Gain For All the Pain

It’s easy to forget that the economic and financial suffering of the American people did not begin with the Great Recession, and won’t end when the jobs everyone is craving return and unemployment drops to more acceptable levels. What was happening even before 2008 was a middle-class solvency crisis that happened to coincide with demographic trends which exposed many millions of Americans to the supposedly outdated threat of poverty in old age. And that threat is not going to subside when the economy superficially recovers.

This underlying reality, and what policymakers can do about it, is the subject of the Washington Monthly‘s July/August cover package. As Paul Glastris and Phillip Longman say in their introductory essay:

[I]t’s worth remembering that before the crash we had nearly full employment, and yet it had already become clear that the American Dream was fading for most Americans. Indeed, the middle class was drifting into insolvency. Through a combination of stagnant wages, indebtedness to often predatory lenders, and the rising cost of middle-class staples such as health care and energy, the average family’s personal balance sheet—assets minus liabilities—was turning red. Household debt soared from 77 percent of disposable income in 1990 to 127 percent in 2007. During the same interval, the personal savings rate dropped from 7 percent of disposable income to near zero.

By 2007, the average consumer was so tapped out that even many people with jobs were no longer able to make their mortgage payments. That was the spark that set off the financial crisis. The ensuing recession further ravaged family balance sheets. The Federal Reserve made front-page news in June when it reported that median family net wealth had decreased by nearly 40 percent from 2007 to 2010, with younger families being particularly hard hit.

In many respects, the financial crisis was a symptom as much as a cause of the gradual destruction of what politicians like to call “the American dream.” Moreover, the robber-baron behavior of big banks that held the economy and the political system hostage when the crisis broke out was simply one toxic feature of an orgy of predatory lending practices that had already ravaged middle-class solvency even when jobs were plentiful.

Unfortunately, the jobs-centered “debate” that is supposedly the main topic of the 2012 elections isn’t much focused on the economic crisis that will persist when the Great Recession finally ends. And while it definitely matters which perspective on job-creation prevails in November, the task of rebuilding middle-class financial security and economic opportunity will have just begun:

[W]hatever we might do to stimulate the economy—through direct federal spending, as Democrats want, or tax cuts, as Republicans demand—won’t be enough to put us back on a path to healthy growth. We’ll also need policies that specifically and directly help ordinary Americans both to avoid ruinous debt and to accumulate productive assets.

On the debt side, what’s needed is a regulatory crackdown on abusive lending so strong that consumer finance firms either change their predatory business models or go out of business. That, in theory, is the mission of the Consumer Financial Protection Bureau, the new watchdog agency created by the Dodd-Frank financial reform law. The question is whether the agency will be allowed to do its job, or will get strangled in its crib.

On the assets side, we argue for two kinds of policies. The first would better enable Americans to save and build wealth, like a new mandatory retirement savings plan to ensure that young people today have the assets they need to avoid poverty in old age. The second would allow people to reap higher returns on assets they already have—for instance, by letting homeowners produce and sell green energy from solar panels on their roofs….

Every year, the American tax code directs half a trillion dollars to subsidize savings and homeownership, via things like the mortgage interest deduction and preferential rates for capital gains. Some 80 percent of these tax expenditures goes to the richest 20 percent of Americans—precisely the people who need the least help saving. Redirecting a portion of this windfall to help people of modest means save and acquire assets could transform the economy as profoundly as the policies that nurtured household savings during World War II. With the entire tax code likely to be on the table shortly after the next presidential election, the political opportunity to correct this major and egregious cause of economic stagnation and diminishing opportunity in American life has not been greater in generations.

Whether or not the prescriptions offered in the Monthly‘s cover package are the right solutions, we believe greater recognition of the fundamental problems they address is long overdue. As the New Deal illustrated, bad economic times can produce the conditions for public policies that make enduring contributions to national well-being. It’s time for another burst of policy innovation aimed at restoring what Americans used to consider their birthright.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.