Sunday, June 24, 2012

Hey, We Had a Deal… Didn’t We?

George Friedman

While shopping for a car last weekend, we met TJ.  He is one of those guys who really should be a salesman.  He is always happy to see you and always has a smile on his face.  He’s the kind of guy everyone wants to be around.  TJ has been selling cars for 30 years.  “What did you do before that?” I asked.  “I was an air traffic controller,” came the reply with a chuckle. 

Remembering my late 20th Century history, I observed he must have been one of those guys put out of work by the PATCO strike.  He was.  “I bet you didn’t vote for Ronald Reagan in 84,” I said.  Laughing again, he admitted I was right. 

TJ didn’t know it at the time but his plight was at the leading edge of a strategic shift.  Stratfor founder, George Friedman, has observed that there have been four such shifts in our history.  Each was brought about by a paradigm that had run its course and a crisis that brought about a failed presidency that was followed by a seminal presidency.  These shifts have occurred approximately every 50 years.  The failed presidency of John Quincy Adams was followed by Andrew Jackson.  A half century later, Grant was followed by Hayes.  Then came Hoover and FDR and, one that many of us remember, Carter followed by Reagan. 

The conditions of the Great Depression made it politically feasible for FDR to create programs that supported the poor, the elderly and the working class.  The term "social safety net" was coined by one of the most conservative economists of that time, Friedrich Hayek.  Social Security, unemployment insurance and the Civilian Conservation Corps were seen by many as a way of placating a wave of immigrants who were accustomed to socialist or social-democratic governments.  By offering the safety net, the lower economic classes were less likely to join truly socialist movements.

Friedrich Hayek
During this half century phase, government was designed to plan, regulate and control economic and social outcomes.  The extremely high tax rates of the Truman and Eisenhower years were necessary not only to pay off the debt accumulated by WW II but also to support the regulatory state. 

For two generations following the war, business, government and organized labor worked in concert to create a domestic economy that served our needs.  Our schools and universities turned out students who were well equipped for the economy of that time.   Those who were fortunate enough to go to college joined the management of big companies like AT&T, GM and IBM.  The rest joined unions and worked in the factories.  Everyone expected to be employed for life by the same company and many, if not most, were. 

But, high tax rates took their toll on capital investment; and, by the 1970’s, foreign competition was taking its toll on the union model.  Globalization meant American companies needed to update their factories and had to compete with low labor cost nations like Japan.   

The Reagan revolution would not have happened if the economy were not in shambles.  He sold us on a vision that undermined the model on which the populace had come to rely.  He used the PATCO strike as a public demonstration that the unions could be broken.  In the 30 years since, union membership has dropped from 30% of the workforce to 7%. 

I don’t remember Reagan ever announcing that he was changing the social contract.  But, it certainly changed during his administration.  Fixed benefit pensions were replaced by 401K’s.  To compensate for rising healthcare costs, corporations introduced HMO’s to replace traditional health insurance.  American corporations needed to become more nimble to compete on a global stage.  Lifetime unemployment was out; flexible workforces were in. 

Under this new paradigm, the American economy boomed for three decades on the strength of the wealth effect from the establishment of two income households, the stock market boom of the 1990’s and the rise of home values in the 2000’s.  But, just as FDR’s model of government had started to fray by the 1970’s, the Reagan revolution has started taking its toll on the middle class.  Globalization has flattened incomes, corporations pass on more of the cost of health and pension benefits to their employees and the cost of a college education is skyrocketing. 

The national political debate seems to be a continuation of FDR vs. Reagan.  But, would either of those models work today?

The booming economy of the 1950’s was coincident with the highest tax rates in our history.  But, anyone who has ever taken a course in logic knows that correlation is not causation.  Perhaps if you could create all the other factors at play in the 1950’s – lack of foreign competition, a balanced federal budget, population growth – you could replicate the economic outcomes. 

Similarly, the 1990’s boomed with improvements in corporate efficiency, technological innovation, low tax rates and a balanced budget.  Can we replicate those conditions again? 

At their core, Americans want the same things no matter their political beliefs.  We want security at a national and local level for our families and property.  We want the opportunity to improve our standard of living.  And, we want to fulfill our role on the global stage – international leadership. 

There is an underlying need for financial stability that will provide a platform for achieving our goals in these areas.  And, there are significant challenges to providing that stability. 

Politicians at the local and state level are taking on those challenges.  Republicans like Scott Walker of Wisconsin and the “love-him-or-hate-him” governor of NJ, Chris Christie, make headlines because the media likes conflict.  But, there are significant reforms being made to pensions by Democratic governors in Rhode Island and New York and at the local level in San Jose and San Diego, CA. 

Beneficiaries have a moral right to say “hey, we had a deal, didn’t we?”  But, the hard reality is that they will have to make a sacrifice in order to get something or run the risk of getting nothing. 

We have the same risk at a national level.  Baby boomers will drain the coffers of Social Security and Medicare.  Rising healthcare and education costs are undermining middle class standards of living.  Our infrastructure needs a serious overhaul and modernization.  And, we are competing with the rising economies of Brazil, China, India and others. 

