The Crash of 2016

By Thom Hartmann

Who will tell the Millennials that the Reagan Revolution was a scam, and that it set up the Crash of 2016?

Much like the generation that came of age during the last Great Crash in the late 1920s and through the early 1930s, today’s Millennial generation knows that something has gone horribly, horribly wrong with both their country’s political structure and its economy–and they’re not sure exactly what it was or how it happened. They know that their parents did well, and their grandparents did okay, but can’t figure out why they can’t get ahead. They know that for about 50 years America was politically stable, and steadily moved forward, making progress in everything from growing the middle class to bringing progressively more and more power and voice to women, young people, and people of color.

What has changed in America in the years before and since their birth?  And what does all this have to do with that stock market crash in 2008?  And why, if we already had a stock market crash in 2008, will there be another one in 2016?

It all began with the Great Forgetting. And that started to take hold of our culture and body politic with the election of Ronald Reagan, although the seeds were laid a decade before. A quote sometimes attributed to Arnold Toynbee is that, “When the last man who remembers the horrors of the last Great War dies, the next Great War becomes inevitable.” The reason, of course, is that the horrors are not remembered from generation to generation, only the glories. Monuments and statues glorify the leaders and the conquerors, but the slaughtered innocents are forgotten. It’s largely true of economies as well as wars.  Consider the previous three Great Crashes—each about eighty years apart (1929 to World War II, 1857 to the Civil War, 1773 to the American Revolution). All arriving just as those who remembered the previous Crash were dying off or stepping down from power.

And while all of these Great Crashes were gut-wrenching in their horror and bloodshed, they ultimately transformed America in ways that made this a greater and more egalitarian nation.

Thomas Jefferson predicted them, as he had lived through one here and observed another sputter and fail in France. Periodic revolutions (significant shifts to politics and economies, not necessarily associated with bloodshed) were necessary for America—or any democratic society—to flourish and grow, he said. And when they were stalled or blocked, then the ensuing crisis are all the more intense.

Jefferson said it best: “If this avenue [of periodic revolution] be shut to the call of sufferance, it will make itself heard through that of force, and we shall go on, as other nations are doing, in the endless cycle of oppression, rebellion, reformation; and oppression, rebellion, reformation, again; and so on forever.”

That cycle, spanning roughly four generations (80 years) each time, has indeed been repeated over and over again in America. And right now we’re in the midst of it being repeated again.

The Great Forgetting of the last cycle took flight in the 1920 election, when Warren Harding campaigned on the slogan of, “Less government in business, and more business in government.”

By that time, the lessons of the Lincoln through Cleveland presidencies of the previous cycle were being forgotten. Lincoln had spent trillions in today’s dollars to build a national infrastructure of railroads, and established free colleges in virtually every state through the Land Grant College program. America was back to work, and with widespread free college education, a rising and educated middle-class began to take shape.

When Warren Harding was elected in 1920, he saw all of Lincoln’s accomplishments as statism or nascent communism.  He reduced regulations on banking and industry, and dropped the top income tax rate from over 90% down to 25%.

The rich were now free to take as much as they could from their corporations, and they did, throwing it into the giant gambling arenas of real estate and the stock market. The market exploded, rising from around 100 in 1920 to over 380 in 1929. During that same period, prices of real estate and highly speculative areas like Florida increased more than tenfold.  In late 1927 the real estate bubble began to burst, and by 1929 the stock market followed—mirroring our real estate bubble bursting in 2006 followed by the stock market collapse of 2008. That collapse led to a genuine revolution in American politics and economics, called The New Deal and initiated with the presidency of Franklin Delano Roosevelt in 1933.

Roosevelt re-regulated the banks, created the Securities and Exchange Commission to oversee Wall Street, regulated the industrialists, and raised the top tax rate back up to over 90%.

America dug out of the Great Depression and went back to work. CEO pay for the next 50 years was a modest 30 times that of the average worker due to that high income tax rate. It strengthened the Middle Class, and kept the housing and stock markets stable.

