Three Decades of Spending Beyond Our Means...

[Einhander Sn0m4n]

New York Times

February 13, 2008
Op-Ed Contributor
Totally Spent
By ROBERT B. REICH

Berkeley, Calif.

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

Another Fed rate cut might unfreeze credit markets and 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, and the values of houses and other assets are dropping faster than interest rates can be lowered.

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.

The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s 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.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. 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 by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

The binge seems to be over. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.

We also need stronger unions, especially in the local service sector that’s sheltered from global competition. Employees should be able to form a union without the current protracted certification process that gives employers too much opportunity to intimidate or coerce them. Workers should be able to decide whether to form a union with a simple majority vote.

And employers who fire workers for trying to organize should have to pay substantial fines. Right now, the typical penalty is back pay for the worker, plus interest — a slap on the wrist.

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.

[Alan Bolte]

I was going to say I posted this in page three of the 'Fake Boom' thread, but it looks like it's been substantially rewritten, not to mention the fact that it appeared in the Times.

[Glocksman]

I notice Reich isn't mentioning the elephant in the corner.
That is the hollowing out of the US industrial base due to 'free trade' that is a direct cause of the drop in real wages since 1970.

[Stuart Mackey]

I notice Reich isn't mentioning the elephant in the corner.
That is the hollowing out of the US industrial base due to 'free trade' that is a direct cause of the drop in real wages since 1970.

Or is it simply lack of efficiancy and competitivness in US industry? or perhaps that as the world has recovered from WW2 the demand simply is not their anymore to sustain that industry? Free trade is one of those things that forces a nation to adapt or 'die', there is no point in throwing up trade barriers, all it does is prolong the ineviatable decline, its no different to borrowing to sustain a desired lifestyle.
Whatever the cause, the US must soon begin to live within its means.

[Illuminatus Primus]

I notice Reich isn't mentioning the elephant in the corner.
That is the hollowing out of the US industrial base due to 'free trade' that is a direct cause of the drop in real wages since 1970.

Of course, as Clinton oversaw that in the 1990s and did not give a shit while there were Easy Al booms. Oops.

[brianeyci]

I notice Reich isn't mentioning the elephant in the corner.

That is the hollowing out of the US industrial base due to 'free trade' that is a direct cause of the drop in real wages since 1970.

This is interesting -- I'm guessing since you put free trade in quotes you mean more than NAFTA. I think it would be interesting to look at whether opening up borders increased or decreased the standard of living for Americans.

The main problem with the free trade hypothesis is, from the outside at least, it appears America seeded its own fate with its focus "service economy." Real wages could have dropped because of lack of career interest in manufacturing and the fucked up situation with the auto industry's unions, having nothing to do with open borders. The problem seems created domestically rather than because China or Mexico is dumping widgets on the US markets... or Canada.

[Glocksman]

I notice Reich isn't mentioning the elephant in the corner.
That is the hollowing out of the US industrial base due to 'free trade' that is a direct cause of the drop in real wages since 1970.

Of course, as Clinton oversaw that in the 1990s and did not give a shit while there were Easy Al booms. Oops.

Chronic trade deficits predate Clinton by twenty years.
Chalmers Johnson wrote a book in which he said that the US deliberately chose to hollow out its industrial base in order to provide rising standards living via trade to countries that were in danger of succumbing to Communism.

Whether that's true or not, the fact remains that the US has gone from being the largest creditor nation to the largest debtor nation.

As for solutions, I'm willing to listen.

[brianeyci]

A solution would involve the "P" swearword, for the minimum 10 or so years it would take to fix America. And it isn't patriotism.

Of course, for a solution to appear politicians need not only to recognize the problem, but to have popular support for measures that will give incredible hardship in the short term. I think that popular support could come if China ever uses anything close to the "nuclear option." Then politicians could spin it as dirty foreigners and cause a revival of everything domestic.

But with that comes the accompanying ultra-nationalism and isolationism. That's the worst part with what Bush has done -- he's taken a core liberal principle, intervention and participation in the world community, and perverted it. So in the future when America really needs to intervene, it either won't be able to or won't want to.

[Glocksman]

That's the worst part with what Bush has done -- he's taken a core liberal principle, intervention and participation in the world community

Participation is one thing.
Intervention is something else entirely, and personally I have never agreed that's its America's job to be the 'global cop'.

