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Define Rich V: Looking at the historical labor economy

We are taking a little side trip inthis series of defining rich based on the prior tax rate schedulesbut, this post is keeping with the process of looking at history formarkers as to the definition of rich. For any new readers, I believeas a society we knew and had definite boundaries as to what definedrich. I believe we knew how to say the word “when” as the incomeand wealth was pouring into one’s glass These boundaries producedspecific public policy that resulted in a more equal and justsociety.
In our local city there is anothertextile mill going to the grave. We have lost a couple of huge millsto fire in the last decade.  The local paper did an article on thismill known as the French Worsted Mill. It was built in two stages,1906 and then 1906. It was part of the revival of the mill industryvia specific targeting of French industrialists, post water power forthe city. A local person who was eventually governor of the state iscredited with bring $6,000,000 of foreign investment into the cityearly turn of the century. At one point they had a Uniroyal rubberplant that made soles for shoes The last pair of Keds (sneakers) went out thedoor in 1970. Nine hundred and fifty people out of work due to “FarEaster Producers”.  (See the article: Pressure growsrapidly for Congress to to clamp tariffs on foreign goods, 5/19/1970)  This was a city as industrial asanything Detroit or Pittsburgh were. This was a cultural center forthe region with 6 theaters and I don’t mean just movies. We aretalking blue collar all the way. We’re talking jobs that we considerthrow away jobs to the far east today. We’re talking jobs that are notconsidered “good” jobs anymore.
So, now that you have the picture, hereis what this mill and the jobs within it were able to do for theworkers. I think this bit of history also adds to my position thatwe have continually pushed the cost of the American Dream up theincome line such that the middle class can not afford it…even with2 college educated people in one house. This is the sub-context tothe discussion regarding the decline of the middle class or the lossof the middle class. When people say the middle class does notexist, what is being stated is that the American Dream is no longerfinancially possible for this groups of citizens. The Dream is notdead or gone, it is over priced relative to the income of the middleclass. It is just as we are not drowning in debt, we are dehydratingfrom lack of income.

The article in the paper talked about aMr. Bacon. He worked in the mill in 1956 along with 700 to 800 otherresidents. The job was not as a machine tool maker (the mill as mosthad their own machine shop) or a special machine operator thatrequired special skill. He was a laborer. The tasks mentioned werestuffing waste wool into burlap sacks or “picking up the yarn” orfetching parts from the machine shop. We’re talking menial labortasks. Starter jobs.
For this work Mr. Bacon was paid $1.80per hour. The minimum wage was $1.00 per hour. At some point he wasearning $80 per week for 40 hours work. This is $4160 per year. With this income Mr. Bacon was able to put himself through collegeand became a teacher in the local school system. It was not just anyold college he went to. It was Providence College with a tuition of$500 per year. Yes, a private college that cost only 1/8thof his annual income.
Mr. Bacon’s story is the story that notonly are the Republican presidential candidates promoting as to whatwe need to “get back” to, but the democrats are saying we needto go forward to. Mr. Bacon’s story with this mill is the proof thatthe 2 parties are not talking about a fantasy time in our history. It did exist.
Here’s the problem though with both of their directions. I’m justgoing to list them.
  1. $40,000 is the annual tuition at Providence College today.
  2. $1.80 per hour is equivalent to the following: $14.40/hour standard of living, $17.80 real value, $18.20 unskilled labor and $22.00/hour production labor.
  3. Tuition of $500 is equivalent to the following: $4010.00 standard of living, $4960 real value, $5050 unskilled labor and $6120.00 production labor
Are you seeing the problem here? It’snot just the difference of tuition going up 80 times. It’s that the wage equivalent today for what amounts to stacking shelves in Walmartis not being paid at Walmart. Not only is this Walmart job notpaying such wages, this is what the current autoworker is earning. The autoworker was one of the best compensated citizens we had. Lookup the definition of  middle class in the dictionary, and you would have seen anautoworker!
How bad is this? Considered
Thelow-wage benchmark set by the UAW has already set off a competitivestruggle in the global auto industry, with Fiat-Chrysler boss SergioMarchionne telling Italian workers they must accept American-styleconcessions or he will move production to North America for cheaperlabor.
I have read that the German automakersare here in the US for the same reason. We are now the stop for outsourcing.
Here is the other more important aspectof the story of the French Worsted Mill and it’s relationship to theAmerican Dream. All those candidates, all those legislators, allthose governors proposing programs they say will encourage people toget off welfare and join the “productive” class, programs thatwill spur job creation, programs that will grow the economy such thatwe can cut taxes JUST LIKE THE GOOD OLD DAYS have no answer for thelack of pay of $14.00 per hour for the Walmart shelf stocker. Theyhave no answer as to how they are going to return the ratio betweenthe hourly wage and the cost of college education to that of the1950’s such that an individual can accomplish what Mr. Bacon andothers from the same mill accomplished. Not only do they have noanswer, they don’t even want to consider this aspect of theirsolution.
Mr. Bacon’s story is also telling uswhy we think the public sector is so over paid. If a Walmart shelfstocker should be earning $14.00 hour comparatively but are not, ifan autoworker earning $14.00 per hour is underpaid comparatively,then certainly the higher hourly wages of the public sector lookexcessive. Everyone used to know that the public sector was alwayspaid less compared to the private sector. They did not have morebenefits than the autoworker, but they do now. The slowdeterioration of the autoworkers and all the other laborers pay andbenefits has hidden the reality of the finger pointing at the publicsector. It’s not that they are paid so much, and thus look “rich”by comparison, it’s that the autoworker has lost so much over such along time that the loss is not recognized as a loss. Instead, thepublic sector’s economic position is looked at as an unjust gain. Not only is this presented as an unjust gain, it is an injusticeperpetrated via taxation. And the stage is now set for all thearguments such as those we hear coming from governors such as Walkerand Kasich.
This is where the Keds hit the road. We, and I have to say “We” because We voted in those who made thepolicy changes, have decided that a good job is not one which allowsthe experience of Mr. Bacon or the autoworker. We upped it to be onethat required academic education. No longer would trade education orapprenticeship education be of such value that it would define themiddle class. Unfortunately, as I had suggested in 2007, evenacademic education is being defined down as to not resulting in a “goodjob”.
“The dream seems to now only be adefinite with a 2 person, college educated and working household. That combination is not far from being in the 10% group. Thus, wehave raised the dream to something beyond which a large portion ofthe population will not reach considering only 28% have a 4 yeardegree even though 64% of high school students are entering college. It looks even worse with people suggesting that you need an IQ of 110to succeed in college. I mean, can we push the dream any further outor be anymore aristocratic in our arguments? “

