Inequality and the Coming Downturn

Economic events this week merit my switching gears this morning and putting my economics reporter hat back on . . .

Retail sales are falling, but the stock market remains ebullient. A weakening dollar reduces the trade deficit, while the projected federal budget deficit shrinks to less than $100 billion. Unemployment is at a six-year low, but income inequality is approaching levels not seen since the eve of the Great Depression.

Indeed, while income has increased smartly for the top 1 percent of the population, the bottom 50 percent has actually seen its real income decline slightly in this decade, according to the latest figures from the Internal Revenue Service reported in both today's New York Times and Wall Street Journal. The Times analysis suggests that 95 percent of folks saw their incomes decline between 2000 and 2005, but only the Bush administration's paltry tax breaks for those in the middle brackets (most of its benefits went to the very rich) kept far more people from losing ground.

Every one of these signs points to a business cycle peak. Stocks are always highest, unemployment lowest and budget deficits smallest just before the fall. Maldistribution of income and higher import prices fed by the weak dollars helps explain declining retail sales (the concommitant uptick in exports for the shrunken manufacturing sector no longer offsets the decline, if it ever did). The mortgage crisis is also eroding demand.

Income is the lifeblood of an economy. When too much goes to the head, it has a stroke.

Meanwhile, the Republican candidates at their debate this week blindly dismissed the struggles of the lower and lower middle classes. So did the president with his veto of S-CHIP, and the right-wing echo chamber with its assault on a 12-year-old child from a struggling middle class family that dared to take advantage of the government program.

The next economic downturn will reveal all these factions for what they are: cranks on the fringe. I just completed reading "The Big Con" by The New Republic writer Jonathan Chait. He dissects how the media's failure to take ideas and policies seriously allowed supply-side economics, which offered the panacea of tax cuts in every season, to achieve political legitimacy. We're about to learn again how wrong those people are, at great pain and cost to the bottom half of the American population.

Posted by gooznews at October 12, 2007 08:18 AM