The New Economy: Stairway to the Stars or House of Cards?

by Doug Dowd

You can guess how this piece will answer that, of course. However, the answer will not be a prediction as to when but a judgment as to whether and why — with a warning that we’d better step up and expand our political work right now.

The basis for that judgment will be an analysis centered on history. Such historical inquiry is essential (though not in itself sufficient) for this purpose; and here it must be confined to a skeletal outline.

The notion of today’s widely-touted “new economy” will be addressed by comparing and contrasting its key elements with what was called "the new era” of the 1920s — under the headings Then and Now. We begin with why the 1920s are appropriate for such an analysis; then the key elements will be discussed.

The hype of today is itself an extension of the 1920s, when modern hype was born and began to stroll along — until tripped up by the depression; now it’s become a thundering herd. The phrase and opinion makers then as now — as always — nested at the top levels of the distribution of income and wealth, status and power. It wasn’t until the mid-1920s that they began to articulate “new era” (soon followed by “prosperity decade”); understandably: a severe inflation and then two recessions occurred between the end of World War I and mid-1922.

Euphoria took hold then, as with the “new economy” now, when a buoyant economic growth led to continuous fireworks on Wall Street and a real estate boom. War demand and technology were the original foundation for the expansion, goosed along by the also war-born art of public relations. Thus,

1) from at least 1914 on, always rising exports of manufactures and farm products and loans to Europe combined to transform the United States from a debtor to a creditor country;

2) more subtly, high and rising foreign demand and rising jobs and incomes shut off and quickly reversed the recession that started in 1913, with a stronger boost when we got in the war; 1 + 2 meant

3) a long rise instead of a large fall in purchasing power after 1913; and

4) because of war shortages after 1917 there was thus an unprecedented accumulation of pent-up consumer and real investment demand after the war.

Before World War I, auto sales were pretty much confined to farmers (the mass-produced Ford's Model T and its high axles were designed for rural dirt roads; other cars were only for the very well off — the Gatsby crowd and their Stutz Bearcats. Even with war-induced good times, the new large-scale production (Chevys, etc.) had by 1923 become plagued by excess capacity; so GM smartly took the lead in introducing the annual model change (and many different models) and consumer debt (available then, unlike now, only to good credit risks: no more than 25 percent of the people). Home electrical appliances were virtually unknown before the war; by 1925 they (and electricity) came to mean what the computer does now for both consumption and production. The radio, first used for military purposes, and seemingly a small matter, fitted in nicely with all that by the late twenties, because of the need for consumer advertising (which paid for all). You can fill in the blanks for the rest.

Nor is it either irrelevant or unimportant that the social process underwent a dramatic transformation in those same years: Prohibition, in making booze illegal also generated Al Capone (et alii) and made drinking into fun and games, especially in speakeasies (with all that jazz). All this at a time when divorces were multiplying, skirts were shortening, and morality was being redefined — or something: thus, “the jazz age,” “the roaring twenties.” (I reached 10 in 1929; my mother divorced when I was 6; her sister ran a gambling joint; my uncle, her gangster hubby, was rubbed out in SF's Tenderloin District; nearby, my pharmacist uncle bottled gin and sold it as rubbing alcohol. Whee!)

Resonating in most of your minds will be the many similiarities and differences with the 1990s, and the roots of the present in World War II and the Cold War and Ronnie Reagan. So I'll leave discussion of the 90s for later.

Both decades will now be explored more fully (if with terrible brevity) under the following loose categories: 1) economic growth and development (quantitative and qualitative change); 2) the distribution of income, wealth and power; and poverty; 3) the global economy; 4) finance; 5) politics.

1. Economic Growth and Development

Then  There were four short recessions in the twenties: 1919 (mild, after a sharp inflation), 1921–1922 (sharp), 1924 (mild), and 1927 (mild). In 1928, just about a year before you know what, the then leading economist in the United States (Irving Fisher, of Harvard) announced that “the U.S. economy is on a high and rising plateau; the problem of the business cycle has been resolved.”

Now  The nineties began with a recession; since 1992 the economy has not had another. Many think there may be another one down the road, but not soon; others say never again; many think it depends on Greenspan. No comment.