In 2003, the homeownership rate for upper-income families withchildren was 90.8 percent, while the rate for their low- tomoderate-income counterparts was significantly lower at 59.6 percent– yet in 1978 some 62.5 percent of low-to moderate-income workingfamilies with children owned their homes. Ultimately, had the 1978homeownership rates for working families with children prevailed in2003, an additional 2.3 million children would now be living inowner-occupied homes.

How’s this little bit of history change your ideas about what toblame for the current housing/mortgage mess? I suppose if you areall for a future that is less than what was accomplished in the pastthen blaming government for promoting housing and people for spendingbeyond there means is all right by you.

No one in the middle class of yore was rich by any means. But,what they had was a life much freer of risk than today. What theylived in was an environment that provided the means to manage therisk of life and living. When we are told by those running for or inoffice that Americans need to be more…(fill in the blank) they aresuggesting such from within their own experience of having grown upin a socially constructed via government environment that was devoidof certain risks of living based on one’s income. In other words,you would not be told that the requirement for food stamps would meanyou had to have less than $2000 in savings.

The removal of these risks allowed one to take what theypersonally had (natural ability and otherwise) and grow it into alife where economically more of life’s risks could be taken onindividually.   It was an environment which removed the concept ofluck from the social justice equation.

This environment was not all welfare. It was an environment thatassured a person of common acuity could live a life free from therisk of weather, malnourishment, illness and aging. It was anenvironment that produced an economy such that the vast majority ofthe 72% without a college education were living this minimal risklife. We had an environment which supported the economic life journeyof the autoworker, simultaneously supporting the economic life journey of Mr.Bacon’s experience, simultaneous supporting the economic life journey of anindividual such as President Obama.

It was an economic environment which produced a directrelationship between income/wealth and risk absorption. As incomeand wealth went up, so did the absorption of risk and vice versa. Today we

have a system that is completely theopposite such that we have arrived at place where the relationship iscompletely reversed. We spare those who as a group can purchase agovernment which insulates them from any risk while pushing all therisks of living on to those who can not afford any risk and then tellthose people “oh well”. The bank bailouts and theausterity plan is the realization of the reversal of the risk/income-wealth relationship.

