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An employee of Associated Charities, a private organization dedicated to alleviating poverty in the District of Columbia, met an old black woman carrying a basket of cinders near the dump in Southeast D.C. on a bitterly cold day in December 1896.
The woman “could not give street and number, but could ‘fotch’ the agent to her place,” according to a case study labeled “Aunt Winnie” in one of the organization’s annual reports from near the turn of the century. “Old age, with a heavy load on top and a strong wind blowing, made the walk a trying one. At last the 8×10 cabin was reached. In it was a stove in many pieces held together with wire, a bedstead with rags for mattress and rags for covering. From the leaky roof the floor was wet through and through.”
Aunt Winnie, the report said, had no income save the 50 cents she made every two weeks for taking in the wash. In summertime she raised herbs and greens, but in winter she “suffered for food and fuel.” Her children had all been sold away to slavery, and a nearby niece was too poor to offer any support. Her neighbors helped, providing money for the stove and cot, and a “colored friendly visitor was found to carry broth and other comforts to her.” The neighborly charity wasn’t enough to persuade the agent, who was essentially a private sector version of a social worker, that the old woman should be on her own.
“In the fall of ’98 agent asked her to go into the almshouse, but she would not consent. During the storm in February ’99, she was kept from perishing with a great effort. Every visit, and they were many, had to be made through snow up to the waist. It was during these visits that the promise was made that before another winter she would take refuge in an almshouse.”
When the weather warmed, Aunt Winnie backed off her promise to go to the almshouse. The social worker started to play hardball.
“It would be hard to say which, the agent or the applicant, suffered the more, because through all this distress had sprung up a loving confidence and perfect trust that seemed cruel to deceive. Attention and assistance were withdrawn gradually.”
It worked: In July, Aunt Winnie relented and said she’d go to the almshouse as soon she could sell her cabin. Nobody would buy it, so the social worker told her to tear it down and sell it for kindling. At 2 p.m. on Aug. 23, 1899, the social worker showed up in a wagon.
“[S]he was sitting on her trunk, without a stick of the cabin to be seen. Without a murmur she dropped a courtsey to the bare spot where once stood the cabin and turned away. After an affectionate separation in the almshouse the agent came away feeling that for such a balmy day in August it was a trying task to perform, but for winter’s blizzards, a blessed relief. In case of her death a promise has been made to her that the general secretary of the Associated Charities will keep her body from potter’s field.”
Aunt Winnie, whose story is preserved in the archives of the Historical Society of Washington, had been sent to an American institution that was by then some 300 years old and went by a variety of names: the county farm, the poor farm, the almshouse or, most often, simply the poorhouse. She would probably have been surprised to learn that more than a hundred years later, after the virtual eradication of elderly poverty, a powerful political movement would materialize with the mission of returning to the hands-off social policies that made the poorhouse the nation’s only refuge for the jobless, the aged, the infirm and the disabled.
That movement’s most outspoken proponent is Fox News host Glenn Beck, who doesn’t merely pine for the pre-New Deal era in general, but regularly prevails upon his audience to recognize the particular genius of some of the period’s presidents, whose ideologies of inaction he holds up as the American ideal.
Democratic President Grover Cleveland is one such hero. When Beck and guest Joseph Lehman were discussing the proper roles of welfare and charity this summer, Lehman noted that one “extreme [position] is, you’ve got welfare only as a last resort and all assistance is private.”
It wasn’t too extreme for Beck. “And this is where we actually were a hundred years ago,” Beck said, rightly thinking — or not — of people in Aunt Winnie’s situation.
“We used to be here. In fact, Grover Cleveland has this excellent statement. In 1887, President Cleveland said, ‘Though the people may support their government, the government shall not support the people,'” Lehman responded.
“That’s great,” said Beck.
While lifting up presidents like Cleveland, he wants to tear down their successors. At Beck University, he offers a course titled “Presidents You Should Hate.” Part one focuses on Woodrow Wilson, part two on Franklin Roosevelt.
Until those men rose to power, the political field belonged to politicians in the command of business. Cleveland, however, is a distant second in the Beck view of the world to Calvin Coolidge. Beck told his audience this August that Coolidge was Ronald Reagan’s favorite president, and that he was “one of best presidents I think we’ve ever had that you don’t know very much about.”
Coolidge earned his place in Beck’s heart for refusing to send federal help to the Gulf region during the Great Mississippi Flood of 1927. “And under 30 feet of water, hundreds of people died. This is the Katrina of the 1920s,” said Beck. “And, to show you the difference in how far we’ve come with progressives, at the time that this happened, nobody was standing on their roof with signs saying, ‘Help me.’ They were helping themselves.”
Whatever the victims of the flood may have done, Wall Street certainly helped itself during Coolidge’s reign from 1923 to 1929. The Dow ran from under a hundred to a high of nearly four hundred. Corporate profits and consumer debt soared. Coolidge slashed taxes. By 1929, the top 0.1 percent had income equal to 42 percent of all Americans and held 34 percent of all the savings — while eight in ten had no savings at all.
Those eight-in-ten people without savings had no cushion against the economic crashes that relentlessly afflicted the economy and had no relief against the one calamity that is entirely foreseeable: old age.
“Most people, unless they were well-to-do, had two options,” said University of Pennsylvania historian Michael B. Katz. “One was living with their kids, the other was the poorhouse.”
There have always been people who for one reason or other — inability to find a job, old age, disability, racism, sexism, drug addiction — have been unable to cobble together the means to support themselves. For most of the nation’s history, and for all of its colonial past, those people have been dealt with much differently than they were following the enactment of the New Deal, and, in particular, the 1935 Social Security Act, which created old-age insurance, unemployment insurance and welfare. Those programs were expanded over the next several decades and grew to include Medicare, Medicaid, the children’s health insurance program and food stamps.
