Socialist Presidents? Who Comes Closer: FDR, Obama, or Reagan?

We seem to have a resurgence of folks worrying about socialism. Those claiming rampant socialism have particularly fretted about certain Presidents, but more on that later. First, let's get an overview of private industry's percentage of all payrolls since 1939 via the BLS data to put it into broad perspective. If there's one clear, defining trait of socialism, it'd be that folks work for the government rather than private industry. After all, to qualify as socialism requires social ownership of the means of production. Private employers aren't socially owned. So the private % of payrolls tells us just how much we're still a [mostly] capitalist society.

What do we see here? Rather little change in the broad perspective. Clearly we'll need to get a close up in order to see any differentiation from President to President. Let's get right to looking at how they stack up. Sadly, using the BLS data only gets us back as far as 1939, so that'll have to do.

Up there we've got a picture of the average % private industry occupied of total nonfarm payrolls during each President's active years. With a high of 86.64% and a low of 80.95%, it's a rather tight range. It takes a close up to see a difference. But while it's neck and neck, Truman gets the high mark. Honorable mention should obviously go to that bastion of small government, Franklin D. Roosevelt, with an average of 86.08% private payrolls during the latter part of his term (1939 onward). Ironically, the low mark goes to a man who bore the same surname as an auto industry magnate, President Ford.

Many have focused on the current President lately. In particular, there's a virtual cottage industry for discussing President Obama in the light of things said by President Reagan. So let's focus on how those two compare.

The private share of payrolls under President Obama rises a bit above the private share under President Reagan. So if President Obama were a socialist as alleged, that'd make President Reagan a socialist ... and an even more effective one at that. Not that President Reagan really was, of course. But this should make it quite clear to anyone who isn't arguing from an unreasoning bias that President Obama has maintained the largely capitalist nature of America. In his first three years, President Obama has presided over a mostly growing private share of payrolls that has averaged higher than that under half of the preceding Presidents since JFK.

We Could Pay Off The Debt. But Should We?

We could do it. If we wanted to, we could eliminate the deficit with taxes alone. The real question is whether we should.

Debt in perspective

Yes, you've probably heard that we can't. You've probably heard the claim that the deficit is unmanageable. You've probably heard the claim that the debt is some grand, unapproachable amount that we already can't possibly hope to pay off. You've probably heard the claims that our debt is so high there aren't enough assets or income in the country to cover it.

They're flat-out false. The only question is whether they believe what they're saying or they're purposefully lying.

Here are the numbers from the census data, the treasury, the fed, and the standard deficit projection:

• Number of households in 2010: 118,682,000
• Mean 2010 household income in 2010 dollars: $67,530
• 9/23/2011 current debt: $14.7 trillion
• Projected 2011 deficit: roughly $1.3 trillion
• Household 2010 net worth: roughly $57 trillion

So take those numbers above and we can see that:

• Net worth / household: $480,275
• Federal debt / household: $123,861
• Net worth after US debt / household: $356,414 (far higher than median net worth)
• National income / household: $67,530
• Federal deficit / household: $10,954
• Net income after deficit: $56,574 (significantly higher than median income)
• Deficit / income / household: 16.2%

The particular items of interest here are: 

• $356,414 dollars left over if we were to pay all all federal debt from all household net worth today
• 16.2% as the mean increase required to eliminate the deficit with tax increases alone

As $356,414 is far above the median net worth, most people would say that's far from broke. There would be lots of problems with actually liquidating private net worth, of course, so that's strictly hypothetical. The fact remains, however, that there is enough household net worth in the US to do it and still have quite a bit of wealth. Just because it isn't something we want to do doesn't mean it couldn't be done.

The 16.2% seems like a massive tax increase. But then consider that we've had higher taxes than that before. It wouldn't be all that bad if such an increase were done in a progressive manner. For the bottom 50% of taxpayers, losing 16.2% more of income would be catastrophic. But together they only make about 12.75% of total AGI, so managing without the bottom 50% isn't so hard. For the top 1% such an increase would be easily survivable and still far below what folks with such incomes would have paid in the 1950s and 60s. Based on the AGI's if we taxed the top 1% an additional 40%, that alone would cover over half the deficit. Just for a rough example, if we were to raise effective tax rates by 40% on the top 1%, 15% on the rest of the top 5%, 10% on the rest of the top 10%, 5% on the rest of the top 25%, and 2% on the rest of the top 50%, that would net us an additional $1.38 trillion. That'd be well more than enough to cover the deficit. Whether we want to do something like that or not, the fact remains that it could be done. If we collectively wanted to, we clearly could close the deficit with tax increases alone.

If you don't believe my numbers, please look them up yourself. If you don't believe these basic calculations, please pull out your calculator or spreadsheet and run them yourself. You'll find the same thing. We could cancel out the deficit if we wanted to. And we could pay off the debt if we really wanted to. That's part of why our debt is an international safe-haven investment at very low interest rates. But there's another side to the story. Do we really want to have no national debt?

