History And The American Economy: Where Have We Been? Where Should We Go? Part 4 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five The new economy generated millions of jobs in new research and development -- intellectual activity. It also generated a burst of manufacturing: Back in those old days -- the 1980s -- we American workers built chips, hard drives, plastic casing and so forth.

I was just beginning my career as a historian back then, and I remember wondering how long this new foundation would last. When would the e-economy go the way of the producer and consumer economies? Even then, it was clear that many of the new economy's jobs would go overseas. Asian countries, for example, quickly took over the work of manufacturing the hardware. And in the past decade or so, India and China have latched onto large parts of the intellectual work.

Here's a trivial but telling example: The aesthetics aspects of my two websites -- the parts you see if you visit either one of them -- were designed by a company in Boston. But the "guts" of both sites -- the code specific to my sites -- were built in Bangalore. (*Note: I was referring to my previous website, not this current version.) These days, writing code is the equivalent of the manufacturing of the sort that Americans lost to Asia back in the 1970s. [NOTE: I now only have one website.]

But China and India have also snared large parts of the foundational intellectual labor needed to expand an e-economy. For example, ten or fifteen years ago, China sent its best engineering and science students here to learn. Those students then went back to China to spread their knowledge. Now, however, the Chinese don't need to come here. They have built a world-class university system and are now generating much of the intellectual foundation of the wired economy right at home. (And unless we Americans start taking education more seriously, we're gonna lose all the intellectual work to them.)

In short (or long), the structural underpinnings of our national economy have shifted and changed over the past 150 or so years. We lay a foundation, and then it changes or, as has been the case recently, other countries "catch up" to us.

Here's one way to think it: Imagine the economy as a pie. During the historical heyday of each type of economy, whether consumer, producer, or wired, the U.S. owned most of the pie. In the 1980s, for example, we owned maybe three-quarters of the newly emerging wired economy. We generated the intellectual foundations of computer, and built much of the hardware. Over time, however, other countries grab more and more of the pie. Asians now manufacture and assemble most of the hardware.

So what's the point? The wired economy is dwindling, just like the producer and consumer economies did earlier. Moreover, the "fake" economy of banking, mortgage swaps, subprime loans, and so forth has also proved to be, well, fragile. As more than one economist has pointed out in the past few weeks (and years), mortgage swaps don't produce tangible goods. (*1) So any sensible person ought to be asking: What's next? What will be the "foundation" of our next national economy?

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*1: It's worth noting that during the recent weeks of economic chaos, "experts" kept referring to Wall Street and the "real" economy. The implication was that the Wall Street economy was "not real." Experts also refer to the current economy as a "debt economy": borrowing money is what keeps things going. Not consumption. Not production. DEBT. That's real depressing. No pun intended.

History And The American Economy: Where Have We Been? Where Should We Go? Part 3 of 3

Part One --- Part Two --- Part Three --- Part Four --- Part Five Thanks in part to the New Deal (and to natural economic cycles), in the second half of the 1930s, the economy began to recover. The eruption of World War II accelerated the recovery process.

War is typically good for the economy and in this case it generated full employment and effectively ended the Great Depression. Because of wartime rationing and shortages of just about everything, however, there weren’t many consumer goods. Instead of spending their paychecks, Americans saved them.

When the war ended, Americans began spending their savings. There was pent-up demand for just about everything, especially housing, cars, and basics like furniture and appliances. The baby boom also fueled consumer activity: millions of kids needed new schools, school buses, teachers, books, shoes, food, etc.

But Americans also enjoyed full employment -- and big paychecks -- thanks to the Cold War. Millions of people worked in the aircraft industry, for example, and in munitions, and in highway construction. (The national interstate system was originally intended as a defense project: if needed, the government could use the highways to move weaponry).

In the 1970s, this “industrial-consumer" economy began grinding to a halt. European and Asian nations devastated during WWII had recovered and rebuilt, thanks to funds provided by the U.S. Marshall Plan, the World Bank, and the International Monetary Fund. These new economies rested on highly efficient industrial systems that could compete with and often surpass American manufacturing.

At the same time, the oil-production nations gained political clout (in part because European colonialism ended) which allowed Saudi Arabia and other oil-rich nations, to gain more control over their resources. (The U.S. economy, of course, was dependent on that oil. If you want to know when, why, and how our current oil-terrorist woes began, study up on U.S foreign relations in the 1970s.)

The result? In the 1970s, and with alarming speed, the U.S., industrial production faltered as companies shifted manufacturing overseas. The structural underpinnings of our economy began to give way.

Watching History Happen

So Iceland's financial system collapsed over the weekend and the Icelandic government went hunting for a quick loan. Fifty years ago -- hell, ten years ago -- it likely would have turned first to the U.S. for the money. Not now.

So who did it turn to? Russia. And this country -- and the world -- have reached a historical turning point. The political alliances that have guided global politics since World War II are crumbling. The president of the U.S. may still be the "leader of the free world," but it may no longer matter.

McCain? Obama? Time to crawl out of the slime-pit and tell Americans what your plan is for dealing with this new reality.

