Student Questions: The Recession and the Middle Class

BY busadmin  November 26, 2009 at 10:24 AM EDT

unemployment; file photo

Editor’s note: This week, the Business Desk continues to feature questions from students in three high schools around the country.

Question: What can the average middle class person do to improve their finances during a recession? — Melissa, senior, Carle Place High School, Carle Place, N.Y.

Paul Solman: How does anyone improve their finances EVER? By spending less than they earn. By specializing so that you’ll have skills to sell according to what I call “The Golden Rule of Work”: “Do unto others in exchange for what you would have them do unto you.” That is, success in any economy is selling your fellow citizens something they can’t buy at a better price, given the quality, from someone else.

Now as a practical matter, WHO you know tends to be more important than WHAT you know, if only because getting the opportunity to show what you CAN do almost always involves a measure of trust at first. That’s why admission to a prestigious college is so valuable: who you’re going to know as a result of having gone there. Plus the pedigree that itself bestows a level of trust.

Question: Ben Bernanke says that the recession is over. When will the middle class see the results of the end of the recession? — Pranav, senior, Carle Place High School, Carle Place, N.Y.

Paul Solman: “Middle class” is a category into which almost all Americans put themselves these days. So let’s say you’re asking when the recession will end for “most Americans” (all save the poorest and very richest).

My answer? Not for quite awhile. How, I ask myself, could it be otherwise? Most Americans spent more than they earned — for years. Now they’ve got to cut back because they’ve come to their senses. And lenders won’t extend them more credit — certainly not at attractive interest rates.

But consumer spending is a huge part of our economy, so if it goes down — as it has been — the economy is unlikely to pick up much.

The rest is the economy is BUSINESS spending, GOVERNMENT spending, and selling more abroad (in exports) than we import. Business spending isn’t likely to grow much given how many Americans — nearly 30 million — are unemployed and underemployed. And now that the stimulus package has come under so much criticism, no matter how unjustified some of the criticism may be, it’s hard to see how more government spending should be expected.

As for more exports and fewer imports stoking the domestic economy, well, America is still running a trade DEFICIT of several hundred billion dollars a year, so that isn’t helping any.

One final piece of pessimism. The economic growth reported recently (at an annual rate of 3.5 percent) reflected the “cash for clunkers” buy-a-car-now! program, increased government spending (including an 8 percent rise for defense), and a build-up of inventories (goods produced for sale, but not yet sold). How sustainable is any of that?