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July 11, 2012 10:55 AM Gain For All the Pain

By Ed Kilgore

It’s easy to forget that the economic and financial suffering of the American people did not begin with the Great Recession, and won’t end when the jobs everyone is craving return and unemployment drops to more acceptable levels. What was happening even before 2008 was a middle-class solvency crisis that happened to coincide with demographic trends which exposed many millions of Americans to the supposedly outdated threat of poverty in old age. And that threat is not going to subside when the economy superficially recovers.

This underlying reality, and what policymakers can do about it, is the subject of the Washington Monthly’s July/August cover package. As Paul Glastris and Phillip Longman say in their introductory essay:

[I]t’s worth remembering that before the crash we had nearly full employment, and yet it had already become clear that the American Dream was fading for most Americans. Indeed, the middle class was drifting into insolvency. Through a combination of stagnant wages, indebtedness to often predatory lenders, and the rising cost of middle-class staples such as health care and energy, the average family’s personal balance sheet—assets minus liabilities—was turning red. Household debt soared from 77 percent of disposable income in 1990 to 127 percent in 2007. During the same interval, the personal savings rate dropped from 7 percent of disposable income to near zero.
By 2007, the average consumer was so tapped out that even many people with jobs were no longer able to make their mortgage payments. That was the spark that set off the financial crisis. The ensuing recession further ravaged family balance sheets. The Federal Reserve made front-page news in June when it reported that median family net wealth had decreased by nearly 40 percent from 2007 to 2010, with younger families being particularly hard hit.

In many respects, the financial crisis was a symptom as much as a cause of the gradual destruction of what politicians like to call “the American dream.” Moreover, the robber-baron behavior of big banks that held the economy and the political system hostage when the crisis broke out was simply one toxic feature of an orgy of predatory lending practices that had already ravaged middle-class solvency even when jobs were plentiful.

Unfortunately, the jobs-centered “debate” that is supposedly the main topic of the 2012 elections isn’t much focused on the economic crisis that will persist when the Great Recession finally ends. And while it definitely matters which perspective on job-creation prevails in November, the task of rebuilding middle-class financial security and economic opportunity will have just begun:

[W]hatever we might do to stimulate the economy—through direct federal spending, as Democrats want, or tax cuts, as Republicans demand—won’t be enough to put us back on a path to healthy growth. We’ll also need policies that specifically and directly help ordinary Americans both to avoid ruinous debt and to accumulate productive assets.
On the debt side, what’s needed is a regulatory crackdown on abusive lending so strong that consumer finance firms either change their predatory business models or go out of business. That, in theory, is the mission of the Consumer Financial Protection Bureau, the new watchdog agency created by the Dodd-Frank financial reform law. The question is whether the agency will be allowed to do its job, or will get strangled in its crib.
On the assets side, we argue for two kinds of policies. The first would better enable Americans to save and build wealth, like a new mandatory retirement savings plan to ensure that young people today have the assets they need to avoid poverty in old age. The second would allow people to reap higher returns on assets they already have—for instance, by letting homeowners produce and sell green energy from solar panels on their roofs….
Every year, the American tax code directs half a trillion dollars to subsidize savings and homeownership, via things like the mortgage interest deduction and preferential rates for capital gains. Some 80 percent of these tax expenditures goes to the richest 20 percent of Americans—precisely the people who need the least help saving. Redirecting a portion of this windfall to help people of modest means save and acquire assets could transform the economy as profoundly as the policies that nurtured household savings during World War II. With the entire tax code likely to be on the table shortly after the next presidential election, the political opportunity to correct this major and egregious cause of economic stagnation and diminishing opportunity in American life has not been greater in generations.

Whether or not the prescriptions offered in the Monthly’s cover package are the right solutions, we believe greater recognition of the fundamental problems they address is long overdue. As the New Deal illustrated, bad economic times can produce the conditions for public policies that make enduring contributions to national well-being. It’s time for another burst of policy innovation aimed at restoring what Americans used to consider their birthright.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • T2 on July 11, 2012 11:23 AM:

    "Itís time for another burst of policy innovation" - Unfortunately we won't get that if Mitt Romney is elected and/or the House stays TeaParty. We'll get more tax cuts for the rich paid for by cuts to programs Americans depend on, especially in these times.
    If you want "policy innovation", the Conservative approach is just the opposite. "Take our country back" and "innovation" don't go together.

  • c u n d gulag on July 11, 2012 11:27 AM:

    Those sound pretty good.

    How about mandatory, company paid-for, pension plans for companies over a certain size, with all money invested in American bonds - not exactly a new idea, that.

    Higher progressive taxes on the wealthiest people and companies. With tax breaks for companies who hire in America.