Throughout the 1940s, 1950s, 1960s, and 1970s the stock market slowly and gradually rose from under 1000 to just short of 2000, and much of that rise simply reflected four decades of normal inflation. The stock market was a stable place, and the top income tax rate floated between 70% and 91% throughout that New Deal era.

Then Ronald Reagan came to power in 1981, and, heavily advised by David Koch’s group Citizens For A Sound Economy (the predecessor of Americans For Prosperity), dropped the top tax rate on the very rich down to 28% and began both privatizing government functions and deregulating industry and banking.   It was a genuine economic and political revolution, repudiating and initiating a rapid unraveling of the New Deal revolution.

Predictably, the real estate market boomed and the stock market exploded from around 2000 when Reagan came to power, to over 12,000 by the time of the George W. Bush presidency.  Virtually all of those gains went to the very wealthy, while average working people, in a radical departure from the trends of the previous 50 years, saw their wages flat-line or even decrease in real dollars for the entire 30+ year period from the start of the Reagan Revolution to today.

In 2008, when the stock market tanked and the economy crumbled, it became obvious to some that the Reagan Revolution had been a scam that only benefited the very wealthy and we really needed to return to what had worked so well for everybody in America: New Deal economics.  But it only took a few months for Barack Obama to get elected and push through enough of a stimulus, following New Deal concepts, to stabilize the economy.  At the end of the 1920s, America suffered through three long and disastrous years of Harding/Coolidge/Hoover Republican economics. By 1932, everybody realized the disaster that low taxes on the rich and deregulation of the banksters and industrialists had produced. Thus, when Roosevelt became president, he had an absolute mandate for revolutionary change.  But when Obama came to power in 2009, America had not hurt all that badly nor for all that long. The result was that most people hadn’t yet clearly seen the Reagan revolution for the fraud that it was, an edifice that only supported the rich and screwed the middle class.  Without a strong middle class, there can be no strong American economy, because purchases by the middle class constitute about 70% of the entire economy. And without a Roosevelt-era-like mandate, Obama was unable to re-regulate the banks and industry, and couldn’t raise taxes on the rich enough to stop the casino on Wall Street.

Thus, here we are today. Politically and economically, we are still in the midst of the Hoover/Reagan revolution. Therefore, we are still committed to 1929 being played out in full.

Between Obama’s small stimulus and an unprecedentedly loose Fed monetary policy, we’ve managed to reinflate some of the bubbles, including housing and the stock market.

But the fundamentals are still all wrong. The middle class continues to deteriorate, and with it so does 70% of the real economy. The “recovery” is only a recovery for the very rich who both create and skim the wealth off the top of the bubbles they create.
It’s just a matter of time before the Harding/Reagan era plays out to its natural historic conclusion: Crash, Depression, and War.

When the Bush administration saw the Reagan Revolution unraveling in 2006 as Housing Starts began to plummet, they threw enormous amounts of borrowed money into the economy, massively increasing our national debt, to stave off the crash until after the election of 2008. They were unsuccessful, and mis-timed it by about six months. (Had they succeeded in holding it off until after the elections in November, John McCain would be president today.)

The Obama administration is doing the same thing right now, and will try to keep the economy from collapsing until after the election of 2016, so that a Democrat can take the White House. But all of today’s efforts to keep the bubbles inflated simply will make the crash harder: both harder to stop, and harder in its impact when it comes.

It’s time to tell the Millennials, because they are the ones, like their ancestors in the 1930s, who will have to pick us up from the damage caused by the Reagan Revolution and produce what Jefferson might call their generation’s political and economic revolution.

We know how to make an economy work: we did it during the New Deal era from the ’30s to the ’70s. As those who remember that era die out and the Great Forgetting sets in, let’s help the Millennials read a bit of history.

Once the crash is over, this is an opportunity for the fourth Great Leap Forward since the founding of our republic.