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The 25-year debt-fueled boom of 1982-2007 has ended, and it has left the country with a stagnant economy, massive debts, high unemployment, huge wealth inequality, an enormous budget deficit, and a sense of entitlement engendered by a half-century of prosperity.
After decades of instant gratification, Americans have also come to believe that all problems can be solved instantly, if only the right leaders are put in charge and the right decisions are made. And so our government has devolved into a permanent election campaign, in which incumbents blame each other for the current mess, and challengers promise change.
The trouble is that our current problems cannot be solved with a simple fix. They also cannot be solved quickly. It took 25 years for us to get to this point, and it will likely take us at least a decade or two to work our way out of it, even if we make the right decisions.
So it is time that we began to face reality.
THE PROBLEM: TOO MUCH DEBT
The biggest debt binge in US history, by a mile.Four years ago, when the debt-fueled boom ended and the economy plunged into recession, most economists and politicians misdiagnosed the problem. They thought we were having just another post-War recession—a serious recession, yes, but a cyclical one, a recession that easy money, government stimulus, and a return of "confidence" could fix.
A handful of economists, meanwhile, argued that the recession was actually fundamentally different—a "balance sheet" recession resulting from a quarter-century-long debt-binge, one that would take a decade or more to fix.
In the past four years, it has become increasingly clear that the latter diagnosis was correct: The US economy is behaving exactly the way other economies have behaved after piling up mountains of debt and eventually going through a financial crisis. It is bumping along with disappointing growth, high unemployment, and, increasingly (and understandably) social unrest.
Total US debt, including households, companies, and the government. Can you say "$50 Trillion"?Image: St. Louis Fed.So how do you get out of a "balance sheet" recession triggered by too much debt? You reduce the debt.
More specifically—and here's the critical point—you reduce the debt that is crippling the productive part of the economy. This is the part that creates most of the jobs, prosperity, and wealth. It is also the part that pays for the rest of the economy. That part is the private sector.
What debt is crippling the private sector?
Consumer debt. The household mortgages, credit cards, student loans, and other obligations that is forcing consumers to save and pay down debts instead of spend. Consumers still account for about 70% of the spending in the US economy, and that spending is now constrained. (See chart below—click for larger).
(Consumer spending was also artificially boosted for 25 years by the debt binge, so there's no way we're going back to that era. And we shouldn't strive to).
Households are still in debt up to their eyeballs. Here's household debt as a percentage of GDP.Image: Calculated RiskHow can consumers reduce their debts? By doing what they are doing right now:
Spending lessSaving morePaying down debtRestructuring debtDefaultingImportantly, this process takes time. And unless you're willing to just tear up the laws and contracts that have formed the basis of the country's economy for the past two centuries, there's no way to just wave a magic wand and make the debts go away.
Also importantly, this healing process has nothing to do with "restoring confidence." Or "reducing regulation." Even if you could suddenly cast a spell and make all Americans (irrationally) exuberant again, you can't solve a debt problem with more debt. Specifically, you can't reduce the amount you owe by borrowing more.
So where does that leave the economy?
It leaves the private sector, the productive engine of the economy, nursing its way back to health.
And it leaves the public sector—the government—trying to minimize the pain while the private sector heals itself.
The government also has debt coming out of its eyeballs. Here's government debt as a percent of GDP.Image: US Government SpendingComplicating the US's problem, of course, is that the public sector—the government—has also racked up humongous debts in the past quarter century. For now, those debts are still manageable: Our creditors are still willing to lend us as much as we want, on ever-easier terms. But, eventually, these debts will have to be addressed. Specifically, at some point, the government will have to cut back spending and reduce its debts, at least as a percentage of GDP. Or the entire government will go bust. Those facts should be relatively uncontroversial. Where the disagreement comes is when and where the government should cut back—and how much.
One side argues that the government should cut back immediately and completely, forcing the country to "take its medicine" in one quick dose.
The other side argues that the government should continue spending to support the economy until the private sector is healthy enough to once again carry the torch.
The policies that arise from this argument affect the lives and livelihoods of hundreds of millions of people, so it's not surprising that people feel strongly about them.
THE SOLUTIONS
So what's the best approach to solving our problem?
Here's where philosophical differences come into play. "Best" is, at least somewhat, in the eye of the beholder.
