I've been closely following the $700b proposed bank bailout deal. I was very happy not to see it pass in the House yesterday. Why? because I don't believe that Main Street America will be affected quite as extremely as the doom and gloom sayers in Washington and the news media say we will be if we don't hand a $700b gift to Wall Street.
What if credit does dry up, as the doom sayers say it will? The American economy has become predicated on credit, and lots of it. Go back 50 years, and this was not the case. People normally paid cash for their cars, and their mortgages were for a much smaller fraction of the worth of their house. People didn't have credit cards, and they got along just fine. In addition, Robert Putnam, professor of political science at Harvard, established links between social capital and economic inequality. On the relationship of inequality and involvement in community he says:
- Community and equality are mutually reinforcing. Social capital and economic inequality moved in tandem through most of the twentieth century. In terms of the distribution of wealth and income, America in the 1950s and 1960s was more egalitarian than it had been in more than a century. [T]hose same decades were also the high point of social connectedness and civic engagement. Record highs in equality and social capital coincided. Conversely, the last third of the twentieth century was a time of growing inequality and eroding social capital. The timing of the two trends is striking: somewhere around 1965-70 America reversed course and started becoming both less just economically and less well connected socially and politically.
Today the distribution of wealth is very uneven in America. In 2004, the people who had the top 20% of household incomes in America owned 85% of the wealth. The people with the lowest 40% household incomes owned owned much less than 1%. The people in the 40th to 60th percentile (ie; the middle class), owned less than 4% of the wealth. And, as you can see in the graph below, the upper echelons have had a much steeper increase in their wealth over the past decade compared to the middle class.
The wealth of the middle class consists mostly of home equity. The wealth of the upper class consists mostly of stocks. As we all know, the stock market closed yesterday with the largest daily net loss in history (around 8%). The news media stated last night that this drop "cost taxpayers" over a trillion dollars, and thus we were supposedly stupid not to support the $700b bailout plan because the bailout would have "ultimately cost less to taxpayers". Well, the "taxpayers" who lost over a trillion dollars yesterday were overwhelmingly not you or your neighbors. They were the ultra rich, who could well afford an adjustment in their total wealth.
I am not naive, and I understand that the country may well be thrown into a deep recession if a bail out does not occur. But frankly, I think it would ultimately be a very good thing for this country to return to the economic principles of the 1950's. People like me, who never use credit, except to buy a house (and even then only to buy a house that cost around 50% of what we technically could have gotten a loan for), are relatively immune to credit crunches (I'm not immune to the bottom falling out of the American dollar, but that is another story). If Americans are forced to get used to not relying on credit, the distribution of wealth might very well become more equitable in the end.
