Maintaining the Illusion of Prosperity is Critical to the Economy

The illusion that the standard of living has not dropped during a period of wage stagnation is because of non-mortgage forms of debt. The financial crisis of 2008 was in part the result of a consumer that had exhausted their ability to use more debt to maintain their lifestyle. But we need to ask ourselves: is the current boom built on sound foundations? In other words, do we have sharp increases in productivity or real wage growth? In the US, household spending now accounts for almost 70% of economic growth, about 10% more than it did in 1971. (Household spending in the U.S. is also approximately 10-15% higher than most other developed nations.) The low unemployment rate as a measure of prosperity is an illusion – the quality of jobs is deteriorating. The illusion of wealth has become a way of life for Americans. Individuals are not as rich as they like to tell themselves they are.

For many groups of Americans, the prosperity of the 1920s was a cruel illusion, because on the surface, there appeared to be economic prosperity. Modern advertising pushed consumers to buy more products that they could not afford. Even during the most prosperous years of the Roaring Twenties, most families lived below what contemporaries defined as the poverty line. In 1929, economists considered $2,500 the income necessary to support a family. In that year, more than 60 percent of the nation’s families earned less than $2,000 a year – the income necessary for basic necessities – and over 40 percent earned less than $1,500 annually. Even before the onset of the Depression, business investment had begun to decline. Residential construction boomed between 1924 and 1927, but in 1929 housing starts fell to less than half the 1924 level. A major reason for the depressed housing market was the 1924 immigration law that had restricted foreign immigration.

In 1910, a farmer’s income was 40 percent of a city worker’s. By 1930, it had sagged to just 30 percent. The decline in farm income reverberated throughout the economy. Rural consumers stopped buying farm implements, tractors, automobiles, furniture, and appliances. Millions of farmers defaulted on their debts, placing tremendous pressure on the banking system. Between 1920 and 1929, more than 5,000 of the country’s 30,000 banks failed. A poor distribution of income compounded the country’s economic problems. During the 1920s, there was a pronounced shift in wealth and income toward the very rich. Between 1919 and 1929, the share of income received by the wealthiest one percent of Americans rose from 12 percent to 19 percent, while the share received by the richest five percent jumped from 24 percent to 34 percent. Over the same period, the poorest 93 percent of the non-farm population actually saw its disposable income fall.

During the instability in Europe, America had managed to establish itself as the new power in international exports, far exceeding France and Britain. An immense feeling of ‘nationalism’ in the United States led to embargos on immigration and imports. Republican tariff policies damaged the economy by depressing foreign trade. Anxious to protect American industries from foreign competitors, Congress passed the Fordney-McCumber Tariff of 1922 and the Hawley-Smoot Tariff of 1930, raising tariff rates to unprecedented levels. American tariffs stifled international trade, making it difficult for European nations to pay off their debts. In addition, the reluctance of the USA to import goods resulted in many countries being unable to repay the loans that they had accrued during the First World War. In reality, the US had broken the international economic moral of trade being a two-way street. As foreign economies foundered, those countries imposed trade barriers of their own, choking off U.S. exports. By 1933, international trade had plunged 30 percent.1

In the short run, the economy and voters benefit from deficit spending. It drives economic growth. The federal government pays for defense equipment, health care, and building construction. It contracts with private firms who then hire new employees. They spend their government-subsidized wages on gasoline, groceries, and new clothes. That boosts the economy. The same effect occurs with the employees the federal government hires directly. As part of the components of GDP, government spending takes a huge chunk, most of which is allocated to military expenditure. “Booming economic growth has not been sufficient to lower the budget deficit – in fact, the deficit and Treasury borrowing are headed sharply higher, and virtually no one in Washington seems to care,” Greg Valliere, chief global strategist at Horizon Investments notes recently.2

Every president borrows from the Social Security Trust Fund. The Fund took in more revenue than it needed through payroll taxes leveraged on baby boomers. Ideally, this money should have been invested to be available when the boomers retire. Instead, the Fund was “loaned” to the government to finance increased spending. This interest-free loan helped keep Treasury Bond interest rates low, allowing more debt financing. Over the next 20 years, the Social Security Trust Fund won’t have enough to cover the retirement benefits promised to baby boomers. That could mean higher taxes once the high U.S. debt rules out further loans from other countries. Congress is more likely to curtail benefits than raise taxes. That would primarily affect retirees younger than 70. It might also hit those who are high income and not as dependent on Social Security payments to fund their retirement.

The first rate hike this year occurred at the Federal Open Market Committee’s (FOMC) March meeting, when it raised the federal funds rate for the first time in 2018. Then in June, FOMC unanimously voted to increase the federal funds rate by 25 basis points to 1.75% to 2%. The criteria used by the FED in the past: inflation rose when unemployment was below 4%. So they think they need to raise unemployment above 4% in order to prevent inflation taking off, even though there is no sign of inflation. If people are not working as much as they want to, because the jobs are not available, then there is slack in the labor market. This too would place downwards pressure on wages, preventing inflation taking off. In today’s fluid job markets rife with casual, part-time and temporary jobs, exists the illusion of unemployment – a measure of labor market tightness that is hopelessly inadequate.

When it comes to stocks and the economy, the illusion of knowledge can be disastrous. Many complicated situations tempt investors to believe they know the answers. But the reality is that the moving parts are too intricate. And the outcomes are anything but certain. If enough corporations re-shore production and supply chains, the U.S. labor market might tighten enough for wages to rise. But this rather assumes that raising barriers to trade has no other economic impact. If President Trump implements all his announced trade barriers, the growth rate of the American economy will fall, even without retaliation from trade partners. And if other countries raise trade barriers in response, re-shored manufacturers will find their export markets drying up. In September the FOMC increases the fed funds rate 25 basis points to a range 2 percent to 2.25 percent. This uncertainty creates increased turmoil in the stock market – the stock market just had its biggest December loss since the Great Depression.

Nietzsche believed, one should be conscious of the illusory nature of what is considered truth, thus opening up the possibility of the creation of new values. It is necessary to create the social environment or milieu to support good governance to control cognitive dissonance and the consequent balancing of perception that leads to misperception. Accountability is the key requirement of good governance. Accountability is about obligation to answer for one’s actions. In addition to being responsible for one’s actions, one may be required to explain them to others. Processes and institutions must produce results that meet needs while making best use of resources. Equity and inclusiveness requires all men and women have opportunities to improve or maintain their well-being. The well-being of the community depends on ensuring that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society.

Maintaining the illusion of prosperity, though, is critical to the economy as it is, because its foundation is built on consumption, fraud, credit and debt. The banking system itself has been engineered from the top down to create unlimited wealth for a few at the top, leaving the workers, those individuals who pay 28% on their credit card, at the bottom. However, true prosperity is connected to wellness. True prosperity is a vibrant environment and an abundance of health, happiness, love, and relationships. However, as more people come to perceive material goods as the form of self-identification in this culture, we slip farther and farther away from the experience of true prosperity. Everyone must have the freedom and opportunity to reach real happiness. Until we restore the primacy of politics (management of the state) over commerce, and address the disparity between the rich and the rest of society, true prosperity remains out of the reach of most individuals.

1 Why It Happened. 2016 http://www.digitalhistory.uh.edu/disp_textbook.cfm?smtid=2&psid=3432

2 Jeff Cox. (2 Aug 2018) The Trump administration is headed for a gigantic debt headache https://www.cnbc.com/2018/08/02/the-trump-administration-is-headed-for-a-gigantic-debt-headache.htm

This entry was posted in economic inequality and tagged , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.