Post-Meltdown Mythologies (I): Americans Have Been Living Beyond Their Means

What brought on the economic meltdown of 2008? Besides the bursting of the housing bubble, Wall Street’s malfeasance and non-feasance, and Washington’s massive failure to oversee Wall Street, fingers are also being pointed at average Americans. Some of them took on mortgages they couldn’t afford, of course, but we’re also hearing a more basic theme that goes something like this: For too long, Americans have been living beyond our means. We went too deeply into debt. And now we’re paying the inevitable price.

The “living beyond our means” argument, with its thinly-veiled suggestion of moral terpitude, is technically correct. Over the last fifteen years, average household debt has soared to record levels, and the typical American family has taken on more of debt than it can safely manage. That became crystal clear when the housing bubble burst and home prices fell, eliminating easy home equity loans and refinancings.

But this story leaves out one very important fact. Since the year 2000, median family income has been dropping, adjusted for inflation. One of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.

It’s not as if the typical family suddenly went on a spending binge — buying yachts and fancy cars and taking ocean cruises. No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it’s more accurate to view it as an ongoing struggle to stay afloat when the boat’s sinking.

The “living beyond our means” argument suggests that the answer over the long term is for American families to become more responsible and not spend more than they earn. Well, that may be necessary but it’s hardly sufficient.

The real answer over the long term is to restore middle-class earnings so families don’t have to go deep into debt to maintain what was a middle-class standard of living. And that requires, among other things, affordable health insurance, tax credits for college tuition, good schools, and an energy policy that’s less dependent on oil, the price of which is going to continue to rise as demand soars in China, India, and elsewhere.

In other words, the way to make sure Americans don’t live beyond their means is to give them back the means.


Originally published at Robert Reich’s Blog on Oct 14, 2008 and reproduced here with the author’s permission.

13 Responses to "Post-Meltdown Mythologies (I): Americans Have Been Living Beyond Their Means"

  1. Anonymous   October 19, 2008 at 3:01 pm

    wow, a wholly useless analysis in the vein of “to win the race, just run faster”, combined with petty bitterness over being rightly criticized. Is the author wholeheartedly suggesting that all the SUVs and all the new housing construction boom of the recent years was just an attempt “to maintain [..] living standards”?Time to accept the criticisms, give up the unnecessary 900sq ft per person of living space, start riding the bike to work and maybe in 10 years the middle class will have some income increases. In the meantime, it’s ramen for everybody.

    • Guest   October 24, 2008 at 10:57 am

      I agree with some of what you have said. Moving the family into a McMansion is hardly maintaining the status quo. And let’s not forget all the BMW’s, Mercedes, and Lexuses clogging the roadways alongside the SUV’s.

  2. Anonymous   October 19, 2008 at 3:36 pm

    Mr. Reich is correct. We are going to enter a period of reform, like in the Teddy Roosevelt days. The masters of the universe will no longer be able to get away with whatever they want.While there are always irresponsible people, societies on the whole do not go massive in debt unless their standards of living are falling and bankers are throwing money at them.It is time for a new direction. This does not mean Smoot-Haley and a depression, but a new way that does not hollow out a country in the name of economic orthodoxy.

    • Guest   October 19, 2008 at 5:46 pm

      Socialism by any other name – it will be an interesting experiment for America – hopefully the unpleasantries associated with some socialist regimes of the past will not accompany it- I fear, however that will not be the case – let the witch hunts begin –

  3. Anonymous   October 19, 2008 at 9:16 pm

    the word is “turpitude”, from “turpid”, not “terpid”…

  4. Bill Chiocchi   October 20, 2008 at 1:18 am

    What has happened in the U.S. is unrestrained excess in all areas – consumption, politically and militarily. W’eve consumed far more than we have produced and our leaders have behaved with a monopoly like arrogance that is beyond belief. One of the largest and longest lived “empires” in history suffered similar problems – Rome. Rome produced nearly nothing but consumed immense amounts. Most things were imported and nearly a third of the population was free labor – slaves. The parallel – Rome’s economy was based on conquering and pillage. The coffers get low annex new lands and send the spoils of war (and later taxes) back home – point-of-the-sword financing if you will. In the U.S. we borrow money from whomever will give it to us (paper’s better than a sword). It would be interesting to see what this great country would look like if we were somehow able to back out the impact of the $10 trillion in debt we currently owe. Smaller houses, fewer cars and probably a whole lot less stuff – consumer and militarily. Although I am optimistic and believe our country is resilient, there are lessons being learned that I hope stay with us.

  5. Guest   October 20, 2008 at 10:27 am

    The American have also seen jobs go abroad thanks to NAFTA and globalization. The American have had disincentives to save with meager interest income rates. The American people have heard their government officials say go out and shop. The American people received credit cards after filing bankruptcy. The American people have been bombarded by advertisement to the point of brainwashing. The American people have seen the economy become 70% dependant on their consumption.The American people have been EXPLOITED AND MANIPULATED

  6. John Slater   October 20, 2008 at 11:58 am

    Prof. Reich should know better than this. He served in the most fiscally sound administration in recent history, one which both raised taxes and cut spending. During the period the U. S. witnessed an explosion of capital creation at a level rarely seen in history and at the same time a rapid growth in real personal income.To claim that a country that has been funding an era of prolifigate consumer and government spending with a national accounts deficit exceeding 5% of GDP is doing anything other than spending beyond its means is incredulous.It’s hard to imagine any satisfactory long term solution that doesn’t entail a return to pay as you go financing both in government and in the national accounts. This will entail some pain, but not an insufferable amount. 5% sounds like a lot, but its only two or three years of productivity improvement at recent rates.If Prof. Reich meant to say that the pain should be placed only on one part of the economy (i.e. the owners of capital) through income redistribution, he has every right to make that case, but the issue should be faced squarely. This is not about moral turpitude, it’s about practical economics and if we can’t get the debate back to reality, the prospects for solution are bleak indeed.

