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Why the Old Growth Won’t Return May 25, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, politics.
Tags: , , , ,

One very straightforward way of thinking about the current economic crisis is that some investment bankers, seeking quick profit with little risk, developed some unusual and unworkable investment instruments. And because of a deregulated environment where no one was paying attention to what they were doing, these investment instruments enabled lots of bad loans, especially in the housing sector. This created a bubble—an inflated housing market—that burst sending the economy into a tailspin.

Once the bad loans are off the books and housing prices are stabilized we can return to the kind of growth rates that we had before the crisis.

I get the impression that lots of people expect something like this after the recession.

But there is another story to be told, one that is less optimistic. The alternative story is that easy credit is not something that appeared over the last few years but has been expanding over the past few decades, fueling what we now think of as modern consumerism—middle class people with the ability to buy lots of stuff. But this expansion of credit was not based on improving real wages for the middle class. Thus, for many years people were borrowing money that they had no realistic means of paying back, while paying exorbitant interest on that money to the bankers. The collapse of the housing market was just the “straw that broke the camel’s back”—an event that triggered the collapse of a financial bubble that had been building for years.

Via Kevin Drum, this chart suggests the alternative story is the right one.



The chart shows, since 1979,  an enormous leap in real income for the top 1%, some modest growth for the next 19%, and for everyone else almost nothing. Yet, this flat growth in real income for most Americans is accompanied by a plummeting savings rate for the middle class and an explosion in consumption fueled by credit.

The conclusion to draw from this is that the growth rates of the past 30 years were based on nothing but financial shenanigans and delusional spending. If so, we will not be able to return to previous growth rates even once there is a economic turn around.

This means a fundamental shift in how Americans conceptualize a good life. It also suggests that no matter how successful Obama is at ending the Great Recession, he will face a frustrated electorate in the future.




1. Paul J. Moloney - May 28, 2009

I consider it a very good thing that philosophy is not dependent on the economy, or, otherwise, I would be out of work.

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