The Long Slump is economist Joseph Stiglitz’s name for the stubbornly weak state of the US economy. Writing in Vanity Fair magazine, Stiglitz argues that the conditions that led up to the present recession eerily mirror the conditions that caused the Great Depression of the 1930s.

If he is correct, it means that the current war against spending and economic investment  in Washington, DC will have two drastic effects. First, it will prolong our economic stagnation and suffering. Second, it will delay the profound changes that are necessary to put our economy back on a growth path.
Here’s the gist of his case. In the early 1900s, the US economy was largely farm and food-based. More than 20% of all American workers were employed on farms. But by the 1920s, farming was in the midst of a grand shift in food-growing technology. Stiglitz describes it this way:

“In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.”

That productivity revolution rocked American farming in the 1920s. As productivity went up, food prices went down. As food prices dropped, farmers mechanized further to increase crops, adding to the downward spiral of prices and income. By 1932, according to Stiglitz, typical farm worker income had dropped by anywhere from one-third to two-thirds. That caused a slump in demand for manufactured goods, so plants began to lay off workers. Income and demand dropped again. A shortfall of tax collections led to layoffs for state and local government workers. Each downward step fueled the next. By the end of 1932, 23% of the working population had no jobs. As government red ink mounted, deficit hawks of the day called for drastic spending cutbacks.

Doesn’t all of this sound a bit familiar? Stiglitz suggests that all we have to do is substitute manufacturing for agriculture, and we will see that the same patterns have been unfolding in our economy over last two decades. Productivity gains outrun demand and manufacturing jobs shrink. Outsourcing shrinks jobs even further. Increased competition for scarce jobs lowers pay. Lower incomes mean less consumer spending, which further depresses the economy.

In the 1930s, millions of farmers lost their jobs and their livelihood. Because of the dried-up Depression economy, they could not migrate to the industrial cities to find new jobs in manufacturing. They found themselves trapped in the small towns on the plains with nowhere to go.

Today, workers in US manufacturing find themselves similarly trapped, victims first of vast productivity increases and then of the shift of manufacturing jobs overseas. Like the depression-era farmers, many of them will never find significant employment again.

Most economists agree that it took World War II to pull America out of the Great Depression. In order to defeat Japan and Germany, America built a world class manufacturing economy on the fly. All this was paid for by deficit spending for the war effort. After the war ended, millions of soldiers came home and were given free educations so that they could take full part in the country’s booming economy. That, too, was paid for by the government.

Stiglitz argues that something akin to government wartime spending is needed once more to facilitate the shift to a post-industrial economy. Manufacturing employment has bottomed-out in the same way that farm employment bottomed-out 80 years ago. US manufacturing at its peak employed one out of every three workers. Today, that number is less than one out of ten.

Whether Stiglitz’s gloomiest predictions are accurate is not entirely the point. We have always looked to government to provide the “stimulus” needed to kick-start new technologies and new industries.

Given the current political climate in Washington, there is zero chance that the government will undertake what would amount to a Marshall Plan-scale of investment in the Post-Industrial economy. If we are going to allow our investment in solar technology to be “spooked” by one bad loan, for example, where will we find the courage to step up to what the future requires of us? Where will our new jobs come from, and how will we generate the R&D and capital investment needed to grow them?

We could look to corporate America, except that big business is already sitting on the largest accumulation of cash in history, and shows no signs of willingness to make investments that are not tied to short-term returns, or that entail higher risk. (The Wall Street Journal reported in September 2011 that American non-financial companies were “hoarding” more than $2 trillion in cash and other liquid assets. And that does not even include the extraordinary amount of cash piling up in overseas subsidiaries.)

Balanced budgets and payroll tax cuts have their place, but they hardly amount to a serious strategy to create the economy of the future. If we follow “Do-Nothing” economic policies, it shouldn’t be a big surprise if we end up with a “Do-Nothing” economy.