  7. Guest   October 24, 2008 at 11:48 am

    Prof. Reich is so out of touch with pop bling bling culture that he can’t see the rotting forest for his own political trees.When income stagnates, the prudent reign in spending. The prudent save for a rainy day, even if it means forgoing luxuries like massive new SUVs, conspicous vacations, and in-your-face consumption. It’s easy to find widow and orphan stories, but at street level it is very obvious to most level-headed Americans that their fellow citizens were on a conspicuous spending binge.

  8. Guest   October 24, 2008 at 12:16 pm

    If any one actually believes that middle class incomes have not decreased over the last 10-15 years, then THEY are out of touch, or are simply not part of the middle class.I ask you this: How is it possible that a two income family has to struggle to pay their bills; taxes from increased faux-appreciation, car loans to just get to work, school loans from ridiculuos college tuitions, not to mention raised insurance premiums that actually get one less. Bash the SUVs, bash the crazy spending and borrowing, but Mr. Reich is dead-on about the fact that incomes have been squeezed out of those that ironically pay the lion’s share of this country’s taxes.

  9. Anonymous   October 24, 2008 at 3:05 pm

    While I will grant you that things like energy, education and medical care have increased in cost at a pace much higher than inflation-adjusted wage growth, one need only look around at one’s neighbors to see that this is all managable with a sensible approach to spending and saving. We, as a nation, earn at among the highest rates on the planet, but we save at among the lowest. Yet we all feel entitled to a three car garage housing at least one BMW, Lexus, Mercedes, Acura, etc., attached to a 3000+ SF home, with a main floor office, palatial master suite, replete with jetted tub and steam shower and dual walk-in closets, etc., and annual family ski and/or tropical vacations. I’m guilty of it, myself — when I see one of my colleagues driving a Toyota or Honda, I’m generally surprised, and I tend to ask myself what’s wrong. However, having just recently been divorced, I have been able to step away from the necessity of keeping up with the Joneses, and I am now living much more reasonably. It’s liberating, I must say. Just need to ditch the big house in the suburbs, now . . .

  10. Guest   October 24, 2008 at 7:36 pm

    No, Mr. Reich, the middle class is as implicated in the race to materialism as are the super-rich whose greed, immorality and lack of prudence helped create the current mess in the first place. The middle class took on debt not to pay the monthly grocery bills or to buy a modest house but to expand the living space in what may have been a modest house when purchased, to purchase a house that stretched the family finances, take on the outward trappings of wealth (i.e., lease the Mercedes, the Lexus, etc.), or to buy a mega-HDTV. THEY WANTED TO BE RICH TOO!Reich and other well-meaning liberal types need to get out into middle-class America once in a while so they actually have a sense of what’s taking place on the ground.At heart, this crisis is all about American materialism and individualism run amok, and it has been building to a crescendo ever since the baby boomers came of age. It is not just about poorly constructed securities and balance sheets but about the flow of history.Yet, here we stand, with tweedle-dee-tweedle-dum political parties, bereft of real leadership, both implicated in this mess, too dumb, lazy or frightened to challenge mainstream America to be better than it is, and too beholden for campaign contributions to financial billionaires and corporate lobbyists to demand a new and more responsible social contract with corporate America.I lived the B.S. in corporate America and have seen the inner-workings of government for five years, and as bizarre and corrupt as life is in corporate America the incompetence and petty corruption one sees in government is even worse. If you think these egotistical peacocks in govt have a clue what they are doing you are sorely mistaken.

  11. Guest   October 24, 2008 at 7:36 pm

    No, Mr. Reich, the middle class is as implicated in the race to materialism as are the super-rich whose greed, immorality and lack of prudence helped create the current mess in the first place. The middle class took on debt not to pay the monthly grocery bills or to buy a modest house but to expand the living space in what may have been a modest house when purchased, to purchase a house that stretched the family finances, take on the outward trappings of wealth (i.e., lease the Mercedes, the Lexus, etc.), or to buy a mega-HDTV. THEY WANTED TO BE RICH TOO!Reich and other well-meaning liberal types need to get out into middle-class America once in a while so they actually have a sense of what’s taking place on the ground.At heart, this crisis is all about American materialism and individualism run amok, and it has been building to a crescendo ever since the baby boomers came of age. It is not just about poorly constructed securities and balance sheets but about the flow of history.Yet, here we stand, with tweedle-dee-tweedle-dum political parties, bereft of real leadership, both implicated in this mess, too dumb, lazy or frightened to challenge mainstream America to be better than it is, and too beholden for campaign contributions to financial billionaires and corporate lobbyists to demand a new and more responsible social contract with corporate America.I lived the B.S. in corporate America and have seen the inner-workings of government for five years, and as bizarre and corrupt as life is in corporate America the incompetence and petty corruption one sees in government is even worse. If you think these egotistical peacocks in govt have a clue what they are doing you are sorely mistaken.