2010 Intragovernmental Holdings

Of that $14.7 trillion, $4.6 trillion is intragovernmental holdings. Over $2.6 trillion is held by the Social Security trust fund alone. Social Security needs someplace secure to hold that cash till it's needed. We don't want them gambling it on stocks or volatile commodities like gold or oil. Even if the rest of the world weren't seeing lots of instability, U.S. Treasuries are the only reasonable option. That means our federal govt must borrow at least enough to be able give the Social Security trust fund a safe place to invest. The same holds true for at least most of the rest of intragovernmental holdings, many of which are insurance or retirement accounts. We don't want them anywhere less safe; and anywhere else is less safe.

So far, we've identified roughly $4.6 trillion of debt that we want right where it is. It would be senseless to force ourselves to find alternatives less secure than the full faith and credit of our own government for those holdings.

Holders of debt, Dec 2010

The rest? As of the end of 2010, there was $802 billion in pension funds. Shall we tell all the pensioners their funds have to be less secure because our debt hawks don't want us to have govt debt anymore? There's $517 billion held by state and local govts. Shall we force our other levels of govt to engage in risky speculation? Depository institutions (i.e., banks) hold $323 billion. Didn't we already get burned by letting banks increase their risk? Do we really want to go there? Wouldn't that be exactly the opposite direction from where we've been trying to push the financial industry? Insurance companies hold $244 billion. Guess why they've put it into Treasuries ... because they need the stability in order to keep insuring us without entirely relying on risky sources to back up our claims. Then there's another $2,046 billion held among mutual funds, savings bonds, and other investors. All of whom look to Treasuries for low-risk investments to balance out our riskier investments with some safe, guaranteed income. Shall we deny all our investors -- both wealthy folks and the grandmother nearing retirement -- the opportunity to choose additional investment beyond Social Security that's backed by the full faith and credit of our govt? To stop issuing federal debt would be to say, "No, you may be ready to retire and seeking to move your funds out of risky assets, but we're not going to let you have this guaranteed income option." Do we really want to say that? Seriously?

What's that leave? The foreign portion, under a third of our debt. That's the part we could seriously consider. That's the part we could pay off without forcing our own govt institutions, companies, and individuals to shift all of their investments into riskier options. But what does that part mean to us? Foreign investments aren't invested in our debt because of attractive rates to them. Quite the opposite; they could easily choose any number of investments with higher rates. But those higher rates all come with more risk. We're the place nations stow cash in case everything else fails, safer than burying it. It isn't about making money off us; it's about making sure they've got enough money socked away where it is more certain to be available than any other option. It's about stability. That means we're issuing debt at very low rates, lower than ordinary inflation. After factoring for inflation, all the world is literally paying us to hold their money safely for them. Why should we turn that down instead of using it to improve our infrastructure and lower our domestic cost of doing business?

No, World War 2 Didn't End The Depression

There's a common myth out there that goes, "the Great Depression was finally ended by World War 2". It has some slight variations, such as "the Great Depression lasted 15 years" or even "the market didn't recover until govt spending stopped".

All of these are complete misunderstandings of history if not outright lies.

While there may not be as accepted a definition for depression as for recession, there's a good bit of consensus along the lines of these two criteria for an economic depression:

1. real GDP decline beyond 10%
2. period of decline lasting more than three years

Year	2005 Real GDP
1929	977,000
1930	892,800
1931	834,900
1932	725,800
1933	716,400
1934	794,400

Real GDP declined every year from 1929 through 1933. By 1934, the economy had been pushed back into growth again. There you have it: the end of the Great Depression. It was 1929-1933, far short of 15 years. One can not be in a depression and have real GDP growth because a depression is defined by GDP decline. One can note other factors peculiar to depression, such as deflation. But a depression only exists while there is a declining economy as measured by real GDP. One can debate what ended the Great Depression, whether it was a combination of monetary and fiscal policy, deficit spending alone, monetary policy alone, or some other set of factors. But there is no reasonable debate that the Great Depression ended years before World War 2 when the economy returned to growth.

Some effects of the Great Depression -- though mostly diminished -- did linger somewhat until World War 2. That much is true. Although unemployment had been drastically reduced before the war, it was still high until the war. Yet while it took quite a while to achieve full recovery, it did not take all that long to achieve renewed growth. Unemployment peaked in 1933. By 1936, the New Deal had kicked the economy into rolling again and -- though unemployment was still high -- the main economic indicators were back in gear. In early 1937, industrial production reached a level above that of 1929. But then pressure picked up to balance the budget, and FDR and Congress cut back spending. Although unemployment had been dramatically reduced from its peak, it was still too high for the economy to be self-sustaining. With the fiscal and monetary tightening of 1937, production dropped and unemployment went back up. Seeing the mistake, they stoked spending back up in 1938 and the recovery resumed.

