Economy's real problem? The spenders can't spend. http://www.csmonitor.com/Business/R...onomy-s-real-problem-The-spenders-can-t-spend Rarely in history has the cause of a major economic problem been so clear yet have so few been willing to see it. The major reason this recovery has been so anemic is not Europe’s debt crisis. It’s not Japan’s tsumami. It’s not Wall Street’s continuing excesses. It’s not, as right-wing economists tell us, because taxes are too high on corporations and the rich, and safety nets are too generous to the needy. It’s not even, as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus. The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008. If you have any doubt, just take a look at the Survey of Consumer Finances, released Monday by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 – a drop of 7.7%. All of the gains from economic growth have been going to the richest 1 percent – who, because they’re so rich, spend no more than half what they take in. Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust. Starting around 1980, globalization and automation began exerting downward pressure on median wages. Employers began busting unions in order to make more profits. And increasingly deregulated financial markets began taking over the real economy. The result was slower wage growth for most households. Women surged into paid work in order to prop up family incomes – which helped for a time. But the median wage kept flattening, and then, after 2001, began to decline. Households tried to keep up by going deeply into debt, using the rising values of their homes as collateral. This also helped – for a time. But then the housing bubble popped. The Fed’s latest report shows how loud that pop was. Between 2007 and 2010 (the latest data available) American families’ median net worth fell almost 40 percent – down to levels last seen in 1992. The typical family’s wealth is their home, not their stock portfolio – and housing values have dropped by a third since 2006. Families have also become less confident about how much income they can expect in the future. In 2010, over 35% of American families said they did not “have a good idea of what their income would be for the next year.” That’s up from 31.4% in 2007. But because their incomes and their net worth have both dropped, families are saving less. The proportion of families that said they had saved in the preceding year fell from 56.4% in 2007 to 52% in 2010, the lowest level since the Fed began collecting that information in 1992. Bottom line: The American economy is still struggling because the vast American middle class can’t spend more to get it out of first gear. What to do? There’s no simple answer in the short term except to hope we stay in first gear and don’t slide backwards. Over the longer term the answer is to make sure the middle class gets far more of the gains from economic growth. How? We might learn something from history. During the 1920s, income concentrated at the top. By 1928, the top 1 percent was raking in an astounding 23.94 percent of the total (close to the 23.5 percent the top 1 percent got in 2007) according to analyses of tax records by my colleague Emmanuel Saez and Thomas Piketty. At that point the bubble popped and we fell into the Great Depression. But then came the Wagner Act, requiring employers to bargain in good faith with organized labor. Social Security and unemployment insurance. The Works Projects Administration and Civilian Conservation Corps. A national minimum wage. And to contain Wall Street: The Securities Act and Glass-Steagall Act. In 1941 America went to war – a vast mobilization that employed every able-bodied adult American, and put money in their pockets. And after the war, the GI Bill, sending millions of returning veterans to college. A vast expansion of public higher education. And huge infrastructure investments, such as the National Defense Highway Act. Taxes on the rich remained at least 70 percent until 1981. The result: By 1957, the top 1 percent of Americans raked in only 10.1 percent of total income. Most of the rest went to a growing middle class – whose members fueled the greatest economic boom in the history of the world. Get it? We won’t get out of first gear until the middle class regains the bargaining power it had in the first three decades after World War II to claim a much larger share of the gains from productivity growth.
The writer leaves out globalization and makes the scope of the problem too narrow. Being the worlds spender is unsustainable regardless of domestic policy. Partly because our workforce isn't dynamic enough to handle the skills shift towards higher paying jobs.
interesting article. However it ignores 1 big reason why Americans aren't spending as much. They are Saving more. Over the last 5yrs, Americans have begun to increase the % of what they save. Also, 401K contributions are reaching all time highs. People are starting to look towards the future again rather than spend for "today". People began spending more and saving less starting in the 70's, because they hadn't learned the lessons of their parents who went through the Great Depression. They began using credit cards in bulk with a "pay later" attitude that is also finally slowly disappearing. In the 80's and 90's, kids wanted what their parents had..but they wanted them immediately instead of at their parents age. Instead of saving for things, they bought on credit, leveraging their financial situations and when they lost their jobs, or had a financial hardship they were screwed. In this last recession, many people have learned the hard way..that they need to spend less and save more. Unfortunately, it has had an adverse effect on the economy. Now we're in a screwed up catch 21. These changing attitudes are good things, but it will cost us a slower economic recovery. However, society as a whole will be better off in the future. Hopefully we can pass these lessons to our children so they don't have to learn the hard way as well.
Another issue to keep in mind is that with a 7.7% drop in salary, health insurance premiums have spiked as well. I read this article a while back that basically said that health care costs have eroded all salary gains made by the median middle class earners the last decade. Good thing Obamacare solved that problem. Oh wait, it only solidified it further.
He does mention globalization as pushing wages down. But I think you can argue that part of building the middle class wealth is by investing in creating a dynamic workforce...which takes cash...which takes tax dollars.
I agree up to "which takes tax dollars." Since the founding of the nation tax dollars rarely have been used wisely. IMO what really should have replaced the "tax dollars" quote, is "which takes investment in domestic manufacturing." Glynch and I rarely agree on anything, but I believe we do share one common belief -- the financiers and CEOs have become far too greedy. Instead of thinking of their companies as people, they think of them as stockholders only. I understand their commitment to shareholders, but nothing works if their employees do not profit as well. No, I have not become a liberal, but I do understand the dangers of shipping our jobs and ideas across international borders to achieve lower labor costs. If we dictated that wages for the same job should be equal internationally to the wages nationally, regardless of whether that job is performed by a man, woman or child, few jobs would leave the U.S. Also, we should insist that no imported goods be made by children under the age of 16.
Correct, but insurance rate increases reflecting changes brought on by the health insurance reform act inappropriately dubbed healthcare reform [namely the removal of the lifetime max among others] have been seen and passed down to businesses and individuals already. My criticism was aimed more at the underlying issues of insurance premiums spiking were not really addressed with that legislation.
My opinion only. The Lousiana purchase, the purchase of Alaska, the Panama Canal, the creation of the national parks system, Social Security and Medicare (as originally intended) come to mind. Short of that, I am having trouble.
Why should we do anything? The top 1% have it better than ever. That should be good enough for the whole nation, they are the only ones that counts anyway.
Since we are all about wealth redistribution, why shouldn't china and india redistribute american wealth.
Please stop being a satanic socialist homosexual ethnic minority terroist! Don't you know that criticizing the people who are making our lives worse is akin to suggesting that Jesus likes gay buttsex? Do you want to **** all over freedom and liberty and turn over power to all the Stalins and Hitlers in the Federal Government?
I agree ... why shouldn't they? P.S. It's not "American" wealth. It belongs to very few people, and you and I are not included in that group.
Actually that is part of the problem for the US and Europe, this process will continue until we reach some sort of equilibrium, who knows when.
Yesterday, a vendor came and made a presentation about a new shop that they had built in Baytown. They now have capabilities to make very large, heavy-walled pressure vessels. The last domestic manufacturer with these capabilities shut down over 20 years ago, and similar vessels were built in Spain or Asia. Since they've opened, they've been booked solid at this facility. This kind of thing is the only thing that will rebuild the economy. Everything else is just putting a new coat of paint on a rotting house.
