→ Economy
Our Debt to Ronald Reagan
| Thu Oct. 1, 2009 9:28 AM PDT
Paul Krugman looks at this chart of the personal savings rate in the United States and concludes that Reaganomics is the most likely reason that it fell off a cliff. Matt Yglesias admits the timing is right: "But is there a causal link? I think it’s suggestive, but I don’t know what it would be."
Krugman suggests that part of the cause was Reagan's blithe acceptance of federal deficits. After all, if the government didn't need to balance its books, why should anyone else? Thus was born an era of binge spending.
Fine. But I'd point to two other things that Krugman mentions: financial deregulation and stagnant median wages. Those seem like much more likely villains to me. Starting in the late 70s, middle class wages flattened out, which meant there was only one way for most people to support the increasing prosperity they had long been accustomed to: borrowing. At the same time, financial deregulation unleashed an industry that marketed itself ever more aggressively on all fronts: credit cards, debit cards, payday loans, day trading, funky home mortgage loans, and more. It was a match made in hell: a culture that suddenly glorified debt; an easy money policy from the Fed that made it available; a predatory financial industry that promoted it; and middle-class workers who dived in to the deep end without ever quite knowing why they were doing it.
So, yeah, Reagan did it. Sort of. But he had plenty of help.
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Comments
So we had this outsourcing
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 9:59 AM PDT.
So we had this outsourcing post yesterday, and Kevin was shocked, just shocked to find that companies outsource, and wanted to know, no, he demanded to know, when he was lately being just a corporate outsourcing shill type of free trader puke.
And now he notes that in the 70s and 80s and the Reagan years, middle class wages were stagnant..............
Free Trade Baby, yeah!
Also about that time, for
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 10:01 AM PDT.
Also about that time, for good or for bad, mostly for good, didn't lots of new female workers and professionals come on board? Supply and demand, and mostly captured by the employers who made two earner families the norm through price increases and wage stagnation.
"financial deregulation and
Submitted by MaynardHandley on Thu Oct. 1, 2009 10:02 AM PDT.
"financial deregulation and stagnant median wages"
Oh come on Kevin? And who was responsible for these? Saint Ronald.
Reaganomics doesn't just refer to voodoo federal budgeting; it refers to the whole BS complex of ideas that drove Reagan's handling of the US economy, from the Laffer curve to greed is good to deregulation of anything and everything.
wealth
Submitted by steve duncan on Thu Oct. 1, 2009 10:47 AM PDT.
The rest of the world wasn't going to remain our cookie jar in perpetuity. They wanted some shiny baubles also. They made stuff and then they made money selling us that stuff. Trouble was the people making it worked cheaper then we did. Maintain that dynamic for a generation and lots of Americans lose their jobs. Unions are demonized as the reason we can't compete with overseas manufacturers and then they're busted up, fall out of favor or legislated away. Free trade pressure and accommodation of other nation's trade demands spirals more of our jobs down the drain. How does it end but inevitably with Americans existing on the same level with everyone else? It has to. We weren't going to be on top forever, get used to it.
Shorter Steve: We deserved it, and it was good for us,
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 10:56 AM PDT.
We deserved it. It was our hubris!
Steve and I join together in spitting on our parents and grandparents who died in factory fires, who died in mining accidents, who died without having paid vacations, or secure jobs.
Steve and I spit on all those Americans that fought for child labor protection, occupational safety, vacations, and other benefits and protections for good safe products, good safe food, good and environmentally safe methods of production.
Steve Duncan and I right now take a giant shit on those people right now, right at this minute.
What were those fuckers thinking!?
Free Trade Baby!
Relax, mate
Submitted by Fnordius on Thu Oct. 1, 2009 11:31 PM PDT.
Steve isn't demonising the unions; he's stating that they were demonised. Mentioning a part of what went on in the Age of Reaganomics. And yes, you must admit that there was a concerted (and somewhat successful) effort to weaken unions and make them seem unattractive to the normal worker.
So calm down and read again what he wrote: it is simply a catalogue of all the things Reaganomics did to enrich the fat cats on top of the heap.
So if we stopped trading
Submitted by James2 (not verified) on Thu Oct. 1, 2009 11:24 AM PDT.
So if we stopped trading with everyone, we'd be better off right? We couldn't rely on cheap labor, and more jobs would be forced to be located here.
Why do we stop at the national level though? Why don't we protect or eliminate trade between states? After all, wages for farmers in California would be much higher if those damned Kansas folk didn't have lower production costs because their land was cheaper, right?
False dichotomy
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 12:14 PM PDT.
There's a whole spectrum between free trade and no trade, but if you can make it either/or, black&white dichotomy, maybe you can scare people into believing you.
Paul Krugman, maybe Kevin too, is okay with carbon import tariffs, not to protect an industry, but to protect the planet.
If carbon import tariffs are okay for a free trader, why not environmental pollution import tariffs or child labor import tariffs? These don't protect industries, they protect people and planets by creating level playing fields and stopping our subsidizing of polluting companies and harmful trade practices.
Trade between states is all
Submitted by Luther on Thu Oct. 1, 2009 12:24 PM PDT.
