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Why We’re in this Economic Mess

02.04.09

If you have the time, you really should read Robert Reich’s entire article.  He was the Secretary of Labor under President Clinton, so he knows what he’s talking about.

He explains just how the current recession started not with the housing bubble, but much earlier:

The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier — in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.

When even these coping mechanisms were exhausted, families went into debt — a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don’t spend as much of their income as the middle class and the poor do — after all, being rich means that you already have most of what you need. That’s why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It’s not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation’s income.)

Just like how CEOs pay continues to climb at a much higher rate compared to that of the average worker, it makes sense that the top 1 percent would take home more and more of the nation’s income.

According to the research and advocacy group United for a Fair Economy:

U.S. CEOs’ pay rose 313 percent from 1990 to 2003, UFE said. By contrast, the Standard & Poor’s 500 stock index rose 242 percent and corporate profits gained 128 percent.

During the same period, average worker pay rose 49 percent while inflation climbed 41 percent.

The most striking point that Reich made was in regards to how the rich don’t spend as much of their income as the poorer groups.  It makes sense since the rich are the ones who get all the free perks despite having the wealth to afford it on their own.  CEOs get company cars, use of company jets, among many other luxuries.  Average workers have to pay for everything on their own from their far smaller wages.

I really wish I knew how to fix this.  It was just a matter of time before the gap between the rich and the poor got too big that it actually collapsed the entire economy.  Perhaps this is what we needed to bring the elite back down to a level that we can actually sustain.

Greed is not good.

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2 comments

  1. Traditionally, these economic issues are reversed (or altered) by violent turmoil and a generally riotous uprising of the poor and most affected. See French Revolution. I’m not certain the American psyche will currently allow for that kind of unity across the diversified lower class.


  2. I agree. I don’t see a revolution in our near or even distant future. Unless this economic disaster went to an unprecedented level that makes our current situation seem like prosperity. Plus, it just doesn’t seem like an “American” thing to do. People don’t unify in mass numbers the way people did, like, say, during the Vietnam War protests.



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