“Social Security is the most successful social program in the history of the world,” Senate Majority Leader Harry Reid, a closet New Dealer, said this year. Poverty statistics are unreliable before about 1960, when the elderly poverty rate was 35 percent, but that figure likely represents a steep decline from the day Social Security became law. Though there were no national measurements, in surveys taken between 1925 and 1932 in Connecticut, New York and Wisconsin, nearly half of elderly people lived on less than $25 per month, which survey administrators deemed “insufficient subsistence income.” A third in Connecticut had no income at all. Whatever the national numbers, by 1974 official elderly poverty had fallen below 15 percent and by 1995 it had dropped to ten.
Quantifying the success of a social policy is an exercise often frustrated by life’s infinite variables. But Social Security is one program so effective that the entire decline in poverty can safely be attributed to it, even by the most cautious academics. “Our analysis suggests that the growth in Social Security can indeed explain all of the decline in poverty among the elderly over this period,” concluded Gary Engelhardt and Jonathan Gruber in a rigorous 2004 National Bureau of Economic Research report on the program.
The nearly 54 million people drawing Social Security benefits receive, on average, $1,073.80 per month, according to the Social Security Administration. The Center on Budget and Policy Priorities estimates the program keeps some 20 million people out of poverty, including 13 million elderly Americans. Engelhardt and Gruber calculate that each ten percent cut in benefits would lead to a 7.2 percent increase in poverty. Such cuts are beginning to seem likely, despite the robust state of the program’s finances, which can cover full benefits through 2037 and boasts a surplus trust fund of $2.6 trillion as of this fall.
The social safety net is coming under the most effective assault it has faced in the past 75 years; Republicans see an opening to finally gouge the New Deal, while Democratic leaders openly discuss cutting Social Security in a conversation colored by deficit hysteria. Half of the Washington phone book, it seems, has recently offered some sort of deficit reduction plan that includes cuts to Social Security.
The keystone of the Social Security Act, its eponymous retirement insurance, has already been fractured by a deal between Obama and Senate Minority Leader Mitch McConnell, who this month agreed to a Social Security payroll tax holiday as a method of stimulating the economy. Republicans openly admit that when the holiday’s expiration arrives next year, it will be treated as a tax hike, meaning Social Security’s dedicated revenue stream, which has never been tampered with before, may now be compromised, at the same time that leading Democrats propose cutting benefits and raising the retirement age. Unemployment insurance, the leg of the New Deal that saved families from checking in and out of the poorhouse in between jobs, has come under attack in the most dramatic fashion since the Great Depression. When Sen. Jim Bunning (R-Ky.) single-handedly blocked an unemployment insurance reauthorization in February, he was treated by the media as a national pariah. But his position was soon shown to be uncontroversial within the Republican Party, and the media went neutral. President Obama would later claim as a major victory persuading Republicans to sign off on an unemployment reauthorization as part of the tax cut deal. Republicans are vowing that no more extensions are coming unless they’re offset by spending cuts elsewhere. The GOP is after Medicare, too, proposing to turn it into a voucher system, where the elderly would be given a coupon to buy health insurance, but the value of the voucher would rise at a rate much slower than health care costs, eventually making health care unaffordable for the elderly, just as it was before the program was implemented. And the economic engine of the New Deal, the necessity of deficit spending to spur employment and growth, has quickly morphed from a near-universally accepted law of economics to a political toxin Washington has puked up.
The easiest leg of the New Deal for the GOP to kick out from under it was Aid to Families with Dependent Children — more commonly known as welfare. In a debate stained with racial prejudice, the nation was introduced to the “Welfare Queen,” a largely mythical mother living fat on the public dole and popping out children for the sole purpose of increasing the monthly stipend. Democrats gave up defending it and President Clinton signed it away in 1995. Politically, “welfare reform” was a dramatic success for Democrats, who no longer need to defend the program during election years. But the new welfare, now called Temporary Assistance for Needy Families, has been a failure: While poverty has risen, unemployment has doubled and food stamp use has ticked up forty percent since the recession began, welfare rolls have expanded by less than ten percent. The tattered net is catching far fewer people.
“The Republicans have been after all three of those programs ever since 1935. They got welfare a few years ago, because that’s poor people. They could jump on them,” Rep. Jim McDermott (D-Wash.) said during an unemployment standoff this summer. “But unemployment and Social Security is middle-class people — they haven’t been able to get them, but it isn’t because they’re not willing to try.”
Republican hostility to the New Deal is nothing new. Time Magazine summarized the position of Social Security’s Republican opponents in 1936: “Wage earners, you will pay and pay in taxes…and when you are very old, you will have an I.O.U. which the U.S. Government may make good if it is still solvent.”
Seventy years later, President George W. Bush theatrically stood before a filing cabinet to mock the notion that the Treasury bonds held by Social Security could be redeemed to pay benefits — a staged act no president would dare pull on China or other holders of U.S. debt. “There is no trust fund, just IOUs that I saw firsthand, that future generations will pay,” said Bush. “Imagine — the retirement security for future generations is sitting in a filing cabinet.”
Rep. John Dingell Jr. (D-Mich.) was born in 1926 and remembers the days before the payroll tax started stuffing that filing cabinet. His father, a prominent House Democrat, stood behind FDR during the signing of the Social Security Act; Dingell Jr. was an architect of Medicare. “Goldwater, Reagan, the Tea Party folks are all really part of the same attempt, and that is to get rid of the New Deal and to get away from these dangerous, socialistic ideas,” said Dingell.
“I can remember the terror that existed with regard to those county poor farms,” Dingell said.
Though Republican hostility to the New Deal isn’t new, the Democratic embrace of language that has long been used to undermine belief in government is. Announcing a pay freeze for federal workers, Obama reasoned that “small businesses and families are tightening their belts. Their government should, too.” With nearly one in ten people unable to find work, Democrats compete with Republicans over who can sound more concerned about the debt and deficit, despite a longstanding economic consensus that a deficit is a good thing to have in times of slow growth and high unemployment.
