Sunday, December 05, 2004

It's everybody's fault, but...

link might be time to ask if American consumers are entirely responsible for all their out-of-control spending. After all, the United States economy depends on its citizens' penchant for spending with abandon. Consumer spending accounts for two-thirds of the nation's $11 trillion economy, and the machinery of American advertising, marketing, media and finance all encourage the consumption habit. Many consumers are unable to resist the overpowering mantra: spend, spend, spend...

"The American consumer has been pulling the United States economy and the global economy for years," noted David Wyss, chief economist of Standard & Poor's, a financial research firm.

But all that heroic pulling comes at a price. The outlook for consumer-driven growth, economists say, is in doubt, given the low savings rates and high debt levels of many American families. The Commerce Department reported last week that the personal savings rate fell near to a record low in October, when American households saved a meager two-tenths of 1 percent of their disposable income. The rate implies that a family with take-home pay of $40,000 saves on average $1.50 a week.

The average American household now spends 13 percent of its after-tax income to pay debts, the highest percentage since 1986. Much of it goes to pay home mortgages and car loans, but the average American household is also carrying more than $8,000 in credit card debt. Every 15 seconds, someone in the United States goes bankrupt, five times the rate in 1980, noted Elizabeth Warren, a Harvard Law School professor who is an expert on bankruptcy...

Another school of thought blames not the consumers, but the rising costs of necessities like education and housing. The debt of American consumers is worrying, but the problem is not impulse buying of luxury goods, said Professor Warren.

Today's middle-class families with two working parents, she said, have far less financial leeway than a single-income middle-class family of 30 years ago. What Ms. Warren classifies as "fixed costs" - mortgage, child care, health insurance, car and taxes - take up 75 percent of the income of today's two-income family. By contrast, the those costs represented about half of a middle-class family's income in the early 1970's.

Given that Americans' real income has been declining, and given the fact that their assets are mostly in real estate nowadays, one way to alleviate the issue is basically for people to agitate for a monetary and economic policy that's devoted to expanding the middle class, rather than raping it.

Of course, to many folks, that smacks of socialism, but when you look at the tax rates from, say, 1969 (start your own research here), if those taxes were indexed to inflation and adjusted for today's incomes (that is, e.g., the median income now is taxed at the same percentage as the median income then), most of us would get a tax cut, and of course the budget would be brought much closer to balance, if not in balance.

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