Robert Reich on the end of an era

Posted by: Michael Mandel on December 05

Catching up with Reich’s blog—in his latest post, he writes:

According to new polls, the economy is the number 1 issue for American voters. But that’s not just because the economy is slowing and mortgages are harder to come by. The real reason is middle-class families have exhausted the coping mechanisms they’ve used for over three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation

The three coping mechanisms he lists are more women working, longer hours, and home equity borrowing.

He then goes on to say:

In short, it’s the economy, stupid — but not just the current slowdown. The underlying problem began around 1970. And any presidential candidate seeking to address it will have to think bigger than stimulating the economy with tax cuts or spending increases.

It will be interesting to see what the presidential candidates come up with.

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Reader Comments

Brandon W

December 5, 2007 12:50 PM

The problem here, is that everyone is looking to the government to "do something". In the meantime, Americans just keep repeating "it's not MY fault! You can't blame me!"

The best thing the government and and Presidential candidate can do is get out of the way.

Americans need to quit being consumption-holics. Save money so you can invest in something. Cut back on your living expenses. Buy a small econo-car instead of the SUV. Cancel the 600 channels of cable TV and actually spend time with your family and friends. Live within your means and save so you can invest in income-producing assets. If you're capable, create an income-producing asset yourself. In under 80 years Americans have gone from industrious, personally-responsible individuals to whining losers who feel they're entitled to all the toys they want and a government that will take care of them when they fail in their responsibility. You are entitled to *nothing* except your life and - by law - the property you own (and in some cases, not even that; try not-paying your property taxes). Anything else you want is your own responsibility.

And now even the so-called free-marketers want a bailout, begging for the government and the Fed to come to their rescue. It is sickening.

KG

December 5, 2007 01:59 PM

Those 3 items may have been exhausted, but Reich neglects the one positive that has been added - stock market participation. Most of the Middle Class owns equities (even if only through a 401K), which was not the case 30 years ago.

Also, it is easy to invest in emerging stock markets like India and China, through US-traded ETFs. This was not possible even 10 years ago.

I agree that Americans have to learn how to tighted the belt. But I think a downturn that forces them to do this will strengthen the country.

Lastly, Reich ignores the wealth-creation of technology, where the deflating prices of an increasing variety of tech products greatly increases the purchasing power of the consumer. A 42-inch plasma TV was $8000 in 2003, but is $1000 today. iPods did not exist in 1999, but today you can get one with amazing features. The internet enables people to save time in 100 ways that did not exist 15 years ago. All these are examples of rises in living standards.

KG

December 5, 2007 02:00 PM

Those 3 items may have been exhausted, but Reich neglects the one positive that has been added - stock market participation. Most of the Middle Class owns equities (even if only through a 401K), which was not the case 30 years ago.

Also, it is easy to invest in emerging stock markets like India and China, through US-traded ETFs. This was not possible even 10 years ago.

I agree that Americans have to learn how to tighten the belt. But I think a downturn that forces them to do this will strengthen the country.

Lastly, Reich ignores the wealth-creation of technology, where the deflating prices of an increasing variety of tech products greatly increases the purchasing power of the consumer. A 42-inch plasma TV was $8000 in 2003, but is $1000 today. iPods did not exist in 1999, but today you can get one with amazing features. The internet enables people to save time in 100 ways that did not exist 15 years ago. All these are examples of rises in living standards.

Brandon W

December 5, 2007 03:09 PM

KG -
As to stocks, approximately 85% of the stock market is owned by the top 10%. The remaining 15% is owned by the next 40% of the population. The bottom 50% of Americans own virtually zero stock. Why? See my response above.

The wealth-creation of technology makes for nice theoretical debate, but the reality is that "better" technology doesn't always make for a better life. Adjusted for inflation, cars are about 50-100% more expensive now than they were in 1970. Are they technologically better? Sure. But for most people a car is just a "unit of transportation"... and their "unit of transportation" has gotten 50-100% more expensive in the past 35 years. Add to that the need for two cars due to both spouses being employed, and "family transportation" is about 300-400% more expensive than it was in 1970. The fact that the technology in those cars is better is virtually irrelevant. Am I better off because I have an iPod and a 42" plasma TV? In theoretical terms, sure. In reality? Hm...

But then again, if people weren't consumption-holics they wouldn't be in the hole they're in. It all comes down to personal responsibility for oneself and one's future.

Mohit Mahendra

December 5, 2007 04:45 PM

Looks like economic data supports the argument that more and more is being spent on consumption. Coping with that or cutting back on that should be the responsibility of the consumer, not the government.

If you look at GDP data that measures relative growth (in constant dollars) across various sectors of the economy over the past couple of decades, the Personal Consumption categories that grew the most are Furniture & Household items (among Durables), Clothing & Shoes (among non-durables), and Recreation & Healthcare (among Services). Consumption of Motor Vehicles (among durables), Food, Gas & Electric (among non-durables), Housing expenses (among services), and residential investment all grew less than the GDP since 1990.

I think that gives a sense of how people are spending their money - more and more in discretionary consumption expenses, and less & less on essentials and investments.

So if the economy is the big issue here, its really a symptom of 'consumption-holism', as Brandon pointed out.

Kevin

December 6, 2007 06:25 PM

"I think that gives a sense of how people are spending their money - more and more in discretionary consumption expenses, and less & less on essentials and investments."

My, this is an amusing thread. Michael quotes a uncredentialed non-economist, the Man Who Is Always Wrong himself, who literally seems to think it is unusual that people are worried about the economy.

