The Heart of the Matter: What Caused the Mess in the U.S.

We understand why the U.S economy is doomed and what has caused this. The following post over the Big Picture explains it well with some data points. Those who have visited my blog from Korea would know the implications of the declining U.S. economy: For instance, why Korea’s export engine is in trouble and Chaebol-centered economic growth model won’t be working.

From the Big Picture:

Some of the factors that have landed us in the mess we’re in have been building for decades, and there’s ample evidence on which to draw to demonstrate that fact. In looking at a few of these issues, I’ll draw on some charts I’ve presented both here and elsewhere before. A couple are replicated from this outstanding study in January’s Monthly Labor Review (MLR).

Let’s begin by referencing a recent piece by Stephen Roach that accurately assesses what’s really wrong with our current economy, summed up in one number:

The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.

While Labor Share has recently plummeted to all-time lows since record keeping began, Median Household Income has stagnated for the past 12 years. In the last recession (2001), incomes had only begun to decline. I’m sure back then no one contemplated the possibility that the decline would last (certainly not for a decade), credit was still widely available and, as we know now, being freely tapped (see the PCE chart above for evidence of how normal consumer spending remained during that period). One decade later, Labor Share has collapsed, incomes have gone nowhere, and credit availability — to say nothing of consumers’ attitudes toward it — has all but vanished except for the most creditworthy.

We are now squarely face-to-face with the consequences of the decades long gutting of the middle class that was the backbone of our economy for so long. Without taking some solid, clearly-defined steps, the middle class will undoubtedly move from an endangered species to extinction. The tipping point may already have been passed and, even if it hasn’t, I’m still not optimistic there’s any interest in D.C. to make the requisite policy changes.

http://www.ritholtz.com/blog/2011/08/the-heart-of-the-matter/