JONATHAN SCHELL, WRITING IN THE NATION BACK IN 2011, stated in concise terms the nature and causes of the economic predicament the United States found itself in:

“It’s true that the United States educational system is measurably slipping. It’s also true that the country’s infrastructure has decayed badly. And yes, the United States would benefit from whatever technical innovation it can bring off, just as any country would. But none of those problems, needful of attention as they are in their own right, is the chief cause of the United States’s economic doldrums — its stubborn high unemployment, its persisting housing bust, its galloping economic inequality. These were the fruit of an economic crash brought on by a misguided, corrupt, incompetent, larcenous, unregulated financial establishment. The relevant remedies are not better technology or some contemporary equivalent of sending a man to the moon … The remedies needed are a re-regulation and reconstruction of the financial system, plus a major, Keynesian style stimulus program to create jobs and purchasing power, and so to jar the economy out of its stupor.”

While things have gotten better with regard to the official unemployment rate since Schell wrote those words, and the housing market has improved somewhat, the American economy is still struggling and employment is far behind where it would be had the Great Recession not happened.

The basic cause of the American economic predicament is that purchasing power (that is, the inflation-adjusted paychecks ordinary workers get) has not appreciably increased in more than 30 years. More ominously, wage growth has been decoupled from productivity growth.

In the years after the Second World War and up until the mid-1970s, wages increased in tandem with productivity — meaning if workers made 2 percent more stuff per hour, then they could expect to receive 2 percent more pay for their efforts. Like this:

Given stagnant wages for the vast majority of workers, the only recourse for consumers to increase spending is buying things on credit cards — i.e., growth financed through increasing consumer debt.


The thing is, financing economic growth by increasing personal indebtedness is not sustainable, because eventually the credit cards are maxed out, and then everyone needs to pay down their debt before they can begin spending again. While this happens, the economy shrinks, or at best grows very sluggishly, since people are not spending on anything except essentials.

Growth through debt leads eventually to systemic crisis. We know this — remember September 2008?

Growth from rising incomes leads to sustainable and widely shared prosperity — we know this. You older folks remember the postwar boom, right?

“America’s median wage, adjusted for inflation, has barely budged for decades,” writes former Labor Secretary Robert Reich. “Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.


“Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income.

“But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928 — with 23.5 percent of the total.”

The income distribution hasn’t appreciably improved since 2008, so we are still caught in the same predicament we were in before the recession: stagnant wages and slow growth.

One interesting way of dealing with this is some form of a guaranteed wage — taxing higher-earning individuals and then using the revenue to directly add to the wages of ordinary workers until their wage meets some criteria of a living wage. I like this idea because it is simple in principle, and would give the top of the income distribution a strong incentive to pay their workers better. Because if everyone is being paid that living wage by their employers, there is no need for the tax.

Matt Talbot is a writer and poet, as well as an old Benicia hand. He works for a tech start-up in San Francisco.

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