*Note: I wrote a draft of this post many months ago. Between then and now I caught Robert Reich giving his American Public Media 2-minute address on NPR’s “Marketplace” on June 29, 2011. It was titled “It’s the demand side, stupid!” He addressed this very issue and did it paralleling my own post title which originally was “It’s about wages, stupid!” On one hand, it sucks to be robbed of my assumed originality in these thoughts. On the other, it is reassuring to have one of the world’s leading (and most ignored) economists trumpeting the same cause with many of the same arguments. You can hear Mr. Reich’s commentary here. It is spot on and speaks directly to this issue.

Throughout the recent recession and its aftermath, somehow the national discussion has been usurped by ideologues that seem to gravitate back to one area – job creation; which I agree has a rightful place in the discussion but should not be the focus of our long-term economic strategy.

From the right, we hear that we need to focus (again…still) on supply side policy that will “allow” businesses to create more jobs, as though they were somehow chained and bound from hiring people now. We’ll dig into the fallacies of this argument elsewhere, but for now let’s just identify the base of this argument which is that lack of jobs is the real problem and therefore job creation, of any kind, is good.

From the left we hear that the government must spend a lot of money (money it doesn’t have anymore, and didn’t have under Reagan, Bush I, Clinton’s first term, Bush II, and now Obama – but they ALL spent it anyway) in targeted areas and on government projects, which will increase business revenue, which will, in turn, create more jobs. So again, the base of the argument is that lack of jobs is the real problem.

The argument from the right is then used to support their tired, old, and now 30-years-disproven theory of reducing taxes on big business and the wealthy to spur job growth. The argument from the left is used to defend higher taxation rates, thereby increasing government revenue, and therefore spending, which perpetuates our debt-spending cycle and leaves us in the financial mess that we’re wallowing in.

Don’t misread me, jobs are important. And yes, with roughly 10% of Americans out of work and upwards of 25% un- or underemployed, creating more jobs would certainly help increase consumer spending and tax revenues as well.

But unemployment is not the cause of the recession; it is merely a symptom. Recessions are caused by people not buying things. When people don’t buy things, businesses don’t make/provide things. When businesses don’t make/provide things, they can’t afford to pay people and often go out of business. When businesses cut jobs or stop being businesses…unemployment.

So why aren’t people aren’t buying things? Let’s look at some probable explanations:
1) They’re unemployed – sure, about 10% of the country can say this now.
2) They are working too hard at their job(s) to enjoy things 
- About another 15% of the country can say this.
3) THEY DON’T HAVE ENOUGH FREAKING MONEY! – 90+% of the country can attest to this one.

The average wage for the bottom 90% of households in the US is about $31,000/year and it’s falling.

Do you know what the average wage (in inflation adjusted dollars) for the bottom 90% of households in the US was 30 years ago? About $30,000/year.

Now, I’ve heard conservatives argue that the cost of goods has gone down over that time frame. Electronics, computers, air travel, long distance – all of those are much cheaper than they used to be. True.

But look at the necessities. Food, fuel, housing, transportation, insurance, health care/insurance, college tuition – all of these have increased exorbitantly over the past 30 years. All while wages have stayed the same. What does that mean? It means that more and more of average household incomes have gone towards those necessities and less and less have gone towards other spending.

For a while, the middle class was able to keep up the spending habits they formed back when they had more cash in hand. How? The great American way…they borrowed it. First they did it with credit cards boasting low introductory rate offers. When the rates shot up, they did it with their homes, pulling out all that supposedly never-ending equity. When housing prices plummeted and banks stopped lending easily, Americans looked in their coffers, counted the pennies, and then went on a cold-turkey spending diet.

The result? Long term recession.

I’m sure you’re wondering: we had quite a few monster growth sports in those 30 years, didn’t we? Between the internet, and housing starts, and a DOW that went from 780 in 1979 to 12,500 in 2011, I mean, there must have been some wealth created in that time! Where’d it all go?

The answer? Straight to the top. Check out these three sets of incredibly disturbing charts from Mother Jones magazine. They’ve been running a scathing series of pieces about income disparity, corporate wealth, and tax inequality that will make your heart sink.
Here’s one on Income inequality.
Here’s one on increased middle class productivity for no reward.
Here’s one on taxes.

Study these charts. They are loaded with sound analysis, well-presented and easy to understand. The conclusion they support is this: “Trickle Down” (aka supply side economics) doesn’t work! Or at least, it doesn’t work for the bottom 90% of the country. It works great for those at the top, though!

Now I can hear my conservative friends saying things like “That’s capitalism,” or “If they did well enough to earn that much money, then they have a right to it.” We’re not talking about hard work resulting in reward, folks! We’re talking about government policy and taxation methods being unfairly beneficial to the wealthiest of us so that their wealth keeps growing and growing at a rate that far outpaces the vast majority of Americans. And I mean vast. I’m talking 99.9% of us have absolutely no hope of ever coming close to making what the top 0.1% makes. And they aren’t even happy with that! They are constantly striving to reduce their tax “burden” even more and doing it with the unwavering support of tens of millions of Americans who suffer as a result of those policies. But that’s for another time.

Here is possibly the best proof I can offer. Sixty years ago, after the troops had come home from World War II, the building of the American Middle Class began. From 1947 to 1979, all of the income quintiles in the United Sates experienced comparable wage growth, and those closer to the bottom (the lower-earning 80% of Americans) experienced more growth than the top 20% and especially than the top 5% (Read more here). This is what built the middle class! And therefore, the middle class is what built a buzzing US economy. Thanks to middle class buying power, homes were built, cars were bought, college tuition paid, vacations taken, Christmas gifts given, and yes, even taxes collected. When the middle class did well, so did our economy and so did our government programs.

Then came Reaganomics, and everything changed for the next thirty years. From 1979 to 2010, wages actually dropped for the poorest 20% of Americans. The middle 60% didn’t fare much better, seeing feeble increases (+9%- to +25%) compared to the previous 30 years. But the real winners were the top 5% who saw an amazing 81% increase over the same time period that the poor were seeing their wages drop (again, read more here)! All while the cost of those same necessities were rising drastically.

And what have we found about high concentrations of wealth? Wealthy people don’t buy anything! At least not what 1000x worth of middle classers would buy. I mean how many iPods does one billionaire want?  Sure they may start a business, or invest capital in another, or fund a project of some kind, but most of the time those resources are not being used to acquire goods or services; they’re being used to acquire more wealth! Which does nothing to boost consumer spending.

The way to improve our economy is to put more cash in the hands of the people who will spend it – the people who earn hourly wages and 5-digit salaries, the people who get paychecks, not investment statements, in other words the lower and middle classes. And spend it they will! In fact, the middle class isn’t good at doing anything BUT spending when it comes to their money.

America doesn’t just need jobs. It needs good-paying jobs. It needs higher wages for the lower and middle classes, which built the economy that we came to know, love, and base all of our economic hopes on.

Without addressing wage inequality, we’ll never address the true problem that lies at the base of our current economic woes.

So while creating jobs can bring about one in ten Americans a paycheck again, it is the quality of those jobs, and therefore the size of that paycheck, and everyone else’s, that truly matters.

Now we just need a way to get employers to do it. Any ideas?