What is the role of the Fed in generating income inequality because low interest rates boost the stock market while the monetary expansion that causes low rates creates inflation and so reduces real wages? In a web page on stock market returns Jeremy J. Siegel in the Concise Encyclopedia of Economics notes:
"The average compound rate of return on stocks from 1802 through 1991 was 7.7 percent per year: 5.8 percent from 1802 to 1870, 7.2 percent from 1871 to 1925, and 10.0 percent from 1926 to 1991. The increase in the rate of return of stocks over time has fully compensated the equity holder for the increased inflation that has occurred since World War II. "
However, these numbers do not follow the contours of changing American policy concerning the Fed. Before 1913 there was no Fed. From 1913 to 1932 there was a Fed whose inflationary power was limited by a gold standard. From 1932 to 1971 Roosevelt had abolished the gold standard but the Bretton Woods monetary regime required that the US convert foreign dollar holders' dollars into gold. In 1971 Richard M. Nixon abolished the international gold standard.
To track the effects of Fed policy on real wages, inflation and stock market returns, I computed Dow Jones Industrial Average returns for four periods: the pre-Fed period from 1896 to 1913; the Fed/gold standard period from 1913 to 1932; the Fed/international gold standard only period from 1932 to 1971; and the gold standard-free period from 1971-2008. I also computed as best as I could with rough and ready Internet data (a) the inflation rate, (b) the Dow returns less inflation, (c) the compounded return on the Dow, (d) the change in real (inflation-adjusted) hourly wage, (e) the compounded real wage change and (f) the compounded inflation change for the four periods.
I was searching for income inequality data (the usual method of measuring income inequality is the "Ginni coefficient") but could not find a measure on the Web that goes back to 1896. I did find a partial measure in an article by Jared Bernstein and Laurence Mishel. To estimate the compound rates I relied on the 1040tools future value calculator here. Data on real hourly wage changes from 1896 to 1913 are available here. The Dow Jones website makes available its Dow Jones Industrial Average index from 1896. There are estimates available of stock returns from 1802, but what is gained in longitude is lost in comparability. Corporations prior to 1890 did not have the same legal attributes as they did after. Moreover, prior to 1880 stocks were limited as to their breadth of circulation, the nature of the firms for which they were traded and the risk involved because of changes in the corporate form of organization. Therefore, the 1896-1913 period will have to do as a pre-Fed measure to compare with subsequent periods.
The chart below (column A--see here for better view) shows that inflation was lower in the pre-Fed period than in any period since the establishment of the Fed in 1913. From 1896-1913 inflation averaged one percent (column H), while from 1913-1932, the Fed/gold standard period it averaged 1.7%. From 1932-1971, the international gold standard period it averaged 2.82% and during the gold standard- free period, thanks to Republican President Richard M. Nixon, it averaged 3.92%, the highest sustained inflation in American history. The media story that the Greenspan Fed achieved low inflation is but puffery by historical standards. The post-1980 era has a poor record with respect to inflation. At the same time, stock market returns have been boosted since the abolition of the gold standard in 1932 but not before. Column C shows that the Dow increased 108.1% from 1896 to 1913; it fell 23.32% from 1913 to 1932 because of the Great Depression and then it rose 1,143.7% from 1932 to 1971 and 1,266% from 1971 to 2008. Adjusting for inflation and compounding, stock market returns were 3.83% during the 1896-1913 period, -2.9% from 1913 to 1932, 5.93% from 1932 to 1971 and then 5.9% from 1971 to 2008. The key change seems to have been in 1932.
The establishment of the Fed and the abolition of the gold standard seem to have coincided with at first a dramatic increase in real wages and then a reduction from 1971 onward (see Columns F and G). From 1896 to 1913 real hourly wages increased 30.2% over 17 years or 1.6% compounded. From 1913 to 1932, the gold standard period of the Fed, real wages increased 45.5% or 2.12% compounded. This is in part due to reduced inflation during the Depression. However, and this contradicts my theory, from 1932 to 1971 real wages increased 171.8%, a compounded real wage change of 2.6%. Then, from 1971 to 2008, the gold standard-free period compounded real wages fell 27% or a compounded rate of -1.1%. This is a unique 37-year period, but it follows a period of very high wage growth from 1932 to 1971.
