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Work and prosperity
30 October 2012

The global economic crisis started forty years ago

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:

  • “Using conventional methods of analysis, the data show that the median earnings for prime-age (25-64) working men have declined slightly from 1970 to 2010, falling by 4 percent after adjusting for inflation.”

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:

  • This finding of stagnant wages is unsettling, but also quite misleading. For one thing, this statistic includes only men who have jobs. In 1970, 94 percent of prime-age men worked, but by 2010, that number was only 81 percent…
  • “When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19 percent since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 — nearly a half century ago.”

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:

  • “Since 1970, the earnings of the median female worker have increased by 71 percent… But after making significant wage gains over several decades, that progress has slowed and even reversed recently. Since 2000, the earnings of the median woman have fallen by 6 percent.”

Ideas, anyone?


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