Wednesday, February 18, 2009

Rude Awakening

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. According to economist Paul Krugman, the bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. Writing in the New York Times, Krugman notes that for most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds na├»ve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Those same voices are now ridiculing the stimulus package, saying that all we need are more tax cuts (presumably for the wealthy) to solve all of our problems. Their theory holds that we can ignore fundamental challenges like energy independence and the high cost of health care and still expect our economy to thrive.

The current state of the economy and the status of American consumer finances is a damning referendum of the economic policies of the last eight years, the winner-takes-all policies of tax breaks for the rich and reduction in aid for the less fortunate. Why are those proposing more of the same even given serious attention?

1 comment:

Uku said...

Geez, what an awesome picture and text! :)

Thank you. I don't have so much to say about that. We just need to do something and we can start doing that today, right now, right here. The importance of practice, the importance of action.

With palms together,