This is not your grandfather’s Great Depression. It’s ours, and it will scar and mold and re-shape us in its own unique way. In its accumulation of bad debt and consequent squeeze on credit, it may have similar origins to the social and economic trauma that brought us Adolf Hitler and the New Deal, Britain’s “Hunger Marchers” and John Steinbeck’s The Grapes of Wrath. But the course and the casualties and the impact of our Great Depression will be different. At the same time, its long-term effects, like those of the 1930s, may prove to be surprisingly useful, re-shaping our global economy and our social systems in fundamentally positive ways.Our Great Depression, first and foremost, may not hurt nearly as much as the original. The United States is unlikely to see the 26.6 percent decline in GDP and the 25.7 percent decline in real personal income that the Bureau of Economic Analysis calculates the nation suffered between 1929 and 1933. There will be no sad trail of farm families fleeing the Dust Bowl of the Great Plains. There will be no hobos riding the rails, and no shantytowns of homeless called Bushvilles or Obamavilles as the originals were called Hoovervilles. Indeed, there should be no housing shortages for some time, if local governments have the wit to take sensible advantage of foreclosures.
The key difference, however, is that in the 1930s most advanced countries were still composed largely of rural and industrial workers, with little property and less education. Less than half of the U.S. population of 1935 graduated from high school; barely 5 percent had a college degree. But the United States and other developed countries these days are characterized by a mass middle class, homeowners with savings and pension plans. This mass middle class has borne the brunt of the $33 trillion fall in the value of equities during this crisis, and of the associated fall of another $15 trillion in property values. Globally, the world experienced something close to $50 trillion in wealth destruction over the past 18 months. This not only represents a shocking psychological blow to the mass middle class, but is also roughly the amount of wealth produced by the whole global economy in 2006.Significantly, this depression is hitting middle classes worldwide, even in countries where the middle class does not represent the majority. The average 60 percent decline in stock markets in emergent economies like China, India, Russia and Turkey has hit the savings of fledgling middle classes whose social and political potential is both great and positive. In countries less advanced and less well-endowed than the United States, this Great Depression could look rather more like the 1930s all over again. Not so here, where it is the destruction of savings, rather than the mass unemployment of the 1930s, that may be its distinctive feature. Its prime American victims beyond the mass middle class are already becoming clear. This Depression is likely most to hurt the illegal, the ill-educated and the young in the United States, in that order. It will hurt the illegal because the 11–12 million illegal immigrants in the United States and the eight million in Europe are the cushion that will prevent native unemployment from expanding to 1930s levels. Undocumented migrants will find it ever harder to get work, then to get paid, and then to have anything like decent money. Remittances back to Mexico, which rose sharply in this decade to an annual peak of $23.7 billion in 2006, fell sharply in 2008 and will fall further as undocumented migrants flee south in droves. Mexico’s central bank expects a decline in 2008 of 7–8 percent once the data is in, which is worrying since remittances account for almost 3 percent of GDP. It will probably end up worse. A study by the Economic Policy Institute found a decline of $670 million between January and May 2008 compared to the previous year. In May alone, Mexican families received $171.3 million less than the previous year. Those who remain will depress wages for unskilled Americans, which is why the poorly educated face real trouble. The Federal minimum wage is currently $6.55 per hour, which comes to less than $12,000 a year. This is hardly an income on which to feed a family, let alone house and clothe one. In the first week of December, the U.S. Department of Agriculture reported that food stamp beneficiaries had increased by 17 percent. More than 31 million Americans now receive food stamps (the program is now known as SNAP, Supplemental Nutrition Assistance Program). The young are going to hurt because, unlike their parents, they are mostly graduating with sizeable college loan debts. The average debt of students graduating with loans rose from $18,976 to $20,098 between 2006 and 2007, a 6 percent increase, according to a survey by the Project on Student Debt. They are coming of age in a recession, and they will find that an increasing number of the jobs they might hope to get are capable of being sent offshore. A new survey by the Harvard Business School, published in December, found that as many as 40 percent of American jobs, including more and more white-collar jobs, can be sent offshore. The study, run by Professor Jan Rivkin as a class project involving some 900 students, sought to verify the earlier calculations of Princeton Professor Alan Blinder that between 22 and 29 percent (which means 25.2 to 31.8 million people) of all U.S. jobs are