History And The American Economy: Where Have We Been? Where Should We Go? Part 2 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five In the early 20th century (around 1900), the economy shifted to what historians call a "consumer" economy. The engine of growth came from making goods purchased directly by consumers: New technologies like refrigerators and radios, as well as makeup, perfume, soap, cars, movies, curtains, and plumbing fixtures.

But in the mid-1920s, an economic meltdown began in western Europe in the mid-1920s, and soon spread to every part of the globe. The event we now call the Great Depression landed in the U.S. c. 1930 in the form of massive numbers of home and farm foreclosures, bank failures, and bankruptcies. In 1932, Americans elected Franklin Roosevelt as president, hoping he would fulfill his promise of a "New Deal" to repair and rebuild the economy.

The New Deal was designed to "prime the pump"; to put money back into people's pockets so they could get back to buying shoes, furniture, and clothes. Its programs can be divided into two main groups (this is a rough generalization). One set of programs rebuilt and strengthened the structural underpinnings of the economy.

Examples include Social Security and the Federal Deposit Insurance Corporation (FDIC), both of which are still with us. The FDIC, for example, protects money people have in bank savings accounts. If the bank fails, you still have your money, and you can participate in the consumption that keeps the economy going. Social Security was originally designed to provide a way for older Americans to retire with an income, so that even after they stopped working, they would spend money and contribute to the consumer economy.

The second set of programs were aimed at the nation's immediate crisis: Unemployment. The logic was simple. When businesses fail, they lay off workers; those workers can no longer spend money on things like shoes and furniture.

So the federal government began using tax revenues to create jobs.(*1) The jobs were offered and created by New Deal agencies such as the Public Works Administration, the Works Progress Administration, and the Civilian Conservation Corps. These agencies hired Americans to build dams, repair bridges, paint murals, landscape public parks. People went to work every day, earned a paycheck, and thus were able to buy food and other goods.

And the projects produced tangible results: new roads, new dams, and so forth. The Tennessee Valley Authority, for example, generated thousands of jobs for workers who built a massive hydroelectric system that brought electricity to millions of rural Americans who didn't have it.

Next up: the American economy after the Great Depression.

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*1: That, by the way, is why the president and Congress moved so quickly to legalize beer even while Prohibition was still in effect: brewers would contribute huge amounts of badly needed tax dollars.

History And The American Economy: Where Have We Been? Where Should We Go? Part 1 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five As I've noted before, I'm a fan of Thomas Friedman, and in particular his call for a "green" economy. He argues that the climate crisis is real, it demands our immediate attention, and that repairing the crisis will, can, and should stimulate the American economy. Going green will produce jobs and fix the planet. (*1)

The New York Times recently ran a piece about one aspect of the shift to a green economy: Silicon Valley venture capitalists are investing money in green enterprises designed to transform American energy use, demands, and needs. It's worth reading, if only because, as the author points out, too often we think about fundamental economic change/repairs in terms of government leadership, whether through federally funded research or through subsidies.

As this article points out, however, private investors aren't waiting for government. They're already investing in this new engine of economic growth.

It's a fascinating piece, but of course I'm a historian, and I think both it and Friedman's plea for a green economy will make more sense if we can place them in historical context. Ditto for the current meltdown and various other problems plaguing our country and the planet.

So, let's take a tour of American economic history.

After the American Revolution and up to about 1870 or so, Americans focused on settling and transforming the continent: Moving west to the Mississippi, and laying out towns and farms. Land speculation. Building canals that could carry grain and other raw materials. Manufacturing on a small scale. They also began laying the groundwork of a metals- and machine-tool based manufacturing sector.

In the late nineteenth century, starting about 1870 (give or take), the pace of "industrialization" accelerated. There are lots of reasons: Inventors developed a way to make steel in large quantities. Foreign investors dumped billions into the American economy. The pace of railroad construction accelerated. Etc.

Historians describe the late nineteenth century as an era of a "producer" economy: Economic growth (and jobs) came from making things like railroad ties, engines (first steam and then internal combustion), machine tools, electrical wire. Yes, Americans also manufactured fabric, shoes, food, and furniture, but the fuel for growth was the manufacture of basic producer goods, the kind of stuff needed to build an infrastructure.

Next time: the shift from a producer economy to a consumer economy. [As always, I'm breaking this into multiple parts not so I hope you'll come back (although I do!), but because I'm aware that most people's days are broken into ten-minute increments. Ya got ten minutes today. You'll have another ten tomorrow.........]

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*1: See in particular his new book Hot, Flat, and Crowded.

The Cranky Historian: The "Shining City"

Just for the record, and for what it's worth: Last night during the debate, Governor Palin appeared to credit Ronald Reagan for coining the phrase "shining city on a hill."

The phrase is not original to Reagan, as he himself noted when he used it during his "Farewell Address" of January 11, 1989. Indeed it's one of the most-quoted phrases in American literature and politics and rightly so.

The quotation originated in "A Model of Christian Charity," a sermon John Winthrop delivered in 1630 shortly before he and his fellow Puritans disembarked from their vessel Arabella and settled in North America.