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The Millennial Files



Kirt Sechooler March, 1996

Historic Note: The Real Incomes of a Majority of Americans Has Been Stagnant since 1973.

Stagnant Incomes and Republican Politics
An article in a recent edition of a major metropolitan newspaper described how many of the current candidates for the GOP Presidential nomination, in a reversal of the party's previous position, were now beginning to acknowledge the fact that the real incomes of a majority of Americans have been stagnant since 1973. The fact that any politician changes his position is certainly not news, but the growing general realization that the standard of living for the majority of Americans has in fact been stagnant for over twenty years represents the confirmation of one of the most important themes in the model now being outlined in The Millennial Files.

This newsletter has in previous files proposed a model of economic history based around the technological cycles of development of the Industrial Age. This model, in fact, explains why real income has been stagnant for so long. And even more importantly, only by using a model such as this will it be possible to construct the policies necessary to deal with the destructive problem of stagnant living standards. To begin this analysis, it must be understood that the problem of stagnant real incomes, now being accepted by the GOP candidates, is not a new phenomenon in American history, but one that has occurred three other times in the last two hundred years.

The Three Previous Declining Phases
All three of the great prior technological cycles that have defined the industrial age in America have been marked, in their declining phases, by stagnating standards of living. The current era can only be understood in light of the experiences of these previous historical periods. To begin to see this, we need to go back to the first technological cycle of the Industrial Age, the Textile Cycle.

1st: Textile-Cotton Cycle
The declining phase of this technocycle began at a clearly identifiable moment in time, 1819. In that year an unprecedented event shook the towns and villages of New England, the event was the first financial panic and economic depression in U.S. history. Beginning in 1819, the declining phase of the Textile Cycle lasted over twenty years, through the economic turmoil that resulted in Andrew Jackson's election as President, and then through the so called Biddle Depression of the 1830s and into the 1840s, a decade referred to by those that lived through it as the “hungry forties,” exactly the type of epithet that could be expected to describe the declining phase of a technological cycle.

2nd: Railroad-Western Expansion Cycle
The declining phase of the second technocycle, the Railroad Cycle, was inaugurated by the Cook Panic of 1873, and continued on from that year until it ended around 1896, three years into the Depression of 1893. The two decade long period was marked by an almost unrelenting downward pressure on the prices farmers received for their crops and an equally unrelenting downward pressure on the wages industrial worker received for their labor. The extremely difficult economic climate of these years resulted in a prolonged period of agrarian and labor unrest and agitation. This agitation lead to the creation of the Populist and labor movements, two of the most important and far reaching socio-economic movements in American history.

3rd: Mass Production-Mass Urbanization Cycle
The next declining phase was that of the third technocycle, the Cycle of Mass Production and Mass Urbanization, that phase was the devastating Great Depression of the 1930s. As explained in file #2 of this newsletter, the sudden and almost complete collapse of the financial structure at the very onset of the third cycle's declining phase turned the Great Depression into a economic nightmare of declining production, employment and income.

The critical point to understand here is that all four of the nation's technological epochs are united by the fact that each has been driven by a set of technologically dominant industries, technological complexes that were powerful enough to have shaped and ultimately defined their respective eras. But as dominant as these technological complexes were, they nevertheless remained subject to the normal lifecycles that all industries naturally experience. In other words, the declining phase of a technological era is the natural and inevitable by product of the lifecycle of the era's historically dominant set of industries, and further than that, the downward pressure on real incomes and living standards, that the country is experiencing again today, for the fourth time in its history, is itself the inevitable by product of this technological cycle’s declining phase.

The Downward Pressure on Real Incomes and Living Standards Is the Inevitable By-Product of a Technological Cycle’s Declining Phase.

