Tomorrow’s election, whatever the outcome, will do nothing to move us toward solving what is arguably the worst financial and economic mess this nation has ever experienced. Neither side has admitted the extent of the problem, nor suggested even reasonably sensible solutions. We are drowning in a horrible bi-partisan morass.
The saddest thing is that this election seems to be mainly about political positioning for the election of 2012. By then it is likely that rescuing the economy will require far more painful actions than what might help today.
There are three basic problems that are being ignored (and which I’ll deal with in future postings). First, our economy over the past 30 years has been built on debt. For consumers and government alike, debt has grown faster than their ability to repay. Consumer debt has grown faster than income, and government debt faster than the economy (measured by Gross Domestic Product). In 1981, when Ronald Reagan became president, Federal debt as a percent of GDP was 30%. When George W. Bush became president in 2001, it was up to 56%. Eight years later, when President Obama was inaugurated, it was up to 76%. As I write this, the ratio of Federal debt to GDP is 93%.
This is a bi-partisan problem that neither party addresses. Our economic woes cannot be solved by further government borrowing. It is fashionable to urge more stimulus spending by comparing today’s situation to the late 1930s, and to fault President Roosevelt for not borrowing to stimulate a stumbling economy. Whatever the merits of the argument, the fact is that FDR could have increased government borrowing; Federal debt remained around 40% of GDP for the entire decade. (It did rise to over 100% during World War II, then declined again to 71% by 1954, and then fell steadily to 30% by 1980.) At today’s 93% of GDP, Federal debt cannot be increased without risking the credit of the whole nation.
The second ignored problem has to do with the increased role our stock market plays in today’s economy. When John J. Raskob wrote in August 1929, on the eve of the market collapse, that “Everyone Ought To Be Rich” by buying stock, only a very small percentage of Americans were investing. More important, the notion of “saving for retirement” by buying stock didn’t exist.
Today, on the advice of experts, at least half of our adult population has come to depend on the stock market for some or all of their retirement income. This bizarre version of the Raskob argument – Everyone Can Retire on Stocks – is based on no more evidence than Raskob offered in 1929, namely that stock prices went up in the past. Today’s promoters can refer to 70 years of stock prices, yet the reality is the same. No one knows where stock prices are going to be 70 years from now, nor for that matter 7 years from now. Can we expect to have a healthy stock market, when government finances and consumer finances alike are in shambles? Maybe, but as I write, stock prices in general are at the same level as they were in 1998.
Finally (since this is becoming even sadder than I can bear), our public and political talk about saving the economy relies heavily on the powers of “the Fed” – that is, on the ability of the Federal Reserve Bank to drive the economy, through its ability to “print money” or “to create money from nothing” (as a recent popular book put it). The reality, unfortunately, is that the Fed has no powers to lift the economy on its own. (I’ll attempt to clear up the confusion in coming months.) In any case, I suspect that no informed American who reads expert commentary on the Fed understands the meaning of “printing money,” nor of the latest fad phrase, “quantitative easing.” I have a gut feeling, and some anecdotal evidence, that the experts don’t really know what the phrases mean either.
The immediate need, of course, is for the government to increase its revenues significantly and use the increases to put Americans to work improving our educational system and undertaking environmental and infrastructure projects. It is just silly to suggest making the rich richer, in the hope that they will invest their added wealth to expand the economy, when there is already enough wealth to make the needed investments, if the wealthy wanted to make them. But it is equally as silly to suggest making it easier for lenders to lend, when borrowers need to reduce their level of debt, not increase it.
I’ll be writing about this as well in future postings.
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Tomorrow’s election, whatever the outcome, will do nothing to move us toward solving what is arguably the worst financial and economic mess this nation has ever experienced. Neither side has admitted the extent of the problem, nor suggested even reasonably sensible solutions. We are drowning in a horrible bi-partisan morass.
The saddest thing is that this election seems to be mainly about political positioning for the election of 2012. By then it is likely that rescuing the economy will require far more painful actions than what might help today.
There are three basic problems that are being ignored (and which I’ll deal with in future postings). First, our economy over the past 30 years has been built on debt. For consumers and government alike, debt has grown faster than their ability to repay. Consumer debt has grown faster than income, and government debt faster than the economy (measured by Gross Domestic Product). In 1981, when Ronald Reagan became president, Federal debt as a percent of GDP was 30%. When George W. Bush became president in 2001, it was up to 56%. Eight years later, when President Obama was inaugurated, it was up to 76%. As I write this, the ratio of Federal debt to GDP is 93%.
This is a bi-partisan problem that neither party addresses. Our economic woes cannot be solved by further government borrowing. It is fashionable to urge more stimulus spending by comparing today’s situation to the late 1930s, and to fault President Roosevelt for not borrowing to stimulate a stumbling economy. Whatever the merits of the argument, the fact is that FDR could have increased government borrowing; Federal debt remained around 40% of GDP for the entire decade. (It did rise to over 100% during World War II, then declined again to 71% by 1954, and then fell steadily to 30% by 1980.) At today’s 93% of GDP, Federal debt cannot be increased without risking the credit of the whole nation.
The second ignored problem has to do with the increased role our stock market plays in today’s economy. When John J. Raskob wrote in August 1929, on the eve of the market collapse, that “Everyone Ought To Be Rich” by buying stock, only a very small percentage of Americans were investing. More important, the notion of “saving for retirement” by buying stock didn’t exist.
Today, on the advice of experts, at least half of our adult population has come to depend on the stock market for some or all of their retirement income. This bizarre version of the Raskob argument – Everyone Can Retire on Stocks – is based on no more evidence than Raskob offered in 1929, namely that stock prices went up in the past. Today’s promoters can refer to 70 years of stock prices, yet the reality is the same. No one knows where stock prices are going to be 70 years from now, nor for that matter 7 years from now. Can we expect to have a healthy stock market, when government finances and consumer finances alike are in shambles? Maybe, but as I write, stock prices in general are at the same level as they were in 1998.
Finally (since this is becoming even sadder than I can bear), our public and political talk about saving the economy relies heavily on the powers of “the Fed” – that is, on the ability of the Federal Reserve Bank to drive the economy, through its ability to “print money” or “to create money from nothing” (as a recent popular book put it). The reality, unfortunately, is that the Fed has no powers to lift the economy on its own. (I’ll attempt to clear up the confusion in coming months.) In any case, I suspect that no informed American who reads expert commentary on the Fed understands the meaning of “printing money,” nor of the latest fad phrase, “quantitative easing.” I have a gut feeling, and some anecdotal evidence, that the experts don’t really know what the phrases mean either.
The immediate need, of course, is for the government to increase its revenues significantly and use the increases to put Americans to work improving our educational system and undertaking environmental and infrastructure projects. It is just silly to suggest making the rich richer, in the hope that they will invest their added wealth to expand the economy, when there is already enough wealth to make the needed investments, if the wealthy wanted to make them. But it is equally as silly to suggest making it easier for lenders to lend, when borrowers need to reduce their level of debt, not increase it.
I’ll be writing about this as well in future postings.
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