Monday, September 27, 2010

Note to Robert Reich: Debt Gap Is What Is Really Killing the U.S. Economy

In a recent interview (h/t to Jesse for the link), Robert Reich, according to the author of the piece, "argues that income inequality has left America's middle class too unstable financially to fuel demand for goods and services as in the past."

While income inequality is certainly an important factor in the demise of the U.S. economy, debt inequality is even more important.   More precisely, what is killing the U.S. economy right now is the huge and increasing inequality in the ratio of debt-to-wages for the top 10% of American households versus everyone else.  For the bottom 90% of American households, wages constitute the vast majority of household income.  While the debt-to-wages ratio of the top 10% of American households has remained relatively constant over the last twenty years, the debt-to-wages ratio of the bottom 90% of American households has almost doubled. 

This is no accident.  The debt-to-wages ratio of the bottom 90% of American households almost doubled because their outstanding debt substatiantially increased while their share of total wages largely remained unchanged.  This was due to increasingly loose standards for the extension of credit, which has led to many of the usurous practices that we're seeing today in consumer credit.  To put it bluntly, the American middle class is being systematically preyed upon by the financial sector.

If pre-1980s debt-to-wages ratios had been maintained, there's every reason to believe that the U.S. economy would not be "dead in the water" today, that people would be willing to spend money buying new things instead of feeling required to just serve the debt they already have.  Of course, we wouldn't have had the illusion of GDP growth that all that new debt helped to create (along with accounting tricks from the BEA).

Later today, I'll update this post to include data and charts that support my assertions regarding debt-to-wage ratios.  There's no straightforward way to calculate this ratio too far back in time, but there's solid data dating back to 1988.