Despite the extensive discussion of income inequality, I could not find readily historical data available on Ginni coefficients or other income inequality measures going back to 1896. It is clear from the Bernstein and Mishel article that since 1972 income inequality as measured by the 90-10 cutoff has been increasing.
The data support the idea that changing the monetary regime boosted the stock market. The 5.9% real stock market returns post 1932 are 35% greater than the real, pre-Fed stock market returns from 1896-1913. If you factor in the Fed/gold standard period of 1913-1932 the boost is greater still. There seems to have been a correction in wages but not stock market returns from 1971 to 2008.
But there is conflicting evidence for the Fed/real wage connection. From 1932 to 1971 real wages increased by 2.6% per year, faster than in the 1896-1913 period, but then from 1971 to 2008 they fell by 1.1% per year. Arguably, the New Deal institutions such as labor unions sustained real wage growth for roughly forty years. Thereafter, there was a shift in employers' bargaining power. This may be because of the dramatic boost to monetary and credit expansion that the elimination of the gold standard permitted. Price inflation from 1971 to 2008 was 432% compared to 196.5% for the 1932 to 1971 period. The increasing price inflation may have enhanced firms' ability to substitute technology and equipment for labor and to finance overseas expansion sufficiently to counteract the wage gains made during the 1932-1971 period. As well, the effects of monetary expansion on real wages may be cumulative over many decades, and it is possible that 40 years of inflation resulted in a 40-year stimulus of demand for labor followed by adjustments due to even longer term inflationary effects. It may be that 40 years is the time required for inflation to influence real wages. However, it is also possible that labor unions were weakened during this period and so lacked the bargaining power to counteract employers' strategies. It is also possible that globalization has increased wage competition and has forced firms to be more competitive.
Rather than view stock returns as resulting from investor demand, as Professor Siegel does, it might be more logical to view them as ensuing directly from the Federal Reserve Bank's subsidization of the stock market. The Fed subsidizes the stock market by depressing real interest rates, which increases stock valuations and enables firms to borrow cheaply. Lower interest rates enable firms to substitute machinery and technology for workers to a greater degree than they otherwise would and to finance moves overseas. As well, workers may not be completely aware of inflation's effects on pay, and accept wages under illusory price stability. Thus, the Fed may have served as a wealth transferal device from workers to stockholders. The one fly in this story's ointment is the sharp increase in real wages during the 1932 to 1971 period.
Tuesday, July 1, 2008
Monday, June 30, 2008
The Federalist 14 and Decentralizaton
In the Federalist 14, Madison argues that while direct democracy is possible only in a small country, a republic can cover a larger geographic area. Based on the transportation available in the 1780s, he shows that a federal republican form of government is possible since the delegates can travel the distance required. He adds that:
"It is to be remembered that the federal government is not to be charged with the whole power of making and administering laws. Its jurisdiction is limited to certain enumerated objects, which concern all the members of the republic, but which are not to be attained by the separate provisions of any. The subordinate governments, which can extend their care to all those other objects which can be separately provided for, will retain their due authority and activity. Were it proposed by the plan of the convention to abolish the governments of the particular States, its adversaries would have some ground for their objection; though it would not be difficult to show that if they were abolished the general government would be compelled by the principle of self-preservation to reinstate them in their proposed jurisdiction."
Madison's recognition of the principle of decentralization anticipated the evolution of large scale corporate enterprise in the twentieth century. In his classic book Strategy and Structure, Alfred Chandler argues that big business evolved from the functional into the decentralized form in the twentieth century in response to strategic shifts, notably the concentration of industry and the formation of conglomerates. The reason the decentralized form was necessary was that the informational demands and transactions costs of a large organization inhibit intelligent processing. Madison anticipated this development in the 18th century.
