Wages, Debt and Deleveraging

Something went wrong with our economy beginning in the 1980s. Over the following 30 years, wages stagnated while profits grew. The middle class got little or none of the productivity gains that should have provided a rising standard of living. Workers had to borrow to buy the goods and services of the suburban life. In 2008, it caught up with us. The Great Recession and the sogging economy that we see now are a direct result of that loss of wages and extended borrowing.

The reasons for the shift in income are debatable but the fact is not. The share of national income going to wages fell from 56 percent in 1982 to 51 percent in 2009. That 5 percent drop means that wages in 2009 accounted for $322 billion less than they would have if workers had continued to receive their share of the productivity gains. That amount of income, about $2000 per worker in 2009, shifted from wage earners to those who receive profits, interest and rent.

In order to maintain their standard of living, families first put mothers to work, then took second jobs and finally, what really has become the problem, they borrowed huge sums of money. In financial jargon, they leveraged, that is borrowed multiples of their income, savings and home equity.

Credit card debt was $55 billion in 1980, grew to $239 billion in 1990, $683 billion in 2000 and $874 billion by November of 2009. Home mortgage increased from $1.4 trillion in 1980 to $14.3 trillion at the end of 2009. Car and student loans grew as fast. It was that humongous borrowing that financed not just the housing and other bubbles in our economy but the everyday consumption of the average worker.

When wage earners ran out of borrowing power, they ran out of purchasing power. They couldn't make the next payment on their mortgage and we got a financial crisis. They couldn't buy the goods our economy was producing and we got the Great Recession. Profits took an even larger proportion of income after the recession hit.

If we are going to have a sustainable recovery, our economy needs a surge in purchasing power. Unfortunately, the middle class is going the other way and deleveraging, that is, paying off that debt, rather than buying goods and services. Credit card debt peaked at $975 billion in September of 2008 and consumers have since paid off $101 billion of that . In addition, $272 billion of mortgage debt has been paid off or foreclosed on. That doesn't help at all.

The Obama administration's $700 billion stimulus package was meant to make up for that lost purchasing power. It was enough to stave off a depression but it wasn't enough to trigger a sustainable recovery. The Federal Reserve stuffed the banks with over $1 trillion, expecting that they would lend creating a surge in investment. That didn't work either. Without a surge in purchasing power, producers have no reason to invest in expanded output or rehiring workers.

At this point, it doesn't look like the economy or wages are going to recover on their own. The corporations are sitting on billions of dollars in cash and cutting workers. The banks are not lending while they are making huge profits and paying outrageous bonuses to those who are manipulating sterile financial deals.

In this present contentious political situation, no one is offering a plan that addresses the problem. The Democrats seem afraid of the accusation of class warfare if they do anything for working class families.

The Republicans apparently believe what has happened to wages is good and that the worse the economy gets the better chance they have to win the election. What they would do then is a closely held political secret. Taxes are of course much lower than they were 30 years ago so cutting taxes is not a solution to anything except the greed of the rich.

Despite the political prognostications of a Republican sweep of both houses in the November election, you can't beat something with nothing. At this point, both parties, or three parties if you will, have nothing. The political party, group or movement that convinces the electorate that they can fix the wage growth problem will bolster the economy and win the election.

Whatever your political thinking, stagnating wages and loss of income among working people are problems we cannot ignore. Working families have not had a raise in 30 years and they are up in arms. If someone doesn't do something shortly, "up in arms" could become more than a figure of speech.