In spite of persistent government efforts aimed at encouraging the American people to toss their purses away every time they visit shops or malls, American people are saving more, spending less, and planning for their future much more carefully than in the past. Personal incomes keep falling, and in tune with that, spending of U.S. households is decreasing. An unsurprising development, since it would be absurd if Americans were as profligate as they had been in the bubbly days of this decade in an environment where unemployment is reaching 10 percent already. And we’re nowhere near the end of the economic downturn.
Over the twelve months through June this year, wages and salaries in the United States have fallen by 4.7 percent, according to numbers released by the Commerce Department. The release is gloomy enough, being the worst number ever since the beginning of records in 1960, but it still masks the true extent of the destruction wrought in the private sector due to the tax cuts, and several one-time benefits distributed by the government to unemployed people.
Edmund Phelps, the winner of the Nobel Prize in 2006, opines that it may take as many as 15 years for the damage done to U.S. consumers’ balance sheet to be fully repaired, according to Bloomberg. But while the time frame mentioned by the worthy academic is worrisome, it is not hard to see the extent of the collapse caused by this crisis even with a brief examination. Just the collapse of the real estate and stock markets has erased some $14 trillion from total household net worth in the U.S. since the autumn of 2007. The stock market crash itself was almost as severe as the one experienced in 2001, and yet, the total damage done to the economy is not confined to the finance sector. Every sector of the U.S. economy has been contracting, and the unemployment tally is still rising in almost every state. At some locations unemployment is around 15-16 percent. When was the last time we had conditions similar to this in this country? We need to go all the way to the days of President Roosevelt to find the answer.
It is hard to imagine that all this damage will be erased by ever more money being pumped around. Recessions are not extraordinary events. They usually happen every 7-10 years, and do not move the earth out of its axis, to be sure. Firms go bankrupt, people lose their jobs, yet economic activity goes on regardless of the size and scope of the capitalistic creative destruction taking place. Our problem this time is that the creative destruction process was not allowed to run its unpleasant but necessary course in a capitalistic system, in spite of the Japanese experience showing that an overly soft approach to a bankrupt financial sector results in lost confidence, pessimism, and lost opportunities. For now the debate is between those who believe that inflation will save us, and those who expect it to ruin the American economy by destroying the U.S. dollar. But the real danger is that neither will happen. If it turns out that the global efforts of governments, as we expect, are insufficient to revive the global economy, then it is difficult to know how long, and deep the slump will last, and how wide it’s impact will be, although we do know that it will be exceptionally sour and bitter for both the rich and the poor all over the world.