We Need a Way Out

A few years ago I read an article about the causes of war, and the author boiled it down to one basic issue: over capacity.

The cause of the Great Depression was a world-wide excess capacity; there were more goods and more labor than anybody needed. Goods were not sold and people were out of work. WWII came along and production soared, as every industrialized nation made things for the sole purpose of destroying them, and destroyed a huge chunk of the labor force as well. After the war it took probably 10 years for that excess capacity to reemerge, and by then we were fighting the Cold War. We weren’t actively blowing things up, but the rapid technological advances made weapons systems obsolete before they were used up, demanding replacement.

The conflicts in Korea and Vietnam (which basically kept us in an active shooting war for much of the 1960’s) didn’t hurt on the excess capacity front either.

It was also in the 1960’s that government started its massive expansion with LBJ’s Great Society, using government to expand the demand for labor, trying to control the unemployment rate through government spending. Nixon, Ford and Carter kept the program, as did Reagan, although Reagan also added military spending, increasing the growth rate of the deficit at the same time. Bush, Clinton and Bush also kept increasing the size of government, at all levels, keeping unemployment low and absorbing the increasing amount of women entering the workforce, as two income families became the norm instead of the exception, to deal with the higher levels of taxation.

Three things I could go into right now are how Reagan’s defeat of the Soviet Union decreased the risk of all out war, especially a war that we would have spent generations recovering from, instead of a decade. And why the Chinese (and other countries) are so readily buying our debt- it’s to keep the American consumer buying and the world production going. The third thing is the irreparability of modern goods; it also keeps over capacity down as more goods are made to replace goods that have ceased to function. Think about too, why we have gotten away from returnable bottles- because more labor is required to recycle and reproduce a bottle than is required to wash and reuse one, again reducing over-capacity by requiring more labor and production for the same end result.

This also lead to governments trying to limit manufacturing, usually through environmental laws, and in the US we saw a push towards a service economy, as government tried to push us out of manufacturing completely. This made us even more dependent on consumer spending as our sole economic engine; and right now the engine is sputtering.

Here is the crux of the matter: it has always been war that has dissipated the excess capacity, and we are suffering now from a world-wide excess capacity, particularly as military spending falls. How can we dissipate the excess capacity without a war?

Think about it this way. The manufacture of a plane or tank for the sole purpose of having it destroyed is a waste. It also eases over capacity. So, we need more waste in the system in order to dissipate over capacity, which means more government involvement. More regulation in manufacturing and service professions; more Federal and State regulations that will need individuals at each employer to assure compliance, and more federal employees to monitor the regulations. This is how we have been dealing with excess capability for 50 years.

And now that method is starting to fail. Debt has increased to a point where it is unsustainable, and borders on unrepayable. Governments cannot increase in size anymore, as the funds are starting to dry up that were used to pay the workforce. What options do we have left?

It was inevitable that we would reach this point. No one has dealt with the excess capacity issue in 50 years. We just kept kicking the can 4 years further down the road. Although I do think some attempts were made to burn off our excess without the world-wide war it took to solve the problem in 1915 and 1945. The reunification of Germany was one attempt, and a percentage of world product went into bringing the former East Germany up to Western standards. The first gulf war was another, as large portions of production went to rebuild Kuwait. Now we are burning excess capacity in Iraq, and maybe Iran soon.

We aren’t so much destroying goods as we are rebuilding the world to modern standards, one country at a time; kind of like we used the Marshall Plan in Europe in the ‘40’s and ‘50’s. Will it be successful?

Maybe, if we can get the government out of the process. If we can get Iraq (and Afghanistan) rebuilt without too much additional government debt it may work. The secret is not taking funds out of the economy that individuals can use to restart the consumption engine. As long as government is confiscating wealth, both through excessive taxes and excessive debt, then the individual doesn’t have the wherewithal to become a consumer.

I for one hope we can do what every other generation has failed to do; find a way to reduce over capacity without a world-wide devastating war. History doesn’t show us a way; we have always fought our way out of a depression. So although I hope we can do it this time, I’m not holding my breath.

ADDED- I hope this doesn't come off as some tinfoil hat conspiracy post, but think about this. Which would you prefer: that I am a tinfoil hat idiot, or that the world leaders ARE working together to avoid another world war?