A picture of a neighborhood

I have a question of Alec, too, which is at the end of this post.
Alec writes:
"The question that underlies this crisis, why have Americans needed to go into so much debt just to have the most modest of American dreams? Why has out economy had to dole out credit like candy just to keep our economic engine running?"

My opinion (and it's not an expert or even informed opinion) is that debt is the basis of capitalism. Entrepreneurs go into debt to create new business enterprises (which create new jobs, the economic backbone of communities, etc.) They risk other people's money; people give them the money because they hope that the risk will pay off and they'll participate in the profits.

That's the entrepreneurs, the private sector. What about the little guys, the guys who aren't entrepreneurs or lenders or investors? In my opinion, debt makes them "go", too. The American dream (in the economic sense) is to own your own home, property, have enough funds so that you won't lose everything if some member of the family gets very sick, have enough personal wealth to retire someday with reasonable retirement income, and to raise your kids and educate them so that they can lead an independent economic life of their own (at very least, as good as yours; hopefully better.)

Personal independence in the USA is related to the amount of capital you have. If you don't have sufficient capital, you will slave away for the boss, the customer or the bank--until you do have enough capital to blow them all off.

For the little guys--most Americans--there's a paradox. Raising enough capital to do all the things listed above--involves taking on debt. If you are planning to start your own business and don't already have the money--you take on debt to get it. If you plan to keep the business you started when times get tough, you take on debt. If you live via selling your labor (as most people do), it will be very hard for you to get wealthy unless you take on debt in the form of a mortgage. The hope there is that you will pay off that debt and get a big lump sum of capital to retire on or invest wisely. (You could exception--you might be a thrifty and smart investor who never took on any debt in his life, but there are notoriously few people like that.)

Not only do you need to take on debt to make money and amass capital: if you're not already wealthy you need to take on debt to live what is vaguely referred to as "a middle class lifestyle." If you want to live in a nice home and have nice clothes for your kids and nice things around your house and go on a nice vacation now and then--indeed, if you want to keep the house itself "nice" and in proper repair--you will probably have to take on debt.

The reason I believe this is because I do not see most people "living within their means," as previous generations of Americans were taught they must do. Indeed, I don't think people are being encouraged to "live within their present means," and that if most Americans did that, there would be a kind of depression. We watch the shopping seasons eagerly, hoping that Americans are purchasing "more stuff," and not "living within their means."

The generation before WWII were taught that they should live within their means, and they did: and they lived remarkably poorly, compared to us. Many of them died without owning their own homes or farms, because no one would give them credit, no one would accept their debt.

That's because, at the beginning of the twentieth century, most of the people in the country were not owners: they were working as some form of domestic servant (hired hands on farms, ranches, people working in households, helpers in tiny mom-and-pop stores, etc.) No, I'm not making that up. That's the research of respected economist and management expert Peter Drucker. It doesn't match up to the image of the past that we get from Hollywood movies, but that's the way it was.

There was a post war boom, and after that, credit was king. The government would get you loans, to get you into a house. People whose parents had been very poor and used to living within their means got used to taking on debt, and despite all the moralizing about "living within your means"--they did well and could pay off their debt and their mortgages. That was because America controlled most of the world's markets and manufacturing after the collapse of the other developed nations via WWII. There wasn't much globalization--if you wanted a car or food, you bought it from America. Unions kept wages high in many places because most manufacturers didn't have the option of moving the factory abroad (now they do.)

So people were trained to take on the debt, and were able to pay it off with wages earned from an ever-growing economy.

So the reason we have debt now is: we were raised that way; most of our parents grew up that way. The system failures we see now will hurt A) because unless government intervenes dramatically there won't be as much credit as is necessary to lend to the businesses and the wage-earners and B) because the wages don't match the level needed to 1) keep up with the debt we were taught to take on and 2) keep up with the expenses of living a middle class lifestyle at least as good as our parent.

That's what I think, anyway. Now here's my question for Alec:
Where the hell did you get that map? Where can I get one, to depict foreclosures in the Sixth District (on Dump Bachmann?)

I will send you a list of instructions for looking up homes. The 6th is a big place though. I agree that debt is totally necessary, but you should not have to have crippling debt just to have the basics of home and health. Hell, my grandpa, of the greatest generation, got his multiple hundred acre farm for a 2% loan as part of the GI Bill. That was called taking care of the middle class and good for the country. So yeah, debt makes capitalism fluid, but crippling debt is not. My wife has a masters degree and I am half way to a masters. We own a small, 1600 sq ft house in an under desired neighborhood, a ten year old car and a new car. We have never taken a family vacation. We live below our means and still it is month to month. Anyway, if people did not live beyond their means, this economy would halt because people's "means" have been disintegrated.

Did you know for the last 7 year business cycle the average American worker actually lost in real wages? They make less today than 7 years ago!

Anyway, I am rambling. I let you know about the map.

Alec

Justice will only exist where those not affected by injustice are filled with the same amount of indignation as those offended.

Thanks for the map instructions, and the warnings about the bigness of the Sixth.

Look, I ramble, too. Yeah, I do know that the American worker has been losing in terms of real wages. I did know that, about the loss in real wages during the business cycle.

I also know that it was possible, during the nineteen sixties, for my father to raise a family of four children and lead a middle class lifestyle--on one salary. After the seventies, that became untrue. The economic geology had already begun shifting from that of the years immediately following the post-war. So it's about the drop in real wages and earning power and the "paying back" power of the working class--

--but capitalism is also about debt and credit and the government making sure that these are available to enough people, enough consumers. If not--no capitalism. If the credit is short and limited in availability--no general prosperity, just prosperity limited to an elite.

From your family story, you make it sound like one basis of your family's wealth during your mom and dad's day was: a government *loan.* That's a Keynesian measure that reflects the belief in the need for widely available credit and manageable debt that are the beginnings of general prosperity (because the loans give the means to people to create enterprises and spend.)

I have no doubt that there's been a change, a terrific change. But the one result that cannot be allowed to happen by any American government, no matter what party, is: the drying up of credit and the opportunities to go into debt to invest into one's own future. If that happens, that's an end to the American middle class, and we return to days before 1900: the ultra-wealthy and the very poor working people.

And I'm not that worried about that happening. The American middle class will stand for a lot of crap from their government, but they will not stand for their kids leading a worse economic life than they did, facing worse economic prospects. They'd lynch a government that allowed that result. When you see cable television go out of business because no one can afford to pay the monthly bills to keep it on: you'll know that the revolution is near.

But that ain't gonna happen. They're not going to let the "capitalism means debt" pattern go away, there's too much money tied up in it.

It is good to be reminded that the world is not so black and white, filled with talking points. I am a Keynesian through and through I hope, and yeah, debt is part of that. I just hope our Friedman-esque Chicago school of economics is dead. Anyway, good discussion.
Take care,
Alec

Justice will only exist where those not affected by injustice are filled with the same amount of indignation as those offended.