“A Case for Further Action”

A quote from Federal Reserve Chairman Ben Bernanke (Washington Post, October 25^th). While Europe pursues it job-killing austerity programs, Bernanke is trying to figure out how to implement the next stimulus in the absence of a Congressional mandate for new funding for this purpose. The mid-term elections are likely to produce a Congressional configuration focused on retaining lower tax rates and eliminating any further enhancements to government spending.

Bernanke’s plan, an expansion of his “Quantitative Easing” program, is to buy off more Treasury and mortgage bonds and to expand the Federal Reserve’s holdings of longer-term securities. Clearly, the Fed is armed with its defined set of tools to control economic trends, and while this effort might create more solidity in the market and free up more lending capital, it might not translate quickly into higher employment or stronger housing values and may add a trillion or more dollars to the Fed’s own deficit, kicking up our inflationary worries. But this may be the only stimulus plan possible in this increasingly conservative environment, and to many it is better than a sharp stick in the eye at a time when the U.S. economy is in desperate need of “more.”

But the rich are getting richer, the middle definitely getting poorer, and anger has risen to “seething and boiling.” The reasons are obvious, and the supporting data disheartening: “During the depths of the recession in 2009, as millions of Americans lost their jobs, homes and life savings, the highest-paid earners in the United States saw their average incomes increase more than five-fold from 2008, according to new data from the federal government… The 74 people who earned more than $50 million last year -- the highest income category measured by the Social Security Administration -- saw their average incomes skyrocket from $91.8 million in 2008 to a mind-boggling $518.8 million in 2009.” DailyFinance.com (October 26^th).

The Standard & Poor’s Case-Shiller report of the 20 major cities in the U.S. just reported that home values dropped – again – in August, with many Americans seeing their home values fall by 50% over the past few years. Our incomes have dropped on average as well, and the jobless and under-employment rates remain staggering. State and municipal government are crumbling under fixed and underfunded pension demands, while watching their property, sales and income taxes erode with falling home values (and foreclosures), eroding consumer demand has tanked sales and depressing unemployment statistics.

And we’re dog-paddling in place: “Economic growth accelerated a bit late this summer, according to new government data, even as the nation remained stuck in a pattern of economic expansion that is too slow to bring down joblessness… Gross domestic product expanded at a 2 percent annual rate in the July through September quarter, the Commerce Department said [on Oct. 29^th], matching economists’ forecasts.” Washington Post (October 29^th). Post-economic downturns normally require multiples of “normal year growth” to reflect any sense of real recovery, and this number is well below average pre-recession growth in the U.S.

So what does NYU economics professor Nouriel Roubini (aka “Dr. Doom” – whose accuracy in predicting economic chaos has been pretty dead-on) think about our near term prospects? In an editorial in the Financial Times (“A Presidency Headed for a Fiscal Train Wreck”), “Roubini gives plenty of credit to President Obama and his administration for preventing another depression, but he fears the president's policies were too short-term. And with the looming political change in Washington and two years of gridlock in prospect, those policies will not only expire, leaving fiscal pain, but new ones won't be implemented... ‘Obama,’ Roubini says, ‘inherited the worst economic crisis since the Great Depression,’ as well as a large budget deficit. ‘His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression.’...

“Still, Roubini says, none of those good moves are going to make much of a difference after the elections because fiscal policy will likely take a different route. ‘The term stimulus is already a dirty word, even within the Obama administration,’ Roubini adds. ‘After the Republicans make significant electoral gains further stimulus is even less likely.’ And this, just when the economy needs the boost most to prevent a double-dip recession.” DailyFinance.com (October 29^th).

People have lived with horrific and sustained economic chaos before, but central economic planning systems didn’t exist then. Maybe we’re really not a whole lot different, even though our leaders (from both sides of the aisle) make a good case for how much worse the economy would have been without government intervention… it’s just galling that the richest segments of our society benefited way too much at the expense of average Americans. But because of all of these government programs have led the average voter to believe that the government can indeed “fix this mess” if only the right formula were followed. Right wingers seem to have one simple solution for all economic issues: reduce taxes and eliminate regulation; let free markets rule. But there haven’t been “free markets” in this country for well over a century, as certain industries – particularly agriculture, finance and petroleum – have had a statutory edge that they will not yield and that the most conservative bastions will not alter. Left wingers believe we can spend our way out of any mess by just incurring deficits without concern; they can’t envision needing suitcase full of cash to buy a cup of coffee.

The truth is somewhere in between, as it always is. First, we aren’t coming out of this mess for a very long time, no matter what we try and do. The November 1^st Fortune Magazine: “There is nothing that the U.S. government or the Federal Reserve or tax-cutters can do to make our economic pain vanish overnight.” The government can nudge the economy up or down based on policy, but every decision is a trade-off with side-effects; the economy is morphing continuously and even good plans stop working after a while and have to be reconfigured. Second, the only “stimulus” likely to be implemented is what the Federal Reserve puts in motion, perhaps too little too late.

The piper has waited a long time to get paid, and the cost of a modern Western society cannot compete against the economies of nations with few social benefits, low labor costs and increasing educational standards. A few harsh facts: “recovery” will take more than a few years, our lifestyles are permanently altered and we are now living in a nation which has begun a decline that only our educational system and entrepreneurial spirit have any chance of correcting. Without shoring up those core values, we will watch the emerging Asian economies spurt past us and watch us in their rearview mirrors.

I’m Peter Dekom, and I would love to see us believe in ourselves enough to preserve and grow our educational systems into the competitive force they must be.