In this depressing week I couldn’t bring myself to write the reviews of some of the books I’ve got ready to go (let alone be upbeat and amusing). Instead, I dug through my old posts to find this one I wrote for www.womensDISH.com in March of 2007 comparing the factors leading up to the Great Depression to what was going on in our economy in the spring of 2007.
It is interesting to note that I wrote this before the runup on gas prices and before we had any idea of the impending financial crisis. It’s now a year and a half later. Back then the fear of the widening income gap reminded me of F. Scott Fitzgerald’s The Great Gatsby.
In Fitzgerald’s 1925 novel we saw a glimpse of pre-Depression society, where the rich were very, very rich and could afford to live by different rules. Tonight, I’ve still got Fitzgerald on my mind, but rather than revisit Jay Gatsby, I think I’ll turn in with a copy of Tender is the Night.
I’d be curious to hear your thoughts on this below!
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[Excerpted from earlier post dated March, 2007]
“So we beat on, boats against the current, borne back ceaselessly into the past.”
F.Scott Fitzgerald.
I don’t know about you, but this New York Times article about the income gap widening kind of worried me:
Income inequality grew significantly in 2005, with the top 1 percent of Americans–those with incomes that year of more than $348,000–receiving their largest share of national income since 1928, analysis of newly released tax data shows.
The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.
Let me say that again–A level of income inequality not seen since 1928. Now, I’m woefully lacking in my knowledge of historical economics. But this stopped me cold and caused me to go read a bit about what was going on with the economy right before the Great Depression. According to the info on Paul Alexander Gusmorino III’s site (seems to be an authority on the Great Depression), the following was going on:
- There was a huge inequity of incomes.
- There was a large increase of output from workers, and wages were increased at only one-quarter the rate of production.
- Calvin Coolidge’s administration (and the conservative-controlled government) favored business and, as a result, the wealthy who invested in these businesses.
- Three-quarters of the U.S. population would spend essentially all of their yearly incomes to purchase consumer goods such as food, clothes, radios and cars.
- Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich.
- Between 1925 and 1929 the total amount of outstanding installment credit more than doubled, creating artificial demand for products that people could not ordinarily afford.
- Much of the wealth and economic dependence was in only two industries: automobiles and radio. This was a problem when the 75 percent of the population could no longer afford the gas for the automobiles and had to return the radios purchased on credit, which was now due.
- Add to that bad international debts, the stock market crash, and the run on the banks . . . well, we all know what happened next.
Flash forward to 2007:
- We have an inequity of incomes.
- Technology has brought us increased output for workers at a rate higher than increases in income.
- George Bush’s administration (and the formerly conservative-controlled government) favors business and, as a result, the wealthy who invested in these businesses.
- Three-quarters of the U.S. population spend essentially all of their yearly incomes on rent/mortgages and to purchase consumer goods such as food, clothes, computers, and cars.
- We are becoming dependent on credit sales, and luxury spending and investment from the rich.
- Credit card debt is expanding, creating artificial demand for products that people could not ordinarily afford.
- While we’re not dependent on just two industries, many of our largest businesses: oil, auto companies, finance, retail, technology may have a problem when 75 percent of the population can no longer afford the gas for the automobiles or games for their playstations.
This is why I started this post with a Fitzgerald quote: The more we change, the more things stay the same. But perhaps there is another Gatsby quote that may be applied to the situation:
“They were careless people, . . . they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made.”
Top Shelf Bottom Line: No advice for entrepreneurs this week. Sorry. I’ll be back with a bunch of reviews starting next week. But I think we all need to step back and take a deep breath. Let’s all put the business books aside (how many of them actually deal with leading a business through what could be a second great depression, anyhow?). Instead, try reading a classic. There’s a reason we studied Fitzgerald in high school, even though clearly we couldn’t read it with the life’s experience we can now. I highly recommend giving Fitzgerald, Hemingway, Maugham a second look if it’s been a few decades since you last read a classic.
This entry was posted on Wednesday, October 1st, 2008 at 7:39 am and is filed under Fiction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.3 Responses to “Economic Crisis Has Me Rereading Fitzgerald”
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October 8th, 2008 at 1:51 pm
Economic depression or not, Fitzgerald any day.
October 18th, 2008 at 8:25 am
Interesting, I will go and dust off Fitzgerald for another read.
October 24th, 2008 at 4:03 pm
Here is an article about the fed chairman during the time of the Great Depression and what he thought caused it. The same thing is happening again for the same reasons. Please read:
In Review: America’s Most Egalitarian Banker
Marriner S. Eccles, Beckoning Frontiers: Public and Personal Recollections. New York: Alfred A. Knopf, 1951.
At the start of the Great Depression, Marriner Eccles hardly seemed someone who might lead a charge against the economic orthodoxies that justified grand hoards of private fortune. By the early 1930s, after all, the Utah-born Eccles had become the top banker in the Mountain West, the organizer of the first multibank holding company in the United States.
But Eccles had also come to understand, after watching the great speculative bubbles of the 1920s pop into massive misery, that prosperity — to endure — needs to be shared. Eccles began speaking out on that theme, shortly after the Great Depression began, and soon caught the attention of the early New Dealers.
In 1933, Eccles would become an assistant secretary of the treasury. A year later, Franklin Roosevelt would appoint him to the Federal Reserve Board. He would become Board chair in 1935 and remain in that central position for the next 13 years. No one individual, over those years, had more of an impact on economic policy in the United States.
Looking back on those years, in his 1951 memoir Beckoning Frontiers, Eccles would do his best to explain the impact he set out to make. Mass production, he noted at the outset, demands mass consumption, but people can’t afford to consume if the wealth an economy generates is concentrating at the top.
In the years leading up to the Great Depression, that concentrating was accelerating. A “giant suction pump,” charged Eccles, “had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth.”
“In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands,” Eccles observed, “the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
Sound familiar? The decade of the 1920s that Eccles describes in his 1951 memoir comes across today as eerily familiar. Then as now, the U.S. economy was floating on a sea of debt.
Then as now, inequality was hollowing out the nation. Eccles put the matter bluntly: “Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy.”
How would Eccles have reacted to our current debt-ridden, war-torn economy? We can’t, of course, know for sure what Eccles would do. But we do know what he did. In 1942, during World War II, a high-powered team of New Deal officials that included Eccles proposed to President Roosevelt that “a ceiling of fifty thousand dollars after taxes should be placed on individual incomes.”
In our current dollars, this $50,000 ceiling would equal about $700,000. What did FDR do with the Eccles proposal? He turned around and asked Congress to place a 100 percent tax on all individual income over $25,000.
Congress would eventually set the nation’s top tax rate at 94 percent on all income over $200,000, and that top tax rate would hover around 90 percent for the next two decades, years that would see the greatest period of middle class prosperity in U.S. economic history.
In 2005, the latest year with statistics available, America’s leading hedge fund managers and the rest of the nation’s top 400 income-earners faced a top tax rate of 35 percent. They actually paid, after loopholes, just 18.2 percent of their incomes in tax.
Marriner Eccles would not approve.
Stat of the Week
In the two decades between 1986 and 2005, America’s top 1 percent of taxpayers saw their share of the nation’s income jump from 11.3 to 21.2 percent. Over those same years, the federal income taxes the top 1 percent paid dropped by an equally stunning margin, from 33.13 percent of total personal income in 1986 to 23.13 percent in 2005, the most current year with IRS stats available. Taxpayers needed to report at least $364,657 in 2005 to enter the top 1 percent.
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