by Andy Sutton, on financialsense.com
New century – same problem?
Now let’s take a look at the situation we have before us in 2008. When looking at statistics, it is very difficult to draw parallels between the actual numbers of that time and the numbers of today. Decades of manipulations (some justified, some not) have made it nearly impossible to do side-by-side comparisons.
- In 2007, approximately 37 million Americans or 12% of the population are living in poverty. Clearly this is much lower than the greater than 50% in 1929, but the devil is in the details. In 2008, the threshold income for poverty was listed as $10,787 for a single person under the age of 65, and %21,027 for a family of four with two children. I don’t know what kind of standard of living this entails, but I found it extremely odd that when using BLS’ inflation calculator, the $750 per capita income in 1929 is worth $9,094 in 2007 dollars. Given what we know about the relevance of the CPI, it is safe to say that the poverty rate is grossly understated. Even that aside, $21,027 is not much of a living for a single person let alone a family of four.
- A 2005 study conducted by the University of California at Berkeley, and the Paris School of Economics contended that income concentration in the top 1% of wage earners was equivalent to 1928 levels.
According to the Census Bureau, the top 1% held nearly 46% of all wealth in the United States in 2007 with the top 10% holding over two-thirds of wealth. Compare to 1929 when the top 1% held around 40% of the nation’s wealth.- The average US household now owes nearly $10,000 on credit cards, and pays an average of $1,478 in interest each year.
The consumer’s balance sheet is in shambles. Granted, a good deal of the responsibility for this lies at his own feet, but without the consumer, this economy is sunk and doomed for a serious contraction. As in the 1920’s, the average American is struggling. Where he barely made a subsistence level wage in the 1920′s, today, he is burdened with debt. The result is the same, although the causes are different. Consumption now represents nearly 70% of GDP, with the bulk of that consumption coming from Main Street. Without it, the prospects for prosperity are slim to none. From a wage perspective, we are not faced with a 1920′s style nominal wage decline, however, we are faced with real wage declines as the inflation rate continues to outpace expansion of earnings.
In the 1929 recession turned depression, there was greed in the usual places as power and wealth were consolidated. The rest of America was compromised by sub-poverty wages with the majority lacking the ability to participate in the boom. During the past 10 year runup, there was an almost universal greed. Those at the top consolidated more and more wealth as evidenced by massive bonuses and merger activity, however, much of the rest of America decided that this time they were going to try to follow suit. They were already half compromised by stagnant then falling real wages; credit cards and home equity loans took care of the rest.
One could certainly make the argument that there has always been a fairly high level of poverty and concentration of wealth. Hasn’t there always been greed? What made 1929 different? What was the trigger? What makes 2008 different and what was (or will be) the trigger now? In 1929, the real economy began to contract because it had outgrown itself. Simply put, it came too far, too fast and there was no more fuel to sustain it. Exporting at that time was more difficult, so once the economy exhausted domestic consumption potential, it was game over. Due to the majority of Americans being unable to support continued rapid growth through consumption, the boom quickly ground to a halt. Simply put, there were too many products made, and no one to buy them.
In the case of the new century, we have had a lack of real growth. Much of the growth that has happened has been due to debt, and therefore, the debt must be figured in when considering the sustainability of growth. Point of fact if the credit cards, home equity loans, and deficit spending had been taken away we would have seen very little, if any, growth during the past decade. While credit is an accoutrement to any healthy economy, and is in fact necessary for growth, when an economy comes to rely on credit for its growth, that economy is doomed.
In our 21st century economy, we don’t rely on the consumption of our own products, but on vendor-financing from the producers in Asia and elsewhere. Our economy by and large ‘produces’ services, but if there are too many services, and no buyers, you end up with the same result: economic contraction. The biggest difference between 1929 and now is that we have the ability through our own contraction to affect the world economy since our consumption has created a demand for their products.
None of the above should be taken as an indictment of capitalism. Certainly ingenuity, industry, and hard work should be rewarded while the opposite discouraged. If anything, our problem is that we didn’t stick to capitalism, but tried to intervene in the normal cleansing process of the free markets. We’ve tried to have Capitalism during the good times and Socialism in the bad times. Even in the best of capitalistic societies, the lesson has to be learned that if the consumer-worker base isn’t included in the prosperity, the prosperity will soon come to an end.
You simply cannot balance long-term healthy economic growth on the consumption of the top few percent of wage earners. There needs to be sustainable demand for the production of an economy, and the ability of the populace to participate in that demand by the sweat of their brow as opposed to VISA is absolutely essential.
