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The Case for Economic Calamity

foreclosureAt long last we are seeing reports of jobs being added to the American economy each month. 290,000 jobs were added in April. 431,000 jobs were reportedly added in May, according to the Bureau of Labor Statistics, with an asterisk indicating that all but 20,000 of them were temporary jobs for census takers. Still, it is growth. But is it enough growth to allow us to grasp onto the edge of the cliff and pull ourselves out of the ongoing recession? Is this a true foothold to recovery, or just a blip preceding another slide?

No one can be sure where we will go from here, but one thing is certain-if even Brian Williams and the mainstream media are rejecting “the worst is behind us” rhetoric and asking the tough questions, then the problem must be serious. The lessons of history and economics are in agreement, making the case that we should buckle up for a bumpy ride. No doubt, the paradigms are shifting as we take a giant step into a new millennium. We cannot be sure, with so many new and wildcat variables, if results in a new age of global economics can be predicated on what were once historically predictable conditions. For one thing, we are in an age where economics have largely been devoured by politics. Economies are now guided as much by social policy and international logrolling as by sound economic strategies. Additionally, the U.S. can no longer swallow all of the goods manufactured and exported by the rest of the world.

Some may argue that the economic crunch in the U.S. was worse in the late Carter and early Reagan years than it is today. But taking into account the global situation – from Greece to Spain to Mexico and back to California – there is no doubt that we, and the world, are in the biggest mess since the Great Depression. Robert Brenner, historical economist from the Center for Social Theory and Comparative History at UCLA, expounded an intriguing theory in a recently published new prologue for his book, Economics of Global Turbulence. Brenner suggests that the presumed epicenter of our economic chaos may not really be the banking and securities meltdown. Rather, “The fundamental source of today’s crisis is the steadily declining vitality of the advanced capitalist economies over three decades,” and this decline is largely the result of “…a persistent tendency to over-capacity, i.e. oversupply, in global manufacturing industries.” He points a finger at Clinton’s balanced budgets in the 1990s, followed by similar fiscal restraint by the EU, for stifling demand and pushing the world’s leading capitalist economies into a cyclical downturn unparalleled in the post-war era.

Follow with Brenner just one more step: With an economic engine compromised by stalled government spending, the Federal Reserve followed the Japanese example of their “lost decade” and endeavored to maintain growth by encouraging private corporations and households to go on a spending spree. They did. And, of course, they were spending borrowed money. Private deficit spending kept the economy flying, not government deficits. Interest rates near zero percent, rapidly rising asset values increasing the net worth of businesses and individuals (at least on paper), relaxed or eliminated loan qualifications – all were impossible to resist. Brenner posits the idea that cheap credit meant a gold rush for asset sales, churning the market and driving prices and “wealth” higher and higher. And of course, it was all essentially underwritten by the Fed. A more perfect bubble machine has not been seen since the last time Lawrence Welk was heard saying, “A one and-a two.”

The question arises: Can we really save the free market system by abandoning free market principles? The grim reality may be that we have to allow failure in order to make free-market capitalism work. The free market is a natural, Darwinian force, and cannot be cured through artificial and unnatural methods. Failure, like death, is part of the natural cycle of things. Capitalism will not die if some of it’s “too big to die” corporations turn to ashes. Perhaps only then can the phoenix of free market enterprise rise from its own ashes, revitalized and renewed. This involves the acceptance of great hardship. The alternative is to keep the patient alive artificially on machines as he hobbles toward a government-run hospice.

The goose cannot lay many golden eggs while semi-conscious and woozy from injections of public money. Eventually, the valiant effort to revive the moribund patient will suck all the life and all the wealth out of all those around it. We will see soon if the U.S. bailouts worked or merely postponed inevitable corporate deaths. We will see if The EU and IMF trillion-dollar transfusion is an investment that will revitalize Greece, or if it is merely alms and social morphine that will ease the pain of death as it pulls the savior nations down with it.

stressBrenner’s view is that financial institutions and matters are not the problem and cannot fix the problem. The “real” blood and bones of the world economy are diseased and broken, overloaded with exports that have nowhere to go. The catch-22 is that people won’t have the money to buy products until the assembly lines start moving to employ them; and the assembly lines won’t start moving until somebody buys the oversupply. Lucy’s cakes have already piled up on the floor at the end of the conveyor belt.

The problem with the economy is much like the problem of antibiotics becoming less and less effective when they are overused. Brenner points to downturns in 1974-75, 1979-82, and in the early 1990s as times when the economy was rescued from disaster by injections of purchasing power. Both government and private spending of borrowed money provided the demand to keep the economic engines turning. But the debt simply languished and accumulated, and interest and debt service began to consume more and more of the real wealth and earnings. People and companies were not able to respond as vigorously to new opportunities that would continue to stimulate the economy, and consequently the economy became more fragile.

We hear about a V-shaped recovery and a double-dip recession, but what is indicated here is a Japanese-style L-shaped recovery – a precipitous decline followed by a long period of stagnation. The “recovery” is simply that we don’t keep falling further. Maybe eventually there is an upturn. And, in this scenario, the only real way to begin that upturn is to suffer through a depression. The “denial” stage of depression, which Greece is experiencing now, can result in great social turmoil and political instability, to say the least. Throwing the good money of the rest of Europe and the world into the Grecian sinkhole is much like throwing yourself into your spouse’s funeral pyre.

Some have suggested that this is, in fact, the plan. One by one nations will fall like dominoes as wealthy nations, enticed by the Pied Piper of social justice, throw their money into the bottomless pit. In the end, people will have nowhere to turn except to a social government. Dostoevsky’s Grand Inquisitor says it best: “In the end they will lay their freedom at our feet and say to us, ‘Make us your slaves, but feed us.’”

Too much gloom and doom? Well, we can theorize that, perhaps, there is another way out. There’s one way that we have never considered because it has never happened before. Once all of the dominoes have tumbled, once bailout economics have finally depleted all real wealth and pulled it into the abyss, who will be the survivors? Perhaps it will be the Third World nations that have inherited all of the world’s manufacturing and out-sourced services. Perhaps with all of the aspects of the “real” tangible economy on their turf, they will create the wealth that allows them to become consumers of their own products. Then, perhaps, they can help to absorb and reduce the over-capacity and oversupply that Brenner says is stalling the movement of the world’s economy.

But there’s a problem with that scenario too. If they begin earning enough to become serious consumers in the world marketplace, then, of necessity, their higher wages will make products unaffordable – which is why the U.S. was forced to outsource in the first place. Where will the new wealth brokers go to find cheap labor? Alpha Centauri?

The new economic order of a free market for the Third Millennium, through the natural forces of natural selection and survival of the fittest, will find the answer. Eventually. Perhaps the answer is right under our noses. Instead of outsourcing to the Third World, perhaps we can outsource to Third America. You know – rural areas, small towns. The cost of living is still much cheaper there. American companies are paying $15 an hour to companies abroad for each call center employee. People here can do those jobs, as well as light manufacturing jobs, for a reasonable wage too, and they can live on that kind of money in rural America. That is…as long as job-killing government and union mandates for taxes, benefits, and ever-increasing wages don’t gut the kitty and stop recovery in its tracks.

The smart money right now seems to be telling us to hope for the best but to prepare for the worst. And while we’re hoping and preparing, maybe we can at least find a way to encourage the government to run our economy with real economic strategies instead of social policy and unsustainable debt. Or, better yet, just leave the economy alone.

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