After the emergency economic packages, then what?

Robert Reich correctly points out that we dare not think temporary government stimulus packages can restore long term economic health to the middle class and working class. They were in a decades-long and accelerating decline before the subprime mortgage crisis and current recession started.

Not long ago I was talking to someone who once had been a deficit hawk but the current recession had turned into a full-blooded Keynesian. He wanted a stimulus package in the range of $500 to $700 billion. "Consumers are dead in the water," he said, fervently, "so government has to step in." I agreed. But I didn't tell him his traditional Keynesianism is based on two highly-questionable assumptions in today's world, and the underlying logic of Keyenes leads us toward something bigger and more permanent than he has in mind.

The first assumption is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren't much higher than they were in the 1970s. Middle-class families continued to spend at a healthy clip over the last thirty years despite this because women went into paid work, everyone started working longer hours, and then, when these tactics gave out, went deeper and deeper into debt. This indebtedness, in turn, depended on rising home values, which generated hundreds of billions of dollars in home equity loans and refinanced mortgages. But now that the housing bubble has burst, the spending has ended. Families cannot work more hours than they did before, and won't be able to borrow as much, either.

Click here to read the rest of Reich's post.

Update on Friday, December 19, 2008 at 09:14PM by Skeptic

Obama said today in a press conference that he's concerned about the aftermath of the recovery--dealing with the public debt and deficit and structuring an economy that produces rising incomes for the middle class.  The New Yorker observes that he and Robert Reich are not the first men in history to worry about what comes after a crisis.