California is hemorrhaging cash and bleeding to death. Revenue from taxes is coming in far below the projections needed to meet its financial obligations for the fiscal year beginning July 1 2009, but the state may have trouble borrowing money to make up the difference because its bond rating is the lowest of the fifty states. Unlike Zimbabwe, however, California cannot print its own money to pay the bills. The market value of its public and private corporations has plummeted, and the value of real estate, housing and commercial, is in free fall. Unemployment is the highest since 1939 but the state has been stripped of its manufacturing base, making any quick recovery based on rebuilding inventories somewhat problematic. Even worse, corporations and productive citizens are fleeing the state, with its high taxes and web of Marxist inspired regulations, in droves, while the only part of the economy that continues to grow is state and local government.

At the local level, Los Angeles is a great example of the problems facing California. The president of the University of Southern California recently declared the city, which is a seething cauldron of unassimilated immigrants ( most of whom arrived illegally), has an unemployment rate of 13%, and contains some of the world’s most vicious and violent gangs, with a membership estimated at around 250,000, to be the capital of the Pacific Rim. (As an aside, whether any of the gang members have absorbed the lessons of the Iraq insurgent’s successful fight against the American army remains to be seen.) Somehow all this, and the fact that if any American city has a claim to being the Pacific Rim capital it is San Francisco, seems to have escaped the university president’s attention.

The point is, he is not the only prominent Californian who apparently has lost his grip on reality. The Democrat controlled Legislature and the Republican governor, after protracted and acrimonious negotiations, cobbled together a temporary financial package, in the form of five propositions, which need voter approval to take affect. Their wording renders the intent of the propositions murky and unintelligible, and a deeply suspicious electorate, fearing the politicians are up to no good, appears likely to reject them. Now, just a week before the vote, Gov. Arnold Schwarzenegger is predicting the state will begin the fiscal year with a $21.3 billion deficit, and may have to ask the federal government for a bailout.

Fifty year ago, California, like Zimbabwe, was a wealthy place; but, inspired by dreamy Marxist utopianism, and plundered by lawyers reminiscent of Somali pirates, and thuggish labor unions, the people are in pretty bad shape with not much to look forward to. It’s enough to make you want to move to Canada, even with its lousy climate and thought police.

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For three decades, American consumers, a moderately well paid middle class, lived high on the hog, enjoying goods and services produced by an emerging international and domestic underclass. The consumers bought and the workers produced. It was a symbiotic relationship, held aloft by high disposable incomes on the one hand, and low incomes on the other that couldn’t go up and up, on and on forever. Now, American consumerism, with it the childish strategy of “Let’s play let’s pretend”, is about to die a flaming fireball death.

The American economy has been creating jobs at a high rate, at least compared to Europe, since the beginning of the second Nixon administration; but, as the distinguished economist, Paul Craig Roberts, correctly reports these jobs have been, for the most part, low paid, low skilled, and concentrated in the service sector. What professor Roberts neglects to note is that these jobs also provide safe and reliable employment with acceptable benefits for modestly educated and unskilled employees who provide the cheap goods and services that the educated and skilled American middle class consumes. The demand for these employees has been almost insatiable, and has been augmented by high rates of immigration and aggressive outsourcing to low wage third world countries.

The big loser, of course, has been the highly unionized lower middle class with its high wages and generous benefits which the National Labor Relations Act,1935 created. This class was concentrated in manufacturing, a sector where technological advancements led to steady increases in productivity, and unions made certain that a fair share of this increase showed up in the workers’ paychecks. More than that, these increases in pay served as a benchmark for employees in other sectors, a kind of economic rising tide.

The problem was this class was overwhelmingly white, male, and surprisingly passive. By 1965, this paradigm had become socially and politically unviable, and was badly in need of an overhaul. The Civil Rights Act,1965 introduced a far more egalitarian and European style employment paradigm, accompanied by intrusive government regulations and high legal expenses. These high maintenance costs were passed onto the lower middle class in the form of lower incomes, once the unions were shoved aside, and the new paradigm quickly replaced the old. The impact was twofold. Because the costs of the goods and services it purchased declined, the standard of living of the middle class increased noticeable, although its contribution to American society did not, while the lower middle class standard of living began to fall.

By the time of the George W. Bush administration, the middle class had grown greedy, contemptuous of others, and detached from reality because it simply didn’t have the disposable income to support its resplendent lifestyle, and had become increasingly dependent on easy debt. Simply stated, it was living beyond its means, and had lost track of the fact that a society where most people are middle class has a rather modest standard of living. More importantly, it was living beyond its contributions to society.