Unemployment remained problematic throughout the 1930s and into the start of the 1940s. But even that measure declined every year that the New Deal was fully in force. The recession of 1937-1938 showed the effect of govt cutbacks pushed by Republicans overzealous to balance the budget at the wrong time. The cuts interrupted the full weight of the New Deal to push the economy forward. The unemployment rate continued to drop right up until the start of the war. We were already growing towards full recovery before the war. Admittedly, the massive increase of spending for the war -- far beyond that of the New Deal -- did push unemployment to very low levels far more rapidly than we would have achieved without the focus of a war effort. But the war boom runs quite the opposite of a case against spending. The extreme, focused spending for the war effort rocketed our economy higher. It was a finale to the New Deal, like a burst of fireworks at the end of a good 4th of July show. It couldn't be further from the truth to say that "the market didn't recover until govt spending stopped". When govt cut spending while the economy was still weak, the economy suffered. Except for the disastrous cut-backs that brought us the recession of 1937-1938, government didn't stop spending until the markets had recovered.

The Keynesian Home-owner vs the Austrian School Home-owner

The Austrian School of economics would have us leave our hands off the economy. Get govt out of the picture, they say, and everything will tend to itself better. Let's explore what that would mean from the perspective of a home-owner's lawn.

Under laissez-fair lawn care, no amendments could be applied to the lawn, no fertilizer and not even water. Should there be a drought, the grass will be left to brown. There would certainly be some benefit to this in areas with a water supply shortage, but it could lead to soil erosion if the grass is not replaced quickly enough. If the Austrian School home-owner had pets that left "presents" on the lawn, that raw manure would be left to sit and create patches of dead grass. Through natural secondary succession, soon most of the grass will be replaced by shrubs and trees. Eventually it will become a forest instead of a lawn. While that's great for harvesting timber and for woodland habitat, it's not much good for having space for kids to play in the grass, for a place to set up your grill for the 4th of July (as overhanging trees would be dangerous), or for much else of what most of us want to have and do right outside our houses.

The Keynesian neighbor, on the other hand, does not share the Austrian's faith that a hands off approach is always best no matter what's going on with the lawn. Instead, the Keynesian will consider whether there's some way to help the lawn stay a nice, green area in which to grill, read, work, or play. Depending on his experience -- or means -- the Keynesian will start with some test to determine the health of the lawn. It might be just looking at whether the grass is green and the soil is dark. Or it might involve testing pH and nitrogen levels. When the soil lacks nutrients, opinions will vary among such home-owners whether it is best to use organic fertilizer or manufactured amendments. But most will have studied the options at least enough to know to avoid raw manure, as that will tend to burn the grass. Some will find that all they need to do is spread some extra seed -- perhaps drought resistant varieties -- where the grass is looking a little thin. Some will worry about every little weed, while others will be content to enjoy the dandelion blooms as long as the lawn is more grass than weed. While the occasional such home-owner will experience setbacks, extremely few end up doing their lawn more harm than good. Most will end up with a lush, enjoyable, robust lawn on which their kids may play and they may eat their hot-dogs and hamburgers in satisfaction. Some will even improve their landscape enough to raise the market value of their house.

"But wait,", you might say, "what's this have to do with economics? After all the economy isn't just a lawn." Yes, and there have been metaphors that shot and missed at capturing economic truth. But consider: life lacks perfection. If the base, natural state of humanity were a perfectly functioning economy without government, governments would never have been able to compete with the raw anarchy before that first tiny government. That first bumbling govt meant the group that formed it obviously out-competed neighboring anarchism. Govt is our means to seek the greener economy in which we wish to see our children play. We develop rules that help us succeed.

Beyond that, aside from its competitive ability, govt is our means to push our economy to look the way we want. Without govt, what happens? Some industries left on their own will do the right thing because they're run by someone with a sound moral compass. Others are run by those who care only about wealth. And these -- absent govt -- will do things like Sinclair described in The Jungle and others have recorded elsewhere of the dark days of unfettered industry. Absent child-labor laws, there would again be five year old girls working 12+ hour days in sweat shops. Absent work-safety laws, those same kids would once again very rarely make it to adulthood without being mangled in a workplace accident. Absent food and drug regulation, we would once again have reason to expect not just the occasional problem but rather frequent death and debilitation from our food and the snake-oil that would pass for medicine. These are the dark and dangerous plants that would invade our lawn if it were not for govt regulation and oversight. Were the Austrian School to fully succeed in their nightmarish dream of entirely unfettered markets, we would likely soon see our economic lawn overwhelmed by poison ivy and thorny trees. If we're to have a place to grill safely and for our children to play on fields of grass, we need to tend our lawns.

And as a bonus, it may well increase our property value.