What is dangerous about Social Security is that it works. It is evidence that people can do a better job insuring against life’s cruel downturns by working together and pooling resources than by going it alone in the market. If the financial market and its representatives in Washington succeed in undermining Social Security, they will not only have access to trillions of dollars, but will have dealt a blow to a leading symbol of the potential collective action. It’s no coincidence that cutting Social Security is often described as a “signal” to financial markets. Even Obama, after his election, echoed such language. “We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s,” Obama said before his inauguration.
And Democrats pander to the relentless fear that an offer of kindness may wind up helping someone who either doesn’t need the aid or who is in need but is to blame for their pitiful circumstances. President Obama articulated that worry in a weighted response to a question about why his attempts to slow foreclosures had been largely unsuccessful.
During a meeting with progressive bloggers, Obama was asked to defend his administration’s failure to stem the foreclosure tide. The president’s worry, he said, was that his anti-foreclosure program might accidentally help people who didn’t deserve it. “The biggest challenge is how do you make sure that you are helping those who really deserve help, and, if they get some temporary help, can get back on their feet,” Obama said, specifically adding that he didn’t want the effort to assist “people who through no fault of their own just can’t afford their house anymore because of the change in housing values or their incomes don’t support it.”
FDR and Obama traveled the same course in reverse: Roosevelt came into office a deficit hawk, pushed to balance the budget and cut federal worker pay. He quickly realized his error and turned around. He had the room to maneuver, however, because poverty had become so widespread that it lost its stigma. It could finally be addressed with a level head rather than a wag of the finger.
Before then, however, the nation was just prosperous enough for those with a little to look down upon those with less. When Adeline Nott was committed to a Portland, Maine poorhouse in the 1830s, she challenged her detention. The Maine Supreme Court ruled against her. “The indigent has no claim to be supported in idleness,” the judges wrote. “[T]heir poverty generally grows out of an unwillingness to labor, or is occasioned by reckless and improvident habits.”
Giving financial support to the jobless, known then as “outdoor relief” — as opposed to the “indoor relief” of the poorhouse — will only “encourage the sturdy beggar and profligate vagrant to become pensioners up the public funds,” argued John Yates, an influential progressive from the mid-19th Century. A cash payment would “relax individual exertion by unnerving the arm of industry” and lessen the “desire of honest independence.”
Critics of the New Deal, such as Beck, argue that the increased size of government it brought about has eroded Americans’ freedom.
“It really buys freedom,” said Nancy Altman, author of “The Battle For Social Security” and an advocate for the program. “If you don’t have economic security, you lose your freedom in a very demeaning way.” There’s data to back up Altman’s claim: Engelhardt and Gruber found that as benefits increased, the number of elderly people living with their families dropped by more than half. And, most noticeably, poorhouses shut down.
“Social Security — this is one of the things of which my dad was very proud — closed eleven hundred old folks’ homes in New York. Eleven hundred. And that was just one example, but it tells you what it did all over the country,” said Dingell, adding that before Social Security, “everybody and his second cousin piled in with their families. I had relatives that came to stay with my dad and mom I didn’t even know were relatives. To tell you the truth, I’m not sure they are. And my grandad on Dad’s side, who threw Dad out of the house, came to live with Dad. Dad was the only one of his kids who’d take care of him. He was, quite frankly, the only one who could afford to do so, because Pop was making a fairly decent living during the war, but he was supporting a whole tribe of Dingells and Selmerses and a whole bunch of others who had other Polish names but were related.” Americans have not forgotten how to stack up — the latest Census numbers show multifamily households have surged to their highest numbers since 1968 — and Engelhardt and Gruber find that cuts to Social Security will only fuel that trend.
Poorhouses assaulted freedom in more painful ways, as well. One winter in the midst of the Great Depression, a “Mr. Green” in Rockingham County, New Hampshire was struggling much like the rest of the nation. “I am informed that you are three months back on your rent. The understanding that I had in your case was that if the county furnished the food, you were to take care for your own rent,” wrote a county commissioner to Green on Jan. 26, 1937, one of the coldest winters of the century. “If you do not ‘snap out of it’ and get to working and paying your rent, my next call on you will be with the police officer and will take your whole family to the county farm. The state of New Hampshire will place your children. A word to the wise is sufficient.”
The talk of taking Green’s children was no vacant threat. In most states, children were not allowed to live in poorhouses. Families forced into them would be split up, with children either bound for orphanages, foster homes or apprenticeships. Pennsylvania, which banned poorhouses from hosting children between the ages of two and 16, was typical. Hundreds of children in just one home, the Chester County Poorhouse, were “bounded out” — given to other families — in the middle of the 19th Century, according to an archive of their names that survives.
Banning children from poorhouses wasn’t intended as a cruel rebuke to the destitute, but as a reprieve to the children. “Degrading and vicious influences surround them in these institutions, corrupting to both body and soul. They quickly fall into ineradicable habits of idleness, which prepares them for a life of pauperism and crime,” the 1874 annual report of New York state’s Commission of Public Charities concluded. “Self-respect is, in time, almost extinguished, and a prolonged residence in a poorhouse leaves upon them a stigma, which clings to them in after years, and carries its unhappy influences through life.” The next year, the state banned children from poorhouses.
The adults who stayed behind would live with a motley gang of the dispossessed. Four of the six poorhouses studied in depth by David Wagner, a professor at the University of Maine’s School of Social Work, in “The Poorhouse: America’s Forgotten Institution,” accepted convicts as well as the unemployed, the sick, the drunk, and the elderly and all lasted well into the 20th Century; four later became prisons or jails and, in the case of Rockingham County, both institutions sit on the same property today. At least 2,300 poorhouses existed across the country, according to Wagner, probably many more. Before the Depression, he said, 60 percent of poorhouse residents were old folks, and 20 percent were disabled (The University of Pennsylvania’s Michael Katz said the numbers sounded plausible though he wouldn’t second the estimate without precise data.)