The two extreme solutions are these:
Job losses from the peak, by recession. Our current recession is the bottom red line. Click for larger.Image: Calculated RiskDo you want a violent, painful "adjustment" in which many million more Americans are thrown out of work and the incomes and spending of tens of millions of Americans are suddenly reduced, thus crushing American companies at the same time? Then immediately cut government spending from ~20%+ of GDP to the 15% of GDP the government collected in taxes last year and hope (pray) that the resulting dislocation doesn't further wallop GDP (which history suggests it almost certainly will).
Do you want to pretend we don't have serious problems and just keep the government spending vastly more than it takes in every year until our government debt load finally becomes unmanageable and the currency collapses?
Then just keep doing what we've been doing for most of the past 30 years.
For obvious reasons, neither of those two approaches are appealing.
Fortunately, there's a third option, which lies somewhere in the middle.
This solution consists of two parts:
Acknowledging the problem (and the problems with either extreme approach)Designing an approach that addresses these problems and helps us work our way out of our predicament with the least possible pain, dislocation, and disruption.THE "ACKNOWLEDGEMENT" PHASE...
Acknowledge the real problem with the economy—that we're in a "balance sheet" recessionAcknowledge that, to fix the economy, consumers need to work off their debtsAcknowledge that trend-line government spending is already too high relative to both GDP and the taxes that the government collectsAcknowledge that, eventually, to fix the latter problem, government spending will have to drop and taxes will have to go upAcknowledge that, raising taxes and/or cutting spending sharply right now will wallop the economyAcknowledge that walloping the economy right now will make the problem worse, not better, at least over the short term (consumers will have less money to spend, so the economy will shrink, and tax collection will drop...and then this vicious cycle will repeat. See Greece.)Acknowledge that making the problem worse right now will increase social frustration and unrest (See Occupy Wall Street). It also won't help the rich get richer.Acknowledge that denying the problem and continuing runaway government spending indefinitely will eventually lead to a debt and currency crisis (see Argentina)Acknowledge that, right now, the government can borrow as much money as it wants at historically low interest rates—rates that are getting lower all the timeAcknowledge that the only spending in the economy that the government can directly control is government spendingAcknowledge, therefore, that the "best approach" given our current reality involves two specific goals:Minimizing short-term pain while giving consumers time to nurse themselves back to healthGetting the long-term deficit under control before the government implodesTHIS LEADS TO A SOLUTION THAT SEEMS THE MOST REASONABLE AND LEAST RISKY AND DISRUPTIVE GIVEN THE CURRENT REALITY...
The government should construct and pass a long-term budget plan thatMinimizes short-term pain, whileGetting the long-term deficit under controlThis budget plan should be designed to benefit all Americans, not just special-interest groups or different classes or industriesThis budget plan can theoretically include an increase in short-term spending designed to minimize the country's pain, as long as it also includes a decrease in long-term spending (again, right now, the world is willing to lend us as much money as we want)One form of government spending that unequivocally benefits all Americans is infrastructure spending (when the projects are finished, America has the infrastructure)Infrastructure spending would help America address another reality that has emerged in the past three decades—the reality that the infrastructure of many countries in Europe, Asia, and other regions has vaulted past that in the US and made the US look like a second-world countryInfrastructure spending would boost employment in one sector of the economy hammered by the recession—constructionInfrastructure spending would involve fewer of the conflicts and misaligned incentives that infuriate many Americans about "entitlement programs," extended unemployment benefits, welfare, food stamps, and other government expenditures that seem to encourage sloth and laziness and "socialism"The 10-year government budget designed to get us out of our current predicament, therefore, should probably include a massive, multi-year infrastructure spending program.
THE NEW DEPRESSION: Click for a tour of a homeless tent city in Lakewood, New Jersey Image: Robert JohnsonThere, I said it. I have now revealed that I find merit in an approach advocated by one side in the religious war (Keynesians). And this religious war is so emotional that I will immediately be flamed as an enemy of the state, despite also advocating the reduced-spending approach held by the other side (Austerians). But so be it.
I think this is the most reasonable approach to solving our nation's problems. I'll explain more about why in the coming days.
SEE ALSO: Here's Why This Recession Is Fundamentally Different
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This week should be another biggie, just based on the economic data on tap.
Each day there will be big earth movers coming.