IMHO, Bush embodies the worst of Woodrow Wilson (worst US leader of the 20th century) and Lyndon Johnson's ego, which wouldn't let him admit he was mistaken about Vietnam.

Though Johnson's social agenda was much more progressive than the old racist Wilson's, which I why I actually have respect for LBJ, whereas I have nothing but contempt and disdain for Wilson.

[brianeyci]

Yeah, the clusterfuck that is Iraq almost makes me want to change my views on the global cop issue. Almost. Because I think of Korea, I think of WWII, I think of Taiwan. I still might change my mind about the global cop if Iran happens.

A local show gathered a bunch of prominent political academics a few years back and they all considered Bush and most of his henchmen as neo-liberal, not neo-conservative. I thought they were on crack until I looked at the specifics, spending, intervention, and came to the distasteful conclusion Bush was a bad liberal ripoff. Which says nothing about liberals in general -- after all you don't judge the originals by their ripoffs -- but it made me really sad, then angry.

[ray245]

Is it possible for the US to shift its consumer base towards devloping countries like China for example? From what I heard, the spending capability of the average middle-income is increasing.


What I am afraid of this mostly related to our technology devlopment rate. After all, the US market is one of the largest consumer market towards IT and electronic goods.

[Glocksman]

Which says nothing about liberals in general -- after all you don't judge the originals by their ripoffs -- but it made me really sad, then angry.

A 'classic', or paleo-con, conservative such as myself feels the same way.
IOW, don't you dare talk about me with the same breath you use to talk about Wolfowitz, Podhoretz, Cheney, and so on.

[Lancer]

Is it possible for the US to shift its consumer base towards devloping countries like China for example? From what I heard, the spending capability of the average middle-income is increasing.


What I am afraid of this mostly related to our technology devlopment rate. After all, the US market is one of the largest consumer market towards IT and electronic goods.

The US economy is a hollow shell at this point, propped up by the service sector of the economy and the specialty manufacturing jobs that can't be outsourced for some reason or another (i.e. Bath Iron Works). There is no way to shift that towards developing countries, as the service sector is essentially the domestic retail and distribution network for consumer goods. Shifting it to other nations would involve setting up warehouses, distribution centers, and stores in those countries, which adds to their economy, not yours.

Export-driven economies should start looking for replacement primary markets (and AFAIK, most of them are) for the point you mentioned.

[The Duchess of Zeon]

The United States has all the resources it needs to go on being a great power in the world for centuries. It will, however, face a situation far worse than the Great Depression in the coming years. For all the resources that lay fallow up the ground, and in it, the national economy at the moment is still a hollow shell, and we're about to see precisely what that means.

[Big Orange]

The United States has all the resources it needs to go on being a great power in the world for centuries. It will, however, face a situation far worse than the Great Depression in the coming years. For all the resources that lay fallow up the ground, and in it, the national economy at the moment is still a hollow shell, and we're about to see precisely what that means.

Great Britain is in similar situation, with the disastrous privatization of British Rail, the NHS, and the near total annihilation of moribund heavy industry back in the 1980s, in addition to more modern manufacturing of any kind being rapidly frittered away overseas since then. In my area Cadburys-Schweppes is going to pack up a perfectly good and logically located confectionary factory in Keynsham, moving production to some souless shed in some Eastern European podunk, so they could save on labour cost, and sell the land the old factory was on (even though the shipping is going to be more protracted and burn up more fuel). And why set up call centres in India, who's "genius" idea was that?

Both misguided attempts of industrial/administrative cost cutting are not quite as deranged as shipping Scottish sea food to Thailand to be peeled by sweatshop workers, then shipped back to Scotand again.

[acesand8s]

Both misguided attempts of industrial/administrative cost cutting are not quite as deranged as shipping Scottish sea food to Thailand to be peeled by sweatshop workers, then shipped back to Scotand again.

And what particularly is crazy about it? Surprisingly enough, it quite often is cheaper for the company to ship raw materials to Asia to have them finished and ship them back than to do all the work domestically. In the US, most furniture is made by cutting down trees in North America, shipping the wood to China or SEA, have it made furniture, then having it shipped back to the US. If it's cheaper for the company, why should they be paying more to do the work in the US than overseas?

