MEDIAN WAGES….So let’s assume that we manage to stabilize the economy sometime soon via whatever combination of stimulus spending, tax cuts, and bailouts you think is best. What’s next? Where will demand come from to get the economy moving normally again? Paul Krugman comments:
I find it useful to compare U.S. spending in recent years with spending in the mid-90s, when things seemed much more sustainable. What changed? Well, we had bloated housing investment and bloated consumer spending. Meanwhile, nonresidental investment as a percentage of GDP was about the same in 2007 as it was in 1996.
So what offset the consumer/housing boom? A vastly increased trade deficit. And that suggests that a return to normalcy would involve getting savings up, housing spending down, and a combination of more exports and less imports.
I think the big thing I’d add to that is growth in median incomes. One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more. This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don’t spend enough all by themselves.
The flip side of this, of course, is that rich people are going to have to accept the fact that they don’t get all the money anymore. Their incomes will still grow, but no faster than anyone else’s.
How do we make this happen, though? I’m not sure. Stronger unions are a part of it. Maybe a higher minimum wage. Stronger immigration controls. More progressive taxation. National healthcare. Education reforms. Maybe it’s just a gigantic cultural adjustment. Add your own favorite policy prescription here.
This isn’t just a matter of social justice. It’s a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama’s biggest economic challenge. Until median wages start rising steadily and consistently, we haven’t gotten ourselves back on track.