The Great Recession
Introduction
The initial cause of the current recession isn't what you think. How is the U.S. economy going to recover? What steps need to be taken? Before these questions can be answered, we need to take a holistic look at the current situation, our past recessions, and other outerliers such as the aging boomers. So lets get started. I should warn you, this is a long read, but well worth the time. Be sure to check out the PDF if your a visual person.
History shows that the Great Depression, and the events leading up to it, are very similar to our current situation. First, look at the presidents in office just before both economic declines. Under both Bush’s and Hoover’s tenure, the U.S. had a dramatic increase in home foreclosures. During the first six years Bush held office, there was a 45% increase, and a 102% increase in the final two years, compared to an 84% increase in Hoover’s only term. More importantly, the average income of Americans in the bottom 90% of wage earners decreased by at least 32% under Bush and 38% under Hoover. Also, income inequality, measured by the ratio of the top 10% of wage earners compared to the bottom 90%, increased dramatically during both presidential terms. The ratio increased from 7.1% in 1928 to 7.8% in 1932 under Hoover, and from 6.8% in 2001 to an outrageous 7.9% in 2006 under Bush, the year the Center For American Progress study was conducted. In addition, both presidents’ economic recovery policies were also almost identical. Both men asked businesses to voluntarily coordinate amongst themselves to influence the economy, rather than using direct government intervention. They also elected to not offer direct assistance to those in need, instead they directly opposed it. They also offered credit pools for businesses to help protect them from the downturn. Both Bush and Hoover either ignored or dismissed the warning signs, which I will outline. In Hoover’s defense, missing the signs may not have been entirely his fault since they had never occurred before. Further, Both Bush and Hoover took steps to either deport and/or restrict Mexicans from immigrating to America, which is a key signal I will discuss in detail. Finally, both Bush and Hoover took steps to inhibit certain forms of new energy – Hoover passed prohibition, which eliminated ethanol, and Bush refused to pass any bills that promoted renewable energy. And a final note not to be underestimated, Bush and Hoover were both voted in during, and were part of, what is known as an Idealist generation, who's members end up embroiling the nation in heated debates on social issues as they try to enact their own personal morality, belief systems, and agendas through the political process.
Similarly, Franklin D. Roosevelt and Barack Obama were voted in by Civic Generations, discussed later, who denounce Idealists using the political process and government to impose Traditionalist values and ideas on American society. Also, both inherited a recession with massive foreclosures, lower average wages, and rising unemployment. It is too early in the current recession to make too many comparisons between these two presidents, but it does look like Obama is following a similar path as the FDR administration, by providing immediate relief funding for public works projects, supporting Unions, increasing government spending, and giving subsidies to those who are unemployed. In addition, both FDR and Obama took on the remnants of war and the debt that comes with that responsibility.
This high-level history review provides a a brief overview of the current situation and the similarities to the Great Depression to set the context for the discussion that follows.
Causes or Results?
During the Great Depression, as well as in the current recession, economists believed that foreclosures, massive bank failures, and a dramatic drop (or “crash”) of the stock market caused the decline in the U.S. economy. As we know, recession precedes depression, although economists can’t seem to agree on what the exact causes are and what importance they play in turning a recession (or “normal business cycle”) into a full-blown depression. Economists argue over what plays a larger role: Failure of the free market or government not regulating the money supply, interest rates, and/or preventing bank failures. The problem with relying on economists is that they tend to rely on things such as GDP, housing starts, and price of gold, all of which focus on the past. These also happen to be items that can be easily combined into a mathematical equation. What economists struggle with is the ability to see, or take into consideration, the average American’s thoughts, fears, education, and progress, or things that can't be counted. Some examples of things that can’t be easily counted that can indicate that a major recession or depression is looming are lawsuits filed by established companies that seek to block competition or progress (RIAA, AP), U.S. citizens complaining about Mexican immigrants taking their jobs, shifts in the way products are brought to market or the way services are performed (the “economic circulatory system”), and a dramatic shift in political and moral beliefs. Not viewing these factors as important, or refusing to consider them, results in an inability to see patterns that cause depressions.
I propose that both during the Great Depression and in the current economic climate, the bank failures, foreclosures, falling interest rates, decreasing value of money, and so on, were not the causes, but were either very small factors, or actually results of the depression, seen only after the real cause or causes were set into motion. An analogy is a virus causing high fever, which eventually causes dehydration. The high temperature did not cause the virus, but contributed to the dehydrated state of the infected person, thus contributing to the depressed health of the individual. And like the flu that brings a fever and chills, recessions and depressions bring bank failures, which end up bursting speculative bubbles. These speculative bubbles don't cause the depression, they just expose who (or what) was over leveraged and industries that were barely hanging on to begin with. If you look back on the 20+ recessions and/or depressions that the U.S. has been affected by, almost all were accompanied by bank failures. Also, a large percentage of them were, according to economists, caused by some form of speculative bubble. But, in a recession or depression, bank failures are almost guaranteed, because the entire banking industry is one big speculative bubble. Banks are only required to keep a portion of one dollar for every ten they loan, so in the banking industry it’s business as usual to take large risks without much backing. Plus, they are FDIC insured. Today, institutions exist like Citi, that are more sophisticated than banks and even bigger risk takers. Unless banks are heavily regulated moving forward, speculative bubbles will remain. Even then, I believe that recessions and depressions will still occur, and banks will go out of business because nobody, especially the larger banks, wants to loan money to anyone when things are tight. My research illustrates that the current recession was not caused by home foreclosures or AIG. In addition, I believe that that all the industries that are struggling to survive were not victims of the recession, but directly caused it.
