The Great Reckoning: How the World Will Change in the Depression of the 1990s

National Review, Nov 4, 1991 by Paul Johnson

THE FAT BOY says to the Old Aunt in The Pickwick Papers, "I wants to make your flesh creep." That is the object of the writers of this book, who predict that the 1990s will be marked by a deep, worldwide depression. They think it will be of the same magnitude of the slump which began with the crash of 1929, perhaps even bigger. They also point out, and this is the really flesh-creeping bit, that the United States society of the 1920s, which was unable to prevent the slump, was in many respects both morally and economically stronger than the United States society of the 1990s.

Let us look more closely at this last point. In the 1920s, the authors remind us, the United States was the world's largest creditor country. The Federal Government ran a budget surplus each year and reduced the national debt by a third during the decade. It had few long-term liabilities that were unfunded. The U.S. ran a large trade surplus. Productivity rose by 50 per cent in the decade. The country saved hard and invested hard. It had low inflation and low interest rates. Big corporations were largely self-financing and cash-rich. There was little bad foreign debt. Unemployment was low; half the population was cushioned against recession by farm ownership and rural occupations. Government was small, military spending minute. Public expectations of what government could do for them were low too, and so were taxes. Families were large and provided support systems. Despite Prohibition and its side-effects, society was law-abiding.

By contrast, the United States of the 1990s, the authors argue, is desperately vulnerable on all these heads. It is the world's largest debtor, leading a mendicant crowd of foreign defaulters, much of whose worthless paper it holds. Its national debt has increased three and a half times in the last decade, it possesses only 9 per cent of the world's gold (as opposed to 50 per cent in the 1920s), it is running massive federal budget deficits, and it has unfunded liabilities of about $14 trillion. During the 1980s "it ran the largest trading deficit of any nation in the history of the world." It has low savings, low investment, stagnant productivity, disquietingly high inflation, high interest and mortgage rates, and high unemployment. It is overwhelmingly urban and thus more cripplingly exposed to depression. Its firms are loaded with debt. Its government spends a much higher proportion of GNP than in 1929, employs 21.2 per cent of the work force (as opposed to 10 per cent in 1929) takes 36.8 per cent of personal incomes in taxes (as opposed to 13 per cent) and has increased transfer payments, at all levels, by 29,000 per cent. This means that many more people are far more dependent on government just to get by. Old-style families, with both husband and wife living with their children under the same roof, now form the minority, and the family as a mutual support system is in rapid decline.

Not least, crime is frequent and ubiquitous. The authors take Dodge City in 1871, "where there was essentially no police or justice system at all," as the archetype of lawlessness in American history. Yet its murder rate was only half that of the nation's capital, Washington, D.C., in 1990, a rate of 80 per 100,000 annually, meaning that your chances of being murdered over a lifetime in the city are about 1 in 16. Indeed, among children under 12, murder is now the leading cause of death in Washington.

On this last point, it is not entirely clear why high crime rates, especially murder, should make a depression more likely or more severe. Traditionally, it has been assumed that widespread and unpunished dishonesty must militate against a healthy economy. But this may be an Anglo-Saxon Protestant prejudice, rather than a demonstrable fact. One of the countries which has prospered mightily in the last half-century is Italy, at least if you judge by general living standards. When I first toured it in 1948, it was penniless, almost starving, swarming with ragged beggars. Now it has a higher GNP than Britain's and affluence has spread even to the once-destitute south. But a silent feature of this upsurge has been the growth of an immense "black" economy, operating largely outside the law and certainly outside any tax system. Gangsterism of every kind has been growing rapidly. The special anti-Mafia commissioner recently told the parliament in Rome: "Whole provinces of Italy and Sicily are now beyond the law." Yet rapid growth continues. I do not know how Adam Smith, or Alfred Marshall, or even Lord Keynes, would have explained this phenomenon of the GNP and crime expanding pari passu. Maybe that clever fellow John Kenneth Galbraith can account for it: private crime brings public affluence, perhaps. It could be that, in certain types of highly bureaucratic societies, men and women, by conducting their transactions outside the law-or even against the law-make them more efficient simply by eliminating the government's cut. It could even be that criminals are less wasteful, in economic terms, than civil servants. If so, the moral implications are devastating.