Trade between states is all in the family.
"Free trade" should really be called "laissez faire global competition" so economists could understand it, i.e., that you have winners and losers, losers being high wage countries and winners being China and India and countries that practice predatory practices like targeting and dumping.
Note that those who preach free trade and immigration are often the same people who protect their jobs every which way. Academic economists with tenure. Politicians who have citizenship requirements protecting their jobs. Journalists and reporters who have little to fear from immigrants with funny accents and poor mastery of English.
Well, f*** me with a
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 12:31 PM PDT.
Well, f*** me with a chainsaw, I actually agree with Luther.
Especially with regards to tenured econ profs who speak of the wonders of free trade.
I'm sorry...
Submitted by caolson (not verified) on Sat Oct. 3, 2009 2:34 PM PDT.
... but the old "there are winners and there are losers" argument is just a tad bit stale. There are only winners and losers if you adhere to the flawed belief that trade is a zero-sum game. It isn't.
At the same time, there are no finite "winners" and "losers" - it is almost always a trade off of opportunity costs that tend to result in a net benefit for everyone. The cost of doing business in China and India are factored into the long-term costs of outsourcing.
I find it quite humorous to see such close mindedness amongst, what I might call, progressives (or liberals or whatever you believe yourself to be). I mean if you really want to care about people and worry about the plight of humanity and the worker, you might just consider thinking of more than those who reside within your own borders.
Trade exists when two - sometimes more - parties agree to exchange things of value. Whether there are borders delineating that trade is irrelevant. If you are not direct party to the trade, then what of it? Are you saying people shouldn't be at liberty to exchange goods and services because you feel it hurts you? What happens when someone else feels that your trade hurts them? I'm sorry I can't offer much more than, possibly, a bottle of J&J's No More Tears to console your woes.
There is a lot of truth in
Submitted by MaynardHandley on Thu Oct. 1, 2009 1:12 PM PDT.
There is a lot of truth in what steve duncan has said ("The rest of the world wasn't going to remain our cookie jar in perpetuity.").
And free trade is not really the issue. The US was still inevitably going to have to pay a whole lot more for oil and other resources, and that cost would have trickled through the economy in ways that made it clear this was no longer the 50s and the 60s.
HOWEVER there are two issues here. One issue is the growth of the US economy as whole, which as I've said, was fated to slow down. The second is the distribution of wealth generated by that economy. There was nothing inevitable about all the growth going to the top 1% while everyone stood still; and this is absolutely the fault of Reagan and his fellow GOP thugs.
Hmm, more quality data
Submitted by coyote (not verified) on Thu Oct. 1, 2009 11:21 AM PDT.
Hmm, more quality data analysis from a partisan site. As a libertarian, I can say this is something both left and right have in common.
1. The chart on the left starts out at 8%. You cleverly picked a recession peak as your starting point, a clever trick, but it appears that when Bush I left office the number was still about 8%. The largest fall seems to be in the Clinton years. Which, by the way, I don't "blame" on Clinton any more than on Reagan, certainly without any real evidence or understanding of the mechanism.
2. Your "consumers are all stupid pawns of electronics retailers and credit card companies" wears thin at some point. Its funny how everyone thinks this is true... of everyone else, but not himself.
3. Let me posit an alternative. The 1980s and 1990s saw huge percentage increases in asset values, both equities and homes. This began just about at the time the savings rate dipped. I would posit that consumers, in their mental calculation of savings, included paper gains on these assets. These paper gains are not, to my knowledge, included in savings rate numbers (you can be sure that is true because if they were, savings rates would have dropped in late 2008). Thus consumers saved less money from their paycheck (which is measured, so it showed a drop in savings rate) while they considered themselves still to be saving as much or more as previously, because they are counting paper profits on assets as savings.
Yeah, but over time the
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 11:58 AM PDT.
Yeah, but over time the concentration of wealth had its own pernicious credit effects beyond the deregulation of finance.
People with a lot of money need to lend it out. They can't let it just sit there. So, they lend it out to a lot of folks, including people who use it to buy things made by the companies that the rich people also own stock in. And that's more money, which means more lending it out and so on and so forth.
And, of course, over time the credit gets easier and easier for 3 reasons: first, concentration of wealth means there's a lot more credit, second, low marginal taxes and deficit spending in a flattened wage universe means there's more growth which means more profits to the rich which means more credit, and third, political capture means we try and keep interest rates as low as possible. Every thing points in the same direction: more credit, easier credit, and less and less ability of the people who use this credit or who support the institutions that use this credit to actually make good on their loans.
Until eventually you end up with a situation where we're investing in tulip bulbs lending trillions to people to buy houses they can't possibly afford. And then there's a shock to this incredibly precarious financial system when the loans inevitably go bad, and the whole thing comes crashing down.
The fundamental problem here is that we're giving too much of our nation's GDP to rich people to trickle down to the rest of us. They are doing crazy, insane things with it instead. The capital markets are flooded, and have been for decades. It's time to move some of that cash out of the pockets of the rich and back to the public sector and into the pockets of people who are actually consuming things. we're producing too much of what we don't need because of crazy speculation and too little of what we DO need due to artificially low tax rates and wage stagnation. Best way to do this is unions, but the second best way to do it is higher taxes on rich folks.