Generational Factors
In the US, every 40 to 80 years a Civic Generation (or “Joshua Generation”) appears that looks to re-energize social, political, and government institutions to solve neglected national issues, usually by dramatically expanding government. The switch in power is gradual, and there is usually a generation between the Civic Generation and the generation currently in power. Take Generation X of our time. This generation may be a transition generation because they may be divided on whether they are Idealists or Civics, or old vs. new. Those born in the early years of Generation X may lean toward the older ideals than those born later. The current economy has been moving more and more towards businesses based on things like online news and entertainment, open source, social networking, energy drinks, lattes, video games, high mpg cars and anything “green.” It is these middle generations, such as Gen X, that may want set the new direction for the economy and belief system, but may not have the numbers or power to make the shift. Apathy is also a factor…they may not be fully devoted. It’s the next generation or two, currently Generation Y and the Millennials, that combine to push the changes over the edge and gain power. It is this Civic Generation that feels they can make a difference through the government and political system, but not by circumventing it. They know and understand that you can’t achieve real change unless you take over the political system from the inside. These Civic Generations are catalysts for change, using community, socialization, and the political system to their advantage to further the advance of their more modern morality. They understand that if you don't use the political system, stopping just at the socialization step, change will only be temporary at best. Therefore, I consider Civic Generations to be the first key contributor or cause of a recession becoming a depression. This may not be preventable, but this isn’t necessarily a bad thing, because it can be viewed as a rebirth or new growth.
Once the Civic Generation becomes strong enough to dictate the outcomes of elections, essentially mandating which candidate gets elected to office, it signals the last nail is in the coffin for the old political system and the old economy. This signals to both national and international governments and businesses that the old guard is no longer in control and that those in power, both politically and fiscally, have dramatically different belief systems, social duties, and preference and tastes in products and services than the Idealist generations before them. This is more than just a party switch, Republican to Democrat, because once the younger generation has control, it will be 40+ years before any dramatic change comes again. And, as in the past, the Civic Generation will eventually split apart, but the two factions will have more in common than they do with the Idealists. This “changing of the guard” is when you see oddities (like we are seeing today) such as older Congressmen trying to speak slang, dance, and use youthful products, like Twitter, to fit in. This signal, the change in power, always wreaks havoc on economies, because industries, businesses, and their related shareholders either stop, slow down, or pause to take stock of their investments to see if they’re aligned with the new direction being dictated to them. As a result, when we have an election with a large, deep, and stressing fracture between the two parties, you will see a pause or decline in business and the stock market, as people wait to see if the country is taking a step toward progress, or a step back toward the Idealist status quo. And when the base of the economy is pulled out from under the more established, older society, we end up with a recession. I believe there are several reasons for this.
The chart above is the working age of the US population by generation, which shows the projected years at which each generation will hit retirement age. First, notice that in roughly 2008 or 2009, the majority of the pre-Baby Boomers will be retired from the workforce. This indicates that the Baby Boomers have lost mentors, fiefdom leaders, or colleagues that were probably happy with the status quo or the old way of doing things. With all pre-Boomers retired, corporations lost a lot of supervisors, managers, and directors, or those in power positions. This also indicates that Baby Boomers are all starting to hit retirement age, or are in the “maintenance mode” of their careers, just wanting to last until retirement. Take notice of the flat line from 2010 to approximately 2027. I believe that this indicates that the “maintenance mode” Boomers, who probably aren’t aggressively climbing the corporate ladder anymore, will not be taking many risks in the corporations they work for so they can ride out the remaining few years until they retire. Understandably, they don't want to risk losing their jobs. But the impact is that the industries and businesses they are leading will also likely be risk averse, going into maintenance mode like their leaders, and thus staying entrenched, not innovating.
Like the pre-Boomers and their age-appropriate industries, companies and brands, which have had significant declines in the past few years, Boomers’ industries, companies, and brands revenues and market-share will start declining as well. As one example, large newspaper publishing companies are disappearing daily, just like pre-Boomers are from corporations. Unfortunately, newspapers and magazines soon are becoming irrelevant, as the Internet and other forms of media take their place. Notice that in 2018, Generation Y makes up half the workforce. When combined with Generation X, they will own 70%+ of the workforce, so their 70% take of the available income, which drives the economy, will dictate what products, brands, businesses, and industries will be viable. Also notice that this 2018 date is exactly 10 years from 2008, the year 99% of pre-Boomers left the workforce, thus the decline. It is not a coincidence that we are seeing pre-Boomers leave the workforce, traditional industries decline, the rise of the Civic Generation, the ousting of Idealists, and the rise in new industries, and it will get worse the next 10 years. Remember the the Great Depression lasted 10 years and was also at the point where the Missionary Generation, an idealist generation, and the Lost Generation, a reactive generation, were retired or nearing retirement. In the 1920's, the country was led by an idealist, Hoover, just as recently our country was led by Bush, Baby Boomer (idealists). As was then, the United States will never be run by another idealist for at least the next 40 years.
