President Barak Obama and many economic advisors have said that they believe that the worst of our economic times are behind us and that we should start to see signs of an economic turnaround. While there will be higher unemployment and struggles, the worst is behind us. Indeed, Wall Street has experienced the biggest one month growth in July in many months.
I think that the President is right when it comes to Wall Street. Growth is occurring. However, Wall Street no longer reflects the average family or consumer and that is one of the problems. They are not tied to fiscal reality for the average family.
There is a second problem that is different today than in past recessions. That is consumer spending and this is going to be a big problem moving forward. Most economic experts will tell you that consumer spending drives the economy. Growth only occurs when people consume and that consumption depends on confidence in the market. It also relies upon the confidence that one will remain working and not have a fear of losing their job. The suggestion that we are turning the corner on the recession is steeped in numbers from Wall Street and the dependence on a return of confidence as the market grows that will lead to more spending. There are a couple of problems with this.
First is that the job market has changed. I have often quoted a study by the Center for Work and Learning in Washington D.C. that was done in the nineties that states that the average person graduating from college in the year 2000 will have to changed or be retrained for their job up to seven times in their career due to technological changes in the work place. I would suggest that this total is low. We know that manufacturing has struggled in the US and even though it is still important, the skill sets required for these jobs have changed dramatically. I worked in the machine tool trades about twenty-five years ago when machinists used micrometers as the most technologically advanced tool. Today machines talk to one another by laser and computers spit out three dimensional models of parts before the machines are started. Skill sets have changed and continue to change. Bill Gates called the 2000’s the “Decade of Velocity”. He may have underestimated the speed of change. We know that fields of new technologies such as stem cell research, nanotechnology, green adaptations of new discoveries, defense work and IT to name a few weren’t even around for our parents generation, yet they dominate the job sets being created. So people are not as confident that they can keep their job as in past generations and we have a challenge in retraining people to keep up with new advances in technologies. All of this slows consumer confidence.
Second, we have witnessed several generations that have spent more money than they have and there is little credit left with which to spend regardless of consumer confidence. Think about it. We have spent the last few decades giving people multiple credit cards, easy payments, and things such as subprime mortgages all while blasting them with commercials about products that they need RIGHT NOW! Want an iphone? Get it. Cars on your own signature and if you can’t afford a home, we will give you one for next to nothing, oh and don’t sweat the balloon payment five years out.
This is irresponsible. But it has lead to a very high consumer debt level while we are saving less than many generations past. Even the federal government is getting with the program spending far more than they have saddling future generations with debt service (already the highest line item in the federal budget) that will make it harder to find expendable income. So, yes, consumer confidence and spending is important, but do we have any money left to spend?
4 comments:
Dan,
You made good points, but how do we change the brainwashing to which many have been exposed?
An economist recently explained that consumer debt was 300% of GDP.
That about says it all.
I think a fair question to ask is - At what level of growth is our economy sustainable?
I hear very smart people refer to GDP growth as the defining statistic of our society's economic well-being without acknowledging that a huge percentage of the "P" is simply money shuffling that creates no real value, let alone something tangible.
I would settle for a less "robust" economy with a strong consumer savings rate and a little more prudence. I suspect that fewer 26 year olds would become hedgefund billionaires, but the actual economic middle class would stabilize.
Overly simplistic? yes. Way out in left field? Not really.
Greg, I agree completely. We have created an expectation that one begets money without the hard work component and the market is now about itself rather than those underlying assets. We were far stronger when our fathers in the Berkshires worked in paper mills and made things in GE. I know we are not going to return to those thrilling days of yesteryear, but the value added jobs allowed people to put food on the table and care for the family. Today the gap between rich and poor is growing and the amount some people make is obscene when compared to the average person.Even Bernanke has said we need to recreate the markets as they looked with a manufacturing base. The markets have to respond to the needs of the underlying assets and not to the need to make the market dealers rich at the expense of the assets.(The need for greed is strong in this one Obi Wan)
MR, We need to start with financial education classes. We need to wean kids off of the latest accessories for the Ipod and start to value savings. It isn't easy, but we need to start explaining to kids how real long term security is achieved. Like a real economy. the answer is not simple nor is it simply achieved.
Post a Comment