Saturday, July 16, 2011

The economic cliff: Part I

In order to understand where we are, I would like to discuss how we got here. This subject is much too large to cover in just three posts, but this is my attempt to grapple with this major issue.

The United States was founded upon the economic theory that the individual can allocate the national resources better than the government. Individual property rights were given priority over just about everything, including the right to vote. We began to see the positive results from this policy almost immediately. (An example is the U.S.S. Constitution, how well it was built and commanded)

Beginning in the first half of the 19th century, the United States began its long run of inventiveness and achievement. The cotton gin and the reaper revolutionized farming and these were only two of the most visible breakthroughs. It is not commonly known that a coinage shortage existed in this country until well into the 2nd half of the 19th century. The base currency was the Spanish real and ‘piece of eight’. This was because our government had such limited resources and controlled so little of the economy that not enough coinage and paper were being minted to supply the expansion of the economy. The 2nd half of the 19th century saw a boom as the industrial revolution caught hold in the United States. (Even with the crippling effects of the Civil War) We invented the phonograph, the electric light, the mass production of steel, and a host of other innovations that had a positive effect worldwide. People began to move to the cities, as it became more practical to make a living besides farming. At the same time, the national wealth was increasing at such a rapid rate that labor began to want a piece of the pie. They began to organize and became a force to be reckoned with. The innovations and breakthroughs continued into the 20th century.

The U.S. invented the airplane, refrigeration, and mass production of the automobile, just to name some of the most obvious ones in the first 2 decades of the 20th century. The crippling effect of World War I did not even touch the United States. Then came the Great Depression.

The Great Depression was the 4th depression to hit the United States. It was the one that hit the hardest and gave birth to the economic theory that countries can spend their way out of financial trouble. Because of the over extension in the economy, prices deflated instead of going up. By spending money, the government can increase the money supply and reverse this process although inflation would eventually become a concern. This is a major reason as to why gold was made illegal to own. Our government did not want resources being shifted into gold.

World War II with its massive spending pulled the United States out of the Depression. After the war, spending was reduced that caused a recession. The Marshall Plan killed two birds with one stone: It helped rebuild Europe and also eased the United States out of the recession by spending at a level that was considerably lower than spending during the war. This helped ease the U.S. off of the dependency from massive spending it had been on. The net effect was to encourage the idea that you can spend your way out of financial difficulty.

The mid-20th century has been the peak of United States innovation. The automatic transmission was one of the smaller examples. United States medical advances led the world from the early 20th century until today. The computer has revolutionized modern life. We invented atomic power, the most important energy discovery of the age. These are the accomplishments of an environment that private capital built up over centuries can achieve. Don’t think privately held companies are that important? England may have given up on this theory today, but the Supermarine Company built the Spitfire on a gamble (During the depression) that the government MAY have bought it. It helped save the country. This applied to other aircraft types as well. When Germany was facing defeat in early 1945, private companies (Krupp being the most obvious) held assets that were helpful in rebuilding. The PEOPLE will take care of their house better than ANYONE else will. When was the list time you washed a rental car? The economic theory that the United States was built upon is based upon human nature and the fact that people will take better care of things when they own it, or ‘have skin in the game’. We have moved away from this theory. The United States government now spends more than ½ of the entire GDP of our country.

President Carter is an excellent example of this ideology. During the election in 1976 the U.S. was in recession. When debating then President Ford, Jimmy Carter said: “The economy needs to be stimulated.” He delivered. The economy rebounded followed by a significant rise in inflation within a few years. The problem is that the basic economic theory of the country was changing.

The idea that you can spend your way out of recession and depression relies upon a basic amount of economic wealth present before the spending begins. We no longer have nearly as much wealth to draw upon as we have in years past.

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