Power Shift
So how did economists not see this coming? That’s what the GDP and unemployment rate should indicate, right? First of all, these indicators are after the fact, so we may not see a meaningful change in GDP or unemployment rates until much later. Consider that when the economy starts to falter, unemployed people will likely shift to new, lower-paying jobs, companies may reduce prices to steady revenue streams, and shareholders need time to de-invest in a company or industry to make strategic moves to maintain higher returns.The first likely step that corporate boards and management teams make during a shift from an Idealist to a Civic Generation is assessing if they can adapt their current business model or product line to align with the Civic Generation’s beliefs, lifestyles, and preferences. It takes time to convert products or change branding, and it’s not something that can be done overnight. (Ask GM.) More importantly, it takes money, so companies must maintain production to generate revenue to fund these changes. Therefore, companies, with products or brands targeting older generations, have been struggling to adapt and didn’t anticipate the importance of the Civic Generation were probably caught off guard. So, they must immediately reduce costs, usually through a reduction in workforce, to generate the revenue required to make these changes. Imagine entire industries following suit, which creates massive layoffs and unemployment, which contributes to reduced consumer spending, which begins the downward spiral towards recession and depression. Another possible scenario is where shareholders and management realize that there is no way for them to exist under the new economy, so they reduce opex and capex costs to give the illusion that they are an efficient and viable business, to continue to attract investors or stay in business long enough to jump ship or retire. And those companies who unfortulately made heavy investments in expansion just before this switch in power have no choice but to close retail outlets or file for bankruptcy, because they are too leveraged toward the old economy and Idealist preferences to make such dramatic changes. Some may argue that banks’ lack of money, or their unwillingness to loan money to businesses, has caused the current economic decline, but I say find me a viable, healthy, self-sustaining business in this scenario. Instead, I propose that the majority of the struggling industries in the US were already in decline—financially, in mindshare, and in market-share—with the Civic Generation. It should come as no surprise that Civic Generation isn’t only impacting business and politics. For example, this generation is much more environmentally conscious than the previous generations were. Should they decide to push for energy changes, the economy will take an even lager hit, initially.
As was evident during the 1930s, during the Great Depression, it can take up to 10 years for this shift in power to be complete, including the change in societal morals and the economy. This 10 year delay is due to how entrenched US businesses, industries, and workers are in the past, which influences our economy, and how many idealist and reactive generational members their are in the workforce. Factors also include how close to retirement or death those (Missionary Generation and Baby Boomers both idealists) with the power and money are, and how willing, capable, and prepared the previous generation (Lost Generation and early Generation Xers) is to accept or adopt change. The rise of a Civic Generation signals that an end is near for those currently in power because their money and/or political status was based on the old economy, social and moral values, and industries. This signal ushers in a new era of change. This scale of change brings fear, anger, and frustration, and sadly, violence often follows. Traditionalists (idealists) may feel as though the life they know and love is slipping away, or leaving them behind. This is especially the case when idealists are so close to retirement and may not have another idealist in office in their lifetime. Each day they are becoming more and more the minority and powerless, whether they like understand it or not. For instance Rupert Murdoch doesn't have a clue how irrelevant he and the newspaper industry have become, glaring apparent from his quote, “We have been at the forefront of that debate and you can confidently presume that we are leading the way in finding a model that maximizes revenues in return for our shareholders… The current days of the Internet will soon be over.”
Traditionalists, as the name suggests, approach life very conservatively, so they usually are late adopters (laggards). This contrasts with the Civics of today (Joshua Generation or Prophets), who are usually early adopters, thus the underlying problem most businesses as brands can't target both. For the past 30 years, many businesses have not altered their products or continued to design products focused on the previous generation’s (your parents and grandparents) preferences, such as Ford and GM with trucks, SUVs, and cars styled and built for Traditionalists. Many of these businesses are suffering today because they are facing declining market share and revenue and are now trying to play catchup. Additional examples, of entrenched companies and industries, are the media industries, including newspapers, magazines, and music labels that haven’t accepted or adapted to online business models fast enough, entrenched software or technology companies not moving away from boxed software to open-source technology and web-based applications, and long distance carriers and wired phone companies who haven't switched to broadband. This is understandably threatening and scary to Traditionalists. They are seeing everything they grew up with change or disappear, taking with it jobs and security, leaving them with little knowledge for the new jobs that are available, and lack of comfort and familiarity with the products, services, economy and government of the future.
It is also important to note that this shift in power has happened before, and that not all generations of change have been driven by modern or liberal morals and belief systems. In the past, conservative generations have driven change, for example Traditionalists in 1828 and 1896. Andrew Jackson's democrats gave rural traditionalism their first victory in 1828, when the country was divided over slavery, which lead to another downturn and the Civil War. Then, in 1896 the industrial-age companies and their urban workers aligned with agricultural workers to help William McKinley to victory. Eventually, blue-collar workers and farmers could not find a way to share the industrial revolution, so the farmers lost that struggle. In 1932, the GI generation won a commanding victory, putting FDR into office. Then again in 1968, the Republican Traditionalists elected Richard Nixon as their president. Also, not all Civic or Idealist shifts cause recessions or depressions, because the shift must be accompanied by one or two other major events or changes. However, the two largest Civic Generations were the GI generation of 1930, and the Millennial generation of 2008, something that will become important.
The Signals
I believe that there are several key signals that indicate a recession will become a severe recession or depression. Further, a few of these have appeared over the past two or three years, indicating we were headed for a severe recession or depression, that we also saw in the 1930s. I question why economists and government leaders didn’t see this.
Competition for Jobs
First, similar to 1928 just before the Great Depression, approximately two or three years before our current recession, blue collar workers have been complaining that Mexican immigrants are taking American jobs. This complaint was not new, but in 1928 it was so overwhelming it caused Hoover to deport 500,000 Mexican migrant workers. Look ahead to 2008 when Bush erected a wall between the US and Mexico and deported an untold amount of Mexican immigrants to address similar complaints. These rumblings of illegal aliens taking American jobs were the frustrations of lower-income, blue-collar workers who found it difficult to find employment and/or find employment that pays a decent wage. I believe that this is not something that should be brushed off lightly, but rather should be viewed as a key signal that trouble is on the horizon. The current argument about undocumented workers taking American jobs started in early 2006, long before any signs of a recession appeared, according to economists…just as it happened two years before the Great Depression started. See the following article by Lou Dobbs.
