The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (33 page)

Whereas tax cuts gave consumer spending a temporary boost, bond yields began a long, solid downtrend.The lower cost of credit was a plus for the economy and for the financial markets—at least as important as tax cuts. Falling interest rates made it cheaper to borrow. From experience, people expected prices to go up—which would lower the cost of their loans still further. Rising prices would also undermine the value of their savings.They did the reasonable thing:They borrowed.

Stocks rose.Things were looking up. It was “morning in America.” The questions would have to wait until evening.

Since 1913, the cost of do-gooders, empire-builders, and world-improvers has been adding up. By the 1970s, it had begun to depress productivity rates. Instead of growing at 2.8 percent per year (the rate since World War II), productivity rose only about 1 percent from 1973 to 1984.

Since then, the rates themselves have become fraudulent: In 1995, Department of Labor officials began to crunch the numbers into such odd and awful shapes, even their own mothers would no longer recognize them. The practice known as hedonic price indexing based on “chained dollars” was put into place. Computers came to be valued for their potential to increase productivity rather than their actual cost, dramatically inflating both the importance of the tech sector in the economy, and overstating GDP so as to make the number useless.

Nearly half the items in America’s measure of consumer price inflation are “adjusted.”

Between 2000 and the end of 2004, for example, spending on computers rose 9.3 percent. Since computers became more powerful, however, the number was enhanced to 113.4 percent. Other numbers in the consumer price inflation calculation were adjusted by the substitution effect. If steak rose in price, the statisticians assumed people switched to mutton, thereby reducing their cost of living.

So did they adjust the price of housing. It cost a lot more to own a house in 2005 than it did in the year 2000, but the boys went to work on the numbers with pliers and a torch. Soon they had twisted the cost of actually owning a house into the cost of renting the same house; “owners’ equivalent rent” they called it. Because the imperial central bank held interest rates below the consumer price index (CPI) rate, people who previously would have rented, bought instead. This reduced rents even while it increased house prices.Voilà! The CPI, of which more than a quarter is the cost of housing, was held down. The credit bubble had a similar effect on used cars. Zero financing deals turned heads away from used cars and toward new ones. Used car prices fell—and so did this component of the CPI.Together the two items alone—housing and used cars—were responsible for a 1.7 percent drop in core CPI between November 2001 and December 2003.

While everyone knows it had become much more expensive to make ends meet, these distortions kept the official CPI low and the gross domestic product (GDP) figures high. (Nominal output is reduced by the official CPI number to give the real GDP figure. The lower the CPI, the higher the resulting GDP figure.) The productivity figures were also beaten senseless. Output per hour was distorted by the measure of output itself, which includes both hedonic quality enhancements and inflation adjustments.

We turn back to the Gipper.When Ronald Wilson Reagan was finally carried off in June 2004, the nation said goodbye with a soft heart and a head that had turned to mush. His obsequies were as full of humbug as a national election. The man deserved better. He should have been carried off by six jolly cowboys and bid farewell by honest drunks.

Instead, Reagan was given a send off worthy of a world-class mountebank. We were told that he was responsible for a huge economic boom in the land of the free. He cut marginal tax rates. He helped get the government off our backs. He defeated communism.

Rod Martin wrote a book praising Ronald Reagan for “saving the world.” “Without Reagan,” he wrote, “We might all be speaking Russian!” We have nothing against Russian. But we doubt that, in any reasonably imaginable circumstances, Americans could all have learned to speak Russian in a single generation.They are not that good at languages. But it illustrates how the world-improvers think; if you want to make a better world, you must make others do just as you do. Martin could not imagine a Russian “victory” without imagining that we had to learn to speak the Russian language. He probably thought we would have to learn to like vodka and dance like Cossacks, too.

[Reagan’s] certainty that people everywhere yearned for freedom and that free markets could always outproduce centrally planned slavery drove his strategies where realpolitik could never go. He replaced both containment and détente with his “Reagan Doctrine,” proclaiming America would actively roll back its foe by helping freedom fighters behind the Iron Curtain.
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What made Reagan so sure that people everywhere yearn for freedom is a mystery; there is no evidence of it. Even Americans, who claim to love freedom as much as anyone, are much more interested in low mortgage rates. They would scrap the entire Bill of Rights in less than 24 hours if it meant guaranteed 10 percent annual real estate gains. And if free markets could always outproduce centrally planned slavery, why was he worried about losing out to the Soviets? It was obvious we could beat them—because we could afford far more and better weapons.

Realpolitik
was Kissinger’s approach to foreign policy. It began by taking people as he found them, whether they wanted Western-style freedom or not, and making the best of the situation. This meant generally trying to avoid conflict without surrendering strategic interests—even imperial ones.

The neo-Wilsonians advising Reagan came up with a more daring doctrine.They wanted to get Kissinger out of the way and remake the world in their own image. Martin does not mention that among the “freedom fighters” that the United States decided to support was, notably, Osama bin Laden. The War on Terror was largely an invention of the neoconservatives. They helped create the enemy and then developed a war against him.

Martin continues:

And free men everywhere, [Reagan] believed, would lay down arms, take up tools and build a new, peaceful, prosperous world for themselves and their posterity, given the chance.
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We have never met Rod Martin; we presume he is an honest and decent man. Yet, in this ode to Ronald Reagan and George W. Bush, the man seemed to have taken leave of his senses altogether. Men—free or not—occasionally pick up weapons and begin killing each other. If liberty has anything to do with it, there is no proof for it in the historical record.

Yet, Reagan’s anti-communism resonated with the voters. He had spent a good part of his career telling the world how bad the communists were. But what was it that was so bad about them? And what business was it of his?

