - 24.9% 1934 - 21.7% 1935 - 20.1% 1936 - 17.0% 1937 - 14.3% 1938 - 19.0% 1939 - 17.2% 1940 - 14.6% 1941 - 9.9% 1942 - 4.7%

There are other examples in history, including Japan in the 1990s which launched massive infrastructure spending to turn around its economy, only to wind up with massive yearly deficits, and an economic doldrum that was called The Lost Decade. There are several reasons why massive infrastructure spending does not turn an economy around. One of them is the lag time for infrastructure projects to get going, and to put money in the economy. The Congressional Budget Office yesterday published a preliminary report about the proposed infrastructure spending, and noted that most of it won't be spent and get into the economy before a recovery is already underway. We should be cautious before generating deep deficit spending using this approach to try to turn the economy around.