Immigrant workers aren’t the cause of the lost jobs or wage reductions. Instead, I propose that companies aren’t hiring due to other factors, such as the proliferation of the Internet and the new Civic Generation’s preferences driving a lack of interest in current products, brands, and traditions. The Internet is revolutionizing American business, by reducing the number of required workers through process efficiencies, or replacing established American businesses altogether. The current Civic Generation’s preferences, which are dramatically different than those of pre-Boomers and Baby Boomers, are at best, stopping the growth of Idealist-entrenched companies, and at worst, putting them out of business. Consider old U.S. auto industries, newspapers, magazines, the movie rental industry, and the music industry. This shift pushes America's blue-collar workers into unemployment or reduced wages, or forces them to take new jobs without adequate skills (technology-focused). Those companies with products and services that are branded, marketed, and aimed at Idealist generations are not growing, so they aren’t hiring. Instead, they are likely reducing costs, by reducing employee count, using low cost labor, or shipping manufacturing overseas. Or alternatively they may be dropping products or product lines, which in turn leads to cutting jobs. Without the right skills, the resulting career changes forced on these furloughed blue-collar workers are not parallel moves, but typically demotions with salaries difficult, or impossible, to live on. When someone who was once a supervisor or manager is forced to take a job at a retail outlet, in food service, or other manufacturing or manual labor positions where undocumented workers may also work, they may direct their anger or frustration toward the illegal workers. Another consideration is that low- cost workers (regardless of ethnicity) have worked in older industries for decades, Today, technological progress and a shift towards a service-based economy have resulted in fewer jobs and those that are available require more education. What does this all mean? More and more people are competing for fewer jobs. Thus, blue-collar workers are pinched off in the middle and are looking to blame someone, and immigrant workers are an easy target. I believe that this is a significant sign of change, likely the first that a decline is coming. However, neither the Bush or Hoover administration recognized it. It will become extremely important for future administrations to apply systems thinking, identify patterns, and interpret these seemingly unrelated events strategically to enable them to see them as part of a bigger picture.
Energy
The second signal can also be considered an important event: The introduction of a new energy source. This alone can bring an economy to a stand- still, but when included with several other events, it can be catastrophic. In 1928, we saw the GI Generation adopt urban lifestyles and new energy sources, moving away from coal to petroleum-based heating elements and gasoline. The introduction of new energy sources, matched with the young GI Generation’s unbridled adoption, had a negative impact on the U.S. economy, again similar to what we’re seeing today.
During the early 1900s, oil was adopted as a new source of energy and by 1923, the uptake of oil as fuel, and especially as a heating element, was overwhelmingly adopted by more progressive individuals and companies. As an example, it was reported, by an unknown source that in 1923, a manufacturer of oil saw his sales in New York alone increase 500% from the year prior. The reason? Oil as a heating element was easier to handle, gave an even temperature, and was cheaper. As another example, in 1923, the Ritz-Carlton Hotel saw a $25,000+ savings in the first six months it used oil as a heating element, versus coal. So by 1931, oil was selling for .10 a barrel. In 1947, annual consumption of oil had surpassed coal, and would end up retaining that title for almost 75 years. By 1950, there was an orgy of oil consumption, and 1/3 of all oil consumed globally was by the United States, which only accounted for 6% of the world’s population.
As you can see from the chart above, since 1975 oil has had roughly double the consumption of coal. Also, during the late 1920s, carbohydrate and vegetable-based ethanols (such as corn) started making progress. In fact, a coalition of scientists, farm leaders, and industrialists came together to promote a carbohydrate economy, which was soon to be shut down by Hoover’s prohibition, which set the ethanol industry back almost 14 years. Some may debate this, but it’s my opinion that prohibition was a disguised effort by the oil industry to shutdown their competition. For those not convinced… in 1906, with the help of Theodore Roosevelt (one of oil's most prominent critics), Congress finally freed industrial alcohol (ethanol) from a burdensome $2 per gallon excise tax. The cost of oil at that time was less than .25 a barrel! After that, the ethanol industry quickly revived and made a rapid comeback, only to be killed off again in 1919 with Prohibition. Also in the 1920s, oil prices were peaking, so oil companies lobbied Congress to grant them depletion allowances. This led to a discovery of large new oil reservoirs, driving prices very low. So like OPEC now, facing falling revenue, oil companies asked the government to help stabilize their prices, and supply restrictions were put in place. When the Roosevelt administration suggested public-utility style regulation of the oil companies, to limit the rate of return, oil companies decided to back the Connolly Hot Oil Act in 1935, which gave states the right to prorate, restricting supply and competition. The US fuel supply had clearly become a political playing field. And this wasn't just fuel we are talking about…oil and carbohydrates would also be used to make the first plastics and rubber, such as in Ford automobiles.
The economy in large part is driven by energy. Without energy, there would be no jobs. And without jobs, no economy would exist. Energy, fuel, and heating elements drove everything in the late 1920s and early 1930s. Energy affected everything in daily life, including politics. The three sources of energy were fighting for the power position in the early1920s. Coal was, and had been, the king of the hill. Everything ran on coal (steam)… tractors, ships, trains, automobiles, and furnaces. Then came the rising star of oil (and gasoline)…with its low price, easy transport and storage, and wonderful usability. It’s hard to drive a car around with a coal tank and steam engine. Finally came the carbohydrate fuel, ethanol, which was fairly cheap (except for the $2 a gallon tax, which would eventually be removed, but not before it destroyed the farming industry). Today, it’s clear who won the energy battle. In 1920, gasoline became the fuel of choice, and every business that relied on the shipping or transportation of goods and services was turned on its head. Take a few minutes to think about the magnitude of this…the effect this had on almost every American industry and business.
