Big Spenders? They Wish
By PETER S. GOODMAN
Millions of Americans have lost homes, jobs and savings to the financial crisis and recession. While greed and extravagance played roles, many lived beyond their means because their paychecks shrank. This article is adapted from “Past Due: The End of Easy Money and the Renewal of the American Economy,” by Peter S. Goodman, a reporter for The New York Times. The book, to be published Tuesday by Times Books, explores the origins of the crisis and suggests ways to reinvigorate the economy.
ONE afternoon in November 2006, a policeman spotted an expired license plate on Dorothy Thomas’s 10-year-old Toyota Corolla as she drove through San Jose, Calif. He ordered her to pull over.
Struggling under the weight of thousands of dollars in credit card bills, Ms. Thomas was perpetually short of cash. She had not bought a $10 auto registration sticker. The officer checked his database and recognized that she had already been ticketed once before for the same thing. He arranged to have her car towed away.
“I got down on my knees and begged that officer,” Ms. Thomas recalled.
As she watched her car being hauled off, she sensed that this was the beginning of a descent into a crisis from which she might not easily escape. Without money to pay the towing and storage fees, she could not extract her car from the lot, and the tab soon grew to $1,600. Without a car, she could not reach the hospital where she worked in the administrative offices, so she lost her $16-an-hour job. Without a paycheck, she could no longer pay the rent on her modest home. She moved to Oakland, where a friend lived in a beaten-down, rented house on a street they called Crack Avenue. By year’s end, Ms. Thomas, then 49, was occupying a bunk at a homeless shelter, searching in vain for a job in an economy plagued by unemployment.
Across the United States a sense has taken hold that the Great Recession and the financial crisis are predominantly a result of national profligacy, as if the economy had been undone by insatiable shoppers, foolhardy home buyers and greedy investment bankers. Extravagance and recklessness certainly played crucial roles, and yet they are only part of the explanation.
Many have lived beyond their incomes simply because incomes have been outstripped by the costs of middle-class life. By the fall of 2008, most American workers were bringing home roughly the same weekly wages they had earned in 1983, after accounting for inflation.
“For middle- and low-wage workers, the median wage basically went nowhere over these years,” said the economist Jared Bernstein.
Spirited and eloquent, Ms. Thomas had worked her way up from rural Oklahoma poverty, enduring the strains of forcibly integrated schools, before settling in California. She had become one of the first African-Americans to sell cosmetics at a Sacramento department store. Then, she forged a career in medical billing, at one point making $22 an hour. She had lived beyond her means, but not out of decadence. For years, she had rented homes in better neighborhoods than she could afford in order to send her two daughters to quality schools. She had run up credit card balances to pay for summer science camps and school supplies. She had never earned more than a high school diploma, but one of her daughters already had a master’s in education; the other was about to start college.
“I truly bought into the idea that education is the way out of poverty,” Ms. Thomas said. “If your kids are going to school with kids who are preprogrammed to go to college, then that’s what they will expect. I didn’t get myself out of poverty. But I got my daughters out. I was the bridge.”
Long before “subprime” entered the American lexicon, before Wall Street convulsed with the collapse of giant institutions and the financial world seized with fear, a slower-moving crisis was already under way for tens of millions of ordinary people like Ms. Thomas. The shock of recent times has merely intensified this deeper crisis, rendering void a mode of living that was already unsustainable.
As wages stagnated, and as the costs of health care and education spiraled higher, easy money filled the gap: shrinking paychecks were masked by an explosion of consumer credit and by a pair of investment manias that made money surge through the American economy — one centered on the supposedly limitless promise of the Internet, the other propelled by faith that real estate values could only climb.
On the backs of these fantasies, the financial system lent out ridiculous sums of money to businesses and homeowners, as if the laws of supply and demand had been repealed.
Americans became addicted to dreaming up the Next Big Thing, telling one another stories that seemed to justify pouring money into stocks, real estate and exotic new investments. A nation skilled in innovation and craftsmanship relinquished its traditional focus on engineering goods and services of intrinsic value in favor of financial make-believe, mostly unchecked by government regulation.
