Streetwise Professor

November 19, 2012

Capital Strike Redux?

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 10:01 pm

After the US economy began to recover rather robustly in the mid-1930s, a series of ill-considered government policies, notably a tax on undistributed profits, a big increase in marginal rates on high incomes, the Wagner Act, and a Fed contraction of the money supply led to a substantial contraction in 1937.  The depression within the Depression.

One notable feature of the 1937 episode was the so-called “Capital Strike”, a sharp decline in corporate investment.

The imminency of Obamacare and Frankendodd, and the continued failure to address seriously the country’s fiscal situation, with the associated uncertainty about taxes and spending, may be creating a modern-day version of the capital strike.  The WSJ reports that growth in investment expenditure has slowed to a standstill, and that many large companies are slashing investment plans.  The article places the blame on the “Fiscal Cliff”, but in reality, this is overdetermined, as they say.  There are multiple factors at work, and all in the same bearish direction: the regulatory friction (epitomized by Obamacare, Frankendodd and the EPA) is a major drag on growth, and a major source of investment-killing uncertainty.  Indeed, I would put the least weight on the Fiscal Cliff as it is conventionally portrayed: that conventional portrayal is almost purely comic book Keynesian in nature, focusing on “aggregate demand”.  IMO, the handling of the expiration of various tax reductions and the potential for sequestration is relevant not because of AD-a slippery and largely chimerical concept-but because of what it portends about the future course of government spending, and in particular the appetite to deal with entitlements and transfer payments.

If what the WSJ reports is indeed a harbinger of a modern day capital strike, that would be consistent with my broad forecast in my post-election post.  A protracted period of stagnation/slow growth.  Which will only exacerbate the fiscal situation and increase the risk of a rollover/funding crisis.

As if we really should need another Ghost of Christmas Future to warn us, take a look at Japan right now.  Just saying.

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  1. Atlas Shrugged! Yet when BEACONS OF TRUTH like Dr. Ron Paul and Gov. Gary Johnson present serious solutions they are portrayed by the main stream media, the neocons the Dems and other LEECHES as not acceptable because they would ruin their crony capitalist scheme!

    Comment by Bob — November 19, 2012 @ 11:50 pm

  2. But what will the evil corporations do with all that cash sitting on their balance sheets? Maybe they will shop at the US Treasury market and make it easier to roll over all the debt that’s been issued! Productive use of capital don’t you think!

    Comment by Jeff — November 20, 2012 @ 4:59 am

  3. […] investment falls off a cliff. It’s the regulation […]

    Pingback by Breakfast Links - Points and Figures | Points and Figures — November 20, 2012 @ 5:41 am

  4. This is good, Prof.

    I agree that, policy-wise, we are repeating the fiscal-side errors of ’37.

    I think we also are revisiting the societal breakdowns of the 1930s that produced these ill-considered remedies, which not only prolonged the Depression but unleashed real evil. Lawmakers are channeling the zeitgeist, which right now, for largest proportions of Western societies, is rage. (See )

    We parallel the 1930s to an eery degree. Similar discontent was clearly evident in the late 1920s and early 1930s in Europe, as is amply documented in Ruggiero’s “European Liberalism,” translated by the great historian and philosopher Robin Collingwood (1927), and William Shirer’s “The Collapse of the Third Republic: An Inquiry into the Fall of France in 1940” (1969). Ruggiero’s a European Liberal (in the classic sense of the word … what we would call Conservative); Shirer was on the scene leading up to the collapse of French society, and he kept his eyes wide open. His recounting of the hatred displayed by the various factions of French society, some of which assiduously courted the fascists, is troubling when viewed against modern America and its dysfunctional Congress. Remember, Paris was taken without a shot being fired.

    This is neither the time nor the place to write a long essay on all this, given the enormity of the topic; however, I would again offer the following summary provided by Ruggiero (p. 425) re the centrifugal forces evident in Europe in the late ’20s, when it became apparent the middle class was being shattered:

    “These economic elements in the crisis of Liberalism have an indirect action; they work by modifying the social structure of the middle classes, on which Liberalism is essentially based. During the period when the middle classes were increasing in strength, their central position gave them an advantage, because it enabled them to attract elements both from above and from below, and, once consolidated, to confer stability on the whole fabric. But it became a disadvantage when industrial evolution polarized the interests of Society, and gave rise to a reverse attractive tendency towards the extremes of plutocracy and social democracy. Thus began a slow but constant erosion of the middle classes, whose fragments were thrown by the centrifugal action partly into the proletariate, and partly into the new bourgeois aristocracy, leaving the central nucleus reduced both in bulk and in coherence.”

    Even highly conservative writers like Ruggiero can rail against the capture of once-liberal constitutional societies, in which the law had been applied equally to all, but is transmogrified into the hand-maiden of the cartels identified by F.A. Hayek back in the 1940s. These forces were clearly visible to thoughtful people well before they had fully emerged in the ’30s. And the consequences are not difficult to foresee: Without a disinterested legal structure markets cannot exist. Nor can once-liberal constitutional societies bear such a breakdown: when the law — and its attendant regulatory edifice — becomes the vehicle these Hayekian cartels, you get to the point E. Burke dreaded: “People crushed by law, have no hopes but from power. If laws are their enemies, they will be enemies to laws; and those who have much to hope and nothing to lose, will always be dangerous.” [Letter to Charles James Fox (1777-10-08)].

    Comment by markets.aurelius — November 20, 2012 @ 6:55 am

  5. @markets.aurelius. In early-09 I wondered whether we were embarking on the new 70s, or the new 30s. By 2010 I was pretty sure it was going to be the new 30s, and now I, like you am absolutely positive.

    Thanks for your very erudite and informative comment. The middle class is indeed being ground between the upper and nether groundstones. It is a war of the plutocrats and the proletariat (and more of the lumpen variety than the true working class) against the middle. I don’t know if I would go as far as Kyle Bass in forecasting that the end result will be war and widespread civil strife, but we are entering a lawless age. Like I’ve said. Converging to Russia from above.

    The ProfessorComment by The Professor — November 20, 2012 @ 12:11 pm

  6. Further re the 1930s. A major difference between now and then is the age of societies. Double edged sword. Societies are much older now, and hence probably less likely to be militarized and aggressive. But the stresses that aging put on the finances of welfare states are huge.

    The ProfessorComment by The Professor — November 20, 2012 @ 1:47 pm

  7. Oh what the hell, just nationalize the Silicon Valley and be done with it.

    Comment by So? — November 20, 2012 @ 5:51 pm

  8. “It is a war of the plutocrats and the proletariat (and more of the lumpen variety than the true working class) against the middle.”

    And We are endlessly grateful to Phil and Wendy Gramm, Ronald Reagan, and the Chicago School for assisting Us returning to Our rightful place and allowing Us the freedom to exercise our First Principle:

    “All for Ourselves and nothing for Other People.”

    Comment by a — November 23, 2012 @ 7:15 am

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