The Socialist Bill of Rights, by FDR

[RCB]

The chart above was previous to the start of hostilities and before Germany's invasion of Poland or even military build up. It would reflect the environment ten+ years after WWI. I was directly referring to public works and other welfare programs and their effect on unemployment.

The broken window fallacy is an incomplete parable to compare early 20th century markets to. The shop keeper would have to own 70% of all the business in the town, taking all profits for himself paying his employees as much as he sees fit, with largely only his own businesses for them to purchase items from keeping them indentured more or less. The shop keeper was also able to use persuasion to prevent new business ventures from developing, ensuring his own oligarchy.

 

[Fletch]

The chart above was previous to the start of hostilities and before Germany's invasion of Poland or even military build up. It would reflect the environment ten+ years after WWI. I was directly referring to public works and other welfare programs and their effect on unemployment.

It fails to explain why the USA had the highest unemployment despite having the strongest economy. Hoover's interventions prior to 1933, and the damage they caused, do help to explain this.

The broken window fallacy is an incomplete parable to compare early 20th century markets to. The shop keeper would have to own 70% of all the business in the town, taking all profits for himself paying his employees as much as he sees fit, with largely only his own businesses for them to purchase items from keeping them indentured more or less. The shop keeper was also able to use persuasion to prevent new business ventures from developing, ensuring his own oligarchy.

You don't understand the point of the fallacy. The point is, if Person A has assets B and income C, is he impoverished or enriched if B is destroyed, such that he has to use C to replace it? Given that C will remain constant either way, the cost to "society" is zero, though it will very likely be spent on something other than replacing B if B is not destroyed.

Restated: Let's say I come to your house and burn it down. Are you impoverished or enriched by that action? Assuming it does not affect your employment to be without a house, you will still be spending money in the greater economy, although now you have to find some way to replace your living quarters and all that they contained. Sure, furniture makers and computer makers and clothiers and construction workers will be enriched by your expenditure, but you are still impoverished, AS ARE the folks who would have received your money had I not burned your house down. "Society" gets the benefit of your income either way, but the overall wealth of "society", measured in the aggregate, has been reduced by this act of destruction.

Put another way, if the broken window fallacy is not in fact a fallacy, then the 9/11 hijackers did us a favor by stimulating our economy. Instead of trying to stop al Qaeda, we should be hiring them to crash planes into more of our buildings. We could do the same thing ourselves by requiring that every consumer product, from toasters to automobiles to houses, contain an explosive device that utterly destroys it one year after the date of purchase. Think of the prosperity that would bring!

Similarly, if the myth of "wartime prosperity" is not in fact a myth, we have no need to go to war with anyone -- we could just build tanks and planes and destroy them ourselves, and kill random numbers of our own citizens for the prosperity that it would bring.

 

[jsgolfman]

Once again, Fletch is spot on.

 

[RCB]

It fails to explain why the USA had the highest unemployment despite having the strongest economy. Hoover's interventions prior to 1933, and the damage they caused, do help to explain this.

What lead to such rampant unemployment was several fold. Over production of food resulted in all but the largest farms unable to sustain themselves financially. Then, to follow that, there was the dust bowl through the plains. What made matters worse was that most people did not own the land they farmed. Unable to sell at adequate prices they lost the ability to stay on the land they worked. Many roved about working for farmers at wages they could not even live off of.

The tycoons held a massive amount of wealth. With extraordinarily low interest rates coupled with deflation, the wealthiest were better suited to hold onto their money, which in turn hurt companies looking to build capital through the stock market. That turned into bankruptcies which lead to unemployment, etc...

This also lead to a down turn in consumer spending. Industry slowed down drastically. Before the right to living wages, many people weren't paid enough to own homes or land. When work dried up, they were summarily dismissed from their previous residences.

This all occurred prior to FDR taking office in 1932.

You don't understand the point of the fallacy. The point is, if Person A has assets B and income C, is he impoverished or enriched if B is destroyed, such that he has to use C to replace it? Given that C will remain constant either way, the cost to "society" is zero, though it will very likely be spent on something other than replacing B if B is not destroyed.

Restated: Let's say I come to your house and burn it down. Are you impoverished or enriched by that action? Assuming it does not affect your employment to be without a house, you will still be spending money in the greater economy, although now you have to find some way to replace your living quarters and all that they contained. Sure, furniture makers and computer makers and clothiers and construction workers will be enriched by your expenditure, but you are still impoverished, AS ARE the folks who would have received your money had I not burned your house down. "Society" gets the benefit of your income either way, but the overall wealth of "society", measured in the aggregate, has been reduced by this act of destruction.

