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Tapped Out

Not only are families tapped out but so is our economic growth model. This why we have had an uneven recovery - corporate profits recover but family finances don’t. It’s the nature of our economic system. The real issue is or should be what are we going to do to change this.

Let’s start with this graph:

It use to be that our economic growth model included steady wage growth for workers. Companies would share the gains in worker productivity with workers. Thus, the idea or notion that people were rewarded for hard work. But then something happened in the 1970’s. The link between wage growth and productivity growth was broken. There are several factors in break of the link including drop in union participation, globalization of labor markets, and technological advances.

Let me digress and show one huge implication of this break:

There’s clearly a correlation between the huge income inequality in U.S. and the break between wage growth and productivity. Currently, the productivity gains, and the resulting profits, powered by worker on behalf of their employers - the companies, is no longer being shared. All the gains are staying at the top with shareholders and senior executives. So it should be no surprise when we hear news stories (covering an actual study) like this one: The Wageless, Profitable Recovery. Sorry, I digress

As we know that if the cost of living continues to rise but wages are not keeping up the cost of living, something has to happen to maintain a certain living standard. Well, as recent history shows when wages are not increasing but families are struggling to maintain a certain living standard - a ‘middle class’ living standard - something did fill the void. Prior to the Great Recession it was more debt:

The above graph measures the amount of family debt versus disposable personal income or the amount of leverage. This graph shows there are huge limitations on the amount of debt families can take on before becoming tapped out. But this was the ‘old normal’ for our economic growth model: lack of wage growth was substitute with debt. Then the Great Recession happened.

Now, we have a ‘new normal’. One that is characterized by low job creation and low economic growth. This all works to suppress wage growth even more - it’s simple higher unemployment means lower wages - law of supply and demand. National Employment Law Project has report out that confirms this ‘new normal’. NELP found that:

• In the weak recovery to date, employment growth has been concentrated in lower-wage occupations, with minimal growth in mid-wage occupations and net losses in higher-wage occupations.
• The net result is that the current U.S. jobs deficit is not evenly distributed.
• Workers’ real wages have shown no growth since the start of the recession.

This ‘new normal’ with low job growth and continued wage stagnation is different from the ‘old normal’ in one very big way - family debt is no longer an option. This means that our economic growth model is tapped out - the debt driven growth we saw years ago is not an option any more. This doesn’t bode well for the living standards of millions of American families. With this status quo economic growth model we will see even bigger income inequality with more and more families falling to the bottom. It doesn’t have to be this way.

We have choices. Any option pursued will not easy or quick to accomplish. But at this point maintaining the status quo economic growth model means economic devastation for millions of American families.

There are options. Some require political involvement - others do not. It truly is up to us to determine the direction we want to go (BTW, there a plenty more options-these are ones that I have studied):

1) Employer of Last Resort/Job Guarantee - obviously this requires legislative action which is a huge problem. Our political system and both political parties don’t really care about the concerns of poor and working class families.

2) New Economy - that’s right, organizing a new economy that is based on an entirely different set of values. Two very important ones: people over profits and more and better democracy. David Korten has written extensively on the subject of a New Economy. There are others with similar visions of a New Economy.

Again, it’s really up to us decide on the direction of our economy. But one thing should be absolutely clear - we have to challenge the economic status quo - it’s now a matter of survival. Any other ideas?

Good luck.