What Have We Gotten Ourselves Into? Part I

I am taking on this complex issue to share my perspective that brought us to the current economic crisis. The financial crisis didn’t just happen out of the blue; but, has been in the making for the better part of six decades. The conditions that led to the “perfect storm” of financial downturn is not purely economic in nature, but encompasses all the major institutions of American life. It is time to connect the dots and plan a strategy to avoid repeating the economic catastrophe. Due to the complexity, I will separate this piece into two parts.

Three years ago Americans found themselves in a position that they never had even considered. It was a financial collapse of magnitude not seen since the days of the “Great Depression”. The impact has been devastating, which by now is old news. What is a reality is that somewhere between 13 to 16 million unemployed, real wages have declined, millions have lost their homes, available life sustainable employment is scarce or nonexistent, healthcare costs are still rising at double digit inflationary rates, post secondary education debt is now greater than the accumulated total of all credit card debt, government spending is growing at unsustainable rates and we have a national government paralyzed by opposing ideologies.

With over eight decades of hindsight, we are well aware of the conditions that led to the “Great Depression”. Three years after the current financial collapse, what do we know, what is now being called the “Great Recession”, the antecedent conditions that have led to this economic state? Not much, yet a lot in comparison to those who faced the “Great Depression” head on.

Our historical insight journey begins at the end of World War II. The nation had pulled itself out of the “Great Depression” with ramping up production to support the war effort. At the end of the war our production capacity was the only one left fully intact after Europe and Asia had been devastated. The beauty of American manufacturing was to easily move from producing tanks and aircraft to manufacturing cars and washing machines. American manufacturing literally rebuilt the war torn foreign economies and met a pent up 15 year demand for domestic goods. The nation prospered and grew rich and powerful in the process. The economic model was based on an ever increasing demand.  This held true throughout the first fifteen years after the war, but demand for domestic goods production began to fall off and the economy had reached a production and consumption plateau. In addition to the falling demands, foreign goods were beginning to penetrate the domestic markets and cutting into the ever slower growing economic pie.

A number of significant changes occurred that have directly impacted and were the antecedents to the state in which we today find ourselves in.

The first significant change event was the approach to consumption. People born prior to the end of the war were taught the value of durability and consumption based on true need. Beginning with the “baby boomers”; business used the power of the newly introduced mass media marketing, educating children to become indiscriminant consumers. The message was not only to consume, but that want and desire were as important as or more important than that of need.  Also, obsolescence and limited lifetime utility was introduced to the consumption generation. In the 1950s cars were expected to be replaced every 3 years and the most durable goods, such as washing machines and refrigerators, replaced at a ten year maximum. This planned obsolescence was built into consumer products and the consuming public was educated to accept it as a matter of normal product lifetimes. By the beginning of the 1970s the nation had been pretty well transformed into a consumer/production economy. By the Reagan era the nation was a consumer/service/declining production economy.

The second significant change was the wide spread introduction of television as the primary source of entertainment and provider of information. A byproduct of television programming, which distinctly influenced social culture and expectations, was that all problems were solved within a short span of 30 or 60 minutes, broken up by a constant deluge of commercial messages. Television became an instrument of social change.

In the 1950s entertainment programming were traditional "family values" reinforcing shows, westerns that effectively delineated between the battle of good and evil, and variety shows for pure entertainment. This was social reinforcement of the values of the “Greatest Generation” By the midpoint of the 1960s; programming had once again shifted, targeting the entertainment needs of the emerging Boomers.  As the decade progressed, television became more “cutting edge” and seriously questioned the accepted values of the proceeding generations. An unwinnable war was part of people’s nightly viewing experience. The world was playing out in this virtual reality. By the mid 1970s television programming had pushed the social limits with shows such as “All in the Family”, “The Mod Squad”, “Mash” and “Saturday Night Live”, just to name a few. Television had taken a place as a prime mover of social values and understanding.

The third significant change event was the rise of consumer credit. Traditionally, consumer credit had been used to purchase homes and possibly automobiles. This began to change after the Second World War when retailers began to offer credit terms for the purchase of durable goods. Department stores like Sears and Roebuck, Montgomery Ward, JC Penney, etc, led the way in extending credit to favored customers. However, it wasn’t until the 1960s with the introduction of the general consumer credit card by Bank of America, that consumer credit cards began to gain a prominent position and become generalized. A new mentality was introduced of “buy now pay later” and gained momentum and acceptance until the recent financial collapse. Coupled with indiscriminant consumption it has led the general population to become a consumption based on credit society. So engrained has the notion become that people have been on a serious 40 year credit spending binge even going to the extent that people have borrowed against the equity in their homes to fund further consumer spending. However, easy consumer credit, shortened attention spans brought on by the virtual reality of television and indiscriminant consumption were not sufficient in and of themselves to create today’s conditions.

Leading into the 1970s, the nation was uncertain of its national direction. The Vietnam War was at its height and the effects of steadily rising prices and wages was beginning to be felt throughout the economy. Inflation was beginning to take off and by August of 1971, President Richard Nixon imposed wage and price controls that lasted nearly three years. Coupled with the U.S. leaving the Gold Standard, the timing for the wage and price controls turned to be a monumental failure. A change was made from solely controlling inflation through manipulating interest rates, to controlling the economy through monetary policy and the resultant interest rate fluctuation based on money supply. In addition, the shocks to the economy included the first of increases caused by the oil boycott imposed by OPEC as a result of the Yom Kippur War. Cheap energy was now a thing of the past and began feeding into the inflation matrix causing interest rates to become double digit.  The mid and latter part of the 1970s was a time of the “wage/price spiral” and wages began to decline in purchasing power, even as prices continued the steady climb. At the turn of the decade of 1980, the nation was without a firm direction and an uncertain future. Under the Carter Administration, to cope with emerging business problems, government began a series of moves to deregulate previously heavily regulated businesses

In the midst of all the uncertainty of the late 1970s, businesses were having difficulty funding fixed benefit retirement programs and health benefits programs. In many cases companies were raiding and spending the assets of their retirement plans just to stay afloat. The entire fixed benefit pension system began to unravel. When the economy finally slowed in 1980/1981, the country began a period of radical adjustment, adjusting to a different economic paradigm and a strong resurgence of conservative alternative ideology.

This is the end point of Part I and I will begin the final chapters of events leading to the “Great Recession” in Part II.