Our past economic environment also produced a direct relationshipbetween income-wealth and luck. Again, as income-wealth increased,your success was more dependent on luck and vice versa. This too hasbeen reversed as we see with the Washington revolving door and evergreater capture of the nations wealth as one’s income-wealthincreases. The environment produces an ever stronger assurance thatincome and wealth will increase as they both increase. This isunlike the experience of the middle class including all the highly educatedpeople who find themselves under employed or unemployed do to theshear luck of having chosen wrong. Today the closer you are to zeroon the line of income-wealth, the luckier you need to be.

I’ll leave you with this, the class warfare. There is classwarfare. It has always been with us, since the writing of theConstitution. However, I believe the current theater is the mostdevious the vast majority of the US population has ever faced. Thisis because of the two parties in this seemingly perpetual human quest,one has successfully cloaked themselves in the costume worn of athird party observer effectively immunizing themselves from the pain of the fight via camouflageof a messenger.  I even suspect some aregaining a wee bit of entertainment in their ability to manipulate theircounterparts into fighting among themselves. I speak of the laborclass successfully being divided such that those who labor in theprivate sector of the economy accuses those who labor in the publicsector of the economy for their poor economic position and the publicsector laborer does not recognizing themselves in the private laborworld. I tell you, the false messenger is recognized in that theirlabor is money. It is not in their mind or body. Warren Buffet maywant to be taxed more, but Warren Buffet is not working his money asthe Kock Brothers are working theirs…and Warren Buffet isbenefiting from the productivity of the Kock’s Brother’s money.

Next up is 1936’s tax table.

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Weekend Reflection Points

The lead article in the current AER is available here (gated, apparently, though the link isn’t working; h/t Tom Bozzo [on FB] and Brad DeLong; I was using the paper copy). The most interesting part so far: the authors only considered the documented costs of air pollution—not land, not water—in deriving the (embarrassingly negative) ROI figures for coal and oil.

As Cousin Lucia and Tom Zeller, Jr., note today, the cost of water pollution makes oil power plants an even worse option.

In such a context, Europe in general and Germany (the top maker of solar panels until China recently passed them) in particular rubs in our faces that they’re winning on the alternative-energy sources front (h/t Barry Ritholtz):

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.

Meanwhile, back in the U.S., it is no secret that Brad and Robert Waldmann are on one (affirmative) side of the TARP-was-a-success argument, and I’m on the other.* But even the Success crowd may pause to wonder if the short-term “profit” was a good long-term strategy:

Some large U.S. banks would have stronger capital bases to better deal with today’s market stresses had regulators not relaxed bailout repayment criteria in late 2009, a new government audit showed on Friday.

Bank of America (BAC.N) Citigroup (C.N), Wells Fargo (WFC.N) and PNC Financial (PNC.N) were allowed exit the Troubled Asset Relief Program without raising as much equity capital as initially prescribed by the Federal Reserve, the TARP Special Inspector General said in the report.

Following bank stress tests earlier in 2009, the Fed gave several banks guidance that they must raise $1 in common equity for every $2 in TARP bailout funds repaid — a formula meant to enable them to withstand future stresses.

But this standard — which was never previously made public — was quickly relaxed, allowing Bank of America, Citi and Wells Fargo to repay taxpayers nearly simultaneously in December 2009,** raising a combined $49.1 billion in equity capital.

Enforcement of the $1 in equity for every $2 repaid guidance would have required $57.5 billion in equity capital to be raised by the three institutions. PNC was later allowed to exit TARP under similar relaxed guidance. [emphasis mine]

The most recent SIGTARP report (28 July 2011), uses the word “Bailout” only once in its 304 pages—and that’s in the title of testimony by Sheila Bair, ““Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation on The Changing Role of the FDIC before the Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs; Committee on Oversight and Government Reform, U.S. House Of Representatives.”

Noted for the record: Patch uses the same article (with minor customization) in multiple locales, highlighting it as a “local” piece. I defer to Felix as to whether this is in keeping with the rest of their “business model.”

As Dan Becker can tell you, the small business “ownership society” is not for the faint of heart. Nor, as anyone who thinks about it for more than three seconds can tell you, is it a primary driver of employment growth. Yet when the most visible and successful Management Consultancy in the United States thinks about growth, its two primary points are “take monies from the government” and “expand small businesses.” But give them credit for recognizing a point that is often obscured by H1-B trolls technology firm leaders such as Meg Whitman:

[I]t’s not just the young who can help fill the skills gap; older, experienced workers can play a part, too. In the US aerospace sector, 60 percent of the workforce is over 45. A practical response would be for governments to remove barriers—particularly those related to the provision of health care and to benefits rules—that prevent older workers from staying in the workforce longer. Germany and the Netherlands raised the participation rate of the 55-to-64 age group by 21 and 24 percentage points, respectively, between 1990 and 2009. In the Netherlands, there were significant changes to pensions and welfare benefits to improve incentives to work longer, coupled with initiatives to change public perceptions, improve employability, and reduce discrimination against older workers. [emphasis mine]

It’s nice to see McKinsey endorsing Medicare For All.

