Historic Fog

from Peter Radford

Ugh.

The numbers are just horrible. We in the United States have wandered off into the desert and will not return for years. Here’s why:

• Household debt is still way too high. It is well down from its peak of about 130% of disposable incomes, and is now “only” 115%. But that compares with an average of around 75% for the last few decades of the last century. Something tells me that we are still retrenching furiously. That undermines aggregate demand. That is why underemployment is a feature of the economy we will not eliminate any time soon.
• One result of the retrenchment is the lack of consumer spending. America is a consumerist nation. It has built its economy around private consumption. But we have never seen such a prolonged period of practically zero growth in consumption as we are currently living through. This is a first for post-war America. Our elites have no answer. They are fumbling. All their policies fail to match up with the historic fog we are in. We have had thirteen straight quarters of weakness in consumption, and while those debt levels are where they are households are likely to keep a tight lid on spending.
• Savings are deplorable. Despite the retrenchment and the reduction in spending rates, households are having a hard time saving. Yes the savings rate is up somewhat from its derisory levels during the years of illusion, but it is less that half what it was back in the latter part of last century. And things are getting worse: one of the great shifts of the decades of illusion was the movement of risk from businesses and government onto households. The shift from defined benefits to defined contributions is one example: it exposed millions of households to a risk they had never shouldered before and are not well equipped to deal with. As the baby boomers approach retirement they are realizing how short they are in terms of invested cash. With the slump in home values depriving them of wealth too – albeit paper wealth – this is the first American generation since World War II, to be faced with an urgent need to save instead of spend. An unintended consequence of privatizing all that risk is to bring upon us the end of the consumer boom. By putting the onus onto their employees, businesses have reduced the spending power in the economy and thus cut their sales prospects. That means the endless short term focus on profit is going to end up as a longer term loss.
• The shift of risk to households would have been ameliorated had wages risen to compensate for the risk. But they didn’t. Businesses have tried to have their cake and eat it too. They cut their own risk by trimming benefits, but they have kept wages flat too. Indeed real wages have fallen by 1.6% over the last year. This is also historic: this is the first recovery ever, where seven quarters in wages have not risen. There is no way that consumption can rise if wages are held flat. No way, unless, that is, consumers are not inclined to pile up debt. And, as I have already said, they are not so inclined.
• This accumulated freeze up of the consumerist spigot is having an enormous impact on smaller businesses. Not only are bigger businesses slashing costs in order to boost profits – this cuts into small business sales since they usually occupy a lower rung on the supply chain – but small business sales direct to consumers are being radically reduced. The National Federation of Independent Business, a small business trade group, has just released its survey of its members: the majority are freezing hiring in anticipation of lower sales volumes. Yes fewer are reducing payrolls too, but, for the first time in almost a year, they are not hiring either. The number one one concern amongst small business is the lack of sales. High taxes and government red tape – a perennial gripe of small business owners ranks third.

Even if we ignore the continuing instability of our financial sector – too big to fail will come back to haunt us sooner rather than later – this list of issues is not one that is easily solved. These are intractable and long term in nature. They imply a very significant shift within the economy – away from consumerism … but towards what?

Some people argue we need to pump our manufacturing up again, but this is a long term solution also and worldwide competition is ferocious. Plus it is not at all clear what we would manufacture. Does this approach portend trade wars? The imposition of tariff walls? The phrase “industrial policy” gets bandied about, but where do we invest? And, even if we back winners, who is going to buy all these domestically produced goods if we have shifted from a consumerist economy? The implication is that we are headed more towards a German, Japanese, or Chinese style export driven economy. Who, then, will take our place as consumer of last resort?

If the American economy is in a historic fog, and if our policy makers have only a set of policies built for the old style consumerist days, it seems clear that a decade of stagnation and frustration is the more likely prognosis.

And on the policy set: neither major party, no business group, and few if any academics, have yet been able to articulate anything new. They all appear to be in denial of the shifts I have outlined. Their prescriptions have all been tried and all have failed at least once. The last ten years have been a spectacular flop: we cut taxes with an historic verve only to debilitate government and produce no visible boost in growth. Wages stagnated. Profits soared. Debt became the only way most Americans kept up with rising costs. The years of illusion ended with a thud when we hit the wall and our banks imploded. The clean up, and the return to sanity, like those days after any binge, will be longer and grayer than it might have been had we recognized the pathetic emptiness of the ideas that led us so far astray.

Historic fog indeed