Friday, June 30, 2017

Q&A - 30/6


Favorite Dave Letterman Top 10?

Top 10 Things That Sound Creepy When Said by John Malkovich 


George Friedman

[From his book The Next 100 Years]

[T]here is an odd—and not entirely explicable—pattern built into American history. Every fifty years, roughly, the United States has been confronted with a defining economic and social crisis. The problem emerges in the decade before the crisis becomes apparent. A pivotal presidential election is held that changes the country's political landscape over the following decade or so. The crisis is resolved, and the United States flourishes. Over the next generation, the solution to the old problem generates a new one, which intensifies until there is another crisis and the process repeats itself. Sometimes the defining moment is not readily apparent until later, and sometimes it can't be missed. But it is always there.[..]

In its history so far, the United States has had four such complete cycles and is currently about halfway through its fifth. The cycles usually begin with a defining presidency and end in a failed one. So the Washington cycle ends with John Quincy Adams, Jackson ends with Ulysses S. Grant, Hayes with Herbert Hoover, and FDR with Jimmy Carter. Underneath the politics, the crises are defined by the struggle between a declining dominant class linked to an established economic model and the emergence of a new class and a new economic model. Each faction represents a radically different way of viewing the world and a different definition of what it means to be a good citizen, and reflects the changing ways of making a living [..]

The founders consisted primarily of a single ethnic group— Englishmen with a smattering of Scots [..] But they couldn't build the country by themselves. Pioneers were needed to move the country outward and settle the land west of the Alleghenies. These pioneers were men completely unlike Jefferson or Washington. Typically they were poor, uneducated immigrants, mostly Scots-Irish, who were searching for small parcels of land to clear and farm. [..]

By the 1820s, a political battle was raging between these two groups, as the ideals of the founders collided with the interests of the settlers. The social tension turned into economic crisis and culminated in the election of the champion of the new generation, Andrew Jackson, in 1828. This followed the failed presidency of John Quincy Adams, the last of the founding generation [..] Jackson's predecessors had favored a stable currency to protect investors. Jackson championed cheap money to protect debtors, the people who voted for him. Where Washington, the gentleman farmer, soldier, and statesman, was the emblematic hero of the first cycle, Abraham Lincoln, born in a log cabin in Kentucky, was the emblematic hero of the second.

By the end of this cycle, after the Civil War, the West was no longer characterized by the hardscrabble subsistence farming of first-generation pioneers. By 1876, farmers not only owned their land but also were making money at farming. The landscape changed as well, homesteads giving rise to small towns that had developed to serve the increasingly prosperous farmers. Small-town banks took the farmers’ deposits and invested the money on Wall Street, which in turn invested the money in railroads and industry.

But there was a problem. The cheap-money policies that had been followed for fifty years might have helped the pioneers, but those same policies were hurting their children, who had turned the farms of the West into businesses. By the 1870s the crisis of cheap money had become unbearable. Low interest rates were making it impossible to invest the profits from the farms—and especially from the businesses that were serving the farmers.

A strong, stable currency was essential if America was to grow. In 1876, Rutherford B. Hayes was elected president after the failed presidency of Ulysses S. Grant. Hayes—or more precisely his secretary of the treasury, John Sherman—championed money backed by gold, which limited inflation, raised interest rates, and made investment more attractive. Poorer farmers were hurt, but wealthier farmers and ranchers and their small-town bankers were helped. This financial policy fueled the rapid industrialization of the United States. For fifty years it drove the American economy in an extraordinary expansion, until it choked on its own success, just as in the two earlier cycles [..]

In 1932, Franklin Roosevelt succeeded the failed presidency of Herbert Hoover. Roosevelt proceeded to reverse the policies of the preceding political generation by looking for ways to increase consumption through transfers of wealth from investors to consumers. He championed the industrial, urban workers at the expense of the declining small towns and their values. [..] The Depression was overcome by increasing demand, by creating jobs and social supports and then transferring money to consumers. High tax rates were imposed on the wealthy, relatively low interest rates were offered to facilitate home ownership, and consumer credit was introduced for a range of purchases. The policies kept the economy humming.

But by the 1970s, the formula was no longer working. High tax rates made the risk of starting businesses prohibitive and favored large, increasingly inefficient corporations. Marginal tax rates—the highest rates paid— were in excess of 70 percent for the wealthy and for corporations. By penalizing success, this tax policy discouraged investment. Factories aged and became obsolete, even as consumption remained high due to ready consumer credit. Without investment, the industrial plant, and the economy as a whole, became increasingly less efficient and less competitive globally.

In the late 1970s the baby boomers entered the period of family formation, when demand for credit was the highest. All of these factors, coupled with an energy crisis, brought the situation to a head. Under President Jimmy Carter, the entire economy was teetering. Long-term interest rates were in the mid-teens. Inflation was over 10 percent, as was unemployment.

Carter's solution was tax cuts for the middle and lower classes, which only increased consumption and put further pressure on the system. All of the economic stimuli that had worked in the previous fifty years had not only stopped working but were making the situation even worse.

In 1980, Ronald Reagan was elected president. Reagan faced a crisis of underinvestment and overconsumption. Reagan's solution was maintaining consumption while simultaneously increasing the amount of investment capital. He did so through “ supply-side economics”: reducing taxes in order to stimulate investment. Reagan did not want to stifle demand, making consumers unable to purchase products. His aim was for the upper classes and corporations to be able to modernize the economy through investment. This represented a radical restructuring of the American economy during the 1980s, setting the stage for the boom of the 1990s. [..]

Reagan thus completed the reorientation of the American economy away from the principles of the New Deal, which favored urban working class consumption over all other considerations, toward the suburban professional and entrepreneurial classes. In this, he was seen by some as betraying the heart of American society, the cities, and the soul of American labor, unionized workers. Just as FDR, Hayes, and Jackson were vilified, so was Reagan vilified as a betrayer of America's common man. But Reagan had no more choice in the end than did Roosevelt or Hayes or Jackson. Reality dictated this evolution.

Excellent Analysis

According to Friedman, US is currently living in the era defined by Reagan. Troubles started to show, but the era has not ended yet.