Is the Game About to Stop?

The probability of another great depression is no higher than 20 percent, but that's too high for comfort. American consumers don't have the buying power they need to absorb the goods and services the U.S. economy is capable of producing. This is likely to mean fewer jobs, which will force Americans to pull in their belts even tighter, leading to still fewer jobs -- the classic recipe for recession. That recession may turn into a full-fledged depression if fiscal and monetary policies can't make up for consumers' lack of buying power. There's reason to worry they cannot because consumers are in a permanent bind. They're deep in debt, their homes are losing value, their paychecks are shrinking.

Under these circumstances, the usual remedies won't work. Tax breaks for businesses won't generate more investment in factories or equipment because demand for their products is dropping. Temporary fixes that give households a one-time cash infusion won't get consumers back to the malls because they know the assistance is temporary and their problems are permanent. They're likely to pocket the extra money instead of spending it. Additional rate cuts by the Federal Reserve Board might give consumers access to somewhat cheaper loans, but there's no going back to the easy money of a few years ago. The values of houses and other major assets are dropping faster than interest rates can be lowered. Growing numbers of home-owners owe more on their mortgages than their homes are now worth.

We're reaping the whirlwind of three decades during which Americans have spent beyond their means and most of the benefits of an expanding economy have gone to a small group at the very top. The nation's median hourly wage is barely higher than it was 35 years ago. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. The rich can't keep the economy going because they devote a smaller percentage of their earnings to buying things than the rest of us: They already have most of what they want. Instead of buying, they're more likely to invest their earnings wherever around the world they can get the highest return.

Some say well and good. They think our consumer society is unsustainable. They argue Americans should learn to accept a lower standard of living and American business must adjust to a smaller domestic economy. This argument leaves out one salient fact: The nation has enough productive capacity to provide a higher standard of living for its citizens and also be sustainable. With the right incentives, we could reduce energy use and carbon emissions while continuing to grow at a rate that provides most people with good jobs at good wages. The problem isn't economic growth per se. It's unbalanced growth -- too much consumption of goods and services that utilize too much energy and generate too much carbon into the atmosphere. Balanced growth is surely possible. But if the economy heads into a severe recession or depression, there's almost no way to achieve more balance. Hard-pressed Americans will be unwilling to sacrifice anything.

The debate over widening economic inequality in America usually pits fairness against growth. But the reality we're now facing poses a different question: Can we have any growth at all when income and wealth are so unequal that most Americans can no longer buy what they produce? The answer can be found in the memoirs of Marriner S. Eccles, Franklin D. Roosevelt's chairman of the Federal Reserve from 1934 to 1948, who offered his view on what caused the Great Depression (from Beckoning Frontiers, 1951):

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Is the game about to stop again?

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