Figuring Out the Economy

I bought a loaf of bread yesterday at the local grocery chain here in Austin. It was a loaf of Pepperidge Farms Whole Wheat, weighing in at 24 ounces. I didn't notice the price in the store, not at the shelf when I picked the loaf, nor at the register when I paid. Today, as I was making a sandwich, I noticed the price on the closure tag: $4.29. Whenever I see the (escalating) price of a loaf of bread, I remember back to my Junior year in high school and my Latin teacher, who one day predicted that when the price of a loaf of bread rose past $1.00 there would be rioting in the streets.

Now this was back in 1974, and fortunately, his prediction has not come to pass, although there has been rioting in other countries when bread and other staples became more expensive. Who hasn't heard (mostly in history class) of bread riots in France (1725), Russia (Petrograd - 1917) or Richmond (1863). Revolutions and Civil Wars have accompanied (correlation, not causation) bread riots. Yet today, with bread having more than quadrupled (OK, expensive bread, not white) over 40 years, (10% per year) we accept it. I guess it's the old story of "How do you boil a frog?" The price increases, year by year, perhaps haven't seemed so much.

In comparison, my wages have gone up, on average, about 8% per year. Unfortunately, due to various events like an auto accident and rehab, changing jobs, changing home towns, recessions, I haven't earned those wages every day of every year since I entered the work force. I am fortunate to have skills (software engineering) that are in demand. Unfortunately, quite a number of Americans in the middle class have seen their wages stagnate and/or their jobs eliminated by globalization. To them, $4.29/loaf bread probably feels like something to cause a bread riot.

Over the past several years there has been an outcry against over-paid government workers. Scott Walker, governor of Wisconsin, broke the government worker's union over pay issues. However, I know of government workers here in Austin, doing valuable work for society, who make 1/3 of what I do. Take away their function, and the people of the community would be up in arms over their loss. Yet their pay scale forces real hardship on them.

I studied chemistry and medicine, yet despite attending a liberal-arts university, I never took a class in economics. Since the Great Recession, I have been reading a number of books on economics, trying to figure what happened. I was lucky (I guess) to have been in an auto accident in January 2008 and to have spent the year concentrating on my rehab, and not on the economy. So I didn't experience it firsthand, really. Instead, I got the effects throughout the "recovery". I wasn't willing to accept what I heard from Geithner or Greenspan or Obama or Santelli.

So far, the best book I have read for explaining the Great Recession is House of Debt, by Atif Mian and Amir Sufi. While both economists, this is one of the few books on economics that I have read that backs up each conclusion with data. So many of the economics books attempting to explain the Great Recession seem to limit themselves to logic arguments or word games, rather than any approach examining real data. Or else the authors work hard at proving their conclusions by eliminating the observations that don't fit their assumptions.

House of Data lays the case for the cause of the Great Recession on the huge increase in household debt that lead up to the 2007 crash. The authors present many previous financial crises that arose from the same cause. Never mind whether the debt expansion came from eased lending restrictions to poor (quality) borrowers or from predatory load behavior chasing origination fees or big banks harvesting securitization fees or politicians seeking higher home ownership statistics or a president intent on waging two wars without economizing (and household saving). Or all of the above.

Where do we go from here? Will continued globalization result in the decline of America? Or can more American companies do what Apple has done - redefine the state of the art. Will capitalism continue to dominate the world's economies in its current form? Or will the free flow of information and technological innovation produce the Zero Marginal Cost Society that some believe will provide greater equality through cheaper production? Will bread top $5.00 a loaf and bring about the second American revolution?