So, why are we still debating 1932 vs. 1982?  Do we really think either of those solutions sets would work today?  The issues of today are structural and strategic.  Compromise and sacrifice are called for.  The leaders who will get us out of this quagmire are those with the vision to craft a solution, the charisma to get the public to embrace it and the political skill to overcome the momentum of special interests.

So, I ask you…  Who will that person be?  WHO WILL LEAD?


  1. George:
    Terrific comments relative to each period in our recent history; enjoyed immensely.
    I could use as much ink as you in reply but not nearly so eloquently?
    Thanks for your insight and request: "step-up to the Plate - Boys!!!

  2. Excellent work, as always. Problem, you keep adding things to my list of books to read!

  3. Good article. Unfortunately, your last question is going to be a hard one to answer. Political discourse is now controlled by the fringes who only remember the history that agrees with their position. Tea Party folks that idolize Reagan conveniently forget the fact that he raised taxes substantially in 1986. When Reagan realized that trickle down didn't achieve the results that were expected and the deficit started to balloon (in 1980's terms), there were substantial changes to ERTA (the 1981 tax act) that increased taxes quite a bit. Clinton is remembered for balacing the budget, but that only occurred because George H. W. Bush made the hard decisions to increase taxes to control the deficit, which cost him his job. Similarly, the hard core pro-union factions forget that they achieved success because of the hardest elements of capitalism and that delivering a benefit to the membership was the primary goal, not organizational success.

    The more that I think about what has happened to moderates in our country, the more I think that very little will change until there is a third party that really represents the middle. I just don't see that happening in my lifetime.
    Posted by Michael Khoury

  4. Thanks for your thoughts, Michael. David Brooks has observed that moderates are at a disadvantage because there is no moderate school of thought. No think tanks in DC are branded as moderate.

    I wish I knew the answer but right now it seems that no one is sure what the question is.

  5. John Calia wrote: "At their core, Americans want the same things no matter their political beliefs. We want security at a national and local level for our families and property. We want the opportunity to improve our standard of living. And, we want to fulfill our role on the global stage - international leadership."

    I am not so sure that this still holds true. The "social engineering" of late and the inherent liberal education and attitudes being taught in our schools and universities (aka Liberal Incubators) have, in my humble opinion, altered the fabric of what was once the mantle that was the American Dream. I no longer believe a majority of Americans want the same things. There is another paradigm shift going on, and it pointing towards all the trappings that Socialisms promises but eventually cannot deliver on. However, the careful dumbing down of the next generation of Americans promises a citizenry that does not have the education, core values, or vision to realize this.

    Who will lead? It has to be the Parents of these young Americans. I think, we, the offspring of The Greatest Generation have failed our children because we did not lead. We were too busy trying to realize the American Dream and "give" them a better life. In doing so, we didn't teach them that they cannot be given everything, they have to do it the old fashioned way, "they have to earn it".

    Who will lead indeed? I am not sure that the next generation coming up has a leader capable of leading those that do not want to be lead, but want to be "taken care of".
    Posted by Ken Mayeaux

  6. Thanks, as always, for your comment, Ken. I am more optimistic than you. I think that someone we don't know today with ideas we haven't imagined will come to the fore in the next 10 years. They will be from Gen X or Y and we will both surprised and delighted by their leadership.

  7. John, you are welcome and let me just say, I sure hope that it is you who is right and that my surprise echoes yours. I am not a pessimist by nature, but the reality of where we are today weighs heavily on my prognostication of the future of our Great Nation. Those that are easily lead by promises that are rooted in baseless optimism and lies seem more than willing to rail against anyone that is trying to make something on their own and not just stand around with hands out waiting for it to be delivered without any efforts extended. Every decade that we wait to turn this mindset around, the harder it becomes, because when those that come to find that they can vote themselves money outnumber those that are working, it becomes very difficult to effect change.

    “When the people find that they can vote themselves money that will herald the end of the republic.” ~ Benjamin Franklin
    Posted by Ken Mayeaux

  8. Ken, I hate to say but we are getting old. The generation that follows us will figure it out and we will be sitting in our rockers shaking our heads and talking about the good old days. It is a part of the passing of the torch.

    And, so it goes...

  9. And, so it goes .... (I hope you are not talking about the nation) ..... LOL or as I routinely say to an attorney friend of mine ....... We shall see ....... Did you say getting old? I prefer to say seasoned ....... take care my friend and thanks for a another provocative blog posting.
    Posted by Ken Mayeaux

  10. According to Rammussen in "The People's Money" it is a myth that we are truly that divided. It's just that, as Michael points out, those on the left and right fringes make all the noise and get all the attention. Many people are abandoning the parties and taking the approach I favor: more liberal on social issues (though I go the other way on some key issues like illegal immigration and the death penalty) and fiscally conservative. Eventually maybe we'll reach critical mass.
    Posted by Jason G. Ramage

  11. Well, Jason, that certainly matches my empirical experience. I think we have already reached critical mass. The open question is when the critical mass will break through. If Mr. Khoury's assessment is correct, the answer is maybe never.