What happened?
Submitted by MarkH on Thu Oct. 1, 2009 12:01 PM PDT.
Despite women entering the work force the unions were being beaten down and jobs going overseas meant a lot of people had to take whatever they could find to stay alive. That happened during the recession of the early 1980s. The constant flow of good-paying jobs overseas has kept it going ever since. With the fall of the Soviet Union and the rise of Democracies around the world there has been joy on Wall St. since they now began to feel we should invest more abroad and reap larger profits. Well, their "we" wasn't ALL of us.
Those still here worked more hours for less pay in non-union jobs.
There is a certain optimism in the long-run view of this trend. If it pans out the entire world will be better off and less in need of wars. That's good. It's just that in the short-run a lot of Americans (being the wealthier brethren on the block) have felt a lot of frustration and pain from job dislocation downsizing and outsourcing.
What we need to do to get going again is to continue to take advantage of the growing world market for our goods and begin producing more for export to satisfy that market AND begin to really get a good hold on our own energy needs AND restrain financial & healthcare industries from sucking up all the profits we could otherwise use AND improve our energy conservation & clean environment footprint with the Green Revolution.
More exports.
Our own energy.
Restrain the financial & healthcare industries.
Green revolution!
Stagnant Wages
Submitted by henryedward (not verified) on Thu Oct. 1, 2009 2:10 PM PDT.
In 1980 I worked delivering oxygen and medical equipment to people in their homes - I made $11.50 hr and had excellent benefits. Through an tortuous confluence of events, I ending up applying for almost the exact same job in the past month. Needless to say my buff body and strength of yesteryear are long gone causing the employer to question my capability to do the job, and my graduate degrees made them suspect (correctly), that I would probably be short term, I did not get the position. The interesting thing is the wage for the job was $11.50 hr and crappy benefits. Around 40% of the equipment is still produced in the US, and the distribution chain is entirely in the US. The quality of equipment has radically improved, and the demand has grown astronomically.
Trade is not the issue here. Having run a small and medium size family business ($1M-40M), the change has more to do with the cost of servicing debt - which supports Kevin. The problem on the ground has to do with cash flow. Servicing debt has to be the highest priority in order to have access to capital which powers "lean" or "pull" types of business - which most are today. Without the ability to bridge gaps with borrowed money most companies today will fail. This pushes wages down on the list of priorities, honestly it is not greed in most cases. What the conundrum is that this reality requires the company to breathlessly grow in order to have access to an ever-increasing capital requirement - much like the government and entire country under Reaganomics.
It all goes back to debt and leverage, the key foundations of Reaganomics. Creating a different reality is near impossible because we have not faced this reality as individuals or a country. We were all economically co-opted into Reaganism and have not done what it takes to get out. Maybe we will, but I am not hopeful. We all hold on to that optimistic idea that we will be Horatio Alger, we even worship and venerate that in our president. Until enough of us get off that merry-go-round nothing will change.
Sorry - Small Edit
Submitted by henryedward (not verified) on Thu Oct. 1, 2009 2:19 PM PDT.
"We all hold on to that optimistic idea that we will be Horatio Alger, we even worship and venerate that in our president." Should read: We all hold on to that optimistic idea that we will be Horatio Alger, we even worship and venerate that rags-to-riches experience in our president.
Two very humdrum facts of
Submitted by Anonymous (not verified) on Thu Oct. 1, 2009 7:33 PM PDT.
Two very humdrum facts of economic life in the 70s and early 80s may also have helped shape the economic habits being formed by young workers: Rampant inflation taught us that any savings were likely to be wiped out quickly; it was "rational" to go ahead and just spend. And it soon became impossible to save in an old-fashioned savings account since banks stopped offering decent interest rates on those accounts. The simple old ways of being thrifty no longer worked.
Its mostly due just wealth effect and lower interest rates
Submitted by Razdoctor (not verified) on Thu Oct. 1, 2009 10:09 PM PDT.
In 1966 the dow was about 1000, in 1982 the Dow was 1000. Inflation and interest reates were high during this period. Real wealth was being destroyed. Families were scared and had to save.
In 1982 the Dow was 1000 and by 2007 the Dow was 14,000. Inflation and interest rates were low. You didn't get paid to save and faimilies felt they their equity in assets looked pretty good.
Also on a small scale you can see from the chart that recessions always cause spikes in the savings rate.
Also Calculated Risk website has done some good work showing that if you include home equity drawdowns as part of income then the savings rate actually remained at 6-8% over the past decade.
I really think this is all just wealth effect and doesn't have much to do with politics.
Surely we should use international comparison in such cases
Submitted by reason (not verified) on Thu Oct. 1, 2009 11:48 PM PDT.
Kevin,
I'm surprised at you here, you are usually so good with empiricism. Surely, the best way to control for other factors (and there are lots demographics, the oil crisis etc) is to make an international comparison. I know Americans like to forget that the majority of their fellow homo sapiens (what a crazily arrogant name), live in other countries, but they are there.
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