[K. A. Pital]

Free trade is one of those things that forces a nation to adapt or 'die'

No, no, no. Remove the apostrophes from die - often the death of people is very literal if they have nowhere, or not enough time, or not enough resource to "adapt". Besides, the "free" trade isn't so "free" - people who are forced to "adapt" are always workers, of course, not the capitalists who don't give a shit if their company gets millions from US or China mainland. The stakeholders of US capital are pretty happy with US industry garroted, after all, why pay more if you can get the same from China

I love "adapt or die" claims, especially from people who never were in the short-end-of the stick nations, like the Second or Third World, where "adapt" often means "die" for many. Don't you love the smell of social darwinism, I'd even say a strong stink, behind those ideas? Wherever you get to the gist of sacrificing machinery efficiency for human happiness, or a more harmonic society, you get the "adapt or die" tune from social darwinists.

[Starglider]

Great Britain is in similar situation, with the disastrous privatization of British Rail,

While it is debetable whether this was a good idea badly executed or just a bad idea to start with, this has very little to do with outsourcing and hollowing out the economy. The only jobs that went overseas were constructing some of the rolling stock, and AFAIK those only went as far as continental Europe.

the NHS

Please explain how changing the accounting systems used in providing national healthcare (effectively all that's happened) has any relevance.

and the near total annihilation of moribund heavy industry back in the 1980s

That would be the elimination of ridiculously high state subisidies which were crippling the rest of the economy with literally insane taxes, contributing to the serious weakening of the British military and causing everyone capable of earning reasonable amounts of money to flee the country. It is simply not economic to maintain a huge uneducated workforce in a first-world country, particularly one located on an island that has to have the raw materials shipped in and (most of) the finnished products shipped out.

in addition to more modern manufacturing of any kind being rapidly frittered away overseas since then.

Most of the blame for that, in cases where it was actually avoidable (e.g. most of the car industry), lies with the unions. Again, the level of union activity in the 1960s and 1970s was quite literally insane, wanting a three day week, ironclad job security and massive and early retirement benefits. I am very glad Thatcher's government broke those unions otherwise literally nothing would have been salvaged. As it is breaking them early made the UK rather more attractive than the rest of Europe for businesses all through the 1980s, though the apathy of the current government and gradual progress in the rest of Europe has been slowly erroding that advantage. Some blame still lies with the management of course, in a similar fashion to what happened to the US car industry in Detroit, but there isn't much the government can do about that unless the management is so utterly apalling that nationalisation is the lesser evil.

In my area Cadburys-Schweppes is going to pack up a perfectly good and logically located confectionary factory in Keynsham, moving production to some souless shed in some Eastern European podunk, so they could save on labour cost, and sell the land the old factory was on (even though the shipping is going to be more protracted and burn up more fuel).

I'm sorry, did you have a point there somewhere? If the shipping cost was more than the difference in salary, they'd keep the factory. As it is, maybe it will be reopened in a decade or two due to rising fuel prices.

And why set up call centres in India, who's "genius" idea was that?

Just about every board of directors who wanted to increase profits - shareholders were cheering them on, consultants were there to make it easy. Sometimes this was a bad idea because the loss of customer goodwill turned out to be a bigger downside than the support cost saving, but more often not.

Both misguided attempts of industrial/administrative cost cutting

They certainly cut costs. Sometimes they resulted in enough lost business to nullify the cost savings, but usually not.

are not quite as deranged as shipping Scottish sea food to Thailand to be peeled by sweatshop workers, then shipped back to Scotand again.

That's a perfectly sane thing to do for a business if Scottish workers are demanding much much higher living conditions than the sweatshop workers, more than enough to cover the cost of fuel.

The basic problem is that a globalised economy exerts an inexorable levelling pressure to equalise living standards, resisted only by differences in the level of education, infrastructure and governance that reasonable levels of private investment can't surmount. By insisting on an 'unfair' standard of living, the first-world workers are forcing economic effort (and fuel) to be wasted working around them. To paraphrase the famous Internet quote; the global economy interprets unions and protectionism as damage and routes around them.

If you envision capital and production moving as water running downhill, slowly erasing essentially arbitrary differences in income between regions (non-arbitrary differences will remain indefinitely), then you can imagine the 'investor class' profiting from outsourcing as a kind of 'hydro power', siphoning off profits from the system to support and increase wealth inequalities within individual regional economies. This is unfortunate, but fighting globalisation (at least with unions and protectionism) will tend to make it even worse in the long run.

