Guest blogger: Stan Sorscher, Seattle, WA

Part 1 | Part 2 | Part 3

Inequality

We should look at one other consequence of these policies. Trickle-down economics works very well for the top segments of our population. See Figure 5. Every economic policy will have winners and losers. Economists say that the winners could compensate the losers. Voluntarily.

In real life, winners don’t compensate losers voluntarily. Under our current policies, the top 5% are keeping their winnings, and our society experiences growing income inequality and even greater wealth inequality.

Consumption

Pundits like to say our economy is based on consumption. That sounds obvious, but China’s economy, for instance is based on production, savings and export. Japan and Germany have more balanced economies, with consumption playing a large role. In the US, savings had dropped off the chart, literally, and production of goods has dropped to just over 10% of GDP.

To pay for our consumption, we’ve spent our earnings, plus around a trillion dollars per year in home equity withdrawals. In doing so, we consumed about another trillion dollars that we would have been saved under normal conditions.

If our banking problem were solved tomorrow, we would still have a shortfall of about $2 trillion per year in income available for consumption, relative to where our standard of living was in 2006.

Stimulus package

Federal spending will add about a trillion dollars to the economy. That should stop the economic decline and we hope it will restore economic growth. However, with the home equity cash machine closed, and with households saving again to prepare for retirement, we will have a huge shortfall in income to devote to consumption.

How do we treat workers going forward?

For over 30 years, our policies were designed to make us “competitive.” In plain English, that means “profitable.” Time after time, workers sacrificed their interests to make business competitive (profitable). In exchange, workers accepted a promise: the market’s invisible hand would take care of workers. Well, the invisible hand did not take care of workers. Instead, we lost three or four decades of real income growth.

Henry Ford is often credited with the insight that workers needed income to buy his products. He raised wages to set a prevailing wage that other employers would need to match. Policies in place encouraged rising wages, rising productivity and rising standard of living.

Our policies since the 80’s have led to stagnating wages, households responded by stretching resources to maintain standard of living. We dismantled the social safety net, and we pushed additional financial risks onto families.

The urge to be “competitive,” or rather profitable, has eroded our ability to sustain consumption and maintain our standard of living. From this point forward, workers must share in the economic benefits of our policies.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of the Economic Opportunity Institute.