This is part two of a four part series that ties our current economic crisis to the thirty year buildup of defense spending since the Reagan Presidency. You might want to read the prologue and Part 1 first.
Life in 1950’s America was lived under the twin fears of annihilation and depression. Annihilation because the constant threat of a Soviet nuclear attack was drummed into the populace from the day you practiced your first duck and cover drill in Kindergarten. I will never forget my first grade teachers warning that we should not open our eyes until she gave the all clear signal, for we would surely be blinded by the nuclear flash. The very idea that blindness would not be our biggest problem was not something a six year old mind could wrap itself around. The second threat, unknown to a six year old, but ever present in the minds of our parents and grandparents had been the 12 year world-wide annihilation of the capitalist economy known as The Great Depression. For economists and planners the biggest shock of the thirties had been the deflationary spiral. Excessive margin borrowing for stock speculation in the late 20’s led inevitably to debt liquidation as stock prices fell sharply. This in turn led to slowing of consumer purchasing Once demand for new products dried up, prices started to fall and the Federal Reserve was unable to stimulate demand by lowering interest rates. It was “pushing on a string”.
The almost two decades of austerity ending in 1947 unleashed a good deal of pent-up demand for consumer products, but by 1954 demand growth for both automobiles and appliances (“consumer durables”) began to flatten. That year at the conference of American advertisers in Minneapolis, Studebaker Auto’s chief designer Brooks Stevens gave a talk on how to use “planned obsolescence” to prevent another fall in demand. Heretofore products had been sold on durability and quality, and even though the British economist, Bernard London had proposed in 1932 that planned obsolescence would be the way out of the depression, it wasn’t until Stevens began touting the idea that it was embraced by American companies. What was necessary he said, was ”Instilling in the buyer the desire to own something a little newer, a little better, a little sooner than is necessary.” From this point on, from Chevrolet cars to Amana refrigerators to RCA televisions the annual “model change”, introduced in September with the start of the new television season became a fact of American life. Ironically, the one American TV manufacturer, Allen Dumont, that sold his more expensive sets based on a high quality ”5000 hour picture tube” was forced out of business by 1958.
A much greater irony rests in the fact that at the same time Steven’s idea of disposable consumer durables (the irony) was being widely accepted in the U.S., the two defeated powers of World War II were rebuilding their industrial plant on a very different model. In Tokyo a young entrepreneur named Akio Morita was building the first transistor radio for a small start-up called Sony, based on licenses he had obtained from Bell Labs. Not far away, Eiji Toyoda, had recently returned from a visit to Ford Motor’s River Rouge plant, 
convinced that his small Toyota Motor company could build cars more efficiently. He put forth to his board the outrageous idea that they sell their new Toyota Crown (left) outside of Japan, targeting Brazil and the U.S. At the same time the factories in Germany of Mercedes Benz, BMW and Volkwagen were slowly beginning to turn out cars based on a principle that they could be run for at least 150,000 miles with the original engine. So as the American manufacturing culture of durability was being hollowed out by a marketing aesthetic of disposability, our former enemies were creating a culture of quality goods that would come to have lasting appeal for publics around the world. This disparity of course would come to haunt our country to an extent unrecognized at the dawn of the cultural revolution of the 60’s.
This cultural revolution affected the ability of all business to continue to market in the aspirational style that had been the hallmark of the consumer durable business. For those companies working with the Pentagon, it was even more problematic. Dow Chemical was no longer known as the producer of miracle fabrics, but rather of incendiary Napalm weapons, capable of searing the flesh off young Vietnamese children. It would not be until 1971, when soon to be Supreme Court Justice Lewis Powell wrote his notorious memorandum to the head of the U.S. Chamber of Commerce, that business fought back. The Powell Manifesto was a call for the Chamber and it’s allies to fund a counter revolution against the cultural and political forces of the 60’s and recapture the country for the political forces of big business.
In an extraordinary prefiguring of the social goals of business that would be felt over the next three decades, Powell set his main goal: Changing how individuals and society think about the corporation, the government, the law, the culture, and the individual became, and would remain, a major goal of business.
Powell’s plan of attack was for big business to fund think tanks like the American Enterprise Institute, the Heritage Foundation and others who would provide policy papers to begin the rollback of the power of unions, students, consumer and environmental groups. Of course in the intervening 25 years since America had introduced it’s planned obsolescence manufacturing system, the lure of foreign quality goods had 
begun to catch on. By 1975, the U.S. was running an annual merchandise trade deficit, which would never be eliminated. With the election of Ronald Reagan, a full scale war against the unions began , but at the same time new thinking at the top of many corporations began to coalesce around the idea of outsourcing manufacturing to countries with lower labor costs and little or no environmental legislation. These two factors began the wholesale deindustrialization of America.
