Debt Burdened and Weary
April 21, 2003
Max Fraad Wolff
Today’s American economy is consumer driven. Approximately two of every three GNP dollars emerges from the receipt swollen wallets and purses of the residents of the United States of shopping. This maybe fine, and has well and long supported a potent middle class. It is on this great engine that our, and much of the global economy, runs. Expert faith is placed in the resilience of strip mall legions. We are witnessing unacknowledged fissures in the structural pillar of our prosperity. Spending has stayed robust, underlying earnings have not kept pace. Two of the past three decades were defined by falling real wages. Real average hourly earnings declined across the period 1973-1995. Thankfully, that trend reversed over the last 7 years. However, the metamorphosis that began under the falling wage period continues today. Spending ahead of earnings, to maintain and enhance lifestyle, continues despite recent year’s enhanced earnings. Little account has been taken of this by dismal science’s leading prognosticators.
The long grinding downswing provides an opportunity to update our 1950’s understanding. The vast, thrifty middle class of yester year is gone. American consumers are heavily indebted, stretched thin and addicted to cheap and easy credit. The Cleavers have two mortgages, $7000 in credit card debt, and kids in $20,000 a year state universities. Fresh from refinancing their home they live in fear of their dismal 401K statements. Their city, county and state governments must mercilessly cut as falling revenues coincide with rising costs. They face heavy tax burdens on the new SUV bought last year, seduced by 0% financing. Incomprehensible cell phone bills pile up alongside notices from health care providers, the local electric monopoly, endless catalogs, the local Baby Bell, and a thousand charitable appeals. They are older, more sleep deprived and less hopeful about the future than their parents were. Sleep and depression disorders are omnipresent as Americans struggle to work 199 more hours per year than they did in the mid 1970s. The children are an all together different story.
This beleaguered mass limped out of the great boom. Few profoundly cashed in. Toward the dusk of the boom, earnings drifted upward. Accordingly, consumers increased spending. No great pay down of debt occurred. The vast middle fed at the credit trough, they did not drink heavily from the earnings’ fountain. While incomes rose after 1996, they did not keep pace with spending. Predatory lending rages, offers fly and scrutiny declines as cultural acceptance of insolvency obscures recognition of income’s inability to keep pace with debt. Millions dreamed of and hoped for great wealth as defined benefit retirements were converted to defined contribution plans. What paychecks did not offer would come from surging equity markets. This was fueled by a cultivated feeling that the ship would come in. Media outlets, living rooms and water coolers buzzed with fantasies of lavish, early retirement and motivated a feeding frenzy. We fed on stocks, SUVs, and imports. The ship never came in. The great boom ended before the middle attained adequately enhanced incomes. The fat years witnessed dis-saving as the lean years had before them. Many still own less valuable equities and you see the SUV revolution every time you hit the road. Our bloated current account imbalance boldly attests to the love of imports.
It was a great party. Those who got in felt invincible and destined for immortality, plans and actions were driven by drunken excess. The party is over. The mass of people are not ready to shoulder clean up burdens. Many are left to ponder a fat bill for a bash they never fully got into. If this were not enough, the new economy turned out to be a great sales pitch and a collective delusion. The macroeconomic and global environment heap insult and injury on these people as the “soft patch” coincides with terror attacks and wars. The middle class has done more than its share of heavy lifting, astonishing debt levels prove that. As we uncritically assume this will continue, we are betting that the weary can continue, unaided, up this steep and treacherous path.
This is the story of the great American middle class. These good, but tired and frightened folks must open their empty wallets and throw down 18%APR plastic, if two thirds of our economy is to grow. We are at a nine year low for labor market participation. Capacity utilization is low. Raises and bonuses are few and far between. Few are bullish on the near term economic future. Yet, we expect people to continue to spend, or increase spending. At some point balance sheets must be strengthened. Stagnant, falling or rising incomes will have to run behind spending. The only other route to debt reduction is bankruptcy.
All of this begs the question, is it wise to hitch the weight of the world to the old Chevy again this summer?
Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst, Mfwolff@aol.com
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