Why is the global economy in such a mess?
Well, we can always blame the bankers. But what did the bankers actually do? Essentially, they lent too much money – more than the economy could sensibly handle.
In this respect one can justifiably condemn the bankers for the many specific examples of reckless lending – such as in the case of the US subprime mortgage market. But that’s only part of the story. While there’s only so much governments can do to ensure that each particular loan is a sensible one, there’s a lot they can do to ensure that the overall level of lending stays within sustainable limits.
Shame they didn’t go for that option, then. In fact, as well borrowing freely on their own part, they allowed private sector borrowing to reach record levels. But why?
The answer can be found in a piece by Michael Greenstone and Adam Looney for the New York Times – which documents a remarkable fact:
Yes, you read that right. In America, the land of opportunity, the notional 'average worker' hasn’t had a raise for forty years. But, in fact, it’s worse than that:
And yet in the same period, the level of consumption – including for households in the middle of the income range – has risen. So where’s the money coming from?
The answer, in part, is from women. Since 1970, female participation in the workforce has risen (as have female earnings). However, that hasn’t been enough to close the gap between income and consumption, which is instead bridged by debt.
It’s not just about the credit cards. A large part of the debt was channelled via looser mortgage lending into rising property prices, which created the illusion of increasing prosperity even through the reality (for the typical working man) was one of stagnation. No wonder then, that politicians – who know that elections are won with votes from the middle of the income spectrum – were happy to keep the credit flowing.
Now that our capacity for accumulating debt is exhausted, politics has entered a new era. The future belongs to whoever can get middling incomes growing again – a task which is all the more urgent, because, now, it isn’t just male median earnings that are stuck:
Ideas, anyone?