Recapitalizing The American Family

Over the past month we have heard a great deal about the problems with the balance sheets of the financial sector and the urgent need to inject more capital into that sector so that it can continue performing its assigned task of directing the flows of credit and savings in the economy. While Wonks Anonymous must observe that it has not been particularly competent at this task and is unlikely to become much more competent in the near future, he reluctantly agrees that some rescue package is needed.

But a rescue of the financial sector, regardless of how competently it is executed, is unlikely to restore our national prosperity. In a previous post titled Animal Spirits Wonks Anonymous stated his belief that the balance sheets of most American consumers were in such bad shape that no sensible bank would want to lend and no sensible consumer would want to borrow. This condition has arisen, in his humble estimation, as a result of almost consistent mismanagement of the economy since 1980 - where some breathing space was gained during the Clinton years when the economy was at least allowed to find its own course without the rampant abuse of debt and crony capitalism.

Unless the balance sheets of ordinary Americans are restored no lasting recovery can be imagined. We will still be limited in our ability to borrow and spend, incapable of restoring domestic or world demand for goods to a reasonable level. So, the wag may ask, shouldn't we just spend another $700 billion to write checks to every household? But, although the amount of money created by this exercise would be significant, Wonks Anonymous fears that it would not really improve the situation.

"We are not the fortunate ones," as Cyndi Lauper observed and will be forced to build our resources the hard way. What will be needed here is savings. honest to god, spend less than your paycheck, savings, paying off debts and putting some money into real, government regulated investments, savings. So what can the government do to help us?

Economic theory has lots of ideas about savings, some good and some not so much. In general economists believe that three factors influence savings: return on investment, consumer income and social norms and expectations. The list is not in order of importance.

The supply side "economics" of the past 27 years is based on the idea that savings can be promoted by increasing the after tax return on investment. All that we need to do is to cut the tax on capital gains or dividends and savings will appear as if by magic. If that does not work then we should cut taxes for rich people and, perhaps, abolish the income tax and replace it with a national sales tax. After 27 years of trying we can see that investment and growth have only occurred at times when taxes were increased. Except in the minds of the most devoted members of the cult, supply side economics has been shown to be bankrupt.

Income is a more likely prospect. When income rises savings tend to rise. We meet the social norms for consumption and put a bit aside to cushion our consumption at a later date. At the same time, if our income is too low to meet these norms, we tend to spend our savings and borrow to keep up with our own expectations and those of others.

It is this contention between norms and incomes that has gotten us into so much trouble. We learn what is normal first and most strongly from our families before we are old enough to question and judge. We have, of course, been faced with real declines in our earning power and serious bouts of unemployment ever since the late 1970's. During that time the American consumer has striven valiantly to maintain appearances but, like the unfortunate debtor in a Dickens novel, has fallen further and further behind.

If low income and high norms are the problem what is the solution?

Real jobs will raise income. And here I mean real jobs created directly by strong public works programs, not jobs at Walmart selling Chinese crap that would be created by yet another tax rebate or stimulus check. Although Alaska probably needs no more roads, the infrastructure of the lower 48 is in horrible shape. Our cities are so crowded with cars that the free market wonks are trying to figure out how to charge for driving. Why not builds some decent subways? If the Russians can build the Moscow Metro think of what American ingenuity can do.

We might also pay qualified young people to attend nursing schools and medical schools and bring about a real lowering of medical costs.

The list of useful projects that would bring lasting economic benefits is quite long. The byproduct of these projects would be even more important. Long term, well paid employment will improve earnings in the future and provide an opportunity to save.

Jobs provide the necessary but not sufficient conditions for savings. The income created could be spent - as it was by the feckless boomers in the 1970's. We will also need a change in norms. Generations that have been fed a steady stream of consumer propaganda will need to be retrained. Something like this was accomplished during the 1940's when frugal consumption and the purchase of war bonds was tied to military victory.

Our advertisers and designers are creative and Wonks Anonymous is sure that we can come up with something similar. If we do this for about a decade then we might just wake up and find ourselves in good shape.


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