Meanwhile, the lower middle class seethed with anger and resentment as it fought to stay out of the underclass. As the husbands’ high paying manufacturing jobs disappeared, the wives were forced to take low paying service jobs, while the quality of public services and public schools (deteriorating under mounting pressure from the new immigrants) declined. Meanwhile, the middle class sent its children to private schools they could now afford.

It was becoming clear to all that this employment paradigm had become as socially and politically unviable as the one it had replaced because the lower middle class was in danger of morphing into an unstable and potentially violent underclass. Allowing the lower middle class to accumulate a modest and controllable amount of debt was added to the model to correct for the imbalance. This change would create the illusion of an increasing standard of living, and banking laws and regulations were modified accordingly, incidentally, creating windfall wealth for the banks. Along with these changes, spending on public services was increased, creating more low paid jobs and, not surprisingly, more debt since taxes were not raised on the middle class.

But how could debt be used to create the appearance of wealth, and disposable income? Housing was the answer. Debt would create good paying jobs for the lower middle class, and at the same time, pull up the price of houses to create the appearance of real wealth. But, at the end of the day, there was just not enough disposable income. And when a blind man could see that all this make-believe wealth was suspended from skyhooks, it came crashing back to earth. And as for the fate of the pompous middle class consumer? It couldn’t happen to a nicer bunch of guys!

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Look at it this way. Labor economists believe that when the United States economy is operating at capacity the unemployment rate is 5%. We could spend a lot of time defining and defending these terms and numbers (and economists do) but let us assume, for the moment, they know what they are talking about. Am I forecasting, then, that the economy is headed for a deep and protracted downturn? To the contrary, I am forecasting that the United States economy will work its way out of the current “financial meltdown” shortly, and will perform relatively well into the foreseeable future. But a huge segment of the so-called American workforce will not participate in the economy because it’s payback time.

Consider the following thought. Suppose the American economy were run to be as efficient and effective as possible instead of to create more jobs and achieve “social and economic justice”. What size workforce would this economy need? I suspect that workforce would be about two-thirds to three-fourths the current size, and that the downsized workforce would create even more wealth than the current one. Business leaders know this and so are using the current financial mess to clean house.

Since the passage of the Civil Rights Act of 1964, American business has been forced to meet “social responsibility” goals along with running a business. And these goals have been sucking the life out of the corporations and the economy. Using well recognized indexes of the stock market which have been adjusted for inflation, it is truly astounding how little real wealth has been created during the past forty years. Now it’s over. Business leaders can go around the world to find people who want to come to work every day on time, and who are willing to put in a fair day’s work for a fair day’s pay instead of filing a sexual harassment claim, or whatever. And there’s nothing President elect Barrack Obama or anyone else can do about it. And by the way, it you think it’s tough doing business in America, you should try California. Folks here are actually proud the state is the worst place in the civilized world to do business. Go figure.

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According to the chattering classes, nothing this astounding has ever happened in the history of the Republic. They appear to believe that Obama’s election actually represents redemption for the nation’s past sins; and even beyond that, the whole world has changed forever and has been born again. This is quite a mantle to lay upon the shoulders of a man whom some regard as little more than a silver tongued politician from the corrupt Chicago Democratic machine. But, the truth is, his fans and supporters need to cool their jets because America already has seen something pretty similar, and not that long ago.

On November 8, 1960, 43 year old John F. Kennedy, a young, handsome and charismatic Senator from Massachusetts, and the grandson of an immigrant, was elected president of the United States in the closest election since 1916, winning 49.7% of the popular vote beating his Republican rival, Richard Nixon, by less than one tenth of a percent. But what really made his narrow victory remarkable was his religion because John F. Kennedy was the first Roman Catholic elected to that office in a country that had always considered itself to be Protestant.

By 1960 the ashes from the bitter and bloody conflagration of the sixteenth and seventeenth centuries known as the Reformation may have grown cold in the United States, but they had not gone out. Until 1880, the American people had been overwhelmingly Protestant, and while official statistics are not available, reliable estimates place the religious preference of Americans at that time at about 80% Protestant. That all began to change after 1880 when a new wave of immigrants began to arrive in the United States, coming this time from central and southern Europe where the population was predominantly Roman Catholic. Prior to this time, most immigrants had arrived from northern and western Europe where the population tended to be Protestant, with the notable exception of Ireland, the ancestral home of the Kennedys.

