The main stream media has gone out of its way to avoid using the dreaded “D” word, “depression. Despite the massive efforts of the central banks of the world to re-inflate their respective economies, worrisome signs persist. The Baltic Dry Index, a proxy for international commercial shipping activity, recovered early this year and has turned down again. Consumer Price Indices in several countries have declined on a year over year basis. And most recently, the US Federal Reserve reported that consumer credit has now significantly contracted for several months in a row, unprecedented since Great Depression I. This current economic contraction may turn out be worse than the 1929 Depression.
Critics of this thesis have argued that we now have a better social safety net: FDIC insurance for bank accounts, Social Security, food stamps, unemployment insurance (now extended in many states) and an extensive federal and state welfare system. How could something worse than the 1929 Depression happen? What if we can no longer afford the safety net? Forces are in place today which could overwhelm the safety net. In a non-linear world it is well worth thinking about the unthinkable.
Too Many Workers, Not Enough Jobs
My analysis starts with the modern worker. US employment in the manufacturing and agriculture sector has declined steadily since 1929. The economy has shifted to services and technology. Employment in these sectors is extremely specialized. Thus, replacing the more generic job positions of 1929 are specialists like credit derivative salesman, industrial hygienist, personal trainer, health benefits lawyer, cardiologist, etc. In 1929 when the mass layoffs occurred, workers could return to family farms or move in with family. Today there are few, if any farms, to return to. Given the nature of work in large corporations, workers have moved around the country and are isolated from family and community support networks. While some recent college graduates have moved back with parents, Americans are ill-equipped to have multi generational family units living together.
Changing Nature of Work
Most importantly, the nature of work has changed. Gone are the mass factories and rows of employees digging at construction sites. Technology has lessened the need for large numbers of employees. Mini mills, construction sites, Proctor and Gamble soap factories operate with a fraction of employees previously needed. Even middle management and support staff are less necessary: computers make larger spans of control possible and secretarial and accounting function are performed by MS Word and Excel. Employers think long and hard about re-employing recently laid off workers. As one of my friends experienced first-hand, bureaucracies can be cut 20% then 20% again and they nary miss a beat.
Politicians Are Fighting the Last War
The government is still stuck in a 1950’s employer mentality. Can we implement New Deal-type of public improvement efforts such as road repair or retrofitting government buildings? How many credit derivative specialists have the ability to perform road paving or asbestos removal?
Similarly, the government is banking on new industries to be engines of growth. Is banking on this type of job growth realistic? High growth industries such as biotechnology and solar cell companies employ few and highly specialized employees. Even the modern US military needs fewer soldiers, as technology has revamped war.
The Great Depression ended when large numbers of employees were recalled by auto, steel, chemical and rubber companies to support the war effort. There is no massive recall or even new industry on the horizon to absorb the unemployed.
The Credit-Based Economy
One last area to think about: credit was not available in 1929 as it is now. We are drowning in student, auto, mortgage, credit card, home equity and every other type of loan imaginable. In a deflationary economy marked by rising unemployment and declining incomes, this debt cannot be paid off or supported. Record foreclosures are occurring. This volatile mix of limited employment opportunities, lost homes and little, if any, availability of new credit could make 1929 look like a trip to Disneyland.
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