The truth is that the consumer-driven model is now functionally dead, an economic zombie shambling along and awaiting the merciful head shot that drops it, allowing it to be kicked into the gutter and out of the way.
PracticalDad, Post-Consumer Parenting (April 8, 2016)
The consumer-driven model that has powered this nation’s economy for three quarters of a century is now officially dead, the head shot delivered by…a virus. Like any zombie, it was compelled to mindlessly consume yet was malnourished by an increasingly severe lack of purchasing power. I would have been less surprised by the manner of death than to find that Bette White was cast as the new villain on The Walking Dead.
It starved for years, certainly longer than April 2016, when I wrote the above linked post. Zombification occurred in stages over the course of decades. One contributing factor was the effort by corporate employers to shift from pensions to 401k plans, citing the need to cut costs and allow for funding to compete against other companies. Another was the claimed throttling cost of benefits, consequently cutting back on health care benefits in the face of rising costs. Yet another was the drive to maximize shareholder value by decreasing labor costs, shipping jobs – even entire plants – overseas or increasing the drive to automate them. Even with these ongoing hits, the process was accelerated by an economic demand that now mandated a college degree for entry into the fabled American Middle Class.
The condition however, became terminal with the Financial Crisis of 2008, from which it never recovered.
The symptoms have been there for years in any variety of news articles:
- Personal credit card debt rising from $238 billion in 1989 to almost $1.2 trillion in 2018;
- The decline in assets for Millennials entering the economy compared to preceding generations;
- The lack of retirement assets for Boomers;
- The report that by 2018, 40% of all Americans didn’t have $400 available in cash to cover an emergency expense;
- The realization that by 2019, 78% of Americans were living paycheck to paycheck;
- The rise in the wealth distribution of the top 10% of families from 1989 to 2013, leading to an inequality in the concentration of wealth that has not been seen since the “Roaring Twenties”.
- Most recently, American billionaires saw their wealth increase by $434 billion since the onset of the Covid-19 Pandemic.
To quote Captain America: I can do this all day.
Understanding the impact of this collapse is helped by understanding how the model came about in the first place and for that, you have to return to the period immediately prior to the Great Depression. Economists were developing the Expenditures Theory of Gross Domestic Product: C + I + G +(X – M) to help create a systemic framework for understanding the national economy . Simply put, a nation’s GDP is a function of the aggregate spending of Consumers (C), Business (I), Governments (G) as well as the aggregate international balance of trade between exports (X) and imports (M).
We might recall the decade as the “Roaring Twenties” but the reality was different. There was supreme confidence in the business community and many industrialists and financiers bought into the notion that the historic business cycle of boom-and-bust had been eliminated. But there was an awareness among others that significant problems still existed. The agricultural sector was mired in an economic depression as crop prices had collapsed years before the Wall Street collapse. Some were aware of the inequitable distribution of wealth in society and others noted that the lion’s share of the economy’s productivity gains through the decade had accrued to the wealthiest class. The average American worker saw significant wage gains but the top 5% of wage earners garnered 34% of the disposable income, up from 24% in 1920. Then came the collapse of 1929.
President Herbert Hoover’s responses to the Great Depression were constrained by the philosophy – along with almost everyone else – that the Federal Government must annually balance it’s budget. There was plenty of rah-rah jawboning and some effort to run a small deficit and create additional relief programs but in the end, he was bound by his personal belief that it was up to American individualism to find a way out instead of government action. Relief programs were left to charity and local and state governments but the continued spiral downwards left everyone without money so that by 1932, destitution reigned; the economy was at the point of real collapse and Senators were warning of open revolt by the election of 1932.
Yet debate among economists continued during that period and it was in 1930 that John Maynard Keynes wrote A Treatise on Money, which became the basis for what we now know as Keynesian Economics. Another economist caught the ear of nominee FDR in that period however, and his name was William Trufant Foster.
The heart of Foster’s concept was that the Depression was ultimately caused by under-consumption, that the average person simply didn’t have the financial wherewithal to support the purchasing power required for all of the economic output produced. If there was to be renewed growth of output and through it, employment and wage growth, it had to come via increased consumption in any fashion, whether by the individual, the business sector or the government. Keynes’ work provided the intellectual justification to allow government deficit spending to spur that aggregate demand in economic downturns.
I don’t know that we can now appreciate the level of political and economic chaos in the period between FDR’s election in November 1932 and his inauguration in March of 1933 (the inauguration date was later moved to January). Farmers were banding together to actively deter farm foreclosures via threat and in some cases, actual violence. The Soviet government actively supported a rising Communist party and through it all, hundreds of banks across the country were closing their doors, destroying the little savings that were left to the individual. Two states independently declared bank holidays, temporarily closing all banks within the state for a one or two week period. Why? Fear. The average American had so lost faith in the system and government that, anticipating his or her own bank to collapse, began pulling all their remaining money from banks. By doing so, they themselves guaranteed a collapse.