Then  Unemployment statistics were not collected in any trustworthy manner until the 1930s; then and now the data chosen (and not chosen) underestimate systematically by about 50% — as is also true regarding poverty. The estimates deemed most accurate for the twenties saw the unemployment rate as vacillating upward from 5 to 13 percent throughout the decade, due to the recessions noted earlier and to structural changes such as these: 1) lowered use of railroads and more of autos and trucks, 2) less use of coal and more of oil and electricity, 3) shrunken demand for wheat and other staples, more for dairy products, meats and poultry, fruits and vegetables.

Now  Unemployment has diminished steadily from 1992 to the present (from 7.5 to around 4 percent), because of prolonged economic expansion — “etc.,” the underside that will be noted soon.

Then  Accompanying the structural changes noted above, there was a substantial increase in the trade and financial sectors, generated by the new consumerism and rising speculation in stocks, bonds, and real estate; but production remained dominant.

Now  The structural changes affecting the current socio-economy had their beginnings after World War II; their nature and consequences changed during the 1980s and have since accelerated. Included among those consequences: 1) a sharp loss of jobs in the production sector, as its share of GDP has declined to one-third (Business Week [Dec 20, 1999] noted that 533,000 manufacturing jobs were lost since March 1998 alone) while the service sector was expanding, for both domestic and foreign and for finance.

But the rise of jobs in the service sector has been predominantly in relatively low-wage (25 percent of all workers now get under $8 an hour), low-skilled jobs (except in finance); 2) the foreign trade sector has expanded to its present level with numerous and immense side effects, at home and abroad — among them, downsizing and outsourcing for domestic production, and the transformation (since 1981) from the our having been the world's largest creditor to becoming its largest debtor. (Concerning which, more below.)

2. The Distribution of Income, Wealth and Power; and Poverty

Then  From 1923 to 1929 there was no inflation. In those years productivity rose but wages were flat or fell, except in manufacturing, where they rose by about 8 percent, as profits rose by 65 percent. Meanwhile, the concentration of business power had taken a big step toward its current dimensions: Berle and Means (The Modern Corporation and Private Property) showed that already by 1931 the 200 largest companies (and their managers, not their owners) ruled the U.S. economy; it will be seen that, compared with today's global gorillas, they were describing local chimpanzees. And although the financial sector until the 1980s remained subordinate to the production sector, its expansion to its present status of sitting in the catbird seat was well underway, as both business, household, and public debt spread and deepened — and Wall Street sizzled.

As for poverty: the measurement of U.S. poverty was not undertaken seriously until the 1960s; using European measures, our our poverty rate goes up 50 percent (Lar Osberg [ed.], Economic Inequality and Poverty: International Perspectives). Even so, the 1964 study by veteran census official Herman Miller (Rich Man, Poor Man) argued that applying U.S. measures, about half of our population was living below the poverty line as the twenties ended. Even divided by two that doesn’t sound much like prosperity. Like now.

Now  Inflation in the 90s has been absent or minimal. Whatever was happening with productivity (and its measurement is highly controversial), wages were stagnant or falling from 1973 until the late 90s and, startlingly, the average U.S. worker now puts in 260 hours more per year than in 1989 (that’s six weeks of extra work) with little or no wage increase. (Business Week, Dec. 6, 1999) Meanwhile, the ratio of average CEO to production worker incomes, which rose from 140-1 to 209-1 in the first half of the 90s (when the ratio in Japan was 7-1), had risen again to over 400 by 1999. (That’s because the productivity of bosses went up lots and/or workers’ productivity went down lots. Ask any economist.)

As for big business, hold your hats. In 1991, Fortune reported that the largest 500 industrial corporations (one-quarter of one percent of all such corporations and much less than that of all industrial businesses) made about 75 percent of all industrial sales ($2.3 trillion) and took in the same percentage of industrial profits. The top 50 of that bunch claimed more than half of the 500’s assets, sales, and profits.

By 1998, Fortune had begun to focus on the 500 largest global companies (191 of them U.S.): the TNCs. Their revenues were $11.5 trillion, profits $440 billion. The Top 10 (that's ten) had revenues of $1.2 trillion. (I underscore in honor of Senator Dirksen's remark in the 1950s: “A billion here and a billion there, and pretty soon we're talking big money.”) Since then, the almost daily mergers and acquisitions across sectors and borders have of course increased the already stupefying concentration of global economic power.