The fundamental problem here is simply what was stated in the original poist; capitalism is efficient at creating wealth, tends to reduce inter-region inequality but almost always increases the amount of absolute inequality (i.e. it makes the rich richer and the poor poorer). Technological progress and a steady increase in the sophistication of the world's financial systems, not to mention more than a little right wing indoctrination in some areas (i.e. the notion that trickle down still works in the US), accelerates the process. Conclusions; given time the costs of unfettered capitalism will inevitably outweigh the benefits, as long as you care about real human welfare and opportunity not just abstract codified rights. However essentially all 'quick fix' mechanisms for tackling this, i.e. raising corporation taxes, trade barriers or local unionisation actually make the problem worse in the long run.

I don't know of any good answers to this that don't involve replacing the entire human global economy with something more sane. Myself and assorted transhumanists are working on this (the bottom up approach is 'fix the inherent human limitations that currently make this about the best we can do'), but I'm afraid it's going to take us a few more decades.

[Beowulf]

Both misguided attempts of industrial/administrative cost cutting are not quite as deranged as shipping Scottish sea food to Thailand to be peeled by sweatshop workers, then shipped back to Scotand again.

And what particularly is crazy about it? Surprisingly enough, it quite often is cheaper for the company to ship raw materials to Asia to have them finished and ship them back than to do all the work domestically. In the US, most furniture is made by cutting down trees in North America, shipping the wood to China or SEA, have it made furniture, then having it shipped back to the US. If it's cheaper for the company, why should they be paying more to do the work in the US than overseas?

It's seafood. You know, perishable? So you'd probably have to air freight it to Thailand, and air freight it back, so you're probably actually losing money.

[Lancer]

Seafood is suprisingly not that perishable if you keep it in deep-freeze.

I personally avoid frozen meats whenever possible because they're nowhere near as tasty as non-frozen meats, but if the vast majority of consumers like lower prices more than they enjoy quality food, then a company will go for it. This is the same reason why McDonalds is still around.

[Stuart Mackey]

Free trade is one of those things that forces a nation to adapt or 'die'

No, no, no. Remove the apostrophes from die - often the death of people is very literal if they have nowhere, or not enough time, or not enough resource to "adapt". Besides, the "free" trade isn't so "free" - people who are forced to "adapt" are always workers, of course, not the capitalists who don't give a shit if their company gets millions from US or China mainland. The stakeholders of US capital are pretty happy with US industry garroted, after all, why pay more if you can get the same from China

Well my nation just about 'died' economically back in 1984 because we did not have free trade with other markets, we almost had to declare bankruptcy, and there was serious consideration of turning our economy over to the IMF if that happened, yeah protectionism suited us real fine. Why should I be out of a job because some fat indolent first world nation wants to live beyond their means by fair means or foul?.
Frankly, I like my cheap(er) made in China clothes, because it means I can afford clothes, full stop, and I will be fucked if I should pay more out of my piss poor wages because some bastard wants his license to print money, a politician wants campaign donations, or the US/Europe can live a life of luxury at my expense, when we can do it better for less, whatever 'it' might be.

I love "adapt or die" claims, especially from people who never were in the short-end-of the stick nations, like the Second or Third World, where "adapt" often means "die" for many. Don't you love the smell of social darwinism, I'd even say a strong stink, behind those ideas? Wherever you get to the gist of sacrificing machinery efficiency for human happiness, or a more harmonic society, you get the "adapt or die" tune from social darwinists.

And maybe those nations might have a fighting chance if they could trade freely with the US and the rest? if the US and Europe did not dump subsidized below cost food on them under various guises or prevent them earning a living with the latest trade prevention ideas? Those nations get shat on precisely because of protectionism, precisely because those first world nations are so fearful that they deliberately refuse poor, invariably brown, nations the chance to better themselves so they can live in idyllic indolence.

[Big Orange]

While it is debetable whether this was a good idea badly executed or just a bad idea to start with, this has very little to do with outsourcing and hollowing out the economy. The only jobs that went overseas were constructing some of the rolling stock, and AFAIK those only went as far as continental Europe.

