Since the 1980s, Americans have consumed more than they produced””and they have made up the difference by borrowing.
Two decades of easy money and innovative financial products meant that virtually anyone could borrow any amount of money for any purpose. If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years. The average household owns 13 credit cards, and 40 percent of them carry a balance, up from 6 percent in 1970.
But the average American’s behavior was virtue itself compared with the government’s. Every city, every county and every state has wanted to preserve its many and proliferating operations and yet not raise taxes. How to square this circle? By borrowing, using ever more elaborate financial instruments. Revenue bonds were backed up by the prospect of future income from taxes or lotteries. “A growing trend is to securitize future federal funding for highways, housing and other items,” says Chris Edwards of the Cato Institute. The effect on the projects, he points out, is to make them more expensive, since they incur interest payments. Because they “insulate the taxpayer from the cost”””all that needs to be paid now is the interest””they also tend to produce cost overruns.
Local pols aren’t the only problem. Under Alan Greenspan, the Federal Reserve obstinately refused to inflict any pain.
Reform our ways? Maybe. The promise of a chicken in every pot and a car in every garage will still draw more votes.
Something Zakaria only touches upon in the article that worries me is the issue of taxes. One of the things that made the depression in the ’30s worse was a decline in consumer spending. Some attribute this to fear, some to national tax policy, perhaps both combined with initial job and investment losses. I realize that spending beyond means drew us into this mess, but if spending stops it may take a generation or more to get back to something like good times again. I worry about a spiral of taxing to pay for props to a dying economy where no one has money for anything because they’re worried about how to pay for anything so no one makes anything and govenment looks for money to boost things a little. As we all know, nothing is free.
What the level of consumer confidence is in 6 and 12 months may give us a better idea of how long and how bad this slowdown will be.
If only. Both parties, but I think the Democrats are the worst, have learned that to win they must buy votes through the form of largess and programs. I agree with the line ” … but if spending stops it may take a generation or more to get back to something like good times again.” I do not think that this will happen because politicions cannot be elected by inflicting pain but buy showering the voters with large quantities of money.
But at some point the system collapses.
I believe it was de Tocqueville who said, “the American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” Politicians of all stripes, though more often Dems IMO, have been conning the American people with Big Government programs for no money down for years.
The GOP rightly got their fannies waxed in 2006 in part for repudiating the fiscal conservatism and control of government growth that the Reagan revolution espoused. Unless and until we decide, as a nation, that we will live within our means in both the private AND public sectors, I don’t see any reason to expect “reform.”