Put another way, if the broken window fallacy is not in fact a fallacy, then the 9/11 hijackers did us a favor by stimulating our economy. Instead of trying to stop al Qaeda, we should be hiring them to crash planes into more of our buildings. We could do the same thing ourselves by requiring that every consumer product, from toasters to automobiles to houses, contain an explosive device that utterly destroys it one year after the date of purchase. Think of the prosperity that would bring!

Similarly, if the myth of "wartime prosperity" is not in fact a myth, we have no need to go to war with anyone -- we could just build tanks and planes and destroy them ourselves, and kill random numbers of our own citizens for the prosperity that it would bring.

The broken window argument is about demand theory. The reason why wartime prosperity happens, is because there is a present need for war, defensive or offensive. That means we all make concessions on things such as taxes as well as war bond drives, etc. to aid our country in making war. It helps the citizens in the way of employment. Money (through additional taxes) that was stalled largely in the accounts of the very wealthy. So lets label Tycoon R as the shop keeper, and the people as the glazier and the baker. The glazier is purchasing his shop while the baker is merely and employee of the shop keeper who also owns his shop. What was going on at the time was that Tycoon R owned the assets of the baker, with them working for income which was only enough to provide for rental and necessities (so no savings). The glazier, although is buying his own shop from the shop keeper, but still has to have the income to buy necessities as well as pay for the shop.

In theory, the shop keeper would have bought bread instead of the window, however he already owns the bakery and already gets it below cost. The baker is paid the same no matter how many or how few he makes. His situation remains unchanged. The shop keeper already had windows and didn't need new ones, so wasn't going to buy anymore. No other bakers could come into being in the town as the money was still pooled with the shop keeper. To boot, the shopkeeper's baker was already producing more than enough for the whole town. The rock doesn't get thrown, so the shop keeper doesn't need a window. When the glazier doesn't make his property payment, the shop keeper evicts him and takes the property, keeping in mind the money already paid on the property by the glazier is not returned, so resulting in a net profit for the shop keeper. So now, the shop keeper hires the unemployed glazier at a low wage. Now any profit made from both the baker and glazier continue to funnel into the shop keepers assets without an investment out.

Now, when everyone in town has windows and makes unleavened bread, he has no need for either employee so offers to pay them a wage that won't even cover their rent or lets them go elsewhere (even though the same conditions are present elsewhere).

The New Deal, stepped in and gave the glazier and the baker somewhere to go and a way to live. The shopkeeper was perfectly suited to not feeding any money back into the economy because he already owned the property. It was more cost effective to be the owner and have other people work at slave wages, so you weren't paying a profit to someone else. It's the whole principle of the game monopoly.

War was a need that the shop keeper did not previous have. As the primary asset holder in the town (and wishing to stay that way) he gives money to the glazier and baker to go to war for him.

 

[Fletch]

Again, either you do not understand the broken window fallacy, or we are talking about two completely different broken window arguments.

 

[RCB]

The argument I am referring to is the boy braking the window of the shop keeper. Which isn't the greatest thing, but it does get the shop keeper to buy a new window, which gives money to the glazier who can then spend his money elsewhere. But in spending his money on the window, the shop keeper has no money for other items, such as from the baker.

The problem with that parable is that with regards to the new deal, it target the wealthy, who if they shop keeper, wasn't spending money elsewhere anyhow as it was more profitable to hold onto their assets with deflation and low interest rates (return on their money). The stone through the window, took the form of taxes and later war production. The money that was spent on the window, wouldn't have been spent elsewhere. So, the broken window fallacy with regards to the depression was a fallacy in its parable.

What compounded that was that the wealthy already owned their assets, as compared to others who did not, renting... from the wealthy. True, the wealthy did hire people, but with such high unemployment rates, they were able to hire them for what amounted to slave wages. Unable to have enough resources to leave or go anywhere else. Only enough to stay right where they were at.

Still, even at that, a majority of people were still employed. What had developed around the world was an ever increasing trend of financial tyranny, which lead to socialist uprising. And that wasn't just in Russia, but every industrialized nation was experiencing socialist movements due in large part to the conditions I mentioned in brief.

In order to preserve stability and the government, relief of the poverty stricken was essential.

Australia didn't have any government programs, suffering just as greatly as the US while drastically cutting government expenditures.

What they had to contend with was "successful" socialist programs such as what happened in New Zealand and the propaganda there of.

Had the New Deal not gone through we would have been no safer from dissension nor economic woes. It is often said that consumer confidence is key to economic recovery. But that confidence would be the belief that they can better their position and provide for their stability. Something the market wasn't going to provide on its own. Without any sort of minimum wage, the return to work would have been akin to enslavement. Waiting on the market to have sorted out would have been folly as revolution would have come beforehand as it did in many countries.