    And for people working for smaller companies, any money up to 5-10% if total income (depending on salary) is tax exempt if put into an IRA, or some new financial vehicle, and held until the new retirement age of 60.
    You can take loans out in case of an buying a home with a safe loan, or an emergency, with fees and taxes - unless the families "breadwinner(s)" are unemployed, in which case, the money can be withdrawn monthly fee and tax free for a year starting from when unemployment money ends. That amount can be made up by a small percentage increase if the new jobs pay is the same or higher, and waived, if it's lower.

    Also - a 2% increase in FICA, with taxes taken out of ALL income - including investments, stock transactions , and trust fund income, over a certain amount.
    This will allow for a lower retirement age, and greater monthly SS benefits for seniors - with NO means testing.

  • c u n d gulag on July 11, 2012 11:35 AM:

    Ooops!

    Correction to that 4th paragraph:
    Instead of, "You can take loans out in case of an buying a home with a safe loan, or an eergency, with fees and taxes...," it should read, at the end, "...with SMALL fees and taxes..."

    Right now, withdrawal of retirement savings is punished at such and excessive rate with penalties and taxes, that it defeats the purpose of having it as a retirement plan.

    And yes, I know, that's meant to encourage people NOT to take any money out, but it also screws up whatever it is that you may need the money for.

    I know, my 401K lost over a third of it's value, and then, with NO savings other than that, when I lost my job and couldn't find another one for love or money, had to cash out the rest - and I'm STILL paying taxes on that monthly over three years later, with another 2-3 years to go.

    Talk about drastic!!!

  • Mimikatz on July 11, 2012 11:56 AM:

    This diagnosis of our structural economic problems seems spot on, but it is hard to imagine Congress doing anything about predtory lending or, for that matter, almost anything else to rein in the banks and other financial institutions. If Angelo Mozzilo of Countrywide and other arch predators could evade jail, and as long as the rewards for predators are so great, it is hard to see Congress not remaining in their pockets. Our system has become so corrupt as to be unable to be self-correcting. Historically that has led to revolution, but the increased passivity of our population and the massed technology and firepower of governments at all levels make that difficult to imagine as well. That suggests internal collapse as the most likely outcome when most people are simply unable to buy goods and services, unless people get motivated to demand change and back those demands with great numbers.

  • SecularAnimist on July 11, 2012 12:11 PM:

    The American middle class is obsolete.

    Yes, it has served its purpose well since WWII as a lucrative cash cow for the corporate oligarchs, with its consumption driving the economic engine of mass destruction known as "consumerism", which chews up "natural resources" to produce "consumer goods" for the many and vast wealth for the very few, and spits out mountains of waste and pollution.

    But consumerism is now being outsourced and offshored to the emerging, and much larger, "middle classes" of China, India, and the rest of the developing world. It's their ever-increasing consumption of material goods that the corporate oligarchs are counting on to continue generating wealth and concentrating it in their hands.

    So, having served its purpose, the US middle class is destined for the ash heap of history.

  • RepublicanPointOfView on July 11, 2012 12:15 PM:

    What a POC posting!

    With all of the things listed in this posting (that you think are bad and that I think are great), you fail to give proper credit to those who contributed mightily to this situation.

    First, credit is due to Billy Bob Clinton for signing NAFTA and the repeal of Glass-Steagil. Our never ending thanks to the DINOs of the DLC for their help. Thanks Ed.

    More importantly, homage should be paid to the greatest American president ever. He set the foundation, now known as Reaganomics, that pushed into motion the overdue destruction of the middle class. We, the wealthy funding wing of the republican party, have been 'pissing' on you ever since!

  • Mimikatz on July 11, 2012 12:19 PM:

    One more thought. I have long understood that the financial sector successfully masked the decline in real wages by making credit more readily available, thus artificially (and temporarily) preventing a decline in standard of living for e middle class. What I had not appreciated until recently is that the enslavement by debt was deliberate, to make the masses more willing to accept low wages and poor working conditions. And the young, with student debt, can't even get their foot in the door. Clearly this is a situation that is unsustainable, but short of something like the Bonus Army. Yet many people don't even vote, which is the minimal level of citizenship. I'm interested in how others think this will play out.

  • Joe Friday on July 11, 2012 1:47 PM:

    Paul Glastris and Phillip Longman: "[I]t's worth remembering that before the crash we had nearly full employment"

    Ah, NO.

    We started losing millions and millions of jobs early in the Chimpy bush administration, as illustrated by the following chart:

    EM RATIO

    Unfortunately, this fact was obscured by the 'Unemployment Rate' number declining later in the term. The 'Unemployment Rate' can decline in two ways. Either by more people getting jobs (good) or by more people dropping out of the national labor pool (bad).

    In this case, a declining 'Unemployment Rate' number actually meant HIGHER unemployment.