We may be seeing the end of the first economic expansion since the Second World War in which average family incomes have not recovered their pre-recession levels.
A bursting housing bubble last summer and the resulting crisis in the U.S. sub-prime mortgage market have triggered a full–blown credit crisis, which now seems to be dragging the American economy into recession and slowing economic growth globally.
Economic growth slowed sharply toward the end of 2007 and the economy began to shed jobs early this year. The unemployment rate rose to 4.9 percent in January but would be 6.7 percent if labor force participation were close to pre-recession levels. Even at the peak of a recovery, median family income, adjusted for inflation, was lower in 2005 than in the previous year and economic anxiety was unusually high due to the threat of job loss, the volatility of family incomes, rising health care costs and the continued erosion of pensions.
Even before the recent economic slowdown, working families were struggling to maintain their living standards by working longer hours and more jobs, by sending more family members to work and by borrowing against the equity in their homes. In terms of jobs, wages, health care and pensions, the recovery from the 2001 recession has been the weakest of any recovery since the Second World War, weaker even than the jobless recovery of the early 1990s. Debt-financed consumer spending has provided what momentum the economy has shown over the past seven years. Stagnant wages and incomes left consumers borrowing against the expected rise in the value of their homes to maintain their families’ living standards. Household savings fell below 1 percent, levels not seen since the worst years of the Great Depression.
The truth is, as weak and unbalanced as the current recovery has been, America’s workers are suffering what is now a generation-long stagnation of wages and rising economic insecurity. The misguided domestic and international economic policies of the past three decades have produced an unbalanced economy that has seriously reduced the role of government in guiding the economy and radically shifted bargaining power from workers to their employers.
These policies have benefited our wealthiest families as never before, but working families have been left behind. Corporations are earning record profits and CEOs, on average, are now earning 364 times what workers earn. Productivity has increased 67 percent since 1980, but wages have barely budged. Average family incomes are only 15 percent higher today than they were three decades ago, and only because families are working harder and sending more members into the workforce. Only the top 10 percent of families have seen their income rise at or above the rate of productivity growth.
As a result, incomes and wealth are more unequally distributed in America than in any other developed country and are more unequal today than at any time since the 1920s. Even more alarming, American intergenerational economic mobility is falling and is already lower today than in many European countries. The American Dream is fading for millions of working families.
The bursting of the housing bubble and resetting interest rates on sub-prime mortgages threaten the homes of hundreds of thousands of America’s working families. The credit crisis and financial market turmoil threaten the pensions and savings of millions. And the resulting pull-back of consumer spending and business investment now threatens the jobs of millions more.
Housing prices already have fallen 10 percent and may fall another 10 to 20 percent over the next two years, leaving 10 million families with negative equity in their homes, causing more than 2 million foreclosures and destroying trillions of dollars of household wealth. This massive loss of wealth likely will undermine consumer spending and business investment. Declining housing prices of this magnitude have never taken place without the economy falling into recession.
The Federal Reserve moved aggressively to lower interest rates by over 2 percentage points and is signaling more cuts to come. Congress also passed a $168 billion fiscal stimulus package featuring a tax rebate for families and tax cuts for business. While these steps are helpful in mitigating some of the worst effects of the slowdown, they are insufficient to avert recession, nor do they deal with the fundamental economic imbalances at the root of the current economic crisis.
Congressional Democrats failed to overcome Republican opposition to some of the most important elements of an effective economic stimulus. Working families need, and we demand, additional measures to keep families in their homes by enacting a moratorium on foreclosures and a second stimulus package to extend unemployment insurance, expand the food stamp program and bolster federal aid to states and cities to prevent further cutbacks of vital public services. We should also front-load public investment to maintain our schools and repair crumbling bridges and deteriorating highways. Spending that puts people to work on projects we desperately need is more likely to stimulate the domestic economy than tax cuts that may be saved or spent largely on imported consumer goods.
