Thursday, July 12, 2012

Why are we expecting miracles for getting out of this economic 'downturn?'

We have been in a serious economic recession/depression since about 2007, when rising unemployment, home foreclosures, and a near banking collapse began to show their teeth.  And the U.S. obviously was not alone, as this has been a global disaster.  There is no way around the fact that, with globalization of markets and deep interdependencies between various national economies, when one country suffers, it is conceivable that the ripple effect through this complex system results in global consequences - when one of those countries is the U.S., or if it is the European Union, then it will more quickly result in a global disaster.

And now we are in the midst of a U.S. election campaign season.  Our leaders and wanna-be leaders are out there telling us that they have 'The Plan' to quickly get us out of this financial mess.  Oh, it is so tempting to believe them.  For those who have been out of work or taken pay cuts over the past four or five years, this is music to the ear.  But the trouble is, history certainly does not support these claims.  I think the American public is rightly wary of anyone stepping up to the microphone saying it will be essentially 'easy' to get out of this mess.

The Great Depression began more or less in 1929.  This is the only period in modern history with a worse economic meltdown than what we have seen presently.  That lasted at least a full decade, and the main engine for getting us out of that period was a world war, that forced millions of people back into work either in the military or in factories to get our war machine in place.  We will never know how long, absent WWII, the depression would have lasted otherwise, if all we had in place were political 'economic recovery' plans or policies.  I suspect it could have lasted another decade.  Another financial collapse of significant magnitude happened in the 1980s, when Japan was on the rise and many thought it could surpass the U.S. as the major economic power.  They still have not fully recovered, and this is well into its second decade for Japan.  Obviously there are large differences between Japan and the U.S., and different economies and interests, but the point is major collapses tend to not be solved or see good recoveries in just a couple years.

I am no historian, I am no economist, so I will not be able to cite theories or provide many other examples supporting this thought without doing some research.  But I am fairly confident in stating that the politicians are blowing smoke.  I think they understand this.  Rather than stepping up and being honest with us (to his credit, President Obama has repeatedly told us this is not going to be fixed overnight, which is not a politically smart thing to say), they continue to try and win votes with the development of fantasy sales pitches about how they are the economic savior.

The thing to think about is how did this happen.  There are so many contributions, but the well-known major contributors include government fiscal mismanagement (two unpaid wars, historic tax cuts and loss of revenue, increased spending, health care costs rising well above inflation and higher entitlement costs, etc.), pure greed in a highly unregulated banking system (through increased DEregulation during the 1990s and through the Bush administration), which allowed millions of careless loans and financing of businesses and mortgages to be made, where the lendees could not possibly afford the loans over the long term.  We were in a period where we, the American citizen, was spending more on credit than we were ever attempting to save.  Personal bankruptcies were beginning to explode, and record per capita debt developed.  As bad as credit card debt is, our college graduates are coming out with even higher college debt.  This by itself, along with a very difficult job market for graduates, is a long-term issue some are finally talking about - we have set up the next generation for long-term financial problems.  And this in a group that historically spends a lot of money that the U.S. economy depends on. This is why Obama has made such a big deal about keeping college loan rates low, which nearly doubled due to some in Congress that were threatening to double the rate.  And another stress on the economy for the past two or three decades: the average American worker's wages have been flat when adjusted for inflation.  By the way, the upper couple percent of American's wages have went up a few hundred percent...and they get the largest financial support through tax policy and loopholes.

Our economy depends on consumer spending.  About 2/3 of the economy is through consumers buying stuff.    It is a fair statement to say that we cannot see much improvement unless there is more spending, which requires people to have jobs that do not just have flat wages over time.  The middle class drives the economy.  When the middle class cannot spend, we have trouble.  The wealthy are not making up the difference, even though many have been taken care of quite nicely throughout this crisis.  Spending must come from somewhere - the government is the only entity capable of such spending.  This was the logic behind the 'Obama stimulus.'  It probably prevented an official depression, as it helped keep another million or more people from losing their jobs.  I don't agree that it was a complete waste of money as the right suggests.  It leads to higher deficits, absolutely.  But in the short term the government spending is one of the few things preventing things from getting even worse.

The rest of the world is not doing well, either, which means any U.S. recovery is affected and slowed down. Even China and India have seen substantial slowing of their economic growth the past two decades.  China cannot maintain double-digit growth forever.  And of course Europe is an absolute mess right now.  None of these circumstances suggest it is possible for the U.S, to have a speedy recovery as the politicians suggest and want us to believe.

Do we try a balanced approach to get our economy moving?  Some spending cuts and some revenue?  Don't go too far in either direction, but have a balanced attack and diverse recovery portfolio?  Or do we cut taxes more for the wealthy, and go solely with spending cuts?  With the middle class suffering, and likely will suffer a bit more since spending cuts will affect everything from being able to buy food (some want cuts to food stamps) or afford college loans or lose unemployment support or lose health insurance (some want to simply repeal the ACA)...average Americans will not be able to spend more if all we have are reductions in government spending, in fact many will need to spend even less!  This is not an economic recovery since it depends most on consumer spending!

This is going to last quite a bit longer.  Regardless of who is President.  But I personally believe the approach Obama wants to take makes more sense than what Romney is suggesting (I would like him to state three things about his plan that are not part of the Bush plan that was largely responsible for the collapse).  We will see what happens with the election, but for the sake of the country the refusal of the parties to work with each other has been disgusting and detrimental to the prospects of reducing the time it will take to get some relief for Americans and the world.  It has only been five years, and history tells us to expect a number of years to come....we cannot afford to wait for political games to play themselves out.

No comments: