The Great Deformation (132 page)

If another road were taken in this manner, the entire domestic welfare state budget could be reduced from 17.5 percent of GDP last year to a permanent 15 percent, notwithstanding the inexorable march of the baby boomers into old age and the honest limits to economic growth in a revived free market economy. In conjunction with the dismantlement of the warfare state and the paydown of the national debt, this would allow the nation's revenue and spending accounts to be balanced at about 20 percent of GDP. The wealth tax would penalize past accumulations and recapture windfalls, but permit a great reset so that entrepreneurs and job creators in the future would face no income tax at all.

At length, the devastating strife of the fiscal cliff would be quieted. Democracy could function, and the people could pursue their ends and ambitions on a free market liberated from the corruptions of crony capitalism, the unfair windfalls to the 1 percent, and the needless inefficiencies and waste which flow from the Keynesian state and its central banking branch. At the end of the day, the cure for the Great Deformation is to return to sound money and fiscal rectitude, and to correct the great error initiated during the New Deal era; namely, that in pursuing humanitarian purposes the state cannot and need not attempt to manage the business cycle or goose the free market with stimulants for more growth and jobs; nor can it afford the universal entitlements of social insurance.

Instead, its job is to be a trustee for citizens left behind, maintaining a sturdy, fair, and efficient safety net regardless of whether the GDP is rising or falling, or whether unemployment is high or low. And most especially, the work of a citizen government attending to and managing the safety net for fellow citizens would proceed apace without regard to the opinion of Professor Paul Krugman or Art Laffer as to whether the free market was achieving the “potential” output decreed by their deeply flawed models and theories. The proof for that imperative is in the pudding.

It goes without saying that this book is a polemic that does not pretend to marshal the pro and con arguments in an even-handed academic fashion. It contains much original interpretation of financial and public policy events and trends of the last century, even a revisionist framework. The facts and information content that have been used to illustrate and support the themes and interpretations are derived from readily accessible sources in the public domain. Accordingly, the book is not footnoted because my purpose has been to interpret and pattern the facts, not discover or explicate them.

I did not use research assistants in the investigation phase or writing phase of producing the book, so all of the factual material cited is the result of my own searches. I am confident that it is accurate insofar as humanly possible and a fair presentation of the underlying source materials in instances where I have made calculations or extracted quotations. The major sources of the extensive financial and fiscal data cited in the book are listed below, but there are certain presentation devices used throughout the book that should be mentioned here. The factual material in the book is presented to illustrate, frame, or document my themes, but not to detract from the flow of the argument owing to inordinate detail or spurious precision. For that reason, the book is also free of charts and graphs. Since I am dealing with long time spans and underlying trends, I have attempted to round billions and trillions to the nearest “big figure” numbers that are true to the underlying facts at issue but are more digestible than the precise raw figures found in the primary databases. Likewise, most percentage change numbers have been rounded to the nearest whole number, unless the argument depends on greater precision, usually in the case of shorter term trends and rates of change. Finally, I have attempted to make data from the periods prior to the Great Inflation of the 1970s more comparable to contemporary financial magnitudes by translating data into “GDP equivalence” on a present-day scale. For example, nominal GDP was about $100 billion in 1929 compared to $15.7 trillion today. So where appropriate, data in the nominal dollars of the day were factored up by approximately 150X. Thus, stock market margin loans at the 1929 peak totaled in excess of $9 billion in dollars of the day and equivalent to 9 percent of GDP, or $1.5 trillion, in today's GDP scale.

The single most important source of data in the book is the economic researcher's best friend, called “FRED,” the acronym for the Federal Reserve Economic Data website maintained by the Federal Reserve Bank of St. Louis. It contains current and historical data, some of it stretching back a half century or longer, from more than 61,000 US and international data series. Due to the user-friendly nature of the site, any of these series are virtually three or four clicks away from most of the macroeconomic data cited in the book. These include GDP and all of its components, price trend data for the CPI, and various deflators, banking, interest rate, and monetary data, as well as all the common series on labor markets, housing, and business activity indicators such as industrial production and retail sales. As one brief example, the book is highly concerned with the huge rise in the PCE (personal consumption expenditure) share of national income over the last four decades as one piece of evidence with respect to the Great Deformation. Any of the book's data on PCE, therefore, can be found by clicking FRED's “National Income and Products Accounts” (NIPA) category, which contains 258 series, several of which provide PCE in real and nominal terms, and all of which can be viewed in graph and raw data form by quarter for any period and sub-period back to 1940. In this regard, an alternative source of the NIPA or GDP account data which are at the center of the book's presentation is an online site maintained by the Bureau of Economic Analysis of the Commerce Department (which produces the GDP data) called “NIPA Interactive.” It is also virtually a few clicks away from any of the components, sub-components, and underlying data series which comprise the NIPA database.

