WE MIGHT BE HEADING FOR A CRASH AS BAD AS 1929 by Robert Reich

I was just reading about economic troubles in Turkey this morning and now today's bleak economic forecast by Robert Reich.  Key quote: 

"The underlying problem isn’t that Americans have been living beyond their means. It’s that their means haven’t been keeping up with the growing economy. Most gains have gone to the top."

Thanks to Rudy Acuña for sharing.

-Angela

ROBERT REICH: WE MIGHT BE HEADING FOR A CRASH AS BAD AS 1929 | OPINION

ROBERT REICH , NEWSWEEK COLUMNIST AND CHANCELLOR’S PROFESSOR OF PUBLIC POLICY AT THE UNIVERSITY OF CALIFORNIA, BERKELEY ON 9/4/18 AT 5:02 AM

The same imbalance has been growing again. The richest 1 percent of Americans now take home about 20 percent of total income, and own over 40 percent of the nation’s wealth.

These are close to the peaks of 1928 and 2007.

The U.S. economy crashes when it becomes too top heavy because the economy depends on consumer spending to keep it going, yet the rich don’t spend nearly as much of their income as the middle class and the poor.

For a time, the middle class and poor can keep the economy going nonetheless by borrowing. But, as in 1929 and 2008, debt bubbles eventually burst.

We’re getting dangerously close. By the first quarter of this year, household debt was at an all-time high of $13.2 trillion.

Almost 80 percent of Americans are now living paycheck to paycheck. In a recent Federal Reserve survey, 40 percent of Americans said they wouldn’t be able to pay their bills if faced with a $400 emergency.

They’ve managed their debts because interest rates have remained low. But the days of low rates are coming to an end.

The underlying problem isn’t that Americans have been living beyond their means. It’s that their means haven’t been keeping up with the growing economy. Most gains have gone to the top.

It was similar in the years leading up to the crash of 2008. Between 1983 and 2007, household debt soared while most economic gains went to the top. Had the majority of households taken home a larger share, they wouldn’t have needed to go so deeply into debt.

Similarly, between 1913 and 1928, the ratio of personal debt to the total national economy nearly doubled. As Mariner Eccles, chairman of the Federal Reserve Board from 1934 to 1948, explained: “As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing.”

Eventually there were “no more poker chips to be loaned on credit,” Eccles said, and “when…credit ran out, the game stopped.”

After the 1929 crash, the government invented new ways to boost wages—Social Security, unemployment insurance, overtime pay, a minimum wage, the requirement that employers bargain with labor unions, and, finally, a full-employment program called World War II.

After the 2008 crash, the government bailed out the banks and pumped enough money into the economy to contain the slide. But apart from the Affordable Care Act, nothing was done to address the underlying problem of stagnant wages.

Trump and his Republican enablers are now reversing regulations put in place to stop Wall Street’s excessively risky lending.

But Trump’s real contributions to the next crash are his sabotage of the Affordable Care Act, rollback of overtime pay, burdens on labor organizing, tax reductions for corporations and the wealthy but not for most workers, cuts in programs for the poor, and proposed cuts in Medicare and Medicaid—all of which put more stress on the paychecks of most Americans.

Ten years after Lehman Brothers collapsed, it’s important to understand that the real root of the Great Recession wasn’t a banking crisis. It was the growing imbalance between consumer spending and total output—brought on by stagnant wages and widening inequality.

That imbalance is back. Watch your wallets.

Robert Reich is the chancellor’s professor of public policy at the University of California, Berkeley, and a senior fellow at the Blum Center for Developing Economies. He served as secretary of labor in the Clinton administration, and Time magazine named him one of the 10 most effective Cabinet secretaries of the 20th century. He has written 14 books, including the best-sellers Aftershock, The Work of Nations and Beyond Outrage and, most recently, Saving Capitalism. He is also a founding editor of The American Prospect magazine, chairman of Common Cause, a member of the American Academy of Arts and Sciences and co-creator of the award-winning documentary Inequality for All. His latest documentary, Saving Capitalism, is streaming on Netflix. Reich 's new book, The Common Good, is available now.

The views expressed in this article are the author's own