Of course the only industries not outsourced were the defense contractors. Eisenhower’s prescient warning of “the unwarranted influence of the military industrial complex” had come true. With factories in almost every state, military contractors had remarketed their closed bid contracts as “job programs” and legislators were eager to protect some of the few manufacturing facilities left in America.
Reagan had convinced us by 1984 that he was presiding over “Morning in America” and for the conservatives that Lewis Powell had urged into battle, it certainly seemed that victory was at hand. All attempts to regulate business such as passing further auto mileage standards had been beaten back and even American car manufacturers were winning converts to their new SUV’s. But there was one part of the puzzle that was being ignored, even though Jimmy Carter had pointed it out during the oil embargo. The U.S. domestic oil supply had passed it’s peak and was declining even as low mileage SUV’s were burning gas at an unprecedented rate. As we will see in part 3, the combined forces of imported oil, skyrocketing military budgets, growing trade and current account deficits were powering Battleship America towards a sea of icebergs.
17 responses so far ↓
Rachel // July 21, 2008 at 5:41 pm |
This argument is evolving well, Jon. I’m still depressed about the lack of solutions, but it’s a compelling analysis of the problem.
Rick Turner // July 21, 2008 at 8:11 pm |
This whole thing has to go front and center. I think the American public might just wake up to this argument. Middle America has the votes, and Middle America is who has gotten screwed.
Morgan Warstler // July 21, 2008 at 9:01 pm |
Let’s just start here:
The Great Depression was set in motion by the passing of the 16th amendment in 1913. While there was definitely a crazy time in the stock market, you MUST understand that when the first real boom in the 1920’s began to peter down, the federal government responded by raising tax rates OVER AND OVER from 25% to 63% in 1931 and then higher to 79% in 1936.
Simply, people who owned hard assets weren’t about to put them up as collateral for new business ventures. They weren’t going to bet on the stock market, they wanted to put their money under a mattress and hide it. Capital disappeared because the the benefits of risk were nullified.
You OWN the great depression. Its on you. We’d NEVER have seen it if we hadn’t passed the 16th amendment, or had at minimum kept tax rates sane.
Thom Dowting // July 21, 2008 at 9:40 pm |
Why no outrage?
http://online.wsj.com/public/article/SB121642367125066615-4K_l2jdjmxrSAZRs5Ii1mziroY8_20080818.html?mod=tff_main_tff_top
Bread & Circus
http://www.time.com/time/arts/article/0,8599,1824888,00.html?imw=Y
doug newhouse // July 22, 2008 at 2:24 am |
Jon– the idea to outsourse manufacturing to low cost countries with minamal environmental regs was driven by free trade and open borders–what should companies have done when faced with foreign competitors that have dramatically lower cost structures?–go out of business?–you are assuming that there was a choice by companies–there was not–my investment company has taken 5 companies to Asia and had one of our companies put out of business by th Chinese when Holloywood would not pay 25 cents for a VHS plastic shell made in our Maine factory and instead bought from Chinaat22 cents to save 3 cents!!–these are your Hollywood liberal budies who drove this company out of business–so when you want to preach about how big business screwed the US workers and messed up the US economy you should look in the mirror and ask how much more you would pay for a made in USA product? these are global forces not isolated US decisions the simple fact is that we have to much of the global pie and other countries have educated hard working populations that are willing to work for about $1 an hour–our workers will have to deal with this cost advantage for a long time unless we want to close our borders to other countries products which in my view would cause a fast and global depression—doug
Jon Taplin // July 22, 2008 at 7:20 am |
Morgan-That is certainly a novel explanation for the Great Depression.
Too bad not a single legitimate economist or historian supports your theory. I’m sure you’ll come up with some crackpot to back up your idea, but it’s not gonna wash.
Jon Taplin // July 22, 2008 at 7:29 am |
Doug- I’m not going to blame business for rationally outsourcing when Warner Bros. wouldn’t pay you the extra 2 cents per VHS shell. However, it seems to me the 10,000 mile long Chinese supply chain is going to be less attractive in a rising fuel cost environment. Doubling the cost of bringing each cassete shell from China to some technicolor plant in America probably would make up that 2 cents difference today.
The point I’m trying to make here was that in 1958 Japanese goods were known as “cheap” and disposable–American goods as expensive and durable. In 40 years we reversed roles.
Morgan Warstler // July 22, 2008 at 8:17 am |
Jon, it speaks volumes about you, that you havent seen the volumes written about the ill economic effects of massive tax rates during the 1930’s.
Look, I’m NOT using these facts to advocate having no government. Where do you think my notion of $MAX comes from?
“Lower tax rates do not mean less tax revenue.
The tax cuts of the 1920s
Tax rates were slashed dramatically during the 1920s, dropping from over 70 percent to less than 25 percent. What happened? Personal income tax revenues increased substantially during the 1920s, despite the reduction in rates. Revenues rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61 percent.
According to then-Treasury Secretary Andrew Mellon:
The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.
