Was It Worth All the Grief?

Financial ReformThe economic boom lasted 15 years, give or take. And then the crash of 2007/2008 came, wiping out nearly all the gains, both individual and national. Now, after more than a decade of easy money, paper wealth and the all-consuming consumerism, only one question remains. Was 15 years of boom worth all the grief today?

One way to look at the world since the 1990s is to see it as a grand experiment, both economically and socially. From the economic point of view, the elasticity of cheap credit was expanded as far as it would go. Socially, that meant that even the essentially poor people could borrow money to buy a house on a vague hope their future earnings would miraculously improve compared to the present day.

We all know what happened when credit was no longer elastic. But if we were to do it again, how would we do it? Or would we even do it at all? Would we avoid the risk and decrease the gains to an extent, or would we roll with the gains and disregard the risks come rain or shine? To answer this question, perhaps the best gauge would be to compare the bottom line; that is, have we lost all the gains or are we at least at a positive zero?

The place to start is looking at the actual purchasing power of the poor and lower middle class. Typically, in developed economies, the poor and lower middle class account for about 20% of the population. The question that needs answering is: has that 20% really gained more bang for their buck and have they kept it? Let’s look at the two outliers on the earnings front after the 2008 crash — Canada and the United States.

Starting with the country that has probably weathered the Great Recession with the least amount of inconvenience, Canada, the answer to that question would be a definite yes. Statistically speaking, the net income of the bottom 20% earners in Canada has slightly decreased during the recession of the 1990s from about $21,000 to $19,000 (in inflation-adjusted present-day dollars). However, the reversal came around 1997, at which point the net income of bottom earners started increasing to almost $24,000. Additionally, the next class of earners in Canada saw their net incomes rise from $32,000 to $40,000 during the period from 1997 to 2008. Since the crash of 2008, the purchasing power of both groups of earners may have flattened, but essentially it has not fallen.

(Something similar has happened in the U.K., tracing Canada’s purchasing power progression up to the crash of 2008. But unlike Canada, incomes of the 20% bottom earners in the U.K. have actually fallen since then, while other earnings groups have been
adversely impacted, too.)

As far as the U.S. is concerned, the picture is completely different. The peak of prosperity for Americans came in year 2000, decreasing a bit after the tech bubble burst, but more or less regaining solid footing and upward momentum in the next few years. However, when the crash of 2008 happened, net incomes in the U.S. seem to have fallen into a bottomless pit, dropping all the way down to 1997 levels.

What these statistics tell me is that it all depended on the strength of infrastructure of the entire society, the way the society as a whole perceives risk and the systems of value that govern it. Just one small example of how different things could have been for the U.S. would be the recently introduced financial reform bill in the U.S. What Canada has had for decades — that is, rigidly regulated financial institutions — the U.S. is introducing only now. The prosperity in Canada may not have been as flashy and apparent as it was in the U.S. However, Canada did not lose its boom years’ gains. U.S. did; all of them.