This book is also highly focused on the “empty quarter” in the Keynesian worldview; namely, the balance sheets of households, the business sector, financial institutions, governments, and the national economy as a whole. The researcher's (and reader's) best friend on that score is a massive database called the “Z.1” report published by the Federal Reserve and formally called the “Flow of Funds Accounts of the United States.” This data has been sorted into consistent form on a quarterly basis going back to 1946, and each quarterly update contains more than a hundred pages of tables that are cross-indexed and fully footed, showing the trends in assets, liabilities, and net worth of the components and aggregates of the US economy, including the balance sheets of the banking system and the Fed. Virtually all of the balance sheet data (other than for individual companies) cited in the book is extracted from the Z.1 reports on the Fed's website.

The book also delves heavily into pre-1945 financial and fiscal history, especially
chapters 8
–
10
on the New Deal and World War II periods. Some
of the cited data is contained in the online databases indicated above, but most comes from the two-volume series issued by the Bureau of the Census called
Historical Statistics of the United States, Colonial Times to 1970
. This publication is the historical equivalent of the current-period
Statistical Abstract
also published by the Census Bureau and is the source of virtually 95 percent of the historical macroeconomic, banking, and other financial data cited for pre-1945 periods in the book.

A third preoccupation of the book is federal budget and fiscal trends. Both the OMB and CBO websites contained extensive historical and current budget data, and I have used the former in most instances owing to certain historical affinities. The principal exception is the detailed analysis of the current ten-year CBO budget baseline contained in
chapter 33
and referenced elsewhere in the book, including the introduction and
chapter 27
. That analysis and the cited revenue and expenditure data are based on a CBO report entitled “The Budget and Economic Outlook: Fiscal Years 2012 to 2022” published in January 2012.

The chapters in
part 4
, “The Age of Bubble Finance,” are heavily focused on financial markets and the financial data and stock prices for dozens of individual companies. While there are innumerable public websites for financial data as well as proprietary databases maintained for clients by brokers and advisors, the book utilized YCharts for the purpose of consistency and due to its user-friendly features for virtually all of the company and financial and stock price data cited. YCharts provides ten years of SEC-filed financial statement data for publicly traded companies, along with stock price, PE multiple, market capitalization data, and a large variety of standard financial analysis ratios such as leverage, margins, and growth rates. Supplementary company data was also obtained from the “Market Data” section of the
Wall Street Journal
's website and a similar database maintained by Yahoo! Finance. More detailed company financial data that drilled deeper than the common categories and ratios contained in the financial websites was obtained directly from SEC-filed 10Ks, 10Qs, and 8-Ks for the cited companies. The aggregate data on stock buybacks, M&A deals, and capital markets activities such as junk bond issuance and IPOs were obtained from the Standard & Poor's website and commonly produced research reports issued by the major Wall Street houses.

Certain chapters also contain a fair amount of specialized economic data, such as
chapters 18
and
19
, which are focused on housing. In addition to the large macroeconomic databases such as FRED cited above, these chapters also draw upon extensive housing finance data published by Inside Mortgage Finance, the authoritative trade source of industry data
such as on the variety of mortgages underwritten during the housing boom, including subprime, alt-A, conforming loans, and all the sub-varieties of these categories.

Likewise,
part 1
on the BlackBerry Panic of 2008 supplements the standard public data series with additional, related data on the financial crisis gathered and assembled by the National Commission on the Causes of the Financial and Economic Crisis in the United States, and published in its official report released in January 2011. The extensive data on the banking system cited in
chapter 2
was also derived from the Fed's weekly H.8 release called “Assets and Liabilities of Commercial Banks in the United States” and especially from the FDIC's large quarterly production called “Quarterly Banking Profile” and related releases.

