Today, I just wanted to throw out a scatter-shot of thoughts revolving around the current state of the world. As everyone knows, the U.S. economy is pretty much a mess right now. There are a lot of scary stats out there that demonstrate just how bad things are (e.g. take a look at stocks from this past week), but for me I tend to focus on employment because jobs are at the core of every economy. Here's one that I saw the other day that shows that the length of unemployment for the average unemployed worker is currently double the next highest peak ON RECORD. Here's another one (source) that shows that employment is going to take a long, long time to recover, as compared to past recessions:
When I see charts like these, I have to think that this is not a normal recession. "Well, duh," you're thinking, "I don't need a Ph.D. to know that." Okay, so this obviously isn't normal. But a key point is that this isn't just a recession on steroids, either. I tend to agree with Ken Rogoff (a really smart macroeconomist) who is arguing that we should be calling this the "Great Contraction," not the "Great Recession." You really should read his article that I've linked to, but if you're not going to, the gist is that a recession is just a temporary slow-down in employment and production but a contraction happens when whole countries get over-indebted. When I say "whole countries," I mean just that: the people, the businesses, and the government itself. Unraveling all of that debt is a slow process, so it takes much longer for the economy to bounce back than in a typical recession. The last Great Contraction was--you guessed it--the Great Depression. And while we're far from Great-Depression bad, things aren't looking too good either.
Why does this distinction matter? Because understanding what the problem is can lead to much better solutions. You might think you have really bad heartburn, but if you really have gallstones, all of those antacids aren't going to help much. Similarly, if you treat a contraction with recession medicine, you're not going to get the expected results. For this reason, the Fed and the Government have been consistently surprised at how slowly the recovery is developing. They have been expecting their medicine to take instant effect, when in reality they're not treating the right problem. We need to do something to reduce the total amount of debt in the economy much more than we need stimulus or quantitative easing.
Anyway, my real point in all of this is that we should all expect the economy to recover very slowly. There's no way around it, really. Paying back the huge amount of debt that we accumulated over the past 10 years is going to take a while, and until we're out from underneath that overhang we're not going to see strong growth in the economy. And remember, when I say we, I really do mean all of us. Regular consumers have way too much debt, along with many business and the government. The good news is that both businesses and consumers are taking steps in the right direction: saving is way up, and debt is way down since 2007.
The bad news, of course, is that the government appears set on incurring more debt. Now, before I berate Congress and Obama, let me say this very clearly: we all love sticking the blame on the government, and we usually go too far. To be honest, the government (especially the President) doesn't have as much influence over the economy as most people think. In addition, remember that we are the ones that voted them in!
That being said, I'd really like to strangle most of the members of Congress for screwing up the debt ceiling deal so badly. Not raising the debt ceiling would have been both idiotic and catastrophic, making it a "must-pass" bill. Since it was apparent that the bill had to pass, I think that most of the world thought that Congress would be able to use this opportunity to really set a long-term plan that would reduce the deficit in conjunction with raising the debt limit. Instead, what do they do? Wait until the very last minute, and then pass a bill that is so vague and limited that it's unclear whether it will actually have any effect all on the deficit. And over the past couple of weeks we've seen the results: the first downgrade of US debt ever, and stock markets are down nearly 12%. Okay, so some of the market crash is a result of the disaster called Europe as well. But still, it's frustrating that they wasted such a great opportunity, and cost us billions of dollars in the process.
Okay, so here are the takeaways from today's Ramble:
- It's going to take us a while longer yet to really start to recovery economically, so plan accordingly.
- Reducing the deficit needs to happen, and we need a credible plan soon. We have three options: (1) Raise taxes, (2) Cut spending, (3) Have high inflation. I would prefer a mix of all three in moderate amounts, in all honesty. But what matters the most is that it happens, not how it happens.
- We need to vote out the ideologues in Congress who were unwilling to compromise to get a better deal done. By refusing to compromise they may have gained a bit of political ground, but they hurt the entire country in the process. I'm looking at you, Tea Party. Please leave.
10 comments:
Yay! I don't know how to answer any of your questions, but I'm SO excited to get all of my opinions about the economy from you.
Also, I think those Tea Partiers are weird.