Monday:
ISM manufacturingConstruction spendingVehicle salesTuesday:
Factory ordersChain store salesWednesday:
Jobs week begins with the ADP reportAlso: ISM non-manufacturingThursday
FRIDAY:
THE JOBS REPORT!!!Consumer creditHere's the outlook on the jobs report from Nomura:
Employment report: We are forecasting an increase in total nonfarm payrolls in September of 60k, with private payrolls increasing 80k and manufacturing payrolls rising by 5k. Assuming no revisions to past data, a data release in line with our forecast would lead to a 3-month moving average for job creation of just 48k in September, sharply slower compared with a high for 2011 of 215k in April, and further ruffling the feathers of the doves on the FOMC that would like to provide more stimulus for the labor market. The economic outlook remained “unusually uncertain” in September, still fuel led by fears of European contagion and stock market volatility. The Verizon strike of 45k workers, which negatively impacted August payrolls, should provide a boost to September payrolls of similar magnitude. Elsewhere, we believe the average work week ticked back up to 34.3 hours and average hourly earnings increased by 0.2% following a decline of 0.1% in August. We also forecast that the unemployment rate held steady at 9.1%.
Meanwhile, expect a ton of news from Europe, the US (watch the banks, especially in the wake of California's decision to drop out of the foreclosure-gate settlements, and the newfound concerns about Morgan Stanley) and of course any drips and drabs out of China.
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The Republican presidential candidates will face off for the first time tonight with front-runner Texas Gov. Rick Perry on the stage. The event at the Reagan Presidential Library kicks off a five-week gauntlet of debates that will sharpen the distinctions between the candidates, and provide more certainty in a crowded field.
With President Barack Obama's jobs speech scheduled for Thursday night, much of the debate will center around the economy and job creation — a topic that is increasingly defining this primary campaign.
Here's what's at stake for the candidates:
Newly anointed GOP front-runner Rick Perry: He's leading in national polls, but can he withstand the forthcoming assault from both the left (Romney) and the right (everyone else, save Huntsman). He'll be combative, but a pitfall would be to overly-engage with lesser candidates. His main concern now needs to be proving his general election mettle — and that doesn't come from attacking Ron Paul.Former Massachusetts Gov. (and former front-runner) Mitt Romney: He largely stayed above the fray in the last debate, but he has little choice but to go on the attack tonight. He just introduced a jobs plan, which should give him a bit of extra ammunition. This is one of his last chances to put a dent in Perry's armor before the front-runner moves out of reach.Rep. Ron Paul: The libertarian candidate's campaign is remarkably static in the polls, gaining the support of about 10 percent of the primary electorate. But Paul is increasingly prying his way into the national conversation, and has begun taking shots at Perry this week. Expect him to continue his offensive tonight and in the weeks ahead.Rep. Michele Bachmann: The Ames Straw Poll winner's campaign has lost all of its momentum in the last month, with Perry stealing her supporters and money. After a shakeup over the weekend, polls showed Bachmann with the support of only 6% of the GOP electorate. She needs to prove she's still relevant.Herman Cain: The former Godfather's Pizza CEO only remains a factor in the campaign inasmuch as he forces fringe issues like opposition to Sharia law into the mainstream. He won't be heard from much tonight.Former Utah Gov. Jon Huntsman: His campaign has been getting more media attention — but little extra poll support — from his jobs plan announced last week and the accompanying media blitz. His campaign strategy is to attack Romney in order to win New Hampshire, and then present himself as the most electable candidate. He'll try to make headway in both areas tonight.Former Sen. Rick Santorum: He placed better than expected in the Iowa Straw Poll and has carved out a niche as the most social conservative candidate in the race. Largely absent from the last debate — he even had to ask for a question because he was being ignored. Santorum will attack Perry from the right tonight, while pressing for more opportunities to introduce himself to the American people — but his path to the GOP nomination remains almost non-existent.Former Speaker of the House Newt Gingrich: His quixotic campaign has taken him to far-flung (and equally irrelevant) states like Hawaii, while his poll numbers and fundraising have dropped like a stone. He's going to make use of what's left of his political comeback tonight, but do little else.Please follow Politics on Twitter and Facebook.To embed this post, copy the code below and paste into your website or blog.
