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Thursday, October 14, 2010
Economics/Business ... Politics ...

The USA is experiencing some bad economic times, and everyone wonders where things are going. In order to get some sense of where we’re headed, I am going to review where our economy has been in recent years. So here goes; perhaps is will point where the road seems to be leading. If I’m right, we may be heading for the New Middle Ages.

Between 1945 and 1975, the US economy experienced a tremendous boom because of a tremendous boon; i.e., most of the factories in Europe and Japan were devastated. By comparison, the US had built up a huge industrial factory base during the WW1 and WW2 efforts, and this was fully intact and fairly modern (relative to the 1950s, anyway). Energy was cheap; oil and gas were available from US soil and were plentiful. Major discoveries soon happened in Arabia that made things even better.

The USA was by far the most developed industrial nation just after WW2. Great Britain and the Soviet Union were recovering relatively quickly, but the others needed to import most of their goods for many years. By comparison, the USA manufactured almost all of its own stuff (tables, chairs, autos, refrigerators, chemicals, glass, appliances, candy, transformers, you name it); and much of what the rest of the world needed. We racked in and accumulated a lot of wealth because of this.

Standards of living in the USA shot up dramatically; the suburban middle class lifestyle took root. The poverty level plummeted from around 30% to 15%, aided by a range of “Great Society” anti-poverty initiatives during the 1960s. Unions got stronger and made sure that the working class shared the wealth. The USA used some of this wealth to start ambitious projects such as the Interstate Highway program, the building of new state and local colleges, and the Space Program. And we had enough left over to fight discretionary wars as to promote our point of view regarding nation-building, and to prevent hostile ideologies from taking root; e.g., Vietnam.

But in the mid 1970s, things started going wrong. The Vietnam war became an expensive, unwinnable mess. Europe and Japan were back on their feet, and autos built in their new factories were taking market share away from GM, Ford and Chrysler; the first casualty was the weakling of the domestic auto companies, American Motors (I drove an AM Rambler in my youth). A lot of other stuff started showing up in the stores with the tag “Made In Japan”. At first it was of poor quality, but over time it got better and better (but was still priced cheaply).

Then came the oil crisis of 1973; US oil production was declining, and the Arab nations teamed up with other oil states to choke off the foreign energy supply that we increasingly depended on, so as to significantly boost oil prices (and thus the wealth that they could take from us). Standards of living started to go down (e.g., thermostats set at 68 degrees in winter, 55 MPH limits on highways, 10% inflation and unemployment rates), and people became upset. And thus, in 1980 they threw out the last of the FDR-style “big government” presidents, Jimmy Carter, and brought in an “anti-government” man, i.e. Ronald Reagan.

Reagan managed to cut taxes, reduce income redistribution programs, shrink social “safety nets”, weaken unions, and eliminate a lot of industrial regulations that once helped to “share the wealth”. America decided to take its chances on appeasing the rich and hoping that the “trickle down” to the not-rich would make up for the state-regulated distribution and protection mechanisms set up during the post-WW2 gravy days. (Admittedly, some of the regulation mechanisms that were done away with by both Carter and Reagan dated to the days between the Civil War and WW1, and were anachronisms relative to the changing modern economy).

Basically, the Reagan Revolution (along with the Federal Reserve’s Paul Volcker, who tamed inflation) succeeded in getting the US economy growing rapidly once again. This allowing a lot of new wealth accumulation. However, not surprisingly, this wealth was not distributed evenly between the poor and the rich as in the 1945-75 period. The rich got richer and the poor got poorer and the middle class got squeezed.

