Responding to my recent post, BigVic writes:
So I turn back to the question that really deserves to be asked in this situation, why? Why allow ourselves to go down this road of credit borrowing and credit spending, why allow private debt to balloon to such astronomical levels, why allow every program to be financed through government debt?
I think that we don't ask these questions because the answer will undermine the system and world that we built. There is no way that most Americans would have been able to keep up with this farce that there is such a thing as the middle class. It is absolutely not possible without such credit policies in place.
If history has taught us anything it is that a strong middle class counters any revolutionary action from occurring in society. It is paramount for the stability of the United States and the system that a middle class is in place...
You write good, kid.
The middle sentence in the middle paragraph there is exactly right, I think. Without the "astronomical" expansion of credit use, There is no way that most Americans would have been able to keep up with this farce that there is such a thing as the middle class.
But if you go back to the 1950s and '60s when the economy was good, we had a strong middle class. Things fell apart then in the '70s, and by the 1980s we had a new kind of economic policy: Reaganomics. With that, the middle class began to wither away.
Reagan was admired like no other President in my lifetime except JFK. Reagan is held in high esteem, still today. And the policies he put in place are still cherished, despite the result we can see all around us.
It is essential to remember that the changes of the past 30 years are the result of the well-received policies of Reaganomics. For many people today there is a disconnect between those policies and the resulting conditions. Current trends of policy are empowered by that disconnect.
You write: a strong middle class counters any revolutionary action from occurring in society. Yes, and a dying middle class gives rise to Tea Parties.
I have to believe that Reagan knew, and every President has known, what you say about a strong middle class. I have to believe Reagan tried to keep the middle class strong with his supply side economics and his policies.
I have to believe, also, that people can see those policies have failed. I think the trouble is that people think there's no alternative to Reaganomics other than pro-debt "Keynesian" policies. But when the problem is excessive debt, one pro-debt policy is no different from another pro-debt policy.
You ask: Why? Why allow ourselves to go down this road of credit borrowing and credit spending, why allow private debt to balloon to such astronomical levels...?
I think you overlook the power of economic policy, Vic. We did not "allow ourselves" to go down that road; we were driven down that road by policy.
Like the weight-reduction industry, the debt-reduction industry has had limited success, but the general trend of the nation is to get fatter, if you get my drift.
People often say we spent too much, we had a party for thirty years, and now we must pay. I say that's nonsense. Maybe some people spent too much. Most people were simply trying to slow the decline in their standard of living.
The problem is not profligate spending. The problem is that we use credit for money. It is difficult to avoid accumulating debt in a society that uses credit for money. And, obviously, one cannot use credit to pay off debt. Even to try would be self-defeating.
Without the astronomical expansion of credit use, as you put it, there is no way that most American would have been able to keep up with this farce that there is such a thing as the middle class.
But it didn't have to be that way. It only is that way, because the Federal Reserve pulled money out of circulation (to fight inflation) while Congress did everything it could think of to get us using more credit (to keep the economy growing). Apparently, they thought using money causes inflation, but using credit doesn't.
Silly boys.
7 comments:
I have a real problem with this argument;
"People often say we spent too much, we had a party for thirty years, and now we must pay"
And my problem is not just as you say, that its untrue that everyone spent too much and that many people who are being punished now had nothing to do with the over spending. My problem is on a different level.
How in any rational universe is the answer to spending more than you earned to make you more unable to earn anyhting? How can massively increased unemployment be the "natural" or logical" answer to a situation where we over partied and now must pay? If their story were true, what SHOULD have happened is that people would have had to start working overtime and those not working needed to start working and part time workers needed to work full time. How can you say people needed to pay and then they become unable to pay by losing their jobs.
The morality play they seem to be invoking has no moral compass that a sane person can recognize. Its like telling your teenager on a Saturday morning after he stole your car, went on a bender in it, left it cluttered and reeking, parked it on your lawn "Your gonna have to pay for this!". And then sending him to his room to watch TV and listen to his stereo
I agree that the argument "If excessive spending, then now-we-must-pay" doesn't make much sense. Your version -- "If excessive spending, then the economy must grow" -- is perhaps what Reagan had in mind. But I don't even accept the premise that "excessive spending" happened, Greg.
To look at our debt and say that the spending increased aggregate demand: I don't see that at all. I see only that our economic policies took money out of circulation and put credit in its place. AD is what it is. Policy changed our medium of exchange from green to red. Debt was the result.
