Unpleasant New Year Ahead?

By Karl Reiner

 

2011SUCKSAs a new year begins, Americans are downright gloomy.  According to the PEW Research Center, 87% of Chinese, 50% of Brazilians and 45% of Indians believe their country is headed in the right direction. In the U.S., only 30% of the population believes the nation is on the right track. Even worse, less than half of Americans think their children’s living standard will be better than theirs.

The glumness reflects the lingering depth of the economic crisis.  Its severity and duration have deeply shaken people’s confidence. There is also an uneasy feeling that the recovery is moving too slowly.  The horrific U.S. unemployment rate stands at 9.8%.  One in ten of America’s workforce remains unemployed.  The U.S. population has been unnerved by the high numbers.  No other recent recession has put so many people out of work for such a long period.

In the late 1970s, housing began to displace defense as one of the main drivers of U.S. economic growth. As with all economic policies that create distortions, America’s unbounded love affair with the housing sector has come to an unpleasant end. Home prices are no longer continually rising.  The national spending spree fueled by lax home financing rules is finished.

There has been a massive drop in home values, down by as much as 50% in many locations.  More than half of the nation’s homeowners now have a negative equity position in their homes, owing more on the house than it is worth in the current depressed market.  As a consequence of the bust, homeowners have been saddled with about $766 billion in negative equity debt.   

Arizona lost approximately 70,000 homes to foreclosure in 2010.  In the crumbling nationwide housing market, the total stands at more than a million.  A repeat of the same dreary scenario is forecast for 2011.  According to analysts, the housing market is not expected to recover until 2015.

Due to the impact of the Great Recession, median household income was 7% lower in 2009 than in 2000. The nagging gap between rich and poor has widened. Despite the flattened housing sector, the government’s stimulus programs appear to be working. U.S. output could grow by 4% in 2011.  As a result of the recession fighting program, the federal debt is now the highest it has been in 50 years. The deficit for the fiscal year ended on September 30, 2010 was $1.3 trillion. It amounted to 9% of GDP.

The long-term structural deficit of the U.S. government is among the worst in the developed world. To bring the deficit under control in the future, there will have to be spending cuts and an increase in taxes. Many economic analysts believe a ratio of 75% in spending cuts and 25% in tax increases would be the right combination. As the deficit debate gets underway, people need to be reminded that with tax revenues amounting to 24% of GDP, the U.S. remains one of the most gently taxed countries in the industrialized world.
 
The recently released Simpson-Bowles and Domenici-Rivlin deficit reduction proposals have already met with disbelief and political resistance. They were a shock to a national political culture that has long avoided facing austerity. It is now clear that Americans will no longer be able to enjoy the instant financial gratification that comes with borrowing heavily from the future. After the recovery gets underway, Congress will have to muster the fiscal discipline needed to bring the deficit problem under control.  

The sense of gloom hanging over the country can serve a useful purpose. Stunned Americans have started to realize they cannot continue to take prosperity for granted. In a globalized economy, their children will have to work hard in school to ensure getting good jobs, education cannot be shortchanged.

Regrettably, the new Congress will be more politically fractured than any in the last 100 years. Many of the new Republicans going to Washington have promoted a culture of conflict, anger and resentment. While anger and resentment may help sway worried voters during an election, they are not particularly useful tools for fostering an economic recovery or undertaking the chancy work of deficit reduction.

 

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