the problem of middle-class spending power: a few comments

The last five years we have witnessed a historic de-leveraging in the private sector. This process was part of a large economic contraction overall. The collective response was (a) creative and explosive monetary expansion combined with (b) politicized fiscal standoff. The problem and the response have led to unprecedented amounts of money held by banks and other corporations, lower rates of money velocity (see image below), and a significant drop in the employment rate. The problem isn’t a lack of money; interest rates are incredibly low. The problem is too little money is being spent or invested. The average dollar is making fewer further dollars.

The credit-fueled economy faces a liquidity trap, a condition demonstrable in the data and well known to even remotely careful readers of Krugman and DeLong. To spur spending and make real headway on the employment problem, economic actors need confidence in the return of inflation (which Fed policy recognizes) and also confidence in the stability and growth of household incomes (which Fed policy doesn’t seem to recognize). The current crisis, evidenced by the lower rate of money velocity, is a middle-class consumer problem. Too many households and businesses are unable or unwilling to spend, given the circumstances. Circumstances like: one fewer family-member employed; an aspiring and costly new college-student; an unforeseen medical cost; a drop in hours; a rise in energy prices; reduced access to credit; higher insurance costs; etc.

Things do seem to be picking up. The conditions for growth may well be ripe. But we ought to seek first and foremost a rise in middle-class incomes, to the point there is a socialized trust that spending is safe, right, and good again. Confidence comes when there is reason to be confident. There need to be reasons for people to want to depart with money. Above all, they have to think and trust more money will soon replace what was just spent. Higher incomes; greater access to credit; targeted government spending. The problem is unemployment; the answer, greater money velocity; the tool: must be a fiscal intervention into the labor market.


This entry was posted in 2007-2012, an actually thriving labor market, debt, money and finance, money velocity, politics, prices, the great contraction, the great contraction 2007-2012. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s