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October 19, 2008
Robert Reich asks 'What brought on the economic meltdown of 2008? He explores the answers:
Besides the bursting of the housing bubble, Wall Street's malfeasance and non-feasance, and Washington's massive failure to oversee Wall Street, fingers are also being pointed at average Americans. Some of them took on mortgages they couldn't afford, of course, but we're also hearing a more basic theme that goes something like this: For too long, Americans have been living beyond our means. We went too deeply into debt. And now we're paying the inevitable price. The "living beyond our means" argument... is technically correct. Over the last fifteen years, average household debt has soared to record levels, and the typical American family has taken on more of debt than it can safely manage. That became crystal clear when the housing bubble burst and home prices fell, eliminating easy home equity loans and refinancings.
However, one of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.The bubble masked the basic reality that for most Americans, earnings have not kept up with the cost of living. This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their earnings, but they have now run out of such coping mechanisms. He says in the New Statesman that:
The first such mechanism was to send more women into paid work. Most women streamed into the workforce in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes....Yet there is a limit to how many mothers can maintain paying jobs.So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.Yet there is also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks. Now, with the bursting of the housing bubble, Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend.
Regardless of the Wall Street bailout, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there is not enough purchasing power in the economy to buy all the goods and services it is producing. We are finally reaping the whirlwind of widening inequality and ever more concentrated wealth.
Reich says that the only way to keep the economy going over the long run is to increase the real earnings of middle- and lower-middle-class Americans by investing in the productivity of working people, enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding infrastructure and investing in the clean energy technologies of the future.
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