So, with all these good times, and rising tides lifting all boats, poverty ended, right? Nope. A good third of the population doesn’t have boats; or they're flimsy and break up on the shore. In the decade after 1989, U.S. GDP rose over 30 percent and per capita income by 14 percent. But the bottom 20 percent of households was still where it was in 1989; in fact, worse off. The measurement of poverty has never changed, but much else has (most terribly, rents): so the poverty line as a percentage of median income (half above, half below) which was 43 percent in 1959 stood at 28 percent in 1998: the rich not only got richer, the poor got poorer. (See Doug Henwood’s Left Business Observer, Feb. 2000, and earlier issues.)

3. The Global Economy

Then  The first world war was caused by the chaos and conflict of a long deteriorating world economy and associated imperialist conflicts; after the war, matters got worse: in the 1920s the world economy kept shrinking until it collapsed: world trade fell by two-thirds, 1929–1933. The UK (supposedly still #1) was in a mess throughout — unemployment averaging 10 percent, its industry in tatters, its financial sector all-dominating: in 1926, Chancellor of the Exchequer Churchill (yes, that Churchill), “listening to the market,” as we say today, caused and beat down a general strike in “in order to protect the pound,” even though it meant falling exports and rising unemployment. The United States (really #1 by then) hadn't yet learned its lines (as Veblen put it, in another context): its most notable actions were 1) the 1924 Dawes Plan for Germany, loans designed to protect U.S. investments and hoped-for reparations. That entailed a huge Allied loan (a preview of the IMF now) and a complete replacement of the old currency — to stop the incredible inflation that had raised prices 4 trillion times from the war to 1924 (and it worked, well for the strong, badly for most others); 2) in the early twenties, U.S. speculators made many loans in Latin America, but stopped rolling them over in 1927, steering funds instead into the hot stock and real estate markets here. That broke Latin America’s already weak economies; and Europe was breathing hard throughout the decade (except for a blip of a few years in Germany after 1925).

There was probably nothing that could have been done by the U.S.A. or anyone else to stave off the depression; however what was done helped to speed up its arrival and exacerbate the crack-up of the national and world economies — including our own.

Now. After World War II, big business and its political cohorts had either learned something from the 1920s and/or simply saw a set of major opportunities and took them. So, for better and for worse, they created a new world economy and a Cold War to nourish and organize it — whether consciously or not is irrelevant for present purposes.

So instead of more hell breaking loose after the war, slowly but surely a new global economy and associated economic expansion and development took hold in all the major powers, with lots of profitable developments for those in the top countries and for the top people in the poor countries. Praise the Lord! (And pass that ammunition.)

It all worked well, or so it is said, until the mid-1970s: and then what had made it work also brought many years of “stagflation” — rising unemployment + rising prices — and rising (regressive) taxes. The last-noted were able to be used (along with racism and assorted other dirty politics) in what Du Boff has called the “corporate counter-attack” to insert Ronnie’s ways and means into the hearts and minds of a broad swath of the population, and Himself into the White House. In turn, that paved the way for what Lola wanted: no-holds barred capitalism.

The United States became a “responsible hegemon” — like the Britain of yore: foreign investments (and covert or open military ops) all over, effective monitor of financial flows (through the IMF and World Bank), running a large import surplus; unlike Britain, however,

1) we have functioned as “the consumer of last resort,”

2) the dollar and the financial sector has been blessed (up to now) by the weakness of almost all other economies,

3) as business has been blessed by the weakness of our unions and that of the millions of desperate immigrants pushed out of their societies by “development.”

By now, the dollar is the only strong currency, our import prices, unemployment and inflation are all low. Since 1981 we've had a steadily rising foreign debt, now surpassing $2.5 trillion and rising at close to 300 billion annually. Ishkabibble: were there a global contraction, those friendly furriners wouldn't want their money back. Would they?

Britain's functioning global economy (roughly 1860–1910) was more far-flung and more tightly integrated than anything earlier; but not compared with “ours.” That difference, measured not only in terms of production and trade but — a big but — also in finance, is what has made the new global economy work “so well” (for those at the top: the Top 10 percent of Yanks (26 million) have as much income as the bottom 2 billion people in the world. When (not if) a contraction takes hold, it is highly likely to take the world into a an economic and political tailspin more severe than (if also very different from) The Big One of yore — neither least nor only because the social process is now much more tightly intertwined with the economy than ever before and more vulnerable to both national and global financial cracks.

That such a warning is not entirely fanciful will be underscored by the ensuing discussions of finance and politics, then and now. Lots of differences as well as similarities. Quick summary: on balance, the twenties were safer.

