Free Aftershock: The Next Economy and America's Future by Robert B. Reich Page B

cards, all amassing larger and larger debt loads. Auto loans were easy to come by. Students and their families went deep into debt to pay the costs of college. Mortgage debt exploded. And as housing values continued to rise, homes doubled as ATMs. Consumers refinanced their homes with even larger mortgages and used their homes as collateral for additional loans. As long as housing prices continued to rise, it seemed a painless way to get money (in 1980 the average home sold for $64,600; by 2006 it went for $246,500). Between 2002 and 2007, American households extracted $2.3 trillion from their houses, putting themselves ever more deeply into the hole.
    Eventually, of course, the debt bubble burst. With it, the last coping mechanism disappeared.
    It has been easy to place blame ever since. Some observers blame consumers for borrowing too much. Others fault banks for lending so carelessly. Others blame foreign lenders—especially the Chinese—who were happy to send so much money our way because we’d use some of it to buy their exports. Or they blame the Federal Reserve, which made borrowing easy by lowering interest rates too much. Or they blame regulators, who didn’t adequately oversee the banks that did the lending. On it goes, a blame game much like a merry-go-round, on which every villain chases every victim, and every victim becomes a villain to another victim.
    Much of this blame is justified, but it misses the point. Middle-class consumers took on the huge amount of debt as a last resort. Median wages had stopped growing, and the proportion of total income going to the middle class continued to shrink. The only way most Americans could keep consuming as if wages hadn’t stalled was to run through the coping mechanisms. But each of these mechanisms reached its inevitable limit. And when the debt bubble burst, most Americans woke up to a startling reality: They could no longer afford to live as they
had
been living; nor as they thought they
should
be living relative to the lavish lifestyles of those at or near the top, nor as they
expected
to be living given their continuing aspirations for a better life, nor as they assumed they
could
be living, given the improvements they had experienced during the Great Prosperity.

9
The Future Without Coping Mechanisms
    November 6, 2008. Barack Obama has just been elected president and has invited a dozen or more of us who informally advised him during the campaign to talk about the big economic challenges of the future. Paul Volcker, the former chairman of the Federal Reserve, eighty-one years old (and almost two feet taller than I am), tells the president-elect the underlying problem is that Americans have been living beyond their means. My colleague Laura Tyson, the former chair of Bill Clinton’s Council of Economic Advisors, disagrees. “The real problem is their means haven’t been growing.”
    Laura was right. The fundamental economic challenge aheadis to lift the means of middle-class Americans and reconstitute the basic bargain linking wages to overall improvements—providing the vast American middle class with a share of economic gains sufficient to allow them to purchase more of what the economy can produce. The nation cannot achieve nearly full employment, a higher median income, and faster growth without a reorganization of the economy that spreads the benefits of growth on a scale similar to that which occurred during the Great Prosperity. It is both an economic challenge and a moral challenge; concentrated income and wealth will threaten the integrity and cohesion of our society, and will undermine democracy. But the conversation with the president-elect that fateful day in November never got this far. There was no opportunity to talk about how the increasing concentration of income and wealth had destabilized the economy. The meeting quickly shifted back to the massive debts Americans had taken on, especially mortgage debt, and from there it moved to the