For some advocates of the poorhouse, the institution was intended to rectify character flaws and was often dubbed a “house of correction,” but prisoners and regular “inmates” weren’t treated much differently. Wagner uses letters and records and interviews with old folks to give a flavor of poorhouse life.
In July 1895, a 61-year-old poorhouse inmate named Flint Peaslee complained to local officials about conditions at the Haverhill City Farm in Massachusetts, according to Wagner. Peaslee had been asked to care for another inmate named John Doton, who was “paralytic” and had maggot-infested bedsores. The city launched an investigation.
“The man was paralyzed. I saw maggots crawling in some of the sores and the odor was disagreeable,” testified a Dr. Anthony. “[B]ed sores are the frequent accompaniment of paralysis … at times even in hospitals, and with the best of care … the paralyzed part is affected and it is the constant pressure that aggravates the trouble.”
The investigating committee recommended adding a trained nurse and an improved hospital ward to the almshouse. Wagner reports that of the 22 current and former inmates interviewed, ten were critical of the management and 12 supportive.
“The people would work the farm and it would sort of support ’em or provide food, such as that,” Dingell said. “But it was a pretty grim existence for those people.”
In 1936 a woman’s aunt and uncle hoped to extract their niece and her new baby from a poorhouse in New Hampshire. They sent a letter to a county commissioner saying they would take care of the hapless pair at their home, but the commissioner wouldn’t allow it, according to Wagner. The commissioner didn’t doubt their ability to provide, but he figured the woman would have another burdensome baby. “If I am presented with definite proof from the Merrimack County Farm, that [she] has had a sterile operation, I have no objection to her going to live in your home.”
These and other anecdotes are why Wagner views poorhouses as “a place to put people away, a place where involuntary surgery was performed, and a place of punishment for those deemed unworthy of outdoor aid.”
Associated Charities highlighted Aunt Winnie’s case mainly to show the beneficence of doing social work in warm weather as well as cold weather, but the vignettes from the century-old report also showed the organization’s ideological opposition to outdoor relief.
The charity’s annual report in 1899 noted several reasons for a “marked improvement in conditions” for poor people in D.C. “First, in the earlier years there was no method of distribution or of ascertaining the deserving poor, but to furnish supplies to all who applied, and much was in this way distributed to impostors and others not really needful or deserving of charity, and which had a tendency to encourage and create pauperism.”
“Several years ago the Associated Charities abandoned the principle of relief giving and became a bureau of investigation and information,” the report said. “It is confidently believed that there have been very few, if any, case of actual need in the city during the last two years which have not been relieved, and many of those relieved have been of the most deserving kind, who probably would not have been known but for the most excellent methods of investigation employed.”
The unemployed who were denied outdoor relief by the city had another option: To be auctioned off to the lowest bidder and live as a boarder. The city would reimburse the homeowner for the specified amount in exchange for putting the pauper up. The jobless person was expected to work without pay in exchange.
Washington’s poorhouses live on only in the name of a dive bar just blocks from the Capitol — congressional staffers frequently imbibe at the “Pourhouse” on Pennsylvania Avenue — but the rhetoric targeting their one-time denizens has survived to the modern day unscathed. Georgia Republican Rep. John Linder said during a hearing this summer that “even when businesses are willing to hire, nearly two years of unemployment benefits are too much of an allure for some … The evidence is mounting that so-called stimulus policies rammed through Congress are doing more harm than good.” Orrin Hatch attacked outdoor relief when he proposed this summer that the government drug-test the unemployed because “we should not be giving cash to people who basically are just gonna blow it on drugs.” Newt Gingrich wants the unemployed to undergo job training to get benefits.
The welfare queen of the 1980s and ’90s, and the “99ers” today — people who’ve exhausted 99 weeks unemployment benefits, who Beck says his viewers should be “ashamed to call … Americans” — were the “gentlemen of leisure in the gutters” in the 1870s, as the New York Tribune put it.
Abetted by journalistic exposes of poorhouse squalor, progressives managed, by the 20th century, to reform the poorhouse into a kinder and more accommodating institution than its Dickensian forebears — too accommodating, according to some Republicans at the time.
At the turn of the century, Congress did precious little to alleviate poverty. Other than funding pensions provided to Union veterans, the bulk of the congressional anti-poverty effort involved funding poorhouses in the capital with an appropriation that amounted to $13,000 in 1897.
Ohio Republican Stephen Northway quizzed Capt. L.B. Cutler, superintendent of D.C.’s Municipal Lodging House, during a hearing in 1897 about the comings and goings of unemployed single male inmates from one poorhouse to another along the east coast.
“It is amusing, when they get together in the yard, to listen to them talking and telling about this place and that one,” Cutler said.
“Much charity to them is a harm,” Northway said.
“They are human beings, and we have to take care of them, but it is outrageous to think that they get off as easy as they do,” Cutler said. “At the workhouse they are treated very kindly by the man in charge there. He feeds them too well. If they were fed sparingly they would not go there.”
Ultimately, outdoor relief for the elderly and the temporarily jobless has prevailed (the handling of non-elderly poor people is another question). President Obama often references the initial passage of Social Security when justifying his administration’s compromises, insisting that if liberals held to their principled position and refused to negotiate, Social Security would never have become law. In December, arguing on behalf of extending the Bush tax cuts for the wealthy, he said that “it’s a big, diverse country and people have a lot of complicated positions, it means that in order to get stuff done, we’re going to compromise. This is why FDR, when he started Social Security, it only affected widows and orphans.” Obama had made the same widows-and-orphans claim earlier to defend compromises in his health care reform law.
Obama has the details of his history wrong — widows and orphans came later, not first — but he also has it wrong in general. In 1935 the House and Senate met to conference the two separate versions of the bill. Neither bill covered every worker — some are still exempt today, others, such as farm workers, have since been covered — but the most critical difference was over a carve-out that private pension companies had demanded: If a company offered its own pension, they reasoned, they should be exempt from participating in Social Security. FDR and the House argued that such a carve-out would undermine the universality of the program and encourage companies to offer lousy pensions to get around the law, plans that wouldn’t be guaranteed to be around when the retiree needed them and would have little protection against the vicissitudes of the market, as Social Security would.