4. Finance

Then  We can be brief; knowing how the story ended in ’29, you can work out the other points yourself. Suffice it to say, the zippiness of the socioeconomy then (for its top 25 percent, max) could not but give a buzz to speculators — that is, gamblers (spare us the spin “investors”). In those years there was NO financial regulation of any type, and the Fed — no ifs, ands, or buts — was Wall Street's lapdog. (It still is, but once in a while it growls to impress the neighbors.) There was a lot of loose cash rolling around (rich having been getting richer, and spreading excess capacity in industry.…), and, well, wotthehell, there ain't no tomorrow, right? Almost everyone buying stocks on margin? Yeah. Including banks? (And using their assets to play the market?) Cool. Paying due attention to price/earnings ratios? You must be kidding. Party time. (We're still talking about “then,” in case you're wondering.)

When they all woke up “the next morning” (1929–1933) the Dow (differently measured then) had dropped from $125 to $36; the average number of bank suspensions rose from 560 (1928) to 1700 (1932); in 1933 all the banks were closed; exports fell from $5.2 to $1.7 billion; construction fell by 75 percent; farm prices by more than half; RCA, the Microsoft of its day, dropped from $355 to $15. Damn!

But let's note some oft-forgotten facts about how such processes proceed, which is never in a straight line: within a few months of the crash there was a recovery. It soon ended. In early 1931, another short recovery. A few months later, the international financial structure collapsed (started with one bank in Austria), hitting bottom in 1932. In the fall, recovery once more, but oops! a financial upset in the U.S. Midwest in early 1933 culminated in the closure of all banks in March by FDR. No more panic; nothing left to panic about.

Now  The high riders of the twenties could be forgiven on grounds of ignorance (although, of course, there had been many crashes before). But today's Wall Street cowboys are riding what has become the strongest and wildest financial sector ever, energized significantly by their growing power to undo the rules and regulations put in place because of the follies of yesteryear — made easy as pie by the bought and paid for cooperation of (the next word is carefully chosen) their government.

But there is a larger point, including but going well beyond Wall Street as gambling casino. It is that the financial sector now outweighs the production sector (and, of course, all others): in its income and wealth, in its political clout (is that saying the same thing?), in its global as well as its national power and, not least, in its impact on overall economic functioning at home and abroad. Having read that, now hear this: 

• Item: Debt. “Is the United States Building a Debt Bomb?” asked Business Week (Nov 20, 1999). And this is how they answered (in part): 1) between 1978 and 1999, household debt (excluding mortgages) rose from 62 to 102 percent of disposable personal income; 2) non-financial corporate debt as a share of corporate ouput rose from 60 to 80 percent; 3) financial sector debt as a share of GDP more than quadrupled, from under 20 to over 80 percent; 4) the U.S. debt to the rest of the world since 1981 has almost tripled (the national debt under renowned budget balancer Reagan quadrupled in his 8 penurious (to all but the military and the rich) years; and 5) all that debt meant mountains of interest, going to the financial sector and the top 10 percent of the population; a handy way of redistributing income upward. But who’s counting?

 • Item: It is not just the amounts of debt, but their whys and wherefores that are alarming:

1) consumers are maxing increasing numbers of easy-to-get (indeed, difficult not to get) credit cards, while also borrowing on home equities (to pay off debt if not rich, to buy stocks, whether rich or not);

2) the percentage of syndicated loans (those involving more than one lender) going to companies with subpar and heavy debt rose from 12 percent in 1995 to 31 percent in 1998;

3) despite (and because of) huge gains in the stock market, corporate financing is depending always more on debt than equity, to finance stock buybacks, acquisitions and mergers; and

4) financial companies are increasingly “repackaging” loans they have made and selling them as bonds and notes — that is borrowing on them so they can lend and spend more: from $2.4 trillion in 1989 to $7 trillion in 1999 — an amount greater than household debt and twice that of nonfinancial debt.

Getting dizzy? Business Week concludes its essay on a dour note: “The worry is that we might become too efficient at creating debt.” Party pooper.

5. Politics

Then  The 1920s were years of pervasive decadence, not just for Brecht’s Germany but, and among other rich societies, for the USA, from sea to shining sea — the forbidden booze, the skirts, the new sexual freedom…: Tender Was the Night. And then there was politics. When I was a kid, Prez Harding was a well-liked drunken swinger and gambler, taker of bribes, and an ignoramus. It takes two to corrupt, of course. His best-known was Teapot Dome (lots oil in the teapot). He passed out cold and then died in the ritzy Palace Hotel one night, under Clintonian circumstances.

