Most economists agree that until the consumer begins to "spend again," the economy is unlikely to grow at meaningful rates in the next several years. But when and how will that happen?
Consumer demand makes up more than two-thirds of the economy. Without significant increases in personal consumption, economic growth sufficient to simultaneously absorb a growing labor force and reduce unemployment is unlikely. But we are now confronted with a perfect storm that will foreclose the possibility of a consumption based upturn without a radical change in the way that work is rewarded or a return to the debt driven growth that led us into the current quagmire.
The perfect storm is the combination of a wholesale deterioration in the labor market -- massive job and hour reductions combined with a long-term decline in real wages -- and the end of the household debt explosion.
When real wages were rising in the post-WWII period through the early 1970s, consumption growth was driven by increased reward for each hour worked. When real wages began to fall in the mid-1970s, consumption growth was driven by a combination of growth of household credit and an increase in the number of hours worked by the average household.
Now, with the simultaneous stagnation of real wages and the reduction in household credit driven both by household deleveraging and more restrictive lending requirements a durable consumption led recovery is not in the cards.
There is no doubt that the psychology of the American consumer (worker) has been profoundly impacted by the current economic crisis. For those who still have jobs, we are seeing a dramatic increase in the savings rate and an unprecedented paying down of debt. It is unclear how long this new psychology will prevail, but it is safe to say that it will not end until there is a positive material change in people's real economic situation (incomes) and their view of the future.
The truth is the financial crisis that was spawned by the collapse in the housing market was at its core a wage crisis. With real wages at least 15% below their 1973 levels (Department of Labor, real average weekly earnings series), and households maxed out on the number of hours they could work to maintain their living standards as measured by median family income, the only way to keep the economy growing in the new century was to increase access to credit by lowering interest rates. That chicken had to come home to roost and it did.
At the peak of the last upturn in 2000, real wages were where they still are today -- significantly below the 1973 level. American workers saw no increase in their real earnings this decade, despite a dramatic increase in productivity.
In order to maintain living standards, household hours worked increased dramatically from the 1970s through the 1990s, primarily by an increase in the hours worked by women. That increase finally hit a wall in the late 1990s, and found expression in a decline in real median family income in the ensuing decade, the first decline in the post-WWII period. (Source: Census Bureau) Adjusting by income quintiles, in the period from 2000 to 2007, real family income fell for the first time in the post-WWII period for the bottom 60% of the population. Even in the period from 1973 to 2000, as real wages were falling, families in all income brackets experienced an increase in real family incomes. (Source: Economic Policy Institute)
With the decline in family income for the broad mass of families, and a simultaneous large-scale reduction in interest rates came an explosion in household debt of all kinds - from credit card to mortgage debt as families sought to maintain their living standards.
While the Fed's "financial obligations ratio" - a measure of household indebtedness relative to disposable income -- remained in a range of 14.5 to 15.5 percent from the mid 1980s through the 1990s, from the first quarter of 2000 to the 4th quarter of 2007 it went from 15.25% to 18.20%, the largest sustained increase in history. A major driver of this increase was the increase in mortgage related debt payments from 9.1% to 11.8%. As we now know, much of the increase in mortgage related indebtedness was not the result of people taking on new mortgages, but rather by people refinancing to maintain their consumption. In 2004, the peak of the housing bubble, of the $1 trillion in new mortgage debt, 60%, or $600 billion, was the result of refinancing. That $600 billion represented 7% of disposable personal income. (Source: Kevin Phillips based on FRB data)
While American workers sought to maintain their consumption by incurring greater amounts of debt, American financial institutions were awash in capital as corporate profits exploded and made their way through the financial system.
And although the gap between compensation and productivity growth had been growing since the mid-1970s, it experienced its greatest expansion in the period from 2000 to the current crisis. The ultimate source of the explosion in corporate profits was the widening gap between compensation and productivity. As finance capital sought profitable outlets dozens of new fangled derivative and other products were created. While the initial shock of the housing bubble hit mortgage backed securities, the entire derivative pyramid came apart.