Fear.
This was the backdrop for FDR’s now-famous First 100 Days. It was the backdrop for the creation of new and untested programs to get people working and money once again flowing through the economy. Fear was the enemy that FDR fought in that early period of his Administration and was the basis for his statement in his first inaugural address, The only thing we have to fear is fear itself. FDR understood that money must be flow and consumption must be restored and in the short-term was willing to use the government budget to do it. He also acknowledged the power of the budget and knew that in the longer term, the average citizen would have to step up and this could not happen until fear was lessened and purchasing power grown.
Why the introduction of bank deposit insurance via the FDIC? To lessen the fear of bank collapse with the resulting loss of savings.
Why the introduction of Social Security? To lessen the fear of poverty in old age.
Why the creation of multiple job and agricultural programs? To lessen the fear of poverty, bankruptcy and ultimately, starvation.
And why the creation of multiple public authorities such as Rural Electrification and the Tennessee Valley Authority? To spur the development of the physical infrastructure necessary for future growth and keep it out of the hands of the private sector, most particularly the financiers.
All of this was undertaken to rebuild the purchasing power of the American citizen and ultimately, to diminish fear because fear eroded faith in the system.
Remember that phrase: purchasing power.
Government spending alone was insufficient however, and it was clear by the severe recession of 1937 that something new had to be tried. This was interrupted by the Second World War and any other activity was shelved for the duration. What happened through the post-war period however, was a series of measures that, by design or happenstance, assisted not only the economy and purchasing power of the American consumer but diminished the fear that kept it from being exercised.
- The wide-spread availability of health insurance from employers meant that Americans were relieved of the fear of crippling medical bills.
- Higher education was made more available to the large number of returning veterans via the GI Bill of 1944 and the quality of that education was increased with significantly higher public funding for facilities at state universities.
- The existence of Social Security and the availability of company sponsored pension plans meant that Americans were, to a considerable extent, relieved of the fear of poverty in their old age.
This is where we find ourselves today. The Consumer-driven economic model was predicated not just upon the wealth and incomes to support reasonable purchasing power, but also the assurance that there was a sufficient safety net to protect the constituent consumers. The high cost of healthcare via premiums, deductibles and co-pays has shifted to the family with a subsequent loss of purchasing power. The high cost of the college degree that is now a prerequisite to a job that at least promises stability has shifted first to the family, and then to the youth, with a subsequent loss of purchasing power. The decrease of pension plans and the rise of self-funded retirement has shifted that to the family as well, with a subsequent loss of purchasing power. Couple these with the disproportionate rise in the actual costs for healthcare and higher education? Disaster.
There is a terminal lack of purchasing power. That the average American had nothing upon which to rely when social distancing shutdowns occurred with no economic support forthcoming while the financial system and corporations were backstopped fed a smoldering anger. That small business was forced to shutter while certain large retailers were declared essential spiked that anger. People can talk all that they want about the pandemic measures impinging upon their rights, the underlying fear is that they face economic ruin unless they can return to their jobs. Regardless of where you are on the political spectrum, it is ultimately an anger built upon the practical implications of economic inequality that we have allowed to take root.
Perhaps the only remote silver lining to this freakishly misbegotten shit show is that it is occurring in an election year. What we have known as an economy is functionally dead. The national savings rate has spiked to 33% in April 2020 and the economic establishment states that we are hoarding cash. Do you know what I say?
Good.
Why should we now spend for anything other than necessities? Why should we spend when government and corporate policies make it clear that our families will receive no meaningful support? Why should we upgrade and consume when the products, although ostensibly American, are built overseas and profits are disseminated only to shareholders and senior executives?
There is now a debate brewing in Washington as to whether the temporary additional weekly unemployment benefits of $600 should be extended past their July 31, 2020 expiration. This is occurring because research finds that fully 68% of American workers now have UI benefits greater than their weekly wage. Conservative legislators fear – understandably – that there is no longer an incentive to work and that such benefits constitute a moral hazard. Yet they oppose an increase in the minimum wage. They oppose any public sector financing for healthcare. They oppose any increase in public funding for higher education and some even support decreasing funding for elementary and secondary education. And they support a President whose 2020 budget proposal called for Medicare and Medicaid cuts to address a trillion dollar deficit.
And they do not answer the underlying question: How have we come to this juncture that the wages are so disproportionate to what is required to survive in America today?
This is why the election year timing matters now. There must be clear and progressive – even radical – policy choices made to help create a new model driving economic growth, one that is not piled upon the back of an American citizen again bereft of purchasing power and crippled by fear.
And yes, one that actively encompasses a real core of social justice.