As exotic mortgages proliferated along with inscrutable investments backed by home payments, respected leaders like Alan Greenspan, chairman of the Federal Reserve, and Robert E. Rubin and Lawrence H. Summers — both Treasury secretaries in the Clinton administration — silenced those inclined to damp the festivities with limits on how much money financial institutions could put into play.
Bankers operating freely would assess risks better than bureaucrats, they counseled, enabling gold rush fever to flourish on Wall Street and in every suburban cul-de-sac, while the consequences of failure swelled to monstrous proportions.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, who served with Mr. Greenspan on the board of governors at the Federal Reserve.
Easy money generated economic growth and spread riches. Yet when arithmetic reasserted itself, annihilating trillions of dollars in wealth and millions of jobs, the economy was left with a debilitating case of disillusionment: once markets lost faith in make-believe, they starved the economy of capital. Even people who had barely benefited — people like Dorothy Thomas — suffered an outsize share of hurt.
The challenge now confronting American society is how to transition from an era in which we spent and consumed in brazen disregard of traditional limits into a new period in which we live on what we bring home from work. Yet just as Americans most need jobs to rebuild savings and pay off past-due bills, jobs are in exceedingly scarce supply.
“If you had told me before that a person could look for a year and not find a job, I’d have said they were just lazy,” Ms. Thomas said. “Every day, I feel like I’m losing a piece of myself.”
BY early 2008, the electricity and water had been cut for lack of payment at the house on Crack Avenue. For Ms. Thomas, 12 months had passed without work, despite dozens of applications at medical billing offices — those she could reach without a car. One potential employer rejected her after she failed a credit check.
“They’re saying that credit is a reflection of your character,” she said, choking back tears.
The confident young woman who had once sold expensive cosmetics had become a middle-aged woman bulging out of sweat pants, her face sagging with exhaustion, her hair matted for lack of access to a shower. Each rejection intensified her fears that she might never work again.
“Is it my age?” she asked. “Is it because I’ve gained weight?” She had been visiting a nearby food bank. “They give us cakes and cookies,” she said. “Then you wonder why poor people are fat! They’re not giving us fruits and vegetables.”
She riffled through a folder, proffering her résumé — evidence that she belonged in the white-collar world. “I’m articulate,” she said, shifting into the smooth tones of a receptionist as she pantomimed answering the phone. “How may I direct your call?”
“When you get discouraged, it’s hard to recover,” she said. “People who aren’t poor, it’s as if they think we don’t know what our lives are like and what’s happening to us. But we know. Poverty is like a prison without bars.”
Three months later, the crumbling house on Crack Avenue fell into foreclosure, and Ms. Thomas was forced out. She thought of asking her oldest daughter for help. But her daughter was struggling to pay her own bills on a teacher’s salary. So Ms. Thomas checked into a homeless shelter for battered women and substance abusers. She pretended to be a drug addict in order to stay, using the free bed as an opportunity to reconstruct her life.
In November, she got a job scheduling appointments for a chain of medical clinics for $16 an hour. She could reach the offices using public transportation. She wore a crisp white blouse and a neat ponytail. Her face radiated calm.
“I feel so good,” she said, “because I feel so normal.”
A long stretch of hopelessness had given way to the outlines of a future. A few weeks later, she had saved $1,600. Soon, she bought a used car, a Toyota Rav 4, which greatly expanded her field of potential workplaces. Another few months of work and saving and she figured to have enough to recover her independence.
But in late January this year, with the economy still deteriorating, her new employer laid her off.
“That first week, I really slipped under,” she said. “I did feel suicidal. I just felt so knocked off the block. To lose that job was just devastating.”
She was sobbing.
“I’m back at Square One,” she said.
MUCH the same might be said of the American economy. Many experts say it may take years to fully recover, creating enough decent-paying jobs so that paychecks can replace home equity loans and credit cards as fuel for spending. “The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund.