potentially offshorable. Based on an analysis of more than 800 distinct occupations, the students concluded that Blinder’s figures were too optimistic. They found that between 21 and 42 percent of jobs (28.4 million to 57.2 million people) were at risk—shocking numbers by almost any measure. At the same time, young Americans are likely to find that their Baby Boom elders will be fighting like cornered rats to cling to their jobs, since the sharp fall of the stock market means that fewer of them will be able to afford retirement. Eons.com, the online community for Boomers, conducted a “Financial Market Crisis” survey this past October that polled more than 450 members of the Eons.com community above the age of 45, asking how the current market crisis is affecting their retirement plans, daily expenses and personal finances. Some 55 percent of respondents said the current financial crisis would cause them to delay retirement by five or more years, and almost half reported losses of 10–20 percent in their retirement accounts. Peter Orszag, formerly head of the Congressional Budget Office and now head of the Office of Management and Budget in the Obama Administration, confirmed the trend when he told the House Education and Labor Committee back on October 8 that Americans’ retirement plans had lost as much as $2 trillion in the past 15 months—about 20 percent of their value. Public and private pension funds and employees’ private retirement savings accounts, such as 401(k)s, had lost about 10 percent between mid-2007 and mid-2008, and lost another 10 percent just in the past three months. Private retirement plans may have suffered slightly more, he added, because those holdings are more heavily skewed toward stocks: “Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working.” Indeed, an AP-GfK poll conducted in September 2008 found more than half the respondents saying that they feared they would have to work longer because the value of their retirement savings has declined. Other polls suggest that fear of medical bills is another factor likely to keep Baby Boomers from retirement. Overall, then, the Boomers seem resigned to working as long as they can, and if that means no vacancy for junior, tough. So we should not expect a new generation of twenty-somethings to start solving the housing crisis by taking mortgages on all those unsold and foreclosed homes. Most won’t be able to afford even the latest low, low prices, even with low interest rates. They’ll be dubious credit risks because of their college loans. The easy-finance mortgages of the past are going to be replaced by much tougher conditions, including steep minimum down payments, maximum loan limits (probably at 250–300 percent of annual income) and possibly also a special insurance premium to guarantee the lender against loss. And besides, not many twenty-somethings want to live in places like the suburbs of Phoenix and Las Vegas, where the housing glut is most marked, even if they found jobs nearby to pay the salaries that could justify these mortgage loans.
Loan conditions of this kind sound outlandish in the context of the past thirty years of easy money, but of course they used to be routine. We have yet fully to comprehend just how much our spending and consumption habits have changed. Between 1951 and 1983, U.S. consumption remained within the range of 60–64 percent as a proportion of GDP. Since 1983 it has grown steadily, to 66 percent in 1990, 68 percent in 1998, 70 percent in 2001, and 71 percent at the end of 2007. Were we as consumers to revert to the 62 percent level we last knew in 1982, that would mean consuming almost $1.3 trillion less than we did last year. (According to the staff of Congress’s Joint Economic Committee, that is the total amount spent on the Iraq war over the past six years.)This period of hyper-consumption since 1980 was also remarkable for the growth of the trade deficit. An analysis by Yi Wen and Luke M. Shimek of the Federal Reserve Bank of St. Louis points out that the trade deficit ran at a maximum of 1 percent of GDP until 1983. It then ballooned to 3 percent in 1986, fell back briefly toward 1 percent in the recession of 1991–92 and then began its inexorable rise to 5 percent of GDP in 2004, a level at which it has remained. They also point out that over the same period, personal savings collapsed from 10 percent of GDP in 1980 to 0.4 percent in 2006, a period when household consumption’s share of disposable income grew from 87.5 percent to 95.8 percent. Over the same period, revolving credit (primarily credit cards) grew from about $55 billion in 1980 (2.7 percent of personal income) to around $850 billion today (8.9 percent of personal income). “It is striking to see how closely these numbers match”, note the two Fed researchers, going on to list “the increase in the trade deficit ($762 billion), the increase in consumption’s share of personal income ($802 billion) and the increase in revolving credit outstanding (about $800 billion).” With heroic self-restraint, they resist the old Marxist temptation to suggest that the similarities in these figures are no accident. But there can be little doubt that their research testifies to the way that, within the space of a single generation, the U.S. public shifted from a culture of relative thrift and moderation in consumption to one of immediate and debt-funded self-gratification, with a striking taste for imported goods.11.
