The Real Fundamentals: Middle Class Income
David Leonhardt has a worthwhile column suggesting that, perhaps, we should all focus a little less attention on how to bail out the latest disaster company and a bit more attention on how to address what, for lack of a better term, one might call the fundamentals of the economy. From back before AIG joined the scrap heap, Scott Lilly had a commentary wisely linking the financial crisis to the income crisis in America: “As a report I authored a little more than a month ago details, the wage and salary increases that have occurred since 2000 have not been sufficient to even maintain the level of income that most families enjoyed at the beginning of this decade.”
Instead of growing real incomes, we saw a growth in both the quantity of indebtedness and in the sophistication — or, at least, we were told it was sophistication — of the credit instruments that people were able to avail themselves of to maintain the levels of consumption they wanted. As long as it lasted that seemed to be not ideal, but still fairly beneficial. Being able to go into debt at appropriate moments is, after all, a pretty useful thing. And part of what it means to have a viable modern economy is to have sophisticated instruments for managing credit and risk. But it now turns out that a lot of that risk was mis-assessed and there are a lot of debts that can’t be paid.
That specific set of issues needs to be unwound with minimal collateral damage, of course, but what’s really needed is a return to more robust form prosperity — to a world in which growth in output is shared by a wider set of people and household consumption isn’t so dependent on debt-innovation that political authorities feel compelled to let everyone push the envelop lest the party end.
33 Responses to “The Real Fundamentals: Middle Class Income”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
September 17th, 2008 at 4:39 pm
Matt, redistribution of wealth from the “successful” to the “unsuccessful” is Socialism and will not be tolerated by God-fearing Conservatives. Using the money of the “unsuccessful” and their progeny to bail out failing private enterprises is Fasiscm and has been deemed in the best interest of the State by this administration and their supporters.
September 17th, 2008 at 4:40 pm
This entry, particularly the last paragraph, is right on.
September 17th, 2008 at 4:40 pm
DARN! I pulled an Yglesias and mispelled a big word. I meant to write Fascism.
September 17th, 2008 at 4:45 pm
Finally, a little obvious common sense! Reduce the income of 90% of the population, inevitably cuts into their spending power (eventually), hence fewer sales, falling profits, and .. further reductions in spending power (usually through layoffs).
September 17th, 2008 at 4:55 pm
It’s the Democratic growth strategy vs. the Republican credit one.
Basically, Clinton grew homeownership by increasing the income of and the number of people in the middle class.
Bush grew homeownership by, as wages stagnated and jobs disappeared, making it easier for folks to get loans they couldn’t afford to pay back.
Unsurprisingly, we are now paying the piper on Bushonomics.
September 17th, 2008 at 5:09 pm
Colonel Danite Says:
DARN! I pulled an Yglesias and mispelled a big word. I meant to write Fascism.
Actually, if you pulled an Yglesias you would have written “Faction” and we’d all be confused. Although i kinda like trying to figure what word is should be
September 17th, 2008 at 5:12 pm
Leonhardt talked to Gary Hart, asking him for some suggestions, among which was this: “The tax code, he said, should be changed to reward savings far more than consumption.”
Let’s see. This is the same tax code that lets you save tax-free for retirement in two ways–IRAs, in which the current contributions and income earned by the savings (including any realized capital gains in your IRA) are exempt from taxes now, and Roth IRAs, in which you pay taxes on the amount you contribute now, but all the income and any withdrawals once you retire are tax exempt. This is the same tax code that essentially exempts dividend income (earned from stock ownership; purchases of shares of common stock, commonly called “investments”, are actually a means of saving) from taxation. This is the same tax code that taxes capital gains at less than half the rate it taxes labor income (at the highest marginal rates). This is the same tax code with so many loopholes for corporate income taxes that many corporations don’t actually pay any income tax.
About the only way to privelege savings (and wealth) more than we already do is to move completely away from taxing income and replace the income tax with either a consumption tax or a value-added tax. I, personally, am not quite ready for all that regressive a tax system.
September 17th, 2008 at 5:15 pm
My suspicion is that the Dow will soon slip below 10,000, if only briefly. This will spark mega panicky headlines. It will be a number people will notice and recognize it as a bad indicator of something.
I think the economy message is going to pretty much dominate for the next couple of weeks and team Obama has got to crush crush crush McCain on this one.
September 17th, 2008 at 5:25 pm
The fundamental drivers of growing income inequality are globalization, immigration and technology. Fiddling around with marginal tax rates isn’t going to change that. That’s why inequality grew even after Clinton’s tax hikes on the rich and expansion of EITC.
September 17th, 2008 at 8:00 pm
Fiddling around with marginal tax rates isn’t going to change that.
“Fiddling around” with the tax code may not do much to address economic inequality, but substantial changes to the tax code, combined with substantial changes on the spending side, just might.
September 17th, 2008 at 8:08 pm
Neither candidate is proposing such changes.
September 17th, 2008 at 8:12 pm
There’s a bit more to this: American consumers could probably support the American economy well enough, but for quite sometime they’ve been expected to pull the entire world along with them: the sluggish European economies, the long-stagnant Japanese economy, and increasingly developing economies in countries like India and China. This needs to stop. The rest of the world needs to do what it takes to re-stimulate consumer deamnd in their own nations, something which would re-balance the world’s economies to a considerable degree and take the stress of the American consumer.
September 17th, 2008 at 8:45 pm
Middle class “income crisis.” That’s exactly right–and a politically useful phrase, I think.
There is also a debt crisis that needs to be addressed, but shrinking real middle class pre-tax income is the core problem. Changing the tax code to further encourage savings vs. consumption–if that’s even possible–is a really, really counterproductive idea. The “real economy” needs more consumption to recover and grow, and in recent years there has been a vast surplus of investment capital in the financial economy–willing to buy crazy risks. Unfortunately, much of this excess liquidity is now owned by Chinese, Japanese, and oil producing states instead of Americans, but it’s investment capital nonetheless.