The Senate also made a straightforward argument that Obama would well recognize: We don’t have the votes, the chamber’s leaders told the president. It’s our way or nothing. For nearly a month in the summer of 1935, FDR stared the Senate down, refusing to accept its offer. He used every lever at his disposal. The president won; the Senate blinked. It’s a different story than Obama tells.
Obama’s confusion about Social Security’s origins would seem mundane if it weren’t for the payroll tax holiday he pushed, the deficit commission targeting Social Security he created, and the reports that he’ll call for cuts to the program in his State of the Union address.
Social Security reform is necessary, the program’s opponents say, because its future solvency is in question: As a result of the Baby Boom and advances in medicine, more people are living longer. But the actuaries who set up Social Security in the 1930s forecast with an eerie exactitude how much life expectancies would increase — a detail that is always ignored. And the system was reformed by the Greenspan Commission in 1983, when the first Boomers were nearly forty years old. Nancy Altman, a boomer herself, served as a top aide to that commission, and said that it very specifically took into account the coming wave of retirements, which explains why it can pay full benefits through 2037, a quarter century after the first Boomer hits early retirement.
Social Security’s actuaries reported this fall that after 2037, payroll taxes would be sufficient to pay nearly four-fifths of benefits through 2084. The payroll tax stops, however, at a little over $106,000. The shortfall could be made up entirely by applying the payroll tax to more income above that threshold.
Instead, President Obama’s deficit commission proposed reshaping the payout structure in a more progressive direction, which would fundamentally change the nature of the program. Pundits such as The Washington Post‘s Robert Samuelson have long been arguing that the program should be more like welfare and that wealthy old folks should have their benefits withheld. But the cost of administering such a program, auditing it and making sure it’s not being gamed would erase the savings associated with it, as well as undermine the element of the program that has made it so successful. Social Security has been an impregnable fortress because people feel ownership of it. It’s their money. They earned it.
Obama’s deficit commission failed to get the 14 of 18 votes necessary to move forward, but Senate Minority Whip Dick Durbin (D-Ill.), a White House ally, voted for it in a gesture that portends its future legislative revival. Durbin, said two sources, has since met with a bipartisan group of senators planning to introduce their own deficit-reduction plan, modeled on the commission’s report, that they hope to attach to must-pass legislation to fund the government or raise the debt limit this spring. The gang includes enough Democrats to give their effort a solid chance of becoming law. Among them: Jon Tester, Ron Wyden, Kay Hagan, Mark Udall, Michael Bennet, Jean Shaheen, Amy Klobuchar, Bill Nelson, Dianne Feinstein and Mark Begich.
Top House Republican aides told HuffPost that leadership is planning to use the debt-ceiling vote — when Congress must authorize the Treasury to issue more debt to pay its obligations or go into default — to demand major cuts in spending. Lamar Alexander, the Senate’s number-three Republican, said that the party will use the looming expiration of the payroll tax holiday to demand changes to Social Security. “My personal hope is that it doesn’t become permanent unless we deal with a way to make Social Security solvent over the long term,” he told HuffPost. “You have to remember, the payroll tax funds Social Security and I like the idea of a lower payroll tax contribution, but we’ve got to make sure Social Security is solvent, which we should be doing this next year as the first order of business.” Making Social Security “solvent” with less revenue coming in necessarily means cuts in benefits.
In the meantime, people are limping across the finish line. Home values and the retirement security that came with them have plummeted, along with IRAs and 401(k)s. Pension plans are struggling and laid-off, middle-aged workers have pulled hundreds of millions of dollars from retirement savings to pay bills — often taking brutal tax hits that come along with such withdrawals. The number of people filing for reduced, early Social Security benefits jumped by 25 percent in 2009. That under such circumstances the political class is leaning toward cutting Social Security is evidence of where its power base resides.
Karen Good, who lost her job at a nonprofit in Florida two years ago, exhausted her 99th week of unemployment insurance on Dec. 1, utterly unable to find work. “I’m not a super political person, but I’ve sort of become one because I need the government now more than I ever have in my life,” she said. On Tuesday, mercifully, she turned 62, which makes her eligible for early Social Security benefits. In February, they’ll kick in, and she’ll start drawing $1,113 a month. It won’t come close to replacing her lost income, but it’s something.
“I haven’t been a proponent, a fan of Social Security for the past 45 years. When I was younger I always felt I should have the option to put my money into an account,” Good told HuffPost on her birthday, scoffing at the suggestion that she might be grateful for the money. “I get my money back,” she said. “I earned it.”
A recent WSJ article on banks in trouble focused on the fact that many of these banks were TARP recipients: QED, TARP was bad and the bailouts didn’t work. While state bashing is nothing new in the pages of the WSJ, it’s worth remembering what the bailouts were actually designed to do: stop the global payments system freezing up. It was not designed to bailout some community lender in the West who got in over their heads in commercial real estate. It is also worth putting these prospective failures in perspective. The median size of these banks was $439 million. Compare that to the balance sheet of Bank of America and the combined $4.2 billion tied up in these banks is a drop in the bucket. Moreover, while 98 failing banks seem a lot, we should remember that between 1985 and 1992 2109 banks failed, so let’s not get too excited about this most recent spate of casualties.
So why the focused attention on these relatively normal events? Perhaps the answer lies in the continuing campaign played so deftly by the banks and their allies to turn the largest ever private sector failure into a public sector failure, thereby getting themselves off the hook for the mess that they made. To take just two examples, the minority report of the Financial Crisis Commission blamed Fannie and Freddie for the crisis, despite the fact that the crisis hit over 20 countries and yet only one of them has Fannie and Freddie. Similarly, the global banking crisis has been turned into a crisis of profligate sovereigns, sidestepping the fact that the debt bloating states’ balance sheets are bailout costs and lost revenues, not runaway social programs. Mere facts, it seems, can’t compete with a good ideology. However, the WSJ may be more right than they know. The bailouts may not ultimately work, but for an entirely different set of reasons.
