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Stimulating the past, not the future
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Friday night we heard that a compromise had been reached and a $820 billion version of the stimulus bill will come up for a vote in the Senate by Tuesday. The White House and members of the Democratic National Committee plan on a series of intense media pressure to help push the final vote through.
But the reality is that this planned bill will do almost nothing for the economy, because like so many economic measures passed by congress in the 200+ life of our country, they are fighting the previous economic situation. The truth is that returning to the economy we thought we enjoyed since 1980 will not happen. The economy is moving into a new era, and as a nation we should have waited to see what the future held.
If we look back, we can see that there have been three major economic periods since 1945. Each still had some cyclical variation, but there are rather clear moments when one can note that the economy moved based on certain factors. Of course the first was the long period of relative prosperity from the end of World War 2 until the mid 60's. Its probably the least noted period, although it laid much of the foundation for the current problems we are seeing.
This period is a historical economic aberration, but today, few economists or politicians realize that the vast majority of the Baby Boom generation believes that economic downturns are unusual. Before this time, the US economy had a cycle that ran no more than ten to fifteen years between major downturns, so any child growing up experienced at least one before he turned eighteen. The generation that lived through the Great Depression was really the last American generation to experience a major downturn, and they remember the lessons of that time still. Of all the current generations, they save the most, and are the most self-reliant and frugal. But that same saving combined with the destruction of most of Europe's industrial capacity during WW2 helped fuel a twenty-year boom in the US economy, so their children never experienced the same hardships.
And so the economy grew until the mid sixties, when finally Europe and Japan had recovered enough to begin to challenge the American industrial giant. The US economic giant slowed its growth just a little and the Baby Boom generation was beginning to take their places in the labor force. But a combination of bad policy and international politics created a period of uncertainty that culminated in the stagnation that turned Jimmy Carter into a one term president. The economy was not terrible, but it was not the almost sleepy and comfortable growth of the 50's.
Then Reagan came in and acted to cut taxes to their lowest levels since before World War 2. Combined with the fall of the Soviet Union, which opened up new markets and developments in computers and communications which globalized the economy, the economy once again was growing at better than 4% per year. To the Baby Boomers, a belief that the economy would always grow settled in.
Of course, economies don't always grow and by 1994 we began to see problems, as investment capital would sprint into a sector or industry seeking profits, only to pour back out when the underlying economic conditions proved less than adequate. As the US economy hummed along we saw investment bubbles appear and burst in South Asia, Latin America, Telecommunications and finally Real Estate. The citizens of the US were living far beyond their means, counting on a growing economy to bail them out of any debt issues they created.
Today, those debt issues are what drove the economy to crash so badly. Now congress is proposing to take on more debt in one year than the US government did throughout the 1990's. And it won't bring the spending back. Many economic analysts are saying that household savings have jumped from less than 1% of income to 3.6% of income. Part of that is driven by fear, but more than a few people are finally noticing the simple economic fact that you cannot take on debt forever and expect to prosper. They are going to save more, and spend less. If all goes well, the economy will be able to take the increased savings and grow again, but it cannot if the US government attempts to recreate the 1990's economy by ramming huge debt levels through. The debt will end up costing far more than any stimulus provided.
The only encouraging sign is the increased savings. In the long run it is private investment, which will save the economy. Increased savings, even if it's currently mostly debt reduction, is the path we all need to look towards for future economic salvation.
