After the binge, the purge

The always excellent Roger Lowenstein has a piece in today’s NYT Magazine about the recent reluctance of the American consumer to spend.

He makes a point that I’d been making and fleshes it out rather well:

American households are rational to cut back on their spending right now, especially while so many of them are deeply in debt and face uncertain job and income prospects in the months, perhaps even years, ahead.

But while individually rational, it makes for a severe economic slump, since consumer spending (or, put differently, goods and services produced for consumers) is two-thirds of GDP.  Unless a new bubble comes along to delude consumers into thinking that their wealth in stocks/housing/other is rising so fast that it’s OK to spend more than their income, then we may not have found the bottom yet.

Consider:  At the peak of the bubble, in 2008, household debt was 136% of income.  After two years of retrenchment, it now stands at . . . 126% of income.  Lowenstein quotes an economist as saying that there is no clear-cut correct debt/income ratio, but it seems fair to say that over 100% is not sustainable.  Lowenstein notes that just getting it back to where it was in the year 2000, at plausible rates of “deleveraging” (paying down debt), would take about five years.  And he might have noted that 2000 was the height of the dot-com bubble; household debt in 2000 was nearly as high as household after-tax income.  People like to pass on something to their children and grandchildren, so the normal debt/income ratio would presumably be well under 100%.  You’d probably have to go back at least 15 years to find a normal, sustainable debt/income ratio.

Lowenstein quotes another economist as saying “deleveraging cycles” typically last about five to seven years.  And today’s debt/income ratio is not typical but is one of the highest on record.

I said before, we’re in a depression.  Still hoping to be proved wrong.

Oh well, at least we’re not in debt to the company store:

The economic crisis explained in six words

“the big banks blew themselves up”

— Simon Johnson

What, you want more?  How about this primer, one clause at a time:

The big banks blew themselves up,

along with a gigantic housing bubble that they did much to inflate.

The collapse of house prices meant the collapse of the largest component of Americans’ wealth.

With banks in trouble and consumers having less money in their house-shaped piggy banks,

credit got harder to obtain

and consumers spent less,

which also caused firms to invest less.

Those last two things caused unemployment to skyrocket.

The Fed and Congress bailed out the banks,

which stabilized the banks,

but couldn’t get them to lend money

and couldn’t get nervous, indebted consumers and businesses to borrow money.

The Fed did practically everything it could to boost the credit markets,

by cutting its main interest rate to zero and creating lots of bank reserves,

but it wasn’t enough.

The government passed spending and tax stimulus bills to boost the economy,

but the stimulus was too small.

Another stimulus could help close the gap,

but the same folks who didn’t object to deficit spending for wars and tax cuts,

have a big problem with deficit spending for other purposes.

Let’s just hope the economy comes back on its own,

because that seems to be the only hope right now.

Automatic destabilizers

Going into this fourth of July weekend, we learned that the U.S. economy shed 125,000 jobs from May to June and that 16.5% of Americans are either unemployed, involuntary working part-time, or have given up looking.  (That’s the “U-6 unemployment rate.”)  We also learned that median duration of unemployment is now almost six months; it rose to 25.5 weeks, up from 18.2 weeks a year ago.

Last week the House of Representatives voted to extend unemployment benefits for the long-term unemployed, as is customary in times of very high unemployment, but the Senate failed to do the same.  The 58-38 vote in favor was not enough to overcome that repugnant, anti-democratic obstacle known as the filibuster. Senate Minority Leader Mitch McConnell said he and the Republicans could not support the extension of benefits unless they were paid for with equivalent spending cuts elsewhere, like in the stimulus bill.  In other words, prudence dictates that we rob Peter to pay Paul.

It’s one thing to be against a stimulus package because the country’s debt level is too high.  It’s not my position, but it is the position of reasonable, otherwise Keynesian-minded economists like Willem Buiter and Jeffrey Sachs.  But traditionally a big thing that mitigates recessions is the “automatic stabilizers” of which occur even without Congress passing new tax cuts or spending programs.   Taxes go down because incomes are down, and spending on unemployment and welfare benefits goes up because more people qualify for them.  For Congress to cut off one of the most important automatic stabilizers is not only callous but sheer idiocy.  Yes, the national debt is a problem, but there are fates worse than debt.  Obsessing about debt during an economic depression is like worrying about cellulite while you’re starving to death.  (Krugman piles on here and here.)

Here’s hoping that the ranks of the unemployed soon include McConnell and the other senators who opposed extending unemployment benefits.  (The would be every Republican except the two from Maine, and Democrat Ben Nelson.)