Does any of this sound familiar? A very similar scenario is playing out today in the battle between oil, natural gas, and nuclear energy vs. renewable energy. And we have been seeing the same kind of political battles with coal, oil, and renewable energy over the past five years. The Civic Generation, which are also the most green voters, elected Obama. I expect our economy to get worse when renewable energy becomes a reality. Renewable energy won't have quite the same effect on the economy as oil and gasoline did in the 20s and 30s because it doesn't improve transportation, but it does provide cheaper energy. This will change the utility and oil industry, which will cascade down as it did to coal workers in the 1920s. Ask any CEO or general manager of a utility and they will tell you that a quick move to renewable energy will put them out of business, which is the same issue coal-related businesses faced in 1920.
Progression
Though the actual change in energy sources had a direct impact on the economy, there was also something going on under the surface. This something was progress. Progress that allowed any person to make a livelihood…all that was needed was the will to succeed. By 1928, the U.S. had a progressively growing new economic circulatory system that was replacing the old, slow, limited, minimal-coverage system, which was a mixture of trains, steam power and draft animals. This progression to oil and gasoline affected the U.S. in the 1920s, 1930s, and now, and can be compared to the progress we are seeing today, brought about by the internet and high-speed bandwidth.
As late as 1890, 40% of the Unites States’ citizens were farmers or farm laborers. The progress brought on by oil and gasoline, was one of the most significant shifts in United States history: The shift between muscle and machine power. Horses, mules, and other draft animals were the most important tools to farmers, well into the first half of the 20th century. In fact, the number of draft animals in the United States continued to rise until about 1920. Along with gasoline came the introduction of mass produced tractors and automobiles, in the 1920s. Immediately, farming related jobs were cut from 40% to 25% and by 1930, roughly the start of the Great Depression, it was down to only 20%. As we know now, this decline in farming jobs would not level off until 1970, at which time it was roughly at 4% of U.S. jobs. The decline was fast and steady.
Farming data, before and during the Great Depression
How Changing Energy Demands Affect the Economy
By now you might be thinking, "What happened to all those farm owners and farm laborers?" If not, you should be. Obviously, some died and others retired, but what about the others? And what about those generations of rural families who knew nothing else but farming? Therein lies the problem. It took roughly 10 years, from 1930 to 1940, for those farm workers and farm worker’s children to find work in other industries, contributing to high unemployment numbers and fueling the depression. But farming job losses didn't single-handedly cause the Great Depression…there was more. The increased usage of gasoline, as mentioned earlier, caused a decline in the need for railroads and railroad workers. As you can see from the chart below, the trucking industry growth from 1920 to 1940 matches that of oil consumption.
This new fuel availability shifted the industry, which changed the entire economy. Instead of large companies using only railroads for transporting goods, they could now use independent truck drivers. The automobile had combined speed and range of a train, with the flexibility of personal transportation, like a horse or bicycle.That meant that anyone with a car or truck could transport goods and services, which back then, were probably short town-to-town or intrastate deliveries. Imagine the impact of this change on the established and entrenched railroad industry….it decimated it, reducing the need for the railroad, and along with it, its employees, suppliers and financiers. Now imagine 10 years later, after a steady decline in this foundational industry, the magnitude of the impact this event had on unemployment, and the economy, and the loss of what had been the fabric of American history and business. This can be compared to losing the auto industry today, because a major cornerstone of our economy would again disappear.
For example, from 1920 to 1929, railroad passenger miles traveled per capita fell, decreasing from 40+% right before the beginning of the Great Depression. During this same period, national parks saw a 3 fold increase in the number of visitors and of those, approximately 90%, came by automobiles. Just prior to 1930, when the Great Depression started, there were almost 3 cars registered for every four households (roughly 5.0 million autos and 6.5 million trucks on farms). Automobiles allowed those in rural areas access to the city and it also opened the door for creation of the suburbs. To what extent did automobiles have on the U.S. economy? Total personal consumption expenditures, related to automobiles, for such items as tires, parts, parking, storage, insurance, and gasoline, reached 6 billion dollars or almost 8% of the total available.
So with decreased need for the railroad, by 1921, the price of coal was $3.35 per ton, but from there it continuously declined and by the 1930s, it was roughly $2.00 per ton. This further contributed to the economic decline. On top of the already reduced need for railroads due to the proliferation of the combustion engine and gasoline and the skyrocketing growth of the trucking industry, coal shipments via train were further reduced, due to the loss of market share. The 1930s also saw several coal mines close, throwing those workers into unemployment and beginning the decline of another major industry that had been America's only major energy source (besides wood), for years.
But some capitalized on the change. Ford took the chance and built cars and tractors that ran on gasoline in 1920, and in the 1990s, Toyota jumped on the opportunity to build battery hybrid cars. Now, think about the economic growth and new industries automobiles created. For example, parking attendants didn't exist before cars existed. Cars enable family road trips, which sparked the need for more restaurants on the road, which require cooks and waiters to serve the food, and so on.
