Mort Zuckerman: America's Supreme Confidence Has Become a Malaise - US News and World Report

Both parties are reeling from the shock of an enraged electorate venting in the primaries. There are eccentric results but there is no doubt the votes reflect dismay at what has been happening to America. The supreme confidence, national pride, and sense of achievement that marked the nation through its first 200 years have been transformed into a mood of doubt. The spasm of hope and idealism that greeted Barack Obama's election two years ago has gone up in smoke. Nearly everyone knows someone who has lost a job or home. They can't help worrying whether they are going to be next and whether their dream of a middle-class lifestyle has evaporated.

Even the wealthiest and most highly educated are anxious at the decline of America's competitiveness. We seem unable to produce new generations of qualified leaders in the fields of science and technology. Our government has been incapable of addressing the nation's problems rationally and constructively. We are haunted that the world is catching up with America; the sense of uniqueness and self-esteem that has been a part of our national character since our founding—and has been amplified since World War II—is steadily eroding.

The problems begin with the economy. So many people accumulated so much debt before the balloon burst, we are in what economists call a balance-sheet recession. It's a bleak contrast to the more traditional inventory recession, where the economy bounces back when the inventory excesses are burned off, as we saw in the 1970s, 1980s, and 1990s.

The baby boomers are particularly vulnerable. Their largest equity asset, namely their home, has dramatically eroded; they worry that if they have to move there may be nobody around to buy their home. A staggering 60 percent of those between the ages of 50 and 61 now indicate they will delay their retirement. They know that they will have to work longer, save more, reduce discretionary expenditures, liquidate their debts, and, in particular, reduce their real estate exposure.

[Read more about unemployment and the economy.]

Lower home and stock market values have reduced household wealth by an estimated $10 trillion over the last several years. Millions of American families have been forced to do what the banks have had to do: the nasty exercise called deleveraging. Families have had to stop spending; the personal savings rate of 2 percent in 2007 has soared to approximately 6 percent today. The pressure to save more and spend less will weaken consumer spending for years, pushing the national recovery toward the horizon.

For a significant portion of the population, we have been in a long-term recession marked by real unemployment in the high teens, reduced hours and reduced incomes, not to mention a growing contraction in credit. The traditional family breadwinners, namely men between the ages of 25 and 54, are among those with the highest unemployment rates. They see companies more apt to shed than engage labor, thanks to productivity increases that have been made possible through enhancing technologies. That would normally be good news, but not at the moment.

Consequently every measurement of consumer confidence suggests attitudes consistent with an even more prolonged recession as the surge of government spending from the stimulus program and the need for companies to build back some inventory peter out. Various econometric surveys suggest we'd have been much worse off without the bank rescues and the stimulus, but the public feels there is nothing organic or sustainable to show for the pump priming. It has, however, left one legacy: a deficit much bigger than the one FDR accumulated in the Great Depression. Millions of people who had good private sector jobs now depend on the government for life support. The result is a growing backlash against new fiscal largess, as the accumulation of deficits and debts has become one of the top issues for the American public after the economy and jobs.

The fiscal stimulus program was too small to fill the gigantic hole in the economy, too wasteful, and too ill-focused. This was my view in February of 2009 when I called the stimulus an "unsatisfactory response from Washington: a massive piece of legislation that provides some $800 billion worth of spending and tax cuts but too little job stimulus." It was plain that the Obama administration had let the House Democrats build "a Trojan horse for pet projects promoted by special interest groups, as well as those who want to expand government through new social programs." There was, I wrote, "little apparent connection with economic growth. Everything became stimulus," from Head Start to global warming to tax rebates that were in effect welfare programs.

[See an opinion slide show of wasteful stimulus projects.]

In selling the stimulus, the administration projected that the unemployment rate would be below 8 percent by now. We are at about 9.6 percent. Of course, that's only the headline number. Real unemployment is much worse. Had the labor participation rates stayed constant—instead of having to account for literally hundreds of thousands of people leaving the labor force as so-called "discouraged workers"—the unemployment rate would be well over 10 percent.

