Jewish World Review Dec 27, 2011 / 1 Teves, 5772
As Obama Fails to Lead, American Dream Is Called Into Question
By Mort Zuckerman
http://www.JewishWorldReview.com | The Great Recession we have endured was unprecedented and therefore unpredictable. The evidence lies in how completely we underestimated the headwinds inherent in a post-bubble, debt-deleveraging era. We saw a dismal decade of lost growth from 2001 to 2010. The annualized growth of real GDP over the past year is a miserable 1.6 percent. Many remain puzzled why this has happened.
One of the main reasons is the relatively recent transformation from a predominantly manufacturing economy to a service economy—a process that parallels the Great Depression, when we moved from an agricultural economy to a manufacturing economy. The decline in manufacturing jobs has been stunning, going from about one third of the workforce 60 years ago to less than one tenth today.
Globalization—invented in the United States with the container ship—has led to millions of jobs going overseas to low-wage countries. Another factor is productivity. The increase in output per man-hour that followed the invention of the reaper in the middle of the 19th century freed labor from the land for the industrial revolution. Now those millions have been released from the factories, but they have nowhere to go and earn indifferent wages when they do find work. At $32,000 per capita today, real personal income is no higher than it was in December 2004.
Employment is the key indicator. Fewer Americans are at work (roughly 131 million) than in April 2000. Yet since 2000 our population has grown by approximately 31 million and the labor force by 12 million. About 6 million people have been out of a job for at least six months, double the number in previous recessions. Indeed, in six decades, we've never had so many people out of work for so long.
For a brief time, the predicament of millions was masked by the bubble in housing prices and the rise in the value of pensions. Then home prices dropped by roughly 35 percent from peak to trough, which translates into a decline in home equity of about 70 percent, given that the average mortgage represents about 50 percent of the original home value. Similarly, the S&P 500 stock index at approximately 1,250 is roughly at the same level it was in January 1999.
Household net worth has declined by over $7 trillion from where it was at the pre-recession highs, something that has never before happened over a four-year span. Average homeowners today have just 38.6 percent equity in their property, down from 61 percent a decade ago, and we are years away from a durable housing recovery given the fact that 20 percent of Americans have an upside-down mortgage, meaning negative equity.
The evaporation of wealth and the insecurity of income are bound to have a long-term impact on spending decisions going forward. Families save more. The personal savings rate is moving from about 3.5 percent of disposable income toward 8 percent, the normal during difficult times. What's happening is best seen in the relationship of household debt to disposable income. For decades, the ratio was in the range of around 60 percent. In the early 1980s, household debt increased as baby boomers formed their households, but in the dismal decade the ratio exploded. It's now 120 percent, down from 135 percent at the bubble peak. But to get the ratio back to 100 percent, we will need to deleverage at least another $3 trillion.
No longer can the American standard of living be sustained by debt, especially through mortgage refinancing. On average, the U.S. savings rate had dropped to nearly zero in 2007, and since savings are concentrated in the upper-income bracket, that meant most people at the moderate and lower-income levels had negative savings numbers. According to one study, the bottom 80 percent of the American population was spending around 110 percent of its income, a level sustained by the housing bubble. Now, businesses and consumers will be paying down debt rather than hiring and spending.
It has not proved possible to reverse trends despite the most stimulative fiscal and monetary policies in American history, resulting in a tripling of the Federal Reserve balance sheet and recurring federal budget deficits in the range of $1.4 trillion a year. But we have not escaped to what President Warren Harding called "normalcy." As David Rosenberg of Gluskin Sheff has pointed out, when you have nominal yields on five-year government paper below 1 percent and the yield on three-month Treasury bills near zero, you know the bond market and the money market are telling you that the intermediate outlook for the economy is bleak. Twenty percent of personal income is now derived from Uncle Sam's checkbook in the form of jobless benefits, food stamps, Social Security, and disability, according to Moody's. The federal stimulus program is likely to expire before the three gremlins stop plaguing us: Deleveraging of consumer debt will continue, home prices will stay weak, and state and local governments will continue to cut back.
This is not just a Great Recession; in the phrase of Nobel laureate Joseph Stiglitz, it's better called the Long Slump. Interest rates have been brought down close to zero, yet have not provoked any genuine revival in credit-sensitive spending. Little of the $2 trillion of bank cash is going in loans to the private sector because lenders feel the need to stay liquid given the overhang of bad debt and empty houses. Home sales have slid to 15-year lows and new home sales to record lows, despite the fact that mortgage rates have fallen to the lowest levels in modern history. As Rosenberg observes, the depression is not as visible as it was in the soup kitchens of the 1930s, but it is there all right. The reason it is not so apparent is that 99 weeks of unemployment checks are being sent to some 10 million jobless Americans.
At the heart of the continuation of the dismal decade is the intangible factor of confidence. According to RealClearPolitics, only about 22 percent of Americans think the country is going in the right direction while 72 percent think it is going in the wrong direction.
In fact, the whole American dream is being called into question. There is much less geographic mobility, which once was the route to higher-paying jobs. Americans don't expect that their homes will steadily rise in value. The public has not seen how the increased federal deficit spending has helped the economy, even as we borrow some $3 billion a day, or 39 cents for every dollar we spend. In fact, the American public looks at the increased debt with astonishment and fear that it will prevent the economy from growing, and they may well be right. This is particularly so since they understand that the 79 million baby boomers who statistically began to retire on Jan. 1, 2011, will have to be paid for.
An economy runs on faith—faith in the future, faith in the system, and faith in the people in charge. When that faith flickers, as it now has, investment, hiring, and shopping go into a stall. Business is sitting on so much capital because it lacks confidence in the government's ability to manage macroeconomic policy. It fears future costs of regulation and Obamacare, and it resents a populist president's attempts to blame business.
It is true that President Obama has had to deal with a do-nothing Congress, in which both Democratic and Republican caveats quickly sabotaged his American Jobs Act. But there's a failure of leadership here, too. Leadership can only come from the person who was elected by all Americans to represent all of them, as opposed to members of Congress who represent the special interests and gerrymandered constituencies. The president failed to lead on trying to push through that promising mix of entitlement and tax reform from his own bipartisan deficit commission, headed by Alan Simpson and Erskine Bowles. He leaves altogether too much to Congress. In his 60 Minutes interview, he said he could not get Congress to agree to a bigger stimulus, as some had advocated, even though Democrats were in control. What he got, though large, was a third too small to fill the hole in demand. Then he left it to Congress to decide where the money should go. He passed the buck to Congress, too, over the health and debt-ceiling legislation.
And he has missed an opportunity to capitalize on a wide recognition that our tax system is a drag on the economy. The single most productive policy change would be to broaden the base, lower the rates for both individuals and business, and simplify the maze. It would reignite the confidence that our public leadership can actually accomplish something on a bipartisan basis, for that is what it would take.
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Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report.
Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report.
© 2009, Mortimer Zuckerman