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A few times a year, Muammar Gaddafi ventured out to the campus of Fateh University in Tripoli to deliver lectures to students in Green Hall, a 450-seat auditorium with a large stage. None of the students or faculty could have guessed what the Saharan madman kept hidden on the first floor of the same building: a love den. “What we found is shocking,” says Faisal Krekshi, 55, the new dean of the university which has now been renamed Tripoli University. “This was Gaddafi’s place. Only he and his people had access to it.”
Behind a set of locked doors there’s a room with a cozy double bed, flowery carpets, and small lamps that casts off a warm orange glow. In an adjoining bathroom there’s a Jacuzzi with water jets. Some faculty members say the dictator brought his mistresses to the room, others ask whether he raped female students there. It gets weirder. A couple of doors down there’s a full gynecological examination room. “There’s a gyne bed—what the hell is it doing in here?” asks Krekshi, an OB/GYN doctor who has worked at the university for 14 years but had no knowledge of the facility. “I think it’s here for illegal abortions.”
As the security situation in Tripoli has improved in the past week, Libyans are slowly coming to terms with Gaddafi’s bizarre legacy and trying to figure out how to move ahead. They must decide how to remove the former regime’s influence without completely destroying the remaining institutions, and how to deal with the loyalists who propped up the dictator for more than four decades. The changes taking place at Tripoli University provide a glimpse of how difficult the task will be. Aside from the love den, rebel fighters who secured the campus also found a makeshift prison and an office used by intelligence chief Abdullah Senussi.
A bedroom at Fateh University in Tripoli., Credit: Babak Dehghanpisheh
During Gaddafi’s time, the campus was monitored by Revolutionary Committees who determined which instructors and students would get preferential treatment based on their loyalty to the Brother-Leader. Spying and informing on peers was encouraged, and dissent was brutally squashed: students involved in an uprising in 1976 were hanged on the campus. The monitoring of staff and students ramped up when the uprising kicked off in February. “There were intelligence documents found at the university which talk about staff members who need to be eliminated,” says Krekshi.
So far, Krekshi has decided to proceed with a soft touch, and members of the Tripoli city council have supported him. When some students and faculty members asked him to tear down the Green Hall, he told them to remove the regime propaganda and turn it into a student union instead. Bringing former regime supporters into the fold is more complicated. Krekshi, a thin, soft-spoken man, doesn’t want to kick off a broad purge and says any staff members who weren’t involved in crimes are welcome to come back. That’s a controversial decision on a campus that’s still gripped with fear and paranoia.
Tripoli University Dean Faisal Krekshi shows the press gynecological equipment in an examination room at the school., Credit: Babak Dehghanpisheh
On Wednesday morning, a handful of professors confronted Kreskshi. “We are scared! We are scared of the Revolutionary Committees!” Mohammed Marqani, a psychology professor shouted, waving his arms theatrically. “Please kick out the loyalists! What are you waiting for?” Krekshi assured Marqani that the issue would be dealt with in an open manner and there was no reason to worry. “They want revenge,” Krekshi said after talking to the professors. “My revenge is simple: transparency, legality, law.”
Still, Krekshi can’t completely ignore his own impulses, either. While walking through a campus library dedicated to Gaddafi, he grabs a silver disk praising the dictator, throws it on the ground and steps on it. A few moments later he pulls out a leather-bound book of Gaddafi’s speeches, throws it on the ground and tells the staff to leave it there. “If you were pro-Gaddafi until two weeks ago,” he says. “’You can’t change colors immediately.”
Sergey Ponomarev / AP Photo
The regime loyalists may not be the only group that Krekshi will have to keep an eye on. When the rebels attacked Tripoli nearly two weeks ago, the large, leafy campus was turned into a battle zone: pro-government snipers positioned themselves on tall buildings and patrols roamed the perimeter. Krekshi was part of a team of rebel sympathizers who were tasked with liberating the university. At the designated “zero hour” on the night of Aug. 27, he coordinated an assault on the campus along with a rebel military commander and a fighting force that included some students. Now, some of those students who fought to liberate the campus are digging in, keeping an eye out for any counterrevolutionary elements and, in some ways, monitoring Krekshi himself.
For the moment, the staff and students are simply enjoying the freedom to speak and debate openly at the university for the first time in more than 40 years. “It’s very beautiful. It’s a new feeling,” says Halima Egrari, 20, a third-year IT student at the university. “We can say whatever we want.”
