Why This Downturn May Last Longer

Or Why Depressions Happen During Times of Changes in The Mechanisms Used to Transfer Wealth

Distribution not creation of wealth makes the greatest economic impact. No matter how much you grow the wealth of a nation unless it is distributed widely it does not make the economy stronger. If wealth grows only in the hands of a few wealthy families the economy is stagnant. It is only when economic growth is widely distributed through work and investment that new wealth makes its greatest impact on a society.

Try modeling growth in a society of five thousand in which wealth only grows in the hands of the top ten owners. You will certainly find that wealth has little or no impact on the lives of most of the five thousand. Distribute the same amount of wealth among the top two thousand five hundred members of that society. You will see a much greater impact on everyone's lives. Trickle down only works in a case where new wealth is widely distributed.

The rise in wealth distribution in manufacturing during the great depression paralleled the drop in wealth distribution from farming. This was a major cause of the length of that downturn. Simply put, the loss of ownership by middle and lower class farmers was not offset by the increase in wealth created in the manufacturing and construction sectors until WWII.

The process of growing a factory and construction workforce basically continued in balance with job destruction in farming from after 1933 until the war came along. WWII moved millions of men into the army and out of the labor force. Manufacturing wealth distribution got a big boost during the war and that laid the foundation of the post-war recovery. Construction saw its first boom in wealth creation in the aftermath of the war.

Let me restate that proposition. Wealth before the depression was largely derived from an agrarian model. Over seventy percent of the workers in the USA were producing wealth on the farms of our nation. After WWII less than thirty percent of our workforce was employed on the farms. Today less than five percent of our workforce labors on the farms of our nation.

That means that a significant part of the length of the great depression was due to the transfer of labor from farms to factories. Construction lagged badly during the depression. So did the transfer of wealth. Small farms were losing their power to create wealth as mechanization decreased the cost of production on larger holdings. Meanwhile the new concentration of ownership of land limited the distribution of wealth through farms.

The decline of farm created wealth transfers into the hands of the majority of the populace continued through the 1930's. That wealth transfer reduction tracked the increase of factory created wealth until the war pushed factories to the forefront of wealth creation here in the USA. Thus economic growth was slow at best.

Since that point in time the broad based distribution of wealth has been through the manufacturing and construction sectors of the economy. Jobs in the manufacturing and construction sectors and wealth created by investment in manufacturing and construction have been the major national source of new wealth since WWII. We are now entering a new era.  China and India are becoming less agrarian. As they convert to our last model for growth what will we develop here to replace the industrial model of wealth transfer?

Factories are now being moved out of our nation. Whatever new mechanisms for wealth transfer are developed here they will have to grow rapidly. At a minimum they must replace the transfer of wealth from employment in factories. That must happen in order to stop and reverse the current economic downturn. Computerization is displacing millions of workers in the retail and governmental workforces. 

Jobs created by government spending will not suffice without the creation of a new economic transfer mechanism that also creates and distributes a lot of new wealth widely. Not only is the world Flat, Hot and Crowded, it is also in the midst of vast wealth distribution changes. Those changes will impact every human on this planet during the next fifty years. They will also determine how the economy of the world grows and how people everywhere live.