 

[Fletch]

The argument I am referring to is the boy braking the window of the shop keeper. Which isn't the greatest thing, but it does get the shop keeper to buy a new window, which gives money to the glazier who can then spend his money elsewhere. But in spending his money on the window, the shop keeper has no money for other items, such as from the baker.

The problem with that parable is that with regards to the new deal, it target the wealthy, who if they shop keeper, wasn't spending money elsewhere anyhow as it was more profitable to hold onto their assets with deflation and low interest rates (return on their money). The stone through the window, took the form of taxes and later war production. The money that was spent on the window, wouldn't have been spent elsewhere. So, the broken window fallacy with regards to the depression was a fallacy in its parable.

And again, you have missed the entire point of the parable. IT IS NOT NECESSARY for the owner of the window to be a shop keeper. It could be a window in someone's house. It could be a window that someone just happens to own in preparation for installing somewhere. And just to seriously blow your mind, IT DOES NOT HAVE TO BE A WINDOW. Any form of material wealth, from a child's teddy bear to a private jet and anything in between, could just as easily serve to make the point that you are completely missing.

The point is that the income/savings diverted to replace wealth which has been destroyed, whether by force majeure or malicious act, does not add to the economy. It is merely diverted from one purpose to another. Further, the act of diversion necessarily impoverishes the owner of the wealth in question. It does not matter if that person is the shopkeeper, the glazier, the butcher, the baker, or the candlestick maker. Even the guy in the soup line is susceptible to the damages wrought by the fallacy in question, if what little wealth he has is destroyed.

The fallacy in question is the idea that destruction of wealth can lead to greater prosperity than would have otherwise occurred had the wealth not been destroyed.

I propose an experiment: if you have children or know of a child, offer to let them do chores for some wage of your choosing, with the idea that when they are done, they will have enough money to buy whatever toy they choose, and you will take them to the store to get it. Once they have bought the toy, take it from them and destroy it. Then offer to let them work for you again under the same arrangement. See if perhaps they can explain to you why this is wrong, or if they thank you for the opportunity to contribute further to the economy, since I am clearly not getting through to you.

 

[Fletch]

What compounded that was that the wealthy already owned their assets, as compared to others who did not, renting... from the wealthy. True, the wealthy did hire people, but with such high unemployment rates, they were able to hire them for what amounted to slave wages.

Untrue. Hoover and FDR both instituted policies strong-arming employers into freezing wages at a price floor, despite the fact that wages desperately needed to fluctuate. As any Econ 101 student can tell you, price minimums create surpluses, and price maximums create shortages. In this case, the price minimum for labor created surplus labor, aka unemployment.

If you want to insist on your shopkeeper theory, try this on for size: Shopkeeper Sam has a payroll of $100/week. He presently pays $10/week for 10 workers, until an economic crunch comes along and he only has payroll capabilities of $90/week. President Obama threatens him with sanctions if he reduces the amount he pays his workers, so instead of negotiating with each worker to take a $1 pay cut, he is forced to lay one off. Congratulations, now the unemployment rate vis a vis Sam's Shop is 10%.

President Obama figures this is unacceptable, so he raises taxes on Shopkeeper Sam, bringing his overhead costs to a point where he can now only afford $80/week. Again, he's not allowed to renegotiate wages with his workers, so another one gets laid off. Unemployment is now 20%, but hey, at least the other two can get government jobs at $7.50/week, right? And that's only assuming a whopping 50% inflation on top of the $10 taxed from Sam, with ZERO administrative costs from government, which we all know is complete horsehockey.

 

[RCB]

In normal situations, I whole heartedly agree with you.

However, in reference to the New Deal, the broken window in need of repair took the form of things such as the CCC, TVA, etc to give the people a way of supporting themselves and their families and also aiding those who provided goods and services as the previously unemployed now had a meager income with which to purchase goods.

The shopkeeper, or rather the assets that were used came from tax payers and bond holders. The thought is that had taxes and bonds not been levied or issued then that money would have been used elsewhere, depriving the individuals who otherwise would have received that money.

The depression was unique in that largely due to drastic cuts already taking place in government, deflation occurred. In other words, money could buy more things. Problem was that prior to the depression, monopolies had pooled wealth in relatively few hands. As the few hands already had all their necessities taken care of, there was no incentive to invest that money, so that others could earn a living and thus make supply and demand work efficiently. Deflation coupled with low interest rates created a situation in which holding money was more profitable than investing it. So in the parable you can consider it as unbreakable glass, that wouldn't have to be replaced on its own.

