CHINA | Is It 1929?

China Stock Prices Down, Volume Up.

July 8, 2018–China's stock market is the second-largest in the world after that of the United States.

It is now in a free fall that extensive government intervention does not appear to be slowing.

The major Chinese market has fallen by one-third from its seven-year high last month and continued to drop today. Expectations are for a further drop despite suspension of trading in one-fourth of listed stocks.

Is it 1929 in China? The political impact of 1929 in the United States was enormous, ushering in two Democratic decades in the White House, FDR and Truman.

The end of the free fall in the U.S. economy after 1929 did not come until 1933. What turned the economy around was:

• FDR and his Treasury Secretary (William H. Woodin) declared a bank holiday, printed money for the banks and opened only the solvent banks.
• They required the sale to the government of privately held gold. Later, FDR devalued the dollar against gold (i.e., raised the price of gold).
• FDR instituted projects to create new jobs.

The program worked until budget-balancing came back in 1936, causing a brief dip again in the economy.

The political impact of the stock market collapse is likely to be great in China because 80 percent of investors in the Chinese market are reportedly individuals, many of whom borrowed money to increase their stake in the market.

GOP | Shifting Strength, 1928-2012

May 21, 2015–The stakes of the 2016 election are made clear in a Real Clear Politics chart by Sean Trende and David Byler.

It shows changes in party strength based on Federal and state elections–weighting equally the presidency, Senate, House, state governors and state legislatures.

Will GOP Grow in 2016?

The RCP blogpost on Tuesday extends the chart to offer three different scenarios for the outcome of the 2016 Federal elections - win, lose and draw. Their conclusion is that the 2016 election is important.

Some broad principles emerge from the chart:

• Voters tend to move away from the party of the presidency.
• After 1936, the GOP steadily improved its electoral position, with a slight blip in 1944.
• Only three incumbent Presidents widened their party's lead by much: FDR in 1936, Truman in 1948 and LBJ in 1964.
• All were Democrats and they widened their lead by being decisive in a crisis.
• When half-hearted policies don't work, it could be because they were inadequate.
• Political fortunes can change quickly if perceptions are altered by events.
• Voters were disappointed in six GOP presidents: Hoover, Eisenhower, Nixon, Ford, GHW Bush, GW Bush.
• Reagan and Clinton (despite his impeachment) held their own after the first mid-term.
• Voters are fickle, but they care about the economy.

Since I am writing about the financial crisis of 1929-33 and FDR's first Treasury Secretary, one of the three Republicans in FDR's first cabinet (the other two were Ickes and Wallace),  my focus is on the early years of the chart, especially what happened between 1928 - the first election year shown - and 1936.

The peak score of 50 in 1928 dropped down to -119 in 1936–a plunge of 169 index points. This is the largest shift in the electoral winds on the chart. Most of the time (60 percent of the time) the index varies between plus and minus 30 percent.

1912-1928

Why did that huge shift between 1928 to 1932 happen and what lessons does this shift offer for today? I am using as my guide Paul F. Boller, Jr.'s Presidential Campaigns (Oxford University Press, 1996).

Let's start at 1912, when Woodrow Wilson won the presidency because the Republicans were divided between Republican Taft and Bull Moose party leader Teddy Roosevelt. All three candidates were competing for progressive voters. Four years later, the country had shifted to the right and the race was about who could keep the country out of war (it took only till April 2 before Wilson had asked "the Gentlemen of Congress" to declare war). By 1920 the country had moved further to the right, fearful of the Russian Revolution and the League of Nations. Even though Wilson was not on the ballot, the vote was largely against him. The Republicans were confident of winning - and, sure enough, Warren Harding won 60.2 percent of the popular votes against James M Cox; 404 electoral votes to 127.

Harding died of a heart attack in office, and Vice President Calvin Coolidge took the reins. Coolidge ran in 1924 against a Democratic Party that was divided between Eastern voters who were "wet" and Western and Southern voters who were "dry". After a marathon of balloting, the two sides compromised on Wall Street lawyer John W. Davis to oppose Coolidge, who was a shoo-in with 54 percent of the votes.

In 1928, the first year of the RCP chart, Herbert Hoover campaigned on the theme of prosperity and efficiency, and Al Smith was tainted with being from Tammany New York and being Catholic and being a "wet". Hoover won with 58 percent of the vote and a 444-87 majority in the electoral college. However, it was clear that urban voters were growing fast, which meant that being "wet" might mean winning. (A cartoon of the period has Smith after the election calling the Vatican, with the one word comment: "Unpack.")

The Importance of 1929

The 1932 election reversed the 1928 numbers. The lopsided victory this time went to New York Governor Franklin Delano Roosevelt. The country had lost its prosperity and Hoover lost the platform he had stood on four years before. The long-time Treasury Secretary, Andrew W. ("Andy") Mellon came under scrutiny and during the campaign the Democrats developed a capsule summary of the Hoover years:

Mellon pulled the whistle
Hoover rang the bell
Wall Street gave the signal
And the country went to hell.

Mellon resigned in early 1932 as Hoover was impeached. Hoover asked his end-of-term Treasury Secretary, Ogden Mills, to lend him a nickel to buy a soda for a friend, and Mills replied laconically: "Here's a dime. Treat all of them." What had happened, of course, was the Crash of 1929 and the  beginning of the Great Depression. To be fair, Hoover experimented with some public-works initiatives, but they didn't turn the economy around. A clueless Republican convention called for a balanced budget, requiring cuts or tax increases - as did the Democratic convention that followed. (FDR embraced the plan but wisely decided later to ignore it to bring down unemployment). The two leading candidates at the Democratic convention were FDR and former NY Governor Al Smith. FDR's staff spoke privately to the next-leading candidate, John Nance Garner, Speaker of the House, offering him the Vice Presidency in return for his support of FDR; he agreed. FDR was nominated and won with 57.4 per cent of the votes to Hoover's 39.7 percent, with the electoral college splitting 472-59.

