Running For The Hills?

This was entirely predictable. Or at least for those of us who are not in the thrall of Wall Street optimism peddlers. US consumers are in an ugly mood.

Duh.

Anyone who expresses surprise at the sharp drop in consumer confidence should henceforth quit the analyst business. This one has been building for some time. As measured by the University of Michigan, consumer confidence dropped a whopping 9.5 points, from 76 in late June to 66.5 in early July. That wipes out all the gains since last August and suggests a particularly surly mood going into the late summer and early fall.

It’s about jobs of course. There aren’t any. Or, rather, there aren’t anywhere near enough. The US economy is going through an extremely slow and jobless recovery. It looks to stay that way as businesses hoard cash and continue to fire people rather than take anything resembling a risk.

As long as fear grips business it will sow the seeds of its own failure. Continued fear leads to falling demand, which justifies the fear. And so we spiral downward.

The feverish, and frankly stupid, proclamations of a sparkling return to growth we were treated to earlier this year are now giving way to a corresponding, and equally stupid panic. The pundits are crawling all over themselves to heap blame on Obama for not doing enough to ‘save’ jobs.

These are, of course, often the same people who decry government intervention in the economy. Quite how the administration is supposed to ‘save’ jobs without getting involved is beyond me, but logic has never been a strong point of the punditry classes. Nor has fact gathering.

Any, even cursory, perusal of the facts would have lead to a somber forecast for the economy this year. I have held fast to my prediction that anything above 1.5% GDP growth for the second half would be an enormous surprise. In that light I am gratified to see that Goldman Sachs has now downgraded its forecast to about that level. They are not the only ones to be busy getting rid of their hopelessly sunny views. The problem now is that forecasts may become too glum. Talk ‘on the street’ has switched to the likelihood of renewed recession. I am not convinced we will drop that far, but we are getting very close to the edge.

Why?

Fear, fear, and more fear.

I have no idea why this is hard to grasp.

The economy is as much an exercise in mass psychology as it is anything else. Consumers are not entirely dumb. If they are fed a relentless diet of job losses, house price reductions, rising costs in health care and education, and negative news about the economy – about the imminent socialist take over of America – then they will tend to hunker down. They will start to save cash for the disaster they fear is rushing towards them. They will spend only on essential stuff while they wait out the crisis.

The antidote is action on the part of government.

But we are so hobbled in Washington that there is little or no prospect of substantive remedies being put together. Instead the Republicans are salivating at their chances in the upcoming elections, when they hope to sweep back into power on the back of their obstructionism. Since Obama would then be neutralized by the GOP’s ability to wear him down, and since he could reciprocate by vetoing every effort the GOP makes to undo our headlong rush into socialism, we face a grim future of nothing emerging from Washington. There could not be a worse outlook.

Meanwhile the pundits are out in force arguing that Obama’s failure was his capitulation to the left. This argument is bogus and not fact based. If anything Obama’s failure is his constant inability to embrace – or articulate – a definite position on anything. Left or right. His health care reform initiative should have been a triumph for the liberal vision. Instead he was so lame during the debates last year that he created a disgruntled cadre of opponents within his own party. Likewise his half hearted attitude towards bank reform. These are two major accomplishments that seem to be buried by the ongoing negative drag created by the economy. His problem is that by trimming towards the center on two pieces of legislation where the right is implacably opposed to any action he gave up his own base and bought nothing in return.

That would have been sensible if the mushy center of America was in a good mood and was willing to reward him for positioning in the middle. But the mushy center is also the pampered middle that needs constant coddling. It needs the warmth of a healthy economy where it can continue to avoid making choices.

By this I mean that the fundamental paradox of America – its embrace of both anti-government ideology and social programs simultaneously – creates excessive confusion in moments of crisis.

Americans are fearful of yet more government action to save the economy. That’s why austerity rings so true to the voters at the moment. They are pessimistic about the viability of Social Security and medicare, yet they are unwilling to deconstruct those programs and get angry at any reform aimed at lowering long term costs. Remember that a key driver of health care reform was the attempt to cut the cost of delivering care. Yet the public remains skeptical of ‘yet more’ government programs. This while they happily receive Social Security payments that they never contributed sufficiently to pay for.

So anti-government ideology is hampering the proper deployment of the only economic policy we have to offset the fear gripping private business: spending.

We are thus stuck in no man’s land. The public doesn’t want a return to a Great Depression, which is the logical outcome of the policies being advanced by the GOP. And it doesn’t want more government spending. It wants action but no cost. It wants to continue the Reagan dream of having it all. This is America after all.

Since that’s not possible the country seems doomed to wallow in failure for a while yet. Until someone explains the facts in simple terms.

And in this nation of perpetual elections facts will always be elusive.

One last message for the austerity advocates amongst you: I am tired of the idea that government debt is necessarily a burden on future generations and thus we should reduce our short term spending to cut the deficit. What is lost in that message is that the economy itself is also a burden on future generations if we don’t fix it. A crippled, but debt free economy is a rotten legacy to leave. The lost opportunity implied in such a scenario is far worse than the alternative. We inherited an illusion from the Reagan years: the notion that the US could avoid making choices, but could, rather, ‘do it all’ was just dumb in the face of global realities. The idea that talking about problems was un-American because it conceded that there were problems has left us without a clear strategy. We should not pass that illusion forward. That means making choices and getting involved in the discussion about policy.

Somehow I don’t think the mushy center wants to get involved in anything. Therein lies the problem: a lack of leadership has allowed the middle to get complacent and avoid resolution of the persistence of its paradoxical beliefs. Americans still want it all. In the face of the nastiest crisis for seventy years its no wonder that confidence collapses as the public watches Washington dither about.

When the soft middle runs for the hills the economy is in trouble.

Watch out.