Possible Cause of
Recession in 2009

Copyright 2009 by Ronald B. Standler


Since the collapse of several mortgage lenders and banks beginning in September 2008, and since many major corporations have decided to terminate the employment of thousands of employees, it is common knowledge that the USA is in a major recession.   No one seems to be asking why we are in such grave financial difficulties.

In this provocative essay, I paint with a very broad brush, describing only generalities.

sketch of economic history

In the 1700s and continuing through the mid-1800s, the USA was primarily an agrarian economy. Many people grew their own food, some of which they could sell to purchase products that they could not make for themselves.

Beginning in the late-1800s and continuing through at least 1960, the USA became primarily an industrial economy. Most people who had an income were employed by a corporation. Food, like other products, was produced on large farms owned by corporations. The USA became famous for mass-produced automobiles, airplanes, and other technological items.

Business managers in large corporations tended to treat low-level employees as commodities to be acquired at the cheapest price, and workers rebelled against dreadful conditions by forming labor unions. As labor unions demanded increases in hourly wages (and health insurance for families of employees and also for retired employees), the cost of labor in the USA became too high for management, and management built fabrication plants in Asia, Mexico, and Central America, where the cost of labor was much less. Shipping assembly jobs overseas was the beginning of the decline of manufacturing in the USA.

Beginning in the 1970s, the USA became primarily a service economy, in which many employees processed information. Other employees personally served customers in health care industry, hotel/restaurant industry, travel industry, etc.

Beginning in the 1980s and continuing, there were many mergers and acquisitions between corporations. The net effect of these mergers seems to be: (1) burdening the remaining corporation with large amounts of debt, used to acquire the other corporation; (2) loss of jobs from alleged increases in efficiency from the merger; and (3) less competition and less choice for the consumer.

Let me say a few words about the computer industry. Desktop computers were invented in the USA in the 1970s by the Hewlett-Packard corporation, who sold their expensive computers to scientists and engineers for doing computations and for controlling instruments in a laboratory. In 1983, IBM introduced its revolutionary PC-XT, which in a few years dominated the market in both offices (e.g., for wordprocessing and financial spreadsheets) and homes. Despite the quality and success of their computers, Hewlett-Packard abandoned the market for scientific and engineering desktop computers using Motorola 680X0 microprocessors in 1998.   IBM sold their entire PC business to Lenovo (a company in communist China) in Dec 2004.   Thirty years after desktop computers were invented in the USA, one could no longer purchase a computer that was "made in the USA". Not only were there no computer manufacturing jobs in the USA, but major software vendors (i.e., Microsoft) had programmers in India write software, thus diminishing the number of computer programming jobs in the USA.

The mini-computer industry in the USA was dominated from 1965 until the late 1980s by Digital Equipment Corporation (DEC), which was based in the Boston area. DEC's famous PDP-8 and PDP-11 mini computers in a steel rack cabinet were common in industrial automation on factory floors and also in scientific laboratories during the 1970s. After an approximately ten-year decline of DEC, Compaq purchased DEC in 1998, and then Hewlett-Packard purchased Compaq in 2001. The demise of DEC was catastrophic for computer engineers in the Boston area, and high-tech industry in the Boston area was thereafter dominated by biochemistry.

Now that manufacturing jobs — even for semiconductors and computers — have gone to Asia, the USA has little new industry to provide jobs.

A colleague told me that the federal tax code allows U.S. corporations with foreign subsidiaries to avoid paying U.S. taxes on profits of those foreign subsidiaries, if the profits were reinvested in the foreign subsidiary. This seemingly innocuous provision encouraged U.S. corporations to expand foreign subsidiaries that employed foreign citizens (at lower wages than American citizens) and to create new jobs in foreign countries (and to eliminate jobs in the USA). I am not familiar with tax law and my quick search of the tax code did not find a statute to cite.

scientific research

In my August 2004 essay on the history of funding of scientific research by the U.S. Government, I tersely sketched the rise of funding during the 1950s and 1960s, and the reasons for the drastic decline of funding in the 1970s, 1980s, and 1990s.

Some major U.S. corporations (e.g., General Electric, Bell Telephone System, Xerox) developed their own in-house laboratories that did both pure science and applied science, with the goal of improving technological products and developing new products. While such in-house scientific research was successful, only large corporations with huge profits could afford the luxury of such research programs.

During the 1950s and 1960s, the U.S. Government generously funded scientific research at universities, which led to a rapid increase in the amount of scientific knowledge as well as educating young scientists and engineers who could then be employed by corporations. This generous research program contributed to the U.S. economy in many ways, such as giving corporations the results of basic scientific research and applied scientific research, as well as giving corporations a pool of job applicants who were well educated and even had experience in research and development.

Less well known is that the U.S. Government during the 1950s and 1960s also gave contacts to private corporations for research and development of technology.

Did decline in support for research
contribute to recession?

My suggestion — surely not original to me — is that the decline in U.S. Government financial support for scientific research, beginning in the 1970s and continuing today, is partly responsible for the current economic crisis, in that American manufacturers and software companies now have less new technology available for new products.

The solution is not as simple as throwing billions of dollars per year at universities and telling them to develop new ideas.   The history of science and technology teaches us that it can take tens of years for results of basic scientific research to be translated into applications, such as new products.   If I am correct, we will be paying for decades for the stupid government decisions since the 1970s to save a little money on scientific research and sacrifice the future of our economy.

The lack of research funding caused the current lack of information on environmental protection, climate change, alternative energy technologies, and other public issues.

The lack of research funding also caused more than one generation of Americans with Ph.D. degrees in science or engineering to be unemployable, because they are "overqualified" for mundane service jobs, and there are few jobs available for professors or in corporate research and development.

This document is at   http://www.rbs0.com/crisis09.htm
created 15 Feb 2009, modified 5 May 2009

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