The Real Fundamentals: Middle Class Income

Posted on



David Leonhardt has a worthwhile column suggesting that, perhaps, we should all focus a little less attention on how to bail out the latest disaster company and a bit more attention on how to address what, for lack of a better term, one might call the fundamentals of the economy. From back before AIG joined the scrap heap, Scott Lilly had a commentary wisely linking the financial crisis to the income crisis in America: “As a report I authored a little more than a month ago details, the wage and salary increases that have occurred since 2000 have not been sufficient to even maintain the level of income that most families enjoyed at the beginning of this decade.”

Instead of growing real incomes, we saw a growth in both the quantity of indebtedness and in the sophistication — or, at least, we were told it was sophistication — of the credit instruments that people were able to avail themselves of to maintain the levels of consumption they wanted. As long as it lasted that seemed to be not ideal, but still fairly beneficial. Being able to go into debt at appropriate moments is, after all, a pretty useful thing. And part of what it means to have a viable modern economy is to have sophisticated instruments for managing credit and risk. But it now turns out that a lot of that risk was mis-assessed and there are a lot of debts that can’t be paid.

That specific set of issues needs to be unwound with minimal collateral damage, of course, but what’s really needed is a return to more robust form prosperity — to a world in which growth in output is shared by a wider set of people and household consumption isn’t so dependent on debt-innovation that political authorities feel compelled to let everyone push the envelop lest the party end.