Rebuttal to Robert Reich's Claim "Americans Have Not Lived Beyond Their Means"

I stumbled upon this after posting the above:

http://www.zerohedge.com/news/2013-01-26/end-era

It's a bit like the CC, but his analysis of globalization is good supplement.  The debt "super cycle" is obvious now, but we don't seem to be doing much about it.  Lending the whole report credence is his emphasis on energy, to which we are well aware on this site.

Good read.

Doug

Thanks Adam for starting Economy Wonks and writing this thread.  Your personal story is compelling.  I want to address the following issues taken from Reich’s quote.

These regressive sentiments are packaged in a mythology that:
*  Americans have been living beyond our means
*  We’ve been unwilling to pay for what we want government to do for us
*  We are now reaching the day of reckoning.
*  The truth is most Americans have not been living beyond their means
*  The problem is their means haven’t been keeping up with the growth of the economy

I will use graphical data directly from the Federal Reserve web site, and one from the New York Times.  Doug’s graph provides an excellent overview on total credit market debt.  I will narrow the focus.

1  Americans have been living beyond our means.  TRUE  This graph shows United States Government debt divided by GDP.  Last year it exceeded GDP.  This is just the official debt.  It does not include unfunded liabilities that are estimated to range from $70 trillion to $400 trillion.  This sure looks excessive to me.

2  We’ve been unwilling to pay for what we want government to do for us.  TRUE  This graph shows United States Government expenditures and receipts.  Notice how often the red line of expenditures is above the green line of receipts.  You can quibble about “willing”, but for 30 years now we certainly haven’t done it, except for a brief period in the late 90s.

3  Most Americans have not been living beyond their means.  FALSE  This graph shows personal debt divided by disposable personal income.  That means income after taxes.  All personal debt, the blue line, peaked at 130% of income.  Just mortgage debt, the red line, peaked at 100%.  Does this look like responsible money management to you?

https://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html

4  Means haven’t been keeping up with the growth of the economy.  I think this is TRUE.  However the best graph I can present is based on data from the Census Bureau, Bureau of Labor Statistics, and the Federal Reserve that has been interpreted by Reich and professors from UC Berkley.  However, I’ve seen confirming data from a variety of credible sources for over twenty years now.  This graph shows the growth of wages compared to productivity.  More wealth is being produced but median pay has been stagnant since the 70s.

5  We are now reaching the day of reckoning.   TRUE  In fact it already started with the crash of 2008.  Look at the first three graphs again.  The changes since 2008 are drastic and shows that the reckoning continues.  Odds are it will get only get worse.

Adam has show one good example of how to respond to this knowledge.  Think hard about what works best for you.

Travlin

PS  In a previous thread my graphs displayed in the thread instead of having to follow the link.    Does anyone know why they don't display here?  Adam, feel free to fix this if you can.

AO/Adam,

"The ride from here is likely to get bumpy as reality punctures our leaders' unrealistic expectations. But if we, as individuals, invest in living authentically, working hard, and fostering supportive community, we'll enjoy the benefits of a resilient life regardless of what transpires."

I'm not trying to speak for Adam, but the way I read this is:
There isn't much we could do to be less resilient. If you work at it you can, at a minimum, suffer less than you otherwise might when the dues are called in, the party ends and we collectively start feeling the hangover from living on unlimited energy and resources.

Afterall, in my estimation, our transients live better than people in third world villages.

I'm not trying to speak for AO, but the way I read his comment is like this:
We're on the precipice of something that's a lot more dangerous that we like to acknowledge.

So, just going off my interpretation, I think you both have a point that should be well taken.
We should be doing everything we can to build resliency in the interim, but it's probably not wise to think that benevolence will reign if/when we have a collapse - which is inevitable to any business that's so mismanaged. 

Adam, 

I really like the anology that the U.S. is like a poorly run business. Every facet of our society these days "looks" like a corporate business to me; we have revolvoing door positions for societies less educated laborers, security to make sure they don't get too rowdy, a bored, disenfranchised middle management and a bunch of dawdling, priveledged idiots 'elected' (in-so-much as you elect your coporate management) to manage our company. 

So what do we sell? Money, I think. We're a money distribution machine for the FED, and not a lot more. 
With no tangible assets, and such a widespread involvement in the rest of the world's transactions, we can't ignore how an eMerican economic collapse would impact the rest of the worlds powers. Argentina, Zimbabwe, Yugoslavia... the Soviet Union - those were all either isolated economies or economies that were reliant on western banking. When that bank itself goes?

I shudder to think, and I don't think you're statement sounded "Pollyanna", but we may be in for a *very* rough ride... 

We seem to be cool with acknowledging the notion that there's something deeply wrong with our society, and that it will impact us, but we seem equally comfortable ignoring the gradient; we say sure, standards will change - but that change itself invites further change, and the potential for a very deep, cataclysmic collapse exists embedded within these changes in the macro-economic composition of the Earth. 

