Some people are surprised at the amount of anguish being expressed by consumers this summer as the stock market embarks on a roller coaster ride and gas and food prices jump and then jump again. After all, unemployment has only risen to 5.5%, not bad compared to the 7.8% rate at the bottom of the recession in May of 1992, and the rise in food and gas prices only really got going in January. However, these short-term afflictions come on top of many years of stagnating income for the 90% of the population that receives most of its income through a paycheck. For middle-income professionals, hard-working blue collar families, and folks who must get by on low-wage jobs in the vast service sector, this recession is the straw that breaks the camel’s back.
Stagnating real wages (that is, wages adjusted over time for the effects of inflation) are deeply rooted in the post-Vietnam War economy. By 1971, the U.S. was experiencing growing inflation and mounting trade deficits spawned by out of control spending for an army of 500,000 American soldiers bogged down in an unwinable war. These woes allowed international financial firms to make “runs” on the American dollar, turning their greenbacks in for a piece of the gold supply at Fort Knox. President Nixon stemmed the melt-down by taking the dollar off of the gold standard, but inflation with no growth resumed in 1974 when the first Arab oil embargo doubled oil prices. (Is any of this starting to sound familiar?) Since then, like Alice in Through the Looking Glass, Americans have had to run faster and faster just to stay in the same place.
A couple of facts. Between 1971 and 2001, the real income of Americans at the 90th income percentile rose an average of just 1% each year. Since then, they and everyone below them in the great middle class has done worse while people in the top 10% of the income pyramid have seen great jumps in their income. In 2005, more than 45 million individuals lived in a family with at least one person working, but had no health insurance. While the price of electronic toys have plunged, the prices of key parts of the middle class dream – college and home ownership are the major examples – have multiplied much faster than income growth. For more data on income stagnation, just google ‘running faster and faster’.
To keep up in the years after 9/11, consumers have taken on piles and piles of debt. In addition to credit card debt, which afflicts all classes, millions of families refinanced their houses, took out home equity loans, or financed their educations with student loans. These methods, which financed home improvements, bedroom and living room sets, sophisticated home entertainment systems, large SUVs, and thousands of degrees that don’t lead to good jobs have left homeowners and their children saddled with boatloads of debt.
The squeaky sound you hear as the housing bubble loses air is the current of fear running through the average family. The Center for Economic and Policy Research has released a new study showing that if housing prices decline by another 10% between now and the end of 2009 “the median household in the ages 45 to 54 cohort will see a 34.6% loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose 67.6% of their wealth.” The study suggests that millions of people thought they were going to finance current major expenditures and their retirement through the equity they were gaining in their homes. Uh, no. Ain’t going to happen.
So when gas costs $4 per gallon, food costs more each week, and mutual funds fall 20%, millions of Americans don’t have a lot of extra income to make up the difference. The real question now is how this affects the election, not in terms of who wins, but in terms of what changes politicians feel they must make to keep unhappy consumers from becoming angry citizens.