4th: The Current Cycle’s Decline
This brings us to the fourth cycle, the Automotive-Petroleum Mass Suburbanization Cycle. Just as the declining phase of the Textile Age began with a clearly identifiable event, the Financial Panic of 1819, and the declining phase of the Railroad Age started with the Cook Panic of 1873, and the Great Depression of the 1930s was triggered by the stock market crash of October 1929, the declining phase of the fourth cycle itself began with a very specific event the Arab Oil Embargo of 1973. This event inaugurated the declining phase of the Automotive-Petroleum Mass Suburbanization Cycle by instantaneously rendering obsolete the entire transportation infrastructure of the United States, the infrastructure that was at the very heart of the era's economic prosperity.

Historic Deflation and Inflation
The nation's four technological eras share many important features, there is, however, a critical distinction between the Automotive-Petroleum Mass Suburbanization Cycle and the three preceeding ones. In the first three cycles, the declining phases were manifested in a powerful deflationary cycle. This was particularly apparent in the declining phase of the third cycle, when as previously mention the financial structure of the day collapsed. In the fourth cycle, however, the development of the financial structure since the days of the Great Depression made it possible for that intangible structure to withstand the great stress that the unprecedented rise in oil prices posed for the American economy.

Because the modern financial structure of today is stronger then in any previous era, the declining phase of the fourth cycle has manifested itself not, as the other three had, as a deflationary period, but rather began as a period of seemingly intractable inflation. This fact has obscured the overall similarities of all four cycles. Nevertheless, the fact remains that the underlying technological factors that produced a decline in real income in the three prior cycles pertain for the fourth. This is true even though during the declining phase of the Automotive-Petroleum Mass Suburbanization Cycle, the economic stresses of the period, as just stated, manifested themselves initially not, as in the other three cycles, as deflationary pressure, but as a powerful inflationary surge. The reality behind all of this is that in the declining phase of the first three technological cycles living standards stagnated because for a majority of Americans wages declined faster then prices. While in the fourth cycle real income for a large majority of Americans has gone down because it has not kept up with inflation. In either case the majority of Americans have experienced the declining phase of all four technological eras as a period of stagnant living standards.

The 1980s & 1990s, Periods of
Unprecedented Debt Accumulation

Inflation Instead of Deflation
Despite the overall similarities of all four eras there is, in fact, a fundamental difference between the first three eras and the last one that remains critically important. And this distinction, does indeed, revolve around the different effects that deflationary periods and inflationary periods produce. To fully understand this critical difference, one must understand that deflation and inflation provide diametrically opposed incentives for borrowing. This is because if overall prices are declining, as they do by definition in a deflationary period, the borrower will have to repay the lender in dollars that are in effect, of ever increasing value. This is why in the Great Depression of the 1930s there was very little borrowing even when at one point interest rates ranged as low as 1.5 to 2.5 %. In an inflationary environment, however, the exact opposite is true. During inflationary periods there is every incentive to borrow, because the borrower will pay the lender back in dollars that are decreasing in value. This is true for individuals, businesses or governments.

Historic Debt Liquidation or Accumulation
The ultimate effect of this basic economic reality has been to create one of the most important differences between the first three technological cycles and the fourth cycle. This difference is that the declining phases of the first three cycles were, as deflationary periods, also periods of debt liquidation, whereas the declining phase of the fourth cycle, as an inflationary period, was also a period of massive and completely unprecedented debt accumulation. Thus the price we have paid to avoid the devastating deflation of the 1930s has been the massive increase in the Federal debt in the 1980s and 1990s. This, in turn, has meant that in the fourth cycle alone, the future has been mortgaged to pay for the declining phase of a receding technological epoch. The implications of this fact have yet to be dealt with.

America is now, clearly, at the end of the fourth and final cycle of the Industrial Age, but the nation has not yet made the transition to the next Age. The Millennial Files is however, dedicated to the successful completion of that task; we will in future files address what must be done to enter the post Automotive-Petroleum Mass Suburbanization Cycle and to once again see an increase in the real incomes and standard of living of the majority of Americans. mmm

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