Thursday, March 20, 2008

Robert Reich's Take on the Economy

I've never understood much about economics and personal finance. I guess that puts me in the same boat would-be president John McCain recently admitted to occupying. But if McCain ends up being president and if I want to improve my chances of getting by in these economically challenging times, he I will both need to boost our EQs. Not emotional IQ, but economics IQ.

Many people say that we're already in an economic recession and could be headed toward a depression. Others disagree. I'm not sure whom to trust for the truth. I could read and listen to all sides, but how do I then decide who's right and who's wrong or what size piece everyone, as Ken Wilber maintains, has of the pie of overall truth?

What size piece does this lengthy excerpt from a Robert Reich blog column have of the pie?

American consumers are coming to the end of their ropes and don't have the buying power they need to absorb the goods and services the U.S. economy is capable of producing. This is likely to mean fewer jobs, which will force Americans to pull in their belts even tighter, leading to still fewer jobs – the classic recipe for recession. That recession may turn into a full-fledged Depression if fiscal and monetary policies can't make up for consumers' lack of buying power. And there's reason to worry they cannot because consumers are in a permanent bind. They're deep in debt, their homes are losing value, and their paychecks are shrinking.

Under these circumstances, the usual remedies won't work. Wall Street bailouts have no effect because housing prices continue to fall, and the Street is sitting on a giant pile of bad debt. Tax breaks for business won't generate more investment in factories or equipment because demand for their products what emerges from the factories is dropping. Temporary fixes like a stimulus package that give households a one-time cash infusion won't get consumers back to the malls because they know the assistance is temporary and their problems are permanent. They're likely to pocket the extra money instead of spending it. Additional Fed rate cuts might give consumers access to somewhat cheaper loans, but there's no going back to the easy money of a few years ago. Lenders and borrowers have been badly burned. The values of houses and other major assets are dropping even faster than interest rates can be lowered. Growing numbers of homeowners owe more on their mortgages than their homes are now worth on the market.

We're reaping the whirlwind of many years during which Americans have spent beyond their means and most of the benefits of an expanding economy have gone to a relatively small group at the very top. Adjusted for inflation, the median wage is below where it was in 1999. The nation's median hourly wage is barely higher than it was 35 thirty-five years ago. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. The rich, meanwhile, can't keep the economy going on their own because they devote a smaller percentage of their earnings to buying things than the rest of us: After all, they're rich, and they already have most of what they want. Instead of buying, they're more likely to invest their earnings wherever around the world they can get the highest return.

Some say well and good. They think our consumer society is unsustainable as it is. They argue Americans should learn to accept a lower standard of living and American business must adjust to a smaller domestic economy. This argument leaves out one salient fact: Considered as a whole, the nation has enough productive capacity to provide a higher standard of living for its citizens and also be sustainable. With the right incentives, we could dramatically reduce energy use and carbon emissions while continuing to grow at a rate that provided most people with good jobs at good wages. The problem isn't economic growth per se. It's unbalanced growth – too much consumption of goods and services that utilize too much energy and generate too much carbon into the atmosphere. Balanced growth is surely possible. But if the economy heads into a severe recession or Depression, there's almost no way to achieve more balance. Hard-pressed Americans will be unwilling to sacrifice anything.

The debate over widening economic inequality of income and wealth in America usually pits fairness against growth. Conservative supply-siders contend that the people at the top not only deserve to be richly rewarded because such rewards encourage them to invest and innovate, and thereby benefit everyone else. Liberals concede that some inequality may be necessary to encourage growth but that we have long passed the point where it is either necessary or fair. But the reality we're now facing poses a different question: Can we have any growth at all when income and wealth are so unequal that most Americans can no longer buy what they produce?

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