Actually, that’s not quite true. The economy can still grow, but since wages aren’t increasing — except for a few people at the top, who, precisely because there aren’t very many of them, can’t make up for the shortfall in consumer spending — the only recourse for consumers is buying things on credit, i.e., growth financed through debt.
This is exactly what we’ve seen in the years since the median wage stopped growing: steadily increasing household debt.
The thing is, financing economic growth by increasing personal indebtedness is not a sustainable path. Eventually the credit cards are maxed out, and then everyone needs to pay down their debt before they can begin spending again.
While this is happening, the economy shrinks, since people are not spending on anything except essentials. The result is layoffs, which means some people can no longer keep up their debt payments — which results in bankruptcies, which result in the banks that are owed that money raising interest rates to cover the increased risk, which results in more bankruptcies, which means more trouble for banks, and so on in a downward spiral.
Eventually, confidence in the entire system begins to erode, which leads to a general panic and the entire financial system grinding to a halt. See October 1929 and September 2008 for an idea of what that looks and feels like.
History tells us these kinds of situations can either be reformed (see Teddy Roosevelt and the trust-busters, FDR and the New Deal, and so on), or, if the oligarchs have so tight a grip on the levers of power — including the means of mass communication — that they can prevent reform, then eventually the people will rise up.
If it gets bad enough, you have the situation famously described by John Steinbeck:
There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our success. The fertile earth, the straight tree rows, the sturdy trunks, and the ripe fruit. And children dying of pellagra must die because a profit cannot be taken from an orange. And coroners must fill in the certificates — died of malnutrition — because the food must rot, must be forced to rot. The people come with nets to fish for potatoes in the river, and the guards hold them back; they come in rattling cars to get the dumped oranges, but the kerosene is sprayed. And they stand still and watch the potatoes float by, listen to the screaming pigs being killed in a ditch and covered with quicklime, watch the mountains of oranges slop down to a putrefying ooze; and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.Growth through debt leads eventually to systemic crisis. The merest, cursory reading of economic history demonstrates this. History also provides ample evidence that economic growth from rising incomes leads to sustainable and widely shared prosperity.
Going forward, one new aim of national economic policy should be to get the real median wage growing on a consistent basis, and to restrain the tendency of capitalism to concentrate wealth at the top of the income scale.
How? Here are some proven, sensible liberal ideas.
1. Give workers a bigger voice in how profits are distributed. A great way to do that is by encouraging union membership. Let me put this bluntly: The government ought to do everything it can to encourage unionization across all economic sectors. A good start would be repealing the Taft-Hartley act, and passing the Employee Free Choice Act.
2. Use the tax system to discourage out-sized payouts for corporate executives and banksters. Restore the tax brackets (adjusted for inflation) to what they were in 1955. Top marginal tax rate: 91.5 percent. This will discourage the obscene paychecks the One Percenters currently award themselves, and might even encourage them (through deductions) to do economically beneficial things with the money.
3. Re-regulate the financial sector. Restore and strengthen the Glass-Steagall Act. Break up the big banks to the point that the insolvency of one won’t threaten the economy. (While I’m at it: impose a retroactive tax of 100 percent on all non-salary compensation of every executive of every financial institution that received federal bailout money. It might not prevail in the ensuing litigation, but it would be amusing to watch them squirm.)
4. Raise the minimum wage to a living wage, and tie future increases to the rate of productivity growth. This will put subtle upward pressure from below on the wages of other workers.
All this would, of course, cause keening howls of outrage on Wall Street and in the executive suites of America’s corporate headquarters, and confusion and alarm among the Wall Street worshipers on CNBC. But the thing is, economic growth that is widely shared will make everyone — corporate elites included — richer in the long run.