Sometimes we wonder if what has become obvious to a majority of Americans really has eluded our ruling class in Washington. “We don’t have a precise read on why this slower pace of growth is persisting,” said Federal Reserve Chief Ben Bernanke at the Fed’s June 22 press conference. President Obama also recently shared with us his insight regarding the sorry state of the economy with this gem:
“There are some structural issues with our economy, where a lot of businesses have learned to become much more efficient, with a lot fewer workers. You see it when you go to the bank and use an ATM — you don’t go to a bank teller. Or you go to the airport, and you’re using a kiosk, instead of checking in at the gate.
Small wonder then that the latest Bloomberg poll reveals that only about one third of Americans believe the economy is in better hands now than it was under the Bush Administration. That is a remarkably poor assessment of the job the people feel the President and his economic team (whoever and wherever they are) is doing managing our economy.
These data are consistent with the most recent assessment of consumer confidence, which has sagged to new lows with only 17% of American households expecting conditions to improve over the next six months. Should anyone be surprised? The Administration seems to be betting on Keynesian strategy from a 1930’s playbook. It didn’t work then and it isn’t going to work now, and the people know it.
That’s a big part of the reason consumer confidence is so low. Carmen Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University warned in their best seller, “This Time It’s Different” that massive government borrowing that approaches or exceeds a nation’s GDP has always led to economic disaster. Their prescient book is based on data from eight hundred years of economic history.
And just last week the non-partisan Congressional Budget Office (CBO) chimed in with its own startling warning, which all but pleads with the nation’s leadership to understand that we are racing toward a fiscal calamity if we keep spending and borrowing as though we don’t have to repay the money we owe and can keep printing our way to prosperity. Reinhart and Rogoff demonstrate that when a nation’s debt reaches 90% of GDP, growth invariably turns negative. The Administration, however, seems to be betting on spending as good Keynesians are prone to do, rather than betting on Reinhart and Rogoff who are more sensitive to the importance of economic growth. Now comes the aforementioned CBO report that tells us we’re headed for debt that will exceed 100% of GDP in ten years. Keep in mind that just last year the same CBO was warning that debt could reach 87% of GDP in 2021. A 15% increase in the CBO estimate of the nation’s debt to GDP in just one year is quite significant. It means they are expecting an additional $2 trillion being added to our national debt if we don’t change course. Were that to happen, we are likely to find ourselves paying an estimated $1 trillion a year just in interest.
Ordinarily, the beltway bureaucrats might assume (perhaps count on) all of this being too complicated for the average American to grasp. But the average American is watching the consequences of government profligacy being played out on the news every night. The story is always the same. Greece, Portugal, Italy, Spain all with runaway spending and debt crowding out growth, along with the hopes and aspirations of an entire generation. Americans get it. They understand, as the CBO report warned, “Large budget deficits and growing debt (will) reduce national saving, leading to higher interest rates, more borrowing from abroad and less domestic investment, which in turn (will) lower income growth in the United States.”
The slower rate of growth is persisting, Mr. Bernanke, because the government is eroding, instead of building, the people’s confidence in their future and, sadly, the country’s future.
President Obama’s ATM laments, cited earlier in this essay, hopefully, was simply an example of rhetoric running way ahead of reason. If, however, the ATM gaffe was an indication of Presidential reason, well, then the price of gold may be cheap at $1500 an ounce.
Efficiency in industry creates jobs, Mr. President; it isn’t “a structural issue” that results in slow economic growth. Someone manufactures those ATM machines and the workers who do most probably make more than the antiquated bank teller. NCR, a Fortune 500 company has recently hired approximately 500 workers to build ATM machines and self-service checkout systems and plans to employ nearly 1000 workers by 2014 at its new plan in Columbus Georgia building products that were formerly produced at plants in China, Hungary and Brazil. And many other businesses provide goods and services to ATM plants producing those ATM machines that you seem to think are costing America jobs. And, oh yes, someone services those ATM machines too. Those machines have created jobs.
The economy will pick up steam as consumer confidence improves. Jawboning about green energy, political sparring over raising the debt ceiling, running deficits that the CBO can’t even keep track of, putting the dollar at risk of losing its international reserve currency status, releasing oil from the emergency oil reserve and ignoring the non-partisan Debt and Deficit Commission’s pro-growth recommendations will not improve consumer confidence.
“We are at a tipping point at the edge of a fresh economic contraction (and) chances are ‘substantial’ that the United States is headed back into a recession, says economist, author and Yale University Professor Robert Shiller.
The sad thing is that it needn’t be this way. It really is all about consumer confidence. “There might be a turnaround if psychology changes,” Shiller says, but “I fear that it may just continue down. It just doesn’t look good.”
The government seems fixated on pushing buttons and pulling levers to manage the economy when what we need are policies that produce strong and sustained economic growth. “When the demand isn’t there, you can lower interest rates all the way to zero and people are still not willing to spend — that’s where we are right now,” Shiller says. “The Federal Reserve has pumped hundreds of billions into the economy in order to spur more robust economic growth, while interest rates stand near zero. However, all the loose monetary policy in the world won’t help if consumer demand just isn’t there.”
The country finds itself in the odd position of being awash in liquidity with an economy that is sputtering like an engine running on fumes. People are saving rather than spending, business is holding on to cash rather than investing in capital improvements and additional personnel and banks and other financial institutions are very slow to loan. Why? Perhaps, because our government seems not to understand the importance of economic growth and the indispensible role it plays in the health of the nation. Industry is being besieged with new regulations, uncertain healthcare costs, the second highest tax rate in the developed world (soon to be the highest in the world), and the most anti-business National Labor Relations Board in memory. Wage earners who make over $200,000 a year are vilified as “millionaires and billionaires” who benefited from the Bush-era tax breaks.
We are not dismissive of the vital role government needs to play in a healthy market driven economy. Lax enforcement of regulations, especially with respect to banking, and poor oversight of government-chartered enterprises such as Fannie Mae and Freddie Mac contributed as much to the current malaise as did greed and (in our opinion) stupidity in the private sector. America does not have to forfeit its position as the number one economic power in the world. We are still the most innovative, the most productive and the most industrious nation in the world.
Washington needs to understand the toxicity of uncertainty in the current economic climate. Uncertainty is what smothers business and consumer confidence, and that is why we have so little to show for the trillions of dollars the government and the Fed have lavished on who knows what. If the Administration doesn’t understand that, then it is, indeed, clueless.
By Hal Gershowitz and Stephen Porter