While I don't know enough about long-term economic forecasting to have many ideas, I couldn't agree more about the current debt deal and the politicians who put it together. They seemed to avoid the only real solutions (the three you mentioned) that could make a difference and are too caught up in party lines and winning to come to a compromise that might actually work. It almost seems like a mob mentality issue that the parties stick to much to their guns and are unwilling to compromise. In my heart of hearts I'd like to think most people are more moderate, but in Washington you aren't allowed to be moderate anymore. And yes, the tea party must go!:)
PS - I enjoy your rambles! (And the fun family updates and pictures.) Keep them coming!
Thanks for the post, Ben. It's great to have your explanation of some of these economic issues. One thing I still don't understand is why we have to increase the debt ceiling. I just read an article (http://comments.americanthinker.com/read/42323/805149.html)
that I'd be interested to hear your opinion of. I think it probably doesn't work to compare the government's financial situation to a household model (as the article's author does), but still, I think he's got some good points. I guess I just think the government shouldn't be taking care of us financially at all, so I think the U.S. should say, "we're getting rid of these social programs in x years, so plan ahead." I think it would be tough to deal with keeping the debt ceiling where it is, but that's the reality of paying off debt. But my dream of a government that only preserves the safety and freedom of its people and does little else is probably a political impossibility.
Kathryn, great question. I'll try cover it in the next Ramble. Stay tuned!
This is great, Ben! I love your insights on economics. Especially with what's been going on recently, it's nice to have a clear and well thought out explanation from someone that I know doesn't have ulterior motives behind their opinions.
And even I could tell that the whole debt ceiling thing was an EMBARRASSMENT. It's really scary to see our leaders fumble so badly. It's frightening to realize that, as a country, we've really let things get so out of hand. It's disgusting to see some leaders act so cavalier when so many Americans are struggling.
Ben - I'm glad for the Ramble too. To be honest, I don't get very excited about politics in the least. Autumn had to tell me just who the Tea Partiers were a few minutes ago. I'd heard about them, sure, but eh? It's kind of like how excited I get when one NFL team plays another NFL team that I don't care about. Big whoop. I realize this has more impact on me (like watching my 401k plummet this past week), so I am excited as far as it impacts the market (my money) and my tax rate, but otherwise I haven't gotten too stirred up about it to date. That's where you come in. You can provide good, sound material for those politically driven water-cooler conversations at work. I'll look interested and smart. Just hope they don't ask questions or make comments about stuff not covered on the Ramble. You'd better get typing already to keep me covered. And I do care about being a good American, so maybe some political understanding is part of that too. Thanks for filling me in.
I'm always too grainjai to ask you about stuff. So I'm glad you offered. I (apparently) trust you with complete abandon and assume that everything you say is 100% correct and the only thing I don't understand is why nobody who makes any decisions asks you. Why don't they all call you, ask you, and then follow through on your suggestions?
A post worth reading!
Here's another question: I just read an essay in the New York Times that stated that George W. Bush created the deficit, largely because of the two wars and also because of 2 trillion in tax cuts which mostly benefitted the wealthy (http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html?pagewanted=all). Is that true? Did the deficit not exist before his presidency? If it is true, when was the last time there was a deficit before then? Do we have deficits off and on through history? I'd like the history of America's deficit, please. If you're so inclined.
Spot on as usual Ben. Obama had a moment of great leadership when he suggested they shoot for a much bigger deal and hit the problem head on with the 4 Trillion package - and he had both Dems and Repubs on board until the TPers decided to score some empty points and reduce the deal. Unbelievably frustrating. Mix of all three is probably right on. I'd start with: 1. Simplification of tax code (e.g. no need to raise/lower, but get rid of all the exemptions) 2. Let bush tax cuts expire for top earners 3. raise the retirement age up to 67 or 70 4. serious reduction in defense spending of ~10%. This has to be smart because we have to consider all future threats like terrorism, hackers, and frankly, the rise of China as a super power, but there is still fat to be had and wars to end. That is a pretty balanced hit across both parties and would go a long way to correcting the ship. Ideologues are driving us into much more massive pendulum swings and there is increasingly no middle ground which is extremely frustrating. Hopefully the US public will get that message across in the next election.
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