Size Doesn't Matter

As a coda to yesterday’s blog, I would argue that the main reason that our economy as a whole has become so big, so international, so interconnected, is because it has been so relatively safe and so relatively stable for so long. Since the Great Depression and since World War II, American economic behavior was consistent, reliable, and smart. It had a fine balance between risk aversion while allowing for enough risk-taking that innovation remained robust. That behavior came about as a result of decades of fairly large economic swings, previously called “panics” which were the hallmark of the 19th and early 20th century business cycles.

The Depression demonstrated the extreme consequences of leaving the markets to operate without controls on extreme behavior. Additionally, tax policy after WWII encouraged wealth creation up to a point, then made it more beneficial for the wealthy to keep money in the stream of commerce rather than in their pockets. Finally, labor policy assured that workers had enough money in their pockets to buy the products they made. These factors effectively created the modern middle class, a class which requires stability and reliability in economics in order to flourish.

That system began to loosen a bit during the Nixon years, with the resultant economic distress of the 70s. The trend towards reversing tax and regulation policy back to a 19th century model accelerated during the Reagan years, a period which also saw the denigration of the average worker by attacking the unions which had built the relationship between management and labor enabling the growth of the middle class. At the same time though, credit availability expanded. That trend continued until the GW Bush administration at which time all regulations were removed or went unenforced, and credit availability exploded. Fake money based on no standards flooded the economy and now that the credit has dried up we are seeing what that flood has washed away.

A generation of conservative economic policy has destroyed what controlled liberalism built two generations before. It is no longer safe to be big much less possible at the moment to grow that big. Until the controls are put back in place and the mess cleaned up, we will become a shadow of our former economic selves. If we don’t pull it together faster than other nations we will become a second-rate power. And we have no one but ourselves to blame for it. We will be the shame of our children. Size won’t matter in a place that can’t be relied upon to manage it properly.