Assimilating the new immigrants had been a rough and tumble affair and not always a pretty sight, but the process was completed, for the most part, in time for the presidential election of 1960. There had been three milestones along the way: the Immigration Act of 1924, which limited the number of new immigrants allowed to enter in a year and heavily favored those from northern and western Europe, the Second Vatican Council, which was under way at the time of the election, and the presidential election of 1928, which pitted the Democratic nominee, New York governor, Al Smith, against the Republican nominee, Herbert Hoover.

Herbert Hoover won the election in a landslide by promising to implement “good government” policies that would continue the economic prosperity of the Roaring Twenties. Along with all this, he shrewdly threw a bone to his conservative supporters by promising continued support for prohibition even though public opinion had begun to turn against the noble experiment. But what really turned this campaign into a watershed, rather than just another “hum-drum” American presidential election, was that Hoover was a Quaker from California and Smith was a Catholic from New York City.

Hoover, whose immediate two predecessors had been wildly popular Republicans, had a “righteous wind” at his back and it’s doubtful any Democrat could have won, but the received wisdom at the time was that Smith’s religion had cost him and the Democrats dearly. If the truth be told, however, it may have been the other way around; because, beginning with Franklin Roosevelt’s 1932 victory, a majority of Catholics had drifted into the Democratic Party where they became a crucial block in the New Deal coalition. But, even with all that voting power, for the next thirty-two years it was an article of the American political faith that no Catholic could ever be elected president. All that would change when John Kennedy decided to run.

Kennedy figured that he had the Catholic vote wrapped up, but needed to attract Protestant voters throughout the heartland to win the election. Astutely, he campaigned early in heavily Protestant parts of the country where he did surprisingly well. In part, it may have been a sign of the times. Given the assimilation of the new immigrants following the 1924 Immigration Act coupled with the liberalizing reforms of the Second Vatican Council, much of the old animus towards Catholics had begun to dissipate. Kennedy’s constant pledge that he “wouldn’t take orders from the Pope” sounded sincere and reassured many of the more skeptical voters. And in part, the Democrats ran a smooth as silk campaign that outperformed the disorganized and unfocused Republicans.

There were charges of voter fraud, and that the corrupt Chicago Democratic machine, controlled by Mayor Richard Daley, had delivered Illinois by delivering up the dead to vote for Kennedy. And if that’s not enough, Richard Nixon was a Quaker from California. In the years following that election, Catholic voters, put off by the growing permissive liberalism of the Democrats, began to drift into the Republican Party. And remember Joe Biden? Does anyone know or care about the religion of the man who’s only a heartbeat away from the presidency? He’s Catholic.

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Today, Wendell Willkie is not exactly a household name but at one time it was because he was the Republican candidate for president in 1940. Willkie was a forty-eight year old lawyer from Indiana and a lifelong Democrat. Indeed, he had even given one of the nominating speeches for Franklin Roosevelt at the 1932 Democratic convention in Chicago. But, like some other Democrats, he became increasingly disillusioned with the New Deal, and by 1940 was ready to challenge it openly. In particular, Willkie had a bone to pick with the TVA, the Tennessee Valley Authority. He was, at the time, president of Commonwealth and Southern, a huge utility company, which was having a hard time competing with the TVA because the latter received generous federal benefits and subsidies while C&S did not. Somehow the logic of all this escaped Willkie.

In 1940, Republicans actually thought they had a chance to elect one of their own as president. Roosevelt was completing his second term, and no president had ever run for a third one, based a tradition going all the way back to George Washington. More than that, after eight years, the New Deal was looking a little tired and in need of a face lift while Roosevelt, himself, looked worn down and worn out. The most serious threat to the Democrats, however, was that many Americans were concerned, if not outright terrified, that Roosevelt would finagle them into another European war. Germany recently had defeated France and driven the British army from the continent; and while there was little serious support for Adolph Hitler and Nazi Germany, there was most certainly nothing like a consensus to join Great Britain in the war. And, of course, there were those who believed the real threat lay with Imperial Japan, an opinion strongly held on the west coast.

