Thursday, June 19, 2008

Why Are We So Down On The Economy?

Great Depression Bread LineFor the past year it has seemed as though all we see in the media are more reports about how horrible the economy is and how we are lucky if we have a job and enough money to eat, buy gas and pay our rent or mortgage. And by the way, in case you didn’t know, we are heading for another Great Depression--or so you'd think.

I read an interesting article in the Washington Post that I wanted to share. The article talks about some of the reasons why people may be amplifying the economic carnage. Here are some quotes I pulled from the article, along with some key points the author didn’t mention:

“…so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively.”

“’We're saying that we feel a lot worse than we did at the depths of the last recession, when we had had 2 or 3 million job losses, that we feel worse than we did after 9/11,’ said William Cheney, chief economist of John Hancock Financial Services. ‘At some level, that just doesn't make a whole lot of sense.’”

“The run-up in gasoline and food prices, for example, appears to affect people's perception of how they're doing more than a similar price rise in other goods.”

“’Things that you buy more frequently and that have large percentage increases will weigh more in people's perception of inflation,’ Eric Johnson, who studies behavioral economics at Columbia Business School, said.

“‘If the unemployment rate goes from 5 to 7 percent, that affects 2 percent of the population,’ said Michael Feroli, an economist at J.P. Morgan Chase. ‘If gas prices go up, almost 100 percent of the population feels terrible.’”

“Americans have been unnerved by the financial crisis that was a major cause of this broader economic slowdown. The credit crisis has spilled from one part of the financial markets to another. At times, the wheels of global capitalism have appeared to be at risk of coming off.”

“Another factor is that homes are losing value -- and this reduces the wealth of more people than a plummeting stock market like that of 2001. Currently, 68 percent of Americans own their home. In 2001, only 21 percent owned stocks directly.”

“When home prices are rising, people spend more money. When they are dropping, they don't spend less money. With stocks and other assets, by contrast, spending both rises and falls with prices,” Wellesley College economist Karl E. Case found.

“Some analysts attribute Americans' negative views on the economy to media coverage, which tends to play bad news more prominently than good news.”

“The biggest reason for people's gloom might be because of what they're used to. In the 1980s and '90s, memories of the double-digit unemployment and double-digit inflation from the 1970s were still fresh.”

In my mind, many of these points are valid. However, I do want to point out a couple things the author doesn’t mention in his article. For one, it is hard to compare our current inflation numbers to those reported back in the '70s and '80s. While our current inflation might be reported at 4.2 percent, if we actually calculated our inflation the way we did prior to the Clinton administration, it would actually be more than 7 percent, according to (visit their site if you want the full background on changes to the CPI). On the same note, John Williams from thinks the unemployment numbers are significantly understated as well. Again, on his site he talks about the various changes made to how they are reported during the Clinton administration. The point is that it is hard to really compare these statistics since the way they have been calculated has changed over the years.

In addition, the author fails to mention anything about the nation’s debt load. The U.S. has more debt on the books now than ever before and much of our financial growth over the years can be directly contributed to that. We have in essence financed our luxurious lifestyle, and we keep thinking we are never going to have to worry about paying it back. I’ve harped on this in past posts time and time again, but there will come a point when we will be forced to address the issue. At that point we will have two choices (I’m eliminating the third choice of systematically paying off the debt with budgetary surpluses, because I know that is never going to happen): Either we default on the debt or we print more money. Of the two, the likely winner is printing more money, which will of course lead to increased inflation. In my mind this is a big and scary variable that not many people seem to give much weight to.

All in all, I agree that things are probably being a little overblown in the press, and I’m probably guilty of it as well. However, things certainly aren’t all roses either. While we might not be facing another Great Depression, we are heading for some serious hardship. It may not be fully realized this year, or the next, but it is coming. We cannot maintain our current lifestyles forever on borrowed money; changes will have to be made at some point.

1 comment:

Richard Jennings said...

Whatever the employment stats are these days - I see a lot of high paying jobs on employment sites -

Dont dwell on the layoff, or the economy or the recession or gas prices, look to the future!