Last week I began a discussion of my views about the number-one issue in the upcoming election, which is the US economy. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak. But now, I’m afraid it’s payback time.
Martin Feldstein, the dean of Republican economists, says he thinks the economy “could slip into a recession, and that the recession could be a long, deep, severe one.” In the South Carolina Democratic presidential debate, Barack Obama made the same argument: “We could be sliding into an extraordinary recession,” he said.
Feldstein and Obama see the economic reality the US is facing, a reality that the other Republican and Democratic candidates or members of Congress don’t want to acknowledge, much less address, because doing the right thing to address America’s long festering economic shortcomings will be painful for everyone.
But I, and others in both parties, contend that continuing to propose partisan half-measure solutions only postpones and increases the length and intensity of the painful measures America will eventually have to take to address its economic ills. Ever hear the phrase “No pain, no gain”? There is a reason why this has become a cliché in our language – because whether we want to acknowledge it or not, there is a whole lot of truth in it.
Unfortunately only John McCain on the Republican side and Obama on the Democratic side appear to have the good sense, judgement and insight to realise that it is time to face the music, stop telling Americans merely what they want to hear, and start telling them the harsh but honest truth so they can begin fixing things.
For many Americans, a psychological barrier has already been broken, and where you can see it is in the actions and sentiments of people who don’t live from paycheque to paycheque. People with plenty of disposable income, good jobs and money from investments, in cities from New York to San Francisco, are cutting back on their dry cleaning and hair salon expenses, buying less expensive bread and skipping dessert when they go out for dinner, even though they are not yet being pinched financially.
Business economists get nervous whenever consumers start pulling back. They know this pruning of daily expenses has a domino effect, setting off a chain of events that actually contributes to an economic slide and more fear. Consumer psychologists say that increased fear then leads to further belt tightening, deepening the economic slide and increasing fear in a seemingly endless cycle that feeds on itself.
Indeed, for the first time in many years, retail sales in the US were down over the holidays, leading economists to debate whether the country could experience a rare decline in personal consumption – a sure sign of a recession that has already begun. The respected Pew Research Center says its polling shows that consumer confidence has plunged and that consumer satisfaction with the economy is now at a 15-year low.
But this is not why I believe the US is facing a deep recession. The reason why is because the US housing market is only in the early stages of a prolonged downward spiral. The current situation in Florida serves as a prime example of what is and will continue to be a looming financial disaster for many middle class US homeowners for the foreseeable future.
In the Fort Myers area of southwest Florida, the local News-Press regularly advertises auctions of homes built to sell for $250,000 with minimum bids of $50,000 and small condos are offered with opening bids of $25,000. Many $250,000 houses are now selling for $100,000, when they sell at all, and most of the properties that are selling are ‘short’ sales, where the debt and closing costs exceed the sales value of the home.
The consumer spending which buoyed the US economy for the last 16 years was, and still is, dependent on Americans feeling optimistic about the value of their assets. For most Americans, their homes are their primary assets and these homes have and will continue to lose value for the next couple of years. When the decline in home values eventually slows and prices stabilise, this will be followed by at least a couple more years of stagnant prices before the market value of homes in the US begins to climb again. When home values do eventually start to rise, it will take another year or two for consumers to adjust psychologically and begin to spend more freely on consumer goods and household durables like furniture and appliances.
If you do the math, we’re looking at five to six years of economic recession in the US. And in an increasing globalised world, it is foolish to think that the EU and Asian economies will not be adversely impacted by this prolonged slump in the US. It is also foolish to think that governments or central banks can do anything more than cushion the fall or mitigate some of the worst consequences.
One of the unfortunate realities of free market economics and capitalism is that long periods of growth and prosperity are always followed by periods of contraction which, although shorter in duration, can be quite painful for a large number of citizens. So whoever is elected as the next US President will be confronted with paying the bill for many years of deficit spending and financial mismanagement on the part of the current Bush Administration and the failure of Congress and both the Bush and Clinton years to effectively confront the rising costs of the US entitlement programs such as Social Security and Medicare.
The solutions to these and many other problems, such as universal healthcare and global warming, will require bi-partisan solutions which have been few and far between in American politics over the past 16 years. A continuation of the partisan politics that dominated the Bush and Clinton years is certainly not the answer.
Charles Laffiteau is a lifelong US Republican from Dallas, Texas, and has recently completed DCU's postgraduate programme in Globalisation, International Relations and Conflict
