The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.This is about as clear an explanation of the current economic situation as we will get. But it's pure economics and does not include the social changes that have been happening in America. Here's what I have seen:
All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.
What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.
What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.
American workers have not received a pay raise other than inflation since 1980. Consumers (considered in family groups) had to send the wives out to work since the early 80's and also to put the consumption purchases on credit cards or other forms of bank debt after that time. This period started off with the growth of the credit card industry. It wasn't just an easy way to buy things. It gave credit to the masses and heavy fees to the bankers.
By the late 1980's that had become unsustainable if the economy (based 70% on consumption and another 20% on investment that only happens when there are growing consumer markets to invest in) were to continue to expand, so second mortgages and refinancing the inflated homes were required to pay the debt bills.
That would have ended about 2000 had Greenspan not gone out of his way to inflate the market and create the housing bubble. The banks and libertarians were simultaneously creating new financial products to suck money from the housing bubble and hand it off to the banks and hedge funds. Deregulating the bank products was another part of the scam.
In the meantime, the wealthiest 5% of Americans were sucking off literally all the gains from increased productivity, so that they now own what, nearly 50% of all American wealth? As Kevin Phillips pointed out in Wealth and Democracy, the wealthiest families have vastly increased their wealth during this period of time. Much of that increase has been through use of hedge funds and private investment managers.
Paul Farrell at the Wall Street Journal confirms that the average investor no longer gets much return on stock investments. He describes the current situation thus: "America's divided into two stock markets: one for Wall Street's rich insiders, another for Main Street's suckers: 'Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.' "
While a lot of this is common knowledge, the arc of events seems to be getting worse rapidly. When I hear good economic news now my first question is what the source of that news is selling. The good news is always either sourced from or disseminated by someone who makes money by keeping people bullish on the economy. (Of course, there are also the Glenn Becks who are profiting from selling disaster news, but it's the same rip-off.) It is being done on the backs of the working and middle classes and it can't last.
The increasing oppression of the poor is a requirement of these economic changes, as is the increasing farming of the lowest income people for money through sub-prime loans, payday loans, over-priced used car loans, extremely high interest rate rapid tax refund loans, check-cashing services (5% or more of the face value of the check because 30% of the employed are not allowed to have bank accounts - the banks won't give them accounts but employers no longer pay in cash), rent-to-own stores, pawn shops and other ways to sop up money from the low income working people.
This is all systematic. The wealth of America is being shifted from the poor and working classes who create it to the extremely wealthy in old money families. That's the urgency about eliminating the inheritance tax. They want to increase their family wealth. With that wealth goes aristocratic power, of course. [I sometimes wonder how closely this resembles the destruction of the Roman middle class farmers and their descent into serfdom at the end of the western Roman Empire.]
Did I leave out bank centralization and the way big box stores are putting small businesses out of business? According to David Cay Johnston (Free Lunch) Wal-Mart's total corporate profits each year almost exactly match the amount of money the local governments have given up in business taxes in order to encourage Wal-Mart to build a store in their location. But Wal-Mart puts the tax paying local stores out of business by undercutting their prices. All at the price of a few pay-offs to a few local city and county politicians.
Paul Krugman himself severely underestimates the structural changes that have occurred in America. There is going to have to be a lot that changes if America is ever to become truly competitive as an industrial nation again. Until this stuff is recognized, that is not going to happen.