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Historical precedent vs. economic nonsense

Chuck Kelly • October 9, 2009 12:15 AM

Those who say our present economic disaster is unprecedented are ignoring history. Sure, if one considers only economic cycles of the past century, we are, indeed, in an unprecedented era.

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Most economists seem to base their analyses on the premise that if banks are healthy and investors have an abundance of money, a good economy automatically results. To some extent, these conditions have been consistent with a growing gross domestic product, a rising stock market, and a more influential and powerful country.

Legitimate historians, however, also consider how wealth is distributed among classes of its citizens, the unification or disintegration of society and the long-term effects of economic policies on a nation's ultimate destiny. On these issues, our nation's present economic decline, both national and international, is perfectly understandable.

Signs of decline

In “A Study of History,” Arnold Toynbee analyzed the growths and breakdowns of 21 civilizations and found they shared many of the same characteristics. One of the first signs of a declining society is class warfare in which the elite minority (however the elite is defined) control the economy in ways that greatly favor themselves at the expense of others. Their short-term power and affluence becomes more important than the long-term national interest.

In their 11-volume “The Story of Civilization,” Will and Ariel Durant concluded that unregulated markets usually resulted in growing and prosperous economies — but they also were accompanied by an increasing disparity in income and wealth between the rich and everyone else. As the disparity grew, they eventually reached a point at which revolution was inevitable.

If the revolution was violent, as in the French Revolution, wealth was redistributed but also destroyed, and everyone was worse off. If the revolution was peaceful, wealth was preserved but redistributed, and the nation became stronger. They cited President Franklin D. Roosevelt's New Deal as an example, as well as other historical precedents.

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More recently, and more directly related to our present situation, award-winning historian T.H. Watkins cited the economy of the 1920s as the cause of the depression in “The Great Depression”:

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“(In 1929) most of the personal wealth in the country resided in the pockets, bank accounts, and stock portfolios of a tiny percentage of the population. But goods had been produced for the millions, not the thousands, and the millions, in the end, simply could not afford them … The banks, one banker remembered, had ‘provided everything for their customers but a roulette wheel.'”

The present jobless economic recovery is a sign our country has fundamentally changed, and we're in a state of national decline. Investors are an aristocracy, while workers increasingly find themselves unable to maintain an acceptable standard of living. Change will be difficult, since any politician willing to take measures to correct this imbalance will face the wrath of America's wealthy and powerful, and be accused of penalizing success, encouraging envy of the rich and class warfare. And no one has explained how the U.S. is going to create good-paying working-class jobs in the new globalized economy.

Bet on others

Even conservative investment advisers have concluded that emerging countries with ample natural resources and/or cheaper labor will be the world's future economic leaders with increasing political clout: China, India, Brazil, Australia, Canada and Russia. That's why they recommend investing in other countries, or in U.S. firms that have significant presence in them. Although China lacks natural resources itself, it is using its newly acquired U.S. dollars to buy resource-rich properties throughout the world, and on a massive scale. This will add greatly to its economic and political power.

Many financial advisers also note that well-positioned investors will be able to profit handsomely from our nation's decline by selling domestic securities short — just as many speculators did in the recent subprime and derivatives meltdown — and are warning their clients to be prepared for the next inevitable meltdown.

Those who say that solutions will be difficult because our economy has been getting worse for the past eight years are only partially right. It's been getting worse for the past 28 years. That's when the decline of America's middle class began in earnest, and it's been accelerating ever since. It's no accident. It's the direct result of our nation's economic policies, and it's time for a peaceful revolution: a new New Deal.

Chuck Kelly is a retired management consultant living in Burnsville and is author of Farewell Fantasyland; Time for Economic and Political Reality. He can be reached at cmk@farewellfantasyland.com.