Why does it sometimes feel like bad news is the only kind there is? Lately you can't pick up a paper without a barrage of doomsday information: market volatility, rising gas prices, job losses, negative consumer spending reports. It's enough to make you hide in your house and never spend another dime. But, what's underlying all this doomsday economic news?
The forces creating these conditions are complicated, but they're not impossible to understand. Let me break it down a bit...
First of all, it's important to understand that consumer spending is two-thirds of the Gross Domestic Product (GDP), which drives the economy. So every time you remodel your house, take a vacation, or buy your kids those trendy new school clothes, you're contributing to the national economy.
Now you hear constant news about the fact that we're in a recession. But what does "recession" really mean? A recession is "a decline in a country's real GDP, or negative real economic growth, for two or more successive quarters of a year. What causes one? Fundamentally, I believe that this recession in particular, is consumer led, brought on by two converging forces: the housing bubble collapsing and the credit crisis.
Collapsing housing bubble: housing prices have decreased, which has led to a decrease in spending on housing-related projects, such as construction and home furnishings. It's not an anomaly if you drive down the street and see the same houses for sale, or new foreclosure signs popping up. Everything is stagnant. As the consumer has seen housing prices decrease it has had a "negative wealth affect," meaning we all feel less wealthy and less excited to spend on goodies like that new cappuccino maker, iPod, or Guitar Hero game.
Credit crises: The most important point about the credit crisis is that the once-easy credit is no longer there -- for businesses as well as the individual. You've probably heard a lot about how personal debt is bad, which in fact, it is, but the act of borrowing and spending helps keep our economy vital and moving. Think of it like this: you might leave it all out on the field in a tough soccer match, causing personal exhaustion, maybe even injury, but you have a great time and the whole team goes on to victory.
Remember those similar recession headlines you saw just seven short years ago? That threat of recession was never fully realized because the consumer saved the day. In 2001-2002, we had 9/11 and the technology bubble burst. With those two events influencing our economy, we should have seen a recession like we're seeing now, but we didn't because the consumer kept spending. They felt encouraged by rising housing prices. Not only were they spending money they had, but taking out home equity loans. The banks, encouraged by rising housing prices, were giving loans freely. Also during that time period we saw low interest rates and the Bush tax cuts. The economy bounced back relatively quickly and we never suffered a recession we could have.
Today we're seeing something very different. Let me paint the slightly grim picture for you: home values are decreasing and food and energy prices increasing. We're seeing that people can't or won't borrow against the value of their homes. Unemployment is rising, as noted in the jobs report. (Jobs report signals economic pain to spread - Apr. 4, 2008) It's hard not to feel or act like a Momma Bear in winter--you want to hoard all the food and nestle in until spring. Which is actually not a bad impulse. While we need to continue to spend money and participate in the economy, we also have to be patient and realistic about what this recession is going to mean for our lives. It's my opinion that we're going to have to weather this recession for at least a couple of years.
The federal stimulus package proposed by Bush, as well as the Federal Reserve interest rate cuts is not a panacea, but it is a move in the right direction. To the contrary, the tax hikes proposed by both Obama and Clinton (not as drastic on capital gains tax increases) are short-sighted and will only serve to prolong the recession. Both Democrats want to raise many taxes, including capital gains--that's the profit you make from your stocks and mutual funds, presently taxed at 15%. If they have their way that rate will nearly double to 28%. Your gut reaction may be that this is only going to affect the wealthy, but in fact, 80% of those who make below $100,000 pay capital gains taxes and 47% of those who make below $50,000 pay capital gains tax. (Obama's Tax Evasion -- WSJ.com) If Americans are forced to contribute more of their profits to the government, they will be feeling even less wealthy and spending even less. Both forces will cause the recession to drag on.
Obama and Clinton would like the voter to believe that an increase in capital gains tax will lead to higher tax revenues for the U.S. government. However, history tells a different story. Since 1962, any increase in capital gain tax resulted in less -- not more -- revenue. During last week's debate, Obama had no explanation for the discrepancy between his proposal and history's hard lesson.
So, what does this mean for Momma Bear? Vote wisely. I'm not advocating one candidate over another; I'm advocating educated voting. Think about the real life consequences for pulling the lever for your favorite candidate. It's not just a popularity contest.
It also means that you should rest assured that nothing lasts forever. It does none of us any good to hide and hoard. Instead we need to make wise decisions for our families and healthy, realistic decisions for our nation's economy. And most of all, dispel fear by learning about the underlying dynamics of our economy. It is complicated, but it's also critical to your family and our nation.