No one should be surprised that we have entered recession. The U.S. economy has never been as healthy as some of the more mainstream economists have been claiming, buoyed only by a tenuous mix of questionable credit and longer working hours.
The housing bubble, for instance, created an unexpected explosion in equity — which, in turn, resulted in a record number of equity loans being taken out. In the past, these loans tended to be used for improvements to housing (boosting home value), but in recent years the money has been used for an array of consumer spending — vacations, electronics, etc.
This boosted the economy, but left many homeowners in perilous circumstances.
The recent flood of borrowing against home equity has driven consumption since the 2001 recession. This borrowing drove the savings rate into negative territory for the first time since the depression. Through the sixties, seventies, and eighties, the savings rate had averaged close to 10 percent. If the savings rate were to move back just half way to its historic level, this would imply a loss of $600 billion in annual consumption. In fact, since virtually all of the baby boom generation is in its peak saving years, the savings rate should be higher than normal.
And now that a the bubble has burst, the shrinking equity is making it even harder to turn the housing market around, with fewer and fewer homeowners having enough equity left in their houses to muster a downpayment for a new house.
Add to this the reality that workers have not been earning more but working more to make ends meet — a trend that is slowing, according to The New York Times. Workers were making ends meet by increasing their hours, but the average work week for employees is on the decline:
From March 2007 to March of this year, the average workweek reported in the private sector slipped slightly to 33.8 hours, from 33.9 hours, while overtime for manufacturing workers fell by a larger margin.
At the end of last month, more than 4.9 million people were working part time either because they could not find full-time jobs or because their companies had cut hours in the face of slack business, according to a Labor Department survey. That represented an increase of 400,000 since November.
And on Wednesday, the government reported that average earnings slipped in March after accounting for the rising costs of food and fuel — the sixth consecutive month that pay failed to keep pace with inflation.
That’s a difficult pill to swallow and one that is creating havoc in the economy.
The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.
While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.
It is part of a larger transformation of the economy, one that is creating anger — should I say “bitterness”? — and fear among workers, weakening consumer confidence in a way that will only continue the spiral. If workers cannot afford to buy new consumer goods, then manufacturers will have to cut back, pinching payrolls leading to a further erosion of confidence.
What’s the answer? Conservatives say the cycle will right itself, which is true. But the question is how long will it take and how much pain the downward spiral will cause before this happens.
The federal government can step in — as it did during the 1930s — priming the pump by rebuilding the nation’s infrastructure, its decaying bridges and levees, improving mass transit opportunities and investing on a transformation of the energy sector from fossil fuels to renewable sources. And it can do more than offer a small tax rebate.
South Brunswick Post, The Cranbury Press
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