Sometimes I’m lost for words. I have an idea which I want to express, but can’t quite wrap my head around exactly how I should put it. So I waited, trying to figure out how best to write it down, when Paul Krugman basically wrote what I was thinking in far more eloquent ways than I ever could.
The title of Krugman’s column in the New York Times is aptly titled ‘Life Without Bubbles’. And that’s exactly what had been bugging me; the realisation that somehow, our world economy needs a bubble, inflated with hot air, to provide the economic volume that creates jobs.
Krugman points out that, now that the housing bubble is gone, another bubble is needed to keep part of the world’s economy (but especially the US economy) afloat. He concludes that, basically, there isn’t a bubble on the horizon yet. That’s interesting, because many economists were able to quickly predict that, after the internet economy bubble, the housing sector would be next.
But I do miss a vital piece of information in Krugman’s column. He fails to point out the fundamental difference between the deflating housing bubble of the past year, and the other bubbles of past centuries.
In by far most cases, the money people and businesses invested in bubbles was excess money. Either some money they’d had on the side, profits or – in some wild cases – savings. Very rarely did people fund bubbles by tapping into their basic wealth, such as salaries. Or their home.
Most bubbles were inflated by either rich people, or people and businesses that had money to spare. Most of them were not part of the middle class, but either part of the upper middle class or simply the rich. This time, it was the other way around.
During the past five years, middle class people who were on the verge of dropping a level to the lower middle class because of a loss of net income, tried to sustain their higher middle class way of life by getting credit based on the inflated value of their homes. People still had small salaries but they were able to keep up appearances by using their house as an ATM of sorts.
This all isn’t new, of course. But talking about the underlying root cause for the problem is a taboo. The people hurt are the very people who are supposed to be living the American dream, which is that ‘if you work hard, you will make it’. The ‘it’ being ‘succesful’, where ‘succesful’ is defined as having a big house, an expensive car, 2.5 kids and a pile of presents under the christmas tree every year.
Alas, no longer.
People who once earned $2,000 at a car assembly line will simply have to adapt to the fact that they’re now flipping burgers for $1,000 (but probably less). And by ‘adapting’ I mean to say: get used to no longer spending money the way you once did.
Not just Americans, but people throughout the Western world will have to adapt. Because it’s not just happening in the US. In the Netherlands, too, the army of ‘working poor’ – people working 2 or 3 jobs and only barely able to pay the bills – is growing fast as real wages remain constant for certain groups, while the cost of living rises.
Of course, there will still be well-paid jobs. But those jobs require high skills and not everybody has the brains to acquire them. The number of people working in those jobs will not nearly be enough to provide the economic volume that will create jobs for everyone. So the ‘knowledge economy’ politicians have been talking about all these years, is actually a fig leaf to hide the nasty truth, which is that there will be a large number of people that soon will not be able to get by anymore.
Hence the bubbles. Shoving piles of money around seemed like a good idea to prop up economic volume, so we could uphold the lie that there weren’t any structural problems, that a choice between who gets rich and who remains poor is not being made. Economists who knew that it was unsustainable, that we had to one day face the facts, warned the decision makers to ditch the fig leaf so as to face the problem and come up with real solutions. But no decision maker had the guts to stand up and speak the truth. Because decision makers wanted to get re-elected.
But now is not the time to go looking for another bubble. Those days are over. The internet bubble was a luxury bubble, for people who had too much money to spend. The housing bubble hit the core of the economy: the middle class. It is time to think about real, painful, unpopular but lasting reforms.