Heart of the Economic Mess in the United States

Robert Reich, the 22nd Secretary of Labor of the United States and a professor at the University of California at Berkeley, has this to say about the current state of the United States economy:

The heart of the matter isn’t the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess, but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon, but it has finally caught up with the pocketbooks of average people.

Reich boils it down to this: the US economy has largely become a consumer-driven economy with many Americans spending beyond their means. Although this has fueled economic growth in the United States in recent decades, this growth has largely been financed on consumer debt, as American consumers have either worked longer hours (there are only so many hours that the American worker can contribute) or for the most part, borrowed (through credit cards or refinancing their housing mortgages and taking out home-equity loans) in order to maintain their standard of living.

Now that these coping mechanisms are no longer readily available (think housing mortgage crises, bank failures and government bail-out of Fannie Mae and Freddie Mac), American consumers are having a difficult time maintaining their standard of living and no longer have enough purchasing power in the economy to buy all of the goods and services being produced. Throughout this time, real earnings have not increased: when adjusted for inflation, the hourly wage of non-government workers is barely higher than they were in the mid-1970′s. And although per-person productivity has grown considerably since then, most Americans have not reaped the benefits of those productivity gains as they have largely gone to the top.

Why have I highlighted this article on a blog focused on social entrepreneurship and innovation? Because the article also provides some insight on how to address some of these economic problems in the long-run, and this would be important for any government or economic policy maker to take into consideration when trying to deal with the economic mess that the United States is currently in.

The only way to keep the economy going over the long run is to increase the real earnings of middle-class and lower-middle-class Americans. The answer is not to protect jobs through trade protection — that would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway. Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We’ve tried that, and it hasn’t worked. Nothing has trickled down.

Rather, the long-term answer is for us to invest in the productivity of our working people — enabling families to afford health insurance and have access to good schools and higher education — while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.

Posted via web from Renjie Butalid