In 1982 the economy was hurting and Ronald Reagan’s approval ratings were even lower than Obama’s in 2010. The economy got better on it’s own and so did Reagan’s approval but not before the Republicans took a drubbing in the midterms. In 1994 the economy was also hurting and Clinton’s approval ratings were also lower than Obama’s now. The economy once again righted itself, Clinton once again enjoyed high approval ratings but not before the Democrats took a drubbing in the midterms. Fast forward to the George W. Bush era. Bush’s approval ratings were declining until the attacks of 9/11. Although the economy was still hurting his approval held through the 2002 election but because of structural defects the economy remained an issue. The Bush tax cuts were primarily creating jobs in China so as the 2004 elections approached Alan Greenspan’s FED flooded the economy with lots of cheap easy to get credit. Since the purchasing power of the middle class had been on the decline since 1980 this smoke and mirrors recovery was all that could save George W. Bush. People who already had houses used them as ATMs and people who couldn’t afford to buy a house were given loans to by them anyway. The result was a housing bubble which eventually popped as it was bound to do.
So now it’s 2010 – the economy is in bad shape, Obama’s approval ratings are down and the Democrats are about to take a drubbing in the midterms. In his OP-ED today Robert Reich correctly identifies the problem.
That’s because the real problem has to do with the structure of the
economy, not the business cycle. No booster rocket can work unless
consumers are able, at some point, to keep the economy moving on their
own. But consumers no longer have the purchasing power to buy the goods
and services they produce as workers; for some time now, their means
haven’t kept up with what the growing economy could and should have been
able to provide them.
This crisis began decades ago when a new wave of technology — things
like satellite communications, container ships, computers and eventually
the Internet — made it cheaper for American employers to use low-wage
labor abroad or labor-replacing software here at home than to continue
paying the typical worker a middle-class wage. Even though the American
economy kept growing, hourly wages flattened. The median male worker
earns less today, adjusted for inflation, than he did 30 years ago.
But for years American families kept spending as if their incomes were
keeping pace with overall economic growth. And their spending fueled
continued growth. How did families manage this trick? First, women
streamed into the paid work force. By the late 1990s, more than 60
percent of mothers with young children worked outside the home (in
1966, only 24 percent did).
Second, everyone put in more hours. What families didn’t receive in wage
increases they made up for in work increases. By the mid-2000s, the
typical male worker was putting in roughly 100 hours more each year than
two decades before, and the typical female worker about 200 hours more.
When American families couldn’t squeeze any more income out of these two
coping mechanisms, they embarked on a third: going ever deeper into
debt. This seemed painless — as long as home prices were soaring. From
2002 to 2007, American households extracted $2.3 trillion from their
He has some suggestions on how to reverse this but they are little more than band-aids and it’s too late for band-aids. He does talk about restructuring but his ideas are insufficient. The politicians will be unable to make the structural changes necessary because those in power are doing just fine and will block any attempt of serious structural change.
Our economy is built on cheap natural resources. While oil gets most of the publicity to day it’s not just oil. We are also approaching peak cheap copper, peak cheap iron, peak cheap rare earth minerals, peak cheap phosphorus and yes peak cheap water. Our credit based economy requires economic growth to pay the interest and that economic growth is dependent on cheap and abundant natural resources.
This will not be like 1982 or 1994, the economy will not fix itself. And the credit bullet the Greenspan used in 2003 is no longer available. So what is next? I’ll leave you with this from by review of Joseph Tainter’s The Collapse Of Complex Societies:
Tainter says that the only solution for over complexity is simplification but complex systems are unable to voluntarily simplify. Collapse is nothing more than involuntary simplification.
Cross posted at Newshoggers