Why the Main Street economy is still lagging
Today鈥檚 most important economic news: U.S. household debt fell for the seventh straight quarter in the first three months of 2010 as Americans continued to respond to the recession鈥檚 fallout.
But like all economic news, its significance depends on where you鈥檙e standing 鈥� whether you鈥檙e a typical American or someone at the top.
The common wisdom is that excessive debt-financed spending was one of the causes of the recent recession, so the news that household debt is dropping is being celebrated by business cheerleaders as reason to believe we鈥檙e on the mend.
Baloney. The reason so many Americans went into such deep debt was because their wages didn鈥檛 keep up. The median wage (adjusted for inflation) dropped between 2001 and 2007, the last so-called economic expansion. So the only way typical Americans could keep spending at the rate necessary to keep themselves 鈥� and the economy 鈥� going was to borrow, especially against the value of their homes. But that borrowing ended when the housing bubble burst.
So now Americans have no choice but to pare back their debt. That鈥檚 bad news because consumer spending is 70 percent of the economy. It helps explain why we so few jobs are being created, and why we can鈥檛 escape the gravitational pull of the Great Recession without far more government spending.
It鈥檚 also a bad omen for the future. The cheerleaders are saying that for too long American consumers lived beyond their means, so the retrenchment in consumer spending is good for the long-term health of the economy. Wrong again. The problem wasn鈥檛 that consumers lived beyond their means. It was that their means didn鈥檛 keep up with what the growing economy was capable of producing at or near full-employment. A larger and larger share of total income went to people at the top.
So in the longer term, it鈥檚 hard to see where the buying power will come from unless America鈥檚 vast middle class has more take-home pay. Yet the economy is moving in exactly the opposite direction: Businesses continue to slash payrolls. And the hourly wage of the typical American with a job continues to drop, adjusted for inflation.
Here鈥檚 more news: A Federal Reserve report Thursday showed the net worth of Americans rose a fourth straight quarter in January-March. Don鈥檛 be fooled by this one either. That increase was almost entirely based on the stock market鈥檚 rise in the first quarter. But the market has since fallen back to where it was at the start of the year. More to the point, most Americans don鈥檛 have many assets in the stock market. To the extent they have any net worth, it鈥檚 in their homes. And home prices continue to languish.
Don鈥檛 be fooled by the cheerleaders. The economic news continues to be dismal.
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