If our use of credit was the result of excessive spending, GDP would be bigger and growing faster than it is. (As you say, people would have had to be working more.) But the problem is not that GDP is too big. The problem is, GDP is too small. So our spending cannot have been excessive. We have all this debt because we use credit for money -- as policy demands -- and because we have no policy that encourages the repayment of debt.
Completely agree Art
What IS excessive spending anyway? Were we fighting 10,12,15% inflation? No. This (excessive spending that is) is an example of a dismissive, non analytical throwaway comment given by someone who doesnt care to look past their nose for answers. Its given by someone mostly unaffected by the current situation who just wants the easy out "Hey, its THEIR fault for spending too much on their credit card"
But as you point out putting stuff on a credit card was THE POINT of our policies since Mr Reagan.
Back mid-'90s, the best story I heard was that government spending was excessive by definition, because the spending was in excess of revenue, and there were deficits. But "in excess of" and "excessive" are two entirely different things.
you write that "a strong middle class counters any revolutionary action from occurring in society. Yes, and a dying middle class gives rise to Tea Parties," but I think that is probably the best scenario that could be envisioned by those who supported these policies. Imagine an organization that reacts to the threat of its demise by asking for policies that further its demise while giving more money to people that line the coffers of the policy makers. The scenario of instability that I imagine would cause the most fright is October 1917 or a movement along those lines.
If I have learned anything from Malthus it is that it is illogical for a middle class to exist in this current system, or maybe in any system for that matter. If you exclude the recent 200 years and more specifically the recent 80 years, wages had been for the most part at subsistence for the 2000+ years prior to that. I don't think that it really should be any different in the long run, maybe the definition of subsistence changes, but even so. As you mentioned, in the 50s and 60s when the economy was good, there was a strong middle class, but to be fair that middle class was only strong because the rest of the world was weak. When China with its massive population in 70s began growing at almost double digit rates, that undoubtedly was going to create create a massive disequilibrium in wages. Now on top of this disequilibrium in wages you throw in the oil embargo shifting back Aggregate Supply and then Supply Side policies that further weaken the strong middle class built up by Keynesian polices and you just created the perfect storm.
Wages have been, and should be falling, it is only logical. And with these falling wages go the middle class and we return to the main two class system that has existed in our society for millenniums. Not that a very small middle class cannot exist, but it would be a minute segment of the population.
This has also been further compounded by the fact that there has not been much real growth in the past 30 years. In the past 30 years the GDP has grown at about 3.2% (real GDP), but I would venture to say that that number is probably closer to 1%-1.6%. I say this because most of the growth has occurred outside the productive sector of the economy. These past thirty years have remarkably been about financial growth. The problem with this financial growth is that none of it is real. It is real in terms of accounting, and we had to create a 700 billion dollar bailout fund to keep this Ponzi scheme from collapsing, but none of it is real. When you have money tied into derivatives, futures, and other financial instruments, your just double, triple, and quadruple counting. Financial instruments do not create anything real in which the money it is worth can ultimately be exchanged for. That is the whole purpose of money, a means to an end and nothing more. But if there are no ends, the means are worthless. I do not even see this problem being addressed, the lack of investments into the productive sector of the economy is what is going to destroy the system in the long run.
You also write "I think you overlook the power of economic policy, Vic. We did not "allow ourselves" to go down that road; we were driven down that road by policy." I would have to say that I don't overlook the role of economic policy at all. I was only posing this question in such a manner because we live in a so called "democracy," therefore all the economic policies dictated from the upper echelons are supposedly suppose to represent "we the people" since we vote for the policy makers. That is why I chose the words "allow ourselves".
I don't actually think most people made a conscious decision of going so far into debt, I think this ballooned out of control as people were just trying to maintain the standard of living. They figured when times got better, they would pay their debts, and right now they would ride the easy credit until that time. The problem of course is that better times are not coming. At least I see no reason to believe they are.
As always good post. When I finish finals this week I will have more time to check out your other posts with more time.
Big, I don't buy the "China-and-oil" story. We came out of World War II with an economic environment that favored growth. But by the 1970s, that environment had changed. In the '80s policy changed, but it never restored the economic environment we needed. Other nations drain our wealth like economic parasites, but they are only doing what we would do if the roles were reversed.
The source of our economic problems is U.S. economic policy (and I do not mean "excessive spending.") China and oil are contributing consequences.
Good luck with those finals.
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