Here is a larger version of the chart to help in reading the headings.

Changes in GOP Electoral Strength, 1928-2012, Chart by Sean Trende and David Byler, Real Clear Politics. 

Avoiding U.S. Fiscal Ruin - David Romer in 2007

Washington’s Out-of-Control Budgets - Notes on a Lecture by Prof. David Romer. (The following report is abbreviated with his permission from notes on the lecture taken by Bill Batt, staff political scientist in the New York State Assembly's Legislative Tax Study Commission, 1982-1992.)

On October 25, 2007, Scranton University held its 22nd Annual Henry George Lecture  and Romer was the Lecturer. [Henry George was a self-taught, widely read economist who favored taxing land rather than labor; he ran with labor support for the mayoralty of New York City in 1886, coming in second, ahead of Theodore Roosevelt, and again in 1897, dying at the height of the campaign. - JTM] The city of Scranton, Pa. itself was wild that day, as it played host to fans of the NBC hit serial, "The Office", set in Scranton. 

David H. Romer is the Herman Royer Professor of Political Economy at the University of California, Berkeley. He is a member of the American Economic Association Executive Committee, co-director of the Program in Monetary Economics at the National Bureau of Economic Research, and a member of the NBER Business Cycle Dating Committee – the so-called “wise men” who decide when national business cycles begin and end.

The lecture title was "Avoiding Fiscal Ruin: Failed Strategies and New Approaches to US Budget Policies." Professor Romer posed three questions: (1) How did we get here? (2) What are the likely consequences? and (3) What are some possible solutions? He showed simple PowerPoint bullets and graphics describing the past history and looming fiscal crises the nation faces in the next few decades:

History of the U.S. Budget

• The United States ran a small budget surplus throughout the years 1791-1929, except for support of the Civil War and World War I.
• The U.S. budget had an annual surplus in the early 1950s, and a deficit every year since then except for the final years of the Clinton administration.
• We are now running a $200 billion deficit, some 2 percent of GDP, which will grow enormously in the next two decades if most assumptions are borne out about health care, social security and other demographic trends. (He did not comment on the budgetary impact of the wars in Afghanistan and Iraq.)

The nation got into this position because we have in recent years stopped thinking of taxes and spending as going hand-in-hand. Moreover, beliefs about appropriate budget policy have changed. The prevailing view in the 1950s was that budgets should be in balance, at least averaged over a few years. Truman, in this regard, was a fiscal conservative, even though he favored government support of services. In the 1960s, a view took hold that balancing the budget was less important than maintaining economic growth. Hence deficits were sometimes necessary as a stimulus at certain points in the economic cycle. Nixon remarked, in 1971 [quoting Milton Friedman in 1965 - JTM], "we are all Keynesians now."

Reagan, in the 1980s, wanted to shrink government, as he believed that "government is the problem." It was possible, he argued, to do so according to a strategy of cutting back on domestic programs, called "starving the beast" [the original use of the term is attributed to David Stockman, Reagan's first budget director - JTM]. It followed to his adherents that cutting taxes would lead to a fall in government spending.

Cutting taxes doesn't have much impact on expenditure levels. Revenues, he argues, change for many reasons, and by tracing the history and motivation for tax changes, he has shown that the cause and effect relationships are very complex, and that correlation and causation should not be confused. He has looked at speeches, news conferences, reports, votes, and events such as wars and recessions, and concluded that it might even be that invoking "starve the beast" rhetoric actually leads to increases in tax and expenditure. Moreover, so many factors are involved in tax policy changes that there is typically shared fiscal responsibility – blame and credit for any policies are quite diffuse.

Problem. When the two sides, revenues and expenditures, are not viewed together it becomes difficult to focus policy. All indications are that U.S. taxes will soon need to increase, but little attention is being given to revenue designs.

With baby-boomers retiring, medical expenses increase, debt service increases, infrastructure renewal demands grow, and so on. Some leaders are already calling for such increases. But all the forecasts are necessarily based on existing law, which will need to be changed. The phase-out of tax measures in the year 2010 will lead to new initiatives, and these will call for new assumptions.

Likely Scenarios. Only three scenarios are possible:

1. Lower national saving, which will mean less reinvestment, slower growth and a lower standard of living.
2. A national economic crisis in anticipation of what is in reality a "Ponzi scheme".
3. Pay off the debt, either by raising taxes or printing more dollars. His comparison with past experiences in nations in Latin America was not lost on the audience. Nor did he see the United States abandoning care for its elderly.

Solutions. Professor Romer argues that we need to:

• Educate the public to a level where a solution is politically possible. He said that we need to link taxes and spending together once again as was the case prior to the 1960s. The political appetite for such policies are not presently on the horizon, but he suggested that perhaps some kind of "mutual disarmament pact" could be devised such as was set up earlier to address the Social Security crisis in the 1980s, and as exists now for closing military bases.
• Improve accounting practices by the federal government and for the U.S. economy.
• Introduce strong "pay as you go" rules such as were attempted in the Gramm-Rudman approach two decades ago.
• More radically, introduce a stringently fashioned "balanced-budget amendment."
• In addition, or alternatively, create a separate agency, comparable perhaps to the Federal Reserve System, that would be granted powers to impose fiscal and budgetary requirements.

Professor Romer was not sanguine that any solution was within sight, even though we are on a "potentially ruinous fiscal path." He argued that we need to contemplate major changes to address the problem.