Hangover Part II for the US economy
The problem in the United States was not just that the country had a 20 year “debt party”. It’s that we expect that we will only suffer a 3 year hangover as a result. And that expectation is wrong.
A range of statistics from diverse economies last week has led to each countries’ media, politicians and commentators talking about a slow down in recovery. Nowhere was this more pronounced or vocal than here in the United States.
Following a poorer-than-expected jobs report on Friday (which in turn followed bad news on housing earlier in the week), the weekend news and politics shows trotted out the usual suspects to talk about “getting the US economy back on track”.
The narratives of both left and right were predictable – possibly best illustrated by the Roundtable on ABC’s This Week with Christiane Amanpour. Paul Krugman of the New York Times called for “more stimulus of any sort” and repeated the “we could really kick-start the economy when there was a war” line. An eminently forgettable goon from the US Chamber of Commerce told us that government just needed “to get out of the way of business and let it create jobs” – going so far as to complain about increased regulation of financial services.
The problem I find with these debates – although they are interesting and important in and of themselves – is that they are missing the bigger picture. To paraphrase Einstein, the root cause of a problem usually lies at one layer of abstraction from the symptoms.
The problem in the United States was not just that the country had a 20 year “debt party”.
It’s that we expect that we will only suffer a 3 year hangover as a result. And that expectation is wrong.
It’s not like we can just clean up the ashtrays and half-empty beer cans, rearrange the furniture, and hope that mum and dad won’t notice what we had been up to when they get back.
The last decade, possibly two decades, have had very profound and structural impacts on the US economy. Those impacts will be long-lasting, if not permanent.
The Hangover (Part II) should be no surprise to anyone because we have not acknowledged and addressed what caused the crisis in the first place. Nor have we admitted that part of the crisis is to have “fooled ourselves” about our real prosperity. It’s hard enough to get economies (of countries and individuals) back to where they ought to be, but to return them to the previous level that we enjoyed is to believe that it’s your birthday every day. It’s not real.
As well as creating the public and private debt mountain that characterises the US (and many Western) economies, we have also fundamentally changed a number of key aspects of how we attempt to prosper together…
1. As a function of globalisation, we (the West) moved a lot of high-paying jobs overseas to low-wage economies. As a result, not only can we consume more-for-less, but hundreds of millions of people in Asia have been lifted out of poverty as a result. We may want those jobs back now and folks on the left may decry the long-run outcome, but it is wrong to say that it has not had its benefits – it’s just that the Chinese and Indian population are getting a shot at the middle-class dream, not Americans.
2. If government can be defined as “the things that we chose to do together”, then we have decided to do a lot more things “together”. Notwithstanding the inexorable rise of healthcare costs (more likely because more can be done for more illnesses, then any corporate raping and pillaging), there is the not-so-small matter of about $2trillion in war spending by the USA alone.
3. Whilst the US government debt is rising, the proportion of GDP been handed over in taxes to government is at its lowest for generations. Where has all the extra money gone? It’s gone to the wealthy and to corporations and thence to the new middle-class and wealthy of resource-rich nations and India/China. Not (in the main) because they are doing anything illegal or underhanded. But because that is the sort of world that we have collectively created.
4. We have also created a financial services industry that spends too much of its time delivering no real value and with no compass now for moral hazard. There are wonderful companies out there who find businesses and invest in them. Who provide capital and lines of credit. Loans, and insurance. Forex services. Risk management. All that is necessary. But too much of the financial services industry is like the garden wasp. Noisy, dangerous, and of no value. “Liquidity” is the alleged benefit of a lot of the valueless trading and derivatives and futures that constitutes much of the global financial services market. I think we would rather have a little less liquidity and a lot fewer value-parasites when all is said and done.
5. Politics in the USA is in a terrible state. Narratives are becoming further polarised. The concept of public service is absent from many public servants. Too much of US politics is about fund-raising and campaign spend. It is making the debate stale, and preventing the country from focusing 110% of its efforts on making things better.
The debt-fueled binge that we have been on has been an effort to keep up progress. To extend-and-pretend in the hope that a solution will arrive.
Slowly, but surely, that debt-fueled pretense will have to be unwound. And this is where the hangover comes in.
It should not be a surprise the US housing prices are back to 2002 levels. Even accounting for inflation, it is likely sometime in the 1990s where realistic pricing began to be fuelled by the bubble. We still have millions of people underwater on their mortgages or in bankruptcy or with their spending power blighted by poor credit scores due to foreclosure. And there is much, much more of it to come.
It should not be a surprise that job creation in the United States is slow. For a start, towns and states are having to trim their payrolls. The federal government is likely to have to do the same. As for the private sector, it is simple. There are not enough people who want to buy the goods and services that that US jobs can produce. It’s not regulation. It’s not the Eurozone debt crisis. It’s not that business is waiting to see what will happen the with the federal deficit.
It’s that we bought and sold too may properties at unrealistic prices, consumed things we could not afford from retailers that are now closed and invented financial services jobs that created no value and had to go. And all this to the constant background music of manufacturing and service jobs going to countries who can do it cheaper (although not necessarily better). We got a false sense of how well-off we really are.
Don’t look to housing, or retail or financial services to create the jobs. Don’t, in most cases look to the multinationals either. They will tend to add jobs in lower-cost economies with better corporate tax rates and weaker labour laws. Small businesses – particularly those with exportable goods and services – will shoulder the burden. Powered by the individual or by America’s top-notch venture capital community, it will still take time for these new companies to emerge and to thrive.
It may just be that 9% unemployment is what we are going to have to live with for the foreseeable future – until the next surge of genuine progress can be made by the country. The United States is capable of that surge. But you are not going to see it in next month’s job figures or in the month after that.
Like most bad hangovers, this one is going to last longer than we would like.