Used to put the paycheck in the bank, now we get it there

Kevin Leicht is guest-blogging at Credit Slips this week, and he starts off with an excellent post that discusses the way in which our economy has moved from one in which people consumed based on what they were paid, lowering their risk over time, to one in which consumption is based on debt. He concludes:

More importantly, Henry Ford’s original idea (that workers should be treated well in part because they spend money as a consumer outside the office door) was discarded as a quaint old-fashioned notion. “Let the other guy treat people well, I can’t afford it” seemed to be the individual response of employers around the country and, for a long time anyway, Wall Street loved it. In the business section of the newspaper major downsizing on the front page was accompanied by major jumps in stock prices on the back page.

Over the long term this exposed a classic public goods problem – U.S. consumer purchasing power is something everyone has an interest in but no one has any concrete incentive to contribute to themselves. There are so many alternatives to paying people a decent wage that virtually any alternative is more acceptable than paying people more money or even paying people what they’re worth.

Is this sustainable?? It is difficult to see how. After all, if someone told you that we were going to base the largest developed economy in the world on (a) treating the mass of employees badly, (b) producing many products and services that are consumed offshore and then (c) loaning these same employees money to buy the basic goods and services to keep the entire economy afloat, I would say that someone just walked off a postbellum Southern plantation to sell us on the virtues of sharecropping(!) .

The current economic downturn gives us an opportunity to think hard about this entire I-borrow-because-I-can’t-get-a-decent-wage system. Simply restoring the ability of banks to loan money is not enough. Instead, the actual real earnings-based purchasing power of the American consumer must be restored. This is a much tougher task. Loaning people money is not a perfect substitute for paying them, but it is the easy way out. It produces real differences in political and economic power that can’t be ignored. It also isn’t economically sustainable.

Nothing to add, except to point out that we have structural problems which will prevent the recovery, when it comes, from being a return to what it was before. Robert Reich sees this, in a post from last week:

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin.

There are those of us who have been arguing this for some time, that the rules and the landscape have changed, and we had better start preparing ourselves for reduced opportunity and circumstances. We could do that through intelligent planning, through a recognition that the old rules don't apply any more, but I'm pretty sure we won't do that.