Jack Asks:
Another Great Depression?
The economy is drifting into uncharted and dangerous seas. In Japan, second largest economy in the world, an epidemic of deflation is already well advanced. In America, except for energy and the imponderables of the Iraq War, deflation is beginning to curtail profits, investments and employment.
Like many other respected economists, Paul Krugman sees little threat.
Krugman’s solution for deflation is simple: Print carloads of money. In the ensuing inflation, loans would be repaid with cheaper dollars. Increased borrowing and spending would revive the economy. Ben S. Bernanke, newest member of the Federal Reserve Board of Governors, has suggested much the same solution in the event of a full-fledged U.S. deflation.
The Krugman-Bernanke scheme is perfectly consistent with accepted economic doctrine. But it is hopelessly naïve.
My research on complex interactions between the society and economy of the U.S. since 1790 suggests that deflation and inflation cannot be toggled by clicking on an economic switch. Price levels depend on social variables as well as economic. (Schizomania, 2003.)
The last sustained deflation initiated the Great Depression of the ‘30s. In the first four years, prices plunged 25 percent. Invisible to economists, a sweeping transformation of society had come to a critical phase. Two American Dreams were ranged against each other, one old and in decline, the other young and rising.
The old vision had ruled America since 1845. Dreaming of a powerful industrial nation, our great grandfathers saved every nickel for investment in railroads, mines and factories. By the ‘30s, however, relentless saving, investing and the building of heavy industrial capacity had become unprofitable.
Around 1900, an opposing vision slowly began to overlap the old one: It urged Americans to forget about saving and investing, Live for today, not tomorrow.. Spend. Borrow. Consume. Old-timers bitterly opposed the new ideas. In their view it was scandalous to spend hard-earned capital on consumer frivolities.
By the ‘20s, America was split in two. One society-and-economy was wedded to a stern past, the other to a permissive future. One was clad in the bustles and proprieties of 1900, the other in short skirts, danced a jazzy Charleston.
In the ‘30s, the two Americas were like heavyweights slugging each other into oblivion. Laws and preferences that shored up one, injured the other. Deflation resulted from an excessive supply of “old” goods and services, and an inadequate demand for both the “new” and “old.”
The new consumption economy would not bring full employment until demand for consumption could be expanded by new social and political forces, as well as by a larger and more enticing range of consumer goods and services. To enlarge both demand and supply, new technologies had to be invented and promoted. A steep learning curve lay ahead.
· Mass purchasing power had to multiply. That required leveling the sharp inequality inherited from the previous century. Now, to stimulate spending, dollars had to be put in the hands of those least able to save — the poor.
· To raise wages, union-haters had to become union supporters. Rabid conservatives had to reverse their views and vote for progressive income taxes and government spending on social programs.
· The new vision commanding us to get it all NOW had to be propagated by novelists, movie makers, editorials, reporters, legislators, advertisers, innovators in every field.
· Houses and cars would become the prime consumer products of the new society-and-economy. Both depended on the invention of suburbia, new city of consumption spending and parking lots. Without a car, living in suburbia was unthinkable. Without suburbia, cars would have been unnecessary.
· But suburbia was slow in coming. William J. Levitt was still too young to have that gleam in his eye.
No wonder the Great Depression lasted so long—and was ended only by the most brutal war in history.
Now fast forward to 2003.
Today’s sluggish economy is rooted in another transformation that began in the ‘60s. That’s when the new vision became a raging mania to consume, when it began to create accelerating excesses—consumer debts, government deficits, pollution, ecological hazards, myriad irresponsibilities threatening our very existence. Now, an opposing vision was born — of a community-oriented, sustainable, environmentally sound and responsible world order.
In the early 21st century, the old consumer society and economy is losing its hold. Deflation will be due to an oversupply of cars, houses and other non-productive goods, as well as by a deficiency of demand for both “old” and “new” goods and services. Economic activity will be slowed by conflict between the two opposing visions.
Eventually the new one will prevail. But not until it surmounts a steep learning curve. Meanwhile, Krugman and Bernanke may have to face the reality of a new Great Depression.
(Jack Lessinger is Professor Emeritus, Business, Government and Society, Graduate School of Business, University of Washington. His latest book is SCHIZOMANIA: Split Society, Perilous Economy 1990-2020. More at www.schizomania.com)
©2003 by Jack Lessinger
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