Cause of Recession

In a recent column found at Townhall Finance http://tinyurl.com/3hox97h one Bill Tatro describes what he believes to be the cause of the current high rates of unemployment: The most significant cause of joblessness and why it will be years before it will be better, he writes, is debt. 

Bill starts off his column by explaining why debt grew so much. “People decided they wanted material possessions instantly, not sometime in the future.” He describes how people wanted cars and vacations and bigger houses and that much of it was financed by debt. [He didn’t mention that low interest rates (thanks Greenspan) made such debt accumulation affordable].

Bill goes on to explain how the economy was boosted by the increased consumer spending. More restaurants, movie theatres and other services in a community to service the consumers led to increased employment [He said that this did not increase manufacturing, but he’s wrong. This also led to increased manufacturing in places like Honduras and China].

Bill explains how spending came to a complete standstill after the housing collapse brought the borrowing and spending to a sudden end. Bill is pessimistic about the future. It is his contention that consumers’ wealth isn’t expected to increase significantly in the near future and that, therefore, he expects the economy and employment to remain in the crapper for a long time.

While Bill missed the fact that low interest rates made the increased spending feasible. He also failed to understand how much manufacturing increased as a result. But, nevertheless, Bill is almost there. He’s right in that consumer spending was a primary engine of the economy for a long time. He’s right that significant reductions in consumer spending are the primary cause of the current economic funk that we’re now experiencing, and he’s right that it will be a long time before consumers recover.

But what he fails to see is that relying on consumer spending as a primary engine of the economy is not sustainable. For decades every time there had been an economic slowdown, you’d hear talk of how to get consumers spending again. Greenspan reduced interest rates and reduced interest rates again and again. Auto loans for 1.9% were common; some were 0% interest. Low mortgage rates. Home equity loans. Consumers were spurred and spurred to spend. Now it’s tapped out.

The solution is not to encourage American consumers to spend even more. There is a huge imbalance in the world economy. Get consumers to spend more or wait until consumer wealth increases so they can spend more is not a sustainable solution. The fact is that the nation’s and the world’s economy cannot be based on an engine that will inevitably result in an imbalance and recession. The world’s economy must adjust and must find a way to progress and grow without depending on American consumers. It’s just not viable in the long term.