With equity markets, real estate, and other financial asset values at or near all-time highs, that small minority of citizens who primarily benefit from the Wall Street economy have never been more well-off in financial terms, at least on paper.
On the other hand, the vast majority of Americans in the Main Street economy, i.e., those who rely on real-world jobs with salaries, hourly wages, and other earnings from their labor, continue to fall further and further behind in both real income and household wealth. For Main Street, personal indebtedness is at record highs (more than $17 trillion in the United States), and savings rates are near all-time lows. Average real (after inflation) income has fallen since 2019. The financial stress on American households is increasing with each passing month. A crisis is brewing.
The value and “dollar” retail stores serve as a good proxy for the financial health of the middle class and low-end household. The American consumer is increasingly closing his or her shrinking wallet to anything other than the most essential of items, such as food and fuel. Facing weak sales trends and profits pressured by everything from rising costs to forced discounting and increased theft, shares of Dollar General and Dollar Tree have each fallen approximately one-third since the beginning of August. Target had negative comparable store sales for over a year before finally turning slightly positive this quarter. The big box retailers, such as Home Depot, Lowe’s, and Best Buy, that sell more expensive, discretionary items, have had negative comparable store sales for six to ten consecutive quarters. Popular restaurants and specialty retailers alike are seeing fewer consumers place smaller-value orders.
Comparing the “Dollar General versus Ferrari” economies reveals stark differences between the two worlds. Wall Street continues to prosper in the face of inflation, slowing GDP growth, and corporate layoffs, while Main Street is clearly in a practical, if not technical, recession, as good-paying jobs grow scarce. For most Americans, things are getting worse, and they know it.
While it was the Trump administration that first confronted this imbalance with a stronger trade regime, and in particular the use of corrective tariffs against China and other countries that were abusing the free trade system, the Biden administration recognized the benefits of tariffs and other measures, and left many of the Trump-era trade policies in place. Nonetheless, it will take much more than what has been done to date to reverse course.
Previous crises, again referencing the GFC and the COVID-19 pandemic, were met with massive deficit spending, financial stimulus, and monetary expansion, which inevitably led to persistent inflation, and to an unsustainable level of government debt. That old trick will not work this time around. The storehouse has been emptied.
A strong nation requires a vibrant middle class, and an economy that is based on the production of real things. The United States can once again make the goods it consumes. This is the only way to build and retain national wealth. This difficult transformation will, at a minimum, require a stronger trade policy that protects American economic, financial, and national security interests. Onshoring must be encouraged, and value-add retained domestically wherever possible. Intellectual property must be safeguarded.
We need an unencumbering of America’s bountiful domestic energy and other natural resources, the production of which has in recent years been held back by relentless regulatory pressure and suffocating bureaucracy. The United States must develop a coordinated technology policy framework that encourages American leadership and innovation in different areas. We need a substantial upgrading of a broken educational system that no longer concerns itself with science, engineering, and related practical skills.
If the Federal Reserve lowers interest rates later this month, as is widely expected, the warp of benefits toward Wall Street will continue, while doing little to benefit Main Street. Marginally lower mortgage rates do little to help families when houses are priced out of the reach of Americans who don’t have stable, well-paying jobs to afford them anyhow. True recovery will come from the real, not the financial, economy, and a new administration will have ample opportunity to set the policy framework to attain it.
History warns us that if this crisis is ignored, and the distortions are allowed to continue, the nation risks serious social disruption and upheaval, which will benefit no one, including those who today aren’t yet feeling the pain.