A sense of malaise is pervasive. As the economist David Rosenberg points out, the list of statistics now available should scare everybody: 1 in every 10 American homeowners missed a mortgage payment in the first quarter, a record; roughly 1 in 6 Americans are either unemployed or underemployed or have left the labor force; over 4 in 10 unemployed Americans have been out of work for at least six months; 1 in 4 Americans with a mortgage have negative equity in their homes; only 1 in 10 Americans believe that their incomes will rise in the next six months; only 1 in 5 see business conditions improving during the same period; only 1 in 8 Americans believe that current government policy is actually helping the economy. And the consumer confidence index remains near or below its lows of the previous four recessions. Household debt, which was about 30 percent in relation to disposable income in 1950 and went to 60 percent in 1970, is now 125 percent. And it might take as long as a decade to return to the earlier, safer range. The public's aversion to risk is reflected in mutual fund flows, which indicate a substantial transfer of funds toward fixed-income securities and away from strategies that look for capital appreciation and assume higher risk.

Normally in two-plus years after a recession starts, nominal GDP is in double figures and real GDP is up by 7½ percent. Currently, nominal GDP is up slightly over 1 percent and real GDP is down from pre-recession peaks. By some key measures, this is the weakest recovery ever—and as for employment, housing, and personal income, there has been no recovery at all. The expectation for the next several years is of even more financial trauma, chronically high unemployment, and poor economic performance reflected in constraints on discretionary spending and credit, and housing attitudes that will likely remain negative for many years.

[See a roundup of editorial cartoons about the economy.]

The history of major economic gyrations is revealing. The global credit collapse of the 1930s dramatically altered social norms regarding consumption, speculation, and savings. In those days, families shunned debt and bought things when they could afford them—habits they would continue for a lifetime. The inflationary shock of the 1970s, in contrast, prompted the baby boomers to go on a binge of spending and speculation, rather than saving. With cash losing value every month, they believed that by buying stocks and real estate, they could in effect have assets that would support a dignified retirement. This failed. Now they look at dramatic increases in debt at the national level on top of expanded entitlement obligations. This combination will be an enormous drag on our economy as taxes to fund these programs are raised to service debt and budgets.

There are limits to what government can do. Some of these problems can only work themselves out over time. But there are some things that government can do. Two areas the government must address stand out:

1. A mismatch of skills between job-seekers and employers. We have to recognize that employment growth for middle-skilled workers has steadily declined because of automation, even as the productivity of higher-skilled workers has boomed. Then there's the fact that half of the 8 million jobs lost were in construction and manufacturing, and these job losses may be permanent. How can the departing workers be trained for jobs in more active areas, such as education and health service?

2. The housing bust. Millions owe more on mortgages than their homes are worth. Residential real estate has plunged roughly 35 percent. The effects of this shock are devastating in so many parts of the economy, such as the willingness to buy a home when the economics of renting looks more appealing. And the problem is growing.

These specific ills will not be easily alleviated by either looser monetary policy or more deficits. The unemployment rate consistent with stable inflation, the so-called structural unemployment rate, may go up from 5 percent to closer to 7 percent, and this is unacceptable. America's job market is not quite as adaptable as it once was, and millions of people will need help. This must not be made up of government jobs. We want to make sure that high unemployment does not become structural in nature.

It is imperative that our national government in Washington change its ways. The public will no longer tolerate the accumulation of deficits and debts to pay for short-term, quick fixes and initiatives aimed at bailing out this or that sector of the economy, whether they be homeowners, businesses, automobile dealers—or well-pensioned public sector workers. The population has lost confidence in interventionist policies. They look again for American pragmatism to revive the country. They look for policies that promote education, infrastructure, a coherent energy strategy, and programs to create incentives to hire people. They demand long-term programs to restore and protect the economic welfare of the people.

• Read more columns by Mort Zuckerman.
• See a roundup of editorial cartoons about the economy.
• See which industries give the most in campaign contributions to members of Congress.

via politics.usnews.com

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