The wealth was not destroyed, as in the broken window, but rather a new need was created.

As an experiment, say you and your wife are divorced. Your children are wanting your assets, so they would be the glazier. why don't you start by requiring them to do chores as part of room and board. However, they receive ten dollars in allowance for their work. The toy is $20. Halfway through the first week, other families have stopped paying their children an allowance as they decided that a lot of the chores weren't essential and the rest they could do themselves. So one of your neighbors children that wants the same toy come to you looking for chores. So I bargain with him for $5 dollars per week for the same chores your current child is doing. You bargain with your child down to $4. So, now it will take five weeks instead of two. Well next week the other children show up asking the same question. Think the process will repeat? When they get to working for room and board only, thankful will they be in participating in your form of capitalism. Now their mother comes along offers to pay him the $4 per week so that even though longer than he hoped, your child can now save to get that toy. Now that the boy is living with his mother, you now have to pay child support, which goes in part to pay his allowance. Which system do you think the child would go with?

I know what you mean about not getting through.

 

[Fletch]

Had the New Deal not gone through we would have been no safer from dissension nor economic woes. It is often said that consumer confidence is key to economic recovery. But that confidence would be the belief that they can better their position and provide for their stability. Something the market wasn't going to provide on its own. Without any sort of minimum wage, the return to work would have been akin to enslavement. Waiting on the market to have sorted out would have been folly as revolution would have come beforehand as it did in many countries.

This does not explain why Harding's response to the post-World War 1 depression did not result in your socialist uprising. Unemployment peaked at 11.7 percent in 1921, but was down to 2.4 percent by 1923, despite Harding doing the exact opposite of Hoover and FDR. Harding and Mellon slashed income tax rates, especially on the highest earners, and drastically reduced government spending. Federal revenues increased substantially, and the increased wealth generation ability of the wealthiest members of society fueled the boom we call the "Roaring 20's". Calvin Coolidge continued Harding's policies, and the prosperity continued.

This had been the federal government's response to every economic downturn in the previous hundred-odd years, and it worked every time. The one time that things went all to hell was when Hoover came into an economic downturn and gave up on over a century of executive history, instead deciding to spend money hand over fist on public works projects. FDR continued the policy.

From Dr. Murphy: "Had FDR had the same success in battling depression as Warren Harding, the unemployment rate in 1935 would have been 16 percent, rather than above 20 percent as it was under Roosevelt."

FDR nearly destroyed the economy and the country with it. He was no hero, he was a political opportunist looking for ways to make others dance to his rhythm. He didn't even spend the money in places where folks needed it the most; examinations of his expenditures show that they went to states where he was having trouble getting elected, no matter how relatively better off they were than the rest of the country. The New Deal was the biggest vote-buying scheme ever conceived, and it worked. Twice.

 

[Fletch]

The depression was unique in that largely due to drastic cuts already taking place in government, deflation occurred. In other words, money could buy more things. Problem was that prior to the depression, monopolies had pooled wealth in relatively few hands. As the few hands already had all their necessities taken care of, there was no incentive to invest that money, so that others could earn a living and thus make supply and demand work efficiently. Deflation coupled with low interest rates created a situation in which holding money was more profitable than investing it.

And this does not take into account the fact that the Fed immediately reversed course in 1929 following the stock market crash, and for the next 2 years inflated the currency. It wasn't until late 1931 that they again started tightening the money supply, because inflation wasn't working. In spite of their printing of money and loosening up access to credit, the depression continued to get worse. If your thesis were correct, conditions would have gotten better from 1929 - 1931, and they did not.

 

[RCB]

Untrue. Hoover and FDR both instituted policies strong-arming employers into freezing wages at a price floor, despite the fact that wages desperately needed to fluctuate. As any Econ 101 student can tell you, price minimums create surpluses, and price maximums create shortages. In this case, the price minimum for labor created surplus labor, aka unemployment.

If you want to insist on your shopkeeper theory, try this on for size: Shopkeeper Sam has a payroll of $100/week. He presently pays $10/week for 10 workers, until an economic crunch comes along and he only has payroll capabilities of $90/week. President Obama threatens him with sanctions if he reduces the amount he pays his workers, so instead of negotiating with each worker to take a $1 pay cut, he is forced to lay one off. Congratulations, now the unemployment rate vis a vis Sam's Shop is 10%.

