Poverty Threatens American Recovery

The finding that American poverty reached its highest level in 18 years is a worrisome fact for two reasons.

First, it shows the sacrifices required of the least-protected population in the past years and also helps in understanding the attitude of billionaire Warren Buffett, when he said that he thinks that the rich are not paying their fair share of taxes to help the country’s recovery.

The second, however, is the more serious aspect. Data compiled by economist Robert Reich, secretary of labor for Bill Clinton, reveal a disturbing pattern in income distribution. In an article published in Estadao of Sao Paulo, Reich says that 5 percent of the American population accounts for 37 percent of the consumption of the country. It is a degree of concentration of wealth, which points to the squeezing out of the middle class, whose wealth had increased for four decades after World War II.

Today, this situation threatens to make the American economy dysfunctional. An increasing number of economists have already understood this phenomenon. In countries with this degree of income concentration, the poor, who are becoming increasingly more numerous, are not able to participate in consumption using just their own salaries and need credit. Up to a certain level, nothing more was needed than simply asking the bank for a loan. These loans would always inject health into the economy and always contributed to its growth.

The problem is when credit consumes many times a family’s income and becomes the principle source of all consumption, being used to buy everything from food at the markets, health insurance, the family car and so forth. At a certain level of indebtedness, people’s main source for spending is of another nature. They use credit to buy more credit.

It was this situation, created by the impoverishment of the American middle class, which brought the country to the crash of 2008. Clients and institutions remade the same loans a number of times, adding to this an artificial risk without any support in the real world. They were just transactions that created a fictitious gain and naturally, were of short duration.

Three years later, this situation is the main obstacle to the recovery of the economy. High unemployment takes away an important part of the consumer market. Among those who keep their jobs, a large portion is not spending for fear of not having a job. The others, who are poorer, earn so little that they do not have the means to return to shopping, which hinders the return of consumption and the generation of jobs.

The current situation is one where companies don’t have enthusiasm to either invest or to ask banks for credit for investing, even though interest rates are close to zero. This atmosphere explains the skepticism about the Obama jobs package. The skepticism is not just based on the fear of giving oxygen to a president who has hit a record low in popularity.

And thus, the American economy comes to a standstill, looking backward. Rarely has the image of the future been so grim.