How Credit Crunched the Middle Class...

If I were a tad better versed in economics, I'm sure I would be able to say this as well as Steve Waldman (pfft, as if!). But I'm doing tadpole economics in a sea of sharks (in power only, not in aggression), so I can't. But he so lyrically says exactly what I'm thinking, every single time:

Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class. 

I hate the whole Republican attitude of "nation of whiners" and I'm not sure why there are so many who buy into the line. Given the real lack of income progress made by the majority of Americans over the last seven/eight years, it is shocking that there are so many out there who still swear by the whole "pull yourself up by your bootstrap" motto.

Chart lovingly borrowed from the NYTimes.

Here is the deal: look at the first graph.  What you see is that the highest fifth of American households consumes just 47% of their income compared to the middle fifth (who consume 77% of their income) and the lowest fifth (who consume an astounding 182% of their income). 

A couple of interesting asides.  First, this chart ends at 2005, before the most recent run-up of gas and food prices.  Given that the official inflation rate in the US is running in the 5-6% area (and some suggest that inflation is as high as 8%, once you toss out certain metric bending adjustments, such as hedonic pricing), you would have to bump up consumption slightly for each bracket.  These numbers also do not take into account (1) any increases in housing prices due to ARMs adjusting over the past year, which has substantially increased housing costs for many Americans and (2) it also does not take into account the escalating unemployment numbers, which will drive the average income down.  Second, I find that there is an interesting disparity between the supposed average American consumption, which would suggest a savings rate of at between 20-50% among 3/5 of Americans compared to the actual savings rate in the US, which is and has been hovering in negative territory (which is, apparently, also a contentious issue, since the savings rate may or may not include pensions and other retirement savings plans and doesn't include home equity -- except we know how that's going).

Anyways, Waldman believes (as do I) that these numbers are vitally important because they hint at what has prevented furor over the growing income disparity in America.  That even as wages have stagnated for everyone except those in the top 5-20%, absolute consumption has actually kept apace among the different income groups.  And the truth is, most Americans (this one included) often use consumption instead of wages as the gauge of their own economic well-being.  (If I can own that latest Coach bag then I must be doing ok financially.)

Of course, the kind of consumption that these numbers suggest has been supported by easy credit.  Apparently, credit was soooo easy, that creditors were under the false illusion that they never had to be repaid.  And it is this "irresponsibility" that the conservatives seem irasibly focused upon. 

Now don't get me wrong: I don't understand how Americans have sank so far so fast, how we have an entire generation of people who think nothing of being tens of thousands, if not hundreds of thousands of dollars in debt.  And I'm not counting the folks who simply found themselves in hard times because of illness or other bad luck, who had to rely on easy credit to get them out of a jam.  I'm mostly thinking about those who thought it was worth a debt burden to own the latest model Suburban, iPhone or whatever monster machine most in vogue.  On the other hand, we are too quick to forget that on the other side of the debt equation were financial companies that made fistfuls of cash (on paper) from one-off fees and usurious interest rates.  As any credit card company will tell you, they don't make money off the rich, who tend to make their payments on time, qualify for low interest rates and, worst of all, never incur the penalties and extra interest charges associated with carrying a balance on their credit cards.  You just know that the incentive system is all wrong when a company can make MORE money off poor people than off the rich.

Now that credit is no longer "easy" and lenders are being told tighten their standards (by their shareholders and by regulators), we are going to face an enormous challenge as a society: what to do with the millions who will shortly have to arrive at the conclusion that they are not in fact the middle class that they had perceived themselves to be?

As Waldman points out: "in a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be. We borrowed to finance an illusory Mayberry. The crisis won't be over until this tension is resolved. Either we modify the facts of our economic relations, or we come to terms with a new America more comfortable with distinct and enduring social classes." (emphasis mine)

So what do you think?  How comfortable are you with an America where social classes are far more distinct and less fluid than that which we have all become accustomed to?

Comments

[teahouseblossom]

I'm totally with you that the "nation of whiners" scenario is completely wrong.

Are you a fan of Elizabeth Warren? She's a bankruptcy professor at Harvard Law School, and my hero! Her theory is that Americans have gotten into debt because of the loosening of regulations over the banking industry over the last few decades. With the changes to the bankruptcy laws in the past 2 years, it's gotten worse.

And most Americans get into financial trouble because of divorce, illness or job loss - not because they're running around spending money irresponsibly! Warren talks about all of this in her book "The Fragile Middle Class." You should check it out!

[Kady]

Actually, I'm a huge fan of Warren's (and I've read her articles, though not yet her book). My bankruptcy prof couldn't talk enough about her in our bankruptcy class!