The information demands of government are greater than the informational demands of private industry. The flexibility required is greater and the scope of the market is greater, which implies the need for greater diversity of strategy. Yet, the modernist or progressive approach to organizing government has been to centralize decision making authority. This runs counter to the insight not only of Madison but of practical business strategists who have learned that efficiency as well as responsive, flexible strategy depend on integration of small scale with large scale and the loose coupling of federal and local units.
"It is to be remembered that the federal government is not to be charged with the whole power of making and administering laws. Its jurisdiction is limited to certain enumerated objects, which concern all the members of the republic, but which are not to be attained by the separate provisions of any. The subordinate governments, which can extend their care to all those other objects which can be separately provided for, will retain their due authority and activity. Were it proposed by the plan of the convention to abolish the governments of the particular States, its adversaries would have some ground for their objection; though it would not be difficult to show that if they were abolished the general government would be compelled by the principle of self-preservation to reinstate them in their proposed jurisdiction."
Madison's recognition of the principle of decentralization anticipated the evolution of large scale corporate enterprise in the twentieth century. In his classic book Strategy and Structure, Alfred Chandler argues that big business evolved from the functional into the decentralized form in the twentieth century in response to strategic shifts, notably the concentration of industry and the formation of conglomerates. The reason the decentralized form was necessary was that the informational demands and transactions costs of a large organization inhibit intelligent processing. Madison anticipated this development in the 18th century.
The information demands of government are greater than the informational demands of private industry. The flexibility required is greater and the scope of the market is greater, which implies the need for greater diversity of strategy. Yet, the modernist or progressive approach to organizing government has been to centralize decision making authority. This runs counter to the insight not only of Madison but of practical business strategists who have learned that efficiency as well as responsive, flexible strategy depend on integration of small scale with large scale and the loose coupling of federal and local units.
Kennedy v. Louisiana and Limiting the Supreme Court's Power
The progressive movement that began in the early twentieth century has followed a gradualist approach to the erosion of liberty. Its left wing makes extreme demands, and then its center argues for moderation, which means less erosion than the left demands. The process repeats so that the extreme demands are achieved through several small steps. As well, the progressives, starting with John Dewey, have been deceitful. They argue that they they idealize democracy and public deliberation, but then they advocate increasing centralization and bureaucratization of power, for instance the accretion of the Supreme Court's power over state law, that stifles democracy. These steps have the effect of restricting the majority of people's freedom, as in the economic realm, or of increasing the power of the progressive elite to impose the cultural values of the wealthy and Ivy League-educated onto the general public.
In Kennedy v. Louisiana, the Court held that a Louisiana law that provided the death penalty for a child rapist is cruel and unusual punishment and so unconstitutional. The New York Sun summarizes the Court's reasoning about cruel and unusual punishment as follows:
'Cruel and unusual punishment,' which is prohibited by the Eighth Amendment, derives its meaning from 'the evolving standards of decency that mark the progress of a maturing society.' These evolved standards, according to Justice Kennedy, require a distinction, 'between intentional first-degree murder on the one hand and non homicide crimes against individual persons, even including child rape, on the other.' Citing precedents, Justice Kennedy claims this distinction shows that the "severity and irrevocability" of child rape cannot be compared to murder 'in terms of moral depravity and of the injury to the person and to the public.'
Kennedy v. Louisiana is a chord in the progressive symphony. In the nineteenth century the Court did not have the power to apply the Bill of Rights to the states. In 1925, near the end of the Progressive era, in the case of Gitlow v. New York the Court ruled that the Fourteenth Amendment extended its power to review state law.
In 1965, in Griswold v. Connecticut, the Supreme Court held that Estelle Griswold, director of planned parenthood of Connecticut and Dr. Buxton of the Yale Medical School could not be fined for giving advice to patients encouraging them to use contraceptives even though the legislature of Connecticut had passed such a law. In the decision Justice Douglas wrote:
"specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance. Various guarantees create zones of privacy. The right of association contained in the penumbra of the First Amendment is one, as we have seen."
