Recently Mitt Romney effectively “stepped in it” by stating that the President Obama could count on the support of 47% of Americans, who rely on government, don’t pay tax and “believe they are victims”. While the statement was very misguided, and a critical blow to the Romney campaign, it tells a deeper story of the real state of the economy and the demise of American prosperity.
While the media currently trumpets that the Administration has saved the economy from a “depression,” it may just be a statistical victory at best as the only real difference is instead of bread lines forming outside the corner soup kitchen they are found at the mailbox instead. There is no doubt that for a large majority of Americans a “change” is wanted.
Romney is right about one thing – the 47% of the population that pays no taxes are the “victims” of the policies that have led the American economy into the malaise that we experience today. For the average American family the financial strains are pervasive and weigh on their relationships. Romney should be reaching out to these families living on living on food stamps and working two part-time jobs just to “get by” with an understanding and a plan. While Romney dismissed the 47% – these are real families, our neighbours and more importantly voters. It is up to Romney to convince them that he can make a difference. This is why Romney should be embracing the 47% rather than dismissing them.
In “The Hidden Depression” I wrote that: “The issue of dependency, as more of the nation’s population receives nutritional assistance, as well as other forms of support, is that it leads to decreased productivity over time. Yes, on an immediate basis individuals are able to buy the necessities of life. However, that dependency reduces their ability to produce at higher levels in the future as long term unemployment leads to degradation of job skills. As consumption is inhibited due to lack of productivity; increased dependency leads to lower standards of living.”
In the 80’s and 90’s the United States was revered as a land of opportunity, wealth and prosperity. America was the shining beacon of capitalism – both loved, and hated, for it. Unfortunately, that shining beacon of prosperity was an illusion that has now been shattered revealing the ugly truth of decades of excess.
As we have discussed previously in “The Breaking Point” and “The End Of Keynesian Economics”, beginning in 1980 the shift of the economic makeup, from a manufacturing and production based economy to a service and finance economy, is partially responsible for this transformation. The decline in economic growth has been exacerbated by increased productivity through technological advances, which while advancing our society, plagued the economy with steadily decreasing wages. Unlike the growing economic environment prior to 1980; the post 1980 economy has experienced a steady decline. Therefore, a statement that the economy has been growing at 5% since 1980 is grossly misleading. The trend of the growth is far more important and tells the story of the growing rate of American poverty today.
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This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living. As their wages declined they were forced to turn to credit to fill the gap in maintaining their current standard of living. This demand for credit became the new breeding ground for the financed based economy. Easier credit terms, lower interest rates, easier lending standards and less regulation fuelled the continued consumption boom. By the end of 2007 the amount of household debt outstanding had surged in excess of 140% of GDP. It was only a function of time until the collapse in a house built of credit cards occurred.
Photo: Street Talk Live
This is why the economic prosperity of the last 30 years has been a fantasy. While America on the surface was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and lower personal savings was eating away at core.
This massive indulgence in debt, what the Austrians refer to as a “credit induced boom”, has now reached its inevitable conclusion. The unsustainable credit-sourced boom, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread mal-investments. Not surprisingly, we clearly saw it play out “real-time” in everything from subprime mortgages to derivative instruments which were only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.
When credit creation can no longer be sustained the markets must began to clear the excesses before the cycle can begin again. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.
Yet, it is precisely these programs that the Romney should be addressing. He should be talking “to” the 47% that are living near, or below, poverty levels and explaining why the current administration has failed them with policies that have massively benefitted Wall Street, such as QE programs, foregiveness of criminal actions for banks, and backdoor bailouts, while ignoring Main Street. If the current Administrations policies and programs were working there would not be a need for further programs of support from the Federal Reserve to stave off an economic recession.
The hidden economic depression running along the underbelly of the country is exactly what Romney should be exposing. The problems in America today that are arising from high levels of unemployment have kept pressures on wages even as work hours have lengthened. This, of course, is assuming full time employment. In reality many individuals are working but either part-time at one or more jobs to make ends meet or working full-time as a temporary hire at reduced wage levels. The declines in real income are evident. The burgeoning labour pool and demand for work is suppressing wages as companies opt for increasing productivity and streamlining employment to protect corporate profit margins. However, as the cost of living is affected by the rising food, energy and healthcare prices without a compensatory increase in incomes – more families are forced to turn to assistance in order to survive.
Photo: Street Talk Live
For a large portion of America the issue of unemployment and underemployment remains an everyday concern. Without government largesse many individuals would literally be living on the street. The chart below shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components. While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans’ benefits and other social benefits have continued to rise. The government “safety net” is already under tremendous strain as the number of “workers” supporting the system has fallen markedly over the last 30 years. With more than 78 million “baby boomers” rolling into retirement the Social Security Administration has already warned they will begin paying out more than they take in by 2017 and will be insolvent not long thereafter without real reforms to the system.
Photo: Street Talk Live
The end game of three decades of excess is upon us and we can’t deny the weight of the balance sheet recession that is currently in play. As we have stated in the past – the medicine that the current administration is prescribing to the patient is a treatment for the common cold; in this case a normal business cycle recession. The problem is that this patient is suffering from a cancer of debt and until we begin the proper treatment the patient will continue to wither.
The American voter wants change. The “spirit” that drove America to its former greatness is still alive but lacks the leadership and conviction to foster that ember back into a flame. Romney must embace the 47% – the evidence is clear, and 800 years of history prove, that the path we are on will not end well. It will take all of us as a nation to turn the tide but it can be done – for if we do not the consequences are far worse than just a “depression.”
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