Tuesday, July 22, 2008

The economy: how bad, really, and for how long?

Very early Saturday morning, before I went to bed, I checked the NYTimes for headlines and saw an article by Peter Goodman titled "Uncomfortable Answers to Questions on the Economy." This is going to hit the 'most emailed list' fast, I thought, and sure enough, before noon it was the most emailed article.

Goodman asked some well-informed economists to do a reality check on the economy-- not the Bush line that the economy is fine, or the doom-and-gloom line that we're headed for a depression. I'm going to summarize his conclusions here, then add a couple of points not covered that I believe will complicate the picture.
  • The economy is going through a rough patch and the worst is yet to come.
  • Job losses will accelerate and unemployment will reach 6.5 percent by the end of next year., coming on top of eight years of weak job growth.
  • Home prices will continue to fall-- have lost 25 percent of their value in inflation-adjusted terms and will lose another 10 to 15 percent before stabilizing.
  • Banks will write off $1 trillion in debt, limiting many institution's ability to function for years.
  • We are not "officially" in a recession, yet this may be the worst downturn in 25 years.
“The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.
Most homeowners have been using their houses as collateral to such a degree that average household debt is now 120 percent of household income! That's double what it was in 1984. But now credit sources are drying up. Given that 70 percent of all economy activity in the country is consumer spending, we're in for the dark side of capitalism: people spend less, factories make less and lay people off, people without jobs don't spend as much, et cetera.

The last part of Goodman's article pins the blame on the Federal Reserve, Wall Street speculators, real estate brokers and suckered-in consumers, most especially, homeowners.

Now for those other points.

When the economy bounces back, poor people never bounce back as far. An astounding 40 percent of the U.S. population has lived below the poverty level for some period in the last ten years..

I've received public assistance twice in my life and can remember a time when public assistance was almost enough to survive on. The welfare reform act of 1996 came about during the long-ago Clinton boom days; meanwhile, between 1979 and 2005, the top five percent of American families saw their real incomes increase 81 percent. while the income of the lowest-income fifth saw a 1 percent decline. The last time the top-fifth's income was this high, by the way, was in 1928-- just before the Great Depression.

How many more poor people can this country hide? And, when they can't be hidden, be demonized?

The real wild card in the economy's deck, though, will be the environment. On the one hand, energy costs are increasing, floods like those in the Midwest raise food prices, unrelenting drought and fires may cause loss of livelihood and mass migration, tropical diseases will continue to move north.

On the other hand, should we really choose to tackle environmental issues-- which include but are scarcely limited to global warming-- the level of new jobs creation could revitalize our economy.

The next three years should tell us which way we're headed. In the meantime, be thrifty.

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