The Real Economic Drag

Broadcast April 12, 2001


The biggest drag on this economy -- easily two-thirds of the current slowdown -- comes from the huge drop in business investment. I mean, we re talking about Niagara Falls here. The first quarter last year, business spending was rocketing at an annual rate of more than 20 percent over the year before. By the end of last year, almost nothing.


Okay, so why is American business so bearish? American companies invested like mad in the 1990s, expecting that American consumers would follow right along and buy everything that was being produced. But last year American consumers reached their limit. They re deep in debt and can t go deeper.


The dirty little secret of the Roaring Nineties is that median family income -- the take-home pay of the middle of the middle class -- didn t rise very much. It went from around $55,000 in 1990 to around $60,000 last year, adjusted for inflation. Most of the Nineties Boom went to families at or near the top.


But wealthy families don t consume at nearly the rate of middle-class families. Wealthy families save most of what they earn. America s big middle class -- the giant engine that s supposed to buy all the stuff that businesses produce -- just didn t accumulate nearly the purchasing power to justify all the new investments business was making.


So it wasn t the bursting of the dot-com bubble that caused this, folks. It wasn t excessive speculation on Wall Street. It wasn t just Alan Greenspan putting on the breaks too hard.


The real reason for this downturn is far more mundane. Businesses need consumers. Consumers can only take on so much debt before they have to depend on their incomes. And middle-class American incomes haven t been anything to write home about. The great danger here is that, as unemployment rises, middle incomes stagnate or even start to drop -- meaning fewer buyers for what businesses produce, and even less business investment.


Yes, of course, Alan Greenspan, you ought to cut interest rates further, and do it soon. This may spur the economy but let s not fool ourselves. It won t cure the underlying problem. Nor, I should add, will a tax cut going mostly to the top. No: The only way to get businesses back in gear will be to boost the incomes of average working families. And that s no easy thing to do.

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