To see why it’s worth having a look at two pieces, one by John Cassidy in the New Yorker Magazine and one by Andy Haldane at the Bank of England. Taken together, they suggest that all may not be well going forward, despite the billions of dollars thrown at the banks: on a fundamental level, their business model may have run out of juice.
Cassidy’s November New Yorker piece asks, “What Good is Wall Street?” If it significantly adds to capital formation, then the argument for compensation orders of magnitude beyond other sectors is somewhat justified. The problem lies in showing this, since doing so rests upon a series of counterfactuals that are hard to prove. For example, the existence of a $400 billion swaps market doesn’t mean that its absence would result in lower GDP growth. It does however mean lots of fees for those who arrange the swaps.
Looking at the link between what banks do and capital formation, Cassidy notes that the part of Morgan Stanley that does link borrowers to savers and raise capital, traditional investment banking, delivered a mere 15 percent of 2009 revenues. For Citibank “about eighty cents of every dollar in revenues came from buying and selling securities, while just 14 cents on every dollar came from raising capital for companies.” As such, the claim that these institutions are doing “God’s work,” AKA capital formation, seems to skate on rather thin ice.
Andy Haldane, executive director of Financial Stability at the Bank of England, similarly set out to measure the contribution of the financial sector to growth. Is it a productivity miracle or a statistical mirage? Haldane concludes that it’s a mirage, but what is of most interest is how he dissects the underlying business model of investment banking, which enables us to see Cassidy’s numbers in a different light.
First of all, you give up on customers and develop counterparties. That is, you fatten your trading book, and to do that you need lots of different products to trade, hence the growth of complex and opaque securities. Second, you use said securities and the firm’s balance sheet to develop massive amounts of leverage so that even if the margins on each trade are thin, with enough volume you can earn a lot of cash. Finally, you ‘cover’ all this by writing deep out of the money options that give you a near risk free income stream: until it doesn’t.
This is how banks actually make their money, until 2007, when it all went wrong. This raises two problems going forward. First of all, the revenues generated by this model are contingent upon some raw material going into the system as an input that one can profit from as the asset increases in value. Over the past twenty years those raw materials were equities and then real estate and then (briefly) commodities. The latter markets were too small and fragmented to pump this system, hence the 2006-7 boom and bust, and the former two and now either held up by massive amounts of free liquidity (equities) or are underwater (real estate). As such, it’s not clear that these engines of profitability can be effectively restarted.
This is a worry since the bailouts were based upon two complimentary definitions of what this was a crisis of. For the Americans this was a crisis of liquidity. That is, the engine was sound; it’s just run out of oil (credit crunch) and with enough liquidity it will spontaneously restart (limited stimulus etc.) For the British, the engine blew a cylinder and it had to be rebuilt (12.5 percent of GDP as bank recapitalization), and with enough oil (liquidity) it will restart.
But what if the raw material to feed these engines is no longer available? Then the business model as a whole may be in much more trouble than we think. Add to this the impending foreclosure mess really coming home in 2011-12 and the revenues may simply not be there anymore.
TARP and associated programs worked. They saved the global payments system. That is what they were supposed to do. They were not supposed to save small-cap banks from their own investment decisions. They were also not designed to save a business model that may have run its evolutionary course.
As we head into the next year and the 112th Congress, understanding the data behind our economic recovery will be crucial if the economy is to grow and strengthen. A closer look at how states fared in 2010 as well as how they fared during the last four recessions can be a useful guide to both Republicans and Democrats who are serious about shaping strong, smart, and strategic job-creation policies in 2011.
Simply put, the Great Recession of 2007-09 was the worst post-World War II recession, and this fact is substantiated in a recent report by the U.S. Congress Joint Economic Committee.
Prior to the Great Recession, the 1981-82 recession was the deepest post-World War II recession. During that recession, job losses averaged 3.1% on a national basis. States like Michigan, Ohio, Oregon, and West Virginia experienced job losses that were twice the national average, with each seeing a decrease in payroll employment of at least 6.9%.
While severe, the 1981-82 recession doesn’t really compare to the depth of the recent Great Recession. The national job loss average during the 2007-09 recession was 5.3%. 21 states experienced job losses above 5%, with Nevada experiencing an 11.6% decrease in payroll employment, Michigan and Arizona experiencing 9.8% decreases, and Florida experiencing an 8.9% decrease.
These job losses have devastated family savings accounts, put companies out of business, and forced states to slash public services.
The Great Recession ended in June 2009 and the high tide that brought soaring job losses began to change in 2010. Now, as the year comes to a close, we know that 46 states and the District of Columbia experienced net job gains in private-sector employment from January to November 2010.
We are moving in the right direction, but clearly not fast enough, as 15 million people are still out of work in our country, and millions of families continue to struggle to just get by — to put food on the table, pay bills, and think of the better days to come.
The American people are frustrated that the federal government’s actions have not completely turned our economy around, and that is understandable. Creating jobs, retraining workers, and rebuilding our economy is going to take time.
As I’ve chaired the Joint Economic Committee over the last two years, experts ranging from the Federal Reserve Chairman to renowned economists have testified that this recession was different and there is no silver bullet that will return our economy to prosperity overnight and create the millions of new jobs needed.
As Republicans assume control of the House on January 5th, I hope they will quickly recognize that it’s time to move beyond campaign rhetoric on cuts in spending, taxes, and federal programs so that we can effectively work together to spur job creation and further economic growth.
We are currently trending in the right direction. Let’s make a New Year’s resolution to work together so that we can continue to encourage innovations, support entrepreneurs and small businesses, and ensure that unemployed Americans are afforded the benefits they deserve and provided with effective job retraining opportunities.
Congresswoman Carolyn Maloney represents parts of Queens and Manhattan in the House of Representatives, where she is Chair of the U.S. Congress Joint Economic Committee in the 111th Congress.