But the US got some lucky breaks regarding energy; oil prices subsided after 1985. Even though more and more factories and mills in the USA were closing as the 80s became the 90s, and more and more stuff was imported, the US economy found other ways to gather wealth. (But again, though, this wealth was not spread to the lower rungs as in the manufacturing days). One of the main engines of job growth was FIRE – finance, insurance and real estate. A runner-up was professional business services, especially those involving design, engineering and management. We still had a great education system and a lot of smart people with a wealth of accumulated expertise. The rest of the world still needed our expertise in FIRE and other business services, so we had something to trade for all of the manufactured stuff that they were now making overseas at lower cost than we could. Ironically, it was our fast-developing communications and transport technologies, along with our professional services, that allowed nations like China and India and Mexico to set up factories that utilized workers getting perhaps 20% of the wage expected by unionized Americans.

We also got over the big ideology-prevention war fetish that cost us so much wealth during the 60s and early 70s in Vietnam, along with our Cold War nuclear and conventional war capacity against the Warsaw Pact, which was no more. That was a big saving, allowing wealth accumulation reminiscent of 1960 levels. So the 1990s went quite well, and things looked good as the 21st Century dawned.

But then came 9-11 and radical, jihadist Islam. Then Afghanistan and Iraq. The USA was back in the ideology war business again, along with a lot more spending on “homeland security” (an economic drag, as this does not create efficiencies that boost the economy over the long run). And energy prices started to creep up again. Then, in 2007 and 08, FIRE started to backfire on us, after creating many new jobs and much new wealth in the US. The housing price bubble finally burst, followed by the collapse of Bear Sterns, AIG and Lehman Brothers, along with Fannie Mae and Freddy Mac. As a result, the financial system seized up and the US was brought to the brink of another decade-long Great Depression, as in the 1930s. Government involvement hopefully has limited this to a half-decade Great Recession.

So at the moment, the US wealth machine seems to have floundered. Actually, US wealth accumulation was probably hindered throughout the 00’s by increasing debt to China and to other nations financing our growing federal deficit; when you accumulate both wealth and debt, you’re not gaining net equity. Since 2008, we’ve probably been losing net equity (along with jobs and standards of living). Will FIRE and professional business services once again save the day in the 10’s, creating new jobs and wealth and bolstering standards of living for all?

Probably not. Slowly but surely, foreign countries are getting smarter and smarter, and our advantage in FIRE and professional services has started to erode. More and more finance and professional services activity are moving to China, India and other off-shore locations. The USA still has the best educational establishment in the world, but that is also starting to decline due to underinvestment (read, less government spending in order to cut taxes; the present Tea Party movement is only going to accelerate this trend).

Meanwhile, China and India, while having a long way to go before they catch up, are investing and moving in the right direction regarding education and other infrastructure. Their methodology also (seemingly) avoids the chaotic economic instability that sometimes plagues the US economic engine. Given that modern information and transport technology allows most anyone to sell most any service anywhere else on the planet, and given the slow movement away from the US dollar as the premier “reserve currency”, the world will no longer rely exclusively on the US for engineering, product development, financial arrangements, legal advice and other stuff that we formerly had a lock on (along with England).

Personally, I think that the US has reached its economic peak. We may not notice the decline for many years yet, but over time it will become apparent. Over the next 10 years there will continue to be nominal growth in GDP, supported by continued innovation in the “tech sector”. The US may also get a medium-term energy break in the form of natural gas; new technologies are opening up a lot of new domestic gas sources at affordable costs. This may slow up or temporarily halt the still-continuing shrinkage of the manufacturing sector of the US economy.

As to President Obama’s dream for “green energy” as the key to future US economic growth, I don’t see that happening. Green energy would take a major commitment to higher taxes and higher government investment in long-term research, i.e. research efforts that businesses themselves won’t risk due to uncertainties regarding foreseeable paybacks. The President has tried to convince the public to go along with his green-future vision; but with the Tea Party movement and the drop in public confidence in Obama, I don’t see a meaningful federal program like the Apollo moon landing project of the 1960s coming along to develop a new green energy industry and infrastructure. Things have changed too much since the 1960s; even though there is much more wealth available now, the public is not as willing to share it for the “common weal” as they were back then, when living standards and expectations were lower but steadily getting better. Also, the US owes too much debt to other countries; much of our wealth is “collateral”, which we can’t just do what we want with.

