Last year on September 15th the failure of Lehman Brothers helped push the US economy into a dramatic tailspin, essentially assuring that Barack Obama would defeat John McCain, and setting up what could be a crisis of historic proportions. It is now one year after that infamous Monday. Where do we stand?
On the one hand, the stock market is well off its lows, allowing investors to feel like perhaps they have a chance to make money again, and replenishing retirement accounts that had bled funds. The dollar, despite a major stimulus package and a debt load that grew dramatically, remains reasonably strong, worth $1.46 per Euro. That is lower than in recent weeks, but still not at historic lows.
Unemployment has continued to sink, now reaching 9.7%. That, of course, is the number according to the official statistics. The calculation method has been massaged enough for political purposes over the years to allow one to reasonably claim that it only counts about half of those who would really like a job but can’t find one and often have ceased looking. The real number could be near 20%, or one in five workers out of a job. Unemployment is a lagging indicator, of course, meaning that if things are getting better, it might take awhile for the employment statistics to improve.
Total public debt is approaching $13 trillion. Going into 2008, it was at just under $9 trillion. Economists say that such an increase in debt during a recession, bringing debt to 90% of GDP, is rational to avoid depression. The debt also makes the US dependent on other countries, especially if we are to keep deficit spending. At least 25% of the debt is in foreign hands, China owns $800 billion worth of US Treasury securities. This foreign borrowing has not only allowed us to increase debt, but also to maintain high current accounts deficits.
Total household debt is also huge. Depending on the source, it’s at about 100% of GDP, or nearing $13 trillion, about the same as government debt. If you add in other debt — corporate, state and local government, etc., you could well be looking at a total debt level of over $50 trillion in the US. This is important. The happy talk about the recession “running its course” assumes that this is just another recession, something we’ve lived through before and will no doubt experience again. A rough one, yes, but we reacted boldly and hopefully that will work.
To be sure, the stimulus package had too many ineffective measures, like tax cuts. Most tax cuts went to paying off debt, and not towards stimulating the economy. Yet now some of the infrastructure money is starting to come in, and no one will ever know just how much state governments were saved from draconian cuts thanks to the transfers from the federal level to the state level. I have a love-hate relationship with the stimulus package. At first I accepted it, then I opposed it, now I’m starting to think that maybe it can work to rebuild infrastructure and was probably necessary to help states. Yet it added significantly to the debt.
The debt is a structural problem, and this level of debt is unprecedented, except in times of severe national crisis. Even then, private debt (at least about $1 trillion as credit card debt) is unbelievably high. Not all such debt is equal — student loans, credit cards, home mortgages, etc., all combine. Yet with home equity at all time lows (it was even low before the housing bubble collapsed!), the US is a country that has been living well beyond its means. The structural problem, of course, is made worse by the fact that baby boomer generation is nearing retirement. When they start collecting social security and medicare, stop paying into retirement accounts (and instead withdrawal), the result could be devastating. Not only will those entitlements quickly reach amounts well over the total current budget, but investments could be under severe pressure as money will be leaving instead of flowing in from these boomers.
Add together our existing debt with those coming challenges, and it’s clear that our entire economic system as its currently structured is unsustainable. The United States is on the brink of experiencing the kind of decline in economic (and by extension military) power that Great Britain experienced after the 19th Century. Or to be more dramatic, perhaps it can compare with the fall of Rome. Most people haven’t caught on to this yet. Moreover, those who do discuss it tend to not quite believe that it could really be that bad, and move quickly to better scenarios.
And there is some good news. We’re starting to save again, and it appears people want to try to start getting rid of the vast amount of household debt accumulated. That is a necessary first step towards fixing these structural woes. Another bit of good news is that the current account deficit, which neared 7% of GDP awhile back, is now down to about 3% of GDP. That’s still high, but not scarily unsustainable like the previous number. This is due to the recession and the lack of demand for foreign goods, but is helpful in terms of not requiring as much an influx of foreign funds to finance the trade deficit. New numbers will be out tomorrow for the second quarter of 2009.
The big question is whether or not these positive trends are indicative of the kind of structural transformation we need to get back on the path to a sustainable economy. (And I’m brushing aside fears like global warming or terrorism for now). The answer is that if these continue, they do help, but the real change has to come at the governmental level. Simply, even if one can defend the stimulus, ultimately the federal government has to get debt and budgets under control, and then address the high costs of the retiring boomer generation.
Here is where taking hard medicine might avoid a major collapse — but hard medicine is something Americans have become adept at avoiding. First, cut military spending and US foreign commitments dramatically. We can’t afford them, and if Iraq and Afghanistan have proven anything, we’re not very good at such actions. Yes, we need counter-terrorism, but terrorism is caused in part by our interventionist foreign policy. If we alter that significantly, we’ll save money, gain international favor, and undercut the anti-Americanism that fuels terrorism. Second, redo the budget from the ground up, with everything on the table.
Should wealthy folk be able to get social security? The argument that it’s a ‘promise’ from the government that they will get back what they paid into is strong, but keeping that promise is not worth sacrificing our entire economy. Wealthy boomers have been the hyper-consumers who have set up this crisis, after all! Health care has to be rationed, and we have to seriously change the amount of money it costs to provide it. If the current reform efforts fail, the structural debt problem will force an even more draconian set of reforms within a decade. New methods of taxation need to be developed, with social welfare programs designed at creating incentives for innovation and work, while avoiding the current problem of the growth of welfare cultures of dependency. That’s easier to say than do, but finding a way to do so is imperative.
Finally, the US does have to start producing goods again, and can’t rely on services as the engine of the economy. This requires infrastructure investment, as well as breaks to small business entrepreneurs who want to start producing real goods in a very dangerous business environment. Ideally, these efforts could dovetail with social welfare reform to allow a business-worker partnership rather than the kind of competition that made it possible for big money to see it as OK to generate huge salaries simply because the “market allowed it,” even as the poor lacked health care and often basic opportunities. The state will need to be involved here, preferably shifting from federal involvement to state and local efforts.
There’s more. But one year on, as we see stagnation remain in the economy, the dollar weakening slowly (but it could start losing value more quickly — pay attention!), and the real problems of debt and future demographic trends on the horizon, I find it impossible to believe this is “just another recession” and things will soon be “back to normal.” The US is large enough, rich enough, and well educated enough to make the adjustments if we have the political will. If we lack the will, they will be forced upon us, perhaps in ways that will threaten the stability and social cohesion of the country.
It’s time to really take stock of what we value as a people. The party is over. Materialist consumer society was like a drug that got us high. A shopping rush as we injected new stuff into our lives, but without taking enough time to really connect with others and find meaning. That crisis of spirit is the most important problem we need to confront. Unless we learn to think differently, we won’t have the political and personal will to do what needs to be done.