Pragmatic Utopia #29

I find the postwar decades (like 1945-1972) in American history really fascinating. It’s the time when we locked in the suburbanization and residential segregation that became so fundamental to our political geography.  It was the “Great Exception,” as Jefferson Cowie and Thomas Piketty both argue, when we reaped the benefits of the New Deal and became more equal, all while sowing the seeds for the backlash of Nixon and Reagan. It was the time of the last great anti-modernist mass movement and several of the last great rights-based movements as well. And it was the childhood of my parents and the rest of their generation–one that has had outsized influence, for better or worse, in shaping the modern world.

People standing outside the home of the Myers family, the first black family to move into Levittown, PA. 

This week I read two books about the postwar decades. Lizabeth Cohen’s A Consumers’ Republic is a broad survey from the 1930s to 1970s. Her organizing move is to say that America became a “consumer society” during that period and to trace the influences of mass consumption on geography, stratification, politics, and culture.

For Cohen, consumption can be a political identity in addition to an economic one. For example, consumer boycotts were the oldest tool in the civil rights movement playbook, from boycotts of Harlem retailers that didn’t hire any black clerks in the 1930s to the more famous sit-ins thirty years later. During World War II, “housewives’ battalions” went store to store enforcing price controls.

Some of the most interesting parts of the book are the extended treatments of the women’s rights and civil rights movements, which Cohen frames largely through this lens of consumer politics. It’s fascinating and infuriating to learn how single women with good credit history would watch it go down the drain upon getting married, because retailers only counted the husband’s credit toward a joint account. At the same time, reducing these movements to their consumer aspects is a bit of a stretch, like when Cohen discusses the 1968 urban riots as responses to predatory lending and exploitative retail prices (hence why so many shop windows were smashed). That story is true, but crime, unemployment, and the murder of Martin Luther King, Jr. were pretty important too.

In contrast to these examples of collective consumer politics, Cohen  argues that the mainstream (i.e. white, middle class) consumer politics that emerged in the period was an individualistic one. Here Cohen’s tells the familiar story about suburbanization, white flight, the rise of “property value” as the most important political issue, and other consequences of suburban home ownership. This story is essential and I don’t mind it being re-told, but I don’t think the consumerism frame much helps tell it. Instead, Cohen’s unique contribution is a deep dive into the political history of suburbanization in…New Jersey!

New Jersey doesn’t get much love in history or elsewhere. But this is the perfect topic to devote a case study to it; New Jersey is the quintessential Baby Boom suburban state (Tyler Cowen on the benefits of growing up in North Jersey). Here’s a crazy fact: New Jersey’s population increased by 2 million people from 1940-1960, but not a single one of its cities gained population! Cohen presents the greatest hits of New Jersey suburban history: the lowest state taxes in the country and massive inequality via property taxes, suburban legal independence and the absence of regional planning, the class action suits against Mount Laurel Township for exclusionary zoning, the Abbott v. Burke lawsuits on equitable school funding, and the privatization of public space in shopping mall after shopping mall. If you’re looking for suburbs giving the finger to cities, New Jersey has got it all.

Cohen’s student Louis Hyman zeroes in on what he sees as the most important institutional enabler of postwar affluence: cheap credit. His book Debtor Nation is a history of the most important consumer lending practices from the 1920s to the present: from loan sharks to legalized small loans to independent installment financing to amortization of FHA and VA-backed mortgage loans to revolving credit to credit cards to home equity loans. If you have a vague sense of what those words mean, as I did in some cases, this is a great book to nail down the nitty gritty of how consumer lending has worked.

Hyman’s gift at getting inside the heads of borrowers and lenders is both the book’s greatest strength and possible weakness. He is really good–better than most financial journalists–at explaining the logic of any given lending scheme.

Like why 1920s furniture retailers would lend to customers they knew couldn’t afford it–they were happy to collect a few installment payments and then repossess the furniture–whereas an independent finance company, upon buying the debt from the store, would rather the customer be able to pay so as not to deal with repossession.

Or how 1960s department store credit managers came to realize that it’s possible for your customers to have too low a default rate. Prior to revolving credit, department store credit was purely a convenience to help people afford their purchases. But managers came to realize that it could also be a source of profit. Revolving credit allows customers to extend the repayment period and rack up larger outstanding balances, and thus pay more interest over a longer period of time. Who knew there were bitter inter-department-store turf battles in the 1960s between managers who wanted to spend on inventory and those who wanted to spend on advancing credit to customers? The latter service eventually became unnecessary to perform in-house when Bank of America launched the Bank Americard (later Visa).

I say this explanatory strength may also be a weakness because Hyman comes to identify too closely with the credit managers he is studying.  He holds up as possible only what they saw as profitable. The central argument of the book is that capital goes where it is most profitable, and so policies that help capital find new productive outlets work while policies that give capital no profitable options fall flat.