As attention focuses on how best to nurture good jobs, many advocate increased government investment into research institutions to spur innovation, in addition to tax incentives for private ventures that turn the resulting know-how into businesses. Renewable energy and biotechnology exemplify how such public-private partnerships have already produced jobs. Amid mounting concerns about climate change, states are compelling utilities to buy energy from clean sources, creating new markets for wind power and solar energy.
Iowa is exploiting its position on the Great Plains — the so-called Saudi Arabia of wind — to manufacture wind turbines. Toledo’s glass factories, confronting declining orders for auto windshields, are focused on making solar panels. North Carolina has twinned the brainpower of its research universities with its engineering prowess to construct a thriving hub of biotechnology, employing people laid off from tobacco and textiles.
These are merely examples of one fruitful approach to creating jobs, say economists, one that may be applied to myriad other areas of American industry. Silicon Valley remains a hotbed of valuable thinking. Wall Street — much maligned though it may be — retains important skills that await incentives to make it function in the national interest.
Some argue that the Next Big Thing may not be big at all, but rather a diffuse process of innovation unleashed on established areas of the economy, one that extracts greater value by improving goods and services we already use every day. Traffic-choked cities may be liberated with modernized public transportation. Homes may be made more comfortable with advances in furnishing. The great American capacity to engineer solutions to life’s problems — still intact — may need only the right policies to flourish again.
“There’s a lot of opportunities for change in existing industries,” says Joe Cortright, an economist at Impresa, a consulting firm in Portland, Ore., where traditional agriculture has in recent years evolved into boutique wineries and specialty-vegetable growers, extracting far greater value.
We are only now beginning to emerge from the longest recession since the Great Depression. The economy remains alarmingly lean. Yet many see in this moment an opportunity to refocus on areas of economic strength.
This month, amid reports that businesses were beginning to receive new orders, Dorothy Thomas was still living in a homeless shelter, unemployed.
Before the end of the month, she will reach the shelter’s time limit and be forced to move again. Yet, a new confidence was evident in her words. After nearly two years of rejection and terrifying proximity to the streets, she had tapped back into a deep resilience. She had polished her résumé, acquired a penchant for saving and secured transportation. All that sat between her desperation and renewal was an item that — in the traditional American narrative — was supposed to be available to anyone willing to work: a paycheck.
“A job,” Ms. Thomas said, “is really all I need.”
Copyright 2009 The New York Times Company
ONE afternoon in November 2006, a policeman spotted an expired license plate on Dorothy Thomas’s 10-year-old Toyota Corolla as she drove through San Jose, Calif. He ordered her to pull over.
Struggling under the weight of thousands of dollars in credit card bills, Ms. Thomas was perpetually short of cash. She had not bought a $10 auto registration sticker. The officer checked his database and recognized that she had already been ticketed once before for the same thing. He arranged to have her car towed away.
“I got down on my knees and begged that officer,” Ms. Thomas recalled.
As she watched her car being hauled off, she sensed that this was the beginning of a descent into a crisis from which she might not easily escape. Without money to pay the towing and storage fees, she could not extract her car from the lot, and the tab soon grew to $1,600. Without a car, she could not reach the hospital where she worked in the administrative offices, so she lost her $16-an-hour job. Without a paycheck, she could no longer pay the rent on her modest home. She moved to Oakland, where a friend lived in a beaten-down, rented house on a street they called Crack Avenue. By year’s end, Ms. Thomas, then 49, was occupying a bunk at a homeless shelter, searching in vain for a job in an economy plagued by unemployment.
Across the United States a sense has taken hold that the Great Recession and the financial crisis are predominantly a result of national profligacy, as if the economy had been undone by insatiable shoppers, foolhardy home buyers and greedy investment bankers. Extravagance and recklessness certainly played crucial roles, and yet they are only part of the explanation.
Many have lived beyond their incomes simply because incomes have been outstripped by the costs of middle-class life. By the fall of 2008, most American workers were bringing home roughly the same weekly wages they had earned in 1983, after accounting for inflation.
“For middle- and low-wage workers, the median wage basically went nowhere over these years,” said the economist Jared Bernstein.
