By Jock O'Connell
Cash-strapped officials in communities throughout California are anxiously cobbling together midyear packages of spending cuts and revenue enhancements in hopes of keeping civic body and soul together until …
Until when? Almost regardless of locale, the presumption underlying the current round of budgetary legerdemain is that the $800 billion stimulus measure will jump-start our moribund economy and restore fiscal affairs to "normal" – a condition implicitly defined as where things were before the popping of a housing bubble in 2007 triggered a cataclysm on Wall Street and then a worldwide recession.
Responsible officials may want to think again. The expectation that we'll all be singing "Happy Days Are Here Again" later this year or early next is not likely to be realized. Instead, state and local policymakers should start planning for an extended period of austerity in public finance.
Why the bearish outlook? Let's begin with how acutely dependent America's economy has become on consumer spending.
From 1997 through 2007, what government statisticians call "total personal consumption expenditures" increased by 41.5 percent, outpacing the 32.4 percent rise during that same period in gross domestic product, the broad measure of the value of all goods and services produced here in the United States. In the process, consumer spending's share of GDP went from 67.0 percent to 71.6 percent.
The surge in consumer spending was remarkable for a number of reasons, not the least of which is that it occurred even though average household income had remained fairly stagnant and actually declined slightly between 1999 and 2007.
So how were we able to indulge in a decade-long shopping spree even though most families were not seeing higher incomes? The short answer, of course, is that we borrowed and then borrowed some more. We refinanced home mortgages and spent the proceeds. And we exercised our credit cards, largely because we fervently believed that our homes would continue to soar in value. (Did I mention that we also didn't save anything?)
Exactly how much of a tab we ran up is a matter of statistical conjecture. But Harvard University's Niall Ferguson estimates that, from 1997 through 2006, Americans withdrew some $9 trillion in cash from the equity stored up in our homes. At the same time, credit card debt spiked to unprecedented levels.
Then in flew a black swan to deliver a reality check. As housing values began to plunge in the summer of 2007, credit markets froze, stock prices tanked, and millions of Americans saw their retirement accounts shrink along with their credit scores.
What is left today is an economy that by no means is out of the woods but whose recovery remains largely dependent on the spending of people who are now pretty much tapped out and whose access to easy credit has been dramatically curtailed.
Even before unemployment rates began to rise, nearly half of all American households lived paycheck to paycheck. Millions now owe more than their homes are worth, and being laid off is an increasingly common dread.
It is therefore inane to think that there is a torrent of consumer spending ready to be unleashed by confidence-inspiring gestures. Nor is it reasonable to expect that financial institutions are eager to re-inflate a credit bubble merely to enable the penurious to have one more run at profligacy.
So long as average household income remains stagnant, economic growth rates over the next several years are apt to remain exceedingly modest.
The rub is that most of the factors that have worked to retard growth in real household income are still very much in play.
Not the least of these is the demonstrable reluctance of American consumers for pay higher prices for products made by American workers. Under-employment remains a critical, chronic issue facing millions of Americans as business models encourage more companies to hire more part-time labor without health and retirement benefits. On top of this, the nation's 75 million baby boomers are starting to retire, further depopulating the ranks of wage-earners.
The use of technology to eliminate jobs remains pervasive. Off-shoring or at least the threat of moving production or service provision to another country or state remains a powerful bargaining tool in countering employee wage and benefit demands. And most of those sectors of the economy in which job creation is expected to be most robust are also the sectors in which wage levels have historically been relatively low.
Under the circumstances, political leaders who hope for revenue flows to return to former levels are going to be gravely disappointed. To be sure, the $800 billion economic stimulus coming out of Washington should provide some measure of relief in the near term. But it will hardly substitute for the stimulus that once came from a level of consumer spending supercharged by massive debt.
So it is time for public officials at all levels of government to stop tinkering with expedient budgetary fixes and to join, along with most households, in learning to live with unaccustomed austerity.
Jock O'Connell is the International Trade and Economics Adviser at the University of California Center, Sacramento, and a private business consultant. His email address is: firstname.lastname@example.org.