“TRY A LITTLE PROPAGANDA ON THEM”

4/22/10

I heartily recommend that my readers see David Wessel’s page A2 article in today’s (i.e., Thursday, 4/22’s) Wall Street Journal entitled “Mapping Fault Lines of Crisis.” Mr. Wessel introduces the reader to University of Chicago economist Raghuram Rajan who has a three pronged explanation, which is among the best I’ve read, for the economic “crisis” from which we are supposedly emerging.

Particularly interesting to me was the first prong of Dr. Rajan’s argument, to wit:

“As incomes at the top soared, politicians responded to middle class angst about stagnant wages and insecurity over jobs and health insurance. Since they couldn’t raise incomes—Mr. Rajan is in the camp that sees better education as the only cure and that takes time—politicians of both parties gave constituents more to spend by fostering an explosion of credit, especially for housing.”

Dr. Rajan’s argument is in general line with one I have been making for years. Middle class incomes (not necessarily household incomes, which have been bolstered, some might say artificially, by the growth to dominance of the two income household, but, rather, real wages) have been stagnant, at best, for about the last twenty years. Meanwhile, incomes at the top of the income distribution have soared. This disparity has come about for some reasons that have their roots in the operation of the free market (e.g., globalization, higher returns to education in a post-industrial economy) and for some reasons that don’t (e.g., the growth of government and the attendant importance of government contracts that go to politically favored companies, the bipartisan, nearly religious, genuflection to globalization without regard to its secondary and tertiary consequences and ultimate ramifications, apathetic, conflicted, and/or stacked corporate boards that have stood by while executive compensation has soared to a point at which it has become nearly completely divorced from the underlying economics of rational compensation structures).

Whatever the reason, the top has done very well and the income disparity has become gaping under (surprise!) both Democratic and Republican administrations. Even the most vacuous politician recognizes that growing income and wealth disparities are not good for society. So what can be done? Given the vestiges of a free market economy, as opposed to a stacked deck, that remain in this country, the politicians’ latitude is constrained. Efforts to restrain incomes at the top are, for the most part, ill-advised economically and, in almost all cases, ill-advised politically, especially when it is those with higher income types who bankroll both parties. Efforts to bolster incomes at the bottom and in the middle are difficult and, as Dr. Rajan points out, take time. Further, the kinds of schemes to bolster lower and middle class incomes that are within the limited scope of the economic understanding of the typical politician are almost always ill-advised.

So how did the political structure respond to an increasingly disgruntled population that was about to see its lifestyle severely restrained while those at the top, most of whom apparently have even less discretion than they do class or maturity, lorded over the populace with a gauche and tone deaf display of the incomes they had managed to attain largely through a degree of coziness with those who make the rules? It seemed so simple—make debt widely and easily available to the middle class so that they could attain the trappings of wealth, a Potemkin prosperity, if you will by simply overleveraging their stagnating real incomes. That way, those at the top could continue to shamelessly display the trappings of their wealth without making the middle class feel that it missed the entire party. And defenders of the current system could respond to those who voiced concern about the growing income disparities with a blithe “What do you mean the system isn’t working? The middle class is living better than it ever has!” Sure it is…because it’s leveraged to a degree that would make previous generations wretch and heave before keeling over in cardiac arrest.

It was brilliant…until it wasn’t.

Now that so much of this debt has come a cropper, if you will, the government is making prodigious efforts, through various default avoidance programs and the like, to relieve borrowers, the overwhelming majority of which are middle class (and often pretending not to be) of the obligation to repay their debts. In effect, then, the government’s current policies are a massive subsidy to the indebted middle class that was made necessary by the government’s massive subsidy to upper income types, both of which were and are being effectively financed by the saving middle class (through lower returns on savings and inevitable higher taxes), which, as usual, gets kicked in the teeth…for its own good, of course.