Thus, the Court went from not reviewing constitutionality of state law in the nineteenth century to reviewing it in the pre-World War II period and then to creating new rules not in the Constitution ("penumbras") in the post-World War II period that the Court then dictatorially imposed on the states. Paradoxically, Herbert Croly and other progressives of the early twentieth century argued that the Court had too much power in the nineteenth century and that democracy ought to supplant Court authority. Instead, progressivism has seen a vast extension of Court power and restriction of democracy. Despite their deceptive claim to support democracy, progressives have hailed this process. Progressives' values have emphasized extension of the First Amendment to revolutionaries (the speech involved in Gitlow involved Gitlow's advocating overthrow of the government, which New York had illegalized) and birth control. Progressives have repeatedly emphasized results like these over democracy.
In Kennedy v. Louisiana the Court claims the authority to reinterpret the Constitution in light of the evolving standards of decency that mark the progress of a maturing society. Yet, there is nothing in the Constitution that gives the Supreme Court that authority any more than the Constitution suggests that its penumbras have Constitutional force. The Supreme Court has simply re-interpreted the Constitution in a way that arrogates power to itself and that is profoundly anti-democratic. The fact that the "progressive" movement has never complained about this pattern evidences its elitism.
The Supreme Court views itself as an arbiter of decency, yet the Supreme Court has no qualification to function as such an arbiter. In Roe v. Wade the Supreme Court held that states could not illegalize abortion. Yet, according to ABC News, 57 percent of Americans oppose abortion solely to end an unwanted pregnancy. In other words, the majority of Americans do not think that the Supreme Court's judgment is decent. Nor should the Supreme Court imagine that it somehow reflects the moral standards of the majority of Americans. Some justices, schooled in elite universities and indoctrinated in politically correct ideology, have values that deviate sharply from the majority of Americans. If so, then the Court has become an arbitrary possessor of power, a factional dictatorial force that represents the "Blue" half of the country, not an interpreter of the Constitution. Perhaps it is time to restrict this anti-democratic, factional force.
An amendment to the Constitution could limit the Court's power to apply the Constitution to the states. If progressives believe in democracy, then they should favor this proposal, because enhancement of the power of the states would significantly enhance democracy. Such an amendment might state that the Constitution, except where it states to the contrary specifically, does not apply to the states. Then, the states will be free to decide what "penumbras" they wish to adopt, and which Supreme Court penumbras they find morally reprehensible.
In Kennedy v. Louisiana, the Court held that a Louisiana law that provided the death penalty for a child rapist is cruel and unusual punishment and so unconstitutional. The New York Sun summarizes the Court's reasoning about cruel and unusual punishment as follows:
'Cruel and unusual punishment,' which is prohibited by the Eighth Amendment, derives its meaning from 'the evolving standards of decency that mark the progress of a maturing society.' These evolved standards, according to Justice Kennedy, require a distinction, 'between intentional first-degree murder on the one hand and non homicide crimes against individual persons, even including child rape, on the other.' Citing precedents, Justice Kennedy claims this distinction shows that the "severity and irrevocability" of child rape cannot be compared to murder 'in terms of moral depravity and of the injury to the person and to the public.'
Kennedy v. Louisiana is a chord in the progressive symphony. In the nineteenth century the Court did not have the power to apply the Bill of Rights to the states. In 1925, near the end of the Progressive era, in the case of Gitlow v. New York the Court ruled that the Fourteenth Amendment extended its power to review state law.
In 1965, in Griswold v. Connecticut, the Supreme Court held that Estelle Griswold, director of planned parenthood of Connecticut and Dr. Buxton of the Yale Medical School could not be fined for giving advice to patients encouraging them to use contraceptives even though the legislature of Connecticut had passed such a law. In the decision Justice Douglas wrote:
"specific guarantees in the Bill of Rights have penumbras, formed by emanations from those guarantees that help give them life and substance. Various guarantees create zones of privacy. The right of association contained in the penumbra of the First Amendment is one, as we have seen."