The New Information Age
Today, just like in 1920, there is more at play than just changing energy demands. In addition to the energy progress that will shift the power in the energy industry, something larger is looming. Our current economy, whether we like it or not, is now facing a barrage by the internet, and more specifically, high-speed bandwidth. The internet, like gasoline, is revolutionizing and modernizing the foundation our economy, destroying several industries along the way. I believe the internet is the most important factor causing our economic decline today. I realize that the personal computer and modem were invented years ago, yet we didn't see a recession or depression until now.
The reason is that the computer can be compared to the steam engine of the early 1900s—it drove an increase in productivity, but at first it was limited to a small percentage of Americans, wasn’t quickly adopted, and didn't offer anything revolutionary. Dial-up internet can be compared to coal in that it gave more power to personal computers. It increased computer output while reducing labor and operational costs. The internet did create a few new industries, but the primary benefit was increased efficiencies and new markets for specific businesses, like Barnes and Noble and online yellow pages. Also like coal, in the beginning, dial-up internet was painful to use and lacked real power, and it was very easy for the average user to hit the limits of what it offered. So, both the advent coal and the internet brought progress, but what they did not bring was the destruction, or total replacement, of entrenched industries. Only a few businesses within specific industries stumbled because of what dial-up internet offered. This brings us to high-speed bandwidth, both wired and mobile, which is the new gasoline.
There are striking similarities between the impact of gasoline on the economy during the Great Depression, and the impact of the internet on the economy today. Like we saw in the 1930s with railroad, farming, and coal, industries are disappearing before our eyes. One of the most obvious is the television industry, as broadband is stealing television viewers, and consequently television advertising revenues, at an increasing rate. As an example, according to a ComScore study in April of 2008, internet videos garnered 11 million viewers in one month. Now, compare that to Comcast’s recent achievement of 11 million viewers, which took 6 years to accomplish. This decline in TV viewers is also the reason we are seeing more and more reality television, because the cost of producing a reality show is miniscule compared to shows like E.R., which costs millions just for the actors. One can argue that the quality of online content is lower than professionally produced television programming, but apparently the Civic Generation thinks otherwise.
Other notable findings from ComScore’s April 2008 study include:
71% of the total US internet audience viewed online video
The average online video viewer watched 228 minutes of video.
18-34 year olds (Generation Y) were the heaviest viewing segment, watching an average of 287 minutes per viewer.
82.1 million viewers watched an average of 81.6 videos
The average online video duration was 2.8 minutes
As I mentioned earlier, the US newspaper industry is in very serious trouble. Like the railroad industry, newspapers are seeing a very sharp decline early on in this recession, which signals that it’s more than just a trend. Also like the railroad industry, the decline isn't just due to the recession, but it’s because a replacement has been found. The newspaper industry decline is helping to fuel the recession…not the other way around. Newspapers will hang around, but I estimate readership will be down to 15% of the highest levels within 10 years, with only a handful still in print. Also, when the newspaper industry folds so to will the magazine industry, which we are seeing now. I suspect that magazines profits may rise for a short period of roughly five years, as newspaper executives and journalist move to magazines for employment, just as farmers in the 1920's became farm laborers. This artificial incline for magazines will fade within two to four years and their fate will then be the same as newspapers.
According to a TechCrunch report, the total print and online advertising revenues for the newspaper industry for each quarter of last year demonstrate that the end is near. (The Total column includes both online and print revenues.)
In addition, the figures of annual newspaper advertising revenues over the past five years are down. Newspaper’s online revenues still account for less than 10% of the total, which are also slipping.
Remember, the Civic Generation gets most of its news online. A recent ComScore report shows those age 65 and older are nearly 3 times more likely than average to read the print edition of a newspaper, 6 times per week. While those age 18-24 are 38 percent more likely than average not to read a print newspaper at all during a typical week.
[insert chart from comscore study saved picture in folder]
On a side note, I find this graph very interesting. I highly suspect this graph to be representative of the U.S. economy as whole. I would venture to say that that a study of online vs. television, coal vs. renewable energy, or even Obama vs. McCain would probably look very similar. I think we are a nation divided, both politically and economically, or very quickly approaching that mark.
One may argue that newspaper readership is down, but the recession has prevented banks from loaning money to newspapers, which could keep them afloat in a down economy. But it’s not just the recession that has affected readership. The following graph of the New York Times circulation shows newspaper readership has been declining for years. When the NYT became a national newspaper in the late 1990s, the circulation remained flat. Even with increased access to a entirely new market (online news), the best the NYT could do is remain relatively flat, but only for 7 years, at which point they could no longer stave off their dark future.
This graph shows all newspaper ad revenue from 2003 to 2008 and, as the more recent numbers shown above state, the rate of decline is increasing quarterly.
Comparison to television and internet.
The Silent Impact
It can be argued that Fortune 500 companies and industries become more efficient, or disappear from time to time, as part of natural economic cycles. It is when those companies and industries disappear at the same time—when a Civic Generation comes to power—that economies falter. It is the Civic Generation’s preferences and buying power, moral and social belief systems, and more modern approach to life that can bring down or alter entire industries, just as their vote can usher in a new administration.
These are just a few examples of industries that are being dramatically altered by the new economy, becoming slivers of what they used to be. Some may disappear entirely. These alterations include significant cuts in the number of employees, either through cost reductions or as operations are streamlined by going digital. Consider how many people are laid off when a newspaper goes online, such as the NYT, and how many of those are blue collar. Think about those involved in manufacturing, shipping, and warehousing DVDs and CDs. Or what about the banking industry’s reduced need for bank branches and tellers when they move to online account maintenance?