The Kennedy tax cuts
President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. Recognizing that high tax rates were hindering the economy, President Kennedy proposed across-the-board tax rate reductions that reduced the top tax rate from more than 90 percent down to 70 percent. What happened? Tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation).
According to President John F. Kennedy:
Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.
The Reagan tax cuts
Thanks to “bracket creep,” the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).
According to then-U.S. Representative Jack Kemp (R-NY), one of the chief architects of the Reagan tax cuts:
At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production.”
Look, this is reasonable thinking. We know there is a ceiling on how high taxes can be. It doesn’t mean NO taxes.
Read that Kennedy quote again.
Now, really think about this. In 1931, when the Depression was just taking hold, the US government decided to increase taxes from 25% to 63% – that’s CRAZY – what don’t you get?
Rick Turner // July 22, 2008 at 9:55 am |
“To a hammer, every problem is a nail…” paraphrased from Abraham Maslow.
A concept embraced by some here and many out there in America.
Armand Asante // July 22, 2008 at 1:00 pm |
@doug newhouse
“these are your Hollywood liberal budies who drove this company out of business–so when you want to preach about how big business screwed the US workers and messed up the US economy you should look in the mirror and ask how much more you would pay for a made in USA product?”
So Warner Bros. is NOT big business?
And you’re riding on liberals for doing business in a free market? Isn’t that what capitalism is about?
Why would ANYONE pay more in a market that does not reward paying more?
I’m sorry. I must be stupid or something, because I have no idea what you’re going on about.
Best I can make of it is: “You Commie bastards! You ruined America by buying the same product for less. All for a profit.”
Nope. Still doesn’t make sense. Sorry.
Jon Taplin // July 22, 2008 at 1:29 pm |
Morgan- Take the Laffer Curve nonsense over to Little Green Footballs. It’s just not true. Even the Wall Street Journal admits it was a con. Didn’t you read David Stockman’s book?
Morgan Warstler // July 22, 2008 at 1:37 pm |
Who’s talking about the Laffer curve?
Jon, READ. This is how you end up saying stuff like, “I thought you wanted to steal Iraq’s oil.”
Please stop throwingup strawmen. This isn’t about saying: Lowering taxes always raises gov revenues. I’m NOT saying that.
This is about saying: There is a breaking point where high taxes cause economic slowdown – like the Great Depression. That’s it, that’s all I’m saying. I’m not saying we are there now. I’m just saying, there is a ceiling.
Do you disagree with that?
Jon Taplin // July 22, 2008 at 2:40 pm |
Morgan- You know I agree that there is a point above which taxes can’t go. That you keep bringing this up is the straw man.
Alex Bowles // July 22, 2008 at 3:00 pm |
Jon,
Do you think this post may have gone a bit off track? It started an an examination of the social control needed to keep empire-builders (that is, foreign military expansionists) in business, and the notion that this demanded a kind of institutionalized fear.
I’m not sure that a fear of being left behind by the Jones (which Madison Avenue did a wonderful job instilling) is quite the same as the sort of fear driven by Fox News et al as cover for the ham-fisted oil grab in Iraq, or the development of the surveillance state in the UK.
Not to say there’s no connection at all – only that there is a difference between state sponsored propaganda, and the variety coming from the private sphere. Even when these two groups collude, they tend to operate in different ways. After all, the private sphere tends to focus on carrots, while the government is more comfortable with sticks.
Since we’re talking about government policy, shouldn’t we be talking about the sticks? Or did I miss the larger thrust of this series?
The Cost of Empire III-The Walls Come Down « Jon Taplin’s Blog // July 22, 2008 at 5:06 pm |
[...] July 22, 2008 · 2 Comments This is part three of a four part series that ties our current economic crisis to the thirty year buildup of defense spending since the Reagan Presidency. The earlier parts can be found here, here and here. [...]
Rick Turner // July 22, 2008 at 6:19 pm |
What if you didn’t lower spending for a while, but merely put the dough into something else? Swords into ploughshare type stuff… Certainly military industrialists can make products that would be useful to our society rather than destructive to some other society. All those rolling mills, forging machines, CNC machining centers, automated parts pickers and PC board stuffers could be switched over to peacetime use just as American industry switched over to military production during WWII. Instead of “smart bombs” make smart solar arrays. Instead of M-16s, make wind turbines.
The best way for America to lead the world would be to show the world the best life here for all. If this country had the best education, the best medical, the best economy in the world, wouldn’t others want to emulate us? But…we’re in the shitter and nobody wants to be like us, so we go and shove it down their throats.
10,000 Mile Supply Chain « Jon Taplin’s Blog // August 2, 2008 at 3:52 pm |
[...] to consider moving their production closer to the world’s largest consumer market. I have written recently about the deindustrialization of America, but the possibility of the re-industrialization of our country is a far more optimistic [...]