At the bottom of everything is a middle class income crisis.
September 17th, 2008 at 8:50 pm
Neither candidate is proposing such changes.
Well, for starters Obama is proposing government-guaranteed and financed universal health insurance coverage. He’s also talking about what sounds like a terrifically expensive crash program in energy technology. And Obama won’t be the sole arbiter of what gets done. Congressional Democrats will also have a say, and they’re likely to be a fairly populist bunch of folks given the tenor of the times.
September 17th, 2008 at 9:16 pm
I agree with Roger that it’s more important to reward work and enterprise in the tax code, than encourage saving, per se.
Early on in the downturn, I think Obama econ advisor Goolsbee made the point that the fundamental reason the mortgage market collapsed is that many Americans were counting on finding a good job to pay their bills, but couldn’t find one when the time came.
But diagnosing the problem isn’t the same thing as proposing persuasive and appealing solutions. If there’s one theme I’d encourage the Obama campaign to bet the farm on, it would be jobs. The fundamental problem with the Bush economy is that it hasn’t created enough jobs and income opportunities for non-rich Americans, compared to the 90’s, and even compared to the 80’s. The fundamental remedy for what ails us is creating more jobs.
If there aren’t enough good jobs to go around, then propping up Fannie & Freddie, propping up the stock market, printing lots of money, etc. is to treat the symptoms rather than the cause.
I think John Edwards said it best: “. . .I believe that our tax code should honor one value above all the others: work. Work gives our lives meaning, and work gives our country stength.”
September 17th, 2008 at 9:20 pm
The Dow is now down from the day that Bush took office.
Would Bush be the first president to preside over a net decrease in the market, since the onset of the depression?
September 17th, 2008 at 9:32 pm
Through all this I keep remembering the Frank Sobotka quote in S2 of the Wire …
“You know what the trouble is, Brucey? We used to make shit in this country, build shit. Now we just put our hand in the next guy’s pocket”
Capitalism!
September 17th, 2008 at 10:59 pm
Well, for starters Obama is proposing government-guaranteed and financed universal health insurance coverage.
No he’s not. Obama’s health care plan is neither “universal” nor funded/guaranteed by the government.
He’s also talking about what sounds like a terrifically expensive crash program in energy technology.
He’s proposing $150 billion on “energy technology” over ten years. That’s $15 billion a year, or about 0.7% of the current annual federal budget. I see no evidence that this spending would have any significant effect on income inequality. If anything, it seems likely to increase inequality. Obama wants to spend a lot of that money on promoting/subsidizing hybrid and electric cars, which probably isn’t going to do much for low-income Americans.
September 17th, 2008 at 11:03 pm
At the bottom of everything is a middle class income crisis.
Stuff and nonsense. What “income crisis?”
September 17th, 2008 at 11:45 pm
Mixner, here’s one report of the middle class income crisis over the last 7 years. Median income lower at the recent business cycle peak than at the previous recession bottom. http://www.nytimes.com/2008/04/09/business/09leonhardt.html?_r=1&ref=business&oref=slogin But this has been going on and getting worse for 35 years. http://www.realitybase.org/journal/2008/7/10/the-recession-is-coming-the-recession-is-coming-republished.html
September 18th, 2008 at 6:42 am
Re: I think Obama econ advisor Goolsbee made the point that the fundamental reason the mortgage market collapsed is that many Americans were counting on finding a good job to pay their bills, but couldn’t find one when the time came.
???
This is, well, weird. I doubt very many people who took out mortgages had some illusion they’d get a better job sometime in the near future. What they were counting on wasn’t higher wages but higher home values so they could either refi or flip the house for a profit.
September 18th, 2008 at 9:44 am
Mixner, my bad. NYT article reports median income decline from peak to peak, not valley to peak. But it is unprecedented.
September 18th, 2008 at 1:19 pm
John F: right on. If Obama is going to pretend that the problem with the mortgage market is jobs then he’s just lying to you, period, end of story. I mean I guess we could all make 6 figure individual incomes and then we’d somehow be able to afford houses at inflated bubble prices, but otherwise, forget it. Houses have become unaffordable to EMPLOYED TWO INCOME COLLEGE GRAD professionals!!
The real problem is the COST OF HOUSING (oh and the funny loans needed to support the inflated costs of housing as prices would never have reached that level with traditional loans, and the crazy derivatives needed to support those funny loans etc. as it wouldn’t have happened if they banks kept the loans themselves).
September 18th, 2008 at 1:43 pm
Well, maybe I overstated, but while a dowturn in housing prices from bubble peaks was inevitable, maybe desirable, the fundamental problem with the Bush economy is the lack of jobs created compared to the 90’s and the 80’s.
Kevin Drum said it well
January 22nd, 2009 at 6:11 am
laptop battery
laptop batteries
March 2nd, 2009 at 8:36 am
levitraVery interesting site. Hope it will always be alive!
March 11th, 2009 at 8:40 am
I want to say – thank you for this!
March 13th, 2009 at 4:51 am
Very interesting site. Hope it will always be alive!
March 17th, 2009 at 3:25 am
If you have to do it, you might as well do it right
tramadol
March 22nd, 2009 at 7:22 am
tramadol
I want to say – thank you for this!
April 2nd, 2009 at 9:37 am
It is the coolest site,keep so!
buy cheap viagra
April 8th, 2009 at 3:20 am
If you have to do it, you might as well do it right
viagra
April 16th, 2009 at 3:45 pm
Excellent site, It was pleasant to me.
viagra