But it seems barmy that you have several different companies running their own sections of the national network (leading to abject chaos), services have generally declined in recent decades, there is not enough rolling stock (with people crammed in like cattle), and the rolling stock made abroad (it's in Europe, but still not in the UK) is said to be noticibly lower in quality than anything made in the UK.

Just about every board of directors who wanted to increase profits - shareholders were cheering them on, consultants were there to make it easy. Sometimes this was a bad idea because the loss of customer goodwill turned out to be a bigger downside than the support cost saving, but more often not.

People thinking as a group and not thinking clearly make the most mistakes. And now many companies that conduct customer sevices over the phone are suddenly back peddling on Indian call centres.

are not quite as deranged as shipping Scottish sea food to Thailand to be peeled by sweatshop workers, then shipped back to Scotand again.

That's a perfectly sane thing to do for a business if Scottish workers are demanding much much higher living conditions than the sweatshop workers, more than enough to cover the cost of fuel.

So they want semi-slaves instead of paid workers, because the economy calls for it? They're still motivated by greed and lack of proper compassion, even if there is a cold logic to their anti-social madness.

I don't know of any good answers to this that don't involve replacing the entire human global economy with something more sane. Myself and assorted transhumanists are working on this (the bottom up approach is 'fix the inherent human limitations that currently make this about the best we can do'), but I'm afraid it's going to take us a few more decades.

But people queing up for the trans-human upgrade are going to be the business elite...

[Fingolfin_Noldor]

The basic problem is that a globalised economy exerts an inexorable levelling pressure to equalise living standards, resisted only by differences in the level of education, infrastructure and governance that reasonable levels of private investment can't surmount. By insisting on an 'unfair' standard of living, the first-world workers are forcing economic effort (and fuel) to be wasted working around them. To paraphrase the famous Internet quote; the global economy interprets unions and protectionism as damage and routes around them.

Regardless what you might say, ultimately, every population in every country is going to have a normal distribution in terms of capability and intelligence, and unless we want to engage in social darwinism of the same order as what Hitler did, this is not an option whatsoever. It's easy to say this when one has perhaps made it in life, but for the worker on the street?

The fundamental problem here is simply what was stated in the original poist; capitalism is efficient at creating wealth, tends to reduce inter-region inequality but almost always increases the amount of absolute inequality (i.e. it makes the rich richer and the poor poorer). Technological progress and a steady increase in the sophistication of the world's financial systems, not to mention more than a little right wing indoctrination in some areas (i.e. the notion that trickle down still works in the US), accelerates the process. Conclusions; given time the costs of unfettered capitalism will inevitably outweigh the benefits, as long as you care about real human welfare and opportunity not just abstract codified rights. However essentially all 'quick fix' mechanisms for tackling this, i.e. raising corporation taxes, trade barriers or local unionisation actually make the problem worse in the long run.

Unfettered capitalism will inevitably outweigh the benefits? You are kidding right? Capitalism is the reason why there's a developing rich-poor divide as it rewards rich and penalises the poor. Deunionisation will not solve anything as ultimately, any company has to pay just enough to keep workers happy and give them enough incentive to stay on. If not enough incentives are given, workers move on to other jobs more wiling to pay for their services. Not to mention, "unfettered capitalism" is the reason why sweat shops exist in the first place! Benefit in the long run? Surely you jest? I doubt the workers in Sweatshops even earn enough to make ends meet. Regardless what happens, there has to be minimum standards and regulations imposed otherwise, protectionism or not, as people have to, at the minimum, earn just enough to make ends meet. Otherwise, you will have the situation where the median wages haven't changed much and people are suffering from increasing inflation. Not to mention, unregulated commerce has been much responsible for many an economic crises, like the 1997 Asian Economic crisis and the recent subprime problem.

[DaveJB]

You know, part of me wishes the Weekly World News was still around. Asides from the fact that the world is a more boring place without them, they might actually have ended up being right on one of their "Super-Mega-Ultra-Great Depression Coming Next Week" stories someday.

[PainRack]

So, why is it so bad that Joe albama in the US has the same living standards as Chink Chung in China?

The trend is to lift up living conditions in the poor and degrade living standards in the rich.

Unfettered capitalism will inevitably outweigh the benefits? You are kidding right?

You have a real problem with reading. May I suggest you remove the bias from your eyes? He state that the COSTS of unfettered capitalism will ineveitably outweigh the benefits, however, attempts to fix this such as protectionism will make the problem worse.