Recessions, we are told, are the unavoidable results of business cycles; yet so long as the fundamentals of an economy remain sound, a cycle should eventually right itself. A depression, by contrast, is a downturn based on structural problems with an economy. If left unremedied, the problem will persist or get worse.

By these definitions, our current economic crisis is a depression.

A former student of mine who works in banking told me a while ago that until we get the financial markets up and lending again, the rest of the economy will be a nonstarter – stimulus package or not. Although he is certainly right, the U.S. economy is suffering from some graver problems: structural problems three decades in the making. The first two problems saw deregulation and the erosion of our manufacturing sector. And now, we find ourselves a cash-rich nation that does not produce many cutting-edge products worth buying; our two greatest exports are dollars and jobs.

Decades before the “Reagan Paradigm” began its transformation of the United States into a deregulated borrower-turned-debtor nation, the best American industrialists cared about making quality products. In this school of thought, you made an innovative product that was competitive, and then, with your profits, you gave your workers a living wage, reinvested some of it in research and development to make an even better product, and got rich along the way. Of course, even back then there was a stock market, but venture capital was meant to generate the wealth with which to manufacture.

This was the recipe that brought us victory in two world wars and made the United States and its dollar the envy of the world. This was the economic basis for the American Century. Now, manufacturing is all about producing as cheaply as possible by exploiting overseas labor markets in places that often have a convenient lack of laws on labor – including child labor – and the environment.

If you were an ambitious young businessman in the 1940s, you might work for or even start up a new company. But over the past 30 years or so, the best newly minted MBAs have not gone into manufacturing. They’ve made their way to Wall Street, where they move money around and generate a lot of wealth on paper as the country produces less and less. An unregulated economy of paper and services tends to be more corrupt than one based on manufacturing. Can anybody explain in a concise sentence what services Enron Corporation provided? I can tell you what any manufacturing company makes in a word or two.

oreover, it is difficult to dupe people with inferior durable goods and it is easier to hold manufacturers accountable. An economy that relies on cheap labor will result in inferior products and will eventually bring down quality throughout the market.

If the United States was a small nation or city-state – a Holland, Hong Kong or Singapore, for instance – we could conceivably run our economy on finance alone. The problem is, we are not small; we are a nation of more than 300 million people. A nation with human and natural resources such as ours cannot subsist solely on finance and high-end services. We have to make something.

It is ironic how some of the smartest people believe in the most stupid things. One hundred years ago it was Marxism, now it is unrestricted free trade theory and the intoxication of globalization and related heady generalizations. As a historian, I would revert to saying there is no silver bullet; no single “Utopian” idea or theory can explain or account for an open system as complex as the world economy. The truth – masquerading as simplicity – is actually exceedingly dicey and its essence can be reduced to a single sentence: Nations trade freely when they are able to and protect when it is in their interest to protect. What this country needs is the courage not to surrender our judgment in favor of clichés and panaceas of economic theory. What we need is individualized judgment to deal with the complexities of economics, not overarching Utopian theories heralding the end of history or a new flat Earth.

Free trade dogmatists believe that any sort of protection is always wrong, but it is they who are wrong. The desire for too much protection gave us the Smoot-Hawley Tariff Act, but the lack of protection has reduced our once-proud manufacturing sector to a mere 10 percent of our economy. We still have a $13 trillion economy that we are giving away through trade imbalances. Instead, we should be telling the world that if they want to do business with us, they will have to pony up. Rather than bring the world down to the lowest-common denominator of cheap labor, resulting in asymmetrical power relations and low-quality products worldwide, we need to start nurturing our own manufacturing and labor markets. The return of industry would also go a long way to pay off the debt incurred by the stimulus package.

When I was a kid, “Made in the U.S.A.” was a boast. My, how times have changed.

ichael Duggan is a professor in the School of Continuing Studies.

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