Using Economic History to Understand the Present

For many years I found economic history to be boring and dull, and generally avoided it as much as I could. However, ever since the crash of 2008, I have become fascinated by economic history, mostly because it provides some very useful ways of interpreting our current crisis. You hear a lot of people compare our current situation to the 1930s, but I think it is best to go back further, to the original "Great Depression" between 1873 and 1896. (The term actually dates from that period.) It was a time of extreme volatility exacerbated by the fact that both major political parties refused to break with conventional thinking that favored austerity and limited government action in the economy.

Although there was economic growth and many advances in industry in this era, the economy worldwide was put through horrible convulsions in 1873 and 1893. In America, both financial collapses were brought on by investor panics once the money-men realized that they had overvalued their stock in railroads. Substitute "railroad stock" for "mortgage financed derivatives" and voila, you have something akin to the 2008 financial collapse. If you look at the history of modern capitalism, such sudden financial collapses are quite common: 1819, 1837, 1857, 1873, 1893, 1907, and most famously, 1929. They are not anomalies, but the norm.

As these events well demonstrate, when capitalism is not reigned in, it is a catastrophic force, a kind of economic hurricane, what its proponents like to call "creative destruction." One of the great stories of the twentieth century is how modern industrial societies managed to balance capitalism's economic advantages with social protections that helped shelter the masses against its worst excesses. Those generations who endured the Depression knew that the beast had to be kept under control, and heartily supported the New Deal. For that reason, in the United States there were no banking collapses from 1932 until the S&L crisis of the late 1980s, after the Depression-era restrictions were being lifted. Contrary to what the free marketeers prophesied, the economy grew at unprecedented levels in the post bank regulation period, despite these supposedly deleterious encumbrances. This growth, because of better tax and social policy, did much to benefit the middle and working classes, rather than the wealthiest (as the following graph illustrates.)

Since the Reagan era, that commitment to balancing capitalism with regulation and a solid social safety net has been abandoned. As Jefferson Cowie has shown in his brilliant work on the working class in the 1970s, Stayin' Alive, the seeds were already being planted in Carter era. When faced with the first sustained economic decline since the Depression, Carter and Congress both prioritized staunching inflation over unemployment. This ought to ring a few bells in light of our political class's obsession with deficits at a time of crushing joblessness. As Cowie also discusses, the late 70s saw new corporate attempts to break the power of organized labor, along with the latter's arrogant inability to muster a proper response. We now live in an era where unions are scarce and with the likes of Scott Walker in power, the right to bargain itself is being threatened. With the social state being gutted and workers losing union protections, we are going forward into our Gilded Age past. This has been going on for about thirty-five years, but critical mass has now recently been achieved. Corporate capitalism is the only game in town, hence the president's inability to get tax raises or even elimination of subsidies to oil companies in his recent compromise with the GOP.

In some ways, Gilded Age II could shape up to be a lot worse than the first time around. At least back then, the United States was becoming the foremost industrial nation in the world, something that is far from the case today. According to Judith Stein's recent economic history of the seventies, Pivotal Decade, national trade and economic policy encouraged the growth of the financial sector and neglected industry, which fell into permanent decline. Our economic wagon has been hitched to the lame horses of real estate and finance. The former is dead in the water at a time when there are empty homes all over suburbia, and the latter still sees plenty of profit, but contributes almost nothing to the wider prosperity of the nation outside of Wall Street. The service economy has grown in the last three decades, but now that's hard to sustain when such a large percentage of the population can no longer afford to spend money. The years of easy credit masked that problem brought on by our gross social inequality, but those days are over. Nowadays luxury stores are booming while the rest of the economy is getting whacked. With no new economic stimulus, either from the government or private sector, coming to increase demand by the real job creators in the middle and working classes, we can just expect more austerity in an attempt by corporate America and their paid political lackeys to bring globalization home. Why outsource cheap labor to foreign nations when you can have exploited, low-wage labor right here in America?

Right now I think that most people, even those worst affected by the current crisis, are too politically disengaged or justifiably disgusted with the political system to bother raising hell over any of this. Instead we have an astroturfed Church and King mob in the form of the Tea Party, taking its marching orders from the trumpet of corporate propaganda, Fox News. However, we should remember one last tidbit of economic history. The French Revolution began with a debt crisis, debts run up because of war bills and a state that did not really tax its richest subjects (sound familiar?). I don't see anything so dramatic coming soon, but the lords of finance might want take heed of history when they keep supporting our worsening social inequality.