NEW YORK (Reuters) – Citigroup Inc is on track to exceed expected regulatory requirements and shrink its worst assets to less than 20 percent of its balance sheet, Chief Executive Vikram Pandit told employees in an end-of-year internal memo on Monday.
The Treasury earlier this month sold its remaining shares in the Citigroup, ending a long and difficult chapter for the bank after it received $45 billion in three government bailouts during the financial crisis.
Like other U.S. banks, Citi — which returned to profitability this year — is also trying to grapple with new rules put in place to try and prevent a repeat of the crisis.
“We believe we are poised to meet and exceed anticipated regulatory requirements,” Pandit wrote in the memo.
“The past three years have been challenging, but I believe we now have in place all the elements for sustained profitability and responsible growth,” he later added.
The bank, which struggled amid mounting losses on credit cards and mortgages, has been selling some of its assets from its Citi Holdings unit. Citi last month sold a $1.4 billion real estate loan portfolio to OneWest bank, helping it shrink Citi Holdings to less than 20 percent of Citi’s total balance sheet.
Citi shares were flat at $4.77 on Tuesday. The shares have climbed 44 percent since the start of the year.
(Reporting by Elinor Comlay; Editing by Bernard Orr)
Copyright 2010 Thomson Reuters. Click for Restrictions.
What a great year for Wall Street: profits up, bonuses up and, best of all, criticism down, especially from Washington. Somehow Wall Street has much of America believing its lies and rationalizations. We’re even beginning to forget that Wall Street is largely responsible for the economic mess we’re in.
So before we’re completely overtaken by financial Alzheimer’s, let’s revisit Wall Street’s greatest fabrications for 2010. (For the full story, please see The Looting of America.)
1.”Honest, we didn’t do it!”
Two years ago Wall Street’s colossal greed crashed our economy. Our financial elites created and spewed highly leveraged toxic assets around the globe. These poisonous “innovations” pumped up the housing bubble and Wall Street grew insanely rich in the process. When it all burst, we learned that the big Wall Street institutions that had caused the crash were far too big to fail — and too connected. High government officials came to their rescue with trillions in cash and guarantees — underwritten, of course, by we taxpayers. Everyone knew this at the time. But if you asked just about anyone on “The Street” they denied all culpability and pointed the finger everywhere else: Fannie, Freddie, the Fed, the Community Reinvestment Act, tax deductions for home buying, bad regulations, not enough regulations, too many regulations, too much consumer debt, the rating agencies, the Chinese — and on and on. Sadly, their blame-shifting strategy worked, bamboozling the media and people across the political spectrum. The GOP members of the Financial Crisis Commission are so drunk with this Kool-Aid that in their minority report, they refuse even to use the words “Wall Street” or “speculation” in assessing the causes of the crash. Hypocrites? Crooks? Morons? Take your pick.
2.”The overall costs will be incredibly small in comparison to almost any experience we can look at in the United States or around the world.”
Ever since Treasury Secretary Timothy Geithner screwed up his tax returns we knew he was numerically challenged. But his statement to Congress on December 16, 2010, on the cost of the bailout shows a willful inability to count. Yes, Wall Street has paid back most of our bailout funds. Whoopee! Our economy is in shambles, and millions of people are suffering. With his offensive “no big deal” analysis, Geithner glosses over all this human misery, and sidesteps the hidden costs of the bailout, including the financial insurance we taxpayers provided to every giant financial company in the country via the Fed. On the open market, that insurance — which guarantees trillions of dollars in toxic assets — would come at a very steep price. We coughed it up for free. But that’s still chump change compared to the human costs of the worst employment crisis since the Great Depression — the lost income, the depleted savings, the ravaged neighborhoods. Then there’s the capsized state and local budgets, the public service reductions, the laid off teachers, firefighters and police officers — all resulting from a plunge in public revenues caused by Wall Street’s crash. Why aren’t these costs on Geithner’s balance sheet? A cynic might think Tim was priming us to accept the latest round of Wall Street bonuses. Hey — they paid us back, so why should we care how much they earn?
3. “It’s a war. It’s like when Hitler invaded Poland in 1939.”
Steven Schwarzman is supposed to be brilliant. After all, he made billions as head of the Blackstone Group, a private equity company and hedge fund. But last August, as some members of Congress mulled about eliminating a very lucrative tax loophole, he suffered a mental meltdown and saw an impending Nazi invasion. But the awful attack never happened. Schwartzman and his fellow hedge fund honchos all held onto their unbelievable tax break: Hedge fund and private equity income is still only taxed at 15 percent rather than at the top income tax rate of 35 percent. (That’s because, inexplicably, it’s considered “capital gains,” not income.) Taxing Schwartzman’s income as income would cost him hundreds of millions of dollars — and the prospect of this apparently triggered a shock spasm that catapulted his foot into his mouth. I’m sure my IQ isn’t high enough to keep up with the genius logic behind Steve’s analogy. But just who is Hitler and who is Poland in his scenario? Maybe in his grandiose conceit, his firm is as big as Poland? Or it would require a Blitzkrieg to wipe out his tax loophole? In reality, even if Schwarzman had to pay a 90 percent tax rate (as he would have under Eisenhower), it would hardly have been a hardship — let alone World War 3. He’d still have more money than he could ever spend in his lifetime. Schwarzman should be proud though: He gets 2010’s Dumbest Wall Street Quote of the Year Award. Bravo! (In 2009 the honor went to Lloyd Blankfein, CEO of Goldman Sachs, who claimed he was “doing God’s work.”
4. “The hard truth is that getting this deficit under control is going to require some broad sacrifice, and that sacrifice must be shared by employees of the federal government.”