Spirited and eloquent, Ms. Thomas had worked her way up from rural Oklahoma poverty, enduring the strains of forcibly integrated schools, before settling in California. She had become one of the first African-Americans to sell cosmetics at a Sacramento department store. Then, she forged a career in medical billing, at one point making $22 an hour. She had lived beyond her means, but not out of decadence. For years, she had rented homes in better neighborhoods than she could afford in order to send her two daughters to quality schools. She had run up credit card balances to pay for summer science camps and school supplies. She had never earned more than a high school diploma, but one of her daughters already had a master’s in education; the other was about to start college.
“I truly bought into the idea that education is the way out of poverty,” Ms. Thomas said. “If your kids are going to school with kids who are preprogrammed to go to college, then that’s what they will expect. I didn’t get myself out of poverty. But I got my daughters out. I was the bridge.”
Long before “subprime” entered the American lexicon, before Wall Street convulsed with the collapse of giant institutions and the financial world seized with fear, a slower-moving crisis was already under way for tens of millions of ordinary people like Ms. Thomas. The shock of recent times has merely intensified this deeper crisis, rendering void a mode of living that was already unsustainable.
As wages stagnated, and as the costs of health care and education spiraled higher, easy money filled the gap: shrinking paychecks were masked by an explosion of consumer credit and by a pair of investment manias that made money surge through the American economy — one centered on the supposedly limitless promise of the Internet, the other propelled by faith that real estate values could only climb.
On the backs of these fantasies, the financial system lent out ridiculous sums of money to businesses and homeowners, as if the laws of supply and demand had been repealed.
Americans became addicted to dreaming up the Next Big Thing, telling one another stories that seemed to justify pouring money into stocks, real estate and exotic new investments. A nation skilled in innovation and craftsmanship relinquished its traditional focus on engineering goods and services of intrinsic value in favor of financial make-believe, mostly unchecked by government regulation.
As exotic mortgages proliferated along with inscrutable investments backed by home payments, respected leaders like Alan Greenspan, chairman of the Federal Reserve, and Robert E. Rubin and Lawrence H. Summers — both Treasury secretaries in the Clinton administration — silenced those inclined to damp the festivities with limits on how much money financial institutions could put into play.
Bankers operating freely would assess risks better than bureaucrats, they counseled, enabling gold rush fever to flourish on Wall Street and in every suburban cul-de-sac, while the consequences of failure swelled to monstrous proportions.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, who served with Mr. Greenspan on the board of governors at the Federal Reserve.
Easy money generated economic growth and spread riches. Yet when arithmetic reasserted itself, annihilating trillions of dollars in wealth and millions of jobs, the economy was left with a debilitating case of disillusionment: once markets lost faith in make-believe, they starved the economy of capital. Even people who had barely benefited — people like Dorothy Thomas — suffered an outsize share of hurt.
The challenge now confronting American society is how to transition from an era in which we spent and consumed in brazen disregard of traditional limits into a new period in which we live on what we bring home from work. Yet just as Americans most need jobs to rebuild savings and pay off past-due bills, jobs are in exceedingly scarce supply.
“If you had told me before that a person could look for a year and not find a job, I’d have said they were just lazy,” Ms. Thomas said. “Every day, I feel like I’m losing a piece of myself.”
BY early 2008, the electricity and water had been cut for lack of payment at the house on Crack Avenue. For Ms. Thomas, 12 months had passed without work, despite dozens of applications at medical billing offices — those she could reach without a car. One potential employer rejected her after she failed a credit check.
“They’re saying that credit is a reflection of your character,” she said, choking back tears.
The confident young woman who had once sold expensive cosmetics had become a middle-aged woman bulging out of sweat pants, her face sagging with exhaustion, her hair matted for lack of access to a shower. Each rejection intensified her fears that she might never work again.
“Is it my age?” she asked. “Is it because I’ve gained weight?” She had been visiting a nearby food bank. “They give us cakes and cookies,” she said. “Then you wonder why poor people are fat! They’re not giving us fruits and vegetables.”