    Political reformists like the Clinton-esque DMC didn't survive party politics. So, what will? Or, put more aptly, what will enable political reform so the critical mass of voters have better representation.

  12. Gentlemen,
    It is disappointing that the article says that “they,” meaning the post-boomer generations, will need to make a sacrifice without considering that a shared sacrifice is needed. Just as debt control requires work on both sides of the equation; it is irresponsible to place the sacrifice wholly on the generation on the revenue side of this equation. It is even more reprehensible for him to argue that the next generation should develop the leadership to fix the problems that were generated by the boomers when they led and while they are still currently leading. If the boomers are really focused on providing the following generations a better life, the time is now to consider how they will share in the sacrifice that their failure to lead now requires. Bottom line: the boomers shouldn’t be letting themselves off the hook yet, there’s still work they need to do and those rockers will still be there when they’re done.
    Posted by Hal DuBois, PE

  13. Hal, thanks for your service and your comments. I think you will see in my post above that I put the blame squarely on the head of the Boomers. However, share in the sacrifice we have and we are. Most Boomers are staring retirement square in the face with a retirement pool/income that is more than likely 50% of what it was projected to be just a few years ago. We are not getting off the hook, we are hanging on the hook with "real" unemployment around 16% and little or no prospects for jobs to make up for the lost retirements and a future with the prospect of the failure of Social Security which we have paid into for the better part of 40+ years. So if you have some work for the Boomers in mind, I and a lot of other Boomers would appreciate you bringing those jobs forward. We are pretty much done leading my brother; so who from your generation and your kid's generation will lead? That might be worth your time to decide upon. Not being harsh, just realistic.
    Posted by Ken Mayeaux

  14. The politics of left vs right are profitable. They make it easier for moneyed brokers of power to control things, because the 'rabble' are constantly at each others throats and can never get together on anything. The politicians only pass what is bought and paid for and never HAVE to pass anything for the People.
    I write about it here ->
    Posted by Anthony Watson

  15. How too lazy? This may apply to all those who don't go to the polls at all, but what of those that do?

    And I cringe when I hear people, especially in a Mensa forum, call others stupid. Spare us the denigrations.

    People may be detached from the process, but one can hardly blame them when they see that many, if not most, politicians are in it to only enrich themselves. They may get out and vote every 2 years, but are the choices available really meaningful?

    Personally, I'd like to see elections funded publicly with no influence from outside money. Yeah, I know the "free speech" argument, and I would say free speech is not absolute (of course it's not, we accept that already). When the political process has been corrupted by big dollars, we no longer have a representative government, and that to me is far worse than any loss of speech that comes from not being able to buy off elections.

    I don't know if mandatory voting would be effective. I think they have that in Australia. You may be able to make people vote, but you can't make them vote with an informed mindset.
    Posted by Jason G. Ramage

  16. Apologies.

    Let me clarify. I was not calling the electorate too lazy or stupid. What I meant was that term limits assumes that the electorate is too lazy or too stupid or too "something" to decide for themselves. We have had term limits in place in California for a generation and I fail to see any real difference in the quality of those elected...but if I do detect some difference, it is politicians even more driven by money as well as being less experienced and therefore less able to deal with the money being thrown at them.

    One question I always ask myself when it comes down to "representative" government is why the House of Reps was frozen back in 1920. I am pretty sure the Founding Fathers meant for the Peoples House to continue to expand as the electorate did. Originally a house rep, represented something less than 100,000 people, but now that number is approaching 1 per million. No wonder we are not being adequately represented in DC!
    Posted by Anthony Watson

  17. I think one of the big lessons to me is the importance of the role of the family. When I was a young boy, my family went to church almost every Sunday. When I became a teen I had the option of going or not, and since my church had a strong youth program I enjoyed spending time with my peers. The current boomers report 85-90% are Christian. The younger generation are reporting only 65-70%. With no understanding of God or the belief that we need to share our God given gifts and to "love thy neighbor" we will have a very difficult future ahead. The decay of our Judao/Christian beliefs will be very difficult to restore with out strong family support. One way is for each and every one of us to be involved is in the education of our children/grandchildren. I think that we need to focus on an honor code being developed in our local public schools, which is not religious based but one that is what is right and wrong. "We do not lie, cheat or steal or tolorate those that do"! A simple process to teach young children which can be expanded as they get to Junior High adding, Council and report, Council, or report any violations. The key is getting a buy-in at the school board level. In my area most of the schools have adopted a code of conduct at the high school level. The problem is convincing the parents of the importance of the code and the consequences if the code is not followed. We just recently had parents sited for hosting a drinking and drug party for the high school seniors. I hope that the Judicial system understands that breaking the law has long term impact on this couple and that the children see a consequence to their actions.
    Posted by Rick Snow

  18. Another well thought out article. I like the way that you lay out the dilemma without taking sides. But it does beg the question that at least someone should be considering the points you make in the strategy they take. Thanks MIKE