Thursday, October 11, 2007

It's the Economy

Patrick was checking the MSN Encarta encyclopedia for homelessness and ended on the causes of the Great Depression. He said it sounded a lot like the current situation: an increasing distribution of the nation's wealth up to the upper classes, which happened partly because profits were rising and wages were not, and partly because there were tax cuts for the rich; rising consumer debt, as credit expanded and the mass of Americans were encouraged to buy goods they could not afford; and finally a huge financial bubble.

We have had all of this is the past 20 or so years.

There's an old Detroit story that goes as follows:

Henry Ford (most likely Henry II) is walking through a car planet with Walter Reuther, one of the legendary founders of the UAW.

Henry says to Walter, "Look around. Someday all these jobs will be done by robots."

Walter answers, "Who's going to buy the cars, Henry?"

The point of this story is, the way to keep a modern economy going is to make sure the mass of workers have enough money to buy the stuff you want to sell.

If you distribute wealth up, two things happen. (1) Either the economy will go into a recession, because workers don't have money to buy the goods the factories are producing, or the workers will go into debt, until they run out of credit, and then they will stop buying and then the economy goes a recession. (2) The rich will invest the money they get, but since they will have more money than they can productively invest, they will end by investing in a financial bubble.

All this was common wisdom when I was a kid. Now it is not. The financial safeguards set up by Congress in the 1930s to prevent another Great Depression have mostly been removed, because they interfere with the "free market;" and we have a financial bubble and huge consumer debt and economy that is finally slowing down.

So, what happens next?

Robert Kuttner testified before Congress this week on the alarming similarities between 1929 and the present. His testimony can be found here.


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