Another specialized set of data on the jobs and employment issues presented in detail in
chapter 31
is derived from the BLS “Employment Situation” reports, and particularly the extensive historical data series for the “A” tables (household survey data) and the Series “B” tables (establishment survey data for nonfarm payrolls). The three categories presented in
chapter 31
referred to as breadwinner jobs, part-time jobs, and the HES complex are a re-sort of the more than one hundred payroll jobs categories contained in the “B” series. Other specialized data series include Commerce Department series on foreign trade and the balance of payments, construction spending, personal income, and its disposition including consumption, savings, and taxes.

Nearly all of the “contemporary” trends, episodes, and events in the post-1970 period cited in the book are based on my own observations and recollections, supplemented by Google searches and books and articles that provide context and details. Events during the Camp David weekend in August 1971 and the Nixon period generally, for instance, were illuminated by Allen J. Matusow's book entitled
Nixon's Economy, Booms, Busts, Dollars, & Votes
(University of Kansas Press, 1998). Likewise, journalistic accounts of contemporary events provided further color and details on various episodes, such as Andrew Ross Sorokin's account of the 2008 financial crisis in
Too Big to Fail
(Viking, 2009) and Ron Suskind's accounts of both the early George W. Bush administration in
The Price of Loyalty
(Harper-Collins, 2004) and economic policy making during the first two years of the Obama administration in
Confidence Men
(HarperCollins, 2011). I reviewed literally hundreds of these kinds of journalistic and academic accounts with respect to the “contemporary” period, but the main thrust of chapters focused on events after the 1960s are based on the raw data sources cited above and my own observations and assessments as a contemporary observer and sometime participant in these events.

By contrast, my “historic” period perspective for the era prior to 1970, especially the New Deal and post-WWI period, is derived from a distinctive literature that was mainly published before 1940. Succinctly stated, I do not believe that postwar Keynesian historiography gives a fair, accurate, or insightful picture of what actually happened. It is so biased against pre-Keynesian “sound money” traditions based on gold standard money and balanced budgets that much that is relevant gets air-brushed out of the picture, and actions consistent with earlier sound money traditions are badly misinterpreted, even ridiculed. While the literature published during these times was obviously massive, the following are leading examples of pre-Keynesian books that have informed my views on this “historic” period:
Economics and the Public Welfare
by Benjamin M. Anderson (D. Van Nostrand Company, 1949);
The Theory and Practice of Central Banking
by H. Parker Willis (Harper & Brothers Publishers, 1936);
The Banking Crisis
by Marcus Nadler and Jules I. Boden (Dodd, Mead & Company, 1933);
Prelude to Panic
by Lawrence Sullivan (Statesman Press, 1936);
The Money Muddle
by James P. Warburg (Alfred A. Knopf, 1934);
Banking and the Business Cycle
by C. A. Phillips, T. F. McManus, and R. W. Nelson (Macmillan Company, 1937);
War Debts and World Prosperity
by Harold G. Moulton and Leo Pasvolsky (Brookings Institution, 1932);
Deterioration of the Quality of Foreign Bonds Issued in the United States, 1920–1930
by Ilse Mintz (National Bureau of Economic Research, 1951);
The Liberal Tradition
by Lewis W. Douglas (D. Van Nostrand Company, 1935);
The Twilight of Gold, 1914–1936
by Melchior Palyi (Henry Regency Company, 1972);
The Banking Situation
by H. Parker Willis and John Chapman (Columbia University Press, 1934);
Bankers and Credit
by Hartley Withers (Eveleigh, Nash & Grayson, 1924);
The Course and Phases of the World-Economic Depression
by the League of Nations (Secretariat of the League of Nations, 1931);
After Seven Years
by Raymond Moley (Harper & Brothers, 1939);
Crisis in Agriculture: The Agricultural Adjustment Administration and the New Deal, 1933
by Van L. Perkins (University of California Press, 1969);
Closed and Distressed Banks
by Cyril B. Upham and Edward Lamke (Brookings Institution, 1934);
The Banking Crisis and Recovery Under the Roosevelt Administration
by J. F. T. O'Connor (De Capo Press, 1938);
The Banking Crisis of 1933
by Susan Estabrook Kennedy (University Press of Kentucky, 1973);
The Banking Panics of the Great Depression
by Elmus Wicker (Cambridge University Press, 1996);
World Agriculture and the Depression
by Valdimir P. Timoshenko (University of Michigan, 1933); and
The Crash and Its Aftermath: A History of the Securities Markets in the United States, 1929–1933
by Barrie A. Wigmore (Green-wood Press, 1985).