See Barbara Dafoe Whitehead, “A Nation in Debt”, The American Interest (May/June 2008). This aberrant era is now drawing to a close. Consumption is already declining, by 3.7 percent in the third quarter of 2008. Savings are starting to inch upward. A cultural shift appears, perforce, to be getting under way, and the tightening conditions for new mortgages will reinforce this return to thrift and shift from profligacy. It will be interesting, however, to see how and whether this trend can be enhanced by public policy. In many ways, public policy in recent years has worked against thrift. Savings have to be run down before an elderly person qualifies for a state-financed nursing home, and savings can make it harder to reduce the costs of college. Dividends on investments are taxed twice, once at the company level and again as personal income for shareholders—and it can even be taxed a third time through capital gains. A thoughtful government might want to reconsider such counterproductive taxes on thrift. This is one way, at least, in which our generation’s Great Depression might have a salutary long-term effect—a return to thrift. There are others, however, among them perhaps a return to sartorial sanity. Americans, it seems, are no longer buying many more clothes than they need. The Financial Times reported in December that an analysis of U.S. import data suggested that “the slump in American clothing sales since the summer has led to a precipitous drop in the number of overseas factories shipping to the U.S.” The number of separate suppliers fell from 22,029 in July to 6,262 in October 2008, and two out of five regular suppliers had seen their volumes drop by at least 75 percent. These are dramatic shifts in long-established consumption patterns. Others are visibly under way. Most of us have now recognized that gasoline is a finite resource, and that dear old planet Earth might have trouble coping with a billion Indians and a billion Chinese taking to the roads like Americans. If they do, the 800 million vehicles currently on the world’s roads will swell to three billion, and the current thirty million barrels of oil a day consumed by these three countries would swell to around 120 million barrels. That would exhaust Saudi Arabia’s known oil reserves in less than ten years. This cannot be. Things will have to change, and the occasion and the opportunity for change are now immediate. Detroit as we have known it is doomed; how we re-engineer the place for a sustainable future, rather than how we rescue its failed business model, symbolizes the way the economic crisis can be used rather than simply endured. Sometime over the next ten to thirty years, we will shift from a carbon-heavy to a carbon-lite economy and very dramatically reduce our reliance on fossil fuels. We will have to re-engineer our current energy, transport and probably our industrial systems. Some of the implications of this may well be useful, if we are wise enough not simply to refurnish old infrastructure but leap over it to a new technological generation. Consider our current system of energy generation and distribution, which is essentially the classic industrial system of centralized manufacturing and widespread delivery to far-flung consumers. Technology is now advancing to the point at which this system could become redundant. Thin-film photovoltaics for solar panels already point to a future in which roof tiles and wall sidings could generate domestic power. A research team at Rensselaer University has now developed an improved solar panel with nano-rod technology that can turn more than 90 percent of the available sunlight into energy, rather than the usual 60 percent. Vertical axis windmills now being deployed in homes, offices and commercial sites in the United Kingdom also point to the prospect of a systemic transformation: the de-centralization of energy production. Armed with smart meters able to measure energy coming out as well as going in and an equally smart international grid, we could transform not only the economics but also the sustainability of our energy systems. Interestingly, both the British and American plans for stimulus packages include subsidies to retrofit insulation to buildings. This may be an obviously useful Keynesian measure immediately available, but it is hardly a generation-leaping technological concept. The EU Energy Efficiency Action Plan asserts that residential and commercial buildings are responsible for about 40 percent of the EU’s