Thursday, September 23, 2010

156. Recovery won't come overnight

Even though 71 percent of the people still blame former President Bush for the economic recession, over next two months Republicans will drill the economy and the issue of job creation into the heads of the American public. We'll hear, "it's the economy, stupid," again and again.

Well, understandably, it is the economy that people care about. However, Americans need to have a realistic expectation or perspective of what a recovery not only might look like, but also how long it will take.

Unfortunately, Republicans plan to seize the impatience of our "immediate gratification" society to create unrealistic expectations as to how long it takes an economy, which nearly completely collapsed, to realize a quantifiable recovery.  

One interesting comparison is the Great Depression, which began in the late 1920s and did not fully recover until the late 1930s. There are some amazing parallels to this recession, such as the collapse of the stock market, high unemployment, bank failures and an intense concentration of wealth- where the richest one percent owned 40 percent of the nation's wealth.

Currently, the richest one percent owns about 34 percent of the nation's wealth and the top 20 percent own about 85 percent of the nation's wealth. The gap between the country's richest and poorest is at a modern high.

Equally interesting are the taxes levied on the nation's wealthiest. In the 1920s, which was the precursor of the Great Depression, the top tax rate went from 73 percent in 1921 to 25 percent in 1925. It was not until the end of the Great Depression that the top tax rate was back up to as high 94 percent. High taxes on the wealthiest remained consistent until the Regan era, who lowered taxes to as low as 28 percent.

So when President Obama speaks of "spreading the wealth" and letting the tax cuts expire, he has history on his side.  Unbelievably, Republicans don't want the tax cuts to expire-which would provide as much as three million dollars in tax savings to each of America's wealthiest families. Unbelievably, Republicans are able to sell tax cuts to the middle and lower classes-- who consistently vote against their own interests.  

Another area Republicans try to sell the tax burden is on corporations, under the guise that a lower tax would mean more jobs. Interestingly, many corporations are doing remarkably well. And, in fact, while pocketing record profits, some are actually laying off employees. Harley-Davidson is one recent example who plans to lay off another 1500 employees despite recognizing a profit of 71 million in the second quarter of this year. Other companies are following their lead, collectively recording corporate profits as high 1.2 trillion while 30 million employees remain laid off. Companies continue to use temporary employees or pay overtime because it is cheaper and they don't have to pay benefits. If this country is demanding job creation, it should start here-with American corporations.

Economic systems are complicated and certainly if they were easily managed there would never be a recession, let alone the need for a recovery.

The collapse of the housing market, for example, put a considerable strain on the economy and its trail is easy to hypothesize. The financial institutions and government made home loans available to people who were probably not in the positions to afford them-thus increasing the supply of homebuyers. This increase in supply of buyers created a demand for homes and new construction that increased prices (and it did not hurt that many homebuyers were approved for significantly more than they could afford).

This demand drove up housing prices, which created artificial wealth in the homes and both drove consumer confidence, and, much worse, made the equity in homes available for loans or the inspiration of home refinancing. This wealth was often put back into the economy as homeowners performed home improvements, took vacations or paid off credit cards.

But when the financial institutions were finished selling their souls and the economy could no longer support all the new mortgages (and other debt incurred), something had to give. Manufacturing fell, foreclosures skyrocketed, home prices collapsed and auto sales stalled.

The point is that with any economic recession, there are many factors to be considered. Some of that consideration is economic theory-such as how much of a nation's wealth should be tied up in the top percentage of its population. Other factors include the impact of tax rates, the responsibility of the private sector, and the consequences of financial irresponsibility.

More importantly is the realization that our economic system has been severely damaged. There are no magic wands, quick fixes or set recovery dates. Some are calling for a double dip recession, and I think they might be right. However, it is unrealistic to believe, and disingenuous to promote for political gain, that the country should have fully recovered by now. What a mistake it would be to change economic theories now-back to the theory that led to the crisis in the first place.

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