The Real Elitism

Yesterday, the McCain campaign defended the rabid hatred that’s been on display at his rallies by accusing Obama of not “understand[ing] regular people and the issues they care about,” and of “dismiss[ing] hardworking middle class Americans as clinging to guns and religion, while at the same time attacking average Americans at McCain rallies who are angry at Washington, Wall Street and the status quo.”

In other words, Obama is an “elitist” for objecting to presidential candidates who incite mob violence.

We all know that the elitist narrative is a key part of the Republican strategy for winning “heartland voters.” And needless to say, in addition to being outrageously untrue, it’s a reversal of the truth: It’s McCain and the present-day Republican Party who are steeped in elitism.

Which is one reason why I’m steaming like a teakettle after reading this op-ed in today’s New York Times, by Casey B. Mulligan, a University of Chicago economics professor who says John McCain is right: The fundamentals of the economy are strong:

THE Treasury Department is now thinking about using some of the $700 billion it has been given to rescue Wall Street to buy ownership stakes in American banks. The idea is that banking is so central to the American economy that the government is justified in virtually nationalizing much of the industry in order to save us from a potential depression.

There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think.
[…]
It turns out that John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right. We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.

How do we know? Well, the economy outside the financial sector is healthier than it seems.

One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. It’s a measure of how much profit that each dollar of capital invested in the economy is producing during, say, a year. Some investments earn more than others, of course, but the marginal product of capital is a composite of all of them — a macroeconomic version of the price-to-earnings ratio followed in the financial markets.

When the profit per dollar of capital invested in the economy is higher than average, future rates of economic growth also tend to be above average. The same cannot be said about rates of return on the S.& P. 500, or any another measurement that commands attention on Wall Street.

Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year. (In other words, each dollar of capital invested in the economy earns, on average, 7 cents to 8 cents annually.) And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year, far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money.

This all sounds impressively lovely, but what about us regular Americans out here who aren’t tenured professors at prestigious universities or owners of non-financial or financial capital? What about food, rent, car insurance, jobs, gas, bus fare?

Professor Mulligan has an answer for us:

When banks failed during the Great Depression, there were not so many foreign investors that were cash-rich (or these days, oil-rich) and appreciative of how some of the bank assets, personnel and brand names in the United States could be used to earn profits in the future. And don’t worry about foreign ownership: Americans would benefit if foreigners brought money into our economy to enable banks to continue to lend.

And if it takes a while for banks and lenders to get up and running again, what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards. How harmful would it be to wait nine more months for a new car or an addition to your house?

We can largely make up for this delay by extra investment when the banking sector reorganizes itself. Americans waited years during World War II to begin private-sector investment projects (when wartime production displaced private investment), and quickly brought the capital stock (housing and big-ticket consumer items) back to normal levels when the war ended.

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

Professor sweetheart, 94 percent of us are worrying because we’re not employed by the financial industry.

One Response to “The Real Elitism”

  1. Chief says:

    The U. of Chicago might as well be an ultra right think tank. The country is “Hemorrhaging” (that’s right, with a capital H) jobs. Unemployment is skyrocketing. 50 million are without health insurance. Mulligan is delusional.

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