total final energy consumption and CO2 emissions, and claims it will cut both by 30 percent by the year 2020 through new building codes with minimum energy performance requirements for all new buildings and all renovations. It estimates that an additional $12 billion in capital investment will produce $36 billion annual energy cost savings. That’s fine, but we can do much better. Indeed, the opportunity before us to make an historic shift in our carbon dependency would help the transition away from an economy based on consumption (and much of it on disposable items) to one based on sustainability. It would also be an economy considerably less centralized, with much less dependence on massive power-generation plants for electricity or huge refineries for retail petroleum products. Such trends might be characterized as “green”, but in another age they might well have been seen as conservative or even reactionary. Small might have been beautiful, but it was seldom seen as efficient in the carbon-heavy industrial era. The big factory and the big power plant and the big car assembly line were three emblems of the age of the giant state with its big industrial workforce and megabanks that could generate the huge investments required. A shift away from such behemoths of state, finance and industry could have interesting political as well as social effects. Some deep changes in the economic system we inherited from the industrial revolution have already become apparent. The G-7 as the symbol of global economic governance is giving way before our eyes to the G-20. The West, after more than two centuries of easy dominance, is going to have to learn to share and to embrace concepts like interdependence. The sovereign wealth funds of Asia and the Middle East have the cash that Western banks and companies need. They also have the cash required to buy up those U.S. Treasury bonds that will be floated to finance the stimulus packages the Obama Administration has promised. This is going to change more than our economic and industrial systems. The way American capital, manufacturing systems, managerial personnel and tastes spread around the world in the 20th century (as those of the British had done in the 19th century) is likely to be followed by their Chinese, Indian and Brazilian and Arab heirs in the future. Confucian values, Bollywood films, Islamic finance and haram rules of hygiene will simply be the most visible of the deep and subtle subversions that will challenge the Enlightenment universalism that Westerners, and particularly Americans, had assumed to be graven forever into the human DNA. Maybe there is a fourth change on the way, a psychological shift that ought to be familiar to most of us from our parents and grandparents. The value system of the “Greatest Generation”, those who grew up in the 1930s, was distinctive. They believed in thrift, in collective action, in the ability and duty of government to do the right thing, and in the need for solidarity and self-sacrifice. And those values, expressed in the language and metaphors of the Bible—which was perhaps rivaled only by the Constitution as their common cultural heritage—comprised the message that Franklin Roosevelt delivered in his 1933 Inaugural Address: The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men. . . . [T]here must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, and on unselfish performance; without them it cannot live.
Roosevelt’s words at the launch of the New Deal have an obvious relevance today beyond his description of “the mad chase of evanescent profits.” He evoked the traditional civic virtues that go back to ancient Greece and Rome and to the Israel of the Ten Commandments, convinced that the American people would respond to his call because he believed that their history, culture and experience persuaded them to believe in duty, in courage, in fidelity, in the conviction that there was something greater and grander than their own individual lives. The Greatest Generation didn’t just believe this; they lived it, and very soon they had to fight for it. We seem fated to have to learn their lessons all over again. So long as we are spared the kind of major war that really ended their Great Depression—not a sure bet, no matter our wishes—confronting these challenges might do us much good. It is a silver lining the hope for which, in any event, can be father to the reality.1.
See Barbara Dafoe Whitehead, “A Nation in Debt”, The American Interest (May/June 2008).