The internet hasn’t only changed the media industry. Car dealers are now faced with customers who know what other buyers paid and what the dealer actually paid for the car. Where does that leave dealers on profit and sales people on commissions? What about all those industries that used to require call centers, such as airline and hotel reservations? Think about how many accounts you manage yourself, online, that a call center representative used to manage. How many jobs have been shipped overseas because transferring calls overseas via VOIP is almost free? How many accounting jobs have been replaced, based on accountants in India answering your questions via online chat? How many telephony employees were replaced with Skype? How many cable television employees will be lost when television is web-based, or worse, YouTube TV is born?
How many Kodak employees were lost since film and printing photos are no longer necessary? How many radio stations are going to be lost when Clear Channel goes out of business due to MP3's and iTunes? How many record labels will disappear when more musicians give their music away for practically nothing, and instead make their money touring?
Now, how many of us will be affected because all those employees lost their jobs and don’t have money to spend, or can’t afford the products and services our employers offer?
To compare…if you look back at the early 1900s, a surge of patents were issued that related to inventions that directly (or indirectly) touched gasoline, from tractors, to cars, to parts of both. In 2003, software and internet-related patents account for more than 15% of all patents granted. Would you like to guess what the percentage is now? Compare this to patents in 2006 (link below), where Silicon Valley had the largest total of any, or 15,881. Both surges happened just before the economic decline.
http://whatmatters.mckinseydigital.com/flash/innovation_clusters/
I’m sure not everyone agrees that the internet is a good thing, but it does signal, as gasoline did, what the world is focused on. This will also dictate our economic future, for at least the next 30 years. Whether we like it or not, the internet is here to stay, just as gasoline wasn't a passing fad. It may be due to patent laws, a new generation, or it may be due to power and money being held by older generations, but it usually takes 20 years for an innovation to be available to—and accepted by—most of the population. At 20 years, inventions usually become so prolific that almost everyone, in industrialized countries, has access or practical knowledge of it.
On March 19th, 2009 the internet turned 20 years old. If you think the past 10 years have been a dramatic change, wait until next 10 years. Just because the internet turned 20 doesn't make or break our economy, but it does dictate where we are headed, what industries, education, and workers will be needed. More importantly, it tells us what industries, trades, education, and skill sets will not be needed or are no longer important, especially to Civic Generations.
This last point is where the problem lies. As the older generations leave the workforce… those with the experience, power, influence, and money, and the laggards who have avoided technology, with the skill sets and knowledge the were important in the old economy, we will see a gap. During the Great Depression, it took 10 years for the rest of the reactive generation to leave the workforce, for small businesses to grow large enough to employ additional workers, and for unemployed, like farmers and coal workers, and those complaining about immigrants taking their jobs, to learn new skill sets. Today, the education level is much higher and things move at a faster pace, but, its possible that we could be facing another 10 years of adjustment.
Compare Jobs & Industries Dying, Now and Then
Follow the link below and take a few minutes to play around with the chart yourself (click an area or type in a job name in the top box), but remember not to just look at the data from 1920 to 1930, but on into 1950. Looking into the 1950s tells us that the advent of oil took what had been just jobs, like truck drivers, and evolved them into what became profitable service industries. Just like today, the internet has made computer programmers into online startup software businesses. Take a look at non-oil related jobs, like “Telegraph Operator” and “Engineer Electrical.” Notice how telegraph and railroad decline at the same time, but “Truck/Tractor Driver” and “Telephone Operator” both increase.
The Argument
Some people will more than likely argue that like the different generations that grow and dye our economy does the same, meaning we don't have dramatic shifts, but rather nice slow convergences. Yes, this is true between reactive generations and lost generations, but not when civic's gain power. The main reasons for the dramatic shift is what we are seeing today, we have two polar opposites opposing each other. The reactive and lost generations are mixture of both idealists and civic generations, in the late part of the idealist generations the middle generations lean to the idealist side and early on in the civic generations they lean more to the civic side. As stated earlier, its when the pendulum swing that the hammer drops. This same pattern is directly translated to our industries and businesses, thus our economy. The old traditionalist businesses have dominated the economy and have been battling to keep new incumbents out. Wether that is through lawsuits, marketing, or straight out lying. Lawsuits from the RIAA or AP blocking technology startups and blogs, respectively. Telephone companies marketing against VOIP companies, saying things such as "You don't want a phone, from a company, that doesn't own telephone wires or employ telephone workers", thus saying they aren't a real company. Or CEO's, lying about revenue and income, in order to keep investment money and remain in business, which we saw during the first dotcom. The problem with these strategies are that they may keep new competitors out, but the civic generation keeps growing. Its this generation, which has no affinity for the products or brands that their parents or grandparents have bought. Ask any Gen Yer or younger Gen Xer if they would rather be given a customizable Scion xB or a Ford Taurus? Ask any student if they would have an Apple computer or a DELL? An iPhone or a Blackberry?
Some may further argue that some of the idealist focused companies try to satisfy both by offering multiple product lines. Its more than just the products companies offer, but also the branding, marketing efforts, and morals of the company. This is the pattern you can see in large organizations trying to figure out how to market to the Civic Generation. They struggle with leaving behind everything they have known and letting go. They are struggling to adopt social aspects. These idealist run companies still take the shotgun approach to marketing, trying to cram their products down the throats of their consumers. They also have a tendency to focus on their heritage, which is a key signal that the company doesn't understand the civic generation.