The population cannot be supported by organic methods (ergo, agriculture without readily available petrol) and that to me speaks volumes about the potential depths. So, as we look into this dark water that's rising, I think we all see the width and breadth, but the depth is something we really can't nail down.

African scale pandemics, starvation, drought and warfare is not unlikely. The Roman Empire was digested by very similar social ills and the dark ages were the result. History might not repeat, but it has a rhythm, and I have a hard time believing people will pull together in sufficient quantity and with sufficient skills and ethics to make anything more than very small, isolated pockets of 'resilent' communities. 

If I had to guess, I'd say that when the bill gets handed to us, most of the people in the U.S. will be reduced to what is basically serfdom for wealthy land owners. Why? Because that's been the human condition since the agricultural revolution, barring the last 400 years.

Cheers,

Aaron

Lots of good comments, but for the life of me it seems like many others read a very different quote from Reich than I did. Firstly, I usually enjoy his commentary, I do not always agree with him as I find he tends to oversimplify things and leave out salient details in the process.

I read his quote as primarily a slam at the currently fashionable practice of lamenting the “fact” that we cannot afford Social Security, Medicare, and other so-called “entitlement” programs. (Even the naming convention is a pejorative)

I happen to agree with this part of the quote, and I suggest that this is the substantive part of his point. He does bring in the spoiler to claim that Americans do not live beyond their means, and this seems to be inflammatory to the PP audience, so we have the majority commentary concerning this and related subjects. More on this in a minute.

To his primary point, I’ll offer a supportive narrative; there is an intrinsic requirement in a capitalist political economy for an insurance type safety net, that cannot be marginalized by Libertarian or other small government ideologies. It must be provided for as a first priority, it is not a question “can we afford it” it is a question of who pays for it. Period. Full stop.

How we got to the false dichotomy of caterwauling that we’re broke, SSI is a Ponzi scheme, and we must immediately stop the madness is almost funny, but is instead pathetic. These claims are the purview and lexicon of the wealthy and those that stand to benefit from cessation of these types of insurance programs. All part of a long line of disastrous neo-liberal socio-economic policies specifically designed to convert these types of programs to privatization, along with any and all other public assets. The only truly shocking part of this is how many perfectly intelligent (but apparently gullible) people fall all over themselves and march in lock step support.

Reich is rightly incensed that this narrative has reached the volume and decibel level that is has, as it fails every test of critical thinking.

Let’s go to Mark Thoma, who published this excerpt in 2005:

Economic systems differ in their ability to provide goods and services and in the level of economic risk faced by a typical household. Socialism is a low mean, low variance economic system. With a planned economy, cycles in unemployment do not occur unless mandated by planners. Worker income, though low, is not subject to substantial variation over time. Other economic risks, such as access to housing and risks related to healthcare are also very low since these services are provided by the state. Economic risks for workers are low in such a system, but so is average income.

Under capitalism the average level of income is much higher, but economic risk is higher as well. In a capitalist system, workers can be involuntarily displaced as new products are invented, new production techniques are implemented, production moves outside the country, or inevitable business cycle variation occurs. These are shocks that affect workers independent of their own behavior. A worker who has shown up to work every day and worked hard to support a family can be suddenly unemployed for reasons unrelated to anything connected to his or her own behavior.

As the U.S. entered the 20th century, important social changes arising from industrialization were becoming increasingly evident, and these changes exposed the high degree of economic risk under a capitalist system. Migration to cities and the resulting breakup of the extended family, reliance on wage income as a primary means of support, and increasing life expectancy resulted in increased economic risk for the typical worker relative to the more agrarian economy that existed prior to industrialization.

In an agrarian economy, economic security is provided by extended family relationships coupled with the largely self-sufficient nature of farms. On a farm, a recession is a bad harvest, but it generally does not mean a total lack of income. Times can be tough, food can be very scarce and there can be hunger, but generating a subsistence level of income from the farm is usually possible even in the worst of years. For a worker dependent solely upon wage income, the consequences of a recession are much more severe. A recession means a total lack of income, not just hard times. Without the help of others or the existence of some type of social insurance program, abject poverty is a real possibility (see Life After the Great Depression for descriptions of the misery that followed the Great Depression).

Retirement also takes on a different character. On the farm, retirement meant gradually, if often reluctantly, letting the children take over responsibility for the farm, but it did not mean a total loss of income. Children provided for parents. But an aging worker in a city, perhaps disconnected geographically from their children, faces a different circumstance upon retirement. Such a worker may face a complete loss of income, and disability from age is not always an event that occurs according to plan. Even a worker who has diligently saved for retirement can suddenly become impoverished due to events such unexpected health costs, or even a much longer life than expected.