Why was Ronald Reagan so eager to get rid of Bolshevism? As long as you didn’t have to live in a communist country, what would it matter to you? Many smart people thought it was a better way.What made the communists a menace was not that they were intent on improving their own world with the benefits of collectivism, but that they were determined to improve our world, too. What made them obnoxious was not their own goofy creed, but their determination to do precisely what Ronald Reagan wanted to do, remake its adversary into something more like itself. Reagan had branded the Soviet Union “an evil empire.” But behind the words was a monstrous conceit that, by some special grace of God, he knew how people everywhere were meant to live and how they were meant to govern themselves. It did not matter that 3,000 generations who had come and gone had had other ideas, nor that a third of the world’s people alive in 1981 had other ideas. Reagan thought he knew what was best for everyone.

In a strictly economic sense, communism was America’s greatest ally. For many decades, it kept millions of people penniless—unable to compete for the world’s oil and other resources. While the United States guzzled cheap oil for half a century, communism retarded the economic development of its competitors. Now, every remaining barrel of oil comes on the market with people bidding for it from all over the planet—Americans, Europeans, Russians—and three billion Asians, too!

The Soviets were so discouraged by the Reagan Revolution, we are told, they decided to give up being Soviets; now, they are Russians or Lithuanians or Khazaks.The Chinese were so impressed, they decided to loose the dogs of capitalism; now they are nipping at our heels and stealing our food.

MARX’S REVENGE

For the first time in two hundred years, the West (including Westernized Japan) faces real competition. The world’s largest nations—China, India, and Russia—sat on the sidelines for most of the nineteenth and twentieth centuries. They were too remote and too backward to participate in the great boom that lifted living standards during the reign of the British Empire in the nineteenth century. GDP per capita rose from barely over $1,000 (in 1990 dollars) in the United States at the beginning of the nineteenth century to more than $5,000 by its end. China, on the other hand, had a GDP per capita of about $600 when the nineteenth century began. By its end, the figure had fallen to around $525. Indian numbers were about the same, but in the other direction, with a small gain in the nineteenth century—probably the result of British colonial development. In the twentieth century, Russia, China, and India all became victims of self-inflicted wounds; various forms of socialist claptrap took them out of economic competition.

But now they are back, and it is a whole new ball game, as they say. These countries are either on the periphery of U.S. imperial protection, or beyond the pale altogether. Either way, they benefit from the order created by the U.S. imperium. Foreign workers seem to be able to make anything we can make—but at much lower cost. Before the recent crack-up, India was growing at 8 percent a year, China at 9 percent—Russia was booming too. In addition, they were turning out millions of young people who can make things—graduates in the practical arts and sciences—better and cheaper than we do in the United States or Europe. What’s more, the foreigners took the old virtues seriously.They saved their money—the saving rate in China is as high as 40 percent of the national income, according to official sources. These savings give them huge piles of capital with which to build more modern factories and more convenient infrastructure.

The price of labor in the rich countries is high.The average cost of an hour of someone’s time in the United States—including social charges—is about $20.The average cost of someone’s time in China, on the other hand, is somewhere between 13.5 and 65 cents, depending on the statistics you look at. As long as capital, expertise, and finished products are free to move around, it is likely that the numbers will grow closer together. The consumer doesn’t particularly care who assembled his gadget; he only cares that he can buy it at the lowest possible price. Labor is the biggest component of the price of most things, so both manufacturers and consumers appreciate lower labor prices. Our old incompetent enemies have learned how to compete.

We were told that America became much richer because of Reagan’s improvements, but if that is so, why did real wage rates not rise? A man sweats, humps, busses, totes, and schleps today, on average, for about the same wage he got before the Reagan revolution fired its first shot. But that is not to say that everything is just the same. Far from it. Today, people own less of their own homes—homeowner equity (the portion not mortgaged) has fallen from nearly 70 percent in the late 1970s to less than 55 percent in 2005. Plus, the average person owes more money to more people than ever before. Household debt rose from $7.8 trillion in 2002 to nearly $14 trillion in 2008. Today, fewer people have secure sources of money for their retirement. More than two-thirds of older households—those headed by people 47 to 64—had someone earning a pension in 1983. By 2001, fewer than half did.

The Reagan Era came with a relatively new idea, that people should be responsible for their own pensions. Companies stopped offering fixed-benefit pension plans. But by 2000, old people were feeling the effects. They were not as well off as they had expected to be. When the holdings of typical households were analyzed, today’s near-retirees turned out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983.

Edward Wolff, an economist at New York University, looked at 18 years of household financial data from the Fed. Somehow he retained his sanity long enough to discover that the net worth of the average older household declined by 2.2 percent, or $4,000, during the period [1983-2001] to $199,900.

We look on that fact in shock and awe. How could it be that after the biggest explosion of wealth-creation in the history of man, the average man was not richer, but poorer?

We recall the Carter years: The nation was at peace. Despite inflation, Americans were still getting richer. Wages were rising. The country still enjoyed a positive balance of trade, and the rest of the world still owed it more than it owed to foreigners.

But in 1980, stocks had been going down for 14 years and bonds had been in a bear market that began in 1945. With eyes in the back of their heads, people must have looked out and seen nothing but trouble. The Vietnam War was still in the near background. And Richard Nixon. And Jimmy Carter himself. Americans were discouraged, we are told; they had lost confidence in themselves.

Then, along came Ronald Reagan with a message of hope, optimism, and something-for-nothing.The supply side, the Laffer Curve! Suddenly it seemed possible to spend more . . . and still have more! Government could cut taxes—and get more revenue, said Laffer. Forget the deficit; it will take care of itself. Somehow. The average man figured he could do the same: borrow more, spend more, and he would get rich.