Lessons from the recession

Why our economy had to fail

By John Jacobsen

 

If you were to Google “U.S. recession” on a computer tonight, you would find a staggering number of articles on how the economy crashed.

The Democrats want you to blame lax oversight, the Republicans want you to blame low-interest rates, the Tea Party wants you to blame the Federal Reserve… everyone seems to have an answer for how the economy crashed, but no one wants to talk about why it crashed.

You wouldn’t know it by listening to most of the pundits, but our economy crashed in large part because we don’t pay working class Americans well enough.

Of course there’s truth in blaming risky lending practices for the crash – just as there is at least some factual base behind blaming low-interest rates. Much more fundamental, however, is uncovering the motivation for these policies in the first place.

There was a reason banks and financial institutions began to loan money so recklessly. They weren’t simply acting out of greed – although that certainly played a part. They were, like all sectors of our economy, responding to a demand. The American working class needed easy credit to continue consuming, and the financial masters of the universe provided them with the means to continue doing so.

1. The wage problem.

If we want to find the real roots of this recession, then, we should look back to the end of the post-war boom in the 1970’s, because that’s when the wages of American workers suddenly stopped rising…

To stay competitive with reemerging European and Asian industry, American employers endeavored to undermine the wages of American workers in a number of new ways by the 1970′s. First, they began extensive campaigns to outsource American jobs to cheaper labor in South America and elsewhere. Workers, in response, could for the most part only save their jobs from being moved overseas by accepting massive pay cuts.

Secondly, but perhaps more importantly, if employers couldn’t move the jobs to cheaper workers in other countries, they simply brought the cheaper labor to work here. 

This in a time when unions were under viscous assault, and women were joining the workforce in droves(whom employers could hire for one half the price of men), had the effect of substantially depressing the wages of the American working class.

In and of themselves, these were major victories for major American businesses. But overcoming the wage problem was only one obstacle. There was another barrier they would have to sidestep.

As it turned out, low wages weren’t only a problem for working people. It only makes sense that if U.S. workers are being paid less, they’re going to spend less on the products companies are trying to sell.

If employers absolutely refused to pay workers more (which, of course, they did) the economy would have to find new ways of increasing consumer spending. But how?

The solution to the great conundrum, which had plagued employers for years, was credit.

2. The rise of credit.

Historically, large amounts of credit have not been extended to American workers. When goods such as homes or cars needed to be purchased, they were bought with a family’s savings. The Federal Reserve Bank of St. Louis confirms that although personal savings through the 1970′s remained similar – around 10% – by the 1980′s and up through 2006 it dropped to a meager .4%. 

Meanwhile credit extended to individual households soared. The Economist reported in 2008 that American household debt as a percentage of annual disposable income was an insane 127% by the end of 2007.

At first this situation seemed to meet every one’s needs – employers could continue to keep wages low, banks could loan money to employees who no longer made as much money, and workers could continue to buy more of what they wanted. But there was a problem. In 1974, household debt in the U.S. was around $705 billion. By 2008, it was a staggering $14.5 trillion.

We know how this extra credit was extended to us. These new loans were able to be made in part because financial institutions learned how to “securitize” mortgage loans – a term used for banks putting a lot of mortgage loans together into a package and selling them to investors to avoid the loans’ risk.

This is where the political speculation on the economic crises was focused. But bad mortgage loans were only a symptom of a larger problem.

Banks and credit companies were compelled to loan more money by an increased demand from working people who no longer made as much money. They were in turn enabled to loan more by lobbying for less and less regulation. But in the end, the loans were supposed to help fill the need for an ever-increasing consumption rate in an economy which refused to raise wages.

Of course, none of these “fixes” addressed the fact that the people buying the homes in the first place couldn’t keep up with the loan payments. That was the problem with the financial system. That continues to be the problem with that system. Regulations won’t stop the financial industry for long – if indeed there will be any meaningful regulations at all. The halls of legislature, in the end, still belong to the same banks and financial institutions which got us into this mess.

In the end, the only sensible way forward is to support the national initiatives of working people – those endeavoring to raise their standards of living. That’s where our energy and attention ought to be focussed now. By encouraging the efforts of regular working people to raise their own wages (through unions, collective bargaining, and collective action) we will not only be guarding against another absurd credit boom, but we will be building a movement capable of defending working Americans against the next financial catastrophe.

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