Friday, July 29, 2011

Another Picture of the Problems With the Economy - Not Another Solution Though

Why Consumers Went Into Debt, and Why Demand is Not High Enough

This chart is from the Economic Policy Institute, by way of Jared Bernstein’s excellent blog on economics.  What the chart is showing is the growth in Real Average Hourly Wage Compensation by income group.  The important part of the graph is at the right hand side, where the compensation for high income wage earners grows substantially while there is virtually no growth for the rest of the labor force

Wages at the high end are growing faster

Wages at the high end are growing faster chart
The chart explains a lot of recent economic and consumer credit history.  With relatively stagnant real wages, lower and middle income families increased their consumption by going into debt.  This debt was financed by a bubble in home values, providing collateral for home equity based loans, and it was financed by credit card companies extending credit far beyond what an average family could support.

The result:  when the housing bubble collapsed the collateral base of consumer debt collapsed, and when  employment and income contracted, the collateral base of credit card debt collapsed.  Since this has not been corrected, the economy cannot resume a high growth path.  Hence the report that the U. S. economy grew very slowing in the 2nd calendar quarter 2011, and that after revisions to earlier numbers, slower growth took place in the first calendar quarter.

And notice that the only time real hourly compensation was rising for everyone was during the Clinton administration, with its higher taxes on the wealthy.  For the Bush years to top lines continued to rise, but the middle and lower income lines, flat-lined.  The result of that trend during the Bush years, a major contribution to the causes of the Great Recession.

For the future,

I’d go further—still in hypothesis mode, but I’ll bet I’m right.  High levels of inequality depress longer-term growth by depressing more broad-based consumption—you end with a lot going on at Walmart and Nordstrom without enough going in the middle—and dampening investment both in human and physical capital.

Mr. Bernstein does not need to be in “hypothesis mode”.  His conclusion is exactly correct.  Eighty years of Keynesian economic theory, proven again and again to be correct, support his conclusion.

Of course, this chart does not even show the enormous tax decreases that have been provided for the top earners over the period.  That would be piling on, wouldn't it.

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