Back to Eccles

It's time to return to the Eccles remarks on the Great Depression. Basically, Eccles contributed the Great Depression to inequality of wealth and income. This inequality put a disproportionate amount of capital into a few hands, who would NORMALLY have invested in new plants, to produce more product to be bought by an increasingly wealthier general population. But, since the distribution of income was disproportionate, the general population consumer market for additional products wasn't there and capital simply accumulated. On top of this, what spending was done was largely done on credit (credit used to even out the disproportionate wealth/income distribution). Eccles wrote: "When their credit ran out, the game simply stopped."

There are similar problems in today's economy with two variations: 1) today, "globalization" takes the place of the nineteen twenties "capital accumulation" and is the prime cause of the failure to build new plants in the USA. 2) cheap imports, combined with extraordinary access of the general population to credit markets, relative to the twenties, in the form of "new financial instruments" - ranging from credit cards to mortgage and home equity debt instruments - has obscured, until recently, the disproportionate wealth distribution.

In regard to 1) above: In other words, in today's global economy, wherein the American manufacturing sector has shrunk to 14% of the total GDP, and consumer goods are for the most part imports, capital spending on "new plant" simply isn't an issue. It's a guess (for which I need to do additional research), but I'd suggest that the trend in capital investment over the last twenty years has been toward foreign investment and commercial real estate (and at a different general population level, 401Ks, based on over-valued stocks and/or inflated housing prices) and that together, today, invested capital in these categories far exceeds investment for the production of consumer goods. The key word in the last sentence is "production." There HAS been substantial capital investment in high tech products related to improved distribution systems for foreign produced product. But, in sum, investment is going toward foreign "new plant," and domestic distribution.

The effect, however, is the same as in the nineteen twenties dealing with a national economy and low imports - i.e. whereas the giant suction pump of the twenties was in capital accumulation, that pump in nineties and early 21st century is globalization.

This brings us to 2) above. This pattern of investment only makes sense (from a populist national economy perspective) if the American consumer keeps consuming, otherwise the house of cards falls. Foreign plant investment and U.S. distribution systems are "valueless" to most of the U.S. population in the absence of mass consumption.

In the absence of an American consumer market, foreign plant will simply turn to production for domestic markets - to the extent possible and as wages adjust - the plant owner doesn't care who he sells to, as long as there is a sale. And, if that American consumer stops buying, we'll be left with a lot of unemployed "service economy" workers wandering among a lot of empty shopping centers and warehouses.

The point is that in the New Economy world, national economies cannot survive a global division of labor, without a single, global set of rules and regulations.

I am coming to the credit problem, but hang on a bit longer.

The bi-partisan American political approach to globalization and the global division of labor was to place a very, very high risk "bet." We bet our manufacturing base on a projected post-industrial society, wherein the United States would make its contribution to the global economy through "ideas." And, these "ideas" would be "packaged" as services. We did this without guarantees of international intellectual property rights; we did it while continuing to train, in our universities, new foreign elites (Note: 60% of science and engineering degrees granted by U.S. universities go to foreign students). We did it without an understanding that "ideas" transfer across borders without controls far, far easier than product production facilities and that it is much more difficult to "value" an idea than it is a hard product.

Sound pretty stupid? Well, I'd argue that this is one result of Eccles' theory of "disproportionate wealth." When that distribution becomes top heavy (and today it is as top heavy as it was in the twenties), you end up with an economy largely separated from most of its peoples. You end up with CEOs who worry a lot more about this year's bonus than how much the guy at the bottom of his corporation is making. Marie Antonite, just before the French Revolution, supposedly, when asked about how the general population would eat, said "let them eat cake," the line today would be, "let them shop at Wal Mart." There is another side to all of this, which I'll come to in a moment.

The big "bet" essentially failed...or, at least, wasn't coming true fast enough to hold the economy together and the answer to this problem was "cheap credit."

[Note: The next part "assumes" the "service economy" failed to replace the former manufacturing economy on a 1 to 1 basis and that cheap credit had to make up the difference. I need further research into this proposition regarding employment shifts in the economy over time. I am suggesting that such a study would show that much of the former economy moved into service jobs ranging from financial services, computer programming, fast food, retail sales, self-employment, etc., but that all of this did not raise household income consistent with overall economic growth. Without the research, at the gross or macro level, there are plenty of income statistics today to show household incomes have either remained flat or increased minimally over this time period.]

Few in either political party are today willing to step up and lay all of this out for the American people. With the current economic crisis most would probably go as far as saying: "the jury is still out." But, no one (other than Pat Buchanan and a few others on the outskirts of the political system) is willing to say: "We've lost the bet."

Instead, the United States poured more and more money into the system, via loose credit and low interest rates, to prop up an "American Consumer Society," which much of the developing world had come to depend upon. This wasn't entirely altruistic. American consumers bought cheap, foreign produced products, on credit. In turn, the importing countries recycled much of their profit back into the U.S., either directly, through the purchase of U.S. assets, or in market investments, pumping up overvalued financial markets. [Note: A few foreign firms actually built "new plant" in the U.S., generally automotive plants; largely to off-set a growing demand for tariffs to protect American industry. But, this is a very small portion of the national economy. Also, the argument that we have an "investor" or "ownership" society - i.e. we're all going to live off the rest of the world - just doesn't hold up to statistical analysis, as shown by the growing stratification of wealth.]

So, we are now verging on the "tipping point," which Eccles described:

"The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment."

This is, basically, the situation in which we are in today - or will probably be shortly. There is one substantial difference, which is not good news. In the above Eccles quotation, the fall in prices mediates the severity of the fall in employment. True for the nineteen twenties. In the 1930s, after government invention, the coming of WWII and the transition of the United States into the "Arsenal of Democracy," created an opportunity for Americans to return to their plants, their factories. Today, there are no plants to return to, and there are other markets for importers to sell into. As already noted, foreign plant product may turn inward, improving their own economies, but doing nothing for us. Further, oil - still the energy source that drives much of the world economy, such as all of those manufacturing plants we shipped abroad - will probably remain at high prices due to increased non-U.S. foreign demand and a dwindling supply. [Note: Drilling in ANWAR and Canadian shale won't save the situation. ANWAR might delay the worst for a couple of years (of course, we may need those years) and processing of Canadian shale is very expensive at present. The "energy problem" long term may be handled; it is the immediate future, wherein its price and availability create enormous economic difficulties.

Before moving along, a word on "the other side of the picture" - the non-populist side. Culturally, I would suggest that much of the traditional American "elite,"(elite in terms of wealth), over a period of time, lost confidence in the country...in its politics, its peoples and in its declining values. To a significant degree, down at the nitty-gritty level, I believe this accounts for a large measure of the willingness to sort of "get out of town" via globalization. This is a factor most liberal economists simply do not want to address. Important as this perspective is, it is not the subject of the current set of posts on the economy. I am trying to avoid "value judgements," whether applied to Wall Street or Welfare. This is merely a series of thoughts on: how we got here, where I think we are, and where we need to go in the future.

I still have to return to "shareholder value," at some point, to show how the "Perfect Storm" arrived. But, first, in the next couple of posts, let's look at "Free Trade," and "How Bad Can It Become?"