*As a general rule, the Econ-first analysts are affirmatives, the finance-grounded ones are negative. If you have to think about why that would be: one group makes its living finding $100 bills on the sidewalk that the other one swears cannot exist. As the Mark Thomas of the world would note, the issue of priors might need to be addressed.

**The reason December 2009 is important is that it meant that monies that otherwise would have to have been used to shore up capital were instead paid out as bonuses by the now-uncontrolled banks, or, in Reuterspeak, “keen to escape executive compensation restrictions associated with the bailout funds.”

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Pro Publica and bailout lists

Barry Ritholtz at The Big Picture points to Pro Publica regarding Tarp and other bailout monies:

Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid.

So far,  938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned.

Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater.


Where is the Money?
Pro Publica

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TARP Cost estimate lowered again

LA Times (via John Chait).

The projected cost of the $700-billion financial bailout fund — initially feared to be a huge hit to taxpayers — continues to drop, with the nonpartisan Congressional Budget Office estimating Monday that losses would amount to just $25 billion.

That’s a sharp drop from the CBO’s last estimate, in August, of a $66-billion loss for the Troubled Asset Relief Program, known as TARP. Going back to March, the budget office estimated that the program would cost taxpayers $109 billion.

No one could have predicted.
And no I don’t get tired of being right all the time.

Rude intrusion:Ken here. For a perspective closer to mine than Robert’s, Donald Marron—who also drank the CBO kool-aid initially—looks at the wider picture of “TARP cost” here.

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I Told You So

Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners.

Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That’s not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.

Note that the acronym FDIC doesn’t appear.

*Sorry for the brief uninformative title. I foolishly precommitted to the title:

OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

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Forget Jumping the Shark? The WaPo is Doing the Tango with It

UPDATE: Jason Linkins at one of the non-Breast-Enhanced sites of the Huffington Post did a burlesque of which I can only dream on the same piece.

Via Chris Hayes’s Twitter feed (and he got it from David Sirota), the following is from “No more ‘me first’ mentality on entitlements“:

While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do.

[B]ailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness.

The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us….If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research.

Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer.

I’ve resequenced the above paragraphs a bit, but remained faithful to the argument as presented.

The author: Neel Kashkari, who is described as “a managing director of the investment management firm PIMCO, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009.”

His sacrifices for the sake of TARP are well known; indeed, documented in the paragraph above. And, gosh, isn’t it nice that he pushes an argument that would make fixed-rate securities—you know, the thing PIMCO is famous for trading—more valuable?

It’s good to know that “Me First” needs to change, and nice to see the Post presenting a prime example of why.

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High Heels and X-Ray Eyes

First, you hear the high heels. These are not the pretty heels of Ginger Rogers, floating in ostrich plumes for some impromptu dance across a marble floor.

No no, these are the no-nonsense high heels whose rhythmic ticktock, louder and louder, signify the approach of authority – firm, fair and with eyes that see through every excuse. It’s Dr. Warren, and she’s ticked.

Elizabeth Warren, head C.O.P. over at the Congressional Oversight Panel which is “charged with the job of reviewing the state of the markets, current regulatory system, and the Treasury Department’s management of the Troubled Asset Relief Program [and] required to report their findings to Congress every 30 days.” She is a longtime researcher of bankruptcy and professor of bankruptcy law, and she saw the crash of the middle class coming from miles away.

In videos like “The Coming Collapse of the Middle Class” (early 2008) and her various net-based reports, TV appearances, and appearances before Congress, she combines absolute clarity of message with a mildness that tempers that message, often dismaying in its implications, enough so it can be heard and digested.

Messages like this graph. And those numbers are from 2001.

She’s just been named the ‘Bostonian of the Year‘ by the Boston Globe, complete with an interesting video that catches her offstage persona. It’s a lot like her camera persona, but madder. Worth watching, if only to see her berating Timothy Geithner, (about 3.02) whose smirking response should infuriate anyone who sees it. Read the accompanying article, too.

A few Elizabeth-quotes from the Globe video:

“The mortgage lenders have behaved abominably.”

