“Bread crumbs”(perhaps how you got here)

I quote (with great approval and applause) a letter from Kyle Hutzler of Huntingtown, Maryland. This letter appeared in the New Yorker of February 8th, 2010:

John Cassidy astutely cites the economist Raghuram Rajan’s research on the cause of the financial crisis, which posits that stagnant wages were a key factor in creating the credit bubble (“After the Blowup,” January 11th). The question is: What is the source of those stagnant wages? Could it be that unaffordable health care is the ultimate cause of the recession? In the past three decades, consumers have taken on vast amounts of debt in an attempt to maintain their standard of living amid flat real wages. Rising health-care expenditures have undeniably absorbed a large chunk of the wage increases owed to workers. Facilitated by financial innovation, consumers responded to crimped wages by monetizing their assets in forms of debt such as home-equity loans. Now that the asset boom has burst, consumers face an extraordinary debt burden that will inhibit robust economic growth for some time. It’s worth wondering whether, if health-care costs had been contained, thereby boosting wages, we would have seen the credit boom that we did. Perhaps we have stumbled upon the best case yet for health-care reform.

Had he the space, perhaps Mr. Hutzler would have gone on to point out that the net effect of much of economic history since the days of Ronald Reagan has been to transfer wealth (particularly newly created wealth) from the middle class to two groups: producers of health care and speculators.

In other words, wealth has flowed from a larger group (the American middle class) to smaller groups. Such a flow inherently means that what is done with that wealth becomes less predictable - imagine pouring a fluid from a large, shallow bowl to a much smaller container, perhaps one that is tall and rests upon a narrow base. It is easy to understand that the newly transferred fluid is in a more precarious situation.

It is not quite true that the modern economy is a “zero-sum game;” there is some creation of new wealth, but the great bulk of economic activity consists mainly of shuffling wealth around. Thanks to modern telecommunications, this shuffling can occur very rapidly and with little visibility. This ability to move vast sums quickly was illustrated in the Enron case, when (in the last few days of the company’s existence prior to bankruptcy) several billion dollars were moved offshore (see Enron crimes get scant punishment, Enron Offshore, Enron, Like Al Qaeda, Hid Money Offshore, etc.). In the long run (and I mean, very long-run, as in several centuries at least), the economy is, by definition, a zero-sum game; sometimes this is even true in the short run, particularly with an abundance of transactions at near-zero costs.

Most important, however, in thinking about Mr. Hutzler’s letter is this: cultural factors completely dominated the consumer-debt “boom.” American (and many other) consumers are subjected to daily bombardment by advertising of many kinds. The net effect of this swamp of advertising is to convince people that they must keep up their consumption of goods and services, even if they have to borrow to do it. And, to no one’s great surprise, consumers did exactly that, particularly after 2000. When the exaltation of greed is combined with stagnant wages, one gets exactly what happened.

It is frightening that nothing has been done about this. There has been, for the last roughly fourteen months, some increased saving by American consumers, but the level is not nearly enough to stabilize the economy - and hardly anyone even wants the economy stabilized. Corporate executives and individuals are still rewarded largely on the basis of short-term behavior; I cannot cite a single instance of a corporation that evaluates its personnel on the basis of reasonably-expected long-term impacts of their actions (by long-term I mean at least a generation).

Some “Christian” commentators believe we have nothing to worry about. The World is going to end soon, so why not live it up now?

These commentators, demented though they obviously are, may get their wish. Even with the pathetically weak reforms in the American economy that started in the last few months of the administration of George W. Bush, the economy clearly continues to slide very rapidly towards disaster. Hutzler’s letter merely points out that the current Republican drive to maintain the existing system of wealth transfers (called “health care”) practically guarantees the end of the economic world that we know today.

 All text on this page is the work of J W Durham and is licensed only under terms of the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. Other licensing terms may be available. E-mail me