Why the Main Street economy isn't looking up

Wages aren't keeping pace, so where is the buying power going to come from?

Published June 10, 2010 10:30PM (EDT)

Today's 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's fallout.

But like all economic news, its significance depends on where you're standing -- whether you're 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’re on the mend.

Baloney. The reason so many Americans went into such deep debt was because their wages didn't 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 -- and the economy -- 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's bad news because consumer spending is 70 percent of the economy. It helps explain why so few jobs are being created, and why we can't escape the gravitational pull of the Great Recession without far more government spending.

It's 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't that consumers lived beyond their means. It was that their means didn't 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's hard to see where the buying power will come from unless America's 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's more news: A Federal Reserve report Thursday showed the net worth of Americans rose a fourth straight quarter in January-March. Don't be fooled by this one either. That increase was almost entirely based on the stock market's 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't have many assets in the stock market. To the extent they have any net worth, it's in their homes. And home prices continue to languish.

Don't be fooled by the cheerleaders. The economic news continues to be dismal.


By Robert Reich

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 15 books, including the best sellers "Aftershock", "The Work of Nations," and"Beyond Outrage," and, his most recent, "The Common Good." 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 also co-creator of the Netflix original documentary "Saving Capitalism."

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