In this three-part series, I lay out an alarming picture of how dependent the U.S. economy has become on bubble cycles. I suggest that capitalism has taken on a different and dangerous form unrelated to the capitalism of Adam Smith, and offer a way to open discussions about moving forward to a more democratic and sustainable system of capitalism.
"Bubble Capitalism" Crushes the American Dream
Forget the cresting, breaking and other visible economic waves we discern on the surface of our economy -- all accompanied by cyclical blathering of the dire necessity to create jobs and growth, and reduce debt and deficit spending.
While we blather, we're blind. The less visible, stronger undercurrents of our dying free market capitalism that catapulted us to global economic dominance with the promise of an "American Dream" along with it, has been morphing into what I'm calling "bubble capitalism." Some are calling it "crony capitalism," which is equally descriptive. It's just that bubbles are what the cronies feed off of. And it is crushing the American Dream by tipping the once-level playing field in favor of a narrowing segment of big finance and big business, aided and abetted by big government.
And let me be crystal clear. I am not whining for redistribution. I'm suggesting that if we don't figure out a way to get back to good old democratic capitalism and its level playing field, we will have a barren wasteland in our future, albeit one that will be filled with a bunch of worthless stuff (popped bubble residue), scattered across a country that will look more and more like the third world. Think about three million empty, decaying and devalued houses following the leveraged-up mortgage crash of 2008. And what about the jobs lost, and spike in the number of people living below the poverty line?
Sorry, you want nice, you probably won't hear it from me. Let's just say it's a wake-up call.
From The Land of Opportunity Where It All Began
Adam Smith, widely considered capitalism's founding father, defined free, unobstructed or manipulated markets as the necessary ingredients for capitalism. This free "invisible hand," as he phrased it, would guide balance and efficiency -- a level playing field of democratic capitalism -- with a harmonious confluence of government, business and finance all guiding us to growth and prosperity. So how has Smith's capitalism been turned on its head?
We have to start by looking at what Adam Smith, if he were still alive, would probably point to as the quintessential example of his thesis at work: capitalism's finest hour. The post-WWII economy in the U.S., lasting well into the 1970s, experienced the most explosive growth in recorded history anywhere on planet Earth.
Then consumer demand began to taper off in the early 1980s. However, the captains of industry and finance were not about to lower their growth objectives. So, to move the growth needle back up, even as competition was increasing, the magic of marketing, advertising and promoting was put into overdrive. And the shift from a production-driven to a marketing-driven economy was well on its way, spawning the most sophisticated communications and distribution infrastructure in the world, including the expansion of the retail industry as 54,000 miles of interstate highways invited the massive construction of regional malls.
Indeed, during those halcyon years -- the golden age of Adam Smith's democratic capitalism -- we were able to promise an American Dream to all who would strive hard enough to achieve it, even for those of lesser means. There was a harmonious balance of supply and demand, of production and consumption. There was also a great balance in people's lifestyles... until there wasn't.
The American Dream on the Slippery Slope of Trading Value Creation for Bubbles
Entering this new phase, greater capital would be invested in the tools of marketing to create demand and ever-higher levels of consumption. Thus, the U.S. economy was transforming itself from primarily creating value to consuming it. According to the Economic Strategy Institute, total manufacturing as a percentage of GDP has been in steady decline from about 25 percent in the early 1980s to roughly 11 percent today. Worse, the decline accelerated during the past decade, dropping some six percentage points. Conversely, consumption has risen from about 62 percent of GDP to roughly 73 percent during the same period. Further, the Institute states that our drop in manufacturing has been more dramatic than in any other industrialized economy.
Of course we knew we would lose labor-driven, basic manufacturing industries to lower-cost countries. But the good news about this was supposed to be that we would simply move up the "food chain" to create higher levels of value, such as the technology, engineering, science, and other industries requiring higher and more specialized skills and educations. It did not happen, and there are many supporting metrics and arguments as to why this "brain drain" will continue -- but there's a whole other article there.
Therefore, the famous quote of a half century ago by then-President of General Motors, Charles Wilson: "What's good for General Motors is good for the country," could credibly be replaced with, "What's good for Walmart is good for the country."
So, the real marketplace economy begins to drift into lower levels of value creation; namely, the services and marketing industries, to fuel more and more consumption, faster and cheaper, required to keep the economy growing.
The American Dream was thus stepping onto a slippery slope, in an economy that was shifting from value creation to value consumption -- which would make it more difficult to achieve the dream. And thus began a spiral downward that fed on itself, as I will explain in my next installment.
This is part one of a three-part series.