Everyone agrees that the American economy is hurting. Left and right, conservative and progressive, Tea Party or OWS, evangelical Christian or Unitarian Universalist, no can can deny that the US economy is performing poorly. Unemployment is high, home foreclosures are increasing, business orders are down and sales are soft. And it has been that way for some period of time, certainly since late 2008, and depending on who you talk to, perhaps since before then. The government has tried to improve the economy, using strategies promoted from the left (stimulus spending) and from the right (tax cuts), with only modest, if any, increase in economic activity realized.
Congress seems unable to act further, mired in endless discussions over putting Americans back to work with government spending, or cutting down the size of US debts. Certainly, when it comes to the US economy, spending and debts are of central importance, and congress is right to focus on these topics. Meanwhile, in recent weeks crowds have gathered in cities across the country, largely in response to the continued poor economic conditions.
n 2008, as the great recession took hold, I wrote a brief humorous piece about my understanding of economic conditions at the time. I called it “Let Me See If I Got This Right”. It went something like this
- Americans buy lots of stuff and business is good for factories and stores.
- Encouraged in part by greed and in part by factories and stores, Americans go into debt in order to buy all those things they have been buying.
- Banks make lots of money by lending to Americans so they can go out buy all those things.
- For a while everyone is happy, American consumers, American businesses, and American banks.
- At some point, banks start getting scared by the amounts of debt owned by American consumers: American consumers start to look like bad credit risks.
- Banks stop lending to consumers, consumers stop buying all that stuff, and factories and stores find their business suffers.
- Banks also find their business suffers because they can no longer make heaps of money lending to American consumers, and they have all these bad loans on their books.
- The American economy heads into the toilet.
I concluded my piece by suggesting that the proper remedy for the economic malaise was for American consumers need to go deeper into debt so they could get back into the stores and buy stuff to make the American economy great again. And while I wrote that piece with tongue planted firmly in cheek, it nonetheless contained some real nuggets of truth: high consumer demand is a critical aspect of US economic strength, and during the 'aughties, high consumer demand was largely fueled by the willingness of consumers to take on debt..
For better or worse, my prescription for a return to economic health was ignored. Stubbornly, the economic downturn has dragged on. While American consumers have been willing to go deeper in debt for the American economy, the banks have been unwilling to extend more credit to what looks to them like a bunch of deadbeat consumers.
Sadly, I now realize my initial analysis of the American economy was flawed, and missed a large and important factor of the American economy. As the Occupy Wall St. movement has pointed out, economic inequality is a influential component of the forces acting on the American economy. One example of this economic inequality was reported earlier this week by the Congressional Budget Office: incomes for the top 1% of Americans rose by over 275% between 1979 and 2007, while those in the middle class saw their incomes increase by about 40% over the same 28 year period, and the lowest 20% of American earners saw only an 18% increase in their incomes, barely keeping pace with inflation over that time period (source: http://www.washingtonpost.com/...).
What does income and economic inequality have to do with what happened to the American economy in 2008 and since? Let's review my 2008 analysis of the economy factoring in this new information.
- Americans buy lots of stuff and business is good for factories and stores
- As larger shares of American income goes to a smaller share of the American consumers, more and more American consumers are having a harder time buying all the stuff needed for robust economic activity.
- Fortunately, banks are willing to lend money to American consumers and consumers are willing to go into debt so American economic activity remains strong.
- As time goes on, American consumers continue to lose buying power to depressed incomes and go deeper into debt.
- At some point, banks get nervous about lending more money to Americans suffering from depressed incomes and large amounts of debt.
- Saddled with large amounts of debt and depressed incomes, American consumers can no longer buy all the stuff needed to keep the economy strong.
- Banks stop lending to consumers, consumers stop buying all that stuff, and factories and stores find their business suffers.
- Banks also find their business suffers because they can no longer make heaps of money lending to American consumers, and they have all these bad loans on their books.
- The American economy heads into the toilet.
This new analysis leads us to new conclusions: 1) the extent to which we can improve the American economy by having American consumers go deeper into debt is limited by the willingness of banks to lend money to those consumers; and 2) there is another way to fix the American economy and that involves reducing economic inequality and increasing incomes for the 99% of Americans who are collectively the largest driver of American economic activity.
There are two main “take-home messages” I hope readers will understand with this article.
1. A strong robust American economy depends on the spending habits of large numbers of Americans. While the richest 1% of Americans have seen large increases in their incomes and overall wealth, the years since 2008 have shown us that the spending habits of the richest Americans alone are not sufficient to effective revive and fully power the American economy. Reducing economic inequality, as suggested by the Occupy Wall St. movement and others, is not only morally and politically correct, it is a necessary ingredient for a sustained economic recovery, and American economic growth in general.
2. AND, a strong robust American economy depends on the spending habits of large numbers of Americans. Just as conservatives like to refer to their wealthy constituents as “jobs creators”, and warn of the negative consequences to jobs and employment that might follow any action that imposes on the 1% (like say, a millionaire's tax), liberal groups should find some similarly pithy and positive way to refer to the middle and lower classes, like, say “the engines of the economy”. And this new designation should be used liberally in discussions of economic policy. For example, in discussing bank foreclosures on homes, liberal groups should point out that mass foreclosures are harmful to the engines of the economy. Or that cutting Social Security will have a negative effect on the engines of the economy. The message should be that policies that hurt the middle and lower classes are not simply widely unpopular, they also are damaging to America's strength and wealth.
There is a story I heard somewhere, and I don't know whether it is true or simply an American myth. The story goes that when Henry Ford was hiring laborers to work in his new automobile factories, he decided to pay his workers a wage that was significantly greater than what workers in other factories received. According to the story, Mr. Ford's reasoning was that it was pointless to make huge numbers of cars using the new-fangled assembly lines if he could not sell lots of cars: Mr. Ford hoped that the higher wage he was offering his workers would come back to him in time in the form of greater auto sales. History tells us that Mr. Ford did indeed make and sell lots of autos.
If the legend is true, Mr. Ford knew something about the economy that seems forgotten today: without the 99%, there is no 1%. A strong economy depends on the well-being of all the people.