He then explains this unprecedented circumstance by telling us that we actually make no more money now than we did 40 years ago, when people drove death trap cars, owned one 19-inch TV that got 3 staticky channels, used ringing-signals because they could not afford to place a long-distance telephone call on the one telephone plugged into their wall, and cut our own homemade clothes from paper patterns.

Evidently the reason we can somehow satisfy basic needs while spending an ever-increasing portion of our budgets on things that did not even exist in 1970 in because we are borrowing against home equity from the bank so that we can consume -- this from a man who most assuredly doesn't understand that one person cannot borrow money from a bank until another person has first chosen NOT to consume by depositing MORE money into said bank.

It is then introduced that the problem with people is that they expect to be consumers. This despite the fact that the only purpose of the economy, and the primary reason to have a job, is to provide for consumption needs.

And finally when I'm convinced how poor we all are, Mohit confuses me by demonstrating that our "essential" spending requires an ever-shrinking portion of our budgets, freeing up ever more portions of our budgets to spend on indulgences and luxuries. But THAT sounds like we're getting richer!?

It's almost as if the number and proportion of households that have discretionary income keeps increasing. (Which come to think of it is what the Conference Board reported last month).


Brandon W

December 7, 2007 11:00 PM

"....this from a man who most assuredly doesn't understand that one person cannot borrow money from a bank until another person has first chosen NOT to consume by depositing MORE money into said bank." - Kevin

False. The Federal Reserve simply prints more money and puts it into banks. It happens all the time. That's why inflation exists. It's why you must have $532,000 today to equal what $100,000 was worth in 1970**. Your argument only holds true if the quantity of money is static.

I never stated that "consumption" was a problem, inherently. I made the argument that over-consumption, in excess of one's means, is a problem. Again, this is only possible because people can borrow money that only exists because the Fed decided to print more.

I don't think you understand fiat currencies.

** See http://www.minneapolisfed.org/research/data/us/calc/

cm

December 8, 2007 01:25 PM

KG: "The internet enables people to save time in 100 ways that did not exist 15 years ago."

I trust you misspoke and meant "waste time"?

Kevin

December 10, 2007 07:42 PM

Brandon, let me give you a little remedial instruction on fiat money and the fractional reserve banking system.

Yes I'm aware that money is created and the supply not static. Money is created when bank loans money. The loan isn't made until someone first makes a deposit of cash, a fraction of which can then be lent. When the loan is issued, the original depositor and the borrow both now have money, hence the money creation.

The Fed is capable of creating money when it wants to, but that is not at all necessary for new money to be created. Money is created by the private banking system in the course of collecting deposits and issuing loans.

Hope that helps.

Kartik

December 10, 2007 08:35 PM

Reich believes that after 1970, people stopped getting richer, simply because after age 11, he stopped getting taller.

I agree with Kevin. Living standards have risen a lot since 1970. This is indisputable to actual thinkers. People have stopped worrying about the cost of domestic long-distance calls, the cost of light-bulbs, the cost of basic clothes (hence no more paper pattern cutouts), etc.

Brandon W

December 11, 2007 01:54 PM

Kevin,
I'm fully aware of everything you said, in your attempt to be condescending. The Fed can reduce the reserve requirements which allows the banks to "create" more money, thereby NOT requiring any new deposits. Your little lecture changes nothing. The fact remains that you're wrong in your original assertion which I addressed.

People ARE able to borrow and consume WITHOUT new savings or bank deposits, and it has been going on that way for a long time. The system, one way or another, is capable of "printing" more money almost at will - and does. Your perspective is Econ 101, and doesn't jive with the reality.

Brandon W

December 11, 2007 02:14 PM

I love how kartik believes that anyone who hasn't drinken the "theoretical Kool-Aid" must not be "thinkers." Personally, I believe that anyone who accepts the government's economic numbers at face value - particularly the CPI - isn't much of an actual thinker. If CPI is 3-4x what's being reported (and there's plenty of evidence to suggest this is the case), then EVERYTHING changes.

Having said that, it's Americans' own fault for electing these statist clowns and consuming beyond their means. I don't blame anyone else if I have a problem and I don't look to the government for bailouts. The cr*p coming from the government and the "properly connected" corporations these days is straight out of Atlas Shrugged. James Taggart would be proud. And then we have Wesley Mouch running the Fed....

Mike Reardon

December 11, 2007 03:29 PM

This economy over the last few years was expanding on leveraged debt (M&A and equity buyouts) and government borrowing far beyond the simple housing debt that supported consumer spending. That massive corporate and banking debt has not returned sufficient income to individual investor to support direct consumer demand. The supply side economy missed again like they did under Reagan.

To restart try cutting health care obligation from corporate and private hands and set up a truly marginal tax rate on maybe a flat tax rate on income. If you create massive debt let it return money into the hands of consumers and relieve corporate obligation that will have a direct impact on profits and consumption.

Linda Ogren

December 12, 2007 12:47 AM

Hmmm, 1970 - wasn't that about when women by the millions began to join the workforce, thinking that they could raise their standard of living more effectively than by cutting patterns at home? Most needed a few more clothes, and often a second car and a few other conveniences to accomplish that, hence a certain pumped up level of consumption might be justified. Perhaps as a result, the home ownership numbers are surprisingly high, but look closer and I think you'll conclude that ownership plus healthcare now typically requires 2 steady incomes. It is not clear to me that this equates to an across the board increase in the standard of living.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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