The President-elect’s plan may buy Americans less time than we need to make overdue changes in how we think about money and the ways we spend it.
Barack Obama’s inauguration is still a week away and it’s already exhausting to think about the challenge he and his advisors face with the rapidly deteriorating economy. It seems like only hours ago that George Bush and Dana Perino were falling all over themselves to avoid using the word “recession.” Now a growing number of respected economists are grimly explaining that we’re in an economic depression.
Part of what’s grim is that, in this circumstance, the very word “depression” is a
double entendre. As former Federal Reserve Chairman Alan Greenspan repeatedly demonstrated with appearances before the Congress, investor and consumer psychology play such a large role in economic activity and market stability. Greenspan is now willing to take some responsibility for not anticipating and doing anything to prevent the sub-prime mortgage debacle. But the news that the Zeus of economic sunshine got himself struck by lightning is itself cause for alarm. And it’s not just Greenspan. If you missed PBS’s Paul Solman’s quick round of interviews with many of the nation’s top economists (asking why the economic crisis eluded them) you can check it out here. Today, the fundamentals of our economy are being examined and re-examined like containers of old, moldy food from the very back of the fridge, and we are all invested in the hope that Obama and his team can begin to remove the stench and throttle back the panic.
I’m open to hope. But I also wonder how honest Obama can be. I’m not talking about the $800 billion “stimulus” package he is proposing. There is little argument about whether a large injection of government spending is needed. The problem is in the long run, because the stimulus, by itself, is just a lifeline. Even if it succeeds in stanching the bleeding, it doesn’t really solve (let alone affect) the underlying structural problems and distorted appetites that caused the U.S. economy to collapse like a bridge into a river. Indeed, the added trillion dollars in national debt makes the long-term challenge harder.
Just to recap, here, in a nutshell, is the path we took to get to this colossal bummer of a hangover:
1) We embraced free trade and generally assured ourselves that the loss of the American industrial capacity and high-paying industrial jobs to Mexico and China (where cheap labor could be exploited and environmental protection is practically non-existent) was inevitable and that the benefits to American consumers would outweigh any of the other economic and social dislocations.
2) Notwithstanding the shift of jobs overseas, Americans became, by far, the most consumptive people on the planet, in terms of energy, consumer goods, etc.
3) Americans, on average, began to spend significantly more than we actually earn. Collectively, we racked up mounds of consumer debt, a custom recently propelled by the practice of liquidating the equity in homes, to support the consumer spending binge.
4) Under the Bush Administration, public debt exploded. So much for national sacrifice and pay as you go. After 9/11, President Bush said it would suffice if we all just went shopping. He then pursued, with Congress’s blessing, additional tax cuts for the wealthiest Americans, all the while taking a couple wars off budget, as if we didn’t really need to pay for them at all.
5) China, in particular, has been willing to finance our budget and trade deficits because the remarkable ascent of the Chinese economy has been predicated on being able to sell Chinese produced goods to American consumers. There are a multitude of problems with this bizarre relationship beginning with the facts that it is: a) economically unsustainable, and b) has been having devastating local and global environmental consequences. Remember global climate change? Well, anything that we’ve been doing in western countries to reduce carbon emissions was quickly being undone by the pace at which China has been adding coal-fired power plants to fuel its economic boom.
The only silver lining in the current collapse that I see is the brilliantly clear death of the conservative ideological shibboleth that the markets regulate themselves; that we can rely on the self-interests of corporations and banks to police our economic system after we (to use Grover Norquist’s famous prescription) drown government in a bathtub. If Norquist were right, we’d at least not have to think hard about how intrusive government has to be to regulate greed, corruption, and stupidity on Wall Street. Now, there’s no question we have to think hard because of the disquieting evidence that the cat burglar gloves for Adam Smith’s invisible hand look a lot more like Bernie Madoff’s than Warren Buffett’s. The life of a citizen was just so much more carefree when we could believe the fairly tale that high altitude capitalism excretes a magic enzyme that protects all of us.
In looking to the long term, I don’t mean to dismiss the importance of the examination we need to better learn why things went so wrong in the markets. We’re already finding that Wall Street used its political influence through campaign contributions to create a new realm of unregulated transactions (i.e. derivatives including credit default swaps) that vastly compounded the damage from the sub-prime mortgage debacle which, by itself, would likely have been enough to induce a recession. So it’s crucial to get to the bottom of that, and impose the political and regulatory reforms required.
But here’s what troubles me. I wonder after the dot.com bubble and the housing bubble have burst whether we are facing a consumer bubble, an “us bubble,” if you will. I don’t see that there’s a better choice facing Obama than a Keynesian economic stimulus from government. But it only works if the money used to stimulate the economy actually stimulates economic activity.
There’s some good reasons to question whether it will work. But, say it does work. Where does that get us if it only gets us back to where we were a year ago?
The problem I see is that our consumer behavior–the kind of consumer behavior we hope Obama can succeed in stimulating–borders on sociopathic, and maybe I’m being too polite in using the word “borders.” Americans simply buy more and in bigger sizes than people need to be happy. I say this as an American who grew up in Panama which is a poor country with a lot of happy people in it. But I also say this as someone who knew his Depression-era grandparents well, and understood that the best things about them were their priorities, including the utility and frugality of their consumerism. Both my grandmothers would have been embarrassed to be caught shopping in Nordstrom. (Sorry Nordstrom.)
There’s a decent argument to make, from a moral and philosophical root, that we’d be better as a people if we weren’t so materialistic and so giggly in the way we’ve come to treat shopping as recreation. Over the holidays there was a television ad for an upscale car that featured flashbacks to when a boy got a “Big Wheel” for Christmas (in the girl version, it’s a pony, I believe) and this memory was of the best Christmas ever. Until this year when, according to the two scripts, the grown boy and girl walked out the doors of their respectively palatial homes to discover gleaming cars with bows on top of them, and became deliriously happy.
Nice car, but especially since I’d been reading about what is happening to our economy, it just made me a little sick to my stomach.
I accept that I’m atypical and that the reasons these ads work is that they give more ordinary, upscale consumers ideas about their Christmas list. So, the practical concern and question I have is about the folks this ad is aimed at. The shoppers. The baby boomer consumers who, we know, ran up huge tabs on their credit cards and home equity loans over the last fifty years, and especially over the past twenty years.
A month ago CNN reported that, for the first time in over half a century, U.S. household debt (now at $13.91 trillion) has started falling. This is not public debt. This is private debt, and it comes to roughly $125,000 per household.
In a rational world (you know, the one we were told about in our first business classes in junior high) this seems like good news. Because you’d want to think that with less household debt, people would have more for their savings and to spend on other things. But that’s not what’s going on, at all. Rather, the household debt decline is a side-effect of our collectively plummeting net worth that results, among other things, in decisions to buy less on credit.
And this gets to the “bubble” I’m referring to: the pattern of hyper-consumerism that we’ve begun to expect is normal and which we’re hoping to re-inflate with the enormous federal stimulus package headed our way this year.
That bubble may have already burst.
Here’s how CNN ended its piece on household debt back in December.
“Consumers are going through a major change in spending and savings habits,” said Lyle Gramley, a former Fed Governor. “Throughout the housing bubble, consumers had a savings rate of zero, relying on the rising price of their homes. Now they’re saving money for the future instead of spending it.”
If Mr. Gramley is right (he’s hardly alone in his view), and consumers have already been jolted to a lasting change in their outlook and behavior, then Obama’s planned stimulus is economic triage at best. He’s not even taken the oath, and we should already be pushing him for answers about what Plan B is going to look like.
–Tim Connor
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