Common wisdom is that excessive debt-financed spending was one of the causes of the recent recession, so the news that household debt is dropping is being celebrated by business cheerleaders as reason to believe we're on the mend is baloney, economist Robert Reich says.
"The reason so many Americans went into such deep debt was because their wages didn't keep up," Reich wrote on his website.
"The median wage (adjusted for inflation) dropped between 2001 and 2007, the last so-called economic expansion. A larger and larger share of total income went to people at the top.”
The problem, Reich writes, wasn’t that consumers lived beyond their means, either. It was that their means didn’t keep up with what the growing economy was capable of producing at or near full-employment.
“The only way typical Americans could keep spending at the rate necessary to keep themselves and the economy going was to borrow,” Reich notes, “especially against the value of their homes. But that borrowing ended when the housing bubble burst.”
So now Americans have no choice but to pare back their debt, Reich says — which is bad news because consumer spending is 70 percent of the U.S. economy.
“It helps explain why we so few jobs are being created, and why we can’t escape the gravitational pull of the Great Recession without far more government spending,” wrote Reich, now a professor of public policy at the University of California at Berkeley.
“It’s hard to see where the buying power will come from unless America’s vast middle class has more take-home pay,” wrote Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton.
“Yet the economy is moving in exactly the opposite direction: Businesses continue to slash payrolls. And the hourly wage of the typical American with a job continues to drop, adjusted for inflation.”
Prior to a recent two-day meeting of G-20 finance ministers, Treasury Secretary Tim Geithner sent a private letter to his counterparts that they can no longer count on the American consumer to lift the global economy by buying exports from the rest of the world.
"Given the broader shifts under way in the U.S. economy towards higher domestic savings, without further progress on rebalancing global demand, global growth rates will fall short of potential," Geithner wrote, according to a copy of the letter viewed by the Wall Street Journal.
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