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. Taxes were hiked on the very rich. And in 1941 America went to war -- a vast mobilization that employed every able-bodied adult American, and put money in their pockets.
By 1953, the top 1 percent of Americans raked in only 9.9 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.
ROBERT B. REICH, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage." He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
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Why the economy can’t get out of first gear? Perhaps is simply the Republican Congress.
Once again, Robert Reich is dead on in his analysis. We are no longer the world's largest manufacturer, China surpassed us. Until we bring back that sector of the economy, until we accept that buying from cheap labor, centralized economies like China is the death of our middle class, we will continue to muddle along a la Britain after WW II. Americans deserve better than that. Our tax structure needs drastic revision, a wealth tax in place of the gift and estate tax, new brackets above $ 200K and a national sales tax, at least on "luxury items" are a start. Our foreign trade should be more balanced, thus we need to convert cars to run on our domestic natural gas to replace imported oil and China should be limited in their exports to us ( Sorry Walmart and their kind). Unpopular medicine, of course, but far better than any alternative. But for segregation, both economically and socially ( and not just for Afro-Americans!), the '50's were perhaps our golden years. We can redeem ourselves, but sacrifices must be made and that should start at the top, with Wall Street and lawyers and members of Congress and some others in DC.
Simple, because they are greedy and want profit. They don't care about the people, and it's not their job to.
That's supposed to be the government's job.
Strange how Reich missed that little tidbit.
http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=5
If consumption spending is the problem, how much higher does it need to be?
To remedy the situation, we need to do several things, including finding ways to encourage businesses to take some risks and speed some hiring. When people see job growth, they will have increased confidence. For businesses, the sluggish demand growth is exacerbated by uncertainty about taxes and regulations. This administration is rightfully perceived as anti-business. They need to start making some moves that get at the heart of the matter -- or else it will become Romney's turn to deal with the problem.
The country is the 2nd largest exporter. It has strong labor unions, covering over a quarter of all German workers. Its unemployment rate is 70% of the US today. Other than it's ridiculous austerity, the country is very strong.
It's labor unions cover over a quarter of all German workers. Ours cover only 11%.
the crisis was caused by the extended and over use of complex derivatives
that's pretty common knowledge....if you have any formal education in business, finance, investment, etc.
http://www.huffingtonpost.com/nick-wiseman/walmarts-coming-to-town_b_1123275.html?ref=business&ir=Business
The story heard around the world is that Wal-Mart mercilessly crushes its competition; for every two job it creates, three are lost in the exchange. The all-inclusive megastores cut hair, change tires, pump gas, and oh yeah, sell food too, at a discount made possible through ruthless pressure on suppliers to cut costs. Every hair salon, mechanic shop, and gas station is threatened. As are the local grocers that are rooted in the community they serve.
Here's a thought. Why don't all workers push for better wages, instead of just unions? It can be done. The first step is not supporting politicians who draft laws that only favor the rich, and then go on from there.
I say leave, because for every overpaid "job-creator" that leaves, for every Corp that goes bust, there are thousands of brilliant young minds waiting in the rafters to swoop down and re-engineer American business in a sustainable way that honors the Social Contract of America.