But even these expanded stimulus measures do not address the fundamental imbalances at the root of the current economic slowdown. In addition, we need a bold national economic recovery program to change the policies that produced the imbalances that are now driving the economy into what may become a serious recession.
First, we must restore the competitiveness of the United States in global markets to balance our trade with the rest of the world. Currently we must borrow nearly $800 billion a year to pay for the things we consume as a nation that we no longer produce. We have lost 3.3 million good manufacturing jobs since 2000, many the result of our imbalanced trade.
Moreover, China and other Asian trading partners are manipulating their currencies to maintain their competitive advantages. The huge trade surpluses of these countries have produced a global savings glut which is fueling asset price inflation in the in the United States. The demand for U.S assets from these countries has fed the unsustainable housing bubble on which our fragile growth has depended over the past seven years.
To restore the competitiveness of the American economy, we must change our trade, tax and exchange rate policies to level the playing field for domestic producers. Domestically, we must also greatly expand public investment in the education and training of America’s workers, as well as the information, communication and transportation infrastructure so essential for a competitive American economy.
We must also adopt a national strategy to rebuild American manufacturing. We must have national health care reform to level the competitive field for domestic manufacturers. And we must have an approach to climate change focused on domestic investment in new technologies to produce a more environmentally sustainable economy, lessen our dependence on foreign oil and produce good manufacturing jobs.
Second, we must have a more robust and coordinated monetary and fiscal policy focused on maximum sustainable growth and full employment. We cannot continue to depend on consumer spending financed by asset bubbles to power the U.S. economy. The Federal Reserve and Treasury are mandated by Congress to maintain rapid growth and full employment but they have largely abandoned this mission to serve other purposes. The Treasury leads the cheers for tax cuts for the wealthy without regard to tax fairness or the impact on employment and wages. And the Federal Reserve is focused too narrowly on fighting inflation.
Third, we must have transparent and more effective financial regulation in the mortgage and credit markets. The failure of regulators to ensure secure mortgage markets and sound financial markets has fostered speculation in both. The promotion of irresponsible mortgages has put millions of working families into homes they cannot now afford. And the financial services industry has engineered these fragile mortgages into exotic securities that we were told would disperse risk to those best able to bear it. Instead, these complex securities have concentrated the risk in the hands of those least able to understand it. The deregulation of financial markets and the financial engineering that produce mountains of unsupportable debt have allowed finance to dominate the real economy, produced turmoil in our capital markets and undermined the stability of the real economy in which our members live and work.
We must restore effective regulation to ensure transparency and accountability of mortgage lenders, investment banks, hedge funds, private equity and sovereign wealth funds.
Fourth, we must restore a fair tax system capable of financing the key public investments necessary for a competitive U.S. economy. The United States is plagued by rapidly rising inequality and a public sector so impoverished we are unable to fund vital infrastructure improvements, educate our children, or deal with the challenge of energy and the environment. At the heart of these problems is a tax system that treats the upper middle class and billionaires the same in terms of marginal income tax rates. We need a truly progressive tax system, one that looks to the superrich to pay their fair share.
Fifth, and most important, we must restore a balance of power between workers and their employers to allow workers to share in the prosperity that they help create. We must enact meaningful minimum employment standards, including a minimum wage indexed to one-half the median wage. We must also pass the Employee Free Choice Act to restore the freedom of workers to organize and bargain collectively. And we must extend collective bargaining rights to millions of public-sector workers denied these fundamental rights.
America’s workers are the most productive workers in the world. And they work longer hours than workers in any other developed country. America is still the richest country in history. There is no reason that we cannot have a strong and internationally competitive American economy whose prosperity is broadly shared.
Economic issues—stagnating living standards, rising economic anxiety and growing inequality—have risen to the top of the nation’s agenda and are the leading concern of America’s voters this year. To win the trust of the American people, candidates for office must show they know and care about the real economic anxieties of America’s working families. Most of all, they must bring forward credible economic policies to produce an Economy That Works for All.