So while the economic crisis broke out in the financial sphere, it was the result of the wage crisis. While fiscal, monetary, and other government policies can ameliorate the effects of the crisis now, we are still in for a difficult and long economic period until the essence of the consumption base -- the American wage structure -- is restored.
As we know from history, corporations do not hand over wage increases that they do not have to without pressure. We have seen that the "pressure" of a "free labor market," is an insufficient impetus. Rather, workers need to be able to bargain from a position of relative equality. The only way for that to happen is for workers to organize and bargain collectively -- i.e. to unionize. This is why labor law reform that gives workers the real right to organize, the Employee Free Choice Act, is not a sop to unions, but a necessary component of the restoration of meaningful economic growth and the foundation of the realization of the true debt-free American Dream. Only if wages rise commensurate with productivity will we be back on the path of broad economic prosperity.
For charts and data please email the author at greg@tarpgroup.com
or.. we find a way to share in the prosperity... I have said that any so called bailout should go directly to each taxpayer.. in terms of cash in your hand.. and the amount should be at least $25,000. per year for five years... oh, wait... they call that socialism... but damnit, most of us would spend it... either to pay bills or to buy stuff... it would stimulate the economy right??
I don't really see either one happening so I guess were toast.
The adjusted rate for unemployment is 16.8% and people are still losing jobs, although the rate has been slowing down. Economic recovery is impossible unless people go back to work and right now no one can even say where the jobs will come from.
The next tsunami, which is just starting to hit, is the defaults in commercial real estate mortgages and their soon to be worthless bundled derivatives.
With no relief in sight and an even bigger tsunami upon us, the economy is about to take another major hit, so y'all can forget about a recovery.
Not really a bad thing.
Consumer demand makes up more than two-thirds of the economy
Perhaps it should be less.
In fact, consumer spending that we thought was going up, was flat when you remove health care inflation.
If you bring the cost down for non-discretionary items, like health care, energy and utilities and food, the same dollar buys more and you have a pay increase in effect and in reality. Raising salaries without additional value makes our country less competitive and we lose jobs.
So we must get the costs of many goods to be in line with fundamental value, not manufactured value, something the corporations are doing every day to get the extra money into the their pocket not yours. Specifically those in Health Care and Energy.
If you stop those excessive corporations from ripping us off every gets a huge raise.
Either that or deal with it the way it is !!!!
This SUCKERS GAME of getting people to go to Credit Counciling and make Unsecured Deby into Secured Debt will not work on the Educated who have been run over !!!!!!
They will not file bankruptize but tell you come get the junk !!!!!!
Get a Judgement !
Bite one! LOL.
They know a Judge can declare them bankrupt but a judge can not force them to file for bankruptize !!!
So the smart one are not going to be your CHUMPS !!!!!!
Why do I need to consume more???
This is called a "deflationary spiral" and it is nearly impossible for the economy to bounce out of it unless government intervenes. Now the question is this: is the government intervention GOOD in the long term for the average worker?
The developed countries and America in particular have been consuming at an unsastainable rate. The transition to a sustainable economy could be smooth or it could be painful. I bet we will take the painful approach.
The solutions are pretty obvious and the fact that nothing has been done is further proof of the rampant corruption in our government. The huge increase in productivity these last thirty years that has not benefited the lower quintiles has VERY MUCH benefited those at the top and that includes most of our senators and representatives. Most of them know where their free lunch is coming from and are not going to pass any legislation that will harm their portfolios. I do believe we will have to hit rock bottom before any meaningful change takes place.
However, it is worse than even he thinks.
Back in 1960 author Vance Packard wrote a book ("The Waste Makers") that dealt with the reality that the productive capacity of the world so far outstripped its ability to consume that forced-draft consumption was required even then. He predicted that the US economy would glut and crash. (That was before globalization.)
Back then forced-draft consumption was via "planned obsolescence".
Packard also said that the saving factor for the US was the Cold War. It consumed huge resources and produced nothing of commercial value-- a pothole to pee labor into that did not result in tangible market output.
He said that if the Cold War ended we would have to start dumping Cadillacs into the ocean.
How prescient-- 50 years ago!