Also, companies that have dominated an industry cannot adapt or turn on a dime as they are entrenched. Take for instance telephone companies not adopting VOIP, they can't, as wired telephones are the base of their revenues. Or newspapers not moving to online content as they are entrenched as well. Also, newspapers have fought for years to keep online content out of the market, calling them fake journalism, yet now they are saying online content is viable and real. The actual underlying issue is investments as that is what keeps industries and businesses afloat. The guy in the 1920's who took money out of the mouth of the railroad by using his truck to deliver goods between his cities is like the blogger of today. Just as their were thousands of truck drivers making just enough money to survive, we have young bloggers doing the same today. Forced to take low wages because as we are seeing today most blogs are free, for now. Yes, both bloggers and independent drivers were contributing to the economy at the same time, but the problem is that these independent workers are not organized or regulated and are still seen as somewhat irrelevant. Irrelevant because of the industries they are replacing are still in business and investors are risk averse and would rather invest in the more organized businesses even if they are declining as they appear less risky.
As an example, I mentioned a quote by Rupert Murdoch earlier, and in a way he is correct, but not in the way he thinks. As newspapers move to online versions of their newspapers, and start charging for content, yes, the internet won't be the same. Not because he is so important or that the newspaper industry is so important, but rather that it legitimizes online blogs. First off people won't pay for the online version of NYT, at least not right away. So the newspaper won't be printed anymore and for the most part those companies will die, though the brand may live on. What will happen is that the money being invested in the newspapers and magazines and the money being spent on print ads will be pushed into blogs. In 10 years or less online content will, in my opinion, garner 90+% of all the money invested in newspapers, magazines, and the money spent on print ads. The same thing will be happening to the television industry as well. Yes, all caused by the newspaper industries collapse, as once you legitimize online content for one you have done it for all. When this happens for online video, television becomes less important or less profitable. I might even go as far as saying, in 10 years or less, local television will not be around (local news).
So no, we don't have a smooth transition between generations and industries, because you can't have that unless industries and business are not entrenched, thus willing to cannibalize their own products and revenue streams to further their existence. All of the industries we have discussed haven't done so but instead have focused on the short-term profits, seeking profitability by targeting the Idealist Generation. Also, employees like their organizations also tend to think short term as well. If you are a manager, supervisor, or possibly a just an employee would you be willing to leave your cushy position to work for a startup company or new industry for less pay and an possibly an unstable company in not so stable industry? Most employees wouldn't, as they are entrenched, as well.
The Solution
How do we get out of the recession, or avoid another Great Depression?
First, we can’t give any more bailout money to any giant banks, AIG, or the auto industry. We can’t bail out businesses that cannot stay in business by themselves and we definately can't pay twice what they are worth (Citi). You can argue that it’s the unions, or it’s the foreclosures, but in reality, all companies have ups and downs, but those companies that adapt, will survive. If the bailouts save these companies, they will either go out of business in the near future, or worse, they won't, and our economy will be based on weak companies that really shouldn't be in business. Keeping a company in business just to keep jobs will be nothing but a drain on our economy and our tax payers.Yes, it is a tough call, but it needs to be made.
That being said, we can create new jobs for those who are unemployed. I believe a better solution is for President Obama to fund businesses or industries that are our future. For example, instead of bailing out GM, he should to give some of this money to Tesla. It may not be a secure investment, but it sends a resounding message and creates new jobs. Another way to create jobs is by funding renewable energy and healthcare, but he needs to ensure that funding goes to the correct companies. These funds should not go to large energy companies like BP or public healthcare companies, but to cooperative energy companies and small businesses (less than $5M revenue). President Obama's message should drive home that our country’s future and our direction should be based on newer, more innovative companies. There are numerous reasons, but the biggest reason is that large companies won't hire as many people as hundreds of mid-sized companies. Chances are, they will streamline operations, half-ass it, and hire lower quality workers as its government related, right? This will also keep the money evenly distributed and spread across the country, and will also help narrow the gap between the rich and the poor, killing two birds with one stone.
Obama, through whatever channels he has available, needs to increase investments in new businesses, not traditional industries. We need larger investments in technology startups, both hardware and software, from internet enabled home appliances (refrigerators, stoves, etc...) to remote controlled utilities, all possible through the electricity grid. We need larger investments in internet security for our national security and in increasing technology usage in both state and local government offices to increase efficiency and throughput. These investments must not be large technology contracts with companies such as the IBMs and the EDSs of the world, but direct investments in smaller companies. We cannot redistribute wealth and make rapid technology advances in government, by going down the same path as previous administrations by offering large contracts to these bloated and slow organizations, but instead we need to focus on cutting edge companies and technology…and the IBMs and EDSs are far from this. He needs to invest the bailout money in Tesla, not in GM, Ford, or Chrysler. We need to invest in new forms of online news and journalism, not in newspapers are local television. http://www.economist.com/opinion/displaystory.cfm?story_id=13642689
Most importantly, President Obama has two choices spend or go into a second double dip and then depression.
Sources
If I have forgotten anyone, let me know.
"http://www.bloomberg.com/apps/news?pid=20601087&sid=ahwzaBwuNaII&refer=home"
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahwzaBwuNaII&refe...
"http://www.cbsnews.com/stories/2004/10/01/60minutes/main646890.shtml"
"http://biz.loudoun.gov/Portals/0/BEC%20Information%20Sheet.pdf"
"http://inventors.about.com/library/inventors/blfarm1.htm"
"http://en.wikipedia.org/wiki/Industrial_Revolution"
"http://en.wikipedia.org/wiki/Great_Depression"
"http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States"
"http://www.internetworldstats.com/am/us.htm"
"http://www.eia.doe.gov/emeu/aer/eh/frame.html"
"http://en.wikipedia.org/wiki/History_of_the_United_States" \l "Post-World_War_I_and_the_Great_Depression_.281918.E2.80.931940.29"