“It seems to me that far to often women are the people who do what needs to be done. It’s about how the old boys club who brought us not just to the brink of ruin, but beyond that, they still want to play the same way. And, well, somebody’s got to say no. If all the old boys want to roll their eyes over it, well then let them roll their eyes over it.”

“AIG was not a bank!”

“Here we are in the middle of a financial crisis. The market is broken. We have a system where very large financial institutions systematically take advantage of hardworking American families. The role of government is just to level that playing field a little bit, and the financial institutions are fighting that tooth and nail. They’re willing to spend hundreds of millions of dollars to block that kind of legislation, and I’ll just tell you, I find that deeply and profoundly shocking.”

“I am not looking for jobs with these guys. My job is not to get out there and kowtow to these guys so they’ll be nice to me. I figure this is the one time I will have a true public-service job. I’m going to do everything I can to execute this job the way it ought to be done. If there’s some politician, Republican or Democrat, who has a problem with that, I just don’t care.”

Every couple of weeks I scan the internet looking for new reports and video from our COP on the beat. So should we all.

Bravo, Dr. Warren.

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Much to My Amazement

UPDATE: It gets even stranger. The bankrupt-since-October-2008 Lehman Brothers is going to pay $50,000,000 in bonuses for this year. (h/t alea’s Twitter feed)

It appears all of the “gosh, we really made a lot of money from bailing out rich bankers who socked it to their customers” rhetoric is having a small problem in the realization:

The U.S. government abruptly shelved plans to start trimming its 34% stake in Citigroup Inc., after investors demanded a price so low that the Treasury Department would have lost money on the deal….

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects…

Gosh, golly, gee. Really? I wonder if that’s a recent phenomenon:

(Recession period—still not officially over—shown in cyan.)

Hmmm. Guess not. Ah, well, there’s always next year. Or the year after. Or…

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We Report, You Lie

NYT headline: Audit Finds TARP Program Effective.

Paragraph six of the same article:

The Treasury’s lack of clarity about the program’s goals, the oversight panel said, made it hard to assess its overall effectiveness. Mr. Geithner is scheduled to testify on Thursday in his quarterly appearance before the five-member panel. [emphasis mine]

Clearly. one of the people to take the buyout was a headline writer who reads the articles first.

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Inflation Detour II: Crisis and Recovery across Great "Fluctuations"

We are now almost 24 months into the Great Recession. While many expect NBER will eventually say that The Great Recession ended several months ago, they have not yet.

By contrast, the recession that began The Great Depression, per NBER, lasted 43 months. It seems only fair to compare the two, so I trust I can be forgiven for not yet having declared The Great Recession over.

One of the problems is that of official government data. Many of the statistics we now consider “standard” were first tracked as part of the government funding and jobs created by FDR’s Administration. (The irony of multiple economists and idiots arguing that the data shows that those programs should never have happened should not be lost on the reader.)

For an examination of Wall Street, though, reasonable proxy data is available. With some issues noted, we can use the change in Real Prices as a proxy. Comparing the two periods produces:

Fairly comparable. The market had a better six months prior to the October 1929 crash, which is rather neutralized by the drop about five months after the first Depression Recession begins, which is steeper than the comparable drop in the current period.

In spite of all the support for the banking system, the recovery is fairly comparable to the one from the Great Depression—at least so far.

Below the fold, let’s look at Main Street.

As noted above, most of the data required for measuring Main Street—most especially a reliable measure of unemployment—is not available publicly. (If anyone wants to provide me with a copy of the Haver Analytics data, for instance, I won’t complain. Meanwhile, see this post at CR for a graphic of that data from the Depression Era.)

So let’s take another approach. Accept, for the sake of discussion, the traditional Republican argument that inflation reduces the ability of Main Street to grow business, borrow money, and generally live.

If we therefore take the inverse of the Annual Inflation Rate, we can see the “gain” the consumer makes. (Note that, in most periods, the consumer is deemed to have lost. Reality may be different, as smoothing hides may variances. But that is always true, and likely always shall be.)

So let’s look at how Main Street fares, then and now:

Judging strictly by the two periods, it appears that Main Street did significantly better—speaking in terms of earning power—during the time leading up to and beginning the Great Depression than it has during the Great Recession. Indeed, the two paths track each other rather well.

It would appear—information that will surprise few other than perhaps Larry Summers and Tim Geithner—that all of the efforts of the Federal Reserve Board and the U.S. Treasury have had no positive effect on Main Street, leaving its purchasing power significantly lower than the same period of the Great Depression.

Probably more on this on a future rock. Comments and suggestions are rather welcome.

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