The problem with the Fed hiking
rates now is that Trump has already stressed the paychecks of most Americans.
The rate hike will make matters worse.
Most Americans are still living in
the shadow of the Great Recession that started in December 2007 and officially
ended in June 2009. More Americans have jobs, but their pay has barely risen
when adjusted for inflation.
Many are worse off due to the
escalating costs of housing, healthcare, and education. And the value of
whatever assets they own is less than in 2007.
Trump has added to their burden by
undermining the Affordable Care Act, rolling back overtime pay, hobbling labor
organizing, reducing taxes on corporations and the wealthy but not on most
workers, allowing states to cut Medicaid, and imposing tariffs that increase
the prices of many goods.
All of which suggests we’re
careening toward the same sort of crash we had in 2008, and possibly as bad as
1929.
Clear away the financial rubble from those two former crashes and you’d see they both followed upon widening imbalances between the capacity of most people to buy, and what they as workers could produce.
Each of these imbalances finally
tipped the economy over.
The same imbalance has been growing
again. The richest 1 percent of Americans now takes home about 20 percent of
total income, and owns over 40 percent of the nation’s wealth. These are close
to the peaks of 1928 and 2007.
The underlying problem isn’t that
Americans have been living beyond their means. It’s that their means haven’t
been keeping up with the growing economy. Most gains have gone to the top.
But the rich only spend a small
fraction of what they earn. The economy depends on the spending of middle and
working class families.
By the first quarter of this year,
household debt was at a record high of $13.2 trillion. Almost 80 percent of
Americans are now living paycheck to paycheck.
The last time household debt was
nearly this high was just before the Great Recession. Between 1983 and 2007,
household debt soared while most economic gains went to the top.
If the majority of households had
taken home a larger share of national income, they wouldn’t have needed to go
so deeply into debt.
Similarly, between 1913 and 1928,
the ratio of personal debt to the total national economy nearly doubled.
After the 1929 crash, the government
invented new ways to boost the wages of most Americans – Social Security,
unemployment insurance, overtime pay, a minimum wage, the requirement that
employers bargain with labor unions, and, finally, a full-employment program
called World War II.
By contrast, after the 2007 crash
the government bailed out the banks and pumped enough money into the economy to
contain the slide. But apart from the Affordable Care Act, nothing was done to
address the underlying problem of stagnant wages.
Without wage growth, most American
workers can’t continue to buy. They’re in the same sort of debt trap that
preceded the 2008 and 1929 crashes. Auto and home sales already are
declining.
The Fed’s rate hike will only worsen
this.
Ten years after the start of the
Great Recession, it’s important to understand that the root of the collapse
wasn’t a banking crisis. It was the growing imbalance between consumer spending
and total output – brought on by stagnant wages and widening inequality.
That imbalance is back. Watch your
wallets.
Robert B. Reich is Chancellor's Professor of Public Policy at
the University of California at Berkeley and Senior Fellow at the Blum Center
for Developing Economies. He served as Secretary of Labor in the Clinton
administration, for which Time Magazine named him one of the ten most effective
cabinet secretaries of the twentieth century. He has written fifteen books,
including the best sellers "Aftershock", "The Work of
Nations," and "Beyond Outrage," and, his most recent, "The
Common Good," which is available in bookstores now. He is also a founding
editor of the American Prospect magazine, chairman of Common Cause, a member of
the American Academy of Arts and Sciences, and co-creator of the award-winning
documentary, "Inequality For All." He's co-creator of the Netflix
original documentary "Saving Capitalism," which is streaming
now.
