Scott Grannis put up a Misery Index update last week and the picture isn’t pretty. The misery index is probably worse than shown because the two components of the index, namely headline unemployment and CPI, are arguably understated compared to the 1970s – previous episodes of high misery in US history.
Misery comes to Main Street
The downturn began on Wall Street but now Main Street is really feeling the misery. Mish has documented how some state and local governments have tried to cope:
- Withdraw services, e.g. disband police departments
- Higher taxes, but the tax base threatens to leave
- Lever up the pension fund - a great idea to take more risk when risk premiums are already low
We can’t escape the simple fact: The cupboard is bare.
It’s time to pay the piper but the adjustments that need to be made to pay the bill will be painful. How painful? Consider John Maudlin’s comments about Greece and extrapolate them to America: [emphasis mine]:
Greece benefited from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week’s market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let’s assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.
The market is saying they don’t believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.
The risks of a populist backlash is rising
I have written about middle class angst before. Consider, for example, this interpretation of the results of the recent election in Massachusetts [emphasis mine]:
President Obama on Wednesday blamed the Democrats' stunning loss of their filibuster-proof majority in the Senate on his administration's failure to give voice to the economic frustrations of the middle class, a disconnect that White House aides vowed to quickly address as they continue to work to advance the president's agenda.
When taxes go up and government services go down, people get upset and look for someone to blame. How you view these developments is a function of the ideological lenses on your glasses. For the Left, Hart Research Associates did an election night survey Of Massachusetts Senate voters for the AFL-CIO. Here are their conclusions:
This was a working-class revolt, and it reveals the danger to Democrats of not successfully addressing workers’ economic concern.
Voters’ believed the federal government has helped Wall Street—61% say government recession policies have helped Wall Street and large banks a lot or a fair amount—but not average working people (only 18%).
In other words, it’s not our fault - blame Wall Street. When (not if) things get worse, how long before the Daily Kos crowd moves from taxing Wall Street bankers to stringing them up on lampposts?
The GOP’s job isn’t any easier either. The Wall Street Journal recently opined that:
As Democrats struggle to respond to a surge of populist anger that has put them on the defensive, Republicans face a challenge of their own: How do you appeal to voters furious at big banks and Wall Street without alienating the party's traditional business allies?
Right now, the natural tendency of the Right is to migrate towards the Tea Party movement. When things get worse, some of the extremist elements could move the consensus to the land of the skinheads and KKK under the banner of “law and order”. Blame the outsiders, the Jews, the blacks, the Muslims, the Chinese and their “slave labor”, etc.
A radical lurch, regardless of whether it's to the Left or the Right, is unhealthy. I reiterate what I wrote in my post entitled Political stability and the middle class: “If the middle class crumbles, what happens to political stability?” We can only hope that the political consensus stays near the middle, because the alternative represents the tearing of the social fabric and political disintegration - and the markets won't like that one bit.