How the middle class is hobbling the economy


    Unless incomes for these Americans can rise along with productivity growth again, the country may suffer a long period of stagnation.

    By Rex Nutting, MarketWatch

    For decades, economic growth in America was driven by a powerful and sustainable force: increased consumption paid for by the rising incomes for middle-class and working-class Americans.

    But somewhere around 1980, that model broke down. Wages flattened out, but consumption didn't. Americans cut back on their savings, and took on more debt -- mostly mortgage debt -- to satisfy their needs and desires.

    It’s not a sustainable model, but it did persist for nearly 30 years until the credit bubble burst in 2007. Millions of Americans lost their jobs, and millions lost their homes when the credit spigot was shut off, forcing average families to cut back on their consumption and live within their means once again.

    And now, with the economy only partially healed, it seems we’re going back to the lend-and-spend economy that failed us before.

    For the past six or seven years, most of what the Federal Reserve has done to fix the problem has been focused on getting the credit spigot turned back on: cutting interest rates and hectoring banks to start lending again, even though demand for loans was weak.

    It's a surreal policy because, while the proximate cause of the Great Recession was the collapse of borrowing in 2007 and 2008, the ultimate cause was the growth of unsustainable debt over many years, culminating in a doubling of debt between 2000 and 2007.

    True, leverage can get you out of a ditch, but it was leverage that got us into that ditch in the first place.

    I don't want to sound too moralistic about this. Debt isn't a sin. Borrowing to finance investments that will pay off in the future is smart. Stretching out the payments for things that last a long time, such as homes, cars or appliances, can also make a lot of sense. But borrowing to pay for immediate consumption is usually a dumb idea.

    Recent data show that the middle class is once again borrowing, mostly for autos and education. Although the cost of servicing their debts has fallen to a record low thanks to low interest rates, middle-class families are vulnerable if interest rates rise significantly.

    And that means the economy is vulnerable. In order to grow, our economy requires spending by the middle class because the rich just don’t spend enough to keep the economy moving forward. But how can the middle class spend when their incomes are flat and they are already overburdened with debt?

    Unless middle-class incomes can rise along with productivity growth again, the U.S. economy probably is doomed to a long period of stagnation.



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