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Max J. Castro | Pro-Business Bias Survives Economic Bust [
America's Middle Classes Are No Longer Coping
By Robert Reich
The Financial Times
Tuesday 29 January 2008
It is an election year and the US economy is in peril of falling into recession or worse. Not surprisingly, Washington is abuzz with plans to prevent it. President George W. Bush has proposed a $150bn stimulus package and all the main presidential candidates are offering similar measures, including middle-class tax cuts and increased spending on infrastructure.
Ben Bernanke and the Federal Reserve have reduced interest rates another three-quarters of a point. But none of these fixes will help much because they do not deal with the underlying anxieties now gripping American voters. The problem lies deeper than the current slowdown and transcends the business cycle.
The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then: the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years now, America's middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences.
The first coping mechanism was moving more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970 - from 38 per cent to close to 70 per cent. Some parents are now even doing 24-hour shifts, one on child duty while the other works. These families are known as Dins: double income, no sex.
But we reached the limit to how many mothers could maintain paying jobs. What to do? We turned to a second coping mechanism. When families could not paddle any harder, they started paddling longer. The typical American now works two weeks more each year than 30 years ago. Compared with any other advanced nation we are veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there is also a limit to how long we can work. As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time. With housing prices rising briskly through the 1990s and even faster between 2002 and 2006, we turned our homes into piggy banks through home equity loans. Americans got nearly $250bn worth of home equity every quarter in second mortgages and refinancings. That is nearly 10 per cent of disposable income. With credit cards raining down like manna, we bought plasma tele 1avision sets, new appliances, vacations.
With dollars artificially high because foreigners continued to hold them even as the nation sank deeper into debt, we summoned inexpensive goods and services from the rest of the world.
But this final coping mechanism can no longer keep us going, either. The era of easy money is over. With the bursting of the housing bubble, home equity is drying up. As Moody's reported recently, defaults on home equity loans have surged to the highest level this decade. Car and credit card debt is next. Personal bankruptcies rose 48 per cent in first half of 2007, probably even more in the second half, which means a wave of defaults on consumer loans. Meanwhile, as foreigners begin shifting out of dollars, we will no longer have access to cheap foreign goods and services.
In short, the anxiety gripping the middle class is not simply a product of the current economic slowdown. The underlying problem began around 1970. Any presidential candidate seeking to address it will have to think bigger than bailing out lenders and borrowers, or stimulating the economy with tax cuts and spending increases.
Most Americans are still not prospering in the high-technology, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a small number of people at the very top.
The candidate who acknowledges this and comes up with ways not just to stimulate the economy but also to boost wages - through, say, a more progressive tax, stronger unions and, over the longer term, better schools for children from lower-income families and better access to higher education - will have a good chance of winning over America's large, and increasingly anxious, voters.
The writer is professor of public policy at the University of California at Berkeley. He is former US secretary of labour and author of Supercapitalism
Pro-Business Bias Survives Economic Bust
By Max J. Castro
31 January to 05 February 2008 Issue
Boasting about the strength of the economy has been a staple of Bush administration propaganda for a long time. In fact, while the rate of economic growth and the level of unemployment have been pretty good for the last few years, throughout the Bush era the economy has been "strong and getting stronger" only for those at the very top of the income distribution.
It is a trend that began long before George W. Bush became president but which has been aggravated by his policies. Since 1973 and especially in the last ten years, those in the top one-tenth of one percent of income earners have done spectacularly well. Those in the top one percent of the income ladder have done very well, and those merely in the top ten percent have made much less impressive but real gains in income. In contrast, and in spite of vast economic growth, between 1973 and 2005 everybody else, the remaining 90 percent of the population, experienced a significant drop in real income!
The current administration's policies of giving huge tax breaks to the very rich, restricting government spending on middle class and low income programs, and giving business a free hand in every sphere have been a major factor in bringing about the obscene levels of inequality in existence today. But these policies have done more than just deepen inequality. By undermining regulation and oversight, these policies have led to many corrupt and irresponsible business practices, with results such as the Enron scandal and the current sub-prime lending crisis.
The regulatory mechanisms that emerged in the wake of the 1929 Wall Street crash and the Depression of the 1930s were not the product of a socialist conspiracy or anti-business ideology. They were lifesaving devices for the capitalist system and the American economy.
The administrations that have run the country for the last three decades seemed to have forgotten this and, in a frenzy of free market faith that has been particularly intense during Republican rule but has also been present during Democratic presidents, have poked huge holes not only in the social safety but also in the economic and financial safety net.
Now the myth of a perfectly self-regulating market has burst, starting with the housing market crisis and spreading through the economy. Many analysts are predicting a recession. The Federal Reserve Board, which usually acts with caution, was so alarmed as to carry out a record decrease in interest rates in order to boost the economy and prop up sinking stock market prices. The administration acted too, but as usual it saw the drama of millions of Americans in danger of losing their houses and their jobs as first and foremost an opportunity to further its ideological agenda in line with the interests of corporations and the very rich. The Democrats in Congress pushed a different set of policies to ward off recession, but in the end once more largely caved in to Congressional Republicans and the administration.
Democrats in Congress wanted to increase food stamps and extend unemployment benefits, measures that would have helped those hurt worst by an economic downturn but also the groups most likely to spend any additional income quickly, exactly what is needed to give the economy a quick boost.
Republicans were adamant against this approach. The GOP's priority was to continue and expand tax cuts for business and the rich. The Republican argument is that this will stimulate the economy by encouraging investment.
Despite controlling Congress, the Democrats ultimately gave in on almost every issue except making the 2001 Bush tax cut permanent, which the Republicans dropped. The compromise that was approved by the House of Representatives and Speaker Nancy Pelosi does not include increased funds for food stamps or unemployment benefits. It does include new tax breaks for business investment. Pelosi did manage to obtain some payments for those too poor to pay taxes and to reduce tax rebates for households with higher incomes.
Despite these small Democratic wins, the irony is that a program intended to provide relief for a looming crisis caused to a significant degree by policies wildly biased in favor of business is itself rife with some of the same biases.
An economy in which income is increasingly concentrated in fewer and fewer hands and that withholds its rewards from the vast majority of the population even in the best of times is not sustainable politically, socially, economically, or morally. The lesson of the compromise economic stimulus package is that neither Republicans nor Democrats are ready to confront this reality.