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The Economic Conversation Enters a New Phase: Putting Consumers Front and Center Now

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Today President Obama is conducting a town hall meeting in New Mexico focusing on the issue of credit card debt. This is a welcome turn in the national economic conversation from the plight of big institutions and the financial system to what is perhaps the most important part of the story of the Great Recession still not adequately understood - the weakened state of the American consumer prior to the recent recession and financial collapse.

We've told this story many times - despite robust growth in the Bush Era, incomes for a typical family fell. Most measures of consumer health during the Bush went in the wrong direction. We saw an increase in those without health insurance, in poverty, incomes fell. The lack of income growth - coupled with a flood of cheap money - helped drive increased consumer indebtedness - mortgages themselves, credit cards, home equity loans. People borrowed to maintain their lifestyles, and to keep up with the Jones. The continued consumption and borrowing was justified in the minds of consumers by the power of the wealth effect brought about the rapidly increasing value of homes and stocks. But we know what happened next. Assets fell. Incomes did not appreciably rise. The debt remained. People lost jobs. The already very weakened balance sheet of a typical family grew much much worse.

And then the inevitable happened - consumption plummeted. Repeatedly throughout this crisis the "experts" have been surprised by the weakness of the typical American consumer. They are not acting like consumers in a typical recession because for consumers the recovery they just experienced was not a typical recovery. Typical Americans have been in their own "recession" for almost a decade. Look at the Post headlines today: "More Homeowners Getting Aid, But Demand Keeps Rising," and "Weak Retail Sales Dash Recovery Hopes."

The reason that this matters so much is that consumer spending in the US is 70 percent of GDP, and it has been the mighty American consumer who has been fueling the recent global expansion. The length and depth of the current Great Recession will be driven to a great degree by the ability of consumers to start buying things again. We maintain that given their weakened home balance sheet that this could be a while. Which is why the next stage of our recovery will not be so much about liquidity or confidence. It will be about actually improving the financial position of the typical American consumer, which inevitably lead us to discussions of "deleveraging," or reducing the amount of debt on the balance sheets of American families.

Which is why what the President is doing today is so important. He is beginning a conversation now about what is happening with American families. What is best for American families now - to spend or save? Do we really want, as a matter of national policy, Americans to spend, to take on more debt? Or is it best for them to save, pull back, spend less, pay down their debts, get their own balance sheets in order? The answer to this question - being put on the table by the President today - will have a lot to do with how the current global recession ends.

My own view is that just as we have tried to figure out how to get the debt off the balance sheet of the banks so they can resume their work, we will have to talk about how to reduce the indebtedness of American consumers, and encourage those nearing retirement to save much more to replenish the losses in their retirement savings. This may mean a period of slower growth and less consumption of course - but what other choice do we have?

Cross-posted at the NDN Blog.

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