By most counts, the U.S. economy started growing in the middle of last year. For many Americans, though, it does not feel as if the Great Recession has ended—unemployment and underemployment are still alarmingly high, and job growth is weak. Many causes have been suggested for both the economic collapse and mediocre recovery, but one that is hardly ever mentioned is income inequality. This is a mistake. Growing income inequality in the United States and the policy responses it has spawned have done tremendous damage to our economy. And because we continue to ignore this underlying problem, the risks of our policies leading to another calamity will not go away, no matter what we do to reform the financial sector.
Since 1968, income inequality has been steadily increasing in the United States. I am not referring to the Croesus-like income of a John Paulsen, the hedge fund manager who in 2008 netted over $3 billion, about 75,000 times the average household income. I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. Since the 1970s, the wages of the former, typically workers at the 90th percentile of the wage distribution in the United States, have grown much faster than the wages of the latter, the typical median worker. Or consider the table below, which shows that the wages of occupation groups that are paid more than the national average in 2002 have grown much faster since then than the wages of occupation groups below the average:
Economists argue over the reasons for the growing inequality—changes in taxation, increasing trade, weaker unions, stagnant minimum wages, and growing immigration have all been flagged. Perhaps the most important, according to Harvard professors Claudia Golden and Larry Katz, is that although technological progress requires the labor force to have ever greater skills, our educational system has not kept pace by providing the labor force with greater education and skills. While a high school diploma may have been sufficient for our parents, an office worker in many knowledge-based industries today can’t get hired without an undergraduate degree. Yet, according to Golden and Katz, rates of graduation from high school in the United States have barely budged since the 1970s, and neither have male graduation rates from college. For the middle class, that has meant a stagnant paycheck and growing job insecurity, as the old well-paying, low-skilled jobs with good benefits disappear.
Politicians feel their constituents’ pain and anxiety. And they recognize that to stay in office, they have to respond in some way. But it is very hard to get at the real source of middle-class discontent by improving the quality of education. The causes of lackluster education are complex and difficult to remedy (poor nutrition and the lack of a safe learning environment just skim the surface of potential problems), and schools are especially difficult to reform because of the many vested interests that favor the status quo. Moreover, any change will require years to take effect and therefore will not alleviate the current anxiety of the electorate. What results, then, is a series of short-term policy fixes that may do more damage than good—in fact, some of these fixes helped to create the Great Recession.
Politicians are resourceful people. Their political skill lies partly in proposing solutions that keep their constituents happy without venturing into the rocky terrain of real reform. In the case of inequality, politicians know intuitively that households ultimately care most about their consumption over time; incomes are only a means to obtaining that consumption stream. A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit.
As a result, the government’s response to rising inequality—whether carefully planned or the path of least resistance—has been to encourage lending to households, especially but not exclusively low-income ones (the government push for housing credit was just the most egregious example). The benefit—higher consumption—is immediate, and paying the inevitable bill can be postponed into the future. Cynical as it may seem, recent administrations have used easy credit as a palliative to address the deeper anxieties of the middle class directly. As I argue in my recent book Fault Lines, “let them eat credit” could well summarize the mantra of the political establishment in the go-go years before the crisis.
The Federal Reserve has aided and abetted this explosion of credit. In response to the dot-com bust in 2001, Alan Greenspan’s Fed cut short-term interest rates to the bone. Even though over-stretched corporations were not interested in investing, artificially low interest rates were a boon to housing and finance. And an important benefit of an expansion in housing construction (and related services like real estate brokerage and mortgage lending) was that it created construction jobs, especially suitable for the unskilled. Unfortunately, the Fed-supported housing boom proved unsustainable, and many of the unskilled have lost their jobs, and are in deeper trouble than before, having also borrowed to buy houses that they could not really afford.
" I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. "
I really can't see why the inequality amongst Main Streeters should deserve more attention than the inequality between Wall Streeters and Main Streeters.
Perhaps it is this second one that's fueling the first one. And if it is so this article kills the main character of the story on the second paragraph.
That admitting that enormous resources (public and private) are being channeled to Wall Street, and that society in general does not really benefit from them indirectly. At least it h ... view full comment
" I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. "
I really can't see why the inequality amongst Main Streeters should deserve more attention than the inequality between Wall Streeters and Main Streeters.
Perhaps it is this second one that's fueling the first one. And if it is so this article kills the main character of the story on the second paragraph.
That admitting that enormous resources (public and private) are being channeled to Wall Street, and that society in general does not really benefit from them indirectly. At least it has not been benefiting, no matter what supply siders, including coveted ones, are still saying.
And if it is so, the disproportional alocation of resources in Wall Street is damaging the possibilities of improvement (individual and collective) in Main Street, fuelling overall inequality.
Perhaps this article -- even if a very serious and thoughtful one -- is still too much influenced by two myths that are still dominating Economics 101: the supply side myth, on the one side, and the myth that disparaties in education are the only factor determining inequality. In what concerns American inequality, I'm affraid such disparities are not the only factor, not even the predominant factor.
Of course, the title of the story ("Let them eat credit") is an anthological one. Really nice.
But in order to understand the malevolous context, one has to understand that "to make them eat credit" is part of an overall scenario in which the privileged chaste (Wall Streeters) and their high priests (Economists) convinced the ruling class that, within supply side, a fair distribution of goods such as housing and education would be produced by "debt programs for the poor" with the privileged chaste getting the inherent interests (and creating derivatives on them).
Indeed, the privileged chaste and their high priests convinced the ruling class that any benefit to society as a whole necessarily h ... view full comment
Of course, the title of the story ("Let them eat credit") is an anthological one. Really nice.
But in order to understand the malevolous context, one has to understand that "to make them eat credit" is part of an overall scenario in which the privileged chaste (Wall Streeters) and their high priests (Economists) convinced the ruling class that, within supply side, a fair distribution of goods such as housing and education would be produced by "debt programs for the poor" with the privileged chaste getting the inherent interests (and creating derivatives on them).
Indeed, the privileged chaste and their high priests convinced the ruling class that any benefit to society as a whole necessarily had to be mediated by them, involving the perpetuation (and even the increasing) of their disproportionate advantages. Obama's unsustainable health care program is still very much under that ideological spell. Not to mention his financial "reform" program.
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