As industrialization progressed, 1920 marks a benchmark year where, for the first time, more than half of the population lived in cities. When the Great Depression hit around a decade later, the social changes the U.S. was experiencing and the need for new ideas regarding the government’s responsibility for the economic security of its citizens became clear. The Great Depression made it evident that in a capitalist system, where the whimsies of the marketplace can wreak havoc on people’s lives, the government has an obligation to provide economic security. It was also evident that the private sector did not provide the needed level of insurance and that government intervention was required to overcome this problem (due to both moral hazard and asymmetric information problems in the private insurance market).

It is important that the economy be allowed to change with new technology and changing preferences, but the consequences for innocent workers affected by such changes is a social responsibility that needs to be addressed. In addition, as extended family relationships are hindered by geography and the social contract between parents and children breaks down, the elderly need a way to avoid poverty. Programs such as Unemployment Compensation, Medicare, and Social Security arose as a means to mitigate these economic risks under capitalism using the least amount of society’s valuable resources.

Drawing a rough analogy, socialism is like investing in T-Bills. Low risk, but low return. Capitalism is like the stock market. There is a higher average return accompanied by higher risk. Financial theory tells how to insure against such risks and there is no reason why this cannot be applied in the social insurance arena to smooth variations in income.

There is a need for social insurance under capitalism.

Yes. Absolutely.

And lastly, back to the point that Americans have or have not lived beyond their means. Economist Michael Hudson gets it right when he points to the valorized time of the supposed Clinton budget “surplus”. He points out that these budget surpluses simply represented a withholding of state (federal) spending, and this directly transferred into a lower wage average for most Americans. He is right on this point. Lower infrastructure investment stymies technological growth limiting such growth to that which is directly and easily monetized by the supposed free market. However noble this may appear, this does not map to the organic growth of the population, newly minted college graduates, coupled with the labor glut caused by both enhanced productivity stateside and offshore low burden labor, seek to further drive wages lower.

However, the cost of living does not stay static, and the consumer credit industry is used to fill in these shortfalls, resulting in catastrophic levels of personal debt. Michael Hudson’s central point is that declining wages are supplemented by the availability of consumer debt, and account for the massive levels of private debt (much larger than government debt as a function of GDP)

So we are to interpret this as “living beyond our means” or is there a deeper, more important question that is beginning to appear?

It is important that the economy be allowed to change with new technology and changing preferences, but the consequences for innocent workers affected by such changes is a social responsibility that needs to be addressed. In addition, as extended family relationships are hindered by geography and the social contract between parents and children breaks down, the elderly need a way to avoid poverty. Programs such as Unemployment Compensation, Medicare, and Social Security arose as a means to mitigate these economic risks under capitalism using the least amount of society’s valuable resources.

I've been pushing this point for awhile. In my opinion it's not a liberal or conservative view, but a reality. Technology and science are wonderful and we need them, but they also create costs as much as benefits. Although innovation/invention can happen at any level of the economy, most often it is applied from the top down when it comes to major mass-societal changes. We need to remember that technology has a long history of being a mechanism for keeping wages down for the capitalist. Increase the rate of innovation and my guess is wages fall faster. (anyone have graphs on this?) If we were to calculate the real costs of innovation, meaning the social/wealth cost of displaced workers and made the private entities that are responsible for these changes pay for those real social costs, we probably wouldn't need the social safety net, but unfortunately this is wishful thinking since they see their actions as a part of the "free market"  and not as a responsibility to the society that made them the entity they are. The other problem is that these costs are often future costs that can't be predicted and only reveal themselves in hindsight. I see hypocrisy on all sides of this. Too often the rebuttal is "we're a company, not a charity."  On a human level, it makes me sick, but our current mature capitalist system (an aggregate of oligarchs) really doesn't treat the human as a human, but rather as an input. On a financial level, they are only doing what they need to do to survive. I'm not sure what the answer is, but we definitely need the safety net, because the private sector has shown that they don't want to and cannot afford to take on the responsibility. If they would stop and think about it, they are getting a pretty good deal...they cut their costs through innovation, and the public sector gets to deal with and pay for the fallout...private sector merely washes its hands once the decision is made, albeit, subtracting out the minor token of a severence package. 

Thank You

Darbikrash,

The argument that capitalist systems impose more economic risk on people and therefore are best complimented by a social safety net is a good one.  However, that doesn't change the limits placed on the system by depletion of resources.  It could be argued that using up those resources quickly as if there were no limits is living beyond our means in that it gives a higher standard of living today at the expense of a lower one and possible economic/social/political instability in the future. 

Perhaps if we reorganized our economy to provide a lower standard of living and a safety net in line with that lower standard, this concept would work.  Another possibility is to reorganize society to once again allow local communities and extended families to provide that safety net.  Of course, if we don't reorganize voluntarily, the reality of depleted resources will do it for us.

I hope you all find my thoughts a useful addition to the discussion.

Q.B.