The Republicans finally nominated Wendell Willkie at their convention in Philadelphia after a series of bruising votes and backroom deals. At first, the New Dealers were not especially worried. After all, Roosevelt had easily defeated Hebert Hoover in 1932, Alfred Landon in 1936, and they expected Roosevelt would easily brush aside the Willkie challenge. They were in for a big surprise because Willkie proved to be a formidable opponent. He was a fiery and effective speaker, and a tireless campaigner, who apparently didn’t need much sleep. The aging Roosevelt clearly was caught off guard, and as the candidates battled throughout September and October, the specter of a Willkie upset began to haunt the Democrats.
When John L. Lewis, the powerful labor leader and president of the United Mine Workers and the CIO, endorsed Willkie, on October 23, because he feared Roosevelt would take the country into the European war, the New Dealers realized Roosevelt needed to do something dramatic to shore up his sagging support. On October 30, 1940, Roosevelt delivered a rousing speech at Boston Garden that was broadcast across the nation (some connoisseurs consider it his finest), in which he promised he would never send American boys to fight in a foreign war. Willkie, who was listening to the speech in his hotel suite in New York City, is said to have exploded in rage, and stormed around the room shouting, “That damned speech just cost me the election.” That much he got right. The speech closed the deal with the American people, and Roosevelt won the election, although it was a lot closer than anyone had expected back in the spring.

After the election, Willkie established a foundation he named Freedom House (believe it or not the co-founder was Eleanor Roosevelt) dedicated to the peaceful resolution of international disputes; although, somewhat surprisingly, its publications quickly took on a rather anti Nazi tone. On December 7, 1941, the Imperial Japanese navy attacked the American fleet at Pearl Harbor in Hawaii, quickly followed by other attacks throughout the Pacific (as the west coast had feared), and four days later Nazi Germany and Italy declared war on the United States. So war came to America after all; and by the summer of 1942, with the Axis powers rolling up one victory after another, the American people were in a grim and sullen mood. The ever politically astute Franklin Roosevelt decided he needed someone to travel around the world to assess the state of affairs, see if there were any good news, and report back to him. So whom did he pick? None other than Wendell Willkie.
On August 26, 1942, Willkie left Mitchell field in New York, on a Consolidated bomber converted for passenger use, accompanied by his publisher Gardner Cowles, and a well known foreign correspondent, Joseph Barnes, on a world wide trip, retuning to Minneapolis on October 14, 1942, and dutifully reported his findings to the president. On April 8, 1943 Simon and Shuster published the report. By this time, however, the mood of the American people had changed dramatically because it was now obvious that the Allies and the Russians were going to achieve an overwhelming victory over the Axis powers. It was also obvious that Nazi Germany and Imperial Japan were going to be ground to powder, and that a new world was being born. But what would this new world look like? As if to answer that question, Willkie titled his book One World. It rocketed to number one on the New York Times list of best selling non-fiction books where it remained for over four months. It would prove to be the best selling non-fiction book in American history up to that time, and even today makes for quite a read.

The first part of One World is bit of a travelogue in which Willkie describes the countries he visited and the leaders he met in a colorful and down home style. It is the second half of the book, however, that is truly astounding. In that section, Willkie describes what the new world that is being born will look like, and, incredibly, got it right because the world he described a lifetime ago is the world we live in today. Now, I have written such a lengthy article because to understand the current banking and financial meltdown we need to see how deep the roots go. And the roots go down all the way to the First World War, the Great Depression and their successor, the Second World War.

Wendell Willkie and his contemporaries were the generation that had lived through the carnage of two world wars, the poverty of a great world depression, and believed passionately, not just intellectually, that this had to stop, now; because, given the increasing devastation caused by modern weapons, mankind might not be able to withstand another such catastrophe of its own making. They believed that peace, in part, could be achieved by people becoming mutually dependent upon each other through the exchange of goods and ideas. What today we call “globalization”. But how to finance this trade, there’s the rub.

Debt was the answer. The world would finance the trade through debt; and, as long as wealth grew faster than the debt needed to finance it, the system worked. But in 2008, sixty-five years after the publication of One World it all came crashing down for one and only one reason, unbridled greed. Governments the world over encouraged their citizens and institutions to pile up mountains upon mountains of debt to finance the growth, particularly in the United States. Citizens, institutions, even governments themselves became willing participants in the illusion that one can borrow instead of work one’s way to prosperity. The men of finance were the worst of a bad lot, believing that vast sums of easy money could be made through the seemingly endless permutations of mind-numbingly complex financial instruments which became ends in themselves instead of instruments to help alleviate poverty and to help to build peace.

Wendell Willkie and his generation looked about at the wreckage and misery they were creating, and thought how can mankind sink lower than this? Now we know.

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