Thus, the Court went from not reviewing constitutionality of state law in the nineteenth century to reviewing it in the pre-World War II period and then to creating new rules not in the Constitution ("penumbras") in the post-World War II period that the Court then dictatorially imposed on the states. Paradoxically, Herbert Croly and other progressives of the early twentieth century argued that the Court had too much power in the nineteenth century and that democracy ought to supplant Court authority. Instead, progressivism has seen a vast extension of Court power and restriction of democracy. Despite their deceptive claim to support democracy, progressives have hailed this process. Progressives' values have emphasized extension of the First Amendment to revolutionaries (the speech involved in Gitlow involved Gitlow's advocating overthrow of the government, which New York had illegalized) and birth control. Progressives have repeatedly emphasized results like these over democracy.
In Kennedy v. Louisiana the Court claims the authority to reinterpret the Constitution in light of the evolving standards of decency that mark the progress of a maturing society. Yet, there is nothing in the Constitution that gives the Supreme Court that authority any more than the Constitution suggests that its penumbras have Constitutional force. The Supreme Court has simply re-interpreted the Constitution in a way that arrogates power to itself and that is profoundly anti-democratic. The fact that the "progressive" movement has never complained about this pattern evidences its elitism.
The Supreme Court views itself as an arbiter of decency, yet the Supreme Court has no qualification to function as such an arbiter. In Roe v. Wade the Supreme Court held that states could not illegalize abortion. Yet, according to ABC News, 57 percent of Americans oppose abortion solely to end an unwanted pregnancy. In other words, the majority of Americans do not think that the Supreme Court's judgment is decent. Nor should the Supreme Court imagine that it somehow reflects the moral standards of the majority of Americans. Some justices, schooled in elite universities and indoctrinated in politically correct ideology, have values that deviate sharply from the majority of Americans. If so, then the Court has become an arbitrary possessor of power, a factional dictatorial force that represents the "Blue" half of the country, not an interpreter of the Constitution. Perhaps it is time to restrict this anti-democratic, factional force.
An amendment to the Constitution could limit the Court's power to apply the Constitution to the states. If progressives believe in democracy, then they should favor this proposal, because enhancement of the power of the states would significantly enhance democracy. Such an amendment might state that the Constitution, except where it states to the contrary specifically, does not apply to the states. Then, the states will be free to decide what "penumbras" they wish to adopt, and which Supreme Court penumbras they find morally reprehensible.
Sunday, June 29, 2008
Freedom of Information Act Request for Barack Obama's Birth Certificate
I have written and will mail on Monday two Freedom of Information Act requests to the State of Hawaii for copies of Barack Obama's birth certificate as per Larwyn's suggestion. Pamela Geller of Atlas Shrugs argues that there may be no problem with Mr. Obama's birth certificate, but the State of Hawaii and Mr. Obama have an ethical obligation to come clean on this matter.
Mark Bennett, Attorney General
Department of the Attorney General
State of Hawaii
425 Queen Street
Honolulu, Hawaii 96813
Dear Mr. Bennett:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Janice Okubo
Department of Health
State of Hawaii
1250 Punchbowl Street Room 326
Honolulu, Hawaii, 96813
Dear Ms. Okubo:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Mark Bennett, Attorney General
Department of the Attorney General
State of Hawaii
425 Queen Street
Honolulu, Hawaii 96813
Dear Mr. Bennett:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
Janice Okubo
Department of Health
State of Hawaii
1250 Punchbowl Street Room 326
Honolulu, Hawaii, 96813
Dear Ms. Okubo:
This is a freedom of information act request for the birth certificate of Barack Obama, born August 4, 1961. Because Mr. Obama is a public figure and because of the importance of this information to the public welfare the ordinary rules of confidentiality do not apply. I will be happy to pay your normal processing fee.
Sincerely,
Mitchell Langbert
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