So perhaps the FIRE has gone out in the US economy. But we still have a strong entrepreneurial spirit, with a lot of people anxious to try new angles in order to make a buck and a lot of built-up wisdom in how to do that sort of thing. The logical thing to do would be to get the public to agree to lower its consumption standards and allow higher taxes as to finance a decade-long program to re-build our school system, invest in cutting-edge information infrastructure, get our basic infrastructure (roads, bridges, water systems, power grids, airports and seaports, rail passenger lines) back in shape, while simultaneously developing the knowledge and techniques that entrepreneurs would use to build a viable green energy industry. Everyone would feel the burden, but those who benefited the most from the wealth accumulation since the Reagan years (i.e., the rich) would logically be required to sacrifice the most.

In return, of course, they would have a shot at the new entrepreneurial opportunities being fostered by this grand program. I.e., they could get rich again – when the time is right. It would take a coordinated 1-2 punch of massive government control for a time, then letting go of that control so that the entrepreneurial class could do its thing. The government would have to know when to get out of the way, shrink itself, eliminate agencies and regulation programs once the mission was accomplished – without waiting for a Reagan to come along. The public would have to buy into a long-term plan involving immediate sacrifice and putting lots of trust in the government, that it will disengage itself at the right time.

UNFORTUNATELY, the public instead appears to be panicking, asking to be “cashed out” from the common-weal through radical tax cuts and immediate government shrinkage. The Tea Party, financed at least in part by those who want to keep all of the wealth accumulation gained from FIRE and other initiatives since the Reagan years, has convinced a growing segment of the public to reject Obama’s plea for a return to big FDR-style government. They demand . . . well, taken to its logical conclusion, they demand to be cut loose from the American social contract as we presently know it. They seem to envision medieval-style fiefdoms that would be responsible for defense, policing, schooling, markets, food, medicine, industrial development, etc. They don’t seem to want the federal government to be there anymore to support a national network of airlines, telecommunication, highways, defense, agriculture, education support, etc.

Hopefully the Tea Party folk, if successful, won’t be too surprised when their tax and government cutting vigor makes “their” Medicare and Social Security collapse; hopefully they will have enough gold stored in their basements. Hopefully they won’t be surprised when their attempts to either drive 500 miles to visit a relative or hop a plane becomes a costly and dangerous proposition. Hopefully they won’t miss the FDA when local medical entrepreneurs develop new drugs and therapies with uncertain long-term effects. I hope they enjoy the New Middle Ages.

◊   posted by Jim G @ 8:06 pm      

  1. Jim, Nice review of our economic times over the last century or so.

    As to current days and specifically the coming election, it’s difficult to foretell exactly what will happen. I did notice at early voting this week that there were a lot of people coming to vote. Usually early voting is sparse, but this time there were people actually waiting for machines. So, definitely people are coming out to vote. Of course, each side is predicting that the people casting early votes are voting for their side.

    As to the Tea Party folks: I find it difficult to actually listen to them any more. I did listen early on, but now I notice that they have a lot of slogans (some of which are not even that original) but actually have little of substance to offer. They seem to take the attitude of people who mistakenly think their opinion is important–those who say: I don’t know anything about this, but then proceed to speak for 5 or 10 minutes on a subject about which they admit they know nothing.

    And so the Tea Party people seem to have a similarly negative approach. They appear to be very knowledgeable about what it is they do not like about everything in politics and government. However, when asked for specific suggestions about what they would actually do to change things in a positive way, all they seem to be able to do is talk on and on about something of which they apparently are not knowledgeable. They also remind me of those people who refuse to help with some problem that arises in life or work. Yet, these same people will then not hesitate to critize vociferously both the people who actually did take some time to work on an issue of life or work and the resulting solution offered by those “working” people. So, the Tea Party people don’t really impress me at all. MCS

    Comment by Mary S. — October 21, 2010 @ 7:32 am

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