The summer weather and the media’s focus on positive economic news may have you feeling cheerier than usual these days.
Two words: “Bah, humbug.” Or maybe, “Get real.”
Focus, for a minute, on the cloud, rather than the silver lining; recognize that evaporation has caused the glass to be less than half full (and more than half empty); see the bubble bursting, the interest rates rising and stock prices dropping. In other words, get realistic about the economy.
In the Keynesian world, the more government spends, the more the economy is “stimulated.” In the real world, more spending means more debt, higher taxes, more regulation and GDP growth well below the historic norm. 
In the imaginary world, central bankers and government officials can keep the economy growing indefinitely and can boost asset prices to new records forever. In the real world, asset prices are at artificially induced levels; reality will take hold when the Federal Reserve Board raises interest rates, when China’s stock market tanks (as it has begun to), when Greece is booted out of the Eurozone, or when Iran uses the $150 billion it receives from the lifting of sanctions to further its war against the U.S. and Israel.
What Recovery?
For an alternative view of the economy, consider the Economic Collapse blog. It’s gloomier than the Red Sox locker room, but Michael Snyder makes some points about the economy that are worth considering.
For example, the declining workforce participation rate has been frequently discussed here, but you may have assumed that retiring Baby Boomers are the cause. Snyder notes, though, that a record number of Americans in their prime working years (25 to 54) aren’t working and aren’t looking for work.
Has 12% of the male population in that age group given up out of desperation? Are they part of the underground economy? Are they receiving government assistance? Are their spouses or parents supporting them?
Here are some of the other points Snyder makes:
- The percentage of children in the U.S. that are living in poverty is higher than it was in 2008. In 2008, 18% of Americans children were living in poverty. That figure has risen to 22% – an increase of nearly three million children. After 50 years of the War on Poverty, let’s give peace a chance.
- Home ownership has dropped. Early in 2008, the home ownership rate reached 68%. Today, it is below 64%, the lowest it’s been in more than 20 years. This is after many years of government programs aimed at increasing home ownership.
- Government dependence has skyrocketed. In 2008, the federal government was spending about $37 billions a year on the federal food stamp program, now called the Supplemental Nutrition Assistance Program (SNAP). Today, SNAP costs more than $74 billion a year.
- Federal debt has doubled since the last recession. The federal debt was about $9 trillion when we entered the last recession. It has doubled since then. How do you feel about your kids being stuck with the bill for today’s spending?
- Household income has dropped. Just prior to the last recession, median household income was above $54,000 a year. In 2000, it was approaching $57.000. Today, it’s about $52,000 a year.
- More businesses are closing than are opening. For each of the past six years, more businesses have closed in the United States than have opened. This had never happened in the U.S. before 2008.
- The middle class is shrinking. In 2008, 53% of Americans considered themselves to be middle class. By 2014, only 44% of Americans considered themselves to be middle class. It’s not because the soaring stock market has pushed more Americans into the upper class. The percentage of Americans 18 to 29 who considered themselves to be upper class fell from 19% to 11%, while those who consider themselves lower class nearly doubled, from 25% to 49%. That may be because the unemployment rate for that age group remains high – it was 9.5% in December, compared with a rate of 6.5% among all adults (and that’s the official U-3 rate).
Slow Money
Maybe factors such as lower household ownership and fewer business startups are side effects of the financial crisis and all will be well with time. All of these factors taken together may not indicate a healthy economy, but they don’t necessarily portend an economic collapse.
But economic trends should also be considered. One that’s particularly troubling is the slowing velocity of money. In a healthy economy, velocity speeds up. The money you spend is spent by those who receive it, who in turn spend it and so on.
“But when an economy is in trouble,” Snyder writes, “the velocity of money tends to go down. As you can see on the chart below, a drop in the velocity of money has been associated with every single recession since 1960. So why has the velocity of money continued to plummet since the end of the last recession?”
T
hat’s a question worth considering, but not one that is easily answered.