This is the most succinct view I’ve heard yet of what the last decade has done to us. It’s Ezra Klein paraphrasing Martin Wolf:
There are a lot of ways to tell the capsule story of the past few years, but one of the better summaries is simply this: Money got too cheap. Martin Wolf tells this story well in his book Fixing Global Finance. Emerging economies had learned in recent years that running current account deficits triggered massive currency crises. So they stopped running deficits. They kept their currencies at low levels to stimulate exports. The policy worked and they ran large surpluses. But that money had to go somewhere. And it largely went into the U.S, which Wolf argues became the global bank of last resort. He estimates that American consumer spending absorbed 70 percent of the global savings glut. That money had to be spent, and so the financial industry set about figuring out how to make consumers more willing to spend it.
Iain Levinson writes a most unusual account of this recent history from the viewpoint of the ultimate victims, the hard-working poor. As so often at ground level, there’s a clear-eyed sanity working that has been infamously missing at the higher elevations of commerce. I must look this author up in the future. Meanwhile try some of this, taken from Sunday’s Washington Post:
They saw it coming. The working poor always see it coming, well before the Wall Street analysts and the Federal Reserve wonks. From the bottom rung of the ladder, you get a more immediate view of the economy and the direction it’s taking. Mark knows that when he makes $8 an hour, and gets a flyer in the mail telling him that he has guaranteed approval on a $40,000 SUV, there is something amiss in the world of finance, a disruption in the force. He doesn’t care, because he likes nice cars, but he knows. And Mark and Robert also know that when the tsunami rolls in, they will be the first ones to be swept off their feet.
Last week, General Motors announced 10,000 job cuts, Wal-Mart 800, and Nobel Prize-winning economist Joseph Stiglitz told an interviewer that in some ways, the current crisis is worse than the Great Depression. But this time around, we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the “wind-down process.” The New York Post reported on a disgraced financial executive who transferred property to his wife to protect it from legal action. It is this type of behavior, rather than economics, that the working poor don’t understand. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker, according to the Economic Policy Institute.
“You can make a million dollars in America,” says Jim Teal, a former waiter at a high-end Raleigh steakhouse who now stays home with his 2-year-old daughter because business has dried up. “But if you’re making hundreds of millions, you’ve screwed someone over.”
That’s nice writing, from someone who seems to be down there working at ground level. We could use more like it.
Getting back to Ezra’s analysis, I totally agree with his forecast:
What replaces the bubble-fueled consumption of the past few years? The answer, as I understand it, is nothing. For the past few years, we’ve been growing like a developed economy but spending as if we were growing like a developing economy. That’s over now, and no similarly unsustainable bubble is likely to replace it.
A commenter on the post points to the future even more succinctly:
The economy is consumption + investment + government + net exports. You usually see written like C+I+G or C+I+G+NX
There’s plenty of I and G to be done.
As we adjust to this we’ll come to value it. After all the bubbles have bust, we have to re-value all the elements of our economy in sustainable terms, with replacement cost factored in right alongside extraction, value-adding, and distribution costs. These are the inelegant and terrifying steps along the way towards that new economy.
One of the best comments I’ve seen on Ezra’s blog – and he has a lot of amazingly substantial discussion there – summarizes in one piece of commentary both the policy history of America in the thirty years since Reagan (and I agree that this is the true timescale of our current malaises, political and economic), and the future requirements.
I think the banking system issue is ultimately more important and more fundamental.
Yes, this is correct.
Except beneath that, the real economy is what’s the problem, here. Essentially we’ve had 30 years of sending more and more GDP to the wealthy, which means sending it to wall street (since the wealthy don’t invest it in their mattresses).
In fact, we’ve actually had the Treasury borrow money to pay for tax cuts and for spending (on military, mostly) that fed GDP which, in turn, went to Wall Street.
Because wages have stagnated, the normal economy hasn’t grown with Wall Street.
And because government has been spending its money on tax cuts instead of infrastructure, the only investments we’ve made have been Wall Street’s capital investments.
So, we’ve ended up with the bizarre spectacle of bridges falling down in the Midwest while consumer spending is propped up by insanely cheap credit which is itself made possible because Wall Street is willing to invest in a huge bet on whether or not strapped consumers will be able to make their mortgage payments. And before that, they were investing in dot com “underpants gnomes” business plans. There’s a reason we keep bouncing from tricked-out bubble to tricked-out bubble.
So, yes, we have to deal with the insolvency of so much of Wall Street. And we have to deal with the impact this has had on the real economy.
But we also have to deal with the distributive issue that has led to both those calamities. Regulation is nice, but the problem simply isn’t that we lacked a regulation to prevent Wall Street from making an insane bet. It’s that Wall Street knowingly made an insane bet. Because they had too much money, and there was nothing else to invest in.
You’ve got to get less money trickling up, and more trickling down. You’ve got to get government making sane investment. Then a lot of this stuff will sort itself out.
- Posted by: anonymiss | February 10, 2009 6:36 PM
I agree with everything said here, and I think, as anonymiss points out, that what matters is the future. My interest revolves around how we get the wealth holders to invest their capital in the reasonable yet infinitely enduring returns that can only come from a sustainable economy – which is the focus of this site, and of all my meanderings through the politics and economics of our times.
