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July 24, 2008How Much More Can Consumers Be Squeezed? |
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From Economic Policy Institute: In testimony this morning before Congress's Joint Economic Committee, Jared Bernstein, a senior economist at the Economic Policy Institute, examines the array of economic forces and events that are squeezing most working Americans' income and living standards, and suggests some policy fixes to help ease at least some of the pain. Bernstein makes a strong case for a second stimulus package, stressing state fiscal relief and public investment in needed infrastructure to help keep more Americans working and contributing to the economy through the downturn. He also advocates strengthening oversight of the financial sector to improve stability and provide long-term protection from the kinds of bubbles that have so buffeted the US economy in recent years.These difficulties are of course real and important, given the centrality of these markets and the critical importance of free-flowing credit in our economy. Though they were highly productive over the business cycle of the 2000s---the productivity of the US labor force grew by 19%, 2000-07, their incomes failed to reflect their contributions. In fact, as my co-authors and I show in our upcoming release of the State of Working America, 2008/09, the gap between productivity growth and that of median income or compensation has never been larger. The first round of economic stimulus was designed with this in mind. Over $100 billion in payments to households were sent out in recent months, and early indicators show that some share of these payments have found their way into the economy. The other area left out of the last stimulus package was infrastructure investment, and I urge this body to strongly consider its inclusion in a second package. Now, in the wake the collapse of Bear Stearns, the Federal Reserve has accorded investment banks the same borrowing privileges of commercial banks. Clearly, this approach would result in apply some of the same regulations that apply to commercial depository institutions to non-commercial entities. This is well below the Bear Stearns or especially Fannie/Freddie reserves, which were said to be in the range of three percent or less (some reports found that Fannie and Freddie had debt to capital holding ratios of 65 to 1). Our system of borrowing, lending, and financing investments by both businesses and households is a national treasure, one which we have squandered in recent years. Risk has been consistently underpriced, contributing to bad underwriting, negligent risk management, and deeply damaging bubbles.
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