She riffled through a folder, proffering her résumé — evidence that she belonged in the white-collar world. “I’m articulate,” she said, shifting into the smooth tones of a receptionist as she pantomimed answering the phone. “How may I direct your call?”
“When you get discouraged, it’s hard to recover,” she said. “People who aren’t poor, it’s as if they think we don’t know what our lives are like and what’s happening to us. But we know. Poverty is like a prison without bars.”
Three months later, the crumbling house on Crack Avenue fell into foreclosure, and Ms. Thomas was forced out. She thought of asking her oldest daughter for help. But her daughter was struggling to pay her own bills on a teacher’s salary. So Ms. Thomas checked into a homeless shelter for battered women and substance abusers. She pretended to be a drug addict in order to stay, using the free bed as an opportunity to reconstruct her life.
In November, she got a job scheduling appointments for a chain of medical clinics for $16 an hour. She could reach the offices using public transportation. She wore a crisp white blouse and a neat ponytail. Her face radiated calm.
“I feel so good,” she said, “because I feel so normal.”
A long stretch of hopelessness had given way to the outlines of a future. A few weeks later, she had saved $1,600. Soon, she bought a used car, a Toyota Rav 4, which greatly expanded her field of potential workplaces. Another few months of work and saving and she figured to have enough to recover her independence.
But in late January this year, with the economy still deteriorating, her new employer laid her off.
“That first week, I really slipped under,” she said. “I did feel suicidal. I just felt so knocked off the block. To lose that job was just devastating.”
She was sobbing.
“I’m back at Square One,” she said.
MUCH the same might be said of the American economy. Many experts say it may take years to fully recover, creating enough decent-paying jobs so that paychecks can replace home equity loans and credit cards as fuel for spending. “The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund.
As attention focuses on how best to nurture good jobs, many advocate increased government investment into research institutions to spur innovation, in addition to tax incentives for private ventures that turn the resulting know-how into businesses. Renewable energy and biotechnology exemplify how such public-private partnerships have already produced jobs. Amid mounting concerns about climate change, states are compelling utilities to buy energy from clean sources, creating new markets for wind power and solar energy.
Iowa is exploiting its position on the Great Plains — the so-called Saudi Arabia of wind — to manufacture wind turbines. Toledo’s glass factories, confronting declining orders for auto windshields, are focused on making solar panels. North Carolina has twinned the brainpower of its research universities with its engineering prowess to construct a thriving hub of biotechnology, employing people laid off from tobacco and textiles.
These are merely examples of one fruitful approach to creating jobs, say economists, one that may be applied to myriad other areas of American industry. Silicon Valley remains a hotbed of valuable thinking. Wall Street — much maligned though it may be — retains important skills that await incentives to make it function in the national interest.
Some argue that the Next Big Thing may not be big at all, but rather a diffuse process of innovation unleashed on established areas of the economy, one that extracts greater value by improving goods and services we already use every day. Traffic-choked cities may be liberated with modernized public transportation. Homes may be made more comfortable with advances in furnishing. The great American capacity to engineer solutions to life’s problems — still intact — may need only the right policies to flourish again.
“There’s a lot of opportunities for change in existing industries,” says Joe Cortright, an economist at Impresa, a consulting firm in Portland, Ore., where traditional agriculture has in recent years evolved into boutique wineries and specialty-vegetable growers, extracting far greater value.
We are only now beginning to emerge from the longest recession since the Great Depression. The economy remains alarmingly lean. Yet many see in this moment an opportunity to refocus on areas of economic strength.
This month, amid reports that businesses were beginning to receive new orders, Dorothy Thomas was still living in a homeless shelter, unemployed.
Before the end of the month, she will reach the shelter’s time limit and be forced to move again. Yet, a new confidence was evident in her words. After nearly two years of rejection and terrifying proximity to the streets, she had tapped back into a deep resilience. She had polished her résumé, acquired a penchant for saving and secured transportation. All that sat between her desperation and renewal was an item that — in the traditional American narrative — was supposed to be available to anyone willing to work: a paycheck.
“A job,” Ms. Thomas said, “is really all I need.”
Copyright 2009 The New York Times Company
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