In this vein, Hyman writes approvingly of the FHA mortgage insurance program. There were regulatory aspects—interest rates were capped at 5%–but these were more than outweighed by attractive propositions for lenders, who were freed from diligence responsibilities. Similarly, Hyman approves of Fannie Mae, Ginnie Mae, and Freddie Mac, which pooled mortgages and created secondary markets for mortgage-backed securities, attracting much larger streams of capital (especially from pension funds) to the housing industry. These were successful acts of market creation, Hyman suggests, because they were fundamentally good deals for capital. Due to rising wages, borrowers rarely defaulted. If they did, government entities covered the losses.

Contrast these efforts with what Hyman sees as failed efforts to regulate and channel lending. In response to the 1968 urban riots, Senator William Proxmire led a series of hearings seeking to address black city-dwellers’ grievances with the credit system. Some banks took up Proxmire’s call to provide more small business financing to the inner cities while the Office of Economic Opportunity set up credit unions. Both initiatives discovered that income and capital accumulation were just too low among the poor to support meaningful loans. Hyman’s conclusion is that regulation of credit markets always fails unless it gives the financial industry a profitable opportunity.

I think this conclusion makes sense only if you are unwilling to commit the full force of the state to a policy priority. The government could have insured loans to urban residents in the 1960s as it did for suburban borrowers in the 1940s and 1950s. Various tax advantages might have been offered to lenders in exchange for seeking out credit-starved communities. There could have been unconditional cash grants or child allowances to held build up urban wealth and close the historical racial wealth gap. Unequal access to credit and to capital is a fundamental element of our economic history, but I resist any tendency to think of it as natural or inevitable. It has been a political choice.

1. The cheating-death tax
Talking about some of the royal families of American politics this week, Josh R. said something about how we need a higher estate tax. That got me wondering whether the ultra-rich actually pay the estate tax. This excellent, detailed Bloomberg article confirmed my fears. It’s a deep dive into the Walton family’s estate tax maneuvering, but it introduced me to the techniques anyone can use.

The most important one is the Charitable Lead Trust, also known as a Jackie O. Trust. You put your money in an ostensibly charitable trust before you die. It gives a predetermined amount to charity each year. And then after 20-30 years, it liquidates, and sends the remainder to a beneficiary–like your heirs–entirely tax-free. How is this ok???

2. Against Uber…but less so than usual

You may have seen this NYT feature about how Uber uses lots of nudges and game elements to keep its drivers working longer hours. I’m going to resist my natural urge to say something about how this is the sign of a creepy dystopian future. Partly this is because I’ve seen ex-Uber drivers commenting that of all the things they don’t like about Uber, these nudges are near the bottom of the list. It’s also because I’m aware that gamifying work is not new.

Probably the most famous book in the last 50 years of industrial sociology is Berkeley sociologist Michael Burawoy’s Manufacturing Consent, which examines how a machine tool factory in the 1970s convinced its employees to work hard. The answer involved an extended metaphor about games, wherein management encouraged employees to compete with one another to produce the most pieces while also capping production to prevent perverse incentives to skimp on quality. So, it’s probably not new and dystopian, but it’s definitely a key piece of the Marxist perspective on how managers keep employees distracted from their collective interests.

3. Matt Bruenig’s favorite Supreme Court case
An interesting Supreme Court case popped up twice for me this week: both in A Consumers’ Republic and in Matt and Elizabeth Bruenig’s talk at Harvard Law (video here). The case is Shelley v. Kraemer (1948). It’s known as the “restrictive covenants” case because it’s about a black family who bought a house in St. Louis which, unbeknownst to them, had a restrictive covenant attached to the property barring it from being sold to black people. A neighbor sued, and the Missouri courts agreed that the covenant was enforceable because it was a purely private contract.

The Supreme Court agreed with those courts that racially exclusionary contracts are not prohibited by the Fourteenth Amendment (so private parties can choose to abide by them), but stressed that a court can’t enforce such a contract, because enforcement would constitute a state action and bring the Fourteenth Amendment back into play. Matt Bruenig says this is his favorite case ever because, for a brief moment, the Supreme Court recognized that there is no real difference between public and private activity; everything is public because everything is eventually enforced by courts and police power. This belief that state action doctrine is incoherent is a signature position of critical legal studies.

4. Manager fees are a scam, part 9,142,394
I’m doing some research involving pension funds and social wealth funds, so was pleased to see this news story about the newly elected North Carolina Treasurer who aims to crack down on the fees money managers suck out of the state’s $90 billion employee pension fund. Costs as a share of assets have gone up 7x for the fund since 2000, largely due to long-term contracts his predecessors signed with expensive hedge funds and private equity firms. The pension fund pays 80% of its fees on 20% of its assets–that is NOT the 80/20 rule anyone has ever recommended. Are the fancy managers worth it? “If North Carolina had owned a vanilla stock-and-bond index portfolio instead of shifting into alternative assets, it would have earned an additional $20 billion over the seven years through June 2016, estimates Ron Elmer, an accountant and indexing advocate.”

5. And now for something completely different
The secret logic of the political compass has finally revealed itself. Three cheers for gluttony amid days of wrath.

Leave a Reply

Your email address will not be published. Required fields are marked *