Gridlocked Politics and Frugal Consumers

By Karl Reiner

The simmering Occupy Tucson movement is a symptom.  It is a reaction, a plea to repair an economy beset by a host of nasty problems.  The irresponsible housing sector lending that led to the economic downturn was based on the faulty assumption that property prices would move in only one direction.  Caught in the wreckage left behind when housing prices faltered, the discontented individuals in the movement are giving a face to the nation’s continuing economic troubles.   

Although the Great Recession has hypothetically bottomed out, the economy remains stifled by distressed corporate loans, declining housing prices and a colossal load of consumer and government debt.  Although the financial sector was bailed out by government programs, banks are not doing much lending these days.  Observers say this is due to a combination of uncertainty, new regulations, litigation, the pile of failed loans clogging the books and the need to reorganize capital structures.

Government actions in the U.S. and Europe are not doing much to help restore business and consumer confidence.  In the U.S., the congressional supercommittee was unable to work out a plan to reduce America’s budget deficit by $1.2 trillion over the next 10 years.  Although analysts believe the deficit solution has to include both spending reductions and tax increases, the Republicans continue to flee from any consideration of the tax matter.  In Europe, the single currency union is in danger of disintegrating because political leaders can’t agree on how to handle the financial mess in Greece and the growing uncertainty in countries such as Italy and Spain.

Although the current recession has pushed western governments deeper into debt, the deficit problem is not new.  Over time, countries have tried many things to control government spending: the gold standard, balanced budget requirements and independent central banks.  In the early days of the United States, Alexander Hamilton described the progressive accumulation of debt as the natural disease of all governments.  What is different this time is the refusal of the conservatives to accept the global consequences of the financial sector meltdown and their refusal to consider tax increases part of the medium-term solution.    

While conservative politicians dither, banks remain becalmed and the poor consumers pinch pennies.  The recession caused decline in consumer buying power has redefined the meaning of low price in the nation’s retail establishments.  Consumers have not recovered from the colossal losses incurred during the recession when household assets shriveled by $13 billion.  The high unemployment rate, the continued slump in housing prices and the wild swings in the stock markets add to the problems faced by beleaguered consumers.  As the economy slowly limps toward recovery, gloomy analysts report that Americans are not going to recover their household wealth anytime soon.  

American social cohesion is crumbling because society is splitting into a small wealthy elite and an enlarging number of low-income households.  Most of the workforce is being squeezed between stagnant wages and rising costs.  Real wages are flat or falling for the majority of workers. Only those at the very top are gaining.  The top 1% of Americans captured the majority of income growth and corporate owners have enjoyed substantial returns from investments in equipment.

As jobs fail to reappear as the recession slowly recedes, economists have begun to consider the role technology plays. Some believe the big gains from past inventions are now exhausted.  With few new ones on the horizon, the results are lower productivity growth and a slower rate of improvement in living standards.  

Others argue that there is too much technology driving change in the labor markets.  As workers get displaced, business has been slow in developing new uses for the idle workers, especially in the aftermath of the recession.  All the observers do agree that there has to be educational change, with a large emphasis on retraining. Unfortunately, none of this seems to matter to the conservatives.  If they are unwilling to face the deficit reality, they will also ignore the technology factor.