V.P. Coolidge took his place (and was re-elected). He was called Silent Cal; one of his few (and most astute) public statements was “The business of America is business.” When told he was dead, Dorothy Parker (the cool wit of the time) asked “How could they tell?” Then we had Hoover. He was doubtless the best-informed of the three, and about as decent as a true conservative can be — that is, indecent only about human and social needs. And he stonewalled the depression, it did him in.

The twenties seemed to be about as corrupt as things can get. However.

Now  Robert Kuttner’s recent book Everything for Sale has it right (if you add “and everyone”). (OK, not you and me. Yet.) There was a great film in the Thirties, Nothing Sacred (Carole Lombard and Frederic March), about media corruption. Compared with today, in or out of the media, everyone in that film seems like a monk or a nun. Our political system (and, in one variation or another, virtually all the others) seem to have reached the bottom for corruption. (But never forget what Tawney reminded us, in writing of the seventeenth century (in Religion and the Rise of Capitalism): “There are always depths below depths.”

In that same seventeenth century, Gresham informed us that “bad money drives out good.” Now we know that big enough buckets of money — in politics, entertainment, health care, education, whatever — distort and destroys anything they are poured over: what an oil spill does to the seabirds, today's $$$$$$$ have done to the social process, to Mother Nature and — be it noted — to our “hearts and minds.”

The capitalist social process does and must bring out the worst in us as it also discourages, even punishes. the best in us. The worst? Greed, hate, envy, lust, pride, fear, anger, gluttony, sentimentality as a substitute for compassion — deadly sins, in modern dress. The best? Solidarity, or call it (as Fromm did) the art of loving, on which, in one form or another, the survival of all species depends); and thought and hope and creativity, and…: it’s getting hard to remember the rest of what's good in us. Capitalism thrives on and feeds decadence and corruption; it is nourished by a population whose desires, insecurities, and fears are continually stimulated and mix infantile with adolescent emotions; and the Top Guys have a supersharp media/advertising gang to tease all that out of us.

The more adult and honest and decent politicians are, the worse their chances; any bottom dweller can be winner, with the right connections and a happy face — and, above all, the openness to being corrupted.

It is common among most of the non-young these days to complain about the young — their vacuity, their recklessness, loudness, wildness, tastelesness (while seldom noting, also, that what's wrong with this society is targeted more frequently by them than by the non-young — if not with the decorum we all possess.

With the kind of society and politicians and other “leaders” we now have, if and when there is an economic crisis, we can expect worse than nothing from the top. Which takes me to the main point of this essay.

It is a commonplace that most lefties (including myself) have a secret hope that there will be another Big One, and the sooner the better. But that's using our guts, not our minds. Why?

1. None of us can do anything either to cause or to hold back an economic downturn, so such “hopes” are meaningless; but all of us can and must work in the political arena.

2. Also: when a downturn occurs, those damaged most will be those in the bottom 80 percent in terms of income and power; worst hit will be the poorest. Those on the top, regrettably, will be hurt least — or may even gain.

3. And we must remind ourselves of the political consequences of the 1930s depression. No nation went Left, except for a while (if that); here, from 1929 to 1935 the State sat still or worse (the Nazis sent a delegation to study the NRA in 1934); the “second” New Deal (1935–1938) was admirable and essential in many ways, but it was the war that ended the depression; and the beneficial social changes up into the 1970s were rightly called “cold war — or corporate — liberalism.”

4. Were there to be a serious recession soon (which is clearly possible), the political balance in this country favors a further shift to the Right — and we have already gone too far. If we are fortunate enough not to have a serious recession for a significant period, our chances for a better rather than a worse society depend squarely on persistent hard and good work by all political groups and individuals, from liberal to radical, working always more together rather than — as is our wont — always more competitively. None of our groups is going to take power in any foreseeable future; but together we can halt the rightward drift and reverse it — as together we can learn and unlearn and teach and work with each other.

After a sustained effort along those lines we will also develop the power to effectuate a social program for enlarging and expanding decency, opportunity, sanity, and well-being.

As Hillel once asked, “If not me, who? If not now, when?”

 

June 24, 2003