But not by Wall Street. President Obama words of November 29th came only days before he “compromised” with the Republicans to continue the Bush tax cuts for the super-rich and to bestow an enormous estate tax gift to the 6,600 richest families in America. Mr. President, the “hard truth” is that you’re slapping around public sector workers because you don’t have the nerve to take on Wall Street. If you had the guts, you could raise real money by going to war with Steven Schwartzman and eliminating the hedge fund tax loophole. By the way, closing that loophole for just the top 25 hedge fund managers would raise twice the revenue than you’ll get by freezing the wages of all two million federal workers! (See “The Wall Street Tax Debate that Never Was” )
5. “25 hedge fund managers are worth 658,000 teachers.”
Nearly everyone on Wall Street sincerely believes that they are “worth” the enormous sums they “earn.” You see, their pay is determined by the market, and markets don’t lie. They reflect the high value our skilled elites bring to the economy. So we shouldn’t be shocked that the top 25 hedge fund managers together “earn” $25 billion a year, even at a moment when more than 29 million Americans can’t find full-time work. The outrageous economic logic of Wall Street compensation has those 25 moguls taking home as much as 658,000 entry level teachers (they earn about $38,000 per year). How can that be justified? It can’t. These obscene “earnings” are the product of 30 years of financial deregulation, as well as the tax cuts and tax loopholes that our government has just extended. The hedge fund honchos get most of their money by siphoning off wealth from the rest of us, not by creating new value. I dare Wall Street to prove otherwise.
6. “To bolster the economy we need …. an improvement in the relationship between business and government (the current antagonism, even if not the primary explanation for slow hiring and sluggish investment, does seem to be affecting hiring and other business behavior).”
In this op-ed, Peter Orszag, Obama’s former budget director, parrots the Wall Street line that employers aren’t hiring because of “regulatory uncertainty.” Mother of God, how much more certainty do they want? The Republicans and Blue Dog Democrats aren’t about to let Obama seriously regulate Wall Street, even if he wanted to, which he doesn’t. The truth is that employers aren’t hiring because there’s insufficient consumer demand for goods and services. But at least Peter Orszag is a man of his word. He personally plans to “improve the relationship between business and government” by tapping his government contacts at his new fat job at Citigroup, the nearly failed mega-bank that he helped to save at taxpayer expense. Orszag could have landed a coveted professorship at just about any university in the world. But apparently the 42-year-old wiz kid prefers Citigroup’s multi-million dollar compensation package. Any bets on how long it takes for Larry Summers to cash in?
7. “Lengthened availability of jobless benefits has raised the unemployment rate by 1.5 percentage points.”
You see, the unemployed cause their own unemployment, at least if you believe this assessment from a March 17th research note from JP Morgan Chase. (Next, Wall Street will call for a return of the Poor Houses.) The theory is simple — you give people money not to work and they won’t look for jobs. Still, it takes chutzpah for JP Morgan Chase, the beneficiary of billions of dollars in taxpayer largess, to criticize the unemployed for not finding jobs that aren’t there, precisely because JP Morgan Chase helped to destroy them! Dear JP Morgan research staff: Five to six workers are now competing for every available job. If that’s too complicated for you quants to grasp, maybe you should try a game of musical chairs in the trading room.
8. “Private employers, led by our revitalized financial sector, will create the jobs we need — that is, if the government would just stay out of the way.”
We now need 22 million new jobs to get us back to full employment (5 percent unemployment). In addition, each month the economy must generate another 105,000 jobs just to keep up with new entrants into the workforce. To get to full employment, the private sector would have to create about 630 firms the size of Apple (35,000 employees each). These numbers don’t lie. Does anyone on Wall Street really believe that the private sector alone can pull off this miracle? But really, why should they care? They’ve got theirs, thank you very much. The painful truth that both Wall Street and Washington refuse to face is that if the big, bad government doesn’t fund or create millions of new jobs, we’ll face crippling unemployment for decades to come.
9. “Tim Geithner extolled ‘the benefits of financial innovation’ to the American economy.” (Wall Street Journal, August 4, 2010)
Sorry to beat up on Tim again, but it’s sometimes hard to tell who he’s working for. Whenever you hear the phrase “financial innovation” put your hand on your wallet. That’s the phrase Wall Street uses to justify its casinos and its outlandish profits and bonuses. People who talk about “financial innovation” are either getting big bucks on Wall Street, want more bucks on Wall Street, or hope to get a job on Wall Street the nano-second their public service ends. My question for Tim is: If Apple creates iPhones, what does Wall Street create? Warren Buffett says it creates “financial weapons of mass destruction.” Paul Volcker, Reagan’s Fed Chair, said there is not a “shred of evidence” that “financial innovation” is beneficial. Volcker also believes that the economy “was quite good in the 1980s without credit-default swaps and without securitization and without CDOs.” Volcker gets the Smartest Wall Street Quote of the Year Award: “The most important financial innovation I’ve seen in the last 25 years is the automatic teller machine.” How could Tim get it so wrong?
10. “I’m shocked, shocked to find that gambling is going on in here.” Okay, okay, Claude Raines said that in Casablanca, not on Wall Street. But Wall Street and its defenders say exactly the same thing about their opaque derivatives games. Louise Story’s excellent piece in The New York Times shows how a handful of banks have cornered the market clearinghouses for derivatives – entities that are supposed to make derivatives less risky. The big banks are limiting competition, according to Story, because they “want to preserve their profit margins, and they are the ones who helped write the membership rules.” Meanwhile, Wall Street is quietly pushing to exempt its most profitable derivatives from even these rigged exchanges. So don’t be “shocked, shocked” when Wall Street crashes again and we’re asked to foot the bill. And that’s when, not if.
Dear Readers, here’s to a Happy New Year and a more just 2011. Many thanks for all your support.
Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the New Class War, (hopefully to be published in 2011).
Read more: Lloyd Blankfein, Wall Street Bailout, The Great Depression, Unemployment Rate, President Obama, Wall Street Reform, Larry Summers, Peter Orszag, Billionaires, Goldman Sachs, JP Morgan, Wall Street Crisis, Unemployment, Wall Street, Steven Schwarzman, Timothy Geithner, Wall Street Bonuses, Citigroup, Business News