September 15 marks the tenth anniversary of the collapse
of Lehman Brothers and
near meltdown of Wall Street, followed by the Great Recession.
Since hitting bottom in 2009, the economy has grown steadily,
the stock market has soared, and corporate profits have ballooned.
But most Americans are still living in the shadow of the Great
Recession. More have jobs, to be sure. But they haven’t seen any rise in their
wages, adjusted for inflation.
Many are worse off due to the escalating costs of housing,
healthcare, and education. And the value of whatever assets they own is less than in 2007.
Last year, about 40 percent of American families struggled to
meet at least one basic need – food, health care, housing or utilities, according to an Urban Institute survey.
All of which suggests we’re careening toward the same sort of
crash we had in 2008, and possibly as bad as 1929.
Clear away the financial rubble from those two former crashes
and you’d see they both followed upon widening imbalances between the capacity
of most people to buy, and what they as workers could produce. Each of these
imbalances finally tipped the economy over.
The same imbalance has been growing again. The richest 1 percent of Americans now takes home about 20 percent of total income, and owns over 40 percent of the nation’s wealth.
These are close to the peaks of 1928 and 2007.
The U.S. economy crashes when it becomes too top heavy because
the economy depends on consumer spending to keep it going, yet the rich don’t
spend nearly as much of their income as the middle class and the poor.
For a time, the middle class and poor can keep the economy going
nonetheless by borrowing. But, as in 1929 and 2008, debt bubbles eventually
burst.
We’re getting dangerously close. By the first quarter of this
year, household debt was at an all-time high of $13.2 trillion.
Almost 80 percent of
Americans are now living paycheck to paycheck. In a recent Federal Reserve
survey, 40 percent of Americans said they wouldn’t be able to pay their bills
if faced with a $400 emergency.
They’ve managed their debts because interest rates have remained
low. But the days of low rates are coming to an end.
The underlying problem isn’t that Americans have been living
beyond their means.
It’s that their means haven’t been keeping up with the growing economy. Most gains have gone to the top.
It’s that their means haven’t been keeping up with the growing economy. Most gains have gone to the top.
It was similar in the years leading up to the crash of 2008.
Between 1983 and 2007, household debt soared while most economic gains went to
the top. Had the majority of households taken home a larger share, they
wouldn’t have needed to go so deeply into debt.
Similarly, between 1913 and 1928, the ratio of personal debt to
the total national economy nearly doubled.
As Mariner Eccles, chairman of the Federal Reserve Board from 1934 to 1948, explained: “As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing.”
As Mariner Eccles, chairman of the Federal Reserve Board from 1934 to 1948, explained: “As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing.”
Eventually there were “no more poker chips to be loaned on
credit,” Eccles said, and “when … credit
ran out, the game stopped.”
After the 1929 crash, the government invented new ways to boost
wages – Social Security, unemployment insurance, overtime pay, a minimum wage,
the requirement that employers bargain with labor unions, and, finally, a
full-employment program called World War II.
After the 2008 crash, the government bailed out the banks and
pumped enough money into the economy to contain the slide. But apart from the
Affordable Care Act, nothing was done to address the underlying problem of
stagnant wages.
Trump and his Republican enablers are now reversing regulations
put in place to stop Wall Street’s excessively risky lending.
But Trump’s real contributions to the next crash are his
sabotage of the Affordable Care Act, rollback of overtime pay, burdens on labor
organizing, tax reductions for corporations and the wealthy but not for most
workers, cuts in programs for the poor, and proposed cuts in Medicare and
Medicaid – all of which put more stress on the paychecks of most Americans.
Ten years after Lehman Brothers collapsed, it’s important to
understand that the real root of the Great Recession wasn’t a banking crisis.
It was the growing imbalance between consumer spending and total output –
brought on by stagnant wages and widening inequality.
That imbalance is back. Watch your wallets.
Robert B. Reich is Chancellor's Professor of
Public Policy at the University of California at Berkeley and Senior Fellow at
the Blum Center for Developing Economies. He served as Secretary of Labor in
the Clinton administration, for which Time Magazine named him one of the ten
most effective cabinet secretaries of the twentieth century. He has written
fifteen books, including the best sellers "Aftershock", "The
Work of Nations," and "Beyond Outrage," and, his most recent,
"The Common Good," which is available in bookstores now. He is also a
founding editor of the American Prospect magazine, chairman of Common Cause, a
member of the American Academy of Arts and Sciences, and co-creator of the
award-winning documentary, "Inequality For All." He's co-creator of
the Netflix original documentary "Saving Capitalism," which is
streaming now.
