I have had occasion to think a lot about the developing economic situation in the US. The more I think, the more worried I get, because this is not the short-term problem that some folks are hoping it is. This isn’t even 1991-92 again. This is a sea-change.
Robert Reich, the Bill Clinton cabinet member, agrees. In a February 13, 2008 op-ed (which I will excerpt because they keep it behind the subscription wall) he said:
But the normal remedies are not likely to work this time, because this isn’t a normal downturn.
The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.
Why have consumers spent themselves out?
The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.
So what did Americans who work for a living do?
The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.
The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.
So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.
I appreciate that Reich debunks the conservative shibboleth that feminism causes women to seek paying work. Women have always done paid work outside the home. They had to. My mother, born into rural poverty, contributed her babysitting money to the family income when she was a pre-teen and teen. Her father was absent, her mother worked, her sisters and brothers all worked, and they grew some vegetables and raised some pigs and chickens because that’s how they got enough to eat. That’s the 1950s that were in rural New England. It wasn’t a Norman Rockwell painting. For the rural poor, it was rural poverty. The 1950s with men in the office and women polishing shiny appliances mail-ordered from Nieman Marcus existed, to the extent it wasn’t all just fiction, for a tiny class-privileged slice of the women in the U.S. The rest were not white or affluent. The “problem with no name” that Friedan wrote about wasn’t a problem my mother’s people had.
So first we put all the parents in the workforce (those that were not already there, those families that had two parents around), then we worked more hours and more overtime (those that could get it), then we borrowed on credit cards (if available), borrowed against retirement savings (those who had them), and borrowed against houses (those who owned them). Now we’ve run out of running room. Nationwide, most folks who are not very affluent are very overextended, without savings, in debt, and struggling just to keep from sliding backwards.
Since the U.S. crawled out of the depression, we had growth, driven first by exports to a world destroyed by war and artifically stunted by colonial exploitation, and by the population explosion of the baby boom. When that cycle should have eased off, instead the last thirty years kept the profit flowing upwards as working people got ever more squeezed, and now a seventy year cycle is closing out.
Nervous yet?
Stephen Roach, the former chief economist at Morgan Stanley and now the chair of Morgan Stanley Asia, is. In his March 5, 2008 op-ed in the Times (again, subscription wall), he said:
The central question for the economy is this: Will this medicine work? The same question was asked repeatedly in Japan during its “lost decade” of the 1990s. Unfortunately, as was the case in Japan, the answer may be no.
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The United States is now going through its second post-bubble downturn in seven years. Yet this one stands in sharp contrast to the post-bubble shakeout in the stock market during 2000 and 2001. Back then, there was a collapse in business capital spending, a sector that peaked at only 13 percent of real gross domestic product.
The current recession has been set off by the simultaneous bursting of property and credit bubbles. The unwinding of these excesses is likely to exact a lasting toll on both homebuilders and American consumers. Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.
For asset-dependent, bubble-prone economies, a cyclical recovery — even when assisted by aggressive monetary and fiscal accommodation — isn’t a given. Over the past six years, income-short consumers made up for the weak increases in their paychecks by extracting equity from the housing bubble through cut-rate borrowing that was subsidized by the credit bubble. That game is now over. . . Given the outsize imbalance between supply and demand for new homes, housing prices may need to fall an additional 20 percent to clear the market. . . Aggressive interest rate cuts have not done much to contain the lethal contagion spreading in credit and capital markets. Now that their houses are worth less and loans are harder to come by, hard-pressed consumers are unlikely to be helped by lower interest rates.
Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.
There are eerie similarities between the United States now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.
Moreover, Japan’s central bank initially denied the perils caused by the bubbles. Similarly, it’s hard to forget the Fed’s blasé approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.
In Japan, a banking crisis constricted lending for years. In the United States, a full-blown credit crisis could do the same.
The unwinding of excessive corporate indebtedness in Japan and a “keiretsu” culture of companies buying one another’s equity shares put extraordinary pressures on business spending. In America, an excess of household indebtedness could put equally serious and lasting restrictions on consumer spending.
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Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
That’s not to say Washington shouldn’t help the innocent victims of the bubble’s aftermath — especially lower- and middle-income families. But the emphasis should be on providing income support for those who have been blindsided by this credit crisis rather than on rekindling excess spending by overextended consumers.
American authorities, especially Federal Reserve officials, harbor the mistaken belief that swift action can forestall a Japan-like collapse. The greater imperative is to avoid toxic asset bubbles in the first place. Steeped in denial and engulfed by election-year myopia, Washington remains oblivious of the dangers ahead.
We have an unstable and unsustainable economy. It has worked well, for a long time now, only for those at the very top. What is unsustainable cannot be sustained. Apparently I am not the only educated, affluent white man who thinks we have reached the point of reckoning. Hopefully when we crawl out of the mess we’re starting to see, we will have a more sustainable economy that works for all of us. Even if that’s the way it happens, the process will be scary.
Buckle up.