Tuesday, November 23, 2010

Inequality, housing costs and resetting the economy

Previously published on the Broad Oak Blog:

Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

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Sobers said...

My first reaction on seeing that graph was that I wondered how much of the growth in the standard of living (and of GDP) was down to increasing debt. And that leads me to wonder what the true standard of living that this nation can afford really is.

My guess is that one way or another, when this current crisis is finally worked through, people will have to go back to what was considered the norm in the 1970s. Secondhand clothes, handmedowns, repairing stuff that broke, only replacing stuff when its totally worn out, buying a house when you're in your 30s and have saved a deposit. Because thats all they could afford.

My feeling is that what we have now is not sustainable. We are not that wealthy a country that 20 somethings can walk out of uni into jobs that afford them to buy new cars, houses, and all the goods to go into them.

We have spent 25 years pulling forward demand from the future. We can't do that again for another 25 years. Something has to give.

Sackerson said...

Reckon you're right, Sobers.