President Obama figures this is unacceptable, so he raises taxes on Shopkeeper Sam, bringing his overhead costs to a point where he can now only afford $80/week. Again, he's not allowed to renegotiate wages with his workers, so another one gets laid off. Unemployment is now 20%, but hey, at least the other two can get government jobs at $7.50/week, right? And that's only assuming a whopping 50% inflation on top of the $10 taxed from Sam, with ZERO administrative costs from government, which we all know is complete horsehockey.

I thought we were talking about the New Deal? There was deflation at the rate of almost ten percent per year, not inflation.

Shopkeeper Sam has a payroll of $100 per week. assuming he is a $10 salary allotment (paying for his living wages) So he was paying out $90 to other people per week, so nine other people. If his payroll was $100, then at a slightly over typical 30% we can assume his gross was 333 per week. At a typical profit of 2-5% he was gaining $6.70 to $16 dollars per week, in addition to his wages. As you pointed out, the increase in wages comes out of his payroll, not profit. During the same time, his dollars saved are increasing in value by ten percent. Suddenly customers stop coming in. His gross is down 20%. Does he a) cut employees or b) reduce his profit margin further. His sales continue to decrease. Now he is down 50%. Same question as before. He finally gets down to where he is the only employee. Now, while that is going on, all his saved money is increasing in value. Every year it is equivalent to more than a months salary. Now he could hire someone back, but the cost in payroll vs the cost of leaving it where it is encourages him to leave it in his mattress. Three out of ten are unemployed. Not many people visit Sam's shop, because they can do without it, so he doesn't restock. The people he orders from stop having supplies produced, etc.

As no products are being made, the deflationary spiral continues as resources become increasing scarce. Value on saved resources continue to go up. Finally, in order to help the people feed themselves and stop stealing and rioting the major hires a portion of them at $5 an hour. That money comes from new taxes and bonds. The bonds are attractive because are tax exempt from some of the taxes he pays, particularly in light of the new taxes coming down. Initially people will be spending money on finding a place to live and basic groceries. However, seeing that there are new tenants, the local landlords are a little more willing to spend money. Which increases Sam's business enough to rehire one of his previous nine employees. If that cycle can repeat a couple times, money will be more prevalent and deflation will stop. Then it becomes potentially profitable to increase production, as his profits from hiring more people will be greater than the value increase from sitting on it.

 

[RCB]

And this does not take into account the fact that the Fed immediately reversed course in 1929 following the stock market crash, and for the next 2 years inflated the currency. It wasn't until late 1931 that they again started tightening the money supply, because inflation wasn't working. In spite of their printing of money and loosening up access to credit, the depression continued to get worse. If your thesis were correct, conditions would have gotten better from 1929 - 1931, and they did not.

They were inflating money to counter act deflation, which occurred regardless.

Keeping in mind that the New Deal was signed in 1933 with the second the years following. GDP bottomed in 1933, increasing from there on. While unemployment lingered on, GDP increased. So the New Deal, with regards to the depression, financially it did help.

 

[Fletch]

I thought we were talking about the New Deal? There was deflation at the rate of almost ten percent per year, not inflation.

And again you missed my point. This is getting old.

It's becoming clear to me that we're doing a lot of talking past one another, which is never productive.

You're harping on deflation, acting as though the savings so encouraged never goes anywhere. While it is true that money stuffed under a mattress earns a positive rate of return in a deflationary economy, savings lent out at interest earns even more, even with low rates of interest. And this completely ignores the fact that the entire purpose of savings is future consumption. A person who saves their money is eventually going to spend it, some sooner than others.

If it were true that price deflation causes people to save indefinitely, no one would ever buy a computer. Prices have been falling for decades, yet people buy computers all the time, even people who already own perfectly serviceable computers. Why would they not hold out indefinitely, waiting for the implied infinite power at zero price?

 

[Fletch]

Another problem with the deflation theory is that once again it doesn't account for other periods of historical deflation. The 1920-1921 depression had a one-year drop in prices 50 percent more severe than any 12-month period of the Great Depression, and yet it did not result in a never-ending spiral. And from 1839 to 1843, long before the creation of the Fed, the money supply dropped by 34 percent and wholesale prices by 42 percent.

In the latter case, we have a 4-year period of deflation just like 1929 - 1933, and instead of having a Great Depression deflation death spiral from hell, investment did fall, but real consumption increased by 21 percent and real GNP by 16 percent. This occurred in a far simpler and more fragile economy than the one 90 years later that went into the Great Depression. How is this possible?

This isn't to say that we have a perfect comparison between the various periods, but if the underlying law of economics is as you propose: deflation creates a death spiral that can only be averted by massive government spending, then these two previous deflationary periods, especially the one during the Harding administration, should have sparked the Great Depression, and they did not.