Cart (0)
business newsThe Key to Economic Growth (Hint: It's Not a Policy Gimmick)
By
Robert Barone
Sep 13, 2011 10:00 am
America needs cheap energy, less regulation, a new tax code, and debt reduction -- all while addressing spending and entitlements.
PRINT
 |
|
Policy Gimmicks
Since the Great Recession began (and some believe that it still has not ended), policymakers have used various gimmicks to try to kick-start the economic engine. On the fiscal side, we have seen programs like Cash for Clunkers or first-time homebuyer tax credits that simply have pulled demand forward rather than stimulating new demand. On the monetary side, Ben Bernanke and the Federal Reserve, deathly afraid of “deflation” (I can’t understand why falling prices are worse than rising prices -- falling prices make incomes go further, rising prices do the opposite!) have managed, through their policies, to significantly raise the dollar prices of food, energy, and related commodities. Meanwhile, those policies have not halted the significant deflation in housing and its surrounding industries. From a consumer point of view, the things that they own continue to fall in value, while the things that they need to purchase have risen in cost. How are they better off after QE1, QE2, and most likely, QE3?
The Key to Growth
One critical issue centers around the level of debt of the American consumer, especially relative to income. Most of America’s larger corporations have already lowered this ratio and have lots of cash to spend. Thus, we have witnessed the relatively good performance of the share prices for most of these non-financial entities since 2009. But the US consumer, without job opportunities, is in a different class. Demand cannot grow without a healthy consumer. And, without rising demand, the economy simply stagnates.
Some who say they have studied the Great Depression, and some commentators today, believe that World War II was the primary factor that pulled America out of depression (see Paul Krugman, "Oh! What a Lovely War!", New York Times, August 15). But think about this: After World War II ended, why would there be an increase in demand? What had changed? (Yes, there was demand from war torn Europe and Japan. But I don't think rational folks would advocate that we destroy assets, our own or those owned by foreigners, so that we can rebuild them. Don't forget, when an asset is destroyed, a loss to someone has occurred. If insured, the owners of the insurance company pay; if not, the owners of the property pay.)
Why the Great Depression Ended
The buildup of debt over the 16 years ended in 2008 is similar to the same phenomenon of that occurred in the 1920s. During World War II, there was rationing and forced saving. People of that generation often talked about the fact that they couldn’t buy a car, or tires, and that gasoline was rationed. Rationing forced the populace to save and pay down their debt, so that, by the end of the war, the consumers’ debt/income ratios were once again healthy and there was the capacity to increase consumption. Of course, the rationing caused a huge build-up of pent-up demand.
Table 1 shows consumer debt outstanding for selected years prior to and in the aftermath of the Great Depression. Table 2 shows a similar growth path in consumer debt and debt as a percentage of GDP from 1992 to 2008.
Table 1: Consumer Debt, Its Growth Rate, and Its Relationship to GDP in The Great Depression
Table 2: Consumer Debt, Its Growth Rate, and Its Relationship to GDP in The Great Recession
Note the rapid rise in consumer debt in the 1920s followed by rapid contraction during the initial years of the Great Depression. Then, debt grew rapidly again until 1941, at which point it contracted rapidly during the war effort due to rationing and the unavailability of consumer goods. Note that the ratio of consumer debt to GDP was lower in 1944 than it was in 1920. What had changed during the war was a significant reduction in the indebtedness of the American consumer.
No such rapid consumer debt reductions are evident in the Great Recession, at least not through 2010. There has been some reduction as shown in Table 2. But, we believe this is due more to mortgage defaults than to actual consumer debt repayments. Note the rapid declines in debt in both the 1929-33 and 1941-44 periods. Reductions of that magnitude are not present in the current economic climate, and some government policies (Cash for Clunkers, and foreclosure moratoria) discourage debt reduction. Given what was necessary in the debt area for the consumer to pull the US out of the Great Depression, it appears that we have quite a long way to go in the current environment.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
