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April 26, 2013

Working-class spending can't fix economy

There is a truism that American consumers drive our economy. While export-oriented countries like Canada are less beholden to the domestic consumer, this country has grown to depend on a healthy working class. Here, the working class, the young and the retired are all hurting.

We fell into a trap, cultivated a myth of the working middle class as a huge economic powerhouse. Their income fueled consumption, and consumption fueled income. This makes some superficial sense. After all, it means that a healthy middle class will allow our nation to maintain economic supremacy.

What a shame that our beliefs were misconceptions.

The root of the dilemma took hold in the 1950s. President Dwight Eisenhower promised a car in every garage and a chicken in every pot. I’m guessing the Chinese middle class is hearing the same thing. But, by the end of his term, Ike was concerned about such economic houses of cards. He warned us of the emerging military-industrial complex. Meanwhile, General Motors was telling us what was good for GM was good for the nation.

The theory is the principle of circular flow of income. The idea is that spending by consumers results in income for corporations, which translates into income for wage-earning consumers. This flow is argued to be the economic equivalent of the Energizer Bunny.

If we subscribe to this wishful thinking, we enjoy a number of false securities. We have been convinced our economy is invincible so long as we keep spending. Our consumption serves a higher purpose than the mere satisfaction of our wants and even takes on a patriotic dimension. With more middle-class consumers than in any other country, until lately, this ensures we maintain our perch as the sole economic superpower.

Meanwhile, General Motors laughs all the way to the Bank of America.

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