VIEWPOINTS : U.S. Should Harken to Henry Ford : Raising Consumption of All Could Avert Economic Slump

America is living in an economic house of cards. The Wall Street Journal recently noted that people were worried that slow growth in Europe and the debt-induced shrinkage of Third World markets could bring the faltering American economy into a recession. And the recent gyrations on Wall Street itself testify eloquently to how widespread these fears are.

This is, in short, a very precarious and even paranoid fifth year of a “recovery” that itself has been uneven and contradictory from the very first.

But haven’t business cycles always witnessed such oscillations and anxieties? Aren’t we just dealing with another of those inevitable blips in economic life? I think not.

I am not for a moment suggesting that 1929 is once more at hand--or even that a mild recession is sure to take place as a result of events this spring. I do assert that the American economy is in deep structural trouble and that, during the next two or three years, there will be another downturn.

Moreover, that event will not just be a blip, but a moment in a major economic transition that could change our lives as much as 1929 did, even if in quite different ways.

The Great Depression was not started by a terrible day on the stock market in 1929. That was the occasion of its onset--and, for that matter, Wall Street recovered from Black Tuesday. The abyss didn’t open up for a year or so.

What was involved was more profound than a one-day nose-dive on the financial market: it was a crisis of a kind that had been foreseen by Karl Marx, John Maynard Keynes and Henry Ford. And this curious history will, I hope, help explain our present plight.

Ford was both a crank and a genius, an anti-Semite and anti-Catholic who perfected the assembly-line techniques that had already begun in other industries.

Moreover, he understood a critically important proposition: that the incredible potential of mass production meant that there had to be mass consumption.

That was why, before World War I, he paid the unheard of wage of $5 a day. He tried to persuade his fellow capitalists to follow suit. Otherwise, he argued, mass production would turn into a mass overproduction and underconsumption.

Ford failed to persuade the captains of industry and his fears were realized between 1929 and 1931 when suddenly America had produced “too much” because wages had lagged behind productivity throughout the 1920s. Shoe plants were closed in a nation with barefoot people and willing shoe workers.

President Franklin D. Roosevelt nationalized Ford’s basic idea. That is, the New Deal created a structure in which social insurance programs, collective bargaining and a government committed to creating jobs built a floor under mass consumption.

Most corporate leaders saw “socialism” or “communism” in these reforms. They did not realize that Roosevelt was socializing a huge new market from which they could profit. After World War II, they finally grasped that fact.

So from Roosevelt through Jimmy Carter, every President of the United States stuck to that New Deal line, Dwight D. Eisenhower as well as Harry S. Truman, Richard M. Nixon and Lyndon B. Johnson.

And from 1945 to about 1970, there was the antithesis of the Great Depression. The conservative thinker, Friedrich von Hayek, called it the Great Prosperity. It demonstrated, among many other things, that social justice is good economics.

In the ‘70s, a whole complex of events--the unprecedented internationalization of the American economy, the shift from smokestacks to services and automation, to name only a few--undercut that Henry Ford-Franklin Roosevelt solution. Indeed, the Right turned Ford’s wisdom upside down: It was, they said, necessary to make the economy more mean if it was to become more productive.

Thus it was that President Reagan took food stamps and Medicaid away from the working poor, raised the taxes of everyone at the bottom of the society and provided huge tax subsidies for the very wealthy.

This, it was said, would lead to such an investment boom that the lost tax revenue--and the billions of dollars being spent on weapons that threaten the existence of the planet--would be more than paid for by a huge surge in the gross national product.

That didn’t happen. But there was a significant shift in the buying power of a great mass of the people, a historic reversal of the trends that lasted from 1933 to 1980. The top 20% did marvelously well and there was a huge increase in a poverty that persisted even in “good” times.

The middle of the society saw its real income decline after hitting a peak in 1973 and its situation has become quite shaky. At the same time, there were similar trends in the European economies. And the Third World, Latin America above all, discovered that it was completely in hock, not to governments, but to private banks. So its ability to consume also declined.

We have, I think, created the conditions for a return of the problem defined by Henry Ford. Sooner or later, corporations, nations and individuals will not be able to avoid the consequences of these trends by borrowing.

Indeed, even a mild recession could turn into a financial panic if only a relatively small percentage of the hordes of debtors in this world defaulted on their payments.

Will we fall into an abyss as we did in 1929-32? Probably not, although that scenario can’t be ruled out. But the fact of the matter is that the economy is structurally booby-trapped because Ronald Reagan, the most radical politician in 20th-Century America, drastically redistributed income and security upward and thereby laid the basis for a new crisis on the old model.

The American economy cannot forever live off of yuppies and the croissant market, or keep mortgaging its future to obliging foreigners. It is going to have to learn what old Henry Ford perceived and Roosevelt legislated: that raising the consumption of the people is good for everyone. But it is going to have to discover how to do that under conditions of internationalization and automation that Ford and Roosevelt never imagined.

I am not crying doom. But I do see a danger in our future that is not just one more turn of the old familiar business cycle, a danger that is going to force us to be as innovative in the late ‘80s and ‘90s as we briefly were in the ‘30s. Old Henry Ford will probably turn in his grave if we do so, but he--with Marx and Keynes--was one of the first to define our problems.